Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

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 March 31, 2012

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 incorporation or organization)		(I.R.S. Employer 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 x NO ¨

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 x NO ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

On May 15, 2012, 5,000 shares of the Registrant’s common stock were issued and outstanding and 4,217,724 Trust Preferred Securities were issued and outstanding by the Hillman Group Capital Trust. The Trust Preferred Securities trade on the NYSE Amex under symbol HLM.Pr.

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

INDEX


		PAGE (S)
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets		3-4

	Condensed Consolidated Statements of Comprehensive Income		5

	Condensed Consolidated Statements of Cash Flows		6

	Condensed Consolidated Statements of Changes in Stockholders’ Equity		7

	Notes to Condensed Consolidated Financial Statements		8-32

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33-46

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		47

Item 4.	Controls and Procedures		47-48

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		49

Item 1A.	Risk Factors		49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		49

Item 3.	Defaults upon Senior Securities		50

Item 4.	Mine Safety Disclosures		50

Item 5.	Other Information		50

Item 6.	Exhibits		50

SIGNATURES			51

Page 2 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(dollars in thousands)


	March 31, 2012		December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	7,677	$	12,027
Restricted investments		344		364
Accounts receivable		72,252		63,565
Inventories		106,002		103,975
Deferred income taxes		8,932		9,908
Other current assets		5,814		5,646

Total current assets		201,021		195,485
Property and equipment		65,903		66,342
Goodwill		458,328		457,443
Other intangibles		381,357		386,202
Restricted investments		3,412		3,390
Deferred financing fees		12,417		13,055
Investment in trust common securities		3,261		3,261
Other assets		3,068		2,673

Total assets	$	1,128,767	$	1,127,851

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	33,855	$	31,273
Current portion of senior term loans		3,200		3,200
Current portion of capitalized lease and other obligations		32		31
Additional acquisition consideration payable		—		12,387
Accrued expenses:
Salaries and wages		3,390		5,628
Pricing allowances		5,632		5,728
Income and other taxes		2,457		2,253
Interest		7,641		2,203
Deferred compensation		344		364
Other accrued expenses		8,136		9,207

Total current liabilities		64,687		72,274
Long term senior term loans		309,842		310,550
Bank revolving credit		14,000		—
Long term capitalized lease and other obligations		95		103
Long term senior notes		204,123		204,248
Junior subordinated debentures		115,304		115,411
Deferred compensation		3,412		3,390
Deferred income taxes		120,999		123,888
Other non-current liabilities		6,861		7,193

Total liabilities		839,323		837,057

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Page 3 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(dollars in thousands)


LIABILITIES AND STOCKHOLDERS’ EQUITY (CONTINUED)	March 31, 2012			December 31, 2011
Common stock with put options:
Common stock, $.01 par, 5,000 shares authorized, 198.3 issued and outstanding at March 31, 2012		12,247			12,247

Commitments and contingencies
Stockholders’ Equity:
Preferred Stock:
Preferred stock, $.01 par, 5,000 shares authorized, none issued and outstanding at March 31, 2012		—			—
Common Stock:
Common stock, $.01 par, 5,000 shares authorized, 4,801.7 issued and outstanding at March 31, 2011		—			—
Additional paid-in capital		296,544			296,544
Accumulated deficit		(20,404	)		(17,817	)
Accumulated other comprehensive income (loss)		1,057			(180	)

Total stockholders’ equity		277,197			278,547

Total liabilities and stockholders’ equity	$	1,128,767		$	1,127,851

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Page 4 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(dollars in thousands)


	Three Months Ended March 31, 2012			Three Months Ended March 31, 2011
Net sales	$	128,373		$	111,294
Cost of sales (exclusive of depreciation and amortization shown separately below)		63,589			55,656
Selling, general and administrative expenses		44,920			42,446
Acquisition and integration expenses		152			1,290
Depreciation		5,889			4,439
Amortization		5,471			4,741
Other income		(483	)		(365	)

Income from operations		8,835			3,087
Interest expense, net		10,102			9,077
Interest expense on junior subordinated debentures		3,152			3,152
Investment income on trust common securities		(95	)		(95	)

Loss before income taxes		(4,324	)		(9,047	)
Income tax benefit		(1,737	)		(4,165	)

Net loss	$	(2,587	)	$	(4,882	)


Net loss (from above)	$	(2,587	)	$	(4,882	)
Other comprehensive income:
Foreign currency translation adjustments		1,237			23
Interest rate swap, net of tax		—			(19	)

Total other comprehensive income		1,237			4

Comprehensive loss	$	(1,350	)	$	(4,878	)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Page 5 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands)


	Three Months Ended March 31, 2012			Three Months Ended March 31, 2011
Cash flows from operating activities:
Net loss	$	(2,587	)	$	(4,882	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization		11,360			9,180
Dispositions of property and equipment		—			34
Deferred income tax benefit		(1,815	)		(4,239	)
Deferred financing and original issue discount amortization		498			499
Other non-cash interest and change in value of interest rate swap		(163	)		—
Changes in operating items:
Accounts receivable		(8,637	)		(7,052	)
Inventories		(2,330	)		(5,156	)
Other assets		(563	)		(1,623	)
Accounts payable		2,582			1,923
Other accrued liabilities		2,237			1,269
Other items, net		(294	)		1,100

Net cash provided by (used for) operating activities		288			(8,947	)

Cash flows from investing activities:
TagWorks acquisition		—			(40,359	)
Proceeds from sale of property and equipment		3			—
Capital expenditures		(5,447	)		(4,122	)

Net cash used for investing activities		(5,444	)		(44,481	)

Cash flows from financing activities:
Repayments of senior term loans		(800	)		(725	)
Borrowings of revolving credit loans		14,000			3,000
Repayments of revolving credit loans		—			(6,000	)
Payment of additional acquisition consideration		(12,387	)		—
Principal payments under capitalized lease obligations		(7	)		(8	)
Borrowings of senior notes		—			50,000
Premium on senior notes		—			4,625
Financing fees, net		—			(1,293	)

Net cash provided by financing activities		806			49,599

Net decrease in cash and cash equivalents		(4,350	)		(3,829	)
Cash and cash equivalents at beginning of period		12,027			7,585

Cash and cash equivalents at end of period	$	7,677		$	3,756

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Page 6 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(dollars in thousands)


	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at December 31, 2011	$	—	$	296,544	$	(17,817	)	$	(180	)	$	278,547
Net loss		—		—		(2,587	)		—			(2,587	)
Change in cumulative foreign translation adjustment		—		—		—			1,237			1,237

Balance at March 31, 2012	$	—	$	296,544	$	(20,404	)	$	1,057		$	277,197

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Page 7 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

1.	Basis of Presentation:

The accompanying financial statements include the condensed consolidated accounts of The Hillman Companies, Inc. (“Hillman Companies”) and its wholly-owned subsidiaries (collectively “Hillman” or the “Company”). All significant intercompany balances and transactions have been eliminated.

On May 28, 2010, Hillman Companies was acquired by an affiliate of Oak Hill Capital Partners (“OHCP”) and certain members of Hillman’s management and Board of Directors. Pursuant to the terms and conditions of an Agreement and Plan of Merger dated as of April 21, 2010, the Company was merged with an affiliate of OHCP with the Company surviving the merger (the “Merger Transaction”). As a result of the Merger Transaction, Hillman Companies is a wholly-owned subsidiary of OHCP HM Acquisition Corp. (“Holdco”). The total consideration paid in the Merger Transaction was $832,679, which includes $11,500 for the Quick Tag license and related patents, repayment of outstanding debt and the net value of the Company’s outstanding junior subordinated debentures ($105,443 liquidation value, net of $3,261 in trust common securities, at time of the merger).

The Company’s financial statements have been presented on the basis of push down accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 805-50-S99. FASB ASC 805-50-S99 states that the push down basis of accounting should be used in a purchase transaction in which the entity becomes wholly-owned by another entity. Under the push down basis of accounting, certain transactions incurred by the parent company which would otherwise be accounted for in the accounts of the parent are “pushed down” and recorded on the financial statements of the subsidiary. Accordingly, certain items resulting from the OHCP Merger Transaction have been recorded on the financial statements of the Company.

The following table indicates the pro-forma financial statements of the Company for the three months ended March 31, 2012 and 2011. The pro-forma financial statements give effect to the acquisitions of TagWorks and Ook (each as defined herein) as if they had occurred on January 1, 2011:


	(Unaudited) Three Months Ended March 31, 2012			(Unaudited) Three Months Ended March 31, 2011
Net Sales	$	128,373		$	117,240
Net Loss		(2,587	)		(5,520	)

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 acquisition had been effective January 1, 2011, nor are they intended to be indicative of results that may occur in the future. The underlying pro-forma information includes the historical results of the Company, the Company’s financing arrangements, and certain purchase accounting adjustments.

Page 8 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

1.	Basis of Presentation (continued):

The accompanying unaudited condensed consolidated financial statements present information in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. Accordingly, they do not include all information or footnotes required by generally accepted accounting principles for complete financial statements. Management believes the financial statements include all normal recurring accrual adjustments necessary for a fair presentation. Operating results for the three month period ended March 31, 2012 do not necessarily indicate the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2011.

Nature of Operations:

The Company is organized as six separate business segments, the largest of which is (1) The Hillman Group, Inc. (the “Hillman Group”) operating primarily in the United States. The other business segments consist of subsidiaries of the Hillman Group operating in (2) Canada under the name The Hillman Group Canada, Ltd., (3) Mexico under the name SunSource Integrated Services de Mexico SA de CV, (4) Florida under the name All Points Industries, Inc., (5) Australia under the name The Hillman Group Australia Pty. Ltd. and (6) the U.S. market as TagWorks (which was merged with and into Hillman Group effective December 31, 2011). 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; builder’s hardware; and identification items, such as tags and letters, numbers and signs, to retail outlets, primarily hardware stores, home centers and 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.

Page 9 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

2.	Summary of Significant Accounting Policies:

The significant accounting policies should be read in conjunction with the significant accounting policies included in the Form 10-K for the year ended December 31, 2011. Policies included herein were updated for activity in the interim period.

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.

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 when collection becomes improbable. The allowance for doubtful accounts was $658 at March 31, 2012 and $641 at December 31, 2011.

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 Company’s condensed consolidated statements of comprehensive income. The Company’s shipping and handling costs were $5,379 and $5,163 in the three month periods ended March 31, 2012 and 2011, respectively.

3.	Recent Accounting Pronouncements:

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in this Update generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS. The amendments in this Update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. The Company adopted this update on January 1, 2012 and the adoption of this update did not have a material impact on our consolidated results of operations or financial condition.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” requiring most entities to present items of net income and other comprehensive income either in one continuous statement—referred to as the statement of comprehensive income—or in two separate, but consecutive, statements of net income and other comprehensive income. The new requirements are effective for interim and annual periods beginning after December 15, 2011. The Company adopted this update on January 1, 2012 and the adoption of this update did not have a material impact on our consolidated results of operations or financial condition.

Page 10 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

3.	Recent Accounting Pronouncements (continued):

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment”. This Update addresses concerns about the cost and complexity of performing the first step of the two-step goodwill impairment test required under Topic 350, Intangibles – Goodwill and Other. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The new requirements are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted this update on January 1, 2012 and the adoption of this update did not have a material impact on our consolidated results of operations or financial condition.

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income”. Under the amendments in Update 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. The amendments in this Update supersede changes to those paragraphs in Update 2011-05 that pertain to how, when and where reclassification adjustments are presented. The amendments in this Update are effective at the same time as the amendments in Update 2011-05; effective for interim and annual periods beginning after December 15, 2011. The Company adopted this update on January 1, 2012 and the adoption of this update did not have a material impact on our consolidated results of operations or financial condition.

4.	Acquisitions:

The following table reconciles the fair value of the acquired assets and assumed liabilities to the total purchase price of the Servalite Acquisition:


Account receivable	$	2,633
Inventory		5,485
Other current assets		86
Deferred income taxes		1,341
Property and equipment		49
Goodwill		4,537
Intangibles		9,100

Total assets acquired		23,231
Less:
Liabilities assumed		1,714

Total purchase price	$	21,517

The excess of the purchase price over the net assets has been allocated to goodwill and intangible assets based upon the final valuation by an independent appraisal. The intangible assets and goodwill are deductible for income tax purposes over a 15 year life.

Page 11 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

4.	Acquisitions (continued):

On March 31, 2011, Servalite was merged with and into Hillman Group, with Hillman Group as the surviving entity.

On March 16, 2011, Hillman Group acquired all of the membership interests in TagWorks, an Arizona limited liability company (the “TagWorks Acquisition”) for an initial purchase price of $40,000 in cash.

In addition, Hillman Group paid additional consideration of $12,500 to the sellers of TagWorks on October 31, 2011, and also paid additional contingent consideration of $12,500 on March 30, 2012. The March 30, 2012 additional consideration was contingent on the successful achievement of defined revenue and earnings targets for the year ended December 31, 2011.

Founded in 2007, TagWorks provides innovative pet ID tag programs to a leading pet products chain retailer using a unique, patent-protected / patent-pending technology and product portfolio. In conjunction with the TagWorks Acquisition, Hillman Group entered into a seventeen (17) year agreement with KeyWorks-KeyExpress, LLC (“KeyWorks”), a company affiliated with TagWorks, to assign its patent-pending retail key program technology to Hillman Group and to continue to work collaboratively with us to develop next generation key duplicating technology.

The closing of the TagWorks Acquisition occurred concurrently with the offering of $50,000 aggregate principal amount of Hillman Group’s 10.875% Senior Notes due 2018. Hillman Group used the net proceeds of the note offering to fund the TagWorks Acquisition, to repay a portion of indebtedness under its revolving credit facility and to pay related transaction and financing fees. The notes are guaranteed by Hillman Companies, Hillman Investment Company and all of the domestic subsidiaries of Hillman Group.

The following table reconciles the fair value of the acquired assets and assumed liabilities to the total purchase price of the TagWorks Acquisition:


Account receivable	$	735
Inventory		1,086
Other current assets		217
Deferred income taxes		24
Property and equipment		17,403
Goodwill		14,996
Intangibles		34,840

Total assets acquired		69,301
Less:
Liabilities assumed		4,622

Total purchase price	$	64,679

Page 12 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

4.	Acquisitions (continued):

On December 1, 2011, the Hillman Group purchased certain assets of Micasa Trading Corporation (“Micasa”), a Miami, Florida based producer of the Ook brand of picture hangers and related products (“Ook” or the “Ook Acquisition”). The initial purchase price of the Ook Acquisition was approximately $15,323 paid in cash at closing. The closing purchase price is subject to post closing adjustments for certain changes in the working capital obtained in the Ook Acquisition as provided in the purchase agreement. The asset acquisition met the definition of a business for business combinations.

In addition, subject to fulfillment of certain conditions provided in the purchase agreement, Hillman Group will pay Micasa an additional undiscounted contingent consideration of up to $6,000 in March 2013. The March 2013 additional consideration is contingent on achieving a defined gross profit earnings target. The fair value of the contingent consideration arrangement of $0 was estimated by applying the income approach. Key assumptions include (a) a discount rate range of 1.0 percent to 3.7 percent; and (b) a probability adjusted level of gross profit in the Ook Acquisition business.

Micasa was established in 1964 and developed into a major supplier of picture hanging fasteners and innovative parts within the retail hardware market. The Ook brand’s excellence in this specialty category strengthens Hillman’s position of providing value-added products and services to home centers and hardware retailers.

The following table reconciles the estimated fair value of the acquired Ook Acquisition assets and assumed liabilities to the total purchase price:


Account receivable	$	2,080
Inventory		2,297
Deferred income taxes		867
Goodwill		5,817
Intangibles		6,000

Total assets acquired		17,061
Less:
Liabilities assumed		1,738

Total purchase price	$	15,323

The excess of the purchase price over the net assets has been preliminarily allocated to goodwill and intangible assets by management pending final valuation by an independent appraisal. The intangible assets and goodwill are expected to be deductible for income tax purposes over a 15 year life.

Page 13 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

5.	Other Intangibles:

Intangible assets are amortized over their useful lives and are subject to impairment testing. The values assigned to intangible assets in connection with the Servalite and Tagworks Acquisitions were determined through separate independent appraisals. The values assigned to intangible assets in connection with the Ook Acquisition were determined by management pending independent appraisal. The Ook intangible asset values may be adjusted by management for any changes upon completion of the independent appraisal. Other intangibles, net as of March 31, 2012 and December 31, 2011 consist of the following:


	Estimated Useful Life (Years)	March 31, 2012		December 31, 2011
Customer relationships	20	$	326,805	$	326,200
Trademarks - All Others	Indefinite		49,732		49,660
Trademarks - TagWorks	5		240		240
Patents	5-20		20,200		20,200
Quick Tag license	6		11,500		11,500
Laser Key license	5		1,250		1,250
KeyWorks license	10		4,100		4,100
Non-compete agreements	5.5-10		4,200		4,200
Lease agreement	0.5		240		240

Intangible assets, gross			418,267		417,590
Less: Accumulated amortization			36,910		31,388

Other intangibles, net		$	381,357	$	386,202

Intangible assets are amortized over their useful lives. The amortization expense for amortizable assets was $5,471 and $4,741 for the three month periods ended March 31, 2012 and 2011, respectively. The amortization expense for amortizable assets for the year ended December 31, 2012 is estimated to be $21,610. For the years ended December 31, 2013, 2014, 2015, 2016, and 2017, the amortization expense for amortizable assets is estimated to be $21,410, $21,410, $20,749, $18,822 and $18,014, respectively.

Page 14 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

6.	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 $40,000. The two risk areas involving the most significant accounting estimates are workers’ compensation and automotive liability. Actuarial valuations performed by the Company’s outside risk insurance expert were used by management to form the basis for workers’ compensation and automotive liability loss reserves. The actuary contemplated the Company’s 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 from development of these claims, as well as for incurred but not yet reported claims. The Company believes the liability of approximately $2,366 recorded for such risk insurance reserves is adequate as of March 31, 2012, but due to judgments inherent in the reserve estimation process, it is possible the ultimate costs will differ from this estimate.

As of March 31, 2012, the Company has provided certain vendors and insurers letters of credit aggregating $4,853 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. 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 $1,917 recorded for such group health insurance reserves is adequate as of March 31, 2012, but due to judgments inherent in the reserve estimation process, it is possible the ultimate costs will differ from this estimate.

On November 23, 2011, Steelworks Hardware LLC, the owner of the Steelworks trade mark and a party to a licensing and marketing agreement with Hillman that originated in 2005 and automatically renewed for a three year period beginning in May 2010, filed a complaint against Hillman Group, Ace Hardware Corporation, Lowe’s Companies, Inc., Lowe’s Home Centers, Inc. and True Value Company in the United States District Court for the Northern District of Illinois Eastern Division. The complaint alleged a series of claims against Hillman Group and the other named defendants, including trade mark and trade dress infringement in violation of the Lanham Act, violations of Illinois Consumer Fraud and Unfair Trade Practices Acts and common law breach of contract, conspiracy and tort claims.

On March 20, 2012, the Company agreed to pay $1,635 to Steelworks Hardware LLC in full settlement of all alleged claims and plaintiff legal fees in this matter. The settlement cost and plaintiff legal fees were recorded in our consolidated results of operations as of December 31, 2011.

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6.	Commitments and Contingencies (continued):

On May 4, 2010, Hy-Ko Products, Inc. filed a complaint against Hillman Group, and Kaba Ilco Corp., a manufacturer of blank replacement keys, in the United States District Court for the Northern District of Ohio Eastern Division, alleging that the defendants engaged in violations of federal and state antitrust laws regarding their business practices relating to automatic key machines and replacement keys. Hy-Ko Products’ May 4, 2010 filing against the Company is based, in part, on the Company’s previously-filed claim against Hy-Ko Products alleging infringement of certain patents of the Company. A claim construction hearing on the Company’s patent infringement claim against Hy-Ko Products occurred in September 2010. A ruling on the claim construction hearing was handed down on November 22, 2011 and was favorable to the Company’s position. A trial date on the patent case is set for the fourth quarter of 2012.

In its antitrust claim against the Company, Hy-Ko Products is seeking monetary damages which would be trebled under the antitrust laws, interest and attorney’s fees as well as injunctive relief. The antitrust claim against the Company has been stayed pending the resolution of the patents claim against Hy-Ko Products. Because the lawsuit is in a preliminary stage, it is not yet possible to assess the impact that the lawsuit will have on the Company. However, the Company believes that it has meritorious defenses and intends to defend the lawsuit vigorously.

In addition, legal proceedings are pending which are either in the ordinary course of business or incidental to the Company’s 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.

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7.	Related Party Transactions:

Gregory Mann and Gabrielle Mann are employed by the All Points subsidiary of Hillman. 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 arm’s length basis. The rental expense for the lease of this facility was $83 and $83 for the three month periods ended March 31, 2012 and 2011, respectively.

8.	Income Taxes:

The Company’s policy is to estimate income taxes for interim periods based on estimated annual effective tax rates. These are derived, in part, from expected pre-tax income. Accordingly, the Company applied an estimated annual effective tax rate to the interim period pre-tax losses in the three month periods ended March 31, 2012 and 2011 to calculate the income tax benefit in accordance with the principal method prescribed by ASC 740-270, the accounting guidance established for computing income taxes in interim periods.

The effective income tax rates were 40.2% and 46.0% for the three month periods ended March 31, 2012 and 2011, respectively. The effective tax rate in the three month period ended March 31, 2012 was affected by state and foreign income taxes. The effective income tax rate differed from the federal statutory rate in the three month period ended March 31, 2011 primarily due to a current period charge caused by the effect of changes in certain state income tax rates on the company’s deferred tax assets and liabilities. In addition, the effective tax rate in this three month period was affected by state and foreign income taxes.

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9.	Long-Term Debt:

On May 28, 2010, Hillman Companies and certain of its subsidiaries closed on a $320,000 senior secured first lien credit facility (the “Senior Facilities”), consisting of a $290,000 term loan and a $30,000 revolving credit facility (the “Revolver”). The term loan portion of the Senior Facilities has a six year term and the Revolver has a five year term. The Senior Facilities provide borrowings at interest rates based on a EuroDollar rate plus a margin of 3.75% (the “EuroDollar Margin”), or a base rate (the “Base Rate”) plus a margin of 2.75% (the “Base Rate Margin”). The EuroDollar rate is subject to a minimum floor rate of 1.75% and the Base Rate is subject to a minimum floor of 2.75%.

Concurrently with the acquisition of the Company on May 28, 2010, Hillman Group issued $150,000 aggregate principal amount of its senior notes due 2018 (the “10.875% Senior Notes”). On March 16, 2011, Hillman Group completed an offering of $50,000 aggregate principal amount of its 10.875% Senior Notes. Hillman Group received a premium of $4,625 on the $50,000 10.875% Senior Notes offering. The 10.875% Senior Notes are guaranteed by Hillman Companies, Hillman Investment Company and all of the domestic subsidiaries of Hillman Group. Hillman Group pays interest on the 10.875% Senior Notes semi-annually on June 1 and December 1 of each year.

The Senior Facilities contain financial and operating covenants which require the Company to maintain certain financial ratios, including a leverage ratio. These debt agreements provide for customary events of default, including but not limited to, payment defaults, breach of representations or covenants, cross-defaults, bankruptcy events, failure to pay judgments, attachment of its assets, change of control and the issuance of an order of dissolution. Certain of these events of default are subject to notice and cure periods or materiality thresholds. The occurrence of an event of default permits the lenders under the Senior Facilities to accelerate repayment of all amounts due. As of March 31, 2012, the Company had $11,148 available under the Revolver.

Effective April 18, 2011, the Company completed an amendment to the credit agreement governing its Senior Facilities. The Senior Facilities amendment eliminated the total leverage and interest coverage covenants and reduced the secured leverage covenant to 4.75x with no future step downs. The term loan pricing was modified to reduce the Eurodollar Margin and the Base Rate Margin by 25 basis points and reduce the floor on Eurodollar and Base Rate Loans by an additional 25 basis points. In connection with the amendment to the credit agreement, the Company incurred loan discount costs of $1,250. As the modification of the Senior Facilities agreement was not substantial, the unamortized loan discount and debt issuance costs will be amortized over the term of the amended Senior Facilities. The Company was in compliance with all provisions and covenants of the amended Senior Facilities as of March 31, 2012.

Effective November 4, 2011, the Company entered into a Joinder Agreement to its credit agreement under the existing Senior Facilities (the “Incremental Facility”). The Incremental Facility increased the aggregate term loan commitments available to Hillman Group under the Senior Facilities by $30,000. In connection with the Incremental Facility, the Company incurred loan discount costs of $750. As the modification of the Senior Facilities agreement was not substantial, the unamortized loan discount costs will be amortized over the term of the amended Senior Facilities. The aggregate principal amount of commitments under the Senior Facilities, after giving effect to the Incremental Facility, is $350,000. The Company used the proceeds for general corporate purposes.

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10.

Common and Preferred Stock:

The Hillman Companies has one class of Common Stock, with 5,000 shares authorized and issued as of March 31, 2012. All outstanding shares of Hillman Companies’ common stock are owned by Holdco.

Under the terms of the Stockholders Agreement for the Holdco Common Stock, management shareholders have the ability to put their shares back to Holdco under certain conditions, including death or disability. ASC 480-10-S99 requires shares to be classified outside of permanent equity if they can be redeemed and the redemption is not solely within control of the issuer. Further, if it is determined that redemption of the shares is probable, the shares are marked to redemption value which equals fair value at each balance sheet date with the change in fair value recorded in additional paid-in capital. Accordingly, the 198.3 shares of common stock held by management are recorded outside permanent equity and have been adjusted to the fair value of $12,247 as of March 31, 2012.

The Hillman Companies has one class of Preferred Stock, with 5,000 shares authorized and none issued as of March 31, 2012.

11.

Stock-Based Compensation:

Effective May 28, 2010, Holdco established the OHCP HM Acquisition Corp. 2010 Stock Option Plan (the “Option Plan”), pursuant to which Holdco may grant options for up to an aggregate of 37,189 shares of its common stock. The Option Plan is administered by a committee of the Holdco Board of Directors. Such committee determines the terms of each option grant under the Option Plan, except that the exercise price of any granted options may not be lower than the fair market value of one share of common stock of Holdco as of the date of grant.

The Company granted 32,284 and 1,030 common options under the Option Plan in 2010 and 2011, respectively. On February 17, 2012, the Company issued 3,875 common options under the Option Plan. The options were granted with an exercise price of one thousand dollars per option which was equal to the grant date fair value of the underlying securities.

Common option holders are not required by the terms of the Option Agreement or the Shareholder Agreement to hold the shares for any period of time following exercise. Since the arrangement permits the holders to put the shares back without being exposed to the risks and rewards of the shares for a reasonable period of time, liability classification is required. The Company has elected to use the intrinsic value method to value the common options.

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12.

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 June 24, 2010, the Company entered into a forward Interest Rate Swap Agreement (the “2010 Swap”) with a two-year term for a notional amount of $115,000. The forward start date of the 2010 Swap was May 31, 2011 and its termination date is May 31, 2013. The 2010 Swap fixes the interest rate at 2.47% plus the applicable interest rate margin.

The 2010 Swap was initially designated as a cash flow hedge. Effective April 18, 2011, the Company executed the second amendment to the credit agreement which modified the interest rate on the Senior Facilities. The critical terms for the 2010 Swap no longer matched the terms of the amended Senior Facilities and the 2010 Swap was de-designated. As a result, $643 of previously unrecognized losses recorded as a component of other comprehensive income were recognized as interest expense in the three month period ended June 30, 2011.

At March 31, 2012, the fair value of the 2010 Swap was $(1,042) and was reported on the condensed consolidated balance sheet in other non-current liabilities with a reduction in interest expense recorded in the statement of operations for the favorable change in fair value since December 31, 2011. The fair value of the 2010 Swap was $(1,205) as of December 31, 2011 and was reported on the condensed consolidated balance sheet in other non-current liabilities.

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13.

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 and requires that assets and liabilities carried at fair value be 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 entity’s 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 liability’s level is based on the lowest level of input that is significant to the fair value measurement.

The following tables set forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis during the periods ended March 31, 2012 and December 31, 2011, by level, within the fair value hierarchy:


	As of March 31, 2012
	Level 1		Level 2			Level 3		Total
Trading securities	$	3,756	$	—		$	—	$	3,756
Interest rate swap		—		(1,042	)		—		(1,042	)

	As of December 31, 2011
	Level 1		Level 2			Level 3		Total
Trading securities	$	3,754	$	—		$	—	$	3,754
Interest rate swap		—		(1,205	)		—		(1,205	)

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 condensed consolidated balance sheets.

For the three months ended March 31, 2012 and 2011, the unrealized gains on these securities of $194 and $106, respectively, were recorded as other income. In each period, an offsetting entry, for the same amount, adjusting the deferred compensation liability and compensation expense within SG&A was also recorded.

The interest rate swaps are valued using observable benchmark rates at commonly quoted intervals for the full term of the swaps. The 2010 Swap was included in other non-current liabilities as of March 31, 2012 and December 31, 2011 on the accompanying condensed consolidated balance sheet.

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14.

Acquisition and Integration Expenses:

For the three months ended March 31, 2012, the Company incurred $152 of expenses in connection with the Ook Acquisition.

For the three months ended March 31, 2011, the Company incurred $1,290 of expenses for investment banking, legal and other professional fees incurred in connection with the Merger Transaction, Servalite acquisition, TagWorks acquisition and the start-up of operations for Hillman Australia.

15.

Segment Reporting:

The Company’s segment reporting structure uses the Company’s management reporting structure as the foundation for how the Company manages its business. The Company periodically evaluates its segment reporting structure in accordance with ASC 350-20-55 and has concluded that it has six reporting units as of March 31, 2012. The United States segment, excluding All Points and Tagworks, is the only segment considered material by Company management as of March 31, 2012. The segments are as follows:

•

United States – excluding the All Points and Tagworks divisions

•

All Points

•

Tagworks

•

Canada

•

Mexico

•

Australia

Our United States segment distributes fasteners and related hardware items, threaded rod, keys, key duplicating systems and accessories, and identification items, such as tags and letters, numbers and signs to hardware stores, home centers, mass merchants, and other retail outlets primarily in the United States.

Our All Points segment is a Florida based distributor of commercial and residential fasteners catering to the hurricane protection industry in the southern United States. All Points has positioned itself as a major supplier to manufacturers of railings, screen enclosures, windows and hurricane shutters.

Our Tagworks segment provides innovative pet ID tag programs to a leading pet products chain retailer in the United States using a unique, patent-protected / patent-pending technology and product portfolio.

Our Canada segment distributes fasteners and related hardware items, threaded rod, keys, key duplicating systems and accessories, and identification items, such as tags and letters, numbers and signs to hardware stores, home centers, mass merchants, and other retail outlets in Canada.

Our Mexico segment distributes fasteners and related hardware items to hardware stores, home centers, mass merchants, and other retail outlets in Mexico.

Our Australia segment distributes keys, key duplicating systems and accessories to home centers and other retail outlets in Australia.

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15.

Segment Reporting (continued):

The Company uses profit or loss from operations to evaluate the performance of its segments. Profit or loss from operations is defined as income from operations before interest and tax expenses. Hillman accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Segment revenue excludes intersegment sales related to the sales or transfer of products between segments which is consistent with the segment revenue information provided to the Company’s chief operating decision maker. Segment Income (Loss) from Operations for Mexico and Australia include insignificant costs allocated from the United States, excluding All Points and Tagworks segment, while the remaining operating segments do not include any allocations.

The table below presents revenues and income from operations for our reportable segments for the three months ended March 31, 2012 and 2011.


	Three Months Ended March 31, 2012			Three Months Ended March 31, 2011
Revenues
United States, excluding All Points and Tagworks	$	115,328		$	103,862
All Points		4,509			2,832
TagWorks		4,433			651
Canada		2,408			2,379
Mexico		1,557			1,570
Australia		138			—

Total revenues	$	128,373		$	111,294

Segment Income (Loss) from Operations
United States, excluding All Points and Tagworks	$	7,595		$	2,816
All Points		92			(139	)
TagWorks		1,133			164
Canada		(219	)		(275	)
Mexico		351			513
Australia		(104	)		(45	)

Total segment income from operations	$	8,848		$	3,034

Reconciliation (1)
Total segment income from operations	$	8,848		$	3,034
Elimination of intercompany profit (loss)		(13	)		53

Total income from operations	$	8,835		$	3,087

(1)	This table reconciles segment income from operations to total income from operations.

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15.

Segment Reporting (continued):

Assets by segment as of March 31, 2012 and December 31, 2011 were as follows:


	March 31, 2012		December 31, 2011
Assets
United States, excluding All Points and Tagworks	$	1,025,074	$	1,025,334
All Points		7,669		8,052
TagWorks		62,711		62,912
Canada		14,108		13,269
Mexico		17,928		17,097
Australia		1,277		1,187

Total Assets	$	1,128,767	$	1,127,851

16.

Subsequent Events:

The Company’s management has evaluated potential subsequent events for recording and disclosure in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2012. There were no additional items requiring disclosure.

17.

Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information:

The 10.875% Senior Notes, of which $200,000 aggregate principal amount are outstanding, were issued by The Hillman Group, Inc. and are fully and unconditionally guaranteed on a joint and several basis by the Company and certain of Company’s wholly owned subsidiaries. The non-guarantor information presented represents our Australian, Canadian and Mexican subsidiaries.

The following financial information presents condensed consolidating statements of comprehensive income, balance sheets, and cash flows for The Hillman Group, Inc., all guarantor subsidiaries, all non-guarantor subsidiaries and the eliminations necessary to provide the consolidated results for The Hillman Companies, Inc. and subsidiaries. For purposes of this presentation, we have accounted for investments in our subsidiaries using the equity method of accounting. The principal consolidating adjustments eliminate investment in subsidiary and intercompany balances and transactions.

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(dollars in thousands)

17.

Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued):

Condensed Consolidating Statements of Comprehensive Income (Unaudited)

For the three months ended March 31, 2012

(Amounts in thousands)


	Guarantors The Hillman Companies, Inc.			Issuer The Hillman Group, Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consol- idating Adjust- ments			Consolidated
Net sales	$	—		$	119,761		$	4,509	$	4,103		$	—		$	128,373
Cost of sales		—			57,629			3,529		2,418			13			63,589
Selling, general and administrative expenses		194			42,070			866		1,790			—			44,920
Acquisition and integration expense		—			152			—		—			—			152
Depreciation		—			5,845			22		22			—			5,889
Amortization		4,515			856			—		100			—			5,471
Intercompany administrative (income) expense		—			(87	)		—		86			1			—
Other (income) expense, net		(194	)		53			—		(341	)		(1	)		(483	)

Income (loss) from operations		(4,515	)		13,243			92		28			(13	)		8,835
Intercompany interest (income) expense		(3,058	)		3,058			—		—			—			—
Interest expense, net		(106	)		10,208			—		—			—			10,102
Interest expense on junior subordinated debentures		3,152			—			—		—			—			3,152
Investment income on trust common securities		(95	)		—			—		—			—			(95	)

Income (loss) before equity in subsidiaries’ income		(4,408	)		(23	)		92		28			(13	)		(4,324	)
Equity in subsidiaries’ income (loss)		(444	)		42			—		—			402			—

Income (loss) before income taxes		(4,852	)		19			92		28			389			(4,324	)
Income tax provision (benefit)		(2,278	)		463			38		40			—			(1,737	)

Net income (loss)	$	(2,574	)	$	(444	)	$	54	$	(12	)	$	389		$	(2,587	)

Other comprehensive income (loss):
Foreign currency translation adjustments		—			—			—		1,237			—			1,237

Total comprehensive income (loss)	$	(2,574	)	$	(444	)	$	54	$	1,225		$	389		$	(1,350	)

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17.

Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued):

Condensed Consolidating Statements of Comprehensive Income (Unaudited)

For the three months ended March 31, 2011

(Amounts in thousands)


	Guarantors The Hillman Companies, Inc.			Issuer The Hillman Group, Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consol- idating Adjust- ments			Consolidated
Net sales	$	—		$	99,469		$	7,876	$	3,949		$	—		$	111,294
Cost of sales		—			49,521			3,971		2,217			(53	)		55,656
Selling, general and administrative expenses		106			37,402			3,209		1,729			—			42,446
Acquisition and integration expense		—			1,250			—		40			—			1,290
Depreciation		—			4,224			197		18			—			4,439
Amortization		4,608			—			133		—			—			4,741
Intercompany administrative (income) expense		—			(60	)		—		60			—			—
Other (income) expense, net		(106	)		47			2		(308	)		—			(365	)

Income (loss) from operations		(4,608	)		7,085			364		193			53			3,087
Intercompany interest (income) expense		(3,058	)		3,058			—		—			—			—
Interest expense, net		(106	)		9,183			—		—			—			9,077
Interest expense on junior subordinated debentures		3,152			—			—		—			—			3,152
Investment income on trust common securities		(95	)		—			—		—			—			(95	)

Income (loss) before equity in subsidiaries’ income		(4,501	)		(5,156	)		364		193			53			(9,047	)
Equity in subsidiaries’ income (loss)		(4,876	)		280			—		—			4,596			—

Income (loss) before income taxes		(9,377	)		(4,876	)		364		193			4,649			(9,047	)
Income tax provision (benefit)		(4,442	)		—			176		101			—			(4,165	)

Net income (loss)	$	(4,935	)	$	(4,876	)	$	188	$	92		$	4,649		$	(4,882	)

Other comprehensive income (loss):
Foreign currency translation adjustments		—			—			—		23			—			23
Change in derivative security value		—			(19	)		—		—			—			(19	)

Total comprehensive income (loss)	$	(4,935	)	$	(4,895	)	$	188	$	115		$	4,649		$	(4,878	)

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17.

Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued):

Condensed Consolidating Balance Sheet (Unaudited)

As of March 31, 2012

(Amounts in thousands)


	Guarantors The Hillman Companies, Inc.			Issuer The Hillman Group, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consol- idating Adjust- ments			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	1		$	5,317		$	661		$	1,698		$	—		$	7,677
Restricted investments		344			—			—			—			—			344
Accounts receivable		—			73,498			5,764			(7,010	)		—			72,252
Inventories		—			98,265			4,438			3,572			(273	)		106,002
Deferred income taxes		7,000			1,775			586			235			(664	)		8,932
Other current assets		—			3,869			126			1,819			—			5,814

Total current assets		7,345			182,724			11,575			314			(937	)		201,021
Intercompany notes receivable		105,446			—			—			—			(105,446	)		—
Intercompany interest receivable		3,058			—			—			—			(3,058	)		—
Investments in subsidiaries		(634,605	)		91,379			—			—			543,226			—
Property and equipment		—			65,423			155			325			—			65,903
Goodwill		419,752			26,564			58			11,674			280			458,328
Other intangibles		325,376			46,797			250			8,934			—			381,357
Restricted investments		3,412			—			—			—			—			3,412
Deferred income taxes		29,702			(126	)		(144	)		643			(30,075	)		—
Deferred financing fees		—			12,417			—			—			—			12,417
Investment in trust common securities		3,261			—			—			—			—			3,261
Other assets		—			2,144			25			899			—			3,068

Total assets	$	262,747		$	427,322		$	11,919		$	22,789		$	403,990		$	1,128,767

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	—		$	32,681		$	650		$	524		$	—		$	33,855
Current portion of senior term loans		—			3,200			—			—			—			3,200
Current portion of capitalized lease and other obligations		—			32			—			—			—			32
Accrued expenses:
Salaries and wages		—			3,123			61			206			—			3,390
Pricing allowances		—			5,187			—			445			—			5,632
Income and other taxes		(396	)		2,313			33			507			—			2,457
Interest		—			7,641			—			—			—			7,641
Deferred compensation		344			—			—			—			—			344
Other accrued expenses		—			7,598			41			497			—			8,136

Total current liabilities		(52	)		61,775			785			2,179			—			64,687

Page 27 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

17.

Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued):

Condensed Consolidating Balance Sheet (Unaudited)

As of March 31, 2012

(Amounts in thousands)


	Guarantors The Hillman Companies, Inc.			Issuer The Hillman Group, Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Consol- idating Adjust- ments			Consolidated
LIABILITIES AND STOCKHOLDERS’ EQUITY (CONTINUED)
Intercompany debt payable		—			105,446			—		—		(105,446	)		—
Intercompany interest payable		—			3,058			—		—		(3,058	)		—
Long term senior term loans		—			309,842			—		—		—			309,842
Bank revolving credit		—			14,000			—		—		—			14,000
Long term portion of capitalized leases		—			95			—		—		—			95
Long term senior notes		—			204,123			—		—		—			204,123
Junior subordinated debentures		115,304			—			—		—		—			115,304
Deferred compensation		3,412			—			—		—		—			3,412
Deferred income taxes, net		147,595			448			199		3,496		(30,739	)		120,999
Other non-current liabilities		—			6,861			—		—		—			6,861

Total liabilities		266,259			705,648			984		5,675		(139,243	)		839,323

Common stock with put options:
Common stock, $.01 par, 5,000 shares authorized, 198.3 issued and outstanding at March 31, 2012		12,247			—			—		—		—			12,247
Commitments and Contingencies
Stockholders’ Equity:
Preferred Stock:
Preferred stock, $.01 par, 5,000 shares authorized, none issued and outstanding at March 31, 2012		—			—			—		—		—			—
Common Stock:
Common stock, $.01 par, 5,000 shares authorized, 4,801.7 issued and outstanding at March 31, 2012		—			—			50		—		(50	)		—
Additional paid-in capital		117,221			(68,624	)		10,306		16,437		221,204			296,544
Accumulated deficit		(132,980	)		(209,702	)		579		101		321,598			(20,404	)
Accumulated other comprehensive loss		—			—			—		576		481			1,057

Total stockholders’ equity		(15,759	)		(278,326	)		10,935		17,114		543,233			277,197

Total liabilities and stockholders’ equity	$	262,747		$	427,322		$	11,919	$	22,789	$	403,990		$	1,128,767

Page 28 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

17.

Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued):

Condensed Consolidating Balance Sheet (Unaudited)

As of December 31, 2011

(Amounts in thousands)


	Guarantors The Hillman Companies, Inc.			Issuer The Hillman Group, Inc.		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consol- idating Adjust- ments			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	1		$	8,852	$	547		$	2,627		$	—		$	12,027
Restricted investments		364			—		—			—			—			364
Accounts receivable		—			59,429		1,273			2,863			—			63,565
Inventories		—			95,757		5,117			3,361			(260	)		103,975
Deferred income taxes		8,176			1,676		587			211			(742	)		9,908
Other current assets		—			10,620		3,976			(8,950	)		—			5,646

Total current assets		8,541			176,334		11,500			112			(1,002	)		195,485
Intercompany notes receivable		105,446			—		—			—			(105,446	)		—
Investments in subsidiaries		(628,481	)		91,378		—			—			537,103			—
Property and equipment		—			65,897		174			271			—			66,342
Goodwill		419,752			26,409		58			10,944			280			457,443
Other intangibles		329,891			47,655		250			8,406			—			386,202
Restricted investments		3,390			—		—			—			—			3,390
Deferred income taxes		28,200			321		(108	)		561			(28,974	)		—
Deferred financing fees		—			13,055		—			—			—			13,055
Investment in trust common securities		3,261			—		—			—			—			3,261
Other assets		—			1,676		25			972			—			2,673

Total assets	$	270,000		$	422,725	$	11,899		$	21,266		$	401,961		$	1,127,851

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	—		$	29,997	$	655		$	621		$	—		$	31,273
Current portion of senior term loans		—			3,200		—			—			—			3,200
Current portion of capitalized lease and other obligations		—			31		—			—			—			31
Additional acquisition consideration		—			12,387		—			—			—			12,387
Accrued expenses:
Salaries and wages		—			5,303		110			215			—			5,628
Pricing allowances		—			5,291		—			437			—			5,728
Income and other taxes		(549	)		2,342		15			445			—			2,253
Interest		—			2,203		—			—			—			2,203
Deferred compensation		364			—		—			—			—			364
Other accrued expenses		—			8,762		39			406			—			9,207

Total current liabilities		(185	)		69,516		819			2,124			—			72,274

Page 29 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

17.

Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued):

Condensed Consolidating Balance Sheet (Unaudited)

As of December 31, 2011

(Amounts in thousands)


	Guarantors The Hillman Companies, Inc.			Issuer The Hillman Group, Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consol- idating Adjust- ments			Consolidated
LIABILITIES AND STOCKHOLDERS’ EQUITY (CONTINUED)
Intercompany debt payable		—			105,446			—		—			(105,446	)		—
Long term senior term loans		—			310,550			—		—			—			310,550
Long term portion of capitalized lease and other obligations		—			103			—		—			—			103
Long term senior notes		—			204,248			—		—			—			204,248
Junior subordinated debentures		115,411			—			—		—			—			115,411
Deferred compensation		3,390			—			—		—			—			3,390
Deferred income taxes, net		149,704			448			199		3,253			(29,716	)		123,888
Other non-current liabilities		—			7,193			—		—			—			7,193

Total liabilities		268,320			697,504			1,018		5,377			(135,162	)		837,057

Common stock with put options:
Common stock, $.01 par, 5,000 shares authorized, 198.4 issued and outstanding at December 31, 2011		12,247			—			—		—			—			12,247
Commitments and Contingencies
Stockholders’ Equity:
Preferred Stock:
Preferred stock, $.01 par, 5,000 shares authorized, none issued and outstanding at December 31, 2011		—			—			—		—			—			—
Common Stock:
Common stock, $.01 par, 5,000 shares authorized, 4,801.6 issued and outstanding at December 31, 2011		—			—			50		—			(50	)		—
Additional paid-in capital		117,221			(68,624	)		10,306		16,437			221,204			296,544
Accumulated deficit		(127,788	)		(206,155	)		525		113			315,488			(17,817	)
Accumulated other comprehensive loss		—			—			—		(661	)		481			(180	)

Total stockholders’ equity		(10,567	)		(274,779	)		10,881		15,889			537,123			278,547

Total liabilities and stockholders’ equity	$	270,000		$	422,725		$	11,899	$	21,266		$	401,961		$	1,127,851

Page 30 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

17.

Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued):

Condensed Consolidating Statement of Cash Flows (Unaudited)

For the three months ended March 31, 2012

(Amounts in thousands)


	Guarantors The Hillman Companies, Inc.			Issuer The Hillman Group, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consol- idating Adjust- ments			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(2,130	)	$	(486	)	$	54		$	(12	)	$	(13	)	$	(2,587	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		4,515			6,701			22			122			—			11,360
Deferred income tax provision (benefit)		(2,435	)		446			37			137			—			(1,815	)
Deferred financing and original issue discount amortization		(107	)		605			—			—			—			498
Other non-cash interest and change in value of interest rate swap		—			(163	)		—			—			—			(163	)
Changes in operating items:
Accounts receivable		—			(7,745	)		(241	)		(651	)		—			(8,637	)
Inventories		—			(2,811	)		679			(211	)		13			(2,330	)
Other assets		—			9			(400	)		(172	)		—			(563	)
Accounts payable		—			2,684			(5	)		(97	)		—			2,582
Other accrued liabilities		153			5,019			(29	)		152			(3,058	)		2,237
Other items, net		4			(3,229	)		—			(127	)		3,058			(294	)

Net cash provided by (used for) operating activities		—			1,030			117			(859	)		—			288

Cash flows from investing activities:
Proceeds from sale of property and equipment		—			—			3			—			—			3
Capital expenditures		—			(5,371	)		(6	)		(70	)		—			(5,447	)

Net cash used for investing activities		—			(5,371	)		(3	)		(70	)		—			(5,444	)

Cash flows from financing activities:
Repayments of senior term loans		—			(800	)		—			—			—			(800	)
Borrowings of revolving credit loans		—			14,000			—			—			—			14,000
Payment of additional acquisition consideration		—			(12,387	)		—			—			—			(12,387	)
Principal payments under capitalized lease obligations		—			(7	)		—			—			—			(7	)

Net cash provided by financing activities		—			806			—			—			—			806

Net (decrease) increase in cash and cash equivalents		—			(3,535	)		114			(929	)		—			(4,350	)
Cash and cash equivalents at beginning of period		1			8,852			547			2,627			—			12,027

Cash and cash equivalents at end of period	$	1		$	5,317		$	661		$	1,698		$	—		$	7,677

Page 31 of 51

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

17.

Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued):

Condensed Consolidating Statement of Cash Flows (Unaudited)

For the three months ended March 31, 2011

(Amounts in thousands)


	Guarantors The Hillman Companies, Inc.			Issuer The Hillman Group, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consol- idating Adjust- ments			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(59	)	$	(5,156	)	$	188		$	92		$	53		$	(4,882	)
Adjustments to reconcile net loss to net cash (used for) provided by operating activities:
Depreciation and amortization		4,608			4,224			330			18			—			9,180
Dispositions of property and equipment		—			31			3			—			—			34
Deferred income tax provision (benefit)		(4,314	)		(14	)		181			(92	)		—			(4,239	)
Deferred financing and original issue discount amortization		(107	)		606			—			—			—			499
Changes in operating items:
Accounts receivable		—			(6,534	)		814			(1,332	)		—			(7,052	)
Inventories		—			(5,219	)		512			(396	)		(53	)		(5,156	)
Other assets		—			(1,384	)		(1,049	)		810			—			(1,623	)
Accounts payable		—			1,297			469			157			—			1,923
Other accrued liabilities		(162	)		5,091			(893	)		291			(3,058	)		1,269
Other items, net		34			(2,495	)		489			14			3,058			1,100

Net cash provided by (used for) operating activities		—			(9,553	)		1,044			(438	)		—			(8,947	)

Cash flows from investing activities:
TagWorks acquisition		—			(40,359	)		—			—			—			(40,359	)
Capital expenditures		—			(4,047	)		(61	)		(14	)		—			(4,122	)

Net cash used for investing activities		—			(44,406	)		(61	)		(14	)		—			(44,481	)

Cash flows from financing activities:
Repayments of senior term loans		—			(725	)		—			—			—			(725	)
Borrowings of revolving credit loans		—			3,000			—			—			—			3,000
Repayments of revolving credit loans		—			(6,000	)		—			—			—			(6,000	)
Principal payments under capitalized lease obligations		—			(8	)		—			—			—			(8	)
Borrowings of senior notes		—			50,000			—			—			—			50,000
Premium on senior notes		—			4,625			—			—			—			4,625
Financing fees, net		—			(1,293	)		—			—			—			(1,293	)

Net cash (used for) provided by financing activities		—			49,599			—			—			—			49,599

Net (decrease) increase in cash and cash equivalents		—			(4,360	)		983			(452	)		—			(3,829	)
Cash and cash equivalents at beginning of period		1			5,166			1,119			1,299			—			7,585

Cash and cash equivalents at end of period	$	1		$	806		$	2,102		$	847		$	—		$	3,756

Page 32 of 51

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion provides information which management believes is relevant to an assessment and understanding of the Company’s operations and financial condition. This discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes in addition to the consolidated statements and notes thereto included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2011.

Forward-Looking Statements

Certain disclosures related to acquisitions, refinancing, capital expenditures, resolution of pending litigation and realization of deferred tax assets contained in this quarterly 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, you can identify forward-looking statements 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 management’s 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 Company’s 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 the caption “Risk Factors” set forth in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. 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 report and the risks and uncertainties discussed under the caption “Risk Factors” set forth in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011; 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 report might not occur or be materially different from those discussed.

General

The Hillman Companies, Inc. and its wholly owned subsidiaries (collectively, “Hillman” or the “Company”) are one of the largest providers of hardware-related products and related merchandising services to retail markets in North America. The Company’s principal business is operated through its wholly-owned subsidiary, The Hillman Group, Inc. (the “Hillman Group”). 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, Australia, Canada, Mexico, Latin America and the Caribbean. Product lines include thousands of small parts such as fasteners and related hardware

Page 33 of 51

items; threaded rod and metal shapes; keys, key duplication systems and accessories; builder’s hardware; and identification items, such as tags and letters, numbers, and signs (“LNS”). 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.

Merger Transaction

On May 28, 2010, Hillman was acquired by affiliates of Oak Hill Capital Partners (“OHCP”) and certain members of Hillman’s management and Board of Directors. Pursuant to the terms and conditions of an Agreement and Plan of Merger dated as of April 21, 2010, the Company was merged with an affiliate of OHCP with the Company surviving the merger (the “Merger Transaction”). As a result of the Merger Transaction, Hillman is a wholly-owned subsidiary of OHCP HM Acquisition Corp. (“Holdco”). The total consideration paid in the Merger Transaction was $832.7 million, which includes $11.5 million for the Quick Tag license and related patents, repayment of outstanding debt and the net value of the Company’s outstanding junior subordinated debentures ($105.4 million liquidation value, net of $3.3 million in trust common securities, at time of the merger).

Prior to the Merger Transaction, affiliates of Code Hennessy & Simmons LLC (“CHS”) owned 49.3% of the Company’s outstanding common stock and 54.6% of the Company’s voting common stock, Ontario Teacher’s Pension Plan (“OTPP”) owned 28.0% of the Company’s outstanding common stock and 31.0% of the Company’s voting common stock and HarbourVest Partners VI owned 8.7% of the Company’s outstanding common stock and 9.7% of the Company’s voting common stock. Certain current and former members of management owned 13.7% of the Company’s outstanding common stock and 4.4% of the Company’s voting common stock. Other investors owned 0.3% of the Company’s common stock and 0.3% of the Company’s voting common stock.

Financing Arrangements

On May 28, 2010, the Company and certain of its subsidiaries closed on a $320.0 million senior secured first lien credit facility (the “Senior Facilities”), consisting of a $290.0 million term loan and a $30.0 million revolving credit facility (the “Revolver”). The term loan portion of the Senior Facilities has a six year term and the Revolver has a five year term. The Senior Facilities provide borrowings at interest rates based on a EuroDollar rate plus a margin of 3.75% (the “EuroDollar Margin”), or a base rate (the “Base Rate”) plus a margin of 2.75% (the “Base Rate Margin”). The EuroDollar rate is subject to a minimum floor of 1.75% and the Base Rate is subject to a minimum floor of 2.75%.

Concurrently with the acquisition of the Company on May 28, 2010, Hillman Group issued $150.0 million aggregate principal amount of its senior notes due 2018 (the “10.875% Senior Notes”). On March 16, 2011, Hillman Group completed an offering of $50.0 million aggregate principal amount of its 10.875% Senior Notes. Hillman Group received a premium of $4.625 million on the $50.0 million 10.875% Senior Notes offering. The 10.875% Senior Notes are guaranteed by Hillman Companies, Hillman Investment Company and all of the domestic subsidiaries of Hillman Group. Hillman Group pays interest on the 10.875% Senior Notes semi-annually on June 1 and December 1 of each year.

The Senior Facilities contain financial and operating covenants. These covenants require the Company to maintain certain financial ratios, including a leverage ratio. These debt agreements provide for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, cross-defaults, bankruptcy events, failure to pay judgments, attachment of its assets, change of control and the issuance of an order of dissolution. Certain of these events of default are subject to notice and cure periods or materiality thresholds. The occurrence of an event of default permits the lenders under the Senior Facilities to accelerate repayment of all amounts due.

Page 34 of 51

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 $12.2 million per annum in the aggregate. The Trust distributes an equivalent amount to the holders of the Trust Preferred Securities. 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 interest payable is immediately payable by the Company at the end of the Deferral Period.

Effective April 18, 2011, the Company completed an amendment to the credit agreement governing its Senior Facilities. The Senior Facilities amendment eliminated the total leverage and interest coverage covenants and reduced the secured leverage covenant to 4.75x with no future step downs. The term loan pricing was modified to reduce the Eurodollar Margin and the Base Rate Margin by 25 basis points and reduce the floor on Eurodollar and Base Rate Loans by an additional 25 basis points. In connection with the amendment to the credit agreement, the Company incurred loan discount costs of $1.25 million. As the modification of the Senior Facilities agreement was not substantial, the unamortized loan discount and debt issuance costs will be amortized over the term of the amended Senior Facilities. The Company was in compliance with all provisions and covenants of the amended Senior Facilities as of March 31, 2012.

Effective November 4, 2011, the Company entered into a Joinder Agreement to its credit agreement under the existing Senior Facilities (the “Incremental Facility”). The Incremental Facility increased the aggregate term loan commitments available to Hillman Group under the Senior Facilities by $30 million. In connection with the Incremental Facility, the Company incurred loan discount costs of $0.75 million. As the modification of the Senior Facilities agreement was not substantial, the unamortized loan discount costs will be amortized over the term of the amended Senior Facilities. The aggregate principal amount of commitments under the Senior Facilities, after giving effect to the Incremental Facility, is $350 million. The Company used the proceeds for general corporate purposes.

On June 24, 2010, the Company entered into a forward Interest Rate Swap Agreement (the “2010 Swap”) with a two-year term for a notional amount of $115.0 million. The forward start date of the 2010 Swap was May 31, 2011 and its termination date is May 31, 2013. The 2010 Swap fixed the interest rate at 2.47% plus applicable interest rate margin.

Page 35 of 51

Acquisitions

On December 29, 2010, the Hillman Group entered into a Stock Purchase Agreement (the “Agreement”) by and among Serv-A-Lite Products, Inc. (“Servalite”), Thomas Rowe, Mary Jennifer Rowe, and the Hillman Group, whereby the Hillman Group acquired all of the equity interest of Servalite. The aggregate purchase price was $21.3 million paid in cash at closing. Servalite has a broad offering of fasteners and ‘hard to find’ parts which are sold primarily into the retail hardware market. Servalite’s breadth of product in specialty fasteners and electrical parts strengthens Hillman’s position of providing value-added products and services to hardware retailers. On March 31, 2011, Servalite was merged with and into Hillman Group, with Hillman Group as the surviving entity.

On March 16, 2011, Hillman Group completed the TagWorks Acquisition for an initial purchase price of approximately $40.0 million in cash. In addition, Hillman Group paid additional consideration of $12.5 million to the sellers of TagWorks on October 31, 2011, and also paid additional contingent consideration of $12.5 million on March 30, 2012. The March 30, 2012 payment of additional consideration was contingent upon the successful achievement of defined revenue and earnings targets for the year ended December 31, 2011. In conjunction with the TagWorks Acquisition agreement, Hillman Group entered into an agreement with KeyWorks, a company affiliated with TagWorks, to assign its patent-pending retail key program technology to Hillman Group.

The closing of the TagWorks Acquisition occurred concurrently with the closing of the new notes offering. Effective December 31, 2011, TagWorks was merged with and into Hillman Group, with Hillman Group as the surviving entity.

On December 1, 2011, the Hillman Group purchased certain assets of Micasa, a Miami, Florida based producer of the Ook brand of picture hangers and related products pursuant to the Ook Acquisition. The initial purchase price of the Ook Acquisition was approximately $15.3 million paid in cash at closing. The closing purchase price is subject to post closing adjustments for certain changes in the working capital obtained in the Ook Acquisition as provided in the purchase agreement.

Page 36 of 51

Results of Operations

The following analysis of results of operations includes a brief discussion of the factors that affected the Company’s operating results and a comparative analysis of the periods for the three months ended March 31, 2012 and 2011.


(dollars in thousands)	Three Months Ended March 31, 2012 Amount			% of Total			Three Months Ended March 31, 2011 Amount			% of Total
Net sales	$	128,373			100.0	%	$	111,294			100.0	%
Cost of sales (exclusive of depreciation and amortization shown separately below)		63,589			49.5	%		55,656			50.0	%
Selling		23,020			17.9	%		21,903			19.7	%
Warehouse & delivery		13,916			10.8	%		13,035			11.7	%
General & administrative		7,984			6.2	%		7,508			6.7	%
Acquisition and integration expenses (a)		152			0.1	%		1,290			1.2	%
Depreciation		5,889			4.6	%		4,439			4.0	%
Amortization		5,471			4.3	%		4,741			4.3	%
Other income		(483	)		-0.4	%		(365	)		-0.3	%

Income from operations		8,835			6.9	%		3,087			2.8	%
Interest expense, net		10,102			7.9	%		9,077			8.2	%
Interest expense on junior subordinated notes		3,152			2.5	%		3,152			2.8	%
Investment income on trust common securities		(95	)		-0.1	%		(95	)		-0.1	%

Loss before income taxes		(4,324	)		-3.4	%		(9,047	)		-8.1	%
Income tax benefit		(1,737	)		-1.4	%		(4,165	)		-3.7	%

Net loss	$	(2,587	)		-2.0	%	$	(4,882	)		-4.4	%

(a)	Represents charges for investment banking, legal and other professional fees incurred in connection with the Merger Transaction, Servalite acquisition, TagWorks acquisition, Ook acquisition and the start-up of operations for Hillman Australia.

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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 prior to this period of recession. This slowdown has reduced the annual level of consumer and business spending, including the spending by our customers. In addition, the less favorable economic conditions of recent years, 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 2012 or through fiscal 2013, our industry, business and results of operations may be severely impacted.

The Company’s 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. Recently, there have been certain signs of improvement in economic activity, however, conditions are not expected to improve significantly in the near term. While recent economic growth reports are more positive, there still exists concern about downside risk to future growth and the high unemployment rate. These factors may have the effect of reducing consumer spending which could adversely affect our results of operations during the next year and beyond.

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. The national and international economic difficulties of 2008 and 2009 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. Throughout most of 2010 and 2011, the Company has seen an end to decreasing costs and, in certain instances, moderate increases in the costs for our products and the most critical commodities used in the manufacture of our products. Additionally, unfavorable exchange rate fluctuations have increased the costs for many of our products. The Company took pricing action in 2011 and 2012 in an attempt to offset a portion of the product cost increases. 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 Company’s operating divisions to institute price increases and seek price concessions, as appropriate, is dependent on competitive market conditions.

The Three Months Ended March 31, 2012 vs the Three Months Ended March 31, 2011

Revenues

Net sales for the three months ended March 31, 2012 were $128.4 million compared to net sales for the three months ended March 31, 2011 of $111.3 million. The increase in revenue of $17.1 million was primarily attributable to the newly acquired TagWorks and Ook businesses which contributed approximately $7.3 million in incremental net sales to the first quarter of 2012. An improvement in retail activity and pricing actions taken in the first quarter of 2012 resulted in further revenue improvement over the prior year in our Franchise and Independent hardware accounts, Regional accounts and the All Points division.

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Expenses

Operating expenses were substantially more for the three months ended March 31, 2012 than the three months ended March 31, 2011. The primary reason for the increase in operating expenses was the inclusion of the newly acquired TagWorks and Ook businesses in the first quarter of 2012. The following changes in underlying trends impacted the change in operating expenses:

•

Selling expense was $23.0 million, or 17.9% of net sales in the three months ended March 31, 2012 compared to $21.9 million, or 19.7% of net sales in the three months ended March 31, 2011. The higher sales volume in the 2012 period resulted in higher variable service cost than the prior year period. The selling expense was less than the prior year period when expressed as a percentage of sales.

•

Warehouse and delivery expense was $13.9 million, or 10.8% of net sales, in the first quarter of 2012 compared to $13.0 million, or 11.7% of net sales in the first quarter of 2011. The higher sales volume in the 2012 period resulted in higher overall costs for warehouse labor and freight used to process and deliver customer orders. However, as a result of operating efficiencies, these costs decreased from the prior year when expressed as a percentage of net sales.

•

G&A expenses were $8.0 million in the first quarter of 2012 compared to $7.5 million in the first quarter of 2011. The increase in G&A expenses in the first quarter of 2012 was primarily the result of higher salaries and benefit costs from the newly acquired TagWorks and Ook business.

•

Depreciation expense was $5.9 million in the first quarter of 2012 compared to $4.4 million in the first quarter of 2011. The increase in depreciation of $1.5 million was primarily attributable to the increase in fixed assets subject to depreciation acquired in the acquisition of TagWorks.

•

Amortization expense was $5.5 million in the first quarter of 2012 compared to $4.7 million in the first quarter of 2011. The higher amount of amortization expense for the 2012 period was due to the increase in intangible assets, subject to amortization, acquired as a result of the TagWorks and Ook acquisitions.

•

Interest expense, net, was $10.1 million in the first quarter of 2012 compared to $9.1 million in the first quarter of 2011. The increase in interest expense was primarily the result of issuance of $50 million in 10.875% Senior Notes outstanding which were used in the acquisition of TagWorks and other corporate purposes.

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Income Taxes

In the three month periods ended March 31, 2012 and 2011, the Company recorded an income tax benefit of $1.7 million and $4.2 million on a pre-tax loss of $4.3 million and $9.1 million respectively. The effective income tax rates were 40.2% and 46.0% for the three month periods ended March 31, 2012 and 2011 respectively.

The difference between the effective income tax rate and the federal statutory rate in the three month period ended March 31, 2012 was due to state and foreign income taxes. In the three month period ended March 31, 2011, the effective income tax rate differed from the federal statutory rate primarily due to a current period charge caused by the effect of changes in certain state income tax rates on the company’s deferred tax assets and liabilities. The net effect of the change was recorded in the current period as required by the accounting standard. The remaining difference between the effective income tax rate and the federal statutory rate in this three month period was due to state and foreign income taxes.

Liquidity and Capital Resources

Cash Flows

The statements of cash flows reflect the changes in cash and cash equivalents for the three months ended March 31, 2012 and the three months ended March 31, 2011 by classifying transactions into three major categories: operating, investing and financing activities.

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2012 of $0.3 million was the result of the net loss adjusted for non-cash items of $7.3 million for depreciation, amortization, deferred taxes, deferred financing and non-cash interest which was offset by cash related adjustments of $7.0 million for routine operating activities represented by changes in accounts receivable, inventories, accounts payable, accrued liabilities and other assets. In the first three months of 2012, routine operating activities used cash through an increase in accounts receivable of $8.6 million, an increase in inventories of $2.3 million, an increase in other assets of $0.6 million and other of $0.3 million. This was partially offset by an increase in accounts payable of $2.6 million and an increase in other accrued liabilities of $2.2 million. The Company typically experiences operating cash outflows in the first two fiscal quarters of the year when selling volume, accounts receivable and inventory levels increase as the Company moves into the stronger selling periods of the spring and summer.

Net cash used by operating activities for the quarter ended March 31, 2011 of $8.9 million was the result of the net loss adjusted for non-cash charges of $0.6 million for depreciation, amortization, deferred taxes, and deferred financing which was offset by cash related adjustments of $9.5 million for routine operating activities represented by changes in inventories, accounts receivable, accounts payable, accrued liabilities and other assets. In the first three months of 2011, routine operating activities used cash through an increase in accounts receivable of $7.0 million, inventories of $5.2 million and other assets of $1.6 million. This was partially offset by an increase in accounts payable of $1.9 million, accrued liabilities of $1.3 million and other of $1.1 million. The Company’s operating cash outflows have historically been higher in the first two fiscal quarters when selling volume, accounts receivable and inventory levels increase as the Company moves into the stronger spring and summer selling seasons.

Investing Activities

Net cash used for investing activities was $5.4 million for the quarter ended March 31, 2012. Capital expenditures for the three months totaled $5.4 million, consisting of $2.9 million for key duplicating machines, $1.7 million for engraving machines, and $0.8 million for computer software and equipment.

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Net cash used for investing activities was $44.5 million for the quarter ended March 31, 2011. The Company used $40.4 million for the acquisition of TagWorks. Capital expenditures for the three months totaled $4.1 million, consisting of $1.5 million for key duplicating machines, $1.1 million for engraving machines and $1.5 million for computer software and equipment.

Financing Activities

Net cash provided by financing activities was $0.8 million for the three months ended March 31, 2012. The net cash provided by financing activities was primarily related to the borrowing of $14.0 million on the revolving credit facility. The Company used cash to pay $12.4 million of additional acquisition consideration and $0.8 million in principal payments on the senior term loans under the Senior Facilities.

Net cash provided by financing activities was $49.6 million for the quarter ended March 31, 2011. The net cash provided by financing activities was primarily related to the issuance of $50.0 million in 10.875% Senior Notes together with the $4.6 million note premium. This was partially offset by net cash used of $3.0 million for repayments on the revolving credit facility, $1.3 million in financing fees on the 10.875% Senior Notes and $0.7 million in principal payments on the senior term loans.

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 Company’s working capital (current assets minus current liabilities) position of $136.3 million as of March 31, 2012, represents an increase of $13.1 million from the December 31, 2011 level of $123.2 million as follows:

(dollars in thousands)


	Amount
Decrease in cash and cash equivalents	$	(4,350	)
Increase in accounts receivable, net		8,687
Increase in inventories, net		2,027
Increase in other current assets		148
Decrease in deferred taxes		(976	)
Increase in accounts payable		(2,582	)
Increase in current portion of capital lease & other obligations		(1	)
Decrease in additional acquisition consideration		12,387
Decrease in accrued salaries and wages		2,238
Decrease in accrued pricing allowances		96
Increase in accrued income and other taxes		(204	)
Increase in accrued interest		(5,438	)
Decrease in other accrued liabilities		1,091

Net increase in working capital for the three months ended March 31, 2012	$	13,123

The increase in the Company’s working capital as of March 31, 2012 was primarily the result of the increase in accounts receivables and inventory and the decrease in additional acquisition consideration which were partially offset by the decrease in cash and increase in accrued interest.

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Contractual Obligations

The Company’s contractual obligations in thousands of dollars as of March 31, 2012:


			Payments Due
Contractual Obligations	Total		Less Than 1 Year		1 to 3 Years		3 to 5 Years		More Than 5 Years
Junior Subordinated Debentures (1)	$	115,304	$	—	$	—	$	—	$	115,304
Senior Term Loans		314,775		3,200		6,400		305,175		—
Bank Revolving Credit Facility		14,000		—		—		14,000		—
10.875% Senior Notes		200,000		—		—		—		200,000
KeyWorks License Agreement		3,601		461		876		815		1,449
Interest Payments (2)		199,275		37,467		74,502		61,401		25,905
Operating Leases		36,992		7,609		8,454		5,383		15,546
Deferred Compensation Obligations		3,756		344		688		688		2,036
Capital Lease Obligations		142		38		64		40		—
Purchase Obligations		438		350		88		—		—
Other Obligations		2,365		1,192		938		235		—
Uncertain Tax Position Liabilities		4,440		1,438		—		—		3,002

Total Contractual Cash Obligations (3)	$	895,088	$	52,099	$	92,010	$	387,737	$	363,242

(1)	The junior subordinated debentures liquidation value is approximately $108,704.

(2)

Interest payments for borrowings under the Senior Facilities and with regard to the 10.875% Senior Notes. Interest payments on the variable rate senior term loans were calculated using the actual interest rate of 5.00% as of March 31, 2012, excluding possible impact of 2010 Swap. Interest payments on the 10.875% Senior Notes were calculated at their fixed rate.

(3)	All of the contractual obligations noted above are reflected on the Company’s condensed consolidated balance sheet as of March 31, 2012 except for the interest payments, purchase obligations and operating leases.

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 $0.0035 per key multiplied by the shortfall. Since the inception of the contract in 1998, the Company has purchased more than the requisite 100 million key blanks per year from the supplier. In 2009, the Company extended this contract for an additional four years.

As of March 31, 2012, the Company had no material purchase commitments for capital expenditures.

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 (the “Exchange Act”).

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Borrowings

As of March 31, 2012, the Company had $11.1 million available under the Senior Facilities. The Company had approximately $328.9 million of outstanding debt under its Senior Facilities at March 31, 2012, consisting of $314.8 million in a term loan, $14.0 million in Revolver borrowings and $0.1 million in capitalized lease obligations. The term loan consisted of a $314.8 million Term B-2 Loan at a three (3) month LIBOR rate plus margin of 5.0%. The Revolver borrowings consisted of $14.0 million currently at a three (3) month LIBOR rate plus margin of 5.5%. The capitalized lease obligations were at various interest rates.

At March 31, 2012 and December 31, 2011, the Company borrowings were as follows:


	March 31, 2012							December 31, 2011
(dollars in thousands)	Facility Amount		Outstanding Amount		Interest Rate			Facility Amount		Outstanding Amount		Interest Rate
Term B-2 Loan			$	314,775		5.00	%			$	315,575		5.00	%
Revolving credit facility	$	30,000		14,000		5.50	%	$	30,000		—		5.50	%
Capital leases & other obligations				127		various					134		various

Total secured credit				328,902							315,709
10.875% Senior notes				200,000		10.875	%				200,000		10.875	%

Total borrowings			$	528,902						$	515,709

On May 28, 2010, the Company and certain of its subsidiaries closed the Senior Facilities, consisting of a $290.0 million term loan and a $30.0 million Revolver. The term loan portion of the Senior Facilities has a six year term and the Revolver has a five year term. The Senior Facilities, as amended, provide borrowings at interest rates based on a EuroDollar rate plus a margin of 3.5%, or a Base Rate plus a margin of 2.5%. The EuroDollar rate is subject to a minimum floor of 1.5% and the Base Rate is subject to a minimum floor of 2.5%.

Concurrently with the consummation of the Merger Transaction, Hillman Group issued $150.0 million aggregate principal amount of its 10.875% Senior Notes due 2018. On March 16, 2011, Hillman Group completed an offering of $50.0 million aggregate principal amount of its 10.875% Senior Notes due 2018. Hillman Group received a premium of $4.6 million on the $50.0 million note offering and used the net proceeds to fund the acquisition of TagWorks, to repay a portion of indebtedness under its revolving credit facility and to pay related fees, expenses and other related payments. The 10.875% Senior Notes are guaranteed by Hillman Companies, Hillman Investment Company and all of the domestic subsidiaries of Hillman Group. Hillman Group pays interest on the 10.875% Senior Notes semi-annually on June 1 and December 1 of each year.

Effective April 18, 2011, the Company completed an amendment to the credit agreement governing its Senior Facilities. The Senior Facilities amendment eliminated the total leverage and interest coverage covenants and reduced the secured leverage covenant to 4.75x with no future step downs. The term loan pricing was modified to reduce the Eurodollar Margin and the Base Rate Margin by 25 basis points and reduce the floor on Eurodollar and Base Rate Loans by an additional 25 basis points. In connection with the amendment to the credit agreement, the Company incurred loan discount costs of $1.25 million. As the modification of the Senior Facilities agreement was not substantial, the unamortized loan discount and debt issuance costs will be amortized over the term of the amended Senior Facilities.

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modification of the Senior Facilities agreement was not substantial, the unamortized loan discount costs will be amortized over the term of the amended Senior Facilities. The aggregate principal amount of commitments under the Senior Facilities, after giving effect to the Incremental Facility, is $350 million. The Company used the proceeds for general corporate purposes.

The Company’s Senior Facilities require the maintenance of a secured leverage ratio described above which 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 covenant, as amended on April 18, 2011, with the Senior Facilities requirement for the twelve trailing months ended March 31, 2012:


(dollars in thousands)	Actual		Ratio Requirement
Secured Leverage Ratio
Senior term loan balance	$	314,775
Revolver		14,000
Capital leases and other credit obligations		127

Total debt	$	328,902

Adjusted EBITDA (1)	$	96,137
Leverage ratio (must be below requirement)		3.42		4.75

(1)

Adjusted EBITDA for the twelve months ended March 31, 2012 is defined as income from operations ($44,201), plus depreciation ($22,783), amortization ($21,447), restructuring costs ($1,659), acquisition and integration costs ($1,667), litigation settlement costs ($2,120), foreign exchange losses ($413), management fees ($110) and other ($1,737).

Critical Accounting Policies and Estimates

Significant accounting policies and estimates are summarized in the notes to the condensed consolidated financial statements. Some accounting policies require management to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Management believes these estimates and assumptions are reasonable based on the facts and circumstances as of March 31, 2012, however, actual results may differ from these estimates under different assumptions and circumstances.

We identified our critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations found in our Annual Report on Form 10-K for the year ended December 31, 2011. We believe there have been no changes in these critical accounting policies. We have summarized our critical accounting policies either in the notes to the condensed consolidated financial statements or below:

Revenue Recognition:

Revenue is recognized when products are shipped or delivered to customers depending upon when title and risks of ownership have passed and the collection of the relevant receivables is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Sales tax collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore excluded from revenues in the consolidated statements of operations.

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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 reserves are established based on historical rates of returns and allowances. The reserves are 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 $658 thousand as of March 31, 2012 and $641 thousand as of December 31, 2011.

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 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 $7.9 million as of March 31, 2012 and $7.4 million as of December 31, 2011.

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. The Company considers TagWorks (see Note 4 – Acquisitions), The Hillman Group Canada, LTD., SunSource Integrated Services de Mexico SA de CV, The Hillman Group Australia, PTY., and All Points as separate reporting units and the remaining operations a sixth reporting unit for goodwill impairment testing purposes. If the carrying amount of goodwill is greater than the fair value, impairment may be present. The Company uses an independent appraiser to assess the value of its goodwill based on a discounted cash flow model and multiple of earnings. Assumptions critical to the Company’s 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 Company’s 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 in the three month periods ended March 31, 2012 and 2011.

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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 three month periods ended March 31, 2012 and 2011.

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 $40 million. The two risk areas involving the most significant accounting estimates are workers’ compensation and automotive liability. Actuarial valuations performed by the Company’s outside risk insurance expert were used to form the basis for workers’ compensation and automotive liability loss reserves. The actuary contemplated the Company’s 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 March 31, 2012, 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. The Company believes the liability recorded for such insurance reserves is adequate as of March 31, 2012, but due to judgments inherent in the reserve estimation process, it is possible the ultimate costs will differ from this estimate.

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) and 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 8 of notes to condensed consolidated financial statements.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to the impact of interest rate changes as borrowings under the Senior Facilities bear interest at variable interest rates. It is the Company’s policy to enter into interest rate transactions only to the extent considered necessary to meet objectives.

On June 24, 2010, the Company entered into a forward Interest Rate Swap Agreement (the “2010 Swap”) with a two-year term for a notional amount of $115.0 million. The 2010 Swap was effective May 31, 2011 and its termination date is May 31, 2013. The 2010 Swap fixes the interest rate at 2.47% plus applicable interest rate margin.

The 2010 Swap was initially designated a cash flow hedge. Effective April 18, 2011, the Company executed the second amendment to the credit agreement and as a result the 2010 Swap was no longer considered effective and de-designated as a cash flow hedge.

Based on the Company’s exposure to variable rate borrowings at March 31, 2012, 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 $2.1 million.

The Company is exposed to foreign exchange rate changes of the Australian, Canadian and Mexican currencies as it impacts the $27.6 million tangible and intangible net asset value of its Australian, Canadian and Mexican subsidiaries as of March 31, 2012. The foreign subsidiaries net tangible assets were $7.0 million and the net intangible assets were $20.6 million as of March 31, 2012. Management considers the Company’s exposure to foreign currency translation gains or losses to be immaterial.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s 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”). Disclosure controls and procedures are those controls and procedures that are designed to ensure 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 SEC’s 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. Based upon the Company’s evaluation, which included the matters discussed below, the Company’s chief executive officer and chief financial officer concluded that, due solely to a material weakness that the Company identified in its internal control over financial reporting, the Company’s disclosure controls and procedures were not effective, as of the end of the period ended March 31, 2012.

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. Management determined that the Company’s internal control over financial reporting was not effective solely as a result of the material weakness described below which existed as of March 31, 2012 The material weakness also existed throughout the annual period ended December 31, 2011.

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Our management identified a number of deficiencies related to the design and operating effectiveness of certain information technology (“IT”) controls that have a direct impact on our financial reporting. In 2011, the IT department went through organizational and operational change, which impacted operating procedures and directly contributed to the noted deficiencies. As of March 31, 2012, deficiencies existed with the monitoring controls surrounding both change management and administrative system access. In addition, certain deficiencies were noted in automated, application and manual business controls that are dependent on system information for their effective operation and, as a result, financial information may not be accurately reflected in key reports or in the general ledger.

The Company is not aware of any transactions that were improperly undertaken as a result of this material weakness and therefore does not believe that such material weakness had any material impact on the Company’s financial statements.

Plan for Remediation of Material Weakness

Management is, and intends to continue, taking appropriate and reasonable steps to make the necessary improvements to remediate this material weakness in internal control over financial reporting. In particular, a senior level manager has been assigned responsibility for internal controls within the IT department. Additionally, administrative access is currently being evaluated for appropriateness and any other necessary control enhancements will be implemented.

Management believes that the measures described above will facilitate remediation of the material weakness we have identified and will continue to strengthen our internal control over financial reporting. The Company is actively involved in improving the effectiveness and efficiency of its internal controls over financial reporting.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2012 and that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. – Legal Proceedings.

On March 20, 2012, the Company agreed to pay approximately $1.6 million to Steelworks Hardware LLC in full settlement of all alleged claims and plaintiff legal fees in this matter. The settlement cost and plaintiff legal fees were recorded in our consolidated results of operations as of December 31, 2011.

In its antitrust claim against the Company, Hy-Ko Products is seeking monetary damages which would be trebled under the antitrust laws, interest and attorney’s fees as well as injunctive relief. The antitrust claim against the Company has been stayed pending the resolution of the patent infringement claim against Hy-Ko Products. Because the lawsuit is in a preliminary stage, it is not yet possible to assess the impact that the lawsuit will have on the Company. However, the Company believes that it has meritorious defenses and intends to defend the lawsuit vigorously.

Item 1A. – Risk Factors.

There have been no material changes to the risks related to the Company from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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

Not Applicable

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Item 3. – Defaults Upon Senior Securities.

Not Applicable

Item 4. – Mine Safety Disclosures.

Not Applicable

Item 5. – Other Information.

Not Applicable

Item 6. – Exhibits.

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 the 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.

101 **		The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 15, 2012, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and the three months ended March 31, 2011, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and the three months ended March 31, 2011, (iv) Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2012 and (v) Notes to Condensed Consolidated Financial Statements.

*	Filed herewith.

This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements 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.


/S/ ANTHONY A. VASCONCELLOS				/S/ HAROLD J. WILDER
Anthony A. Vasconcellos				Harold J. Wilder
Chief Financial Officer				Controller
				(Chief Accounting Officer)

DATE: May 15, 2012

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