##### 



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 June 30, 2002

Commission file number 1-13293

The Hillman Companies, Inc. (formerly SunSource, 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
Preferred Share Purchase Rights |  |                                          

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  ____

On August 14, 2002 there were 7,138,665 Common Shares issued and outstanding by
the Registrant and 4,217,724 Trust Preferred Securities issued and outstanding
by the Hillman Group Capital Trust (formerly SunSource Capital Trust). The
Trust Preferred Securities trade on the American Stock Exchange under symbol
HLM.Pr.

Page 1 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)

INDEX

|                              |  |                                                                                        |    |  |                                                                                                       |  |  |      | 
|----------------------------- |  | -------------------------------------------------------------------------------------- | -- |  | ----------------------------------------------------------------------------------------------------- |  |  | ---- | 
|PART I. FINANCIAL INFORMATION |  | PAGE(S)                                                                               
|                             
|                             
|                             
|                             
|Item 1.                       |  | Consolidated Financial Statements                                                      |    |  |                                                                                                       | 
|                             
|                             
|                             
|                             
|                              |  |                                                                                        |    |  | Consolidated Balance Sheets as of June 30, 2002  (Unaudited)
and December 31, 2001                    |  |  | 3    | 
|                             
|                             
|                             
|                             
|                              |  |                                                                                        |    |  | Consolidated Statements of Operations for  the
Three Months ended June 30, 2002 and 2001  (Unaudited) |  |  | 4    | 
|                             
|                             
|                             
|                             
|                              |  |                                                                                        |    |  | Consolidated Statements of Operations for  the
Six Months ended June 30, 2002 and 2001  (Unaudited)   |  |  | 5    | 
|                             
|                             
|                             
|                             
|                              |  |                                                                                        |    |  | Consolidated Statements of Cash Flows  for
the Six Months ended June 30, 2002 and 2001  (Unaudited)   |  |  | 6    | 
|                             
|                             
|                             
|                             
|                              |  |                                                                                        |    |  | Notes to Consolidated Financial Statements  (Unaudited)                                               |  |  | 7-15 | 
|                             
|                             
|                             
|                             
|Item 2.                       |  | Managements Discussion and Analysis of Financial Conditions
and Results of Operations |    |  | 16-25                                                                                                 | 
|                             
|                             
|                             
|                             
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                             |    |  | 25                                                                                                    | 
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION    |  |                                                                                        | 26 | 
|                             
|                             
|                             
|                             
|SIGNATURES                    |  |                                                                                        | 27 | 

Page 2 of 27



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##### 



|        |  |                                                                                                                                           
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Item 1. |  | THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |              |        |         |  | 
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------- | ------------------------------------------ | ------------------------------------ | ------ | -------- | ------- | ------------ | ------ | ------- |  | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        | June 30, |         |              |        |        
|                                                                                          |                                                                                        |                        |                                            |                                      |        | 2002     |         | December 31,
|ASSETS                                                                                    |                                                                                        | (Unaudited)            |                                            | 2001                                
|                                                                                          |                                                                                        |                        |                                            |                                     
|Current assets:                                                                           |                                                                                        |                        |                                            |                                      |        |          |         |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Cash and cash equivalents                                                              |                        | $                                          | 1,960                                |        |          | $       | 2,059        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Restricted investments                                                                 |                        |                                            | 1,142                                |        |          |         | 1,187        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Accounts receivable, net                                                               |                        |                                            | 41,310                               |        |          |         | 28,399       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Inventories                                                                            |                        |                                            | 47,291                               |        |          |         | 49,937       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Deferred income taxes                                                                  |                        |                                            | 9,136                                |        |          |         | 9,136        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Other current assets                                                                   |                        |                                            | 3,320                                |        |          |         | 5,868        |       
|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |             
|                                                                                          |                                                                                        |                        | Total current assets                       |                                      |        | 104,159  |         |              |        | 96,586  | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Property and equipment, net                                                               |                                                                                        |                        | 59,949                                     |                                      |        |          | 55,285  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Goodwill, net                                                                             |                                                                                        |                        | 126,687                                    |                                      |        |          | 120,585 |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other intangibles, net                                                                    |                                                                                        |                        | 11,811                                     |                                      |        |          | 12,553  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Deferred income taxes                                                                     |                                                                                        |                        | 24,091                                     |                                      |        |          | 25,443  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Restricted investments                                                                    |                                                                                        |                        | 6,331                                      |                                      |        |          | 7,462   |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other investments                                                                         |                                                                                        |                        | 16,831                                     |                                      |        |          | 16,185  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Deferred financing fees                                                                   |                                                                                        |                        | 5,975                                      |                                      |        |          | 5,536   |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other assets                                                                              |                                                                                        |                        | 3,730                                      |                                      |        |          | 4,929   |             
|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |             
|                                                                                          |                                                                                        |                        | Total assets                               |                                      | $      | 359,564  |         |              | $      | 344,564 | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |             
|                                                                                          |                                                                                        |                        |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |        |          |         |              |        |         |  | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Current liabilities:                                                                      |                                                                                        |                        |                                            |                                      |        |          |         |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Accounts payable                                                                       |                        | $                                          | 20,383                               |        |          | $       | 17,124       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Current portion of senior term loans                                                   |                        |                                            | 7,049                                |        |          |         | 3,813        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Current portion of capitalized lease obligations                                       |                        |                                            | 53                                   |        |          |         | 74           |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Deferred income tax liability                                                          |                        |                                            | 31                                   |        |          |         | 31           |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Accrued expenses:                                                                      |                        |                                            |                                      |        |          |         |              |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        | Salaries and wages     |                                            |                                      | 2,953  |          |         |              | 5,337  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        | Income and other taxes |                                            |                                      | 1,234  |          |         |              | 2,014  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        | Deferred compensation  |                                            |                                      | 1,142  |          |         |              | 1,187  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        | Other accrued expenses |                                            |                                      | 17,955 |          |         |              | 15,427 |        
|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |             
|                                                                                          |                                                                                        |                        | Total current liabilities                  |                                      |        | 50,800   |         |              |        | 45,007  | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Long term senior term loans                                                               |                                                                                        |                        | 60,326                                     |                                      |        |          | 50,312  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Bank revolving credit                                                                     |                                                                                        |                        | 32,337                                     |                                      |        |          | 34,052  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Long term capitalized lease obligations                                                   |                                                                                        |                        | 222                                        |                                      |        |          | 248     |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Long term unsecured subordinated notes to related party                                   |                                                                                        |                        | 41,156                                     |                                      |        |          | 40,240  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Deferred compensation                                                                     |                                                                                        |                        | 6,331                                      |                                      |        |          | 7,462   |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Deferred income tax liability                                                             |                                                                                        |                        | 4,603                                      |                                      |        |          | 4,603   |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other non-current liabilities                                                             |                                                                                        |                        | 6,372                                      |                                      |        |          | 7,122   |             
|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |             
|                                                                                          |                                                                                        |                        | Total liabilities                          |                                      |        | 202,147  |         |              |        | 189,046 | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |             
|Guaranteed preferred beneficial interests in the
Companys junior subordinated debentures |                                                                                        |                        | 102,169                                    |                                      |        |          | 102,104 |             
|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |             
|Commitments
and contingencies                                                             |                                                                                        |                        |                                            |                                      |        |          |         |             
|Stockholders equity:                                                                     |                                                                                        |                        |                                            |                                      |        |          |         |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Preferred stock, $.01 par, 1,000,000 shares
authorized, none outstanding               |                        |                                            |                                      |        |          |         |             |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Common stock, $.01 par, 20,000,000 shares authorized,
7,138,665 issued and outstanding |                        |                                            | 71                                   |        |          |         | 71           |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Additional paid-in capital                                                             |                        |                                            | 56,252                               |        |          |         | 56,252       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Accumulated deficit                                                                    |                        |                                            | (1,075                               | )      |          |         | (2,909       | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Accumulated other comprehensive income                                                 |                        |                                            |                                     |        |          |         |             |       
|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        |                        | Total stockholders equity                 |                                      |        | 55,248   |         |              |        | 53,414  | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |             
|                                                                                          |                                                                                        |                        | Total liabilities and stockholders equity |                                      | $      | 359,564  |         |              | $      | 344,564 | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |          |         |             

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 3 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED,
(dollars in thousands)

|                                                           |                                              |                            |        |           |        |             |         |        |        | 
|---------------------------------------------------------- | -------------------------------------------- | -------------------------- | ------ | --------- | ------ | ----------- | ------- | ------ | ------ | 
|                                                           |                                              |                            |        | Successor |        | Predecessor
|                                                           |                                              |                            |        |           |        |            
|                                                           |                                              |                            |        | June 30,  |        | June 30,   
|                                                           |                                              |                            |        | 2002      |        | 2001       
|                                                           |                                              |                            |        |           |        |            
|Net sales                                                  |                                              | $                          | 75,778 |           |        | $           | 116,611 |       
|                                                          
|                                                          
|                                                          
|                                                          
|Cost of sales                                              |                                              |                            | 34,018 |           |        |             | 67,232  |       
|                                                           |                                              |                            |        |           |        |             |         |       
|                                                           |                                              | Gross profit               |        |           | 41,760 |             |         |        | 49,379 | 
|                                                           |                                              |                            |        |           |        |             |         |       
|Operating expenses:                                        |                                              |                            |        |           |        |             |         |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Selling, general and administrative expenses |                            |        | 28,200    |        |             |         | 37,441 |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Depreciation                                 |                            |        | 2,622     |        |             |         | 3,043  |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Amortization                                 |                            |        | 373       |        |             |         | 1,003  |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Management fee                               |                            |        | 450       |        |             |         |       |       
|                                                           |                                              |                            |        |           |        |             |         |       
|                                                           |                                              | Total operating expenses   |        |           | 31,645 |             |         |        | 41,487 | 
|                                                           |                                              |                            |        |           |        |             |         |       
|Other income (expense), net                                |                                              |                            | 1,410  |           |        |             | 76      |       
|                                                           |                                              |                            |        |           |        |             |         |       
|                                                           |                                              | Income from operations     |        |           | 11,525 |             |         |        | 7,968  | 
|                                                          
|                                                          
|                                                          
|                                                          
|Interest expense, net                                      |                                              |                            | 3,321  |           |        |             | 3,086   |       
|                                                          
|                                                          
|                                                          
|                                                          
|Distributions on guaranteed preferred
beneficial interests |                                              |                            | 3,057  |           |        |             | 3,058   |       
|                                                          
|                                                          
|                                                          
|                                                          
|Equity in earnings of affiliate (Note 3)                   |                                              |                            |       |           |        |             | 444     |       
|                                                           |                                              |                            |        |           |        |             |         |       
|                                                           |                                              | Income before income taxes |        |           | 5,147  |             |         |        | 2,268  | 
|                                                          
|                                                          
|                                                          
|                                                          
|Income tax provision                                       |                                              |                            | 2,047  |           |        |             | 2,054   |       
|                                                           |                                              |                            |        |           |        |             |         |       
|                                                           |                                              | Net income                 |        | $         | 3,100  |             |         | $      | 214    | 
|                                                           |                                              |                            |        |           |        |             |         |       

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 4 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE SIX MONTHS ENDED,
(dollars in thousands)

|                                                           |                                              |                                   |         |           |        |             |         |        |        |  
|---------------------------------------------------------- | -------------------------------------------- | --------------------------------- | ------- | --------- | ------ | ----------- | ------- | ------ | ------ | -
|                                                           |                                              |                                   |         | Successor |        | Predecessor
|                                                           |                                              |                                   |         |           |        |            
|                                                           |                                              |                                   |         | June 30,  |        | June 30,   
|                                                           |                                              |                                   |         | 2002      |        | 2001       
|                                                           |                                              |                                   |         |           |        |            
|Net sales                                                  |                                              | $                                 | 139,203 |           |        | $           | 226,540 |       
|                                                          
|                                                          
|                                                          
|                                                          
|Cost of sales                                              |                                              |                                   | 62,493  |           |        |             | 132,192 |       
|                                                           |                                              |                                   |         |           |        |             |         |       
|                                                           |                                              | Gross profit                      |         |           | 76,710 |             |         |        | 94,348 |  
|                                                           |                                              |                                   |         |           |        |             |         |       
|Operating expenses:                                        |                                              |                                   |         |           |        |             |         |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Selling, general and administrative expenses |                                   |         | 54,749    |        |             |         | 75,141 |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Depreciation                                 |                                   |         | 5,705     |        |             |         | 6,088  |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Amortization                                 |                                   |         | 743       |        |             |         | 1,906  |       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Management fee                               |                                   |         | 900       |        |             |         |       |       
|                                                           |                                              |                                   |         |           |        |             |         |       
|                                                           |                                              | Total operating expenses          |         |           | 62,097 |             |         |        | 83,135 |  
|                                                           |                                              |                                   |         |           |        |             |         |       
|Other income (expense), net                                |                                              |                                   | 1,462   |           |        |             | (293    | )     
|                                                           |                                              |                                   |         |           |        |             |         |       
|                                                           |                                              | Income from operations            |         |           | 16,075 |             |         |        | 10,920 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Interest expense, net                                      |                                              |                                   | 6,771   |           |        |             | 6,301   |       
|                                                          
|                                                          
|                                                          
|                                                          
|Distributions on guaranteed preferred
beneficial interests |                                              |                                   | 6,114   |           |        |             | 6,116   |       
|                                                          
|                                                          
|                                                          
|                                                          
|Equity in earnings of affiliate (Note 3)                   |                                              |                                   |        |           |        |             | 945     |       
|                                                           |                                              |                                   |         |           |        |             |         |       
|                                                           |                                              | Income (loss) before income taxes |         |           | 3,190  |             |         |        | (552   | )
|                                                          
|                                                          
|                                                          
|                                                          
|Income tax provision                                       |                                              |                                   | 1,352   |           |        |             | 1,863   |       
|                                                           |                                              |                                   |         |           |        |             |         |       
|                                                           |                                              | Net income (loss)                 |         | $         | 1,838  |             |         | $      | (2,415 | )
|                                                           |                                              |                                   |         |           |        |             |         |       

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 5 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED,
(dollars in thousands)

|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |             |        |       |         |  
|------------------------------------------------ | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | -------------------------------------------- | ------------------------------------------- | ------- | --------- | ------- | ----------- | ------ | ----- | ------- | -
|                                                 |                                                                                                     |                                                      |                                              |                                             |         | Successor |         | Predecessor
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|                                                 |                                                                                                     |                                                      |                                              |                                             |         | June 30,  |         | June 30,   
|                                                 |                                                                                                     |                                                      |                                              |                                             |         | 2002      |         | 2001       
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|Cash flows from operating activities:            |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Net income (loss)                                                                                   |                                                      | $                                            | 1,838                                       |         |           | $       | (2,415      | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities: |                                                      |                                              |                                             |         |           |         |             |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      | Depreciation and amortization                |                                             |         | 6,448     |         |             |        | 7,994 |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      | Equity in earnings of affiliate              |                                             |         |          |         |             |        | (945  | )      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      | Deferred income tax                          |                                             |         | 1,352     |         |             |        | 1,188 |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      | PIK interest on unsecured subordinated notes |                                             |         | 916       |         |             |        |      |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      | Changes in current operating items:          |                                             |         |           |         |             |        |       |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      |                                              | Increase in accounts receivable             |         |           | (12,127 | )           |        |       | (11,362 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      |                                              | Decrease in inventories                     |         |           | 3,919   |             |        |       | 537     |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      |                                              | Decrease in income taxes receivable         |         |           |        |             |        |       | 27      |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      |                                              | Decrease (increase) in other current assets |         |           | 2,370   |             |        |       | (871    | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      |                                              | Increase in accounts payable                |         |           | 3,259   |             |        |       | 1,861   |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      |                                              | Decrease in other accrued liabilities       |         |           | (1,642  | )           |        |       | (3,391  | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                     |                                                      | Other items, net                             |                                             |         | (738      | )       |             |        | 1,377 |        
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|                                                 |                                                                                                     | Net cash provided by (used for) operating activities |                                              |                                             | 5,595   |           |         |             | (6,000 | )    
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|Cash flows from investing activities:            |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Proceeds from sale of property and equipment                                                        |                                                      |                                              | 104                                         |         |           |         | 625         |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Capital expenditures                                                                                |                                                      |                                              | (10,737                                     | )       |           |         | (7,779      | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | R&B Acquisition                                                                                     |                                                      |                                              | (6,225                                      | )       |           |         |            |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Other, net                                                                                          |                                                      |                                              | 393                                         |         |           |         | (957        | )     
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|                                                 |                                                                                                     | Net cash used for investing activities               |                                              |                                             | (16,465 | )         |         |             | (8,111 | )    
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|Cash flows from financing activities:            |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Borrowings (repayments) of senior term loans                                                        |                                                      |                                              | 13,250                                      |         |           |         | (125        | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | (Repayments) borrowings of revolving credit loans, net                                              |                                                      |                                              | (1,715                                      | )       |           |         | 16,974      |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Repayments of unsecured subordinated notes                                                          |                                                      |                                              |                                            |         |           |         | (2,785      | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Principal payments under capitalized lease obligations                                              |                                                      |                                              | (47                                         | )       |           |         | (481        | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Financing fees                                                                                      |                                                      |                                              | (717                                        | )       |           |         |            |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Repayments under other credit facilities, net                                                       |                                                      |                                              |                                            |         |           |         | (407        | )     
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|                                                 |                                                                                                     | Net cash provided by financing activities            |                                              |                                             | 10,771  |           |         |             | 13,176 |      
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|Net decrease in cash and cash equivalents        |                                                                                                     |                                                      | (99                                          | )                                           |         |           | (935    | )          
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at beginning of period |                                                                                                     |                                                      | 2,059                                        |                                             |         |           | 2,811   |            
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |            
|Cash and cash equivalents at end of period       |                                                                                                     | $                                                    | 1,960                                        |                                             |         | $         | 1,876   |            
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |           |         |            

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 6 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

1. Basis of Presentation:

The accompanying financial statements include the consolidated accounts of The
Hillman Companies, Inc., (the Company), formerly SunSource Inc., and its
indirect, wholly owned subsidiaries including an investment trust, Hillman
Group Capital Trust, (the Trust), formerly SunSource Capital Trust. Also,
the Company has a minority investment in STS Operating, Inc., its former
SunSource Technology Services subsidiary (STS or Technology Services). See
Note 3, Contribution of Subsidiaries/Acquisitions/ Divestitures. All
significant intercompany balances and transactions have been eliminated.

On September 26, 2001, SunSource Inc. (SunSource) was acquired by Allied
Capital Corporation (Allied Capital) pursuant to the terms and conditions of
an Agreement and Plan of Merger dated as of June 18, 2001, by and among Allied
Capital, Allied Capital Lock Acquisition Corporation and SunSource (the Merger
Transaction). Certain members of management and other stockholders continued
as stockholders of the Company after the merger. The total transaction value
was $74,027, consisting of the cash purchase price paid for the outstanding
common stock of the Company aggregating $71,494 and managements common shares
valued at $2,533. The Company was the surviving entity in the merger and
organized as an independently managed, privately held portfolio company of
Allied Capital.

On September 28, 2001, the Company refinanced its $115,000 bank revolving
credit and $21,500 term loan with $105,000 in senior secured credit facilities
(the Refinancing).

The Companys Statements of Operations and Cash Flows for the periods presented
prior to the September 26, 2001 Merger Transaction are referenced herein as the
predecessor financial statements (the Predecessor or Predecessor Financial
Statements). The Companys Consolidated Balance Sheet as of June 30, 2002 and
December 31, 2001 and Statement of Operations and Cash Flow for the three and
six months ended June 30, 2002 are referenced herein as the successor financial
statements (the Successor or Successor Financial Statements). The
Successor Financial Statements include the effects of the Merger Transaction
and related transactions completed subsequent to the Merger Transaction,
including the Refinancing and sale of the Technology Services subsidiary.

The accompanying Successor Financial Statements reflect the allocation of the
aggregate purchase price of $74,027 to the assets and liabilities of the
Company based on fair values at the date of the merger in accordance with
Accounting Principles Board Opinion No. 16, Accounting for Business
Combinations for transactions initiated prior to June 30, 2001.

The accompanying unaudited consolidated condensed 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 months and six months ended June 30, 2002 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 for the year ended
December 31, 2001.

Page 7 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

1. Basis of Presentation, continued:

Goodwill and Other Intangible Assets

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, effective January 1, 2002. Under SFAS
No. 142, goodwill and certain other intangible assets are no longer amortized
but are reviewed for impairment. In connection with the adoption of SFAS No.
142, the Company has completed the first step of the transitional goodwill
impairment test, which requires the Company to compare the fair value of its
reporting units to the carrying value of the net assets of the respective
reporting units as of January 1, 2002. Based on this analysis, the Company has
concluded that no impairment existed at the time of adoption, and, accordingly,
the Company has not recognized any transitional impairment loss.

Results for periods prior to the adoption of SFAS 142 have not been restated to
reflect the effect of discontinuing goodwill amortization. The following table
reconciles the reported net loss to results that would have been reported if
SFAS 142 had been adopted as of January 1, 2001:

|                                           |  |                            |       |                          |  |      |     |      |  |   |       |  |  |   |        |  
|------------------------------------------ |  | -------------------------- | ----- | ------------------------ |  | ---- | --- | ---- |  | - | ----- |  |  | - | ------ | -
|                                           |  | Three Months ended June 30 |       | Six Months ended June 30
|                                           |  |                            |       |                         
|                                           |  | 2002                       |       | 2001                     |  | 2002 |     | 2001
|                                           |  |                            |       |                          |  |      |     |     
|Reported net income (loss)                 |  | $                          | 3,100 |                          |  | $    | 214 |      |  | $ | 1,838 |  |  | $ | (2,415 | )
|                                          
|                                          
|                                          
|                                          
|Goodwill amortization, net of income taxes |  |                            |      |                          |  |      | 632 |      |  |   |      |  |  |   | 1,163  |  
|                                           |  |                            |       |                          |  |      |     |      |  |   |       |  |  |   |        |  
|Adjusted net income (loss)                 |  | $                          | 3,100 |                          |  | $    | 846 |      |  | $ | 1,838 |  |  | $ | (1,252 | )
|                                           |  |                            |       |                          |  |      |     |      |  |   |       |  |  |   |        |  

Intangible assets subject to amortization consisted of the following
as of June 30, 2002:

|                       |  |          |        |              |  |   |       | 
|---------------------- |  | -------- | ------ | ------------ |  | - | ----- | 
|                       |  | Carrying |        | Accumulated 
|                       |  | Amount   |        | Amortization
|                       |  |          |        |             
|Trademarks             |  | $        | 6,500  |              |  | $ | 585   | 
|                      
|                      
|                      
|                      
|Patents                |  |          | 6,700  |              |  |   | 1,884 | 
|                      
|                      
|                      
|                      
|Proprietary software   |  |          | 1,000  |              |  |   | 281   | 
|                      
|                      
|                      
|                      
|Non-compete agreements |  |          | 1,250  |              |  |   | 889   | 
|                       |  |          |        |              |  |   |       | 
|                       |  | $        | 15,450 |              |  | $ | 3,639 | 
|                       |  |          |        |              |  |   |       | 

Amortization expense for intangible assets for the three months and six months ended June 30, 2002
was $373 and $743, respectively. Amortization expense for the next five years is estimated to be
as follows:

|            |  |        |       | 
|----------- |  | ------ | ----- | 
|Year Ended  |  |        |       | 
|December 31 |  | Amount
|            |  |       
|2002        |  | $      | 1,485 | 
|           
|           
|           
|           
|2003        |  | $      | 1,437 | 
|           
|           
|           
|           
|2004        |  | $      | 1,238 | 
|           
|           
|           
|           
|2005        |  | $      | 1,223 | 
|           
|           
|           
|           
|2006        |  | $      | 1,222 | 

Page 8 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

2. Summary of Significant Accounting Policies:

Cash Equivalents:

Cash equivalents consist of commercial paper, U.S. Treasury obligations and
other liquid securities purchased with initial maturities less than 90 days and
are stated at cost which approximates market value.

Restricted Investments:

Restricted investments represent assets held in a Rabbi Trust to fund deferred
compensation liabilities due to the Companys employees.

Inventories:

Inventories consisting predominantly of finished goods are valued at the lower
of cost or market, cost being determined principally on the first-in, first-out
method.

Property and Equipment:

Property and equipment, including assets acquired under capital leases, are
carried at cost and include expenditures for new facilities and major renewals.
Maintenance and repairs are charged to expense as incurred. When assets are
sold or otherwise disposed of, the cost and related accumulated depreciation
are removed from their respective accounts, and the resulting gain or loss is
reflected in current operations.

Depreciation:

For financial accounting purposes, depreciation, including that related to
plant and equipment acquired under capital leases, is computed on the
straight-line method over the estimated useful lives of the assets, generally
three to ten years, or, if shorter, over the terms of the related leases.

Goodwill and Other Intangible Assets:

For the Predecessor Financial Statements, goodwill related to the excess of
acquisition cost over the fair value of net assets acquired is amortized on a
straight-line basis over twenty-five to forty years. Effective January 1, 2002
the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets and
accordingly, goodwill is no longer amortized, but is reviewed periodically for
impairment (See Note 1, Basis of Presentation). Other intangible assets
arising principally from acquisitions are amortized on a straight-line basis
over periods ranging from three to twenty-five years.

Long-Lived Assets:

Under the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company has evaluated its long-lived assets
and certain identifiable intangibles including goodwill 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.

Page 9 of 27



---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

2. Summary of Significant Accounting Policies, continued:

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 bases 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.

Retirement Benefits:

Certain employees of the Predecessor and Successor are covered under
profit-sharing retirement plans (defined contribution plans) for which
contributions are determined on an annual basis in accordance with the
requirements of each plan. Certain employees of the Predecessor were covered
under post-retirement benefit plans for which benefits were determined in
accordance with the requirements of each plan.

Revenue Recognition:

Revenue from sales of products is recorded upon the passing of title and risks
of ownership which occurs upon the shipment of goods.

Fair Value of Financial Instruments:

Cash, accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value due to short-term maturity or revolving
nature of these instruments.

Translation of Foreign Currencies:

For the Predecessor Financial Statements, the translation of applicable
foreign-currency-based financial statements into U.S. dollars is performed for
balance sheet accounts using exchange rates in effect at the balance sheet date
and for revenue and expense accounts using an average exchange rate during the
period. The translation of foreign currency transactions is not applicable to
the Successor Financial Statements as a result of the sale of STS.

Exchange adjustments resulting from foreign currency transactions are
recognized in net income in the Predecessor Statements of Operations and were
immaterial for the three and six-month periods ended June 30, 2001.

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 requires management to make
estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Page 10 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

3. Contribution of Subsidiaries/Acquisitions/Divestitures:

On March 2, 2000, the Company contributed the interests in its Kar Products,
Inc. and A & H Bolt & Nut Company Limited operations (collectively, the Kar
or Kar Products business) to a newly-formed partnership affiliated with
Glencoe Capital, L.L.C. (Glencoe). Glencoe contributed cash equity to the
new partnership, GC-Sun Holdings L.P. (G-C). The Company received $105,000
in cash proceeds from the transaction through repayment of assumed debt by G-C
and retained a minority ownership in G-C. Affiliates of Glencoe hold a
controlling interest in G-C.

On April 13, 2002, the Company entered into a Unit Repurchase Agreement with
G-C, pursuant to which G-C exercised its call right under the G-C partnership
agreement to purchase the Companys interest in G-C. The Unit Repurchase
Agreement was closed on June 25, 2002. In exchange for its interest in G-C,
the Company received a $10,000 subordinated note from G-C. Interest on the
note is payable quarterly at a rate of 18% from May 1, 2002 to April 30, 2003,
17% from May 1, 2003 to April 30, 2004, and 16% thereafter. G-Cs payment of
interest on the note is subject to certain restrictions under the terms of the
subordinated note agreement. If such restrictions do not permit the current
payment of interest in cash when due, accrued interest is added to the
principal. For the two-month period ended June 30, 2002 the Company added $301
of accrued interest to the principal. As of June 30, 2002, the Companys
consolidated balance sheet includes $10,301 in other investments related to the
notes and interest accrued, thereon.

On September 28, 2001, the Company sold substantially all of the assets of its
Technology Services subsidiary. The sales price aggregated $25,546 in cash and
preferred stock, subject to post-closing adjustments, plus the assumption of
certain liabilities by the buyer. The sale of assets resulted in no gain or
loss on the sale transaction because the assets and liabilities of Technology
Services were recorded at fair value in conjunction with the Merger
Transaction. As of June 30, 2002, the Companys consolidated balance sheet
includes $6,530 in other investments related to the Companys investment in the
preferred stock of the buyer of the Technology Services business. The cash
proceeds from the sale were distributed to Allied Capital and certain members
of management, who are the remaining common shareholders of the Company.

During the third quarter of 2002, the Company intends to distribute the note
receivable from G-C and any interest accrued thereon and the Companys
investment in preferred stock of the Technology Services business to its common
stockholders. There can be no assurances the transaction described herein will
be completed.

On September 26, 2001, SunSource was acquired by Allied Capital pursuant to the
terms and conditions of an Agreement and Plan of Merger dated as of June 18,
2001, (the Merger Transaction). Certain members of management and other
stockholders continued as stockholders of the Company after the merger. The
total transaction value was $74,027, consisting of the cash purchase price paid
for the outstanding common stock of the Company aggregating $71,494 and
managements common shares valued at $2,533. The Company was the surviving
entity in the merger and organized as an independently managed, privately held
portfolio company of Allied Capital. See Note 1, Basis of Presentation.

On May 1, 2002 the Company purchased certain assets of the Lowes specialty
fastener business from R&B, Inc. for cash consideration of $6,225. In
connection with this transaction, the Company settled litigation filed by R&B,
Inc. in February 1996 related to the Companys sale of the Dorman Products
division (See Note 4, Contingencies). The litigation settlement in the amount
of $1,250 was fully reserved on the Companys balance sheet, and accordingly,
there was no charge to income.

Page 11 of 27



---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

3. Contribution of Subsidiaries/Acquisitions/Divestitures, continued:

The accompanying financial statements reflect the allocation of the aggregate
purchase price of $6,225 to the assets and liabilities of the Company based on
fair values at the date of the transaction in accordance with SFAS No. 141,
Business Combinations. The following table reconciles the fair value of the
acquired assets and assumed liabilities to the total purchase price:

|                         |                      |   |       |  |  |   |       |       | 
|------------------------ | -------------------- | - | ----- |  |  | - | ----- | ----- | 
|Accounts Receivable      |                      | $ | 785   |  |  |   |       |      
|                        
|                        
|                        
|                        
|Inventory                |                      |   | 1,350 |  |  |   |       |      
|                        
|                        
|                        
|                        
|Property and equipment   |                      |   | 138   |  |  |   |       |      
|                        
|                        
|                        
|                        
|Goodwill                 |                      |   | 4,252 |  |  |   |       |      
|                         |                      |   |       |  |  |   |       |      
|Total assets acquired    |                      |   |       |  |  | $ | 6,525 |      
|                        
|                        
|                        
|                        
|Less assumed liabilities |                      |   |       |  |  |   | 300   |      
|                         |                      |   |       |  |  |   |       |      
|                         | Total purchase price |   |       |  |  |   | $     | 6,225 | 
|                         |                      |   |       |  |  |   |       |      

The following disclosures indicate the Companys estimate of pro forma
financial results for the three months and six months ended June 30, 2001 had
the sale of the Technology Services subsidiary, the Companys Refinancing and
the acquisition of the Lowes specialty fastener business been consummated on
January 1, 2001:

|                  |  |                    |        |                  |  |   |         |  
|----------------- |  | ------------------ | ------ | ---------------- |  | - | ------- | -
|                  |  | Three months ended |        | Six months ended
|                  |  | June 30, 2001      |        | June 30, 2001   
|                  |  |                    |        |                 
|Net sales         |  | $                  | 67,068 |                  |  | $ | 125,747 |  
|                 
|                 
|                 
|                 
|Net income (loss) |  | $                  | 1,907  |                  |  | $ | (151    | )

4. Contingencies:

On February 27, 1996, a lawsuit was filed against the Company by the buyer,
R&B, Inc., of its Dorman Products division for alleged misrepresentation of
certain facts by the Company upon which the buyer allegedly based its offer to
purchase Dorman. On May 1, 2002, the Company settled this litigation in
conjunction with the purchase of certain assets of the Lowes specialty
fastener business from R&B, Inc. (See Note 3, Contribution of
Subsidiaries/Acquisitions/Divestitures).

Certain other 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 effect on the consolidated financial position,
operations or cash flows of the Company.

Page 12 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

5. Segment Information:

The Successor is organized as a single business segment and the Predecessor has
two reportable segments (see Note 1, Basis of Presentation) which were
disaggregated based on the products and services provided, markets served,
marketing strategies and delivery methods. The Successor and the Predecessor
each measure profitability and allocate corporate resources based on each
segments Earnings Before Interest, Taxes, Depreciation, and Amortization
(EBITDA) which is defined as income from operations before depreciation and
amortization. The segment profitability can be further measured after
recording depreciation and amortization based on Earnings Before Interest and
Taxes (EBIT).

Following is a tabulation of segment information for the three months and six
months ended June 30, 2002 and 2001. Corporate information is included to
reconcile segment data to the consolidated financial statements.

|                                                                     |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |         |  
|-------------------------------------------------------------------- | ------------------------------------------ | - | -------------------------- | ------ | ------------------------ | - | ------------- | ------- | ------------- | - | ------- | ------- |  | - | ------- | ------- | -
|                                                                     |                                            |   | For the Three Months Ended |        | For the Six Months Ended
|                                                                     |                                            |   |                            |        |                         
|                                                                     |                                            |   | June 30, 2002              |        | June 30, 2001            |   | June 30, 2002 |         | June 30, 2001
|                                                                     |                                            |   |                            |        |                          |   |               |         |              
|                                                                     |                                            |   | (Successor)                |        | (Predecessor)            |   | (Successor)   |         | (Predecessor)
|                                                                     |                                            |   |                            |        |                          |   |               |         |              
|Net Sales                                                            |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Hillman Group                                                        |                                            | $ | 75,778                     |        |                          | $ | 65,390        |         |               | $ | 139,203 |         |  | $ | 122,391 |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Technology Services                                                  |                                            |   |                           |        |                          |   | 51,221        |         |               |   |        |         |  |   | 104,149 |        
|                                                                     |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|                                                                     | Consolidated net sales -
business segments |   | $                          | 75,778 |                          |   | $             | 116,611 |               |   | $       | 139,203 |  |   | $       | 226,540 |  
|                                                                     |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|EBITDA                                                               |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Hillman Group                                                        |                                            | $ | 15,663                     |        |                          | $ | 13,145        |         |               | $ | 24,818  |         |  | $ | 21,742  |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Technology Services                                                  |                                            |   |                           |        |                          |   | 144           |         |               |   |        |         |  |   | (278    | )      
|                                                                     |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|                                                                     | EBITDA  business segments                 |   | $                          | 15,663 |                          |   | $             | 13,289  |               |   | $       | 24,818  |  |   | $       | 21,464  |  
|                                                                     |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|EBIT                                                                 |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Segment Profit  EBITDA                                              |                                            | $ | 15,663                     |        |                          | $ | 13,289        |         |               | $ | 24,818  |         |  | $ | 21,464  |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Hillman Group  Depreciation                                         |                                            |   | (2,622                     | )      |                          |   | (2,589        | )       |               |   | (5,705  | )       |  |   | (5,178  | )      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Technology Services  Depreciation                                   |                                            |   |                           |        |                          |   | (454          | )       |               |   |        |         |  |   | (910    | )      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Hillman Group  Amortization                                         |                                            |   | (373                       | )      |                          |   | (859          | )       |               |   | (743    | )       |  |   | (1,618  | )      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Technology Services  Amortization                                   |                                            |   |                           |        |                          |   | (144          | )       |               |   |        |         |  |   | (288    | )      
|                                                                     |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|                                                                     | EBIT  business segments                   |   | $                          | 12,668 |                          |   | $             | 9,243   |               |   | $       | 18,370  |  |   | $       | 13,470  |  
|                                                                     |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|Reconciliation of Segment Profit toIncome (Loss) Before Income Taxes |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Segment Profit  EBIT                                                |                                            | $ | 12,668                     |        |                          | $ | 9,243         |         |               | $ | 18,370  |         |  | $ | 13,470  |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Management fee expense                                               |                                            |   | (450                       | )      |                          |   |              |         |               |   | (900    | )       |  |   |        |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Dividend income  STS Operating, Inc.                                |                                            |   | 173                        |        |                          |   |              |         |               |   | 345     |         |  |   |        |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Corporate expenses                                                   |                                            |   | (866                       | )      |                          |   | (1,275        | )       |               |   | (1,740  | )       |  |   | (2,550  | )      
|                                                                     |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|                                                                     | Income from operations                     |   |                            | 11,525 |                          |   |               | 7,968   |               |   |         | 16,075  |  |   |         | 10,920  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Equity in earnings of affiliate                                      |                                            |   |                           |        |                          |   | 444           |         |               |   |        |         |  |   | 945     |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Interest expense, net                                                |                                            |   | (3,321                     | )      |                          |   | (3,086        | )       |               |   | (6,771  | )       |  |   | (6,301  | )      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Distributions on guaranteed preferred
beneficial interests           |                                            |   | (3,057                     | )      |                          |   | (3,058        | )       |               |   | (6,114  | )       |  |   | (6,116  | )      
|                                                                     |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        
|                                                                     | Income (loss) before income taxes          |   | $                          | 5,147  |                          |   | $             | 2,268   |               |   | $       | 3,190   |  |   | $       | (552    | )
|                                                                     |                                            |   |                            |        |                          |   |               |         |               |   |         |         |  |   |         |        

Page 13 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

6. Lines of Credit/Notes Payable/Long-Term Debt:

On September 28, 2001, the Company, through its Hillman subsidiary, refinanced
its Revolver and Term Loan with $105,000 in senior secured credit facilities
(the New Refinancing) consisting of $50,000 revolving credit (the
Revolver), a $20,000 term loan (the Term Loan A), and a $35,000 term loan
(the Term Loan B). This new credit agreement has a five-year term for the
Revolver and Term Loan A and a seven-year term for Term Loan B (the Credit
Agreement). The Credit Agreement provides borrowings at interest rates based
on LIBOR plus a LIBOR margin of between 3.25% and 3.75%, or prime (the Base
Rate) plus a margin of between 2.0% and 2.5% (the Base Rate Margin). In
accordance with the Credit Agreement, letter of credit commitment fees are
based on the average daily face amount of each outstanding letter of credit
multiplied by three and one quarter percent (3.25%) per annum. Also, the
Company pays an annual commitment fee of 0.5% per annum on the unused Revolver
balance.

On May 1, 2002 the Credit Agreement was amended to provide an additional
$10,000 of availability under the revolving credit facility and to increase
Term Loan A by $15,000. In addition to funding the purchase of certain assets
of the Lowes specialty fastener business from R&B, Inc (see Note 3,
Contribution of Subsidiaries/Acquisitions/ Divestitures) the cash proceeds and
additional availability will be used to finance the planned expansion and
automation of the Companys distribution facilities.

As of June 30, 2002, the Company had $24,438 available under the Revolver. The
Company had $99,987 of outstanding debt at June 30, 2002 consisting of Revolver
borrowings of $32,337, outstanding Term Loans of $67,375 and capital lease
obligations of $275. The Company had letter of credit commitments outstanding
of $3,225 at June 30, 2002.

As of June 30, 2002, the estimated fair value of the Companys Term Loans
approximates the recorded value as determined in accordance with SFAS 107. The
Company discounted the future cash flows of its Term Loans based on borrowing
rates for debt with similar terms and remaining maturities. The fair value
estimate is made at a specific point in time, is subjective in nature, and
involves uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly
affect the estimate.

On December 28, 2000, the Company issued $30,000 of unsecured subordinated
notes (the Subordinated Debt Issuance), maturing December 28, 2006. The
Company issued Allied Capital, the holder of the subordinated notes, the right
to purchase 285,000 shares of the Companys common stock at a nominal value. In
accordance with APB 14  Accounting for Convertible Debt and Debt Issued with
Stock Purchased Warrants, the Company recorded the Subordinated Debt Issuance
and stock purchase rights issued to Allied Capital at a fair value of $29,103.

On September 28, 2001 the Company amended the Subordinated Debt Issuance to
increase the existing subordinated debenture to $40,000 maturing on September
29, 2009 (the Amended Subordinated Debt Issuance). Interest on the Amended
Subordinated Debt Issuance is at a fixed rate of 18.0% per annum, with cash
interest payments required on a quarterly basis at a fixed rate of 13.5%
commencing November 15, 2001. The outstanding principal balance of the Amended
Subordinated Debt Issuance shall be increased on a quarterly basis at the
remaining 4.5% fixed rate (the PIK Amount). All of the PIK Amounts are due
on the fifth anniversary of the Amended Subordinated Debt Issuance. The
outstanding principal balance of the Amended Subordinated Debt Issuance is
included in long term unsecured subordinated notes on the Companys
consolidated balance sheet at June 30, 2002 in the amount of $41,156 of which
$1,156 represents the PIK amount.

Page 14 of 27



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

7. Defined Benefit Retirement Plan:

In December 1999, the Company froze the benefit accruals under the Technology
Services defined benefit retirement plan (the STS Plan), resulting in a
curtailment gain of $5,608. In December 2000, the STS Plan was merged with
another Company owned plan which was held for certain divested operations, and
the Company terminated the merged plans as of December 31, 2000 resulting in a
pre-tax loss of $4,279. In April 2002, the settlement of the STS Plan was
completed and the Company received cash proceeds from plan assets in excess of
settlement obligations totaling $3,903. Other income in the second quarter of
2002 includes a favorable income adjustment of $1,231 to the previously
recorded estimated loss on termination resulting from final settlement of the
STS Plan.

8. Recent Accounting Pronouncements:

In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. This
statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for certain Employee Termination benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS No. 146 is not
expected to have a material impact on the Companys financial position, results
of operations, or cash flows.

Page 15 of 27



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##### 



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
consolidated financial statements and notes thereto appearing elsewhere herein.

General

The Hillman Companies, Inc. (Hillman or the Company), formerly SunSource
Inc. (SunSource) is one of the largest providers of value-added merchandising
services and hardware-related products to retail markets in North America.
Also, the Company has a minority investment in STS Operating, Inc., the former
SunSource Technology Services business.

The Company through its wholly owned subsidiary, The Hillman Group, Inc. (the
Hillman Group) provides merchandising services and hardware and related
products, such as, fasteners and similar items, key duplication equipment, keys
and related accessories and identification equipment and items to retail
outlets, primarily hardware stores, home centers and mass merchants.

Merger Transaction

On September 26, 2001, SunSource was acquired by Allied Capital Corporation
(Allied Capital) pursuant to the terms and conditions of an Agreement and
Plan of Merger dated as of June 18, 2001 (the Merger Transaction). Certain
members of management and other stockholders continued as stockholders of the
Company after the merger. The total transaction value was $74.0 million or
$10.375 per SunSource common share, consisting of the cash purchase price paid
for the outstanding common stock of the Company aggregating approximately $71.5
million and managements common shares valued at approximately $2.5 million.
SunSource was the surviving entity in the merger and organized as an
independently managed, privately held portfolio company of Allied Capital.

In connection with the Merger Transaction, on September 28, 2001, the Company
completed the sale of substantially all of the assets of its SunSource
Technology Services business (the STS Business) to STS Operating, Inc. (STS
OP), an entity formed by certain officers and managers of the STS Business,
Allied Capital and Easton Hunt Capital Partners, L.P. for the purpose of
acquiring the STS Business. The purchase price aggregated approximately $25.5
million in cash and preferred stock, subject to post-closing adjustments plus
the assumption of certain liabilities. An equity investment in STS OP
continues to be held by the Hillman Group.

The Companys operations for the periods presented prior to September 30, 2001
are referenced herein as the predecessor operations (the Predecessor or
Predecessor Operations). The Companys operations for the period presented
since the Merger Transaction are referenced herein as the successor operations
(the Successor or Successor Operations) and include the effects of the
Merger Transaction and related transactions completed subsequently, including
the Companys debt refinancing and sale of the STS business (see Financing
Arrangements below).

Page 16 of 27



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##### 



Financing Arrangements

On September 28, 2001, the Company refinanced its $115 million bank revolving
credit and $21.5 million term loan with $105 million in senior secured credit
facilities (the Refinancing). The new senior debt arrangement has a $50
million revolving credit line and a $20 million term loan that expires on
September 27, 2006 and a $35 million term loan that expires on September 27,
2008.

On May 1, 2002, the Senior Credit Agreement was amended to provide an
additional $10 million of availability under the revolving credit facility and
to increase the $20 million term loan expiring September 27, 2006 by $15
million. Proceeds of the additional financing were used to finance the
purchase of the specialty fastener business of Lowes, Inc. from R&B, Inc., the
settlement of litigation with R&B, Inc. and the planned expansion and
automation of the Companys distribution facilities. As of June 30, 2002 the
outstanding balance of the term loans aggregated $67.4 million.

On December 28, 2000, the Company issued $30 million of unsecured subordinated
notes to Allied Capital and issued an additional $10 million of these notes to
Allied Capital on September 28, 2001 in conjunction with the Refinancing noted
above (the Amended Subordinated Debt Issuance). The majority of the cash
proceeds generated from the Amended Subordinated Debt Issuance were used to
repay at a discount an unsecured subordinated note issued in connection with
the consummation of the acquisition of Axxess Technologies.

Page 17 of 27



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##### 



Results of Operations

Segment Sales and Profitability for the Three Months and Six Months Ended June 30, 2002 and 2001

(dollars in thousands)


|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |      |  
|------------------------------------- | -------------------------------------------- | ------ | --------------------------- | ------ | ------------------------- | ------ | ------------- | ----- | ------------- | ------ | ------ | ------- | ---- | ------ | ----- | ----- | - | ----- | ------- | ------- |  |  | ----- | ----- | ---- | - | ------- | ------- |  |  | ----- | ---- | -
|                                      |                                              |        | FOR THE THREE MONTHS ENDED, |        | FOR THE SIX MONTHS ENDED,
|                                      |                                              |        |                             |        |                          
|                                      |                                              |        | Successor                   |        | Predecessor               |        | Successor     |       | Predecessor  
|                                      |                                              |        |                             |        |                           |        |               |       |              
|                                      |                                              |        | June 30, 2002               |        | June 30, 2001             |        | June 30, 2002 |       | June 30, 2001
|                                      |                                              |        |                             |        |                           |        |               |       |              
|                                      |                                              |        |                             |        |                           |        | % OF          |       |               |        |        |         | % OF |        |       |       |   |       | % OF    |         |  |  |       |       | % OF
|Sales                                 |                                              | AMOUNT |                             | TOTAL  |                           | AMOUNT |               | TOTAL |               | AMOUNT |        | TOTAL   |      | AMOUNT |       | TOTAL
|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |      
|Hillman Group  Ongoing Operations    |                                              | $      | 75,778                      |        |                           |        | 100.0         | %     |               | $      | 65,390 |         |      |        | 100.0 | %     |   | $     | 139,203 |         |  |  | 100.0 | %     |      | $ | 122,391 |         |  |  | 100.0 | %   
|                                     
|                                     
|                                     
|                                     
|Technology Services                   |                                              |        |                            |        |                           |        |               |       |               |        | 51,221 |         |      |        |       |       |   |       |        |         |  |  |       |       |      |   | 104,149 |         |  |  |       |     
|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |     
|                                      | Consolidated Net Sales                       |        | $                           | 75,778 |                           |        |               |       |               |        | $      | 116,611 |      |        |       |       |   |       | $       | 139,203 |  |  |       |       |      |   | $       | 226,540 |  |  |       |      |  
|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |     
|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |     
|                                     
|                                     
|                                     
|                                     
|                                      |                                              |        |                             |        |                           | % OF   |               |       |               |        |        | % OF    |      |        |       |       |   | % OF  |         |         |  |  |       | % OF 
|                                     
|                                     
|                                     
|                                     
|Gross Profit                          |                                              |        |                             |        |                           | SALES  |               |       |               |        |        | SALES   |      |        |       |       |   | SALES |         |         |  |  |       | SALES
|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |     
|Hillman Group  Ongoing Operations    |                                              | $      | 41,760                      |        |                           |        | 55.1          | %     |               | $      | 36,973 |         |      |        | 56.5  | %     |   | $     | 76,710  |         |  |  | 55.1  | %     |      | $ | 69,158  |         |  |  | 56.5  | %   
|                                     
|                                     
|                                     
|                                     
|Technology Services                   |                                              |        |                            |        |                           |        |               |       |               |        | 12,406 |         |      |        |       |       |   |       |        |         |  |  |       |       |      |   | 25,190  |         |  |  |       |     
|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |     
|                                      | Consolidated Gross Profit                    |        | $                           | 41,760 |                           |        |               |       |               |        | $      | 49,379  |      |        |       |       |   |       | $       | 76,710  |  |  |       |       |      |   | $       | 94,348  |  |  |       |      |  
|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |     
|EBITDA                                |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |     
|                                     
|                                     
|                                     
|                                     
|Hillman Group                         |                                              | $      | 15,663                      |        |                           |        | 20.7          | %     |               | $      | 13,145 |         |      |        | 20.1  | %     |   | $     | 24,818  |         |  |  | 17.8  | %     |      | $ | 21,742  |         |  |  | 17.8  | %   
|                                     
|                                     
|                                     
|                                     
|Management fee expense                |                                              |        | (450                        | )      |                           |        | -0.6          | %     |               |        |       |         |      |        |       |       |   |       | (900    | )       |  |  | -0.6  | %     |      |   |        |         |  |  |       |     
|                                     
|                                     
|                                     
|                                     
|Dividend income  STS Operating, Inc. |                                              |        | 173                         |        |                           |        | 0.2           | %     |               |        |       |         |      |        |       |       |   |       | 345     |         |  |  | 0.2   | %     |      |   |        |         |  |  |       |     
|                                     
|                                     
|                                     
|                                     
|Corporate expenses                    |                                              |        | (866                        | )      |                           |        | -1.1          | %     |               |        | (1,275 | )       |      |        | -1.9  | %     |   |       | (1,740  | )       |  |  | -1.2  | %     |      |   | (2,550  | )       |  |  | -2.1  | %   
|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |     
|                                      | Consolidated EBITDA -
Ongoing Operations (a) |        | $                           | 14,520 |                           |        |               | 19.2  | %             |        | $      | 11,870  |      |        |       | 18.2  | % |       | $       | 22,523  |  |  |       | 16.2  | %    |   | $       | 19,192  |  |  |       | 15.7 | %
|                                     
|                                     
|                                     
|                                     
|Technology Services                   |                                              |        |                            |        |                           |        |               |       |               |        | 144    |         |      |        |       |       |   |       |        |         |  |  |       |       |      |   | (278    | )       |  |  |       |     
|                                     
|                                     
|                                     
|                                     
|Equity in earnings of affiliate (b)   |                                              |        |                            |        |                           |        |               |       |               |        | 444    |         |      |        |       |       |   |       |        |         |  |  |       |       |      |   | 945     |         |  |  |       |     
|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |     
|                                      | Consolidated EBITDA                          |        | $                           | 14,520 |                           |        |               |       |               |        | $      | 12,458  |      |        |       |       |   |       | $       | 22,523  |  |  |       |       |      |   | $       | 19,859  |  |  |       |      |  
|                                      |                                              |        |                             |        |                           |        |               |       |               |        |        |         |      |        |       |       |   |       |         |         |  |  |       |       |      |   |         |         |  |  |       |     



|(a) |  | EBITDA (earnings before interest, taxes, depreciation and amortization) is defined as income (loss) from
ongoing operations before depreciation and amortization.                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Represents equity in earnings from the Companys Kar Products, Inc. and A & H Bolt & Nut Company, Limited
business (collectively, the affiliate) which was contributed on March 2, 2000 to a newly formed partnership
affiliated with Glencoe Capital L.L.C.

Page 18 of 27



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##### 



The comparisons of operating results for the periods presented below reflect
ongoing operations only (the Hillman Group and Corporate Expenses). Excluded
from this discussion are the operating results of the sold STS Business as
identified in the preceding Results of Operations financial table.

Three Months Ended June 30, 2002 and 2001

Net sales from the Hillman Group ongoing operations increased $10.4 million or
15.9% in the second quarter of 2002 to $75.8 million from $65.4 million in
2001. Hillman entered into a supply agreement in April 2001 to provide
fastener related products to 360 Lowes, Inc (Lowes) stores. In September
2001, Hillman was named the exclusive, chain-wide supplier of fastener related
products for all Lowes locations. In May 2002, Hillman began supplying all
Lowes locations from the specialty fastener business acquired from R&B, Inc.
The total fastener sales to Lowes represented $6.1 million of the $10.4
million total sales increase in the second quarter. Sales to other national
accounts including Home Depot, Wal*Mart, Petsmart, and Tractor Supply increased
by an aggregate $3.3 million in the second quarter of 2002 compared to the
second quarter of 2001, primarily as a result of new store growth. In
addition, the regional accounts together with franchise and independent (F&I)
accounts increased $1.0 million over the comparable period in 2001. The
regional accounts represent mid-sized hardware and lumber chains. The F&I
accounts are typically individual dealers who are members of larger
cooperatives, such as TruServ, Ace, and Do-It-Best.

The Hillman Groups gross margin was 55.1% in the second quarter of 2002
compared with 56.5% in the second quarter of 2001. The large increase in sales
volume to Lowes and other large national accounts described above and the
resultant shift in sales mix contributed to the 1.4% decline in gross margin in
the comparison period.

The Companys consolidated selling, general and administrative expenses
(S,G&A) decreased $9.2 million or 24.6% from $37.4 million in the second
quarter of 2001 to $28.2 million in the second quarter of 2002. Excluding the
sold STS Business from the Predecessor Operations, the S,G&A expenses from
ongoing operations increased $3.1 million or 12.4% from $25.1 million in the
second quarter of 2001 to $28.2 million in the second quarter of 2002. Selling
expenses increased $1.2 million or 9.3% primarily as a result of servicing
costs at new national account stores. Warehouse and delivery expenses
increased $1.9 million or 28.4% primarily as a result of increased freight and
labor costs from new business in 2002. In addition, the Company recorded a
gain of $0.4 million in the second quarter of 2001 for property tax refunds.
General and administrative expenses decreased by $0.1 million or 1.8% primarily
as a result of a reduction in corporate overhead costs following elimination of
the Philadelphia corporate office in May 2002.

Total S,G&A expenses from ongoing operations expressed as a percentage of sales
compared with the second quarter of 2001 are as follows:

|                                    |                      |      |                             |      |   |  |      |      |  
|----------------------------------- | -------------------- | ---- | --------------------------- | ---- | - |  | ---- | ---- | -
|                                    |                      |      | Three Months ended June 30,
|                                    |                      |      |                            
|As of a % of Sales                  |                      | 2002 |                             | 2001
|                                    |                      |      |                             |     
|Selling Expenses                    |                      |      | 18.6                        | %    |   |  | 19.7 | %   
|                                   
|                                   
|                                   
|                                   
|Warehouse and Delivery Expenses     |                      |      | 11.4                        | %    |   |  | 10.2 | %   
|                                   
|                                   
|                                   
|                                   
|General and Administrative Expenses |                      |      | 7.2                         | %    |   |  | 8.6  | %   
|                                    |                      |      |                             |      |   |  |      |     
|                                    | Total S,G&A Expenses |      |                             | 37.2 | % |  |      | 38.5 | %
|                                    |                      |      |                             |      |   |  |      |     

EBITDA from ongoing operations after corporate expenses for the second quarter
of 2002 was $14.5 million compared with $11.9 million for the same prior-year
period, representing an increase of 21.8%.

The Companys consolidated operating profit margin from ongoing operations
(EBITDA as a percentage of sales) after corporate expenses increased to 19.2%
in the second quarter of 2002 compared with 18.2% in 2001. The operating
profit margin benefited from the reduction of S,G&A expenses as a percentage of
sales. However, the S,G&A benefit was offset by the margin decrease which was
primarily the result of pricing pressures and

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from costs associated with the opening and servicing of a large number of new
national account customer locations. The remaining operating profit margin
improvement was primarily due to other income of $1.2 million recorded from the
termination of the STS pension plan.

Depreciation expense from ongoing operations of $2.6 million in the second
quarter of 2002 was unchanged from the same quarter of 2001.

Amortization expense from ongoing operations decreased $0.5 million to $0.4
million in the second quarter of 2002 from $0.9 million in the second quarter
of 2001. The decrease in amortization was the result of an accounting standard
change which discontinued the recognition of amortization expense on goodwill
from the Companys acquisitions.

Interest expense, net of interest income, increased $0.2 million to $3.3
million in the second quarter of 2002 from $3.1 million in the same period of
2001. The increase was primarily the result of an increase in borrowings
needed to finance the Companys higher seasonal working capital requirements
and purchase the Lowes specialty fastener business from R&B, Inc. The Company
also recorded interest income of $0.3 million in the second quarter of 2002 on
the $10.0 million note received from Glencoe from sale of the Companys
interest in GC-Sun Holdings L.P.

The Company has recorded a management fee charge of $0.45 million for the three
months ended June 30, 2002. In connection with the Merger Transaction, the
Company is obligated to pay management fees to a subsidiary of Allied Capital
for management services rendered in the amount of $1.8 million for calendar
years subsequent to 2001. The payment of management fees is due annually after
delivery of the Companys annual audited financial statements to the Board of
Directors of the Company.

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. For the three months ended June 30, 2002 and 2001,
the Company paid $3.1 million in interest on the Junior Subordinated
Debentures, equivalent to the amounts distributed by the Trust on the Trust
Preferred Securities.

The Company is subject to federal, state and local income taxes on its domestic
operations and foreign income taxes on its Canadian operation as accounted for
in accordance with Statement of Financial Accounting Standard (SFAS) No. 109,
Accounting for Income Taxes. Deferred income taxes represent differences
between the financial statement and tax basis of assets and liabilities as
classified on the Companys balance sheet. The Company recorded a tax
provision for income taxes of $2.0 million on pre-tax income of $5.1 million in
the second quarter of 2002. The effective tax rate in the second quarter of
2002 was 39.8% compared to 90.5% in the second quarter of 2001. The effective
tax rate in the first quarter of 2001 was significantly greater than the
Companys statutory tax rate primarily due to non-deductible goodwill and other
items related to acquisition and divestiture activities.

Six Months Ended June 30, 2002 and 2001

Net sales from the Hillman Group ongoing operations increased $16.8 million or
13.7% in the first half of 2002 to $139.2 million from $122.4 million in 2001.
Hillman entered into a supply agreement in April 2001 to provide fastener
related products to 360 Lowes stores. In September 2001, Hillman was named
the exclusive, chain-wide supplier of fastener related products for all Lowes
locations. In May 2002, Hillman began supplying all Lowes locations from the
specialty fastener business acquired from R&B, Inc. The total fastener sales
to Lowes represented $10.5 million of the $16.8 million total sales increase
in the first half. Sales to other national accounts including Home Depot,
Wal*Mart, Petsmart, and Tractor Supply increased by an aggregate $4.6 million
in the first half of 2002 compared to the same period of 2001, primarily as a

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result of new store growth. In addition, the regional accounts together with
franchise and independent (F&I) accounts increased $1.7 million over the
comparable period in 2001. The regional accounts represent mid-sized hardware
and lumber chains. The F&I accounts are typically individual dealers who are
members of larger cooperatives, such as TruServ, Ace, and Do-It-Best.

The Hillman Groups gross margin was 55.1% in the first half of 2002 compared
with 56.5% in the first half of 2001. The large increase in sales volume to
Lowes and other large national accounts described above and the resultant
shift in sales mix contributed to the 1.4% decline in gross margin in the
comparison period.

The Companys consolidated S,G&A expenses decreased $20.4 million or 27.2% from
$75.1 million in the first half of 2001 to $54.7 million in the first half of
2002. Excluding the sold STS Business from the Predecessor Operations, the
S,G&A expenses from ongoing operations increased $5.1 million or 10.3% from
$49.7 million in the first half of 2001 to $54.7 million in the first half of
2002. Selling expenses increased $2.5 million or 9.7% primarily as a result of
servicing costs at new national account stores. Warehouse and delivery
expenses increased $3.0 million or 23.4% as a result of increased freight and
labor costs to process and ship the additional sales volume. General and
administrative expenses decreased by $0.5 million or 4.6% primarily as a result
of reduced corporate expenses.

Total S,G&A expenses from ongoing operations expressed as a percentage of sales
compared with the first half of 2001 are as follows:

|                                    |                      |      |                           |      |   |  |      |      |  
|----------------------------------- | -------------------- | ---- | ------------------------- | ---- | - |  | ---- | ---- | -
|                                    |                      |      | Six Months ended June 30,
|                                    |                      |      |                          
|As of a % of Sales                  |                      | 2002 |                           | 2001
|                                    |                      |      |                           |     
|Selling Expenses                    |                      |      | 20.3                      | %    |   |  | 21.0 | %   
|                                   
|                                   
|                                   
|                                   
|Warehouse and Delivery Expenses     |                      |      | 11.3                      | %    |   |  | 10.4 | %   
|                                   
|                                   
|                                   
|                                   
|General and Administrative Expenses |                      |      | 7.7                       | %    |   |  | 9.2  | %   
|                                    |                      |      |                           |      |   |  |      |     
|                                    | Total S,G&A Expenses |      |                           | 39.3 | % |  |      | 40.6 | %
|                                    |                      |      |                           |      |   |  |      |     

EBITDA from ongoing operations after corporate expenses for the first half of
2002 was $22.5 million compared with $19.2 million for the same prior-year
period, representing an increase of 17.2%.

The Companys consolidated operating profit margin from ongoing operations
(EBITDA as a percentage of sales) after corporate expenses increased to 16.2%
in the first half of 2002 compared with 15.7% in 2001. The operating profit
margin benefited from the reduction of S,G&A expenses as a percentage of sales.
However, the S,G&A benefit was offset by the margin decrease which was
primarily the result of pricing pressures and from costs associated with the
opening and servicing of a large number of new national account customer
locations. The remaining operating profit margin improvement was primarily due
to other income of $1.2 million recorded from the termination of the STS
pension plan which was partially offset by $0.9 million in management fee
expense.

Depreciation expense from ongoing operations increased $0.5 million to $5.7
million in the first half of 2002 from $5.2 million in the same period of 2001
primarily as a result of an increase in the depreciable fixed asset base in
connection with the production of new key duplication machines used for
national accounts.

Amortization expense from ongoing operations decreased $0.9 million to $0.7
million in the first half of 2002 from $1.6 million in the first half of 2001.
The decrease in amortization was the result of an accounting standard change
which discontinued the recognition of amortization expense on goodwill from the
Companys acquisitions.

Interest expense, net of interest income, increased $0.5 million to $6.8
million in the first half of 2002 from $6.3 million in the same period of 2001.
The increase was primarily the result of an increase in borrowings needed to
finance the Companys higher seasonal working capital requirements and purchase
the Lowes specialty fastener business from R&B, Inc. The Company also
recorded interest income of $0.3 million in

Page 21 of 27



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the first half of 2002 on the $10.0 million note received from Glencoe from
sale of the Companys interest in GC-Sun Holdings L.P.

The Company has recorded a management fee charge of $0.9 million for the six
months ended June 30, 2002. In connection with the Merger Transaction, the
Company is obligated to pay management fees to a subsidiary of Allied Capital
for management services rendered in the amount of $1.8 million for calendar
years subsequent to 2001. The payment of management fees is due annually after
delivery of the Companys annual audited financial statements to the Board of
Directors of the Company.

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. For the six months ended June 30, 2002 and 2001,
the Company paid $6.1 million in interest on the Junior Subordinated
Debentures, equivalent to the amounts distributed by the Trust on the Trust
Preferred Securities.

The Company is subject to federal, state and local income taxes on its domestic
operations and foreign income taxes on its Canadian operation as accounted for
in accordance with Statement of Financial Accounting Standard (SFAS) 109,
Accounting for Income Taxes. Deferred income taxes represent differences
between the financial statement and tax basis of assets and liabilities as
classified on the Companys balance sheet. The Company recorded a tax
provision for income taxes of $1.4 million on pre-tax income of $3.2 million in
the first six months of 2002. The effective tax rate in the first six months
of 2002 was 42.3%. In the first six months of 2001, the Company recorded a tax
provision for income taxes of $1.9 million on a pre-tax loss of $0.6 million.
This was primarily the result of non-deductible goodwill and other items
related to acquisition and divestiture activities.

For the six months ended June 30, 2002,
Hillmans net sales and EBITDA were above plan. For the year
ended December 31, 2002, Hillman is projected to achieve net sales of
approximately $276.0 million, EBITDA of approximately $48.2 million,
and profits before taxes of approximately $6.8 million. There can be no assurance that Hillman
will be able to meet these projections. See Forward Looking Statements.

Cash Flows

The statements of cash flows reflect the changes in cash and cash equivalents
for the six months ended June 30, 2002 and 2001 by classifying transactions
into three major categories: operating, investing and financing activities.

Operating Activities

The Companys main source of liquidity is cash generated from operating
activities consisting of net earnings from operations adjusted for non-cash
operating items such as depreciation and changes in operating assets and
liabilities such as receivables, inventories and payables.

Cash provided by operating activities for the first half of 2002 was $5.6
million compared to cash used of $6.0 million in the same prior year period.
The positive net change of $11.6 million in the current half year was primarily
due to increased earnings in The Hillman Group and the elimination of losses
and working capital associated with the STS Business sold in September 2001.

Investing Activities

The principal recurring investing activities are property additions primarily
for key duplicating machines. Net property additions for the first six months
of 2002 were $10.7 million compared to $7.8 million in the comparable prior
year period. The increase in capital expenditures in the first half of 2002
compared to the year earlier period is primarily the result of the capital
expenditures incurred for the expansion and automation of the new Cincinnati
distribution facility in the amount of $4.7 million. Additionally, the Company
paid $6.2 million in the first half of 2002 to purchase the Lowes specialty
fastener business from R&B, Inc.

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Financing Activities

Net borrowings under the Companys senior credit facilities of $10.8 million
for the six months ended June 30, 2002 decreased $2.4 million from the
comparable prior year period as a result primarily of improved cash flow from
operations. See Operating Activities noted above.

Liquidity and Capital Resources

The Companys working capital position of $53.4 million at June 30,2002
represents an increase of $1.8 million from the December 31, 2001 level of
$51.6 million primarily as a result of the seasonal increase in accounts
receivable of $12.1 million offset by an increase in accounts payable of $3.3
and a decrease in inventories of $3.9 million. The Companys current ratio
decreased slightly to 2.05x at June 30, 2002 from 2.15x at December 31, 2001.

As of June 30, 2002, the Company had $24.4 million available under its secured
credit facilities. The Company had approximately $100.0 million of outstanding
debt under its secured credit facilities at June 30, 2002, consisting of $67.4
million in term loans, $32.3 million in revolving credit borrowings and $0.3
million in capitalized lease obligations. The term loans consisted of a $34.6
million Term B Loan (the Term Loan B) currently at a six (6) month LIBOR rate
of 6.06% and a $32.8 million Term A loan (the Term Loan A) consisting of
$17.0 million currently at a six (6) month LIBOR rate of 5.63% and $15.8
million currently at a three (3) month LIBOR rate of 5.13%. The revolver
borrowings (the Revolver) consist of $20.0 million currently at a three (3)
month LIBOR rate of 5.30%, $12.0 million at a three (3) month LIBOR rate of
5.19% and $0.3 million at an effective rate of 6.75%. The capitalized lease
obligations were at various interest rates.

The Company increased its revolving credit facility by $10 million and its Term
A Loan by $15 million on May 1, 2002 to finance the asset purchase of the
Lowes specialty fastener business and to provide capital to fund the Companys
planned expansion and automation of its distribution facilities. Quarterly
principal payments on the additional $15 million Term A loan totaling $705 will
be paid in the year ended December 31, 2002 followed by quarterly payments of
$953 beginning March 31, 2003 and ending September 30, 2007.

As of June 30, 2002 the Company had firm purchase commitments for capital
expenditures in connection with the automation of its Cincinnati distribution
center of approximately $4.2 million.

The Companys net interest coverage ratio from continuing operations for the
six months ended June 30, 2002 increased to 1.25X (earnings before interest,
distributions on trust preferred securities and income taxes, over net interest
expense and distributions on trust preferred securities), from 0.96X in the
2001 comparison period as a result of increased earnings.

Interest on the Amended Subordinated Debt Issuance of $40 million which matures
September 29, 2009 is at a fixed rate of 18.0% per annum, with cash interest
payments being required on a quarterly basis at a fixed rate of 13.5%
commencing November 15, 2001. The outstanding principal balance of the Amended
Subordinated Debt Issuance shall be increased on a quarterly basis at the
remaining 4.5% fixed rate (the PIK Amount). All of the PIK Amounts are due
on the fifth anniversary of the Amended Subordinated Debt Issuance. As of June
30, 2002, the outstanding Amended Subordinated Debt Issuance including the PIK
Amounts was $41.2 million.

In accordance with the Companys senior credit agreement, Hillman must maintain
its fixed charge coverage at all times in excess of 1.05x through December 31,
2002 and 1.10x thereafter to continue monthly distributions on its Trust
Preferred Securities ($1.0 million per month). Hillmans fixed charge coverage
was 1.36x for the twelve-month period ended June 30, 2002. The fixed charge
test measures adjusted EBITDA, as defined in the senior credit agreement, less
capital expenditures over cash interest expense, Trust Preferred Security
distributions, scheduled senior debt repayments and other fixed charge items.

Page 23 of 27



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The Company has deferred tax assets aggregating $33.2 million and deferred tax
liabilities of $4.6 million as of June 30, 2002, as determined in accordance
with SFAS 109. Management believes that the Companys deferred tax assets will
be realized through the reversal of existing temporary differences between the
financial statement and tax bases, as well as through future taxable income.

During the third quarter of 2002 the Company intends to distribute the note
receivable from G-C and any interest accrued thereon and the Companys
investment in preferred stock of the Technology Services business to its common
stockholders. There can be no assurances the transaction described herein will
be completed.

Critical Accounting Policies and Estimates

The Companys accounting policies are more fully described in Note 2, Summary
of Significant Accounting Policies, of Notes To Consolidated Financial
Statements. As disclosed in Note 2, Summary of Significant Accounting
Policies, of Notes To Consolidated Financial Statements, the preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions about future
events that affect the amounts reported in the financial statements and
accompanying notes. Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from those
estimates, and such differences may be material to the consolidated financial
statements.

The most significant accounting estimates inherent in the preparation of the
Companys consolidated financial statements include estimates associated with
its evaluation of the recoverability of goodwill as well as those used in the
determination of liabilities related to insurance programs, litigation,
discontinued operations, taxation, restructuring, and environmental matters.
In addition, significant estimates form the basis for the Companys reserves
with respect to sales and pricing allowances, collectibility of accounts
receivable, inventory valuations, post-retirement benefits, post-employment
benefits, and certain benefits provided to current employees. Various
assumptions and other factors underlie the determination of these significant
estimates. The process of determining significant estimates is fact specific
and takes into account factors such as historical experience, current and
expected economic conditions, product mix, and in some cases, actuarial
techniques. The Company constantly re-evaluates these significant factors and
makes adjustments where facts and circumstances dictate. Specific factors are
as follows: recoverability of goodwill is based on discounted future cash
flows; litigation and environmental matters are based on projections provided
by legal counsel; insurance programs and post-retirement benefits are
actuarially determined; discontinued operations and restructuring charges are
based on expected termination costs; deferred taxes are based on the Companys
projections of future taxable income; sales and returns and allowances are
based on historical activity and customer contracts; accounts receivable
reserves are based on doubtful accounts and aging of outstanding balances;
inventory reserves are based on expected obsolescence and excess inventory
levels; and post-employment and other employee benefits are based on benefit
plan requirements and severance agreements. Historically, actual results have
not significantly deviated from those determined using the estimates described
above.

Cash Equivalents:

Cash equivalents consist of commercial paper, U.S. Treasury obligations and
other liquid securities purchased with initial maturities less than 90 days and
are stated at cost which approximates market value.

Restricted Investments:

Restricted investments represent assets held in a Rabbi Trust to fund deferred
compensation liabilities due to the Companys employees.

Inventories:

Inventories consisting predominantly of finished goods are valued at the lower
of cost or market, cost being determined principally on the first-in, first-out
method.

Property and Equipment:

Property and equipment, including assets acquired under capital leases, are
carried at cost and include expenditures for new facilities and major renewals.
Maintenance and repairs are charged to expense as incurred. When assets are
sold or otherwise disposed of, the cost and related accumulated depreciation
are removed from their respective accounts, and the resulting gain or loss is
reflected in current operations.

Depreciation:

For financial accounting purposes, depreciation, including that related to
plant and equipment acquired under capital leases, is computed on the
straight-line method over the estimated useful lives of the assets, generally
three to ten years, or, if shorter, over the terms of the related leases.

Goodwill and Other Intangible Assets:

For the Predecessor Financial Statements, goodwill related to the excess of
acquisition cost over the fair value of net assets acquired is amortized on a
straight-line basis over twenty-five to forty years. Effective January 1, 2002
the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets and
accordingly, goodwill is no longer amortized, but is reviewed periodically for
impairment (See Note 1, Basis of Presentation). Other intangible assets
arising principally from acquisitions are amortized on a straight-line basis
over periods ranging from three to twenty-five years.

Long-Lived Assets:

Under the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company has evaluated its long-lived assets
and certain identifiable intangibles including goodwill 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.

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 bases 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.

Retirement Benefits:

Certain employees of the Predecessor and Successor are covered under
profit-sharing retirement plans (defined contribution plans) for which
contributions are determined on an annual basis in accordance with the
requirements of each plan. Certain employees of the Predecessor were covered
under post-retirement benefit plans for which benefits were determined in
accordance with the requirements of each plan.

Revenue Recognition:

Revenue from sales of products is recorded upon the passing of title and risks
of ownership which occurs upon the shipment of goods.

Fair Value of Financial Instruments:

Cash, accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value due to short-term maturity or revolving
nature of these instruments.

Translation of Foreign Currencies:

For the Predecessor Financial Statements, the translation of applicable
foreign-currency-based financial statements into U.S. dollars is performed for
balance sheet accounts using exchange rates in effect at the balance sheet date
and for revenue and expense accounts using an average exchange rate during the
period. The translation of foreign currency transactions is not applicable to
the Successor Financial Statements as a result of the sale of STS.

Exchange adjustments resulting from foreign currency transactions are
recognized in net income in the Predecessor Statements of Operations and were
immaterial for the three and six-month periods ended June 30, 2001.

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 requires management to make
estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Please reference Note 1,
Basis of Presentation, of Notes To Consolidated Financial Statements for
additional related information.

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Inflation

Inflation in recent years has had a modest impact on the operations of the
Company. Continued inflation, over a period of years at higher than current
rates, would result in significant increases in inventory costs and operating
expenses. However, such higher cost of sales and operating expenses can
generally be offset by increases in selling prices, although the ability of the
Companys operating divisions to raise prices is dependent on competitive
market conditions.

Forward Looking Statements

Certain disclosures related to acquisitions and divestitures, refinancing,
capital expenditures, resolution of pending litigation and realization of
deferred tax assets contained in this report involve risks and uncertainties
and may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. We have based these forward-looking
statements on our current expectations, assumptions and projections about
future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions that may cause our actual results,
levels of activity, performance, or achievements to be materially different
from any future results, levels of activity, performance, or achievements
expressed or implied by such forward-looking statements. Actual results could
differ materially from those currently anticipated as a result of a number of
factors, including the risks and uncertainties discussed under captions Risk
Factors set forth in Item 1 of the Companys Annual Report on Form 10-K for
the year ended December 31, 2001. Given these uncertainties, current or
prospective investors are cautioned not to place undue reliance on any such
forward-looking statements.

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. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements included in this Report. 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.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to the impact of interest rate changes as borrowings under our
senior credit facility bear interest at variable interest rates. It is our
policy to enter into interest rate transactions only to the extent considered
necessary to meet our objectives. On March 31,2002 the Company entered into an
interest rate cap agreement on a notional amount of $26.5 million of senior
term debt. The interest rate cap agreement, which expires September 30, 2004,
caps the LIBOR interest rate at 6% plus the senior credit facility LIBOR margin
of between 2% and 2.5%. Based on our exposure to variable rate borrowings at
June 30,2002, a one percent (1%) change in the weighted average interest rate
would change our annual interest expense by approximately $0.9 million.

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PART II
OTHER INFORMATION

Items 1, 2, 3, 4 & 5  None

Item 6  Exhibits and Reports on Form 8-K

|   |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) |  |        |  | Exhibits, Including Those Incorporated by Reference.                                                                                                                                                                                                                                                                                                                                           
|  
|  
|  
|  
|   |  | 10.1*  |  | Consent and First Amendment to the Credit Agreement dated
as of September 28, 2001, by and among The Hillman Group, Inc. as
Borrower and Heller Financial, Inc. as Agent, an Issuing Lender and
a Lender and Antares Capital Corporation, General Electric Capital
Corporation and Madison Capital Funding, LLC, each as Co-Agent and
the other financial institutions party hereto as lenders.
|  
|  
|  
|  
|   |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|  
|  
|  
|  
|   |  | 10.2** |  | Unit Repurchase Agreement by and among The Hillman Companies,
Inc., SunSub Holdings LLC and GC-Sun Holdings, L.P.                                                                                                                                                                                                                                                                              
|  
|  
|  
|  
|   |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|  
|  
|  
|  
|   |  | 99.1** |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                        
|  
|  
|  
|  
|   |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                
|  
|  
|  
|  
|   |  | 99.2** |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                        
|  
|  
|  
|  
|   |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                
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|b) |  |        |  | Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                                                                           
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|   |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                
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|   |  |        |  | None                                                                                                                                                                                                                                                                                                                                                                                           

|   |  |                                                                                           
|-- |  | ------------------------------------------------------------------------------------------
|*  |  | Filed as an exhibit to Quarterly Report on Form 10-Q for the Quarter
ended March 31, 2002.
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|   |  |                                                                                           
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|** |  | Filed herewith                                                                            

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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/ James P. Waters                                                |  | /s/ Harold J. Wilder                                  
|James P. Waters
Vice President  Finance
(Chief Financial Officer) |  | Harold J. Wilder
Controller
(Chief Accounting Officer)



DATE: August 14, 2002

Page 27 of 27