e10vq

/s/ James P. Waters

/s/ Harold J. Wilder

James P. Waters

Harold J. Wilder

Vice President - Finance

Controller

(Chief Financial Officer)

(Chief Accounting Officer)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

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)

Registrant’s telephone number, including area code: (513) 851-4900

Securities registered pursuant to Section 12(b) of the Act:


Title of 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 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 o NO þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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 11, 2006 there were 6,212.9 Class A Common Shares issued and outstanding, 1,000.0 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 and 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 American Stock Exchange under symbol HLM.Pr.


		PAGE(S)
PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets		3-4

	Condensed Consolidated Statements of Operations		5-6

	Condensed Consolidated Statements of Cash Flows		7

	Condensed Consolidated Statement of Changes in Stockholders’ Equity		8

	Notes to Condensed Consolidated Financial Statements		9-26

Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations		27-38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		39

Item 4.	Controls and Procedures		39-41

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		42

Item 1A.	Risk Factors		42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		42

Item 3.	Defaults upon Senior Securities		42

Item 4.	Submission of Matters to a Vote of Security Holders		42

Item 5.	Other Information		42

Item 6.	Exhibits		43

SIGNATURES			44


	September 30,		December 31,
	2005		2004
			(as restated,
			see Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	12,244	$	29,613
Restricted investments		138		75
Accounts receivable, net		53,295		37,370
Inventories, net		81,059		65,835
Deferred income taxes, net		8,347		6,712
Other current assets		3,353		2,820

Total current assets		158,436		142,425
Property and equipment, net		60,930		61,111
Goodwill		241,934		242,267
Other intangibles, net		162,314		167,842
Restricted investments		4,546		4,148
Deferred financing fees, net		5,980		6,786
Investment in trust common securities		3,261		3,261
Other assets		660		1,059

Total assets	$	638,061	$	628,899

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	19,567	$	21,172
Current portion of senior term loans		2,175		2,175
Current portion of capitalized lease obligations		44		43
Accrued expenses:
Salaries and wages		4,976		4,299
Pricing allowances		8,840		9,681
Income and other taxes		2,020		1,520
Interest		3,824		3,362
Deferred compensation		138		75
Other accrued expenses		11,235		12,407

Total current liabilities		52,819		54,734
Long term senior term loans		212,062		213,694
Long term capitalized lease obligations		66		99
Long term unsecured subordinated notes		48,911		48,090
Junior subordinated debentures		117,394		117,690
Mandatorily redeemable preferred stock (Note 8)		67,737		62,232
Management purchased options (Note 9)		3,953		3,577
Deferred compensation		4,546		4,148
Deferred income taxes, net		38,817		33,221
Other non-current liabilities		17,653		9,770

Total liabilities		563,958		547,255


	Successor						Predecessor
	Nine months			Six months			Three months
	ended			ended			ended
	September 30,			September 30,			March 31,
	2005			2004			2004
				(As restated,			(As restated,
				see Note 2)			see Note 2)
Net sales	$	293,127		$	190,352		$	78,190
Cost of sales (exclusive of depreciation and amortization shown separately below)		133,797			85,611			35,383

Gross profit		159,330			104,741			42,807


Operating expenses:
Selling, general and administrative expenses		106,401			66,623			30,996
Non-recurring expense (Note 11)		—			—			30,707
Depreciation		11,799			7,610			3,799
Amortization		5,420			5,355			321
Management and transaction fees to related party		788			547			524

Total operating expenses		124,408			80,135			66,347


Other income (expense), net		35			397			(140	)


Income (loss) from operations		34,957			25,003			(23,680	)

Interest expense, net		15,361			9,055			3,841
Interest expense on mandatorily redeemable preferred stock and management purchased options		5,880			3,583			—
Interest expense on junior subordinated debentures		9,458			6,305			3,152
Investment income on trust common securities		(284	)		(189	)		(94	)


Income (loss) before income taxes		4,542			6,249			(30,579	)

Income tax provision (benefit)		4,686			8,547			(10,213	)


Net loss	$	(144	)	$	(2,298	)	$	(20,366	)


																Accumulated
					Additional			Class A					Compre-			Other			Total
	Common Stock				Paid-in			Preferred		Accumulated			hensive			Comprehensive			Stockholders’
	Class A		Class C		Capital			Stock		Deficit			Income(Loss)			Income			Equity
Balance at December 31, 2004 (as previously reported)				—	$	81,452		$	1	$	(1,274	)				$	(128	)	$	80,051
Effect of restatement (see note 2)		—		—		(1,122	)		—		1,274						34			186

Balance at December 31, 2004 (as restated)		—		—		80,330			1		—						(94	)		80,237

Dividends to shareholders		—		—		(2,536	)		—		—						—			(2,536	)
Comprehensive income (loss):
Net loss (as restated) (2)		—		—		—			—		(324	)	$	(324	)		—			(324	)

Other comprehensive income (loss), net of tax:
Change in cumulative foreign translation adjustment (1)				—		—			—		—			10			10			10
Change in derivative security value, net of tax (1)				—		—			—		—			141			141			141

Other comprehensive income														151

Comprehensive loss													$	(173	)


Balance at March 31, 2005 (as restated)		—		—		77,794			1		(324	)					57			77,528

Dividends to shareholders		—		—		(2,637	)		—								—			(2,637	)
Comprehensive income (loss):
Net loss		—		—		—			—		(39	)	$	(39	)		—			(39	)

Other comprehensive income (loss), net of tax:
Change in cumulative foreign translation adjustment (1)				—		—			—		—			21			21			21
Change in derivative security value, net of tax (1)				—		—			—		—			(65	)		(65	)		(65	)

Other comprehensive loss														(44	)

Comprehensive loss													$	(83	)

Balance at June 30, 2005		—		—		75,157			1		(363	)					13			74,808

Dividends to shareholders		—		—		(2,742	)		—								—			(2,742	)
Comprehensive income (loss):
Net income		—		—		—			—		219		$	219			—			219

Other comprehensive income (loss), net of tax:
Change in cumulative foreign translation adjustment (1)				—		—			—		—			(56	)		(56	)		(56	)
Change in derivative security value, net of tax (1)				—		—			—		—			41			41			41

Other comprehensive loss														(15	)

Comprehensive income													$	204


Balance at September 30, 2005	$	—	$	—	$	72,415		$	1	$	(144	)				$	(2	)	$	72,270


(1)		The cumulative foreign translation adjustment, change in derivative security value, and unrealized gains and losses on investments, net of taxes, represent the only items of other comprehensive income.

(2)		The net loss as previously reported of $2,209 was reduced by $1,923 for the impact of a change in the estimated annual effective tax rate used for the computation of the interim period tax provision and increased by $38 to properly recognize revenue in accordance with SAB No. 104, “Revenue Recognition”. See Note 2 to Condensed Consolidated Financial Statements.


Accounts receivable	$	37,750
Inventory		66,958
Property and equipment		63,230
Goodwill		241,934
Intangible assets		173,162
Other assets		8,924

Total assets acquired		591,958


Less:
Liabilities assumed		42,948
Deferred taxes, net		21,773
Junior subordinated debentures		117,986

Total assumed liabilities		182,707


Total purchase price	$	409,251


	Nine Months Ended
	September 30, 2004
	(as restated,
	see Note 2)
Net sales	$	268,542
Net loss		(25,354	)


(1)		The Company’s standard freight terms are FOB shipping point and historically revenue was recognized upon shipment. However, the Company arranges for the shipment of product, selects the carrier and maintains responsibility for lost or damaged product. Accordingly, management has determined that the risk of loss is not fully transferred to the customer until shipments are received by the customer which is generally within two days of product shipment. Therefore, the Company concluded that revenue was not recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements.”

(2)		At the end of each fiscal period the Company has historically reclassified all checks issued but still outstanding between accounts payable and cash or, for outstanding payroll checks, between accrued salaries and cash. Generally accepted accounting principles allow only the portion of the outstanding checks in excess of available deposits to be classified as a liability. In the accompanying condensed consolidated balance sheet as of December 31, 2004 an adjustment has been made to reclassify the outstanding checks to accounts payable or accrued salaries and wages.


	Condensed Consolidated Balance Sheet
	As			Adjustments
	Previously			Revenue			Income											As
As of December 31, 2004:	Reported			Recognition			Taxes			Other (1)			Dividends			Other		Restated
Cash and cash equivalents	$	33,032		$	—		$	—		$	(3,419	)	$	—			—	$	29,613
Accounts receivable, net		39,903			(2,533	)		—			—			—			—		37,370
Inventories, net		64,627			1,208			—			—			—			—		65,835
Deferred tax assets- current		6,520			613			(328	)		(93	)		—			—		6,712
Goodwill		219,051			974			22,499			(257	)		—			—		242,267
Investment in trust common
securities		—			—			—			3,261			—			—		3,261
Investments		—			—			—			432			—			—		432
Accounts payable		24,367			—			—			(3,195	)		—			—		21,172
Accrued salaries and wages		4,523			—			—			(224	)		—			—		4,299
Accrued pricing allowances		9,909			—			—			(228	)		—			—		9,681
Accrued income and other taxes		2,137			—			(617	)		—			—			—		1,520
Other accrued expenses		11,724			27			656			—			—			—		12,407
Junior subordinated debentures		114,429			—			—			3,261			—			—		117,690
Deferred tax liabilities-non current		10,730			56			22,264			171			—			—		33,221
Additional paid-in capital		81,452			—			—			—			(1,122	)		—		80,330
Accumulated deficit		(1,274	)		179			(132	)		105			1,122			—		—
Accumulated other comprehensive loss		(128	)		—			—			34			—			—		(94	)


	Condensed Consolidated Statement of Operations
	As		Adjustments
For the three months	Previously		Revenue			Income						As
ended September 30, 2004:	Reported		Recognition			Taxes			Other (1)			Restated
Net sales	$	97,463	$	(496	)	$	—		$	65		$	97,032
Cost of sales		43,958		(214	)		—			—			43,744
Gross profit		53,505		(282	)		—			65			53,288
Income from operations		13,527		(282	)		—			65			13,310
Interest expense on junior subordinated debentures		3,058		—			—			94			3,152
Investment income on trust common securities		—		—			—			(94	)		(94	)
Income before income taxes		4,179		(282	)		—			65			3,962
Income tax provision		2,489		(116	)		2,735			26			5,134
Net income (loss)		1,690		(166	)		(2,735	)		39			(1,172	)


	Estimated
	Useful Life	September 30,		December 31,
	(Years)	2005		2004
Customer Relationships	23	$	114,790	$	114,897
Trademarks	Indefinite		44,670		44,670
Patents	9		7,960		7,960
Non Compete Agreements	4		5,742		5,742

Intangible assets, gross			173,162		173,269
Less: Accumulated amortization			10,848		5,427

Other Intangibles, net		$	162,314	$	167,842


	(dollars in thousands)
	2005						2004
				% of						% of
	Amount			Total			Amount			Total
							(As restated)
Net sales	$	102,593			100.0	%	$	97,032			100.0	%
Cost of sales (exclusive of depreciation and amortization shown separately below)		48,118			46.9	%		43,744			45.1	%

Gross profit		54,475			53.1	%		53,288			54.9	%


Operating expenses:
Selling		17,774			17.3	%		17,575			18.1	%
Warehouse & delivery		12,208			11.9	%		11,549			11.9	%
General & Administrative		4,748			4.6	%		4,712			4.9	%
Stock compensation expense		552			0.5	%		—			0.0	%

Total SG&A		35,282			34.4	%		33,836			34.9	%
Depreciation		3,912			3.8	%		3,706			3.8	%
Amortization		1,808			1.8	%		2,676			2.8	%
Management and transaction fees		255			0.2	%		291			0.3	%

Total operating expenses		41,257			40.2	%		40,509			41.7	%


Other income		222			0.2	%		531			0.5	%


Income from operations		13,440			13.1	%		13,310			13.7	%

Interest expense, net		5,457			5.3	%		4,464			4.6	%
Interest expense on mandatorily redeemable preferred stock & management purchased options		2,035			2.0	%		1,826			1.9	%
Interest expense on junior subordinated notes		3,153			3.1	%		3,152			3.2	%
Investment income on trust common securities		(95	)		-0.1	%		(94	)		-0.1	%


Income before income taxes		2,890			2.8	%		3,962			4.1	%


			Payments Due
			Less Than 1						More Than 5
Contractual Obligations	Total		Year		1 to 3 Years		3 to 5 Years		Years
Junior Subordinated Debentures (1)	$	117,394	$	—	$	—	$	—	$	117,394
Long Term Senior Term Loans		214,238		2,175		4,350		105,488		102,225
Long Term Unsecured Subordinated Notes		48,911		—		—		—		48,911
Interest Payments (2)		113,467		21,787		43,763		40,700		7,217
Operating Leases		49,830		6,583		9,819		7,871		25,557
Mandatorily Redeemable Preferred Stock		67,737								67,737
Management Purchased Options		3,953								3,953
Deferred Compensation Obligations		4,684		138		276		276		3,994
Capital Lease Obligations		110		44		66		—		—
Other Long Term Obligations		5,140		1,781		800		165		2,394


Total Contractual Cash Obligations	$	625,464	$	32,508	$	59,074	$	154,500	$	379,382


(1)		The junior subordinated debentures liquidation value is approximately $108,707.

(2)		Interest payments for Long Term Senior Term Loans and Long Term Unsecured Subordinated Notes. Interest payments on the variable rate Long Term Senior Loans were calculated using actual interest rates through December 31, 2005 and a LIBOR rate plus applicable margin of 7.6875% thereafter.


	Condensed Consolidated Statement of Operations
	As		Adjustments
For the six months	Previously		Revenue		Income						As
ended September 30, 2004:	Reported		Recognition		Taxes			Other (1)			Restated
Net sales	$	190,099	$	133	$	—		$	120		$	190,352
Cost of sales		85,564		47		—			—			85,611
Gross profit		104,535		86		—			120			104,741
Selling, general and administrative expenses		66,523		—		100			—			66,623
Income from operations		24,897		86		(100	)		120			25,003
Interest expense on junior subordinated debentures		6,116		—		—			189			6,305
Investment income on trust common securities		—		—		—			(189	)		(189	)
Income before income taxes		6,143		86		(100	)		120			6,249
Income tax provision		4,242		35		4,221			49			8,547
Net income (loss)		1,901		51		(4,321	)		71			(2,298	)


	Condensed Consolidated Statement of Cash Flows
For the six months ended	As Previously			As
September 30, 2004:	Reported			Restated
Net cash (used for) provided by operating activities	$	(13,147	)	$	9,572
Net cash used for investing activities		(5,463	)		(5,463	)
Net cash provided by financing activities		35,479			12,223

Net increase in cash and equivalents		16,869			16,332
Cash and cash equivalents at beginning of period		2,915			1,258

Cash and cash equivalents at end of period	$	19,784		$	17,590


	Condensed Consolidated Statement of Cash Flows
For the three months ended	As Previously			As
March 31, 2004:	Reported			Restated
Net cash (used for) provided by operating activities	$	(699	)	$	38
Net cash used for investing activities		(2,609	)		(2,609	)
Net cash provided by financing activities		4,695			2,666

Net increase in cash and equivalents		1,387			95
Cash and cash equivalents at beginning of period		1,528			1,163

Cash and cash equivalents at end of period	$	2,915		$	1,258


10.		Guaranteed Preferred Beneficial Interest in the Company’s Junior Subordinated Debentures:


Non-current assets — junior subordinated debentures — preferred	$	114,133
Non-current assets — junior subordinated debentures — common		3,261

Total assets	$	117,394


Non-current liabilities — Trust Preferred Securities	$	114,133
Stockholder’s equity — Trust Common Securities		3,261

Total liabilities and stockholder’s equity	$	117,394


	(dollars in thousands)
	2005						2004 (b)
				% of						% of
	Amount			Total			Amount			Total
							(As restated)
Net sales	$	293,127			100.0	%	$	268,542			100.0	%
Cost of sales (exclusive of depreciation and amortization shown separately below)		133,797			45.6	%		120,994			45.1	%

Gross profit		159,330			54.4	%		147,548			54.9	%


Operating expenses:
Selling		54,247			18.5	%		50,349			18.7	%
Warehouse & delivery		35,804			12.2	%		33,140			12.3	%
General & Administrative		15,066			5.1	%		14,130			5.3	%
Stock compensation expense		1,284			0.4	%		—			0.0	%

Total SG&A		106,401			36.3	%		97,619			36.4	%
Non-recurring expense (a)		—			0.0	%		30,707			11.4	%
Depreciation		11,799			4.0	%		11,409			4.2	%
Amortization		5,420			1.8	%		5,676			2.1	%
Management and transaction fees		788			0.3	%		1,071			0.4	%

Total operating expenses		124,408			42.4	%		146,482			54.5	%


Other income		35			0.0	%		257			0.1	%


Income from operations		34,957			11.9	%		1,323			0.5	%

Interest expense, net		15,361			5.2	%		12,896			4.8	%
Interest expense on mandatorily redeemable preferred stock & management purchased options		5,880			2.0	%		3,583			1.3	%
Interest expense on junior subordinated notes		9,458			3.2	%		9,457			3.5	%
Investment income on trust common securities		(284	)		-0.1	%		(283	)		-0.1	%


Income (loss) before income taxes		4,542			1.5	%		(24,330	)		-9.1	%


(a)		Represents one-time charges for stock options, management bonuses, investment banking, and legal fees incurred in connection with the March 31, 2004 Merger Transaction.

(b)		For the purpose of comparing the Company’s results of operations for the nine months ended September 30, 2005, the results of the Predecessor Operations for the three months ended March 31, 2004 have been combined with the results of the Successor Operations for the six months ended September 30, 2004.

	•		Deferred income tax balances related to purchase business combinations were not appropriately determined to ensure that deferred income tax liabilities and allocated goodwill were fairly stated in accordance with GAAP;

	•		Quarterly income tax provisions were not appropriately determined utilizing an estimate of the annual effective tax rate;

	•		The annual income tax provision was calculated using an inappropriate estimate of federal and state statutory tax rates;

	•		Deferred tax balances were not accurate;

	•		The income tax provision did not appropriately reflect the tax effect of stock option exercises in accordance with GAAP;

	•		Valuation allowances for state tax operating loss carryforwards were overstated based on loss carryforward periods and estimates of future state taxable income;

	•		Changes in valuation allowances and reserves for uncertain tax positions established in purchase business combinations were incorrectly charged to income tax expense instead of goodwill;

	•		State income and franchise tax provisions and the related tax payable accounts were incorrectly calculated;

	•		Certain book versus tax basis differences were based on estimates which were not updated on a timely basis and certain temporary differences were incorrectly treated as permanent items; and

	•		State franchise taxes were incorrectly included as a component of income tax expense instead of operating expenses.

	•		Investment in trust common securities;

	•		Capitalized interest on construction of Cincinnati distribution facility;

	•		Accrued pricing allowances; and,

	•		Insurance demutualization.

	•		Increase our training and resources in the income tax accounting area;

	•		Expand review procedures and controls related to unique and specialized transactions;

	•		Increase review procedures and controls related to income tax accounting;

	•		Increase review procedures and controls related to sales and marketing initiatives as well as sales contracts and agreements; and

	•		Review the disclosure committee process and increase the frequency of such meetings from quarterly to monthly.


a)		Exhibits, Including Those Incorporated by Reference.

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 Securities Exchange Act of 1934.

32.1	+	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	+	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.