##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2003

Commission file number 1-13293

The Hillman Companies, Inc.

---

(Exact name of registrant as specified in its charter)


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

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

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

|                                                                                                   |  |                                          
|-------------------------------------------------------------------------------------------------- |  | -----------------------------------------
|Title of Class                                                                                     |  | Name of Each Exchange on Which Registered
|                                                                                                   |  |                                          
|11.6% Junior Subordinated Debentures
Preferred Securities Guaranty
Preferred Share Purchase Rights |  | None                                     

Securities registered pursuant to Section 12(g) of the Act:None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES X
      NO

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

YES 
      NO X

On November 12, 2003 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. The Trust Preferred Securities
trade on the American Stock Exchange under symbol HLM.Pr.

Page 1 of 27





---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

INDEX

|           |  |                                                                                        |                                                                                                          |         |       |      |  | 
|---------- |  | -------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------- | ----- | ---- |  | 
|PART I.    |  | FINANCIAL INFORMATION                                                                  |                                                                                                          | PAGE(S)
|           |  |                                                                                        |                                                                                                          |        
|Item 1.    |  | Consolidated Financial Statements                                                      |                                                                                                          |        
|          
|           |  |                                                                                        | Consolidated Balance Sheets as of September 30, 2003
(Unaudited) and December 31, 2002                   |         |       | 3   
|          
|           |  |                                                                                        | Consolidated Statements of Operations for the
Three Months ended September 30, 2003 and 2002
(Unaudited) |         |       | 4   
|          
|           |  |                                                                                        | Consolidated Statements of Operations for the
Nine Months ended September 30, 2003 and 2002
(Unaudited)  |         |       | 5   
|          
|           |  |                                                                                        | Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2003 and 2002
(Unaudited)  |         |       | 6   
|          
|           |  |                                                                                        | Notes to Consolidated Financial Statements
(Unaudited)                                                   |         |       | 7-14
|          
|Item 2.    |  | Managements Discussion and Analysis of Financial Conditions
and Results of Operations |                                                                                                          |         | 15-24
|          
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                             |                                                                                                          |         | 25   
|          
|Item 4.    |  | Controls and Procedures                                                                |                                                                                                          |         | 25   
|          
|PART II.   |  | OTHER INFORMATION                                                                      |                                                                                                          |         | 26   
|          
|SIGNATURES |  |                                                                                        |                                                                                                          |         | 27   





Page 2 of 27



---



##### 



Item 1.

THE HILLMAN COMPANIES, INC. AND
SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(dollars in thousands)

|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |        |        |         | 
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------ | ------------- | ------- | ------------ | ------ | ------ | ------- | 
|                                                                                          |                                                                                        |                           |                                            |        | September 30, |         |              |        |       
|                                                                                          |                                                                                        |                           |                                            |        | 2003          |         | December 31,
|                                                                                          |                                                                                        |                           |                                            |        | (Unaudited)   |         | 2002        
|                                                                                          |                                                                                        |                           |                                            |        |               |         |             
|ASSETS                                                                                    |                                                                                        |                           |                                           
|Current assets:                                                                           |                                                                                        |                           |                                            |        |               |         |              |       
|                                                                                          | Cash and cash equivalents                                                              |                           | $                                          | 1,015  |               |         | $            | 2,768  |       
|                                                                                          | Restricted investments                                                                 |                           |                                            | 948    |               |         |              | 1,142  |       
|                                                                                          | Accounts receivable, net                                                               |                           |                                            | 46,276 |               |         |              | 31,855 |       
|                                                                                          | Inventories                                                                            |                           |                                            | 65,215 |               |         |              | 59,783 |       
|                                                                                          | Deferred income taxes                                                                  |                           |                                            | 10,285 |               |         |              | 10,911 |       
|                                                                                          | Other current assets                                                                   |                           |                                            | 2,736  |               |         |              | 3,249  |       
|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |       
|                                                                                          |                                                                                        |                           | Total current assets                       |        |               | 126,475 |              |        |        | 109,708 | 
|Property and equipment, net                                                               |                                                                                        |                           | 66,722                                     |        |               |         | 68,596       |       
|Goodwill                                                                                  |                                                                                        |                           | 135,535                                    |        |               |         | 132,677      |       
|Other intangibles, net                                                                    |                                                                                        |                           | 9,952                                      |        |               |         | 11,068       |       
|Deferred income taxes                                                                     |                                                                                        |                           | 21,829                                     |        |               |         | 21,638       |       
|Restricted investments                                                                    |                                                                                        |                           | 5,724                                      |        |               |         | 5,923        |       
|Note receivable                                                                           |                                                                                        |                           | 5,000                                      |        |               |         | 11,258       |       
|Deferred financing fees, net                                                              |                                                                                        |                           | 6,065                                      |        |               |         | 5,774        |       
|Other assets                                                                              |                                                                                        |                           | 1,129                                      |        |               |         | 2,212        |       
|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |       
|                                                                                          |                                                                                        |                           | Total assets                               |        | $             | 378,431 |              |        | $      | 368,854 | 
|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                      |                                                                                        |                           |                                            |       
|Current liabilities:                                                                      |                                                                                        |                           |                                            |        |               |         |              |       
|                                                                                          | Accounts payable                                                                       |                           | $                                          | 19,763 |               |         | $            | 20,373 |       
|                                                                                          | Current portion of senior term loans                                                   |                           |                                            | 9,268  |               |         |              | 9,268  |       
|                                                                                          | Current portion of capitalized lease obligations                                       |                           |                                            | 52     |               |         |              | 55     |       
|                                                                                          | Accrued expenses:                                                                      |                           |                                            |        |               |         |              |        |       
|                                                                                          |                                                                                        | Salaries and wages        |                                            |        | 3,178         |         |              |        | 5,523  |        
|                                                                                          |                                                                                        | Pricing allowances        |                                            |        | 6,788         |         |              |        | 6,118  |        
|                                                                                          |                                                                                        | Acquisition related costs |                                            |        | 5,822         |         |              |        | 3,395  |        
|                                                                                          |                                                                                        | Income and other taxes    |                                            |        | 1,644         |         |              |        | 1,329  |        
|                                                                                          |                                                                                        | Deferred compensation     |                                            |        | 948           |         |              |        | 1,142  |        
|                                                                                          |                                                                                        | Other accrued expenses    |                                            |        | 9,821         |         |              |        | 12,797 |        
|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |       
|                                                                                          |                                                                                        |                           | Total current liabilities                  |        |               | 57,284  |              |        |        | 60,000  | 
|Long term senior term loans                                                               |                                                                                        |                           | 53,607                                     |        |               |         | 60,559       |       
|Bank revolving credit                                                                     |                                                                                        |                           | 51,308                                     |        |               |         | 34,532       |       
|Long term capitalized lease obligations                                                   |                                                                                        |                           | 157                                        |        |               |         | 194          |       
|Long term unsecured subordinated notes to related party                                   |                                                                                        |                           | 43,561                                     |        |               |         | 42,108       |       
|Deferred compensation                                                                     |                                                                                        |                           | 5,724                                      |        |               |         | 5,923        |       
|Deferred income tax liability                                                             |                                                                                        |                           | 5,763                                      |        |               |         | 5,660        |       
|Other non-current liabilities                                                             |                                                                                        |                           | 5,506                                      |        |               |         | 5,258        |       
|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |       
|                                                                                          |                                                                                        |                           | Total liabilities                          |        |               | 222,910 |              |        |        | 214,234 | 
|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |       
|Guaranteed preferred beneficial interests in the
Companys junior subordinated debentures |                                                                                        |                           | 102,331                                    |        |               |         | 102,234      |       
|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |       
|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,
7,118,665 issued and outstanding |                           |                                            | 71     |               |         |              | 71     |       
|                                                                                          | Additional paid-in capital                                                             |                           |                                            | 52,310 |               |         |              | 52,310 |       
|                                                                                          | Retained earnings                                                                      |                           |                                            | 903    |               |         |              |       |       
|                                                                                          | Accumulated other comprehensive (loss) income                                          |                           |                                            | (94    | )             |         |              | 5      |       
|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |       
|                                                                                          |                                                                                        |                           | Total stockholders equity                 |        |               | 53,190  |              |        |        | 52,386  | 
|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |       
|                                                                                          |                                                                                        |                           | Total liabilities and stockholders equity |        | $             | 378,431 |              |        | $      | 368,854 | 
|                                                                                          |                                                                                        |                           |                                            |        |               |         |              |       

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 3 of 27





---



##### 



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

|                                                           |                                              |                            |        |               |        |               |        |        |        | 
|---------------------------------------------------------- | -------------------------------------------- | -------------------------- | ------ | ------------- | ------ | ------------- | ------ | ------ | ------ | 
|                                                           |                                              |                            |        | September 30, |        | September 30,
|                                                           |                                              |                            |        | 2003          |        | 2002         
|                                                           |                                              |                            |        |               |        |              
|Net sales                                                  |                                              | $                          | 86,055 |               |        | $             | 75,707 |       
|Cost of sales                                              |                                              |                            | 38,818 |               |        |               | 33,071 |       
|                                                           |                                              |                            |        |               |        |               |        |       
|                                                           |                                              | Gross profit               |        |               | 47,237 |               |        |        | 42,636 | 
|                                                           |                                              |                            |        |               |        |               |        |       
|Operating expenses:                                        |                                              |                            |        |               |        |               |        |       
|                                                           | Selling, general and administrative expenses |                            |        | 31,126        |        |               |        | 27,584 |       
|                                                           | Depreciation                                 |                            |        | 3,480         |        |               |        | 3,048  |       
|                                                           | Amortization                                 |                            |        | 373           |        |               |        | 371    |       
|                                                           | Management fee to related party              |                            |        | 450           |        |               |        | 450    |       
|                                                           |                                              |                            |        |               |        |               |        |       
|                                                           |                                              | Total operating expenses   |        |               | 35,429 |               |        |        | 31,453 | 
|                                                           |                                              |                            |        |               |        |               |        |       
|Other income, net                                          |                                              |                            | 459    |               |        |               | 109    |       
|                                                           |                                              |                            |        |               |        |               |        |       
|                                                           |                                              | Income from operations     |        |               | 12,267 |               |        |        | 11,292 | 
|                                                          
|Interest expense, net                                      |                                              |                            | 4,101  |               |        |               | 3,268  |       
|Distributions on guaranteed preferred
beneficial interests |                                              |                            | 3,058  |               |        |               | 3,058  |       
|                                                           |                                              |                            |        |               |        |               |        |       
|                                                           |                                              | Income before income taxes |        |               | 5,108  |               |        |        | 4,966  | 
|                                                          
|Income tax provision                                       |                                              |                            | 1,988  |               |        |               | 2,177  |       
|                                                           |                                              |                            |        |               |        |               |        |       
|                                                           |                                              | Net income                 |        | $             | 3,120  |               |        | $      | 2,789  | 
|                                                           |                                              |                            |        |               |        |               |        |       

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 4 of 27





---



##### 



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

|                                                           |                                              |                            |         |               |         |               |         |        |         | 
|---------------------------------------------------------- | -------------------------------------------- | -------------------------- | ------- | ------------- | ------- | ------------- | ------- | ------ | ------- | 
|                                                           |                                              |                            |         | September 30, |         | September 30,
|                                                           |                                              |                            |         | 2003          |         | 2002         
|                                                           |                                              |                            |         |               |         |              
|Net sales                                                  |                                              | $                          | 240,307 |               |         | $             | 214,910 |       
|Cost of sales                                              |                                              |                            | 108,772 |               |         |               | 95,564  |       
|                                                           |                                              |                            |         |               |         |               |         |       
|                                                           |                                              | Gross profit               |         |               | 131,535 |               |         |        | 119,346 | 
|                                                           |                                              |                            |         |               |         |               |         |       
|Operating expenses:                                        |                                              |                            |         |               |         |               |         |       
|                                                           | Selling, general and administrative expenses |                            |         | 90,315        |         |               |         | 82,333 |        
|                                                           | Depreciation                                 |                            |         | 10,443        |         |               |         | 8,753  |        
|                                                           | Amortization                                 |                            |         | 1,116         |         |               |         | 1,114  |        
|                                                           | Management fee to related party              |                            |         | 1,350         |         |               |         | 1,350  |        
|                                                           |                                              |                            |         |               |         |               |         |       
|                                                           |                                              | Total operating expenses   |         |               | 103,224 |               |         |        | 93,550  | 
|                                                           |                                              |                            |         |               |         |               |         |       
|Other income, net                                          |                                              |                            | 643     |               |         |               | 1,571   |       
|                                                           |                                              |                            |         |               |         |               |         |       
|                                                           |                                              | Income from operations     |         |               | 28,954  |               |         |        | 27,367  | 
|                                                          
|Interest expense, net                                      |                                              |                            | 11,656  |               |         |               | 10,039  |       
|Distributions on guaranteed preferred
beneficial interests |                                              |                            | 9,174   |               |         |               | 9,172   |       
|Write-down of note receivable                              |                                              |                            | 6,257   |               |         |               |        |       
|                                                           |                                              |                            |         |               |         |               |         |       
|                                                           |                                              | Income before income taxes |         |               | 1,867   |               |         |        | 8,156   | 
|                                                          
|Income tax provision                                       |                                              |                            | 964     |               |         |               | 3,529   |       
|                                                           |                                              |                            |         |               |         |               |         |       
|                                                           |                                              | Net income                 |         | $             | 903     |               |         | $      | 4,627   | 
|                                                           |                                              |                            |         |               |         |               |         |       

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 5 of 27





---



##### 



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

|                                                     |                                                                                              |                                                      |                                          |        |               |         |               |         |         |         |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------- | ------ | ------------- | ------- | ------------- | ------- | ------- | ------- | -
|                                                     |                                                                                              |                                                      |                                          |        | September 30, |         | September 30,
|                                                     |                                                                                              |                                                      |                                          |        | 2003          |         | 2002         
|                                                     |                                                                                              |                                                      |                                          |        |               |         |              
|Cash flows from operating activities:                |                                                                                              |                                                      |                                          |        |               |         |               |        
|                                                     | Net income                                                                                   |                                                      | $                                        | 903    |               |         | $             | 4,627   |        
|                                                     | Adjustments to reconcile net income to net cash
(used for) provided by operating activities: |                                                      |                                          |        |               |         |               |         |        
|                                                     |                                                                                              | Depreciation and amortization                        |                                          |        | 11,559        |         |               |         | 9,867   |        
|                                                     |                                                                                              | Deferred income tax                                  |                                          |        | 538           |         |               |         | 3,467   |        
|                                                     |                                                                                              | PIK interest on unsecured subordinated notes         |                                          |        | 1,453         |         |               |         | 1,389   |        
|                                                     |                                                                                              | Write-down of note receivable                        |                                          |        | 6,257         |         |               |         |        |        
|                                                     |                                                                                              | Changes in current operating items:                  |                                          |        |               |         |               |         |         |        
|                                                     |                                                                                              |                                                      | Increase in accounts receivable          |        |               | (14,421 | )             |         |         | (11,884 | )
|                                                     |                                                                                              |                                                      | (Increase) decrease in inventories       |        |               | (5,432  | )             |         |         | 4,713   |  
|                                                     |                                                                                              |                                                      | Decrease in other current assets         |        |               | 939     |               |         |         | 2,122   |  
|                                                     |                                                                                              |                                                      | (Decrease ) increase in accounts payable |        |               | (610    | )             |         |         | 3,499   |  
|                                                     |                                                                                              |                                                      | Decrease in other accrued liabilities    |        |               | (4,633  | )             |         |         | (1,505  | )
|                                                     |                                                                                              |                                                      | Other items, net                         |        |               | 1,393   |               |         |         | (553    | )
|                                                     |                                                                                              |                                                      |                                          |        |               |         |               |        
|                                                     |                                                                                              | Net cash (used for) provided by operating activities |                                          |        | (2,054        | )       |               |         | 15,742  |        
|                                                     |                                                                                              |                                                      |                                          |        |               |         |               |        
|Cash flows from investing activities:                |                                                                                              |                                                      |                                          |        |               |         |               |        
|                                                     | Proceeds from sale of property and equipment                                                 |                                                      |                                          | 20     |               |         |               | 104     |        
|                                                     | Capital expenditures                                                                         |                                                      |                                          | (8,537 | )             |         |               | (17,714 | )      
|                                                     | R&B acquisition                                                                              |                                                      |                                          |       |               |         |               | (6,225  | )      
|                                                     | Other, net                                                                                   |                                                      |                                          | 471    |               |         |               | 1,037   |        
|                                                     |                                                                                              |                                                      |                                          |        |               |         |               |        
|                                                     |                                                                                              | Net cash used for investing activities               |                                          |        | (8,046        | )       |               |         | (22,798 | )      
|                                                     |                                                                                              |                                                      |                                          |        |               |         |               |        
|Cash flows from financing activities:                |                                                                                              |                                                      |                                          |        |               |         |               |        
|                                                     | (Repayments) borrowings of senior term loans                                                 |                                                      |                                          | (6,952 | )             |         |               | 12,022  |        
|                                                     | Borrowings (repayments) of revolving credit loans, net                                       |                                                      |                                          | 16,776 |               |         |               | (3,707  | )      
|                                                     | Principal payments under capitalized lease obligations                                       |                                                      |                                          | (40    | )             |         |               | (59     | )      
|                                                     | Financing fees, net                                                                          |                                                      |                                          | (1,437 | )             |         |               | (749    | )      
|                                                     |                                                                                              |                                                      |                                          |        |               |         |               |        
|                                                     |                                                                                              | Net cash provided by financing activities            |                                          |        | 8,347         |         |               |         | 7,507   |        
|                                                     |                                                                                              |                                                      |                                          |        |               |         |               |        
|Net (decrease) increase in cash and cash equivalents |                                                                                              |                                                      | (1,753                                   | )      |               |         | 451           |        
|Cash and cash equivalents at beginning of period     |                                                                                              |                                                      | 2,768                                    |        |               |         | 2,059         |        
|                                                     |                                                                                              |                                                      |                                          |        |               |         |               |        
|Cash and cash equivalents at end of period           |                                                                                              | $                                                    | 1,015                                    |        |               | $       | 2,510         |        
|                                                     |                                                                                              |                                                      |                                          |        |               |         |               |        

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Page 6 of 27





---



##### 



THE HILLMAN COMPANIES, 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. (Hillman or the Company), and its wholly owned
subsidiaries including an investment trust, Hillman Group Capital Trust (the
Trust). All significant intercompany balances and transactions have been
eliminated. The Company is organized as an independently managed portfolio
company of Allied Capital Corporation (Allied Capital). Allied Capital owns
approximately 96.8% of Hillmans common stock with the remainder being held
primarily by Company Management. Allied Capitals stock ownership is subject to
dilution by management options.

The accompanying unaudited consolidated financial statements present
information in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and applicable
rules of Regulation S-X. Accordingly, they do not include all information or
footnotes required by generally accepted accounting principles for complete
financial statements. Management believes the financial statements include all
normal recurring accrual adjustments necessary for a fair presentation.
Operating results for the three and nine months ended September 30, 2003 do not
necessarily indicate the results that may be expected for the full year. For
further information, refer to the consolidated financial statements and notes
thereto included in the Companys annual report filed on Form 10-K for the year
ended December 31, 2002.

Other Intangible Assets

Intangible assets subject to amortization consisted of the following
as of September 30, 2003:

|                       |  |          |        |              |  |   |       | 
|---------------------- |  | -------- | ------ | ------------ |  | - | ----- | 
|                       |  | Carrying |        | Accumulated 
|                       |  | Amount   |        | Amortization
|                       |  |          |        |             
|Trademarks             |  | $        | 6,500  |              |  | $ | 910   | 
|Patents                |  |          | 6,700  |              |  |   | 2,931 | 
|Proprietary software   |  |          | 1,000  |              |  |   | 438   | 
|Non-compete agreements |  |          | 1,250  |              |  |   | 1,219 | 
|                       |  |          |        |              |  |   |       | 
|                       |  | $        | 15,450 |              |  | $ | 5,498 | 
|                       |  |          |        |              |  |   |       | 

Amortization expense for intangible assets for the three and nine months
ended September 30, 2003 was $373 and $1,116, respectively. Amortization
expense for the next five years is estimated to be as follows:

|            |  |        |       | 
|----------- |  | ------ | ----- | 
|Year Ended  |  |        |       | 
|December 31 |  | Amount
|            |  |       
|2003        |  | $      | 1,437 | 
|2004        |  | $      | 1,238 | 
|2005        |  | $      | 1,223 | 
|2006        |  | $      | 1,222 | 
|2007        |  | $      | 1,223 | 

Page 7 of 27





---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

2.     Summary of Significant Accounting Policies:

Cash Equivalents:

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

Restricted Investments:

Restricted investments represent assets held in a Rabbi Trust to fund deferred
compensation liabilities due to certain Company 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. The cost and
related accumulated depreciation are removed from their respective accounts
when assets are sold or otherwise disposed of 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.

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
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 basis of assets and liabilities
(temporary differences) and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

Retirement Benefits:

Certain employees of the Company are covered under a profit-sharing and
retirement savings plan (the plan). The plan provides for a matching
contribution for eligible employees of 50% of each dollar contributed by the
employee up to 6% of employees compensation. In addition, the plan provides
an annual contribution in amounts authorized by the Board, subject to the terms
and conditions of the plan.

Page 8 of 27





---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

2.     Summary of Significant Accounting Policies (continued):

Revenue Recognition:

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

Shipping and Handling:

The costs incurred to ship product to customers, including freight and handling
expenses, are included in selling, general and administrative (SG&A) expenses
on the Companys Statements of Operations. For the three months ended
September 30, 2003 and 2002, shipping and handling costs included in SG&A were
$4,044 and $3,704, respectively. For the nine months ended September 30, 2003
and 2002, shipping and handling costs included in SG&A were $11,906 and
$10,380, respectively.

Research and Development:

The Company incurs research and development costs in connection with
improvements to the key duplicating and engraving machines. For the three
months ended September 30, 2003 and 2002, research and development expenses,
consisting primarily of internal wages and benefits, were $424 and $413,
respectively. For the nine months ended September 30, 2003 and 2002, research
and development expenses were $1,148 and $1,166, respectively.

Translation of Foreign Currencies:

The translation of the Companys Canadian 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:

The components of comprehensive income for the three and nine months
ended
September 30, 2003 and 2002 were as follows:

|                                        |  |                    |       |                   |  |      |       |      |  |   |     |   |  |   |       | 
|--------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | --- | - |  | - | ----- | 
|                                        |  | Three Months Ended |       | Nine Months Ended
|                                        |  | September 30       |       | September 30     
|                                        |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                                        |  |                    |       |                   |  |      |       |     
|Net income                              |  | $                  | 3,120 |                   |  | $    | 2,789 |      |  | $ | 903 |   |  | $ | 4,627 | 
|Foreign currency translation
adjustment |  |                    | 1     |                   |  |      | 7     |      |  |   | (99 | ) |  |   | 3     | 
|                                        |  |                    |       |                   |  |      |       |      |  |   |     |   |  |   |       | 
|Comprehensive income                    |  | $                  | 3,121 |                   |  | $    | 2,796 |      |  | $ | 804 |   |  | $ | 4,630 | 
|                                        |  |                    |       |                   |  |      |       |      |  |   |     |   |  |   |       | 

Use of Estimates in the Preparation of Financial Statements:

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Page 9 of 27





---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

3.     Acquisitions:

On May 1, 2002, the Company purchased certain assets of the Lowes specialty
fastener business from R&B, Inc. for cash consideration of $6,207. On October
3, 2002, the Company purchased the net assets of the DIY division (DIY) of
the Fastenal Company for cash consideration of $15,218. The following
disclosures indicate the Companys estimate of pro forma financial results for
the three and nine month periods ended September 30, 2002 had the acquisitions
of the Lowes specialty fastener business and the DIY business been consummated
on January 1, 2002:

|           |  |                    |        |                    |  |   |         | 
|---------- |  | ------------------ | ------ | ------------------ |  | - | ------- | 
|           |  | Three months ended |        | Nine months ended 
|           |  | September 30, 2002 |        | September 30, 2002
|           |  |                    |        |                   
|Net sales  |  | $                  | 80,734 |                    |  | $ | 232,229 | 
|Net income |  | $                  | 2,909  |                    |  | $ | 5,216   | 

In connection with the DIY acquisition, the Company developed an overall
integration plan that included the elimination of redundant headcount and
facilities. In accordance with ETIF No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination, the Company accrued
approximately $3,400 of estimated costs related to the integration plan in the
fourth quarter of 2002. The estimated costs consisted of approximately $1,500
of fixed asset disposals, $900 of facilities costs, $500 of moving expenses and
$500 for planned workforce reductions. The integration is expected to be
implemented beginning in the fourth quarter of 2003 and be substantially
completed by the end of the first quarter of 2004.

Additional reserves have been established in the second quarter of 2003 for
costs associated with the integration of the DIY acquisition. Additional costs
include severance of $207, inventory valuation adjustments of $1,200, and
customer conversion costs which include product buybacks of $1,450.

The following table provides a rollforward from December 31, 2002 to September
30, 2003 of the remaining liabilities and acquisition related charges recorded
by the Company:

|                               |  |               |     |          |  |              |     |             |  |             |       |       |  |   |       |  |  |   |       |   |  |   |       |  
|------------------------------ |  | ------------- | --- | -------- |  | ------------ | --- | ----------- |  | ----------- | ----- | ----- |  | - | ----- |  |  | - | ----- | - |  | - | ----- | -
|                               |  |               |     |          |  |              |     |             |  | Inventory   |       |       |  |   |       |  |  |   |       |  
|                               |  | Severence &   |     | Facility |  | Revaluation/ |     | Fixed Asset |  | Customer    |       |       |  |  
|                               |  | Related Costs |     | Lease    |  | Relocation   |     | Disposal    |  | Conversions |       | Total
|                               |  |               |     |          |  |              |     |             |  |             |       |      
|Balances at December 31, 2002  |  | $             | 495 |          |  | $            | 900 |             |  | $           | 500   |       |  | $ | 1,500 |  |  | $ |      |   |  | $ | 3,395 |  
|                              
|Additions                      |  |               |    |          |  |              |    |             |  |             |      |       |  |   |      |  |  |   |      |   |  |   |      |  
|Payments                       |  |               | (13 | )        |  |              |    |             |  |             |      |       |  |   |      |  |  |   |      |   |  |   | (13   | )
|                               |  |               |     |          |  |              |     |             |  |             |       |       |  |   |       |  |  |   |       |   |  |   |       |  
|Balances at March 31, 2003     |  |               | 482 |          |  |              | 900 |             |  |             | 500   |       |  |   | 1,500 |  |  |   |      |   |  |   | 3,382 |  
|                              
|Additions                      |  |               | 207 |          |  |              |    |             |  |             | 1,200 |       |  |   |      |  |  |   | 1,450 |   |  |   | 2,857 |  
|Payments                       |  |               | (14 | )        |  |              |    |             |  |             |      |       |  |   |      |  |  |   |      |   |  |   | (14   | )
|                               |  |               |     |          |  |              |     |             |  |             |       |       |  |   |       |  |  |   |       |   |  |   |       |  
|Balances at June 30, 2003      |  |               | 675 |          |  |              | 900 |             |  |             | 1,700 |       |  |   | 1,500 |  |  |   | 1,450 |   |  |   | 6,225 |  
|                              
|Additions                      |  |               |    |          |  |              |    |             |  |             |      |       |  |   |      |  |  |   |      |   |  |   |      |  
|Payments                       |  |               |    |          |  |              |    |             |  |             | (122  | )     |  |   |      |  |  |   | (281  | ) |  |   | (403  | )
|                               |  |               |     |          |  |              |     |             |  |             |       |       |  |   |       |  |  |   |       |   |  |   |       |  
|Balances at September 30, 2003 |  | $             | 675 |          |  | $            | 900 |             |  | $           | 1,578 |       |  | $ | 1,500 |  |  | $ | 1,169 |   |  | $ | 5,822 |  
|                               |  |               |     |          |  |              |     |             |  |             |       |       |  |   |       |  |  |   |       |   |  |   |       |  

Page 10 of 27





---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

4.     Contingencies:

Under the Companys insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of normal
claims. Beginning in 1991, the Company has retained risk on certain expected
losses from both asserted and unasserted claims related to workers
compensation, general liability and automobile as well as the health benefits
of certain employees. Provisions for losses expected under these programs are
recorded based on an analysis of historical insurance claim data and certain
actuarial assumptions. As of September 30, 2003, the Company has provided
insurers letters of credit aggregating $3,857 related to certain insurance
programs.

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 should not have a material adverse
effect on the consolidated financial position, operations or cash flows of the
Company.

5.     Related Party Transactions:

On September 26, 2001, the Company was acquired by Allied Capital pursuant to
the terms and conditions of an Agreement and Plan of Merger dated as of June
18, 2001. 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 $1,800 for calendar years subsequent to
2001. The Company has recorded a management fee charge of $450 for the three
months and $1,350 for the nine months ended September 30, 2003 and 2002.
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 management fee for the year ended December 31, 2002 was paid in April 2003.

The Company incurs interest expense to Allied Capital on the subordinated debt
at a fixed rate of 18.0% per annum. Cash interest payments are required on a
quarterly basis at a fixed rate of 13.5% with the remaining 4.5% fixed rate
(the PIK Amount) being added to the principal balance. As of September 30,
2003, the outstanding subordinated debt including the PIK amounts was $43,561.

6.     Recent Accounting Pronouncements:

In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN No. 45 requires that a guarantor
must recognize, at the inception of a guarantee, a liability for the fair value
of the obligation that it has undertaken in issuing a guarantee. FIN No. 45
also addresses the disclosure requirements that a guarantor must include in its
financial statements for guarantees issued. The disclosure requirements in
this interpretation are effective for financial statements ending after
December 15, 2002. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company adopted the provisions of FIN
No. 45 effective January 1, 2003. The adoption of FIN 45 did not have an
impact on the Companys consolidated financial position, results of operations
or cash flows.

Page 11 of 27





---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

6.     Recent Accounting Pronouncements (continued):

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities (an interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements). FIN No. 46 addresses consolidation by
business enterprises of variable interest entities that possess certain
characteristics. FIN No. 46 requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must
be included in the consolidated financial statements with those of the business
enterprise. On October 8, 2003, the FASB deferred the effective date for variable interest entities that
existed prior to January 31, 2003. FASB Staff Position FIN 46-6 (FSP FIN 46-6) establishes
the first interim or annual period ending after December 15, 2003 as the new effective date for variable
interest entities that existed prior to January 31, 2003. The Company has elected to defer
adoption of FIN 46 pending final resolution of the issues currently under discussion at the FASB.

In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS No. 145). Among other
items, SFAS No. 145 updates and clarifies existing accounting pronouncements
related to reporting gains and losses from the extinguishment of debt and
certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of SFAS No. 145 are generally
effective for fiscal years beginning after May 15, 2002, with earlier adoption
of certain provisions encouraged. The Company adopted the provisions of SFAS
No. 145 effective January 1, 2003. The adoption of SFAS No. 145 did not have
an impact on the Companys consolidated financial position, results of
operations or cash flows.

In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No. 146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost as
defined in EITF Issue 94-3 was recognized at the date of an entitys commitment
to an exit plan. The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
application encouraged. Under SFAS No. 146, an entity may not restate its
previously issued financial statements and the new statement grandfathers the
accounting for liabilities that an entity had previously recorded under EITF
Issue 94-3. The Company adopted the provisions of SFAS No. 146 effective
January 1, 2003. The adoption of SFAS No. 146 did not have an impact on the
Companys consolidated financial position, results of operations, or cash
flows.

In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure
(SFAS No. 148). SFAS No. 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the prior disclosure
guidance and requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of SFAS No. 148 are generally effective for fiscal years ending
after December 15, 2002. At this time the Company does not plan to adopt the
accounting provisions of SFAS No. 123 and will continue to account for stock
options in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.

Page 12 of 27





---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

6.     Recent Accounting Pronouncements (continued):

In May 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 did not have an impact on the Companys
consolidated financial position, results of operations, or cash flows.

In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The
statement requires that an issuer classify financial instruments that are
within its scope as a liability. Many of those instruments were classified as
equity under previous guidance. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for certain mandatorily redeemable financial instruments.
On November 7, 2003, the FASB indefinitely deferred the effective
date of SFAS No. 150 for certain mandatorily redeemable financial
instruments and therefore the Company has elected to defer adoption.

7.     Note Receivable:

On April 13, 2002, the Company entered into a Unit Repurchase Agreement with
GC-Sun Holdings, L.P. (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.

In February 2003, G-C sold the assets of its largest operating division, Kar
Products. The proceeds of the sale were primarily used to pay down G-Cs senior
creditors. Following the sale of Kar Products, the Company estimated the
enterprise value of G-C based on the cash flows and book value of the remaining
operating division. The excess of the estimated enterprise value less debt
obligations senior to the G-C note were determined to be insufficient to
support the value of the G-C note. Accordingly, the Company recorded a $5,657
charge to income in the first quarter of 2003 to write-down the face value of
the note and accrued interest thereon to its estimated fair value. The Company
recorded an additional $600 charge to income in the second quarter of 2003 to
write-down the note to its estimated fair value.

Page 13 of 27





---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

8.     Financing Fees:

On September 28, 2001, the Company entered into a $105,000 senior secured
credit facility (the Credit Agreement) 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 Credit Agreement has a five-year term for the
Revolver and Term Loan A and a seven-year term for Term Loan B.

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. Proceeds were used to fund the expansion and automation
of the Companys Cincinnati distribution center and to purchase certain assets
of the Lowes specialty fastener business from R&B, Inc.

On December 23, 2002 the Credit Agreement was amended to provide an additional
$4,780 of availability under the revolving credit agreement and to increase
Term Loan A by $2,500 and Term Loan B by $2,720. The proceeds were used to
fund the previously completed acquisition of the DIY Business.

In May 2003, the Company made additional payments in the amount of $1,420 in
connection with the Companys 2001 Credit Agreement. The payments were
capitalized as deferred financing fees and are being amortized over the
remaining term of the Revolver, Term Loan A and Term Loan B.

Page 14 of 27





---



##### 



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), is one of the largest
providers of value-added merchandising services and hardware-related products
to retail markets in North America.

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.

Hillman is organized as an independently managed portfolio company of Allied
Capital Corporation (Allied Capital). Allied Capital owns approximately
96.8% of Hillmans common stock with the remainder being held primarily by
Company Management.

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 (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 acquisition of Axxess
Technologies, Inc. on April 7, 2000 (the Axxess Subordinated Note Repayment).

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 agreement (Credit
Agreement) has a $50 million revolving credit line, 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 Credit Agreement was amended to provide an additional $10.0
million of availability under the revolving credit facility and to increase the
term loans by $15.0 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 expansion and
automation of the Companys distribution facilities.

On December 23, 2002, the Credit Agreement was amended to provide an additional
$4.8 million of availability under the revolving credit agreement and to
increase the term loans by $5.2 million. As of September 30, 2003, the
outstanding balance of the term loans aggregated $62.9 million.

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.

Acquisitions

On May 1, 2002, the Company purchased certain assets of the Lowes specialty
fastener business from R&B, Inc. for cash consideration of $6,207. On October
3, 2002, the Company purchased the net assets of the DIY division (DIY) of
the Fastenal Company for cash consideration of $15,218.

Page 15 of 27



---



##### 



Results of Operations

Three Months Ended September 30, 2003 and 2002

Net sales increased $10.4 million or 13.7% in the third quarter of 2003 to
$86.1 million from $75.7 million in 2002. Sales to national accounts
represented $2.7 million of the $10.4 million total sales increase in the third
quarter primarily as a result of increased fastener sales to Lowes and
increased keys and letters, numbers, and signs (LNS) sales to Home Depot. In
October 2002, Hillman acquired the DIY division (DIY) of the Fastenal Company
which contributed fastener related sales of $4.3 million in the third quarter
of 2003. Other sales, including regional accounts and engraving products were
up $2.3 million compared to the third quarter of 2002. In addition, franchise
and independent (F&I) accounts increased $1.1 million from the comparable
period in 2002. The F&I accounts are typically individual hardware dealers who
are members of larger cooperatives, such as TruServ, Ace, and Do-It-Best.

The Hillman Groups gross profit was 54.9% in the third quarter of 2003
compared to 56.3% in the third quarter of 2002. The margin rate decrease from
the prior year was the result of lower margins on the newly acquired DIY
business.

The Companys consolidated selling, general and administrative expenses
(S,G&A) increased $3.5 million or 12.7% from $27.6 million in the third
quarter of 2002 to $31.1 million in the third quarter of 2003. Selling
expenses increased $1.7 million or 12.9% primarily as a result of an increase
in displays, fixtures and service labor for newly opened national account
locations and conversion of merchant displays in existing locations. Warehouse
and delivery expenses increased $1.8 million or 20.9% primarily as a result of
increased freight and labor of $1.4 million on increased sales volume and labor
and other costs of $0.4 million related to operation of the new distribution
facility in 2003. General and administrative expenses increased by $0.1
million or 1.8% primarily as a result of an increase in the Companys medical
claims cost.

Total S,G&A expenses in the third quarter of 2003 expressed as a percentage of
sales compared with the third quarter of 2002 are as follows:

|                                    |                       |      |                              |      |   |  |      |      |  
|----------------------------------- | --------------------- | ---- | ---------------------------- | ---- | - |  | ---- | ---- | -
|                                    |                       |      | Three Months ended Sept. 30,
|                                    |                       |      |                             
|As a % of Sales                     |                       | 2003 |                              | 2002
|                                    |                       |      |                              |     
|Selling Expenses                    |                       |      | 17.3                         | %    |   |  | 17.5 | %   
|Warehouse and Delivery Expenses     |                       |      | 12.1                         | %    |   |  | 11.4 | %   
|General and Administrative Expenses |                       |      | 6.8                          | %    |   |  | 7.5  | %   
|                                    |                       |      |                              |      |   |  |      |     
|                                    | Total S, G&A Expenses |      |                              | 36.2 | % |  |      | 36.4 | %
|                                    |                       |      |                              |      |   |  |      |     

Income from operations for the third quarter of 2003 was $12.3 million compared
with $11.3 million for the same prior-year period, representing an increase of
8.8%.

The Companys consolidated operating profit margin (income from operations as a
percentage of sales) decreased to 14.3% in the third quarter of 2003 compared
with 14.9% in 2002. The operating profit margin decrease was the result of the
decrease in gross profit which was partially offset by a decrease in operating
expenses and an increase in other income expressed as a percentage of sales.
The gross profit rate decrease from the comparable prior year period was the
result of lower margins on the newly acquired DIY business. Other income
increased in the third quarter of 2003 from a $0.4 million gain recorded as a
result of a payout received from the Companys former insurance company upon
its demutualization.

Depreciation expense increased $0.5 million to $3.5 million in the third
quarter of 2003 from $3.0 million in the same quarter of 2002.

Amortization expense of $0.4 million in the third quarter of 2003 was equal to
the amortization in the same quarter of 2002.

Page 16 of 27



---



##### 



The Company has recorded a management fee charge of $0.45 million for the third
quarters of 2003 and 2002, respectively. 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 management fee for the year ended December 31, 2002 was paid in April,
2003.

Interest expense from credit facilities, net of interest income, increased $0.8
million to $4.1 million in the third quarter of 2003 from $3.3 million in the
same period of 2002. The interest expense increase was the result of
additional borrowings used to finance the expansion and automation of the
Companys distribution facility and to purchase two businesses in 2002. A
reduction in interest income of $0.5 million resulted from the suspension of
interest income on the subordinated note received from G-C.

For the three months ended September 30, 2003 and 2002, the Company paid $3.1
million in interest on the Junior Subordinated Debentures, equivalent to the
amounts distributed by the Trust on the Trust Preferred Securities.

The Company is subject to federal, state and local income taxes on its domestic
operations and foreign income taxes on its Canadian operation as accounted for
in accordance with Statement of Financial Accounting Standard (SFAS) No. 109,
Accounting for Income Taxes. Deferred income taxes represent differences
between the financial statement and tax basis of assets and liabilities as
classified on the Companys balance sheet. The Company recorded a tax
provision for income taxes of $2.0 million on pre-tax income of $5.1 million in
the third quarter of 2003. The effective tax rate in the third quarter of 2003
was 38.9% compared to 43.8% in the third quarter of 2002. The change in the
effective tax rate resulted from the increase in income before taxes in the
third quarter of 2003 compared with the third quarter of 2002 and a decrease in
the change of permanent tax items in 2003 when compared to 2002.

Nine Months Ended September 30, 2003 and 2002

Net sales increased $25.4 million or 11.8% in the first nine months of 2003 to
$240.3 million from $214.9 million in 2002. Sales to national accounts
represented $9.2 million of the $25.4 million total sales increase in the first
nine months primarily as a result of increased fastener sales to Lowes and
increased keys and letters, numbers, and signs (LNS) sales to Home Depot. In
October 2002, Hillman acquired the DIY division (DIY) of the Fastenal Company
which contributed fastener related sales of $12.8 million in the first nine
months of 2003. Other sales, including regional accounts and engraving
products were up $5.0 million compared to the first nine months of 2002.
Franchise and independent (F&I) accounts decreased $1.6 million from the
comparable period in 2002. The F&I accounts are typically individual hardware
dealers who are members of larger cooperatives, such as TruServ, Ace, and
Do-It-Best. The F&I business decline was primarily the result of the
unseasonal weather conditions, consumer uncertainties related to the war in
Iraq and unfavorable economic conditions during the first half of the year.
The F&I sales decline in the first half of 2003 compared to 2002 reversed
direction as the economy began to show signs of recovery.

The Hillman Groups gross profit was 54.7% in the first nine months of 2003
compared to 55.5% in the first nine months of 2002. The margin rate decrease
from the prior year was the result of lower margins on the newly acquired DIY
business.

The Companys consolidated selling, general and administrative expenses
(S,G&A) increased $8.0 million or 9.7% from $82.3 million in the first nine
months of 2002 to $90.3 million in the first nine months of 2003. Selling
expenses increased $1.4 million or 3.4% primarily as a result of an increase in
displays, fixtures and service labor for newly opened national account
locations and conversion of merchant displays

Page 17 of 27



---



##### 



in existing locations. Warehouse
and delivery expenses increased $5.8 million or 23.8% primarily as a result of
increased freight and labor of $3.4 million on increased sales volume and labor
and other costs of $1.6 million related to start up of the new distribution
facility in 2003. The start up costs associated with the new distribution
facility moderated in the second and third quarters and management does not
expect these costs to be material in the fourth quarter. General and
administrative expenses increased by $0.7 million or 4.2% primarily as a result
of an increase in the Companys medical claims cost which was partially offset
by a reduction in corporate overhead costs following elimination of the
Philadelphia corporate office in May 2002. Medical expenses for the first nine
months of 2003 include $1.5 million of claims paid under the Companys group
medical insurance plan, which involved claims by an employee for medical
services performed at the end of 2002. Management does not anticipate further
medical expense of a material amount in connection with these claims.

Total S,G&A expenses in the first nine months of 2003 expressed as a percentage
of sales compared with the first nine months of 2002 are as follows:

|                                    |                       |      |                             |      |   |  |      |      |  
|----------------------------------- | --------------------- | ---- | --------------------------- | ---- | - |  | ---- | ---- | -
|                                    |                       |      | Nine Months ended Sept. 30,
|                                    |                       |      |                            
|As a % of Sales                     |                       | 2003 |                             | 2002
|                                    |                       |      |                             |     
|Selling Expenses                    |                       |      | 17.8                        | %    |   |  | 19.3 | %   
|Warehouse and Delivery Expenses     |                       |      | 12.6                        | %    |   |  | 11.3 | %   
|General and Administrative Expenses |                       |      | 7.2                         | %    |   |  | 7.7  | %   
|                                    |                       |      |                             |      |   |  |      |     
|                                    | Total S, G&A Expenses |      |                             | 37.6 | % |  |      | 38.3 | %
|                                    |                       |      |                             |      |   |  |      |     

Income from operations for the first nine months of 2003 was $29.0 million
compared with $27.4 million for the same prior-year period, representing an
increase of 5.8%.

The Companys consolidated operating profit margin (income from operations as a
percentage of sales) was 12.0% in the first nine months of 2003 compared with
12.7% in 2002. The operating profit margin reduction was due primarily to the
decrease in gross profit and the increase in depreciation expense expressed as
a percentage of sales. In addition, the favorable effect of a reduction in
S,G&A expenses as a percentage of sales was offset by a corresponding decrease
in other income compared to the prior year. The gross profit rate decrease
from the comparable prior year period was the result of lower margins on the
newly acquired DIY business. The increase in depreciation expense for the
first nine months of 2003 compared to the prior year period was due to the
increase in depreciable fixed assets for the new distribution facility placed
into service in January 2003 and increased key machine placements. The smaller
S,G&A expense as a percentage of sales in 2003 was due to a reduction in costs
associated with promotional marketing materials and corporate overhead
expenses. Other income was reduced in the first nine months of 2003 as a
result of the $1.2 million gain on termination of the STS pension plan recorded
in the prior year compared to the $0.4 gain from the payment received in 2003
from General American Insurance Company upon its demutualization.

Depreciation expense increased $1.6 million to $10.4 million in the first nine
months of 2003 from $8.8 million in the same period of 2002.

Amortization expense of $1.1 million in the first nine months of 2003 was equal
to the amortization in the same period of 2002.

The Company has recorded a management fee charge of $1.4 million for the first
nine months of 2003 and 2002, respectively. 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 management fee for the year ended December 31, 2002 was paid in April,
2003.

Page 18 of 27



---



##### 



In February 2003, G-C sold the assets of its largest operating division, Kar
Products. The proceeds of the sale were primarily used to pay down G-Cs senior
creditors. Following the sale of Kar Products, the Company estimated the
enterprise value of G-C based on the cash flows and book value of the remaining
operating division. The excess of the estimated enterprise value less debt
obligations senior to the G-C note were determined to be insufficient to
support the value of the G-C note. Accordingly, the Company recorded a $5.7
million charge to income in the first quarter of 2003 to write-down the face
value of the note and accrued interest thereon to its estimated fair value.
The Company recorded an additional $0.6 million charge to income in the second
quarter of 2003 to write-down the note to its estimated fair value of $5.0
million.

Interest expense from credit facilities, net of interest income, increased $1.7
million to $11.7 million in the first nine months of 2003 from $10.0 million in
the same period of 2002. The increase was primarily the result of additional
borrowings to finance the expansion and automation of the Companys
distribution facility, to purchase the Lowes specialty fastener business from
R&B, Inc. in May 2002, and to purchase the DIY business from Fastenal Company
in October 2002. A reduction in interest income of $0.8 million resulted from
the suspension of interest income on the subordinated note received from G-C.

For the nine months ended September 30, 2003 and 2002, 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) 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 $1.0 million on pre-tax income of $1.9 million in
the first nine months of 2003. The effective tax rate in the first nine months
of 2003 was 51.6% compared to 43.3% in the first nine months of 2002. The
increase in the effective tax rate was the result of the decrease in income
before taxes in 2003 as compared to 2002 together with an increase in the
permanent tax items.

Cash Flows

The statements of cash flows reflect the changes in cash and cash equivalents
for the nine months ended September 30, 2003 and 2002 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 used by operating activities for the first nine months of 2003 was $2.1
million compared to cash provided of $15.7 million in the same prior year
period. The negative net change of $17.8 million in the current nine months
compared to the same period in 2002 was primarily due to the use of $13.9
million more operating cash to fund the increased inventory, accounts
receivable, and other asset requirements. The increased inventory was used to
facilitate the transition of sales order volume from the Companys Tempe
facility to the new Cincinnati distribution facility and to support the
Companys increased sales volume. The transition of sales order volume was
substantially complete as of September 30, 2003. The accounts receivable
increase in 2003 compared to 2002 was also a function of higher sales levels.
An additional $2.1 million more operating cash was used this year to fund the
higher customer pricing allowances earned and accrued in 2002, but paid in
2003. The sales improvement recorded in 2002 produced the increased amount of
customer allowances paid in 2003.

Page 19 of 27



---



##### 



Investing Activities

The principal recurring investing activities are property additions primarily
for key duplicating machines. Net property additions for the first nine months
of 2003 were $8.5 million compared to $17.7 million in the comparable prior
year period. The decrease in capital expenditures in the first nine months of
2003 compared to the prior year period results from a decrease in the amount of
expenditures for the automated distribution center in Cincinnati which was
completed in November 2002 and placed into service in January 2003.

Financing Activities

Net borrowings under the Companys senior credit facilities of $8.3 million for
the nine months ended September 30, 2003 increased $0.8 million from the
comparable prior year period as a result primarily of cash flow used for
operations.

Liquidity and Capital Resources

The Companys working capital position (defined as current assets less current
liabilities) of $69.2 million at September 30, 2003 represents an increase of
$19.5 million from the December 31, 2002 level of $49.7 million primarily as a
result of the seasonal increase in accounts receivable of $14.4 million and
an inventory increase of $5.4 million resulting from seasonal
requirements as well as a build up of stock to facilitate the
transition of sales order volume from the Companys Tempe
facility to the new Cincinnati distribution center. The Companys current ratio (defined as current
assets divided by current liabilities) increased to 2.21x at September 30, 2003
from 1.83x at December 31, 2002.

The Companys contractual obligations in thousands of dollars as of September
30, 2003 are summarized below:

|                                                                                          |                                    |       |         |          |  |       |              |         |        |   |           |        |  |   |         |         | 
|----------------------------------------------------------------------------------------- | ---------------------------------- | ----- | ------- | -------- |  | ----- | ------------ | ------- | ------ | - | --------- | ------ |  | - | ------- | ------- | 
|                                                                                          |                                    |       |         |          |  |       | Payments Due
|                                                                                          |                                    |       |         |          |  |       |             
|                                                                                          |                                    |       |         |          |  |       | Less Than    |         | 1 to 3 |   | More Than
|Contractual Obligations                                                                   |                                    | Total |         | One Year |  | Years |              | 3 Years
|                                                                                          |                                    |       |         |          |  |       |              |        
|Guaranteed Preferred Beneficial
Interests in the Companys Junior
Subordinated Debentures |                                    | $     | 105,446 |          |  |       |             |         |        |   |          |        |  | $ | 105,446 |        
|Long Term Senior Term Loans                                                               |                                    |       | 62,875  |          |  | $     | 9,268        |         |        | $ | 18,537    |        |  |   | 35,070  |        
|Bank Revolving Credit Facility                                                            |                                    |       | 51,308  |          |  |       |             |         |        |   |          |        |  |   | 51,308  |        
|Long Term Unsecured Subordinated Notes                                                    |                                    |       | 43,561  |          |  |       |             |         |        |   |          |        |  |   | 43,561  |        
|Operating Leases                                                                          |                                    |       | 32,509  |          |  |       | 6,756        |         |        |   | 10,015    |        |  |   | 15,738  |        
|Deferred Compensation Obligations                                                         |                                    |       | 6,672   |          |  |       | 948          |         |        |   | 1,896     |        |  |   | 3,828   |        
|Capital Lease Obligations                                                                 |                                    |       | 209     |          |  |       | 66           |         |        |   | 105       |        |  |   | 38      |        
|Other Long Term Obligations                                                               |                                    |       | 6,902   |          |  |       | 1,696        |         |        |   | 1,955     |        |  |   | 3,251   |        
|                                                                                          |                                    |       |         |          |  |       |              |         |        |   |           |        |  |   |         |        
|                                                                                          | Total Contractual Cash Obligations |       | $       | 309,482  |  |       | $            | 18,734  |        |   | $         | 32,508 |  |   | $       | 258,240 | 
|                                                                                          |                                    |       |         |          |  |       |              |         |        |   |           |        |  |   |         |        

All of the obligations noted above are reflected on the Companys Consolidated
Balance Sheet as of September 30, 2003, except for the Operating Leases.

As of September 30, 2003, the Company had $9.6 million available under its
secured credit facilities. The Company had approximately $114.4 million of
outstanding debt under its secured credit facilities at September 30, 2003,
consisting of $62.9 million in term loans, $51.3 million in revolving credit
borrowings and $0.2 million in capitalized lease obligations. The term loans
consisted of a $36.7 million Term B Loan (the Term Loan B) currently at a
three (3) month LIBOR rate of 4.94% and a $26.2 million Term A loan (the Term
Loan A) at a one (1) month LIBOR rate of 4.625%. The revolver borrowings (the
Revolver) consist of $20.0 million currently at a two (2) month LIBOR rate of
4.625%, $14.0 million at a three (3) month LIBOR rate of 4.6875%, $15.0 million
at a three (3) month LIBOR rate of 4.625% and $2.3 million at the prime
rate of 6.00%. The capitalized lease obligations were at various interest rates.

Page 20 of 27



---



##### 



As of September 30, 2003 the Company had no material purchase commitments for
capital expenditures.

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, 2003, the outstanding Amended Subordinated Debt Issuance
including the PIK Amounts was $43.6 million.

The Senior Credit Agreement, among other provisions, contains financial
covenants requiring the maintenance of specific ratios and levels of financial
position, restricts the incurrence of additional debt, and the sale of assets,
and permits acquisitions only with the consent of the lenders. The Company was
in full compliance with all provisions of the Senior Credit Agreement as of
September 30, 2003.

The Company has deferred tax assets aggregating $32.1 million and deferred tax
liabilities of $5.8 million as of September 30, 2003, 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 basis, as well as through future
taxable income.

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
may 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, and
taxation. In addition, significant estimates form the basis for the Companys
reserves with respect to sales and returns allowances, collectibility of
accounts receivable, inventory valuations, deferred tax assets, 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 and intangible assets are subject
to annual impairment testing; litigation is based on projections provided by
legal counsel; realization of certain deferred tax assets 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.

Page 21 of 27



---



##### 



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.

The Company offers a variety of sales incentives to its customers primarily in
the form of discounts and rebates. Discounts are recognized in the financial
statements at the date of the related sale. Rebates are estimated based on the
anticipated rebate to be paid and a portion of the estimated cost of the rebate
is allocated to each underlying sales transaction. Rebates and discounts are
included in the determination of net sales.

The Company also establishes reserves for customer returns and allowances. The
reserve is established based on historical rates of returns and allowances.
The reserve is adjusted quarterly based on actual experience.

Inventory Realization:

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. Excess and obsolete inventories are carried at net realizable value.
The historical usage rate is the primary factor used by the Company in
assessing the net realizable value of excess and obsolete inventory. A
reduction in the carrying value of an inventory item from cost to market is
recorded for inventory with no usage in the preceding twelve month period or
with on hand quantities in excess of twenty-four months average usage.

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:

Prior to January 1, 2002, the Company recorded goodwill related to the excess
of acquisition cost over the fair value of net assets acquired and amortized
the goodwill on a straight-line basis over twenty-five to forty years. The
Company adopted SFAS No. 142, Goodwill and Other Intangible Assets and
accordingly, goodwill is no longer amortized, but is reviewed periodically for
impairment. 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
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 basis of assets and liabilities
(temporary differences) and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

Page 22 of 27



---



##### 



Self-insurance Reserves:

The Company purchases third party insurance for workers compensation,
automobile, product and general liability claims that exceed a certain level.
However, the Company is responsible for the payment of claims under these
insured limits. In estimating the obligation associated with incurred losses,
the Company utilizes loss development factors prepared by consulting insurance
carriers. These development factors utilize historical data to project the
future development of incurred losses. Loss estimates are adjusted based upon
actual claims settlements and reported claims.

The Company also purchases third party insurance for group medical claims that
exceed a certain level on an individual claim basis and in the aggregate for a
plan year. The Company is responsible for the payment of claims under the
specific and aggregate insured limits. Reserves for the incurred, but not
reported losses are estimated based on several factors including historical
claims experience and claims payment lag time information.

Retirement Benefits:

Certain employees of the Company are covered under a profit-sharing and
retirement savings plan (the plan). The plan provides for a matching
contribution for eligible employees of 50% of each dollar contributed by the
employee up to 6% of employees compensation. In addition, the plan provides
an annual contribution in amounts authorized by the Board, subject to the terms
and conditions of the plan.

Shipping and Handling

The costs incurred to ship product to customers, including freight and handling
expenses, are included in selling, general and administrative (SG&A) expenses
on the Companys Statements of Operations. For the three months ended
September 30, 2003 and 2002, shipping and handling costs included in SG&A were
$4,044 and $3,704, respectively. For the nine months ended September 30, 2003
and 2002, shipping and handling costs included in SG&A were $11,906 and
$10,380, respectively.

Research and Development:

The Company incurs research and development costs in connection with
improvements to the key duplicating and engraving machines. For the three
months ended September 30, 2003 and 2002, research and development expenses,
consisting primarily of internal wages and benefits, were $424 and $413,
respectively. For the nine months ended September 30, 2003 and 2002, research
and development expenses were $1,148 and $1,166, respectively.

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 the Companys Canadian 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.

Page 23 of 27



---



##### 



Comprehensive Income:

The components of comprehensive income for the three and nine month
periods ended September 30, 2003 and 2002 were as follows:

|                                        |  |                    |       |                   |  |      |       |      |  |   |     |   |  |   |       | 
|--------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | --- | - |  | - | ----- | 
|                                        |  | Three Months Ended |       | Nine Months Ended
|                                        |  | September 30       |       | September 30     
|                                        |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                                        |  |                    |       |                   |  |      |       |     
|Net income                              |  | $                  | 3,120 |                   |  | $    | 2,789 |      |  | $ | 903 |   |  | $ | 4,627 | 
|Foreign currency translation
adjustment |  |                    | 1     |                   |  |      | 7     |      |  |   | (99 | ) |  |   | 3     | 
|                                        |  |                    |       |                   |  |      |       |      |  |   |     |   |  |   |       | 
|Comprehensive income                    |  | $                  | 3,121 |                   |  | $    | 2,796 |      |  | $ | 804 |   |  | $ | 4,630 | 
|                                        |  |                    |       |                   |  |      |       |      |  |   |     |   |  |   |       | 

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 2, Summary of Significant Accounting Policies, 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, 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, 2002. 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.

Page 24 of 27



---



##### 



Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to the impact of interest rate changes as borrowings
under the senior credit facility bear interest at variable interest rates. It
is Hillmans policy to enter into interest rate transactions only to the extent
considered necessary to meet objectives. On March 31, 2002, the Company
entered into an interest rate cap agreement on a notional amount of $26.6
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 3.25% and 3.75%. Based on Hillmans exposure
to variable rate borrowings at September 30, 2003, a one percent (1%) change in
the weighted average interest rate would change the annual interest expense by
approximately $1.0 million.

The Company is exposed to foreign exchange rate changes of the Canadian
currency as it impacts the $0.8 million net asset value of its Canadian
subsidiary, The Hillman Group Canada, Ltd., as of September 30, 2003.
Management considers the Companys exposure to foreign currency translation
gains or losses to be minimal.

Item 4.

Controls and Procedures

(a)  As of the end of the period covered by this quarterly report on Form 10-Q,
the Companys chief executive officer and chief financial officer conducted an
evaluation of the Companys disclosure controls and procedures (as defined in
Rules 13a-15 and 15d-15 of the Securities Exchanges 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 been no changes in the Companys internal control over financial
reporting that occurred during the quarter ended September 30, 2003, that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

Page 25 of 27



---



##### 



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.                                                                                                
|    
|31.1 |  | * Certification of chief executive officer pursuant to rule 13a-14(a)
or 15d- 14(a) under the Securities Exchange Act of 1934.                      
|    
|31.2 |  | * Certification of chief financial officer pursuant to rule 13a-14(a)
or 15d-14(a) under Securities Exchange Act of 1934.                           
|    
|32.1 |  | + Certification of chief executive officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|    
|32.2 |  | + Certification of chief financial officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.



|* |  | Filed herewith.    
|- |  | -------------------
|+ |  | Submitted herewith.

Page 26 of 27



---



##### 



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



DATE: November 12, 2003

Page 27 of 27