##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 Commission file number 1-13293 The Hillman Companies, Inc.  Delaware
    
    23-2874736(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 10590 Hamilton AvenueCincinnati, 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 Registered11.6% Junior Subordinated Debentures
Preferred Securities Guaranty
    
    NonePreferred Share Purchase Rights
 Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  On May 12, 2004 there were 6,212.9 Class A Common Shares issued and
outstanding, 1,000.0 Class B Common Shares issued and outstanding, 2,787.1
Class C 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 31




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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES INDEX PAGE(S)PART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial StatementsConsolidated Balance Sheets as of March 31, 2004
(Unaudited) and December 31, 2003
    
    3-4Consolidated Statements of Operations for the Three Months
ended March 31, 2004 and 2003 (Unaudited)
    
    5Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2004 and 2003 (Unaudited)
    
    6Consolidated Statement of Changes in Stockholders Equity
for the Three Months ended March 31, 2004 (Unaudited)
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    8-17Item 2. Managements Discussion and Analysis of Financial Conditions
and Results of Operations
    
    18-27Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    28Item 4. Controls and Procedures
    
    28PART II. OTHER INFORMATION
    
    29-30SIGNATURES
    
    31
 Page 2 of 31




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Item 1. THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) Successor
    
    PredecessorMarch 31,2004
    
    December 31,(Unaudited)
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,071
    
    
    $
    1,528Restricted investments
    
    
    1,133
    
    
    
    1,145Accounts receivable, net
    
    
    40,840
    
    
    
    35,383Inventories, net
    
    
    65,496
    
    
    
    64,772Deferred income taxes
    
    
    7,382
    
    
    
    5,283Other current assets
    
    
    4,791
    
    
    
    5,770Total current assets
    
    
    132,713
    
    
    
    113,881Property and equipment, net
    
    
    63,417
    
    
    
    64,601Goodwill
    
    
        236,179
    
    
    
    134,725Other intangibles, net
    
    
    152,461
    
    
    
    9,631Deferred income taxes, net
    
    
    
    
    
    
    20,498Restricted investments
    
    
    5,182
    
    
    
    5,932Deferred financing fees, net
    
    
    7,592
    
    
    
    5,638Other assets
    
    
    536
    
    
    
    927Total assets
    
    $
        598,080
    
    
    $
    355,833LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    22,903
    
    
    $
    16,836Current portion of senior term loans
    
    
    2,175
    
    
    
    9,268Current portion of capitalized lease obligations
    
    
    49
    
    
    
    54Accrued expenses:Salaries and wages
    
    
    2,872
    
    
    
    4,467Employee benefits and related withholdings
    
    
    9,119
    
    
    
    Pricing allowances
    
    
    4,323
    
    
    
    8,242Income and other taxes
    
    
    1,876
    
    
    
    1,966Deferred compensation
    
    
    1,133
    
    
    
    1,145Other accrued expenses
    
    
    9,864
    
    
    
    13,363Total current liabilities
    
    
    54,314
    
    
    
    55,341Long term senior term loans
    
    
    215,325
    
    
    
    51,290Bank revolving credit
    
    
    2,198
    
    
    
    43,495Long term capitalized lease obligations
    
    
    131
    
    
    
    140Long term unsecured subordinated notes
    
    
    47,500
    
    
    
    Long term unsecured subordinated notes to related party
    
    
    
    
    
    
    44,062Junior subordinated debentures
    
    
    114,725
    
    
    
    Mandatorily redeemable preferred stock (Note 7)
    
    
    57,121
    
    
    
    Management purchased preferred options
    
    
        3,230
    
    
    
    Deferred compensation
    
    
    5,182
    
    
    
    5,932Deferred income taxes, net
    
    
    3,246
    
    
    
    Other non-current liabilities
    
    
    6,828
    
    
    
    5,605Total liabilities
    
    
        509,800
    
    
    
    205,865
 Page 3 of 31




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) Successor
        
        PredecessorMarch 31,2004
        
        December 31,(Unaudited)
        
        2003LIABILITIES
            AND STOCKHOLDERS EQUITY (CONTINUED)Common Stock with put options:Class A
Common stock
            $.01 par, 23,141 shares authorized 407.6 issued and outstanding at
            March 31, 2004
        
        
        407
        
        
        
        Class B Common stock,
            $.01 par, 2,500 shares authorized, 1,000 issued and outstanding at
            March 31, 2004
        
        
        1,000
        
        
        
        Guaranteed preferred
            beneficial interests in the Companys junior subordinated debentures
        
        
        
        
        
        
        102,364Commitments and contingenciesStockholders
            equity:Preferred stock,
            $.01 par, 1,000,000 shares authorized, none outstanding at December 31,
            2003
        
        
        
        
        
        
        Class A Preferred
            stock, $.01 par, 238,889 shares authorized, 82,104.8 issued and outstanding
            at March 31, 2004
        
        
        1
        
        
        
        Common Stock:Common stock, $.01
            par, 20,000,000 shares authorized, 7,118,484 issued and outstanding
            at December 31, 2003
        
        
        
        
        
        
        71Class A Common
            stock, $.01 par, 23,141 shares authorized, 5805.3 issued and outstanding
            at March 31, 2004
        
        
        
        
        
        
        Class C Common
            stock, $.01 par, 30,109 shares authorized, 2,787.1 issued and outstanding
            at March 31, 2004
        
        
        
        
        
        
        Additional paid-in
            capital
        
        
        86,872
        
        
        
        52,310Accumulated deficit
        
        
        
        
        
        
        (4,647
        )Accumulated other
            comprehensive loss
        
        
        
        
        
        
        (130
        )Total stockholders
            equity
        
        
        86,873
        
        
        
        47,604Total liabilities
            and stockholders equity
        
        $
        598,080
        
        
        $
        355,833
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 4 of 31




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED,
(dollars in thousands) March 31,
    
    March 31,2004
    
    2003PredecessorNet sales
    
    $
    78,997
    
    
    $
    69,989Cost of sales
    
    
    35,780
    
    
    
    31,664Gross profit
    
    
    43,217
    
    
    
    38,325Operating expenses:Selling, general and administrative expenses
    
    
    30,999
    
    
    
    28,200Non-recurring expense (Note 9)
    
    
    30,707
    
    
    
    Depreciation
    
    
    3,799
    
    
    
    3,467Amortization
    
    
    321
    
    
    
    371Management fee to related party
    
    
    524
    
    
    
    450Total operating expenses
    
    
    66,350
    
    
    
    32,488Other (expense) income, net
    
    
    (140
    )
    
    
    53(Loss) income from operations
    
    
    (23,273
    )
    
    
    5,890Interest expense, net
    
    
    3,841
    
    
    
    3,635Interest expense on junior subordinated notes
    
    
    3,058
    
    
    
    Distributions on guaranteed preferred
beneficial interests
    
    
    
    
    
    
    3,058Write-down of note receivable
    
    
    
    
    
    
    5,657Loss before income taxes
    
    
    (30,172
    )
    
    
    (6,460
    )Income tax benefit
    
    
    (10,856
    )
    
    
    (615
    )Net loss
    
    $
    (19,316
    )
    
    $
    (5,845
    )
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 5 of 31




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED,
(dollars in thousands) Successor
    
    PredecessorAt
    
    March 31
    
    March 31Inception
    
    2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    
    
    
    $
    (19,316
    )
    
    $
    (5,845
    )Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:Depreciation and amortization
    
    
    
    
    
    
    4,120
    
    
    
    3,838Deferred income tax benefit
    
    
    
    
    
    
    (10,287
    )
    
    
    (621
    )PIK interest on unsecured subordinated notes
    
    
    
    
    
    
    506
    
    
    
    483Write-down of note receivable
    
    
    
    
    
    
    
    
    
    
    5,657Changes in operating items, net of effects of acquisitions:Increase in accounts receivable, net
    
    
    
    
    
    
    (5,457
    )
    
    
    (7,100
    )Increase in inventories, net
    
    
    
    
    
    
    (724
    )
    
    
    (1,906
    )(Increase) decrease in other assets
    
    
    (170
    )
    
    
    1,464
    
    
    
    369Increase in accounts payable
    
    
    
    
    
    
    5,832
    
    
    
    573(Decrease) increase in other accrued liabilities
    
    
    (25,937
    )
    
    
    23,157
    
    
    
    (6,032
    )Other items, net
    
    
    
    
    
    
    6
    
    
    
    755Net cash used for operating activities
    
    
    (26,107
    )
    
    
    (699
    )
    
    
    (9,829
    )Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (2,586
    )
    
    
    (3,294
    )Other, net
    
    
    
    
    
    
    (23
    )
    
    
    152Net cash used for investing activities
    
    
    
    
    
    
    (2,609
    )
    
    
    (3,142
    )Cash flows from financing activities:Borrowings of senior term loans
    
    
    217,500
    
    
    
    
    
    
    
    Repayments of senior term loans
    
    
    (60,558
    )
    
    
    
    
    
    
    (2,317
    )Borrowings of revolving credit loans
    
    
    2,198
    
    
    
    4,709
    
    
    
    13,754Repayments of revolving credit loans
    
    
    (48,204
    )
    
    
    
    
    
    
    Borrowings of unsecured subordinated notes
    
    
    47,500
    
    
    
    
    
    
    
    Repayments of unsecured subordinated notes
    
    
    (44,569
    )
    
    
    
    
    
    
    Principal payments under capitalized lease obligations
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Financing fees, net
    
    
    (7,592
    )
    
    
    
    
    
    
    8Purchase of predecessor common stock
    
    
    (214,724
    )
    
    
    
    
    
    
    Receipt of successor equity proceeds
    
    
    147,980
    
    
    
    
    
    
    
    Merger transaction expenses
    
    
    (2,171
    )
    
    
    
    
    
    
    Prepayment penalty
    
    
    (1,097
    )
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    36,263
    
    
    
    4,695
    
    
    
    11,431Net increase (decrease) in cash and cash equivalents
    
    
    10,156
    
    
    
    1,387
    
    
    
    (1,540
    )Cash and cash equivalents at beginning of period
    
    
    2,915
    
    
    
    1,528
    
    
    
    2,768Cash and cash equivalents at end of period
    
    $
    13,071
    
    
    $
    2,915
    
    
    $
    1,228
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 6 of 31




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004 Predecessor
        Common
      
      Successor Common Stock
      
      Additional
        Paid-inStock
      
      Class A
      
      Class C
      
      CapitalBeginning Balance at
          December 31, 2003- Predecessor
      
      $
      71
      
      
      $
      
      
      
      $
      
      
      
      $
      52,310Net LossChange in cumulative
          foreign translation adjustment (1)Ending Balance at March 31,
          2004 - Predecessor
      
      
      71
      
      
      
      
      
      
      
      
      
      
      
      52,310Close Predecessors
          stockholders equity at merger date
      
      
      (71
      )
      
      
      
      
      
      
      
      
      
      
      (52,310
      )Issuance of 5,805.3 shares
          of Class A Common Stock
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      5,443Issuance of 2,787.1 shares
          of Class C Common Stock
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      2,787Issuance of 82,104.8 shares
          of The Hillman Companies, Inc.Class A Preferred
          Stock
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      78,642Ending Balance at March 31,
          2004 - Successor
      
      $
      
      
      
      $
      
      
      
      $
      
      
      
      $
      86,872
   [Continued from above table, first column(s) repeated] AccumulatedClass A
      
      
      
      
      
      Other
      
      TotalPreferred
      
      Accumulated
      
      Comprehensive
      
      StockholdersStock
      
      Deficit
      
      Income
      
      EquityBeginning Balance at
          December 31, 2003- Predecessor
      
      $
      
      
      
      $
      (4,647
      )
      
      $
      (130
      )
      
      $
      47,604Net Loss
      
      
      
      
      
      
      (19,316
      )
      
      
      
      
      
      
      (19,316
      )Change in cumulative
          foreign translation adjustment (1)
      
      
      
      
      
      
      
      
      
      
      10
      
      
      
      10Ending Balance at March 31,
          2004 - Predecessor
      
      
      
      
      
      
      (23,963
      )
      
      
      (120
      )
      
      
      28,298Close Predecessors
          stockholders equity at merger date
      
      
      
      
      
      
      23,963
      
      
      
      120
      
      
      
      (28,298
      )Issuance of 5,805.3 shares
            of Class A Common Stock
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      5,443Issuance of 2,787.1 shares
          of Class C Common Stock
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      2,787Issuance of 82,104.8 shares
          of The Hillman Companies, Inc.
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      Class A Preferred
          Stock
      
      
      1
      
      
      
      
      
      
      
      
      
      
      
      78,643Ending Balance at March 31,
          2004 - Successor
      
      $
      1
      
      
      $
      
      
      
      $
      
      
      
      $
      86,873
  (1)
    
    The cumulative foreign translation adjustment represents the only item of
other comprehensive income. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 7 of 31




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##### 



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. (the Company or Hillman) and its indirect, wholly
owned subsidiaries including an investment trust, Hillman Group Capital Trust
(the Trust). All significant intercompany balances and transactions have been
eliminated. On March 31, 2004, The Hillman Companies, Inc. was acquired by an affiliate of
Code Hennessy & Simmons LLC (CHS). Pursuant to the terms and conditions of
an Agreement and Plan of Merger (Merger Agreement) dated as of February 14,
2004, the Company was merged with an affiliate of CHS with the Company
surviving the merger (Merger Transaction). The total consideration paid in
the Merger Transaction was $511.6 million including repayment of outstanding
debt and including the value of the Companys outstanding Trust Preferred
Securities. The merger consideration is subject to certain post-closing
working capital and other adjustments. Prior to the merger, Allied Capital Corporation (Allied Capital) owned 96.8 %
of the Companys common stock. As a result of the change of control, an
affiliate of CHS owns 49.1% of the Companys common stock and 54.5% of the
Companys voting common stock, Ontario Teachers Pension Plan (OTPP) owns
27.9% of the Companys common stock and 31.0% of the Companys voting common
stock and HarborVest Partners VI owns 8.7% of the Companys common stock and
9.7% of the Companys voting common stock. Certain members of management own
14.1% of the Companys common stock and 4.5% of the Companys voting common
stock. CHS is a private equity firm that manages approximately $1.56 billion in
capital in four funds. The acquisition of the Company by CHS adds to their
existing portfolio of middle market manufacturing and distribution businesses. The Companys Consolidated Balance Sheet as of March 31, 2004 and its related
Statements of Operations, Cash Flows and Changes in Stockholders Equity for
the periods presented prior to March 31, 2004 are referenced herein as the
predecessor financial statements (the Predecessor or Predecessor Financial
Statements). The Companys Consolidated Balance Sheet as of March 31, 2004
and its related Statements of Operations, Cash Flows and Changes in
Stockholders Equity for period presented at inception of the Merger
Transaction are referenced herein as the successor financial statements (the
Successor or Successor Financial Statements). The accompanying Successor
Financial Statements reflect the allocation of the aggregate purchase price of
$511.6, including the value of the Companys Trust Preferred Securities, to the
assets and liabilities of Hillman based on fair values at the date of the
merger in accordance with Statement of Financial Accounting Standards No. 141,
Business Combinations. The Company is in the process of obtaining
third-party valuations of certain assets acquired in connection with the Merger
Transaction. Thus, the allocation of the purchase price is subject to change.
Any amounts attributable to such assets are expected to be finalized during
2004. The following table reconciles the fair value of the acquired assets and
assumed liabilities to the total purchase price: Page 8 of 31




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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 1. Basis of Presentation (continued): Accounts Receivable
        
        $
        40,840Inventory
        
        
        65,496Property and equipment
        
        
        63,417Goodwill
        
        
        236,179Intangible assets
        
        
        152,461Other assets
        
        
        11,551Total assets acquired
        
        
        569,944Less:Liabilities assumed
        
        
        45,968Junior subordinated
            debentures
        
        
        114,725Total assumed liabilities
        
        
        160,693Total purchase price
        
        $
        409,251
 The
    purchase price includes transaction related costs aggregating $2,171 which
    were associated with CHSs purchase of the Company. The
    pro forma net loss of the Company for the three months ended March 31,
    2004 and 2003 is $19,593 (including non-recurring charges of $30,707 as discussed
    in Note 9) and $6,161, respectively. The pro forma net loss gives effect to
    the Merger Transaction as if it had occurred on January 1, 2004 and January 1,
    2003, respectively. The pro forma results are based on assumptions that the
    Company believes are reasonable under the circumstances. The pro forma results
    are not necessarily indicative of the operating results that would have occurred
    if the acquisition had been effective January 1, 2004 and 2003, nor are
    they intended to be indicative of results that may occur in the future. The
    underlying pro forma information includes the historical financial results
    of the Company, the Companys financing arrangements, and certain purchase
    accounting adjustments. 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 months ended March 31, 2004 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, 2003. 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. Page 9 of 31




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 2. Summary of Significant Accounting Policies (continued): 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. Excess and obsolete inventories are carried at net realizable value.
The historical usage rate is the primary factor used by the Company in
assessing the net realizable value of excess and obsolete inventory. A
reduction in the carrying value of an inventory item from cost to market is
recorded for inventory with no usage in the preceding twenty-four month period
or with on hand quantities in excess of twenty-four months average usage. 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. Valuation
allowances are provided for tax benefits where it is more likely than not that
certain future tax benefits will not be realized. Adjustments to valuation
allowances are recorded from changes in utilization of the tax related item. 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. 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. Page 10 of 31




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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 2. Summary of Significant Accounting Policies (continued): 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. 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 March
31, 2004 and 2003, shipping and handling costs included in SG&A were $3,628 and
$3,557, 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 March 31, 2004 and 2003, research and development expenses,
consisting primarily of internal wages and benefits, were $277 and $293,
respectively. Stock-Based Compensation: The Company applies the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for our employee stock option plan. For
the three months ended March 31, 2004 the Company recognized compensation
expense for certain options granted under the stock option plan with an
exercise price less than the market value of the underlying common stock on the
date of grant (See Note 7, Common and Preferred Stock). There would have been
no effect on net earnings, assuming the fair value recognition provisions of
Statements of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation had been applied. 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 Loss: The components of comprehensive loss for the three months ended
March 31, 2004 and 2003 were as follows: Three Months EndedMarch 312004
    
    2003Net loss
    
    $
    19,316
    
    
    $
    5,845Foreign currency translation adjustment
    
    
    (10
    )
    
    
    36Comprehensive loss
    
    $
    19,306
    
    
    $
    5,881
 Page 11 of 31




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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 2. Summary of Significant Accounting Policies (continued): Reclassifications: Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform to the 2004 presentation. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. 3. Goodwill and Other Intangible Assets Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 provides for the non-amortization of goodwill. Goodwill is now
subject to at least an annual assessment for impairment by applying a fair
value-based test. Goodwill totaling $236,179 was recorded in connection with
the Merger Transaction. Other intangible assets will be amortized over their
useful lives and will be subject to a lower of cost or market impairment
testing. The
values assigned to intangible assets in connection with the March 31, 2004
Merger Transaction were determined by a preliminary independent
appraisal. The intangible asset values may be adjusted for any
changes determined upon completion of work on the independent
appraisal. Intangible
assets as of March 31, 2004 and December 31, 2003 consist of the following: March 31,
        
        December 31,2004
        
        2003Customer Relationships
        
        $
        100,000
        
        
        $
        Trademarks
        
        
        34,461
        
        
        
        6,500Patents
        
        
        10,000
        
        
        
        6,700Proprietary Software
        
        
        
        
        
        
        1,000Non Compete Agreements
        
        
        8,000
        
        
        
        1,250Intangible assets,
            gross
        
        
        152,461
        
        
        
        15,450Less: Accumulated
            amortization
        
        
        
        
        
        
        5,819Intangible assets,
            net
        
        $
        152,461
        
        
        $
        9,631
 Amortization
    expense for amortizable assets for the years ended December 31, 2004,
    2005, 2006, 2007 and 2008 are estimated to be $8,696, $11,167, $11,167 , $11,167
    , and $7,792 , respectively. 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 March 31, 2004, the Company has provided
insurers letters of credit aggregating $4,499 related to certain insurance
programs. Page 12 of 31




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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 4. Contingencies (continued): 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 Allied acquisition, the Company was obligated
to pay management fees to a subsidiary of Allied Capital for management
services rendered in the amount of $1,800 per year, plus out of pocket
expenses, for calendar years subsequent to 2001. The Company has recorded a
management fee charge of $524 and $450 for the three months ended March 31,
2004 and 2003, respectively. Payment of management fees was due annually after
delivery of the Companys annual audited financial statements to the Board of
Directors of the Company. The obligation to pay management fees to Allied
Capital was terminated upon the payment of outstanding fees in the amount of
$2,324 on March 31, 2004 in connection with the close of the Merger
Transaction. On March 31, 2004, the Company was acquired by an affiliate of Code Hennessy &
Simmons LLC. In connection with the CHS acquisition, the Company is obligated
to pay management fees to a subsidiary of CHS in the amount of $58 per month
and to pay management fees to a subsidiary of OTPP in the amount of $26 per
month, plus out of pocket expenses, for each month commencing with the closing
date of the Merger Transaction. The Company incurred interest expense to Allied Capital on the subordinated
debt at a fixed rate of 18.0% per annum. Cash interest payments were 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. The subordinated
debt and accrued interest thereon of $45,571 were paid in full at March 31,
2004 in connection with the Merger Transaction. 6. Long Term Debt: On March 31, 2004 the Company, through its Hillman Group, Inc. subsidiary,
refinanced its revolving credit and senior term loans with a Senior Credit
Agreement consisting of a $40,000 revolving credit (the Revolver) and a
$217,500 term loan (the Term Loan). The Senior Credit Agreement has a
seven-year term and provides borrowings at interest rates based on the London
Inter-bank Offered Rates (the LIBOR) plus a margin of between 2.25% and 3.00%
(the LIBOR Margin), or prime (the Base Rate) plus a margin of between 1.25%
and 2.0% (the Base Rate Margin). The applicable LIBOR Margin and Base Rate
Margin is based on the Companys leverage at the date of the preceding fiscal
quarter. In accordance with the Senior Credit Agreement, letter of credit
commitment fees are based on the average daily face amount of each outstanding
letter of credit multiplied by a Letter of Credit Margin of between 2.25% and
3.00% per annum. The Letter of Credit Margin is also based on the Companys
leverage at the date of the preceding fiscal quarter. The Company also pays a
Commitment fee of 0.50% per annum on the average daily unused Revolver balance. The Senior Credit Agreement, among other provisions, contains financial
covenants requiring the maintenance of specific leverage and interest coverage
ratios and levels of financial position, restricts the incurrence of additional
debt and the sale of assets, and permits acquisitions with the consent of the
lenders. Page 13 of 31




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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 6. Long Term Debt (continued): On March 31, 2004 the Company, through its Hillman Group, Inc. subsidiary,
issued $47,500 of unsecured subordinated notes to Allied Capital Corporation
maturing on September 30, 2011 (Subordinated Debt Issuance). Interest on the
Subordinated Debt Issuance is at a fixed rate of 13.5% per annum, with cash
interest payments required on a quarterly basis at a fixed rate of 11.25%
commencing April 15, 2004. The outstanding principal balance of the
Subordinated Debt Issuance shall be increased on a quarterly basis at the
remaining 2.25% fixed rate (the PIK Amount). All of the PIK Amounts are due
on the maturity date of the Subordinated Debt Issuance. The Company is subject to a prepayment charge on the Subordinated Debt equal to
6% of the outstanding principal if paid prior to March 31, 2006, 3% of the
outstanding principal if paid after March 31, 2006 but prior to March 31, 2007
and 1% of the outstanding principal if paid after March 31, 2007 but before
March 31, 2008. The
Company incurred financing fees of $6,539 and $1,053 in connection with the
Senior Credit Agreement and the Subordinated Debt issuance, respectively.
These fees were capitalized as deferred financing fees as of March 31, 2004 and
will be amortized over the lives of the respective credit agreements. 7. Common and Preferred Stock: Common Stock issued in connection with the Merger Transaction: There are 23,141 authorized shares of Class A Common Stock, 6,212.9 of which
are issued and outstanding. Each share of Class A Common Stock entitles its
holder to one vote. Each holder of Class A Common Stock is entitled at any
time to convert any or all of the shares into an equal number of shares of
Class C Common Stock. There are 2,500 authorized shares of Class B Common Stock, 1,000 of which are
issued and outstanding. Holders of Class B Common Stock have no voting rights.
The Class B Common was issued to certain members of the Companys management
and is subject to vesting over five years with 20% vesting on each anniversary
of the Merger Transaction. In connection with the Merger Transaction, certain members of management
entered into an Executive Securities Agreement (ESA). The ESA provides for
the method and terms under which management proceeds were invested in the
Company. Under the terms of the ESA, management shareholders have the right to
put their Class A Common Stock and Class B Common Stock back
to the Company at fair market value if employment is terminated for other than
cause. If terminated for cause, the management shareholders can generally put
the Class A Common Stock and Class B Common Stock back to
the Company for the lower of the fair market value or cost. Accounting
Series Release No. 268 requires certain securities whose
redemption is not in the control of the issuer to be classified outside of
permanent equity. The put feature embedded in managements Class A Common Stock
and Class B Common Stock allow redemption at the holders option under certain
circumstances.  Accordingly managements 407.6 Class A Common Stock shares and
1,000 Class B Common Stock shares have been classified between liabilities and
stockholders equity in the accompanying Consolidated Balance Sheet. There are 30,109 authorized shares of Class C Common Stock, 2,787.1 of which
are issued and outstanding. Each share of Class C Common Stock entitles its
holder to one vote, provided that the aggregate voting power of Class C Common
Stock (with respect to the election of directors) never exceeds 30%. Each
holder of Class C Common Stock is entitled at any time to convert any or all of
the shares into an equal number of shares of Class A Common Stock. Preferred Stock issued in connection with the Merger Transaction: The Company has 238,889 authorized shares of Class A Preferred Stock, 82,104.8
of which are issued and outstanding and 13,450.7 of which are reserved for
issuance upon the exercise of options to purchase shares of Class A Preferred
Stock. Holders of Class A Preferred Stock are not entitled to any voting
rights. Holders of Class A Preferred Stock are entitled to preferential
dividends that shall accrue on a daily basis at the rate of 11.5% per annum of
the sum of the Liquidation Value (as defined in the Certificate of
Incorporation) thereof plus all accumulated and unpaid dividends thereon. Hillman Investment Company, a subsidiary of the Company, has 166,667 authorized
shares of Class A Preferred Stock, 57,282.4 of which are issued and outstanding
and 9,384.2 of which are reserved for issuance upon the exercise of options to
purchase shares of Class A Preferred Stock. Holders of Class A Preferred Stock
are not entitled to any voting rights. Holders of Class A Preferred Stock are
entitled to preferential dividends that shall accrue on a daily basis at the
rate of 11.0% per annum on the sum of the Liquidation Value (as defined in the
Certificate of Incorporation) thereof plus
all accumulated and unpaid dividends thereon. Page 14 of 31




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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 7. Common and Preferred Stock (continued): In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 requires certain financial
instruments with both debt and equity characteristics to be classified as debt.
The statement requires initial and subsequent valuation of this debt at a
present or fair market value and was effective July 1, 2003. The Hillman
Investment Company Class A Preferred Stock is mandatorily redeemable on March
31, 2028 and in accordance with SFAS 150 has been classified as debt in the
accompanying March 31, 2004 Balance Sheet. Stock Options: On March 30, 2004, the Company granted 1,085,116 common stock options under the
SunSource Inc. 2001 Stock Incentive Plan (the 2001 Incentive Plan). The
options were issued with an exercise price below the fair market value of the
common stock on the grant date. The fair value of the stock on March 30, 2004
was $29.20 per share and the weighted average exercise price was $6.76 per
share. Compensation expense of $24,353 was recorded in the first quarter of
2004 for the excess of the fair market value over the exercise price. Prior to the Merger Transaction the Company had 349,641 options issued in
connection with the 1998 SunSource Equity Compensation Plan (1998 Incentive
Plan). The options were 100% vested and had a weighted average strike price
of $4.19 per share. In connection with the Merger Agreement, 154,641 of the
1998 Incentive Plan options and 75,714 of the 2001 Incentive Plan options were
cancelled and converted into rights to receive options to purchase 3,895.16
shares of Hillman Companies, Inc. Class A Preferred Stock and 2,717.55 shares
of Hillman Investment Company Class A Preferred Stock (collectively the
Purchased Options). The Purchased Options have a weighted average strike
price of $170.69. The fair value of the Hillman Investment Company Class A Preferred Stock
options have been included with the underlying security in the accompanying
Consolidated Balance Sheets. SFAS 150 requires security instruments with a
redemption date that is certain to occur to be classified as liabilities. Thus,
the Hillman Companies, Inc. Class A Preferred Stock options, which have a March
31, 2014 expiration date, have been classified at their fair market value in
the liability section of the accompanying Consolidated Balance Sheets. To the
extent the Company pays a dividend to holders of the Class A Preferred Stock
and the Hillman Investment Company Class A Preferred Stock, the Purchased
Option Holder will be entitled to receive an amount equal to the dividend which
would have been paid if the Purchased Options had been exercised on the date
immediately prior to the record date for the dividend. Additionally,
under the terms of the ESA, the Purchased Options can be put back to
the Company at fair market value if employment is terminated. The remaining 1998 Incentive Plan Options and 2001 Incentive Plan Options were
cancelled and converted into rights to receive a pro rata share of the merger
consideration. The 1998 Incentive Plan and the 2001 Incentive Plan were then
terminated. On March 31, 2004, the Company adopted The Hillman Companies, Inc. 2004 Stock
Option Plan (Common Option Plan) following Board and shareholder approval.
Grants under the Common Option Plan will consist of non-qualified stock options
for the purchase of Class B Common Shares. The number of Class B Common Shares
authorized for issuance under the Common Option Plan is not to exceed 256.41
shares. Unless otherwise consented to by the Board, the aggregate number of
Class B Common Shares for which
options may be granted under the Common Option Plan cannot exceed 51.28 in any
one calendar year. Page 15 of 31




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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)  7.
    
    Common and Preferred Stock (continued): The Common Option Plan is administered by a Committee of the Board. The
Committee determines the term of each option, provided, however, that the
exercise period may not exceed ten years from date of grant. No options have
been awarded under the Common Option Plan as of March 31, 2004. On March 31, 2004, certain members of the Companys management were granted
options to purchase 9,555.5 shares of Class A Preferred Stock and 6,666.7
shares of Hillman Investment Company Class A Preferred Stock (collectively the
Preferred Options). The Preferred Options vest over five years with 20%
vesting on each anniversary of the Merger Transaction.  8.
    
    Guaranteed Preferred Beneficial Interest in the Companys Junior
Subordinated Debentures: In September 1997, The Hillman Group Capital Trust (Trust), a subsidiary
trust, completed a $105.4 million underwritten public offering of 4,217,724
11.6% Trust Preferred Securities (TOPrS). The Trust invested the proceeds
from the sale of the preferred securities and the related common securities in
an equal principal amount of 11.6% Junior Subordinated Debentures of Hillman
due September 2027. The Trust distributes monthly cash payments it receives
from the Company as interest on the debentures to preferred security holders at
an annual rate of 11.6% on the liquidation amount of $25 per preferred
security. The Company may defer interest payments on the debentures at any
time, for up to 60 consecutive months. If this occurs, the Trust will also
defer distribution payments on the preferred securities. The deferred
distributions, however, will accumulate distributions at a rate of 11.6% per
annum. The Trust will redeem the preferred securities when the debentures are
repaid, or at maturity on September 30, 2027. The Company may redeem the
debentures before their maturity at a price equal to 100% of the principal
amount of the debentures redeemed, plus accrued interest. When the Company
redeems any debentures before their maturity, the Trust will use the cash it
receives to redeem preferred securities and common securities as provided in
the trust agreement. The Company guarantees the obligations of the Trust on
the Trust Preferred Securities. The Company has determined that the Trust is a variable interest entity and
(ii) the Company is not the primary beneficiary of the Trust pursuant to the
provisions of FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entries (FIN 46R). Accordingly,
pursuant to the requirements of FIN 46R, the Company has de-consolidated the
Trust at March 31, 2004. Summarized below is the condensed financial
information of the Trust as of March 31, 2004. Non-current assets- junior subordinated debentures
    
    $
    114,725Non-current liabilities  Trust Preferred Securities
    
    $
    114,725
 The non-current assets for the Trust relate to its investment in the 11.6%
junior subordinated deferrable interest debentures of Hillman due September 30,
2027. In accordance with SFAS 150, the TOPrS constitute mandatorily redeemable
financial instruments. The Company guarantees the obligations of the Trust on
the Trust Preferred Securities. Upon adoption of SFAS 150 on January 1, 2004,
the guaranteed preferred beneficial interest in the Companys Junior
Subordinated Debentures have been reclassified prospectively from the mezzanine
section to the long-term liabilities section of the Consolidated Balance Sheet.
Items previously shown separately on the Consolidated Statement of Operations
as preferred security distributions of guaranteed preferred beneficial
interests are classified as interest expense in the current period in
accordance with the requirements of SFAS 150. Page 16 of 31




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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)  8.
    
    Guaranteed Preferred Beneficial Interest in the Companys Junior
Subordinated Debentures: On March 31, 2004, the Junior Subordinated Debentures were recorded at the fair
value of $114,725 based on the price underlying the Trust Preferred Securities
of $27.20 per share upon close of trading on the American Stock Exchange on
that date. The premium on the Junior Subordinated Debentures of $9,279 will be
amortized over their remaining life.  9.
    
    Non-Recurring Expense: During the three month period ended March 31, 2004, the Company incurred
$30,707 of non-recurring, one-time charges. The charges included a $24,353
non-cash expense for stock options granted in connection with the Merger
Transaction at an exercise price below fair market value. See Note 7, Common
and Preferred Stock for additional details. Payroll taxes on the stock option
grant of $397 were also recorded in the first quarter of 2004. In addition,
the Company recorded Merger Transaction costs incurred by the selling
shareholders which consisted primarily of investment banking and legal fees of
$4,035. Finally, in connection with the Merger Transaction the Company awarded
bonuses to certain members of management totaling $1,922.  10.
    
    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 under a held for sale methodology. 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 and accrued
interest. 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 future cash flows. The Company recorded
additional charges to income of $5,600 in the remainder of 2003 for changes in
the assessments of the estimated amounts recoverable under the note. On March
30, 2004, the G-C note was distributed to the Predecessor common shareholders
of the Company.  11.
    
    Subsequent Event: The Senior Credit Agreement requires the Company to enter into and maintain
interest rate protection instruments such that at least 50% of its total debt,
including the Junior Subordinated Debentures, bears interest at a fixed or
capped rate. Accordingly, effective April 28, 2004, the Company entered into
an Interest Rate Swap Agreement (Swap) with a two-year term for a notional
amount of $50 million. The Swap fixes the interest rate on $50 million of the
Senior Term Loan at a rate of 1.17% plus the applicable interest rate margin
for the first three months of the Swap with incremental increases ranging from
28 to 47 basis points in each successive quarter. Page 17 of 31




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS The following discussion provides information which management believes is
relevant to an assessment and understanding of the Companys operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein. General The Hillman Companies, Inc. (Hillman or the Company), 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. On March 31, 2004, The Hillman Companies, Inc. was acquired by an affiliate of
Code Hennessy & Simmons LLC (CHS). Pursuant to the terms and conditions of
an Agreement and Plan of Merger (Merger Agreement) dated as of February 14,
2004, the Company was merged with an affiliate of CHS with the Company
surviving the merger (Merger Transaction). The total consideration paid in
the Merger Transaction was $511.6 million including repayment of outstanding
debt and including the value of the Companys outstanding Trust Preferred
Securities. The merger consideration is subject to certain post-closing
working capital and other adjustments. Prior to the Merger Transaction, Allied Capital Corporation (Allied Capital)
owned 96.8 % of the Companys common stock. As a result of the change of
control, an affiliate of CHS owns 49.1% of the Companys common stock and 54.5%
of the Companys voting common stock, Ontario Teachers Pension Plan (OTPP)
owns 27.9% of the Companys common stock and 31.0% of the Companys voting
common stock and HarborVest Partners VI owns 8.7% of the Companys common stock
and 9.7% of the Companys voting common stock. Certain members of management
own 14.1% of the Companys common stock and 4.5% of the Companys voting common
stock. Financing Arrangements On March 31, 2004, the Company, through its Hillman Group subsidiary,
refinanced its revolving credit and senior term loans with a Senior Credit
Agreement consisting of a $40.0 million revolving credit (the Revolver) and a
$217.5 million term loan (the Term Loan). The Senior Credit Agreement has a
seven-year term and provides borrowings at interest rates based on the London
Interbank Offered Rates (the LIBOR) plus a margin of between 2.25% and 3.00%
(the LIBOR Margin), or prime (the Base Rate) plus a margin of between 1.25%
and 2.0% (the Base Rate Margin). The applicable LIBOR Margin and Base Rate
Margin is based on the Companys leverage at the date of the preceding fiscal
quarter. In accordance with the Senior Credit Agreement, letter of credit
commitment fees are based on the average daily face amount of each outstanding
letter of credit multiplied by a Letter of Credit Margin of between 2.25% and
3.00% per annum. The Letter of Credit Margin is also based on the Companys
leverage at the date of the preceding fiscal quarter. The Company also pays a
Commitment fee of 0.50% per annum on the average daily unused Revolver balance. Page 18 of 31




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On March 31, 2004, the Company, through its Hillman Group subsidiary, issued
$47.5 million of unsecured subordinated notes to Allied Capital maturing on September
30, 2011 (Subordinated Debt Issuance). Interest on the Subordinated Debt
Issuance is at a fixed rate of 13.5% per annum, with cash interest payments
required on a quarterly basis at a fixed rate of 11.25% commencing April 15,
2004. The outstanding principal balance of the Subordinated Debt Issuance
shall be increased on a quarterly basis at the remaining 2.25% fixed rate (the
PIK Amount). All of the PIK Amounts are due on the maturity date of the
Subordinated Debt Issuance. 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. Page 19 of 31




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Results of Operations Three Months Ended March 31, 2004 and 2003 Net sales increased $9.0 million or 12.9% in the first quarter of 2004 to $79.0
million from $70.0 million in 2003. Sales to national accounts represented
$5.6 million of the $9.0 million total sales increase in the first quarter
primarily as a result of increased fastener, keys, and letters, numbers, and
signs (LNS) sales to Lowes and increased keys and LNS sales to Home Depot.
Franchise and independent (F&I) accounts increased $2.6 million from the
comparable period in 2003. The increased F&I sales were the result of improved
economic activity at the retail level and increased sales of galvanized
fasteners used in the newly formulated treated lumber. The F&I accounts are
typically individual hardware dealers who are members of larger cooperatives,
such as TruServ, Ace, and Do-It-Best. Other sales, including regional accounts
and engraving products were up $0.8 million compared to the first quarter of
2003. The Companys gross profit was 54.7% in the first quarter of 2004 compared to
54.8% in the first quarter of 2003. The margin rate decrease from the prior
year was the result of increasing fastener product costs, primarily from our
overseas suppliers. The Companys consolidated selling, general and administrative expenses
(S,G&A) increased $2.8 million or 9.9% from $28.2 million in the first
quarter of 2003 to $31.0 million in the first quarter of 2004. Selling
expenses increased $1.9 million or 13.6% primarily as a result of an increase
in service labor and outside service cost for newly opened national account
locations and conversion of merchant displays in existing locations. Warehouse
and delivery expenses increased $0.8 million or 8.6% primarily as a result of
increased freight and labor of $0.7 million on increased sales volume. General
and administrative expenses increased by only $0.1 million or 2.0%. Total
S, G&A expenses in the first quarter of 2004 expressed as a percentage of
sales compared with the first quarter of 2003 are as follows: Three Months ended March 31,As a % of Sales
    
    2004
    
    2003Selling Expenses
    
    
    20.1
    %
    
    
    20.0
    %Warehouse and Delivery Expenses
    
    
    12.8
    %
    
    
    13.2
    %General and Administrative Expenses
    
    
    6.3
    %
    
    
    7.1
    %Total S, G&A Expenses
    
    
    39.2
    %
    
    
    40.3
    %
 Loss from operations for the first quarter of 2004 was $23.3 million compared
with income of $5.9 million for the same prior-year period, representing a
decrease of $29.2 million. The decrease in income from operations was the
result of $30.7 million in stock option compensation expense, management
incentive fees, investment banking and legal fees incurred in connection with
the Merger Transaction. The Companys consolidated operating profit margin (income from operations as a
percentage of sales) decreased from 8.4% in the first quarter of 2003 to
(29.5%) in 2004. The operating profit margin decrease was the result of
non-recurring expenses of $4.0 for investment banking and legal fees, $1.9
million in management incentives, and $24.8 million in stock option
compensation and related payroll taxes recorded in connection with the Merger Transaction. The
consolidated operating profit, net of non-recurring Merger Transaction costs of
$30.7 million, was $7.4 million or 9.4% expressed as a percentage of sales. Depreciation expense increased $0.3 million to $3.8 million in the first
quarter of 2004 from $3.5 million in the same quarter of 2003. Amortization expense of $0.3 million in the first quarter of 2004 decreased
from $0.4 million in the same quarter of 2003. Page 20 of 31




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The Company has recorded a management fee charge of $0.52 million for the first
quarter of 2004 and $0.45 million for the first quarter of 2003. The Company
was obligated to pay management fees to a subsidiary of Allied Capital for
management services rendered in the amount of $1.8 million, plus out of pocket
expenses, for calendar years subsequent to 2001. In the first quarter of 2004,
the Company incurred management fees of $0.07 million in connection with the
Merger Transaction in addition to the regular $0.45 million quarterly
obligation. The payment of management fees was due annually after delivery of
the Companys annual audited financial statements to the Board of Directors of
the Company. The obligation to pay management fees to Allied Capital was
terminated upon the payment of outstanding fees in the amount of $2.3 million
on March 31, 2004 in connection with the close of the Merger Transaction. In February 2003, G-C Sun Holdings, L.P. (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 future cash flows. The Company recorded additional charges to income
of $5.6 million in the remainder of 2003 for changes in the assessments of the
estimated amounts recoverable under the note. Interest expense from credit facilities, net of interest income, increased $0.2
million to $3.8 million in the first quarter of 2004 from $3.6 million in the
same period of 2003. The interest expense increase was primarily the result of
the amortization of additional deferred financing costs. For the three months ended March 31, 2004 the Company paid $3.1 million in
interest on the Junior Subordinated Debentures and for the three months ended
March 31, 2003 the Company paid $3.1 million in interest distributions on the
guaranteed preferred beneficial interests. These interest payments were
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 international operations 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 benefit for income taxes of $10.9 million on pre-tax losses of $30.2
million in the first quarter of 2004. The effective tax rate in the first
quarter of 2004 was 36.0% compared to 9.5% in the first quarter of 2003. The
change in the effective tax rate is due to the increase in the pre-tax loss
because of the non-recurring expense incurred in the first quarter of 2004
along with a decrease in the permanent tax items in 2004 when compared to 2003
which include certain costs associated with the Merger Transaction and the
write-down of the face value of the G-C Note in 2003. Cash Flows The statements of cash flows reflect the changes in cash and cash equivalents
for the three months ended March 31, 2004 and 2003 by classifying transactions
into three major categories: operating, investing and financing activities.
Cash flows from the March 31, 2004 Merger Transaction are separately discussed
below. Merger Transaction In connection with Merger Transaction the Company issued Common Stock and
Preferred Stock for $148.0 million in cash. Proceeds from the refinancing of
the Senior Credit Agreement and the Subordinated Debt Issuance net of financing
fees of $7.6 million provided an additional $259.8 million. The debt and equity
proceeds were used to repay existing senior and subordinated debt and accrued
interest thereon of $154.9 and to repurchase existing shareholders common
equity of $214.7 million and $24.8 million in compensation for
stock options and related payroll taxes. The remainder of the proceeds were used to pay
transaction expenses of $2.2 million and a senior credit prepayment penalty of
$1.1 million. Page 21 of 31




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##### 



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 three months of 2004 was $.6
million compared to $9.8 million in the same prior year period. Operating cash
outflows have historically been the greatest in the first fiscal quarter as
sales volume and inventory levels generally increase as the Company approaches
the stronger spring and summer selling seasons. The seasonal working capital
impact was less pronounced in the first quarter of 2004 as the net operating
assets including inventory, receivables and payables increased only $.3 million
compared to $8.4 million in 2003. Investing Activities The principal recurring investing activities are property additions primarily
for key duplicating machines. Net property additions for the first three
months of 2004 were $2.6 million compared to $3.3 million in the comparable
prior year period. The decrease in capital expenditures in the first three
months of 2004 compared to the prior year period results from a decrease in the
amount of expenditures for key duplicating machines of $.3 million and a
reduction in plant and equipment expenditures for the Cincinnati distribution
center of $.4. Financing Activities Net cash provided by financing activities for the three months ended March 31,
2004 was $4.7 million compared to $11.4 million for the comparable quarter in
2003. The reduction in cash provided by financing activities is primarily a
function of reduced borrowings under the revolving credit facility. As
discussed above revolver borrowings to fund the seasonal increase in working
capital requirements were less significant in the first three months of 2003. Liquidity and Capital Resources The Companys working capital position (defined as current assets less current
liabilities) of $78.4 million at March 31, 2004 represents
an increase of $19.9
million from the December 31, 2003 level of $58.5 million primarily as a result
of the seasonal increase in accounts receivable of $5.5 million and inventory
of $0.7 million together with an increase in cash of $11.5 million related to
the timing of certain payments received by the Company in conjunction with the
Merger Transaction. The Companys current ratio (defined as current assets
divided by current liabilities) increased to 2.44x at March 31, 2004 from 2.06x
at December 31, 2003. The Companys contractual obligations in thousands of dollars as of March 31,
2004 are summarized below: Payments DueLess Than 1
    
    1 to 3
    
    3 to 5
    
    More Than 5Contractual Obligations
    
    Total
    
    Year
    
    Years
    
    Years
    
    YearsJunior Subordinated Debentures
    
    $
    114,725
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    114,725Long Term Senior Term Loans
    
    
    217,500
    
    
    
    2,175
    
    
    
    4,350
    
    
    
    4,350
    
    
    
    206,625Bank Revolving Credit Facility
    
    
    2,198
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,198Long Term Unsecured Subordinated Notes
    
    
    47,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,500Operating Leases
    
    
    30,393
    
    
    
    6,734
    
    
    
    9,383
    
    
    
    4,469
    
    
    
    9,807Deferrred Compensation Obligations
    
    
    6,315
    
    
    
    1,133
    
    
    
    2,266
    
    
    
    2,266
    
    
    
    650Capital Lease Obligations
    
    
    180
    
    
    
    49
    
    
    
    86
    
    
    
    45
    
    
    
    Other Long Term Obligations
    
    
    6,147
    
    
    
    1,446
    
    
    
    1,679
    
    
    
    516
    
    
    
    2,506Total Contractual Cash Obligations
    
    $
    424,958
    
    
    $
    11,537
    
    
    $
    17,764
    
    
    $
    11,646
    
    
    $
    384,011
 Page 22 of 31




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##### 



All of the obligations noted above are reflected on the Companys Consolidated
Balance Sheet as of March 31, 2004 except for the Operating Leases. As of March 31, 2004, the Company had $33.3 million available under its secured
credit facilities. The Company had approximately $219.9 million of outstanding
debt under its secured credit facilities at March 31, 2004, consisting of
$217.5 million in a term loan, $2.2 million in revolving credit borrowings and
$0.2 million in capitalized lease obligations. The term loan consisted of a
$217.5 million Term B Loan (the Term Loan B) currently at a rate of 6.25%.
The revolver borrowings (the Revolver) consist of $2.2 million at a rate of
6.25%. The capitalized lease obligations were at various interest rates. As of March 31, 2004 the Company had no material purchase commitments for
capital expenditures. Interest on the Subordinated Debt Issuance of $47.5 million which matures
September 30, 2011 is at a fixed rate of 13.5% per annum, with cash interest
payments being required on a quarterly basis at a fixed rate of 11.25%
commencing April 15, 2004. The outstanding principal balance of the
Subordinated Debt Issuance shall be increased on a quarterly basis at the
remaining 2.25% fixed rate (the PIK Amount). All of the PIK Amounts are due
on the maturity date of the Subordinated Debt Issuance. As of March 31, 2004,
the outstanding Subordinated Debt Issuance including the PIK Amounts was $47.5
million. The Senior Credit Agreement, among other provisions, contains financial
covenants requiring the maintenance of specific leverage and interest coverage
ratios and levels of financial position, restricts the incurrence of additional
debt and the sale of assets, and permits acquisitions with the consent of the
lenders. The Company was in full compliance with all provisions of the Senior
Credit Agreement as of March 31, 2004. The
Company has net deferred tax assets aggregating $4.1 million as of March
31, 2004, 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 Page 23 of 31




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##### 



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. 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, rebates and slotting fees. 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.
Slotting fees are used on an infrequent basis and are not considered to be
significant. Discounts, rebates and slotting fees are included in the
determination of net sales. The Company also establishes reserves for customer returns and allowances. The
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 twenty-four 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 four to
fifteen years. Page 24 of 31




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##### 



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. Valuation
allowances are provided for tax benefits where it is more likely than not that
certain future tax benefits will not be realized. Adjustments to valuation
allowances are recorded from changes in utilization of the tax related item. Self-insurance Reserves: The Company self insures its product liability, workers compensation and
general liability losses up to $250 thousand per occurrence. Catastrophic
coverage is maintained for occurrences in excess of $0.25 million up to $25.0
million. The Company self insures its group health claims up to an annual stop loss
limit of $125 thousand per participant. Aggregate coverage is maintained for
annual group health insurance claims in excess of 125% of expected claims. Provisions for losses expected under these programs are recorded based on an
analysis of historical insurance claim data and certain actuarial assumptions. 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 March
31, 2004 and 2003, shipping and handling costs included in SG&A were $3,628 and
$3,557, 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 March 31, 2004 and 2003, research and development expenses,
consisting primarily of internal wages and benefits, were $277 and $293,
respectively. Stock-Based Compensation: The Company applies the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for our employee stock option plan. For
the three months ended March 31, 2004 the Company recognized compensation
expense for certain options granted under the stock option plan with an
exercise price less than the market value of the underlying common stock on the
date of grant (See Note 7, Common and Preferred Stock). There would have been
no effect on net earnings, assuming the fair value recognition provisions of
Statements of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation had been applied. Page 25 of 31




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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. Comprehensive Loss: The components of comprehensive loss for the three month periods ended March
31, 2004 and 2003 were as follows: Three Months EndedMarch 312004
    
    2003Net loss
    
    $
    19,316
    
    
    $
    5,845Foreign currency translation
adjustment
    
    
    (10
    )
    
    
    36Comprehensive loss
    
    $
    19,306
    
    
    $
    5,881
 Reclassifications: Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform to the 2004 presentation. 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 The Company is sensitive to inflation present in the economies of the United
States and our foreign suppliers located primarily in Taiwan and China.
Inflation in recent years has produced only a modest impact on the Companys
operations, however the recent growth in Chinas economic activity has
increased overall demand for materials used in the manufacture of our products.
This increased demand has produced cost increases for certain of our fastener
products which exceed the prevailing rate of inflation. Continued inflation and
resulting cost increases over a period of years 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. Page 26 of 31




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Forward Looking Statements Certain disclosures related to acquisitions, refinancing, capital expenditures,
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, 2003. 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 27 of 31




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Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to the impact of interest rate changes as borrowings
under the senior 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 was cancelled in
connection with the refinancing of the Senior Credit Agreement. Based on
Hillmans exposure to variable rate borrowings at March 31, 2004, a one percent
(1%) change in the weighted average interest rate would change the annual
interest expense by approximately $2.2 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 March 31, 2004. 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 have been no changes in the Companys internal control over financial
reporting that occurred during the quarter ended March 31, 2004, that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. Page 28 of 31




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PART II
OTHER INFORMATION Items 1, 3, 4 & 5  None Item 2  Changes in Securities and Use of Proceeds.  a)
    
    In connection with the Merger Transaction, the Rights Agreement
terminated, and the Preferred Share Purchase Rights also terminated.b)
    
    Not Applicable.c)
    
    On March 31, 2004, the Company was acquired by an affiliate of CHS.
As a result of the Merger Transaction, an affiliate of CHS owns 49.1% of
the Companys common stock and 54.5% of the Companys voting common
stock, OTPP owns 27.9% of the Companys common stock and 31.0% of the
Companys voting common stock and HarborVest Partners VI owns 8.7 % of
the Companys common stock and 9.7% of the Companys voting common
stock. Certain members of management own 14.1% of the Companys common
stock and 4.5% of the Companys voting common stock.In connection with the Merger Transaction, the Company issued
6,212.9 shares of Class A Common Stock. Each share of Class A
Common Stock entitles its holder to one vote. Each holder of Class
A Common Stock is entitled at any time to convert any or all of the shares into an equal number of shares of Class C Common Stock. The
Company also issued 1,000 shares of Class B Common Stock. Holders
of Class B Common Stock have no voting stock. The Class B Common
Stock was issued to certain members of management and is subject to
vesting over five years with 20% vesting on each anniversary of the
Merger Transaction.The Company also issued 2,787.1 shares of Class C Common Stock.
Each share of Class C Common Stock entitles its holder to one vote,
provided that the aggregate voting power of Class C Common Stock
(with respect to the election of directors) never exceeds 30%.
Each holder of Class C Common Stock is entitled at any time to
convert any or all of the shares into an equal number of shares of
Class A Common Stock.The shares of common stock issued in the Merger Transaction
were not registered under the Securities Act of 1933 in reliance on
the exemption from registration provided in Rule 506 under the
securities Act of 1933.d)
    
    Not Applicable.e)
    
    Not Applicable. Item 6  Exhibits and Reports on Form 8-K a)
    Exhibits, Including Those Incorporated by Reference.2.1
    Agreement and Plan of Merger dated as of February 14, 2004 by and
among HCI Acquisition Corp., The Hillman Companies, Inc. and the
Stockholders and Optionholders of The Hillman Companies, Inc. (1)
(Exhibit 2.1)4.1 *
    HCI Stockholders Agreement dated March 31, 2004.4.2 *
    Hillman Investment Company Stockholders Agreement dated March 31, 2004.4.3 *
    Registration Agreement dated March 31, 2004.10.1 *
    Credit Agreement dated as of March 31, 2004 by and among The
Hillman Companies, Inc., Hillman Investment Company, The Hillman Group,
Inc., Merrill Lynch Capital as Administrative Agent, Issuing Lender and
Swingline Lender, JP Morgan Chase Bank as Syndication Agent, and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and JP
Morgan Securities as Joint Lead Arrangers and Joint Lead Bookrunners.
 Page 29 of 31




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10.2 *
    Loan Agreement dated as of March 31, 2004 by and among The Hillman Companies,
Inc., Hillman Investment Company, The Hillman Group, Inc., and Allied Capital
Corporation.10.3 *
    Subordination and Intercreditor Agreement dated March 31, 2004.10.4 *
    The Hillman Companies, Inc. 2004 Stock Option Plan.10.5 *
    Hillman Companies Employee Securities Purchase Plan.10.6 *
    Hillman Investment Company Employee Securities Purchase Plan.10.7 *
    HCI Securities Purchase Agreement dated March 31, 2004.10.8 *
    Joinder to Securities Purchase Agreement dated March 31, 2004.10.9 *
    Hillman Investment Company Securities Purchase Agreement dated March 31, 2004.10.10 *
    Management Agreement dated March 31, 2004.10.11 *
    Employment Agreement by and between The Hillman Group, Inc. and Max W.
Hillman dated March 31, 2004.10.12 *
    Executive Securities Agreement between Max W. Hillman and HCI Acquisition
Corp. dated March 31, 2004.10.13 *
    Employment Agreement by and between The Hillman Group, Inc. and Richard P.
Hillman dated March 31, 2004.10.14 *
    Executive Securities Agreement between HCI Acquisition Corp. and
Richard P. Hillman dated March 31, 2004.10.15 *
    Employment Agreement by and between The Hillman Group, Inc. and James P.
Waters dated March 31, 2004.10.16 *
    Executive Securities Agreement between HCI Acquisition Corp. and
James P. Waters date March 31, 2004.31.1 *
    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.
  b)
    
    Reports onForm 8-K.A Current Report on Form 8-K was filed on February 17, 2004 reporting on
a unscheduled material event under Item 5 of Form 8-K (See exhibit 2.1
hereto)A Current Report on Form 8-K was filed on April 14, 2004 reporting on a
change in control under Item 1 of Form 8-K (See exhibit 2.1 hereto) (1)- Filed on April 14, 2004 as an exhibit to the Current Report on Form 8-K.  *
    
    Filed herewith.+
    
    Submitted herewith. Page 30 of 31




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. THE HILLMAN COMPANIES, INC. /s/ James P. Waters
    
    /s/ Harold J. WilderJames P. Waters
    
    Harold J. WilderVice President  Finance
    
    Controller(Chief Financial Officer)
    
    (Chief Accounting Officer)
 DATE: May 17, 2004 Page 31 of 31