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

FORM 10-K

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

For the fiscal year ended December 31, 2002

Commission file number 1-13293

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

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(Exact name of registrant as specified in its charter)


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

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

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

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

YES     X     NO

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

YES     NO     X

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.     X

On March 20, 2003 there were 7,118,665 Common Shares issued and outstanding by
the Registrant and 4,217,724 Trust Preferred Securities issued and outstanding
by the Hillman Group Capital Trust (formerly SunSource Capital Trust). The
Trust Preferred Securities trade on the American Stock Exchange under the
symbol HLM.Pr. The aggregate market value of the Trust Preferred Shares held
by non-affiliates at June 28, 2002 was $103,376,415.





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PART I

Item I  Business.

General

SunSource Inc., a Delaware corporation (SunSource) converted from partnership
to corporate form on September 30, 1997. On March 18, 2002, SunSource, as a
result of the acquisition of a majority of SunSource common stock by Allied
Capital Corporation in September 2001 as discussed below, changed its name to
The Hillman Companies, Inc. (Hillman or the Company) which reflects its
predominant business as one of the largest providers of merchandising services
and hardware-related products to retail markets in North America. In
connection with the SunSource name change, SunSource Capital Trust, which has
4.2 million Trust Preferred Securities outstanding and trading on the American
Stock Exchange, changed its name to the Hillman Group Capital Trust. The Trust
Preferred Securities trade under the ticker symbol HLM.Pr (formerly SDP.Pr).
The Company has moved its principal executive offices from Philadelphia,
Pennsylvania, to Cincinnati, Ohio.

The Companys principal business is operated through its wholly owned
subsidiary, The Hillman Group, Inc. (the Hillman Group) which had sales of
approximately $287 million in 2002. The Hillman Group sells to hardware
stores, home centers, mass merchants, pet suppliers, and other retail outlets
principally in the United States, Canada, Mexico and South America. Product
lines include thousands of small parts such as fasteners and related hardware
items; keys, key duplication systems and accessories; and identification items,
such as, tags and letters, numbers, and signs. Services offered include design
and installation of merchandising systems and maintenance of appropriate
in-store inventory levels.

Background

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

In connection with the Merger Transaction, on September 28, 2001, the Company
completed the sale of substantially all of the assets of its SunSource
Technology Services business (the STS Business) to STS Operating, Inc. (STS
OP), an entity formed by certain officers and managers of the STS Business,
Allied Capital and Easton Hunt Capital Partners, L.P. for the purpose of
acquiring the STS Business. STS OP purchased the assets of the STS Business
including the rights to the name SunSource from SunSource Technology Services,
LLC, an indirect wholly owned subsidiary of SunSource, pursuant to an Asset
Purchase Agreement, dated September 28, 2001, by and between SunSource
Technology Services, LLC and STS OP. The purchase price aggregated
approximately $25.5 million in cash and preferred stock of STS OP, subject to
post-closing adjustments, plus the assumption of certain liabilities. On
October 16, 2002, Hillmans equity investment in STS OP preferred stock and
$0.2 million of cash was distributed to the Companys common stockholders.

On March 2, 2000, the Company contributed its Kar Products operations to a
newly formed partnership affiliated with Glencoe Capital L.L.C. (Glencoe).
Glencoe contributed cash equity to the new partnership in exchange for a 51%
controlling interest with the remaining minority interest retained by
SunSource. The Company received $105 million in cash proceeds from the
transaction through repayment of assumed debt by the new partnership, GC-Sun
Holdings, L.P. (G-C). On October 4, 2000, G-C acquired all of the
outstanding stock of Brampton Fastener Co. Limited (d/b/a Brafasco). On
January 4, 2002, G-C provided the Company notice that it intended to exercise
its call right to purchase the Companys partnership interest as a result of
the Merger Transaction with Allied Capital. On April 13, 2002, the

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Company
entered into a Unit Repurchase Agreement with G-C, pursuant to which G-C
exercised its call right. In exchange for its interest in G-C, the Company
received a $10 million subordinated note from G-C.

On May 1, 2002 the Company purchased certain assets of the Lowes specialty
fastener business from R&B, Inc. for cash consideration of $6.3 million. In
connection with this transaction, the Company settled litigation filed by R&B,
Inc. in February 1996 related to the Companys sale of the Dorman Products
division.

On October 3, 2002, the Company, through its Hillman Group subsidiary,
purchased the net assets of the DIY division (DIY) of the Fastenal Company of
Winona, MN (Fastenal). DIY, with annual sales of approximately $22 million,
distributes fasteners, anchors, picture hanging wire, hooks, tacks, and brads
to national hardware cooperatives and home centers. The Company paid $15.3
million in cash to Fastenal for the net assets of DIY.

Acquisitions and Dispositions

On April 13, 2000, the Company sold substantially all of the assets of its
Harding Glass, Inc. (Harding) subsidiary to VVP America for a cash purchase
price of $30.6 million plus the assumption by the buyer of certain liabilities
aggregating $12.7 million, subject to certain post-closing adjustments.
Proceeds from the sale of Harding were used to repay the Companys outstanding
debt. Harding sales aggregated $28.0 million from January 1, 2000 through
April 12, 2000.

A plan to dispose of the Companys Harding Glass business was approved by the
Board of Directors in December 1999. From December 1999 through the date of
sale, Harding was accounted for as a discontinued operation and, accordingly,
its results of operations were segregated from results of the Companys ongoing
businesses including restatement of prior periods presented.

On April 7, 2000, the Company acquired Axxess Technologies, Inc. (Axxess or
Axxess Technologies) of Tempe, Arizona through a stock merger transaction.
Axxess is a manufacturer and distributor of key duplication and identification
systems. The transaction was structured as a purchase of 100% of the stock of
the privately held company and repayment of outstanding Axxess debt in exchange
for $87 million in cash and $23 million in subordinated notes. Axxess
Technologies sales aggregated $19.4 million for the three months ended March
31, 2000. The results of operations for Axxess are included in the results of
the Hillman Group from the date of acquisition. On June 1, 2001, Axxess
Technologies merged with and into the Hillman Group in conjunction with the
2001 Legal Reorganization noted above with the Hillman Group being the
surviving entity in the merger.

On November 3, 2000, the Company purchased inventory and other assets of the
Sharon-Philstone division of Pawtucket Fasteners, L.P. of Rhode Island,
distributors of fasteners to the retail hardware marketplace with annual sales
of approximately $14 million for the twelve months ended prior to the
acquisition. The purchase price was $6.9 million for inventory and other
assets including certain post-closing adjustments.

In December 2000, the Board of Directors approved a plan to liquidate the
Companys investment in SunSource Integrated Services de Mexico, SA de CV, the
Mexican Business Segment. This segment has been accounted for as a
discontinued operation and, accordingly, its results of operations were
segregated from the results of the Companys ongoing businesses including
restatement of prior periods presented. The liquidation process was
substantially completed as of June 30, 2001. On August 3, 2001, STS
distributed its common stock investment in the Mexican Business Segment to the
Hillman Group to segregate the STS Business from the remaining business
interests of SunSource.

On May 16, 2001, the Board of Directors approved a plan of legal
reorganization whereby (i) SunSource Technology Services, Inc. (STS) was
formed as a single member limited liability company and a wholly owned
subsidiary of the Hillman Group and (ii) Axxess Technologies, Inc. was merged
with and into the Hillman Group, collectively, the 2001 Legal
Reorganization.

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Industry Overview

Hillman operates in multiple channels of the retail marketplace such as
hardware stores, national and regional home centers and mass merchants. Hillman
focuses on delivering merchandising systems, point-of-sale displays, product
support and sales installation services through its nationwide field sales and
service force to the retail sector.

These retail channels are currently experiencing significant change marked by
the continued growth of the large national big box (Big Box) chains (defined
as mass merchants, home centers and large-format grocery/drug centers), which
have taken market share from the regional home centers and independent hardware
dealers and co-ops. Hillman has developed sales, marketing, merchandising and
service specifically to meet the needs of the Big Box chains. Hillman believes
that its market knowledge, merchandising skills, breadth of inventory, and
value-added services, including superior support and fulfillment capabilities,
will enable the Company to prosper with the Big Box chains.

The Hillman Group

Refer to Item 7  Managements Discussion and Analysis of Financial Condition
and Results of Operations and Note 19, Segment Information, to the
Consolidated Financial Statements for segment financial data for the three
years ended December 31, 2002.

The Company is organized as a single business segment which is the Hillman
Group. With annualized sales of approximately $287 million, the Hillman Group
believes it is the leading provider of fasteners and related small hardware
items; keys, key duplication systems and related accessories; and
identification items, such as tags and letters, numbers and signs (LNS) to
retail outlets in North America. Retail outlets served by Hillman are hardware
stores, home centers, mass merchants, pet suppliers, grocery stores and drug
stores. Through its field sales and service organization, Hillman complements
its extensive product selection with value-added services for the retailer.

Sales and service representatives regularly visit retail outlets to review
stock levels, reorder items in need of replacement, and interact with the store
management to offer new product and merchandising ideas. Thousands of items
can be actively managed with the retailer experiencing a substantial reduction
in paperwork and labor costs. Service representatives also assist in organizing
the products in a consumer-friendly manner. Hillman complements its broad
range of products with value-added merchandising services such as displays,
product identification stickers, retail price stickers, store rack and drawer
systems, assistance in rack positioning and store layout, and inventory
restocking services. Periodically, Hillman introduces new products and package
designs with color-coding for ease of shopping by consumers and modifies rack
designs to improve the attractiveness of individual store displays. In effect,
Hillman functions as a merchandising manager for retailers, supporting these
services with high order fill rates and rapid delivery from its twelve
distribution centers across the United States. Currently, orders are shipped
within 48 hours with a 96% order fill rate.

Hillman also manufactures and markets a value-added mix of high-tech and
conventional products in two core product categories: key duplication systems
and identification systems. The patent-protected Axxess Precision Key
Duplication SystemTM has proven to be a profitable revenue source within Big
Box retailers. This system has been placed in over 13,000 retail locations to
date.

In addition, Hillman offers a commercialized, innovative, consumer-operated
vending system, Quick-TagTM, which provides custom engraved specialty items,
such as pet identification tags, luggage tags and other engraved identification
tags. Hillman initially targeted the pet identification market with its
Quick-Tag system, and has facilitated the process of obtaining a pet tag by
providing pet owners with a quick and highly convenient means to custom engrave
tags while shopping at large format retail stores such as Wal-Mart and
PETsMART. Hillman has developed other high impact applications for its
Quick-Tag interactive engraving technology, including luggage tags, key chains
and military-style identification tags. To date, more than 2,900 Quick-Tag
machines have been placed in retail locations which are being supported by
Hillmans sales and service representatives.

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The Company ships its products from twelve distribution centers located
strategically throughout the U.S. and Canada (See Item 2  Properties). In 2002
Hillman invested $9.8 million in a new state of the art distribution facility
in Cincinnati, Ohio. In addition to improving order turnaround time and
reducing labor costs the new facility will provide additional capacity to
accommodate future sales growth.

Products and Suppliers

Currently, Hillman buys its products from approximately 650 vendors, the
largest of which accounted for approximately 10% of the Groups annual
purchases and the top five of which accounted for 27% of its purchases. About
half of its purchases are from overseas suppliers, with the balance from
domestic manufacturers and master distributors.

Fasteners

Hillmans fastener product line includes both standard and specialty nuts,
bolts, washers, screws and anchors. The line also includes brass, plastic,
stainless steel, and other miscellaneous fasteners. The depth of the line,
over 37,500 products, is believed to be the largest among suppliers servicing
the hardware retail segment. Fasteners generated almost 57% of total revenue
in 2002. Non-fastener products feature picture hanging items and accessories,
keys and accessories, LNS, rope and chain accessories, and an extensive list of
specialty items. To assure quality from its vendors, Hillman conducts periodic
on-site evaluations, random sampling of products and communicates results to
vendors. Hillman also tracks the performance of its vendors based on delivery
time and accuracy of shipments.

Keys and Key Accessories

Hillman provides a competitive line of metal key products for major retailers
and the automotive sector. In 2002, keys represented 21.4% of total revenue.
Hillman manufactures two metal key duplication systems that are niche-marketed
to retail outlets, primarily mass merchants and home centers, and a code
cutting system for use in automotive dealerships and in vehicle fleet
environments.

The Axxess Precision Key Duplication System creates high quality duplicate
keys with the precision of a locksmith while minimizing the technical skill
required by operators. The system was developed in response to retailers needs
for reducing the miscut rate on keys. Axxess keys provide retailers with
nearly ten times more gross profit per square foot than the average of all
products sold in grocery and mass merchant channels. Hillman also markets a
conventional key cutting system. Key styles marketed include standard brass
keys, Wackeys, NFL logo keys, Color Plus keys, rubber head keys, and high
security vehicle anti-theft key blanks. The conventional system is marketed to
retailers who do not experience high employee turnover and therefore do not
have the same labor constraints as mass merchants, home centers or grocery and
drug retailers.

The key cutting system developed for the automotive industry, PC+ Code Cutter,
produces automobile keys using alphanumeric codes based on a vehicles
identification number. Utilizing a proprietary computer program, the PC+ Code
Cutter identifies and then cuts keys based on the automobiles original key
pattern. The PC+ Code Cutter is distributed through Barnes Distribution, a
distribution company serving vehicular and industrial markets. Since its
introduction in February 1996, more than 7,700 PC+ Code Cutter systems have
been sold.

Hillman also markets key accessories in conjunction with its key duplication
systems. Popular accessories include the Key Light, Valet
KeyChain, key
identifiers, key coils and key clips. The Key Mates line of key accessories
includes a broad range of products such as key chains, tags, lights, floats,
holders, whistles, and a host of other miscellaneous complementary items.

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Engraving

Quick-Tag is a patented, state-of-the-art consumer-operated vending system
that custom engraves specialty products such as pet identification tags,
military-style I.D. tags, holiday ornaments and luggage tags. The Company has
placed almost 3,000 Quick-Tag machines in retail outlets throughout the United
States and Canada. Using an interactive touch screen, customers input
information such as a pet name and telephone number, and the systems
proprietary technology engraves the tag in less than two minutes. The
Quick-Tag system does not require incremental labor and generates high levels
of customer satisfaction and attractive margins for the retailer. The
Quick-Tag custom engraving systems generate retail profit per square foot over
seven times the typical retail average. Revenues for engraving products
represented 8.7% of total revenues in 2002.

Hillman purchases a wide variety of materials and components to manufacture the
Axxess Key Duplication and Quick-Tag engraving machines, many of which are
manufactured to its specifications. Management does not believe that it is
overly dependent on any one supplier. The machine components do not generally
require proprietary technology and Hillman has identified or used alternate
suppliers for its primary sourcing needs.

Letters,
numbers and signs (LNS)

LNS sales accounted for 9.0% of 2002 revenues and include packaged
self-adhesive letters and numbers, mailbox numbers and accessories, house
numbers and letters, contractor safety program signs, and driveway markers and
reflectors. Typical retailers dedicate eight linear feet of retail space for
this product and view it as a significant contributor to their retail
offerings.

Markets
and Customers

Hillman services approximately 15,000 franchise and independent (F&I) retail
outlets. These individual dealers are typically members of the larger
cooperatives, such as Tru-Serv, Ace and Do-it-Best. The Company sells directly
to the cooperatives retail locations and also supplies many fastener items to
the cooperatives central warehouses. These central warehouses distribute to
their members that do not have a requirement for Hillmans in-store service.
These arrangements reduce credit risk and logistic expense for Hillman and
reduce central warehouse inventory and delivery costs for the cooperatives.

The products sold to the F&I dealers typically account for approximately 7% of
the retailers revenues and over 25% of a hardware stores traffic. A typical
hardware store maintains in inventory thousands of different items, many of
which generate small dollar sales but large profits. It is difficult for a
retailer to monitor economically all stock levels and to reorder the products
from multiple vendors. The problem is compounded by the necessity of receiving
small shipments of inventory at different times and having to stock the goods.
However, failure to have these small items available will have an adverse
effect on store traffic, thereby denying the retailer the opportunity to sell
items that generate higher dollar sales.

In addition, Hillman sells its products to national accounts such as Wal-Mart,
Home Depot, Lowes, Sears, Tractor Supply, PETsMART, and PetCo. Hillmans
status as a national supplier of unique, proprietary products to Big Box
retailers allowed it to develop a formidable market position and high barriers
to entry within its product categories. Management believes that the dynamics,
which make its services attractive to hardware retailers, are present with
these larger customers as well.

Hillman serves over approximately 20,000 customers, the top five of which
accounted for approximately 40% of its annualized sales. The single largest
customer represented approximately 14.4% of total revenue and the second
largest was slightly less than 12%. No other customer accounted for more than
10% of the Companys total sales in 2002.

Hillmans telemarketing activity sells to approximately 6,700 smaller hardware
outlets and over 6,000 non-hardware accounts. New business is also being
cultivated internationally in such places as Canada, Mexico, South and Central
America, and the Caribbean.

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Sales
and Marketing

Management believes the Company consistently is able to be responsive to the
needs of the F&I retailers because it employs the largest direct sales
organization in the retail home industry. This organization consists of 210
people, managed by 15 field managers. Each sales representative is responsible
for approximately 50 full service accounts that they call on approximately
every two weeks. Coupled with the efforts of the Marketing Department, the
sales force not only sells products, but can sell merchandising and
technological support capabilities as well. The Marketing Department provides
support through the development of new products, sales collateral, promotional
items, merchandising aids and marketing services such as advertising and trade
show management. Its EDI system is used by a number of its large customers.

In addition, the national accounts field service organization consists of over
300 service people and 22 field managers focusing on Big Box retailers, pet
super stores, large national discount chains and grocery stores. This
organization reorders products, details store shelves and sets up in-store
promotions.

Management believes that Hillman provides unmatched product support, customer
service and profit opportunities for its retail distribution partners. It also
believes that a significant source of its competitive advantage rests in its
ability to provide a greater level of customer service than its competitors.
Hillman products are covered directly by the combined field service
organization, which provides service support through field visits. These field
visits provide Hillman with critical information relating to consumer buying
patterns and retailing trends, and complements their new product development
efforts. Field service representatives also help retail customers to improve
the efficiency and profitability of Hillmans on-site merchandising systems by
consulting with customers in the areas of EDI, product planning, inventory
control, systems interface and store operations.

Competition

The principal competitors for Hillmans F&I business are Midwest Fasteners,
Serv-A-Lite and Hyko in the hardware store marketplace. The first two carry
mainly fastener products, while the latter is the major competitor in letters
numbers and signs. Hillman competes primarily on field service, merchandising,
as well as product availability, price and breadth of product line.

Management estimates that Hillman sells to approximately 65% of the full
service hardware stores in the F&I marketplace. The hardware outlets that
purchase products but not services from Hillman also purchase products from
local and regional distributors and cooperatives. Competition in the F&I
marketplace is primarily on the basis of price and availability.

The primary competitors in the national accounts marketplace for fasteners are
Crown-Bolt, R&B, Inc. and the Newell Group. Competition is based primarily on
in-store service and price. Other competitors are local and regional
distributors.

In 2002, the total domestic market for keys was estimated to be 600 million
units at the retail level with annual sales of over $900 million. The key
duplication market can be segmented into three primary retail categories:
hardware stores, locksmiths and Big Box retailers. Hillman believes it
maintains the leading market share of keys in terms of unit and dollar sales.
To displace Hillmans market position, a competitor would have to develop a
full range of products with demonstrably better technology without infringing
on patents. These competitors would also have to buyback existing inventory
from retailers. Management believes that these substantial competitive
barriers help preserve its unique franchise within the key duplication market
segment.

Hillman competes with Hyko for LNS sales in hardware stores, home centers and
mass merchants. Competitors in the pet tag market are specialty retailers,
direct mail order and retailers with in-store mail order capability. The
Quick-Tag system has patent protected proprietary technology that is a major
barrier to entry and preserves this market segment.

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Risk Factors

Risks
Associated with Acquisitions

An element of Hillmans future growth strategy is to pursue selected
acquisitions that either expand or complement its businesses in new or existing
markets. However, there can be no assurance that the Company will be able to
identify or acquire acceptable acquisition candidates on terms favorable to the
Company and in a timely manner to the extent necessary to fulfill Hillmans
growth strategy. Furthermore, there can be no assurance that competition for
acquisition candidates will not escalate, thereby increasing the costs of
acquisitions. The process of integrating acquired businesses into the
Companys operations may result in unforeseen difficulties and may require a
disproportionate amount of resources and managements attention, and there can
be no assurance that Hillman will be able to successfully integrate acquired
businesses into its operations. The failure to complete or successfully
integrate prospective acquisitions may have an adverse impact on the Companys
growth strategy.

Competition

The retail industry is highly competitive, with the principal methods of
competition being price, quality of service, quality of products, product
availability, credit terms and the provision of value-added services, such as
merchandising design, in-store service and inventory management. The Company
encounters competition from a large number of regional and national
distributors, some of which have greater financial resources than the Company
and may offer a greater variety of products.

Seasonality
and Economic Conditions

Hillman has, in the past, experienced seasonal fluctuations in sales and
operating results from quarter to quarter. Typically, the first calendar
quarter is the weakest due to the effect of weather on home projects and the
construction industry.

With the growing trend toward retail trade consolidation we are increasingly
dependent upon key retailers whose bargaining strength is growing.
Accordingly, we face greater pressure from our retail trade customers to
provide more favorable trade terms. We can be negatively affected by changes
in the policies of our retail trade customers.

The threat of potential military action or war, as well as attendant political
activity, has created an atmosphere of economic uncertainty throughout the
world. Our results may be impacted by the macroeconomic effects of those
events. A disruption in our supply chain as a result of such actions may
significantly affect our business and its prospects. In addition, such events
may also result in heightened domestic security and higher costs for importing
shipments of product. Any of these occurrences may have a material adverse
effect on our financial position, cash flow or results in any reporting period.

Changes in general economic conditions could also have a material adverse
effect on the Companys business, results of operations and financial
condition.

Dependence
on Information Systems

The Company believes that its proprietary computer software programs are an
integral part of its business and growth strategies. Hillman depends on its
information systems generally to process orders, to manage inventory and
accounts receivable collections, to purchase, sell and ship products
efficiently and on a timely basis, to maintain cost-effective operations and to
provide superior service to its customers. There can be no assurance that the
precautions which the Company has taken against certain events that could
disrupt the operations of its information systems will prevent the occurrence
of such a disruption. Any such disruption could have a material adverse effect
on the Companys business and results of operations.

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Insurance Arrangements

Under the Companys current insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of expected
claims. Since October 1991, the Company has retained the exposure on certain
expected losses related to workers compensation, general liability and
automobile. The Company also retains the exposure on expected losses related to
health benefits of certain employees. The Company believes that its present
insurance is adequate for its businesses. See Note 15, Commitments and
Contingencies, of Notes to Consolidated Financial Statements of the Company as
of and for the three years ended December 31, 2002.

Employees

As of December 31, 2002, the Companys total operations employed approximately
1,800 employees, of which approximately 640 were sales personnel, approximately
890 were employed as warehouse, manufacturing and delivery personnel, and
approximately 270 were administrative positions. In the opinion of management,
employee relations are good.

Backlog

The Companys sales backlog from ongoing operations was $1.3 million as of
December 31, 2002, and $1.6 million as of December 31, 2001.

Where You Can Find More
Information

The Company files quarterly, annual and special reports, proxy statements and
other information with the Securities and Exchange Commission (the
Commission). You may read and copy any reports, statements, or other
information filed by the Company at the Commissions public reference rooms at
450 5th Street, N.W., Washington, D.C. 20549. Please call the Commission at
1-202-942-8090 for more information on the public reference rooms. The
Commission also maintains an Internet site at http://www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers, like Hillman,
that file electronically with the Commission. Copies may also be obtained,
after paying a duplicating fee, by electronic request to publicinfo@sec.gov or by written request
to Public Reference Section, Washington, D.C. 20549-0102.

You can inspect reports, proxy statements, and other information about the
Company at the offices of The American Stock Exchange, 86 Trinity Place, New
York, NY 10006.

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Item 2  Properties.

The Companys principal office, manufacturing and distribution properties are
as follows:

|                          |  |                |         |             |  |                      |  | 
|------------------------- |  | -------------- | ------- | ----------- |  | -------------------- |  | 
|                          |  | Approximate    |         |             |  |                     
|Location                  |  | Square Footage |         | Description
|                          |  |                |         |            
|Cincinnati, Ohio          |  |                | 240,000 |             |  | Office, Distribution
|                         
|                         
|                         
|                         
|Forest Park, Ohio         |  |                | 260,000 |             |  | Distribution        
|                         
|                         
|                         
|                         
|Tempe, Arizona            |  |                | 161,000 |             |  | Mfg., Distribution  
|                         
|                         
|                         
|                         
|Tempe, Arizona            |  |                | 47,000  |             |  | Office              
|                         
|                         
|                         
|                         
|Bakersfield, California   |  |                | 84,000  |             |  | Distribution        
|                         
|                         
|                         
|                         
|Dallas, Texas             |  |                | 32,000  |             |  | Distribution        
|                         
|                         
|                         
|                         
|Portland, Oregon          |  |                | 29,000  |             |  | Distribution        
|                         
|                         
|                         
|                         
|Charlotte, North Carolina |  |                | 32,000  |             |  | Distribution        
|                         
|                         
|                         
|                         
|Albany, New York          |  |                | 39,000  |             |  | Distribution        
|                         
|                         
|                         
|                         
|LaCrosse, Wisconsin       |  |                | 48,000  |             |  | Distribution        
|                         
|                         
|                         
|                         
|Rockford, Illinois        |  |                | 153,000 |             |  | Office, Distribution
|                         
|                         
|                         
|                         
|Riveria Beach, Florida    |  |                | 37,000  |             |  | Distribution        
|                         
|                         
|                         
|                         
|Goodlettsville, Tennessee |  |                | 72,000  |             |  | Manufacturing       
|                         
|                         
|                         
|                         
|Mississuaga, Ontario      |  |                | 11,000  |             |  | Distribution        

With the exception of Goodlettseville, Tennessee, all of the Companys
facilities are leased. In the opinion of management, the Companys existing
facilities are in good condition.

Item 3  Legal
Proceedings.

Legal proceedings are pending which are either in the ordinary course of
business or incidental to the Companys business. Those legal proceedings
incidental to the business of the Company are generally not covered by
insurance or other indemnity. In the opinion of management, the ultimate
resolution of the pending litigation matters will not have a material adverse
effect on the consolidated financial position, operations or cash flows of the
Company.

Item 4  Submission of
Matters to a Vote of Security Holders.

The Company did not submit any matters to a vote of Trust Preferred holders
during the quarter ended December 31, 2002.

10



---



##### 



PART II

Item 5  Market for
Registrants Common Shares and Related Stockholder Matters.

Stock Exchange Listing

Effective June 19, 2001, the Company transferred listing of its Common Stock
and Trust Preferred Securities from the New York Stock Exchange to the American
Stock exchange utilizing its same ticker symbols SDP and SDP.PR, respectively.
As a result of the Merger Transaction, the Common Stock is no longer publicly
traded. In connection with the SunSource name change on March 18, 2002, the
Trust Preferred Securities trade under the ticker symbol HLM.Pr (formerly
SDP.Pr).

The following table sets forth the high and low closing sale prices on the New
York Stock Exchange and the American Stock Exchange composite tapes for the
Trust Preferred Securities.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | HIGH |       | LOW
|               |  |      |       |    
|2002           |  |      |       |     |  |   |       | 
|               |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 25.80 |     |  | $ | 24.80 | 
|              
|              
|              
|              
|Second Quarter |  |      | 25.50 |     |  |   | 24.51 | 
|              
|              
|              
|              
|Third Quarter  |  |      | 24.80 |     |  |   | 21.95 | 
|              
|              
|              
|              
|Fourth Quarter |  |      | 25.00 |     |  |   | 23.31 | 
|              
|              
|              
|              
|2001           |  |      |       |     |  |   |       | 
|               |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 18.62 |     |  | $ | 15.06 | 
|              
|              
|              
|              
|Second Quarter |  |      | 23.50 |     |  |   | 17.90 | 
|              
|              
|              
|              
|Third Quarter  |  |      | 24.79 |     |  |   | 23.21 | 
|              
|              
|              
|              
|Fourth Quarter |  |      | 25.47 |     |  |   | 24.40 | 

The Trust Preferred Securities have a liquidation value of $25.00 per security.
As of March 20, 2003, there were 808 holders of Trust Preferred Securities and
fourteen (14) common stockholders. The total number of Trust Preferred
Securities outstanding as of March 20, 2003, was 4,217,724. The total number
of Common Shares outstanding as of March 20, 2003, was 7,118,665.

Distributions

The Company pays interest to the Hillman Group Capital Trust, formerly
SunSource Capital Trust (the Trust), on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. For the years ended December 31, 2002 and 2001,
the Company paid $12.2 million per year in interest on the Junior Subordinated
Debentures, equivalent to the amounts distributed by the Trust on the Trust
Preferred Securities.

11



---



##### 



Item 6  Selected
Financial Data.

As a result of the Merger Transaction, the Companys operations for the periods
presented prior to September 30, 2001 are referenced herein as the predecessor
operations (the Predecessor or Predecessor Operations). The Companys
operations for the periods presented since the Merger Transaction are
referenced herein as the successor operations (the Successor or Successor
Operations) and include the effects of the Companys debt refinancing and sale
of an operating subsidiary completed subsequent to the Merger Transaction.

The following table sets forth selected consolidated financial data of the
Predecessor as of and for the three years ended December 31, 2000 and the nine
months ended September 30, 2001; and consolidated financial data of the
Successor as of and for the year ended December 31, 2002 and the three months
ended December 31, 2001. See accompanying Notes to Consolidated Financial
Statements and Managements Discussion and Analysis of Financial Condition and
Results of Operations for information regarding the acquisition of the Company
by Allied Capital, the Companys debt refinancing, and discontinued operations
as well as other acquisitions and divestitures that affect comparability.

(dollars in thousands)

|                                                     |                                              |   |            |         |             |   |          |        |            |   |            |         |            |   |         |         |  |   |         |         |   |   |         |         | 
|---------------------------------------------------- | -------------------------------------------- | - | ---------- | ------- | ----------- | - | -------- | ------ | ---------- | - | ---------- | ------- | ---------- | - | ------- | ------- |  | - | ------- | ------- | - | - | ------- | ------- | 
|                                                     |                                              |   | Successor  |         | Predecessor
|                                                     |                                              |   |            |         |            
|                                                     |                                              |   |            |         |             |   | Three    |        | Nine       |   |            |         |            |   |         |         |  |   |         |         |  
|                                                     |                                              |   |            |         |             |   | Months   |        | Months     |   |            |         |            |   |         |         |  |   |         |         |  
|                                                     |                                              |   | Year Ended |         | Ended       |   | Ended    |        | Year Ended |   | Year Ended |         | Year Ended
|                                                     |                                              |   | 12/31/02   |         | 12/31/01    |   | 09/30/01 |        | 12/31/00   |   | 12/31/99   |         | 12/31/98  
|                                                     |                                              |   |            |         |             |   |          |        |            |   |            |         |           
|Income Statement Data:                              
|Continuing Operations                                |                                              |   |            |         |             |   |          |        |            |   |            |         |            |   |         |         |  |   |         |         |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net sales                                    | $ | 286,788    |         |             | $ | 60,040   |        |            | $ | 341,307    |         |            | $ | 462,839 |         |  | $ | 543,277 |         |   | $ | 603,071 |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Gross profit                                 |   |            | 160,614 |             |   |          | 34,442 |            |   |            | 143,564 |            |   |         | 184,660 |  |   |         | 226,154 |   |   |         | 252,168 | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Gain on contribution of
subsidiaries         |   |            |        |             |   |          |       |            |   |            |        |            |   |         | 49,115  |  |   |         |        |   |   |         |        | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Income (loss) before
discontinued operations |   |            | 6,103   |             |   |          | (2,909 | )          |   |            | (1,327  | )          |   |         | 27,290  |  |   |         | (11,321 | ) |   |         | 11,517  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Income (loss) from discontinued
operations           |                                              |   |           |         |             |   |         |        |            |   |           |         |            |   | (2,610  | )       |  |   | (25,815 | )       |   |   | 2,300   |        
|                                                    
|                                                    
|                                                    
|                                                    
|Extraordinary loss                                   |                                              |   |           |         |             |   |         |        |            |   |           |         |            |   |        |         |  |   | (235    | )       |   |   |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|Net income (loss)                                    |                                              | $ | 6,103      |         |             | $ | (2,909   | )      |            | $ | (1,327     | )       |            | $ | 24,680  |         |  | $ | (37,371 | )       |   | $ | 13,817  |        
|                                                    
|                                                    
|                                                    
|                                                    
|Balance
Sheet Data at December 31:                   |                                              |   |            |         |             |   |          |        |            |   |            |         |            |   |         |         |  |   |         |         |   |   |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|Total assets                                         |                                              | $ | 368,854    |         |             | $ | 344,564  |        |            |   | N/A        |         |            | $ | 322,589 |         |  | $ | 321,626 |         |   | $ | 327,523 |        
|                                                    
|                                                    
|                                                    
|                                                    
|Long-term debt and capitalized
lease obligations (1) |                                              | $ | 146,716    |         |             | $ | 128,739  |        |            |   | N/A        |         |            | $ | 102,790 |         |  | $ | 126,723 |         |   | $ | 95,842  |        



---

|(1) |  | Includes current portion of long-term debt.
|--- |  | -------------------------------------------

12



---



##### 



Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion provides information which management believes is
relevant to an assessment and understanding of the Companys operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein.

General

The Hillman Companies, Inc. (Hillman or the Company), formerly SunSource
Inc. (SunSource), is one of the largest providers of value-added
merchandising services and hardware-related products to retail markets in North
America.

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

Merger
Transaction

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

In connection with the Merger Transaction, on September 28, 2001, the Company
completed the sale of substantially all of the assets of its SunSource
Technology Services business (the STS Business) to STS Operating, Inc. (STS
OP), an entity formed by certain officers and managers of the STS Business,
Allied Capital and Easton Hunt Capital Partners, L.P. for the purpose of
acquiring the STS Business. The purchase price aggregated approximately $25.5
million in cash and preferred stock, subject to post-closing adjustments plus
the assumption of certain liabilities. On October 16, 2002, Hillmans equity
investment in STS OP preferred stock and $0.2 million of cash was distributed
to the Companys common stockholders.

The Companys operations for the periods presented prior to September 30, 2001
are referenced herein as the predecessor operations (the Predecessor or
Predecessor Operations). The Companys operations for the period presented
since the Merger Transaction are referenced herein as the successor operations
(the Successor or Successor Operations) and include the effects of the
Companys debt refinancing and sale of an operating subsidiary completed
subsequent to the Merger Transaction (see Financing Arrangements and
Acquisitions/Divestitures below). The Companys final two business days of
operation in September 2001 are immaterial for separate presentation and have
been reflected in the Predecessor Operations.

13



---



##### 



Financing
Arrangements

On September 28, 2001, the Company refinanced its $115 million bank revolving
credit and $21.5 million term loan with $105 million in senior secured credit
facilities (the Refinancing). The new senior debt agreement (Credit
Agreement) has a $50 million revolving credit line, a $20 million term loan
that expires on September 27, 2006, and a $35 million term loan that expires on
September 27, 2008.
On May 1, 2002, the Credit Agreement was amended to provide an additional $10.0
million of availability under the revolving credit facility and to increase the
term loans by $15.0 million.

On December 23, 2002, the Credit Agreement was amended to provide an additional
$4.8 million of availability under the revolving credit agreement and to
increase the term loans by $5.2 million. As of December 31, 2002, the
outstanding balance of the term loans aggregated $69.8 million.

On December 28, 2000, the Company issued $30 million of unsecured subordinated
notes to Allied Capital and issued an additional $10 million of these notes to
Allied Capital on September 28, 2001 in conjunction with the Refinancing noted
above (the Amended Subordinated Debt Issuance). The majority of the cash
proceeds generated from the Amended Subordinated Debt Issuance were used to
repay at a discount an unsecured subordinated note issued in connection with
the acquisition of Axxess Technologies, Inc. on April 7, 2000 (the Axxess
Subordinated Note Repayment).

Corporate
Reorganization

On May 16, 2001, the Board of Directors approved a plan of legal
reorganization whereby (i) SunSource Technology Services, Inc. (STS) was
formed as a single member limited liability company and a wholly owned
subsidiary of the Hillman Group and (ii) Axxess Technologies, Inc. was merged
with and into the Hillman Group, collectively, the 2001 Legal
Reorganization.

Acquisitions and Dispositions

On October 3, 2002, the Company, through its Hillman Group subsidiary,
purchased the net assets of the DIY division (DIY) of the Fastenal Company of
Winona, MN (Fastenal). DIY, with annual sales of approximately $22 million,
distributes fasteners, anchors, picture hanging wire, hooks, tacks, and brads
to national hardware cooperatives and home centers. The Company paid $15.3
million in cash to Fastenal for the net assets of DIY. The transaction was
financed from the Companys existing credit lines.

In connection with the DIY acquisition, the Company developed an overall
integration plan that included the elimination of redundant headcount and
facilities. The Company accrued approximately $3.4 million of estimated costs
related to the integration plan consisting of approximately $1.5 million of
fixed asset disposals, $0.9 million of facilities costs, $0.5 million of moving
expenses and $0.5 million for planned workforce reductions. The integration is
expected to be implemented beginning in the fourth quarter of 2003.

On May 1, 2002 the Companys Hillman Group purchased certain assets of the
Lowes specialty fastener business from R&B, Inc. for cash consideration of
$6.2 million. The purchase of the specialty fastener business will expand the
breadth of the Companys product offering to Lowes. In connection with this
transaction, the Company settled litigation filed by R&B, Inc. in February 1996
related to the Companys sale of the Dorman Products division. The litigation
settlement in the amount of $1.25 million was fully reserved on the Companys
balance sheet, and accordingly, there was no charge to income in 2002.

On September 28, 2001, the Company sold substantially all of the assets of STS,
its Technology Services business. The sales price aggregated $25.5 million in
cash and preferred stock, subject to post-closing adjustments, plus the
assumption of certain liabilities by the buyer.

14



---



##### 



In December 2000, the Board approved a plan to liquidate the Companys
investment in SunSource Integrated Services de Mexico, SA de CV, the Mexican
Business Segment which provided comprehensive inventory management services of
maintenance and repair materials to large manufacturing plants in Mexico. The
Company recorded a pre-tax loss on liquidation of approximately $4.6 million
representing non-cash charges for accumulated translation losses, the
write-down of inventories and other assets, and other liquidation-related
costs. The liquidation process was substantially completed as of June 30,
2001. On August 3, 2001, STS distributed its common stock investment in the
Mexican Business Segment to the Hillman Group to segregate the STS Business
from the remaining business interests of SunSource. No additional loss on
disposal was recorded for the twelve months ended December 31, 2002 and 2001,
respectively.

On November 3, 2000, the Company purchased inventory and other assets of the
Sharon-Philstone division of Pawtucket Fasteners, L.P. of Rhode Island,
distributors of fasteners to the retail hardware marketplace with annual sales
of approximately $14 million for the twelve months ended prior to the
acquisition. The purchase price was $6.9 million for inventory and other
assets including certain post-closing adjustments.

On April 13, 2000, the Company sold substantially all of the assets of Harding
Glass, Inc. (Harding) for a cash purchase price of $30.6 million plus the
assumption by the buyer of certain liabilities aggregating $12.7 million,
subject to certain post-closing adjustments. Proceeds from the sale of Harding
were used to repay the Companys outstanding debt. Harding sales aggregated
$28.0 million from January 1, 2000 through April 12, 2000. Since December 1999,
Harding has been accounted for as a discontinued operation and, accordingly,
its results of operations were segregated from results of the Companys ongoing
businesses including restatement of prior periods presented. Through December
31, 2000, the Company had recorded a loss on the discontinued Harding segment
of $22.0 million in the aggregate, net of tax benefits. No additional loss on
disposal was recorded for the years ended December 31, 2002 and 2001,
respectively.

On April 7, 2000, the Company acquired Axxess Technologies, Inc. (Axxess or
Axxess Technologies), a Tempe, Arizona manufacturer of key duplication and
identification systems. The transaction was structured as a purchase of 100%
of the stock of the privately held company and repayment of outstanding Axxess
debt in exchange for $87 million in cash and $23 million in subordinated notes.
Axxess sales aggregated $19.4 million for the three months ended March 31,
2000. Axxess results of operations are included in the results of the Hillman
Group from the date of acquisition. On June 1, 2001, Axxess merged with and
into the Hillman Group in conjunction with the 2001 Legal Reorganization noted
above with the Hillman Group being the surviving entity in the merger.

On March 2, 2000, the Company contributed the interests in its Kar Products,
Inc. and A & H Bolt & Nut Company Limited operations (collectively, the Kar
business), to a newly-formed partnership affiliated with Glencoe Capital,
L.L.C. (Glencoe). Glencoe contributed cash equity to the new partnership,
GC-Sun Holdings L.P. (G-C). The Company received $105 million in cash
proceeds from the transaction through repayment of assumed debt by G-C and
retained minority ownership in G-C. Affiliates of Glencoe hold the controlling
interest in G-C. The Company recorded a pre-tax gain on the transaction of
approximately $49.1 million in the first quarter of 2000. On January 4, 2002
G-C provided the Company notice that it intended to exercise its call right to
purchase the Companys partnership interest as a result of the Merger
Transaction with Allied Capital. On April 13, 2002, the Company entered into a
Unit Repurchase Agreement with G-C, pursuant to which G-C exercised its call
right. In exchange for its interest in G-C, the Company received a $10 million
subordinated note from G-C.

On October 4, 2000, G-C, acquired all of the outstanding stock of Brampton
Fastener Co. Limited, d/b/a Brafasco, a supplier of maintenance and repair
products to industrial customers based in Toronto, Canada. Brafasco had sales
of $28.5 million ($CDN) for the year ended December 31, 2000.

15



---



##### 



Results of Operations

Segment Sales and Profitability for each of the Three Years Ended December 31

(dollars in thousands)

|                                       |   |         |         |       |          |        |       |       |   |         |         |       |      |  |       |   |   |         |         |  |  |  |       |   | 
|-------------------------------------- | - | ------- | ------- | ----- | -------- | ------ | ----- | ----- | - | ------- | ------- | ----- | ---- |  | ----- | - | - | ------- | ------- |  |  |  | ----- | - | 
|                                       |   |         | 2002    |       | 2001 (a) |        | 2000 
|                                       |   |         |         |       |          |        |      
|                                       |   |         |         |       |          |        | % OF  |       |   |         |         |       | % OF |  |       |   |   |         | % OF   
|SALES                                  |   | AMOUNT  |         | TOTAL |          | AMOUNT |       | TOTAL |   | AMOUNT  |         | TOTAL
|                                       |   |         |         |       |          |        |       |       |   |         |         |      
|Hillman Group  Ongoing Operations (b) |   | $       | 286,788 |       |          |        | 100.0 | %     |   | $       | 248,786 |       |      |  | 100.0 | % |   | $       | 210,938 |  |  |  | 100.0 | %
|                                      
|                                      
|                                      
|                                      
|Technology Services (c)                |   |         |        |       |          |        |       |       |   |         | 152,561 |       |      |  |       |   |   |         | 228,730 |  |  |  |       |  
|                                      
|                                      
|                                      
|                                      
|Expediter Segment (d)                  |   |         |        |       |          |        |       |       |   |         |        |       |      |  |       |   |   |         | 23,170  |  |  |  |       |  
|                                       |   |         |         |       |          |        |       |       |   |         |         |       |      |  |       |   |   |         |         |  |  |  |       |  
|Consolidated Net Sales                 | $ | 286,788 |         |       |          |        |       |       | $ | 401,347 |         |       |      |  |       |   | $ | 462,838 |         |  |  |  |      
|                                       |   |         |         |       |          |        |       |       |   |         |         |       |      |  |       |   |   |         |         |  |  |  |       |  

|                                                   |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |       |         |        |  |  |      |      |   | 
|-------------------------------------------------- | ---------------------------------------- | - | ------- | ------ |  | ----- | ---- | ---- | - | - | ------- | ------ |  | ---- | ---- | ---- | - | ----- | ------- | ------ |  |  | ---- | ---- | - | 
|                                                   |                                          |   |         |        |  |       |      | % OF |   |   |         |        |  | % OF |      |      |   |       |         | % OF  
|GROSS PROFIT                                       |                                          |   |         |        |  | SALES |      |      |   |   |         | SALES  |  |      |      |      |   | SALES
|                                                   |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |      
|Hillman Group  Ongoing Operations (b)             |                                          | $ | 160,614 |        |  |       | 56.0 | %    |   | $ | 140,983 |        |  |      | 56.7 | %    |   | $     | 117,295 |        |  |  | 55.6 | %   
|                                                  
|                                                  
|                                                  
|                                                  
|Technology Services (c)                            |                                          |   |        |        |  |       |      |      |   |   | 37,023  |        |  |      |      |      |   |       | 52,313  |        |  |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Expediter Segment (d)                              |                                          |   |        |        |  |       |      |      |   |   |        |        |  |      |      |      |   |       | 15,052  |        |  |  |      |     
|                                                   |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |       |         |        |  |  |      |     
|Consolidated Gross Profit                          |                                          | $ | 160,614 |        |  |       |      |      |   | $ | 178,006 |        |  |      |      |      |   | $     | 184,660 |        |  |  |      |     
|                                                   |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |       |         |        |  |  |      |     
|EBITDA
(g)                                         |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |       |         |        |  |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Hillman Group (b)                                  |                                          | $ | 51,574  |        |  |       | 18.0 | %    |   | $ | 45,439  |        |  |      | 18.3 | %    |   | $     | 34,053  |        |  |  | 16.1 | %   
|                                                  
|                                                  
|                                                  
|                                                  
|Management fee expense                             |                                          |   | (1,800  | )      |  |       |      |      |   |   | (250    | )      |  |      |      |      |   |       |        |        |  |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Dividend income  STS Operating, Inc.              |                                          |   | 546     |        |  |       |      |      |   |   | 185     |        |  |      |      |      |   |       |        |        |  |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Corporate expenses                                 |                                          |   | (2,622  | )      |  |       | -0.9 | %    |   |   | (5,193  | )      |  |      | -2.1 | %    |   |       | (8,956  | )      |  |  | -4.2 | %   
|                                                   |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |       |         |        |  |  |      |     
|                                                   | Consolidated EBITDA -
ongoing operations |   |         | 47,698 |  |       |      | 16.6 | % |   |         | 40,181 |  |      |      | 16.2 | % |       |         | 25,097 |  |  |      | 11.9 | %
|                                                  
|                                                  
|                                                  
|                                                  
|Technology Services (c)                            |                                          |   |        |        |  |       |      |      |   |   | (1,205  | )      |  |      |      |      |   |       | (6,652  | )      |  |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Expediter Segment (d)                              |                                          |   |        |        |  |       |      |      |   |   |        |        |  |      |      |      |   |       | 2,823   |        |  |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Equity in (loss) earnings
of Expediter Segment (e) |                                          |   |        |        |  |       |      |      |   |   | (105    | )      |  |      |      |      |   |       | 2,438   |        |  |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Gain (loss) on termination
of pension plans (f)    |                                          |   | 1,231   |        |  |       |      |      |   |   |        |        |  |      |      |      |   |       | (4,279  | )      |  |  |      |     
|                                                   |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |       |         |        |  |  |      |     
|Consolidated EBITDA                                |                                          | $ | 48,929  |        |  |       |      |      |   | $ | 38,871  |        |  |      |      |      |   | $     | 19,427  |        |  |  |      |     
|                                                   |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |       |         |        |  |  |      |     
|INCOME
FROM OPERATIONS                             |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |       |         |        |  |  |      |     
|                                                  
|Consolidated EBITDA                                |                                          | $ | 48,929  |        |  |       |      |      |   | $ | 38,871  |        |  |      |      |      |   | $     | 19,427  |        |  |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Depreciation                                       |                                          |   | (12,004 | )      |  |       |      |      |   |   | (12,623 | )      |  |      |      |      |   |       | (9,455  | )      |  |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Amortization                                       |                                          |   | (1,485  | )      |  |       |      |      |   |   | (4,483  | )      |  |      |      |      |   |       | (3,369  | )      |  |  |      |     
|                                                  
|                                                  
|                                                  
|                                                  
|Equity in loss (earnings)
of Expediter Segment (e) |                                          |   |        |        |  |       |      |      |   |   | 105     |        |  |      |      |      |   |       | (2,438  | )      |  |  |      |     
|                                                   |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |       |         |        |  |  |      |     
|Consolidated income from
operations                |                                          | $ | 35,440  |        |  |       |      |      |   | $ | 21,870  |        |  |      |      |      |   | $     | 4,165   |        |  |  |      |     
|                                                   |                                          |   |         |        |  |       |      |      |   |   |         |        |  |      |      |      |   |       |         |        |  |  |      |     



---

|(a) |  | For the purpose of comparing the Companys results of operations for each
of the three years ended December 31, 2002, the results of the Predecessor
Operations for the nine months ended September 30, 2001 have been combined
with the results of the Successor Operations for the three months ended
December 31, 2001.                               
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Includes sales, gross profit and EBITDA from Axxess Technologies, Inc.
since its acquisition on April 7, 2000, Sharon-Philstone since its
acquisition on November 3, 2000, Lowes specialty fastener business from
R&B, Inc. since its acquisition on May 1, 2002, and the DIY division of
the Fastenal Company since its acquisition on October 3, 2002.
|   
|   
|   
|   
|(c) |  | Represents sales, gross profit and EBITDA from the Companys SunSource
Technology Services business until its sale on September 28, 2001.                                                                                                                                                                                                                
|   
|   
|   
|   
|(d) |  | Represents sales, gross profit and EBITDA from the Companys Kar
Products, Inc. and A & H Bolt & Nut Company Limited business
(collectively, the Expediter Segment) until its contribution on March 2,
2000 to a newly formed partnership affiliated with Glencoe Capital L.L.C.,
G-C Sun Holdings L.P. (G-C).                                         

16



---



##### 



|(e) |  | Represents Equity in Earnings from the Contributed Expediter Segment from
March 2, 2000 until the exercise of the call option by G-C in January
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(f) |  | Represents non-recurring income as a result of the final settlement of
the Companys defined benefit plans in 2002. Non-recurring expense was
previously recorded in 2000 as a result of the merger and termination of
these defined benefit plans.                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|   
|   
|   
|(g) |  | EBITDA (earnings before interest, taxes, depreciation and amortization)
is defined as income (loss) from ongoing operations before depreciation
and amortization. Management believes that EBITDA provides useful
information regarding the Companys ability to service debt. EBITDA is
not a measure of operating performance computed in accordance with
generally accepted accounting principles (GAAP) and should not be
considered as a substitute for operating income, net income, cash flows
from operating activities, or other statement of operations or cash flow
data prepared in conformity with GAAP, or as a measure of profitability or
liquidity.

17



---



##### 



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

Years Ended December 31,
2002 and 2001

Net sales from the Hillman Group ongoing operations increased $38.0 million or
15.3% in 2002 to $286.8 million from $248.8 million in 2001. Hillman entered
into a supply agreement in April 2001 to provide fastener related products to
360 Lowes stores. In September 2001, Hillman was named the exclusive,
chain-wide supplier of fastener related products for all Lowes locations. In
May 2002, Hillman began supplying all Lowes locations following the
acquisition of the specialty fastener business from R&B, Inc. The total
fastener sales to Lowes represented $17.7 million of the $38.0 million total
sales increase in 2002 over 2001. Sales to other national accounts including
Home Depot, Wal-Mart, Petsmart, and Tractor Supply increased by an aggregate
$10.2 million in 2002 compared to 2001, primarily as a result of new store
growth. In October 2002, Hillman acquired the DIY division of the Fastenal
Company which contributed net sales of $4.7 million. In addition, the regional
accounts together with franchise and independent (F&I) accounts increased
$3.5 million over the comparable period in 2001. The regional accounts
represent mid-sized hardware and lumber chains. The F&I accounts are typically
individual dealers who are members of larger cooperatives, such as TruServ,
Ace, and Do-It-Best.

The Companys sales backlog, based upon cancelable purchase orders, was $1.3
million as of December 31, 2002 and $1.6 million as of December 31, 2001.

The Hillman Groups gross margin was 56.0% in 2002 compared with 56.7% in 2001.
The large increase in sales volume to Lowes and other large national accounts
described above and the resultant shift in sales mix caused pricing pressures
which contributed to the 0.7% decline in gross margin in the comparison period.

The Companys consolidated Selling, General and Administrative (S,G&A)
expenses decreased $27.2 million or 19.6% from $138.6 million in 2001 to $111.4
million in 2002. Excluding the sold STS Business from the Predecessor
Operations, the S,G&A expenses from ongoing operations increased $11.0 million
or 11.0% from $100.4 million in 2001 to $111.4 million in 2002. Selling
expenses increased $4.8 million or 9.5% primarily as a result of servicing
costs at new national account stores. Warehouse and delivery expenses
increased $6.7 million or 26.1% as a result of increased freight and labor
costs to process and ship the additional sales volume. General and
administrative expenses decreased by $0.5 million or 2.2% primarily as a result
of the elimination of the Philadelphia Corporate office.

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

|                                    |                      |      |                          |      |   |  |      |      |  
|----------------------------------- | -------------------- | ---- | ------------------------ | ---- | - |  | ---- | ---- | -
|                                    |                      |      | Years ended December 31,
|                                    |                      |      |                         
|As of a % of Sales                  |                      | 2002 |                          | 2001
|                                    |                      |      |                          |     
|Selling Expenses                    |                      |      | 19.1                     | %    |   |  | 20.1 | %   
|                                   
|                                   
|                                   
|                                   
|Warehouse and Delivery Expenses     |                      |      | 11.5                     | %    |   |  | 10.5 | %   
|                                   
|                                   
|                                   
|                                   
|General and Administrative Expenses |                      |      | 8.2                      | %    |   |  | 9.7  | %   
|                                    |                      |      |                          |      |   |  |      |     
|                                    | Total S,G&A Expenses |      |                          | 38.8 | % |  |      | 40.3 | %
|                                    |                      |      |                          |      |   |  |      |     

EBITDA from ongoing operations after corporate expenses for 2002 was $47.7
million compared with $40.2 million for the year 2001, representing an increase
of 18.7%.

The Companys consolidated operating profit margin from ongoing operations
(EBITDA as a percentage of sales) after corporate expenses, increased to 16.6%
in 2002 compared with 16.2% in 2001. The operating profit margin benefited
from the reduction of S,G&A expenses as a percentage of sales. The corporate
expenses included in S,G&A were lower in 2002 as a result of closing the former
corporate office located in Philadelphia and moving the corporate operations to
the Cincinnati headquarters of the Hillman Group. However, the S,G&A benefit
was partially offset by the margin decrease which was primarily the result of
pricing pressures and from costs associated with the opening and servicing of a
large number of new national

18



---



##### 



account customer locations. The remaining
operating profit margin improvement in 2002 was further offset by the recording
of $1.8 million in management fee expense compared to $0.25 million in 2001.

Depreciation expense from ongoing operations increased $1.0 million to $12.0
million in 2002 from $11.0 million in 2001 primarily as a result of an increase
in the depreciable fixed asset base in connection with the production of new
key duplication machines used for national accounts.

Amortization expense from ongoing operations decreased $1.3 million to $1.5
million in 2002 from $2.8 million in 2001. The decrease in amortization was
the result of the adoption of Financial Accounting Standard (SFAS) No. 142
under which goodwill is no longer amortized, but reviewed periodically for
impairment.

Interest expense, net of interest income, increased $0.4 million to $13.2
million in 2002 from $12.8 million in 2001. The increase was primarily the
result of additional borrowings to finance the expansion and automation of the
Companys distribution facility, to purchase the Lowes specialty fastener
business from R&B, Inc., and to purchase the DIY division of Fastenal Company.
The Company also recorded interest income of $1.3 million in 2002 on the $10.0
million note received from Glencoe from sale of the Companys interest in
GC-Sun Holdings L.P.

The Company has recorded a management fee charge of $1.8 million for 2002
compared to $0.25 million in 2001. In connection with the Merger Transaction,
the Company is obligated to pay management fees to a subsidiary of Allied
Capital for management services rendered in the amount of $1.8 million for
calendar years subsequent to 2001. The payment of management fees is due
annually after delivery of the Companys annual audited financial statements to
the Board of Directors of the Company.

The Company pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. For the years ended December 31, 2002 and 2001,
the Company paid $12.2 million in interest on the Junior Subordinated
Debentures, equivalent to the amounts distributed by the Trust on the Trust
Preferred Securities.

See Note 6, Income Taxes, of Notes To Consolidated Financial Statements of the
Company for the three years ended December 31, 2002, for income taxes and
disclosures related to 2002 and 2001 income tax events.

Years Ended December 31,
2001 and 2000

Net sales from the Hillman Group from ongoing operations increased $37.9
million in 2001 to $248.8 million from $210.9 million in 2000 primarily as a
result of the acquisition of Axxess and Sharon-Philstone, and strong sales from
national accounts. On a pro forma basis including Axxess, the Hillman Groups
sales increased 8.0% in 2001 over the prior year period.

The Companys sales backlog, based upon cancelable purchase orders, was $1.6
million as of December 31, 2001, compared with $1.3 million at December 31,
2000.

The Hillman Groups gross margin was 56.7% in 2001 compared with 55.6% in 2000.
On a comparable basis, including Axxess for the full year 2000, the gross
margin was 55.8% in 2000. Gross margin improved 0.9% in the comparison period
as a result of higher margin sales of keys and identification items related to
the acquisition of Axxess, price increases for certain fastener products and
productivity gains in the various manufacturing operations.

The Companys S,G&A from ongoing operations on a comparable basis, including
Axxess for the full year 2000 increased $0.8 million from $99.6 million in 2000
to $100.4 million in 2001. Selling expenses on a comparable basis, including
Axxess for the full year 2000, increased $2.7 million primarily as a result of
conversion costs associated with the Hillman Groups purchase of inventory and
other assets of Sharon-Philstone. Warehouse and delivery expenses on a
comparable basis, including Axxess for the full year 2000, increased by $0.6
million. Higher labor costs from

19



---



##### 



new business and increased rent expense from
a new facility offset reduced property taxes at the Hillman Group. General and
administrative expenses on a comparable basis, including Axxess for the full
year 2000, decreased by $2.5 million primarily as a result of reduced corporate
expenses offset by performance bonuses related to the acquisition of Axxess.

Total S,G&A expenses from ongoing operations on a comparable basis, including
Axxess for the full year 2000, as a percentage of sales compared with prior
year are as follows:

|                                    |                      |      |                          |      |   |  |      |      |  
|----------------------------------- | -------------------- | ---- | ------------------------ | ---- | - |  | ---- | ---- | -
|                                    |                      |      | Years ended December 31,
|                                    |                      |      |                         
|As of a % of Sales                  |                      | 2001 |                          | 2000
|                                    |                      |      |                          |     
|Selling Expenses                    |                      |      | 20.1                     | %    |   |  | 20.5 | %   
|                                   
|                                   
|                                   
|                                   
|Warehouse and Delivery Expenses     |                      |      | 10.5                     | %    |   |  | 11.1 | %   
|                                   
|                                   
|                                   
|                                   
|General and Administrative Expenses |                      |      | 9.7                      | %    |   |  | 11.6 | %   
|                                    |                      |      |                          |      |   |  |      |     
|                                    | Total S,G&A Expenses |      |                          | 40.3 | % |  |      | 43.2 | %
|                                    |                      |      |                          |      |   |  |      |     

EBITDA from ongoing operations for 2001 was $40.2 million including Axxess and
corporate expenses compared with $29.1 million on a pro forma basis for the
year 2000 or an increase of 38.1%.

The Companys operating profit margin from ongoing operations (EBITDA as a
percentage of sales) after corporate expenses increased to 16.2% in 2001
compared with 12.6% in 2000 on a pro forma basis as a result of the acquisition
of Axxess and operational efficiencies.

Depreciation expense from ongoing operations increased $3.8 million to $11.0
million in 2001 from $7.2 million in 2000 primarily as a result of the
acquisition of Axxess.

Amortization expense from ongoing operations increased $1.3 million to $4.0
million primarily as a result of the acquisition of Axxess, Sharon-Philstone
and the Merger Transaction.

Interest expense, net for ongoing operations increased $1.6 million in 2001
from $11.1 million in 2000, primarily as a result of additional interest and
related amortization of deferred financing fees in connection with the
Companys December 2000 issuance of $30.0 million of unsecured subordinated
notes.

The Company has recorded a management fee charge of $0.25 million on the
Successors Statement of Operations for the three months ended December 31,
2001. In connection with the Merger Transaction, the Company is obligated to
pay management fees to a subsidiary of Allied Capital for management services
rendered in the amount of $0.25 million for calendar year 2001 and $1.8 million
for each calendar year thereafter.

The Company pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. For the years ended December 31, 2001 and 2000,
the Company paid $12.2 million in interest on the Junior Subordinated
Debentures, equivalent to the amounts distributed by the Trust on the Trust
Preferred Securities.

See Note 6, Income Taxes, of Notes To Consolidated Financial Statements of the
Company for the three years ended December 31, 2002, for income taxes and
disclosures related to 2001 and 2000 income tax events.

Liquidity and Capital
Resources

Cash provided by operating activities for the year ended December 31, 2002 was
$29.8 million, primarily due to net income adjusted for non-cash charges for
depreciation, amortization, deferred taxes and PIK interest of $26.5 million.

Cash used for investing activities was $43.6 million for the year ended
December 31, 2002. Capital expenditures for the year totaled $23.0 million
including $9.8 million for the automation and expansion of the Cincinnati
Distribution facility. This new, state of the art facility is
intended to improve order
turnaround time and accuracy, reduce

20



---



##### 



labor costs and provide additional
distribution capacity. Other capital expenditures include $7.1 million for key
duplicating machines, $2.4 million for engraving machines and $3.7 million for
equipment purchases. In addition, the cash purchase price for the acquisition
of the Lowes specialty fastener business and the DIY business was $6.3 million
and $15.2 million, respectively.

Cash provided by financing activities in the year ended December 31, 2002 was
approximately $14.5 million, primarily related to $15.7 million of additional
borrowings under the Companys senior credit facility, net of repayments.

The Companys working capital position of $48.6 million (excluding restricted
investments) as of December 31, 2002, represents a decrease of $1.8 million
from the December 31, 2001 level of $50.4 million as follows (dollars in
thousands):

|                                                                     |  |   |        |  
|-------------------------------------------------------------------- |  | - | ------ | -
|Working capital from acquisitions                                    |  | $ | 7,681  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Increase in current maturities of senior term loans                  |  |   | (5,455 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Increase in other accrued liabilities                                |  |   | (4,044 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Other items, net                                                     |  |   | (8     | )
|                                                                     |  |   |        |  
|Net decrease in working capital for the year ended December 31, 2002 |  | $ | (1,826 | )
|                                                                     |  |   |        |  

The Companys contractual obligations in thousands of dollars as of December
31, 2002 are summarized below:

|                                                                                          |                                    |       |         |          |  |       |              |             |        |   |           |        |  |   |         |         | 
|----------------------------------------------------------------------------------------- | ---------------------------------- | ----- | ------- | -------- |  | ----- | ------------ | ----------- | ------ | - | --------- | ------ |  | - | ------- | ------- | 
|                                                                                          |                                    |       |         |          |  |       | Payments
Due
|                                                                                          |                                    |       |        
|                                                                                          |                                    |       |         |          |  |       | Less Than    |             | 1 to 3 |   | More Than
|Contractual
Obligations                                                                   |                                    | Total |         | One Year |  | Years |              | Three
Years
|                                                                                          |                                    |       |         |          |  |       |              |             |       
|Guaranteed Preferred Beneficial
Interests in the Companys Junior
Subordinated Debentures |                                    | $     | 105,446 |          |  |       |             |             |        |   |          |        |  | $ | 105,446 |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Long Term Senior Term Loans                                                               |                                    |       | 69,827  |          |  | $     | 9,268        |             |        | $ | 18,538    |        |  |   | 42,021  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Bank Revolving Credit Facility                                                            |                                    |       | 34,532  |          |  |       |             |             |        |   |          |        |  |   | 34,532  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Long Term Unsecured Subordinated Notes                                                    |                                    |       | 42,108  |          |  |       |             |             |        |   |          |        |  |   | 42,108  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Operating Leases                                                                          |                                    |       | 33,954  |          |  |       | 6,869        |             |        |   | 9,608     |        |  |   | 17,477  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Deferred Compensation Obligations                                                         |                                    |       | 7,065   |          |  |       | 1,142        |             |        |   | 2,284     |        |  |   | 3,639   |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Capital Lease Obligations                                                                 |                                    |       | 303     |          |  |       | 74           |             |        |   | 113       |        |  |   | 116     |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other Long Term Obligations                                                               |                                    |       | 6,457   |          |  |       | 1,544        |             |        |   | 1,659     |        |  |   | 3,254   |        
|                                                                                          |                                    |       |         |          |  |       |              |             |        |   |           |        |  |   |         |        
|                                                                                          | Total Contractual Cash Obligations |       | $       | 299,692  |  |       | $            | 18,897      |        |   | $         | 32,202 |  |   | $       | 248,593 | 
|                                                                                          |                                    |       |         |          |  |       |              |             |        |   |           |        |  |   |         |        

All of the obligations noted above are reflected on the Companys Consolidated
Balance Sheet as of December 31, 2002, except for the Operating Leases. See
Notes To Consolidated Financial Statements as of and for the Three Years Ended
December 31, 2002 for additional information. Please reference Note 15,
Commitments and Contingencies, for off-balance sheet obligations regarding
outstanding letters of credit for certain insurance programs.

As of December 31, 2002, the Company had $26.4 million available under its
secured credit facilities. The Company had approximately $104.6 million of
outstanding debt under its secured credit facilities at December 31, 2002,
consisting of $69.8 million in term loans, $34.5 million in revolving credit
borrowings and $0.3 million in capitalized lease obligations. The term loans
consisted of a $37.1 million Term B Loan (the Term Loan B) currently at a
three (3) month LIBOR rate of 5.56% and a $32.7 million Term A loan (the Term
Loan A) consisting of $30.2 million currently at a three (3) month LIBOR rate
of 4.81%, and $2.5 million at the prime rate of 6.00%. The revolver borrowings
(the Revolver) consist of $20.0 million currently at a three (3) month LIBOR
rate of 4.81%, $8.0 million at a three (3) month LIBOR rate of 4.44% and $6.5
million at the prime rate of 6.00%. The capitalized lease obligations were at
various interest rates.

On December 23, 2002, the Company increased its revolving credit facility by
$4.8 million, Term Loan A by $2.5 million and Term Loan B by $2.7 million. The
additional financing will provide the Company with additional working capital.

21



---



##### 



On October 3, 2002, the Company purchased the net assets of the DIY division of
the Fastenal Company for cash consideration of $15.3 million. This transaction
was financed from the Companys existing credit lines and had the impact of
lowering the amount available on the secured credit facilities by the amount
paid for the DIY purchase.

The Company increased its revolving credit facility by $10 million and its Term
A Loan by $15 million on May 1, 2002 to finance the asset purchase of the
Lowes specialty fastener business and to provide capital to fund the Companys
expansion and automation of its distribution facilities.

On September 28, 2001, the Company refinanced its $115 million bank revolving
credit and $21.5 million term loan with $105 million in senior secured credit
facilities. The new financing consists of a Revolver, Term Loan A, and Term
Loan B. The Revolver and Term Loan A have a five-year term and Term Loan B has
a seven-year term. The credit facility provides Hillman with adequate funds for
working capital and other corporate requirements.

In accordance with the Companys senior credit agreement, Hillman must maintain
its fixed charge coverage at all times in excess of 1.05x through December 31,
2003 and 1.10x thereafter to continue monthly distributions on its Trust
Preferred Securities ($1.0 million per month). Hillmans fixed charge coverage
was 1.38x for the twelve-month period ended December 31, 2002. The fixed
charge test measures adjusted EBITDA, as defined in the senior credit
agreement, less capital expenditures over cash interest expense, Trust
Preferred Security distributions, scheduled senior debt repayments and other
fixed charge items.

On September 28, 2001, the Company sold substantially all of the assets of STS,
including its Canadian operation for a sales price of $25.5 million in cash and
preferred stock plus the assumption of certain liabilities by the buyer,
subject to certain post-closing adjustments. The cash proceeds from the sale of
SunSource Technology Services were distributed to Allied Capital and others
including certain members of management, who are the remaining shareholders of
the Company.

Interest on the Amended Subordinated Debt Issuance of $40 million which matures
September 29, 2009 is at a fixed rate of 18.0% per annum, with cash interest
payments being required on a quarterly basis at a fixed rate of 13.5%
commencing November 15, 2001. The outstanding principal balance of the Amended
Subordinated Debt Issuance shall be increased on a quarterly basis at the
remaining 4.5% fixed rate (the PIK Amount). All of the PIK Amounts are due
on the fifth anniversary of the Amended Subordinated Debt Issuance. As of
December 31, 2002, the outstanding Amended Subordinated Debt Issuance including
the PIK Amounts was $42.1 million.

The Company has deferred tax assets aggregating $32.5 million, net of valuation
allowance of $15.4 million, and deferred tax liabilities of $5.7 million as of
December 31, 2002, as determined in accordance with SFAS 109. Management
believes that the Companys deferred tax assets will be realized through the
reversal of existing temporary differences between the financial statement and
tax basis, as well as through future taxable income.

Inflation

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

22



---



##### 



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; deferred taxes are based on the Companys projections of future
taxable income; sales and returns and allowances are based on historical
activity and customer contracts; accounts receivable reserves are based on
doubtful accounts and aging of outstanding balances; inventory reserves are
based on expected obsolescence and excess inventory levels; and employee
benefits are based on benefit plan requirements and severance agreements.
Historically, actual results have not significantly deviated from those
determined using the estimates described above.

Revenue Recognition:

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

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

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

Inventory Realization:

Inventories consisting predominantly of finished goods are valued at the lower
of cost or market, cost being determined principally on the first-in, first-out
method. Excess and obsolete inventories are carried at net realizable value.
The historical usage rate is the primary factor used by the Company in
assessing the net realizable value of excess and obsolete inventory. A
reduction in the carrying value of an inventory item from cost to market is
recorded for inventory with no usage in the preceding twelve month period or
with on hand quantities in excess of twenty-four months average usage.

Property and Equipment:

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

23



---



##### 



Depreciation:

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

Goodwill and Other Intangible Assets:

For the Predecessor Financial Statements, goodwill related to the excess of
acquisition cost over the fair value of net assets acquired is amortized on a
straight-line basis over twenty-five to forty years. Effective January 1, 2002
the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets and
accordingly, goodwill is no longer amortized, but is reviewed periodically for
impairment (See Note 2, Summary of Significant Accounting Policies). Other
intangible assets arising principally from acquisitions are amortized on a
straight-line basis over periods ranging from three to twenty-five years.

Long-Lived Assets:

Under the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company has evaluated its long-lived assets
for financial impairment and will continue to evaluate them based on the
estimated undiscounted future cash flows as events or changes in circumstances
indicate that the carrying amount of such assets may not be fully recoverable.

Income Taxes:

Deferred income taxes are computed using the asset and liability method. Under
this method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
(temporary differences) and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

Self-insurance Reserves:

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

Retirement Benefits:

Certain employees of the Predecessor and Successor are covered under profit
sharing retirement plans (defined contribution plans) for which contributions
are determined on an annual basis in accordance with the requirements of each
plan. Certain employees of the Predecessor, principally employed at STS, were
covered under a post-retirement benefit plan for which benefits were determined
in accordance with the requirements of the plan. This post-retirement benefit
plan was terminated as of December 31, 2000. See Note 14, Retirement Benefits.

Shipping and handling

The costs incurred to ship product to customers, including freight and handling
expenses, are included in selling, general and administrative expenses on the
Companys Statements of Operations. For the three years ended December 31,
2002 shipping and handling costs included in selling, general and
administrative were $13,913 for 2002, $11,362 for 2001 and $10,002 for 2000.

24



---



##### 



Research and Development:

The Company incurs research and development costs in connection with
improvements to the key duplicating and engraving machines. For the three
years ended December 31, 2002, research and development expenses, consisting
primarily of internal wages and benefits, were $1,510 for 2002, $1,482 for
2001, and $635 for 2000.

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 Income (Loss):

The components of comprehensive income (loss) for the years ended December 31,
2002, 2001 and 2000 were as follows:

|                                        |  |      |       |      |  |      |        |   |  |   |        | 
|--------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                        |  | 2002 |       | 2001 |  | 2000
|                                        |  |      |       |      |  |     
|Net income (loss)                       |  | $    | 6,103 |      |  | $    | (4,236 | ) |  | $ | 24,680 | 
|                                       
|                                       
|                                       
|                                       
|Foreign currency translation
adjustment |  |      | 5     |      |  |      |       |   |  |   |       | 
|                                        |  |      |       |      |  |      |        |   |  |   |        | 
|Comprehensive income (loss)             |  | $    | 6,108 |      |  | $    | (4,236 | ) |  | $ | 24,680 | 
|                                        |  |      |       |      |  |      |        |   |  |   |        | 

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.

Recent Accounting
Pronouncements:

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

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities (an interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements), which becomes effective for the Company
in June 2003. FIN No. 46 provides consolidation guidance for certain variable
interest entities (VIE) in which equity investors of the VIE do not have the
characteristics of a controlling interest or do not have sufficient equity at
risk for the VIE to finance its activities independently. FIN No. 46 requires
each enterprise involved with a special purpose entity to determine whether it
provides financial support to the special purpose entity through a variable
interest. Variable interests may arise

25



---



##### 



from financial instruments, service
contracts, minority ownership interests or other arrangements. If an entity
holds a majority of the variable interests, or a significant variable interest
that is considerably more than any other partys variable interest, that entity
would be the primary beneficiary and would be required to include the assets,
liabilities and results of operations of the special purpose entity in its
consolidated financial statements. The Company does not expect the adoption of
FIN 46 to have a material impact on its financial position or results of
operations.

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

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

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

Forward Looking Statements

Certain disclosures related to acquisitions and divestitures, refinancing,
capital expenditures, resolution of pending litigation and realization of
deferred tax assets contained in this report involve risks and uncertainties
and may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. We have based these forward-looking
statements on our current expectations, assumptions and projections about
future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions that may cause our actual results,
levels of activity, performance, or achievements to be materially different
from any future results, levels of activity, performance, or achievements
expressed or implied by such forward-looking statements. Actual results could
differ materially from those currently anticipated as a result of a number of
factors, including the risks and uncertainties discussed under captions Risk
Factors set forth in Item 1 of this 10-K. Given these

26



---



##### 



uncertainties, current
or prospective investors are cautioned not to place undue reliance on any such
forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such
as may, will, should, could, would, expect, plan, anticipate,
believe, estimate, continue, project or the negative of such terms or
other similar expressions. All forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements included in this Report. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in
this Report might not occur.

Item 7A  Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to the impact of interest rate changes as borrowings
under the senior credit facility bear interest at variable interest rates. It
is Hillmans policy to enter into interest rate transactions only to the extent
considered necessary to meet objectives. On March 31, 2002, the Company
entered into an interest rate cap agreement on a notional amount of $26.6
million of senior term debt. The interest rate cap agreement, which expires
September 30, 2004, caps the LIBOR interest rate at 6% plus the senior credit
facility LIBOR margin of between 3.25% and 3.75%. Based on Hillmans exposure
to variable rate borrowings at December 31, 2002, a one percent (1%) change in
the weighted average interest rate would change the annual interest expense by
approximately $1.0 million.

The Company is exposed to foreign exchange rate changes of the Canadian
currency as it impacts the $0.3 million net asset value of its Canadian
subsidiary, The Hillman Group Canada, Ltd., as of December 31, 2002.
Management considers the Companys exposure to foreign currency translation
gains or losses to be minimal.

27



---



##### 



Item 8  Financial
Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES

|                                                                                                                                                                                         |  |  |       |      | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----- | ---- | 
|                                                                                                                                                                                         |  |  |       | Page | 
|                                                                                                                                                                                         |  |  |       |      | 
|Report
of Independent Accountants                                                                                                                                                        |  |  | 29    |     
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|Financial Statements:                                                                                                                                                                    |  |  |       |     
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|Consolidated Balance Sheets, December 31, 2002 and 2001                                                                                                                                  |  |  | 30    |     
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|Consolidated Statements of Operations for the Year ended
December 31, 2002, Three Months ended December 31, 2001,
Nine Months ended September 30, 2001, and Year ended December 31, 2000 |  |  | 31    |     
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|Consolidated Statements of Cash Flows for the Year ended
December 31, 2002, Three Months ended December 31, 2001,
Nine Months ended September 30, 2001, and Year ended
December 31, 2000 |  |  | 32    |     
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|Consolidated Statements of Changes in Stockholders
Equity for the Year ended December 31, 2002, Three Months ended
December 31, 2001, and Nine Months ended September 30, 2001          |  |  | 33    |     
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|Notes To Consolidated Financial Statements                                                                                                                                               |  |  | 34-59 |     
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|Financial Statement Schedule:                                                                                                                                                            |  |  |       |     
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|                                                                                                                                                                                        
|Valuation Accounts                                                                                                                                                                       |  |  | 60    |     

28



---



##### 



Report of Independent Accountants

The Board of Directors and Stockholders
The Hillman Companies, Inc. and Subsidiaries

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of The Hillman Companies, Inc. and its subsidiaries at December 31,
2002 and 2001 and the results of their operations and their cash flows for the
year ended December 31, 2002, the three-month period ended December 31, 2001,
the nine-month period ended September 30, 2001 and the year ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and the significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

As discussed in Note 2, effective January 1, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets.

PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 6, 2003

29



---



##### 



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

|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |              |        |         |  | 
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------- | ------------------------------------------ | ------------------------------------ | ------ | ------------ | ------- | ------------ | ------ | ------- |  | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        | December 31, |         | December 31,
|                                                                                          |                                                                                        |                        |                                            |                                      |        | 2002         |         | 2001        
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                          |                                                                                        |                        |                                            | ASSETS                               |        |              |         |              |        |         |  | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Current assets:                                                                           |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Cash and cash equivalents                                                              |                        | $                                          | 2,768                                |        |              | $       | 2,059        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Restricted investments                                                                 |                        |                                            | 1,142                                |        |              |         | 1,187        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Accounts receivable, net of allowances
of $552 and $537, respectively                  |                        |                                            | 31,855                               |        |              |         | 28,399       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Inventories                                                                            |                        |                                            | 59,783                               |        |              |         | 49,937       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Deferred income taxes                                                                  |                        |                                            | 10,911                               |        |              |         | 9,136        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Other current assets                                                                   |                        |                                            | 3,249                                |        |              |         | 5,868        |       
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                          |                                                                                        |                        | Total current assets                       |                                      |        | 109,708      |         |              |        | 96,586  | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Property and equipment, net                                                               |                                                                                        |                        | 68,596                                     |                                      |        |              | 55,285  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Goodwill                                                                                  |                                                                                        |                        | 132,677                                    |                                      |        |              | 120,585 |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other intangibles, net                                                                    |                                                                                        |                        | 11,068                                     |                                      |        |              | 12,553  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Deferred income taxes                                                                     |                                                                                        |                        | 21,638                                     |                                      |        |              | 25,443  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Restricted investments                                                                    |                                                                                        |                        | 5,923                                      |                                      |        |              | 7,462   |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other investments                                                                         |                                                                                        |                        | 11,258                                     |                                      |        |              | 16,185  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Deferred financing fees, net of accumulated amortization
of $1,386 and $237, respectively |                                                                                        |                        | 5,774                                      |                                      |        |              | 5,536   |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other assets                                                                              |                                                                                        |                        | 2,212                                      |                                      |        |              | 4,929   |             
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                          |                                                                                        |                        | Total assets                               |                                      | $      | 368,854      |         |              | $      | 344,564 | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                          |                                                                                        |                        |                                            | LIABILITIES
AND STOCKHOLDERS EQUITY |        |              |         |              |        |         |  | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Current liabilities:                                                                      |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Accounts payable                                                                       |                        | $                                          | 20,373                               |        |              | $       | 17,124       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Current portion of senior term loans                                                   |                        |                                            | 9,268                                |        |              |         | 3,813        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Current portion of capitalized lease obligations                                       |                        |                                            | 55                                   |        |              |         | 74           |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Deferred income tax liability                                                          |                        |                                            |                                     |        |              |         | 31           |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Accrued expenses:                                                                      |                        |                                            |                                      |        |              |         |              |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        | Salaries and wages     |                                            |                                      | 5,523  |              |         |              | 5,337  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        | Pricing allowances     |                                            |                                      | 6,118  |              |         |              | 4,092  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        | Integration costs      |                                            |                                      | 4,378  |              |         |              | 215    |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        | Income and other taxes |                                            |                                      | 1,329  |              |         |              | 2,014  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        | Deferred compensation  |                                            |                                      | 1,142  |              |         |              | 1,187  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          |                                                                                        | Other accrued expenses |                                            |                                      | 11,814 |              |         |              | 11,120 |        
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                          |                                                                                        |                        | Total current liabilities                  |                                      |        | 60,000       |         |              |        | 45,007  | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Long term senior term loans                                                               |                                                                                        |                        | 60,559                                     |                                      |        |              | 50,312  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Bank revolving credit                                                                     |                                                                                        |                        | 34,532                                     |                                      |        |              | 34,052  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Long term capitalized lease obligations                                                   |                                                                                        |                        | 194                                        |                                      |        |              | 248     |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Long term unsecured subordinated notes to related party                                   |                                                                                        |                        | 42,108                                     |                                      |        |              | 40,240  |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Deferred compensation                                                                     |                                                                                        |                        | 5,923                                      |                                      |        |              | 7,462   |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Deferred income tax liability                                                             |                                                                                        |                        | 5,660                                      |                                      |        |              | 4,603   |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other non-current liabilities                                                             |                                                                                        |                        | 5,258                                      |                                      |        |              | 7,122   |             
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                          |                                                                                        |                        | Total liabilities                          |                                      |        | 214,234      |         |              |        | 189,046 | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             
|Guaranteed preferred beneficial interests in the
Companys junior subordinated debentures |                                                                                        |                        | 102,234                                    |                                      |        |              | 102,104 |             
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             
|Commitments and contingencies (Note 15)                                                   |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Stockholders equity:                                                                     |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Preferred stock, $.01 par, 1,000,000 shares
authorized, none outstanding               |                        |                                            |                                     |        |              |         |             |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Common stock, $.01 par, 20,000,000 shares authorized,
7,118,665 issued and outstanding |                        |                                            | 71                                   |        |              |         | 71           |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Additional paid-in capital                                                             |                        |                                            | 52,310                               |        |              |         | 56,252       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Accumulated deficit                                                                    |                        |                                            |                                     |        |              |         | (2,909       | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Accumulated other comprehensive income                                                 |                        |                                            | 5                                    |        |              |         |             |       
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                          |                                                                                        |                        | Total stockholders equity                 |                                      |        | 52,386       |         |              |        | 53,414  | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             
|                                                                                          |                                                                                        |                        | Total liabilities and stockholders equity |                                      | $      | 368,854      |         |              | $      | 344,564 | 
|                                                                                          |                                                                                        |                        |                                            |                                      |        |              |         |             

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

30



---



##### 



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

|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |         |         |        |        |  
|--------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------ | ------------------------------------------------------------ | --------------------------------- | ------- | ------------ | ------ | ------------ | ------ | ------------- | ------- | ------------ | ------- | ------ | ------- | ------- | ------- | ------ | ------ | -
|                                                                                  |                                              |                          |                                                              |                                   |         | Successor    |        | Predecessor 
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |             
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        | Three months  |         | Nine Months  |         |        |         |        
|                                                                                  |                                              |                          |                                                              |                                   |         | Year ended   |        | ended        |        | ended         |         | Year ended  
|                                                                                  |                                              |                          |                                                              |                                   |         | December 31, |        | December 31, |        | September 30, |         | December 31,
|                                                                                  |                                              |                          |                                                              |                                   |         | 2002         |        | 2001         |        | 2001          |         | 2000        
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |             
|Net sales                                                                         |                                              | $                        | 286,788                                                      |                                   |         | $            | 60,040 |              |        | $             | 341,307 |              |         | $      | 462,838 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cost of sales                                                                     |                                              |                          | 126,174                                                      |                                   |         |              | 25,598 |              |        |               | 197,743 |              |         |        | 278,178 |        
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|                                                                                  |                                              | Gross profit             |                                                              |                                   | 160,614 |              |        |              | 34,442 |               |         |              | 143,564 |        |         |         | 184,660 |       
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|Operating expenses:                                                               |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Selling, general and administrative expenses |                          |                                                              | 111,436                           |         |              |        | 25,112       |        |               |         | 113,443      |         |        |         | 163,573 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation                                 |                          |                                                              | 12,004                            |         |              |        | 3,030        |        |               |         | 9,593        |         |        |         | 9,455   |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Amortization                                 |                          |                                                              | 1,485                             |         |              |        | 1,588        |        |               |         | 2,895        |         |        |         | 3,369   |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Management fee to related party              |                          |                                                              | 1,800                             |         |              |        | 250          |        |               |         |             |         |        |         |        |        
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|                                                                                  |                                              | Total operating expenses |                                                              |                                   | 126,725 |              |        |              | 29,980 |               |         |              | 125,931 |        |         |         | 176,397 |       
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|Gain (loss) on termination of defined
benefit pension plan (Note 14)              |                                              |                          | 1,231                                                        |                                   |         |              |       |              |        |               |        |              |         |        | (5,204  | )      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Contribution to defined contribution plan
(Note 14)                               |                                              |                          |                                                             |                                   |         |              |       |              |        |               |        |              |         |        | 925     |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Other income (expense), net                                                       |                                              |                          | 320                                                          |                                   |         |              | 173    |              |        |               | (398    | )            |         |        | 181     |        
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|                                                                                  |                                              | Income from operations   |                                                              |                                   | 35,440  |              |        |              | 4,635  |               |         |              | 17,235  |        |         |         | 4,165   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Interest expense, net                                                             |                                              |                          | 13,227                                                       |                                   |         |              | 3,616  |              |        |               | 9,222   |              |         |        | 11,286  |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Distributions on guaranteed preferred
beneficial interests                        |                                              |                          | 12,231                                                       |                                   |         |              | 3,058  |              |        |               | 9,174   |              |         |        | 12,232  |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Gain on contribution of subsidiaries
(Note 4)                                     |                                              |                          |                                                             |                                   |         |              |       |              |        |               |        |              |         |        | 49,115  |        
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|                                                                                  |                                              |                          | Income (loss) from continuing operations
before income taxes |                                   |         | 9,982        |        |              |        | (2,039        | )       |              |         | (1,161 | )       |         |         | 29,762 |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Income tax provision (benefit)                                                    |                                              |                          | 3,879                                                        |                                   |         |              | (298   | )            |        |               | 1,229   |              |         |        | 4,910   |        
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|                                                                                  |                                              |                          | Income (loss) from continuing operations                     |                                   |         | 6,103        |        |              |        | (1,741        | )       |              |         | (2,390 | )       |         |         | 24,852 |       
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|Equity in (loss) earnings of affiliate
(Note 4)                                   |                                              |                          |                                                             |                                   |         |              | (1,168 | )            |        |               | 1,063   |              |         |        | 2,438   |        
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|Discontinued operations (Note 1)                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Loss from discontinued operations
less applicable income taxes of ($110)          |                                              |                          |                                                             |                                   |         |              |       |              |        |               |        |              |         |        | (109    | )      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Loss on disposal discontinued operations
less applicable income taxes of ($7,393) |                                              |                          |                                                             |                                   |         |              |       |              |        |               |        |              |         |        | (2,501  | )      
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|                                                                                  |                                              |                          |                                                              | Loss from discontinued operations |         |              |       |              |        |               |        |              |         |        |        |         |         |        | (2,610 | )
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        
|                                                                                  |                                              | Net income (loss)        |                                                              | $                                 | 6,103   |              |        | $            | (2,909 | )             |         | $            | (1,327) |        |         | $       | 24,680  |       
|                                                                                  |                                              |                          |                                                              |                                   |         |              |        |              |        |               |         |              |         |        |         |        

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

31



---



##### 



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

|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |         |         |         |        |  
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------ | ------- | ------------ | ------ | ------------ | ------- | ------------- | ------ | ------------ | ------- | ------ | ------- | ------- | ------- | ------- | ------ | -
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         | Successor    |        | Predecessor 
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |             
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         | Year         |        | Three Months |         | Nine months   |        | Year        
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         | ended        |        | ended        |         | ended         |        | ended       
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         | December 31, |        | December 31, |         | September 30, |        | December 31,
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         | 2002         |        | 2001         |         | 2001          |        | 2000        
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |             
|Cash flows from operating activities:                |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income (loss)                                                                                   |                                                      | $                                                                                    | 6,103                                            |         |              | $      | (2,909       | )       |               | $      | (1,327       | )       |        | $       | 24,680  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities: |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | Depreciation and amortization                                                        |                                                  |         | 13,489       |        |              |         | 4,618         |        |              |         | 12,488 |         |         |         | 12,824  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | Dispositions of property and equipment                                               |                                                  |         | 1,269        |        |              |         |              |        |              |         |       |         |         |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | Loss from discontinued segments before taxes                                         |                                                  |         |             |        |              |         |              |        |              |         |       |         |         |         | 10,113  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | Gain on contribution from subsidiaries                                               |                                                  |         |             |        |              |         |              |        |              |         |       |         |         |         | (49,115 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | Deferred income tax                                                                  |                                                  |         | 5,081        |        |              |         | (298          | )      |              |         | 1,044  |         |         |         | (8,938  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | Loss on termination of pension plans                                                 |                                                  |         |             |        |              |         |              |        |              |         |       |         |         |         | 5,204   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | Gain on termination of pension plan contributed to
defined contribution plan         |                                                  |         |             |        |              |         |              |        |              |         |       |         |         |         | (925    | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | Loss (equity) in earnings of affiliate                                               |                                                  |         |             |        |              |         | 1,168         |        |              |         | (1,063 | )       |         |         | (2,438  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | PIK interest on unsecured subordinated notes                                         |                                                  |         | 1,868        |        |              |         | 476           |        |              |         |       |         |         |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | Changes in current operating items, net of effects of
acquisitions and divistitures: |                                                  |         |              |        |              |         |               |        |              |         |        |         |         |         |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      |                                                                                      | Decrease (increase) in accounts receivable       |         |              | 892    |              |         |               | 7,179  |              |         |        | (13,792 | )       |         |         | 8,455  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      |                                                                                      | Decrease (increase) in inventories               |         |              | (1,184 | )            |         |               | (764   | )            |         |        | 3,964   |         |         |         | 6,596  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      |                                                                                      | Decrease in income taxes receivable              |         |              |       |              |         |               |       |              |         |        | 27      |         |         |         | 10,995 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      |                                                                                      | Decrease (increase) in other current assets      |         |              | 2,484  |              |         |               | (491   | )            |         |        | (356    | )       |         |         | 2,222  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      |                                                                                      | Increase (decrease) in accounts payable          |         |              | 1,302  |              |         |               | (3,292 | )            |         |        | (185    | )       |         |         | (4,866 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      |                                                                                      | Increase (decrease) in other accrued liabilities |         |              | (383   | )            |         |               | 3,163  |              |         |        | (3,865  | )       |         |         | (4,507 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                      | Other items, net                                                                     |                                                  |         | (1,114       | )      |              |         | (72           | )      |              |         | 2,013  |         |         |         | 1,340   |       
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        
|                                                     |                                                                                                     | Net cash provided by (used for) operating activities |                                                                                      |                                                  | 29,807  |              |        |              | 8,778   |               |        |              | (1,052  | )      |         |         | 11,640  |        
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        
|Cash flows from investing activities:                |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from contribution of subsidiaries                                                          |                                                      |                                                                                      |                                                 |         |              |        |             |         |               |        |             |         |        |         | 105,000 |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Costs associated with contribution of subsidiaries                                                  |                                                      |                                                                                      |                                                 |         |              |        |             |         |               |        |             |         |        |         | (655    | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of subsidiary, net of cash                                                       |                                                      |                                                                                      |                                                 |         |              |        | 18,047       |         |               |        |             |         |        |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale/liquidation of discontinued operations                                           |                                                      |                                                                                      |                                                 |         |              |        | 40           |         |               |        | 1,623        |         |        |         | 30,592  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Costs from sale/liquidation of discontinued operations                                              |                                                      |                                                                                      |                                                 |         |              |        | (387         | )       |               |        | (1,214       | )       |        |         | (2,023  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of property and equipment                                                        |                                                      |                                                                                      | 104                                              |         |              |        | 74           |         |               |        | 718          |         |        |         | 1,523   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment for acquired businesses, net of cash                                                        |                                                      |                                                                                      | (21,592                                          | )       |              |        |             |         |               |        | (5,003       | )       |        |         | (88,870 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                                                                                |                                                      |                                                                                      | (22,989                                          | )       |              |        | (2,796       | )       |               |        | (12,179      | )       |        |         | (8,345  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capitalized royalties, licensing & slotting fees                                                    |                                                      |                                                                                      |                                                 |         |              |        | (554         | )       |               |        | (1,172       | )       |        |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Merger transaction fees                                                                             |                                                      |                                                                                      |                                                 |         |              |        | (2,503       | )       |               |        | (3,112       | )       |        |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Increase (decrease) in net assets held for sale                                                     |                                                      |                                                                                      |                                                 |         |              |        | 5            |         |               |        | (43          | )       |        |         | (949    | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repurchase of common stock                                                                          |                                                      |                                                                                      | (231                                             | )       |              |        |             |         |               |        |             |         |        |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other investments                                                                                   |                                                      |                                                                                      |                                                 |         |              |        | (1,000       | )       |               |        |             |         |        |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other, net                                                                                          |                                                      |                                                                                      | 1,062                                            |         |              |        | (443         | )       |               |        | (1,039       | )       |        |         | (68     | )      
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        
|                                                     |                                                                                                     | Net cash (used for) provided by investing activities |                                                                                      |                                                  | (43,646 | )            |        |              | 10,483  |               |        |              | (21,421 | )      |         |         | 36,205  |        
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        
|Cash flows from financing activities:                |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings (repayments) of senior term loans, net                                                   |                                                      |                                                                                      | 15,702                                           |         |              |        | 51,875       |         |               |        | (250         | )       |        |         | (19,000 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings (repayments) of revolving credit loans, net                                              |                                                      |                                                                                      | 480                                              |         |              |        | (51,142      | )       |               |        | 30,083       |         |        |         | (47,680 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings (repayments) of unsecured subordinated notes                                             |                                                      |                                                                                      |                                                 |         |              |        | 1,197        |         |               |        | (2,785       | )       |        |         | 20,400  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments under capitalized lease obligations                                              |                                                      |                                                                                      | (73                                              | )       |              |        | (62          | )       |               |        | (707         | )       |        |         | (974    | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of note issued for purchase of treasury stock                                             |                                                      |                                                                                      |                                                 |         |              |        | (1,261       | )       |               |        |             |         |        |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Dividends to shareholders                                                                           |                                                      |                                                                                      |                                                 |         |              |        | (17,718      | )       |               |        |             |         |        |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Prepayment penalty                                                                                  |                                                      |                                                                                      |                                                 |         |              |        | (1,675       | )       |               |        |             |         |        |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment on STS preferred stock                                                                      |                                                      |                                                                                      | (174                                             | )       |              |        |             |         |               |        |             |         |        |         |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Financing fees                                                                                      |                                                      |                                                                                      | (1,387                                           | )       |              |        | (4,476       | )       |               |        | 5            |         |        |         | (3,303  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings (repayments) under other credit facilities                                               |                                                      |                                                                                      |                                                 |         |              |        |             |         |               |        | (624         | )       |        |         | 248     |        
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        
|                                                     |                                                                                                     | Net cash provided by (used for) financing activities |                                                                                      |                                                  | 14,548  |              |        |              | (23,262 | )             |        |              | 25,722  |        |         |         | (50,309 | )      
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                                     |                                                      | 709                                                                                  |                                                  |         |              | (4,001 | )            |         |               | 3,249  |              |         |        | (2,464  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                                                     |                                                      | 2,059                                                                                |                                                  |         |              | 6,060  |              |         |               | 2,811  |              |         |        | 5,275   |        
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        
|Cash and cash equivalents at end of period           |                                                                                                     | $                                                    | 2,768                                                                                |                                                  |         | $            | 2,059  |              |         | $             | 6,060  |              |         | $      | 2,811   |        
|                                                     |                                                                                                     |                                                      |                                                                                      |                                                  |         |              |        |              |         |               |        |              |         |        |         |        

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

32



---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
(formerly SunSource Inc. and Subsidiaries)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

(dollars in thousands)

|                                                                                      |  |        |     |         |  |             |         |         |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   |         |  
|------------------------------------------------------------------------------------- |  | ------ | --- | ------- |  | ----------- | ------- | ------- |  | ------------- | ------ | -------- |  | ------------- | ---- | - |  | ----------- | ---- | ------ |  | - | ------ | ----- |  | - | ------- | -
|                                                                                      |  |        |     |         |  |             |         |         |  |               |        |          |  |               |      |   |  | Accumulated |      |        |  |   |        |       |  |  
|                                                                                      |  |        |     |         |  |             |         |         |  |               |        |          |  |               |      |   |  | Other       |      |        |  |   |        | Total
|                                                                                      |  |        |     |         |  | Additional  |         |         |  |               |        | Unearned |  | Comprehensive |      |   |  |             |      | Stock-
|                                                                                      |  | Common |     | Paid-in |  | Accumulated |         | Compen- |  | Income (loss) |        | Treasury |  | holders'     
|                                                                                      |  | Stock  |     | Capital |  | Deficit     |         | sation  |  | (1)           |        | Stock    |  | Equity       
|                                                                                      |  |        |     |         |  |             |         |         |  |               |        |          |  |              
|Beginning
Balance  December 31, 2000  Predecessor                                   |  | $      | 74  |         |  | $           | 22,808  |         |  | $             | (617   | )        |  | $             | (428 | ) |  | $           | (528 | )      |  | $ | (8,705 | )     |  | $ | 12,604  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net Loss                                                                              |  |        |     |         |  |             |         |         |  |               | (1,327 | )        |  |               |      |   |  |             |      |        |  |   |        |       |  |   | (1,327  | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Issuance of 16,807 shares of common stock
to certain non-employee directors           |  |        |     |         |  |             | 58      |         |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   | 58      |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Issuance of 366,804 shares of common stock
in exchange for warrants and stock options |  |        | 3   |         |  |             | (3      | )       |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   |        |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Amortization of stock option discount                                                 |  |        |     |         |  |             |         |         |  |               |        |          |  |               | 55   |   |  |             |      |        |  |   |        |       |  |   | 55      |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Amortization of vested portion of
restricted stock                                    |  |        |     |         |  |             |         |         |  |               |        |          |  |               | 75   |   |  |             |      |        |  |   |        |       |  |   | 75      |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Purchase of 121,524 shares of common stock
for treasury                               |  |        |     |         |  |             |         |         |  |               |        |          |  |               |      |   |  |             |      |        |  |   | (1,261 | )     |  |   | (1,261  | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Cancellation of 600,624 shares of common stock
for treasury                           |  |        |     |         |  |             | (9,966  | )       |  |               |        |          |  |               |      |   |  |             |      |        |  |   | 9,966  |       |  |   |        |  
|                                                                                      |  |        |     |         |  |             |         |         |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   |         |  
|Ending Balance  September 30, 2001  Predecessor                                     |  |        | 77  |         |  |             | 12,897  |         |  |               | (1,944 | )        |  |               | (298 | ) |  |             | (528 | )      |  |   |       |       |  |   | 10,204  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Close predecessors stockholders equity at
merger date                               |  |        | (77 | )       |  |             | (12,897 | )       |  |               | 1,944  |          |  |               | 298  |   |  |             | 528  |        |  |   |       |       |  |   | (10,204 | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Issuance of 7,135,125 shares of common stock to
shareholders                          |  |        | 71  |         |  |             | 73,956  |         |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   | 74,027  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net Loss                                                                              |  |        |     |         |  |             |         |         |  |               | (2,909 | )        |  |               |      |   |  |             |      |        |  |   |        |       |  |   | (2,909  | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Issuance of 3,540 shares of common stock
for the exercise of stock options            |  |        |     |         |  |             | 14      |         |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   | 14      |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Dividends to shareholders                                                             |  |        |     |         |  |             | (17,718 | )       |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   | (17,718 | )
|                                                                                      |  |        |     |         |  |             |         |         |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   |         |  
|Ending
Balance  December 31, 2001  Successor                                        |  |        | 71  |         |  |             | 56,252  |         |  |               | (2,909 | )        |  |               |     |   |  |             |     |        |  |   |       |       |  |   | 53,414  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net Income                                                                            |  |        |     |         |  |             |         |         |  |               | 6,103  |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   | 6,103   |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Change in cumulative foreign translation adjustment (1)                               |  |        |     |         |  |             |         |         |  |               |        |          |  |               |      |   |  |             | 5    |        |  |   |        |       |  |   | 5       |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Purchase and retirement 20,000 shares of common stock                                 |  |        |     |         |  |             | (231    | )       |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   | (231    | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Dividends to shareholders                                                             |  |        |     |         |  |             | (3,711  | )       |  |               | (3,194 | )        |  |               |      |   |  |             |      |        |  |   |        |       |  |   | (6,905  | )
|                                                                                      |  |        |     |         |  |             |         |         |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   |         |  
|Ending Balance  December 31, 2002  Successor                                        |  | $      | 71  |         |  | $           | 52,310  |         |  | $             |       |          |  | $             |     |   |  | $           | 5    |        |  | $ |       |       |  | $ | 52,386  |  
|                                                                                      |  |        |     |         |  |             |         |         |  |               |        |          |  |               |      |   |  |             |      |        |  |   |        |       |  |   |         |  



---

|(1) |  | The cumulative foreign translation adjustment represents the only item of other comprehensive income.
|--- |  | -----------------------------------------------------------------------------------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

33



---



##### 



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

1. Basis of Presentation:

The accompanying financial statements include the consolidated accounts of The
Hillman Companies, Inc., (the Company) formerly SunSource Inc. (SunSource)
and its wholly owned subsidiaries including an investment trust, Hillman Group
Capital Trust (the Trust), formerly SunSource Capital Trust. All significant
intercompany balances and transactions have been eliminated.

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

The Companys Consolidated Statements of Operations, Cash Flows and Changes in
Stockholders Equity for the periods presented prior to September 30, 2001 are
referenced herein as the predecessor financial statements (the Predecessor or
Predecessor Financial Statements). The Companys Consolidated Balance Sheets
as of December 31, 2002 and 2001 and its related Statements of Operations, Cash
Flows and Changes in Stockholders Equity for the year ended December 31, 2002
and the three months ended December 31, 2001 are referenced herein as the
successor financial statements (the Successor or Successor Financial
Statements). The Successor Financial Statements include the effects of the
Merger Transaction, the Companys debt refinancing and sale of an operating
subsidiary completed subsequent to the Merger Transaction (see allocation of
the purchase price below and reference Note 4, Acquisitions and Divestitures
and Note 9, Long-Term Debt, for information related to these events). For
purposes of these financial statements, the final two business days of
operation in September 2001 after the Merger Transaction are presented as part
of the Predecessor Financial Statements because the results from these two days
are immaterial for separate presentation.

The accompanying Successor Financial Statements reflect the allocation of the
aggregate purchase price of $74,027 to the assets and liabilities of the
Company based on fair values at the date of the merger in accordance with
Accounting Principles Board Opinion #16, Accounting for Business
Combinations, for transactions initiated prior to June 30, 2001. The
following table reconciles the fair value of the acquired assets and assumed
liabilities to the total purchase price:

|                                                                                          |                           |   |         |         |  |  | 
|----------------------------------------------------------------------------------------- | ------------------------- | - | ------- | ------- |  |  | 
|Accounts Receivable                                                                       |                           | $ | 58,439  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Inventory                                                                                 |                           |   | 71,857  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Property and equipment                                                                    |                           |   | 58,589  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Goodwill                                                                                  |                           |   | 125,881 |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Intangible assets                                                                         |                           |   | 12,924  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other current assets                                                                      |                           |   | 31,255  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other non-current assets                                                                  |                           |   | 36,858  |        
|                                                                                          |                           |   |         |        
|                                                                                          | Total assets acquired     |   |         | 395,803 | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Less:                                                                                     |                           |   |         |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Liabilities assumed                                                                       |                           |   | 219,704 |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Guaranteed preferred beneficial interests in
the Companys junior subordinated debentures |                           |   | 102,072 |        
|                                                                                          |                           |   |         |        
|                                                                                          | Total assumed liabilities |   |         | 321,776 | 
|                                                                                          |                           |   |         |         | 
|                                                                                          | Total purchase price      |   | $       | 74,027  | 
|                                                                                          |                           |   |         |        

34



---



##### 



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

1. Basis of Presentation (continued):

Changes in the estimate of the fair value of the assets and liabilities assumed
in the Merger Transaction for the year ended December 31, 2002 resulted in a
$4,079 increase in goodwill and a corresponding increase in liabilities assumed
primarily due to the settlement of contingent liabilities related to the
purchase.

The total liabilities include transaction related costs aggregating $4,875
which were associated with Allied Capitals purchase of the Company and assumed
by the Company in accordance with push down accounting.

The following unaudited pro forma consolidated net sales and net income (loss)
for the years ended December 31, 2002, 2001 and 2000 assume that the
acquisition of SunSource, its subsequent refinancing and the acquisitions and
dispositions described in Note 4, Acquisitions and Divestitures, were
consummated on January 1, 2000:

|                  |  |      |         |      |  |      |         |   |  |   |         |  
|----------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                  |  | 2002 |         | 2001 |  | 2000
|                  |  |      |         |      |  |     
|Net Sales         |  | $    | 304,107 |      |  | $    | 275,608 |   |  | $ | 264,856 |  
|                 
|                 
|                 
|                 
|Net Income (loss) |  | $    | 6,692   |      |  | $    | (3,570  | ) |  | $ | (6,692  | )

Nature of Operations:

The Company is one of the largest providers of value-added merchandising
services and hardware-related products to retail markets in North America
through its wholly-owned subsidiary, The Hillman Group, Inc. (the Hillman
Group). A subsidiary of The Hillman Group operates in Canada under the name
The Hillman Group Canada, Ltd. The Hillman Group provides merchandising
services and products, such as, fasteners and related hardware items, key
duplication equipment, keys and related accessories, and identification
equipment and items to retail outlets, primarily hardware stores, home centers
and mass merchants. The Company has approximately 20,000 customers, the
largest two of which accounted for 24.3% of net sales in 2002. The average
single sale in 2002 was less than six hundred dollars.

Discontinued Operations:

In December 1999, the Companys Board of Directors approved managements plan
to dispose of the Companys glass business, Harding Glass, Inc. (Harding).
In December 2000, the Companys Board of Directors also approved managements
plan to liquidate the Companys Integrated Supply  Mexico business (the
Mexican Segment). Accordingly, Harding and the Mexican Segment have been
accounted for as discontinued operations with results of operations segregated
from results of the Companys ongoing businesses. On April 13, 2000, the
Company consummated the sale of Harding. SunSource substantially completed the
liquidation of the Mexican Segment as of June 30, 2001. See Note 4,
Acquisitions and Divestitures.

For the year ended December 31, 2000, the Company recorded an additional loss
on disposal of the discontinued Harding segment of $5,322 less an income tax
benefit of $7,191. Through December 31, 2000, the Company had recorded a loss
on disposal of the discontinued Harding segment of $21,965 in the aggregate,
net of tax benefits.

For the year ended December 31, 2000, the Mexican Segment had a loss from
operations of $219 less an income tax benefit of $110. The estimated loss
recorded during the year ended December 31, 2000 on the liquidation of the
Mexican Segment was $4,572 less an income tax benefit of $202.

35



---



##### 



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

1. Basis of Presentation (continued):

Following is summary financial information for the Companys discontinued
Harding and Mexican Segment operations:

|                                                      |                 |                                                   |   |        |        |  
|----------------------------------------------------- | --------------- | ------------------------------------------------- | - | ------ | ------ | -
|                                                      |                 |                                                   |   | 2000  
|                                                      |                 |                                                   |   |        |       
|Income (loss) from
discontinued operations:           |                 |                                                   |   |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Harding         |                                                   | $ |       |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Mexican Segment |                                                   |   | (109   | )     
|                                                      |                 |                                                   |   |       
|                                                      |                 | Total loss from
discontinued operations           |   |        | (109   | )
|                                                      |                 |                                                   |   |       
|Income (loss) on disposal of
discontinued operations: |                 |                                                   |   |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Harding         |                                                   |   | 1,869  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Mexican Segment |                                                   |   | (4,370 | )     
|                                                      |                 |                                                   |   |       
|                                                      |                 | Total loss on disposal of
discontinued operations |   |        | (2,501 | )
|                                                      |                 |                                                   |   |       
|Total income (loss) from
discontinued operations:     |                 |                                                   |   |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Harding         |                                                   |   | 1,869  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Mexican Segment |                                                   |   | (4,479 | )     
|                                                      |                 |                                                   |   |       
|                                                      |                 | Total loss from
discontinued operations           |   | $      | (2,610 | )
|                                                      |                 |                                                   |   |       

2. Summary of Significant Accounting Policies:

Cash Equivalents:

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

Restricted Investments:

Restricted investments represent assets held in a Rabbi Trust to fund deferred
compensation liabilities due to the Companys employees. (see Note 11,
Deferred Compensation Plans).

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.

36



---



##### 



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

2. Summary of Significant Accounting Policies (continued):

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.

Goodwill and Other Intangible
Assets:

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

Results for periods prior to the adoption of SFAS 142 have not been restated to
reflect the effect of discontinuing goodwill amortization. The following table
reconciles the reported net income (loss) to results that would have been
reported if SFAS 142 had been adopted as of January 1, 2000:

|                                           |  |                         |       |      |  |      |        |   |  |   |        | 
|------------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                           |  | Year ended December 31,
|                                           |  |                        
|                                           |  | 2002                    |       | 2001 |  | 2000
|                                           |  |                         |       |      |  |     
|Reported net income (loss)                 |  | $                       | 6,103 |      |  | $    | (4,236 | ) |  | $ | 24,680 | 
|                                          
|                                          
|                                          
|                                          
|Goodwill amortization, net of
income taxes |  |                         |      |      |  |      | 3,001  |   |  |   | 2,192  | 
|                                           |  |                         |       |      |  |      |        |   |  |   |        | 
|Adjusted net income (loss)                 |  | $                       | 6,103 |      |  | $    | (1,235 | ) |  | $ | 26,872 | 
|                                           |  |                         |       |      |  |      |        |   |  |   |        | 

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.

37



---



##### 



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

2. Summary of Significant
Accounting Policies (continued):

Income Taxes:

Deferred income taxes are computed using the asset and liability method. Under
this method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax 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. See Note
6, Income Taxes.

Retirement Benefits:

Certain employees of the Company are covered under a profit-sharing and
retirement savings plan (defined contribution plan). Certain employees of
the Predecessor were covered under post-retirement benefit plans for which
benefits were determined in accordance with the requirements of each plan. See
Note 14, Retirement Benefits.

Revenue Recognition:

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

Shipping and handling

The costs incurred to ship product to customers, including freight and handling
expenses, are included in selling, general and administrative expenses on the
Companys Statements of Operations. For the three years ended December 31,
2002, shipping and handling costs included in selling, general and
administrative were $13,913 for 2002, $11,362 for 2001 and $10,002 for 2000.

Research and Development:

The Company incurs research and development costs in connection with
improvements to the key duplicating and engraving machines. For the three
years ended December 31, 2002, research and development expenses, consisting
primarily of internal wages and benefits, were $1,510 for 2002, $1,482 for
2001, and $635 for 2000.

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. The fair values of the Companys debt instruments
are disclosed in Note 9, Long-Term Debt. The fair value of the Trust Preferred
Securities is disclosed in Note 12, Guaranteed Preferred Beneficial Interests
in the Companys Junior Subordinated Debentures.

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.

38



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##### 



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

2. Summary of Significant Accounting Policies (continued):

Comprehensive Income
(Loss):

The components of comprehensive income (loss) for the years ended December 31,
2002, 2001 and 2000 were as follows:

|                                        |  |      |       |      |  |      |        |   |  |   |        | 
|--------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                        |  | 2002 |       | 2001 |  | 2000
|                                        |  |      |       |      |  |     
|Net income (loss)                       |  | $    | 6,103 |      |  | $    | (4,236 | ) |  | $ | 24,680 | 
|                                       
|                                       
|                                       
|                                       
|Foreign currency translation
adjustment |  |      | 5     |      |  |      |       |   |  |   |       | 
|                                        |  |      |       |      |  |      |        |   |  |   |        | 
|Comprehensive income (loss)             |  | $    | 6,108 |      |  | $    | (4,236 | ) |  | $ | 24,680 | 
|                                        |  |      |       |      |  |      |        |   |  |   |        | 

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. Recent Accounting Pronouncements:

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

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities (an interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements), which becomes effective for the Company
in June 2003. FIN No. 46 provides consolidation guidance for certain variable
interest entities (VIE) in which equity investors of the VIE do not have the
characteristics of a controlling interest or do not have sufficient equity at
risk for the VIE to finance its activities independently. FIN No. 46 requires
each enterprise involved with a special purpose entity to determine whether it

39



---



##### 



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

3. Recent Accounting Pronouncements (continued):

provides financial support to the special purpose entity through a variable
interest. Variable interests may arise from financial instruments, service
contracts, minority ownership interests or other arrangements. If an entity
holds a majority of the variable interests, or a significant variable interest
that is considerably more than any other partys variable interest, that
entity would be the primary beneficiary and would be required to include the
assets, liabilities and results of operations of the special purpose entity in
its consolidated financial statements. The Company does not expect the
adoption of FIN 46 to have a material impact on its financial position or
results of operations.

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

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

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

40



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##### 



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

4. Acquisitions and Divestitures:

On October 3, 2002, the Company, through its Hillman Group subsidiary,
purchased the net assets of the DIY division (DIY) of the Fastenal Company
of Winona, MN. DIY distributes fasteners, anchors, picture hanging wire,
hooks, tacks, and brads to national hardware cooperatives and home centers.
The Companys management believes that the purchase of the DIY business will
further strengthen the Companys position in its core market segments,
particularly with the national hardware cooperatives.

The accompanying financial statements reflect the preliminary allocation of
the aggregate purchase price of $15,218 to the assets and liabilities of the
Company based on fair values at the date of the transaction in accordance with
SFAS No. 141, Business Combinations. The following table reconciles the fair
value of the acquired assets and assumed liabilities to the total purchase
price:

|                         |                       |   |       |        | 
|------------------------ | --------------------- | - | ----- | ------ | 
|Accounts Receivable      |                       | $ | 3,658 |       
|                        
|                        
|                        
|                        
|Inventory                |                       |   | 7,323 |       
|                        
|                        
|                        
|                        
|Property and equipment   |                       |   | 3,561 |       
|                        
|                        
|                        
|                        
|Other Assets             |                       |   | 2,101 |       
|                        
|                        
|                        
|                        
|Goodwill                 |                       |   | 3,929 |       
|                         |                       |   |       |       
|                         | Total assets acquired |   |       | 20,572 | 
|                        
|                        
|                        
|                        
|Less assumed liabilities |                       |   | 5,354 |       
|                         |                       |   |       |       
|                         | Total purchase price  |   | $     | 15,218 | 
|                         |                       |   |       |       

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

On May 1, 2002, the Hillman Group purchased certain assets of the Lowes
specialty fastener business from R&B, Inc. for cash consideration of $6,207.
The purchase price has been allocated as follows: $690 to accounts receivable,
$1,338 to inventory, $138 to fixed assets, $51 to accrued liabilities and
$4,092 to goodwill. The purchase of the specialty fastener business will
expand the breadth of the Companys product offering to Lowes. In connection
with this transaction, the Company settled litigation filed by R&B, Inc. in
February 1996 related to the Companys sale of the Dorman Products division.
The litigation settlement in the amount of $1,250 was fully reserved on the
Companys balance sheet, and accordingly, there was no charge to income in
2002.

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

41



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##### 



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

4. Acquisitions and Divestitures (continued):

added to the principal. For the year ended December 31, 2002 the Company
added $1,258 of accrued interest to the principal. As of December 31, 2002,
the Companys consolidated balance sheet includes $11,258 in other
investments related to the notes and interest accrued thereon. The Company
accounted for its investment in the partnership under the equity method
through December 31, 2001.

On September 28, 2001 the Company sold substantially all of the assets of
its Technology Services subsidiary. The sales price aggregated $25,546 in
cash and preferred stock, subject to post-closing adjustments, plus the
assumption of certain liabilities by the buyer. The sale of assets resulted
in no gain or loss on the sale transaction because the assets and
liabilities of Technology Services were recorded at fair value in
conjunction with the Merger Transaction. In the fourth quarter of 2001, the
cash proceeds of $17,746 from the sale of STS, were distributed to Allied
Capital and certain members of management, who are the remaining
stockholders of the Company. The Technology Services preferred stock of
$6,000 and accrued dividends thereon of $731 were distributed to the
Companys common shareholders in the fourth quarter of 2002.

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

In December 2000, the Board approved a plan to liquidate the Mexican Segment
which provided comprehensive inventory management services of Maintenance
Repair Operations (MRO) materials to large manufacturing plants in Mexico.
The Company recorded a pre-tax loss on liquidation of approximately $4,600
representing non-cash charges for accumulated translation losses, the
write-down of inventories and other assets, and other liquidation costs.
The liquidation process was substantially completed as of June 30, 2001. On
August 3, 2001, STS distributed its common stock investment in the Mexican
Segment to the Hillman Group to segregate the STS Business from the
remaining business interests of the Company.

On November 3, 2000, the Hillman Group purchased inventory and other assets
of the Sharon-Philstone division of Pawtucket Fasteners, L.P. of Rhode
Island. The Hillman Group assumed the sales and servicing of the
Sharon-Philstone division who were distributors of fasteners to the retail
hardware marketplace with annual sales of approximately $14,000 for the
twelve month period prior to acquisition. The purchase price consisted of
$5,460 for inventory and other assets including certain post-closing
adjustments, and $1,413 for integration liabilities and transaction costs
resulting in an aggregate cash purchase price of $6,873.

On April l3, 2000, the Company sold substantially all of the assets of
Harding for a cash purchase price of $30,592 plus the assumption by the
buyer of certain liabilities aggregating $12,693.

42



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##### 



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

4. Acquisitions and Divestitures (continued):

On April 7, 2000, the Companys Hillman Group acquired Axxess Technologies,
Inc. (Axxess or Axxess Technologies), a Tempe, Arizona manufacturer of
key duplication and identification systems. The transaction was structured as
a purchase of 100% of the stock of the privately held company and repayment
of outstanding Axxess debt in exchange for $87,000 in cash and $23,000 in
subordinated notes. In connection with the sale of Harding on April 13,
2000, the Company repaid $9,600 of these subordinated notes leaving a balance
of $13,400 comprised as follows: 1) a $2,400 note which was repaid on April
7, 2001 and 2) an $11,000 note which was repaid on September 28, 2001 at a
discount as part of the Companys debt refinancing arrangement. The
aggregate consideration for the transaction was $111,537, including
transaction costs of $1,537, plus the assumption of certain liabilities
aggregating $14,018. The Hillman Group recorded goodwill and other
intangible assets of $48,259 related to this acquisition. Axxess sales
aggregated $19,364 for the three months ended March 31, 2000, and its results
of operations are included in the results of the Hillman Group from the date
of acquisition. On June 1, 2001, Axxess Technologies merged with and into
the Hillman Group with the Hillman Group being the surviving entity in the
merger.

On March 2, 2000, the Company contributed the interests in its Kar Products,
Inc. and A & H Bolt & Nut Company Limited operations (collectively, the Kar
or Kar Products business) to a newly-formed partnership affiliated with
Glencoe Capital, L.L.C. (Glencoe). Glencoe contributed cash equity to the
new partnership, GC-Sun Holdings, L.P. (G-C). The Company received
$105,000 in cash proceeds from the transaction through repayment of assumed
debt by G-C and retained a 49% minority ownership in G-C. Affiliates of
Glencoe hold a controlling interest in G-C. The Company recorded a pre-tax
gain on the transaction of approximately $49,115 in the first quarter of
2000. Sales from Kar aggregated $22,122 from January 1, 2000 to March 2,
2000.

On October 4, 2000, G-C acquired all of the outstanding stock of Brampton
Fastener Co. Limited, d/b/a Brafasco, based in Toronto, Canada. G-C
purchased the outstanding stock of Brafasco for cash and notes. Brafasco is
a supplier of maintenance and repair products serving primarily industrial
customers.

5. Related Party Transactions:

On September 28, 2001, the Company completed the sale of substantially all of
the assets of its SunSource Technology Services business (the STS Business)
to STS Operating, Inc. (STS OP), an entity formed by certain officers and
managers of the STS Business, Allied Capital and Easton Hunt Capital
Partners, L.P. for the purpose of acquiring the STS Business. The purchase
price consisted of cash and preferred stock of STS OP plus the assumption of
certain liabilities. See Note 4, Acquisitions and Divestitures.

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. See Note 1, Basis of Presentation, Note 4, Acquisitions and
Divestitures, and Note 9, Long-Term Debt. In connection with the Merger
Transaction, the Company is obligated to pay management fees to a subsidiary
of Allied Capital for management services rendered in the amount

43



---



##### 



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

5. Related Party Transactions (continued):

of $250 for calendar year 2001 and $1,800 for each calendar year
thereafter. The Company has recorded a management fee charge of $1,800 and
$250 on the Successors Statement of Operations for the year ended December
31, 2002 and the three months ended December 31, 2001, respectively.
Payment of management fees are due annually after delivery of the Companys
annual audited financial statements to the Board of Directors of the
Company. The management fee for the three months ended December 31, 2001
was paid in March 2002.

On June 29, 2001, Allied Capital purchased an unsecured subordinated note,
with an outstanding principal balance of approximately $12,500, from a
SunSource creditor for $8,500. In connection with the Merger Transaction
and refinancing the Companys debt, Allied Capital exchanged the note for
$8,500 of the Companys subordinated debt. See Note 1, Basis of
Presentation and Note 9, Long-Term Debt for additional information.

On December 28, 2000, the Company issued $30,000 of unsecured subordinated
notes to Allied Capital which was amended on September 28, 2001, to
increase the existing subordinated debenture to $40,000 in conjunction with
refinancing the Companys senior debt. See discussion above and Note 9,
Long-Term Debt.

6. Income Taxes:

The Companys income tax provision (benefit) for the three years ended
December 31, 2002 was as follows:

|                              |   |       |  |              |   |              |   |               |   |              |  |  |   |        |   |  |  | 
|----------------------------- | - | ----- |  | ------------ | - | ------------ | - | ------------- | - | ------------ |  |  | - | ------ | - |  |  | 
|                              |   |       |  | Successor    |   | Predecessor 
|                              |   |       |  |              |   |             
|                              |   |       |  | Year         |   | Three Months |   | Nine months   |   | Year        
|                              |   |       |  | ended        |   | ended        |   | ended         |   | ended       
|                              |   |       |  | December 31, |   | December 31, |   | September 30, |   | December 31,
|                              |   |       |  | 2002         |   | 2001         |   | 2001          |   | 2000        
|                              |   |       |  |              |   |              |   |               |   |             
|Continuing operations         | $ | 3,879 |  |              | $ | (298         | ) |               | $ | 1,229        |  |  | $ | 4,910  |  
|                             
|                             
|                             
|                             
|Discontinued operations       |   |      |  |              |   |             |   |               |   |             |  |  |   | (7,503 | )
|                              |   |       |  |              |   |              |   |               |   |              | 
|Total tax provision (benefit) | $ | 3,879 |  |              | $ | (298         | ) |               | $ | 1,229        |  |  | $ | (2,593 | )
|                              |   |       |  |              |   |              |   |               |   |              | 

44



---



##### 



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

6. Income Taxes (continued):

The components of the Companys provision (benefit) for income taxes from
continuing operations for the three years ended December 31, 2002 were as
follows:

|                    |                 |                                      |      |              |       |              |   |               |      |              |       |      |       |   |       |       |       |  
|------------------- | --------------- | ------------------------------------ | ---- | ------------ | ----- | ------------ | - | ------------- | ---- | ------------ | ----- | ---- | ----- | - | ----- | ----- | ----- | -
|                    |                 |                                      |      | Successor    |       | Predecessor 
|                    |                 |                                      |      |              |       |             
|                    |                 |                                      |      | Year         |       | Three Months |   | Nine months   |      | Year        
|                    |                 |                                      |      | ended        |       | ended        |   | ended         |      | ended       
|                    |                 |                                      |      | December 31, |       | December 31, |   | September 30, |      | December 31,
|                    |                 |                                      |      | 2002         |       | 2001         |   | 2001          |      | 2000        
|                    |                 |                                      |      |              |       |              |   |               |      |             
|Current:            |                 |                                      |      |              |       |              |   |               |      |              |       |      |       |   |       |      
|                   
|                   
|                   
|                   
|                    | Federal & State |                                      | $    | 232          |       |              | $ |              |      |              | $     | (292 | )     |   | $     | 2,522 |      
|                   
|                   
|                   
|                   
|                    | Foreign         |                                      |      |              |      |              |   |               |     |              |       |      | 185   |   |       |       | (159  | )
|                    |                 |                                      |      |              |       |              |   |               |      |              |       |      |       |   |       |      
|                    |                 | Total current                        |      |              | 232   |              |   |               |     |              |       |      | (107  | ) |       |       | 2,363 |  
|                    |                 |                                      |      |              |       |              |   |               |      |              |       |      |       |   |       |      
|Deferred:           |                 |                                      |      |              |       |              |   |               |      |              |       |      |       |   |       |      
|                   
|                   
|                   
|                   
|                    | Federal & State |                                      |      | 3,872        |       |              |   | (298          | )    |              |       | 268  |       |   |       | 317   |      
|                   
|                   
|                   
|                   
|                    | Foreign         |                                      |      |             |       |              |   |              |      |              |       |     |       |   |       |      |      
|                    |                 |                                      |      |              |       |              |   |               |      |              |       |      |       |   |       |      
|                    |                 | Total deferred                       |      |              | 3,872 |              |   |               | (298 | )            |       |      | 268   |   |       |       | 317   |  
|                    |                 |                                      |      |              |       |              |   |               |      |              |       |      |       |   |       |      
|Valuation allowance |                 |                                      | (225 | )            |       |              |  |               |      |              | 1,068 |      |       |   | 2,230 |      
|                    |                 |                                      |      |              |       |              |   |               |      |              |       |      |       |   |       |      
|                    |                 | Provision (benefit)
for income taxes |      | $            | 3,879 |              |   | $             | (298 | )            |       | $    | 1,229 |   |       | $     | 4,910 |  
|                    |                 |                                      |      |              |       |              |   |               |      |              |       |      |       |   |       |      

The Company has U.S. federal net operating loss (NOL) carryforwards for tax
purposes, totaling $51,902 as of December 31, 2002, that are available to
offset future taxable income. These carryforwards expire from 2019 to 2021.
No valuation allowance has been provided against the federal NOL.

The Company has state net operating loss carryforwards with an aggregate tax
benefit of $5,405 which expire from 2003 to 2021. A valuation allowance of
$5,405 has been established for these deferred tax assets.

The Company has federal unused capital losses totaling $28,641 as of
December 31, 2002 that are available to offset future capital gains. These
carryforwards expire in 2006. A valuation allowance of $9,738 has been
established for these deferred tax assets. The Company also has $283 of
general business tax credits which expire from 2009 to 2021. A valuation
allowance of $283 has been established for these tax credits. In 2002, the
reduction in the valuation reserve is due to utilization of capital loss
and state net operating loss carryforwards and tax credits.

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.

45



---



##### 



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

6. Income Taxes (continued):

The table below reflects the significant components of the Companys net
deferred tax assets and liabilities at December 31, 2002 and 2001:

|                                            |                                    |                                |   |                         |        |                         |         |         |        |             |   |       |       |  |         |        |        | 
|------------------------------------------- | ---------------------------------- | ------------------------------ | - | ----------------------- | ------ | ----------------------- | ------- | ------- | ------ | ----------- | - | ----- | ----- |  | ------- | ------ | ------ | 
|                                            |                                    |                                |   | As of December 31, 2002 |        | As of December 31, 2001
|                                            |                                    |                                |   |                         |        |                        
|                                            |                                    |                                |   | Current                 |        | Non-current             |         | Current |        | Non-current
|                                            |                                    |                                |   |                         |        |                         |         |         |        |            
|Deferred
Tax Assets:                        |                                    |                                |   |                         |        |                         |         |         |        |             |   |       |       |  |         |       
|                                           
|                                           
|                                           
|                                           
|                                            | Inventory                          |                                | $ | 5,108                   |        |                         | $       |        |        |             | $ | 4,870 |       |  | $       |       |       
|                                           
|                                           
|                                           
|                                           
|                                            | Bad debt reserve                   |                                |   | 591                     |        |                         |         |        |        |             |   | 385   |       |  |         |       |       
|                                           
|                                           
|                                           
|                                           
|                                            | Deferred compensation              |                                |   | 487                     |        |                         |         | 2,428   |        |             |   | 487   |       |  |         | 2,526  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Integration/severance reserve      |                                |   | 2,135                   |        |                         |         |        |        |             |   |       |       |  |         |        |       
|                                           
|                                           
|                                           
|                                           
|                                            | Federal net operating loss         |                                |   |                        |        |                         |         | 17,647  |        |             |   |      |       |  |         | 18,892 |       
|                                           
|                                           
|                                           
|                                           
|                                            | State net operating loss           |                                |   |                        |        |                         |         | 5,405   |        |             |   |      |       |  |         | 8,083  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Tax credit carryforwards           |                                |   |                        |        |                         |         | 283     |        |             |   |      |       |  |         | 1,318  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Transaction costs                  |                                |   |                        |        |                         |         | 661     |        |             |   |      |       |  |         | 1,045  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Federal capital loss carryforwards |                                |   |                        |        |                         |         | 9,738   |        |             |   |      |       |  |         | 12,748 |       
|                                           
|                                           
|                                           
|                                           
|                                            | All other items                    |                                |   | 2,590                   |        |                         |         | 902     |        |             |   | 3,394 |       |  |         | 801    |       
|                                            |                                    |                                |   |                         |        |                         |         |         |        |             |   |       |       |  |         |       
|                                            |                                    | Gross deferred tax assets      |   |                         | 10,911 |                         |         |         | 37,064 |             |   |       | 9,136 |  |         |        | 45,413 | 
|                                           
|                                           
|                                           
|                                           
|Valuation allowance for
deferred tax assets |                                    |                                |  |                         |        |                         | (15,426 | )       |        |             |  |       |       |  | (19,970 | )     
|                                            |                                    |                                |   |                         |        |                         |         |         |        |             |   |       |       |  |         |       
|                                            |                                    | Net deferred tax assets        |   | $                       | 10,911 |                         |         | $       | 21,638 |             |   | $     | 9,136 |  |         | $      | 25,443 | 
|                                            |                                    |                                |   |                         |        |                         |         |         |        |             |   |       |       |  |         |       
|Deferred Tax Liability:                     |                                    |                                |   |                         |        |                         |         |         |        |             |   |       |       |  |         |       
|                                           
|                                           
|                                           
|                                           
|                                            | Property and equipment             |                                | $ |                        |        |                         | $       | 4,473   |        |             | $ |      |       |  | $       | 4,113  |       
|                                           
|                                           
|                                           
|                                           
|                                            | All other items                    |                                |   |                        |        |                         |         | 1,187   |        |             |   | 31    |       |  |         | 490    |       
|                                            |                                    |                                |   |                         |        |                         |         |         |        |             |   |       |       |  |         |       
|                                            |                                    | Gross deferred tax liabilities |   | $                       |       |                         |         | $       | 5,660  |             |   | $     | 31    |  |         | $      | 4,603  | 
|                                            |                                    |                                |   |                         |        |                         |         |         |        |             |   |       |       |  |         |       

Realization of the net deferred tax assets is dependent on generating
sufficient taxable income prior to their expiration. Although realization
is not assured, management believes it is more likely than not that the net
deferred tax assets will be realized. The amount of net deferred tax
assets considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward periods are
reduced.

46



---



##### 



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

6. Income Taxes (continued):

Below is a reconciliation of statutory income tax rates to the effective
income tax rates for the periods indicated:

|                                                                     |                           |  |              |      |              |  |               |      |              |  |        |        |   |  |       |      |  
|-------------------------------------------------------------------- | ------------------------- |  | ------------ | ---- | ------------ |  | ------------- | ---- | ------------ |  | ------ | ------ | - |  | ----- | ---- | -
|                                                                     |                           |  | Successor    |      | Predecessor 
|                                                                     |                           |  |              |      |             
|                                                                     |                           |  | Year         |      | Three Months |  | Nine Months   |      | Year        
|                                                                     |                           |  | Ended        |      | Ended        |  | Ended         |      | Ended       
|                                                                     |                           |  | December 31, |      | December 31, |  | September 30, |      | December 31,
|                                                                     |                           |  | 2002         |      | 2001         |  | 2001          |      | 2000        
|                                                                     |                           |  |              |      |              |  |               |      |             
|Statuatory federal income tax rate                                   |                           |  | 34.0         | %    |              |  | 34.0         | %    |              |  | 34.0  | %      |   |  | 34.0  | %   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Foreign income tax rates in excess of
U.S. federal income tax rates  |                           |  | 0.0          | %    |              |  | 0.0           | %    |              |  | 0.0    | %      |   |  | 0.7  | %   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|State and local income taxes, net of
U.S. federal income tax benefit |                           |  | 6.7          | %    |              |  | 0.2           | %    |              |  | 6.7   | %      |   |  | 2.7   | %   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Other permanent differences, principally
goodwill                    |                           |  | 1.8         | %    |              |  | 24.5          | %    |              |  | 1294.8 | %      |   |  | 13.3  | %   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Non-taxable income  Kar transaction                                 |                           |  | 0.0          | %    |              |  | 0.0           | %    |              |  | 0.0    | %      |   |  | 34.1 | %   
|                                                                     |                           |  |              |      |              |  |               |      |              |  |        |        |   |  |       |     
|                                                                     | Effective income tax rate |  |              | 38.9 | %            |  |               | 9.3 | %            |  |        | 1254.1 | % |  |       | 15.2 | %
|                                                                     |                           |  |              |      |              |  |               |      |              |  |        |        |   |  |       |     

7. Property and Equipment:

Property and equipment consists of the following at December 31, 2002 and
2001:

|                              |                               |  |             |  |      |   |        |        |  |   |        |        | 
|----------------------------- | ----------------------------- |  | ----------- |  | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                              |                               |  | Estimated   |  |      |   |        |        |  |   |       
|                              |                               |  | Useful Life |  |      |   |       
|                              |                               |  | (Years)     |  | 2002 |   | 2001  
|                              |                               |  |             |  |      |   |       
|Land                          |                               |  |             |  |      | $ | 131    |        |  | $ |       |       
|                             
|                             
|                             
|                             
|Buildings                     |                               |  | 27          |  |      |   | 863    |        |  |   |       |       
|                             
|                             
|                             
|                             
|Leasehold improvements        |                               |  | 3-10        |  |      |   | 4,706  |        |  |   | 3,649  |       
|                             
|                             
|                             
|                             
|Machinery and equipment       |                               |  | 3-10        |  |      |   | 59,948 |        |  |   | 53,278 |       
|                             
|                             
|                             
|                             
|Furniture and fixtures        |                               |  | 3-5         |  |      |   | 1,430  |        |  |   | 1,131  |       
|                             
|                             
|                             
|                             
|Construction in process       |                               |  |             |  |      |   | 10,500 |        |  |   | 257    |       
|                              |                               |  |             |  |      |   |        |        |  |   |        |       
|                              | Property and equipment, gross |  |             |  |      |   |        | 77,578 |  |   |        | 58,315 | 
|                             
|                             
|                             
|                             
|Less accumulated depreciation |                               |  |             |  |      |   | 8,982  |        |  |   | 3,030  |       
|                              |                               |  |             |  |      |   |        |        |  |   |        |       
|                              | Property and equipment, net   |  |             |  |      |   | $      | 68,596 |  |   | $      | 55,285 | 
|                              |                               |  |             |  |      |   |        |        |  |   |        |       

47



---



##### 



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

8. Intangible Assets:

Intangible assets subject to amortization consisted of the following as of
December 31, 2002:

|                       |  |          |        |              |  |   |       | 
|---------------------- |  | -------- | ------ | ------------ |  | - | ----- | 
|                       |  | Carrying |        | Accumulated 
|                       |  | Amount   |        | Amortization
|                       |  |          |        |             
|Trademarks             |  | $        | 6,500  |              |  | $ | 715   | 
|                      
|                      
|                      
|                      
|Patents                |  |          | 6,700  |              |  |   | 2,303 | 
|                      
|                      
|                      
|                      
|Proprietary software   |  |          | 1,000  |              |  |   | 344   | 
|                      
|                      
|                      
|                      
|Non-compete agreements |  |          | 1,250  |              |  |   | 1,020 | 
|                       |  |          |        |              |  |   |       | 
|Total                  |  | $        | 15,450 |              |  | $ | 4,382 | 
|                       |  |          |        |              |  |   |       | 

Amortization expense for intangible assets for the year ended December 31, 2002
was $1,485. Amortization expense for the next five years is estimated to be as
follows:

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

9. Long-Term Debt:

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

The Senior Credit Agreement, among other provisions, contains financial
covenants requiring the maintenance of specific coverage ratios and levels
of financial position, restricts the incurrence of additional debt, and the
sale of assets, and permits acquisitions only with the consent of the
lenders. If the Company sells a significant amount of assets as defined in
the Credit Agreement, it must make a repayment in an amount equal to the
net proceeds of such sale. Such repayments shall be applied to the Term
Loans and at any time after the Term Loans have been prepaid in full, such
repayments shall then be applied to reduce the outstanding principal
balance of the Revolver. The Company was in compliance with all provisions
of the Senior Credit Agreement as of December 31, 2002.

48



---



##### 



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

9. Long-Term Debt (continued):

On May 1, 2002 the Credit Agreement was amended to provide an additional
$10,000 of availability under the revolving credit facility and to increase
Term Loan A by $15,000. In addition to funding the purchase of certain assets
of the Lowes specialty fastener business from R&B, Inc., (see Note 4,
Acquisitions and Divestitures) the cash proceeds and additional availability
was used to finance the expansion and automation of the Companys
distribution facilities.

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

The Company incurred an additional $1,387 of financing fees for the year
ended December 31, 2002 in connection with the amendments to the senior
credit agreement described above. These financing fees have been capitalized
and are being amortized over the remaining term of the revolver and term
loans.

On December 28, 2000, the Company issued $30,000 of unsecured subordinated
notes (the Subordinated Debt Issuance), maturing December 28, 2006 to
Allied Capital. On September 28, 2001 the Company amended the Subordinated
Debt Issuance to increase the existing subordinated debenture to $40,000
maturing on September 29, 2009 (the Amended Subordinated Debt Issuance).
Interest on the Amended Subordinated Debt Issuance is at a fixed rate of
18.0% per annum, with cash interest payments required on a quarterly basis at
a fixed rate of 13.5% commencing November 15, 2001. The outstanding
principal balance of the Amended Subordinated Debt Issuance shall be
increased on a quarterly basis at the remaining 4.5% fixed rate (the PIK
Amount). All of the PIK Amounts are due on the fifth anniversary of the
Amended Subordinated Debt Issuance. The outstanding principal balance of the
Amended Subordinated Debt Issuance is included in long term unsecured
subordinated notes to related party on the Companys consolidated balance
sheet at December 31, 2002 in the amount of $42,108 of which $2,108
represents the PIK amount.

As of December 31, 2002 and 2001, long-term debt is summarized as follows:

|                              |  |      |         |      |  |   |         | 
|----------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                              |  | 2002 |         | 2001
|                              |  |      |         |     
|Revolving Credit Agreement    |  | $    | 34,532  |      |  | $ | 34,052  | 
|                             
|                             
|                             
|                             
|Term Loan A                   |  |      | 32,732  |      |  |   | 19,250  | 
|                             
|                             
|                             
|                             
|Term Loan B                   |  |      | 37,095  |      |  |   | 34,875  | 
|                             
|                             
|                             
|                             
|Subordinated Debt Notes       |  |      | 42,108  |      |  |   | 40,240  | 
|                             
|                             
|                             
|                             
|Capital Leases                |  |      | 249     |      |  |   | 322     | 
|                              |  |      |         |      |  |   |         | 
|                              |  |      | 146,716 |      |  |   | 128,739 | 
|                             
|                             
|                             
|                             
|Less: amounts due in one year |  |      | 9,323   |      |  |   | 3,887   | 
|                              |  |      |         |      |  |   |         | 
|Long-term debt                |  | $    | 137,393 |      |  | $ | 124,852 | 
|                              |  |      |         |      |  |   |         | 

49



---



##### 



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

9. Long-Term Debt (continued):

The aggregate minimum principal maturities of the long-term debt for each
of the five fiscal years following December 31, 2002, are as follows:

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2003                |  | $ | 9,324  | 
|                   
|                   
|                   
|                   
|2004                |  |   | 9,324  | 
|                   
|                   
|                   
|                   
|2005                |  |   | 9,324  | 
|                   
|                   
|                   
|                   
|2006                |  |   | 48,030 | 
|                   
|                   
|                   
|                   
|2007                |  |   | 17,565 | 
|                   
|                   
|                   
|                   
|2008 and thereafter |  |   | 53,149 | 

As of December 31, 2002, the Company had $26,391 available under the
Revolver. The Company had letter of credit commitments outstanding of
$3,857 at December 31, 2002.

As of December 31, 2002, the estimated fair value of the Companys Term
Loans approximates the recorded value as determined in accordance with SFAS
107. The Company discounted the future cash flows of its Term Loans based
on borrowing rates for debt with similar terms and remaining maturities.
The fair value estimate is made at a specific point in time, is subjective
in nature, and involves uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimate.

10. Leases:

Certain warehouse and office space and equipment are leased under capital
and operating leases with terms in excess of one year. Future minimum
lease payments under noncancellable leases consisted of the following at
December 31, 2002:

|                                   |                                                                               |   |         |     |           |   |        |        | 
|---------------------------------- | ----------------------------------------------------------------------------- | - | ------- | --- | --------- | - | ------ | ------ | 
|                                   |                                                                               |   | Capital |     | Operating
|                                   |                                                                               |   | Leases  |     | Leases   
|                                   |                                                                               |   |         |     |          
|2003                               |                                                                               | $ | 74      |     |           | $ | 6,869  |       
|                                  
|                                  
|                                  
|                                  
|2004                               |                                                                               |   | 60      |     |           |   | 5,326  |       
|                                  
|                                  
|                                  
|                                  
|2005                               |                                                                               |   | 53      |     |           |   | 4,282  |       
|                                  
|                                  
|                                  
|                                  
|2006                               |                                                                               |   | 57      |     |           |   | 3,684  |       
|                                  
|                                  
|                                  
|                                  
|2007                               |                                                                               |   | 41      |     |           |   | 2,694  |       
|                                  
|                                  
|                                  
|                                  
|Later years                        |                                                                               |   | 18      |     |           |   | 11,099 |       
|                                   |                                                                               |   |         |     |           |   |        |       
|                                   | Total minimum lease payments                                                  |   |         | 303 |           |   | $      | 33,954 | 
|                                   |                                                                               |   |         |     |           |   |        |       
|Less amounts representing interest |                                                                               |   | (54     | )   |           |   |        |       
|                                   |                                                                               |   |         |     |           |   |        |       
|                                   | Present value of net minimum lease payments
(including $55 currently payable) |   | $       | 249 |           |   |        |        | 
|                                   |                                                                               |   |         |     |           |   |        |       

Total rental expense for all operating leases from continuing operations
amounted to $10,080 in 2002, $11,407 in 2001, and $12,562 in 2000.
Certain leases are subject to terms of renewal and escalation clauses.

50



---



##### 



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

11. Deferred Compensation Plans:

The Company maintains a deferred compensation plan for key employees (the
Nonqualified Deferred Compensation Plan) which allows for deferral of cash
compensation from salary and annual bonuses. The Nonqualified Deferred
Compensation Plan also includes awards that were made under previous
long-term incentive plans of SunSource. Executive deferrals can grow at
mutual fund investment rates.

The Company had established a Rabbi Trust which held insurance policies to
assist in funding the liabilities of the deferred compensation plan. On
December 29, 2000, the Company surrendered the insurance policies and
transferred all investments to mutual fund investment accounts. Upon
termination of the insurance policies, the Company incurred a cash surrender
charge of $506 in December 2000.

As of December 31, 2002 and 2001, the Companys consolidated balance sheet
included $7,065 and $8,649, respectively, in restricted investments
representing the assets held in mutual funds to fund deferred compensation
liabilities due to the Companys current and former employees. The current
portion of the restricted investments was $1,142 and $1,187 as of December
31, 2002 and 2001, respectively.

Except for the cash surrender charge in December 2000, there were no other
amounts charged to income for the three years ended December 31, 2002 under
the Companys deferred compensation plans. During the three years ended
December 31, 2002, distributions from the deferred compensation plans
aggregated $1,142 in 2002, $4,539 in 2001, and $2,714 in 2000.

12. Guaranteed Preferred Beneficial Interests in the Companys
Junior Subordinated Debentures:

The Trust was organized in connection with the conversion of the Company to
corporate form in September 1997 for the purpose of (a) issuing its Trust
Preferred Securities to the Company in consideration for the deposit by the
Company of Junior Subordinated Debentures in the Trust as trust assets, and
its Trust Common Securities to the Company in exchange for cash and investing
the proceeds thereof in an equivalent amount of Junior Subordinated
Debentures and (b) engaging in such other activities as are necessary or
incidental thereto.

The Trust had no operating history prior to the issuance of the Trust
Preferred Securities. The terms of the Junior Subordinated Debentures
include those stated in the indenture between the Company and the indenture
trustee, and those made part of the Indenture by the Trust Indenture Act (the
Indenture).

The Company has guaranteed on a subordinated basis the payment of
distributions on the Trust Preferred Securities and payments on liquidation
of the Trust and redemption of Trust Preferred Securities (the Preferred
Securities Guarantee). The sole assets of the Trust are the Junior
Subordinated Debentures and the obligations of the Company under the
Indenture, the Preferred Securities Guarantee and the Junior Subordinated
Debentures in the aggregate constitute a full and unconditional guarantee by
the Company of the Trusts obligations under the Trust Preferred Securities.

51



---



##### 



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

12. Guaranteed Preferred Beneficial Interests in the
Companys Junior Subordinated Debentures (continued):

The Trust Preferred Securities have equity characteristics but creditors
rights and are therefore classified between liabilities and stockholders
equity on the balance sheet. On September 26, 2001, the Trust Preferred
Securities were recorded at fair value of $102,072 based on the price of
the Trust Preferred Securities of $24.20 upon close of trading on the
American Stock Exchange on that date. The Trust Preferred Securities have
a liquidation value of $25.00 per security. The discount on the Trust
Preferred Securities as of September 26, 2001 to their liquidation value of
$105,446, or $3,374 is amortized over the remaining life of the Trust
Preferred Securities. The fair value of the Trust Preferred Securities on
December 31, 2002 was $104,389 based on the closing price on the American
Stock Exchange of $24.75 per security on that date.

The interest payments on the Junior Subordinated Debentures underlying the
Trust Preferred Securities, aggregating $12,232 per year, are deductible
for federal income tax purposes under current law and will remain an
obligation of the Company until the Trust Preferred Securities are redeemed
or upon their maturity in 2027.

13. Stockholders Equity:

Common Shares Issued to Certain
Non-Employee Directors:

Under the Companys Stock Compensation Plan for Non-Employee Directors,
certain non-employee directors were issued 16,807 common shares in the
first nine months of 2001, which resulted in a compensation charge of $58.

Stock Options:

During the two years ended December 31, 2001, the Company provided
employees equity incentive compensation in the form of grants of incentive
stock options, non-qualified stock options and restricted stock in
accordance with the Companys Equity Compensation Plan (the Existing
Equity Plan). No equity incentive compensation was provided to employees
during the year ended December 31, 2002. The aggregate numbers of common
shares that may be issued or transferred under the Existing Equity Plan is
2,150,000 common shares. Immediately prior to the Merger Transaction, the
Company had 1,120,000 stock options outstanding which were granted in
accordance with the Existing Equity Plan.

On September 26, 2001, in conjunction with the Merger Transaction, 131,500
of these options were converted to common shares and 545,500 stock options
were cancelled. During the fourth quarter of 2001, 3,359 of these stock
options were exercised. In the third quarter of 2002, 50,000 of these stock
options were cancelled. The balance of the outstanding stock options will
remain in effect pursuant to the same terms and conditions of the Existing
Equity Plan except that these roll-over options aggregating 389,641 became
fully vested in connection with the Merger Transaction. The roll-over
options are summarized as follows:

52



---



##### 



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

13. Stockholders Equity (continued):

|             |       |                               |         |                          |  |   |       |  | 
|------------ | ----- | ----------------------------- | ------- | ------------------------ |  | - | ----- |  | 
|Grant Date   |       | Number of Options Outstanding |         | Exercise Price Per Share
|             |       |                               |         |                         
|May 1, 2000  |       |                               | 22,500  |                          |  | $ | 3.825 | 
|            
|            
|            
|            
|May 1, 2000  |       |                               | 198,500 |                          |  | $ | 4.500 | 
|            
|            
|            
|            
|May 23, 2001 |       |                               | 22,500  |                          |  | $ | 3.400 | 
|            
|            
|            
|            
|May 23, 2001 |       |                               | 146,141 |                          |  | $ | 4.000 | 
|             |       |                               |         |                          |  |   |       | 
|             | Total |                               |         | 389,641                  |  |   |       |  | 
|             |       |                               |         |                          |  |   |       | 

In conjunction with the Merger Transaction, the Company has reserved
1,337,316 stock options for issuance under the SunSource Inc. 2001 Stock
Incentive Plan (the New Equity Plan). Under the New Equity Plan, the
stock options are intended to vest over four years with 25% of the options
vesting on each anniversary of the merger through the end of year four. No
awards have been made under New Equity Plan as of December 31, 2002.

Dividends:

In the fourth quarter of 2002 the Company distributed a cash dividend of
$174 and STS OP preferred stock with a book value of $6,731 to the
shareholders of the Companys common stock.

During the fourth quarter of 2001, in connection with the proceeds from the
sale of STS Business, the Company distributed a cash dividend of $17,718 to
the shareholders of the Companys common stock.

14. Retirement Benefits:

In December 2000, the Board of Directors approved a proposal to merge the
STS Plan with another Company owned plan which was held for certain divested
operations, and terminate the merged plans as of December 31, 2000. As a
result, the Company recorded a pre-tax loss on termination of the merged
pension plans of $4,279 in December 2000.

The $4,279 loss on termination of the defined benefit pension plans
represents an estimated surplus upon termination of the defined benefit
pension plans of $3,700, less a write-off of a prepaid pension asset of
$7,424, and a charge for estimated excise taxes of $555. The approved
proposal also provides for a contribution of 25% or $925 of the $3,700
estimated surplus upon termination to the STS deferred contribution plan.
During 2000, the Company recorded a net periodic benefit of $1,500 related
to expected investment returns on the surplus assets of the STS Plan.

As of December 31, 2001, the Companys consolidated balance sheet included a
prepaid pension asset of $2,775 in other current assets. In April 2002, the
settlement of the STS Plan was completed and the Company received cash
proceeds from plan assets in excess of settlement obligations totaling
$3,903. Other income for the year ended December 31, 2002 includes a
favorable income adjustment of $1,231 to the previously recorded estimated
loss on termination resulting from final settlement of the STS Plan.

The Technology Services subsidiary also had a post-retirement benefit plan.
The benefit obligation of this plan was assumed by the buyer of Technology
Services when the subsidiary was sold on September 28, 2001. The Companys
net postretirement expense for the nine months ended September 30, 2001 and
the year ended December 31, 2000 was $58 and $136, respectively.

53



---



##### 



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

14. Retirement Benefits (continued):

Certain employees of the Company are covered under a profit-sharing and
retirement savings plan (defined contribution 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.

Costs (income) charged to operations under all retirement benefit plans
for the three years ended December 31, 2002 was as follows:

|                           |  |      |        |      |  |      |       |  |  |   |       | 
|-------------------------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                           |  | 2002 |        | 2001 |  | 2000
|                           |  |      |        |      |  |     
|Defined contribution plans |  | $    | 1,905  |      |  | $    | 2,541 |  |  | $ | 2,475 | 
|                          
|                          
|                          
|                          
|Defined benefit plans      |  |      | (1,231 | )    |  |      | 58    |  |  |   | 2,293 | 
|                           |  |      |        |      |  |      |       |  |  |   |       | 
|Total                      |  | $    | 674    |      |  | $    | 2,599 |  |  | $ | 4,768 | 
|                           |  |      |        |      |  |      |       |  |  |   |       | 

15. Commitments and 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 December
31, 2002, the Company has provided insurers letters of credit aggregating
$3,857 related to certain insurance programs.

Legal proceedings are pending which are either in the ordinary course of
business or incidental to the Companys business. Those legal proceedings
incidental to the business of the Company are generally not covered by
insurance or other indemnity. In the opinion of management, the ultimate
resolution of the pending litigation matters will not have a material
adverse effect on the consolidated financial position, operations or cash
flows of the Company.

54



---



##### 



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

16. Statements of Cash Flows:

Supplemental disclosures of cash flow information are presented below:

|                                            |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |       |         |        | 
|------------------------------------------- | -------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------- | ------ | ------------ | ------ | ------------ | - | ------------- | - | ------------ | ----- | ----- | ----- | - | ----- | ------- | ------ | 
|                                            |                                                                      |                                                   |                                   |        | Successor    |        | Predecessor 
|                                            |                                                                      |                                                   |                                   |        |              |        |             
|                                            |                                                                      |                                                   |                                   |        | Year         |        | Three Months |   | Nine months   |   | Year        
|                                            |                                                                      |                                                   |                                   |        | ended        |        | ended        |   | ended         |   | ended       
|                                            |                                                                      |                                                   |                                   |        | December 31, |        | December 31, |   | September 30, |   | December 31,
|                                            |                                                                      |                                                   |                                   |        | 2002         |        | 2001         |   | 2001          |   | 2000        
|                                            |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |             
|Cash paid (refunded) during the
period for: |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                      | Interest                                          |                                   | $      | 13,227       |        |              | $ | 1,983         |   |              | $     | 9,263 |       |   | $     | 9,186   |       
|                                            |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|                                            |                                                                      | Income taxes                                      |                                   | $      | (179         | )      |              | $ | (49           | ) |              | $     | 304   |       |   | $     | 4,174   |       
|                                            |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|Non-cash operating activities:              |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|                                           
|                                           
|                                           
|                                           
|                                            | Issuance of shares of common stock
to certain non-employee directors |                                                   | $                                 |       |              |        | $            |  |               |   | $            | 58    |       |       | $ | 105   |        
|                                            |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|Cash investing activities:                  |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|                                           
|                                           
|                                           
|                                           
|                                            | Acquisitions (see Note 4, Acquisitions
and Divestitures):            |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |       |        
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                      | Fair value of assets acquired,
including goodwill |                                   | $      | 21,592       |        |              | $ |              |   |              | $     | 5,003 |       |   | $     | 127,425 |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                      | Less: Unsecured subordinated
notes issued         |                                   |        |             |        |              |   |              |   |              |       |      |       |   |       | 23,000  |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                      | Less: Liabilities assumed                         |                                   |        |             |        |              |   |              |   |              |       |      |       |   |       | 15,555  |       
|                                            |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|                                            |                                                                      |                                                   | Cash paid for acquired businesses |        | $            | 21,592 |              |   | $             |  |              |       | $     | 5,003 |   |       | $       | 88,870 | 
|                                            |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|Non-cash investing activities:              |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|                                           
|                                           
|                                           
|                                           
|                                            | Exchange of G-C interest for
subordinated G-C note (Note 4)          |                                                   | $                                 | 10,000 |              |        | $            |  |               |   | $            |      |       |       | $ |      |        
|                                            |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|Non-cash financing activities:              |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued and unpaid distributions
on trust preferred securities       |                                                   | $                                 |       |              |        | $            |  |               |   | $            | 1,019 |       |       | $ | 1,019 |        
|                                            |                                                                      |                                                   |                                   |        |              |        |              |   |               |   |              |       |       |       |   |      

55



---



##### 



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

17. Quarterly Data (unaudited):

|                                         |  |        |        |       |  |           |        |       |  |   |        |  |  |   |        |  
|---------------------------------------- |  | ------ | ------ | ----- |  | --------- | ------ | ----- |  | - | ------ |  |  | - | ------ | -
|                                         |  |        |        |       |  | Successor |        |       |  |  
|                                         |  |        |        |       |  |          
|2002                                     |  | Fourth |        | Third |  | Second    |        | First
|                                         |  |        |        |       |  |           |        |      
|Net Sales                                |  | $      | 71,878 |       |  | $         | 75,707 |       |  | $ | 75,778 |  |  | $ | 63,425 |  
|                                        
|                                        
|                                        
|                                        
|Gross Profit                             |  |        | 41,268 |       |  |           | 42,636 |       |  |   | 41,760 |  |  |   | 34,950 |  
|                                        
|                                        
|                                        
|                                        
|Income (loss) from
continuing operations |  |        | 1,476  |       |  |           | 2,789  |       |  |   | 3,100  |  |  |   | (1,262 | )
|                                        
|                                        
|                                        
|                                        
|Net income (loss)                        |  |        | 1,476  |       |  |           | 2,789  |       |  |   | 3,100  |  |  |   | (1,262 | )

|                                         |  |           |        |       |  |        |         |             |  |   |         |  |  |   |         |  
|---------------------------------------- |  | --------- | ------ | ----- |  | ------ | ------- | ----------- |  | - | ------- |  |  | - | ------- | -
|                                         |  | Successor |        |       |  |        |         | Predecessor |  |   |         | 
|                                         |  |           |        |       |  |        |         |            
|2001                                     |  | Fourth    |        | Third |  | Second |         | First      
|                                         |  |           |        |       |  |        |         |            
|Net Sales                                |  | $         | 60,040 |       |  | $      | 114,767 |             |  | $ | 116,611 |  |  | $ | 109,929 |  
|                                        
|                                        
|                                        
|                                        
|Gross Profit                             |  |           | 34,442 |       |  |        | 49,216  |             |  |   | 49,379  |  |  |   | 44,969  |  
|                                        
|                                        
|                                        
|                                        
|Income (loss) from
continuing operations |  |           | (2,909 | )     |  |        | 1,088   |             |  |   | 214     |  |  |   | (2,629  | )
|                                        
|                                        
|                                        
|                                        
|Net income (loss)                        |  |           | (2,909 | )     |  |        | 1,088   |             |  |   | 214     |  |  |   | (2,629  | )

18. Concentration of Credit Risk:

Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash
equivalents and trade receivables. The Company places its cash and cash
equivalents with high credit quality financial institutions.
Concentrations of credit risk with respect to sales and trade receivables
are limited due to the large number of customers comprising the Companys
customer base and their dispersion across geographic areas. The Company
performs periodic credit evaluations of its customers financial condition
and generally does not require collateral. For the year ended December
31, 2002 the largest two customers accounted for 24.3% of sales and 31.8%
of the year-end accounts receivable balance. No other customer accounted
for more than 10% of the Companys total sales in 2002.

Concentration of credit risk with respect to purchases and trade payables
are limited due to the large number of vendors comprising the Companys
vendor base, with dispersion across different industries and geographic
areas. The Companys largest vendor in terms of annual purchases
accounted for less than 10% of the Companys total purchases for ongoing
operations and 12.1% of the Companys total trade payables for ongoing
operations on December 31, 2002.

19. Segment Information:

The Successor is organized as a single business segment and the
Predecessor has two reportable segments (see Note 1, Basis of
Presentation) which were disaggregated based on the products and services
provided, markets served, marketing strategies and delivery methods.

56



---



##### 



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

19. Segment Information (continued):

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment sales are
immaterial. The Company measures segment profitability and allocates
corporate resources based on each segments Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) which is defined as income from
operations before depreciation and amortization. Management believes that
EBITDA provides useful information regarding the Companys ability to
service debt. EBITDA is not a measure of operating performance computed in
accordance with generally accepted accounting principles (GAAP) and should
not be considered as a substitute for operating income, net income, cash
flows from operating activities, or other statement of operations or cash
flow data prepared in conformity with GAAP, or as a measure of profitability
or liquidity. The Company also measures the segments on performance on
their tangible asset base. The table below provides the Companys segment
disclosures and is followed by reconciliations of the segment amounts to the
consolidated amounts where appropriate:

|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |         |         | 
|------------------------------------------------------------------------------------ | ----------------------- | ------------------------- | ------- | ------------ | ------- | ------------ | ------- | ------------- | ------ | ------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                     |                         |                           |         | Successor    |         | Predecessor 
|                                                                                     |                         |                           |         |              |         |             
|                                                                                     |                         |                           |         | Year         |         | Three Months |         | Nine months   |        | Year        
|                                                                                     |                         |                           |         | ended        |         | ended        |         | ended         |        | ended       
|                                                                                     |                         |                           |         | December 31, |         | December 31, |         | September 30, |        | December 31,
|                                                                                     |                         |                           |         | 2002         |         | 2001         |         | 2001          |        | 2000        
|                                                                                     |                         |                           |         |              |         |              |         |               |        |             
|Net
Sale                                                                             |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|Technology Services (STS)                                                            |                         | $                         |        |              |         | $            |        |               |        | $            | 152,561 |         |         | $ | 228,730 |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Hillman Group                                                                        |                         |                           | 286,788 |              |         |              | 60,040  |               |        |              | 188,746 |         |         |   | 210,938 |        
|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|                                                                                     | Segment net sales       |                           |         | 286,788      |         |              |         | 60,040        |        |              |         | 341,307 |         |   |         | 439,668 |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net sales from contributed
subsidiaries, sold businesses and
terminated contracts    |                         |                           |        |              |         |              |        |               |        |              |        |         |         |   | 23,170  |        
|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|                                                                                     |                         | Consolidated net sales    |         | $            | 286,788 |              |         | $             | 60,040 |              |         | $       | 341,307 |   |         | $       | 462,838 | 
|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|Gross
Profit                                                                         |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|Technology
Services (STS)                                                            |                         | $                         |        |              |         | $            |        |               |        | $            | 37,023  |         |         | $ | 52,313  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Hillman Group                                                                        |                         |                           | 160,614 |              |         |              | 34,442  |               |        |              | 106,541 |         |         |   | 117,295 |        
|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|                                                                                     | Segment gross profit    |                           |         | 160,614      |         |              |         | 34,442        |        |              |         | 143,564 |         |   |         | 169,608 |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Gross profit from contributed
subsidiaries, sold businesses and
terminated contracts |                         |                           |        |              |         |              |        |               |        |              |        |         |         |   | 15,052  |        
|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|                                                                                     |                         | Consolidated gross profit |         | $            | 160,614 |              |         | $             | 34,442 |              |         | $       | 143,564 |   |         | $       | 184,660 | 
|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|EBITDA                                                                               |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Technology Services (STS)                                                            |                         | $                         |        |              |         | $            |        |               |        | $            | (1,205  | )       |         | $ | (6,652  | )      
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Hillman Group                                                                        |                         |                           | 51,574  |              |         |              | 10,182  |               |        |              | 35,007  |         |         |   | 34,053  |        
|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|                                                                                     | Segment EBITDA          |                           | $       | 51,574       |         |              | $       | 10,182        |        |              | $       | 33,802  |         |   | $       | 27,401  |        
|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|Tangible Assets                                                                      |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Technology Services (STS)                                                            |                         | $                         |        |              |         | $            |        |               |        |              | N/A     |         |         | $ | 62,132  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Hillman Group                                                                        |                         |                           | 168,463 |              |         |              | 146,331 |               |        |              | N/A     |         |         |   | 133,320 |        
|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        
|                                                                                     | Segment tangible assets |                           | $       | 168,463      |         |              | $       | 146,331       |        |              |         | N/A     |         |   | $       | 195,452 |        
|                                                                                     |                         |                           |         |              |         |              |         |               |        |              |         |         |         |   |         |        

57



---



##### 



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

19. Segment Information, (continued):

|                                                                                             |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |         |         | 
|-------------------------------------------------------------------------------------------- | ---------------------------- | --------------------------------- | ------ | --------- | ------- | ------------ | ----- | ----------- | ------ | -------- | ------ | ------- | ------- | - | ----- | ------- | ------- | 
|                                                                                             |                              |                                   |        | Successor |         | Predecessor 
|                                                                                             |                              |                                   |        |           |         |             
|                                                                                             |                              |                                   |        | Year      |         | Three Months |       | Nine Months |        | Year    
|                                                                                             |                              |                                   |        | Ended     |         | Ended        |       | Ended       |        | Ended   
|                                                                                             |                              |                                   |        | 12/31/02  |         | 12/31/01     |       | 9/30/01     |        | 12/31/00
|                                                                                             |                              |                                   |        |           |         |              |       |             |        |         
|Capital Expenditures                                                                         |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Technology Services (STS)                                                                    |                              | $                                 |       |           |         | $            |      |             |        | $        | 427    |         |         | $ | 937   |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Hillman Group                                                                                |                              |                                   | 22,989 |           |         |              | 2,796 |             |        |          | 11,752 |         |         |   | 7,376 |        
|                                                                                             |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|                                                                                             | Segment capital expenditures |                                   |        | 22,989    |         |              |       | 2,796       |        |          |        | 12,179  |         |   |       | 8,313   |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Capital expenditures from
contributed subsidiaries,
sold businesses and
terminated contracts |                              |                                   |       |           |         |              |      |             |        |          |       |         |         |   | 27    |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Corporate capital expenditures                                                               |                              |                                   |       |           |         |              |      |             |        |          |       |         |         |   | 5     |        
|                                                                                             |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|                                                                                             |                              | Consolidated capital
expenditures |        | $         | 22,989  |              |       | $           | 2,796  |          |        | $       | 12,179  |   |       | $       | 8,345   | 
|                                                                                             |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|Depreciation                                                                                 |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Technology Services (STS)                                                                    |                              | $                                 |       |           |         | $            |      |             |        | $        | 1,616  |         |         | $ | 2,070 |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Hillman Group                                                                                |                              |                                   | 12,004 |           |         |              | 3,030 |             |        |          | 7,946  |         |         |   | 7,161 |        
|                                                                                             |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|                                                                                             | Segment depreciation         |                                   |        | 12,004    |         |              |       | 3,030       |        |          |        | 9,562   |         |   |       | 9,231   |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Depreciation from contributed
subsidiaries, sold businesses
and terminated contracts         |                              |                                   |       |           |         |              |      |             |        |          |       |         |         |   | 181   |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Corporate depreciation                                                                       |                              |                                   |       |           |         |              |      |             |        |          | 31     |         |         |   | 43    |        
|                                                                                             |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|                                                                                             |                              | Consolidated depreciation         |        | $         | 12,004  |              |       | $           | 3,030  |          |        | $       | 9,593   |   |       | $       | 9,455   | 
|                                                                                             |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|Geographic Segment Data                                                                      |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Net
Sales                                                                                    |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | United States                |                                   | $      | 285,571   |         |              | $     | 59,875      |        |          | $      | 330,832 |         |   | $     | 443,159 |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                             | Canada                       |                                   |        | 1,217     |         |              |       | 165         |        |          |        | 10,475  |         |   |       | 19,679  |        
|                                                                                             |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        
|                                                                                             |                              | Consolidated net sales            |        | $         | 286,788 |              |       | $           | 60,040 |          |        | $       | 341,307 |   |       | $       | 462,838 | 
|                                                                                             |                              |                                   |        |           |         |              |       |             |        |          |        |         |         |   |       |        

58



---



##### 



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

19. Segment Information,
(continued):

|                                                                                                 |                                                 |   |           |       |              |   |             |   |          |   |        |   |  |   |         |        |  
|------------------------------------------------------------------------------------------------ | ----------------------------------------------- | - | --------- | ----- | ------------ | - | ----------- | - | -------- | - | ------ | - |  | - | ------- | ------ | -
|                                                                                                 |                                                 |   | Successor |       | Predecessor 
|                                                                                                 |                                                 |   |           |       |             
|                                                                                                 |                                                 |   | Year      |       | Three Months |   | Nine Months |   | Year    
|                                                                                                 |                                                 |   | Ended     |       | Ended        |   | Ended       |   | Ended   
|                                                                                                 |                                                 |   | 12/31/02  |       | 12/31/01     |   | 9/30/01     |   | 12/31/00
|                                                                                                 |                                                 |   |           |       |              |   |             |   |         
|Reconciliation of Segment Profit to
Income (Loss) from Continuing
Operations Before Income Taxes |                                                 |   |           |       |              |   |             |   |          |   |        |   |  |   |         |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Segment profit  EBITDA                                                                          |                                                 | $ | 51,574    |       |              | $ | 10,182      |   |          | $ | 33,802 |   |  | $ | 27,401  |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|EBITDA from contributed subsidiaries,
sold businesses and terminated
contracts                   |                                                 |   |          |       |              |   |            |   |          |   |       |   |  |   | 2,823   |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Dividend income  STS Operating, Inc.                                                            |                                                 |   | 546       |       |              |   | 185         |   |          |   |       |   |  |   |        |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Depreciation                                                                                     |                                                 |   | (12,004   | )     |              |   | (3,030      | ) |          |   | (9,593 | ) |  |   | (9,455  | )     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Amortization                                                                                     |                                                 |   | (1,485    | )     |              |   | (1,588      | ) |          |   | (2,895 | ) |  |   | (3,369  | )     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Management fee expense                                                                           |                                                 |   | (1,800    | )     |              |   | (250        | ) |          |   |       |   |  |   |        |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Corporate expenses                                                                               |                                                 |   | (2,622    | )     |              |   | (864        | ) |          |   | (4,079 | ) |  |   | (8,956  | )     
|                                                                                                 |                                                 |   |           |       |              |   |             |   |          |   |        |   |  |   |         |       
|Income before non-recurring charges                                                              |                                                 |   | 34,209    |       |              |   | 4,635       |   |          |   | 17,235 |   |  |   | 8,444   |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Non-recurring gains (charges):                                                                   |                                                 |   |           |       |              |   |             |   |          |   |        |   |  |   |         |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Gain on curtailment/termination
of pension plan |   |           | 1,231 |              |   |             |  |          |   |        |  |  |   |         | (4,279 | )
|                                                                                                 |                                                 |   |           |       |              |   |             |   |          |   |        |   |  |   |         |       
|Income from operations                                                                           |                                                 |   | 35,440    |       |              |   | 4,635       |   |          |   | 17,235 |   |  |   | 4,165   |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Interest expense, net                                                                            |                                                 |   | (13,227   | )     |              |   | (3,616      | ) |          |   | (9,222 | ) |  |   | (11,286 | )     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Distribution on guaranteed preferred
beneficial interests                                        |                                                 |   | (12,231   | )     |              |   | (3,058      | ) |          |   | (9,174 | ) |  |   | (12,232 | )     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Gain on contribution of subsidiaries                                                             |                                                 |   |          |       |              |   |            |   |          |   |       |   |  |   | 49,115  |       
|                                                                                                 |                                                 |   |           |       |              |   |             |   |          |   |        |   |  |   |         |       
|Income (loss) from continuing
operations before income taxes                                     |                                                 | $ | 9,982     |       |              | $ | (2,039      | ) |          | $ | (1,161 | ) |  | $ | 29,762  |       
|                                                                                                 |                                                 |   |           |       |              |   |             |   |          |   |        |   |  |   |         |       
|Reconciliation
of Segment TangibleAssets to Total Assets                                         |                                                 |   |           |       |              |   |             |   |          |   |        |   |  |   |         |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Segment tangible assets                                                                          |                                                 | $ | 168,463   |       |              | $ | 146,331     |   |          |   | N/A    |   |  | $ | 195,452 |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Goodwill                                                                                         |                                                 |   | 132,677   |       |              |   | 120,585     |   |          |   | N/A    |   |  |   | 63,914  |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Other intangible assets                                                                          |                                                 |   | 11,068    |       |              |   | 12,553      |   |          |   | N/A    |   |  |   | 14,035  |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Deferred income taxes                                                                            |                                                 |   | 32,549    |       |              |   | 34,579      |   |          |   | N/A    |   |  |   | 29,601  |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Deferred financing fees                                                                          |                                                 |   | 5,774     |       |              |   | 5,536       |   |          |   | N/A    |   |  |   | 5,835   |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Assets held for sale                                                                             |                                                 |   |          |       |              |   | 146         |   |          |   | N/A    |   |  |   | 1,767   |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Other corporate assets                                                                           |                                                 |   | 18,323    |       |              |   | 24,834      |   |          |   | N/A    |   |  |   | 11,985  |       
|                                                                                                 |                                                 |   |           |       |              |   |             |   |          |   |        |   |  |   |         |       
|Consolidated total assets                                                                        |                                                 | $ | 368,854   |       |              | $ | 344,564     |   |          |   | N/A    |   |  | $ | 322,589 |       
|                                                                                                 |                                                 |   |           |       |              |   |             |   |          |   |        |   |  |   |         |       

59



---



##### 



Financial Statement Schedule:

SCHEDULE II  VALUATION ACCOUNTS

(dollars in thousands)

|                                               |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  |  |   |       |       |     |  |  |  | 
|---------------------------------------------- | ------------------ | - | ------------------------------------- | ----- | --- |  |  |  | --------- | - | ------------- | ----- | ------------ | - | ----------- | ----- | -------------- |  | ----------- |  |  | - | ----- | ----- | --- |  |  |  | 
|                                               |                    |   | Deducted From Assets in Balance Sheet
|                                               |                    |   |                                      
|                                               |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   | Accumulated |       |                |  |             |  |  |   |       |       |     |  | 
|                                               |                    |   |                                       |       |     |  |  |  |           |   | Allowance for |       | Amortization |   |             |       |                |  | Accumulated |  |  |   |      
|                                               |                    |   | Allowance for                         |       |     |  |  |  | Obsolete/ |   | of Goodwill   |       |              |   |             |       | Amortization   |  |             |  | 
|                                               |                    |   | Doubtful                              |       |     |  |  |  | Excess    |   | and           |       |              |   |             |       | of Deferred    |  |             |  | 
|                                               |                    |   | Accounts                              |       |     |  |  |  | Inventory |   | Intangibles   |       |              |   |             |       | Financing Fees |  |             |  | 
|                                               |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  | 
|Balance,
December 31, 1999  Predecessor       |                    | $ | 2,064                                 |       |     |  |  |  |           | $ | 6,768         |       |              | $ | 19,786      |       |                |  |             |  |  | $ | 29    |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|Additions charged to cost and expenses         |                    |   | 756                                   |       |     |  |  |  |           |   | 2,132         |       |              |   | 3,369       |       |                |  |             |  |  |   | 961   |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|Additions
for Axxess acquisition               |                    |   | 212                                   |       |     |  |  |  |           |   | 1,201         |       |              |   |            |       |                |  |             |  |  |   |      |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|Deductions due to:                             |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  |  |   |       |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|                                               | Sale of division   |   |                                       | 368   |     |  |  |  |           |   |               | 657   |              |   |             | 8,927 |                |  |             |  |  |   |       |      |     |  |  |  | 
|                                              
|                                              
|                                              
|                                              
|                                               | Others             |   |                                       | 1,264 | (A) |  |  |  |           |   |               | 3,086 | (A)          |   |             |      |                |  |             |  |  |   |       |      |     |  |  |  | 
|                                               |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  |  |   |       |       |     |  |  | 
|Balance,
December 31, 2000  Predecessor       |                    |   | 1,400                                 |       |     |  |  |  |           |   | 6,358         |       |              |   | 14,228      |       |                |  |             |  |  |   | 990   |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|Additions charged to cost and expenses         |                    |   | 430                                   |       |     |  |  |  |           |   | 1,699         |       |              |   | 2,895       |       |                |  |             |  |  |   | 1,047 |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|Deductions due to:                             |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  |  |   |       |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|                                               | Others             |   |                                       | 228   | (A) |  |  |  |           |   |               | 1,068 | (A)          |   |             |      |                |  |             |  |  |   |       | 1,804 | (C) |  |  |  | 
|                                               |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  |  |   |       |       |     |  |  | 
|Balance,
September 30, 2001  Predecessor      |                    |   | 1,602                                 |       |     |  |  |  |           |   | 6,989         |       |              |   | 17,123      |       |                |  |             |  |  |   | 233   |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|Additions charged to cost and expense          |                    |   | 495                                   |       |     |  |  |  |           |   | (4            | )     |              |   | 1,588       |       |                |  |             |  |  |   | 237   |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|Deductions due to:                             |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  |  |   |       |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|                                               | Sale of division   |   |                                       | 1,038 |     |  |  |  |           |   |               | 3,436 |              |   |             | 8,816 |                |  |             |  |  |   |       |      |     |  |  |  | 
|                                              
|                                              
|                                              
|                                              
|                                               | Merger transaction |   |                                       |      |     |  |  |  |           |   |               |      |              |   |             | 8,307 | (B)            |  |             |  |  |   |       | 233   | (B) |  |  |  | 
|                                              
|                                              
|                                              
|                                              
|                                               | Others             |   |                                       | 522   | (A) |  |  |  |           |   |               | (378  | )(A)         |   |             |      |                |  |             |  |  |   |       |      |     |  |  |  | 
|                                               |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  |  |   |       |       |     |  |  | 
|Balance,
December 31, 2001  Successor         |                    |   | 537                                   |       |     |  |  |  |           |   | 3,927         |       |              |   | 1,588       |       |                |  |             |  |  |   | 237   |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|Additions charged to cost and expenses         |                    |   | 274                                   |       |     |  |  |  |           |   | 654           |       |              |   | 1,485       |       |                |  |             |  |  |   | 1,149 |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|Additions for DIY Acquisition                  |                    |   | 100                                   |       |     |  |  |  |           |   | 1,419         |       |              |   |            |       |                |  |             |  |  |   |      |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|Deductions due to:                             |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  |  |   |       |       |     |  |  | 
|                                              
|                                              
|                                              
|                                              
|                                               | Others             |   |                                       | 359   | (A) |  |  |  |           |   |               | 1,625 | (A)          |   |             |      |                |  |             |  |  |   |       |      |     |  |  |  | 
|                                               |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  |  |   |       |       |     |  |  | 
|Ending
Balance  December 31, 2002  Successor |                    |   | 552                                   |       |     |  |  |  |           |   | 4,375         |       |              |   | 3,073       |       |                |  |             |  |  |   | 1,386 |       |     |  |  | 
|                                               |                    |   |                                       |       |     |  |  |  |           |   |               |       |              |   |             |       |                |  |             |  |  |   |       |       |     |  |  | 

Notes:

(A)  Includes write-off of accounts receivable (net of bad debt
recoveries) and inventories.

(B)  Adjustment to write-off pre-merger accumulated amortization.

(C)  Write-off of deferred financing fee as a result of early
extinguishment of debt related to the Companys bank
revolving credit.

60



---



##### 



Item 9  Changes in and Disagreements on Accounting and
Financial Disclosure.

There were no changes in or disagreements on accounting and financial
disclosure during the year ended December 31, 2002.

61



---



##### 



PART III

Item 10  Directors and Executive Officers of the Registrant.

The following is a summary of the biographies for at least the last five
years of the continuing directors and officers. Each of the directors has
served as such since September 2001 except for Alan T. Biland who has served since December
2002.

Directors

|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                             |  | Principal Occupation; Five-Year Employment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Name and Age                 |  | History; Other Directorships                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Maurice P. Andrien, Jr. (61) |  | Chairman of The Hillman Companies, Inc., Cincinnati, Ohio
(f/k/a SunSource Inc., Philadelphia, Pennsylvania). From April
1999 to November 2001 Mr. Andrien was President and Chief
Executive Officer of SunSource Inc. From June 1998 to April
1999, Mr. Andrien was President and Chief Operating Officer of
Unican Security Systems, Ltd., Montreal, Quebec, Canada. From
April 1992 to June 1998, Mr. Andrien was President and Chief
Executive Officer of Curtis Industries, Inc., Mayfield Heights,
Ohio.                          
|                            
|                            
|                            
|                            
|Max W. Hillman, Jr. (56)     |  | President and Chief Executive Officer of The Hillman Companies,
Inc., Chief Executive Officer of The Hillman Group, Inc.,
Cincinnati, Ohio. From April 2000 to November 2001, Mr.
Hillman was Co-Chief Executive Officer of The Hillman Group,
Inc. From 1999 to April 2000, Mr. Hillman held the position of
Chief Executive Officer of The Hillman Group, Inc. From 1991
to 1999, Mr. Hillman was a Group Vice President for The Hillman
Group, Inc.                                                                                  
|                            
|                            
|                            
|                            
|Alan T. Biland (44)          |  | President, Diagnostics and Information; Vice President, Chief
Information Officer of Snap-on Incorporated, Kenosha,
Wisconsin. From April 1998, Mr. Biland was CIO for Snap-on
Incorporated. From 1985 to 1998, Mr. Biland held positions of
increasing responsibility at Case IH in Racine, Wisconsin. Mr.
Biland serves on a number of internal advisory board positions
at Snap-on Incorporated including Mitchell 1, San Diego,
California, Cartec GMBH in Unterneukirchen, Germany, and
Snap-on Technologies in Kenosha, Wisconsin.

62



---



##### 



|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Daniel L. Russell (38)       |  | Principal of Allied Capital Corporation, Washington, D.C. Mr.
Russell serves as a Principal in Allied Capitals private finance
group. Prior to joining Allied Capital in 1998, Mr. Russell spent
six years with KPMG Peat Marwick LLP in the firms financial services
group, including serving as a Senior Manager. Mr. Russell is a
director of Nobel Learning Communities, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                            
|                            
|                            
|                            
|William L. Walton (53)       |  | Chairman, Chief Executive Officer and President of Allied Capital
Corporation, Washington, D.C., since 1997. Mr. Walton has served on
the Allied Capital Board of Directors since 1986 and was named
Chairman and CEO in February 1997. Mr. Walton previously served as
Managing Director of New York-based Butler Capital Corporation, a
mezzanine buyout firm, and was the personal venture capital advisor
for William S. Paley, founder and Chairman of CBS. In addition, he
was a Senior Vice President in Lehman Brothers Kuhn Loebs Investment
Banking Group. Mr. Walton also founded and managed two start-up
businesses, SuccessLab, Inc. and Language Odyssey, in the emerging
education industry (1992-1996). Mr. Walton is a director of Riggs
National Corporation and the National Venture Capital Association.
|                            
|                            
|                            
|                            
|G. Cabell Williams, III (48) |  | Managing Director of Allied Capital Corporation, Washington, D.C.
Mr. Williams has been employed by Allied Capital in the private
finance group since 1981. Mr. Williams has served in many capacities
during his tenure at Allied Capital since 1981.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

All directors hold office until their successors are duly elected and
qualified.

63



---



##### 



The executive officers of the Company (including the executive officers of The
Hillman Group, Inc.) are set forth below:

Executive Officers

|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Age                 |  | Position with the Company; Five-Year Employment History                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Maurice P. Andrien, Jr. (61) |  | Chairman of The Hillman Companies, Inc., Cincinnati, Ohio. See page 62
for five-year employment history.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                            
|                            
|                            
|                            
|Max W. Hillman, Jr. (56)     |  | President and Chief Executive Officer of The Hillman Companies, Inc.,
Chief Executive Officer of The Hillman Group, Inc., Cincinnati, Ohio.
See page 62 for five-year employment history. Mr. Hillman is the
brother of Richard P. Hillman.                                                                                                                                                                                                                                                                                                                                          
|                            
|                            
|                            
|                            
|Richard P. Hillman (54)      |  | President of The Hillman Group, Inc., Cincinnati, Ohio. Mr. Hillman has
held such position since 1991. Mr. Hillman is the brother of Max W.
Hillman.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                            
|                            
|                            
|                            
|James P. Waters (41)         |  | Chief Financial Officer and Secretary of The Hillman Companies, Inc.,
Cincinnati, Ohio and Vice President, Chief Financial Officer and
Secretary of The Hillman Group, Inc., Cincinnati, Ohio. From September
1999 to November 2001, Mr. Waters was Vice President and Chief Financial
Officer of The Hillman Group, Inc. From November 1997 to September
1999, Mr. Waters was Vice President of Finance for Curtis Industries,
Inc., Mayfield Heights, Ohio. From May 1993 to November 1997, Mr.
Waters was Director of Finance for Curtis Industries, Inc., Mayfield
Heights, Ohio.
|                            
|                            
|                            
|                            
|George L. Heredia (44)       |  | Senior Vice President of Engraving for The Hillman Group, Inc., Tempe,
Arizona. Mr. Heredia has held various executive positions since April
2000. Prior to April 2000, Mr. Heredia has held the positions of Senior
Vice President of Marketing and Senior Vice President of Operations for
Axxess Technologies Inc.                                                                                                                                                                                                                                                                
|                            
|                            
|                            
|                            
|Terry R. Rowe (48)           |  | Senior Vice President of National Account Sales for The Hillman
Group, Inc., Tempe, Arizona. Mr. Rowe had held such position
with The Hillman Group since 1992.                                                                                                                                                                                                                                                                                                                                                                                                                      

All executive officers hold office at the pleasure of the board of directors.

64



---



##### 



Item 11  Executive Compensation

Summary Compensation Table

The following table sets forth all cash compensation paid and accrued for
services rendered during the three years ended December 31, 2002, by each of
the Chief Executive Officer, and the four other most highly compensated
executive officers of the Company and its subsidiaries whose remuneration
exceeded $100,000 and two individuals who served as executive officers during
the last completed fiscal year but were not serving as such as of December 31,
2002.

|                                |  |                     |      |              |  |          |         |                 |  |           |         |     |  |              |  |                        |         |            |  |  |        |  |  |   |         |    
|------------------------------- |  | ------------------- | ---- | ------------ |  | -------- | ------- | --------------- |  | --------- | ------- | --- |  | ------------ |  | ---------------------- | ------- | ---------- |  |  | ------ |  |  | - | ------- | ---
|                                |  |                     |      |              |  |          |         |                 |  |           |         |     |  |              |  | Long-Term Compensation |         |            |  | 
|                                |  |                     |      |              |  |          |         |                 |  |           |         |     |  |              |  |                        |         |            |  | 
|                                |  |                     |      |              |  |          |         |                 |  |           |         |     |  |              |  | Restricted             |         | Securities |  |  |        | 
|                                |  | Annual Compensation |      |              |  | Stock    |         | Underlying      |  |           |         |    
|Name and                        |  |                     |      | Other Annual |  | Awards   |         | Options         |  | All Other
|Principal Position              |  | Year                |      | Salary(1)    |  | Bonus(2) |         | Compensation(9) |  | $         |         | #   |  | Compensation
|                                |  |                     |      |              |  |          |         |                 |  |           |         |     |  |             
|Maurice P. Andrien, Jr.         |  |                     | 2002 |              |  | $        | 355,600 |                 |  | $         | 228,467 |     |  |             |  |                        |        |            |  |  |       |  |  |   |        |    
|                               
|                               
|                               
|                               
|Chairman                        |  |                     | 2001 |              |  |          | 473,352 |                 |  |           | 299,928 |     |  |             |  |                        |        |            |  |  | 60,000 |  |  |   |        |    
|                               
|                               
|                               
|                               
|The Hillman Companies, Inc. (3) |  |                     | 2000 |              |  |          | 462,608 |                 |  |           | 284,000 |     |  |             |  | $                      | 450,000 | (3)        |  |  | 70,000 |  |  | $ | 344,157 | (4)
|                               
|Max W. Hillman, Jr.             |  |                     | 2002 |              |  |          | 362,500 |                 |  |           | 293,794 |     |  |             |  |                        |        |            |  |  |       |  |  |   |        |    
|                               
|                               
|                               
|                               
|President and CEO               |  |                     | 2001 |              |  |          | 361,216 |                 |  |           | 193,262 |     |  |             |  |                        |        |            |  |  | 25,000 |  |  |   |        |    
|                               
|                               
|                               
|                               
|The Hillman Companies, Inc.     |  |                     | 2000 |              |  |          | 324,778 |                 |  |           | 154,414 |     |  |             |  |                        |        |            |  |  | 42,500 |  |  |   |        |    
|                               
|Richard P. Hillman              |  |                     | 2002 |              |  |          | 234,423 |                 |  |           | 105,990 |     |  |             |  |                        |        |            |  |  |       |  |  |   |        |    
|                               
|                               
|                               
|                               
|President                       |  |                     | 2001 |              |  |          | 230,161 |                 |  |           | 49,967  |     |  |             |  |                        |        |            |  |  | 10,000 |  |  |   |        |    
|                               
|                               
|                               
|                               
|The Hillman Group, Inc.         |  |                     | 2000 |              |  |          | 222,077 |                 |  |           | 53,340  |     |  |             |  |                        |        |            |  |  | 10,000 |  |  |   |        |    
|                               
|George L. Heredia               |  |                     | 2002 |              |  |          | 193,992 |                 |  |           | 67,968  |     |  |             |  |                        |        |            |  |  |       |  |  |   |        |    
|                               
|                               
|                               
|                               
|Senior VP of Engraving          |  |                     | 2001 |              |  |          | 183,257 |                 |  |           | 47,992  | (6) |  |             |  |                        |        |            |  |  | 10,000 |  |  |   |        |    
|                               
|                               
|                               
|                               
|The Hillman Group, Inc. (5)     |  |                     | 2000 |              |  |          | 133,284 |                 |  |           | 42,586  |     |  |             |  |                        |        |            |  |  |       |  |  |   |        |    
|                               
|Terry R. Rowe                   |  |                     | 2002 |              |  |          | 182,000 |                 |  |           | 64,715  |     |  |             |  |                        |        |            |  |  |       |  |  |   |        |    
|                               
|                               
|                               
|                               
|Senior VP National Accounts     |  |                     | 2001 |              |  |          | 175,000 |                 |  |           | 49,508  |     |  |             |  |                        |        |            |  |  | 5,000  |  |  |   |        |    
|                               
|                               
|                               
|                               
|The Hillman Group, Inc.         |  |                     | 2000 |              |  |          | 125,000 |                 |  |           | 18,737  |     |  |             |  |                        |        |            |  |  | 4,000  |  |  |   |        |    
|                               
|Former Executive Officers       |  |                     |      |              |  |          |         |                 |  |           |         |     |  |              |  |                        |         |            |  |  |        |  |  |   |         |    
|                                |  |                     |      |              |  |          |         |                 |  |           |         |     |  |              |  |                        |         |            |  |  |        |  |  |   |         |    
|Joseph M. Corvino (8)           |  |                     | 2002 |              |  |          | 303,353 |                 |  |           |        |     |  |             |  |                        |        |            |  |  |       |  |  |   |        |    
|                               
|                               
|                               
|                               
|Former Senior VP & CFO          |  |                     | 2001 |              |  |          | 262,600 |                 |  |           | 101,404 |     |  |             |  |                        |        |            |  |  | 30,000 |  |  |   |        |    
|                               
|                               
|                               
|                               
|The Hillman Companies, Inc.     |  |                     | 2000 |              |  |          | 252,600 |                 |  |           | 75,000  |     |  |             |  |                        |        |            |  |  | 35,000 |  |  |   |        |    
|                               
|Stephen W. Miller (7)           |  |                     | 2002 |              |  |          | 362,500 |                 |  |           | 220,344 |     |  |             |  |                        |        |            |  |  |       |  |  |   |        |    
|                               
|                               
|                               
|                               
|Former Vice Chairman            |  |                     | 2001 |              |  |          | 362,604 |                 |  |           | 193,163 | (6) |  |             |  |                        |        |            |  |  | 25,000 |  |  |   |        |    
|                               
|                               
|                               
|                               
|The Hillman Group, Inc. (5)     |  |                     | 2000 |              |  |          | 242,786 |                 |  |           | 200,000 |     |  |             |  |                        |        |            |  |  | 25,000 |  |  |   |        |    



---

|(1) |  | Represents base salary plus other types of miscellaneous compensation.                                                                                                                                                                                                                                                                                                            
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Represents earned bonus for services rendered in each year.                                                                                                                                                                                                                                                                                                                       
|   
|   
|   
|   
|(3) |  | On January 26, 2000, the Compensation Committee of the Board of
Directors amended an original grant instrument by reducing the number
of stock options from 150,000 to 50,000 and issued 100,000 shares of
restricted stock. The restricted shares were issued at a fair market
value of $4.50 per share (see Compensation of the Chairman of the Board
of the Companyon page 67).

65



---



##### 



|(4) |  | Includes compensation for the forgiveness of a loan in the amount
of $217,058 by the Company associated with the restricted stock issued
on January 26, 2000 (see note 3 above), relocation expenses of
$110,666, country club fees of $13,953 and miscellaneous items of
$2,480 paid by the Company in 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(5) |  | Represents compensation paid or distributed from April 7, 2000
through December 31, 2000 only as a result of the acquisition of Axxess
Technologies, Inc.                                                                                                                                                    
|   
|   
|   
|   
|(6) |  | Excludes special performance bonuses of $800,000 for Mr. Miller and
$293,000 for Mr. Heredia earned in 2001 related to the acquisition of
Axxess Technologies, Inc.                                                                                                                                          
|   
|   
|   
|   
|(7) |  | Retired as Vice Chairman of The Hillman Group, Inc. in September
2002. Mr. Millers 2002 annual compensation excludes a lump sum
severance payment of $1,068,623 paid in October 2002.                                                                                                                       
|   
|   
|   
|   
|(8) |  | Retired as Senior Vice President and CFO in May 2002.                                                                                                                                                                                                                                                        
|   
|   
|   
|   
|(9) |  | There were no perquisites paid by the Company in excess of the lesser of $50,000 or 10% of the persons total salary
and bonus for the year.                                                                                                                                                                 

There were no stock options granted in 2002.
The Board of Directors were not compensated by the Company during
the year ended December 31, 2002.

AGGREGATED OPTION EXERCISES IN 2002
AND FISCAL YEAR-END OPTION VALUES

The following table sets forth information for each named executive officer
with regard to stock option exercises during 2002 and the aggregate stock
options held at December 31, 2002.

|                        |  |             |   |          |  |                   |   |                   |  |               |           |                      |  |   |             | 
|----------------------- |  | ----------- | - | -------- |  | ----------------- | - | ----------------- |  | ------------- | --------- | -------------------- |  | - | ----------- | 
|                        |  |             |   |          |  |                   |   |                   |  | Number of     |           |                      |  |  
|                        |  |             |   |          |  |                   |   |                   |  | Underlying    |           |                      |  |  
|                        |  |             |   |          |  |                   |   |                   |  | Unexercised   |           | Value of Unexercised
|                        |  |             |   |          |  |                   |   |                   |  | Options       |           | In-The-Money Options
|                        |  | Shares      |   |          |  |                   |   | At FY-End (#)     |  | At FY-End ($)
|                        |  | Acquired by |   | Value    |  | Exercisable/      |   | Exercisable/     
|Name                    |  | Exercise    |   | Realized |  | Unexercisable (1) |   | Unexercisable (2)
|                        |  |             |   |          |  |                   |   |                  
|Maurice P. Andrien, Jr. |  |             |  |          |  |                   |  |                   |  |               | 130,000/0 |                      |  | $ | 2,057,626/0 | 
|                       
|                       
|                       
|                       
|Joseph M. Corvino       |  |             |  |          |  |                   |  |                   |  |               | 65,000/0  |                      |  |   | 1,041,563/0 | 
|                       
|                       
|                       
|                       
|Max W. Hillman, Jr.     |  |             |  |          |  |                   |  |                   |  |               | 67,500/0  |                      |  |   | 1,081,243/0 | 
|                       
|                       
|                       
|                       
|Richard P. Hillman      |  |             |  |          |  |                   |  |                   |  |               | 20,000/0  |                      |  |   | 316,942/0   | 
|                       
|                       
|                       
|                       
|George L. Heredia       |  |             |  |          |  |                   |  |                   |  |               | 6,641/0   |                      |  |   | 104,401/0   | 
|                       
|                       
|                       
|                       
|Terry R. Rowe           |  |             |  |          |  |                   |  |                   |  |               | 9,000/0   |                      |  |   | 142,874/0   | 



---

|(1) |  | Represents the number of shares subject to outstanding options.                                                                                                    
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Based on a price of $20.10 per share, the estimated per share fair
value of the Companys Common Stock as of December 31, 2002 minus the
associated exercise price.

66



---



##### 



Employment Contracts, Termination of Employment and Change-in-Control

Arrangements

Upon a change in control of the Companys Nonqualified Deferred Compensation
Plan (the Deferred Compensation Plan), payment would be provided for all
amounts, including accrued investment earnings.

Compensation of the Chairman of the
Board of the Company

Mr. Maurice P. Andrien, Jr. became the Chairman of the Board of the Company
(Chairman) on September 26, 2001. Mr. Andrien had been President and Chief
Executive Officer of the Company since April 27, 1999. Mr. Andrien entered
into a four-year employment agreement with the Company effective as of the
merger with Allied Capital Corporation on September 26, 2001, which term will
renew on a year-to-year basis after the initial term, unless the agreement is
terminated earlier or not renewed. Within the terms of Mr. Andriens initial
employment agreement with the Company, dated April 27, 1999, a change in
control credit of $1,000,000 was made in Mr. Andriens name to the Deferred
Compensation Plan upon the Companys merger with Allied Capital Corporation.
The agreement provides for an annual base salary of $343,000, a 2001 bonus of
up to 100% of base salary in accordance with performance targets established
in January, 2001, and subsequent annual bonuses of up to 100% of base salary
for the remainder of the term, subject to performance in accordance with
performance criteria determined by the Board each calendar year. During the
term, Mr. Andrien will be eligible to participate in the SunSource Inc. 2001
Stock Incentive Plan (the New Equity Plan), the 1998 Equity Compensation
Plan (the Existing Equity Plan) and the Deferred Compensation Plan. Mr.
Andriens employment agreement contains a Non-Solicitation covenant for two
years following termination of employment with the Company. If Mr. Andrien is
terminated without cause in the absence of a change in control involving the
Company, then the agreement requires the Company to pay Mr. Andrien his normal
base salary and bonus compensation for a period of two years following the
termination date. If the Company should undergo a change in control within
the terms of the agreement, Mr. Andrien will receive the lump sum equivalent
of one years base compensation and bonus.

A grant of 150,000 non-qualified stock options, at fair market value, was made
to Mr. Andrien upon his initial employment with the Company, on April 27, 1999
under the Existing Equity Plan (the Equity Plan). The options were fully
exercisable at the date of grant. External industry conditions and certain
internal events that were in progress at the time of Mr. Andriens hire
resulted in significant reduction of the intended value of the grant. On
January 26, 2000 the Compensation Committee of The Board of Directors amended
the grant by reducing the number of stock options from 150,000 to 50,000 and
issued a grant of 100,000 shares of restricted stock. One-third of the
restricted shares vested six months from the date of grant. Vesting of the
remaining two-thirds of the restricted shares was based on achievement of
certain performance goals. All unvested restricted shares became fully vested
upon the merger with Allied Capital Corporation on September 26, 2001.

Compensation of the President and
Chief Executive Officer of the Company

Mr. Max W. Hillman, Jr. became the President and Chief Executive Officer of
The Hillman Companies, Inc. in November 2001. Mr. Hillman entered into a
four-year employment agreement with the Company effective as of the merger
with Allied Capital Corporation on September 26, 2001, which term will renew
on a year-to-year basis after the initial term, unless this agreement is
terminated earlier or not renewed. The agreement provides for an annual base
salary of $350,000, 2001 bonus compensation in accordance with performance
targets established in January, 2001, and subsequent annual bonuses of up to
124% of base salary for the remainder of the term, subject to performance in
accordance with performance criteria determined by the Board each calendar
year. During the term, Mr. Hillman will be eligible to participate in the
Companys New Equity Plan, Existing Equity Plan and Deferred Compensation
Plan. Mr. Hillmans employment agreement contains Non-Compete and
Non-Solicitation covenants for two years following termination of employment
with

67



---



##### 



the Company. If Mr. Hillman is terminated without cause in the absence
of a change in control involving the Company, then the agreement requires the
Company to pay Mr. Hillman his normal base salary and bonus compensation for a
period of two years following the termination date. If the Company should
undergo a change in control within the terms of the agreement, Mr. Hillman
will receive the lump sum equivalent of one years base compensation and
bonus.

Compensation of the Former Senior
Vice President of The Hillman Companies, Inc.

The Company and Mr. Corvino agreed that Mr. Corvinos employment would
terminate effective May 31, 2002 at which time he became eligible to receive
the benefits provided for under the terms of his employment agreement.
Benefits include compensation equal to two times his annual base salary of
$250,000, bonus of $101,404 and car allowance as of the date of his
termination. This compensation will be paid to Mr. Corvino in equal, bi-weekly
installments over a four (4) year period beginning in June 2002.

Compensation of the Former Vice
Chairman of The Hillman Group, Inc.

The Company and Mr. Miller agreed that Mr. Millers employment would terminate
effective September 26, 2002 at which time he became eligible to receive the
benefits provided for under the terms of his employment agreement. Benefits
include a lump sum distribution of $1,068,623, the payment of Mr. Millers
base salary of $350,000, bonus of $200,925, medical benefits and car allowance
for a one year period following the date of termination. Mr. Miller will also
receive a Transition Success Bonus of $188,500 on the first anniversary of his
termination date, provided his duties are performed as expected under the
agreement. In addition to the benefits provided by the terms of his employment agreement
the Company purchased Mr. Millers shares of common stock for $231,377.

68



---



##### 



Item 12  Security Ownership of Certain Beneficial Owners and Management.

OWNERSHIP OF COMMON SHARES

The following table shows for (i) each director, (ii) each executive officer
named in the summary compensation table, and (iii) all officers and directors
as a group, the beneficial ownership of Common Shares as of December 31,
2002.

|                                 |                                               |                    |               |                  |  |  |   |     |  
|-------------------------------- | --------------------------------------------- | ------------------ | ------------- | ---------------- |  |  | - | --- | -
|                                 |                                               |                    | Common Shares |                  |  |  |  
|Name of Beneficial Owner         |                                               | Owned Beneficially |               | Percent of Class
|                                 |                                               |                    |               |                 
|Directors and Executive Officers |                                               |                    |               |                  |  |  |   |    
|                                
|                                
|                                
|                                
|                                 | Maurice P. Andrien, Jr.                       |                    | 19,880        |                  |  |  | * |    
|                                
|                                
|                                
|                                
|                                 | Richard P. Hillman                            |                    |               | 41,205           |  |  |   | *   |  
|                                
|                                
|                                
|                                
|                                 | Max W. Hillman, Jr.                           |                    |               | 55,422           |  |  |   | *   |  
|                                
|                                
|                                
|                                
|                                 | George L. Heredia                             |                    |               | 3,359            |  |  |   | *   |  
|                                
|                                
|                                
|                                
|                                 | Terry R. Rowe                                 |                    |               | 2,410            |  |  |   | *   |  
|                                
|                                
|                                
|                                
|                                 | Daniel L. Russell                             |                    |               |                 |  |  |   | *   |  
|                                
|                                
|                                
|                                
|                                 | G. Cabell Williams, III                       |                    |               |                 |  |  |   | *   |  
|                                
|                                
|                                
|                                
|                                 | William L. Walton                             |                    |               |                 |  |  |   | *   |  
|                                
|                                
|                                
|                                
|                                 | Alan T. Biland                                |                    |               |                 |  |  |   | *   |  
|                                
|                                
|                                
|                                
|                                 | All Executive Officers as a Group (9 persons) |                    |               | 161,005          |  |  |   | 2.3 | %

The firm identified in the table below has reported that it beneficially
owned at December 31, 2002 more than 5% of the outstanding shares of the
Common Stock:

|                                                                              |  |  |           |  |  |  |      |  
|----------------------------------------------------------------------------- |  |  | --------- |  |  |  | ---- | -
|Other 5% Owners :                                                             |  |  |           |  |  |  |      |  
|                                                                              |  |  |           |  |  |  |      |  
|Allied Capital Corporation 1919 Pennsylvania Ave., N.W
Washington, D.C. 20006 |  |  | 6,890,937 |  |  |  | 96.8 | %



---

|* |  | Less than 1%
|- |  | ------------

Item 13  Certain Relationships and Related Transactions.

On September 28, 2001, the Company completed the sale of substantially
all of the assets of its SunSource Technology Services business (the
STS Business) to STS Operating, Inc. (STS OP), an entity formed by
certain officers and managers of the STS Business, Allied Capital
Corporation and Easton Hunt Capital Partners, L.P. for the purpose of
acquiring the STS Business. The purchase price included preferred stock
of STS OP which was distributed to the shareholders of The Hillman
Companies, Inc. Common Stock on December 23, 2002.

On September 26, 2001, the Company was acquired by Allied Capital
Corporation pursuant to the terms and conditions of an Agreement and
Plan of Merger dated as of June 18, 2001 (the Merger Transaction). In
connection with the Merger Transaction, the Company is obligated to pay
management fees to a subsidiary of Allied Capital Corporation for
management services rendered in the amount of $250,000 for calendar year
2001 and $1,800,000 for each calendar year thereafter. The Company has
recorded a management fee charge of $1,800,000 and $250,000 on its
Statement of Operations for the year ended December 31, 2002 and three
months ended December 31, 2001, respectively. Payment of management
fees are due annually after delivery of the Companys annual audited
financial statements to the Board of Directors of the Company. The
Company paid $250,000 of management fees in March 2002 for the three months ended
December 31, 2001.

69



---



##### 



On June 29, 2001, Allied Capital Corporation purchased an unsecured
subordinated note, with an outstanding principal balance of approximately
$12,500,000 from a SunSource Inc. creditor for $8,500,000. In connection
with the Merger Transaction and the Companys debt refinancing, Allied
Capital Corporation exchanged the note for $8,500,000 of the Companys
subordinated debt.

On December 28, 2000, the Company issued $30,000,000 of unsecured
subordinated notes to Allied Capital Corporation which was amended on
September 28, 2001, to increase the existing subordinated debenture to
$40,000,000 in conjunction with refinancing the Companys senior debt and
to exchange the subordinated note indicated above.

Item 14  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Companys Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-14 and 15d-14 under the
Securities Exchanges Act of 1934, as amended) as of a date within 90 days
prior to filing date of this annual report (the Evaluation Date). Based
on such evaluation, such officers have concluded that, as of the Evaluation
Date, the companys disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be included
in the Companys reports filed or submitted under the Securities Exchange
Act of 1934.

Changes in Internal Controls

Since the Evaluation Date, there have not been any significant changes in
the Companys internal controls or in other factors that could
significantly affect such controls.

70



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##### 



PART IV

Item 15  Exhibits, Financial Statement Schedules, and Reports
on Form 10-K.

(a)  Documents Filed as a Part of the Report:

1.     Financial Statements.



| |  |  | The information concerning financial statements called for by
Item 15 of Form 10-K is set forth in Part II, Item 8 of this annual
report on Form 10-K.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

2.     Financial Statement Schedules.



| |  |  | The information concerning financial statement schedules called
for by Item 15 of Form 10-K is set forth in Part II, Item 8 of this
annual report on Form 10-K.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

3.     Reports on Form 8-K.



| |  |  | A Current Report on Form 8-K was filed on December 26, 2002
reporting an other event under Item 5 of Form 8-K.                       
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A Current Report on Form 8-K was filed on October 4, 2002
reporting an other event under Item 5 of Form 8-K (See Exhibit 2.2
hereto).

4.     Exhibits, Including Those Incorporated by Reference.



| |  |  | The following is a list of exhibits filed as part of this
annual report on Form 10-K. Where so indicated by footnote,
exhibits which were previously filed are incorporated by reference.
For exhibits incorporated by reference, the location of the
exhibit in the previous filing is indicated in parentheses.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|    |  |                                                                                |  | 
|--- |  | ------------------------------------------------------------------------------ |  | 
|2.1 |  | Unit Repurchase Agreement by and among The Hillman Companies, Inc.,           
|   
|   
|   
|   
|    |  | SunSub Holdings LLC and GC-Sun Holdings, L.P. dated April 13, 2002. (15)      
|   
|   
|   
|   
|    |  | (Exhibit 10.2)                                                                
|   
|   
|   
|   
|2.2 |  | Asset Purchase Agreement between Fastenal Company and The Hillman Group,      
|   
|   
|   
|   
|    |  | Inc. dated October 3, 2002. (16) (Exhibit 10.3)                               
|   
|   
|   
|   
|2.3 |  | Agreement and Plan of Merger dated as of June 18, 2001 by and among           
|   
|   
|   
|   
|    |  | Allied Capital Corporation, Allied Capital Lock Acquisition Corporation       
|   
|   
|   
|   
|    |  | and SunSource Inc. (10) (Exhibit 2.1)                                         
|   
|   
|   
|   
|2.4 |  | Asset Purchase Agreement dated September 28, 2001, by and between             
|   
|   
|   
|   
|    |  | SunSource
Technology Services, LLC, and STS Operating, Inc. (12) (Exhibit 2.1)
|   
|   
|   
|   
|2.5 |  | Amended and Restated Agreement and Plan of Merger dated as of April 7,        
|   
|   
|   
|   
|    |  | 2000 among SunSource Inc., The Hillman Group, Inc., the Hillman Group         
|   
|   
|   
|   
|    |  | Acquisition Corp., Axxess Technologies, Inc., and certain security holders    
|   
|   
|   
|   
|    |  | of Axxess (6) (Exhibit 2.1)                                                   
|   
|   
|   
|   
|2.6 |  | Asset Purchase Agreement dated as of April 12, 2000, among VVP America,       
|   
|   
|   
|   
|    |  | Inc., VVP America Acquisition, L.L.C., SunSource Inc., SunSource              
|   
|   
|   
|   
|    |  | Investment Company, Inc., Harding Glass, Inc., and SunSub A Inc. (6)          
|   
|   
|   
|   
|    |  | (Exhibit 2.2)                                                                 
|   
|   
|   
|   
|2.7 |  | Contribution Agreement by and among SunSource Inc., SunSource Industrial      
|   
|   
|   
|   
|    |  | Services Company, Inc., KAR Products Inc., A & H Holding Company, Inc.,       
|   
|   
|   
|   
|    |  | SunSource Canada Investment Company, A. & H. Bolt & Nut Company Limited       
|   
|   
|   
|   
|    |  | and GC-Sun Holdings, L.P. dated as of February 10, 2000 (5) (Exhibit 2.1)     

71



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##### 



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|10.1   |  | Credit Agreement dated as of September 28, 2001, by and among The Hillman
Group, Inc., as Borrower and Heller Financial, Inc., as Agent, an Issuing
Lender and a Lender and Antares Capital Corporation, General Electric
Capital Corporation and Madison Capital Funding LLC each as a Co-Agent and
the other financial institutions party hereto as lenders. (13) (Exhibit
10.1)                                                                 
|      
|      
|      
|      
|10.2   |  | Consent and First Amendment to the Credit Agreement dated as of September
28, 2001, by and among The Hillman Group, Inc. as Borrower and Heller
Financial, Inc. as Agent, an Issuing Lender and a Lender and Antares
Capital Corporation, General Electric Capital Corporation and Madison
Capital Funding, LLC, each as Co-Agent and the other financial
institutions party hereto as lenders. (14) (Exhibit 10.1)                                
|      
|      
|      
|      
|10.3** |  | Consent and Second Amendment to the Credit Agreement dated as of
September 28, 2001, by and among The Hillman Group, Inc. as Borrower and
Heller Financial, Inc. as Agent, an Issuing Lender and a Lender and
Antares Capital Corporation, General Electric Capital Corporation and
Madison Capital Funding, LLC, each as Co-Agent and the other financial
institutions party hereto as lenders.                                                   
|      
|      
|      
|      
|10.4** |  | Third Amendment to the Credit Agreement dated as of September 28,
2001, by and among The Hillman Group, Inc. as Borrower and Heller
Financial, Inc. as Agent, an Issuing Lender and a Lender and Antares
Capital Corporation, General Electric Capital Corporation and Madison
Capital Funding, LLC, each as Co-Agent and the other financial
institutions party hereto as lenders.                                                                
|      
|      
|      
|      
|10.5   |  | First Amended and Restated Investment Agreement by and among SunSource
Inc., SunSource Investment Company, Inc., The Hillman Group, Inc., and
Allied Capital Corporation dated September 28, 2001. (13) (Exhibit 10.2)                                                                                                                                                                                                                             
|      
|      
|      
|      
|10.6   |  | SunSource Inc. 2001 Stock Incentive Plan. (13) (Exhibit 10.3)                                                                                                                                                                                                                                                                                                                                                                                      
|      
|      
|      
|      
|10.7   |  | Termination Agreement dated as of June 18, 2001 by and among SunSource,
Lehman Brothers, Donald T. Marshall, John P. McDonnell, Norman V
Edmonson, Harold Cornelius, Max W. Hillman, Joseph P. Corvino and the
respective S corporations of Marshall, McDonnell, Edmonson, Cornelius,
Hillman and Corvino. (11) (Exhibit d6)                                                                                                                       
|      
|      
|      
|      
|10.8*  |  | Employment Agreement by and between SunSource Inc. and Maurice P. Andrien, Jr. entered into June 18, 2001. (11) (Exhibit e1)                                                                                                                                                                                                                                                                                                                       
|      
|      
|      
|      
|10.9*  |  | Employment Agreement by and between SunSource Inc. and Stephen W
Miller entered into June 18, 2001 (11) (Exhibit e2)                                                                                                                                                                                                                                                                                                                               
|      
|      
|      
|      
|10.10* |  | Employment Agreement by and between SunSource Inc. and Joseph M
Corvino entered into June 18, 2001. (13) (Exhibit 10.7)                                                                                                                                                                                                                                                                                                                            
|      
|      
|      
|      
|10.11* |  | Employment Agreement by and between SunSource Inc. and Max. W. Hillman
entered into June 18, 2001. (13) (Exhibit 10.8)                                                                                                                                                                                                                                                                                                                             
|      
|      
|      
|      
|10.12* |  | SunSource Inc. Nonqualified Deferred Compensation Plan dated as of
August 1, 2000. (9) (Exhibit 10.1)                                                                                                                                                                                                                                                                                                                                              
|      
|      
|      
|      
|10.13  |  | Investment Agreement entered into as of December 28, 2000 by and among
SunSource Technology Services, Inc., SunSource Investment Company, Inc.,
SunSub A, Inc., the Hillman Group, Inc., Axxess Technologies, Inc.,
SunSource Corporate Group, Inc., SunSource Industrial Services, Inc.,
SunSource inventory Management Company, Inc., A&H Holding Co., SunSub C,
Inc., SunSub Holdings, L.L.C. and Allied Capital Corporation. (9) (Exhibit
10.8)
|      
|      
|      
|      
|10.14  |  | 1998 Equity Compensation Plan-Amendment to Nonqualified Stock Option
Grant dated as of January 26, 2000. (8)(Exhibit 10.1)                                                                                                                                                                                                                                                                                                                         

72



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##### 



|       |  |                                                                                                                         | 
|------ |  | ----------------------------------------------------------------------------------------------------------------------- | 
|10.15  |  | 1998 Equity Compensation Plan  Restricted Stock Grant dated as of
January 26, 2000. (8) (Exhibit 10.2)                
|      
|      
|      
|      
|10.16* |  | SunSource Inc. 1998 Equity Compensation Plan (1) (Exhibit 10.1)                                                        
|      
|      
|      
|      
|10.17* |  | SunSource Inc. Stock Compensation Plan for Non-Employee Directors (1)
(Exhibit 10.2)                                   
|      
|      
|      
|      
|21.1** |  | Subsidiaries (As of December 31, 2002)                                                                                 
|      
|      
|      
|      
|99.1** |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|      
|      
|      
|      
|99.2** |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.



---

|(1)  |  | Filed as an exhibit to Quarterly Report on Form 10-Q for the Quarter
ended March 31, 1998.                                    
|---- |  | ------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Filed as an exhibit to Registration Statement No. 333-19077 on Form S-4.                                                      
|    
|    
|    
|    
|(3)  |  | Filed as an exhibit to Registration Statement No. 333-44733 on Form S-2.                                                      
|    
|    
|    
|    
|(4)  |  | Filed on March 31, 1994, as an exhibit to Annual Report on Form 10-K for
the year ended December 31, 1993.                    
|    
|    
|    
|    
|(5)  |  | Filed on March 17, 2000 as an exhibit to Current Report on Form 8-K.                                                          
|    
|    
|    
|    
|(6)  |  | Filed on April 24, 2000 as an exhibit to Current Report on Form 8-K                                                           
|    
|    
|    
|    
|(7)  |  | Filed on May 11, 2000 as Item 7 to Current Report on Amendment No. 1 to
Form 8-K originally filed on April 24, 2000.          
|    
|    
|    
|    
|(8)  |  | Filed on March 30, 2000 as an exhibit to Annual Report on Form 10-K for
the year ended December 31, 1999.                     
|    
|    
|    
|    
|(9)  |  | Filed on April 2, 2001 as an exhibit to Annual Report on form 10-K for
the year ended December 31, 2000.                      
|    
|    
|    
|    
|(10) |  | Filed on June 21, 2001 as an exhibit to the Current Report on form 8-K
filed on June 21, 2001.                                
|    
|    
|    
|    
|(11) |  | Filed as an exhibit to Schedule 13E-3 filed on July 11, 2001, as amended.                                                     
|    
|    
|    
|    
|(12) |  | Filed as an exhibit to the Current Report on Form 8-K filed on October
15, 2001.                                              
|    
|    
|    
|    
|(13) |  | Filed as an exhibit to Quarterly Report on form 10-Q for the Quarter
ended September 30, 2001.                                
|    
|    
|    
|    
|(14) |  | Filed as an exhibit to Quarterly Report on form 10-Q for the Quarter
ended March 31, 2002.                                    
|    
|    
|    
|    
|(15) |  | Filed as an exhibit to Quarterly Report on form 10-Q for the Quarter
ended June 30, 2002.                                     
|    
|    
|    
|    
|(16) |  | Filed as an exhibit to the Current Report on Form 8-K filed on October 4,
2002.                                               
|    
|    
|    
|    
|*    |  | Management contract or compensatory plan or arrangement required to be
filed as an Exhibit pursuant to Item 15 of this report.
|    
|    
|    
|    
|**   |  | Filed herewith.                                                                                                               

73



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##### 



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
| | ---------------------------

|      |  |                |  |     |                                                                                                                                                
|----- |  | -------------- |  | --- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Date: |  | March 25, 2003 |  | By: | /s/ James P. WatersJames P. Waters
Title: Chief Financial Officer and Duly  Authorized
Officer of the
Registrant (principal financial  officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated below.

|                            |  |                      |  |                |  |  |  |  | 
|--------------------------- |  | -------------------- |  | -------------- |  |  |  |  | 
|Signature                   |  | Capacity             |  | Date          
|                            |  |                      |  |               
|                            |  | Principal Executive  |  | March 25, 2003
|                           
|                           
|                           
|                           
|/s/ Max W. Hillman, Jr.     |  | Officer and Director |  |                |  | 
|                            |  |                      |  |                |  |  |  | 
|                           
|                           
|                           
|                           
|Max W. Hillman, Jr.         |  |                      |  |                |  |  |  | 
|                           
|                           
|                           
|                           
|                            |  | Chairman and         |  | March 25, 2003
|                           
|                           
|                           
|                           
|/s/ Maurice P. Andrien, Jr. |  | Director             |  |                |  | 
|                            |  |                      |  |                |  |  |  | 
|                           
|                           
|                           
|                           
|Maurice P. Andrien, Jr.     |  |                      |  |                |  |  |  | 
|                           
|                           
|                           
|                           
|                            |  | Principal Accounting |  | March 25, 2003
|                           
|                           
|                           
|                           
|/s/ Harold J. Wilder        |  | Officer              |  |                |  | 
|                            |  |                      |  |                |  |  |  | 
|                           
|                           
|                           
|                           
|Harold J. Wilder            |  |                      |  |                |  |  |  | 
|                           
|/s/ Alan T. Biland          |  | Director             |  | March 25, 2003
|                            |  |                      |  |                |  |  |  | 
|Alan T. Biland              |  |                      |  |                |  |  |  | 
|                           
|/s/ Daniel L. Russell       |  | Director             |  | March 25, 2003
|                            |  |                      |  |                |  |  |  | 
|Daniel L. Russell           |  |                      |  |                |  |  |  | 
|                           
|/s/ William L. Walton       |  | Director             |  | March 25, 2003
|                            |  |                      |  |                |  |  |  | 
|William L. Walton           |  |                      |  |                |  |  |  | 
|                           
|/s/ G. Cabell Williams, III |  | Director             |  | March 25, 2003
|                            |  |                      |  |                |  |  |  | 
|G. Cabell Williams, III     |  |                      |  |                |  |  |  | 

74



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##### 



CERTIFICATION OF CHIEF EXECUTIVE OFFICER

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

1.     I have reviewed this annual report on Form 10-K of The Hillman Companies,
Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



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

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



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

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|      |  |         |  |                                                         
|----- |  | ------- |  | --------------------------------------------------------
|Date: |  | 3/25/03 |  |                                                         
|     
|      |  |         |  | /s/ Max W. HillmanMax W. Hillman
Chief Executive Officer

75



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##### 



CERTIFICATION OF CHIEF FINANCIAL OFFICER

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

1.     I have reviewed this annual report on Form 10-K of The Hillman Companies,
Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



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

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



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

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

|      |  |         |  |                                                           
|----- |  | ------- |  | ----------------------------------------------------------
|Date: |  | 3/25/03 |  |                                                           
|     
|      |  |         |  | /s/ James P. WatersJames P. Waters
Chief Financial Officer

76