10-K/A: Annual report pursuant to Section 13 and 15(d)
Published on May 4, 2010
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission file number 1-13293
The Hillman Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 23-2874736 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
10590 Hamilton Avenue Cincinnati, Ohio |
45231 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (513) 851-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
11.6% Junior Subordinated Debentures | None | |
Preferred Securities Guaranty | None |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act of 1934. YES o NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
YES o NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). YES o NO þ
On
May 3, 2010, there were 6,201.0 Class A Common Shares issued and outstanding, 970.6 Class B
Common Shares issued and outstanding, 2,787.1 Class C Common Shares issued and outstanding,
82,104.8 Class A Preferred Shares issued and outstanding by the Registrant, 57,282.4 Class A
Preferred Shares issued and outstanding by the Hillman Investment Company and 4,217,724 Trust
Preferred Securities issued and outstanding by the Hillman Group Capital Trust. The Trust
Preferred Securities trade on the NYSE Amex (formerly the American Stock Exchange) under the symbol
HLM.Pr. The aggregate market value of the Trust Preferred Securities held by non-affiliates at
June 30, 2009 was $90,681,066.
TABLE OF CONTENTS
Table of Contents
Explanatory Note:
This Annual Report on Form 10-K/A (Form 10-K/A) is being filed as Amendment No. 1 to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009, which was filed with the
Securities and Exchange Commission (SEC) on March 26, 2010 (the Original Filing). We are filing
this Form 10-K/A to reflect restatements of our consolidated balance
sheets at December 31, 2009
and December 31, 2008, and our consolidated statements of operations, stockholders equity and cash
flows for the fiscal years ended December 31, 2009, December 31, 2008 and December 31, 2007, and the related notes
thereto, to correct an error in our stock-based compensation and the income tax provision related
to such compensation (the Restatement). For a more detailed description of the Restatement, see
Note 18 Restatement of the Notes to Consolidated Financial Statements.
This Form 10-K/A amends and restates Item 1. Business, Item 6. Selected Financial Data, Item 7. Managements
Discussion and Analysis of Results of Operations and Financial Condition, Item 8. Financial
Statements and Supplementary Data, Item 9A. Controls and Procedures, and Item 15 Financial
Statements of Part IV of the Original Filing, as amended, in each case, solely as a result of, and
to reflect, the Restatement. Pursuant to the rules of the SEC, Item 15 of Part IV of the Original
Filing has been amended to contain the currently-dated certifications from our principal executive
officer and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley
Act of 2002. The certifications of our principal executive officer and our principal financial
officer are attached to this form 10-K/A as Exhibits 31.1, 31.2, 32.1 and 32.2.
Except for the foregoing amended information, this Form 10-K/A continues to describe conditions as
of the date of the Original Filing, and we have not updated the disclosures contained herein to
reflect events that have occurred subsequent to that date. Other events occurring after the date
of the Original Filing or other information necessary to reflect subsequent events have been
disclosed in reports filed with the SEC subsequent to the Original Filing.
2
Table of Contents
PART I
Item 1 Business.
General
The Hillman Companies, Inc. (Hillman or the Company) is one of the largest providers of
hardware-related products and related merchandising services to retail markets in North America.
The Companys principal business is operated through its wholly-owned subsidiary, The Hillman
Group, Inc. (the Hillman Group) which had net sales of approximately $458.2 million in 2009. The
Hillman Group sells its products to hardware stores, home centers, mass merchants, pet supply
stores, and other retail outlets principally in the United States, Canada, Mexico, Latin America
and the Caribbean. Product lines include thousands of small parts such as fasteners and related
hardware items; threaded rod and metal shapes; keys, key duplication systems and accessories; and
identification items, such as tags and letters, numbers, and signs. The Company supports its
product sales with value added services including design and installation of merchandising systems
and maintenance of appropriate in-store inventory levels.
The Companys headquarters are located at 10590 Hamilton Avenue, Cincinnati, Ohio. The Company
maintains a website at http://www.hillmangroup.com. Information contained or linked on our website
is not incorporated by reference into this annual report and should not be considered a part of
this annual report.
Background
On March 31, 2004, Hillman was acquired by affiliates of Code Hennessy & Simmons LLC (CHS).
Pursuant to the terms and conditions of the related Agreement and Plan of Merger (Merger
Agreement), dated as of February 14, 2004, the Company was merged with an affiliate of CHS, with
the Company surviving the merger (Merger Transaction).
As a result of the Merger Transaction, affiliates of CHS own 49.3% of the Companys common stock
and 54.6% of the Companys voting common stock, Ontario Teachers Pension Plan (OTPP) owns 28.0%
of the Companys common stock and 31.0% of the Companys voting common stock and HarbourVest
Partners VI owns 8.7% of the Companys common stock and 9.7% of the Companys voting common stock.
OTPPs voting rights with respect to the election of directors to the Board of Directors is limited
to the lesser of 30.0% or the actual percentage of voting common stock held. Certain current and
former members of management own 13.7% of the Companys common stock and 4.4% of the Companys
voting common stock. For a discussion of the Companys capital stock, see Note 13, Common and
Preferred Stock, of Notes to Consolidated Financial Statements.
On January 5, 2006, the Hillman Group purchased certain assets of The SteelWorks Corporation
(SteelWorks), a Denver, Colorado, based manufacturer and distributor of metal shapes, threaded
rod and metal sheet to the retail hardware and home improvement industry. Revenues from the sales
of this product line were approximately $30.1 million, $37.1 million and $30.7 million for the
years ended December 31, 2009, 2008 and 2007, respectively. The aggregate purchase price was $34.4
million paid in cash at closing. The acquisition of this business was made to complement Hillmans
national presence in its core markets and add an established market brand name to our business.
On December 28, 2007, the Hillman Group entered into a Stock Purchase Agreement by and among All
Points Industries, Inc. (All Points), Gabrielle Mann, Gregory Mann and the Hillman Group, whereby
the Hillman Group acquired all of the equity interest of All Points. All Points, a Pompano Beach,
Florida, based distributor of commercial and residential fasteners catering to the hurricane
protection industry, has positioned itself as a major supplier to manufacturers of railings, screen
enclosures, windows and hurricane shutters. All Points has also developed a retail division that
supplies hardware for hurricane protection to the do-it-yourself consumer. Revenues of the
acquired All Points business were approximately $15.1 million and $21.3 million for the years ended
December 31, 2009 and 2008, respectively. The aggregate purchase price, including acquisition
costs, was $10.2 million paid in cash at closing. The acquisition
3
Table of Contents
of this business was made to
strengthen Hillmans presence in the Florida market and in the hurricane protection market.
For additional information on certain details of the transactions, see Item 7 Managements
Discussion and Analysis of Financial Conditions and Results of Operations.
Industry Overview
Hillman operates in multiple channels of the retail marketplace such as hardware stores, regional
and national home centers, and mass merchants. Hillman focuses on delivering merchandising
systems, point-of-sale displays, product support and sales installation services through its
nationwide field sales and service force to the retail sector.
These retail channels have experienced significant change as a result of the growth of the large
national big box (Big Box) chains (defined as mass merchants, home centers, and large-format
grocery/drug centers), which have taken market share from the regional home centers and independent
hardware dealers and cooperatives. Hillman has developed sales, marketing, merchandising and
service specifically to meet the needs of the Big Box chains which include Lowes, Home Depot and
Wal-Mart. Hillman believes that its market knowledge, merchandising skills, breadth of inventory,
and value-added services, including support and fulfillment capabilities, will enable the Company
to maintain its relationships with the Big Box chains.
The U.S. economy has undergone a period of recession and the future economic environment may
continue to be less favorable than that of recent years. This slowdown has, and could further lead
to, reduced consumer and business spending in the foreseeable future, including by our customers.
In addition, economic conditions, including decreased access to credit, may result in financial
difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for
our customers, suppliers and other service providers. If such conditions continue or further
deteriorate in 2010 or through fiscal 2011, our industry, business and results of operations may be
severely impacted.
The Hillman Group
The Company is organized as a single business segment, The Hillman Group. A subsidiary of the
Hillman Group operates in Canada under the name The Hillman Group Canada, Ltd. and another in
Mexico under the name SunSource Integrated Services de Mexico SA de CV. Retail outlets served by
Hillman include hardware stores, home centers, mass merchants, pet supply stores, grocery stores
and drug stores. Through its field sales and service organization, Hillman complements its
extensive product selection with value-added services for the retailer.
Sales and service representatives regularly visit retail outlets to review stock levels, reorder
items in need of replacement, and interact with the store management to offer new product and
merchandising ideas. Thousands of items can be actively managed with the retailer experiencing a
substantial reduction in paperwork and labor costs. Service representatives also assist in
organizing the products in a consumer-friendly manner. Hillman complements its broad range of
products with value-added merchandising services such as displays, product identification stickers,
retail price stickers, store rack and drawer systems, assistance in rack positioning and store
layout, and inventory restocking services. Hillman regularly introduces new products and package
designs with color-coding for ease of shopping by consumers and modifies rack designs to improve
the attractiveness of individual store displays. Hillman functions as a merchandising manager for
retailers and supports this service with high order fill rates and rapid delivery of products sold.
The Company ships its products from 11 strategically located distribution centers in the United
States and Canada (See Item 2 Properties). The Company closed its distribution center in Green
Island, NY effective at the end of March 2009. The impact of closing this facility was not
material to Company operations and the customer orders processed from this facility were shifted to
existing facilities in Cincinnati, Ohio and LaCrosse, Wisconsin. Hillman utilizes a third-party
logistics provider to warehouse and ship customer orders in Mexico. Currently, orders are shipped
within 48 hours and, for the year ended December 31,
4
Table of Contents
2009, the Company had a 97% order fill rate.
The average single sale in 2009 was approximately $400 as compared to $407 in 2008.
Hillman also manufactures and markets a value-added mix of high-tech and conventional products in
two core product categories: key duplication systems and identification
systems. The patent-protected Axxess Precision Key Duplication System has proven to be a
profitable revenue source within Big Box retailers. The technology developed for this system
revolutionized the key duplicating process utilizing computer aided alignment, indexing and
duplication of keys. This system has been placed in over 14,700 retail locations to date and is
supported by Hillman sales and service representatives.
In addition, Hillman offers Quick-Tag, a commercialized, consumer-operated vending system which
provides custom engraved specialty items, such as pet identification tags, luggage tags and other
engraved identification tags. To date, more than 3,300 Quick-Tag machines have been placed in
retail locations which are being supported by Hillmans sales and service representatives.
Products and Suppliers
Hillman currently purchases its products from approximately 580 vendors, the largest of which
accounted for approximately 7.7% of the Companys annual purchases and the top five of which
accounted for approximately 25.4% of its purchases. About 41.1% of Hillmans purchases are from
non-U.S. suppliers, with the balance from U.S. manufacturers and master distributors. The
Companys vendor quality control procedures include on-site evaluations and frequent product
testing. Vendors are also evaluated based on delivery performance and the accuracy of their
shipments.
Fasteners
Fasteners still remain the core of Hillmans business and the product line encompasses more than
40,000 stock keeping units (SKUs), which management believes to be one of the largest selections
among suppliers servicing the hardware retail segment. The fastener line includes standard and
specialty nuts, bolts, washers, screws, anchors, and picture hanging items. Hillman offers zinc,
chrome, and galvanized plated steel fasteners in addition to stainless steel, brass, and nylon
fasteners in this vast line of products. In addition, the Company carries a complete line of
indoor and outdoor project fasteners for use with drywall and deck construction.
Some of the Companys latest offerings include WallDog, which is an innovative, all steel,
one-piece screw anchor which features high profile threads for easy fastening into drywall and
masonry base materials. In addition, the new Agri Center marked Hillmans expansion into the fast
growing and highly fragmented Agricultural hardware segment. The Agri Center features accessories
and fasteners commonly used for the repair and maintenance of trailers and implementation
equipment. The program also features an innovative new merchandising format which allows retailers
to increase holding power while displaying products in a neat and organized system.
Further, the Companys chrome and automotive fastener lines are offered primarily to franchise and
independent hardware stores and automotive parts retailers. Management believes that these two
lines are among the most comprehensive in the retail market and are growing in popularity with both
the automotive and motorcycle industries. Other new fastener offerings include construction lags,
suspended ceiling fasteners, wire goods, painted & specialty finished screws, stainless steel
outdoor screws and anchor bolts.
The acquisition of All Points, which was completed on December 28, 2007, has expanded our presence
in this area to include the distribution of residential fasteners to the hurricane protection
industry. Hillman management believes that the core competencies developed over time in the
management of the fastener product line have enabled Hillman to leverage its scale and expertise to
broaden its product offerings efficiently.
Fasteners generated approximately 55.3% of the Companys total revenues in 2009, as compared to
54.3% in 2008.
5
Table of Contents
Keys and Key Accessories
Hillman designs and manufactures state-of-the-art, proprietary equipment which forms the
cornerstone for the Companys key duplication business. The Hillman key duplication system is
offered in various retail channels including mass merchants, home centers, automotive parts
retailers, franchise and independent hardware stores, and grocery/drug
chains; it can also be found in many service based businesses like parcel shipping outlets.
Hillman markets its key duplication system under two different brands. The Axxess Precision Key
Duplication System© is marketed to national retailers requiring a key duplication program easily
mastered by novice associates, while the Hillman Key Program targets the franchise hardware and
independent retailers, with a machine that works well in businesses with lower turnover and highly
skilled employees. There are over 14,900 Axxess Programs placed in North American retailers
including Wal-Mart, Kmart, Sears, The Home Depot, Lowes, Menards and Longs Drugs.
In 2007, a new key duplication system, the Precision Laser Key System, was introduced to select
test markets. The new system uses a digital optical camera and proprietary software to scan a
customers key. The system identifies the key and retrieves the keys specifications, including
the appropriate blank and cutting pattern, from a comprehensive database. This new technology also
eliminates the effect of natural wear on the customers key by reproducing the original key
pattern. Hillman management believes that the Company is well-positioned to capitalize on this new
technology to further reinforce its market leadership in key duplication.
In addition to key duplication, Hillman has an exclusive, strategic partnership with Barnes
Distribution for the distribution of the proprietary PC+© Code Cutter which produces automobile
keys based on a vehicles identification number. The Code Cutter machines are marketed to
automotive dealerships, auto rental agencies and various companies with truck and vehicle fleets.
Since its introduction, over 7,900 PC+© units and 7,900 of the newer Flash Code Cutter units have
been sold.
Hillman also markets key accessories in conjunction with its key duplication systems. Popular
accessories include the Key Light, Valet KeyChain, Fanatix key identifiers, key coils and key
clips. The line of key accessories includes a broad range of products such as key chains, tags,
lights, floats, holders, whistles and a host of other miscellaneous complementary items.
Additionally, new fashion key and accessory programs have been introduced recently, including DIVA
and licensed programs featuring NFL, MLB, Disney, Harley Davidson and other popular licensed
properties. Hillman has taken the key and key accessory categories from a price sensitive
commodity to a fashion driven business and has significantly increased retail pricing and gross
margins.
Keys, key accessories and Code Cutter units represented approximately 22.0% of the Companys total
revenues in each of the years of 2009 and 2008.
Engraving
Quick-Tag is a patented, state-of-the-art consumer-operated vending system that custom engraves
and dispenses specialty products such as pet identification tags, military-style I.D. tags, holiday
ornaments and luggage tags. Styles include NFL and NCAA logo military tags. Quick-Tag is an
easy, convenient means for the consumer to custom engrave tags while shopping at large format
retail stores such as Wal-Mart and Petco. Hillman has placed over 3,300 Quick-Tag machines in
retail outlets throughout the United States and Canada.
Innovation has played a major role in the development of the Companys Quick-Tag machine. Using an
interactive touch screen, customers input information such as a pet name and telephone number, and
the systems proprietary technology engraves the tag in less than two minutes. The Quick-Tag
system does not require incremental labor and generates high levels of customer satisfaction and
attractive margins for the retailer. This custom engraving system generates retail profit per
square foot over seven times the
6
Table of Contents
typical retail average. In addition to the placements in retail
outlets, the Company has placed machines inside theme parks such as Disney, Sea World, and
Universal Studios.
Hillman purchases a wide variety of materials and components to manufacture the Axxess Key
Duplication and Quick-Tag engraving machines, many of which are manufactured to its
specifications. Management does not believe that it is dependent on any one supplier. The machine
components do not generally require proprietary technology and Hillman has identified or used
alternate suppliers for its primary sourcing needs.
Engraving products represented approximately 7.8% of the Companys total revenues in 2009, as
compared to 8.5% in 2008.
Letters, Numbers and Signs
Letters, Numbers and Signs (LNS) includes utilitarian product lines that target both the
homeowner and commercial user. Product lines within this category include individual and/or
packaged letters, numbers, signs, safety related products (e.g. 911 signs), driveway markers, and a
diversity of sign accessories, such as sign frames.
Hillman markets LNS products under the Hillman Sign Center brand. Through a series of strategic
acquisitions, exclusive partnerships, and organic product development, the Hillman LNS program
gives retailers one of the largest product offerings available in this category. This SKU
intensive product category is considered a staple for retail hardware departments and is typically
merchandised in eight linear feet of retail space containing hundreds of SKUs. In addition to the
core product program, Hillman provides its customers with value-added retail support including
custom plan-o-grams and merchandising solutions which incorporate a wide variety of space-utilizing
merchandisers.
Hillman has expanded the LNS product offering to further penetrate the growing home improvement
market by developing a new line of high-end house numbers and address plaques. This program
provides Hillman with a unique, competitive position expected to yield new revenue growth in this
otherwise mature product category.
The Hillman LNS program can be found in Big Box retailers, mass merchants, and pet supply accounts.
In addition, Hillman has product placement in franchise and independent hardware retailers.
The LNS category represented approximately 7.5% of the Companys total revenues in 2009, as
compared to 7.2% in 2008.
Threaded Rod
With the Companys acquisition of SteelWorks, Hillman is now a leading supplier of metal shapes
and threaded rod in the retail market. The line includes hot and cold rolled rod, both weld-able
and plated, as well as a complete offering of All-Thread rod in galvanized, stainless steel, and
brass.
The SteelWorks program is carried by many top retailers, including Lowes, Menards, and Sears, and
through cooperatives such as Ace, True Value and Do-It-Best. In addition, Hillman is the primary
supplier of metal shapes to many wholesalers throughout the country.
Threaded rod generated approximately 6.6% of the Companys total revenues in 2009, as compared to
7.7% in 2008.
Builders Hardware
In 2007, the Company entered the residential Builders Hardware market by selling its newly
developed product line to Canadian Tire, a Canadian retailer with 493 stores. The Builders
Hardware category includes a variety of common household items such as coat hooks, door stops,
hinges, gate latches, hasps and decorative hardware.
7
Table of Contents
Hillman markets the Builders Hardware products under the Hardware Essentials brand and provides
the retailer with an innovative merchandising solution. The Hardware Essentials program utilizes
modular packaging, color coding and integrated merchandising to simplify the shopping experience
for consumers. Colorful signs, packaging and installation instructions guide the consumer quickly
and easily to the correct product location. Hardware Essentials provides retailers and consumers
decorative upgrade opportunities through the introduction of high-end finishes such as satin
nickel, pewter and antique bronze.
The combination of merchandising, upgraded finishes and product breadth is designed to improve the
retailers performance. The addition of the Builders Hardware product line exemplifies the
Companys strategy of leveraging its core competencies to further penetrate customer accounts with
new product offerings. The Company plans to aggressively expand the placement of the Hardware
Essentials line in future periods.
The Builders Hardware category generated approximately 0.8% of the Companys total revenues in
2009, as compared to 0.3% in 2008.
Markets and Customers
Hillman sells its products to national accounts such as Lowes, Home Depot, Wal-Mart, Tractor
Supply, Sears, Menards, PetSmart, and Petco. Hillmans status as a national supplier of
proprietary products to Big Box retailers allows it to develop a strong market position and high
barriers to entry within its product categories.
Hillman services approximately 14,000 franchise and independent (F&I) retail outlets. These
individual dealers are typically members of the larger cooperatives, such as True Value, Ace, and
Do-It-Best. The Company sells directly to the cooperatives retail locations and also supplies
many items to the cooperatives central warehouses. These central warehouses distribute to their
members that do not have a requirement for Hillmans in-store service. These arrangements reduce
credit risk and logistic expenses for Hillman while also reducing central warehouse inventory and
delivery costs for the cooperatives.
A typical hardware store maintains thousands of different items in inventory, many of which
generate small dollar sales but large profits. It is difficult for a retailer to economically
monitor all stock levels and to reorder the products from multiple vendors. The problem is
compounded by the necessity of receiving small shipments of inventory at different times and having
to stock the goods. The failure to have these small items available will have an adverse effect on
store traffic, thereby denying the retailer the opportunity to sell items that generate higher
dollar sales.
Hillman sells its products to approximately 19,000 customers, the top five of which accounted for
approximately 47.7% of its total revenue in 2009. Lowes is the single largest customer,
representing approximately 23.7% of total revenue, Home Depot is the second largest at
approximately 11.1% and Wal-Mart is the third largest at approximately 8.0% of total revenue. No
other customer accounted for more than 5.0% of the Companys total revenue in 2009.
The Companys telemarketing activity sells to thousands of smaller hardware outlets and
non-hardware accounts. New business is also being pursued internationally in such places as
Canada, Mexico, South and Central America, and the Caribbean.
Sales and Marketing
The Hillman Group provides product support, customer service and profit opportunities for its
retail distribution partners. The Company believes its competitive advantage is in its ability to
provide a greater level of customer service than its competitors.
As a company, service is the hallmark of Hillman. The national accounts field service organization
consists of over 475 employees and 34 field managers focusing on Big Box retailers, pet super
stores, large national discount chains and grocery stores. This
8
Table of Contents
organization reorders products,
details store shelves, and sets up in-store promotions. Many of the Companys largest customers
use electronic data interchange (EDI) for handling of orders and invoices.
The Company employs what it believes to be the largest factory direct sales force in the industry.
The sales force which consists of 216 people, and is managed by 20 field managers, focuses on the
F&I customers. The depth of the sales and service team enables Hillman to maintain consistent call
cycles ensuring that all customers experience proper stock levels and inventory turns. This team
also builds custom plan-o-grams of displays to fit the needs of any store, as well as establishing
programs that meet customers requirements for pricing, invoicing, and other needs. This group
also benefits from
daily internal support from the inside sales and customer service teams. Each sales representative
is responsible for approximately 57 full service accounts that they call on approximately every two
weeks.
These efforts, coupled with those of the marketing department, allow the sales force to not only
sell products, but sell merchandising and technological support capabilities as well. Hillmans
marketing department provides support through the development of new products, sales collateral
material, promotional items, merchandising aids and custom signage. Marketing services such as
advertising, graphic design, and trade show management are also provided. The department is
organized along Hillmans three marketing competencies: product management, channel marketing and
marketing communications.
Competition
The primary competitors in the national accounts marketplace for fasteners are ITW Inc., Dorman
Inc., Crown Bolt LLC., Midwest Fasteners, and the Newell Group. Competition is based primarily on
in-store service and price. Other competitors are local and regional distributors. Competitors in
the pet tag market are TagWorks, LLC, specialty retailers, direct mail order and retailers with
in-store mail order capability. The Quick-Tag system has patent protected proprietary technology
that is a major barrier to entry and preserves this market segment.
The principal competitors for Hillmans F&I business are Midwest Fasteners, Serv-A-Lite, and Hy-Ko
in the hardware store marketplace. Midwest Fasteners and Serv-A-Lite primarily focus on fasteners,
while Hy-Ko is the major competitor in LNS products and keys/key accessories. Management estimates
that Hillman sells to approximately 65% of the full service hardware stores in the F&I marketplace.
The hardware outlets that purchase products but not services from Hillman also purchase products
from local and regional distributors and cooperatives. Hillman competes primarily on field
service, merchandising, as well as product availability, price and depth of product line.
Insurance Arrangements
Under the Companys current insurance programs, commercial umbrella coverage is obtained for
catastrophic exposure and aggregate losses in excess of expected claims. Since October 1991, the
Company has retained the exposure on certain expected losses related to workers compensation,
general liability and automobile. The Company also retains the exposure on expected losses related
to health benefits of certain employees. The Company believes that its present insurance is
adequate for its businesses. See Note 17, Commitments and Contingencies, of Notes to Consolidated
Financial Statements.
Employees
As of December 31, 2009, the Company had 1,850 full time and part time employees. In the opinion
of management, employee relations are good.
9
Table of Contents
Backlog
The Company does not consider the sales backlog to be a significant indicator of future performance
due to the short order cycle of its business. The Companys sales backlog from ongoing operations
was approximately $3.5 million as of December 31, 2009 and approximately $7.7 million as of
December 31, 2008.
Where You Can Find More Information
The Company files quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on
Form 8-K, and other information with the Securities and Exchange Commission (the Commission). You
may read and copy any reports, statements, or other information filed by the Company at the
Commissions public reference rooms at 100 F Street, N.E., Washington, D.C. 20549. Please call the
Commission at 1-800-SEC-0330 for more information on the public reference rooms. The Commission
also maintains an Internet site at http://www.sec.gov that contains quarterly, annual, and current
reports, proxy and information statements, and other information regarding issuers, like Hillman,
that file electronically with the Commission.
Item 1A Risk Factors.
An investment in the Companys securities involves certain risks as discussed below. However,
the risks set forth below are not the only risks the Company faces, and it faces other risks which
have not yet been identified or which are not yet otherwise predictable. If any of the following
risks occur or are otherwise realized, the Companys business, financial condition and results of
operations could be materially adversely affected. You should consider carefully the risks
described below and all other information in this annual report, including the Companys financial
statements and the related notes and schedules thereto, prior to making an investment decision with
regard to the Companys securities.
Current economic conditions may adversely impact demand for our products, reduce access to credit
and cause our customers and others with which we do business to suffer financial hardship, all of
which could adversely impact our business, results of operations, financial condition and cash
flows.
Our business, financial condition and results of operations have and may continue to be affected by
various economic factors. The U.S. economy has undergone a period of recession and the future
economic environment may continue to be less favorable than that of recent years. This slowdown
has, and could further lead to, reduced consumer and business spending in the foreseeable future,
including by our customers. In addition, economic conditions, including decreased access to
credit, may result in financial difficulties leading to restructurings, bankruptcies, liquidations
and other unfavorable events for our customers, suppliers and other service providers. If such
conditions continue or further deteriorate in 2010 or through fiscal 2011, our industry, business
and results of operations may be severely impacted.
The Companys business is impacted by general economic conditions in the U.S. and international
markets, particularly the U.S. retail markets including hardware stores, home centers, mass
merchants, and other retailers. In recent quarters, operations have been negatively impacted by
the general downturn in the U.S. economy, including higher unemployment figures, and the
contraction of the retail market. Although there have been certain signs of improvement in the
economy, generally such conditions are not expected to improve significantly in the near term and
may have the effect of reducing consumer spending which could adversely affect our results of
operations during the next year.
The Company operates in a highly competitive industry, which may have a material adverse effect on
its business, financial condition and results of operations.
The retail industry is highly competitive, with the principal methods of competition being price,
quality of service, quality of products, product availability, credit terms and the provision of
value-added services, such as merchandising design, in-store service
10
Table of Contents
and inventory management. The
Company encounters competition from a large number of regional and national distributors, some of
which have greater financial resources than
the Company and may offer a greater variety of products. If these competitors are successful, the
Companys business, financial condition and results of operations may be materially adversely
affected.
If the current weakness continues in the retail markets including hardware stores, home centers,
mass merchants and other retail outlets in North America, or general recessionary conditions
worsen, it could have a material adverse effect on the Companys business.
The Companys business has been adversely affected by the decline in the North American economy,
particularly with respect to retail markets including hardware stores, home centers, lumberyards
and mass merchants. It is possible this softness will continue or further deteriorate in 2010 or
through fiscal 2011. To the extent it persists or deteriorates, there is likely to be an
unfavorable impact on demand for Company products which could have a material adverse effect on
sales, earnings and cash flows. In addition, due to current economic conditions, it is possible
certain customers credit-worthiness may erode resulting in increased write-offs of customer
receivables.
The Company has significant indebtedness that could affect operations and financial condition.
The Company had consolidated long term debt and capitalized lease obligations of $208.2 million at
December 31, 2009. The level of indebtedness and the significant debt servicing costs associated
with our indebtedness requires that a substantial portion of cash flows from operations be
dedicated to make payments on debt, thereby reducing the amount of cash flows available for working
capital, capital expenditures, acquisitions, and other general corporate purposes; limiting
flexibility in planning for, or reacting to, changes in the industries in which we compete; placing
the Company at a competitive disadvantage compared to competitors, some of whom have lower debt
service obligations and greater financial resources; limiting the ability to borrow additional
funds; and increasing the Companys vulnerability to general adverse economic and industry
conditions.
The decline of general economic conditions in the U.S. capital markets over the past two years has
significantly reduced the availability of credit for a number of companies. This may impact our
ability to borrow additional funds, if necessary.
The failure to meet certain financial covenants required by our credit agreements may materially
and adversely affect assets, financial position and cash flows.
Certain of the Companys credit agreements require the maintenance of certain fixed charge,
interest coverage and leverage ratios and limit our ability to incur debt, make investments, make
dividend payments to holders of the Trust Preferred Securities or undertake certain other business
activities. In particular, our maximum allowed leverage requirement declines from 3.25x as of
December 31, 2009 to 3.00x as of March 31, 2010. A breach of the leverage covenant, or any other
covenants, could result in an event of default under the credit agreements. Upon the occurrence of
an event of default under the credit agreements, all amounts outstanding, together with accrued
interest, could be declared immediately due and payable by our lenders. If this happens, our
assets may not be sufficient to repay in full the payments due under the credit agreements. The
current credit market environment and other macro-economic challenges affecting the global economy
may adversely impact our ability to borrow sufficient funds or sell assets or equity in order to
pay existing debt.
The Companys business, financial condition and results of operations may be materially adversely
affected by seasonality.
In general, the Company has experienced seasonal fluctuations in sales and operating results from
quarter to quarter. Typically, the first calendar quarter is the weakest due to the effect of
weather on home projects and the construction industry.
11
Table of Contents
Large customer concentration and the inability to penetrate new channels of distribution could
adversely affect the business.
The Companys three largest customers constituted approximately 42.8% of net sales and 55.0% of the
year-end accounts receivable balance for 2009. Each of these customers is a Big Box chain store.
As a result, the Companys results of operations depend greatly on our ability to maintain existing
relationships and arrangements with these Big Box chain stores. To the extent the Big Box chain
stores are materially adversely impacted by the current economic slowdown, this could have a
negative effect on our results of operations. The loss of one of these customers or a material
adverse change in the relationship with these customers could have a negative impact on business.
The Companys inability to penetrate new channels of distribution may also have a negative impact
on its future sales and business.
Successful sales and marketing efforts depend on the Companys ability to recruit and retain
qualified employees.
The success of the Companys efforts to grow its business depends on the contributions and
abilities of key executives, its sales force and other personnel, including the ability of its
sales force to achieve adequate customer coverage. The Company must therefore continue to recruit,
retain and motivate management, sales and other personnel to maintain its current business and
support its projected growth. A shortage of these key employees might jeopardize the Companys
ability to implement its growth strategy.
The Company is exposed to adverse changes in currency exchange rates.
Exposure to foreign currency risk results because the Company, through its global operations,
enters into transactions and makes investments denominated in multiple currencies. The Companys
predominant exposures are in Mexican, Canadian and Asian currencies, including the Chinese Renminbi
(RMB). In preparing its financial statements, for foreign operations with functional currencies
other than the U.S. dollar, asset and liability accounts are translated at current exchange rates,
and income and expenses are translated using weighted-average exchange rates. With respect to the
effects on translated earnings, if the U.S. dollar strengthens relative to local currencies, the
Companys earnings could be negatively impacted. The Company does not make a practice of hedging
its non-U.S. dollar earnings.
The Company sources many products from China and other Asian countries for resale in other regions.
To the extent the RMB or other currencies appreciate with respect to the U.S. dollar, the Company
may experience cost increases on such purchases. The RMB appreciated approximately 7% versus the
U.S. dollar in 2008 and remained substantially unchanged in 2009. The RMB currency fluctuation in
2009 and 2008 has not generated material cost increases for products sourced from China, however
further significant appreciation of the RMB or other currencies in countries where the Company
sources product could adversely impact profitability. The Company may not be successful at
implementing customer pricing or other actions in an effort to mitigate the related cost increases
and thus its results of operations may be adversely impacted.
The Companys results of operations could be negatively impacted by inflation or deflation in the
cost of raw materials, freight and energy.
The Companys products are manufactured of metals, including but not limited to steel, aluminum,
zinc, and copper. Additionally, the Company uses other commodity based materials in the
manufacture of LNS that are resin based and subject to fluctuations in the price of oil. The
Company is also exposed to fluctuations in the price of diesel fuel in the form of freight
surcharges on customer shipments and the cost of gasoline used by the field sales and service
force. As described in more detail in Item 7 hereto, the Company has been negatively impacted by
commodity and freight inflation in recent years. Continued inflation over a period of years would
result in significant increases in inventory costs and operating expenses. If the Company is
unable to mitigate these inflation increases through various customer pricing actions and cost
reduction initiatives, its financial condition may be adversely affected. Conversely, in the event
there is deflation, the Company may experience pressure from its customers to reduce
12
Table of Contents
prices. There
can be no assurance that the Company would be able to reduce its cost base
(through negotiations with suppliers or other measures) to offset any such price concessions which
could adversely impact results of operations and cash flows.
The Companys business is subject to risks associated with sourcing product from overseas.
The Company imports large quantities of its fastener products. Substantially all of its import
operations are subject to customs requirements and to tariffs and quotas set by governments through
mutual agreements or bilateral actions. In addition, the countries from which the Companys
products and materials are manufactured or imported may, from time to time, impose additional
quotas, duties, tariffs or other restrictions on its imports or adversely modify existing
restrictions. Adverse changes in these import costs and restrictions, or the Companys suppliers
failure to comply with customs regulations or similar laws, could harm the Companys business.
The Companys ability to import products in a timely and cost-effective manner may also be affected
by conditions at ports or issues that otherwise affect transportation and warehousing providers,
such as port and shipping capacity, labor disputes, severe weather or increased homeland security
requirements in the U.S. and other countries. These issues could delay importation of products or
require the Company to locate alternative ports or warehousing providers to avoid disruption to
customers. These alternatives may not be available on short notice or could result in higher
transit costs, which could have an adverse impact on the Companys business and financial
condition.
Acquisitions have formed a significant part of our growth strategy in the past and may continue to
do so. If we are unable to identify suitable acquisition candidates or obtain financing needed to
complete an acquisition, our growth strategy may not succeed.
Historically, the Companys growth strategy has relied on acquisitions that either expand or
complement its businesses in new or existing markets. However, there can be no assurance that the
Company will be able to identify or acquire acceptable acquisition candidates on terms favorable to
the Company and in a timely manner, if at all, to the extent necessary to fulfill Hillmans growth
strategy.
The process of integrating acquired businesses into the Companys operations may result in
unforeseen difficulties and may require a disproportionate amount of resources and managements
attention, and there can be no assurance that Hillman will be able to successfully integrate
acquired businesses into its operations.
The current economic environment may make it difficult to acquire businesses in order to further
our growth strategy. We will continue to seek acquisition opportunities both to expand into new
markets and to enhance our position in our existing markets. However, our ability to do so will
depend on a number of factors, including our ability to obtain financing that we may need to
complete a proposed acquisition opportunity which may be unavailable or available on terms that are
not advantageous to us. If financing is unavailable, we may be forced to forego otherwise
attractive acquisition opportunities which may have a negative effect on our ability to grow.
If the Company were required to write down all or part of its goodwill or indefinite-lived
tradenames, its results of operations could be materially adversely affected.
As a result of the Merger Transaction, the 2006 acquisition of SteelWorks, and the 2007 acquisition
of All Points, the Company has $257.8 million of goodwill and $47.4 million of indefinite-lived
tradenames recorded on its Consolidated Balance Sheet at December 31, 2009. The Company is
required to periodically determine if its goodwill or indefinite-lived tradenames have become
impaired, in which case it would write down the impaired portion of the intangible asset. If the
Company were required to write down all or part of its goodwill or indefinite-lived tradenames, its
net income could be materially adversely affected.
13
Table of Contents
The Companys success is highly dependent on information and technology systems.
The Company believes that its proprietary computer software programs are an integral part of its
business and growth strategies. Hillman depends on its information systems to process orders, to
manage inventory and accounts receivable collections, to purchase, sell and ship products
efficiently and on a timely basis, to maintain cost-effective operations and to provide superior
service to its customers. There can be no assurance that the precautions which the Company has
taken against certain events that could disrupt the operations of its information systems will
prevent the occurrence of such a disruption. Any such disruption could have a material adverse
effect on the Companys business and results of operations.
The Company is subject to fluctuations in interest rates.
A significant portion of the Companys outstanding debt has variable rate interest. Increases in
borrowing rates will increase the Companys cost of borrowing, which may affect the Companys
results of operations and financial condition.
Item 1B Unresolved Staff Comments.
None.
14
Table of Contents
Item 2 Properties.
The Companys principal office, manufacturing and distribution properties are as follows:
Approximate | ||||||
Location | Square Footage | Description | ||||
Cincinnati, Ohio |
248,200 | Office, Distribution | ||||
Forest Park, Ohio |
335,700 | Distribution | ||||
Tempe, Arizona |
184,100 | Office, Mfg., Distribution | ||||
Jacksonville, Florida |
96,500 | Distribution | ||||
Shafter, California |
84,000 | Distribution | ||||
Lewisville, Texas |
80,500 | Distribution | ||||
Wilsonville, Oregon |
29,400 | Distribution | ||||
LaCrosse, Wisconsin |
48,000 | Distribution | ||||
Goodlettsville, Tennessee |
72,000 | Mfg., Distribution | ||||
Pompano Beach, Florida |
38,800 | Office, Distribution | ||||
Mississauga, Ontario |
34,700 | Office, Distribution |
With the exception of Goodlettsville, Tennessee, all of the Companys facilities are leased. In
the opinion of management, the Companys existing facilities are in good condition.
Item 3 Legal Proceedings.
Legal proceedings are pending which are either in the ordinary course of business or
incidental to the Companys business. Those legal proceedings incidental to the business of the
Company are generally not covered by insurance or other indemnity. In the opinion of management,
the ultimate resolution of the pending litigation matters will not have a material adverse effect
on the consolidated financial position, operations or cash flows of the Company.
Item 4 Reserved.
15
Table of Contents
PART II
Item 5 Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
Stock Exchange Listing
The Companys common stock does not trade and is not listed on or quoted in an exchange or other
market. The Trust Preferred Securities trade under the ticker symbol HLM.Pr on the NYSE Amex
(formerly the American Stock Exchange). The following table sets forth the high and low closing
sale prices as reported on the NYSE Amex for the Trust Preferred Securities.
2009 | High | Low | ||||||
First Quarter |
$ | 13.00 | $ | 3.56 | ||||
Second Quarter |
21.50 | 10.00 | ||||||
Third Quarter |
25.30 | 20.80 | ||||||
Fourth Quarter |
26.00 | 21.00 |
2008 | High | Low | ||||||
First Quarter |
$ | 29.81 | $ | 28.47 | ||||
Second Quarter |
30.22 | 29.30 | ||||||
Third Quarter |
30.23 | 28.75 | ||||||
Fourth Quarter |
28.50 | 10.00 |
The Trust Preferred Securities have a liquidation value of $25.00 per security. As of March 5,
2010, there were 522 holders of Trust Preferred Securities and fifteen (15) common stockholders.
The total number of Trust Preferred Securities outstanding as of March 26, 2010, was 4,217,724.
The total number of shares of Common Stock outstanding as of March 26, 2010, was 9,958.6.
Distributions
The Company pays interest to the Hillman Group Capital Trust (the Trust) on the Junior
Subordinated Debentures underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the aggregate. The Trust
distributes an equivalent amount to the holders of the Trust Preferred Securities. For the years
ended December 31, 2009 and 2008, the Company paid $12.4 million and $12.2 million per year,
respectively, in interest on the Junior Subordinated Debentures, which was equivalent to the
amounts distributed by the Trust for the same periods.
Pursuant to the Indenture that governs the Trust Preferred Securities, the Trust was able to defer
distribution payments to holders of the Trust Preferred Securities for a period that cannot exceed
60 months (the Deferral Period). During the Deferral Period, the Company was required to accrue
the full amount of all interest payable, and such deferred interest payments were immediately
payable by the Company at the end of the Deferral Period. In the first six months of 2009, the
Company accrued $6.3 million in interest payable to the Trust on the Junior Subordinated
Debentures. On July 31, 2009, the Trust resumed payments of monthly distributions and paid all
amounts accrued during the six month Deferral Period.
The interest payments on the Junior Subordinated Debentures underlying the Trust Preferred
Securities are deductible for federal income tax purposes by the Company under current law and will
remain an obligation of the Company until the Trust Preferred Securities are redeemed or upon their
maturity in 2027.
For more information on the Trust and Junior Subordinated Debentures, see Item 7-Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Issuer Purchases of Equity Securities
On October 13, 2009, a former executive of the Company exercised his right to redeem certain
securities of the Company and its wholly-owned subsidiary, the Hillman Investment Company, in
accordance with the Executive Securities Agreement (ESA) dated March 31,
16
Table of Contents
2004. Under the terms of the ESA, the executive put back to the Company 11.93 shares of Class A
Common Stock for $32.4, 29.44 shares of Class B Common Stock for $80.1, 281.42 preferred options
for Class A Preferred Stock for $228.9, and 114.71 purchased options for Class A Preferred Stock
for $188.2. In addition, the former executive put back to the Company 196.34 preferred options for
Class A Preferred Stock in Hillman Investment Company for $150.7 and 80.03 purchased options for
Class A Preferred Stock in Hillman Investment Company for $127.7.
On November 20, 2009, a former executive of the Company exercised his right to redeem certain
securities of the Company and the Hillman Investment Company in accordance with the ESA dated July
31, 2006. Under the terms of the ESA, the former executive put back to the Company 4.396 shares of
Class A Common Stock for $22.8, 88.0 shares of Class A Preferred Stock for $127.2, 30.385 common
options for Class B Common Stock for $94.8, and 62.0 shares of Hillman Investment Company Class A
Preferred Stock for $88.2.
Item 6 Selected Financial Data.
The following table sets forth selected consolidated financial data (as restated, See Note 18
of Notes to Consolidated Financial Statements) of the Company as of and for the years ended
December 31, 2009, 2008, 2007, 2006 and 2005. See the accompanying Notes to Consolidated Financial
Statements and Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations for information regarding the acquisition of the Company by CHS and the Companys debt
refinancing as well as other acquisitions that affect comparability.
(dollars in thousands) | ||||||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(as restated) | (as restated) | (as restated) | (as restated) | (as restated) | ||||||||||||||||
Income Statement Data: |
||||||||||||||||||||
Net sales |
$ | 458,161 | $ | 481,923 | $ | 445,628 | $ | 423,901 | $ | 382,512 | ||||||||||
Gross profit |
233,519 | 237,276 | 229,895 | 220,450 | 206,290 | |||||||||||||||
Extinguishment of debt |
| | | 726 | | |||||||||||||||
Net loss |
(1,230 | ) | (1,165 | ) | (7,922 | ) | (6,333 | ) | (1,617 | ) | ||||||||||
Balance Sheet Data at December 31: |
||||||||||||||||||||
Total assets |
$ | 628,481 | $ | 650,677 | $ | 660,358 | $ | 653,882 | $ | 631,586 | ||||||||||
Long-term debt & capital lease obligations (1) |
208,163 | 253,069 | 281,800 | 284,406 | 263,508 | |||||||||||||||
Mandatorily redeemable preferred stock |
111,452 | 100,146 | 89,773 | 80,494 | 72,110 | |||||||||||||||
Management purchased preferred options |
6,617 | 6,016 | 5,298 | 4,659 | 4,087 |
(1) | Includes current portion of long-term debt and capitalized lease obligations. | |
(2) | The Company has restated the financial statements for each of the years presented to correct an error in the accounting for income taxes related to stock based compensation. See Note 18 in the Notes to the Consolidated Financial Statements. |
17
Table of Contents
Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operation.
All of the financial information presented in this Item 7 has been adjusted to reflect the
restatement of the accompanying consolidated financial statements as of and for the fiscal years
ended December 31, 2009, December 31, 2008, and December 31, 2007. Specifically, we have restated
our consolidated balance sheets as of December 31, 2009 and 2008, and the related consolidated statements of income, consolidated
statements of stockholders equity and consolidated statements of cash flows for the
years ended December 31, 2009, 2008 and 2007. The restatement is more fully described in the
Explanatory Note immediately preceding Part I, Item 1 and in Note 18 Restatement of Consolidated
Financial Statements, which is included in Financial Statements and Supplementary Data in Item 8
of this Form 10-K/A. The following discussion provides information which management believes is
relevant to an assessment and understanding of the Companys operations and financial condition.
This discussion should be read in conjunction with the consolidated financial statements and
related notes and schedules thereto appearing elsewhere herein.
Forward-Looking Statements
Certain disclosures related to acquisitions, refinancing, capital expenditures, resolution of
pending litigation and realization of deferred tax assets contained in this annual report involve
substantial risks and uncertainties and may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking
statements can be identified by terminology such as may, will, should, could, would,
expect, plan, anticipate, believe, estimate, continue, project or the negative of
such terms or other similar expressions.
These forward-looking statements are not historical facts, but rather are based on managements
current expectations, assumptions and projections about future events. Although management
believes that the expectations, assumptions and projections on which these forward-looking
statements are based are reasonable, they nonetheless could prove to be inaccurate, and as a
result, the forward-looking statements based on those expectations, assumptions and projections
also could be inaccurate. Forward-looking statements are not guarantees of future performance.
Instead, forward-looking statements are subject to known and unknown risks, uncertainties and
assumptions that may cause the Companys strategy, planning, actual results, levels of activity,
performance, or achievements to be materially different from any strategy, planning, future
results, levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Actual results could differ materially from those currently
anticipated as a result of a number of factors, including the risks and uncertainties discussed
under captions Risk Factors set forth in Item 1A of this annual report. Given these
uncertainties, current or prospective investors are cautioned not to place undue reliance on any
such forward-looking statements.
All forward-looking statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the cautionary statements included in this annual report;
they should not be regarded as a representation by the Company or any other individual. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this annual report might not occur or be
materially different from those discussed.
General
The Hillman Companies, Inc. (Hillman or the Company), which had net sales of approximately
$458.2 million in 2009, is one of the largest providers of hardware-related products and related
merchandising services to the retail markets in North America. The Companys principal business is
operated through its wholly-owned subsidiary, The Hillman Group, Inc. (the Hillman Group). A
subsidiary of the Hillman Group operates in (1) Canada under the name The Hillman Group Canada,
Ltd., (2) Mexico under the name SunSource Integrated Services de Mexico SA de CV, and (3) primarily
in Florida under the name All Points Industries, Inc. The Hillman Group sells its product lines
and provides its services to hardware stores, home centers, mass merchants, pet supply stores, and
other retail
18
Table of Contents
outlets principally in the United States, Canada, Mexico, Latin America and the Caribbean. Product
lines include thousands of small parts such as fasteners and related hardware items; threaded rod
and metal shapes; keys, key duplication systems and accessories; and identification items, such as,
tags and letters, numbers, and signs (LNS). Services offered include design and installation of
merchandising systems and maintenance of appropriate in-store inventory levels.
Merger Transaction
On March 31, 2004, The Hillman Companies, Inc. was acquired by affiliates of Code Hennessy &
Simmons LLC (CHS). Pursuant to the terms and conditions of an Agreement and Plan of Merger
(Merger Agreement) dated as of February 14, 2004, the Company was merged with an affiliate of CHS
with the Company surviving the merger (Merger Transaction). The total consideration paid in the
Merger Transaction was $511.6 million including repayment of outstanding debt and including the
value of the Companys outstanding Trust Preferred Securities ($102.4 million at merger).
Prior to the merger, Allied Capital Corporation (Allied Capital) owned 96.8% of the Companys
common stock. As a result of the change of control, affiliates of CHS own 49.3% of the Companys
common stock and 54.6% of the Companys voting common stock, Ontario Teachers Pension Plan
(OTPP) owns 28.0% of the Companys common stock and 31.0% of the Companys voting common stock
and HarbourVest Partners VI owns 8.7% of the Companys common stock and 9.7% of the Companys
voting common stock. OTPPs voting rights with respect to the election of directors to the Board
of Directors is limited to the lesser of 30.0% or the actual percentage of voting stock held.
Certain current and former members of management own 13.7% of the Companys common stock and 4.4%
of the Companys voting common stock. Allied Capital no longer has an ownership interest in the
Company.
Financing Arrangements
On March 31, 2004, the Company, through its Hillman Group subsidiary, refinanced its revolving
credit and senior term loans with a Senior Credit Agreement (the Senior Credit Agreement)
consisting of a $40.0 million revolving credit line (the Revolver) and a $217.5 million term loan
(the Term Loan). The Senior Credit Agreement had a seven-year term and provided borrowings at
interest rates based on the London Interbank Offered Rates (the LIBOR) plus a margin of between
2.25% and 3.00% (the LIBOR Margin), or prime (the Base Rate) plus a margin of between 1.25% and
2.0% (the Base Rate Margin). The applicable LIBOR Margin and Base Rate Margin were based on the
Companys leverage as of the last day of the preceding fiscal quarter. In accordance with the
Senior Credit Agreement, letter of credit commitment fees were based on the average daily face
amount of each outstanding letter of credit multiplied by a letter of credit margin of between
2.25% and 3.00% per annum (the Letter of Credit Margin). The Letter of Credit Margin was also
based on the Companys leverage at the date of the preceding fiscal quarter. The Company also paid
a commitment fee of 0.50% per annum on the average daily unused Revolver balance.
On July 21, 2006, the Company amended and restated the Senior Credit Agreement. The Term Loan was
increased by $22.4 million to $235.0 million. Proceeds of the additional Term Loan borrowings were
used to pay down outstanding Revolver borrowings. The Revolver credit line remained at $40.0
million. Additionally, the LIBOR margin on the Term Loan was reduced by 25 basis points and
certain financial covenants were revised to provide additional flexibility. There were no other
significant changes to the Senior Credit Agreement. The Company incurred $1.1 million in financing
fees in connection with the amended and restated agreement. The fees were capitalized and will be
amortized over the remaining term of the Senior Credit Agreement, as amended.
Effective August 7, 2009 the Company, through its Hillman Group subsidiary, entered into an Amended
and Restated Credit Agreement which amended its revolving credit and senior term loan (Amended
Senior Credit Agreement). Lenders representing 82.3% of the
19
Table of Contents
outstanding balance of the revolving credit and senior term loan consented to the Amended Senior
Credit Agreement (Consenting Lenders). For the 17.7% of Lender commitments which did not consent
to the amendment (Non-Consenting Lenders), pricing and amortization of the senior term loan
remain unchanged. Under the terms of the Amended Senior Credit Agreement, the Consenting Lenders
agreed to extend the term of the Senior Credit Agreement to March 31, 2012 from March 31, 2011.
Amortization of the senior term loan was set at 1.5% per quarter beginning September 1, 2009, with
the remainder due at maturity. Pricing on the senior term loan was increased from LIBOR plus a
margin of 2.75% to LIBOR plus a margin of 4.50%. The fixed charge and interest coverage covenants
remained the same and were extended for 12 months while the leverage covenant was extended 12
months and increased 0.25 to 3.0 times from March 31, 2010 to March 31, 2012. Additionally, the
amendment includes a $18.0 million delayed draw term loan (Delayed Draw) which can be used only
to fund all or a portion of the amortization payments for the Non-Consenting Lenders. The pricing,
covenants, terms and conditions for the Delayed Draw are the same as under the Amended Senior
Credit Agreement. The Company was in compliance with all provisions of the Amended Senior Credit
Agreement as of December 31, 2009.
The Amended Senior Credit Agreement also extended the revolving credit line to March 31, 2012 from
March 31, 2011 and reduced it to $20.0 million from $40.0 million. Pricing on the revolving credit
line was increased from LIBOR plus a margin of 2.75% to LIBOR plus a margin of 4.50% and the unused
commitment fee was increased 25 basis points to 75 basis points.
On March 31, 2004, the Company, through its Hillman Group subsidiary, issued $47.5 million of
unsecured subordinated notes to Allied Capital maturing on September 30, 2011 (Subordinated Debt
Issuance). Interest on the Subordinated Debt Issuance was at a fixed rate of 13.5% per annum,
with cash interest payments required on a quarterly basis at a fixed rate of 11.25% commencing
April 15, 2004. The outstanding principal balance of the Subordinated Debt Issuance was increased
on a quarterly basis at the remaining 2.25% fixed rate (the PIK Amount). All of the PIK Amounts
are due on the maturity date of the Subordinated Debt Issuance.
Effective July 21, 2006, the Subordinated Debt Agreement was amended to reduce the interest rate to
a fixed rate of 10.0% payable quarterly. In addition, financial covenants were revised consistent
with the changes to the amended and restated Senior Credit Agreement. The reduction in the
interest rate was retroactive to May 15, 2006.
In connection with the Amended Senior Credit Agreement effective August 7, 2009, the Subordinated
Debt Agreement was amended to extend the maturity date to September 30, 2012 from September 30,
2011 and increase the interest rate from 10.0% to 12.5%. Covenant levels were extended and
modified consistent with the Amended Senior Credit Agreement.
On May 6, 2009, a group of investors, including affiliates of AEA Investors LP, CIG & Co. and
several private investors, assumed the unsecured subordinated notes previously held by Allied
Capital.
The Company pays interest to the Hillman Group Capital Trust (Trust) on the Junior Subordinated
Debentures underlying the Trust Preferred Securities at the rate of 11.6% per annum on their face
amount of $105.4 million, or $12.2 million per annum in the aggregate. The Trust distributes an
equivalent amount to the holders of the Trust Preferred Securities. In order to retain capital, the
Companys Board of Directors determined to temporarily defer interest payments on the Junior
Subordinated Debentures and the Trust determined to defer the payment of cash distributions to
holders of Trust Preferred Securities beginning with the January 2009 distribution. The Companys
decision to defer the payment of interest on the Junior Subordinated Debentures was designed to
ensure that the Company preserve cash and maintain its compliance with the financial covenants
contained in its Senior Credit and Subordinated Debt Agreements. Pursuant to the Indenture that
governs the Trust Preferred Securities, the Trust is able to defer distribution payments to holders
of the Trust Preferred Securities for a period that cannot exceed 60 months (the Deferral
Period). During the Deferral Period, the Company is required to accrue the full amount of all
interest payable, and such deferred
20
Table of Contents
interest payable was immediately payable by the Company at the end of the Deferral Period. On July
31, 2009, the Company ended the Deferral Period and the Trust resumed monthly distributions and
paid all deferred distributions to holders of the Trust Preferred Securities.
21
Table of Contents
On August 28, 2006, the Company entered into an Interest Rate Swap Agreement (2006 Swap) with a
two-year term for a notional amount of $50 million. The 2006 Swap fixed the interest rate at
5.375% plus applicable interest rate margin. The 2006 Swap expired on August 28, 2008.
On August 29, 2008, the Company entered into a new Interest Rate Swap Agreement (2008 Swap) with
a three-year term for a notional amount of $50 million. The 2008 Swap fixes the interest rate at
3.41% plus applicable interest rate margin.
Acquisitions
On December 28, 2007, the Hillman Group entered into a Stock Purchase Agreement by and among
All Points Industries, Inc. (All Points), Gabrielle Mann, Gregory Mann and the Hillman Group,
whereby the Hillman Group acquired all of the equity interest of All Points. All Points, a Pompano
Beach, Florida, based distributor of commercial and residential fasteners catering to the hurricane
protection industry, has positioned itself as a major supplier to manufacturers of railings, screen
enclosures, windows and hurricane shutters. All Points has also developed a retail division that
supplies hardware for hurricane protection to the do-it-yourself consumer. Revenues of the
acquired All Points business were approximately $15.1 million and $21.3 million for the years ended
December 31, 2009 and 2008, respectively. The aggregate purchase price, including acquisition
costs, was $10.2 million paid in cash at closing. The acquisition of this business was made to
strengthen Hillmans presence in the Florida market and in the hurricane protection market.
Product Revenues
The following is revenue based on products for the Companys significant product categories
(in 000s):
Year | Year | Year | ||||||||||
Ended | Ended | Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Net sales |
||||||||||||
Keys |
$ | 78,012 | $ | 80,754 | $ | 79,370 | ||||||
Engraving |
35,518 | 40,945 | 39,158 | |||||||||
Letters, numbers and signs |
34,287 | 34,671 | 37,711 | |||||||||
Fasteners |
253,703 | 261,646 | 230,857 | |||||||||
Threaded rod |
30,118 | 37,145 | 30,693 | |||||||||
Code cutter |
3,353 | 4,934 | 5,149 | |||||||||
Builders hardware |
3,832 | 1,606 | 2,578 | |||||||||
Other |
19,338 | 20,222 | 20,112 | |||||||||
Consolidated net sales |
$ | 458,161 | $ | 481,923 | $ | 445,628 | ||||||
22
Table of Contents
Results of Operations
Sales and Profitability for each of the Three Years Ended December 31,
(dollars in thousands) | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
% of | % of | % of | ||||||||||||||||||||||
Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||
(as restated) | (as restated) | (as restated) | ||||||||||||||||||||||
Net sales |
$ | 458,161 | 100.0 | % | $ | 481,923 | 100.0 | % | $ | 445,628 | 100.0 | % | ||||||||||||
Cost of
sales (exclusive of depreciation
and amortization shown below) |
224,642 | 49.0 | % | 244,647 | 50.8 | % | 215,733 | 48.4 | % | |||||||||||||||
Gross profit |
233,519 | 51.0 | % | 237,276 | 49.2 | % | 229,895 | 51.6 | % | |||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Selling |
77,099 | 16.8 | % | 82,312 | 17.1 | % | 80,174 | 18.0 | % | |||||||||||||||
Warehouse & delivery |
48,496 | 10.6 | % | 55,781 | 11.6 | % | 55,328 | 12.4 | % | |||||||||||||||
General & administrative |
24,818 | 5.4 | % | 20,776 | 4.3 | % | 21,232 | 4.8 | % | |||||||||||||||
Stock compensation expense |
8,737 | 1.9 | % | 2,481 | 0.5 | % | 5,322 | 1.2 | % | |||||||||||||||
Total SG&A |
159,150 | 34.7 | % | 161,350 | 33.5 | % | 162,056 | 36.4 | % | |||||||||||||||
Depreciation |
16,993 | 3.7 | % | 17,835 | 3.7 | % | 18,224 | 4.1 | % | |||||||||||||||
Amortization |
6,912 | 1.5 | % | 7,073 | 1.5 | % | 7,274 | 1.6 | % | |||||||||||||||
Management fees |
1,010 | 0.2 | % | 1,043 | 0.2 | % | 1,023 | 0.2 | % | |||||||||||||||
Total operating expenses |
184,065 | 40.2 | % | 187,301 | 38.9 | % | 188,577 | 42.3 | % | |||||||||||||||
Other income (expense) |
(120 | ) | 0.0 | % | (2,250 | ) | -0.5 | % | 839 | 0.2 | % | |||||||||||||
Income from operations |
49,334 | 10.8 | % | 47,725 | 9.9 | % | 42,157 | 9.5 | % | |||||||||||||||
Interest expense |
15,521 | 3.4 | % | 20,545 | 4.3 | % | 25,528 | 5.7 | % | |||||||||||||||
Interest expense on mandatorily
redeemable preferred stock &
management purchased preferred
options |
12,312 | 2.7 | % | 11,091 | 2.3 | % | 9,919 | 2.2 | % | |||||||||||||||
Interest expense on junior
subordinated debentures |
12,820 | 2.8 | % | 12,609 | 2.6 | % | 12,609 | 2.8 | % | |||||||||||||||
Investment income on trust
common securities |
(378 | ) | -0.1 | % | (378 | ) | -0.1 | % | (378 | ) | -0.1 | % | ||||||||||||
Income (loss) before taxes |
9,059 | 2.0 | % | 3,858 | 0.8 | % | (5,521 | ) | -1.2 | % | ||||||||||||||
Income tax provision |
10,289 | 2.2 | % | 5,023 | 1.0 | % | 2,401 | 0.5 | % | |||||||||||||||
Net loss |
$ | (1,230 | ) | -0.3 | % | $ | (1,165 | ) | -0.2 | % | $ | (7,922 | ) | -1.8 | % | |||||||||
23
Table of Contents
Current Economic Conditions
The U.S. economy has undergone a period of recession and the future economic environment may
continue to be less favorable than that of recent years. This slowdown has, and could further lead
to, reduced consumer and business spending in the foreseeable future, including by our customers.
In addition, economic conditions, including decreased access to credit, may result in financial
difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for
our customers, suppliers and other service providers. If such conditions continue or further
deteriorate in 2010 or through fiscal 2011, our industry, business and results of operations may be
severely impacted.
The Companys business is impacted by general economic conditions in the U.S. and international
markets, particularly the U.S. retail markets including hardware stores, home centers, mass
merchants, and other retailers. In recent quarters, operations have been negatively impacted by
the general downturn in the U.S. economy, including higher unemployment figures, and the
contraction of the retail market. Although there have been certain signs of improvement in the
economy, generally such conditions are not expected to improve significantly in the near term and
may have the effect of reducing consumer spending which could adversely affect our results of
operations during the next year.
The Company is sensitive to inflation or deflation present in the economies of the United States
and foreign suppliers located primarily in Taiwan and China. For the last several years leading up
to 2009, the rapid growth in Chinas economic activity produced significantly rising costs of
certain imported fastener products. In addition, the cost of commodities such as copper, zinc,
aluminum, nickel, and plastics used in the manufacture of other Company products increased sharply.
Further, increases in the cost of diesel fuel contributed to transportation rate increases. The
trend of rising commodity costs accelerated in the first half of 2008. In the latter half of 2008
and during the first half of 2009, national and international economic difficulties began a
reversal of the trend of rising costs for our products and commodities used in the manufacture of
our products, including a decrease in the cost of oil and diesel fuel. The second half of 2009 has
seen an end to decreasing costs and, in certain instances, moderate increases in the costs for our
products and commodities used in the manufacture of our products. While inflation and resulting
cost increases over a period of years would result in significant increases in inventory costs and
operating expenses, the opposite is true when exposed to a prolonged period of cost decreases. The
ability of the Companys operating divisions to institute price increases and seek price
concessions, as appropriate, is dependent on competitive market conditions.
Years Ended December 31, 2009 and 2008
Net sales of $458.2 million in 2009 decreased $23.8 million, or 4.9%, from 2008.
As a result of the contraction in the residential construction market and a decrease in activity
among our retail customers as a result of depressed economic conditions, sales declined from the
prior year in nearly every sales division. The sales to traditional franchise and independent
accounts, All Points customers and warehouse customers decreased $7.7 million, $6.3 million and
$2.6 million, respectively, from the prior year. Sales of engraving products decreased $5.4
million in 2009 primarily as a result of the lower sales at the large national pet retailers. In
particular, the sales to Petsmart were down by $3.7 million as a result of losing a significant
number of store accounts to a competing tag supplier. The sales of the Mexican and Canadian
divisions were higher by $1.6 million and $0.4 million, respectively, in 2009 as a result of new
store openings by Home Depot Mexico and additional builders hardware and key sales to Canadian
Tire. Other sales to regional, commercial industrial, direct marketing, and Latin American
accounts decreased $2.5 million to $39.6 million in 2009 from $42.1 million in 2008.
The sales to national accounts decreased $1.3 million in 2009 as compared to 2008. The Lowes sales
decreased $2.0 million in 2009 as a result of Lowes decision in 2008 to increase fastener and
threaded rod inventory of high volume items at the store level to increase sales volume. The sale
of code cutter machines to Barnes decreased by $1.6 million as a result of reduced sales to
automotive dealers. The sales in 2009 increased
24
Table of Contents
by $1.5 million to Pep Boys and increased by $1.3 million to Menards as a result of the
introduction of new fastener programs. The Home Depot sales increased $2.0 million in 2009
primarily due to the release of new LNS items and the expansion of the hollow wall anchor program.
The remaining national accounts sales decreased $2.5 million, which included a sales decrease of
$0.5 million to Fred Meyer primarily for keys and fasteners and a sales decrease of $1.1 million to
Walmart, primarily for keys. Unless we benefit from a rebound in economic activity, management
expects 2010 national accounts sales to be relatively flat to slightly higher than the previous
year.
The Companys sales backlog, based upon cancelable purchase orders, was approximately $3.5 million
as of December 31, 2009 compared to approximately $7.7 million as of December 31, 2008.
The Companys gross profit of 51.0% in 2009 increased compared to 49.2% in 2008. For most of 2009,
the Company was able to procure inventory items at lower unit costs than during the same prior year
period as a result of decreased prices for commodities such as steel, plastics, aluminum, nickel,
copper, and zinc. In particular, the cost of steel based fasteners sourced primarily from Taiwan
and China returned to the levels prior to the price increases seen in the second and third quarters
of 2008. The Company was able to implement pricing actions during 2008 to recoup a portion of the
cost increases received from suppliers. This was followed by a reduction in commodity costs in the
second half of 2008 which resulted in lower supplier prices.
Selling, general and administrative (SG&A) expense of $159.2 million in 2009 decreased $2.2
million, or 1.4%, from 2008. Selling expenses decreased $5.2 million, or 6.3%, primarily as a
result of headcount reductions , reduced commissions on lower franchise and independent sales, and
reduced auto and travel related expenses to provide service and merchandising to our customers.
Warehouse and delivery costs decreased $7.3 million in actual terms and decreased from 11.6%
expressed as a percentage of net sales in 2008 to 10.6% in 2009. Freight expense, the largest
component of warehouse and delivery expense, decreased from 4.6% of sales in 2008 to 4.1% of sales
in 2009. The reduction in freight expense as a percentage of sales in 2009 resulted from a reduced
level of fuel surcharges, the negotiation of more favorable freight contracts and the
implementation of shipping and handling efficiencies. Operational improvements to the order
fulfillment process continued to produce lower labor costs and shipping supply expense in 2009.
General and administrative (G&A) expenses of $24.8 million in 2009 were $4.0 million more than
2008. The increase in G&A expenses was primarily the result of the investment performance of
securities held in the non-qualified deferred compensation plans Rabbi Trust which provided an
unfavorable adjustment of $0.3 million in 2009 and a favorable adjustment of $1.4 million in 2008.
In both years, an offsetting adjustment was recorded in other income (expense). In addition,
professional and legal costs increased by $1.2 million in 2009 and administrative salaries, bonuses
and benefits increased by $1.2 million as a result of higher EBITDA earnings in 2009. Stock
compensation expenses of $8.7 million were $6.3 million more than 2008. The stock compensation
expense is derived from the changes in value of common stock and stock options primarily related to
the Merger Transaction. The changes in the fair value of the Class B Common Stock are included in
stock compensation expense and this resulted in a charge of $4.7 million in 2009 compared to a gain
of $1.0 million in 2008.
Depreciation expense decreased $0.8 million from $17.8 million in 2008 to $17.0 million in 2009.
The decreased depreciation was a result of less capital spending in 2009 for the placement of
Quick-Tag and key duplicating machines which were partially offset by additional depreciation
primarily for the Enterprise Resource Planning software (ERP) which became operational in 2009.
In 2009, amortization expense decreased $0.2 million from the prior year as a result of the
expiration of a non-compete agreement with R&B Corporation.
25
Table of Contents
The Company recorded a management and transaction fee charge of $1.0 million for 2009 and $1.0
million for 2008. As of the closing of the Merger Transaction in March 2004, the Company is
obligated to pay management fees to a subsidiary of CHS for management services rendered in the
amount of $58.0 thousand per month, plus out of pocket expenses, and to pay transaction fees to a
subsidiary of OTPP in the amount of $26.0 thousand per month, plus out of pocket expenses, for each
month.
Interest expense, net, decreased $5.0 million to $15.5 million in 2009 from $20.5 million in 2008.
The decrease in net interest expense was primarily the result of a decrease in the Companys
outstanding debt and lower borrowing costs on the variable rate Term Loan.
Interest expense on the mandatorily redeemable preferred stock and management purchased preferred
options related to the Merger Transaction increased from $11.1 million in 2008 to $12.3 million in
2009. The increase can be attributed to the cumulative nature of the interest earned on these
securities and additional vesting of the management purchased preferred options.
The Company pays interest to the Trust on the Junior Subordinated Debentures underlying the trust
preferred securities at the rate of 11.6% per annum on their face amount of $105.4 million, or
$12.6 million per annum in the aggregate. For the year ended December 31, 2009, the Company
incurred $12.8 million in interest on the Junior Subordinated Debentures compared to $12.6 million
in interest for the same prior year period. The Companys interest expense on the Junior
Subordinated Debentures is equivalent to the amount distributed by the Trust on the Trust Preferred
Securities.
In order to retain capital, the Companys Board of Directors determined to temporarily defer the
payment of cash distributions to holders of Trust Preferred Securities beginning with the
January 2009 distribution. The Companys decision to defer the payment of distributions to holders
of Trust Preferred Securities was designed to ensure that the Company preserve cash and maintain
its compliance with the financial covenants contained in its Senior Credit and Subordinated Debt
Agreements. Pursuant to the Indenture that governs the Trust Preferred Securities, the Company was
able to defer distribution payments to holders of the Trust Preferred Securities for a period that
cannot exceed 60 months. During the Deferral Period, the Company was required to accrue the full
amount of all distributions payable, and such deferred distributions were immediately payable by
the Company at the end of the Deferral Period. In the first six months of 2009, the Company
accrued $6.3 million in interest payable to the Trust on the Junior Subordinated Debentures. On
July 31, 2009, the Company resumed payments of monthly distributions and paid all amounts accrued
during the six month Deferral Period.
The Company receives investment income on the trust common securities in the amount of $0.4 million
per annum. The Trust distributes the equivalent net amount to the holders of the trust preferred
securities. The Company also pays interest to the Trust on the Junior Subordinated Debentures
underlying the trust common securities at the rate of 11.6% per annum on their face amount of $3.3
million, or $0.4 million per annum in the aggregate. The Trust distributes an equivalent amount to
the Company as a distribution on the underlying trust common securities. For the years ended
December 31, 2009 and 2008, the Company paid $0.4 million interest on the Junior Subordinated
Debentures, which is equivalent to the amounts received by the Company as investment income.
The effective income tax rates were 113.6% and 130.2% for the years ended December 31, 2009 and
2008, respectively. The change in effective income tax rate differed from the federal statutory
rate primarily due to the effect of nondeductible interest on mandatorily redeemable preferred
stock in addition to the effect of state rates. See Note 6, Income Taxes,
of Notes to Consolidated Financial Statements for income taxes and disclosures related to 2009 and
2008 income tax events.
26
Table of Contents
Years Ended December 31, 2008 and 2007
Net sales of $481.9 million in 2008 increased $36.3 million, or 8.1%, from 2007. Sales of fastener
and hurricane protection products by the newly acquired All Points business represented $21.3
million of the total $36.3 million increase over the prior year.
Sales to national accounts increased $15.1 million in 2008 primarily as a result of increased
fastener and threaded rod sales to Lowes of $13.2 million. The total sales to Lowes increased by
$16.4 million as a result of additional store locations and Lowes current strategy to increase
fastener and threaded rod inventory at the store level to drive sales volume. Lowes has employed
this strategy in similar product categories resulting in improved comparable store sales activity.
The remaining national account sales declined $1.3 million, which included sales declines of $0.7
million to Kmart, $0.3 to Fred Meyer and $0.1 million to Walmart. National account sales, with the
exception of Lowes, were negatively impacted by this years contraction in the residential
construction market and the U.S. economic downturn. The worsening national economic conditions
also had an adverse impact on sales to the traditional franchise and independent, warehouse, and
regional accounts which experienced sales decreases of $0.8 million, $0.7 million, and $0.3
million, respectively.
Sales of engraving products increased $1.8 million in 2008 primarily as a result of additional
machine placements at the large national pet retailers. The sales to Mexican accounts increased
$0.9 million, or 36.0%, from 2007 as a result of additional store locations and new product
introductions at Home Depot. The sales to Canadian accounts decreased $0.9 million, or 12.3%, from
2007 as a result of the reduction in opening orders for builders hardware products sold to Canadian
Tire in the prior year. The 2008 sales of other accounts including Latin America, commercial
industrial, and direct marketing were unchanged from the prior year at $11.5 million.
The Companys sales backlog, based upon cancelable purchase orders, was $7.7 million as of December
31, 2008 compared to $6.3 million as of December 31, 2007.
The Companys gross profit of 49.2% in 2008 decreased compared to 51.6% in 2007. Adjusted for the
All Points acquisition, the gross profit for 2008 was 50.4%. Increased prices for commodities such
as steel, plastics, aluminum, nickel, copper, and zinc resulted in significantly higher product
costs in 2008. The Company implemented price increases across all product lines in 2008 which
partially offset the higher product costs passed on from our vendors. However, the Companys gross
profit declined 0.8% in 2008 from the product cost not recovered through customer price increases.
The remaining decline of 0.4% in 2008 was primarily a function of the shift in sales mix. In 2008,
a proportionately larger percentage of the Companys revenue was generated from Lowes, the
Companys largest customer, at a gross profit rate lower than the Company average.
Selling, general and administrative expense of $161.4 million in 2008 decreased $0.7 million, or
0.4%, from 2007. Selling expenses increased $2.1 million, or 2.7%, primarily as a result of
additional selling costs of $1.0 million in the newly acquired All Points operation. In addition,
higher costs to provide service and merchandising to the expanded national accounts store base were
partially offset by savings on marketing costs which were used in 2007 to develop the builders
hardware product line and implement the customer price increases. Warehouse and delivery costs
increased $0.5 million in actual terms and fell from 12.4% expressed as a percentage of net sales
in 2007 to 11.6% in 2008. Freight expense, the largest component of warehouse and delivery
expense, decreased from 5.0% of sales in 2007 to 4.6% of sales in 2008 because the Company was able
to offset the negative impact of higher fuel surcharges by negotiating more favorable freight
contracts and implementing shipping and handling efficiencies. Operational improvements to the
order fulfillment process produced lower labor costs and shipping supply expense in 2008.
General and administrative expenses of $20.8 million in 2008 were $0.5 million less than 2007. The
decrease in G&A expenses was primarily the result of the investment performance of securities held
in the non-qualified deferred compensation plans Rabbi Trust which provided a favorable adjustment
of $1.4 million in 2008 and an unfavorable adjustment of $0.4 million in 2007. In both years, an
offsetting adjustment was recorded in other income (expense). Stock compensation expenses from
stock options primarily related to the Merger
27
Table of Contents
Transaction were $2.5 million in 2008 compared to $5.3 million in 2007. The changes in the fair
value of the Class B Common Stock are included in stock compensation expense and this resulted in a
gain of $1.0 million in 2008 and a charge of $1.6 million in 2007.
Depreciation expense decreased $0.4 million from $18.2 million in 2007 to $17.8 million in 2008.
The decreased depreciation was a result of less capital spending in 2008 for the placement of
Quick-Tag and key duplicating machines which were partially offset by additional depreciation for
the ERP software used in the Companys general ledger and Tempe customer service operations.
In 2008, amortization expense decreased $0.2 million as a result of the expiration of a non-compete
agreement with R&B Corporation which was partially offset by the addition of amortization for the
new All Points non-compete agreement.
The Company has recorded a management and transaction fee charge of $1.0 million for 2008 and $1.0
million for 2007. As of the closing of the Merger Transaction in March 2004, the Company is
obligated to pay management fees to a subsidiary of CHS for management services rendered in the
amount of $58,000 per month, plus out of pocket expenses, and to pay transaction fees to a
subsidiary of OTPP in the amount of $26,000 per month, plus out of pocket expenses, for each month.
Interest expense, net, decreased $5.0 million to $20.5 million in 2008 from $25.5 million in 2007.
The decrease in net interest expense was primarily the result of less Company debt and lower
borrowing costs on the variable rate Term Loan.
Interest expense on the mandatorily redeemable preferred stock and management purchased preferred
options related to the Merger Transaction increased from $9.9 million in 2007 to $11.1 million in
2008. The increase can be attributed to the cumulative nature of the interest earned on these
securities and additional vesting of the management purchased preferred options.
The Company pays interest to the Trust on the Junior Subordinated Debentures underlying the trust
preferred securities at the rate of 11.6% per annum on their face amount of $105.4 million, or
$12.6 million per annum in the aggregate. The Company receives investment income on the trust
common securities in the amount of $0.4 million per annum. The Trust distributes the equivalent
net amount to the holders of the trust preferred securities. For the years ended December 31, 2008
and 2007, the Company paid interest, net of investment income, of $12.2 million on the Junior
Subordinated Debentures, which is equivalent to the amounts distributed by the Trust on the trust
preferred securities.
The Company also pays interest to the Trust on the Junior Subordinated Debentures underlying the
trust common securities at the rate of 11.6% per annum on their face amount of $3.3 million, or
$0.4 million per annum in the aggregate. The Trust distributes an equivalent amount to the Company
as a distribution on the underlying trust common securities. For the years ended December 31, 2008
and 2007, the Company paid $0.4 million interest on the Junior Subordinated Debentures, which is
equivalent to the amounts received by the Company as investment income.
The effective income tax rates were 130.2% and -43.5% for the years ended December 31, 2008 and
2007, respectively. The change in the effective income tax rate differed from the federal
statutory rate primarily due to the effect of nondeductible interest on mandatorily redeemable
preferred stock in addition to the effect of state rates. See Note 6,
Income Taxes, of Notes to Consolidated Financial Statements for income taxes and disclosures
related to 2008 and 2007 income tax events.
28
Table of Contents
Liquidity and Capital Resources
Cash Flows
Operating Activities
Net cash provided by operating activities for the year ended December 31, 2009 of $72.0 million was
generated by the net loss adjusted for non-cash charges of $55.1 million for depreciation,
amortization, dispositions of equipment, deferred taxes, deferred financing, stock-based
compensation and interest on mandatorily redeemable preferred stock which was in addition to cash
related adjustments of $18.1 million for routine operating activities represented by changes in
inventories, accounts receivable, accounts payable, accrued liabilities and other assets. In 2009,
routine operating activities provided cash through a decrease in inventories of $18.3 million,
accounts receivable of $1.6 million, other assets of $1.0 million and an increase in accrued
liabilities of $3.6 million. Accounts payable accounted for the remaining $6.2 million decrease of
cash provided by operating activities. The large decrease in inventories resulted from product
cost reductions and the implementation of new inventory management processes which reduced the
inventory requirements.
Net cash provided by operating activities for the year ended December 31, 2008 of $37.6 million was
generated by the net loss adjusted for non-cash charges of $43.3 million for depreciation,
amortization, dispositions of equipment, deferred taxes, deferred financing, stock-based
compensation and interest on mandatorily redeemable preferred stock which was partially offset by
cash related adjustments of $4.6 million for routine operating activities represented by changes in
inventories, accounts receivable, accounts payable, accrued liabilities and other assets. In 2008,
routine operating activities used cash for an increase in inventories of $3.5 million and accounts
receivable of $4.4 million. Accounts payable, accrued liabilities and other items accounted for
the remaining $3.3 million increase of cash provided by operating activities.
Net cash provided by operating activities for the year ended December 31, 2007 of $36.5 million was
generated by the net loss adjusted for non-cash charges of $45.8 million for depreciation,
amortization, dispositions of equipment, deferred taxes, deferred financing, interest on
mandatorily redeemable preferred stock, and stock-based compensation which was partially offset by
cash related adjustments of $1.4 million for routine operating activities represented by changes in
inventories, accounts receivable, accounts payable, accrued liabilities and other assets. In 2007,
routine operating activities increased accounts payable by $0.1 million and decreased inventories
by $1.8 million and accounts receivable by $0.4 million. Other items accounted for remaining $3.7
million decrease of cash provided by operating activities.
Investing Activities
Net cash used for investing activities was $13.0 million for the year ended December 31, 2009.
Capital expenditures for the year totaled $13.0 million, consisting of $7.4 million for key
duplicating machines, $0.5 million for engraving machines, $3.8 million for computer software and
equipment and $1.3 million for plant equipment and other equipment purchases.
Net cash used for investing activities was $13.4 million for the year ended December 31, 2008.
Capital expenditures for the year totaled $13.4 million, consisting of $7.3 million for key
duplicating machines, $1.4 million for engraving machines, $3.4 million for computer software and
equipment and $1.3 million for plant equipment and other equipment purchases.
Net cash used for investing activities was $24.5 million for the year ended December 31, 2007.
Cash of $9.8 million was paid for the acquisition of All Points. Capital expenditures for the year
totaled $14.8 million, consisting of $8.8 million for key duplicating machines, $2.2 million for
engraving machines, $2.3 million for computer software and equipment and $1.5 million for plant
equipment and other equipment purchases.
29
Table of Contents
Financing Activities
Net cash used for financing activities was $49.0 million for the year ended December 31, 2009. The
net cash used was primarily related to the principal payments of $45.0 million on the senior term
loan.
Net cash used for financing activities was $29.0 million for the year ended December 31, 2008. The
net cash used was primarily related to the principal payments of $28.6 million on the senior term
loan.
Net cash used for financing activities was $2.6 million for the year ended December 31, 2007. The
net cash used was primarily related to the principal payments of $2.3 million on the senior term
loan.
Liquidity
Management believes projected cash flows from operations and revolver availability will be
sufficient to fund working capital and capital expenditure needs for the next 12 months.
The Companys working capital (current assets minus current liabilities) position of $110.6 million
as of December 31, 2009, represents a decrease of $15.9 million from the December 31, 2008 level of
$126.5 million as follows:
(dollars in thousands)
Amount | ||||
Increase in cash and cash equivalents |
$ | 10,031 | ||
Decrease in accounts receivable, net |
(1,633 | ) | ||
Decrease in inventories, net |
(18,282 | ) | ||
Decrease in other current assets |
(767 | ) | ||
Decrease in deferred taxes |
(295 | ) | ||
Decrease in accounts payable |
6,219 | |||
Increase in senior term loans & capital lease obligations |
(7,563 | ) | ||
Increase in accrued salaries and wages |
(2,122 | ) | ||
Increase in accrued pricing allowances |
(27 | ) | ||
Decrease in accrued income and other taxes |
105 | |||
Increase in accrued interest |
(948 | ) | ||
Increase in other accrued liabilities |
(635 | ) | ||
Net decrease in working capital for the year ended December 31, 2009 |
$ | (15,917 | ) | |
30
Table of Contents
Contractual Obligations
The Companys contractual obligations in thousands of dollars as of December 31, 2009 are
summarized below:
Payments Due | ||||||||||||||||||||
Less Than | 1 to 3 | 3 to 5 | More Than | |||||||||||||||||
Contractual Obligations | Total | One Year | Years | Years | Five Years | |||||||||||||||
Junior Subordinated Debentures (1) |
$ | 115,716 | $ | | $ | | $ | | $ | 115,716 | ||||||||||
Long Term Senior Term Loans |
157,849 | 9,519 | 148,330 | | | |||||||||||||||
Bank Revolving Credit Facility |
| | | | | |||||||||||||||
Long Term Unsecured Subordinated Notes |
49,820 | | 49,820 | | | |||||||||||||||
Interest payments (2) |
32,442 | 13,442 | 19,000 | | | |||||||||||||||
Operating Leases |
35,712 | 7,937 | 10,957 | 6,007 | 10,811 | |||||||||||||||
Mandatorily Redeemable Preferred Stock |
111,452 | | | | 111,452 | |||||||||||||||
Management Purchased Preferred Options |
6,617 | | | | 6,617 | |||||||||||||||
Accrued Stock Based Compensation on
Preferred Options |
14,151 | | | | 14,151 | |||||||||||||||
Deferred Compensation Obligations |
3,043 | 334 | 668 | 668 | 1,373 | |||||||||||||||
Capital Lease Obligations |
514 | 361 | 147 | 6 | | |||||||||||||||
Purchase Obligations |
1,225 | 350 | 700 | 175 | | |||||||||||||||
Other Long Term Obligations |
2,677 | 839 | 989 | 247 | 602 | |||||||||||||||
Uncertain Tax Position Liabilities |
2,879 | | | | 2,879 | |||||||||||||||
Total Contractual Cash Obligations (3) |
$ | 534,097 | $ | 32,782 | $ | 230,611 | $ | 7,103 | $ | 263,601 | ||||||||||
(1) | The junior subordinated debentures liquidation value is approximately $108,707. | |
(2) | Interest payments for Long Term Senior Term Loans and the Long Term Unsecured Subordinated Notes. Interest payments on the variable rate Long Term Senior Term Loans were calculated using actual interest rates as of December 31, 2009 and a LIBOR rate of 0.27% plus applicable margin of between 2.75% and 4.50% thereafter. | |
(3) | All of the contractual obligations noted above are reflected on the Companys consolidated balance sheet as of December 31, 2009 except for the interest payments and operating leases. In addition to the contractual obligations above, the Company has issued certain equity securities to management shareholders with terms that allow them to be put back to the Company upon termination from employment, death or disability. The terms of the equity securities held by management limit cash distributions for puttable equity securities to an aggregate of $5.0 million per annum. During 2009, equity securities with a value of $1,141 were put back to the Company by former management shareholders. See Note 13, Common and Preferred Stock, of Notes to Consolidated Financial Statements for additional information. |
The Company has a purchase agreement with its supplier of key blanks which requires minimum
purchases of 100 million key blanks per year. To the extent minimum purchases of key blanks are
below 100 million, the Company must pay the supplier $.0035 per key multiplied by the shortfall.
Since the inception of the contract in 1998, the Company has purchased more than requisite 100
million key blanks per year from the supplier. The Company extended this contract in 2009 for an
additional four years.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of
Regulation S-K under the Securities Exchange Act of 1934, as amended.
31
Table of Contents
Borrowings
As of December 31, 2009, the Company had $14.5 million available under its secured credit
facilities. The Company had approximately $158.3 million of outstanding debt under its secured
credit facilities at December 31, 2009, consisting of $157.8 million in a term loans and $0.5
million in capitalized lease obligations. The term loans consisted of an $18.0 million Term B-1
Loan currently at a three (3) month LIBOR rate plus margin of 3.02% and a $139.8 million Term B-2
Loan at a three (3) month LIBOR rate plus margin of 4.77%. The capitalized lease obligations were
at various interest rates.
At December 31, 2009 and 2008, the Company borrowings were as follows:
December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
Facility | Outstanding | Interest | Facility | Outstanding | Interest | |||||||||||||||||||
(dollars in 000s) | Amount | Amount | Rate | Amount | Amount | Rate | ||||||||||||||||||
Term B-1 Loan |
$ | 17,992 | 3.02 | % | $ | 202,849 | 3.46 | % | ||||||||||||||||
Term B-2 Loan |
139,857 | 4.77 | % | | | |||||||||||||||||||
Total Term Loans |
157,849 | 202,849 | ||||||||||||||||||||||
Revolving credit facility |
$ | 20,000 | | | $ | 40,000 | | | ||||||||||||||||
Capital leases & other obligations |
494 | various | 400 | various | ||||||||||||||||||||
Total secured credit |
158,343 | 203,249 | ||||||||||||||||||||||
Unsecured subordinated notes |
49,820 | 12.50 | % | 49,820 | 10.00 | % | ||||||||||||||||||
Total borrowings |
$ | 208,163 | $ | 253,069 | ||||||||||||||||||||
Effective August 7, 2009 the Company, through its Hillman Group subsidiary, entered into an
Amended and Restated Credit Agreement which amended its revolving credit and senior term loan
(Amended Senior Credit Agreement). Lenders representing 82.3% of the outstanding balance of the
revolving credit and senior term loan consented to the Amended Senior Credit Agreement (Consenting
Lenders). For the 17.7% of Lender commitments which did not consent to the amendment
(Non-Consenting Lenders), pricing and amortization of the senior term loan remain unchanged.
Under the terms of the Amended Senior Credit Agreement, the Consenting Lenders agreed to extend the
term of the Senior Credit Agreement to March 31, 2012 from March 31, 2011. Amortization of the
senior term loan was set at 1.5% per quarter beginning September 1, 2009, with the remainder due at
maturity. Pricing on the senior term loan was increased from LIBOR plus a margin of 2.75% to LIBOR
plus a margin of 4.50%. The fixed charge and interest coverage covenants remained the same and
were extended for 12 months while the leverage covenant was extended 12 months and increased 0.25
to 3.0 times from March 31, 2010 to March 31, 2012. Additionally, the amendment includes a $18.0
million delayed draw term loan (Delayed Draw) which can be used only to fund all or a portion of
the amortization payments for the Non-Consenting Lenders. The pricing, covenants, terms and
conditions for the Delayed Draw are the same as under the Amended Senior Credit Agreement. The
Company was in compliance with all provisions of the Amended Senior Credit Agreement as of December
31, 2009.
The Amended Senior Credit Agreement also extended the revolving credit line to March 31, 2012 from
March 31, 2011 and reduced it to $20.0 million from $40.0 million. Pricing on the revolving credit
line was increased from LIBOR plus a margin of 2.75% to LIBOR plus a margin of 4.50% and the unused
commitment fee was increased 25 basis points to 75 basis points.
In connection with the Amended Senior Credit Agreement effective August 7, 2009, the Subordinated
Debt Agreement for the Subordinated Debt Issuance of $49.4 million was amended to extend the
maturity date to September 30, 2012 from September 30, 2011 and increase the interest rate from
10.0% to 12.5% per annum, payable on a quarterly basis.
Covenant levels were extended and modified consistent with the Amended Senior Credit Agreement.
32
Table of Contents
The Companys Senior Credit Agreement requires the maintenance of certain fixed charge, interest
coverage and leverage ratios and limits the ability of the Company to incur debt, make investments,
make dividend payments to holders of the Trust Preferred Securities or undertake certain other
business activities. Upon the occurrence of an event of default under the credit agreements, all
amounts outstanding, together with accrued interest, could be declared immediately due and payable
by our lenders. Below are the calculations of the financial covenants with the Senior Credit
Agreement requirement for the twelve months ended December 31, 2009:
(dollars in 000s)
Ratio | ||||||||
Actual | Requirement | |||||||
Fixed Charge Ratio |
||||||||
Adjusted EBITDA (1) |
$ | 82,293 | ||||||
Cash interest expense (2) |
14,043 | |||||||
Interest on junior subordinated debentures |
12,442 | |||||||
Capital expenditures, net of disposals |
12,728 | |||||||
Scheduled principal payments |
1,011 | |||||||
Tax payments, net |
1,759 | |||||||
Total fixed charges |
$ | 41,983 | ||||||
Fixed charge ratio (must be above requirement) |
1.96 | 1.15 | ||||||
Interest Coverage Ratio |
||||||||
Adjusted EBITDA (1) |
$ | 82,293 | ||||||
Cash interest expense (2) |
$ | 14,043 | ||||||
Interest coverage ratio (must be above requirement) |
5.86 | 2.50 | ||||||
Leverage Ratio |
||||||||
Senior term loan balance |
$ | 157,849 | ||||||
Capital lease obligations |
494 | |||||||
Subordinated notes |
49,820 | |||||||
Total debt |
$ | 208,163 | ||||||
Adjusted EBITDA (1) |
$ | 82,293 | ||||||
Leverage ratio (must be below requirement) |
2.53 | 3.25 | ||||||
(1) | Adjusted EBITDA is defined as income from operations ($49,334) plus depreciation ($16,993), amortization ($6,912), non-cash stock compensation expense ($8,737), restructuring costs ($838), other non recurring expenses ($15) and less foreign exchange gains ($536). | |
(2) | Includes cash interest expense on senior term loans, capitalized lease obligations and subordinated notes. |
The Company had deferred tax assets aggregating $29.6 million, net of valuation allowance of $2.5
million, and deferred tax liabilities of $71.2 million as of December 31, 2009, as determined in
accordance with guidance in ASC Topic 740. Management believes that the Companys net deferred tax
assets will be realized through the reversal of existing temporary differences between the
financial statement and tax basis, as well as through future taxable income.
33
Table of Contents
Related Party Transactions
On March 31, 2004, the Company was acquired by affiliates of CHS. In connection with the CHS
acquisition, the Company is obligated to pay management fees to a subsidiary of CHS in the amount
of $58 thousand per month and to pay transaction fees to a subsidiary of OTPP in the amount of $26
thousand per month, plus out of pocket expenses, for each month commencing with the closing date of
the Merger Transaction. The Company has recorded management and transaction charges and expenses
from CHS and OTPP in the amount of $1.0 million for each of the years ended December 31, 2009,
2008, and 2007, respectively.
Gregory Mann and Gabrielle Mann are employed by the All Points subsidiary of Hillman as President
and Vice President, respectively. All Points leases an industrial warehouse and office facility
from companies under the control of the Manns. The Company has recorded rental expense for the
lease of this facility on an arms length basis in the amount of $0.3 million and $0.3 million for
the years ended December 31, 2009 and 2008, respectively.
Critical Accounting Policies and Estimates
The Companys accounting policies are more fully described in Note 2, Summary of Significant
Accounting Policies, of Notes to Consolidated Financial Statements. As disclosed in that note, the
preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Future events cannot be predicted with certainty and, therefore, actual results
could differ from those estimates. The following section describes the Companys critical
accounting policies.
Revenue Recognition:
Revenue is recognized when products are shipped or delivered to customers depending upon when title
and risks of ownership have passed.
The Company offers a variety of sales incentives to its customers primarily in the form of
discounts, rebates and slotting fees. Discounts are recognized in the financial statements at the
date of the related sale. Rebates are estimated based on the revenue to date and the contractual
rebate percentage to be paid. A portion of the estimated cost of the rebate is allocated to each
underlying sales transaction. Slotting fees are used on an infrequent basis and are not considered
to be significant. Discounts, rebates and slotting fees are included in the determination of net
sales.
The Company also establishes reserves for customer returns and allowances. The reserve is
established based on historical rates of returns and allowances. The reserve is adjusted quarterly
based on actual experience. Returns and allowances are included in the determination of net sales.
Accounts Receivable and Allowance for Doubtful Accounts:
The Company establishes the allowance for doubtful accounts using the specific identification
method and also provides a reserve in the aggregate. The estimates for calculating the aggregate
reserve are based on historical information. Increases to the allowance for doubtful accounts
result in a corresponding expense. The Company writes off individual accounts receivable accounts
when they become uncollectible. The allowance for doubtful accounts was $514 thousand and $544
thousand as of December 31, 2009 and 2008, respectively.
Inventory Realization:
Inventories consisting predominantly of finished goods are valued at the lower of cost or market,
cost being determined principally on the weighted average cost method. Excess and obsolete
inventories are carried at net realizable value. The historical usage rate is the primary factor
used by the Company in assessing the net realizable value of excess and
34
Table of Contents
obsolete inventory. A reduction in the carrying value of an inventory item from cost to market is
recorded for inventory with no usage in the preceding twenty-four month period or with on-hand
quantities in excess of twenty-four months average usage. The inventory reserve amounts were $7.1
million and $6.1 million at December 31, 2009 and 2008, respectively.
Goodwill and Other Intangible Assets:
Goodwill represents the excess purchase cost over the fair value of net assets of companies
acquired in business combinations. Goodwill is an indefinite lived asset and is tested for
impairment at least annually or more frequently if a triggering event occurs. If the carrying
amount of goodwill is greater than the fair value, impairment may be present. The Companys
independent appraiser, John Cole, CPA, CVA, assesses the value of its goodwill based on a
discounted cash flow model and multiple of earnings. Assumptions critical to the Companys fair
value estimates under the discounted cash flow model include the discount rate, projected average
revenue growth and projected long-term growth rates in the determination of terminal values.
The Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade
names) for impairment annually. The Company also tests for impairment if events and circumstances
indicate that it is more likely than not that the fair value of an indefinite-lived intangible
asset is below its carrying amount. Assumptions critical to the Companys evaluation of
indefinite-lived intangible assets for impairment include: the discount rate, royalty rates used in
its evaluation of trade names, projected average revenue growth, and projected long-term growth
rates in the determination of terminal values. An impairment charge is recorded if the carrying
amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement
date.
No impairment charges were recorded by the Company as a result of the annual impairment testing.
In 2007, the Company changed the timing of the annual impairment test from December 31 to October
1. The October 1 goodwill and intangible impairment test data better aligns the impairment test
with the preparation of the Companys annual strategic plan and allows additional time for a more
thorough analysis by the Companys independent appraiser.
Long-Lived Assets:
The Company evaluates its long-lived assets for financial impairment and will continue to evaluate
them based on the estimated undiscounted future cash flows as events or changes in circumstances
indicate that the carrying amount of such assets may not be fully recoverable. No impairment
charges were recognized for long-lived assets in the years ended December 31, 2009 and 2008.
Income Taxes:
Deferred income taxes are computed using the asset and liability method. Under this method,
deferred income tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities (temporary differences). They are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Valuation allowances are provided for tax benefits where it is more likely than not that certain
tax benefits will not be realized. Adjustments to valuation allowances are recorded from changes
in utilization of the tax related item. For additional information, see Note 6, Income Taxes, of
the Notes to the Consolidated Financial Statements.
35
Table of Contents
Risk Insurance Reserves:
The Company self insures its product liability, automotive, workers compensation and general
liability losses up to $250 thousand per occurrence. Catastrophic coverage has been purchased from
third party insurers for occurrences in excess of $250 thousand up to $35 million. The two risk
areas involving the most significant accounting estimates are workers compensation and automotive
liability. Actuarial valuations performed by the Companys outside risk insurance expert,
Insurance Services Office, Inc., were used to form the basis for workers compensation and
automotive liability loss reserves. The actuary contemplated the Companys specific loss history,
actual claims reported, and industry trends among statistical and other factors to estimate the
range of reserves required. Risk insurance reserves are comprised of specific reserves for
individual claims and additional amounts expected for development of these claims, as well as for
incurred but not yet reported claims. The Company believes the liability recorded for such risk
insurance reserves is adequate as of December 31, 2009, but due to judgments inherent in the
reserve estimation process it is possible the ultimate costs will differ from this estimate.
The Company self-insures its group health claims up to an annual stop loss limit of $200 thousand
per participant. Aggregate coverage is maintained for annual group health insurance claims in
excess of 125% of expected claims. Historical group insurance loss experience forms the basis for
the recognition of group health insurance reserves.
Common and Preferred Stock:
In connection with the March 31, 2004 acquisition of the Company by affiliates of Code Hennessey &
Simmons LLC, certain members of management entered into an Executive Securities Agreement (ESA).
The ESA provides the method and terms under which management proceeds were invested in the Company.
Under the terms of the ESA, management shareholders have the right to put their Class A Common
Stock, Class B Common Stock, Class A Preferred Stock Options and Hillman Investment Company Class A
Preferred Stock Options back to the Company at fair value if employment is terminated for other
than cause and upon death or disability. The terms of the ESA limit the total amount of redemption
from all puttable equity securities to an aggregate of $5 million per year.
The fair value of the Class A Common Stock and the Class B Common Stock have been calculated at
each balance sheet date by estimating the enterprise value of the Company less the redemption value
of all obligations payable in preference to the common stock, including the Class A Preferred stock
and options issued thereon, the Hillman Investment Company Class A Preferred Stock and options
issued thereon, the Trust Preferred Securities, long term debt and bank revolving credit. The
remainder is divided by the fully diluted common shares outstanding to arrive at a fair value per
common share outstanding.
36
Table of Contents
The calculation of the fair value of the Class A Common Stock and Class B Common Stock as of
December 31, 2009, 2008, and 2007, respectively, is detailed below:
(dollars in 000s) | December 31, | December 31, | December 31, | |||||||||
2009 | 2008 | 2007 | ||||||||||
Trailing twelve fiscal months EBITDA (1) |
$ | 83,303 | $ | 77,391 | $ | 74,623 | ||||||
Valuation Multiple (2) |
8.0 | 8.0 | 8.3 | |||||||||
Hillman Enterprise Value Excluding All Points |
666,424 | 619,128 | 619,371 | |||||||||
All Points Fair Value (3) |
| | 10,243 | |||||||||
Hillman Enterprise Value |
666,424 | 619,128 | 629,614 | |||||||||
Less: |
||||||||||||
Senior term loans |
157,849 | 202,849 | 231,475 | |||||||||
Bank revolving credit |
| | | |||||||||
Unsecured subordinated notes |
49,820 | 49,820 | 49,820 | |||||||||
Junior subordinated debentures redemption value, net (4) |
105,446 | 105,446 | 105,446 | |||||||||
Total Debt |
313,115 | 358,115 | 386,741 | |||||||||
Plus: |
||||||||||||
Cash |
17,164 | 7,133 | 11,919 | |||||||||
Less: |
||||||||||||
Accrued Hillman Investment Company Class A Preferred (5) |
117,434 | 105,038 | 93,480 | |||||||||
Accrued Hillman Class A Preferred (5) |
173,358 | 154,297 | 136,630 | |||||||||
290,792 | 259,335 | 230,110 | ||||||||||
Common Equity Value |
79,681 | 8,811 | 24,682 | |||||||||
Liquidity & Minority Discount on Common Only (6) |
23,904 | 2,643 | 7,405 | |||||||||
Discounted Common Equity Value |
55,777 | 6,168 | 17,277 | |||||||||
Fully-diluted Common Shares outstanding |
10,227 | 10,309 | 10,209 | |||||||||
Fully-diluted Discounted Value Per Common Share |
$ | 5,454 | $ | 598 | $ | 1,692 | ||||||
(1) | - EBITDA is calculated for the most recent four fiscal quarters as follows: |
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Income from operations |
$ | 49,334 | $ | 47,725 | $ | 42,157 | ||||||
Depreciation and amortization |
23,905 | 24,908 | 25,498 | |||||||||
Management fees |
1,010 | 1,043 | 1,023 | |||||||||
Stock compensation expense |
8,737 | 2,481 | 5,322 | |||||||||
Exchange rate (gain) loss |
(536 | ) | 980 | (409 | ) | |||||||
Other adjustments |
853 | 254 | 1,032 | |||||||||
EBITDA |
$ | 83,303 | $ | 77,391 | $ | 74,623 | ||||||
The other adjustments include one time legal and professional fees.
(2) | - The Company periodically reviews the valuation multiple used and notes that it is consistent with comparable multiples used for distribution companies. | |
(3) | - In the initial period following the acquisition of All Points, the purchase price was deemed the most accurate measure of enterprise value. | |
(4) | - The value of the junior subordinated debentures is the redemption value of $25 per share. | |
(5) | - Redemption value of all preferred shares and options thereon, less any applicable strike price. | |
(6) | - Under the terms of the ESA agreement with management shareholders, the redemption of shares is subject to a discount given the lack of a public market for the shares. A 30% discount has applied to the equity value to adjust for the lack of an active market for the shares. |
37
Table of Contents
The enterprise value of the Company is determined based on the earnings before interest,
taxes, depreciation and amortization adjusted for management fees, stock compensation costs, and
other non-recurring general and administrative costs (Adjusted EBITDA) for the most recent twelve
month period multiplied by a valuation multiple. As of December 31, 2009, 2008, and 2007, the
Company has applied valuation multiples of 8.0x, 8.0x, and 8.3x, respectively, to trailing twelve
months Adjusted EBITDA in determining enterprise value. Management periodically reviews the
appropriateness of this multiple and notes that it is consistent with comparable distribution
companies.
A change of 0.1 in the valuation multiple used to calculate the enterprise value adjusts the per
share fair value of the Class A Common Stock and the Class B Common Stock by $570 thousand.
The fair value of the Class A Preferred Stock Options and Hillman Investment Company Class A
Preferred Stock Options is equal to the liquidation value of $1,000 per share plus all accumulated
and unpaid dividends thereon less the applicable strike price. The aggregate fair value of the
puttable Class A Preferred Stock Options and Hillman Investment Company Class A Preferred Stock
Options was $11,246, $10,104, and $8,916 thousand at December 31, 2009, 2008, and 2007,
respectively.
According to the ESA, the fair value of the Class A Common Stock and the Class B Common Stock is to
be determined by the Board of Directors using an enterprise basis and taking into account all
relevant market factors.
See Note 13, Common and Preferred Stock, of the Notes to the Consolidated Financial Statements for
further information.
Stock-Based Compensation:
Stock-based compensation cost is measured at the grant date based on the fair value of the award
and is recognized as expense on a straight-line basis over the requisite service period, which is
the vesting period. See Note 14, Stock-Based Compensation, of the Notes to the Consolidated
Financial Statements for further information.
Fair Value of Financial Instruments:
Cash, accounts receivable, short-term borrowings, accounts payable, accrued liabilities and bank
revolving credit are reflected in the consolidated financial statements at fair value due to
short-term maturity or revolving nature of these instruments. The fair values of the Companys debt
instruments are disclosed in Note 9, Long-Term Debt, and the fair value of the Trust Preferred
Securities is disclosed in Note 12, Guaranteed Preferred Beneficial Interest in the Companys
Junior Subordinated Debentures, of the Notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements:
In June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification. The FASB Accounting Standards Codification (ASC) became the source of
authoritative, non-governmental GAAP, except for rules and interpretive releases of the Securities
and Exchange Commission (SEC). The FASB Accounting Standards Codification was effective for
financial statements issued for interim and annual periods ending after September 15, 2009. The
adoption of this guidance did not have a material impact on the Companys consolidated results of
operations and financial condition.
In June 2009, the FASB issued guidance on consolidations. This guidance, among other things,
requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of
a variable interest entity (VIE); requires continuous assessments of whether an enterprise is the
primary beneficiary of a VIE; requires enhanced disclosures about an enterprises involvement with
a VIE; and amends certain guidance for determining whether an entity is a VIE. It will be effective
for the Company on January 1, 2010, and will be applied prospectively. Under this guidance, a VIE
must be
38
Table of Contents
consolidated if the enterprise has both (a) the power to direct the activities of the VIE that most
significantly impact the entitys economic performance, and (b) the obligation to absorb losses or
the right to receive benefits from the VIE that could potentially be significant to the VIE. The
Company does not expect the adoption of this guidance to have a material impact on the Companys
consolidated results of operations and financial condition.
In January 2010, the FASB issued guidance on fair value measurements disclosures. This guidance
amends the ASC to require new disclosures for fair value measurements and provides clarification
for existing disclosure requirements. The guidance requires new disclosures about transfers in and
out of Levels 1 and 2 and further descriptions for the reasons for the transfers. The guidance also
requires an entity to present separately information about purchases, sales, issuances and
settlements in Level 3 fair value measurements. The update also provides amendments that clarify
existing disclosures concerning the level of disaggregation and disclosures about inputs and
valuation techniques. The new disclosures and clarification of existing disclosures are effective
for interim and annual reporting periods beginning after December 15, 2009, except for the
disclosure about purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for the interim periods within those fiscal years. The Company does not
expect the adoption of this guidance to have a material impact on the Companys consolidated
results of operations and financial condition.
In February 2010, the FASB made amendments to certain recognition and disclosure requirements
concerning subsequent events. This update addresses the interaction of the requirements of the ASC
with the SECs reporting requirements. The update requires an entity to evaluate subsequent events
through the date that the financial statements are issued. The update also provides that a filer is
not required to disclose the date through which subsequent events have been evaluated. All the
amendments in this update are effective upon issuance of the final update. The adoption of this
amendment did not have a material impact on the Companys consolidated results of operations and
financial conditions.
Item 7A Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to the impact of interest rate changes as borrowings under the Senior
Credit Agreement bear interest at variable interest rates. It is the Companys policy to enter
into interest rate swap transactions only to the extent considered necessary to meet its
objectives.
On August 28, 2006, the Company entered into an Interest Rate Swap Agreement (2006 Swap) with a
two-year term for a notional amount of $50 million. The 2006 Swap fixed the interest rate at
5.375% plus applicable interest rate margin. The 2006 Swap expired on August 28, 2008.
On August 29, 2008, the Company entered into a new Interest Rate Swap Agreement (2008 Swap) with
a three-year term for a notional amount of $50 million. The 2008 Swap fixes the interest rate at
3.41% plus applicable interest rate margin.
Based on Hillmans exposure to variable rate borrowings at December 31, 2009, a one percent (1%)
change in the weighted average interest rate for a period of one year would change the annual
interest expense by approximately $1.1 million.
The Company is exposed to foreign exchange rate changes of the Canadian and Mexican currencies as
it impacts the $5.6 million net asset value of its Canadian and Mexican subsidiaries as of December
31, 2009. Management considers the Companys exposure to foreign currency translation gains or
losses to be immaterial.
39
Table of Contents
Item 8 Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
Page (s) | ||||
41 | ||||
42 | ||||
Consolidated Financial Statements: |
||||
43-44 | ||||
45 | ||||
46 | ||||
47 | ||||
48-79 | ||||
80 |
40
Table of Contents
Report of Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. Internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of The Hillman Companies, Inc. and its consolidated subsidiaries; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of The Hillman Companies, Inc. and its consolidated
subsidiaries are being made only in accordance with authorizations of management and directors of
The Hillman Companies, Inc. and its consolidated subsidiaries, as appropriate; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the assets of The Hillman Companies, Inc. and its consolidated subsidiaries that
could have a material effect on the consolidated financial statements.
Management, with the participation of our principal executive officer and principal financial
officer, assessed the effectiveness of our internal control over financial reporting as of December
31, 2009, the end of our fiscal year. Management based its assessment on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Managements assessment included evaluation of such elements as the design and
operating effectiveness of key financial reporting controls, process documentation, accounting
policies and our overall control environment. This assessment is supported by testing and
monitoring performed under the direction of management.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluations of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an
effective system of internal control over financial reporting will provide only reasonable
assurance with respect to financial statement preparation.
Based on our assessment we believe that the companys internal control over financial reporting was
not effective as a result of the material weakness related to the tax position and accounting
treatment of the dividends on management owned Preferred and Purchased
Options as of December 31, 2009.
A material weakness is a control deficiency, or combination of deficiencies, that results in a
reasonable possibility that a material misstatement of the companys annual or interim financial
statements will not be prevented or detected in a timely manner. Management identified a material
weakness in our internal control over financial reporting as of December 31, 2009, related to its
evaluation and determination of its tax position and subsequent accounting treatment of our
Purchased Preferred Shares and Preferred Stock Options. This control deficiency resulted in the
filing of Form 10K/A as Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2009; and restatements of our consolidated balance sheets at December 31, 2009
and December 31, 2008, and our consolidated statements of operations, stockholders equity and cash
flows for the fiscal years ended December 31, 2009, 2008 and 2007, and the related notes
thereto to correct an error in income tax accounting.
This annual report does not include an attestation report of the Companys independent
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered public
accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company
to provide only managements report in this annual report.
/s/ Max W. Hillman
|
/s/ James P. Waters | |
Max W. Hillman
|
James P. Waters | |
Chief Executive Officer
|
Chief Financial Officer | |
Dated: May 3, 2010
|
Dated: May 3, 2010 |
41
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders of
The Hillman Companies, Inc.
The Hillman Companies, Inc.
We have audited the accompanying consolidated balance sheets of The Hillman Companies, Inc. and
subsidiaries (a Delaware corporation) (the Company) as of December 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders equity and cash flows for each of the
three years in the period ended December 31, 2009. Our audits of the basic financial statements
included the financial statement schedule listed in the index appearing under Valuation Accounts.
These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Hillman Companies, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material aspects, the information set forth therein.
As
discussed in Note 18, the consolidated balance sheets as of December
31, 2009 and 2008, and the related consolidated statements of
operations, stockholders equity and cash flows for each of the
three years in the period ending December 31, 2009 have been
restated to correct a misstatement in the recording of the provision for income taxes.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Cincinnati, Ohio
March 26, 2010, except as to Note 18, which is as of May 3, 2010.
Cincinnati, Ohio
March 26, 2010, except as to Note 18, which is as of May 3, 2010.
42
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(dollars in thousands)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
(as restated) | (as restated) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 17,164 | $ | 7,133 | ||||
Restricted investments |
334 | 282 | ||||||
Accounts receivable, net |
51,757 | 53,390 | ||||||
Inventories, net |
83,182 | 101,464 | ||||||
Deferred income taxes, net |
8,100 | 8,395 | ||||||
Other current assets |
2,657 | 3,424 | ||||||
Total current assets |
163,194 | 174,088 | ||||||
Property and equipment, net |
47,565 | 51,694 | ||||||
Goodwill |
257,806 | 257,806 | ||||||
Other intangibles, net |
146,640 | 153,553 | ||||||
Restricted investments |
2,709 | 3,972 | ||||||
Deferred income taxes, net |
418 | 485 | ||||||
Deferred financing fees, net |
5,690 | 4,438 | ||||||
Investment in trust common securities |
3,261 | 3,261 | ||||||
Other assets |
1,198 | 1,380 | ||||||
Total assets |
$ | 628,481 | $ | 650,677 | ||||
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 19,191 | $ | 25,410 | ||||
Current portion of senior term loans |
9,519 | 2,080 | ||||||
Current portion of capitalized lease obligations |
349 | 225 | ||||||
Accrued expenses: |
||||||||
Salaries and wages |
7,624 | 5,502 | ||||||
Pricing allowances |
5,317 | 5,290 | ||||||
Income and other taxes |
1,904 | 2,009 | ||||||
Interest |
2,199 | 1,251 | ||||||
Deferred compensation |
334 | 282 | ||||||
Other accrued expenses |
6,147 | 5,512 | ||||||
Total current liabilities |
52,584 | 47,561 | ||||||
Long term senior term loans |
148,330 | 200,769 | ||||||
Long term capitalized lease obligations |
145 | 175 | ||||||
Long term unsecured subordinated notes |
49,820 | 49,820 | ||||||
Junior subordinated debentures |
115,716 | 116,110 | ||||||
Mandatorily redeemable preferred stock |
111,452 | 100,146 | ||||||
Management purchased preferred options |
6,617 | 6,016 | ||||||
Deferred compensation |
2,709 | 3,972 | ||||||
Deferred income taxes, net |
50,169 | 41,858 | ||||||
Accrued dividends on preferred stock |
75,580 | 58,708 | ||||||
Other non-current liabilities |
18,467 | 15,131 | ||||||
Total liabilities |
631,589 | 640,266 | ||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
43
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
(as restated) | (as restated) | |||||||
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY (CONTINUED) |
||||||||
Common and Preferred stock with put options: |
||||||||
Class A Preferred stock, $.01 par, $1,000 liquidation value, 238,889 shares
authorized, none issued and outstanding at December 31, 2009 and
88.0 issued and outstanding at December 31, 2008 |
| 88 | ||||||
Class A Common stock, $.01 par, 23,141 shares authorized,
395.7 issued and outstanding at December 31, 2009 and
412.0 issued and outstanding at December 31, 2008 |
2,158 | 247 | ||||||
Class B Common stock, $.01 par, 2,500 shares authorized,
970.6 issued and outstanding at December 31, 2009 and
1,000 issued and outstanding at December 31, 2008 |
5,293 | 598 | ||||||
Commitments and contingencies (Note 17) |
||||||||
Stockholders equity: |
||||||||
Preferred Stock: |
||||||||
Class A Preferred stock, $.01 par, $1,000 liquidation value, 238,889 shares
authorized, 82,104.8 issued and outstanding at December 31, 2009 and 2008 |
1 | 1 | ||||||
Common Stock: |
||||||||
Class A Common stock, $.01 par, 23,141 shares authorized,
5,805.3 issued and outstanding at December 31, 2009 and 2008 |
| | ||||||
Class C Common stock, $.01 par, 30,109 shares authorized,
2,787.1 issued and outstanding at December 31, 2009 and 2008 |
| | ||||||
Additional paid-in capital |
10,302 | 29,209 | ||||||
Accumulated deficit |
(19,377 | ) | (18,147 | ) | ||||
Accumulated other comprehensive loss |
(1,485 | ) | (1,585 | ) | ||||
Total stockholders (deficit) equity |
(10,559 | ) | 9,478 | |||||
Total liabilities and stockholders (deficit) equity |
$ | 628,481 | $ | 650,677 | ||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
44
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2009, 2008, and 2007
(dollars in thousands)
For the years ended December 31, 2009, 2008, and 2007
(dollars in thousands)
2009 | 2008 | 2007 | ||||||||||
(as restated) | (as restated) | (as restated) | ||||||||||
Net sales |
$ | 458,161 | $ | 481,923 | $ | 445,628 | ||||||
Cost of sales (exclusive of depreciation and
amortization shown separately below) |
224,642 | 244,647 | 215,733 | |||||||||
Gross profit |
233,519 | 237,276 | 229,895 | |||||||||
Operating expenses: |
||||||||||||
Selling, general and administrative expenses |
159,150 | 161,350 | 162,056 | |||||||||
Depreciation |
16,993 | 17,835 | 18,224 | |||||||||
Amortization |
6,912 | 7,073 | 7,274 | |||||||||
Management and transaction fees to related
party |
1,010 | 1,043 | 1,023 | |||||||||
Total operating expenses |
184,065 | 187,301 | 188,577 | |||||||||
Other income (expense), net |
(120 | ) | (2,250 | ) | 839 | |||||||
Income from operations |
49,334 | 47,725 | 42,157 | |||||||||
Interest expense, net |
15,521 | 20,545 | 25,528 | |||||||||
Interest expense on mandatorily redeemable
preferred stock and management purchased
preferred options |
12,312 | 11,091 | 9,919 | |||||||||
Interest expense on junior subordinated
debentures |
12,820 | 12,609 | 12,609 | |||||||||
Investment income on trust common securities |
(378 | ) | (378 | ) | (378 | ) | ||||||
Income (loss) before income taxes |
9,059 | 3,858 | (5,521 | ) | ||||||||
Income tax provision |
10,289 | 5,023 | 2,401 | |||||||||
Net loss |
$ | (1,230 | ) | $ | (1,165 | ) | $ | (7,922 | ) | |||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
45
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2009, 2008, and 2007
(dollars in thousands)
For the years ended December 31, 2009, 2008, and 2007
(dollars in thousands)
2009 | 2008 | 2007 | ||||||||||
(as restated) | (as restated) | (as restated) | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (1,230 | ) | $ | (1,165 | ) | $ | (7,922 | ) | |||
Adjustments to reconcile net loss to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
23,905 | 24,908 | 25,498 | |||||||||
Dispositions of property and equipment |
243 | 75 | 4 | |||||||||
Deferred income tax provision |
8,673 | 3,476 | 4,191 | |||||||||
Deferred financing and original issue
discount amortization |
1,275 | 1,294 | 894 | |||||||||
Interest on mandatorily redeemable preferred stock
and management purchased options |
12,312 | 11,091 | 9,919 | |||||||||
Stock-based compensation |
8,737 | 2,481 | 5,322 | |||||||||
Changes in operating items, net of effect of
acquisition: |
||||||||||||
Decrease (increase) in accounts receivable, net |
1,633 | (4,428 | ) | 386 | ||||||||
Decrease (increase) in inventories, net |
18,282 | (3,488 | ) | 1,777 | ||||||||
Decrease (increase) in other assets |
949 | (740 | ) | (749 | ) | |||||||
(Decrease) increase in accounts payable |
(6,219 | ) | 2,177 | 108 | ||||||||
Increase (decrease) in other accrued liabilities |
3,627 | 569 | (2,739 | ) | ||||||||
Other items, net |
(190 | ) | 1,342 | (173 | ) | |||||||
Net cash provided by operating activities |
71,997 | 37,592 | 36,516 | |||||||||
Cash flows from investing activities: |
||||||||||||
All Points acquisition |
| | (9,762 | ) | ||||||||
Capital expenditures |
(12,971 | ) | (13,409 | ) | (14,765 | ) | ||||||
Net cash used for investing activities |
(12,971 | ) | (13,409 | ) | (24,527 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Repayments of senior term loans |
(45,000 | ) | (28,626 | ) | (2,350 | ) | ||||||
Borrowings of revolving credit loans |
| 24,250 | 9,500 | |||||||||
Repayments of revolving credit loans |
| (24,250 | ) | (9,500 | ) | |||||||
Borrowings of other financing obligations |
461 | | | |||||||||
Principal payments under capitalized lease obligations |
(394 | ) | (343 | ) | (271 | ) | ||||||
Financing fees, net |
(2,921 | ) | | | ||||||||
Redemption of securities |
(1,141 | ) | | | ||||||||
Net cash used for financing activities |
(48,995 | ) | (28,969 | ) | (2,621 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
10,031 | (4,786 | ) | 9,368 | ||||||||
Cash and cash equivalents at beginning of period |
7,133 | 11,919 | 2,551 | |||||||||
Cash and cash equivalents at end of period |
$ | 17,164 | $ | 7,133 | $ | 11,919 | ||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
46
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(dollars in thousands)
(dollars in thousands)
Accumulated | Total | |||||||||||||||||||||||||||||||
Additional | Class A | Other | Stockholders | |||||||||||||||||||||||||||||
Common Stock | Paid-in | Preferred | Accumulated | Comprehensive | Comprehensive | Equity | ||||||||||||||||||||||||||
Class A | Class C | Capital | Stock | Deficit | Income (Loss) | Income (Loss) | (Deficit) | |||||||||||||||||||||||||
(as restated) | (as restated) | |||||||||||||||||||||||||||||||
Balance at December 31, 2006 |
$ | | $ | | $ | 57,599 | $ | 1 | $ | (7,622 | ) | $ | (277 | ) | $ | 49,701 | ||||||||||||||||
Net loss |
| | | | (7,922 | ) | | $ | (7,922 | ) | (7,922 | ) | ||||||||||||||||||||
Adoption of guidance from ASC 740-10-25 (FIN 48) |
| | | | (1,438 | ) | | (1,438 | ) | |||||||||||||||||||||||
Dividends to shareholders |
| | (13,484 | ) | | | | (13,484 | ) | |||||||||||||||||||||||
Stock-based compensation |
| | 49 | | | | 49 | |||||||||||||||||||||||||
Change in cumulative foreign translation adjustment (1) |
| | | | | (54 | ) | (54 | ) | (54 | ) | |||||||||||||||||||||
Change in derivative security value (1) |
| | | | | (80 | ) | (80 | ) | (80 | ) | |||||||||||||||||||||
Comprehensive loss |
$ | (8,056 | ) | |||||||||||||||||||||||||||||
Balance at December 31, 2007 |
| | 44,164 | 1 | (16,982 | ) | (411 | ) | 26,772 | |||||||||||||||||||||||
Net loss |
| | | | (1,165 | ) | | $ | (1,165 | ) | (1,165 | ) | ||||||||||||||||||||
Class A Common Stock FMV adjustment (2) |
| | 170 | | | | 170 | |||||||||||||||||||||||||
Dividends to shareholders |
| | (15,141 | ) | | | | (15,141 | ) | |||||||||||||||||||||||
Stock-based compensation |
| | 16 | | | | 16 | |||||||||||||||||||||||||
Change in cumulative foreign translation adjustment (1) |
| | | | | 74 | 74 | 74 | ||||||||||||||||||||||||
Change in derivative security value (1) |
| | | | | (1,248 | ) | (1,248 | ) | (1,248 | ) | |||||||||||||||||||||
Comprehensive loss |
$ | (2,339 | ) | |||||||||||||||||||||||||||||
Balance at December 31, 2008 |
| | 29,209 | 1 | (18,147 | ) | (1,585 | ) | 9,478 | |||||||||||||||||||||||
Net loss |
| | | | (1,230 | ) | | $ | (1,230 | ) | (1,230 | ) | ||||||||||||||||||||
Class A Common Stock FMV adjustment (2) |
| | (1,995 | ) | | | | (1,995 | ) | |||||||||||||||||||||||
Dividends to shareholders |
| | (16,912 | ) | | | | (16,912 | ) | |||||||||||||||||||||||
Change in cumulative foreign translation adjustment (1) |
| | | | | (197 | ) | (197 | ) | (197 | ) | |||||||||||||||||||||
Change in derivative security value (1) |
| | | | | 297 | 297 | 297 | ||||||||||||||||||||||||
Comprehensive loss |
$ | (1,130 | ) | |||||||||||||||||||||||||||||
Balance at December 31, 2009 |
$ | | $ | | $ | 10,302 | $ | 1 | $ | (19,377 | ) | $ | (1,485 | ) | $ | (10,559 | ) | |||||||||||||||
(1) | The realized gains on investments, cumulative foreign translation adjustment and change in derivative security value are net of taxes and represent the only items of other comprehensive income (loss). | |
(2) | Management controlled 395.7 shares of Class A common stock at December 31, 2009 and 412.0 shares of Class A common stock at December 31, 2008. These shares contain a put feature that allows redemption at the holders option. These shares are classified as temporary equity and have been adjusted to fair value. See Note 13, Common and Preferred Stock, for further details. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
47
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of The Hillman
Companies, Inc. (the Company or Hillman) and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
On March 31, 2004, The Hillman Companies, Inc. was acquired by affiliates of Code Hennessy &
Simmons LLC (CHS). Pursuant to the terms and conditions of an Agreement and Plan of Merger
(Merger Agreement) dated as of February 14, 2004, the Company was merged with an affiliate of CHS
with the Company surviving the merger (Merger Transaction). The total consideration paid in the
Merger Transaction was $511,646 including repayment of outstanding debt and including the value of
the Companys outstanding Trust Preferred Securities ($102,395 at merger).
As a result of the Merger Transaction, affiliates of CHS own 49.3% of the Companys common stock
and 54.6% of the Companys voting common stock, Ontario Teachers Pension Plan (OTPP) owns 28.0%
of the Companys common stock and 31.0% of the Companys voting common stock and HarbourVest
Partners VI owns 8.7% of the Companys common stock and 9.7% of the Companys voting common stock.
OTPPs voting rights with respect to the election of directors to the Board of Directors is limited
to the lesser of 30.0% or the actual percentage of voting common stock held. Certain current and
former members of management own 13.7% of the Companys common stock and 4.4% of the Companys
voting common stock.
Nature of Operations:
The Company is one of the largest providers of value-added merchandising services and
hardware-related products to retail markets in North America through its wholly-owned subsidiary,
The Hillman Group, Inc. (the Hillman Group). A subsidiary of the Hillman Group operates in
Canada under the name The Hillman Group Canada, Ltd. and another in Mexico under the name SunSource
Integrated Services de Mexico SA de CV. The Hillman Group provides merchandising services and
products such as fasteners and related hardware items; threaded rod and metal shapes; keys, key
duplication systems and accessories; and identification items, such as tags and letters, numbers
and signs, to retail outlets, primarily hardware stores, home centers and mass merchants. The
Company has approximately 19,000 customers, the largest three of which accounted for 42.8% of net
sales in 2009. The average single sale in 2009 was approximately four hundred dollars.
2. Summary of Significant Accounting Policies:
Cash and Cash Equivalents:
Cash and cash equivalents consist of commercial paper, U.S. Treasury obligations and other liquid
securities purchased with initial maturities less than 90 days and are stated at cost which
approximates market value. The Company has foreign bank balances of approximately $363 and $358 at
December 31, 2009 and 2008, respectively. The Company maintains cash and cash equivalent balances
with financial institutions that exceed federally insured limits. The Company has not experienced
any losses related to these balances and management believes its credit risk is minimal.
Restricted Investments:
The Companys restricted investments are trading securities carried at market value which represent
assets held in a Rabbi Trust to fund deferred compensation liabilities owed to the Companys
employees. See Note 11, Deferred Compensation Plans.
48
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. Summary of Significant Accounting Policies: (continued)
Accounts Receivable and Allowance for Doubtful Accounts:
The Company establishes the allowance for doubtful accounts using the specific identification
method and also provides a reserve in the aggregate. The estimates for calculating the aggregate
reserve are based on historical collection experience. Increases to the allowance for doubtful
accounts result in a corresponding expense. The Company writes off individual accounts receivable
accounts when they become uncollectible. The allowance for doubtful accounts was $514 and $544 as
of December 31, 2009 and 2008, respectively.
Inventories:
Inventories consisting predominantly of finished goods are valued at the lower of cost or market,
cost being determined principally on the weighted average cost method. Excess and obsolete
inventories are carried at net realizable value. The historical usage rate is the primary factor
used by the Company in assessing the net realizable value of excess and obsolete inventory. A
reduction in the carrying value of an inventory item from cost to market is recorded for inventory
with no usage in the preceding 24 month period or with on hand quantities in excess of 24 months
average usage. The inventory reserve amounts were $7,145 and $6,088 at December 31, 2009 and 2008,
respectively.
Property and Equipment:
Property and equipment, including assets acquired under capital leases, are carried at cost and
include expenditures for new facilities and major renewals. Maintenance and repairs are charged to
expense as incurred. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from their respective accounts, and the resulting gain or loss
is reflected in income from operations.
Costs incurred to develop software for internal use are capitalized and amortized over the
estimated useful life of the software. Costs related to maintenance of internal-use software are
expensed as incurred. Costs used for the development of internal-use software were capitalized in
the amount of $2,837, $1,985 and $256 for the years ended December 31, 2009, 2008 and 2007,
respectively.
Depreciation:
For financial accounting purposes, depreciation, including that related to plant and equipment
acquired under capital leases, is computed on the straight-line method over the estimated useful
lives of the assets, generally three to ten years or over the terms of the related leases.
Goodwill and Other Intangible Assets:
Goodwill represents the excess purchase cost over the fair value of net assets of companies
acquired in business combinations. Goodwill is an indefinite lived asset and is tested for
impairment at least annually or more frequently if a triggering event occurs. If the carrying
amount of goodwill is greater than the fair value, impairment may be present. The Companys
independent appraiser, John Cole, CPA, CVA, assesses the value of its goodwill based on a
discounted cash flow model and multiple of earnings. Assumptions critical to the Companys fair
value estimates under the discounted cash flow model include the discount rate, projected average
revenue growth and projected long-term growth rates in the determination of terminal values.
49
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. Summary of Significant Accounting Policies: (continued)
The Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade
names) for impairment annually. The Company also tests for impairment if events and circumstances
indicate that it is more likely than not that the fair value of an indefinite-lived intangible
asset is below its carrying amount. Assumptions critical to the Companys evaluation of
indefinite-lived intangible assets for impairment include the discount rate, royalty rates used in
its evaluation of trade names, projected average revenue growth, and projected long-term growth
rates in the determination of terminal values. An impairment charge is recorded if the carrying
amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement
date.
No impairment charges were recorded by the Company as a result of the annual impairment testing.
In 2007, the Company changed the timing of the annual impairment test from December 31 to October
1. The October 1 goodwill and intangible impairment test data better aligns the impairment test
with the preparation of the Companys annual strategic plan and allows additional time for a more
thorough analysis by the Companys independent appraiser.
Long-Lived Assets:
The Company evaluates its long-lived assets for financial impairment including an evaluation based
on the estimated undiscounted future cash flows as events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable. No impairment charges were
recognized for long-lived assets in the years ended December 31, 2009 and 2008.
Income Taxes:
Deferred income taxes are computed using the asset and liability method. Under this method,
deferred income tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities (temporary differences). They are measured using
the enacted tax rates and laws that management estimates will be in effect when the differences are
expected to reverse. Valuation allowances are provided for tax benefits where management estimates
it is more likely than not that certain tax benefits will not be realized. Adjustments to
valuation allowances are recorded from changes in utilization of the tax related item. See Note 6,
Income Taxes, for additional information.
Risk Insurance Reserves:
The Company self insures its product liability, automotive, workers compensation and general
liability losses up to $250 per occurrence. Catastrophic coverage has been purchased from third
party insurers for occurrences in excess of $250 up to $35,000. The two risk areas involving the
most significant accounting estimates are workers compensation and automotive liability.
Actuarial valuations performed by the Companys outside risk insurance expert, Insurance Services
Office, Inc., were used to form the basis for workers compensation and automotive liability loss
reserves. The actuary contemplated the Companys specific loss history, actual claims reported,
and industry trends among statistical and other factors to estimate the range of reserves required.
Risk insurance reserves are comprised of specific reserves for individual claims and additional
amounts expected for development of these claims, as well as for incurred but not yet reported
claims. The Company believes the liability recorded for such risk insurance reserves is adequate
as of December 31, 2009, but due to judgments inherent in the reserve estimation process it is
possible the ultimate costs will differ from this estimate.
50
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. Summary of Significant Accounting Policies: (continued)
The Company self-insures its group health claims up to an annual stop loss limit of $200 per
participant. Aggregate coverage is maintained for annual group health insurance claims in excess
of 125% of expected claims. Historical group insurance loss experience forms the basis for the
recognition of group health insurance reserves.
Retirement Benefits:
Certain employees of the Company are covered under a profit-sharing and retirement savings plan
(defined contribution plan). The plan provides for a matching contribution for eligible
employees of 50% of each dollar contributed by the employee up to 6% of the employees
compensation. The matching contribution for all eligible employees was reduced to 25% of each
dollar contributed in February 2009, but was reinstated at the 50% level in July 2009. In
addition, the plan provides an annual contribution in amounts authorized by the Board of Directors,
subject to the terms and conditions of the plan.
The Companys defined contribution plan costs were $1,035, $1,368, and $1,249 for the years ended
December 31, 2009, 2008 and 2007, respectively.
Revenue Recognition:
Revenue is recognized when products are shipped or delivered to customers depending upon when title
and risks of ownership have passed.
The Company offers a variety of sales incentives to its customers primarily in the form of
discounts and rebates. Discounts are recognized in the consolidated financial statements at the
date of the related sale. Rebates are estimated based on the revenue to date and the contractual
rebate percentage to be paid. A portion of the estimated cost of the rebate is allocated to each
underlying sales transaction. Rebates and discounts are included in the determination of net
sales.
The Company also establishes reserves for customer returns and allowances. The reserve is
established based on historical rates of returns and allowances. The reserve is adjusted quarterly
based on actual experience. Returns and allowances are included in the determination of net sales.
Shipping and Handling:
The costs incurred to ship product to customers, including freight and handling expenses, are
included in selling, general and administrative (SG&A) expenses on the Companys consolidated
statements of operations. The Companys shipping and handling costs were $16,667, $19,393, and
$19,117 for the years ended December 31, 2009, 2008, and 2007, respectively.
Research and Development:
The Company expenses research and development costs consisting primarily of internal wages and
benefits in connection with improvements to the key duplicating and engraving machines. The
Companys research and development costs were $1,198, $998 and $856 for the years ended December
31, 2009, 2008 and 2007, respectively.
51
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. Summary of Significant Accounting Policies: (continued)
Common and Preferred Stock:
In connection with the March 31, 2004 acquisition of the Company by affiliates of Code Hennessey &
Simmons LLC, certain members of management entered into an Executive Securities Agreement (ESA).
The ESA provides the method and terms under which management proceeds were invested in the Company.
Under the terms of the ESA, management shareholders have the right to put their Class A Common
Stock, Class B Common Stock, Class A Preferred Stock Options and Hillman Investment Company Class A
Preferred Stock Options back to the Company at fair value if employment is terminated for other
than cause and upon death or disability. The terms of the ESA limit the total amount of redemption
from all puttable equity securities to an aggregate of $5 million per year.
According to the ESA, the fair value of the Class A Common Stock and the Class B Common Stock is to
be determined by the Board of Directors using an enterprise basis and taking into account all
relevant market factors.
The fair values of the Class A Common Stock and the Class B Common Stock have been calculated at
each balance sheet date by estimating the enterprise value of the Company less the redemption value
of all obligations payable in preference to the common stock, including the Class A Preferred stock
and options issued thereon, the Hillman Investment Company Class A Preferred Stock and options
issued thereon, the Trust Preferred Securities, long term debt and bank revolving credit. The
remainder is divided by the fully diluted common shares outstanding to arrive at a fair value per
common share outstanding.
The enterprise value of the Company is determined based on the earnings before interest, taxes,
depreciation and amortization adjusted for management fees, stock compensation costs, and other
non-recurring general and administrative costs (Adjusted EBITDA) for the most recent twelve month
period multiplied by a valuation multiple. As of December 31, 2009, 2008, and 2007, the Company
has applied valuation multiples of 8.0x, 8.0x, and 8.3x, respectively, to trailing twelve months
Adjusted EBITDA in determining enterprise value. Management periodically reviews the
appropriateness of this multiple and notes that it is consistent with comparable distribution
companies.
A change of 0.1 in the valuation multiple used to calculate the enterprise value adjusts the per
share fair value of the Class A Common Stock and the Class B Common Stock by $570.
The fair value of the Class A Preferred Stock Options and Hillman Investment Company Class A
Preferred Stock Options is equal to the liquidation value of $1,000 per share plus all accumulated
and unpaid dividends thereon less the applicable strike price. The aggregate fair value of the
puttable Class A Preferred Stock Options and Hillman Investment Company Class A Preferred Stock
Options was $11,246, $10,104, and $8,916 at December 31, 2009, 2008, and 2007, respectively.
Stock Based Compensation:
Stock-based compensation cost is measured at the grant date based on the fair value of the award
and is recognized as expense on a straight-line basis over the requisite service period, which is
the vesting period. See Note 14, Stock Based Compensation, for further information.
52
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. Summary of Significant Accounting Policies: (continued)
Fair Value of Financial Instruments:
Cash, restricted investments, accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and bank revolving credit balances are reflected in the consolidated financial
statements at fair value due to the short-term maturity or revolving nature of these instruments.
The fair values of the Companys debt instruments are disclosed in Note 9, Long-Term Debt. The
fair value of the Trust Preferred Securities is disclosed in Note 12, Guaranteed Preferred
Beneficial Interest in the Companys Junior Subordinated Debentures.
Translation of Foreign Currencies:
The translation of the Companys Canadian and Mexican local currency based financial statements
into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the
balance sheet date and for revenue and expense accounts using an average exchange rate during the
period. Cumulative translation adjustments are recorded as a component of accumulated other
comprehensive income (loss) in shareholders equity.
Comprehensive Income (Loss):
The
components of comprehensive loss were as follows:
Year | Year | Year | ||||||||||
ended | ended | ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
(as restated) | (as restated) | (as restated) | ||||||||||
Net loss |
$ | (1,230 | ) | $ | (1,165 | ) | $ | (7,922 | ) | |||
Foreign currency translation adjustment, net |
(197 | ) | 74 | (54 | ) | |||||||
Change in derivative security value, net (1) |
297 | (1,248 | ) | (80 | ) | |||||||
Comprehensive loss |
$ | (1,130 | ) | $ | (2,339 | ) | $ | (8,056 | ) | |||
(1) | Utilizing an income tax rate of 38.7%, 38.5%, and 38.5% for the years ended December 31, 2009, 2008, and 2007, respectively. |
The accumulated other comprehensive loss of $1,485 at December 31, 2009 consisted of $324 for the
cumulative change in foreign currency translation adjustment and $1,161 for the cumulative change
in derivative security value.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses for the
reporting period. Actual results may differ from estimates.
53
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
3. Recent Accounting Pronouncements:
In June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification. The FASB Accounting Standards Codification (ASC) became the source of
authoritative, non-governmental GAAP, except for rules and interpretive releases of the Securities
and Exchange Commission (SEC). The FASB Accounting Standards Codification was effective for
financial statements issued for interim and annual periods ending after September 15, 2009. The
adoption of this guidance did not have a material impact on the Companys consolidated results of
operations and financial condition.
In June 2009, the FASB issued guidance on consolidations. This guidance, among other things,
requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of
a variable interest entity (VIE); requires continuous assessments of whether an enterprise is the
primary beneficiary of a VIE; requires enhanced disclosures about an enterprises involvement with
a VIE; and amends certain guidance for determining whether an entity is a VIE. It will be effective
for the Company on January 1, 2010, and will be applied prospectively. Under this guidance, a VIE
must be consolidated if the enterprise has both (a) the power to direct the activities of the VIE
that most significantly impact the entitys economic performance, and (b) the obligation to absorb
losses or the right to receive benefits from the VIE that could potentially be significant to the
VIE. The Company does not expect the adoption of this guidance to have a material impact on the
Companys consolidated results of operations and financial condition.
In January 2010, the FASB issued guidance on fair value measurements disclosures. This guidance
amends the ASC to require new disclosures for fair value measurements and provides clarification
for existing disclosure requirements. The guidance requires new disclosures about transfers in and
out of Levels 1 and 2 and further descriptions for the reasons for the transfers. The guidance also
requires an entity to present separately information about purchases, sales, issuances and
settlements in Level 3 fair value measurements. The update also provides amendments that clarify
existing disclosures concerning the level of disaggregation and disclosures about inputs and
valuation techniques. The new disclosures and clarification of existing disclosures are effective
for interim and annual reporting periods beginning after December 15, 2009, except for the
disclosure about purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for the interim periods within those fiscal years. The Company does not
expect the adoption of this guidance to have a material impact on the Companys consolidated
results of operations and financial condition.
In February 2010, the FASB made amendments to certain recognition and disclosure requirements
concerning subsequent events. This update addresses the interaction of the requirements of the ASC
with the SECs reporting requirements. The update requires an entity to evaluate subsequent events
through the date that the financial statements are issued. The update also provides that a filer is
not required to disclose the date through which subsequent events have been evaluated. All the
amendments in this update are effective upon issuance of the final update. The adoption of this
amendment did not have a material impact on the Companys consolidated results of operations and
financial conditions.
54
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
4. Acquisitions:
On December 28, 2007, the Hillman Group entered into a Stock Purchase Agreement (the
Agreement) by and among All Points Industries, Inc. (All Points), Gabrielle Mann, Gregory Mann,
and the Hillman Group, whereby the Hillman Group acquired all of the equity interest of All Points.
The aggregate purchase price, including acquisition costs of $335, was $10,243 paid in cash at
closing. The acquisition of this business was made to strengthen Hillmans presence in the Florida
market and in the hurricane protection market.
The following table reconciles the fair value of the acquired assets and assumed liabilities to the
total purchase price:
Cash |
$ | 481 | ||
Account receivable, net |
1,017 | |||
Inventory, net |
7,563 | |||
Other current assets |
51 | |||
Deferred income taxes |
614 | |||
Property and equipment |
435 | |||
Goodwill |
292 | |||
Intangibles |
655 | |||
Total assets acquired |
11,108 | |||
Less: |
||||
Liabilities assumed |
865 | |||
Total purchase price |
$ | 10,243 | ||
The values assigned to intangibles were determined by an independent appraisal by John H.
Cole, CPA, CVA. The customer relationships have been assigned a 15 year life and the trademarks an
indefinite life. The intangible assets and goodwill are deductible for income tax purposes over a
15 year life.
55
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
4. Acquisitions: (continued)
The following table indicates the pro forma financial statements of the Company for the year
ended December 31, 2007. The pro forma financial statements give effect to the All Points
acquisition, as if it had occurred on January 1, 2007:
(unaudited) | ||||
2007 | ||||
(as restated) | ||||
Net sales |
$ | 468,415 | ||
Net loss |
(7,388 | ) |
The pro forma results are based on assumptions that the Company believes are reasonable under the
circumstances. The pro forma results are not necessarily indicative of the operating results that
would have occurred if the transactions had been effective January 1, 2007, nor are they intended
to be indicative of results that may occur in the future. The underlying pro forma information
includes the historical financial results of the Company, the Companys financing arrangements, and
certain purchase accounting adjustments.
5. Related Party Transactions:
On March 31, 2004, the Company was acquired by affiliates of CHS. The Company is obligated to
pay management fees in the amount of $58 per month, plus out of pocket expenses, to a subsidiary of
CHS which owns 49.3% of the Companys outstanding common stock and 54.6% of the Companys voting
common stock. The Company is also obligated to pay transaction fees in the amount of $26 per
month, plus out of pocket expenses, to a subsidiary of OTPP which owns 28.0% of the Companys
outstanding common stock and 31.0% of the Companys voting common stock. The Company has recorded
management and transaction fee charges and expenses from CHS and OTPP of $1,010, $1,043 and $1,023
for the years ended December 31, 2009, 2008 and 2007, respectively.
Gregory Mann and Gabrielle Mann are employed by the All Points subsidiary of Hillman as President
and Vice President, respectively. All Points leases an industrial warehouse and office facility
from companies under the control of the Manns. The Company has recorded rental expense for the
lease of this facility on an arms length basis in the amount of $311 and $302 for the years ended
December 31, 2009 and 2008, respectively.
56
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
6. Income Taxes:
The components of the Companys income tax provision for the three years ended December 31,
2009 were as follows:
Year | Year | Year | ||||||||||
ended | ended | ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
(as restated) | (as restated) | (as restated) | ||||||||||
Current: |
||||||||||||
Federal & State |
$ | 1,579 | $ | 878 | $ | 462 | ||||||
Foreign |
102 | 104 | | |||||||||
Total current |
1,681 | 982 | 462 | |||||||||
Deferred: |
||||||||||||
Federal & State |
8,412 | 4,588 | 1,855 | |||||||||
Foreign |
196 | (547 | ) | 84 | ||||||||
Total deferred |
8,608 | 4,041 | 1,939 | |||||||||
Provision for income taxes |
$ | 10,289 | $ | 5,023 | $ | 2,401 | ||||||
The Company has U.S. federal net operating loss (NOL) carryforwards for tax purposes, totaling
$15,990 as of December 31, 2009, that are available to offset future taxable income. These
carryforwards expire in 2027. Management estimates that these losses will be fully utilized prior
to the expiration date. No valuation allowance has been provided against the federal NOL. In
addition, the Companys foreign subsidiaries have NOL carryforwards aggregating $1,130 which expire
in 2015. Management estimates that these losses will be fully utilized prior to the expiration
date. No valuation allowance has been provided against the foreign NOL.
The Company has state net operating loss carryforwards with an aggregate tax benefit of $1,591
which expire from 2010 to 2027. Management estimates that the Company will not be able to fully
absorb some of the loss carryforwards in certain states before they expire. A valuation allowance
of $8 has been established for these deferred tax assets. In 2009, the valuation allowance for
state net operating loss carryforwards decreased by $8. The decrease was primarily as a result of
the utilization of the related state net operating losses and other adjustments.
The Company has a federal capital loss carryforward of $1,783 as of December 31, 2009. This loss
is available to offset future capital gains. This loss will expire from 2013 to 2014 if not
utilized. Management has recorded a valuation allowance of $657 for this capital loss carryforward
to fully offset the deferred tax asset in 2009. Management estimates that the utilization of this
capital loss carryforward is uncertain due to the short carryforward period and the uncertainty of
generating sufficient capital gains in the carryforward period. The Company has $293 of general
business tax credit carryforwards which expire from 2010 to 2028. A valuation allowance of $283
has been established for these tax credits.
57
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
6. Income Taxes: (continued)
In the three months ended March 31, 2004, a deferred tax asset was recorded for costs that
were capitalized in connection with the Merger Transaction. Certain of these capitalized costs are
not amortized under the tax law and can only be recovered for tax purposes under certain
circumstances. The Company has established a valuation allowance of $1,561 for the entire amount
of the deferred tax asset related to these non-amortizable capitalized costs.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts
of the assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes.
The table below reflects the significant components of the Companys net deferred tax assets and
liabilities at December 31, 2009 and 2008:
As of December 31, 2009 | As of December 31, 2008 | |||||||||||||||
Current | Non-current | Current | Non-current | |||||||||||||
(as restated) | (as restated) | |||||||||||||||
Deferred Tax Asset: |
||||||||||||||||
Inventory |
$ | 5,163 | $ | | $ | 5,287 | $ | | ||||||||
Bad debt reserve |
724 | | 641 | | ||||||||||||
Casualty loss reserve |
325 | 478 | 444 | 390 | ||||||||||||
Accrued bonus / deferred compensation |
1,975 | 1,312 | 1,181 | 1,566 | ||||||||||||
Medical insurance reserve |
374 | | 670 | | ||||||||||||
Interest
expense on Purchased Preferred Stock Options |
| 4,293 | | 3,891 | ||||||||||||
Compensation
expense on Preferred Stock Options |
| 5,477 | | 4,319 | ||||||||||||
Original issue discount amortization |
| 355 | | 370 | ||||||||||||
Derivative security value |
| 733 | | 912 | ||||||||||||
Transaction costs |
| 2,009 | | 2,024 | ||||||||||||
Federal / foreign net operating loss |
| 5,958 | | 16,315 | ||||||||||||
State net operating loss |
| 1,591 | | 2,178 | ||||||||||||
Unrecognized tax benefit |
| (2,879 | ) | | (2,872 | ) | ||||||||||
Federal capital loss carryforwards |
| 657 | | 134 | ||||||||||||
Tax credit carryforwards |
| 2,181 | | 1,436 | ||||||||||||
All other items |
584 | 794 | 728 | 683 | ||||||||||||
Gross deferred tax assets |
9,145 | 22,959 | 8,951 | 31,346 | ||||||||||||
Valuation allowance for deferred tax assets |
(1,045 | ) | (1,464 | ) | (556 | ) | (1,430 | ) | ||||||||
Net deferred tax assets |
$ | 8,100 | $ | 21,495 | $ | 8,395 | $ | 29,916 | ||||||||
Deferred Tax Liability: |
||||||||||||||||
Intangible asset amortization |
$ | | $ | 65,575 | $ | | $ | 65,888 | ||||||||
Property and equipment |
| 5,671 | | 5,401 | ||||||||||||
Deferred tax liabilities |
$ | | $ | 71,246 | $ | | $ | 71,289 | ||||||||
Net deferred tax liability |
$ | 41,651 | $ | 32,978 | ||||||||||||
Long term net deferred tax liability |
$ | 50,169 | $ | 41,858 | ||||||||||||
Current net deferred tax asset |
8,100 | 8,395 | ||||||||||||||
Long term net deferred tax asset |
418 | 485 | ||||||||||||||
Net deferred tax liability |
$ | 41,651 | $ | 32,978 | ||||||||||||
58
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
6. Income Taxes: (continued)
The valuation allowance at December 31, 2009 was $2,509. Of this balance, $1,832 was
established at the Merger Transaction date. In previous years, initial recognition of a tax
benefit by a future reduction of $1,832 in the year end valuation allowance would have reduced
goodwill related to the Merger Transaction. Effective for financial reporting periods beginning
after December 15, 2008, any change in the valuation reserve will be recorded as an adjustment to
the tax provision in the period of change.
Reductions in the valuation allowance for the years ended December 31, 2009, 2008, and 2007 of $0,
$0, and $299, respectively, were recorded as reductions to goodwill resulting from the initial
recognition of the tax benefits from valuation allowances established in purchase accounting.
Foreign tax (provision)/benefits in the years ended December 31, 2009, 2008 and 2007 were offset by
charges to the valuation allowance of $0, ($114), and ($89), respectively.
Realization of the net deferred tax assets is dependent on generating sufficient taxable income
prior to their expiration. Although realization is not assured, management estimates it is more
likely than not that the net deferred tax assets will be realized. The amount of net deferred tax
assets considered realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward periods are reduced.
Below is a reconciliation of statutory income tax rates to the effective income tax rates for the
periods indicated:
Year | Year | Year | ||||||||||
ended | ended | ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
(as restated) | (as restated) | (as restated) | ||||||||||
Statutory federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Non-U.S. taxes and the impact of non-U.S. losses
for which a current tax benefit is not available |
0.6 | % | -0.9 | % | 1.0 | % | ||||||
State and local income taxes, net of U.S. federal
income tax benefit |
10.7 | % | 16.3 | % | -5.6 | % | ||||||
Adjustment of reserve for change in valuation
allowance and other items |
5.8 | % | -1.4 | % | -1.3 | % | ||||||
Adjustment for change in tax law |
3.0 | % | -3.7 | % | -3.7 | % | ||||||
Permanent differences: |
||||||||||||
Interest expense on mandatorily redeemable
preferred stock |
42.5 | % | 89.8 | % | -56.2 | % | ||||||
Stock based compensation expense |
18.3 | % | -9.4 | % | -10.4 | % | ||||||
Dividends received exclusion |
0.0 | % | -0.1 | % | 0.1 | % | ||||||
Meals and entertainment expense |
1.2 | % | 3.2 | % | -2.3 | % | ||||||
Other permanent differences |
0.2 | % | 1.4 | % | -0.1 | % | ||||||
Reconciliation of tax return to tax provision |
-3.7 | % | 0.0 | % | 0.0 | % | ||||||
Effective income tax rate |
113.6 | % | 130.2 | % | -43.5 | % | ||||||
59
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
6. Income Taxes: (continued)
As of January 1, 2007, the Company adopted the provisions of an accounting standard related to
accounting for uncertainty in income taxes. As a result of the implementation, the Company has
recorded a $2,879 decrease in the deferred tax asset related to the future tax benefit of the
Companys net operating loss carryforward as of December 31, 2009.
2009 | 2008 | |||||||
Unrecognized tax benefits January 1 |
$ | 2,872 | $ | 2,875 | ||||
Gross increases tax positions in prior period |
7 | | ||||||
Gross decreases tax positions in prior period |
| (3 | ) | |||||
Unrecognized tax benefits December 31 |
$ | 2,879 | $ | 2,872 | ||||
Amount of unrecognized tax benefit that, if recognized would affect the companys effective tax rate |
$ | 2,879 | $ | 2,872 | ||||
The Company recognizes potential accrued interest and penalties related to unrecognized tax
benefits in income tax expense. In conjunction with the adoption of an accounting standard related
to accounting for uncertainty in income taxes, the Company has not recognized any adjustment of
interest or penalties in its consolidated financial statements due to its net operating loss
position. The Company does not anticipate that total unrecognized tax benefits will change due to
the settlement of audits and the expiration of statute of limitations prior to December 31, 2010.
The Company files a consolidated income tax return in the U.S. and numerous consolidated and
separate income tax returns in various states and foreign jurisdictions. As of December 31, 2009,
with a few exceptions, the Company is no longer subject to U.S. federal, state, and foreign tax
examinations by tax authorities for the tax years prior to 2006. However, the IRS can make
adjustments to losses carried forward by the Company from 1999 forward and utilized on its federal
return.
60
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
7. Property and Equipment, net:
Property and equipment, net, consists of the following at December 31, 2009 and 2008:
Estimated | ||||||||||||
Useful Life | ||||||||||||
(Years) | 2009 | 2008 | ||||||||||
Land |
n/a | $ | 131 | $ | 131 | |||||||
Buildings |
27 | 781 | 781 | |||||||||
Leasehold improvements |
3-10 | 4,961 | 4,540 | |||||||||
Machinery and equipment |
2-10 | 104,568 | 100,173 | |||||||||
Furniture and fixtures |
3-5 | 1,481 | 1,469 | |||||||||
Construction in process |
1,051 | 1,539 | ||||||||||
Property and equipment, gross |
112,973 | 108,633 | ||||||||||
Less: Accumulated depreciation |
65,408 | 56,939 | ||||||||||
Property and equipment, net |
$ | 47,565 | $ | 51,694 | ||||||||
Machinery and equipment includes capitalized software of $8,328 and $5,492 as
as of December 31, 2009 and 2008, respectively. Captitalized interest of $63
and $86 was recorded for the years ended December 31, 2009 and 2008, respectively.
8. Other Intangibles, net:
Intangible assets are amortized over their useful lives and are subject to lower of cost or
market impairment testing.
The values assigned to intangible assets in connection with the March 31, 2004 Merger Transaction,
the SteelWorks acquisition, and the All Points acquisition were determined by independent
appraisals. Other intangibles, net as of December 31, 2009 and 2008 consist of the following:
Estimated | ||||||||||||
Useful Life | ||||||||||||
(Years) | 2009 | 2008 | ||||||||||
Customer relationships Hillman |
23 | $ | 126,651 | $ | 126,651 | |||||||
Customer relationships All Points |
15 | 555 | 555 | |||||||||
Trademarks |
Indefinite | 47,394 | 47,394 | |||||||||
Patents |
9 | 7,960 | 7,960 | |||||||||
Non Compete Agreements |
4 | 5,742 | 5,742 | |||||||||
Intangible assets, gross |
188,302 | 188,302 | ||||||||||
Less: Accumulated amortization |
41,662 | 34,749 | ||||||||||
Other intangibles, net |
$ | 146,640 | $ | 153,553 | ||||||||
The Companys amortization expense for amortizable assets for the years ended December 31, 2009,
2008 and 2007 was $6,912, $7,073, and $7,274, respectively. For the years ending December 31,
2010, 2011, 2012, 2013 and 2014, amortization expense is estimated to be $6,428, $6,428, $6,428,
$5,765 and $5,544, respectively.
61
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
9. Long-Term Debt:
On March 31, 2004, the Company, through its Hillman Group subsidiary, refinanced its revolving
credit and senior term loans with a Senior Credit Agreement (the Senior Credit Agreement)
consisting of a $40,000 revolving credit (the Revolver) and a $217,500 Term B Loan (the Term
Loan) collateralized by the Companys cash, accounts receivable, inventories, and fixed assets.
The Senior Credit Agreement had a seven-year term and provides borrowings at interest rates based
on the London Inter-bank Offered Rates (the LIBOR) plus a margin of between 2.25% and 3.0% (the
LIBOR Margin), or prime (the Base Rate) plus a margin of between 1.25% and 2.0% (the Base Rate
Margin). The applicable LIBOR Margin and Base Rate Margin were based on the Companys leverage at
the date of the preceding fiscal quarter. In accordance with the Senior Credit Agreement, letter
of credit commitment fees were based on the average daily face amount of each outstanding letter of
credit multiplied by a letter of credit margin of between 2.25% and 3.0% per annum (the Letter of
Credit Margin). The Letter of Credit Margin was also based on the Companys leverage at the date
of the preceding fiscal quarter. The Company also paid a Commitment fee of 0.5% per annum on the
average daily unused Revolver balance.
On July 21, 2006, the Company amended and restated the Senior Credit Agreement. The Term Loan was
increased by $22,400 to $235,000. Proceeds of the additional Term Loan borrowings were used to pay
down outstanding Revolver borrowings. The Revolver credit line remained at $40,000. Additionally,
the LIBOR margin on the Term Loan was reduced by 25 basis points, and certain financial covenants
were revised to provide additional flexibility. There were no other significant changes to the
Senior Credit Agreement. The Company incurred $1,173 in financing fees in connection with the
amended and restated agreement. The fees were capitalized and will be amortized over the remaining
term of the Senior Credit Agreement, as amended.
Effective August 7, 2009 the Company, through its Hillman Group subsidiary, entered into an Amended
and Restated Credit Agreement which amended its revolving credit and senior term loan (Amended
Senior Credit Agreement). Lenders representing 82.3% of the outstanding balance of the revolving
credit and senior term loan consented to the Amended Senior Credit Agreement (Consenting
Lenders). For the 17.7% of Lender commitments which did not consent to the amendment
(Non-Consenting Lenders) pricing and amortization of the senior term loan remain unchanged.
Under the terms of the Amended Senior Credit Agreement, the Consenting Lenders agreed to extend the
term of the Senior Credit Agreement to March 31, 2012 from March 31, 2011. Amortization of the
senior term loan was set at 1.5% per quarter beginning September 1, 2009, with the remainder due at
maturity. Pricing on the senior term loan was increased from LIBOR plus a margin of 2.75% to LIBOR
plus a margin of 4.50%. The fixed charge and interest coverage covenants remained the same and
were extended for 12 months while the leverage covenant was extended 12 months and increased 0.25
to 3.0 times from March 31, 2010 to March 31, 2012. Additionally, the amendment includes a $18,000
delayed draw term loan (Delayed Draw) which can be used only to fund all or a portion of the
amortization payments for the Non-Consenting Lenders. The pricing, covenants, terms and conditions
for the Delayed Draw are the same as under the Amended Senior Credit Agreement.
The Amended Senior Credit Agreement extended the revolving credit line to March 31, 2012 from March
31, 2011 and reduced it to $20,000 from $40,000. Pricing on the revolving credit line was
increased from LIBOR plus a margin of 2.75% to LIBOR plus a margin of 4.50% and the unused
commitment fee was increased 25 basis points to 75 basis points.
62
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
9. Long-Term Debt: (continued)
The Amended Senior Credit Agreement, among other provisions, contains financial covenants
requiring the maintenance of specific leverage and interest coverage ratios and levels of financial
position, restricts the incurrence of additional debt and the sale of assets, and permits
acquisitions with the consent of the lenders. Additionally, the Amended Senior Credit Agreement
restricts the Company or any of its subsidiaries from paying dividends. Dividends to officers and
directors are allowed under certain circumstances up to a limit of $2 million per year.
The Company was in compliance with all provisions of the Amended Senior Credit Agreement as of
December 31, 2009.
In addition, on March 31, 2004, the Company, through its Hillman Group subsidiary, issued $47,500
of unsecured subordinated notes to Allied Capital Corporation maturing on September 30, 2011
(Subordinated Debt Issuance). Interest on the Subordinated Debt Issuance was at a fixed rate of
13.5% per annum, with cash interest payments required on a quarterly basis at a fixed rate of
11.25% commencing April 15, 2004. The outstanding principal balance of the Subordinated Debt
Issuance shall be increased on a quarterly basis at the remaining 2.25% fixed rate (the PIK
Amount). All of the PIK Amounts are due on the maturity date of the Subordinated Debt Issuance.
Effective July 21, 2006, the Subordinated Debt Agreement was amended to reduce the interest rate to
a fixed rate of 10.0% payable quarterly. In addition, financial covenants were revised consistent
with the changes to the amended and restated Senior Credit Agreement. The reduction in the
interest rate was retroactive to May 15, 2006.
On May 6, 2009, a group of investors, including affiliates of AEA Investors LP, CIG & Co. and
several private investors, assumed the unsecured subordinated notes previously held by Allied
Capital.
In connection with the Amended Senior Credit Agreement effective August 7, 2009, the Subordinated
Debt Agreement was amended to extend the maturity date to September 30, 2012 from September 30,
2011 and increase the interest rate from 10.0% to 12.5%. Covenant levels were extended and
modified consistent with the Amended Senior Credit Agreement.
Modifications to a debt instrument deemed to be substantially different require recognition as an
extinguishment of debt. An exchange of debt instruments where the present value of cash flows is
greater than 10% different from the present value of cash flows under the terms of the original
debt instrument would be considered substantially different. The change in the interest rate in
the 2009 amendment to the Subordinated Debt Issuance did not change the present value of cash flows
by more than 10% and, accordingly, no extinguishment of debt was recorded in 2009.
63
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
9. Long-Term Debt: (continued)
As of December 31, 2009 and 2008, long-term debt is summarized as follows:
2009 | 2008 | |||||||
Revolving Credit Agreement |
$ | | $ | | ||||
Term Loan B |
157,849 | 202,849 | ||||||
Subordinated Debt Issuance |
49,820 | 49,820 | ||||||
Capital Leases |
494 | 400 | ||||||
208,163 | 253,069 | |||||||
Less: amounts due in one year |
9,868 | 2,305 | ||||||
Long-term debt |
$ | 198,295 | $ | 250,764 | ||||
The aggregate minimum principal maturities of the long-term debt for each of the five years
following December 31, 2009 are as follows:
Amount | ||||
2010 |
$ | 9,868 | ||
2011 |
17,547 | |||
2012 |
180,742 | |||
2013 |
6 | |||
2014 |
| |||
2015 and thereafter |
|
As of December 31, 2009, the Company had $14,513 available under its revolving credit agreement and
letter of credit commitments outstanding of $5,487. The Company had outstanding debt of $158,343
under its secured credit facilities at December 31, 2009, consisting of a $157,849 Term B loans and
$494 in capitalized lease obligations. The term loans consisted of a $17,992 Term B-1 Loan
currently at a three (3) month LIBOR rate of 3.02% and a $139,857 Term B-2 Loan currently at a
three (3) month LIBOR rate of 4.77%. The capitalized lease obligations were at various interest
rates.
As of December 31, 2009, the estimated fair value of the Companys long-term debt approximates the
recorded value as determined in accordance with accounting guidance. The Company discounted the
future cash flows of its senior and subordinated debt based on borrowing rates for debt with
similar terms and remaining maturities. The fair value estimate is made at a specific point in
time, is subjective in nature, and involves uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could significantly affect
the estimate.
64
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
10. Leases:
Certain warehouse and office space and equipment are leased under capital and operating leases
with terms in excess of one year. Future minimum lease payments under non-cancellable leases
consisted of the following at December 31, 2009:
Capital | Operating | |||||||
Leases | Leases | |||||||
2010 |
$ | 361 | $ | 7,937 | ||||
2011 |
99 | 6,336 | ||||||
2012 |
48 | 4,621 | ||||||
2013 |
6 | 3,597 | ||||||
2014 |
| 2,410 | ||||||
Later years |
| 10,811 | ||||||
Total minimum lease payments |
514 | $ | 35,712 | |||||
Less amounts representing interest |
(20 | ) | ||||||
Present value of net minimum lease payments
(including $349 currently payable) |
$ | 494 | ||||||
The rental expense for all operating leases was $8,716, $9,486 and $9,275 for the years ended
December 31, 2009, 2008 and 2007, respectively. Certain leases are subject to terms of renewal and
escalation clauses.
11. Deferred Compensation Plan:
The Company maintains a deferred compensation plan for key employees (the Nonqualified
Deferred Compensation Plan or NQDC) which allows the participants to defer up to 25% of salary
and commissions and up to 100% of bonuses to be paid during the year and invest these deferred
amounts into certain Company directed mutual fund investments, subject to the election of the
participants. The Company is permitted to make a 25% matching contribution on deferred amounts up
to $10, subject to a five year vesting schedule.
As of December 31, 2009 and 2008, the Companys consolidated balance sheets included $3,043 and
$4,254, respectively, in restricted investments representing the assets held in mutual funds to
fund deferred compensation liabilities owed to the Companys current and former employees. The
current portion of the restricted investments was $334 and $282 as of December 31, 2009 and 2008,
respectively.
The assets held in the NQDC are classified as an investment in trading securities. The Company
recorded trading gains and offsetting compensation expense of $254 for the year ended December 31,
2009. The Company recorded trading losses of $1,428 and an offsetting reduction of compensation
expense for the year ended December 31, 2008. The Company recorded trading gains and offsetting
compensation expense of $397 for the year ended December 31, 2007.
During the three years ended December 31, 2009, distributions from the deferred compensation plan
aggregated $1,792 in 2009, $390 in 2008, and $500 in 2007.
65
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
12. Guaranteed Preferred Beneficial Interest in the Companys
Junior Subordinated Debentures:
In September 1997, The Hillman Group Capital Trust (Trust), a Grantor trust, completed a $105,446
underwritten public offering of 4,217,724 11.6% Trust Preferred Securities (TOPrS). The Trust
invested the proceeds from the sale of the preferred securities in an equal principal amount of
11.6% Junior Subordinated Debentures of Hillman due September 2027.
The Trust distributes monthly cash payments it receives from the Company as interest on the
debentures to preferred security holders at an annual rate of 11.6% on the liquidation amount of
$25.00 per preferred security.
In connection with the public offering of TOPrS, the Trust issued $3,261 of trust common securities
to the Company. The Trust invested the proceeds from the sale of the trust common securities in an
equal principal amount of 11.6% Junior Subordinated Debentures of Hillman due September 2027. The
Trust distributes monthly cash payments it receives from the Company as interest on the debentures
to the Company at an annual rate of 11.6% on the liquidation amount of the common security.
The Company may defer interest payments on the debentures at any time, for up to 60 consecutive
months. If this occurs, the Trust will also defer distribution payments on the preferred
securities. The deferred distributions, however, will accumulate at a rate of 11.6% per annum.
The Trust will redeem the preferred securities when the debentures are repaid, or at maturity on
September 30, 2027. The Company may redeem the debentures before their maturity at a price equal
to 100% of the principal amount of the debentures redeemed, plus accrued interest. When the
Company redeems any debentures before their maturity, the Trust will use the cash it receives to
redeem preferred securities and common securities as provided in the trust agreement. The Company
guarantees the obligations of the Trust on the Trust Preferred Securities.
The Company has determined that the Trust is a variable interest entity and the holders of the
Trust Preferred Securities are the primary beneficiaries of the Trust. Accordingly, the Company
has de-consolidated the Trust at March 31, 2004. Summarized below is the condensed financial
information of the Trust as of December 31, 2009.
Non-current assets junior subordinated debentures preferred |
$ | 112,455 | ||
Non-current assets junior subordinated debentures common |
3,261 | |||
Total assets |
$ | 115,716 | ||
Non-current liabilities trust preferred securities |
$ | 112,455 | ||
Stockholders equity trust common securities |
3,261 | |||
Total liabilities and stockholders equity |
$ | 115,716 | ||
The non-current assets for the Trust relate to its investment in the 11.6% junior subordinated
deferrable interest debentures of Hillman due September 30, 2027.
The TOPrS constitute mandatorily redeemable financial instruments. The Company guarantees the
obligations of the Trust on the Trust Preferred Securities. Accordingly, the guaranteed preferred
beneficial interest in the Companys Junior Subordinated Debentures is presented in long-term
liabilities in the accompanying Consolidated Balance Sheet.
66
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
12. Guaranteed Preferred Beneficial Interest in the Companys
Junior Subordinated Debentures: (continued)
On March 31, 2004, the Junior Subordinated Debentures were recorded at the fair value of $117,986
based on the price underlying the Trust Preferred Securities of $27.20 per share upon close of
trading on the American Stock Exchange on that date plus the liquidation value of the trust common
securities. The Company is amortizing the premium on the Junior Subordinated Debentures of $9,279
over their remaining life in the amount of $395 per year.
In order to retain capital, the Companys Board of Directors determined to temporarily defer
interest payments on the Junior Subordinated Debentures and the Trust determined to defer the
payment of cash distributions to holders of Trust Preferred Securities beginning with the
January 2009 distribution. The Companys decision to defer the payment of interest on the Junior
Subordinated Debentures was designed to ensure that the Company preserve cash and maintain its
compliance with the financial covenants contained in its Senior Credit and Subordinated Debt
Agreements. Pursuant to the Indenture that governs the Trust Preferred Securities, the Company was
able to defer distribution payments to holders of the Trust Preferred Securities for a period that
cannot exceed 60 months (the Deferral Period). During the Deferral Period, the Company was
required to accrue the full amount of all distributions payable, and such deferred distributions
were immediately payable by the Company at the end of the Deferral Period. In the first six months
of 2009, the Company accrued $6,265 in interest payable to the Trust on the Junior Subordinated
Debentures. On July 31, 2009, the Company resumed payments of monthly distributions and paid all
amounts accrued during the six month Deferral Period.
At December 31, 2009, the recorded value of the Junior Subordinated Debentures, net of premium
amortization, was $115,716. The fair value of the Junior Subordinated Debentures on December 31,
2009 was $110,560 based on the $25.44 per share closing price of the underlying Trust Preferred
Securities as quoted on the NYSE Amex (formerly the American Stock Exchange) plus the liquidation
value of the trust common securities.
13. Common and Preferred Stock:
Common Stock issued in connection with the Merger Transaction:
There are 23,141 authorized shares of Class A Common Stock, 6,201.0 of which are issued and
outstanding. Each share of Class A Common Stock entitles its holder to one vote. Each holder of
Class A Common Stock is entitled at any time to convert any or all of the shares into an equal
number of shares of Class C Common Stock.
There are 2,500 authorized shares of Class B Common Stock, 970.6 of which are issued and
outstanding. Holders of Class B Common Stock have no voting rights. The Class B Common Stock was
purchased by and issued to certain members of the Companys management and is subject to vesting
over five years with 20% vesting on each anniversary of the Merger Transaction.
In connection with the Merger Transaction, certain members of management entered into an Executive
Securities Agreement (ESA). The ESA provides for the method and terms under which management
proceeds were invested in the Company. Under the terms of the ESA, management shareholders have
the right to put their Class A Common Stock and Class B Common Stock back to the Company at fair
value if employment is terminated for other than cause. If terminated for cause, the management
shareholders can generally put the Class A Common Stock and Class B Common Stock back to the
Company for the lower of the fair value or cost.
67
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
13. Common and Preferred Stock: (continued)
Securities whose redemption is not in the control of the issuer are required to be classified
outside of permanent equity. The put feature embedded in managements Class A Common Stock and
Class B Common Stock allow redemption at the holders option if employment is terminated for other
than cause, resignation by the executive security holder, death, disability or retirement at age
61. Accordingly, managements 395.7 Class A Common Stock shares and 970.6 Class B Common Stock
shares have been classified between liabilities and stockholders equity in the accompanying
consolidated balance sheet. The fair value and cost of the Class A Common Stock subject to the put
feature were $2,158 and $396, respectively at December 31, 2009 and $247 and $417, respectively at
December 31, 2008. The fair value and cost of the Class B Common Stock subject to the put feature
were $5,293 and $971, respectively at December 31, 2009 and $598 and $1,000, respectively at
December 31, 2008.
Securities that are either currently redeemable or where redemption is probable are to be marked to
redemption value with a corresponding charge to accumulated paid in capital. The ESA allows the
management shareholders to put, or redeem, the Class A Common Stock back to the Company if
terminated for other than cause. Under the terms of the ESA, the redemption value of the Class A
Common Stock is equal to the fair value as determined by the Board of Directors. Accordingly, the
Class A Common stock has been adjusted to its fair value of $2,158 as of December 31, 2009 with a
corresponding decrease in additional paid-in capital of $1,996.
The repurchase feature of the Class B Common Stock triggers liability accounting treatment. See
Note 14, Stock-Based Compensation, for further information.
There are 30,109 authorized shares of Class C Common Stock, 2,787.1 of which are issued and
outstanding. Each share of Class C Common Stock entitles its holder to one vote, provided that the
aggregate voting power of Class C Common Stock (with respect to the election of directors) never
exceeds 30%. Each holder of Class C Common Stock is entitled at any time to convert any or all of
the shares into an equal number of shares of Class A Common Stock.
Preferred Stock:
The Company has 238,889 authorized shares of Class A Preferred Stock, 82,104.8 of which are issued
and outstanding and 13,450.7 of which are reserved for issuance upon the exercise of options to
purchase shares of Class A Preferred Stock. Holders of Class A Preferred Stock are not entitled to
any voting rights. Holders of Class A Preferred Stock are entitled to preferential dividends that
shall accrue on a daily basis at the rate of 11.5% per annum of the sum of the Liquidation Value
(as defined in the Restated Certificate of Incorporation) plus all accumulated and unpaid dividends
thereon. At December 31, 2009, the Liquidation Value including accumulated and unpaid dividends
was $1,919 per share.
Hillman Investment Company, a subsidiary of the Company, has 166,667 authorized shares of Class A
Preferred Stock, 57,282.4 of which are issued and outstanding and 9,384.2 of which are reserved for
issuance upon the exercise of options to purchase shares of Class A Preferred Stock. Holders of
Class A Preferred Stock are not entitled to any voting rights. Holders of Class A Preferred Stock
are entitled to preferential dividends that shall accrue on a daily basis at the rate of 11.0% per
annum on the sum of the Liquidation Value (as defined in the Restated Certificate of Incorporation)
thereof plus all accumulated and unpaid dividends thereon.
68
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
13. Common and Preferred Stock: (continued)
The Hillman Investment Company Class A Preferred Stock is mandatorily redeemable on March 31, 2028
and has been classified as debt in the accompanying consolidated balance sheets. The Hillman
Investment Company Class A Preferred Stock is redeemable at its liquidation value of $1,000 per
share plus all accumulated and unpaid dividends. Dividends on the mandatorily redeemable Class A
Preferred Stock were $11,008, $9,903, and $8,860 for the years ended December 31, 2009, 2008, and
2007, respectively. The dividends on the mandatorily redeemable Class A Preferred Stock are
recorded as interest expense in the accompanying consolidated statements of operations. At
December 31, 2009, the liquidation value including accumulated and unpaid dividends was $1,866 per
share.
The Company incurred $2,415 in financing fees in connection with the issuance of the Hillman
Investment Company Class A Preferred Stock. The financing fees were capitalized and will be
amortized over the redemption period using the effective interest method. For the years ended
December 31, 2009 and 2008, interest expense of $37 and $130, respectively, was included in the
accompanying consolidated statements of operations.
Management believes the liquidation value of the Class A Preferred Stock and the Hillman Investment
Company Class A Preferred Stock, including accumulated and unpaid dividends, approximates fair
value at December 31, 2009.
Under the terms of the Companys Senior Credit Agreement, dividend payments on equity securities
are restricted. Dividends to officers and directors are allowable under certain circumstances up
to a limit of $2 million per year.
Purchased Options:
In connection with the Merger Transaction, options in the predecessor to the Company were cancelled
and converted into rights to receive options to purchase 3,895.16 shares of Hillman Companies, Inc.
Class A Preferred Stock and 2,717.55 shares of Hillman Investment Company Class A Preferred Stock
(collectively the Purchased Options). The Purchased Options have a weighted average strike price
of $170.69 per share. The fair value of the Hillman Investment Company Class A Preferred Stock
options has been included with the underlying security in the accompanying consolidated balance
sheets. Security instruments with a redemption date that is certain to occur are to be classified
as liabilities. The Hillman Companies, Inc. Class A Preferred Stock options, which have a March
31, 2028 expiration date, have been classified at their fair value in the liability section of the
accompanying consolidated balance sheets. To the extent the Company pays a dividend to holders of
the Class A Preferred Stock and the Hillman Investment Company Class A Preferred Stock, the
Purchased Option holder will be entitled to receive an amount equal to the dividend which would
have been paid if the Purchased Options had been exercised on the date immediately prior to the
record date for the dividend. Dividends on the Purchased Options are recorded as interest expense
in the accompanying consolidated statement of operations. Additionally, under the terms of the
ESA, the Purchased Options can be put back to the Company at fair value if employment is
terminated.
The initial and subsequent valuations of the Purchased Options are measured at fair value with the
change in fair value recognized as interest expense. Interest expense of $1,314, $1,187, and
$1,059 was recorded for the years ended December 31, 2009, 2008, and 2007, respectively, to
recognize the increase in fair value of the Purchased Options.
69
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
13. Common and Preferred Stock: (continued)
The table below reconciles the components of the Preferred Stock and the Purchased Options to
the accompanying consolidated balance sheets:
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Hillman Investment Company Class A Preferred Stock |
$ | 57,282 | $ | 57,344 | ||||
Purchased Options Hillman Investment Company
Class A Preferred Stock |
2,188 | 2,254 | ||||||
Accumulated and unpaid dividends |
51,982 | 40,548 | ||||||
Total mandatorily redeemable preferred stock |
$ | 111,452 | $ | 100,146 | ||||
Purchased Options Hillman Companies, Inc. Class A
Preferred Stock |
$ | 3,135 | $ | 3,230 | ||||
Accumulated and unpaid dividends |
3,482 | 2,786 | ||||||
Total management purchased preferred options |
$ | 6,617 | $ | 6,016 | ||||
2006 Equity Issuance:
On July 31, 2006, an executive of the Company purchased 88 shares of Class A Preferred Stock for
$88.0, 62 shares of Hillman Investment Company Class A Preferred Stock for $62.0 and 4.396 shares
of Class A Common Stock for $10.0. In connection with the equity purchase, the executive entered
into an ESA similar in terms to the existing management shareholders ESA.
Under the terms of the ESA, the executive has the right to put the Class A Preferred Stock, the
Hillman Investment Company Class A Preferred Stock and the Class A Common Stock back to the Company
at fair value if employment is terminated for other than cause. If terminated for cause, the
shares can be put back to the Company for the lower of cost or the fair value. As discussed above,
the put feature embedded in the Class A Preferred Stock and the Class A Common Stock requires
classification outside permanent equity. Accordingly, the Class A Preferred Stock and the Class A
Common Stock were classified between liabilities and stockholders equity in the accompanying
Consolidated Balance Sheet.
The 62 shares of Hillman Investment Company Class A Preferred Stock were mandatorily redeemable on
March 31, 2028, and were classified as a liability in the accompanying consolidated balance sheets.
This executive put back to the Company all of the securities from the 2006 Equity Issuance. See
the 2009 Equity Redemptions section for details.
70
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
13. Common and Preferred Stock: (continued)
2009 Equity Redemptions:
On October 13, 2009, a former executive of the Company exercised his right to redeem certain
securities of the Company and the Hillman Investment Company in accordance with the ESA dated March
31, 2004. Under the terms of the ESA, the former executive put back to the Company 11.93 shares of
Class A Common Stock for $32.4, 29.44 shares of Class B Common Stock for $80.1, 281.42 preferred
options for Class A Preferred Stock for $228.9, and 114.71 purchased options for Class A Preferred
Stock for $188.2. In addition, the former executive put back to the Company 196.34 preferred
options for Class A Preferred Stock in Hillman Investment Company for $150.7 and 80.03 purchased
options for Class A Preferred Stock in Hillman Investment Company for $127.7.
On November 20, 2009, a former executive of the Company exercised his right to redeem certain
securities of the Company and the Hillman Investment Company in accordance with the ESA dated July
31, 2006. Under the terms of the ESA, the former executive put back to the Company 4.396 shares of
Class A Common Stock for $22.8, 88.0 shares of Class A Preferred Stock for $127.2, 30.385 common
options for Class B Common Stock for $94.8, and 62.0 shares of Hillman Investment Company Class A
Preferred Stock for $88.2.
14. Stock-Based Compensation:
Common Option Plan:
On March 31, 2004, the Company adopted the 2004 Stock Option Plan (Common Option Plan) following
Board and shareholder approval. Grants under the Common Option Plan will consist of non-qualified
stock options for the purchase of Class B Common Shares. The number of Class B Common Shares
authorized for issuance under the Common Option Plan is not to exceed 356.41 shares. Unless
otherwise consented to by the Board, the aggregate number of Class B Common Shares for which
options may be granted under the Common Option Plan cannot exceed 71.28 in any one calendar year.
The Common Option Plan is administered by a Committee of the Board. The Committee determines the
term of each option, provided that the exercise period may not exceed ten years from date of grant.
The Class B Common Options vest over two years with 50% vesting on each anniversary of the date of
grant.
The stock options issued under the Common Option Plan are accounted for in a manner consistent with
the underlying security. Therefore, the Class B Common Stock Options are adjusted to the fair
value of the Class B Common shares less the strike price of the Class B Common shares adjusted for
the proportion of employee service.
Preferred Options:
On March 31, 2004, certain members of the Companys management were granted options to purchase
9,555.5 shares of Class A Preferred Stock and 6,666.7 shares of Hillman Investment Company Class A
Preferred Stock (collectively the Preferred Options). The Preferred Options were granted with an
exercise price of $1,000 per share which was equal to the value of the underlying Preferred Stock.
The Preferred Options vest over five years with 20% vesting on each anniversary of the Merger
Transaction. Holders of the Preferred Options are entitled to accrued dividends as if the
underlying Preferred Stock were issued and outstanding as of the grant date.
71
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
14. Stock-Based Compensation: (continued)
On October 13, 2009, a former executive of the Company exercised his right to redeem certain
securities of the Company and the Hillman Investment Company in accordance with the ESA dated March
31, 2004. Under the terms of the ESA, the former executive put back to the Company 281.42
preferred options for Class A Preferred Stock for $228.9 and 196.34 preferred options for Class A
Preferred Stock in Hillman Investment Company for $150.7. There have been no other grants,
forfeitures or exercise of the Preferred Options since March 31, 2004.
Upon resignation from the Company after the third anniversary of grant, termination by the Company
without cause, death or disability, or retirement at age 61, the holder of the Preferred Options
has a put right on the vested securities at a price equal to fair value less any option exercise
price payable. Accounting guidance required that stock-based compensation awards are classified as
liabilities if the underlying security is classified as a liability. Therefore, the Preferred
Options are treated as liability classified awards.
Accounting guidance allows nonpublic entities, such as the Company, to make a policy decision as to
whether to measure its liability awards at fair value or intrinsic value. Management has
determined the lack of an active market, trading restrictions and absence of any trading history
preclude the reasonable estimate of fair value. Regardless of the valuation method selected, a
nonpublic entity is required to re-measure its liabilities under share based payment awards at each
reporting date until settlement. Accordingly, the Company has elected to use the intrinsic value
method to value the Preferred Options at the end of each reporting period pro-rated for the portion
of the service period rendered. Compensation expense of $3,311, $3,501, and $3,637 was recognized
in the accompanying consolidated statements of operations for the years ended December 31, 2009,
2008, and 2007, respectively.
At December 31, 2009, the aggregate intrinsic value of the outstanding Preferred Options was
$14,150, and the intrinsic value of the exercisable Preferred Options was $14,150. The value of
the Preferred Options is included under other non-current liabilities on the accompanying
consolidated balance sheets.
Class B Shares:
The outstanding shares of Class B Common Stock are subject to vesting over 5 years with 20% of the
shares vesting on each anniversary of the Merger Transaction. Vested shares of the Class B Common
Stock can be put back to the Company at fair value upon termination. Unvested shares of the Class
B Common Stock are puttable at the lesser of fair value or cost. Accordingly, the value of the
Class B common shares is adjusted at each balance sheet date to fair value for the proportion of
consideration received in the form of employee service plus an amount equal to the lesser of fair
value or original cost for the proportion of the Class B common shares for which employee service
has not been recognized. The proportion of consideration recognized is based on the percentage of
employee services for each of the 5 vesting periods. On a weighted average basis, the proportion
of service deemed to have been earned for the Class B Common Shares was 100.0% at December 31,
2009.
There have been no grants or forfeitures of shares of Class B Common Stock since the Merger
Transaction. At December 31, 2009, there were 970.6 Class B Common shares vested with a fair value
of $5,453.8 per share. Compensation expense (income) of $4,746, ($1,036), and $1,635 was recorded
in the accompanying consolidated statements of operations for the years ended December 31, 2009,
2008, and 2007, respectively.
72
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
15. Derivatives and Hedging:
The Company uses derivative financial instruments to manage its exposures to interest rate
fluctuations on its floating rate senior debt. The Company measures those instruments at fair
value and recognizes changes in the fair value of derivatives in earnings in the period of change,
unless the derivative qualifies as an effective hedge that offsets certain exposures.
On August 28, 2006, the Company entered into an Interest Rate Swap Agreement (2006 Swap) with a
two-year term for a notional amount of $50 million. The 2006 Swap fixed the interest rate at
5.375% plus applicable interest rate margin. The 2006 Swap expired on August 28, 2008.
On August 29, 2008, the Company entered into a new Interest Rate Swap Agreement (2008 Swap) with
a three-year term for a notional amount of $50 million. The 2008 Swap fixes the interest rate at
3.41% plus applicable interest rate margin.
The 2008 Swap was designated as a cash flow hedge, and the fair value at December 31, 2009 was
$(1,161), net of $733 in taxes. The 2008 Swap was reported on the consolidated balance sheet in
other non-current liabilities with a related deferred charge recorded as a component of other
comprehensive income in shareholders equity.
16. Fair Value Measurements:
On January 1, 2008, the Company adopted the guidance that applies to all assets and liabilities
that are being measured and reported on a fair value basis. The guidance defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The guidance also establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value. Assets and liabilities carried at fair value are classified and disclosed in one of the
following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by
market data.
Level 3: Unobservable inputs reflecting the reporting entitys own assumptions.
The accounting guidance establishes a hierarchy which requires an entity to maximize the use of
quoted market prices and minimize the use of unobservable inputs. An asset or liabilitys level is
based on the lowest level of input that is significant to the fair value measurement.
The following table sets forth the Companys financial assets and liabilities that were measured at
fair value on a recurring basis during the period, by level, within the fair value hierarchy:
at December 31, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Trading securities |
$ | 3,043 | $ | | $ | | $ | 3,043 | ||||||||
Interest rate swaps |
| (1,894 | ) | | (1,894 | ) | ||||||||||
Fixed rate debt |
| (49,820 | ) | | (49,820 | ) |
73
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
16. Fair Value Measurements: (continued)
Trading securities are valued using quoted prices on an active exchange. Trading securities
represent assets held in a Rabbi Trust to fund deferred compensation liabilities and are included
as restricted investments on the accompanying consolidated balance sheets.
For the year ended December 31, 2009, the unrealized gains on these securities of $254 were
recorded as other income. An offsetting entry, for the same amount, increasing the deferred
compensation liability and compensation expense within SG&A was also recorded.
For the year ended December 31, 2008, the unrealized losses on these securities of $1,428 were
recorded as other expense. An offsetting entry, for the same amount, decreasing the deferred
compensation liability and compensation expense within SG&A was also recorded.
For the year ended December 31, 2007, the unrealized gains on these securities of $397 were
recorded as other income. An offsetting entry, for the same amount, increasing the deferred
compensation liability and compensation expense within SG&A was also recorded.
The Company utilizes interest rate swap contracts to manage its targeted mix of fixed and floating
rate debt, and these swaps are valued using observable benchmark rates at commonly quoted intervals
for the full term of the swaps. The 2008 Swap was included in other non-current liabilities as of
December 31, 2009 on the accompanying consolidated balance sheet.
Fixed rate debt represents the Subordinated Debt Issuance recorded in long-term debt. As of
December 31, 2009, the estimated fair value of the Companys fixed rate debt approximates the
recorded value as determined in accordance with accounting guidance. The Company discounted the
future cash flows of its subordinated debt based on borrowing rates for debt with similar terms and
remaining maturities. The fair value estimate is made at a specific point in time, is subjective
in nature, and involves uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the estimate.
17. Commitments and Contingencies:
The Company self insures its product liability, automotive, workers compensation and general
liability losses up to $250 per occurrence. Catastrophic coverage has been purchased from third
party insurers for occurrences in excess of $250 up to $35,000. The two risk areas involving the
most significant accounting estimates are workers compensation and automotive liability.
Actuarial valuations performed by the Companys outside risk insurance expert, Insurance Services
Office, Inc., were used to form the basis for workers compensation and automotive liability loss
reserves. The actuary contemplated the Companys specific loss history, actual claims reported,
and industry trends among statistical and other factors to estimate the range of reserves required.
Risk insurance reserves are comprised of specific reserves for individual claims and additional
amounts expected for development of these claims, as well as for incurred but not yet reported
claims. The Company believes the liability of approximately $2,076 recorded for such risk
insurance reserves is adequate as of December 31, 2009, but due to judgments inherent in the
reserve estimate, it is possible the ultimate costs will differ from this estimate.
As of December 31, 2009, the Company has provided certain vendors and insurers letters of credit
aggregating $5,487 related to its product purchases and insurance coverage of product liability,
workers compensation and general liability.
The Company self-insures its group health claims up to an annual stop loss limit of $200 per
participant. Aggregate coverage is maintained for annual group health insurance claims in excess
of 125% of expected claims. Historical group insurance loss experience forms the basis for the
recognition of group health insurance reserves.
74
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
17. Commitments and Contingencies: (continued)
Provisions for losses expected under these programs are recorded based on an analysis of historical
insurance claim data and certain actuarial assumptions. The Company believes the liability of
approximately $1,732 recorded for such risk insurance reserves is adequate as of December 31, 2009,
but due to judgments inherent in the reserve estimation process it is possible the ultimate costs
will differ from this estimate.
Legal proceedings are pending which are either in the ordinary course of business or incidental to
the Companys business. Those legal proceedings incidental to the business of the Company are
generally not covered by insurance or other indemnity. In the opinion of management, the ultimate
resolution of the pending litigation matters will not have a material adverse effect on the
consolidated financial position, operations or cash flows of the Company.
18. Restatement of Consolidated Financial Statements:
Subsequent to the issuance of the Companys December 31, 2009 consolidated financial statements,
the Company concluded that certain of its accounting practices with respect to the income tax
accounting for the Purchased Options and the Preferred Options were not in accordance with
generally accepted accounting principles. As more fully described in Note 13, Common and Preferred
Stock, certain members of management were issued options to purchase shares of the Hillman
Companies, Inc. Class A Preferred Stock and the Hillman Investment Company Class A Preferred Stock.
Changes in the fair value of the Purchased Options were recognized as interest expense and changes
in the fair value of the Preferred Options were recognized as compensation expense. For income tax
reporting purposes, changes in the fair value of the Purchased Options and the Preferred Options
were treated as permanent book versus tax timing differences and, therefore, no income tax benefit
was recognized. Management has determined that, upon exercise, the difference between the
redemption value and strike price of the Purchased Options and Preferred Options is deductible
for federal and state income tax. Therefore, there should be a tax benefit reported in each period
where compensation and interest expense was recognized for the change in the fair value of the
Preferred Options and the Purchased Options. Additionally, a benefit should be recognized for the
cumulative difference in the fair value and the strike price of the Purchased Options at the date
of the Merger Transaction resulting in an adjustment to goodwill.
The following is a summary of the effects of these changes on the Companys consolidated balance
sheets as of December 31, 2009 and 2008, as well as the effect on the consolidated statements of
operations and cash flows for the years ended December 31, 2009, 2008 and 2007.
Consolidated Balance Sheets | ||||||||||||
As Previously | As | |||||||||||
As of December 31, 2008: | Reported | Adjustment | Restated | |||||||||
Goodwill |
$ | 259,923 | $ | (2,117 | ) | $ | 257,806 | |||||
Total Assets |
652,794 | (2,117 | ) | 650,677 | ||||||||
Deferred income taxes, net -long term |
50,068 | (8,210 | ) | 41,858 | ||||||||
Total liabilities |
648,476 | (8,210 | ) | 640,266 | ||||||||
Accumulated deficit |
(24,240 | ) | 6,093 | (18,147 | ) | |||||||
Total stockholders equity |
3,385 | 6,093 | 9,478 | |||||||||
Total
liabilities and stockholders deficit |
652,794 | (2,117 | ) | 650,677 |
75
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
18. Restatement of Consolidated Financial Statements: (continued)
Consolidated Balance Sheets | ||||||||||||
As Previously | As | |||||||||||
As of December 31, 2009: | Reported | Adjustment | Restated | |||||||||
Goodwill |
$ | 259,923 | $ | (2,117 | ) | $ | 257,806 | |||||
Total Assets |
630,598 | (2,117 | ) | 628,481 | ||||||||
Deferred tax liability |
60,208 | (10,039 | ) | 50,169 | ||||||||
Total Liabilities |
641,628 | (10,039 | ) | 631,589 | ||||||||
Accumulated deficit |
(27,299 | ) | 7,922 | (19,377 | ) | |||||||
Total stockholders (deficit) equity |
(18,481 | ) | 7,922 | (10,559 | ) | |||||||
Total liabilities and stockholders
deficit |
630,598 | (2,117 | ) | 628,481 |
Consolidated Statement of Operations | ||||||||||||
For the year ended | As Previously | As | ||||||||||
December 31, 2007: | Reported | Adjustment | Restated | |||||||||
Income tax provision |
$ | 4,238 | $ | (1,837 | ) | $ | 2,401 | |||||
Net Loss |
(9,759 | ) | 1,837 | $ | (7,922 | ) |
Consolidated Statement of Operations | ||||||||||||
For the year ended | As Previously | As | ||||||||||
December 31, 2008: | Reported | Adjustment | Restated | |||||||||
Income tax provision |
$ | 6,811 | $ | (1,788 | ) | $ | 5,023 | |||||
Net Loss |
(2,953 | ) | 1,788 | $ | (1,165 | ) |
Consolidated Statement of Operations | ||||||||||||
For the year ended | As Previously | As | ||||||||||
December 31, 2009: | Reported | Adjustment | Restated | |||||||||
Income tax provision |
$ | 12,118 | $ | (1,829 | ) | $ | 10,289 | |||||
Net Loss |
(3,059 | ) | 1,829 | $ | (1,230 | ) |
Consolidated Statement of Cash Flows | ||||||||||||
For the year ended | As Previously | As | ||||||||||
December 31, 2007: | Reported | Adjustment | Restated | |||||||||
Net Loss |
$ | (9,759 | ) | $ | 1,837 | $ | (7,922 | ) | ||||
Deferred income tax provision |
6,028 | (1,837 | ) | $ | 4,191 |
Consolidated Statement of Cash Flows | ||||||||||||
For the year ended | As Previously | As | ||||||||||
December 31, 2008: | Reported | Adjustment | Restated | |||||||||
Net Loss |
$ | (2,953 | ) | $ | 1,788 | $ | (1,165 | ) | ||||
Deferred income tax provision |
5,264 | (1,788 | ) | $ | 3,476 |
76
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
18. Restatement of Consolidated Financial Statements: (continued)
Consolidated Statement of Cash Flows | ||||||||||||
For the year ended | As Previously | As | ||||||||||
December 31, 2009: | Reported | Adjustment | Restated | |||||||||
Net Loss |
$ | (3,059 | ) | $ | 1,829 | $ | (1,230 | ) | ||||
Deferred income tax provision |
10,502 | (1,829 | ) | $ | 8,673 |
19. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
Year | Year | Year | ||||||||||
ended | ended | ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash paid (refunded) during the
period for: |
||||||||||||
Interest on junior subordinated
debentures |
$ | 12,442 | $ | 12,231 | $ | 12,231 | ||||||
Interest |
$ | 14,043 | $ | 19,112 | $ | 26,117 | ||||||
Income taxes |
$ | 1,759 | $ | 985 | $ | (17 | ) | |||||
Non-cash investing activities: |
||||||||||||
Property and equipment purchased
with capital lease |
$ | 27 | $ | 238 | $ | 15 | ||||||
Non-cash financing activities: |
||||||||||||
Increase in accrued dividends on preferred stock |
$ | 16,872 | $ | 15,142 | $ | 13,484 | ||||||
20. Quarterly Data (unaudited):
The unaudited quarterly data for the years ended December 31, 2009 and 2008 have been restated
to reflect the corrections for the matters described in Note 18.
2009 | Fourth | Third | Second | First | ||||||||||||
Net sales |
$ | 99,462 | $ | 122,673 | $ | 123,813 | $ | 112,213 | ||||||||
Gross profit |
51,785 | 65,093 | 62,704 | 53,937 | ||||||||||||
Net
(loss) income (as previously reported) |
(2,950 | ) | 2,290 | 1,920 | (4,319 | ) | ||||||||||
Net
(loss) income (as restated) |
(2,487 | ) | 2,741 | 2,353 | (3,837 | ) |
2008 | Fourth | Third | Second | First | ||||||||||||
Net sales |
$ | 113,469 | $ | 132,588 | $ | 129,070 | $ | 106,796 | ||||||||
Gross profit |
54,520 | 64,653 | 64,252 | 53,851 | ||||||||||||
Net
(loss) income (as previously reported) |
(2,606 | ) | 1,321 | 1,686 | (3,354 | ) | ||||||||||
Net
(loss) income (as restated) |
(2,175 | ) | 1,798 | 2,137 | (2,925 | ) |
77
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
21. Concentration of Credit Risks:
Financial instruments which potentially subject the Company to concentration of credit risk
consist principally of cash and cash equivalents and trade receivables. The Company places its
cash and cash equivalents with high credit quality financial institutions. Concentrations of
credit risk with respect to sales and trade receivables are limited due to the large number of
customers comprising the Companys customer base and their dispersion across geographic areas. The
Company performs periodic credit evaluations of its customers financial condition and generally
does not require collateral.
For the year ended December 31, 2009, the largest three customers accounted for 42.8% of sales and
55.0% of the year-end accounts receivable balance. For the year ended December 31, 2008, the
largest three customers accounted for 40.7% of sales and 47.1% of the year-end accounts receivable
balance. For the year ended December 31, 2007, the largest three customers accounted for 40.4% of
sales and 42.0% of the year-end accounts receivable balance. No other customer accounted for more
than 5.0% of the Companys total sales in 2009, 2008 or 2007.
Concentration of credit risk with respect to purchases and trade payables are limited due to the
large number of vendors comprising the Companys vendor base, with dispersion across different
industries and geographic areas. The Companys largest vendor in terms of annual purchases
accounted for 7.7% of the Companys total purchases and 1.1% of the Companys total trade payables
on December 31, 2009.
22. Segment and Geographic Information:
The Company provides merchandising services and products such as fasteners and related
hardware items; threaded rod and metal shapes; keys, key duplication systems and accessories; and
identification items, such as tags and letters, numbers and signs, to retail outlets, primarily
hardware stores, home centers and mass merchants. Management considers all such sales to be part
of a single operating unit.
The following geographic area data includes revenue based on product shipment destination for the
years ended December 31 and long-lived assets based on physical location as of December 31:
2009 | 2008 | 2007 | ||||||||||
Net sales |
||||||||||||
United States |
$ | 442,695 | $ | 467,925 | $ | 429,627 | ||||||
Canada |
4,479 | 4,241 | 7,289 | |||||||||
Mexico |
4,980 | 3,416 | 2,523 | |||||||||
Other |
6,007 | 6,341 | 6,189 | |||||||||
Consolidated net sales |
$ | 458,161 | $ | 481,923 | $ | 445,628 | ||||||
Long-lived assets: |
||||||||||||
United States |
$ | 466,737 | $ | 477,855 | $ | 489,234 | ||||||
Canada |
249 | 311 | 509 | |||||||||
Mexico |
| 55 | | |||||||||
Other |
| | | |||||||||
Consolidated long-lived assets |
$ | 466,986 | $ | 478,221 | $ | 489,743 | ||||||
78
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
22. Segment and Geographic Information: (continued)
As of | As of | As of | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash & cash equivalents |
||||||||||||
United States |
$ | 16,801 | $ | 6,775 | $ | 11,080 | ||||||
Canada |
250 | 234 | 288 | |||||||||
Mexico |
113 | 124 | 551 | |||||||||
Other |
| | | |||||||||
Consolidated cash & cash equivalents |
$ | 17,164 | $ | 7,133 | $ | 11,919 | ||||||
Following is revenue based on products for the Companys significant product categories:
Year | Year | Year | ||||||||||
Ended | Ended | Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Net sales |
||||||||||||
Keys |
$ | 78,012 | $ | 80,754 | $ | 79,370 | ||||||
Engraving |
35,518 | 40,945 | 39,158 | |||||||||
Letters, numbers and signs |
34,287 | 34,671 | 37,711 | |||||||||
Fasteners |
253,704 | 261,646 | 230,857 | |||||||||
Threaded rod |
30,118 | 37,145 | 30,693 | |||||||||
Code cutter |
3,353 | 4,934 | 5,149 | |||||||||
Builders hardware |
3,832 | 1,606 | 2,578 | |||||||||
Other |
19,337 | 20,222 | 20,112 | |||||||||
Consolidated net sales |
$ | 458,161 | $ | 481,923 | $ | 445,628 | ||||||
23. Subsequent Events:
The Companys management has evaluated potential subsequent events for recording and
disclosure in this Annual Report on Form 10-K for the year ended December 31, 2009. There were no
items requiring disclosure.
79
Table of Contents
Financial Statement Schedule:
Schedule II VALUATION ACCOUNTS
(dollars in thousands)
Deducted From Assets in Balance Sheet | ||||||||
Allowance for | ||||||||
Allowance for | Obsolete/ | |||||||
Doubtful | Excess | |||||||
Accounts | Inventory | |||||||
Ending
Balance - December 31, 2006 |
$ | 369 | $ | 4,642 | ||||
Additions charged to cost and expense |
200 | 230 | ||||||
Additions from acquired company |
124 | 1,629 | ||||||
Deductions due to: |
||||||||
Others |
96 | (A) | 337 | (A) | ||||
Ending
Balance - December 31, 2007 |
597 | 6,164 | ||||||
Additions charged to cost and expense |
40 | 381 | ||||||
Deductions from acquired company |
| (191 | ) | |||||
Deductions due to: |
||||||||
Others |
93 | (A) | 266 | (A) | ||||
Ending
Balance - December 31, 2008 |
544 | 6,088 | ||||||
Additions charged to cost and expense |
345 | 1,530 | ||||||
Deductions due to: |
||||||||
Others |
375 | (A) | 473 | (A) | ||||
Ending
Balance - December 31, 2009 |
$ | 514 | $ | 7,145 | ||||
Notes: | ||
(A) | Includes write-off of accounts receivable (net of bad debt recoveries) and inventories. |
80
Table of Contents
Item 9 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
Item 9A | Controls and Procedures. |
Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision
and with the participation of the
Companys management, including the chief executive officer and the chief financial officer, of the
effectiveness of the design and operation of the disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act). Based upon that evaluation, which included the matters discussed below, the Companys chief
executive officer and chief financial officer concluded that the Companys disclosure controls and
procedures were not effective, as of the end of the period covered by this Report (December 31,
2009), in ensuring that material information relating to The Hillman Companies, Inc. required to be
disclosed by the Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms
and that such information is accumulated and communicated to management, including the chief
executive officer and the chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
Notwithstanding the material weakness described below, the Companys management has concluded that
the consolidated financial statements included in this annual report fairly present in all material
respects the Companys financial condition, results of operations and cash flows for the period
presented in conformity with generally accepted accounting principles (GAAP).
A material weakness is a control deficiency, or combination of control deficiencies, in internal
control over financial reporting such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected in a
timely manner. As a result of the restatement described above, the Company concluded that the
material weakness described below existed as of December 31, 2009.
The company
did not maintain effective controls over its tax position and accounting treatment of
the dividends on management owned Preferred and Purchased Options. The
Company had concluded that the dividends on the underlying Preferred Shares were not deductible for
federal income tax purposes, and as such the dividends on the related Preferred and Purchased
Options would also be non-deductible. Subsequently, management
determined the dividends on the Purchased and Preferred Options were
deductible for income tax purposes and, accordingly, the income tax
provision and related deferred tax balances have been restated.
This control deficiency resulted in the filing of Form 10-K/A as Amendment No. 1 to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009; and restatements of our
consolidated balance sheets at December 31, 2009 and
December 31, 2008, our consolidated statements
of operations, stockholders equity and cash flows for the
fiscal years ended December 31, 2009, 2008 and 2007, and the
related notes thereto correct an error in our income tax accounting.
Plan for Remediation of Material Weaknesses
Management is in the process of remediating this material weakness in internal control over
financial reporting. In particular, management obtained expert tax guidance regarding the deductibility of dividends on the Purchased Preferred Shares and Preferred Stock
Options, which supports the position of treating these items as temporary timing differences for
accounting purposes. Additionally, any future transactions or events that are deemed by management
to be unusually subjective in nature will be thoroughly evaluated by management to determine the
necessity of obtaining expert tax guidance. Management will also analyze the periodic assessment of
the tax reporting control environment and make any enhancements deemed to be appropriate.
81
Table of Contents
Attestation Report of Registered Public Accounting Firm on Internal Control Over Financial
Reporting.
This annual report does not contain an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.
Changes in Internal Control over Financial Reporting.
During the quarter ended December 31, 2009, there were no changes in the Companys internal control
over financial reporting (as defined in Rule 13a-15(f)) that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 9B | Other Information. |
None.
82
Table of Contents
PART III
Item 10 | Directors, Executive Officers, and Corporate Governance. |
The following is a summary of the biographies for at least the last five years of the
continuing directors and officers. Each of the directors has served as such since March 31, 2004
except for Maurice P. Andrien, Jr. and Max W. Hillman who have served since September 2001 and
Shael J. Dolman who has served since June 19, 2005.
Directors
Principal Occupation; Five-Year | ||
Name and Age | Employment; Other Directorships | |
Andrew W. Code (51)
|
Chairman of The Hillman Companies, Inc. since April 27, 2009. Mr. Code has been a general partner of CHS Management Limited Partnership (CHS Management) and a general partner of Code Hennessy & Simmons Limited Partnership (CHS) since August 1988. Mr. Code is on the Boards of Pool Corporation and Woodstream Corp. | |
Peter M. Gotsch (45)
|
From March 31, 2004 to April 26, 2009, Mr. Gotsch was Chairman of The Hillman Companies, Inc., Cincinnati, Ohio. Mr. Gotsch has been a general partner of Ellipse Capital LLC since June 2008. Mr. Gotsch had been a member of Code Hennessy & Simmons LLC since 1997 and employed by its affiliates since 1989. Mr. Gotsch presently serves on the Board of Beacon Roofing Supply, Inc. and the Board of Houston Wire & Cable Company. | |
Maurice P. Andrien, Jr. (68)
|
From September 2001 to March 2004, Mr. Andrien was Chairman of The Hillman Companies, Inc., Cincinnati, Ohio. From April 1999 to November 2001, Mr. Andrien was President and Chief Executive Officer of SunSource Inc., the predecessor of the Company. Mr. Andrien presently serves on the Boards of State Industrial Products, Inc., Cogniscape LLC and Kaba Holding AG. | |
Max W. Hillman (63)
|
President and Chief Executive Officer of The Hillman Companies, Inc., Chief Executive Officer of The Hillman Group, Inc., Cincinnati, Ohio. From April 2000 to November 2001, Mr. Hillman was Co-Chief Executive Officer of The Hillman Group, Inc. Mr. Hillman presently serves on the Boards of State Industrial Products, Inc., Sunsource Technology Services Inc. and Woodstream Corp. |
83
Table of Contents
Principal Occupation; Five-Year | ||
Name and Age | Employment; Other Directorships | |
Larry Wilton (62)
|
Mr. Wilton has been CEO of United Plastics Group since 2007 and he was CEO of Compass Home Inc. from 2004 to 2005. From 1996 to 2002, Mr. Wilton was President and CEO of Philips Lamps NAFTA. From 1994 to 1996, Mr. Wilton was Executive Vice President of Philips Lighting United States and Canada. From 1999 to 2002, Mr. Wilton served on the Philips NV Lamps Board of Directors. | |
Shael J. Dolman (38)
|
Mr. Dolman is a Director at the private equity arm of the Ontario Teachers Pension Plan (OTPP). Mr. Dolman joined OTPP in 1997 after working in Commercial and Corporate Banking at a Canadian chartered bank. He is a director of ALH Holding, Inc and Easton-Bell Sports, Inc. |
All directors hold office until their successors are duly elected and qualified.
In considering each director and the composition of the board of directors as a whole, the board of
directors utilizes a diverse group of experiences, characteristics, attributes and skills that the
board of directors believes enables a director to make a significant contribution to the board of
directors, the Company and our shareholders. These experiences, characteristics, attributes and
skills, which are more fully described below, include, but are not limited to, management
experience, independence, financial expertise and experience serving as directors of other
entities. The board of directors may also consider such other experiences, characteristics,
attributes and skills, as it deems appropriate, given the then-current needs of the board of
directors and the Company. The board of directors also considered the specific experience and
skills described below.
Mr. Codes and Mr. Gotschs qualifications to sit on our board of directors include their positions
with CHS and its affiliates, which is a majority holder of our Class A Common Stock. In addition,
Messrs. Code and Gotsch have extensive experience serving as members of the board of directors of
other companies.
Mr. Andriens qualifications to sit on our board of directors include his long affiliation with the
Company, including his service as President and Chief Executive Officer of SunSource Inc., the
predecessor of the Company.
Mr. Hillmans qualifications to sit on our board of directors include his role as President and
Chief Executive Officer of the Company and formerly Co-Chief Executive Officer of the Hillman
Group, prior to the Merger Transaction.
Mr. Wiltons qualifications to sit on our board of directors include his experience as president
and chief executive officer and his service on the board of directors of other entities.
Mr. Dolmans qualifications to sit on our board of directors include his service as director of
OTPP, the sole holder of our Class C Common Stock as well as his service on the board of directors
of other entities.
84
Table of Contents
Committees
The Company is a controlled company within the meaning of the NYSE Amex (formerly the American
Stock Exchange) listing standards because affiliates of CHS own more than 50% of the outstanding
shares of the Companys common voting stock. Accordingly, the Company is exempt from the
requirements of the NYSE Amex listing standards to maintain a majority of independent directors on
the Companys board of directors and to have a nominating committee and a compensation committee
composed entirely of independent directors.
The Company does not have a nominating committee, but it does have a compensation committee. The
board of directors believes that it is not necessary to utilize a nominating committee. Director
nominees for the Company are selected by the board of directors following receipt of
recommendations of potential candidates from the Chairman of the Board of the Company. The board
of directors is not limited by the recommendation of the Chairman and may select other nominees.
There is no charter setting forth these procedures and the board of directors has no policy
regarding the consideration of any director candidates recommended by shareholders. While the
board of directors does not have a formal policy on diversity, it will consider issues of
diversity, including diversity of gender, race and national origin, education, professional
experiences and differences in viewpoints and skills when filling vacancies on the board of
directors.
The current members of the audit committee are Maurice Andrien and Larry Wilton, both of whom are
considered independent under the SEC standards and the NYSE AMEX listing standards. The Company
has previously received an exemption from AMEX to Section 121 of the AMEX Company Guide that
requires the Audit Committee to have three members. The board of directors has not made a
determination as to whether any member of the audit committee has the necessary qualifications or
experience to be considered an Audit Committee Financial Expert.
Risk Oversight and Board Structure
The board of directors executes its oversight responsibility for risk management directly and
through its audit committee and compensation committee. The audit committee has primary authority
overseeing the Companys risk management activities. The audit committees meeting agendas include
discussions of individual risk areas throughout the year, as well as an annual summary of the risk
management process.
Performance-Based Compensation and Risk
The compensation committee considers, in establishing and reviewing the executive compensation
program, whether the program encourages unnecessary or excessive risk taking and has concluded that
it does not. Base salaries are fixed in amount and thus do not encourage risk taking. The
compensation committee believes that the bonus program appropriately balances risk and the desire
to focus executives on specific short-term goals important to the Companys success, and that it
does not encourage unnecessary or excessive risk taking.
Code of Ethics
The Company has adopted a code of ethics which applies to its senior officers, including its Chief
Executive Officer and its Chief Financial Officer, as well as every employee of the Company. The
Companys code of ethics can be accessed via its website at http://www.hillmangroup.com. The
Company intends to disclose amendments to or waivers from a required provision of the code of
ethics on Form 8-K.
85
Table of Contents
The executive officers of the Company (including the executive officers of The Hillman Group, Inc.)
are set forth below:
Executive Officers
Position with the Company; | ||
Name and Age | Five-year Employment History | |
Max W. Hillman (63)
|
President and Chief Executive Officer of The Hillman Companies, Inc., Chief Executive Officer of The Hillman Group, Inc., Cincinnati, Ohio. See page 86 for five-year employment history. Mr. Hillman is the brother of Richard P. Hillman. | |
Richard P. Hillman (61)
|
President of The Hillman Group, Inc., Cincinnati, Ohio. Mr. Hillman has held such position since 1991. Mr. Hillman is the brother of Max W. Hillman. | |
James P. Waters (48)
|
Chief Financial Officer and Secretary of The Hillman Companies, Inc., Cincinnati, Ohio and Vice President, Chief Financial Officer and Secretary of The Hillman Group, Inc., Cincinnati, Ohio. From September 1999 to November 2001, Mr. Waters was Vice President and Chief Financial Officer of The Hillman Group, Inc. | |
George L. Heredia (51)
|
Senior Vice President of Engraving for The Hillman Group, Inc., Tempe, Arizona. Mr. Heredia has held various executive positions since April 2000. Prior to April 2000, Mr. Heredia had held the positions of Senior Vice President of Marketing and Senior Vice President of Operations for Axxess Technologies, Inc. | |
Ali Fartaj (42)
|
Senior Vice President of Operations for The Hillman Group, Inc., Cincinnati, Ohio since January 2008. From 2006 to 2008, Mr. Fartaj was a Principal with AMF Partners. From 1999 to 2006, Mr. Fartaj was with Thomas & Betts Corporation, most recently as Vice President of Global Logistics and Transportation. |
All executive officers hold office at the pleasure of the board of directors.
86
Table of Contents
Item 11 | Executive Compensation |
Compensation Discussion & Analysis
Overview of the Compensation Program
Compensation Philosophy
The corporate compensation and benefits program of Hillman is designed to establish and maintain
competitive total compensation programs that will attract, motivate and retain the qualified and
skilled work force necessary for the continued success of Hillman. To help align compensation paid
to executive officers with the achievement of corporate goals, Hillman has designed its cash
compensation program as a pay-for-performance based system that rewards named executive officers
(NEOs) for their individual performance and contribution in achieving corporate goals. To remain
competitive, the Compensation Committee assesses how each component, including base and performance
pay, is validated relative to market values on an annual basis. The Board of Directors decisions
on compensation for its NEOs are based primarily upon its assessment of the performance of the
Company during the given year as measured against its earnings before interest, taxes, depreciation
and amortization (EBITDA) target and each individuals performance and potential to enhance
long-term stockholder value. The Board relies on judgment and not on rigid guidelines or formulas
in determining the amount and mix of compensation elements for the Companys NEOs.
Components of Total Compensation
Compensation packages in 2009 for the Companys NEOs were comprised of the following four primary
components:
| Annual base salary; | |
| Performance based cash bonuses, determined on an annual basis; | |
| Benefits, which consist primarily of health and welfare benefits and retirement benefits under its Defined Contribution Plan and its Deferred Compensation Plan; and | |
| Perquisites to certain NEOs, including reimbursements in connection with the lease or purchase of an automobile and reimbursement of country club dues. |
Establishing Compensation Levels
Role of the Compensation Committee and Management
The Compensation Committee is comprised of: Andrew Code, Shael Dolman and Peter Gotsch. The
Compensation Committee meets annually to review base salary adjustments, bonus plans and any
incentive stock or option awards. The Compensation Committee also reviews the compensation package
for all new executive hires.
The key member of management involved in the compensation process is the Chief Executive Officer
(CEO). The CEO identifies corporate and individual performance objectives for each NEO that are
used to determine performance pay amounts. The CEO then presents these goals to the Compensation
Committee, which in turn approves these goals and presents them to the Board of Directors for
review and approval. On an annual basis a comprehensive report is provided to the Compensation
Committee on all of Hillmans compensation programs.
Assessment of Market Data, Peer Comparisons and Benchmarking of Compensation
Target total cash compensation for each NEO is established primarily based on data obtained from
various organizations including the Employee Research Association of Cincinnati and the National
Association of Manufacturers. The Company seeks to compensate its executives in a comparable
manner to the 50th percentile of its peer group members which include companies of a comparable
size with similar products and services within its geographic region.
87
Table of Contents
Determination of NEO Compensation
The Compensation Committee established 2009 compensation for the CEO based on market data and
compensation of CEOs at companies of similar size and complexity. The types of market data
examined by the Compensation Committee, in making this determination, were surveys from the Profit
Planning Group and market studies by Employee Research Association of Cincinnati and the National
Association of Manufacturers.
Compensation for the year ended December 31, 2009 for James Waters, Richard Hillman, George Heredia
and Ali Fartaj was based on the recommendations of the CEO to the Compensation Committee. The CEO
considered performance during the previous year, if applicable, as well as market data.
Base Salary
Hillman believes that executive base salaries should be targeted at the median of the range of
salaries for executives in similar positions and with similar responsibilities at comparable
companies. Base pay is established primarily based on peer group data. Market data is also used
to determine the need for salary structure adjustments and annual base pay adjustments. The
Company also considers other compensation provided to its NEOs such as outstanding options when
determining base salary.
The CEO of Hillman recommends officers base salaries to the Compensation Committee which then
approves these recommendations on an annual basis. The Companys Board of Directors approves the
base salary of the CEO upon the Compensation Committees recommendation.
The following NEOs of the Company, pursuant to employment agreements entered into in March 2004 and
amended effective December 2008, are eligible to receive base salaries as follows: Max Hillman -
$425,000; James Waters $220,000; and Richard Hillman $290,000. The base salaries above are
adjusted on an annual basis as determined by the Compensation Committee.
During 2009, the Compensation Committee did not award base salary increases to Max Hillman, Rick
Hillman, Ali Fartaj or George Heredia because of a company-wide salary freeze initiated following
the financial crisis and recession which continues to persist. Following the recommendations made
by Max Hillman, the Companys CEO, James Waters was awarded a salary of $250,000, an increase of
approximately 13.7% from 2008, as a result of additional management responsibilities.
The base salary amounts were determined as part of the total compensation paid to each NEO and were
not considered, by themselves, as fully compensating the NEOs for their service to the Company.
Performance Based Bonuses
Annual Performance Based Bonus (PBB) targets are established by the CEO and approved by the
Compensation Committee and the Board of Directors. Generally, the higher the level of
responsibility of the executive within the Company, the greater the portion of that executives
targeted bonus compensation. In 2009 bonus objectives for all executives were based on four
criteria relating to the Companys performance; 30% on EBITDA, 30% on gross margin, 30% on debt
leverage and 10% on corporate safety goals.
In addition to the above, pursuant to employment agreements the Company has with certain of its
NEOs, each NEO is eligible to receive an annual bonus up to a specified amount of his/her annual
salary. For example, the following NEOs are eligible to receive bonus payments up to the following
amounts: Max Hillman 130 percent of base salary; James Waters 70 percent of base salary; and
Richard Hillman 80 percent of base salary. The remaining NEOs are awarded bonuses by the
Compensation Committee, after considering the recommendations of the Companys CEO based on the
factors noted above. During 2009, the Company awarded bonuses to its NEOs that ranged in value
from 49 percent to 87 percent of the base salary awarded to each NEO. In actual dollars and in
percentage terms, these awards were higher than awards made in 2008 for all of the NEOs primarily
as a result of
88
Table of Contents
Hillmans increases in EBITDA and gross margin, improvement in safety and a significant reduction
in debt leverage levels.
During 2009, the Compensation Committee, in its discretion, awarded Max Hillman a 2009 bonus of
$368,900 an increase of approximately 78 percent from 2008 as a result of his overall leadership
and strategic oversight of the Company during difficult economic conditions. This bonus
represented 86.8% of Mr. Hillmans base salary for 2009.
In addition, following the recommendations made by the CEO, bonuses were awarded to its NEOs as
follows:
| James Waters was awarded a bonus of $175,000, which represents approximately 73.7% of his base salary and is an increase of approximately 203 percent from 2008; | ||
| Richard Hillman was awarded a bonus of $162,400, which represents 56% of his base salary and is an increase of approximately 87 percent from 2008; | ||
| George Heredia was awarded a bonus of $119,070, which represents 49% of his base salary and is an increase of approximately 132 percent from 2008; and | ||
| Ali Fartaj was awarded a bonus of $157,500, which represents 70% of his base salary and is an increase of approximately 112 percent from 2008. |
The bonus awards were determined as part of the total compensation paid to each NEO and were not
considered, by themselves, as fully compensating the NEOs for their services.
In addition to the above, Messrs. Max Hillman, Richard Hillman and James Waters are also eligible
to receive severance and change in control payments in the event their employment is terminated or
the Company enters into a transaction that results in a change in control. See Severance and
Change in Control Arrangements for additional information.
Benefits
Executives are eligible to participate in the same health and benefit plans available to all
employees including health insurance, dental, vision, term life and disability insurance. All
executives are entitled to four weeks of paid vacation. In addition, the NEOs are eligible to
participate in the Companys Defined Contribution Plan and 401(k) Plan, both described below.
Amended Stock Option Plan
On March 31, 2004, the Company adopted the 2004 Stock Option Plan (Common Option Plan) following
Board and shareholder approval. Grants under the Common Option Plan consist of non-qualified stock
options for the purchase of Class B Common Shares. The number of Class B Common Shares authorized
for issuance under the Common Option Plan is not to exceed 356.41 shares. Unless otherwise
consented to by the Board, the aggregate number of Class B Common Shares for which options may be
granted under the Common Option Plan cannot exceed 71.28 in any one calendar year.
The Common Option Plan is administered by the Compensation Committee of the Board. All of the
Companys executive officers are eligible to participate in the Common Option Plan. The
Compensation Committee determines to whom to grant options as well as the term of each option,
provided that the exercise period may not exceed ten years from date of grant. There were no
option grants to the named executive officers for the year ended December 31, 2009.
Outstanding options granted in accordance with the Common Option Plan vest immediately upon a
change in control.
89
Table of Contents
Defined Contribution Plan
The Companys NEOs and certain other employees are covered under a profit-sharing and retirement
savings plan (Defined Contribution Plan). The plan provides for a matching contribution for
eligible employees of 50% of each dollar contributed by the employee up to 6% of the employees
compensation. In addition, the plan provides an annual contribution in amounts authorized by the
Board, subject to the terms and conditions of the plan. The matching contribution for all eligible
employees was reduced to 25% of each dollar contributed in February 2009 but subsequently
reinstated at the 50% level in July 2009.
Perquisites
Each of the NEOs receives the choice of the use of a company car or a monthly car allowance of up
to $1,050 per month. The President and Chief Executive Officer approve car expense amounts
annually and report those amounts to the Compensation Committee. Mr. Max Hillman receives up to
$1,000 per month as reimbursement for country club dues which are used for business and client
development purposes.
Executive Securities Agreement
In connection with the CHS Merger, Max W. Hillman, Richard P. Hillman, James P. Waters and George
L. Heredia entered into the Executive Securities Agreement (the ESA) which sets forth the terms
under which the named executives may purchase, exchange or cancel the Companys equity securities.
In addition, the ESA is the grant instrument for the Companys Class A Preferred Options and The
Hillman Investment Company Class A Preferred Options (Preferred Options). The Preferred Options
vest 20% per year over a five year period and expire on March 31, 2014. Under the terms of the ESA,
if employment is terminated for other than cause, the security holder has the option to put the
security or vested portion of the Preferred Options back to the Company at fair value. If
terminated for cause, securities can be put back to the Company at the lower of cost or fair value.
The Company also has the option to call the securities at the fair value if employment is
terminated.
90
Table of Contents
Compensation Committee Report
February 19, 2010
The Committee, together with Hillmans board of directors, determines compensation for executive
officers based upon recommendations from Hillmans CEO and oversees the Companys Amended Stock
Option Plan. The Committee currently consists of Andrew Code, Peter Gotsch and Shael Dolman.
Based on the Compensation Committees deliberations and discussions with management, the
Compensation Committee recommends that the Board of Directors include the Compensation Discussion
and Analysis in the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2009 for filing with the Securities and Exchange Commission.
Respectfully Submitted,
The Compensation Committee
Andrew Code
Peter Gotsch
Shael Dolman
Peter Gotsch
Shael Dolman
The information contained in the report above shall not be deemed to be soliciting material or to
be filed with the Securities and Exchange Commission, nor shall such information be incorporated
by reference into any future filing under the Securities Act of 1933, as amended, or the Securities
exchange Act of 1934, as amended, except to the extent specifically incorporated by reference
therein.
91
Table of Contents
Summary Compensation Table
The following table sets forth compensation that the Company paid during the year ended
December 31, 2009, to its principal executive officer, principal financial officer and each of the
three highest paid executive officers of the Company (collectively, the NEOs) in each capacity in
which each NEO served. Certain of the NEOs served as both officers and directors.
Change in | ||||||||||||||||||||||||||||
Pension | ||||||||||||||||||||||||||||
Value and | ||||||||||||||||||||||||||||
Nonqualified | ||||||||||||||||||||||||||||
Deferred | All Other | |||||||||||||||||||||||||||
Name and | Option | Compensation | Compen- | |||||||||||||||||||||||||
Principal Position | Year | Salary(1) | Bonus(2) | Awards (3) | Earnings (4) | sation | Total | |||||||||||||||||||||
Max W. Hillman |
2009 | 425,000 | 368,900 | | | 28,592 | (5) | 822,492 | ||||||||||||||||||||
President and CEO |
2008 | 424,182 | 207,506 | | | 36,503 | (6) | 668,191 | ||||||||||||||||||||
The Hillman Companies, Inc. |
2007 | 413,284 | 185,468 | | | 35,041 | (7) | 633,793 | ||||||||||||||||||||
James P. Waters |
2009 | 237,308 | 175,000 | | | 8,298 | (8) | 420,606 | ||||||||||||||||||||
CFO and Secretary |
2008 | 218,615 | 57,750 | | | 11,429 | (9) | 287,794 | ||||||||||||||||||||
The Hillman Companies, Inc. |
2007 | 201,477 | 48,225 | | | 9,383 | (10) | 259,085 | ||||||||||||||||||||
Richard P. Hillman |
2009 | 290,000 | 162,400 | | | 6,825 | (11) | 459,225 | ||||||||||||||||||||
President |
2008 | 289,231 | 87,000 | | | 13,228 | (12) | 389,459 | ||||||||||||||||||||
The Hillman Group, Inc. |
2007 | 279,231 | 74,622 | | | 14,359 | (13) | 368,212 | ||||||||||||||||||||
George L. Heredia |
2009 | 243,000 | 119,070 | | | 15,058 | (14) | 377,128 | ||||||||||||||||||||
Senior VP of Engraving |
2008 | 242,615 | 51,231 | | | 16,150 | (15) | 309,996 | ||||||||||||||||||||
The Hillman Group, Inc. |
2007 | 237,462 | 44,527 | | | 16,286 | (16) | 298,275 | ||||||||||||||||||||
Ali Fartaj |
2009 | 225,000 | 157,500 | | | 173,940 | (17) | 556,440 | ||||||||||||||||||||
Senior VP of Operations |
2008 | 216,346 | 74,260 | 6,000 | | 13,863 | (18) | 310,469 | ||||||||||||||||||||
The Hillman Group, Inc. |
2007 | | | | | | (19) | |
(1) | Represents base salary including any deferral of salary into the Hillman Nonqualified Deferred Compensation Plan. | |
(2) | Represents earned bonus for services rendered in each year. | |
(3) | In connection with the 2004 acquisition by CHS, Max W. Hillman, James P. Waters, Richard P. Hillman and George L. Heredia were issued options to purchase Class A Preferred Stock and shares of Class A Preferred Stock in Hillman Investment Company. The options were issued with a strike price equal to the fair value of the underlying securities. The option awards are classified as liability based awards, and accordingly, no compensation would have been recognized under SFAS 123R. | |
In June 2008, Ali Fartaj was issued 50 options to purchase shares of the Companys Class B Common Shares. The Class B Common Options were issued with a strike price equal to the fair value at the date of grant which was $6,000. | ||
(4) | There were no above market earnings in the Hillman Nonqualified Deferred Compensation Plan for the NEOs. | |
(5) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $3,746, reimbursement of country club dues of $12,246 and car allowance of $12,600. | |
(6) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $6,971, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $2,500, reimbursement of country club dues of $14,432 and car allowance of $12,600. | |
(7) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $8,941, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $2,500, reimbursement of country club dues of $11,000 and car allowance of $12,600. | |
(8) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $5,559, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $1,971 and personal use of Company owned vehicles of $768. | |
(9) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $6,334, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $2,500 and personal use of Company owned vehicles of $2,595. |
92
Table of Contents
(10) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $6,271, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $2,500 and personal use of Company owned vehicles of $612. | |
(11) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $4,056, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $1,971 and personal use of Company owned vehicles of $798. | |
(12) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $7,173, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $2,500 and personal use of Company owned vehicles of $3,555. | |
(13) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $9,283, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $2,500 and personal use of Company owned vehicles of $2,576. | |
(14) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $6,658 and car allowance of $8,400. | |
(15) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $7,750 and car allowance of $8,400. | |
(16) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $5,386, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $2,500, and car allowance of $8,400. | |
(17) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $3,469, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $1,464, a car allowance of $7,200 and $161,807 for reimbursement of expenses incurred relative to the sale of his home and relocation to Cincinnati. | |
(18) | Includes employer matching contributions to the Hillman Retirement Savings and 401(k) Plan of $4,439, employer matching contributions to the Hillman Nonqualified Deferred Compensation Plan of $2,500 and a car allowance of $6,924. | |
(19) | Mr. Fartaj joined the Company on January 6, 2008 as Senior Vice of Operations. As a result, no compensation information is included for the year ended December 31, 2007. |
Grants of Plan-Based Award Tables
There were no option grants to the named executive officers for the year ended December 31, 2009.
All Other | ||||||||||||||||
Option | ||||||||||||||||
Awards; | Grant Date | |||||||||||||||
Number of | Exercise or | Fair Value | ||||||||||||||
Securities | Base Price | of Stock and | ||||||||||||||
Underlying | of Option | Option | ||||||||||||||
Name | Grant Date | Options | Awards | Awards | ||||||||||||
Max W. Hillman |
| | | | ||||||||||||
James P. Waters |
| | | | ||||||||||||
Richard P. Hillman |
| | | | ||||||||||||
George L. Heredia |
| | | | ||||||||||||
Ali Fartaj |
| | | |
93
Table of Contents
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth the number of unexercised options held by the NEOs at December 31,
2009. The NEOs have never been granted stock awards, so these columns have been omitted from the
table.
Option Awards | ||||||||||||||||||||
Equity | ||||||||||||||||||||
Incentive | ||||||||||||||||||||
Plan Awards: | ||||||||||||||||||||
Number of | Number of | Number of | ||||||||||||||||||
Securities | Securities | Securities | ||||||||||||||||||
Underlying | Underlying | Underlying | ||||||||||||||||||
Unexercised | Unexercised | Unexercised | Option | Option | ||||||||||||||||
Options | Options | Unearned | Exercise | Expiration | ||||||||||||||||
Name | Exercisable | Unexercisable | Options | Price | Date | |||||||||||||||
(a) | (b) | (c) | (d) | (e) | (f) | |||||||||||||||
Max W. Hillman |
3,247 | (1) | | (1) | | $ | 1,000 | 03/31/2014 | ||||||||||||
2,265 | (2) | | (2) | | $ | 1,000 | 03/31/2014 | |||||||||||||
James P. Waters |
683 | (1) | | (1) | | $ | 1,000 | 03/31/2014 | ||||||||||||
476 | (2) | | (2) | | $ | 1,000 | 03/31/2014 | |||||||||||||
Richard P. Hillman |
1,389 | (1) | | (1) | | $ | 1,000 | 03/31/2014 | ||||||||||||
969 | (2) | | (2) | | $ | 1,000 | 03/31/2014 | |||||||||||||
George L. Heredia |
717 | (1) | | (1) | | $ | 1,000 | 03/31/2014 | ||||||||||||
500 | (2) | | (2) | | $ | 1,000 | 03/31/2014 | |||||||||||||
Ali Fartaj |
| (3) | 50 | (3) | | $ | 6,000 | 06/30/2018 |
(1) | Class A Preferred Options of the Company. | |
(2) | Class A Preferred Options of The Hillman Investment Company, a wholly-owned subsidiary of the Company. | |
(3) | Class B Common Shares were granted under the 2004 Stock Option Plan (Common Option Plan) following Board and shareholder approval. Grants under the Common Option Plan consist of non-qualified stock options for the purchase of Class B Common Shares and vest 100% on the second anniversary of the date of grant. |
The Preferred Options were granted under the Executive Securities Agreement (the ESA) on March
31, 2004 and vest 20% per year over a five-year period, expiring on March 31, 2014. Under the
terms of the ESA, if employment is terminated for other than cause the security holder has the
option to put the security or vested portion of the Preferred Options back to the Company at fair
value. If terminated for cause, securities can be put back to the Company at the lower of cost or
fair value. The Company also has the option to call the securities if employment is terminated.
Option Exercises and Stock Vested
There were no options exercised by the NEOs for the year ended December 31, 2009.
94
Table of Contents
Nonqualified Deferred Compensation
All executives and certain senior managers are eligible to participate in the Hillman Non-Qualified
Deferred Compensation Plan (the Deferred Compensation Plan). The Deferred Compensation Plan
allows eligible employees to defer up to 100% of their annual base salary and bonus. The Company
contributes a matching contribution of 25% on the first $10,000 of salary and bonus deferrals. The
matching contribution was reduced to 12.5% of each dollar contributed in February 2009 but was
subsequently reinstated at the 25% level in July 2009.
The following table sets forth activity in the Hillman Non-Qualified Deferred Compensation Plan for
the NEOs for the year ended December 31, 2009:
Executive | Registrant | Aggregate | Aggregate | Aggregate | ||||||||||||||||
Contributions | Contributions | Earnings | Withdrawals/ | Balance at | ||||||||||||||||
Name | in Last FY (1) | in Last FY (2) | in Last FY (3) | Distributions | Last FYE | |||||||||||||||
Max W. Hillman |
$ | | $ | | $ | 180,204 | $ | (1,538,749 | ) | $ | 1,820,863 | |||||||||
James P. Waters |
$ | 29,705 | $ | 1,971 | $ | 18,120 | $ | | $ | 144,590 | ||||||||||
Richard P. Hillman |
$ | 31,899 | $ | 1,971 | $ | 55,903 | $ | | $ | 376,610 | ||||||||||
George L. Heredia |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Ali Fartaj |
$ | 7,426 | $ | 1,464 | $ | 5,864 | $ | | $ | 24,563 |
(1) | Executive Contributions represent the deferral of Base Salary and Bonuses and are also included in the Summary Compensation Table in the Salary column. | |
(2) | The amounts in this column are also included in the Summary Compensation Table in the all other compensation column. | |
(3) | Earnings in the deferred compensation plan are excluded from the base salary and bonus reported in the Summary Compensation Table. |
Severance and Change in Control Arrangements
The Company has the following severance or change in control arrangements for the following NEOs
pursuant to the terms of their employment agreements. After the third anniversary from the date of
grant and upon resignation from the Company, termination without cause, death, disability, or
retirement at the age of 61, NEOs who hold Preferred Options have put rights on the vested
securities at a price equal to the fair value less any option exercise price payable. The Company
does not have employment agreements with Messrs. Heredia or Fartaj. The above severance and change
in control provisions are for each of the NEOs, including Messrs. Heredia and Fartaj, and are in
addition to the provisions noted below in the employment agreements for Messrs. Hillman, Waters and
Hillman.
Employment Contracts, Termination of Employment and Change-in-Control Arrangements
Max W. Hillman, President and Chief Executive Officer
Max W. Hillman entered into a four-year employment agreement with the Company effective as of the
merger with CHS on March 31, 2004, which was amended on December 21, 2008 and became effective
March 31, 2008. The amended employment agreement is for an initial period of three years beginning
March 31, 2008 and on a year-to-year basis after the initial term, unless this agreement is
terminated earlier or not renewed. The amended agreement provides for an initial annual base
salary of $425,000, 2009 cash bonus compensation in accordance with performance targets established
in January 2009 by the Companys Board of Directors, and subsequent annual bonuses of up to 130% of
the then current base salary for the remainder of the term, subject to the achievement of certain
performance targets determined by the Board of Directors each calendar year. During the term of
the amended employment agreement, Mr. Hillman is eligible to participate in the Companys 401(k)
Plan and Deferred Compensation Plan. Mr. Hillmans amended employment agreement contains
non-compete covenants for one year and non-solicitation covenants for two years following
termination of employment with the Company.
If Mr. Hillman is terminated without cause or if he resigns with good reason, during the initial
term of the amended employment agreement, then the Company is required to pay
95
Table of Contents
Mr. Hillman his then current base salary and an amount equal to the greater of the annual average
bonus paid during the last three years or the bonus paid during the most recent year (the
Termination Bonus Amount). In addition, Mr. Hillman would be entitled to health insurance
continuation coverage for one year following the termination of his employment, and he would be
eligible to participate in the Companys group life and disability insurance programs under the
same terms and conditions that apply to all employees at the Companys expense. The aggregate
value of the severance benefits that Mr. Hillman would receive, including the value of the health,
life and disability insurance benefits, as of December 31, 2009, is $804,900. If Mr. Hillman is
terminated without cause or if he resigns with good reason after the initial term of the amended
employment agreement, he would receive the lump sum equivalent of his then current base salary and
50% of the Termination Bonus Amount. This amount, which includes the value of the health, life and
disability insurance benefits, would be $609,450 if such amount were payable as of December 31,
2009. In either case, Mr. Hillman would also be entitled to health insurance continuation coverage
for one year following the termination of his employment. In addition he would be eligible to
participate in the Companys group life and disability insurance programs under the same terms and
conditions that apply to all employees at the Companys expense.
In the event of a change in control, and within 90 days following the change in control, if Mr.
Hillman is terminated without cause or Mr. Hillman resigns for good reason, then Mr. Hillman is
entitled to receive a lump sum payment equal to the sum of his then current base salary and the
Termination Bonus Amount. In addition, Mr. Hillman would be entitled to health insurance
continuation coverage for one year following the termination of his employment, and he would be
eligible to participate in the Companys group life and disability insurance programs under the
same terms and conditions that apply to all employees at the Companys expense. The aggregate
value of the severance benefits that Mr. Hillman would receive, including the value of the health,
life and disability insurance benefits, as of December 31, 2009, is $804,900.
James P. Waters, Chief Financial Officer
James P. Waters entered into a two-year employment agreement with the Company effective as of the
merger with CHS on March 31, 2004, which was amended on December 21, 2008 and became effective
March 31, 2008. The amended employment agreement is for an initial period of three years beginning
March 31, 2008 and on a year-to-year basis after the initial term, unless this agreement is
terminated earlier or not renewed. The amended employment agreement provides for an initial annual
base salary of $220,000, 2009 cash bonus compensation in accordance with performance targets
established in January 2009 as established by the Companys Chief Executive Officer and the Board
of Directors, and subsequent annual bonuses of up to 70% of the then current base salary for the
remainder of the term, subject to the achievement of certain performance targets determined by the
Board of Directors each calendar year. During the term of the amended employment agreement,
Mr. Waters will be eligible to participate in the Companys 401(k) Plan and Deferred Compensation
Plan. Mr. Waters amended employment agreement contains non-compete covenants for one year and
non-solicitation covenants for two years following termination of employment with the Company.
If Mr. Waters is terminated without cause or if he resigns with good reason, during the initial
term of the amended employment agreement, then the Company is required to pay Mr. Waters his then
current base salary and an amount equal to the greater of the annual average bonus paid during the
last three years or the bonus paid during the most recent year (the Termination Bonus Amount).
In addition, Mr. Waters would be entitled to health insurance continuation coverage for one year
following the termination of his employment, and he would be eligible to participate in the
Companys group life and disability insurance programs under the same terms and conditions that
apply to all employees at the Companys expense. The aggregate value of the severance benefits that
Mr. Hillman would receive, including the value of the health, life and disability insurance
benefits, as of December 31, 2009, is $436,000. If Mr. Waters is terminated without cause or if he
resigns with good reason after the initial term of the amended employment agreement, he would
receive the lump sum equivalent of his then current base salary and 50% of the Termination Bonus
Amount. This amount, which includes the value of the health, life and disability
96
Table of Contents
insurance benefits, would be $337,500 if such amount were payable as of December 31, 2009. In
either case, Mr. Waters would also be entitled to health insurance continuation coverage for one
year following the termination of his employment. In addition he would be eligible to participate
in the Companys group life and disability insurance programs under the same terms and conditions
that apply to all employees at the Companys expense.
In the event of a change in control, and within 90 days following the change in control, if Mr.
Waters is terminated without cause or Mr. Waters resigns for good reason, then Mr. Waters is
entitled to receive a lump sum payment equal to the sum of his then current base salary and the
Termination Bonus Amount. In addition, Mr. Waters would be entitled to health insurance
continuation coverage for one year following the termination of his employment, and he would be
eligible to participate in the Companys group life and disability insurance programs under the
same terms and conditions that apply to all employees at the Companys expense. The aggregate
value of the severance benefits that Mr. Waters would receive, including the value of the health,
life and disability insurance benefits, as of December 31, 2009, is $436,000.
Richard P. Hillman, President of The Hillman Group, Inc.
Richard P. Hillman entered into a three-year employment agreement with the Company effective as of
the merger with CHS on March 31, 2004, which was amended on December 21, 2008 and became effective
March 31, 2008. The amended employment agreement is for an initial period of three years beginning
March 31, 2008 and on a year-to-year basis after the initial term, unless this agreement is
terminated earlier or not renewed. The amended employment agreement provides for an initial annual
base salary of $290,000, 2009 cash bonus compensation in accordance with performance targets
established in January 2009 by the Companys Chief Executive Officer and the Board of Directors,
and subsequent annual bonuses of up to 80% of his then current base salary for the remainder of the
term, subject to the achievement of certain performance targets determined by the Board of
Directors each calendar year. During the term of the amended employment agreement, Mr. Hillman
will be eligible to participate in the Companys 401(k) Plan and Deferred Compensation Plan.
Mr. Hillmans amended employment agreement contains non-compete covenants for one year and
non-solicitation covenants for two years following termination of employment with the Company.
If Mr. Hillman is terminated without cause or if he resigns with good reason, during the initial
term of the amended employment agreement, then the Company is required to pay Mr. Hillman his then
current base salary and an amount equal to the greater of the annual average bonus paid during the
last three years or the bonus paid during the most recent year (the Termination Bonus Amount).
In addition, Mr. Hillman would be entitled to health insurance continuation coverage for one year
following the termination of his employment, and he would be eligible to participate in the
Companys group life and disability insurance programs under the same terms and conditions that
apply to all employees at the Companys expense. The aggregate value of the severance benefits
that Mr. Hillman would receive, including the value of the health, life and disability insurance
benefits, as of December 31, 2009, is $463,400. If Mr. Hillman is terminated without cause or if
he resigns with good reason after the initial term of the amended employment agreement, he would
receive the lump sum equivalent of his then current base salary and 50% of the Termination Bonus
Amount. This amount, which includes the value of the health, life and disability insurance
benefits, would be $371,200 if such amount were payable as of December 31, 2009. In either case,
Mr. Hillman would also be entitled to health insurance continuation coverage for one year following
the termination of his employment. In addition he would be eligible to participate in the
Companys group life and disability insurance programs under the same terms and conditions that
apply to all employees at the Companys expense.
In the event of a change in control, and within 90 days following the change in control, if Mr.
Hillman is terminated without cause or Mr. Hillman resigns for good reason, then Mr. Hillman is
entitled to receive a lump sum payment equal to the sum of his then current base salary and the
Termination Bonus Amount. In addition, Mr. Hillman would be entitled to health insurance
continuation coverage for one year following the termination of his
97
Table of Contents
employment, and he would be eligible to participate in the Companys group life and disability
insurance programs under the same terms and conditions that apply to all employees at the Companys
expense. The aggregate value of the severance benefits that Mr. Hillman would receive, including
the value of the health, life and disability insurance benefits, as of December 31, 2009, is
$463,400.
Under the terms of the ESA, if employment of any of the Companys NEOs is terminated for other than
cause, the NEO has the option to put the security or vested portion of the Preferred Options back
to the Company at fair value. If terminated for cause, securities can be put back to the Company
at the lower of cost or fair value. The Company also has the option to call the securities if
employment is terminated.
Below is a table that shows the amounts that each NEO would receive upon (1) the death or
disability of the NEO, (2) termination of the NEO for cause or the NEOs resignation without good
reason, (3) termination of the NEO without cause or the NEOs resignation for good reason and (4)
termination of the NEO as a result of a change in control.
Termination | Termination | Termination | ||||||||||||||||||
by named | without cause | without cause | ||||||||||||||||||
executive | or | or | ||||||||||||||||||
Death or | officer for | resignation | resignation | |||||||||||||||||
disability of | cause or | for good | for good | Termination | ||||||||||||||||
named | resignation | reason | reason | as a result | ||||||||||||||||
executive | without good | (during | (following | of a change | ||||||||||||||||
Name | officer | reason | initial term) | initial term) | in control | |||||||||||||||
Max W. Hillman |
$ | | $ | | $ | 804,900 | $ | 609,450 | $ | 804,900 | ||||||||||
James P. Waters |
$ | | $ | | $ | 436,000 | $ | 337,500 | $ | 436,000 | ||||||||||
Richard P. Hillman |
$ | | $ | | $ | 463,400 | $ | 371,200 | $ | 463,400 | ||||||||||
George L. Heredia |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Ali Fartaj |
$ | | $ | | $ | | $ | | $ | |
98
Table of Contents
Director Compensation
The following table sets forth compensation that the Company paid during the year ended
December 31, 2009, to its directors. The Company is a controlled company within the meaning of the
NYSE Amex (formerly the American Stock Exchange) listing standards because affiliates of CHS own
more than 50% of the outstanding shares of the Companys common voting stock. Accordingly, the
Company is exempt from the requirements of the NYSE Amex listing standards to maintain a majority
of independent directors on the Companys board of directors and to have a nominating committee and
a compensation committee composed entirely of independent directors.
Change in | ||||||||||||||||||||||||||||
Pension | ||||||||||||||||||||||||||||
Value and | ||||||||||||||||||||||||||||
Fees | Non-Equity | Nonqualified | ||||||||||||||||||||||||||
Earned | Incentive | Deferred | ||||||||||||||||||||||||||
or Paid | Stock | Option | Plan | Compensation | All Other | |||||||||||||||||||||||
Name | in Cash | Awards | Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||
(a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | |||||||||||||||||||||
Peter M. Gotsch |
$ | 0 | NA | NA | NA | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||||
Maurice P. Andrien, Jr. |
$ | 29,500 | NA | NA | NA | $ | 0 | $ | 0 | $ | 29,500 | |||||||||||||||||
Max W. Hillman (1) |
$ | 0 | NA | NA | NA | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||||
Andrew W. Code |
$ | 0 | NA | NA | NA | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||||
Larry Wilton |
$ | 29,500 | NA | NA | NA | $ | 0 | $ | 0 | $ | 29,500 | |||||||||||||||||
Shael J. Dolman |
$ | 0 | NA | NA | NA | $ | 0 | $ | 0 | $ | 0 |
(1) | Mr. Hillman also serves as the Companys Chief Executive Officer. The compensation awarded to him in this capacity is represented in the Summary Compensation Table. He is not compensated in his role as a Director. |
Maurice P. Andrien, Jr. and Larry Wilton are entitled to receive $4,000 for each Board meeting
attended, an annual retainer of $5,000 and $1,500 for each Board committee meeting attended. Mr.
Andrien and Mr. Wilton each received $25,000 cash compensation for the year ended December 31, 2009
for attending meetings of the Board of Directors and $4,500 for attending meetings of the Audit
Committee of the Board of Directors. The remaining members of the Board of Directors and related
committees are employed and compensated by either CHS, OTPP, or the Company and were not
compensated for their service on the Board during the year ended December 31, 2009. Directors do
not receive any perquisites or other personal benefits from the Company.
99
Table of Contents
Item 12
Security Ownership of Certain Beneficial Owners and Management.
The following table shows the number of shares of the Companys securities beneficially owned
as determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
by each executive officer and director and all executive officers and directors as a group and
persons beneficially owning more than 5% of any one class of the Companys securities. Unless
otherwise set forth below, the address for each of the beneficial owners is 10590 Hamilton Ave.,
Cincinnati, Ohio 45231.
Class A Common | Class B Common | Class C Common | Class A Preferred | |||||||||||||||||||||||||||||||||||||
Name | Stock (1) | Stock (2) | Stock (3) | Total Common Stock (4) | Stock (5) | |||||||||||||||||||||||||||||||||||
5% Owners | Shares | Percent | Shares | Percent | Shares | Percent | Shares | Percent | Shares | Percent | ||||||||||||||||||||||||||||||
Code Hennessy & Simmons IV LP 10 South Wacker Dr. Suite 3175 Chicago, IL 60606 |
4,904.9 | 79.10 | % | | | | | 4,904.9 | 49.25 | % | 46,869.4 | 49.25 | % | |||||||||||||||||||||||||||
Ontario Teachers Pension Plan 5650 Yonge St. North York, Ontario M2M 4H5 |
| | | | 2,787.1 | 100.00 | % | 2,787.1 | 27.99 | % | 26,632.3 | 27.99 | % | |||||||||||||||||||||||||||
HarbourVest Partners VI Direct Fund, L.P. One Financial Center 44th Floor Boston, MA 02111 |
871.0 | 14.05 | % | | | | | 871.0 | 8.75 | % | 8,322.6 | 8.75 | % | |||||||||||||||||||||||||||
Directors and
Executive Officers |
||||||||||||||||||||||||||||||||||||||||
Max W. Hillman |
166.4 | 2.68 | % | 343.4 | 35.39 | % | | | 509.8 | 5.12 | % | 4,565.9 | 4.80 | %(6) | ||||||||||||||||||||||||||
Richard P. Hillman |
54.6 | 0.88 | % | 144.6 | 14.90 | % | | | 199.2 | 2.00 | % | 1,953.7 | 2.05 | %(7) | ||||||||||||||||||||||||||
George L. Heredia |
23.3 | 0.38 | % | 73.9 | 7.61 | % | | | 97.2 | 0.98 | % | 1,007.8 | 1.06 | %(8) | ||||||||||||||||||||||||||
James P. Waters |
23.9 | 0.38 | % | 67.3 | 6.93 | % | | | 91.2 | 0.92 | % | 912.4 | 0.96 | %(9) | ||||||||||||||||||||||||||
Ali Fartaj |
| | | | | | | | | | ||||||||||||||||||||||||||||||
All Directors and
Executive Officers
as a Group (8
persons) |
350.7 | 5.66 | % | 874.2 | 90.1 | % | | | 1,224.9 | 12.30 | % | 11,770.2 | 12.37 | % |
(1) | Each holder of Class A Common Stock is entitled at any time to convert any or all of the shares into an equal number of shares of Class C Common Stock. | |
(2) | Class B Common Stock has no voting rights. | |
(3) | Each holder of Class C Common Stock is entitled at any time to convert any or all of the shares into an equal number of shares of Class A Common Stock. Each share of Class C Common Stock is entitled to one vote provided that the aggregate voting power of Class C Common Stock (with respect to the election of directors) never exceeds 30%. | |
(4) | Total of all classes of Common Stock | |
(5) | Class A Preferred shares do not have voting rights. | |
(6) | Includes options to purchase 3,243.7 shares of Class A Preferred stock | |
(7) | Includes options to purchase 1,387.9 shares of Class A Preferred stock. | |
(8) | Includes options to purchase 716.0 shares of Class A Preferred stock. | |
(9) | Includes options to purchase 648.2 shares of Class A Preferred stock. |
100
Table of Contents
Item 13
Certain Relationships and Related Transactions.
On March 31, 2004, the Company was acquired by affiliates of Code Hennessy & Simmons LLC
(CHS). In connection with the CHS acquisition, the Company is obligated to pay management fees
to a subsidiary of CHS in the amount of $57,962 per month and to pay transaction fees to a
subsidiary of OTPP in the amount of $25,640 per month, plus out of pocket expenses, for each month
commencing with the closing date of the Merger Transaction. The Company has paid management and
transaction fees and expenses of $1,010,136, $1,042,951 and $1,023,334 to CHS and OTPP for the
years ended December 31, 2009, 2008 and 2007, respectively.
Gregory Mann and Gabrielle Mann are employed by the All Points division of Hillman as President and
Vice President, respectively. All Points leases an industrial warehouse and office facility from
companies under the control of the Manns. The Company has recorded rental expense for the lease of
this facility on an arms length basis in the amount of $311,339, $302,422 and $0 for the years
ended December 31, 2009, 2008 and 2007, respectively.
The Companys Code of Business Conduct and Ethics addresses the approval of related party
transactions including transactions between the Company and its officers, directors, and employees.
The Company does not allow officers, directors and employees to give preferences in business
dealings based upon personal financial considerations. Officers, directors and employees are also
not permitted to own financial interest in or hold any employment or managerial position with a
competing firm or one that seeks to do or does business with the company. In addition, the
Companys code prohibits officers, directors and employees from receiving or giving loans, gifts or
benefits to any supplier, customer or competitor unless specifically permitted in the Companys
code. Such expenditures or gifts must be reported to, and approved by a supervisor. Compliance
review and reporting procedures for violations of the Company rules are also listed in the ethics
code.
Item 14
Principal Accounting Fees and Services.
Audit Fees
Audit fees consist of fees billed for professional services rendered for the audit of the Companys
financial statements and review of the interim consolidated financial statements included in
quarterly reports and services that are normally provided in connection with statutory and
regulatory filings. The aggregate fees billed by Grant Thornton LLP for the 2009 and 2008 audit
were approximately $448,383 and $341,466, respectively.
Audit Related Fees
Audit related fees are fees billed for assurance and related services that are reasonably related
to the performance of the audit or review of the Companys consolidated financial statements and
are not under Audit Fees. Grant Thornton LLP billed $8,254 for the year ended December 31, 2009
in connection with audit of the Hillman Group, Inc. Retirement Savings & Profit Sharing Plan
financial statements and billed $27,463 for the year ended December 31, 2008 primarily in
connection with reviews of the Companys responses to comment letters from the SEC.
Tax Fees
Tax fees consist of fees billed for professional services for tax compliance, tax advice and tax
planning. There have been no tax fees billed by Grant Thornton LLP.
All Other Fees
No other services were rendered by Grant Thornton LLP for 2009 or 2008.
The Audit Committees policy is to pre-approve all audit and permissible non-audit services
provided by Grant Thornton LLP on a case by case basis, and any pre-approval is detailed as
101
Table of Contents
to the particular service or category of service and is generally subject to a specific budget.
These services may include audit services, audit related services, tax services and other related
services. Grant Thornton LLP and management are required to periodically report to the Audit
Committee regarding the extent of services provided by Grant Thornton LLP in accordance with this
pre-approval policy, and the fees for the services performed to date.
102
Table of Contents
PART IV
Item 15 Exhibits and Financial Statement Schedules.
(a) Documents Filed as a Part of the Report:
1. | Financial Statements. | |
The information concerning financial statements called for by Item 15 of Form 10-K is set forth in Part II, Item 8 of this annual report on Form 10-K. | ||
2. | Financial Statement Schedules. | |
The information concerning financial statement schedules called for by Item 15 of Form 10-K is set forth in Part II, Item 8 of this annual report on Form 10-K. | ||
3. | Exhibits, Including Those Incorporated by Reference. | |
The following is a list of exhibits filed as part of this annual report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses. |
2.1 | Unit Repurchase Agreement by and among The Hillman Companies, Inc., SunSub Holdings LLC and GC-Sun Holdings, L.P. dated April 13, 2002. (6)(Exhibit 10.2) | ||
2.2 | Asset Purchase Agreement between Fastenal Company and The Hillman Group, Inc. dated October 3, 2002. (7)(Exhibit 10.3) | ||
2.3 | Agreement and Plan of Merger dated as of June 18, 2001 by and among Allied Capital Corporation, Allied Capital Lock Acquisition Corporation and SunSource Inc. (4)(Exhibit 2.1) | ||
2.4 | Asset Purchase Agreement dated September 28, 2001, by and between SunSource Technology Services, LLC, and STS Operating, Inc. (5)(Exhibit 2.1) | ||
2.5 | Agreement and Plan of Merger dated as of February 14, 2004 by and among the Company, HCI Acquisition Corp. and the Common Stockholders of the Company. (2)(Exhibit 2.1) | ||
2.6 | Stock Purchase Agreement by and among All Points Industries, Inc., Gabrielle Mann, Gregory Mann, and The Hillman Group, Inc. dated as of December 28, 2007. (16)(Exhibit 2.6) | ||
3.1 | Bylaws as adopted by the Corporations stockholders as of March 30, 2004. (10)(Exhibit 3.2) | ||
3.2 | Amendment No. 1 to the Companys Bylaws effective October 26, 2007. (15)(Exhibit 99.1) | ||
3.3 | Restated Certificate of Incorporation of the Company as of March 30, 2004. (10)(Exhibit 3.1) | ||
4.1 | HCI Stockholders Agreement dated March 31, 2004. (9)(Exhibit 4.1) | ||
4.2 | Amended and Restated Declaration of Trust. (1)(Exhibit 4.1) | ||
4.3 | Indenture between the Company and the Bank of New York. (1)(Exhibit 4.2) | ||
4.4 | Preferred Securities Guarantee. (1)(Exhibit 4.3) |
103
Table of Contents
4.5 | Rights Agreement between the Company and the Registrar and Transfer Company. (1)(Exhibit 10.5) | ||
4.6 | Amendment No. 1 to the Rights Agreement dated June 18, 2001. (8)(Exhibit 4.6) | ||
4.7 | Amendment No. 2 to the Rights Agreement dated February 14, 2004. (8)(Exhibit 4.7) | ||
4.8 | Hillman Investment Company Stockholders Agreement dated March 31, 2004. (9) (Exhibit 4.2) | ||
4.9 | Registration Agreement dated March 31, 2004. (9) (Exhibit 4.3) | ||
10.1 | Credit Agreement dated as of March 31, 2004 by and among The Hillman Companies, Inc., Hillman Investment Company, The Hillman Group, Inc., Merrill Lynch Capital as Administrative Agent, Issuing Lender and Swingline Lender, JP Morgan Chase Bank as Syndication Agent, and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and JP Morgan Securities as Joint Lead Arrangers and Joint Lead Bookrunners. (9)(Exhibit 10.1) | ||
10.2 | Loan Agreement dated as of March 31, 2004 by and among The Hillman Companies, Inc., Hillman Investment Company, The Hillman Group, Inc., and Allied Capital Corporation. (9)(Exhibit 10.2) | ||
10.3 | Subordination and Intercreditor Agreement dated March 31, 2004. (9)(Exhibit 10.3) | ||
10.4 | The Hillman Companies, Inc. 2004 Stock Option Plan. (9)(Exhibit 10.4) | ||
10.5 | The Hillman Companies, Inc. Amended and Restated 2004 Stock Option Plan. (12) (Exhibit 10.5) | ||
10.6 | The Hillman Companies, Inc. Employee Securities Purchase Plan. (9)(Exhibit 10.5) | ||
10.7 | Hillman Investment Company Employee Securities Purchase Plan. (9)(Exhibit 10.6) | ||
10.8 | HCI Securities Purchase Agreement dated March 31, 2004. (9)(Exhibit 10.7) | ||
10.9 | Joinder to Securities Purchase Agreement dated March 31, 2004. (9)(Exhibit 10.8) | ||
10.10 | Hillman Investment Company Securities Purchase Agreement dated March 31, 2004. (9)(Exhibit 10.9) | ||
10.11 | Management Agreement dated March 31, 2004. (9)(Exhibit 10.10) | ||
10.12 | Employment Agreement by and between The Hillman Group, Inc. and Max W. Hillman dated March 31, 2004. (9)(Exhibit 10.11) | ||
10.13 | Executive Securities Agreement between Max W. Hillman and HCI Acquisition Corp. dated March 31, 2004. (9)(Exhibit 10.12) | ||
10.14 | Employment Agreement by and between The Hillman Group, Inc. and Richard P. Hillman dated March 31, 2004. (9)(Exhibit 10.13) | ||
10.15 | Executive Securities Purchase Agreement between HCI Acquisition Corp. and Richard P. Hillman dated March 31, 2004. (9)(Exhibit 10.14) | ||
10.16 | Employment Agreement by and between The Hillman Group, Inc. and James P. Waters dated March 31, 2004. (9)(Exhibit 10.15) |
104
Table of Contents
10.17 | Executive Securities Agreement by and between HCI Acquisition Corp. and James P. Waters dated March 31, 2004. (9)(Exhibit 10.16) | ||
10.18 | Executive Securities Agreement by and between HCI Acquisition Corp. and George L. Heredia dated March 31, 2004. (12)(Exhibit 10.18) | ||
10.19 | Executive Securities Agreement by and between HCI Acquisition Corp. and Terry R. Rowe dated March 31, 2004. (12)(Exhibit 10.19) | ||
10.20 | SunSource Inc. Nonqualified Deferred Compensation Plan dated as of August 1, 2000. (3)(Exhibit 10.1) | ||
10.21 | The Hillman Companies, Inc. Nonqualified Deferred Compensation Plan (amended and restated). (11)(Exhibit 10.1) | ||
10.22 | First Amendment to The Hillman Companies, Inc. Nonqualified Deferred Compensation Plan. (11)(Exhibit 10.2) | ||
10.23 | Asset Purchase Agreement dated January 5, 2006 between The SteelWorks Corporation and The Hillman Group, Inc. (13)(Exhibit 10.1) | ||
10.24 | Supply Agreement dated January 5, 2006 between The SteelWorks Corporation and The Hillman Group, Inc. (13)(Exhibit 10.2) | ||
10.25 | Amended and Restated Credit Agreement dated July 21, 2006. (14)(Exhibit 10.1) | ||
10.26 | Second Amendment to Loan Agreement dated July 21, 2006. (14)(Exhibit 10.2) | ||
10.27 | Amended and Restated Credit Agreement dated July 21, 2006, amended as of August 7, 2009. (17)(Exhibit 10.1) | ||
10.28 | Third Amendment to Loan Agreement dated May 6, 2009. (18)(Exhibit 10.28) | ||
10.29 | Fourth Amendment to Loan Agreement dated August 7, 2009. (17)(Exhibit 10.2) | ||
10.30 | Amended and Restated Employment Agreement by and between The Hillman Group, Inc. and Max W. Hillman dated December 21, 2008. (18)(Exhibit 10.30) | ||
10.31 | Amended and Restated Employment Agreement by and between The Hillman Group, Inc. and Richard P. Hillman dated December 21, 2008. (18)(Exhibit 10.31) | ||
10.32 | Amended and Restated Employment Agreement by and between The Hillman Group, Inc. and James P. Waters dated December 21, 2008. (18)(Exhibit 12.1) | ||
12.1 | Computation of Ratio of Income to Fixed Charges. (18)(Exhibit 12.1) | ||
21.1 | Subsidiaries. (As of December 31, 2009) (18)(Exhibit 10.32) | ||
31.1 * | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. | ||
31.2 * | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. | ||
32.1 * | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 * | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
105
Table of Contents
(1) | Filed as an exhibit to Registration Statement No. 333-44733 on Form S-2. | |
(2) | Filed as an exhibit to the Form 8-K filed February 17, 2004. | |
(3) | Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 2000. | |
(4) | Filed on June 21, 2001 as an exhibit to the Current Report on Form 8-K filed on June 21, 2001. | |
(5) | Filed as an exhibit to the Current Report on Form 8-K filed on October 15, 2001. | |
(6) | Filed as an exhibit to Quarterly Report on Form 10-Q for the Quarter ended June 30, 2002. | |
(7) | Filed as an exhibit to the Current Report on Form 8-K filed on October 4, 2002. | |
(8) | Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2003. | |
(9) | Filed as an exhibit to the Quarterly Report on Form 10-Q for the Quarter ended March 31, 2004. | |
(10) | Filed as an exhibit to the Quarterly Report on Form 10-Q for the Quarter ended June 30, 2004. | |
(11) | Filed as an exhibit to the Quarterly Report on Form 10-Q for the Quarter ended September 30, 2004. | |
(12) | Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2004. | |
(13) | Filed as an exhibit to the Current Report on Form 8-K filed on January 11, 2006. | |
(14) | Filed as an exhibit to the Current Report on Form 8-K filed on August 1, 2006. | |
(15) | Filed as an exhibit to the Current Report on Form 8-K filed on November 1, 2007. | |
(16) | Filed as an exhibit to the Current Report on Form 8-K filed on December 28, 2007. | |
(17) | Filed as an exhibit to the Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009. | |
(18) | Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2009. | |
* | Filed herewith. |
106
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE HILLMAN COMPANIES, INC. |
||||
Date: May 3, 2010 | By: | /s/ James P. Waters | ||
James P. Waters | ||||
Title: | Chief Financial
Officer and Duly
Authorized Officer
of the Registrant (Principal Financial Officer) |
|||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated below.
Signature | Capacity | Date | ||
/s/ Max W. Hillman
|
Principal Executive Officer and Director | May 3, 2010 | ||
/s/ Andrew W. Code
|
Chairman and Director | May 3, 2010 | ||
/s/ Harold J. Wilder
|
Principal Accounting Officer | May 3, 2010 | ||
/s/ Peter M. Gotsch
|
Director | May 3, 2010 | ||
/s/ Larry Wilton
|
Director | May 3, 2010 | ||
/s/ Maurice P. Andrien, Jr.
|
Director | May 3, 2010 | ||
/s/ Shael J. Dolman
|
Director | May 3, 2010 |
107