##### 



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended September 30, 2002

Commission file number 1-13293

The Hillman Companies, Inc. (formerly SunSource, Inc.)

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(Exact name of registrant as specified in its charter)


|                                         |  |                    
|---------------------------------------- |  | -------------------
|Delaware                                 |  | 23-2874736         
|                                         |  |                    
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|incorporation or organization)           |  | Identification No.)
|                                         |  |                    
|10590 Hamilton Avenue                    |  |                    
|Cincinnati, Ohio                         |  | 45231              
|                                         |  |                    
|(Address of principal executive offices) |  | (Zip Code)         

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

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

|                                     |  |                                          
|------------------------------------ |  | -----------------------------------------
|Title of Class                       |  | Name of Each Exchange on Which Registered
|                                     |  |                                          
|11.6% Junior Subordinated Debentures |  | None                                     
|Preferred Securities Guaranty        |  |                                          
|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 November 14, 2002 there were 7,118,665 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 33



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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

(formerly SunSource Inc. and Subsidiaries)

INDEX

|                                                                                               |                                                                                                          |  |         |      | 
|---------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- |  | ------- | ---- | 
|                                                                                               |                                                                                                          |  | PAGE(S) |     
|                                                                                               |                                                                                                          |  |         |     
|PART I. FINANCIAL INFORMATION                                                                  |                                                                                                          |  |         |     
|Item 1. Consolidated Financial Statements                                                      |                                                                                                          |  |         |     
|                                                                                               | Consolidated Balance Sheets as of September 30, 2002
(Unaudited) and December 31, 2001                   |  |         | 3    | 
|                                                                                               | Consolidated Statements of Operations for
the Three Months ended September 30, 2002 and 2001
(Unaudited) |  |         | 4    | 
|                                                                                               | Consolidated Statements of Operations for
the Nine Months ended September 30, 2002 and 2001
(Unaudited)  |  |         | 5    | 
|                                                                                               | Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 2002 and 2001
(Unaudited)  |  |         | 6    | 
|                                                                                               | Notes to Consolidated Financial Statements
(Unaudited)                                                   |  |         | 7-16 | 
|Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations |                                                                                                          |  | 17-28   |     
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                             |                                                                                                          |  | 29      |     
|Item 4. Controls and Procedures                                                                |                                                                                                          |  | 29      |     
|PART II. OTHER INFORMATION                                                                     |                                                                                                          |  | 30      |     
|SIGNATURES                                                                                     |                                                                                                          |  | 31      |     
|CERTIFICATES PURSUANT to SECTION 302 of the SARBANES-OXLEY ACT OF 2002                         |                                                                                                          |  | 32-33   |     

Page 2 of 33



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Item 1.

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

|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |              |        |         |  | 
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------- | ------------------------------------------ | ------------------------------------ | ------ | ------------- | ------- | ------------ | ------ | ------- |  | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        | September 30, |         |              |        |        
|                                                                                          |                                                                                        |                        |                                            |                                      |        | 2002          |         | December 31,
|                                                                                          |                                                                                        |                        |                                            |                                      |        | (Unaudited)   |         | 2001        
|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |             
|                                                                                          |                                                                                        |                        |                                            | ASSETS                               |        |               |         |              |        |         |  | 
|Current assets:                                                                           |                                                                                        |                        |                                            |                                      |        |               |         |             
|                                                                                          | Cash and cash equivalents                                                              |                        | $                                          | 2,510                                |        |               | $       | 2,059        |       
|                                                                                          | Restricted investments                                                                 |                        |                                            | 1,142                                |        |               |         | 1,187        |       
|                                                                                          | Accounts receivable, net                                                               |                        |                                            | 41,067                               |        |               |         | 28,399       |       
|                                                                                          | Inventories                                                                            |                        |                                            | 46,575                               |        |               |         | 49,937       |       
|                                                                                          | Deferred income taxes                                                                  |                        |                                            | 9,136                                |        |               |         | 9,136        |       
|                                                                                          | Other current assets                                                                   |                        |                                            | 3,558                                |        |               |         | 5,868        |       
|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |             
|                                                                                          |                                                                                        |                        | Total current assets                       |                                      |        | 103,988       |         |              |        | 96,586  | 
|Property and equipment, net                                                               |                                                                                        |                        | 63,381                                     |                                      |        |               | 55,285  |             
|Goodwill, net                                                                             |                                                                                        |                        | 128,916                                    |                                      |        |               | 120,585 |             
|Other intangibles, net                                                                    |                                                                                        |                        | 11,439                                     |                                      |        |               | 12,553  |             
|Deferred income taxes                                                                     |                                                                                        |                        | 21,976                                     |                                      |        |               | 25,443  |             
|Restricted investments                                                                    |                                                                                        |                        | 5,701                                      |                                      |        |               | 7,462   |             
|Other investments                                                                         |                                                                                        |                        | 17,475                                     |                                      |        |               | 16,185  |             
|Deferred financing fees, net                                                              |                                                                                        |                        | 5,644                                      |                                      |        |               | 5,536   |             
|Other assets                                                                              |                                                                                        |                        | 3,079                                      |                                      |        |               | 4,929   |             
|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |             
|                                                                                          |                                                                                        |                        | Total assets                               |                                      | $      | 361,599       |         |              | $      | 344,564 | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |             
|                                                                                          |                                                                                        |                        |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |        |               |         |              |        |         |  | 
|Current liabilities:                                                                      |                                                                                        |                        |                                            |                                      |        |               |         |             
|                                                                                          | Accounts payable                                                                       |                        | $                                          | 20,623                               |        |               | $       | 17,124       |       
|                                                                                          | Current portion of senior term loans                                                   |                        |                                            | 7,962                                |        |               |         | 3,813        |       
|                                                                                          | Current portion of capitalized lease obligations                                       |                        |                                            | 55                                   |        |               |         | 74           |       
|                                                                                          | Deferred income tax liability                                                          |                        |                                            | 31                                   |        |               |         | 31           |       
|                                                                                          | Accrued expenses:                                                                      |                        |                                            |                                      |        |               |         |              |       
|                                                                                          |                                                                                        | Salaries and wages     |                                            |                                      | 3,215  |               |         |              | 5,337  |        
|                                                                                          |                                                                                        | Income and other taxes |                                            |                                      | 1,490  |               |         |              | 2,014  |        
|                                                                                          |                                                                                        | Deferred compensation  |                                            |                                      | 1,142  |               |         |              | 1,187  |        
|                                                                                          |                                                                                        | Other accrued expenses |                                            |                                      | 19,829 |               |         |              | 15,427 |        
|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |             
|                                                                                          |                                                                                        |                        | Total current liabilities                  |                                      |        | 54,347        |         |              |        | 45,007  | 
|Long term senior term loans                                                               |                                                                                        |                        | 58,185                                     |                                      |        |               | 50,312  |             
|Bank revolving credit                                                                     |                                                                                        |                        | 30,345                                     |                                      |        |               | 34,052  |             
|Long term capitalized lease obligations                                                   |                                                                                        |                        | 208                                        |                                      |        |               | 248     |             
|Long term unsecured subordinated notes to related party                                   |                                                                                        |                        | 41,629                                     |                                      |        |               | 40,240  |             
|Deferred compensation                                                                     |                                                                                        |                        | 5,701                                      |                                      |        |               | 7,462   |             
|Deferred income tax liability                                                             |                                                                                        |                        | 4,603                                      |                                      |        |               | 4,603   |             
|Other non-current liabilities                                                             |                                                                                        |                        | 6,336                                      |                                      |        |               | 7,122   |             
|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |             
|                                                                                          |                                                                                        |                        | Total liabilities                          |                                      |        | 201,354       |         |              |        | 189,046 | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |             
|Guaranteed preferred beneficial interests in the
Companys junior subordinated debentures |                                                                                        |                        | 102,201                                    |                                      |        |               | 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       |       
|                                                                                          | Retained earnings (accumulated deficit)                                                |                        |                                            | 1,718                                |        |               |         | (2,909       | )     
|                                                                                          | Accumulated other comprehensive income                                                 |                        |                                            | 3                                    |        |               |         |             |       
|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |             
|                                                                                          |                                                                                        |                        | Total stockholders equity                 |                                      |        | 58,044        |         |              |        | 53,414  | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |             
|                                                                                          |                                                                                        |                        | Total liabilities and stockholders equity |                                      | $      | 361,599       |         |              | $      | 344,564 | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |               |         |             

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 3 of 33



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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  
|                                                           |                                              |                            |        |               |        |              
|                                                           |                                              |                            |        | September 30, |        | September 30,
|                                                           |                                              |                            |        | 2002          |        | 2001         
|                                                           |                                              |                            |        |               |        |              
|Net sales                                                  |                                              | $                          | 75,707 |               |        | $             | 114,767 |       
|Cost of sales                                              |                                              |                            | 33,071 |               |        |               | 65,551  |       
|                                                           |                                              |                            |        |               |        |               |         |       
|                                                           |                                              | Gross profit               |        |               | 42,636 |               |         |        | 49,216 | 
|                                                           |                                              |                            |        |               |        |               |         |       
|Operating expenses:                                        |                                              |                            |        |               |        |               |         |       
|                                                           | Selling, general and administrative expenses |                            |        | 27,584        |        |               |         | 38,302 |       
|                                                           | Depreciation                                 |                            |        | 3,048         |        |               |         | 3,505  |       
|                                                           | Amortization                                 |                            |        | 371           |        |               |         | 989    |       
|                                                           | Management fee                               |                            |        | 450           |        |               |         |       |       
|                                                           |                                              |                            |        |               |        |               |         |       
|                                                           |                                              | Total operating expenses   |        |               | 31,453 |               |         |        | 42,796 | 
|                                                           |                                              |                            |        |               |        |               |         |       
|Other income (expense), net                                |                                              |                            | 109    |               |        |               | (105    | )     
|                                                           |                                              |                            |        |               |        |               |         |       
|                                                           |                                              | Income from operations     |        |               | 11,292 |               |         |        | 6,315  | 
|Interest expense, net                                      |                                              |                            | 3,268  |               |        |               | 2,921   |       
|Distributions on guaranteed preferred
beneficial interests |                                              |                            | 3,058  |               |        |               | 3,058   |       
|Equity in earnings of affiliate (Note 3)                   |                                              |                            |       |               |        |               | 118     |       
|                                                           |                                              |                            |        |               |        |               |         |       
|                                                           |                                              | Income before income taxes |        |               | 4,966  |               |         |        | 454    | 
|Income tax provision (benefit)                             |                                              |                            | 2,177  |               |        |               | (634    | )     
|                                                           |                                              |                            |        |               |        |               |         |       
|                                                           |                                              | Net income                 |        | $             | 2,789  |               |         | $      | 1,088  | 
|                                                           |                                              |                            |        |               |        |               |         |       

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 4 of 33



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##### 



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

|                                                           |                                              |                                   |         |               |         |               |         |         |         |  
|---------------------------------------------------------- | -------------------------------------------- | --------------------------------- | ------- | ------------- | ------- | ------------- | ------- | ------- | ------- | -
|                                                           |                                              |                                   |         | Successor     |         | Predecessor  
|                                                           |                                              |                                   |         |               |         |              
|                                                           |                                              |                                   |         | September 30, |         | September 30,
|                                                           |                                              |                                   |         | 2002          |         | 2001         
|                                                           |                                              |                                   |         |               |         |              
|Net sales                                                  |                                              | $                                 | 214,910 |               |         | $             | 341,307 |        
|Cost of sales                                              |                                              |                                   | 95,564  |               |         |               | 197,743 |        
|                                                           |                                              |                                   |         |               |         |               |         |        
|                                                           |                                              | Gross profit                      |         |               | 119,346 |               |         |         | 143,564 |  
|                                                           |                                              |                                   |         |               |         |               |         |        
|Operating expenses:                                        |                                              |                                   |         |               |         |               |         |        
|                                                           | Selling, general and administrative expenses |                                   |         | 82,333        |         |               |         | 113,443 |        
|                                                           | Depreciation                                 |                                   |         | 8,753         |         |               |         | 9,593   |        
|                                                           | Amortization                                 |                                   |         | 1,114         |         |               |         | 2,895   |        
|                                                           | Management fee                               |                                   |         | 1,350         |         |               |         |        |        
|                                                           |                                              |                                   |         |               |         |               |         |        
|                                                           |                                              | Total operating expenses          |         |               | 93,550  |               |         |         | 125,931 |  
|                                                           |                                              |                                   |         |               |         |               |         |        
|Other income (expense), net                                |                                              |                                   | 1,571   |               |         |               | (398    | )      
|                                                           |                                              |                                   |         |               |         |               |         |        
|                                                           |                                              | Income from operations            |         |               | 27,367  |               |         |         | 17,235  |  
|Interest expense, net                                      |                                              |                                   | 10,039  |               |         |               | 9,222   |        
|Distributions on guaranteed preferred
beneficial interests |                                              |                                   | 9,172   |               |         |               | 9,174   |        
|Equity in earnings of affiliate (Note 3)                   |                                              |                                   |        |               |         |               | 1,063   |        
|                                                           |                                              |                                   |         |               |         |               |         |        
|                                                           |                                              | Income (loss) before income taxes |         |               | 8,156   |               |         |         | (98     | )
|Income tax provision                                       |                                              |                                   | 3,529   |               |         |               | 1,229   |        
|                                                           |                                              |                                   |         |               |         |               |         |        
|                                                           |                                              | Net income (loss)                 |         | $             | 4,627   |               |         | $       | (1,327  | )
|                                                           |                                              |                                   |         |               |         |               |         |        

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 5 of 33



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

|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |               |         |        |         |  
|------------------------------------------------ | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | -------------------------------------------- | ------------------------------------------- | ------- | ------------- | ------- | ------------- | ------- | ------ | ------- | -
|                                                 |                                                                                                     |                                                      |                                              |                                             |         | Successor     |         | Predecessor  
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|                                                 |                                                                                                     |                                                      |                                              |                                             |         | September 30, |         | September 30,
|                                                 |                                                                                                     |                                                      |                                              |                                             |         | 2002          |         | 2001         
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|Cash flows from operating activities:            |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|                                                 | Net income (loss)                                                                                   |                                                      | $                                            | 4,627                                       |         |               | $       | (1,327        | )      
|                                                 | Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities: |                                                      |                                              |                                             |         |               |         |               |        
|                                                 |                                                                                                     |                                                      | Depreciation and amortization                |                                             |         | 9,867         |         |               |         | 12,488 |        
|                                                 |                                                                                                     |                                                      | Equity in earnings of affiliate              |                                             |         |              |         |               |         | (1,063 | )      
|                                                 |                                                                                                     |                                                      | Deferred income tax                          |                                             |         | 3,467         |         |               |         | 1,044  |        
|                                                 |                                                                                                     |                                                      | PIK interest on unsecured subordinated notes |                                             |         | 1,389         |         |               |         |       |        
|                                                 |                                                                                                     |                                                      | Changes in current operating items:          |                                             |         |               |         |               |         |        |        
|                                                 |                                                                                                     |                                                      |                                              | Increase in accounts receivable             |         |               | (11,884 | )             |         |        | (13,792 | )
|                                                 |                                                                                                     |                                                      |                                              | Decrease in inventories                     |         |               | 4,713   |               |         |        | 1,228   |  
|                                                 |                                                                                                     |                                                      |                                              | Decrease in income taxes receivable         |         |               |        |               |         |        | 27      |  
|                                                 |                                                                                                     |                                                      |                                              | Decrease (increase) in other current assets |         |               | 2,122   |               |         |        | (356    | )
|                                                 |                                                                                                     |                                                      |                                              | Increase (decrease) in accounts payable     |         |               | 3,499   |               |         |        | (185    | )
|                                                 |                                                                                                     |                                                      |                                              | Decrease in other accrued liabilities       |         |               | (1,505  | )             |         |        | (4,881  | )
|                                                 |                                                                                                     |                                                      | Other items, net                             |                                             |         | (553          | )       |               |         | 2,013  |        
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|                                                 |                                                                                                     | Net cash provided by (used for) operating activities |                                              |                                             | 15,742  |               |         |               | (4,804  | )     
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|Cash flows from investing activities:            |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|                                                 | Proceeds from sale of property and equipment                                                        |                                                      |                                              | 104                                         |         |               |         | 718           |        
|                                                 | Capital expenditures                                                                                |                                                      |                                              | (17,714                                     | )       |               |         | (12,179       | )      
|                                                 | R&B Acquisition                                                                                     |                                                      |                                              | (6,225                                      | )       |               |         |              |        
|                                                 | Merger transaction fees                                                                             |                                                      |                                              |                                            |         |               |         | (3,112        | )      
|                                                 | Other, net                                                                                          |                                                      |                                              | 1,037                                       |         |               |         | (3,096        | )      
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|                                                 |                                                                                                     | Net cash used for investing activities               |                                              |                                             | (22,798 | )             |         |               | (17,669 | )     
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|Cash flows from financing activities:            |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|                                                 | Borrowings (repayments) of senior term loans                                                        |                                                      |                                              | 12,022                                      |         |               |         | (250          | )      
|                                                 | (Repayments) borrowings of revolving credit loans, net                                              |                                                      |                                              | (3,707                                      | )       |               |         | 30,083        |        
|                                                 | Repayments of unsecured subordinated notes                                                          |                                                      |                                              |                                            |         |               |         | (2,785        | )      
|                                                 | Principal payments under capitalized lease obligations                                              |                                                      |                                              | (59                                         | )       |               |         | (707          | )      
|                                                 | Financing fees                                                                                      |                                                      |                                              | (749                                        | )       |               |         | 5             |        
|                                                 | Repayments under other credit facilities, net                                                       |                                                      |                                              |                                            |         |               |         | (624          | )      
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|                                                 |                                                                                                     | Net cash provided by financing activities            |                                              |                                             | 7,507   |               |         |               | 25,722  |       
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|Net increase in cash and cash equivalents        |                                                                                                     |                                                      | 451                                          |                                             |         |               | 3,249   |              
|Cash and cash equivalents at beginning of period |                                                                                                     |                                                      | 2,059                                        |                                             |         |               | 2,811   |              
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |              
|Cash and cash equivalents at end of period       |                                                                                                     | $                                                    | 2,510                                        |                                             |         | $             | 6,060   |              
|                                                 |                                                                                                     |                                                      |                                              |                                             |         |               |         |              

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 6 of 33



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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, the Company 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 September 30,
2002 and December 31, 2001 and Statements of Operations for the three and nine
month periods ended September 30, 2002 and 2001 and Statement of Cash Flow for
the nine month periods ended September 30, 2002 and 2001 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. Changes in the
estimate of fair value of the assets and liabilities assumed in the Merger
Transaction for the nine month period ended September 30, 2002 resulted in a
$4,079 increase in goodwill and a corresponding increase in liabilities assumed
primarily due to the settlement of contingent liabilities related to the
purchase.

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 nine months ended September 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 33



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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 Sept. 30 |       | Nine Months ended Sept. 30
|                                           |  |                             |       |                           
|                                           |  | 2002                        |       | 2001                       |  | 2002 |       | 2001
|                                           |  |                             |       |                            |  |      |       |     
|Reported net income (loss)                 |  | $                           | 2,789 |                            |  | $    | 1,088 |      |  | $ | 4,627 |  |  | $ | (1,327 | )
|Goodwill amortization, net of income taxes |  |                             |      |                            |  |      | 618   |      |  |   |      |  |  |   | 1,781  |  
|                                           |  |                             |       |                            |  |      |       |      |  |   |       |  |  |   |        |  
|Adjusted net income                        |  | $                           | 2,789 |                            |  | $    | 1,706 |      |  | $ | 4,627 |  |  | $ | 454    |  
|                                           |  |                             |       |                            |  |      |       |      |  |   |       |  |  |   |        |  

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

|                       |  |          |        |              |  |   |       | 
|---------------------- |  | -------- | ------ | ------------ |  | - | ----- | 
|                       |  | Carrying |        | Accumulated 
|                       |  | Amount   |        | Amortization
|                       |  |          |        |             
|Trademarks             |  | $        | 6,500  |              |  | $ | 650   | 
|Patents                |  |          | 6,700  |              |  |   | 2,094 | 
|Proprietary software   |  |          | 1,000  |              |  |   | 313   | 
|Non-compete agreements |  |          | 1,250  |              |  |   | 954   | 
|                       |  |          |        |              |  |   |       | 
|                       |  | $        | 15,450 |              |  | $ | 4,011 | 
|                       |  |          |        |              |  |   |       | 

Amortization expense for intangible assets for the three months and nine months
ended September 30, 2002 was $371 and $1,114, 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 33



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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 original 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 33



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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, 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, principally
employed at STS, were covered under a post-retirement benefit plan for which
benefits were determined in accordance with the requirements of the plan. This
post-retirement benefit plan was terminated as of December 31, 2000. See Note
7, Defined Benefit Retirement Plan.

Revenue Recognition:

Revenue from sales of products is recorded upon the passing of title and risks
of ownership to the customer, which occurs upon the shipment of goods. Revenue
is recorded net of pricing allowances such as customer rebates and slotting
fees.

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:

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.

Comprehensive Income (Loss):

The components of comprehensive income (loss) for the three and nine month
periods ended September 30, 2002 and 2001 were as follows:

|                                        |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|--------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ------ | -
|                                        |  | Three months ended |       | Nine months ended
|                                        |  | September 30       |       | September 30     
|                                        |  | 2002               |       | 2001              |  | 2002 |       | 2001
|                                        |  |                    |       |                   |  |      |       |     
|Net income (loss)                       |  | $                  | 2,789 |                   |  | $    | 1,088 |      |  | $ | 4,627 |  |  | $ | (1,327 | )
|Foreign currency translation
adjustment |  |                    | 7     |                   |  |      |      |      |  |   | 3     |  |  |   |       |  
|                                        |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|Comprehensive income (loss)             |  | $                  | 2,796 |                   |  | $    | 1,088 |      |  | $ | 4,630 |  |  | $ | (1,327 | )
|                                        |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  

Page 10 of 33



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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, continued:

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.

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 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 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 September 30, 2002, the Companys consolidated balance
sheet includes $6,706 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.

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 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 three and nine month periods ended September 30, 2002 the
Company added $468 and $769, respectively, of accrued interest to the
principal. As of

Page 11 of 33



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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, continued:

September 30, 2002, the Companys consolidated balance sheet includes $10,769
in other investments related to the notes and interest accrued thereon.

During the fourth quarter of 2002, the Company currently intends
to retain the G-C subordinated note receivable issued and the interest accrued thereon and
to distribute its
investment in the preferred stock of the Technology Services business to its
common stockholders. There can be no assurances that this distribution will be
made.

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. The
purchase of the specialty fastener business will expand the breadth of the
Companys product offering to Lowes. 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. 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 in 2002.

The accompanying financial statements reflect the preliminary 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 final purchase price is subject to
adjustment based on the value of inventory determined in accordance with the
asset purchase agreement between the Company and R&B, Inc. 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 month period ended September 30, 2001 and nine
month periods ended September 30, 2001 and 2002 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 |        | Nine months ended |  | Nine months ended
|                  |  | Sept. 30, 2001     |        | Sept. 30, 2001    |  | Sept. 30, 2002   
|                  |  |                    |        |                   |  |                  
|Net Sales         |  | $                  | 68,034 |                   |  | $                 | 193,781 |   |  | $ | 217,148 | 
|Net Income (loss) |  | $                  | 21     |                   |  | $                 | (130    | ) |  | $ | 4,855   | 

Page 12 of 33



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##### 



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

4. Contingencies:

Certain 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 13 of 33



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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. The Predecessor had
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 nine
months ended September 30, 2002 and 2001. Corporate information is included to
reconcile segment data to the consolidated financial statements.

|                                                                      |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |         |  
|--------------------------------------------------------------------- | --------------------------------- | - | -------------------------- | ------ | ------------------------- | - | ------------- | ------- | ------------- | - | ------- | ------- |  | - | ------- | ------- | -
|                                                                      |                                   |   | For the Three Months Ended |        | For the Nine Months Ended
|                                                                      |                                   |   | Sept 30, 2002              |        | Sept 30, 2001             |   | Sept 30, 2002 |         | Sept 30, 2001
|                                                                      |                                   |   |                            |        |                           |   |               |         |              
|                                                                      |                                   |   | (Successor)                |        | (Predecessor)             |   | (Successor)   |         | (Predecessor)
|                                                                      |                                   |   |                            |        |                           |   |               |         |              
|Net
Sales                                                             |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|Hillman Group                                                         |                                   | $ | 75,707                     |        |                           | $ | 66,355        |         |               | $ | 214,910 |         |  | $ | 188,746 |        
|Technology Services                                                   |                                   |   |                           |        |                           |   | 48,412        |         |               |   |        |         |  |   | 152,561 |        
|                                                                      |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|                                                                      | Consolidated net sales -          |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |         |  
|                                                                      | business segments                 |   | $                          | 75,707 |                           |   | $             | 114,767 |               |   | $       | 214,910 |  |   | $       | 341,307 |  
|                                                                      |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|EBITDA                                                                |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|Hillman Group                                                         |                                   | $ | 15,587                     |        |                           | $ | 13,265        |         |               | $ | 40,405  |         |  | $ | 35,007  |        
|Technology Services                                                   |                                   |   |                           |        |                           |   | (927          | )       |               |   |        |         |  |   | (1,205  | )      
|                                                                      |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|                                                                      | EBITDA  business segments        |   | $                          | 15,587 |                           |   | $             | 12,338  |               |   | $       | 40,405  |  |   | $       | 33,802  |  
|                                                                      |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|EBIT                                                                  |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|Segment Profit  EBITDA                                               |                                   | $ | 15,587                     |        |                           | $ | 12,338        |         |               | $ | 40,405  |         |  | $ | 33,802  |        
|Hillman Group  Depreciation                                          |                                   |   | (3,048                     | )      |                           |   | (2,799        | )       |               |   | (8,753  | )       |  |   | (7,977  | )      
|Technology Services  Depreciation                                    |                                   |   |                           |        |                           |   | (706          | )       |               |   |        |         |  |   | (1,616  | )      
|Hillman Group  Amortization                                          |                                   |   | (371                       | )      |                           |   | (848          | )       |               |   | (1,114  | )       |  |   | (2,466  | )      
|Technology Services  Amortization                                    |                                   |   |                           |        |                           |   | (141          | )       |               |   |        |         |  |   | (429    | )      
|                                                                      |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|                                                                      | EBIT  business segments          |   | $                          | 12,168 |                           |   | $             | 7,844   |               |   | $       | 30,538  |  |   | $       | 21,314  |  
|                                                                      |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|Reconciliation of Segment Profit to
Income (Loss) Before Income Taxes |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|Segment Profit  EBIT                                                 |                                   | $ | 12,168                     |        |                           | $ | 7,844         |         |               | $ | 30,538  |         |  | $ | 21,314  |        
|Management fee expense                                                |                                   |   | (450                       | )      |                           |   |              |         |               |   | (1,350  | )       |  |   |        |        
|Dividend income  STS Operating, Inc.                                 |                                   |   | 176                        |        |                           |   |              |         |               |   | 521     |         |  |   |        |        
|Corporate expenses                                                    |                                   |   | (602                       | )      |                           |   | (1,529        | )       |               |   | (2,342  | )       |  |   | (4,079  | )      
|                                                                      |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|                                                                      | Income from operations            |   |                            | 11,292 |                           |   |               | 6,315   |               |   |         | 27,367  |  |   |         | 17,235  |  
|Equity in earnings of affiliate                                       |                                   |   |                           |        |                           |   | 118           |         |               |   |        |         |  |   | 1,063   |        
|Interest expense, net                                                 |                                   |   | (3,268                     | )      |                           |   | (2,921        | )       |               |   | (10,039 | )       |  |   | (9,222  | )      
|Distributions on guaranteed preferred
beneficial interests            |                                   |   | (3,058                     | )      |                           |   | (3,058        | )       |               |   | (9,172  | )       |  |   | (9,174  | )      
|                                                                      |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        
|                                                                      | Income (loss) before income taxes |   | $                          | 4,966  |                           |   | $             | 454     |               |   | $       | 8,156   |  |   | $       | (98     | )
|                                                                      |                                   |   |                            |        |                           |   |               |         |               |   |         |         |  |   |         |        

Page 14 of 33



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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 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 to related party on the
Companys consolidated balance sheet at September 30, 2002 in the amount of
$41,629 of which $1,629 represents the PIK amount.

On September 28, 2001, the Company 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 was used to finance the expansion and automation of the
Companys distribution facilities.

As of September 30, 2002, the Company had $26,429 available under the Revolver.
The Company had $96,755 of outstanding debt at September 30, 2002 consisting
of Revolver borrowings of $30,345, outstanding Term Loans of $66,147 and
capital lease obligations of $263. The Company had letter of credit
commitments outstanding of $3,225 at September 30, 2002.

As of September 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.

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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 for the nine month period
ended September 30, 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.

9. Subsequent Events:

On October 3, 2002, the Company, through its Hillman Group subsidiary,
purchased the net assets of the DIY division (DIY) of the Fastenal Company of
Winona, MN (the Seller). DIY distributes fasteners, anchors, picture hanging
wire, hooks, tacks, and brads to national hardware cooperatives and home
centers. The Companys management believes that the purchase of the DIY
business will further strengthen the Companys position in its core market
segments, particularly with the national hardware cooperatives. The Company
paid $15,658 in cash to the Seller for the net assets of DIY. The purchase
price is subject to a post-closing adjustment based upon the Companys review
of the closing balance sheet of DIY provided by the Seller. The final
allocation of the purchase price will be determined following the post-closing
adjustment to the balance sheet. The excess of the $15,658 purchase price over
the net assets acquired is preliminarily estimated to be $6,240. The
transaction was financed from the Companys existing credit lines.

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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).

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Financing Arrangements

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.

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 September 30, 2002,
the outstanding balance of the term loans aggregated $66.1 million.

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##### 



Results of Operations

Segment Sales and
Profitability for the Three Months and Nine Months Ended September 30, 2002 and 2001

(dollars in thousands)

|                                      |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |      |  
|------------------------------------- | ------------------------------------------- | - | --------------------------- | ------ | -------------------------- |  | ------------- | ---- | ------------- | - | ------ | ------- | ----- |  | --------- | ---- | ----- | - | ------- | ------- |  |  | --------- | ---- | ---- | - | ------- | ------- |  |  | --------- | ---- | -
|                                      |                                             |   | FOR THE THREE MONTHS ENDED, |        | FOR THE NINE MONTHS ENDED,
|                                      |                                             |   |                             |        |                           
|                                      |                                             |   | Successor                   |        | Predecessor                |  | Successor     |      | Predecessor  
|                                      |                                             |   |                             |        |                            |  |               |      |              
|                                      |                                             |   | Sept 30, 2002               |        | Sept 30, 2001              |  | Sept 30, 2002 |      | Sept 30, 2001
|                                      |                                             |   |                             |        |                            |  |               |      |              
|                                      |                                             |   |                             |        |                            |  | % OF          |      |               |   |        |         | % OF  |  |           |      |       |   | % OF    |         |  |  |           |      | % OF
|                                      |                                             |   | AMOUNT                      |        | TOTAL                      |  | AMOUNT        |      | TOTAL         |   | AMOUNT |         | TOTAL |  | AMOUNT    |      | TOTAL
|                                      |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |      
|Sales                                 |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |     
|Hillman Group  Ongoing Operations    |                                             | $ | 75,707                      |        |                            |  | 100.0         | %    |               | $ | 66,355 |         |       |  | 100.0     | %    |       | $ | 214,910 |         |  |  | 100.0     | %    |      | $ | 188,746 |         |  |  | 100.0     | %   
|Technology Services                   |                                             |   |                            |        |                            |  |               |      |               |   | 48,412 |         |       |  |           |      |       |   |        |         |  |  |           |      |      |   | 152,561 |         |  |  |           |     
|                                      |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |     
|                                      | Consolidated Net Sales                      |   | $                           | 75,707 |                            |  |               |      |               |   | $      | 114,767 |       |  |           |      |       |   | $       | 214,910 |  |  |           |      |      |   | $       | 341,307 |  |  |           |      |  
|                                      |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |     
|                                      |                                             |   |                             |        |                            |  | % OFSALES     |      |               |   |        |         |       |  | % OFSALES |      |       |   |         |         |  |  | % OFSALES |      |      |   |         |         |  |  | % OFSALES |     
|Gross
Profit                          |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |     
|Hillman Group  Ongoing Operations    |                                             | $ | 42,636                      |        |                            |  | 56.3          | %    |               | $ | 37,383 |         |       |  | 56.3      | %    |       | $ | 119,346 |         |  |  | 55.5      | %    |      | $ | 106,541 |         |  |  | 56.4      | %   
|Technology Services                   |                                             |   |                            |        |                            |  |               |      |               |   | 11,833 |         |       |  |           |      |       |   |        |         |  |  |           |      |      |   | 37,023  |         |  |  |           |     
|                                      |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |     
|                                      | Consolidated Gross Profit                   |   | $                           | 42,636 |                            |  |               |      |               |   | $      | 49,216  |       |  |           |      |       |   | $       | 119,346 |  |  |           |      |      |   | $       | 143,564 |  |  |           |      |  
|                                      |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |     
|EBITDA                                |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |     
|Hillman Group                         |                                             | $ | 15,587                      |        |                            |  | 20.6          | %    |               | $ | 13,265 |         |       |  | 20.0      | %    |       | $ | 40,405  |         |  |  | 18.8      | %    |      | $ | 35,007  |         |  |  | 18.5      | %   
|Management fee expense                |                                             |   | (450                        | )      |                            |  | -0.6          | %    |               |   |       |         |       |  |           |      |       |   | (1,350  | )       |  |  | -0.6      | %    |      |   |        |         |  |  |           |     
|Dividend income  STS Operating, Inc. |                                             |   | 176                         |        |                            |  | 0.2           | %    |               |   |       |         |       |  |           |      |       |   | 521     |         |  |  | 0.2       | %    |      |   |        |         |  |  |           |     
|Corporate expenses                    |                                             |   | (602                        | )      |                            |  | -0.8          | %    |               |   | (1,529 | )       |       |  | -2.3      | %    |       |   | (2,342  | )       |  |  | -1.1      | %    |      |   | (4,079  | )       |  |  | -2.2      | %   
|                                      |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |     
|                                      | Consolidated EBITDA -
Ongoing Operations(a) |   | $                           | 14,711 |                            |  |               | 19.4 | %             |   | $      | 11,736  |       |  |           | 17.7 | %     |   | $       | 37,234  |  |  |           | 17.3 | %    |   | $       | 30,928  |  |  |           | 16.4 | %
|Technology Services                   |                                             |   |                            |        |                            |  |               |      |               |   | (927   | )       |       |  |           |      |       |   |        |         |  |  |           |      |      |   | (1,205  | )       |  |  |           |     
|Equity in earnings of affiliate(b)    |                                             |   |                            |        |                            |  |               |      |               |   | 118    |         |       |  |           |      |       |   |        |         |  |  |           |      |      |   | 1,063   |         |  |  |           |     
|                                      |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |     
|                                      | Consolidated EBITDA                         |   | $                           | 14,711 |                            |  |               |      |               |   | $      | 10,927  |       |  |           |      |       |   | $       | 37,234  |  |  |           |      |      |   | $       | 30,786  |  |  |           |      |  
|                                      |                                             |   |                             |        |                            |  |               |      |               |   |        |         |       |  |           |      |       |   |         |         |  |  |           |      |      |   |         |         |  |  |           |     



---

|(a) |  | EBITDA (earnings before interest, taxes, depreciation and amortization)
is defined as income (loss) from ongoing operations before depreciation and
amortization. We believe that EBITDA provides useful information regarding
our ability to service our debt. EBITDA is not a measure of operating
performance computed in accordance with GAAP and should not be considered
as a substitute for operating income, net income, cash flows from operating
activities, or other statement of operations or cash flow data prepared in
conformity with GAAP, or as a measure of profitability or liquidity.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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.                                                                                                                                                                                                                                                                                                                                              

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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 September 30, 2002
and 2001

Net sales from the Hillman Group ongoing operations increased $9.3 million or
14.0% in the third quarter of 2002 to $75.7 million from $66.4 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 $4.4 million of the $9.3 million
total sales increase in the third quarter. Sales to other national accounts
including Home Depot, Wal*Mart, Petsmart, and Tractor Supply increased by an
aggregate $3.0 million in the third quarter of 2002 compared to the third
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 $1.4 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 of 56.3% in the third quarter of 2002 was
unchanged from the comparable 2001 period.

The Companys consolidated selling, general and administrative expenses
(S,G&A) decreased $10.7 million or 27.9% from $38.3 million in the third
quarter of 2001 to $27.6 million in the third quarter of 2002. Excluding the
sold STS Business from the Predecessor Operations, the S,G&A expenses from
ongoing operations increased $2.0 million or 7.8% from $25.6 million in the
third quarter of 2001 to $27.6 million in the third quarter of 2002. Selling
expenses increased $0.6 million or 4.8% primarily as a result of servicing
costs at new national account stores. Warehouse and delivery expenses
increased $1.5 million or 21.1% primarily as a result of increased freight and
labor costs from new business in 2002. General and administrative expenses
decreased by $0.2 million or 3.4% 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 third quarter of 2001 are as follows:

|                                    |                      |      |                              |      |   |  |      |      |  
|----------------------------------- | -------------------- | ---- | ---------------------------- | ---- | - |  | ---- | ---- | -
|                                    |                      |      | Three Months ended Sept. 30,
|                                    |                      |      |                             
|As of a % of Sales                  |                      | 2002 |                              | 2001
|                                    |                      |      |                              |     
|Selling Expenses                    |                      |      | 17.5                         | %    |   |  | 19.0 | %   
|Warehouse and Delivery Expenses     |                      |      | 11.4                         | %    |   |  | 10.7 | %   
|General and Administrative Expenses |                      |      | 7.5                          | %    |   |  | 8.8  | %   
|                                    |                      |      |                              |      |   |  |      |     
|                                    | Total S,G&A Expenses |      |                              | 36.4 | % |  |      | 38.5 | %
|                                    |                      |      |                              |      |   |  |      |     

EBITDA from ongoing operations after corporate expenses for the third quarter
of 2002 was $14.7 million compared with $11.7 million for the same prior-year
period, representing an increase of 25.6%.

The Companys consolidated operating profit margin from ongoing operations
(EBITDA as a percentage of sales) after corporate expenses increased to 19.4%
in the third quarter of 2002 compared with 17.7% in 2001. The operating profit
margin improvement was due to the reduction of S,G&A expenses as a percentage
of sales while gross margin remained constant. The third quarters 14.1% sales
increase outpaced the smaller 7.8% S,G&A expense increase, thereby raising the
overall operating profit margin. The smaller S,G&A rate of increase was due to
a reduction in costs associated with promotional marketing materials and
corporate expenses.

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Depreciation expense from ongoing operations increased $0.2 million to $3.0
million in the third quarter of 2002 from $2.8 million in the same quarter of
2001.

Amortization expense from ongoing operations decreased $0.4 million to $0.4
million in the third quarter of 2002 from $0.8 million in the third 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 $0.4 million to $3.3
million in the third quarter of 2002 from $2.9 million in the same period of
2001. The increase was primarily the result of additional borrowings to
finance the expansion and automation of the Companys distribution facility and
to purchase the Lowes specialty fastener business from R&B, Inc. The Company
also recorded interest income of $0.2 million in the third 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 September 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 September 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 $2.2 million on pre-tax income of $5.0 million in
the third quarter of 2002. The effective tax rate in the third quarter of 2002
was 43.8% compared to -73.6% in the third quarter of 2001. The effective tax
rate in the third quarter of 2001 included an adjustment for additional federal
and state tax benefits related to the year 2000.

Nine Months Ended September 30, 2002 and
2001

Net sales from the Hillman Group ongoing operations increased $26.2 million or
13.9% in the first nine months of 2002 to $214.9 million from $188.7 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 $14.9 million of the $26.2 million total
sales increase in the first nine months. Sales to other national accounts
including Home Depot, Wal*Mart, Petsmart, and Tractor Supply increased by an
aggregate $6.5 million in the first nine months of 2002 compared to the same
period of 2001, primarily as a result of new store growth. In addition, the
regional accounts together with franchise and independent (F&I) accounts
increased $3.1 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.

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The Hillman Groups gross margin was 55.5% in the first nine months of 2002
compared with 56.4% in the first nine months 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 0.9% decline in gross
margin in the comparison period.

The Companys consolidated S,G&A expenses decreased $31.1 million or 27.4% from
$113.4 million in the first nine months of 2001 to $82.3 million in the first
nine months of 2002. Excluding the sold STS Business from the Predecessor
Operations, the S,G&A expenses from ongoing operations increased $7.0 million
or 9.3% from $75.3 million in the first nine months of 2001 to $82.3 million in
the first nine months of 2002. Selling expenses increased $3.2 million or 8.4%
primarily as a result of servicing costs at new national account stores.
Warehouse and delivery expenses increased $4.6 million or 23.2% as a result of
increased freight and labor costs to process and ship the additional sales
volume. General and administrative expenses decreased by $0.7 million or 4.1%
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 nine months of 2001 are as follows:

|                                    |                      |      |                             |      |   |  |      |      |  
|----------------------------------- | -------------------- | ---- | --------------------------- | ---- | - |  | ---- | ---- | -
|                                    |                      |      | Nine Months ended Sept. 30,
|                                    |                      |      |                            
|As of a % of Sales                  |                      | 2002 |                             | 2001
|                                    |                      |      |                             |     
|Selling Expenses                    |                      |      | 19.3                        | %    |   |  | 20.3 | %   
|Warehouse and Delivery Expenses     |                      |      | 11.3                        | %    |   |  | 10.5 | %   
|General and Administrative Expenses |                      |      | 7.7                         | %    |   |  | 9.1  | %   
|                                    |                      |      |                             |      |   |  |      |     
|                                    | Total S,G&A Expenses |      |                             | 38.3 | % |  |      | 39.9 | %
|                                    |                      |      |                             |      |   |  |      |     

EBITDA from ongoing operations after corporate expenses for the first nine
months of 2002 was $37.2 million compared with $30.9 million for the same
prior-year period, representing an increase of 20.4%.

The Companys consolidated operating profit margin from ongoing operations
(EBITDA as a percentage of sales) after corporate expenses increased to 17.3%
in the first nine months of 2002 compared with 16.4% 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 together with dividend income of $0.5 million on the STS
Investment which were partially offset by $1.4 million in management fee
expense.

Depreciation expense from ongoing operations increased $0.8 million to $8.8
million in the first nine months of 2002 from $8.0 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 $1.4 million to $1.1
million in the first nine months of 2002 from $2.5 million in the first nine
months 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 $0.8 million to $10.0
million in the first nine months of 2002 from $9.2 million in the same period
of 2001. The increase was primarily the result of additional borrowings to
finance the expansion and automation of the Companys distribution facility and
to purchase the Lowes specialty fastener business from R&B, Inc. The Company
also recorded interest income of $0.8 million in the first nine months of 2002
on the $10.0 million note received from Glencoe from sale of the Companys
interest in GC-Sun Holdings L.P.

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The Company has recorded a management fee charge of $1.4 million for the nine
months ended September 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 nine months ended September 30, 2002 and
2001, the Company paid $9.2 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 $3.5 million on pre-tax income of $8.2 million in
the first nine months of 2002. The effective tax rate in the first nine months
of 2002 was 43.3%. In the first nine months of 2001, the Company recorded a
tax provision for income taxes of $1.2 million on a pre-tax loss of $0.1
million. This was primarily the result of non-deductible goodwill and other
items related to acquisition and divestiture activities.

For the nine month period ended September 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 $287.5 million, EBITDA of
approximately $50.0 million, and profits before taxes of approximately $9.8
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 nine months ended September 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 nine months of 2002 was
$15.7 million compared to cash used of $4.8 million in the same prior year
period. The positive net change of $20.5 million in the current nine months
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 nine months
of 2002 were $17.7 million compared to $12.2 million in the comparable prior
year period. The increase in capital expenditures in the first nine months 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 $7.7 million. Additionally, the Company
paid $6.2 million in the first nine months 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 $8.3 million for
the nine months ended September 30, 2002 decreased $21.5 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 $49.6 million at September 30,2002
represents a decrease of $2.0 million from the December 31, 2001 level of $51.6
million primarily as a result of the seasonal increase in accounts receivable
of $11.9 million offset by an increase in accounts payable of $3.5 and a
decrease in inventories of $4.7 million. The Companys current ratio decreased
to 1.91x at September 30, 2002 from 2.15x at December 31, 2001.

The Companys contractual obligations in thousands of dollars as of September
30, 2002 are summarized below:

|                                       |                                    |                                                           |        |          |         |       |       |           |   |        |        |        |   | 
|-------------------------------------- | ---------------------------------- | --------------------------------------------------------- | ------ | -------- | ------- | ----- | ----- | --------- | - | ------ | ------ | ------ | - | 
|                                       |                                    |                                                           |        |          |         |       |       | Less Than |   | 1 to 3
|Contractual Obligations                |                                    | Total                                                     |        | One Year |         | Years
|                                       |                                    |                                                           |        |          |         |      
|Guaranteed Preferred Beneficial        |                                    |                                                           |        |          |         |       |       |           |   |        |        |       
|                                       |                                    | Interests in the Companys Junior
Subordinated Debentures |        | $        | 105,446 |       |       |           |  |        |        |        |  | 
|Long Term Senior Term Loans            |                                    |                                                           | 66,147 |          |         | $     | 7,962 |           |   | $      | 17,124 |       
|Bank Revolving Credit Facility         |                                    |                                                           | 30,345 |          |         |       |      |           |   |        |       |       
|Long Term Unsecured Subordinated Notes |                                    |                                                           | 41,629 |          |         |       |      |           |   |        |       |       
|Operating Leases                       |                                    |                                                           | 33,758 |          |         |       | 6,647 |           |   |        | 9,506  |       
|Deferrred Compensation Obligations     |                                    |                                                           | 6,843  |          |         |       | 1,142 |           |   |        | 2,284  |       
|Capital Lease Obligations              |                                    |                                                           | 315    |          |         |       | 74    |           |   |        | 119    |       
|Other Long Term Obligations            |                                    |                                                           | 7,536  |          |         |       | 1,544 |           |   |        | 1,981  |       
|                                       |                                    |                                                           |        |          |         |       |       |           |   |        |        |       
|                                       | Total Contractual Cash Obligations |                                                           | $      | 292,019  |         |       | $     | 17,369    |   |        | $      | 31,014 |  
|                                       |                                    |                                                           |        |          |         |       |       |           |   |        |        |       

All of the obligations noted above are reflected on the Companys Consolidated
Balance Sheet as of September 30, 2002, except for the Operating Leases.

As of September 30, 2002, the Company had $26.4 million available under its
secured credit facilities. The Company had approximately $97.0 million of
outstanding debt under its secured credit facilities at September 30, 2002,
consisting of $66.2 million in term loans, $30.3 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 $31.6 million Term A loan (the Term Loan
A) consisting of $17.0 million currently at a three (3) month LIBOR rate of
5.56% and $14.6 million currently at a two (2) month LIBOR rate of 5.06%. The
revolver borrowings (the Revolver) consist of $17.0 million currently at a
three (3) month LIBOR rate of 5.13%, $12.0 million at a three (3) month LIBOR
rate of 5.06% and $0.1 million at a three (3) month LIBOR rate of 5.81%. The
capitalized lease obligations were at various interest rates.

The Company increased its revolving credit facility by $10 million and its
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
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.

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On October 3, 2002, subsequent to the close of the third quarter, the Company
purchased the net assets of the DIY division of the Fastenal Company for cash
consideration of $15.6 million. This transaction was financed from the
Companys existing credit lines
and had the impact of lowering the amount available on the secured credit
facilities by the amount paid for the DIY purchase. See Note 9, Subsequent
Events, of Notes To Consolidated Financial Statements for additional related
information.

As of September 30, 2002 the Company had firm purchase commitments for capital
expenditures in connection with the automation of its Cincinnati distribution
center of approximately $2.1 million.

The Companys net interest coverage ratio from continuing operations for the
nine months ended September 30, 2002 increased to 1.42X (earnings before
interest, distributions on trust preferred securities and income taxes, over
net interest expense and distributions on trust preferred securities), from
0.99X 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
September 30, 2002, the outstanding Amended Subordinated Debt Issuance
including the PIK Amounts was $41.6 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,
2003 and 1.10x thereafter to continue monthly distributions on its Trust
Preferred Securities ($1.0 million per month). Hillmans fixed charge coverage
was 1.44x for the twelve-month period ended September 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.

The Company has deferred tax assets aggregating $31.1 million and deferred tax
liabilities of $4.6 million as of September 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 fourth quarter of 2002, the Company currently intends
to retain the G-C subordinated note receivable and the interest accrued thereon and
to distribute its
investment in the preferred stock of the Technology Services business to its
common stockholders. There can be no assurances that this distribution will be
made.

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, 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

Page 25 of 33



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form the basis for the Companys reserves
with respect to sales and pricing allowances, collectibility of accounts
receivable, inventory valuations, 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 and product
mix. 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; 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 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.

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

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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, principally
employed at STS, were covered under a post-retirement benefit plan for which
benefits were determined in accordance with the requirements of the plan. This
post-retirement benefit plan was terminated as of December 31, 2000. See Note
7, Defined Benefit Retirement Plan.

Revenue Recognition:

Revenue from sales of products is recorded upon the passing of title and risks
of ownership to the customer, which occurs upon the shipment of goods. Revenue
is recorded net of pricing allowances such as customer rebates and slotting
fees.

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:

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.

Comprehensive Income (Loss):

The components of comprehensive income (loss) for the three and nine month
periods ended September 30, 2002 and 2001 were as follows:

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|                                        |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|--------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ------ | -
|                                        |  | Three months ended |       | Nine months ended
|                                        |  | September 30       |       | September 30     
|                                        |  |                    |       |                  
|                                        |  | 2002               |       | 2001              |  | 2002 |       | 2001
|                                        |  |                    |       |                   |  |      |       |     
|Net income (loss)                       |  | $                  | 2,789 |                   |  | $    | 1,088 |      |  | $ | 4,627 |  |  | $ | (1,327 | )
|Foreign currency translation adjustment |  |                    | 7     |                   |  |      |      |      |  |   | 3     |  |  |   |       |  
|                                        |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  
|Comprehensive income (loss)             |  | $                  | 2,796 |                   |  | $    | 1,088 |      |  | $ | 4,630 |  |  | $ | (1,327 | )
|                                        |  |                    |       |                   |  |      |       |      |  |   |       |  |  |   |        |  

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.

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.

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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
September 30,2002, a one percent (1%) change in the weighted average interest
rate would change our annual interest expense by approximately $0.9 million.

Item 4.

Controls and Procedures

| |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) |  | Within the 90-day period prior to the filing date of this quarterly report, the Companys
chief executive officer and chief financial officer have conducted an evaluation of the Companys disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934).
Based upon this evaluation, the Companys chief executive officer and chief financial officer concluded that the Companys disclosure controls and procedures
are effective in timely alerting them of any material information
relating to the Company that is
required to be disclosed by the Company in the reports it files or submits
under the Securities Exchange Act of 1934.
| |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (b) |  | There have
not been any significant changes in the Companys internal controls or
in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.                                                                                                                                                                                                                                                                                                                                                                                                              

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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.                                                                                                                                                                                                                                                                              
|   |  |          |  |                                                                                                                                                                                                                                                                                                                                                                                                
|   |  | 10.3***  |  | Asset Purchase Agreement between Fastenal Company and The Hillman
Group, Inc. dated October 3, 2002.                                                                                                                                                                                                                                                                                           
|   |  |          |  |                                                                                                                                                                                                                                                                                                                                                                                                
|   |  | 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.                                                                                                                                                                                                                                                                        
|   |  |          |  |                                                                                                                                                                                                                                                                                                                                                                                                
|b) |  |          |  | Reports on
Form 8-K                                                                                                                                                                                                                                                                                                                                                                            
|   |  |          |  |                                                                                                                                                                                                                                                                                                                                                                                                
|   |  |          |  | A Current Report on Form 8-K was filed on October 4, 2002
reporting our acquisition of the DIY division of Fastenal Company
under Item 5 of Form 8-K                                                                                                                                                                                                                                           



---

|*    |  | Filed as an exhibit to Quarterly Report on Form 10-Q for the Quarter
ended March 31, 2002.
|---- |  | ------------------------------------------------------------------------------------------
|    
|**   |  | Filed as an exhibit to Quarterly Report on Form 10-Q for the Quarter
ended June 30, 2002. 
|    
|***  |  | Filed as an exhibit to Current Report on Form 8-K dated October 4, 2002.                  
|    
|**** |  | 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: November 14, 2002

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---



##### 



CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Max W. Hillman, Chief Executive Officer, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of The Hillman
Companies, Inc.;                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                      



| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons
performing the equivalent functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design
or operation of internal controls which could aversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for
the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrants internal controls; and                                                                                                                                       



|6. |  | The registrants other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |          |  |                                       
|----- |  | -------- |  | --------------------------------------
|Date: |  | 11/14/02 |  |                                       
|      |  |          |  | /s/ Max W. Hillman                    
|      |  |          |  | Max W. Hillman
Chief Executive Officer

Page 32 of 33



---



##### 



CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, James P. Waters, Chief Financial Officer, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of The Hillman
Companies, Inc.;                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                      



| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons
performing the equivalent functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) |  | all significant deficiencies in the design
or operation of internal controls which could aversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for
the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | e) |  | any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrants internal controls; and                                                                                                                                       



|6. |  | The registrants other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |          |  |                                        
|----- |  | -------- |  | ---------------------------------------
|Date: |  | 11/14/02 |  |                                        
|      |  |          |  | /s/ James P. Waters                    
|      |  |          |  | James P. Waters
Chief Financial Officer

Page 33 of 33