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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, 2003 Commission file number 1-13293 The Hillman Companies, Inc. 
  Delaware
    
    23-2874736(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 10590 Hamilton Avenue
Cincinnati, Ohio
    
    45231(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:(513) 851-4900 Securities registered pursuant to Section 12(b) of the Act: Title of Class
    
    Name of Each Exchange on Which Registered11.6% Junior Subordinated Debentures
Preferred Securities Guaranty
Preferred Share Purchase Rights
    
    None
 Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES  [X]      NO  [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES  [  ]      NO  [X] 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 26, 2004, there were 7,118,484
    Common Shares issued and outstanding by the Registrant and 4,217,724 Trust
    Preferred Securities issued and outstanding by the Hillman Group Capital Trust.
    The Trust Preferred Securities trade on the American Stock Exchange under
    the symbol HLM.Pr. The aggregate market value of the Trust Preferred Shares
    held by non-affiliates at June 30, 2003 was $111,347,914.




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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 value added
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 maintains a
website at http://www.hillmangroup.com. The Companys principal business is operated through its wholly owned
subsidiary, The Hillman Group, Inc. (the Hillman Group) which had sales of
approximately $318 million in 2003. The Hillman Group sells to hardware
stores, home centers, mass merchants, pet supply stores, 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. Recent Developments On February 14, 2004 Allied Capital and the
Company entered into a Merger Agreement to sell 100% of the Companys
outstanding common stock to HCI Acquisition Companies, Inc., an affiliate of
Code Hennessy & Simmons LLC, and certain members of management. The Merger
Agreement has a total transaction value of approximately $510 million for the
sale of the company, including repayment of outstanding debt and including the
value of the companys outstanding Trust Preferred Securities. The Merger
Agreement is subject to a working capital adjustment and certain closing
conditions and is anticipated to close by the beginning of the second quarter
of 2004. The Companys Trust Preferred Securities will remain outstanding and will not
be converted or exchanged in connection with the merger. 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. 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 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 2




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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 LLC (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 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. 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 have experienced significant change as a result of the
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 cooperatives. 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, 2003. The Company is organized as a single business segment which is the Hillman
Group. With annualized sales of approximately $318 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 3




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and letters, numbers and signs (LNS) to retail outlets in North America.
Retail outlets served by Hillman include hardware stores, home centers, mass
merchants, pet supply stores, 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 and
Canada. Currently, orders are shipped within 48 hours with a 97% order fill
rate. 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 state of the art distribution facility
in Cincinnati, Ohio. In addition to improving order turnaround time and
reducing labor costs, the new facility provides additional capacity to
accommodate future sales growth. 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 System has proven to be a profitable revenue source within Big Box
retailers. This system has been placed in over 13,800 retail locations to date
and is supported by Hillman sales and service representatives. In addition, Hillman offers a commercialized, innovative, consumer-operated
vending system, Quick-Tag, which provides custom engraved specialty items,
such as pet identification tags, luggage tags and other engraved identification
tags. To date, more than 3,100 Quick-Tag machines have been placed in retail
locations which are being supported by Hillmans sales and service
representatives. Products and Suppliers Currently, Hillman buys its products from
approximately 650 vendors, the largest of which accounted for approximately 9%
of the Groups annual purchases and the top five of which accounted for 29% 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
57.3% of total revenue in 2003. 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. 4




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Keys and Key Accessories Hillman provides a competitive line of metal key
products for major retailers and the automotive sector. In 2003, keys
represented 20.4% 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 7,900 PC+ Code Cutter and 1,200 of the
new Flash 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. 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. 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. The Company has placed over 3,100
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 8.6% of total revenues in
2003. 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. 5




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Letters, Numbers and Signs (LNS) LNS sales accounted for 8.6% of 2003 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 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 allows 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 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 economically monitor 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. Hillman serves approximately 20,000 customers, the top five of which accounted
for 42.2% of its annualized sales. Lowes is the single largest customer,
representing 15.3% of total sales, Wal-Mart is the second largest at 10.8% and
Home Depot is the third largest at 10.2%. No other customer accounted for more
than 10% of the Companys total sales in 2003. Hillmans telemarketing activity sells to approximately 6,700 smaller hardware
outlets and over 6,000 non-hardware accounts. New business is also being
pursued internationally in such places as Canada, Mexico, South and Central
America, and the Caribbean. Sales and Marketing 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. 6




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The national accounts field service organization consists of over 350 service
people and 26 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 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 220
people, managed by 18 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 electronic data interchange (EDI) system is used by a
number of its large customers for handling of orders and invoices. Competition 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. 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 LNS
products. 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. In 2003, 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 units 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 buy back 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. 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 7




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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 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 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. 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, 2003. 8




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Employees As of December 31, 2003, the Companys total operations employed
approximately 1,760 employees, of which approximately 755 were sales personnel,
approximately 790 were employed as warehouse, manufacturing and delivery
personnel, and approximately 215 were administrative positions. In the opinion
of management, employee relations are good. Backlog The Companys sales backlog from ongoing operations was $2.6 million
as of December 31, 2003, and $1.3 million as of December 31, 2002. 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. 9




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Item 2  Properties. The Companys principal office, manufacturing and distribution
properties are as follows: ApproximateLocation
    
    Square Footage
    
    DescriptionCincinnati, Ohio
    
    
    240,000
    
    
    Office, DistributionForest Park, Ohio
    
    
    260,000
    
    
    DistributionTempe, Arizona
    
    
    161,000
    
    
    Mfg., DistributionTempe, Arizona
    
    
    47,000
    
    
    OfficeBakersfield, California
    
    
    84,000
    
    
    DistributionDallas, Texas
    
    
    32,000
    
    
    DistributionPortland, Oregon
    
    
    29,000
    
    
    DistributionCharlotte, North Carolina
    
    
    40,000
    
    
    DistributionAlbany, New York
    
    
    56,000
    
    
    DistributionLaCrosse, Wisconsin
    
    
    48,000
    
    
    DistributionRockford, Illinois
    
    
    153,000
    
    
    Office, DistributionRiviera Beach, Florida
    
    
    37,000
    
    
    DistributionGoodlettsville, Tennessee
    
    
    72,000
    
    
    Mfg., DistributionMississauga, Ontario
    
    
    11,000
    
    
    Distribution
 With the exception of Goodlettsville, Tennessee, all of the Companys
facilities are leased. The office and distribution facility in Rockford,
Illinois was shut down in December, 2003. 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, 2003. 10




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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 with Allied Capital, the Common Stock
is no longer publicly traded. In connection with the SunSource name change on
March 18, 2002, the Trust Preferred Securities now trades under the ticker symbol
HLM.Pr (formerly SDP.Pr). The following table sets forth the high and low closing sale prices on the
American Stock Exchange composite tape for the Trust Preferred Securities. 2003
    
    High
    
    LowFirst Quarter
    
    $
    25.85
    
    
    $
    25.00Second Quarter
    
    
    27.00
    
    
    
    25.14Third Quarter
    
    
    26.95
    
    
    
    26.00Fourth Quarter
    
    
    27.04
    
    
    
    26.20
 2002
    
    High
    
    LowFirst Quarter
    
    $
    25.80
    
    
    $
    24.80Second Quarter
    
    
    25.50
    
    
    
    24.51Third Quarter
    
    
    24.80
    
    
    
    21.95Fourth Quarter
    
    
    25.00
    
    
    
    23.31
 The Trust Preferred Securities have a liquidation value of $25.00 per security.
As of March 26, 2004, there were 761 holders of Trust Preferred Securities and
fourteen (14) common stockholders. The total number of Trust Preferred
Securities outstanding as of March 26, 2004, was 4,217,724. The total number
of Common Shares outstanding as of March 26, 2004, was 7,118,484. Distributions The Company pays interest to the Hillman Group 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, 2003 and 2002, the Company paid $12.2 million per year
in interest on the Junior Subordinated Debentures, equivalent to the amounts
distributed by the Trust Preferred Securities. The interest payments on the Junior Subordinated Debentures underlying the
Trust Preferred Securities are deductible for federal income tax purposes by
the Company under current law and will remain an obligation of the Company
until the Trust Preferred Securities are redeemed or upon their maturity in
2027. Issuer Purchases of Equity Securities The Company made no common stock repurchases during 2003. 11




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##### 



Item 6  Selected Financial Data. As a result of the merger with Allied Capital, 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 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. The following table sets forth selected consolidated financial data of the
Predecessor as of and for the two 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 two years ended December 31, 2003 and the three
months ended December 31, 2001. See the 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
        
        PredecessorThree
        
        NineMonths
        
        MonthsYear Ended
        
        Year Ended
        
        Ended
        
        Ended
        
        Year Ended
        
        Year Ended12/31/03
        
        12/31/02
        
        12/31/01
        
        09/30/01
        
        12/31/00
        
        12/31/99Income Statement
            Data:Continuing OperationsNet sales
        
        $
        318,441
        
        
        $
        286,788
        
        
        $
        60,040
        
        
        $
        341,307
        
        
        $
        462,839
        
        
        $
        543,277Gross profit
        
        
        174,671
        
        
        
        160,614
        
        
        
        34,442
        
        
        
        143,564
        
        
        
        184,660
        
        
        
        226,154Gain on contribution
            of subsidiaries
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        49,115
        
        
        
        (Loss) income before
            discontinued operations
        
        
        (4,647
        )
        
        
        6,103
        
        
        
        (2,909
        )
        
        
        (1,327
        )
        
        
        27,290
        
        
        
        (11,321
        )(Loss) income from
            discontinued operations
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (2,610
        )
        
        
        (25,815
        )Extraordinary loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (235
        )Net (loss) income
        
        
        (4,647
        )
        
        
        6,103
        
        
        
        (2,909
        )
        
        
        (1,327
        )
        
        
        24,680
        
        
        
        (37,371
        )Balance Sheet
            Data at December 31:Total assets
        
        
        355,833
        
        
        
        363,194
        
        
        
        339,961
        
        
        
        N/A
        
        
        
        320,960
        
        
        
        321,626Long-term debt and
            capitalized lease obligations (1)
        
        
        148,309
        
        
        
        146,716
        
        
        
        128,739
        
        
        
        N/A
        
        
        
        102,790
        
        
        
        126,723
 (1) Includes current portion of long-term debt. 12




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##### 



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. Hillman is organized as an independently managed portfolio company of Allied
Capital Corporation (Allied Capital). Allied Capital owns approximately
96.8% of Hillmans common stock with the remainder being held primarily by
Company management. Recent Developments On February 14, 2004 Allied Capital and the
Company entered into a Merger Agreement to sell 100% of the Companys
outstanding common stock to HCI Acquisition Companies, Inc., an affiliate of
Code Hennessy & Simmons LLC, and certain members of management. The Merger
Agreement has a total transaction value of approximately $510 million for the
sale of the company, including repayment of outstanding debt and including the
value of the companys outstanding Trust Preferred Securities. The Merger
Agreement is subject to a working capital adjustment and certain closing
conditions and is anticipated to close by the beginning of the second
quarter of 2004. See Note 13, Stockholders Equity, of Notes to
Consolidated Financial Statements of the Company as of and for the three years ended
December 31, 2003. The Companys Trust Preferred Securities will remain outstanding and will not
be converted or exchanged in connection with the merger. Merger Transaction On September 26, 2001, SunSource 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. 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 periods presented
since the merger 13




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##### 



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 with Allied Capital (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. Financing Arrangements On December 28, 2000, the Company issued $30 million of unsecured subordinated
notes to Allied Capital and issued an additional $10 million of these notes to
Allied Capital on September 28, 2001 (the Amended Subordinated Debt
Issuance). The majority of the cash proceeds generated from the Amended
Subordinated Debt Issuance were used to repay at a discount an unsecured
subordinated note issued in connection with the acquisition of Axxess
Technologies, Inc. on April 7, 2000 (the Axxess Subordinated Note Repayment). On September 28, 2001, the Company refinanced its $115 million bank revolving
credit and $21.5 million term loan with $105 million in senior secured credit
facilities (the Refinancing). The new senior debt agreement (Credit
Agreement) has a $50 million revolving credit line, a $20 million term loan
that expires on September 27, 2006, and a $35 million term loan that expires on
September 27, 2008. On May 1, 2002, the Credit Agreement was amended to provide an additional $10.0
million of availability under the revolving credit facility and to increase the
term loans by $15.0 million. Proceeds of the additional financing were used to
finance the purchase of the specialty fastener business of Lowes, Inc. from R&B
Inc., the settlement of litigation with R&B Inc. and the expansion and
automation of the Companys distribution facilities. On December 23, 2002, the Credit Agreement was amended to provide an additional
$4.8 million of availability under the revolving credit agreement and to
increase the term loans by $5.2 million. As of December 31, 2003, the
outstanding balance of the term loans aggregated $60.6 million. The Company pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. 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, Inc. and (ii) Axxess Technologies, Inc. was merged with and into The
Hillman Group, Inc. 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 (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
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 $3.4
million of estimated costs related to the plan in the fourth
quarter of 2002. 14




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##### 



The estimated costs consisted of approximately $1.5 million of fixed asset
disposals, $0.9 million of facilities lease costs, $0.5 million of inventory
conversion and relocation expense and $0.5 million for planned workforce
reductions. The plan was substantially completed by December 31, 2003. Additional reserves were established in 2003 for costs associated with the
integration of the DIY acquisition. Additional costs include severance of $0.3
million, facility lease of $1.2 million, inventory adjustments of
$0.8 million, and customer conversion costs which include product buybacks of
$1.6 million. The actual cost of fixed asset disposals was $0.4 million less
than the original estimate. 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 has expanded 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 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. In February 2003, G-C sold the assets of its largest operating division, Kar
Products. The proceeds of the sale were primarily used to pay down G-Cs senior
creditors. Following the sale of Kar Products, the Company estimated the
enterprise value of G-C based on the cash flows and book value of the remaining
operating division under a held for sale methodology. The excess of the
estimated enterprise value less debt obligations senior to the G-C note were
determined to be insufficient to support the value of the G-C note and accrued interest thereon.
Accordingly, the Company recorded a $11.3 million charge to income during the year
ended December 31, 2003 to write-down the face value of the note and accrued
interest thereon to its estimated future cash flows. 15




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##### 



Results of Operations  Segment Sales and
Profitability for each of the Three Years Ended
December 31(dollars in thousands) 2003
    
    2002
    
    2001(a)% of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofSales
    
    AMOUNT
    
    TOTAL
    
    AMOUNT
    
    TOTAL
    
    AMOUNT
    
    TOTALHillman
Group - Ongoing Operations (b)
    
    $
    318,441
    
    
    
    100.0
    %
    
    $
    286,788
    
    
    
    100.0
    %
    
    $
    248,786
    
    
    
    100.0
    %Technology Services (c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152,561Consolidated Net Sales
    
    $
    318,441
    
    
    
    
    
    
    $
    286,788
    
    
    
    
    
    
    $
    401,347% of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofSALES
    
    
    
    
    
    SALES
    
    
    
    
    
    SALESGross ProfitHillman
Group - Ongoing Operations (b)
    
    $
    174,671
    
    
    
    54.9
    %
    
    $
    160,614
    
    
    
    56.0
    %
    
    $
    140,983
    
    
    
    56.7
    %Technology Services (c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,023Consolidated Gross Profit
    
    $
    174,671
    
    
    
    
    
    
    $
    160,614
    
    
    
    
    
    
    $
    178,006EBITDA
(f)Hillman Group (b)
    
    $
    54,901
    
    
    
    17.2
    %
    
    $
    51,574
    
    
    
    18.0
    %
    
    $
    45,439
    
    
    
    18.3
    %Management fee expense
    
    
    (1,800
    )
    
    
    
    
    
    
    (1,800
    )
    
    
    
    
    
    
    (250
    )Dividend
income - STS Operating, Inc.
    
    
    
    
    
    
    
    
    
    
    546
    
    
    
    
    
    

    
    185Corporate expenses
    
    
    
    
    
    
    0.0
    %
    
    
    (2,622
    )
    
    
    -0.9
    %
    
    
    (5,193
    )
    
    
    -2.1
    %Consolidated EBITDA -
ongoing operations
    
    
    53,101
    
    
    
    16.7
    %
    
    
    47,698
    
    
    
    16.6
    %
    
    
    40,181
    
    
    
    16.2
    %Technology Services (c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,205
    )Equity in loss
of Expediter Segment (d)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105
    )Gain on termination
of pension plans (e)
    
    
    

    
    
    
    
    
    
        
        1,231
    
    
    
    
    
    
        
        Consolidated EBITDA
    
    $
    53,101
    
    
    
    
    
    
    $
    48,929
    
    
    
    
    
    
    $
    38,871Income
from operationsConsolidated EBITDA
    
    $
    53,101
    
    
    
    
    
    
    $
    48,929
    
    
    
    
    
    
    $
    38,871Depreciation
    
    
    (14,399
    )
    
    
    
    
    
    
    (12,004
    )
    
    
    
    
    
    
    (12,623
    )Amortization
    
    
    (1,437
    )
    
    
    
    
    
    
    (1,485
    )
    
    
    
    
    
    
    (4,483
    )Equity in loss
of Expediter Segment (d)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Consolidated income from
operations
    
    $
    37,265
    
    
    
    
    
    
    $
    35,440
    
    
    
    
    
    
    $
    21,870
  (a)
    
    For the purpose of comparing the Companys results of
operations for each of the three years ended December 31, 2003, 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 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 Equity in Earnings from the Contributed Expeditor Segment
from March 2, 2000 until the exercise of the call option by G-C in
January 2002.(e)
    
    Represents non-recurring income as a result of the final settlement
of the Companys defined benefit plans in 2002. 16




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##### 



(f)
    
    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, 2003 and 2002 Net sales from the Hillman Group ongoing operations increased $31.6 million or
11.0% in 2003 to $318.4 million from $286.8 million in 2002. DIY, which was
acquired from the Fastenal Company in October 2002, contributed $12.8 million
of the 2003 sales increase. Increased fastener sales to Lowes represented
$4.7 million of the $31.6 million total sales increase in 2003 over 2002. In
May 2002, Hillman began supplying all Lowes locations following the
acquisition of the specialty fastener business from R&B, Inc. Sales to other
national accounts, including Home Depot and Wal-Mart, increased by an aggregate
$7.2 million in 2003 compared to 2002, primarily as a result of new store
growth. In addition, the regional and engraving accounts together with F&I
accounts increased $5.3 million over the comparable period in 2002. 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. Sales by our Canadian
division increased $0.5 million, Export sales increased $0.6 million, and other
sales accounted for the remaining $0.5 million in increased sales over 2002. The Companys sales backlog, based upon cancelable purchase orders, was $2.6
million as of December 31, 2003 and $1.3 million as of December 31, 2002. The Hillman Groups gross margin was 54.9% in 2003 compared with 56.0% in 2002.
The increase in sales volume generated from the newly acquired DIY division
was made primarily to warehouse accounts at lower margin rates than other
typical Hillman accounts. The resultant shift in sales mix contributed to the
1.1% decrease in gross margin in the comparison period. The Companys consolidated Selling, General and Administrative (S,G&A)
expenses increased $9.1 million or 8.2% from $111.4 million in 2002 to $120.5
million in 2003. Selling expenses increased $3.1 million or 5.5% primarily as
a result of servicing costs at new national account stores. Warehouse and
delivery expenses increased $7.6 million or 23.0% as a result of increased
freight and labor costs to process and ship the additional sales volume.
General and administrative expenses decreased by $1.6 million or 6.8% primarily
as a result of the closing of the Philadelphia corporate office in May 2002 and
moving the corporate operations to Cincinnati. Total S,G&A expenses from ongoing operations expressed as a percentage of sales
compared with 2002 are as follows: Years ended December 31,As a % of Sales
    
    2003
    
    2002Selling Expenses
    
    
    18.2
    %
    
    
    19.1
    %Warehouse and Delivery Expenses
    
    
    12.7
    %
    
    
    11.5
    %General and Administrative Expenses
    
    
    6.9
    %
    
    
    8.2
    %Total S, G&A Expenses
    
    
    37.8
    %
    
    
    38.8
    %
 EBITDA from ongoing operations after corporate expenses for 2003 was $53.1
million compared with $47.7 million for the year 2002, representing an increase
of 11.3%. The Companys consolidated operating profit margin from ongoing operations
(EBITDA as a percentage of sales) after corporate expenses, increased to 16.7%
in 2003 compared with 16.6% in 2002. 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 2003 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 rate decrease which was primarily the result
of incremental sales from the acquisition of the DIY division of the Fastenal
Company at a lower margin rate. 18




---



##### 



Depreciation expense from ongoing operations increased $2.4 million to $14.4
million in 2003 from $12.0 million in 2002 primarily as a result of an increase
in the depreciable fixed asset base in connection with the purchase of
automation equipment for the Cincinnati distribution center. Amortization expense from ongoing operations decreased $0.1 million to $1.4
million in 2003 from $1.5 million in 2002. The decrease in amortization was
the result of certain intangible assets becoming fully amortized during 2003. Interest expense, net of interest income, increased $2.2 million to $15.4
million in 2003 from $13.2 million in 2002. The increase in interest expense,
net of interest income, was primarily the result of a decrease in interest
income recorded on the $10.0 million note received from Glencoe from sale of
the Companys interest in GC-Sun Holdings L.P. The Company recorded no
interest income in 2003 as compared to $1.3 million in 2002. The remaining
increase in interest expense 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 has recorded a management fee charge of $1.8 million in both the
years 2003 and 2002. In connection with the merger transaction with Allied
Capital, 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, 2003 and 2002,
the Company paid $12.2 million 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, 2003, for income taxes and
disclosures related to 2003 and 2002 income tax events. 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. 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 19




---



##### 



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 a % of Sales
    
    2002
    
    2001Selling 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 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
with Allied Capital, 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 20




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##### 



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 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, 2003, for income taxes and
disclosures related to 2002 and 2001 income tax events. Liquidity and Capital Resources Cash provided by operating activities for the year ended December 31, 2003 was
$12.2 million, primarily due to net income adjusted for non-cash charges for
depreciation, amortization, deferred taxes, PIK interest and write-down of note
receivable of $25.5 million less cash related adjustments of $13.3 million for
routine operating activities represented by changes in inventories, accounts
receivable, accounts payable, and other assets. Cash used for investing activities was $11.6 million for the year ended
December 31, 2003. Capital expenditures for the year totaled $11.5 million,
consisting of $6.4 million for key duplicating machines, $2.2 million for
engraving machines and $2.9 million for equipment purchases. Cash used for financing activities in the year ended December 31, 2003 was
approximately $1.8 million, primarily related to $1.4 million of additional
payments for financing fees in connection with the Companys 2001 Credit
Agreement. The Companys working capital position of $58.5 million as of December 31,
2003, represents an increase of $12.1 million from the December 31, 2002 level
of $46.4 million as follows (dollars in thousands): Increase in accounts receivable, net
    
    $
    3,528Increase in inventories, net
    
    
    4,989Increase in other current assets
    
    
    2,521Decrease in deferred taxes
    
    
    (2,380
    )Decrease in accounts payable
    
    
    3,537Decrease in other accrued liabilities
    
    
    1,121Other items, net
    
    
    (1,236
    )Net increase in working capital for the year ended December 31, 2003
    
    $
    12,080
 The Companys contractual obligations in thousands of dollars as of December
31, 2003 are summarized below: Payments DueLess Than
    
    1 to 3
    
    3 to 5
    
    More ThanContractual Obligations
    
    Total
    
    One Year
    
    Years
    
    Years
    
    Five YearsGuaranteed Preferred BeneficialInterests in the Companys JuniorSubordinated Debentures
    
    $
    105,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    105,446Long Term Senior Term Loans
    
    
    60,558
    
    
    $
    9,268
    
    
    $
    20,603
    
    
    $
    30,687
    
    
    
    Bank Revolving Credit Facility
    
    
    43,495
    
    
    
    
    
    
    
    43,495
    
    
    
    
    
    
    
    Long Term Unsecured Subordinated Notes
    
    
    44,062
    
    
    
    
    
    
    
    4,062
    
    
    
    
    
    
    
    40,000Operating Leases
    
    
    31,784
    
    
    
    6,945
    
    
    
    9,899
    
    
    
    4,727
    
    
    
    10,213Deferred Compensation Obligations
    
    
    7,077
    
    
    
    1,145
    
    
    
    2,290
    
    
    
    2,290
    
    
    
    1,352Capital Lease Obligations
    
    
    194
    
    
    
    54
    
    
    
    86
    
    
    
    54
    
    
    
    Other Long Term Obligations
    
    
    6,747
    
    
    
    1,391
    
    
    
    1,963
    
    
    
    344
    
    
    
    3,049Total Contractual Cash Obligations
    
    $
    299,363
    
    
    $
    18,803
    
    
    $
    82,398
    
    
    $
    38,102
    
    
    $
    160,060
 21




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##### 



All of the obligations noted above are reflected on the Companys Consolidated
Balance Sheet as of December 31, 2003, except for the Operating Leases. See
Notes To Consolidated Financial Statements as of and for the three years ended
December 31, 2003 for additional information. The Company does not have any off-balance sheet arrangements, as defined in
Item 303(a)(4(ii) of Regulation S-K under the Securities Exchange Act of 1934,
as amended. As of December 31, 2003, the Company had $17.1 million available under its
secured credit facilities. The Company had approximately $104.3 million of
outstanding debt under its secured credit facilities at December 31, 2003,
consisting of $60.6 million in term loans, $43.5 million in revolving credit
borrowings and $0.2 million in capitalized lease obligations. The term loans
consisted of a $36.6 million Term B Loan (the Term Loan B) currently at a
three (3) month LIBOR rate of 4.94% and a $24.0 million Term A loan (the Term
Loan A) currently at a one (1) month LIBOR rate of 4.44%. The revolver
borrowings (the Revolver) consist of $20.0 million currently at a three (3)
month LIBOR rate of 4.44%, $20.0 million at a three (3) month LIBOR rate of
4.38% and $3.5 million at the prime plus 2 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, the Term Loan A by $2.5 million and the Term Loan B by $2.7
million. The additional financing was used to provide the Company with
additional working capital. 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 consisted 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 1.20x for the twelve-month period ended December 31, 2003. 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 charged items. On September 28, 2001, the Company sold substantially all of the assets of STS,
including its Canadian operations 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 common
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 22




---



##### 



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, 2003, the outstanding
Amended Subordinated Debt Issuance including PIK Amounts was $44.1 million. The Company had deferred tax assets aggregating $33.6 million, net of valuation
allowance of $17.3 million, and deferred tax liabilities of $7.8 million as of
December 31, 2003, as determined in accordance with SFAS 109. Management
believes that the Companys deferred tax assets will be realized through the
reversal of existing temporary differences between the financial statement and
tax basis, as well as through future taxable income. 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. 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 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 of $0.25 million for calendar year
2001 and $1.8 million for each calendar year thereafter. The Company has
recorded a management fee charge of $1.8 million, $1.8 million and $0.25
million on the Successors Statement of Operations for the year ended December
31, 2003 and 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 year ended December 31, 2002 was paid in March 2003
and 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 $12.5 million, from a
SunSource creditor for $8.5 million. In connection with the Merger Transaction
and refinancing the Companys debt, Allied Capital exchanged the note for $8.5
million 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 $30.0 million of unsecured
subordinated notes to Allied Capital which was amended on September 28, 2001,
to increase the existing subordinated debenture to $40.0 million in conjunction
with refinancing the Companys senior debt. See discussion above and Note 9,
Long-Term Debt. 23




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##### 



Critical Accounting Policies and Estimates 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. The Companys purchase price allocation methodology requires
estimates of the fair value of assets acquired and liabilities assumed. 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 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; purchase price allocation adjustments are based on changes
in settlements of liabilities and assets realized; 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, rebates and
    slotting fees. Discounts are recognized in the financial statements at the
    date of the related sale. Rebates are estimated based on the anticipated rebate
    to be paid and a portion of the estimated cost of the rebate is allocated
    to each underlying sales transaction. Slotting fees are used on an infrequent
    basis and are not considered to be significant. Discounts, rebates and slotting
    fees are included in the determination of net sales. The Company also establishes reserves for customer returns and allowances. The
reserve is established based on historical rates of returns and allowances.
The reserve is adjusted quarterly based on actual experience. Inventory Realization: Inventories consisting predominantly of finished goods are valued at the lower
of cost or market, cost being determined principally on the first-in, first-out
method. Excess and obsolete inventories are carried at net realizable value.
The historical usage rate is the primary factor used by the Company in
assessing the net realizable value of excess and obsolete inventory. A
reduction in the carrying value of an inventory item from cost to market is
recorded for inventory with no usage in the preceding twenty-four month period
or with on hand quantities in excess of twenty-four months average usage. 24




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##### 



Property and Equipment: Property and equipment, including assets acquired under capital leases, are
carried at cost and include expenditures for new facilities and major renewals.
Maintenance and repairs are charged to expense as incurred. When assets are
sold or otherwise disposed of, the cost and related accumulated depreciation
are removed from their respective accounts, and the resulting gain or loss is
reflected in current operations. Depreciation: For financial accounting purposes, depreciation, including that related to
plant and equipment acquired under capital leases, is computed on the
straight-lined 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.
Valuation allowances are provided for tax benefits where it is more likely than
not certain tax benefits will not be realized. Adjustments to valuation
allowances are recorded from changes in utilization of the tax related item. Self-insurance Reserves: The Company self insures its product liability, workers compensation and
general liability losses up to $250 thousand per occurrence. Catastrophic
coverage is maintained for occurrences in excess of $0.25 million up to $25.0
million. The Company self insures its group health claims up to an annual stop loss
limit of $125 thousand per participant. Aggregate coverage is maintained for
annual group health insurance claims in excess of 125% of expected claims. Provisions for losses expected under these programs are recorded based on an
analysis of historical insurance claim data and certain actuarial assumptions. 25




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##### 



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,
2003 shipping and handling costs included in selling, general and
administrative were $15,916 for 2003, $13,913 for 2002 and $11,362 for 2001. 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, 2003, research and development expenses, consisting
primarily of internal wages and benefits, were $1,381 for 2003, $1,510 for
2002, and $1,482 for 2001. Fair Value of Financial Instruments: Cash, accounts receivable, short-term borrowings, accounts payable,
accrued liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value due to short-term maturity or revolving
nature of these instruments. Translation of Foreign Currencies: The translation of the Companys Canadian foreign currency based
financial statements into U.S. dollars is performed for balance sheet accounts
using exchange rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during the period. Comprehensive (Loss) Income: The components of comprehensive (loss) income for the years ended
December 31, 2003, 2002 and 2001 were as follows: 2003
    
    2002
    
    2001Net (loss) income
    
    $
    (4,647
    )
    
    $
    6,103
    
    
    $
    (4,236
    )Foreign currency translation
adjustment
    
    
    (135
    )
    
    
    5
    
    
    
    Comprehensive (loss) income
    
    $
    (4,782
    )
    
    $
    6,108
    
    
    $
    (4,236
    )
 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. 26




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##### 



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 adopted the provisions of FIN
No. 45 effective January 1, 2003. The adoption of FIN 45 did not have an
impact on the Companys consolidated financial position, results of operations
or cash flows. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities (an interpretation of Accounting Research Bulletin (ARB)
No. 51, Consolidated Financial Statements). This Interpretation is intended
to clarify the application of the majority voting interest requirement of ARB
No. 51, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The controlling financial
interest may be achieved through arrangements that do not involve voting
interests. FIN No. 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
FIN No. 46 is effective immediately to variable interests in a variable
interest entity (VIE) created or obtained after January 31, 2003. As amended
by FASB Staff Position (FSP) FIN 46-6, FIN No. 46 became effective for
variable interests in a VIE created before February 1, 2003 at the end of the
first interim or annual period ending after December 15, 2003. Subsequent to issuing FIN No. 46 and FSP FIN 46-6, the FASB continued to
propose modifications and issue FSPs that changed and clarified FIN No. 46.
These modifications and FSPs were subsequently incorporated into FIN No. 46
(revised) (FIN No. 46R), which replaces FIN No. 46. Among other things,
relative to FIN No. 46, FIN No. 46R a) essentially excludes operating
businesses from its provisions subject to four conditions, b) states the
provisions of FIN No. 46R are not required to be applied if a company is
unable, subject to making an exhaustive effort, to obtain the necessary
information, c) includes new definitions and examples of what variable
interests are, d) clarifies and changes the definition of a variable interest
entity, and e) clarifies and changes the definition and treatment of de facto
agents, as that term is defined in FIN No. 46 and FIN No. 46R. FIN No. 46R was
issued December 23, 2003. The Company will apply FIN No. 46R to all variable
interest entities at the end of the first quarter of 2004. When FIN No. 46R becomes fully effective for the Company in the first quarter
of 2004, the Company will be required to deconsolidate the accounts of the
Hillman Group Capital Trust because the call feature may no longer be
considered as a condition for consolidation. As a result, the current balance
sheet caption that reads Guaranteed preferred beneficial interests in the
Companys junior subordinated debentures will be revised to read Junior
subordinated debentures in the same dollar amount as the Trust Preferred
Securities. Within the statement of operations, the Distributions on
guaranteed preferred beneficial interests will be reclassified as interest
expense. 27




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##### 



In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS No. 145). Among other
items, SFAS No. 145 updates and clarifies existing accounting pronouncements
related to reporting gains and losses from the extinguishment of debt and
certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of SFAS No. 145 are generally
effective for fiscal years beginning after May 15, 2002, with earlier adoption
of certain provisions encouraged. The Company adopted the provisions of SFAS
No. 145 effective January 1, 2003. The adoption of SFAS No. 145 did not have
an impact on the Companys consolidated financial position, results of
operations or cash flows. In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No. 146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost as
defined in EITF Issue 94-3 was recognized at the date of an entitys commitment
to an exit plan. The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
application encouraged. Under SFAS No. 146, an entity may not restate its
previously issued financial statements and the new statement grandfathers the
accounting for liabilities that an entity had previously recorded under EITF
Issue 94-3. The Company adopted the provisions of SFAS No. 146 effective
January 1, 2003. The adoption of SFAS No. 146 did not have an impact on the
Companys consolidated financial position, results of operations, or cash
flows. In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure
(SFAS No. 148). SFAS No. 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the prior disclosure
guidance and requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of SFAS No. 148 are generally effective for fiscal years ending
after December 15, 2002. At this time the Company does not plan to adopt the
accounting provisions of SFAS No. 123 and will continue to account for stock
options in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. In May 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 did not have an impact on the Companys
consolidated financial position, results of operations, or cash flows. In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The
statement requires that an issuer classify financial instruments that are
within its scope as a liability. Many of those instruments were classified as
equity under previous guidance. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for certain mandatorily redeemable financial instruments. On
November 7, 2003, the FASB indefinitely 28




---



##### 



deferred the effective date of SFAS No. 150 for certain mandatorily redeemable
financial instruments and therefore the Company has elected to defer adoption. 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 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 borrowing
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, 2003, a one percent (1%) change in
the weighted average interest rate would change the annual interest expense by
approximately $1.0 million. The Company is exposed to foreign exchange rate changes of the Canadian
currency as it impacts the $0.9 million net asset value of its Canadian
subsidiary, The Hillman Group Canada, Ltd., as of December 31, 2003.
Management considers the Companys exposure to foreign currency translation
gains or losses to be minimal. 29




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##### 



Item 8  Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES PageReport of Independent Auditors
    
    
    31Financial Statements:Consolidated Balance Sheets, December 31, 2003 and 2002
    
    
    32Consolidated Statements of Operations for the Years ended
December 31, 2003 and 2002, Three Months ended
December 31, 2001, and Nine Months ended September 30, 2001
    
    
    33Consolidated Statements
            of Cash Flows for the Years ended December 31, 2003 and 2002,
            Three Months ended December 31, 2001, and Nine Months ended September 30,
            2001
    
    
    34Consolidated Statements
            of Changes in Stockholders Equity for the Years ended December 31,
            2003 and 2002
    
    
    35Notes to Consolidated Financial Statements
    
    
    36-61Financial Statement Schedule:Valuation Accounts
    
    
    62
 30




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##### 



Report of Independent Auditors 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,
2003 and 2002 and the results of their operations and their cash flows for the
years ended December 31, 2003 and 2002, the three-month period ended December
31, 2001, and the nine-month period ended September 30, 2001 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
March 19, 2004 31




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) December 31,
    
    December 31,2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,528
    
    
    $
    2,768Restricted investments
    
    
    1,145
    
    
    
    1,142Accounts receivable, net of allowances
of $524 and $555, respectively
    
    
    35,383
    
    
    
    31,855Inventories, net of allowances
of $3,189 and $4,375, respectively
    
    
    64,772
    
    
    
    59,783Deferred income taxes
    
    
    5,283
    
    
    
    7,663Other current assets
    
    
    5,770
    
    
    
    3,249Total current assets
    
    
    113,881
    
    
    
    106,460Property and equipment, net
    
    
    64,601
    
    
    
    68,596Goodwill
    
    
    134,725
    
    
    
    132,677Other intangibles, net
    
    
    9,631
    
    
    
    11,068Deferred income taxes, net
    
    
    20,498
    
    
    
    19,226Restricted investments
    
    
    5,932
    
    
    
    5,923Note receivable
    
    
    
    
    
    
    11,258Deferred financing fees, net of accumulated amortization
of $2,969 and $1,386, respectively
    
    
    5,638
    
    
    
    5,774Other assets
    
    
    927
    
    
    
    2,212Total assets
    
    $
    355,833
    
    
    $
    363,194LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    16,836
    
    
    $
    20,373Current portion of senior term loans
    
    
    9,268
    
    
    
    9,268Current portion of capitalized lease obligations
    
    
    54
    
    
    
    55Accrued expenses:Salaries and wages
    
    
    4,467
    
    
    
    5,523Pricing allowances
    
    
    8,242
    
    
    
    6,118Acquisition related costs
    
    
    4,226
    
    
    
    3,395Income and other taxes
    
    
    1,966
    
    
    
    1,329Deferred compensation
    
    
    1,145
    
    
    
    1,142Other accrued expenses
    
    
    9,137
    
    
    
    12,797Total current liabilities
    
    
    55,341
    
    
    
    60,000Long term senior term loans
    
    
    51,290
    
    
    
    60,559Bank revolving credit
    
    
    43,495
    
    
    
    34,532Long term capitalized lease obligations
    
    
    140
    
    
    
    194Long term unsecured subordinated notes to related party
    
    
    44,062
    
    
    
    42,108Deferred compensation
    
    
    5,932
    
    
    
    5,923Other non-current liabilities
    
    
    5,605
    
    
    
    5,258Total liabilities
    
    
    205,865
    
    
    
    208,574Guaranteed preferred beneficial interests in the
Companys junior subordinated debentures
    
    
    102,364
    
    
    
    102,234Commitments 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,
7,118,484 issued and outstanding
    
    
    71
    
    
    
    71Additional paid-in capital
    
    
    52,310
    
    
    
    52,310Accumulated deficit
    
    
    (4,647
    )
    
    
    Accumulated other comprehensive (loss) income
    
    
    (130
    )
    
    
    5Total stockholders equity
    
    
    47,604
    
    
    
    52,386Total liabilities and stockholders equity
    
    $
    355,833
    
    
    $
    363,194
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands) Successor
    
    PredecessorThree Months
    
    Nine MonthsYear ended
    
    Year ended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,
    
    September 30,2003
    
    2002
    
    2001
    
    2001Net sales
    
    $
    318,441
    
    
    $
    286,788
    
    
    $
    60,040
    
    
    $
    341,307Cost of sales
    
    
    143,770
    
    
    
    126,174
    
    
    
    25,598
    
    
    
    197,743Gross profit
    
    
    174,671
    
    
    
    160,614
    
    
    
    34,442
    
    
    
    143,564Operating expenses:Selling, general and administrative expenses
    
    
    120,451
    
    
    
    111,436
    
    
    
    25,112
    
    
    
    113,443Depreciation
    
    
    14,399
    
    
    
    12,004
    
    
    
    3,030
    
    
    
    9,593Amortization
    
    
    1,437
    
    
    
    1,485
    
    
    
    1,588
    
    
    
    2,895Management fee to related party
    
    
    1,800
    
    
    
    1,800
    
    
    
    250
    
    
    
    Total operating expenses
    
    
    138,087
    
    
    
    126,725
    
    
    
    29,980
    
    
    
    125,931Gain on termination of defined benefit
pension plan (Note 14)
    
    
    
    
    
    
    1,231
    
    
    
    
    
    
    
    Other income (expense), net
    
    
    681
    
    
    
    320
    
    
    
    173
    
    
    
    (398
    )Income from operations
    
    
    37,265
    
    
    
    35,440
    
    
    
    4,635
    
    
    
    17,235Interest expense, net
    
    
    15,405
    
    
    
    13,227
    
    
    
    3,616
    
    
    
    9,222Distributions on guaranteed preferred
beneficial interests
    
    
    12,231
    
    
    
    12,231
    
    
    
    3,058
    
    
    
    9,174Write-down of note receivable
    
    
    11,258
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income from continuing operations
before income taxes
    
    
    (1,629
    )
    
    
    9,982
    
    
    
    (2,039
    )
    
    
    (1,161
    )Income tax provision (benefit)
    
    
    3,018
    
    
    
    3,879
    
    
    
    (298
    )
    
    
    1,229(Loss) income from continuing operations
    
    
    (4,647
    )
    
    
    6,103
    
    
    
    (1,741
    )
    
    
    (2,390
    )Equity in (loss) earnings of affiliate (Note 4)
    
    
    
    
    
    
    
    
    
    
    (1,168
    )
    
    
    1,063Net (loss) income
    
    $
    (4,647
    )
    
    $
    6,103
    
    
    $
    (2,909
    )
    
    $
    (1,327
    )
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands) Successor
    
    PredecessorYear
    
    Year
    
    Three Months
    
    Nine Monthsended
    
    ended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,
    
    September 30,2003
    
    2002
    
    2001
    
    2001Cash flows from operating activities:Net (loss) income
    
    $
    (4,647
    )
    
    $
    6,103
    
    
    $
    (2,909
    )
    
    $
    (1,327
    )Adjustments to reconcile net (loss) income to net cash
provided by (used for) operating activities:Depreciation and amortization
    
    
    15,836
    
    
    
    13,489
    
    
    
    4,618
    
    
    
    12,488Dispositions of property and equipment
    
    
    
    
    
    
    1,269
    
    
    
    
    
    
    
    Deferred income tax (benefit)
    
    
    1,108
    
    
    
    5,081
    
    
    
    (298
    )
    
    
    1,044Loss (equity) in earnings of affiliate
    
    
    
    
    
    
    
    
    
    
    1,168
    
    
    
    (1,063
    )PIK interest on unsecured subordinated notes
    
    
    1,954
    
    
    
    1,868
    
    
    
    476
    
    
    
    Write-down of note receivable
    
    
    11,258
    
    
    
    
    
    
    
    
    
    
    
    Changes in operating items, net of effects of
acquisitions and divestitures:(Increase) decrease in accounts receivable, net
    
    
    (3,528
    )
    
    
    892
    
    
    
    7,179
    
    
    
    (13,792
    )(Increase) decrease in inventories, net
    
    
    (4,989
    )
    
    
    (1,184
    )
    
    
    (764
    )
    
    
    3,964Decrease in income taxes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27(Increase) decrease in other assets
    
    
    (1,236
    )
    
    
    2,484
    
    
    
    (491
    )
    
    
    (356
    )(Decrease) increase in accounts payable
    
    
    (3,537
    )
    
    
    1,302
    
    
    
    (3,292
    )
    
    
    (185
    )(Decrease) increase in other accrued liabilities
    
    
    (1,974
    )
    
    
    (383
    )
    
    
    3,163
    
    
    
    (3,865
    )Other items, net
    
    
    1,925
    
    
    
    (1,114
    )
    
    
    (72
    )
    
    
    2,013Net cash provided by (used for) operating activities
    
    
    12,170
    
    
    
    29,807
    
    
    
    8,778
    
    
    
    (1,052
    )Cash flows from investing activities:Proceeds from sale of subsidiary, net of cash
    
    
    
    
    
    
    
    
    
    
    18,047
    
    
    
    Proceeds from sale/liquidation of discontinued operations
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    1,623Costs from sale/liquidation of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (387
    )
    
    
    (1,214
    )Proceeds from sale of property and equipment
    
    
    20
    
    
    
    104
    
    
    
    74
    
    
    
    718Payment for acquired businesses, net of cash
    
    
    
    
    
    
    (21,592
    )
    
    
    
    
    
    
    (5,003
    )Capital expenditures
    
    
    (11,479
    )
    
    
    (22,989
    )
    
    
    (2,796
    )
    
    
    (12,179
    )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
    )Repurchase of common stock
    
    
    
    
    
    
    (231
    )
    
    
    
    
    
    
    Other investments
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    
    Other, net
    
    
    (143
    )
    
    
    1,062
    
    
    
    (443
    )
    
    
    (1,039
    )Net cash (used for) provided by investing activities
    
    
    (11,602
    )
    
    
    (43,646
    )
    
    
    10,483
    
    
    
    (21,421
    )Cash flows from financing activities:Borrowings of senior term loans
    
    
    
    
    
    
    20,220
    
    
    
    55,000
    
    
    
    Repayments of senior term loans
    
    
    (9,269
    )
    
    
    (4,518
    )
    
    
    (3,125
    )
    
    
    (250
    )Borrowings (repayments) of revolving credit loans, net
    
    
    8,963
    
    
    
    480
    
    
    
    (51,142
    )
    
    
    30,083Borrowings (repayments) of unsecured subordinated notes
    
    
    
    
    
    
    
    
    
    
    1,197
    
    
    
    (2,785
    )Principal payments under capitalized lease obligations
    
    
    (55
    )
    
    
    (73
    )
    
    
    (62
    )
    
    
    (707
    )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
    
    
    (1,447
    )
    
    
    (1,387
    )
    
    
    (4,476
    )
    
    
    5Borrowings (repayments) under other credit facilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (624
    )Net cash (used for) provided by financing activities
    
    
    (1,808
    )
    
    
    14,548
    
    
    
    (23,262
    )
    
    
    25,722Net (decrease) increase in cash and cash equivalents
    
    
    (1,240
    )
    
    
    709
    
    
    
    (4,001
    )
    
    
    3,249Cash and cash equivalents at beginning of period
    
    
    2,768
    
    
    
    2,059
    
    
    
    6,060
    
    
    
    2,811Cash and cash equivalents at end of period
    
    $
    1,528
    
    
    $
    2,768
    
    
    $
    2,059
    
    
    $
    6,060
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(dollars in thousands) TotalAdditional
    
    
    
    
    
    Accumulated Other
    
    Stock-Common
    
    Paid-in
    
    Accumulated
    
    Comprehensive
    
    holdersStock
    
    Capital
    
    Deficit
    
    Income (loss) (1)
    
    EquityBeginning
Balance - December 31, 2001
    
    $
    71
    
    
    $
    56,252
    
    
    $
    (2,909
    )
    
    $
    
    
    
    $
    53,414Net Income
    
    
    
    
    
    
    
    
    
    
    6,103
    
    
    
    
    
    
    
    6,103Change in cumulative foreign translation adjustment (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Purchase and retirement 20,000 shares of common stock
    
    
    
    
    
    
    (231
    )
    
    
    
    
    
    
    
    
    
    
    (231
    )Dividends to stockholders
    
    
    
    
    
    
    (3,711
    )
    
    
    (3,194
    )
    
    
    
    
    
    
    (6,905
    )Ending
Balance - December 31, 2002
    
    
    71
    
    
    
    52,310
    
    
    
    
    
    
    
    5
    
    
    
    52,386Net Loss
    
    
    
    
    
    
    
    
    
    
    (4,647
    )
    
    
    
    
    
    
    (4,647
    )Change in cumulative foreign translation adjustment (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (135
    )
    
    
    (135
    )Ending
Balance - December 31, 2003
    
    $
    71
    
    
    $
    52,310
    
    
    $
    (4,647
    )
    
    $
    (130
    )
    
    $
    47,604
  (1)
    
    The cumulative foreign translation adjustment represents the only item of other comprehensive
income. SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 35




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)  1.
    
    Basis of Presentation: The accompanying financial statements include the consolidated accounts of The
Hillman Companies, Inc., (the Company) 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. 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 and of Cash Flows 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,
2003 and 2002, and its related Statements of Operations, Cash Flows and Changes
in Stockholders Equity for the years ended December 31, 2003 and 2002 and for
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 with Allied Capital, the Companys debt refinancing and sale of an
operating subsidiary completed subsequent to the merger transaction with Allied
Capital (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 with Allied Capital are presented as part of the Predecessor
Financial Statements because the results from these two days are immaterial for
separate presentation. The accompanying 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
    
    $
    58,439Inventory
    
    
    71,857Property and equipment
    
    
    58,589Goodwill
    
    
    125,881Intangible assets
    
    
    12,924Other current assets
    
    
    31,255Other non-current assets
    
    
    36,858Total assets acquired
    
    
    395,803Less:Liabilities assumed
    
    
    219,704Guaranteed preferred beneficial interest in
the Companys junior subordinated debentures
    
    
    102,072Total assumed liabilities
    
    
    321,776Total purchase price
    
    $
    74,027
 36




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##### 



THE HILLMAN COMPANIES, 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 and 2001 assume that the acquisition of
SunSource, its subsequent refinancing and the acquisitions and dispositions
described in Note 4, Acquisitions and Divestitures, were consumed on January 1,
2001: 2002
    
    2001Net Sales
    
    $
    304,107
    
    
    $
    275,608Net Income (loss)
    
    $
    6,692
    
    
    $
    (3,570
    )
 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 three of which accounted for 36.3% of net sales in 2003. The average
single sale in 2003 was less than six hundred dollars. 37




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 2. Summary of Significant Accounting Policies: Cash Equivalents: Cash equivalents consist of commercial paper, U.S. Treasury obligations and
other liquid securities purchased with initial maturities less than 90 days and
are stated at cost which approximates market value. Restricted Investments: Restricted investments, which are carried at market value, 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. Excess and obsolete inventories are carried at net realizable value.
The historical usage rate is the primary factor used by the Company in
assessing the net realizable value of excess and obsolete inventory. A
reduction in the carrying value of an inventory item from cost to market is
recorded for inventory with no usage in the preceding twenty-four month period
or with on hand quantities in excess of twenty-four months average usage. Property and Equipment: Property and equipment, including assets acquired under capital leases, are
carried at cost and include expenditures for new facilities and major renewals.
Maintenance and repairs are charged to expense as incurred. The cost and
related accumulated depreciation are removed from their respective accounts
when assets are sold or otherwise disposed of and the resulting gain or loss is
reflected in current operations. Depreciation: For financial accounting purposes, depreciation, including that related to
plant and equipment acquired under capital leases, is computed on the
straight-line method over the estimated useful lives of the assets, generally
three to ten years, or, if shorter, over the terms of the related leases. 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 completed the first step of the transitional goodwill
impairment test, which required 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 concluded that no
impairment existed at the time of adoption, and, accordingly, the Company did
not recognize any transitional impairment loss. 38




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)  2.
    
    Summary of Significant Accounting Policies (continued): 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, 2001: Year ended December 31,2003
    
    2002
    
    2001Reported net (loss) income
    
    $
    (4,647
    )
    
    $
    6,103
    
    
    $
    (4,236
    )Goodwill amortization, net of
income taxes
    
    
    
    
    
    
    
    
    
    
    3,001Adjusted net (loss) income
    
    $
    (4,647
    )
    
    $
    6,103
    
    
    $
    (1,235
    )
 Long-Lived Assets: Under the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company has evaluated its long-lived assets
for financial impairment and will continue to evaluate them based on the
estimated undiscounted future cash flows as events or changes in circumstances
indicate that the carrying amount of such assets may not be fully recoverable. Income Taxes: Deferred income taxes are computed using the asset and liability method. Under
this method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
(temporary differences) and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Valuation allowances are provided for tax benefits where it
is more likely than not that certain future tax benefits will not be realized.  Adjustments to valuation allowances are recorded from changes in utilization of the tax related item.  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 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. 39




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)  2.
    
    Summary of Significant Accounting Policies (continued): 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,
2003, shipping and handling costs included in selling, general and
administrative were $15,916 for 2003, $13,913 for 2002 and $11,362 for 2001. 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, 2003, research and development expenses, consisting
primarily of internal wages and benefits, were $1,381 for 2003, $1,510 for
2002, and $1,482 for 2001. 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 the 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. Comprehensive (Loss) Income: The components of comprehensive (loss) income for the years ended December 31,
2003, 2002 and 2001 were as follows: 2003
    
    2002
    
    2001Net (loss) income
    
    $
    (4,647
    )
    
    $
    6,103
    
    
    $
    (4,236
    )Foreign currency translation
adjustment
    
    
    (135
    )
    
    
    5
    
    
    
    Comprehensive (loss) income
    
    $
    (4,782
    )
    
    $
    6,108
    
    
    $
    (4,236
    )
 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. 40




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 2. Summary of Significant Accounting Policies (continued): Reclassifications: Certain amounts in the 2002 and 2001 consolidated financial statements have
been reclassified to conform to the 2003 presentation. 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 were effective for financial statements ending after
December 15, 2002. The initial recognition and measurement provisions of this
interpretation were applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company adopted the provisions of FIN
No. 45 effective January 1, 2003. The adoption of FIN 45 did not have an
impact on the Companys consolidated financial position, results of operations
or cash flows. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities (an interpretation of Accounting Research Bulletin (ARB)
No. 51, Consolidated Financial Statements). This Interpretation is intended
to clarify the application of the majority voting interest requirement of ARB
No. 51, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The controlling financial
interest may be achieved through arrangements that do not involve voting
interests. FIN No. 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
FIN No. 46 is effective immediately to variable interests in a variable
interest entity (VIE) created or obtained after January 31, 2003. As amended
by FASB Staff Position (FSP) FIN 46-6, FIN No. 46 became effective for
variable interests in a VIE created before February 1, 2003 at the end of the
first interim or annual period ending after December 15, 2003. Subsequent to issuing FIN No. 46 and FSP FIN 46-6, the FASB continued to
propose modifications and issue FSPs that changed and clarified FIN No. 46.
These modifications and FSPs were subsequently incorporated into FIN No. 46
(revised) (FIN No. 46R), which replaces FIN No. 46. Among other things,
relative to FIN No. 46, FIN No. 46R a) essentially excludes operating
businesses from its provisions subject to four conditions, b) states the
provisions of FIN No. 46R are not required to be applied if a company is
unable, subject to making an exhaustive effort, to obtain the necessary
information, c) includes new definitions and examples of what variable
interests are, d) clarifies and changes the definition of a variable interest
entity, and e) clarifies and changes the definition and treatment of de facto
agents, as that term is defined in FIN No. 46 and FIN No. 46R. FIN No. 46R was
issued December 23, 2003. The Company will apply FIN No. 46R to all variable
interest entities at the end of the first quarter of 2004. 41




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 3. Recent Accounting Pronouncements (continued): When FIN No. 46R becomes fully effective for the Company in the first quarter
of 2004, the Company will be required to deconsolidate the accounts of the
Hillman Group Capital Trust because the call feature may no longer be
considered as a condition for consolidation. As a result, the current balance
sheet caption that reads Guaranteed preferred beneficial interests in the
Companys junior subordinated debentures will be revised to read Junior
subordinated debentures in the same dollar amount as the Trust Preferred
Securities. Within the statement of operations, the Distributions on
guaranteed preferred beneficial interests will be reclassified as interest
expense. In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS No. 145). Among other
items, SFAS No. 145 updates and clarifies existing accounting pronouncements
related to reporting gains and losses from the extinguishment of debt and
certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of SFAS No. 145 are generally
effective for fiscal years beginning after May 15, 2002, with earlier adoption
of certain provisions encouraged. The Company adopted the provisions of SFAS
No. 145 effective January 1, 2003. The adoption of SFAS No. 145 did not have
an impact on the Companys consolidated financial position, results of
operations or cash flows. In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No. 146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost as
defined in EITF Issue 94-3 was recognized at the date of an entitys commitment
to an exit plan. The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
application encouraged. Under SFAS No. 146, an entity may not restate its
previously issued financial statements and the new statement grandfathers the
accounting for liabilities that an entity had previously recorded under EITF
Issue 94-3. The Company adopted the provisions of SFAS No. 146 effective
January 1, 2003. The adoption of SFAS No. 146 did not have an impact on the
Companys consolidated financial position, results of operations, or cash
flows. In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure
(SFAS No. 148). SFAS No. 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the prior disclosure
guidance and requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of SFAS No. 148 are generally effective for 42




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 3. Recent Accounting Pronouncements (continued): 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. In May 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 did not have an impact on the Companys
consolidated financial position, results of operations, or cash flows. In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The
statement requires that an issuer classify financial instruments that are
within its scope as a liability. Many of those instruments were classified as
equity under previous guidance. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for certain mandatorily redeemable financial instruments. On
November 7, 2003, the FASB indefinitely deferred the effective date of SFAS No.
150 for certain mandatorily redeemable financial instruments and therefore the
Company has elected to defer adoption. 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 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
    
    $
    3,658Inventory
    
    
    7,323Property and equipment
    
    
    2,490Other Assets
    
    
    3,523Goodwill
    
    
    5,976Total assets acquired
    
    
    22,970Less assumed liabilities
    
    
    7,752Total purchase price
    
    $
    15,218
 43




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 4. Acquisitions and Divestitures (continued): In connection with the DIY acquisition, the Company developed an overall plan
that included the elimination of redundant headcount and facilities. In
accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination, the Company accrued $3,395 of estimated costs
related to the DIY acquisition plan in the fourth quarter of 2002. The
estimated costs consisted of approximately $1,500 of fixed asset disposals,
$900 of facilities lease costs, $500 of inventory conversion and relocation
expense and $495 for planned workforce reductions. The integration was
substantially completed by December 31, 2003. Additional reserves of $3,470, before
    tax adjustments of $1,422, have been established in 2003 for acquisition related
    costs associated with the purchase of DIY and recorded to goodwill. Additional
    costs include severance of $256, facility lease of $1,230, inventory adjustments
    of $832, and customer conversion costs which include product buybacks of $1,581.
    The actual cost of fixed asset disposals was $429 less than the original estimate. The following table provides a rollforward from December 31, 2002 to December
31, 2003 of the remaining liabilities and acquisition related charges recorded
by the Company: Severence &
    
    Facility
    
        Inventory
    
    Fixed Asset
    
    CustomerRelated Costs
    
    Lease
    
        Adjustments
    
    Disposal
    
    Conversions
    
    TotalBalances at December 31, 2002
    
    $
    495
    
    
    $
    900
    
    
    $
    500
    
    
    $
    1,500
    
    
    $
    
    
    
    $
    3,395Additions (Reductions)
    
    
    256
    
    
    
    1,230
    
    
    
    832
    
    
    
    (429
    )
    
    
    1,581
    
    
    
    3,470Payments
    
    
    (217
    )
    
    
    
    
    
    
    (952
    )
    
    
    (1,071
    )
    
    
    (399
    )
    
    
    (2,639
    )Balances at December 31, 2003
    
    $
    534
    
    
    $
    2,130
    
    
    $
    380
    
    
    $
    
    
    
    $
    1,182
    
    
    $
    4,226
 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 with G-C, the Company received a $10,000 subordinated note from G-C.
Interest on the note is payable quarterly at a rate of 18% from May 1, 2002 to
April 30, 2003, 17% from May 1, 2003 to April 30, 2004, and 16% thereafter.
G-Cs payment of interest on the note is subject to certain restrictions under
the terms of the subordinated note agreement. If such restrictions do not
permit the current payment of interest in cash when due, accrued interest is
added to the principal. 44




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 4. Acquisitions and Divestitures (continued): In
    February 2003, G-C sold the assets of its largest operating division,
    Kar Products. The proceeds of the sale were primarily used to pay down G-Cs
    senior creditors. Following the sale of Kar Products, the Company estimated
    the enterprise value of G-C based on the cash flows and book value of the
    remaining operating division under a held for sale methodology. The excess
    of the estimated enterprise value less debt obligations senior to the G-C
    note were determined to be insufficient to support the value of the G-C note
    and accrued interest. Accordingly, the Company recorded a $11,258 charge to
    income during the year ended December 31, 2003 to write-down the face
    value of the note and accrued interest thereon to zero. 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
with Allied Capital. 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 shareholder 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. 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. 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 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 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, $1,800 and $250 on the Successors Statement
of Operations for the year ended December 31, 2003 and 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 year ended December 31, 2002 was paid in March 2003 and the management fee
for the three months ended December 31, 2001 was paid in March 2002. 45




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 5. Related Party Transactions (continued): 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. 46




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 6. Income Taxes The components of the Companys provision (benefit) for income taxes from
continuing operations for the three years ended December 31, 2003 were as
follows: Successor
    
    PredecessorYear
    
    Year
    
    Three Months
    
    Nine Monthsended
    
    ended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,
    
    September 30,2003
    
    2002
    
    2001
    
    2001Current:Federal & State
    
    $
    397
    
    
    $
    232
    
    
    $
    
    
    
    $
    (292
    )Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185Total current
    
    
    397
    
    
    
    232
    
    
    
    
    
    
    
    (107
    )Deferred:Federal & State
    
    
    2,748
    
    
    
    3,872
    
    
    
    (298
    )
    
    
    268Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    
    2,748
    
    
    
    3,872
    
    
    
    (298
    )
    
    
    268Valuation allowance
    
    
    (127
    )
    
    
    (225
    )
    
    

    
    
    
    
    1,068Provision (benefit)
for income taxes
    
    $
    3,018
    
    
    $
    3,879
    
    
    $
    (298
    )
    
    $
    1,229
 The Company has U.S. federal net operating loss (NOL) carryforwards for tax
purposes, totaling $51,718 as of December 31, 2003, that are available to
offset future taxable income. These carryforwards expire from 2019 to 2021.
Limitations on utilization may apply to approximately $46,497 of these loss
carryforwards. Management believes that these losses will be fully utilized
prior to the expiration date. No valuation allowance has been provided against
the federal NOL. The Company has state net operating loss carryforwards with an aggregate tax
benefit of $4,289 which expire from 2004 to 2021. A valuation allowance of
$4,289 has been established for these deferred tax assets. The Company has federal unused capital losses totaling $36,708 as of December
31, 2003 that are available to offset future capital gains. These
carryforwards expire in 2006. A valuation allowance of $12,481 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 2003, the
change in the valuation reserve is due to an adjustment and utilization of
capital loss and state net operating loss carryforwards. 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. 47




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##### 



THE HILLMAN COMPANIES, 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, 2003 and 2002: As of December 31, 2003
    
    As of December 31, 2002Current
    
    Non-current
    
    Current
    
    Non-currentDeferred Tax Assets:Inventory
    
    $
    5,060
    
    
    $
    
    
    
    $
    5,108
    
    
    $
    Bad debt reserve
    
    
    797
    
    
    
    
    
    
    
    591
    
    
    
    Casualty loss reserve
    
    
    960
    
    
    
    1,032
    
    
    
    845
    
    
    
    399Deferred compensation
    
    
    468
    
    
    
    2,428
    
    
    
    487
    
    
    
    2,428Acquisition related/severance reserve
    
    
    2,125
    
    
    
    
    
    
    
    2,135
    
    
    
    Federal net operating loss
    
    
    
    
    
    
    17,584
    
    
    
    
    
    
    
    17,647State net operating loss
    
    
    
    
    
    
    4,289
    
    
    
    
    
    
    
    5,405Tax credit carryforwards
    
    
    
    
    
    
    283
    
    
    
    
    
    
    
    283Transaction costs
    
    
    
    
    
    
    635
    
    
    
    
    
    
    
    661Federal capital loss carryforwards
    
    
    
    
    
    
    12,481
    
    
    
    
    
    
    
    12,748All other items
    
    
    1,749
    
    
    
    945
    
    
    
    1,745
    
    
    
    503Gross deferred tax assets
    
    
    11,159
    
    
    
    39,677
    
    
    
    10,911
    
    
    
    40,074Valuation allowance for
deferred tax assets
    
    
    (5,876
    )
    
    
    (11,407
    )
    
    
    (3,248
    )
    
    
    (11,518
    )Net deferred tax assets
    
    $
    5,283
    
    
    $
    28,270
    
    
    $
    7,663
    
    
    $
    28,556Deferred Tax Liability:Intangible Asset Amortization
    
    $
    
    
    
    $
    1,992
    
    
    $
    
    
    
    $
    1,208Property and equipment
    
    
    
    
    
    
    5,800
    
    
    
    
    
    
    
    4,473Note receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,670All other items
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    (21
    )Gross deferred tax liabilities
    
    $
    
    
    
    $
    7,772
    
    
    $
    
    
    
    $
    9,330
 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. 48




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##### 



THE HILLMAN COMPANIES, 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
    
    PredecessorYear
    
    Year
    
    Three Months
    
    Nine Monthsended
    
    ended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,
    
    September 30,2003
    
    2002
    
    2001
    
    2001Statuatory federal income tax rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    -34.0
    %
    
    
    -34.0
    %Impact of foreign losses for which a
current tax benefit is not available
    
    
    -7.3
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %State and local income taxes, net of
U.S. federal income tax benefit
    
    
    -3.5
    %
    
    
    6.7
    %
    
    
    0.2
    %
    
    
    -6.7
    %Increase in valuation allowance
    
    
    -208.7
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Other permanent differences, principally
amortization of intangible assets
    
    
    -19.9
    %
    
    
    -1.8
    %
    
    
    24.5
    %
    
    
    1294.8
    %Effect of change in valuation allowances
    
    
    20.1
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Effective income tax rate
    
    
    -185.3
    %
    
    
    38.9
    %
    
    
    -9.3
    %
    
    
    1254.1
    %
 7. Property and Equipment: Property and equipment consists of the following at December 31, 2003 and 2002: EstimatedUseful Life(Years)
    
    2003
    
    2002Land
    
    
    
    
    
    $
    131
    
    
    $
    131Buildings
    
    
    27
    
    
    
    884
    
    
    
    863Leasehold improvements
    
    
    3-10
    
    
    
    4,029
    
    
    
    4,706Machinery and equipment
    
    
    3-10
    
    
    
    74,859
    
    
    
    61,014Furniture and fixtures
    
    
    3-5
    
    
    
    1,511
    
    
    
    1,430Construction in process
    
    
    
    
    
    
    
    
    
    
    9,434Property and equipment, gross
    
    
    
    
    
    
    81,414
    
    
    
    77,578Less accumulated depreciation
    
    
    
    
    
    
    16,813
    
    
    
    8,982Property and equipment, net
    
    
    
    
    
    $
    64,601
    
    
    $
    68,596
 49




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 8. Intangible Assets: Intangible assets subject to amortization consist of the following
as of December 31, 2003 and 2002: 2003
    
    2002Trademarks
    
    $
    6,500
    
    
    $
    6,500Patents
    
    
    6,700
    
    
    
    6,700Proprietary software
    
    
    1,000
    
    
    
    1,000Non-compete agreements
    
    
    1,250
    
    
    
    1,250Intangible assets, gross
    
    
    15,450
    
    
    
    15,450Less: Accumulated amortization
    
    
    5,819
    
    
    
    4,382Intangible assets, net
    
    $
    9,631
    
    
    $
    11,068
 Amortization expense for intangible assets for the year ended December 31, 2003
was $1,437. Amortization expense for the next five years is estimated to be
as follows: Year EndedDecember 31
    
    Amount2004
    
    $
    1,2392005
    
    $
    1,2232006
    
    $
    1,2232007
    
    $
    1,2232008
    
    $
    498
 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 50




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 9. Long-Term Debt (continued): repaid 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, 2003. 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) 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 $1,447 and $1,387 of financing fees for the
years ended December 31, 2003 and 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, 2003 in the amount of
$44,062 of which $4,062 represents the PIK amount. As of December 31, 2003 and 2002, long-term debt is summarized as follows: 2003
    
    2002Revolving Credit Agreement
    
    $
    43,495
    
    
    $
    34,532Term Loan A
    
    
    24,003
    
    
    
    32,732Term Loan B
    
    
    36,555
    
    
    
    37,095Subordinated Debt Notes
    
    
    44,062
    
    
    
    42,108Capital Leases
    
    
    194
    
    
    
    249148,309
    
    
    
    146,716Less: amounts due in one year
    
    
    9,322
    
    
    
    9,323Long-term debt
    
    $
    138,987
    
    
    $
    137,393
 51




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##### 



THE HILLMAN COMPANIES, 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, 2003, are as follows: 2004
    
    $
    9,3222005
    
    
    9,3112006
    
    
    58,9352007
    
    
    17,5742008
    
    
    13,1672009 and thereafter
    
    
    40,000
 As of December 31, 2003, the Company had $17,062 available under the Revolver.
The Company had letter of credit commitments outstanding of $4,223 at December
31, 2003. As of December 31, 2003, 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,
2003: Capital
    
    OperatingLeases
    
    Leases2004
    
    $
    68
    
    
    $
    6,9452005
    
    
    53
    
    
    
    5,7782006
    
    
    50
    
    
    
    4,1212007
    
    
    41
    
    
    
    2,9342008
    
    
    17
    
    
    
    1,793Later years
    
    
    0
    
    
    
    10,213Total minimum lease payments
    
    
    229
    
    
    $
    31,784Less amounts representing interest
    
    
    (35
    )Present value of net minimum lease payments
(including $54 currently payable)
    
    $
    194
 Total rental expense for all operating leases from continuing operations
amounted to $8,913 in 2003, $7,560 in 2002, and $7,089 in 2001. Certain leases
are subject to terms of renewal and escalation clauses. 52




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##### 



THE HILLMAN COMPANIES, 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. As of December 31, 2003 and 2002, the Companys consolidated balance sheet
included $7,077 and $7,065, 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 $1,145 and $1,142 as of December 31,
2003 and 2002, respectively. During the three years ended December 31, 2003, distributions from the deferred
compensation plans aggregated $948 in 2003, $1,142 in 2002, and $4,539 in 2001.  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. 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 a 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 53




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)  12.
    Guaranteed Preferred Beneficial Interests in the Companys
Junior Subordinated Debentures (continued): on December 31, 2003 was $111,770 based on the closing price on the American
Stock Exchange of $26.50 per security on that date. The interest payments on the Junior Subordinated Debentures underlying the
Trust Preferred Securities, aggregating $12,231 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. The Company has the right to redeem the Trust Preferred Securities, in whole or
in part, on or after September 30, 2002, upon not less than 30 days notice, at
a redemption price equal to the face value of the securities to be redeemed. 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 two years ended
December 31, 2003. 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 with Allied Capital, 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 and in the fourth quarter of 2003, 20,000 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 in connection with the
merger transaction. The roll-over options are summarized as follows: Grant Date
    
    Number of Options Outstanding
    
    Exercise Price Per ShareMay 1, 2000
    
    
    22,500
    
    
    $
    3.825May 1, 2000
    
    
    188,500
    
    
    $
    4.500May 23, 2001
    
    
    22,500
    
    
    $
    3.400May 23, 2001
    
    
    136,141
    
    
    $
    4.000Total
    
    
    369,641
 In conjunction with the merger transaction with Allied Capital, 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 54




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 13. Stockholders Equity (continued): each anniversary of the merger through the end of year four. No awards have
been made under New Equity Plan as of December 31, 2003. The Company will
issue 1,085,116 options under the New Equity Plan prior to the close of the
Merger Agreement more fully described in Note 20, Subsequent Events.
Upon issuance of the options, the Company will record a charge to income equal to the excess of the fair market value of the shares less the exercise price.  Based on the $510 million transaction value, the excess of the fair market value of the shares issued under the New Equity Plan will be approximately $24.3 million. 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. 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 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 was
$58. 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, 2003 was as follows: 2003
    
    2002
    
    2001Defined contribution plans
    
    $
    827
    
    
    $
    1,905
    
    
    $
    2,541Defined benefit plans
    
    
    
    
    
    
    (1,231
    )
    
    
    58Total
    
    $
    827
    
    
    $
    674
    
    
    $
    2,599
 15. Commitments and Contingencies: The Company self insures its product liability, workers compensation and
general liability losses up to $250 per occurrence. Catastrophic coverage is
maintained for occurrences in excess of $250 up to $25,000. As of December 31,
2003, the
Company has provided insurers letters of credit aggregating $4,223 related to
its product liability, workers compensation and general liability coverage. 55




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 15. Commitments and Contingencies (continued): The Company self insures its group health claims up to an annual stop loss
limit of $125 per participant. Aggregate coverage is maintained for annual
group health insurance claims in excess of 125% of expected claims. Provisions for losses expected under these programs are recorded based on an
analysis of historical insurance claim data and certain actuarial assumptions. 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. 16. Statements of Cash Flows: Supplemental disclosures of cash flow information are presented below: Successor
    
    PredecessorYear
    
    Year
    
    Three Months
    
    Nine Monthsended
    
    ended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,
    
    September 30,2003
    
    2002
    
    2001
    
    2001Cash paid (refunded) during the
period for:Interest
    
    $
    15,405
    
    
    $
    13,227
    
    
    $
    1,983
    
    
    $
    9,263Income taxes
    
    $
    338
    
    
    $
    (179
    )
    
    $
    (49
    )
    
    $
    304Non-cash operating activities:Issuance of shares of common stock
to certain 
non-employee directors
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    58Cash investing activities:Acquisitions (see Note 4, Acquisitions
and Divestitures):Fair value of assets acquired,
including goodwill
    
    $
    
    
    
    $
    21,592
    
    
    $
    
    
    
    $
    5,003Cash paid for acquired businesses
    
    $
    
    
    
    $
    21,592
    
    
    $
    
    
    
    $
    5,003Non-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
 56




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 17. Quarterly Data (unaudited): 2003
    
    Fourth
    
    Third
    
    Second
    
    FirstNet Sales
    
    $
    78,134
    
    
    $
    86,055
    
    
    $
    84,263
    
    
    $
    69,989Gross Profit
    
    
    43,136
    
    
    
    47,237
    
    
    
    45,973
    
    
    
    38,325Net income (loss)
    
    
    (2,100
    )
    
    
    1,720
    
    
    
    1,578
    
    
    
    (5,845
    )
 2002
    
    Fourth
    
    Third
    
    Second
    
    FirstNet Sales
    
    $
    71,878
    
    
    $
    75,707
    
    
    $
    75,778
    
    
    $
    63,425Gross Profit
    
    
    41,268
    
    
    
    42,636
    
    
    
    41,760
    
    
    
    34,950Net income (loss)
    
    
    1,476
    
    
    
    2,789
    
    
    
    3,100
    
    
    
    (1,262
    )
 The Company recorded a $3,601 charge to income during the quarter ended
December 31, 2003 to write-down the remaining face value of the G-C note to
zero. 18. Concentration of Credit Risks: 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, 2003, the largest three customers accounted for 36.3% of
sales and 40.6% of the year-end accounts receivable balance. No other customer
accounted for more than 10% of the Companys total sales in 2003. 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 8.7% of the
Companys total purchases for ongoing operations and 7.5% of the Companys
total trade payables for ongoing operations on December 31, 2003. 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. 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 57




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 19. Segment Information, (continued): income, net income, cash flows from operating activities, or other statement of
operations or 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
    
    PredecessorYear
    
    Year
    
    Three Months
    
    Nine Monthsended
    
    ended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,
    
    September 30,2003
    
    2002
    
    2001
    
    2001Net SalesTechnology Services (STS)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    152,561Hillman Group
    
    
    318,441
    
    
    
    286,788
    
    
    
    60,040
    
    
    
    188,746Consolidated net sales
    
    $
    318,441
    
    
    $
    286,788
    
    
    $
    60,040
    
    
    $
    341,307Gross ProfitTechnology Services (STS)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    37,023Hillman Group
    
    
    174,671
    
    
    
    160,614
    
    
    
    34,442
    
    
    
    106,541Consolidated gross profit
    
    $
    174,671
    
    
    $
    160,614
    
    
    $
    34,442
    
    
    $
    143,564EBITDATechnology Services (STS)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,205
    )Hillman Group
    
    
    54,901
    
    
    
    51,574
    
    
    
    10,182
    
    
    
    35,007Consolidated EBITDA
    
    $
    54,901
    
    
    $
    51,574
    
    
    $
    10,182
    
    
    $
    33,802Tangible AssetsTechnology Services (STS)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    N/AHillman Group
    
    
    172,981
    
    
    
    168,463
    
    
    
    146,331
    
    
    
    N/AConsolidated tangible
            assets
    
    $
    172,981
    
    
    $
    168,463
    
    
    $
    146,331
    
    
    
    N/A
 58




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 19. Segment Information, (continued): Successor
    
    PredecessorYear
    
    Year
    
    Three Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    Ended12/31/03
    
    12/31/02
    
    12/31/01
    
    9/30/01Capital ExpendituresTechnology Services (STS)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    427Hillman Group
    
    
    11,479
    
    
    
    22,989
    
    
    
    2,796
    
    
    
    11,752Consolidated capital expenditures
    
    $
    11,479
    
    
    $
    22,989
    
    
    $
    2,796
    
    
    $
    12,179DepreciationTechnology Services (STS)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,616Hillman Group
    
    
    14,399
    
    
    
    12,004
    
    
    
    3,030
    
    
    
    7,946Segment depreciation
    
    
    14,399
    
    
    
    12,004
    
    
    
    3,030
    
    
    
    9,562Corporate depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Consolidated depreciation
    
    $
    14,399
    
    
    $
    12,004
    
    
    $
    3,030
    
    
    $
    9,593Geographic Segment DataNet SalesUnited States
    
    $
    316,950
    
    
    $
    285,571
    
    
    $
    59,875
    
    
    $
    330,832Canada
    
    
    1,491
    
    
    
    1,217
    
    
    
    165
    
    
    
    10,475Consolidated net sales
    
    $
    318,441
    
    
    $
    286,788
    
    
    $
    60,040
    
    
    $
    341,307
 59




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 19. Segment Information, (continued): Successor
    
    PredecessorYear
    
    Year
    
    Three Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    Ended12/31/03
    
    12/31/02
    
    12/31/01
    
    9/30/01Reconciliation of Segment Profit to
(Loss) Incomefrom Continuing
Operations Before Income TaxesSegment
profit - EBITDA
    
    $
    54,901
    
    
    $
    51,574
    
    
    $
    10,182
    
    
    $
    33,802Dividend
income - STS Operating, Inc.
    
    
    
    
    
    
    546
    
    
    
    185
    
    
    
    Depreciation
    
    
    (14,399
    )
    
    
    (12,004
    )
    
    
    (3,030
    )
    
    
    (9,593
    )Amortization
    
    
    (1,437
    )
    
    
    (1,485
    )
    
    
    (1,588
    )
    
    
    (2,895
    )Management fee expense
    
    
    (1,800
    )
    
    
    (1,800
    )
    
    
    (250
    )
    
    
    Corporate expenses
    
    
    
    
    
    
    (2,622
    )
    
    
    (864
    )
    
    
    (4,079
    )Income before non-recurring charges
    
    
    37,265
    
    
    
    34,209
    
    
    
    4,635
    
    
    
    17,235Non-recurring gains:Gain on termination of pension plan
    
    
    
    
    
    
    1,231
    
    
    
    
    
    
    
    Income from operations
    
    
    37,265
    
    
    
    35,440
    
    
    
    4,635
    
    
    
    17,235Interest expense, net
    
    
    (15,405
    )
    
    
    (13,227
    )
    
    
    (3,616
    )
    
    
    (9,222
    )Distribution on guaranteed preferred
beneficial interests
    
    
    (12,231
    )
    
    
    (12,231
    )
    
    
    (3,058
    )
    
    
    (9,174
    )Write-down of note receivable
    
    
    (11,258
    )
    
    
    
    
    
    
    
    
    
    
    (Loss) income from continuing
operations before income taxes
    
    $
    (1,629
    )
    
    $
    9,982
    
    
    $
    (2,039
    )
    
    $
    (1,161
    )Reconciliation of Segment TangibleAssets to Total AssetsSegment tangible assets
    
    $
    172,981
    
    
    $
    168,463
    
    
    $
    146,331
    
    
    
    N/AGoodwill
    
    
    134,725
    
    
    
    132,677
    
    
    
    120,585
    
    
    
    N/AOther intangible assets
    
    
    9,631
    
    
    
    11,068
    
    
    
    12,553
    
    
    
    N/ADeferred income taxes
    
    
    25,781
    
    
    
    26,889
    
    
    
    29,976
    
    
    
    N/ADeferred financing fees
    
    
    5,638
    
    
    
    5,774
    
    
    
    5,536
    
    
    
    N/AAssets held for sale
    
    
    
    
    
    
    
    
    
    
    146
    
    
    
    N/AOther corporate assets
    
    
    7,077
    
    
    
    18,323
    
    
    
    24,834
    
    
    
    N/AConsolidated total assets
    
    $
    355,833
    
    
    $
    363,194
    
    
    $
    339,961
    
    
    
    N/A
 20. Subsequent Event: On February 14, 2004 Allied Capital and the Company entered into a Merger
Agreement to sell 100% of the Companys outstanding common stock to HCI
Acquisition Companies, Inc., an affiliate of Code Hennessy & Simmons LLC, and
certain members of management. The Merger Agreement has a total transaction
value of approximately $510 million for the sale of the company, including
repayment of outstanding debt and including the value of the companys
outstanding Trust Preferred Securities. The Merger Agreement is subject to a
working capital adjustment and certain closing conditions and is anticipated to
close by the beginning of the second quarter of 2004. 60




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 20. Subsequent Event, (continued): The Companys Trust Preferred Securities will remain outstanding and will not
be converted or exchanged in connection with the merger. 61




---



##### 



Financial Statement Schedule: Schedule II - VALUATION ACCOUNTS (dollars in thousands) Deducted From Assets in Balance SheetAllowance forAllowance for
    
    Obsolete/Doubtful
    
    ExcessAccounts
    
    InventoryBalance, December 31, 2000 - Predecessor
    
    $
    1,400
    
    
    $
    6,358Additions charged to
            cost and expense
    
    
    430
    
    
    
    1,699Deductions due to:Others
    
    
    228
    (A)
    
    
    1,068
    (A)Balance, September 30, 2001 - Predecessor
    
    
    1,602
    
    
    
    6,989Additions charged to cost and expense
    
    
    495
    
    
    
    (4
    )Deductions due to:Sale of division
    
    
    1,038
    
    
    
    3,436Merger transaction
    
    
    
    
    
    
    Others
    
    
    522
    (A)
    
    
    (378
    )(A)Balance, December 31, 2001 - Successor
    
    
    537
    
    
    
    3,927Additions charged to
            cost and expense
    
    
    277
    
    
    
    654Additions for DIY Acquisition
    
    
    100
    
    
    
    1,419Deductions due to:Others
    
    
    359
    (A)
    
    
    1,625
    (A)Ending
Balance - December 31, 2002 - Successor
    
    
    555
    
    
    
    4,375Additions charged to cost and expense
    
    
    63
    
    
    
    697Deductions due to:Others
    
    
    94
    (A)
    
    
    1,883
    (A)Ending
Balance - December 31, 2003 - Successor
    
    $
    524
    
    
    $
    3,189
 Notes:  (A)
    
    Includes write-off of accounts receivable (net of bad debt
recoveries) and inventories. 62




---



##### 



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, 2003. Item 9A  Controls and Procedures (a) As of the end of the period covered by this annual report on Form 10-K, the
Companys chief executive officer and chief financial officer conducted an
evaluation of the Companys disclosure controls and procedures (as defined in
Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based upon
this evaluation, the Companys chief executive officer and chief financial
officer concluded that the Companys disclosure controls and procedures are
effective in timely alerting them of any material information relating to the
Company that is required to be disclosed by the Company in the reports it files
or submits under the Securities Exchange Act of 1934. (b) There been no changes in the Companys internal control over financial
reporting that occurred during the year ended December 31, 2003, that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 63




---



##### 



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-YearName and Age
    
    Employment; Other DirectorshipsMaurice P. Andrien, Jr. (62)
    
    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 (57)
    
    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 SunSource, Inc.Alan T. Biland (45)
    
    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.
 64




---



##### 



Principal Occupation; Five-YearName and Age
    
    Employment; Other DirectorshipsDaniel L. Russell (39)
    
    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 (54)
    
    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s
previous work experience includes serving as
Managing Director of Butler Capital
Corporation, a mezzanine buyout firm, and the personal advisor to William S. Paley,
founder of CBS, and a
Senior Vice President in Lehman Brothers Kuhn
Loebs Merger and Acquisition Group. He also founded two
education service companies: Language Odyssey and SuccessLab. Mr. Walton is
a director of Riggs National Corporation.
 All directors hold office until their successors are duly elected and
qualified. 65




---



##### 



Committees The
Company is a controlled company within the meaning of the American
Stock Exchange listing
standards because Allied Capital Corporation owns more than 50% of the
outstanding shares of the Companys common stock. Accordingly, the Company is
exempt from certain requirements of the Amex listing standards, including the
requirement to maintain a majority of independent directors on the Companys
board of directors and to have a nominating committee and a compensation
committee composed entirely of independent directors. The Company does not have a nominating committee but it does have a compensation committee.
Because the Company is a controlled company within the Amex rules, the board of
directors believes that it is not necessary to utilize a nominating committee.
Director nominees for the Company are selected by the board of directors
following receipt of recommendations of potential candidates from the Chairman
of the Board of the Company. The board is not limited by the recommendation of
the Chairman and may select other nominees. There is no charter setting forth
these procedures and the board of directors has no policy regarding the
consideration of any director candidates recommended by shareholders. The current members of the audit committee are Alan T. Biland, and Daniel L.
Russell. At present, Mr. Biland is the only member of the audit committee who
is independent. In addition, none of the members of the audit committee is
designated as an audit committee financial expert. Code of Ethics The Company has adopted a code of ethics which applies to, among others, its
senior officers, including its Chief Executive Officer and its Chief Financial
Officer, as well as every employee of the Company. The Companys code can be
accessed via its website at http://www.hillmangroup.com. The Company intends
to disclose amendments to or waivers from a required provision of the code on
Form 8-K. 66




---



##### 



The executive officers of the Company (including the executive officers of The
Hillman Group, Inc.) are set forth below: Executive Officers Position with the Company; Five-yearName and Age
    
    Employment HistoryMaurice P. Andrien, Jr. (62)
    
    Chairman of The Hillman Companies, Inc.,
Cincinnati, Ohio. See page 64 for five-year
employment history.Max W. Hillman (57)
    
    President and Chief Executive Officer of The
Hillman Companies, Inc., Chief Executive
Officer of The Hillman Group, Inc.,
Cincinnati, Ohio. See page 64 for five-year
employment history. Mr. Hillman is the
brother of Richard P. Hillman.Richard P. Hillman (55)
    
    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 (42)
    
    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 (45)
    
    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 (49)
    
    Senior Vice President of National Account
Sales for The Hillman Group, Inc., Tempe,
Arizona. Mr. Rowe has held such position
with The Hillman Group since 1992.
 All executive officers hold office at the pleasure of the board of directors. 67




---



##### 



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, 2003, 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. Long-Term CompensationRestricted
    
    SecuritiesAnnual Compensation
    
    
    
    
    
    Stock
    
    UnderlyingName and
    
    
    
    Other Annual
    
    Awards
    
    Options
    
    All OtherPrincipal Position
    
    Year
    
    Salary(1)
    
    Bonus(2)
    
    Compensation(4)
    
    $
    
    #
    
    CompensationMaurice P. Andrien, Jr.
    
    
    2003
    
    
    $
    355,000
    
    
    $
    129,763
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman
    
    
    2002
    
    
    
    355,600
    
    
    
    228,467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    The Hillman Companies, Inc.
    
    
    2001
    
    
    
    473,352
    
    
    
    299,928
    
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    
    Max W. Hillman
    
    
    2003
    
    
    
    363,270
    
    
    
    162,164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President and CEO
    
    
    2002
    
    
    
    362,500
    
    
    
    293,794
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    The Hillman Companies, Inc.
    
    
    2001
    
    
    
    261,216
    
    
    
    193,262
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    Richard P. Hillman
    
    
    2003
    
    
    
    244,813
    
    
    
    50,051
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President
    
    
    2002
    
    
    
    234,423
    
    
    
    105,990
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    The Hillman Group, Inc.
    
    
    2001
    
    
    
    230,161
    
    
    
    49,967
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    George L. Heredia
    
    
    2003
    
    
    
    193,192
    
    
    
    49,724
    (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior VP of Engraving
    
    
    2002
    
    
    
    193,992
    
    
    
    67,968
    (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    The Hillman Group, Inc.
    
    
    2001
    
    
    
    183,257
    
    
    
    47,992
    (3)
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    Terry R. Rowe
    
    
    2003
    
    
    
    189,000
    
    
    
    54,858
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior VP National Accounts
    
    
    2002
    
    
    
    182,000
    
    
    
    64,715
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    The Hillman Group, Inc.
    
    
    2001
    
    
    
    175,000
    
    
    
    49,508
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    
   (1)
    
    Represents base salary plus other types of miscellaneous
compensation.(2)
    
    Represents earned bonus for services rendered in each year.(3)
    
    Excludes special performance and retention bonuses of $186,000,
$85,000, and $293,000 earned in 2003, 2002, and 2001, respectively,
related to the acquisition of Axxess Technologies, Inc.(4)
    
    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 2003.
Alan T. Biland received $25,000 cash compensation for the year ended December
31, 2003 for his Board of Director duties. The remaining Board of Directors
were not compensated by the Company during the year ended December 31, 2003. 68




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##### 



AGGREGATED OPTION EXERCISES IN 2003
AND FISCAL YEAR-END OPTION VALUES The following table sets forth information for each named executive officer
with regard to stock options exercised during 2003 and the aggregate stock
options held at December 31, 2003. Number of
    
    Value ofUnderlying
    
    UnexercisedUnexercised
    
    In-The-MoneyOptions
    
    Options AtShares
    
    
    
    
    
    At FY-End (#)
    
    FY-End ($)Acquired
    
    
    
    
    
    Exercisable/
    
    Exercisable/by
    
    Value
    
    Unexercisable
    
    UnexcercisableName
    
    Exercise
    
    Realized
    
    (1)
    
    (2)Maurice P. Andrien, Jr.
    
    
    
    
    
    
    
    
    
    
    130,000/ 0
    
    
    $
    3,040,304/0Max W. Hillman
    
    
    
    
    
    
    
    
    
    
    67,500/0
    
    
    
    1,591,430/0Richard P. Hillman
    
    
    
    
    
    
    
    
    
    
    20,000/0
    
    
    
    468,124/0George L. Heredia
    
    
    
    
    
    
    
    
    
    
    6,641/0
    
    
    
    154,601/0Terry R. Rowe
    
    
    
    
    
    
    
    
    
    
    9,000/0
    
    
    
    210,906/0
  (1)
    
    Represents the number of shares subject to outstanding options.(2)
    
    Based on a price of $27.66 per share, the estimated per share
fair value of the Companys Common Stock as of December 31, 2003
minus the associated exercise price. 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 the 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. On February 14, 2004 Allied Capital and the Company entered into a Merger
Agreement to sell 100% of the Companys outstanding common stock to HCI
Acquisition Companies, Inc., an affiliate of Code Hennessy & Simmons LLC, and
certain members 69




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##### 



of management. Upon closing of the Merger Agreement, Mr. Andrien
will be paid severance in accordance with his employment agreement described above. 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 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
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 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 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. On February 14, 2004, Allied Capital and the Company entered into a Merger
Agreement to sell 100% of the Companys outstanding common stock to HCI
Acquisition Companies, Inc., an affiliate of Code Hennessy & Simmons LLC, and
certain members of management. Following the consummation of the Merger
Agreement, Mr. Hillman will continue in his current position as President and
Chief Executive Officer of The Hillman Companies, Inc. Mr. Hillman will enter
into a new four-year employment agreement effective with the date of the Merger
Agreement. 70




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##### 



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, 2003. Common SharesName of Beneficial Owner
    
    Owned Beneficially
    
    Percent of ClassDirectors and Executive OfficersMaurice P. Andrien, Jr.
    
    
    19,880
    
    
    
    *Richard P. Hillman
    
    
    41,205
    
    
    
    *Max W. Hillman
    
    
    55,422
    
    
    
    *George L. Heredia
    
    
    3,359
    
    
    
    *Terry R. Rowe
    
    
    2,410
    
    
    
    *Daniel L. Russell

    
    
    
    
    
    
    *G. Cabel Williams, III
    
    
    
    
    
    
    *William L. Walton
    
    
    
    
    
    
    *Alan T. Biland
    
    
    
    
    
    
    *All Executive Officers as a Group (7 persons)
    
    
    161,005
    
    
    
    2.3
    %
 The firm identified in the table below has reported that it beneficially owned
at December 31, 2003 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 Partner, 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. 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 on its Statement of Operations
for each of the annual periods ended December 31, 2003 and 2002. 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 $1,800,000 of management fees in March 2003 for the year ended December
31, 2002 and $250,000 of management fees in March 2002 for the three months
ended December 31, 2001. 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 with Allied Capital 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. 71




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##### 



Item 14  Principal Accounting Fees and Services. PricewaterhouseCoopers LLP billed the Company aggregate fees of $145,000 for
the audit of the Companys annual financial statement for the fiscal year ended
December 31, 2003 and for the review of the financial statements included in
the Companys Forms 10-Q for such fiscal year and $125,000 for the audit of the
Companys annual financial statement for the fiscal year ended December 31,
2002 and for the review of the financial statements included in the Companys
Forms 10-Q for such fiscal year. The following are aggregate fees billed to the Company by
PricewaterhouseCoopers LLP during 2003 and 2002: Fiscal Year Ended
    
    Fiscal Year EndedDecember 31, 2003
    
    December 31, 2002Audit Fees
    
    $
    145,000
    
    
    $
    125,000Audit Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    84,296
    
    
    
    343,275All Other Fees
    
    
    
    
    
    
    131,058Total Fees:
    
    $
    229,296
    
    
    $
    599,333
 Audit Fees Audit fees consist of fees billed for professional services rendered for the
audit of the Companys financial statements and review of the interim
consolidated financial statements included in quarterly reports and services
that are normally provided by PricewaterhouseCoopers LLP in connection with
statutory and regulatory filings. Audit Related Fees Audit related fees are fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of the Companys
consolidated financial statements and are not under Audit Fees. Tax Fees Tax fees consist of fees billed for professional services for tax compliance,
tax advice and tax planning. These services include assistance regarding
federal, state and international tax compliance, tax audit defense, customs and
duties, mergers and acquisitions, and international tax planning. All Other Fees All other fees consist of fees for products and services other than the
services reported above. The Audit Committees policy is to pre-approve
all audit and permissible non-audit services provided by PricewaterhouseCoopers
LLP on a case by case basis, and any pre-approval is detailed as to
the particular service or category of service and is generally
subject to a specific budget. These services may include audit services, audit-related services, tax
services and other related services. PricewaterhouseCoopers LLP and management are required to periodically report
to the Audit Committee regarding the extent of services provided by
PricewaterhouseCoopers LLP in accordance with this pre-approval, and the fees
for the services performed to date. 72




---



##### 



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 8-K.A Current Report on Form 8-K was filed on February 17, 2004 reporting an
other event under Item 5 of 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.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. (16)(Exhibit 10.2)2.2
    
    Asset Purchase Agreement between Fastenal Company and The
Hillman Group, Inc. dated October 3, 2002. (17)(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. (11)(Exhibit 2.1)2.4
    
    Asset Purchase Agreement dated September 28, 2001, by and
between SunSource Technology Services, LLC, and STS Operating, Inc.
(13) (Exhibit 2.1)2.5
    
    Agreement and Plan of Merger dated as of February 14, 2004 by
and among the Company, HCI Acquisition Corp. and the Common
Stockholders of the Company. (5)(Exhibit 2.1)2.6
    
    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. (8)(Exhibit 2.1) 73




---



##### 



2.7
    
    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. (8) (Exhibit 2.2)2.8
    
    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. (8)(Exhibit 2.1)2.9
    
    Amendment No. 1 to Contribution Agreement by and among
SunSource Inc., SunSource Industrial Services Company, Inc., Kar
Products LLC (as successor by merger to 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
March 2, 2000. (8)(Exhibit 2.2)3.1
    
    Amended and Restated bylaws as adopted by the Corporations
stockholders as of September 26, 2001. (14)(Exhibit 3.1)3.2
    
    Amended and Restated Certificate of Incorporation of the
Company. (3) (Exhibit 3.1)3.3
    
    Amendment to Amended and Restated Certificate of Incorporation
of the Company. (18)(Exhibit 3.3)4.1
    
    Form of Stockholders Agreement (12)(Exhibit d5)4.2
    
    Amended and Restated Declaration of Trust (3)(Exhibit 4.1)4.3
    
    Indenture between the Company and the Bank of New York (3)(Exhibit 4.2)4.4
    
    Preferred Securities Guarantee (3) (Exhibit 4.3)4.5
    
    Rights Agreement between the Company and the Registrar and
Transfer Company (3)(Exhibit 10.5)4.6
    
    * Amendment No. 1 to the Rights Agreement dated June 18, 2001.4.7
    
    * Amendment No. 2 to the Rights Agreement dated February 14,
2004.10.1
    
    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. (14)(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. (15)(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. (19)(Exhibit 10.3) 74




---



##### 



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. (19)(Exhibit 10.4)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.
(14)(Exhibit 10.2)10.6
    
    SunSource Inc. 2001 Stock Incentive Plan. (14) (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. (12)(Exhibit e1)10.9
    
    Employment Agreement by and between SunSource Inc. and Stephen
W. Miller entered into June 18, 2001. (12)(Exhibit e2)10.10
    
    Employment Agreement by and between SunSource Inc. and Joseph
M. Corvino entered into June 18, 2001. (14)(Exhibit 10.7)10.11
    
    Employment Agreement by and between SunSource Inc. and Max. W.
Hillman entered into June 18, 2001. (14)(Exhibit 10.8)10.12
    
    SunSource Inc. Nonqualified Deferred Compensation Plan dated
as of August 1, 2000. (10)(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. (10)(Exhibit 10.8)10.14
    
    1998 Equity Compensation Plan-Amendment to Nonqualified Stock
Option Grant dated as of January 26, 2000. (9)(Exhibit 10.1)10.15
    
    1998 Equity Compensation Plan  Restricted Stock Grant dated
as of January 26, 2000. (9)(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, 2003)31.1
    
    * Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 75




---



##### 



31.2
    
    * Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.32.1
    
    * Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    * 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 as an exhibit to the Form 8-K filed February 17, 2004.(6)
    
    Filed on March 17, 2000 as an exhibit to Current Report on Form
8-K.(7)
    
    Filed on April 24, 2000 as an exhibit to Current Report on Form
8-K.(8)
    
    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.(9)
    
    Filed on March 30, 2000 as an exhibit to Annual Report on Form
10-K for the year ended December 31, 1999.(10)
    
    Filed on April 2, 2001 as an exhibit to Annual Report on Form
10-K for the year ended December 31, 2000.(11)
    
    Filed on June 21, 2001 as an exhibit to the Current Report on
Form 8-K filed on June 21, 2001.(12)
    
    Filed as an exhibit to Schedule 13E-3 filed on July 11, 2001,
as amended.(13)
    
    Filed as an exhibit to the Current Report on Form 8-K filed on
October 15, 2001.(14)
    
    Filed as an exhibit to Quarterly Report on Form 10-Q for the
Quarter ended September 30, 2001.(15)
    
    Filed as an exhibit to Quarterly Report on Form 10-Q for the
Quarter ended March 31, 2002.(16)
    
    Filed as an exhibit to Quarterly Report on Form 10-Q for the
Quarter ended June 30, 2002.(17)
    
    Filed as an exhibit to the Current Report on Form 8-K filed on
October 4, 2002.(18)
    
    Filed on April 1, 2002 as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 2001.(19)
    
    Filed on March 27, 2003 as an exhibit to the Annual Report on
Form 10-K for the year ended December 31, 2002.  *
    
    Filed herewith. 76




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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 26, 2004
    
    
    By:
    
    
    /s/ James P. WatersJames P. WatersTitle:
    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/s/ Max W. Hillman

Max W. Hillman
    
    Principal Executive
Officer and Director
    
    March 26, 2004/s/ Maurice P. Andrien, Jr.

Maurice P. Andrien, Jr.
    
    Chairman and
Director
    
    March 26, 2004/s/ Harold J. Wilder

Harold J. Wilder
    
    Principal Accounting Officer
    
    March 26, 2004/s/ Alan T. Biland

Alan T. Biland
    
    Director
    
    March 26, 2004/s/ Daniel L. Russell

Daniel L. Russell
    
    Director
    
    March 26, 2004/s/ William L. Walton

William L. Walton
    
    Director
    
    March 26, 2004
 77