Form: CORRESP

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October 15, 2008

October 15, 2008
CONFIDENTIAL
VIA EDGAR
Terence O’Brien
Accounting Branch Chief
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
         
 
  Re:   The Hillman Companies, Inc.
 
      Form 10-K for the Fiscal Year Ended December 31, 2007
 
      Filed March 31, 2008
 
      Form 10-Q for the Fiscal Quarters Ended March 31, 2008 and June 30, 2008
 
      File No: 1-13293
Dear Mr. O’Brien:
     The Hillman Companies, Inc. (the “Company” or “Hillman”) hereby acknowledges receipt of the comment letter, dated September 18, 2008, from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) concerning the Company’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2007 (the “Form 10-K”) and the Company’s Quarterly Reports on Form 10-Q for the Fiscal Three Months Ended March 31, 2008 and the Fiscal Three and Six Months Ended June 30, 2008 (the “Form 10-Qs”) and hereby submits this letter in response. The Staff’s comments are reprinted below and are followed by the Company’s responses.
Form 10-K for the Fiscal Year Ended December 31, 2007
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 15
Critical Accounting Policies and Estimates, page 24
  1.   Comment: We note your response to comment 1 in our letter dated July 23, 2008. Specifically, we note that you are not using EBITDA to calculate your enterprise value. Rather, you are using EBITDA further adjusted for other items, such as management

 


 

Terence O’Brien, Accounting Branch Chief
Division of Corporation Finance
October 15, 2008
Page 2
fees, compensation expense, etc. As such, please revise your disclosure regarding the calculation of your enterprise value used to estimate the fair value of your Class A and Class B common stocks to acknowledge that you use EBITDA, as adjusted. Further, for your presentation of the calculation of the fair value of your Class A and Class B common stocks, please include a footnote disclosure to explain why you determined it is appropriate to adjust cash for the March 31, 2008 period. In this regard, we note you recognized approximately $2 million in cash and cash equivalents on your March 31, 2008 consolidated balance sheet; however, you included $14.8 million in cash in the calculation.
Response: Disclosure regarding the calculation of enterprise value used to estimate the fair value of our Class A and Class B common stock will be revised in future periodic reports filed with the Commission to acknowledge the use of adjusted EBITDA.
As a result of the seasonality inherent in the business, the first fiscal quarter of the year requires a significant working capital build and offsetting use of cash. Cash for the March 31, 2008, 2007 and 2006 periods was adjusted by $12.8 million, $6.2 million and $5.5 million, respectively to normalize for the seasonal use of cash. An explanatory footnote will be included in future periodic reports filed with the Commission to explain any adjustment to cash in the calculation of the fair value of the Class A and Class B common stock.
Form 10-Q for the Fiscal Quarter Ended June 30, 2008
9. Common and Preferred Stock, page 15
2. Comment: We note your response to comment 4 in our letter dated July 23, 2008. Specifically, we note that you acknowledge the sponsor fees for the Hillman Investment Company Class A Preferred Stock should have been recognized as deferred financing costs in total assets rather than as a reduction to the Hillman Investment Company Class A Preferred Stock included in total liabilities. In addition, you state that the Hillman Investment Company Class A Preferred Stock should have been recognized at fair value at the date of issuance with subsequent accretion to its mandatory redemption value using the effective interest rate method. You then provide us with an analysis of the accretion amounts you should have recognized for each period subsequent to the date of issuance on March 31, 2004. It is unclear from your discussion and analysis of the impact the accounting errors have had on your consolidated financial statements if the accretion you refer to is actually the amortization of the sponsor fees that should have been recognized as deferred financing fees within total assets.
  •   Please provide us with your calculation of the amortization of the sponsor fees.
 
  •   If the fair value of the Hillman Investment Company Class A Preferred Stock at the date of issuance was less than the redemption value and this is what your response is

 


 

Terence O’Brien, Accounting Branch Chief
Division of Corporation Finance
October 15, 2008
Page 3
      referring to, please tell us what the fair value was at the date of issuance and the redemption amount as of March 31, 2028 along with your calculation of the accretion in accordance with SAB Topic 3:C.
 
  •   As appropriate, please refer to the guidance in SAB Topics 1:M and 1:N and provide us with a revised materiality analysis for these errors.
Response: The amortization of the sponsor fees was calculated using the effective interest method. Below is the calculated amortization for each period;
                                         
                            Amortization    
            Cumulative   Redemption   During the   Cumulative
Period Ended   Principal   Interest   Value   Period Ended   Amort.
December 31, 2004
    57,282,446       4,879,736       62,162,182       16,338       16,338  
December 31, 2005
    57,282,446       12,004,835       69,287,281       23,958       40,296  
December 31, 2006
    57,282,446       19,946,621       77,229,067       26,704       67,001  
December 31, 2007
    57,282,446       28,798,704       86,081,150       29,765       96,766  
December 31, 2008
    57,282,446       38,693,575       95,976,021       33,187       129,952  
December 31, 2009
    57,282,446       49,694,455       106,976,901       36,991       166,943  
December 31, 2010
    57,282,446       61,956,268       119,238,714       41,230       208,173  
December 31, 2011
    57,282,446       75,623,544       132,905,990       45,956       254,130  
December 31, 2012
    57,282,446       90,900,844       148,183,290       51,239       305,368  
December 31, 2013
    57,282,446       107,885,780       165,168,226       57,112       362,480  
December 31, 2014
    57,282,446       126,817,548       184,099,994       63,658       426,139  
December 31, 2015
    57,282,446       147,919,297       205,201,743       70,955       497,093  
December 31, 2016
    57,282,446       171,506,862       228,789,308       79,111       576,204  
December 31, 2017
    57,282,446       197,730,950       255,013,396       88,179       664,383  
December 31, 2018
    57,282,446       226,960,873       284,243,319       98,286       762,669  
December 31, 2019
    57,282,446       259,541,163       316,823,609       109,551       872,220  
December 31, 2020
    57,282,446       295,959,457       353,241,903       122,144       994,364  
December 31, 2021
    57,282,446       336,448,442       393,730,888       136,144       1,130,508  
December 31, 2022
    57,282,446       381,578,320       438,860,766       151,749       1,282,258  
December 31, 2023
    57,282,446       431,881,036       489,163,482       169,143       1,451,401  
December 31, 2024
    57,282,446       488,109,484       545,391,930       188,586       1,639,987  
December 31, 2025
    57,282,446       550,622,922       607,905,368       210,202       1,850,189  
December 31, 2026
    57,282,446       620,301,720       677,584,166       234,295       2,084,484  
December 31, 2027
    57,282,446       697,967,181       755,249,627       261,151       2,345,634  
March 31, 2028
    57,282,446       718,679,644       775,962,090       69,850       2,415,484  
The fair value of the Hillman Investment Company Class A Preferred Stock at the date of issuance was the redemption value. The initial accounting treatment was to reduce the fair value of the Hillman Investment Company Class A Preferred Stock by the amount of sponsor fees paid. In subsequent periodic reports filed with the commission, the sponsor fees will be recorded as deferred financing fees. The financing fees will be amortized using the effective interest method. The calculation of the amortization of the sponsor fees is detailed above.

 


 

Terence O’Brien, Accounting Branch Chief
Division of Corporation Finance
October 15, 2008
Page 4
As noted in our response to your comment letter dated July 23, 2008, the impact of the reclassification of the deferred financing fees and the related amortization are not material to the Company’s consolidated financial statements from a quantitative standpoint.
In addition, we have evaluated the other considerations outlined in SAB Topic 1:M that may render an otherwise quantitatively small misstatement material including the following (with our analysis following each factor):
1. Whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate.
Response: The calculation of the amount of the misstatement is based on a precise calculation and does not arise from an estimate.
2. Whether the misstatement masks a change in earnings or other trends.
Response: The misstatement does not change the trend in net earnings as a whole or the interest expense on the mandatorily redeemable preferred stock line item in the consolidated statements of operations.
3. Whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise.
Response: There is no analyst coverage of The Hillman Trust Preferred Securities nor does the Company issue any earning guidance.
4. Whether the misstatement changes a loss into income or vice versa.
Response: The misstatement would not change the reported loss to income for any of the periods presented.
5. Whether the misstatement concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability.
Response: The misstatement was at the corporate level and would not have any impact on any individual portion of the business.
6. Whether the misstatement affects the registrant’s compliance with regulatory requirements.
Response: The misstatement has no impact on our compliance with any regulatory requirements.
7. Whether the misstatement affects the registrant’s compliance with loan covenants or other contractual requirements.
Response: Earnings calculations in the Company’s financial covenants exclude interest, depreciation, taxes and amortization. Interest expense used in the covenant calculations

 


 

Terence O’Brien, Accounting Branch Chief
Division of Corporation Finance
October 15, 2008
Page 5
includes only cash paid. Therefore, the misstatement has no impact on covenant calculations.
8. Whether the misstatement has the effect of increasing management’s compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation.
Response: The calculation of management bonus and incentive plan awards are based on earnings before interest, depreciation, amortization and taxes, and therefore, the misstatement has no impact on bonus or incentive compensation for management.
9. Whether the misstatement involves concealment of an unlawful transaction.
Response: The misstatement involved no concealment of an unlawful transaction.
Another consideration in the evaluation of whether a misstatement is material is the expected market reaction. The Hillman Trust Preferred Securities are very thinly traded with daily volume averaging approximately 2,500 shares for the twelve months ended September 30, 2008. There is minimal price volatility with The Hillman Trust Preferred securities trading between $25.50 and $30.22 per share during the 5 year period ended September 30, 2008 (Since September 30, 2008 the volatility in the global financial markets has resulted in increased trading activity and price volotility in the Hillman Trust Preferred Securities.). In management’s opinion, an immaterial, non-cash misstatement is unlikely to generate a significant reaction from the holders of the Hillman Trust Preferred Securities.
Management also considered whether the cumulative impact of correcting the error would have a material impact on the current year financial statements in accordance with SAB Topic 1:N. The cumulative impact of the misstatement though December 31, 2007 is a $96,766 understatement of interest expense and overstatement of income. From a quantitative standpoint the correction of the misstatement in the Company’s 2008 consolidated financial statements will not be material. The $96,766 adjustment of interest expense on the mandatorily redeemable preferred stock will be less than 1% of the full year interest expense.
The balance sheet impact of the cumulative adjustment of the sponsor fees would be an increase in assets of $2,318,718 or , an increase in liabilities of $2,415,484 and a reduction in Stockholder’s Equity of $96,766. The cumulative balance sheet adjustment is less than 1% of total assets, total liabilities and stockholders’ equity as of June 30, 2008 which would not be considered material.
The qualitative considerations discussed above would also apply to the cumulative impact of the current year correction.
The adjustments discussed above will be reflected in future periodic reports filed with the Commission.

 


 

Terence O’Brien, Accounting Branch Chief
Division of Corporation Finance
October 15, 2008
Page 6
* * *
     If you have any questions or additional comments concerning the foregoing, please contact me at (513) 851-4900, extension #2063.
Sincerely,
/s/ James P. Waters                          
James P. Waters
Chief Financial Officer
The Hillman Companies, Inc.
cc: Cynthia M. Krus, Esq.