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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period September 30, 2003

Commission file number 1-3919


Keystone Consolidated Industries, Inc.
(Exact name of registrant as specified in its charter)


Delaware 37-0364250
- ------------------------------- --------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)

5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, TX 75240-2697
(Address of principal executive offices) (Zip Code)


Registrant's telephone number, including area code: (972) 458-0028

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, 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 Exchange Act).

Yes _____ No X
-----

Number of shares of common stock outstanding at November 14, 2003: 10,068,450








KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

INDEX


Page
number

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets - December 31, 2002
and September 30, 2003 3-4

Consolidated Statements of Operations - Three months
and nine months ended September 30, 2002 and 2003 5-6

Consolidated Statements of Cash Flows - Nine months
ended September 30, 2002 and 2003 7

Consolidated Statement of Stockholders'
Deficit - Nine months ended September 30, 2003 8

Notes to Consolidated Financial Statements 9-24

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25-38

Item 4. Controls and Procedures 39


PART II. OTHER INFORMATION

Item 1. Legal Proceedings 40

Item 6. Exhibits and Reports on Form 8-K 40






KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)




December 31, September 30,
ASSETS 2002 2003
----------- -------------

Current assets:

Notes and accounts receivable .................. $ 22,578 $ 35,849
Inventories .................................... 50,089 27,729
Prepaid expenses and other ..................... 893 3,093
-------- --------

Total current assets ........................ 73,560 66,671
-------- --------

Property, plant and equipment .................... 373,833 368,737
Less accumulated depreciation .................... 253,849 259,772
-------- --------

Net property, plant and equipment ........... 119,984 108,965
-------- --------

Other assets:
Restricted investments ......................... 5,730 5,720
Unrecognized net pension obligation ............ 11,852 11,852
Deferred financing costs ....................... 2,319 1,785
Goodwill ....................................... 752 752
Other .......................................... 1,298 1,208
-------- --------

Total other assets .......................... 21,951 21,317
-------- --------

$215,495 $196,953
======== ========









KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)




LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31, September 30,
2002 2003
------------ -------------

Current liabilities:
Notes payable and current maturities of

long-term debt ............................... $ 33,935 $ 68,522
Accounts payable ............................... 23,696 20,078
Accounts payable to affiliates ................. 1,448 2,505
Accrued OPEB cost .............................. 11,372 11,385
Accrued preferred stock dividends .............. 4,683 9,138
Other accrued liabilities ...................... 40,216 40,006
--------- ---------

Total current liabilities .................. 115,350 151,634
--------- ---------

Noncurrent liabilities:
Long-term debt ................................. 63,306 32,240
Accrued OPEB cost .............................. 102,717 108,085
Accrued pension costs .......................... 48,571 53,744
Other .......................................... 20,337 17,497
--------- ---------

Total noncurrent liabilities ............... 234,931 211,566
--------- ---------

Minority interest ................................ 2 --
--------- ---------

Redeemable Series A preferred stock .............. 2,112 2,112
--------- ---------

Stockholders' deficit:
Common stock ................................... 10,798 10,798
Additional paid-in capital ..................... 48,388 43,933
Accumulated other comprehensive loss -
pension liabilities ........................... (170,307) (170,307)
Accumulated deficit ............................ (25,767) (52,771)
Treasury stock, at cost ........................ (12) (12)
--------- ---------

Total stockholders' deficit ................ (136,900) (168,359)
--------- ---------

$ 215,495 $ 196,953
========= =========









KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----


Net sales ....................... $ 83,844 $ 80,452 $ 273,290 $ 258,290
Cost of goods sold .............. 79,510 83,712 249,412 256,287
-------- -------- --------- ---------
Gross margin .................. 4,334 (3,260) 23,878 2,003
-------- -------- --------- ---------

Selling expense ................. 1,666 1,687 5,240 6,221
General and administrative ...... 5,708 5,418 16,231 13,253
Defined benefit pension expense
(credit) 297 1,774 (1,203) 5,174
-------- -------- --------- ---------
7,671 8,879 20,268 24,648
-------- -------- --------- ---------

Operating income (loss) ..... (3,337) (12,139) 3,610 (22,645)
-------- -------- --------- ---------

General corporate income (expense):
Corporate expense ............... (645) 87 (2,849) (2,254)
Interest expense ................ (937) (942) (4,584) (3,024)
Interest income ................. 22 18 63 38
Gain on early extinguishment of
debt ........................... -- -- 54,739 --
Gain on sale of business units .. -- 1,073 -- 1,073
Other income (expense), net ..... (12) 34 25 107
-------- -------- --------- ---------
(1,572) 270 47,394 (4,060)
-------- -------- --------- ---------

Income (loss) before income taxes
and cumulative effect of change
in accounting principle ........ (4,909) (11,869) 51,004 (26,705)

Provision for income taxes ........ -- -- 21,622 --

Minority interest in after-tax
earnings (losses) ............... (108) (33) 166 299
-------- -------- --------- ---------

Income (loss) before cumulative
effect of change in accounting
principle ........................ (4,801) (11,836) 29,216 (27,004)

Cumulative effect of change in
accounting principle ............. -- -- 19,998 --
-------- -------- --------- ---------

Net income (loss) .............. (4,801) (11,836) 49,214 (27,004)

Dividends on preferred stock ...... 1,485 1,485 3,198 4,455
-------- -------- --------- ---------

Net income (loss) available for
common shares .................... $ (6,286) $(13,321) $ 46,016 $ (31,459)
======== ======== ========= =========







KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

(In thousands, except per share data)



Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----

Basic earnings (loss) per share available for common shares:

Income (loss) before cumulative
effect of change in accounting

principle .................... $ (.63) $ (1.32) $ 2.58 $ (3.12)

Cumulative effect of change in
accounting principle ......... -- -- 1.99 --
---------- ---------- ---------- ----------

Net income (loss) ........... $ (.63) $ (1.32) $ 4.57 $ (3.12)
========== ========== ========== ==========

Basic shares outstanding ........ 10,068 10,068 10,067 10,068
========== ========== ========== ==========

Diluted earnings (loss) per share
available for common shares:

Income (loss) before cumulative
effect of change in accounting
principle .................... $ (.63) $ (1.32) $ 1.46 $ (3.12)

Cumulative effect of change in
accounting principle ......... -- -- 1.00 --
---------- ---------- ---------- ----------

Net income (loss) ........... $ (.63) $ (1.32) $ 2.46 $ (3.12)
========== ========== ========== ==========

Diluted shares outstanding ...... 10,068 10,068 19,967 10,068
========== ========== ========== ==========










KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)



Nine months ended
September 30,
2002 2003
---- ----

Cash flows from operating activities:

Net income (loss) .................................... $ 49,214 $(27,004)
Depreciation and amortization ........................ 13,105 12,490
Amortization of deferred financing costs ............. 498 557
Deferred income taxes ................................ 21,622 --
Non-cash defined benefit pension expense (credit) .... (1,203) 5,173
Non-cash OPEB expense ................................ 3,670 5,381
Gain on early extinguishment of debt ................. (54,739) --
Cumulative effect of change in accounting principle .. (19,998) --
Other, net ........................................... 250 (1,136)
Change in assets and liabilities:
Notes and accounts receivable ...................... (8,499) (14,463)
Inventories ........................................ (4,507) 16,373
Accounts payable ................................... 166 (605)
Other, net ......................................... 5,468 (4,302)
-------- --------

Net cash provided (used) by operating activities . 5,047 (7,536)
-------- --------

Cash flows from investing activities:
Capital expenditures ................................. (4,803) (2,352)
Proceeds from sale of business units ................. -- 3,344
Collection of notes receivable ....................... 1,127 75
Other, net ........................................... 166 (650)
-------- --------

Net cash provided (used) by investing activities . (3,510) 417
-------- --------

Cash flows from financing activities:
Revolving credit facilities, net ..................... (13,106) 9,102
Other notes payable and long-term debt:
Additions .......................................... 15,066 109
Principal payments ................................. (1,025) (2,069)
Deferred financing costs paid ........................ (2,472) (23)
-------- --------

Net cash provided (used) by financing activities . (1,537) 7,119
-------- --------

Net change in cash and cash equivalents ................ -- --

Cash and cash equivalents, beginning of period ......... -- --
-------- --------

Cash and cash equivalents, end of period ............... $ -- $ --
======== ========

Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized ................ $ 2,739 $ 2,138
Income taxes ....................................... 108 52









KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

Nine months ended September 30, 2003
(In thousands)




Accumulated
other
comprehensive
Additional loss -
Common paid-in pension Accumulated Treasury
stock capital liabilities deficit stock Total
------ ---------- ----------- ---------- -------- -----


Balance - December 31, 2002 $10,798 $ 48,388 $(170,307) $(25,767) $(12) $(136,900)

Net loss ................... -- -- -- (27,004) -- (27,004)

Preferred stock dividends .. -- (4,455) -- -- -- (4,455)
------- -------- --------- -------- ---- ---------

Balance - September 30, 2003 $10,798 $ 43,933 $(170,307) $(52,771) $(12) $(168,359)
======= ======== ========= ======== ==== =========













KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and basis of presentation:

The consolidated balance sheet of Keystone Consolidated Industries, Inc.
("Keystone" or the "Company") at December 31, 2002 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 2003 and the consolidated statements
of operations and cash flows for the interim periods ended September 30, 2002
and 2003, and the consolidated statement of common stockholders' deficit for the
interim period ended September 30, 2003, have each been prepared by the Company,
without audit, in accordance with accounting principles generally accepted in
the United States of America ("GAAP"). In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the consolidated financial position, results of operations and
cash flows, have been made. However, it should be understood that accounting
measurements at interim dates may be less precise than at year end. The results
of operations for the interim periods are not necessarily indicative of the
operating results for a full year or of future operations.

Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 (the "Annual Report").

At September 30, 2003, Contran Corporation ("Contran") and other entities
related to Mr. Harold C. Simmons, beneficially owned approximately 50% of the
outstanding common stock of the Company. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Mr. Simmons, of which Mr. Simmons is sole
trustee. Keystone may be deemed to be controlled by Contran and Mr. Simmons. At
September 30, 2003, Contran also owned 54,956 shares of the 59,399 shares of the
Company's outstanding Redeemable Series A Preferred Stock. Effective March 15,
2003, each share of Series A Preferred Stock is convertible, at the option of
the holder, into 250 shares of the Company's common stock (equivalent to a $4.00
per share exchange rate).

As discussed in Note 4, at September 30, 2003, the Company was not in
compliance with certain financial covenants included in its primary revolving
credit facility. In addition, Keystone management expects to report a net loss
for the year ending December 31, 2003, and management currently believes its
available credit facilities may not be sufficient to fund the anticipated needs
of the Company's operations and capital expenditures for the foreseeable future.
The Company's inability to obtain adequate additional sources of liquidity or
achieve sufficient reduction in its operating costs could have a material
adverse effect on the Company's ability to continue as a going-concern.

Employee stock options. As disclosed in the Annual Report, Keystone
accounts for stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APBO") No. 25, Accounting for Stock Issued to
Employees, and its various interpretations. Under APBO No. 25, no compensation
cost is generally recognized for fixed stock options in which the exercise price
is equal to or greater than the market price on the grant date. Compensation
cost related to stock options recognized by the Company in accordance with APBO
No. 25 was nil during the interim periods ended September 30, 2002 and 2003.



The following table presents what the Company's consolidated net income
(loss) available for common shares, and related per share amounts, would have
been if Keystone would have elected to account for its stock-based employee
compensation related to stock options in accordance with the fair value-based
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
for all awards granted subsequent to January 1, 1995.



Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)

Net income (loss) available for

common shares as reported ............ $ (6,286) $ (13,321) $ 46,016 $ (31,459)
Adjustments, net of applicable
income tax effects:
Stock-based employee compensation
expense under APBO No. 25 .......... -- -- -- --
Stock-based employee compensation
expense under SFAS No. 123 ......... (43) -- (142) (25)
---------- ---------- ---------- ----------

Pro forma net income (loss)
available for common shares .......... $ (6,329) $ (13,321) $ 45,874 $ (31,484)
========== ========== ========== ==========

Basic net income (loss)
available for common shares per share:
As reported .......................... $ (.63) $ (1.32) $ 4.57 $ (3.12)
Pro forma ............................ $ (.63) $ (1.32) $ 4.56 $ (3.12)

Diluted net income (loss)
available for common shares per share:
As reported .......................... $ (.63) $ (1.32) $ 2.46 $ (3.12)
Pro forma ............................ $ (.63) $ (1.32) $ 2.45 $ (3.12)


Note 2 - Business Segment Information:

Keystone's operating segments are defined as components of consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. David L. Cheek, President and Chief Executive Officer of
Keystone. Each operating segment is separately managed, and each operating
segment represents a strategic business unit offering different products. During
2003, the Company expanded the composition of its reportable segments. The
corresponding segment information for prior periods has been restated to conform
to the current year presentation. In addition, the information below also
provides disclosure of segment information with respect to each year in the
three-year period ended December 31, 2002.

The Company's operating segments are organized along its manufacturing
facilities and include two reportable segments: (i) Keystone Steel and Wire
("KSW") which manufacturers and sells wire rod, wire and wire products for
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer markets and, (ii) Engineered Wire Products
("EWP") which manufactures and sells welded wire reinforcement in both roll and
sheet form that is utilized in concrete construction products including pipe,
pre-cast boxes and applications for use in roadways, buildings and bridges.



Prior to July 2003, the Company owned a 51% interest in Garden Zone, a
distributor of wire, plastic and wood lawn and garden products to retailers. In
July 2003, Garden Zone purchased Keystone's 51% ownership in Garden Zone.

In addition, prior to July 2003, Keystone also operated three businesses
that did not constitute reportable business segments. These businesses sold wire
and wire products for agricultural, industrial, construction, commercial,
original manufacturers and retail consumer markets. The results of operations of
these businesses are aggregated and included under the "All Other" heading in
the following tables. During July 2003, Keystone transferred its operations at
one of these three businesses to other Keystone facilities, and during August
2003 Keystone sold another of the businesses. As a result, as of August 2003,
the "All Other" heading in the following tables only includes Sherman Wire.

Keystone is also engaged in a scrap recycling joint venture through its 50%
interest in Alter Recycling Company, L.L.C. ("ARC"), an unconsolidated equity
affiliate.

KSW's products and EWP's products are distributed primarily in the
Midwestern, Southwestern and Southeastern United States. Garden Zone's products
were distributed primarily in the Southeastern United States.

Business Segment Principal entities Location

Keystone Steel & Wire Keystone Steel & Wire Peoria, Illinois

Engineered Wire Products Engineered Wire Products Upper Sandusky, Ohio

Garden Zone Garden Zone (1) Charleston, South
Carolina

All other Sherman Wire Sherman, Texas
Sherman Wire
of Caldwell, Inc. (2) Caldwell, Texas
Keystone Fasteners (3) Springdale, Arkansas

(1) 51.0% subsidiary - interest sold in July 2003.
(2) Transferred operations in July 2003 to Sherman Wire and Keystone Steel &
Wire.
(3) Business sold in August 2003.


The net proceeds from the sale of Garden Zone and Keystone Fasteners
aggregated $3.3 million. The gain on the sale of these businesses, as well as
the results of operations of each of Garden Zone and Keystone Fasteners are not
significant, individually and in the aggregate. Accordingly, the Company has
elected not to present their results of operations as discontinued operations
for all periods presented due to their immateriality.

Keystone evaluates segment performance based on segment operating income,
which is defined as income before income taxes and interest expense, exclusive
of certain items (such as gains or losses on disposition of business units or
sale of fixed assets) and certain general corporate income and expense items
(including interest income) which are not attributable to the operations of the
reportable operating segments.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that (i) defined benefit
pension expense for each segment is recognized and measured on the basis of
estimated current service cost of each segment, with the remainder of the
Company's net defined benefit pension expense or credit not allocated to each
segment but still is reported as part of operating profit or loss, (ii) segment
OPEB expense is recognized and measured based on the basis of the estimated
expense of each segment with the remainder of the Company's actual OPEB expense



not allocated to each segment but still is reported as part of operating profit
or loss, (iii) elimination of intercompany profit or loss on ending inventory
balances is not allocated to each segment but still is reported as part of
operating profit or loss, (iv) LIFO inventory reserve adjustments are not
allocated to each segment but still are reported as part of operating profit or
loss, and (v) amortization of goodwill and negative goodwill are included in
general corporate expenses and are not allocated to any segment and are not
included in total reporting operating profit or loss. General corporate expenses
also includes OPEB and environmental expenses relative to facilities no longer
owned by the Company. Intercompany sales between reportable segments are
generally recorded at prices that approximate market prices to third-party
customers.

Segment assets are comprised of all assets attributable to each reportable
operating segment. Corporate assets consist principally of pension related
assets, restricted investments, deferred tax assets and corporate property,
plant and equipment.



GAAP
Adjustments,
Corporate
Items
Garden All Segment and
KSW EWP Zone Other Total Eliminations Total
--- --- ------ ----- ------- ------------ -----
(In thousands)

Three months ended September 30, 2002:


Third party net sales $ 63,679 $10,692 $ 1,190 $ 8,283 $ 83,844 $ - $ 83,844
Intercompany sales 9,420 - 157 2,161 11,738 (11,738) -
-------- ------- ------- ------- -------- -------- --------

$ 73,099 $10,692 $ 1,347 $10,444 $ 95,582 $(11,738) $ 83,844
======== ======= ======= ======= ======== ======== ========

Operating income (loss) $ (1,447) $ 1,025 $ (200) $(1,305) $ (1,927) $ (1,410) $(3,337)
======== ======= ======= ======= ======== ======== =======

Three months ended September 30, 2003:

Third party net sales $ 64,712 $11,559 $ 352 $ 3,829 $ 80,452 $ - $ 80,452
Intercompany sales 6,518 - 19 1,756 8,293 (8,293) -
-------- ------- ------- ------- -------- -------- --------

$ 71,230 $11,559 $ 371 $ 5,585 $ 88,745 $ (8,293) $ 80,452
======== ======= ======= ======= ======== ======== ========

Operating income (loss) $ (7,671) $ 1,136 $ (58) $(1,380) $ (7,973) $ (4,166) $(12,139)
======== ======= ======= ======= ======== ======== ========

Nine months ended September 30, 2002:

Third party net sales $209,635 $25,914 $ 8,445 $29,296 $273,290 $ - $273,290
Intercompany sales 27,618 - 1,036 7,450 36,104 (36,104) -
-------- ------- ------- ------- -------- -------- --------

$237,253 $25,914 $ 9,481 $36,746 $309,394 $(36,104) $273,290
======== ======= ======= ======= ======== ======== ========

Operating income (loss) $ 3,246 $ 2,515 $ 404 $(2,258) $ 3,907 $ (297) $ 3,610
======== ======= ======= ======= ======== ======== ========

Nine months ended September 30, 2003:

Third party net sales $205,380 $26,853 $11,203 $14,854 $258,290 $ - $258,290
Intercompany sales 23,953 - 879 10,296 35,128 (35,128) -
-------- ------- ------- ------- -------- -------- --------

$229,333 $26,853 $12,082 $25,150 $293,418 $(35,128) $258,290
======== ======= ======= ======= ======== ======== ========

Operating income (loss) $(16,370) $ 2,293 $ 700 $(3,240) $(16,617) $ (6,028) $(22,645)
======== ======= ======= ======= ======== ======== ========







GAAP
Adjustments,
Corporate
Items
Garden All Segment and
KSW EWP Zone Other Total Eliminations Total
--- --- ------ ----- ------- ------------ -----
(In thousands)

Year ended December 31, 2002:


Third party net sales $243,039 $31,247 $ 9,523 $ 34,171 $317,980 $ - $317,980
Intercompany sales 31,839 - 1,221 9,398 42,458 (42,458) -
-------- ------- ------- -------- -------- -------- -----
$274,878 $31,247 $10,744 $ 43,569 $360,438 $(42,458) $317,980
======== ======= ======= ======== ======== ======== ========
Depreciation and
amortization $ 14,693 $ 1,006 $ - $ 1,646 $ 17,345 $ 51 $ 17,396
Operating profit (loss) (3,921) 2,743 85 (2,971) (4,064) (561) (4,625)
Identifable segment assets 157,321 18,130 4,186 18,537 198,174 17,321 215,495
Capital expenditures 7,597 164 - 208 7,969 4 7,973

Year ended December 31, 2001:

Third party net sales $227,018 $32,409 $ 8,011 $ 41,232 $308,670 $ - $308,670
Intercompany sales 32,124 - 472 8,363 40,959 (40,959) -
-------- ------- ------- -------- -------- -------- -----
$259,142 $32,409 $ 8,483 $ 49,595 $349,629 $(40,959) $308,670
======== ======= ======= ======== ======== ======== ========
Depreciation and
amortization $ 15,312 $ 1,043 $ - $ 1,815 $ 18,170 $ (1,178) $ 16,992
Operating profit (loss) (12,779) 4,156 210 (2,603) (11,016) 6,610 (4,406)
Identifable segment assets 162,796 18,252 2,812 22,923 206,783 160,117 366,900
Capital expenditures 3,534 269 - 85 3,888 1 3,889

Year ended December 31, 2000:

Third party net sales $241,665 $31,909 $ 6,346 $ 58,401 $338,321 $ - $338,321
Intercompany sales 32,232 - 414 8,280 40,926 (40,926) -
-------- ------- ------- -------- -------- -------- -----
$273,897 $31,909 $ 6,760 $ 66,681 $379,247 $(40,926) $338,321
======== ======= ======= ======== ======== ======== ========
Depreciation and
amortization $ 15,289 $ 1,067 $ - $ 2,090 $ 18,446 $ (1,222) $ 17,224
Equity in loss of
unconsolidated
affiliate (281) - - - (281) - (281)
Operating profit (loss) (23,989) 3,134 345 (1,964) (22,474) 6,885 (15,589)
Identifable segment assets 172,563 19,187 3,990 29,453 225,193 160,510 385,703
Capital expenditures 12,191 352 - 502 13,045 7 13,052


In the above tables, GAAP adjustments relate to operating profit (loss),
Corporate items relate to depreciation and amortization, segment assets and
capital expenditures and eliminations relate to net sales. GAAP adjustments are
principally (i) the difference between the defined benefit pension expense or
credit and OPEB expense allocated to the segments and the actual expense or
credit included in the determination of operating profit or loss, (ii) the
elimination of intercompany profit or loss on ending inventory balances and
(iii) LIFO inventory reserve adjustments.











Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)


Operating loss $(15,589) $ (4,406) $(4,625)
Equity in loss of unconsolidated affiliate (281) - -
General corporate items:
Interest income 599 253 66
Other income 183 565 34
General income (expenses), net (2,002) (2,232) (4,600)
Gain on early extinguishment of debt - - 54,739
Interest expense (15,346) (14,575) (5,569)
-------- -------- -------

Income (loss) before income taxes $(32,436) $(20,395) $40,045
======== ======== =======


Note 3 - Inventories:

Inventories are stated at the lower of cost or market. At December 31, 2002
and September 30, 2003, the last-in, first-out ("LIFO") method was used to
determine the cost of approximately 77% and 67% respectively, of total
inventories and the first-in, first-out or average cost methods were used to
determine the cost of other inventories.



December 31, September 30,
2002 2003
---- ----
(In thousands)

Steel and wire products:

Raw materials .................................... $ 8,825 $ 5,307
Work in process .................................. 14,920 8,615
Finished goods ................................... 21,178 13,427
Supplies ......................................... 14,710 13,632
------- -------
59,633 40,981
Less LIFO reserve ................................ 13,352 13,252
------- -------
46,281 27,729

Lawn and garden products - finished goods .......... 3,808 --
------- -------

$50,089 $27,729
======= =======







Note 4 - Notes payable and long-term debt:



December 31, September 30,
2002 2003
---- ----
(In thousands)

Revolving credit facilities:

Keystone ................................. $ 28,328 $ 35,050
EWP ...................................... 1,362 2,000
Garden Zone .............................. 1,650 --
8% Notes ................................... 28,908 28,116
6% Notes ................................... 16,031 16,031
9 5/8% Notes ............................... 6,150 6,150
Keystone Term Loan ......................... 4,167 3,229
County Term Loan ........................... 10,000 10,000
Other ...................................... 645 186
-------- --------
97,241 100,762
Less current maturities .................. 33,935 68,522
-------- --------

$ 63,306 $ 32,240
======== ========


At September 30, 2003, Keystone was not in compliance with certain
financial covenants included in its primary revolving credit facility (the
"Keystone Revolver"). Under the terms of the Keystone Revolver, failure to
comply with these covenants is considered an event of default and gives the
lender the right to accelerate the maturity of both the Keystone Revolver and
the Keystone Term Loan. As such, the Keystone Term Loan was classified as a
current liability at September 30, 2003. The Company is currently negotiating
with the Keystone Revolver and Keystone Term Loan lender to obtain waivers of
such financial covenants or otherwise amend the respective loan agreements to
cure the defaults. There can be no assurance Keystone will be successful in
obtaining such waivers or amendments and if Keystone is unsuccessful there is no
assurance the Company would have the liquidity or other financial resources
sufficient to repay the applicable indebtedness if such indebtedness is
accelerated. The indenture governing Keystone's 8% Notes provides the holders of
such Notes with the right to accelerate the maturity of the Notes in the event
of a default by Keystone resulting in an acceleration of the maturity of any of
the Company's other secured debt. As such, the 8% Notes were also classified as
a current liability at September 30, 2003.

As a result of Keystone's failure to comply with the financial covenants in
its primary revolving credit facility, in October 2003 the lender increased the
interest rate on the Keystone revolving credit facility and Keystone Term Loan
by .5% per annum, eliminated the Company's LIBOR interest rate option and
instituted a $5.5 million reserve against Keystone's borrowing base.

In connection with its ongoing discussions with the lender, Keystone
continues to evaluate possible restructuring alternatives to improve its overall
financial condition. In this regard, Keystone has retained financial advisors to
assist the Company in the process of evaluating possible restructuring
alternatives.

In addition, a wholly-owned subsidiary of Contran has agreed to loan the
Company up to an aggregate of $6 million under the terms of a revolving credit
facility that, as amended, matures November 30, 2003. This facility is
collateralized by the common stock of EWP owned by Keystone. Through November
14, 2003, the Company has not borrowed any amounts under such facility.




Note 5 - Income taxes:

At September 30, 2003, considering all factors believed to be relevant,
including the Company's recent operating results, its expected future near-term
productivity rates; cost of raw materials, electricity, labor and employee
benefits, environmental remediation, and retiree medical coverage; interest
rates; product mix; sales volumes and selling prices; and the fact that accrued
OPEB expenses will become deductible over an extended period of time and require
the Company to generate significant amounts of future taxable income, the
Company believes its gross deferred tax assets do not currently meet the
"more-likely-than-not" realizability test. As such, at December 31, 2002, the
Company had provided a deferred tax asset valuation allowance of approximately
$89.0 million. As a result of the deferred tax asset valuation allowance, the
Company does not anticipate recognizing a tax benefit associated with its
expected pre-tax losses during 2003 will be appropriate. Accordingly, during the
first nine months of 2003, the Company increased the deferred tax asset
valuation allowance by approximately $10.1 million. Keystone will continue to
review the recoverability of its deferred tax assets, and based on such periodic
reviews, Keystone could recognize a change in the valuation allowance related to
its deferred tax assets in the future.

Summarized below are (i) the differences between the income tax provision
(benefit) and the amounts that would be expected by applying the U.S. federal
statutory income tax rate of 35% to the income (loss) before income taxes and
cumulative effect of change in accounting principle, and (ii) the components of
the income tax provision.



Nine months ended
September 30,
2002 2003
---- ----
(In thousands)


Expected tax provision (benefit), at statutory rate $17,851 $(9,347)
U.S. state income taxes, net 2,315 (732)
Deferred tax asset valuation allowance 1,429 10,056
Other, net 27 23
------- -------

Income tax provision (benefit) $21,622 $ -
======= =======

Comprehensive provision (benefit) for income taxes:
Currently refundable:
U.S. federal $ (28) $ (20)
U.S. state 28 20
------- -------
Net currently refundable - -

Deferred income taxes, net 21,622 -
------- -------
$21,622 $ -
======= =======

Comprehensive provision for income taxes allocable to:
Income before cumulative effect of change in
accounting principle $21,622 $ -
Cumulative effect of change in accounting principle - -
------- -------

$21,622 $ -
======= =======




Note 6 - Other accrued liabilities:



December 31, September 30,
2002 2003
---- ----
(In thousands)

Current:

Employee benefits $ 11,455 $ 11,624
Self insurance 10,336 10,671
Environmental 8,103 8,006
Deferred vendor payments 3,338 3,338
Legal and professional 1,176 970
Disposition of former facilities 659 668
Interest 318 124
Other 4,831 4,605
-------- --------
$ 40,216 $ 40,006
======== ========

Noncurrent:
Deferred vendor payments $ 10,252 $ 8,090
Environmental 7,087 6,745
Workers compensation payments 2,309 1,963
Interest 298 601
Other 391 98
-------- --------
$ 20,337 $ 17,497
======== ========






Note 7 - Environmental matters:

Keystone has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or similar state laws in approximately
24 governmental and private actions associated with environmental matters,
including waste disposal sites and facilities currently or previously owned,
operated or used by Keystone, certain of which are on the United States
Environmental Protection Agency's (the "U.S. EPA") Superfund National Priorities
List or similar state lists. These proceedings seek cleanup costs, damages for
personal injury or property damage and/or damages for injury to natural
resources. Certain of these proceedings involve claims for substantial amounts.
Although Keystone may be jointly and severally liable for such costs, in most
cases, it is only one of a number of PRPs who may also be jointly and severally
liable.

On a quarterly basis, Keystone evaluates the potential range of its
liability at sites where it has been named as a PRP or defendant by analyzing
and estimating the range of reasonably possible costs to Keystone. Such costs
include, among other things, expenditures for remedial investigations,
monitoring, managing, studies, certain legal fees, clean-up, removal and
remediation. Keystone believes it has provided adequate accruals ($14.8 million
at September 30, 2003) for these matters at 13 sites for which Keystone believes
its liability is probable and reasonably estimable, but Keystone's ultimate
liability may be affected by a number of factors, including the imposition of
more stringent standards or requirements under environmental laws or
regulations, new developments or changes in remedial alternatives and costs, the
allocation of such costs among PRPs, the solvency of other PRPs or a
determination that Keystone is potentially responsible for the release of



hazardous substances at other sites, any of which could result in expenditures
in excess of amounts currently estimated by Keystone to be required for such
matters. In addition, with respect to other PRPs and the fact that the Company
may be jointly and severally liable for the total remediation cost at certain
sites, the Company could ultimately be liable for amounts in excess of its
accruals due to, among other things, reallocation of costs among PRPs or the
insolvency of one or more PRPs. In addition, the actual timeframe for payments
by Keystone for these matters may be substantially in the future.

Keystone believes it is not possible to estimate the range of costs for
seven sites. For these sites, generally the investigation is in the early
stages, and it is either unknown as to whether or not the Company actually had
any association with the site, or if the Company had association with the site,
the nature of its responsibility, if any, for the contamination at the site and
the extent of contamination. The timing on when information would become
available to the Company to allow the Company to estimate a range of loss is
unknown and dependent on events outside the control of the Company, such as when
the party alleging liability provides information to the Company.

The upper end of the range of reasonably possible costs to Keystone for
sites for which it is possible to estimate costs (16 sites) is approximately
$20.6 million. Keystone's estimates of such liabilities have not been discounted
to present value, and other than certain previously-reported settlements with
respect to certain of Keystone's former insurance carriers, Keystone has not
recognized any material insurance recoveries. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to the 8 sites as to which no estimate
of liability can presently be made because the respective investigations are in
early stages. The extent of CERCLA liability cannot be determined until the
Remedial Investigation/Feasibility Study ("RI/FS") is complete, the U.S. EPA
issues a Record of Decision ("ROD") and costs are allocated among PRPs. The
extent of liability under analogous state cleanup statutes and for common law
equivalents is subject to similar uncertainties.

The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process which in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs which
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
are classified as a noncurrent liability.


More detailed descriptions of certain legal proceedings relating to
environmental matters are set forth below. A summary of activity in the
Company's environmental accruals for the nine month period ended September 30,
2003 is as follows:




Nine months ended
September 30, 2003
(In thousands)


Balance at beginning of period ............................ $ 15,190
Payments .................................................. (439)
--------

Balance at end of period .................................. $ 14,751
========



The Company is currently involved in the closure of inactive waste disposal
units at its Peoria facility pursuant to a closure plan approved by the Illinois
Environmental Protection Agency ("IEPA") in September 1992. The original closure
plan provides for the in-place treatment of seven hazardous waste surface
impoundments and two waste piles to be disposed of as special wastes. The
Company recorded an estimated liability for remediation of the impoundments and
waste piles based on a six-phase remediation plan. The Company adjusts the



recorded liability for each Phase as actual remediation costs become known.
During 1995, the Company began remediation of Phases II and III and completed
these Phases, as well as Phase IV during 1996. During 1998 and 1999 the Company
did not have any significant remediation efforts relative to Phases V and VI.
During 2000, Keystone began preliminary efforts relative to Phase V. Pursuant to
agreements with the IEPA and Illinois Attorney General's office, the Company is
depositing $75,000 per quarter into a trust fund. The Company must continue
these quarterly deposits and cannot withdraw funds from the trust fund until the
fund balance exceeds the sum of the estimated remaining remediation costs plus
$2 million. At December 31, 2002 and September 30, 2003 the trust fund had
balances of $5.1 million and $5.3 million, respectively, which amounts are
included in other noncurrent assets because the Company does not expect to have
access to any of these funds until after September 30, 2004.

In February 2000, Keystone received a notice from the U.S. EPA giving
formal notice of the U.S. EPA's intent to issue a unilateral administrative
order to Keystone pursuant to section 3008(h) of the Resource Conservation and
Recovery Act ("RCRA"). The draft order enclosed with this notice would require
Keystone to: (1) investigate the nature and extent of hazardous constituents
present at and released from five alleged solid waste management units at the
Peoria facility; (2) investigate hazardous constituent releases from "any other
past or present locations at the Peoria facility where past waste treatment,
storage or disposal may pose an unacceptable risk to human health and the
environment"; (3) complete by June 30, 2001 an "environmental indicators report"
demonstrating the containment of hazardous substances that could pose a risk to
"human receptors" and further demonstrating that Keystone "has stabilized the
migration of contaminated groundwater at or from the facility;" (4) submit by
January 30, 2002 proposed "final corrective measures necessary to protect human
health and the environment from all current and future unacceptable risks of
releases of hazardous waste or hazardous constituents at or from the Peoria
facility; and (5) complete by June 30, 2001 the closure of the sites discussed
in the preceding paragraph now undergoing RCRA closure under the supervision of
the IEPA. Keystone has complied with deadlines in the draft order. During the
fourth quarter of 2000, Keystone entered into a modified Administrative Order on
Consent, which may require the Company to conduct cleanup activities at certain
solid waste management units at its Peoria facility depending on the results of
soil and groundwater sampling and risk assessment to be conducted by Keystone
during future periods pursuant to the order.

In March 2000, the Illinois Attorney General (the "IAG") filed and served a
seven-count complaint against Keystone for alleged violations of the Illinois
Environmental Protection Act, 415 ILCS 5/31, and regulations implementing RCRA
at Keystone's Peoria facility. The complaint alleges Keystone violated RCRA in
failing to prevent spills of an alleged hazardous waste on four separate
occasions during the period from June 1995 through January 1999. The complaint
also alleges the Company illegally "stored", "disposed of" and manifested the
same allegedly hazardous waste on some or all of those occasions. In addition,
the complaint alleges these hazardous waste spills resulted in groundwater
pollution in violation of the Illinois Environmental Protection Act. The
complaint further alleges Keystone improperly disposed of hazardous waste on two
occasions at a landfill not permitted to receive such wastes. The complaint
seeks the maximum statutory penalties allowed which ranges up to $50,000 for
each violation and additional amounts up to $25,000 for each day of violation.
Keystone has answered the complaint and proceedings in the case have been stayed
pending the outcome of settlement negotiations between Keystone and the IAG's
office.




In June 2000, the IAG filed a Complaint For Injunction And Civil Penalties
against Keystone. The complaint alleges the Company's Peoria facility violated
its National Pollutant Discharge Elimination System ("NPDES") permit limits for
ammonia and zinc discharges from the facility's wastewater treatment facility
into the Illinois River. The complaint alleges specific violations of the 30-day
average ammonia limit in the NPDES permit for three months in 1996, 11 months in
1997, 12 months in 1998, 11 months in 1999 and the first two months of 2000. The
complaint further alleges two violations of the daily maximum limit for zinc in
October and December of 1999. Keystone has answered the complaint and
proceedings in the case have been stayed pending the outcome of settlement
negotiations between the Company and the IAG's office.

"Superfund" sites

The Company is subject to federal and state "Superfund" legislation that
imposes cleanup and remediation responsibility upon present and former owners
and operators of, and persons that generated hazardous substances deposited
upon, sites determined by state or federal regulators to contain hazardous
substances. Keystone has been notified by U.S. EPA that the Company is a PRP
under the federal "Superfund" legislation for the alleged release or threat of
release of hazardous substances into the environment at eight sites. These
situations involve cleanup of landfills and disposal facilities which allegedly
received hazardous substances generated by discontinued operations of the
Company. Although Keystone believes its comprehensive general liability
insurance policies provide indemnification for certain costs the Company incurs
at the "Superfund" sites discussed below, it has only recorded receivables for
the estimated insurance recoveries at three of those sites. During prior years,
the Company has received payments from certain of its insurers in exchange for
releasing such insurers from coverage for certain years of environmental related
liabilities. Such amounts are included in Keystone's self insurance accruals.

In July 1991, the United States filed an action against a former division
of the Company and four other PRPs in the United States District Court for the
Northern District of Illinois (Civil Action No. 91C4482) seeking to recover
investigation and remediation costs incurred by U.S. EPA at the Byron Salvage
Yard, located in Byron, Illinois. In April 1992, Keystone filed a third-party
complaint in this civil action against 15 additional parties seeking
contribution in the event the Company is held liable for any response costs at
the Byron site. Neither the Company nor the other designated PRPs are performing
any investigation of the nature and extent of the contamination. In December
1996, Keystone, U.S. EPA and the Department of Justice entered into the Fifth
Partial Consent Decree to settle Keystone's liability for EPA response costs
incurred at the site through April 1994 for a payment of $690,000. Under the
agreement Keystone is precluded from recovering any portion of the $690,000
settlement payment from other parties to the lawsuit. In January 1997, Keystone
paid the $690,000 settlement. Keystone will remain potentially liable for EPA
response costs incurred after April 30, 1994, and natural resource damage
claims, if any, that may be asserted in the future. Keystone recovered a portion
of the $690,000 payment from its insurer. In March 1997, U.S. EPA issued a
Proposed Remedial Action Plan ("PRAP") recommending that a limited excavation of
contaminated soils be performed at an estimated cost of $63,000, that a soil
cover be placed over the site, an on-site groundwater pump and treat system be
installed and operated for an estimated period of 15 years, and that both
on-site and off-site groundwater monitoring be conducted for an indefinite



period. U.S. EPA's cost estimate for the recommended plan is $5.1 million. U.S.
EPA's estimate of the highest cost alternatives evaluated but not recommended in
the PRAP is approximately $6 million. The Company filed public comments on May
1, 1997, objecting to the PRAP. In March 1999, Keystone and other PRP's received
a CERCLA special notice letter notifying them for the first time of a September
1998 ROD and requesting a commitment on or before May 19, 1999 to perform soils
work required by that ROD that was estimated to cost approximately $300,000. In
addition, the special notice letter also requested the PRPs to reimburse U.S.
EPA for costs incurred at the site since May 1994 in the amount of $1.1 million,
as well as for all future costs the U.S. EPA will incur at the site in
overseeing the implementation of the selected soils remedy and any future
groundwater remedy. Keystone refused to agree to the U.S. EPA's past and future
cost demand. In August 1999, U.S. EPA issued a groundwater PRAP with an
estimated present value cost of $3 million. Keystone filed public comments
opposing the PRAP in September 1999. In October 2002, Keystone and the other
remaining PRPs entered into a second Consent Decree with the U.S. EPA, in order
to resolve their liability for performance of the U.S. EPA's September 1998 ROD
for a soils remedy at the site, for the performance of the U.S. EPA's December
1999 ROD for remedial action regarding the groundwater component of Operable
Unit No. 4 at the site, for payment of U.S. EPA's site costs incurred since May
1994 as well as future U.S. EPA oversight costs, and for the transfer of certain
funds that may be made available to the PRPs as a result of a consent decree
reached between U.S. EPA and another site PRP. Under the terms of the second
Consent Decree, and the PRP Agreement was executed to implement the PRPs'
performance under that decree, Keystone is required to pay approximately
$700,000 (of which approximately $600,000 has already been paid into a PRP Group
trust fund), and would remain liable for 18.57% of future U.S. EPA oversight
costs as well as a similar share of any unanticipated cost increases in the
soils remedial action work. (Under the agreements, the City of Byron, Illinois,
would assume responsibility for any cost overruns associated with the municipal
water supply components of the groundwater contamination remedy.) The U.S. EPA
served the PRP Group in February 2003 with its first oversight cost claim under
the second Consent Decree, in the amount of $186,000 for the period from March
1, 2000 to November 25, 2002. Keystone's share of that claim is approximately
$35,000. The U.S. EPA has also requested changes to the groundwater monitoring
program at the site that may require future increases in the PRP Group's
groundwater monitoring reserves. In September 2002, the IAG served a demand
letter on Keystone and 3 other PRP's seeking recovery of approximately $1.3
million in state cleanup costs incurred at the Byron Salvage Yard site. The
PRP's are currently negotiating with the IAG in an attempt to settle this claim.
The four PRP's named in the demand letter are also attempting to include other
site PRP's in the negotiations. It remains possible that these negotiations
could fail and that Keystone's ultimate liability for the Byron Salvage Yard
site could increase in a subsequent settlement agreement or as a result of
litigation.

In September 1991, the Company along with 53 other PRPs, executed a consent
decree to undertake the immediate removal of hazardous wastes and initiate a
RI/FS of the Interstate Pollution Control site located in Rockford, Illinois.
The Company's percentage allocation within the group of PRPs agreeing to fund
this project is currently 2.14%. However, the Company's ultimate allocation, and
the ultimate costs of the RI/FS and any remedial action, are subject to change
depending, for example, upon: the number and financial condition of the other
participating PRPs, field conditions and sampling results, results of the risk
assessment and feasibility study, additional regulatory requirements, and the
success of a contribution action seeking to compel additional parties to
contribute to the costs of the RI/FS and any remedial action. The RI/FS began in
1993, was completed in 1997 and approved by IEPA in 1998. In the summer of 1999,
IEPA selected a capping and soil vapor extraction remedy estimated by the PRP
group to have a present value cost of approximately $2.5 million. IEPA may also
demand reimbursement of future oversight costs. The three largest PRPs at the
site are negotiating a consent order with IEPA for the performance of the site
remedy. Keystone expects to participate with the larger PRPs in the performance
of that remedy based on its RI/FS allocation percentage.




In August 1987, Keystone was notified by U.S. EPA that it is a PRP
responsible for the alleged hazardous substance contamination of a site
previously owned by the Company in Cortland, New York. Four other PRPs
participated in the RI/FS and a contribution action is pending against eleven
additional viable companies which contributed wastes to the site. Following
completion of the RI/FS, U.S. EPA published in November 1997, a PRAP for the
site that recommends the excavation and disposal of contaminated soil,
installation of an impervious cap over a portion of the site, placement of a
surface cover over the remainder of the site and semi-annual groundwater
monitoring until drinking water standards are met by natural attenuation. U.S.
EPA estimates the costs of this recommended plan to be $3.1 million. The highest
cost remedy evaluated by U.S. EPA but not recommended in the PRAP is estimated
by U.S. EPA to have a cost of $19.8 million. In September 1998, Keystone and
four other PRPs who had funded the prior remedial actions and RI/FS signed a
proposed Consent Decree with U.S. EPA calling for them to be "nonperforming
parties" for the implementation of a March 1998 Record of Decision. Under this
Consent Decree, Keystone could be responsible for an unspecified share of U.S.
EPA's future costs in the event that changes to the existing ROD are required.

Prior to its acquisition by Keystone, DeSoto, Inc. ("DeSoto") was notified
by U.S. EPA that it is one of approximately 50 PRPs at the Chemical Recyclers,
Inc. site in Wylie, Texas. In January 1999, DeSoto changed its name to Sherman
Wire Company ("Sherman"). Under a consent order with the U.S. EPA, the PRP group
has performed a removal action and an investigation of soil and groundwater
contamination. Such investigation revealed certain environmental contamination.
It is anticipated U.S. EPA will order further remedial action, the exact extent
of which is not currently known. Sherman is paying on a non-binding interim
basis, approximately 10% of the costs for this site. Remediation costs, at
Sherman's present allocation level, are estimated at a range of from $1.5
million to $4 million.

In 1984, U.S. EPA filed suit against DeSoto by amending a complaint against
Midwest Solvent Recovery, Inc. et al ("Midco"). DeSoto was a defendant based
upon alleged shipments to an industrial waste recycling storage and disposal
operation site located in Gary, Indiana. The amended complaint sought relief
under CERCLA to force the defendants to clean up the site, pay non-compliance
penalties and reimburse the government for past clean up costs. In June 1992,
DeSoto settled its portion of the case by entering into a partial consent
decree, and all but one of the eight remaining primary defendants and 93 third
party defendants entered into a main consent decree. Under the terms of the
partial consent decree, DeSoto agreed to pay its pro rata share (13.47%) of all
costs under the main consent decree. In addition to certain amounts included in
the trust fund discussed below, Sherman also has certain funds available in
other trust funds due it under the partial consent decree. These credits can be
used by Sherman (with certain limitations) to fund its future liabilities under
the partial consent decree.

In 1995, DeSoto was notified by the Texas Natural Resource Conservation
Commission ("TNRCC") that there were certain deficiencies in prior reports to
TNRCC relative to one of its non-operating facilities located in Gainesville,
Texas. During 1999, Sherman entered into TNRCC's Voluntary Cleanup Program.
Remediation costs are presently estimated to be between $1.2 million and $2
million. Investigation activities are on-going including additional soil and
groundwater sampling.

In December 1991, DeSoto and approximately 600 other PRPs were named in a
complaint alleging DeSoto and the PRPs generated wastes that were disposed of at
a Pennsauken, New Jersey municipal landfill. The plaintiffs in the complaint



were ordered by the court to show in what manner the defendants were connected
to the site. The plaintiffs provided an alleged nexus indicating garbage and
construction materials from DeSoto's former Pennsauken facility were disposed of
at the site and such waste allegedly contained hazardous material to which
DeSoto objected. The claim was dismissed without prejudice in August 1993. In
1996, DeSoto received an amended complaint containing the same allegations. This
matter is in discovery stage at September 30, 2003. Sherman has denied any
liability with regard to this matter and expects to vigorously defend the
action.

Sherman has received notification from the TNRCC stating that DeSoto is a
PRP at the Material Recovery Enterprises Site near Ovalo, Texas, with
approximately 3% of the total liability. The matter has been tendered to the
Valspar Corporation ("Valspar") pursuant to a 1990 agreement whereby Valspar
purchased certain assets of DeSoto. Valspar has been handling the matter under
reservation of rights. At the request of Valspar, Sherman has signed a
participation agreement which would require Sherman to pay no less than 3% of
the remediation costs. Valspar continues to pay for legal fees in this matter
and has reimbursed Sherman for all assessments.

In addition to the sites discussed above, Sherman is allegedly involved at
various other sites and in related toxic tort lawsuits in which it does not
currently expect to incur significant liability.

Under the terms of a 1990 asset sale agreement, DeSoto established two
trust funds totaling $6 million to fund potential clean-up liabilities relating
to the assets sold. Sherman has access to the trust funds for any expenses or
liabilities it incurs relative to environmental claims relating to the sites
identified in the trust agreements. The trust funds are primarily invested in
United States Treasury securities and are classified as restricted investments
on the balance sheet. In October 2000, one of the trust's term expired and the
$3.6 million trust balance was returned to Sherman. As of December 31, 2002 and
September 30, 2003, the balance in the trust fund was approximately $385,000 and
$136,000 respectively.

Note 8 - Other commitments and contingencies:

Current litigation

In July 2001, Sherman received a letter from a law firm advising them that
Sears Roebuck & Co. ("Sears") had been named as a defendant in a lead paint
personal injury case. Sears claimed contractual indemnity against Sherman and
demanded that Sherman defend and indemnify Sears with regard to any losses or
damages Sears may sustain in the case. Sears was named as an additional insured
on insurance policies in which DeSoto, the manufacturer of the paint, was the
named insured. Additional demands were made by Sears in 2002 with regard to
additional lead paint cases. DeSoto's insurance carriers were notified of the
action and asked to indemnify Sherman with respect to the complaint. Sherman has
not indemnified Sears and is unaware if the insurors have agreed to indemnify
Sears.

In May 2002, the Company was notified by an insurance company of a
declaratory complaint filed in Cook County Illinois by Sears against the
insurance company and a second insurance company (collectively the "Insurance
Companies") relative to a certain lead paint personal injury litigation against
Sears. It is the Company's understanding that the declaratory complaint has
since been amended to include all lead paint cases where Sears has been named as
a defendant as a result of paint sold by Sears that was manufactured by DeSoto
(now Sherman). Sears was allegedly named as an additional insured on insurance
policies issued by the Insurance Companies, in which DeSoto, the manufacturer of
the paint, was the named insured. Sears has demanded indemnification from the
Insurance Companies. One of the Insurance Companies has demanded indemnification
and defense from Sherman. Sherman believes the request for indemnification is
invalid. However, such Insurance Company has refused to accept Sherman's
response and has demanded that Sherman participate in mediation in accordance
with the terms of a prior settlement agreement. Sherman and the Insurance
Company are in the process of commencing a mediation. If the mediation process
is not successful, Sherman may be sued by the Insurance Companies and, as a
result, could be held responsible for all costs incurred by the Insurance
Companies in defending Sears and paying for any claims against Sears as well as



for the cost of any litigation against Sherman. The total amount of these lead
paint litigation related costs and claims could be significant. However, the
Company does not have a liability recorded with respect to these matters because
the liability that may result, if any, cannot be reasonably estimated at this
time.


Note 9 - Earnings per share:

Net income (loss) per share is based upon the weighted average number of
common shares and dilutive securities. A reconciliation of the numerators and
denominators used in the calculations of basic and diluted earnings per share
computations of income (loss) before cumulative effect of change in accounting
principle is presented below. The effect of the assumed conversion of the Series
A Convertible Preferred Stock was antidilutive in the three months ended
September 30, 2002 period and the three and nine month periods ended September
30, 2003. The dilutive effect of the assumed conversion of the Series A
Preferred Stock in the nine month ended September 30, 2002 period is calculated
from its issuance in March 2002. Keystone stock options were omitted from the
calculation because they were antidilutive in all periods presented.



Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)

Numerator:
Net income (loss) before cumulative
effect of change in accounting

principle $(4,801) $(11,836) $29,216 $(27,004)

Less Series A Preferred Stock
dividends (1,485) (1,485) (3,198) (4,455)
------- -------- ------- --------
Basic net income (loss) before
cumulative effect of change in
accounting principle (6,286) (13,321) 26,018 (31,459)
Series A Preferred Stock dividends - - 3,198 -
------- -------- ------- ---------

Diluted net income (loss) before
cumulative effect of change in
accounting principle $(6,286) $(13,321) $29,216 $(31,459)
======= ======== ======= ========

Denominator:
Average common shares outstanding 10,068 10,068 10,067 10,068
Dilutive effect of Series A
Preferred Stock - - 9,900 -
------- -------- ------- ---------

Diluted shares 10,068 10,068 19,967 10,068
======= ======== ======= ========









MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

OVERALL RESULTS OF OPERATIONS:

Keystone believes it is a leading manufacturer of steel fabricated wire
products, industrial wire and wire rod for the agricultural, industrial,
construction, original equipment manufacturer and retail consumer markets.
Historically, the Company has experienced greater sales and profits during the
first half of the year due to the seasonality of sales in principal wire
products markets, including the agricultural and construction markets. Keystone
is also engaged in scrap recycling through ARC and through July 2003, was
engaged in the distribution of wire, plastic and wood lawn and garden products
to retailers through Garden Zone.

As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
including, but not limited to, statements found in this "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes", "intends", "may", "should",
"could", "anticipates," "expected" or comparable terminology, or by discussions
of strategies or trends. Although Keystone believes the expectations reflected
in such forward-looking statements are reasonable, it cannot give any assurances
that these expectations will prove to be correct. Such statements by their
nature involve substantial risks and uncertainties that could significantly
impact expected results, and actual future results could differ materially from
those described in such forward-looking statements. While it is not possible to
identify all factors, Keystone continues to face many risks and uncertainties.
Among the factors that could cause actual future results to differ materially
are the risks and uncertainties discussed in this Quarterly Report and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission including, but not limited to;

o Future supply and demand for the Company's products (including cyclicality
thereof),
o Customer inventory levels,
o Changes in raw material and other operating costs (such as ferrous scrap
and energy)
o General economic conditions,
o Competitive products and substitute products,
o Changes in customer and competitor strategies,
o The impact of pricing and production decisions,
o The possibility of labor disruptions,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government regulations and possible changes therein,
o Significant increases in the cost of providing medical coverage to
employees and retirees,
o The ability to successfully obtain reductions in the Company's operating
costs,
o The ability of the Company to successfully renegotiate the terms of certain
of its indebtedness,
o The ultimate resolution of pending litigation,
o International trade policies of the United States and certain foreign
countries,



o Any possible future litigation, and
o Other risks and uncertainties as discussed in this Quarterly Report and the
Annual Report, including, without limitation, the section referenced above.

Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected.
Keystone disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.

The following table sets forth Keystone's steel and wire production,
ferrous scrap costs, sales volume and pricing data for the periods indicated.



Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
(Tons in thousands)

Production volume (tons):

Billets 202 172 586 510
Wire rod 182 158 556 490

Average per-ton ferrous scrap
purchase cost $102 $117 $ 93 $114

Sales volume(tons):
Fabricated wire products 71 63 230 202
Industrial wire 24 25 76 77
Wire rod 75 82 236 232
Billets - 5 - 15
---- ---- ---- ----

170 175 542 526
==== ==== ==== ====
Per-ton selling prices:
Fabricated wire products $672 $657 $685 $677
Industrial wire $452 $453 $448 $445
Wire rod $321 $317 $304 $312
Billets $ - $172 $ - $196
All steel and wire products $486 $454 $486 $468


The following table sets forth the components of the Company's net sales
for the periods indicated.



Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
(In millions)

Steel and wire products:

Fabricated wire products $47.7 $41.3 $157.8 $136.5
Industrial wire 10.7 11.5 34.1 34.2
Wire rod 23.9 26.1 71.9 72.3
Billets - .9 - 3.1
Other .4 .3 1.0 1.0
----- ----- ------ ------
82.7 80.1 264.8 247.1

Lawn and garden products 1.1 .4 8.5 11.2
----- ----- ------ ------

$83.8 $80.5 $273.3 $258.3
===== ===== ====== ======





The following table sets forth selected operating data of the Company as a
percentage of net sales for the periods indicated.



Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----


Net sales ......................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold ................ 94.8 (104.1) 91.3 99.2
------- ------- ------- -------
Gross margin ...................... 5.2 % (4.1)% 8.7 % .8 %
======= ======= ======= =======

Selling expense ................... 2.0 % 2.1 % 1.9 % 2.4 %
General and administrative expense 6.8 % 6.7 % 5.9 % 5.1 %
Defined benefit pension expense
(credit) ......................... .4 % 2.2 % (.4)% 2.0 %
Corporate expense (income) ........ .8 % (.1)% 1.0 % .9 %
Gain on early extinguishment of
debt ............................. - % - % (20.0)% - %

Income (loss) before income taxes
and cumulative effect of change in
accounting principle ............. (5.9)% (14.8)% 18.7 % (10.3)%
Income tax provision .............. -- -- 7.9 --
Minority interest in after-tax
earnings ........................ (.1) (.1) .1 .2
------- ------- ------- -------

Net income (loss) before cumulative
effect of change in accounting
principle ........................ (5.8)% (14.7)% 10.7 % (10.5)%
======= ======= ======= =======



Net sales of $80.5 million in the 2003 third quarter were down 4% from
$83.8 million during the same period in 2002. The decline in sales was due
primarily to a $32 per-ton decline in steel and wire product selling prices and
a $700,000 decline in Garden Zone's sales all partially offset by a 3% increase



in shipment volume of the Company's steel and wire products. Shipments of wire
rod increased 9% while per-ton selling prices of wire rod declined 1%.
Industrial wire shipments during the 2003 third quarter increased 4% from the
2002 third quarter while per-ton selling prices remained relatively constant.
Fabricated wire product shipments declined 11% during the 2003 third quarter as
compared to the 2002 third quarter while per-ton selling prices declined 2%. In
addition, during the third quarter of 2003, Keystone sold 5,000 tons of billets
as compared to none sold during the 2002 third quarter. The lower per-ton
selling price of the Company's steel and wire products during the 2003 third
quarter adversely impacted total net sales by $5.4 million. Management believes
the decline in shipment volume of wire products during the 2003 third quarter
was due to softening demand due in part to high levels of imported steel and
wire products. Although high levels of imported steel and wire products
continue, these import levels have been somewhat mitigated by former competitors
of the Company exiting the marketplace. However, despite this decline in
domestic production capacity, rod imports have filled the resulting production
shortfall and as such, per-ton selling prices continue to be adversely impacted
by the availability of high levels of imported wire rod. The decline in Garden
Zone's sales during the third quarter of 2003 as compared to the 2002 third
quarter was due to Keystone selling its 51% interest in Garden Zone during July
of 2003.

Net sales of $258.3 million in the first nine months of 2003 were down 6%
from $273.3 million in the first nine months of 2002. This decline in sales was
primarily due to a 3% decline in shipments of Keystone's steel and wire products
and an $18 per-ton decline in selling prices of the Company's steel and wire
products partially offset by a $2.7 million increase in Garden Zone's sales
during the first nine months of 2003. Garden Zone's sales during the first nine
months of 2003 prior to Keystone's sale of its interest in Garden Zone amounted
to $11.2 million as compared to $8.5 million during the first nine months of the
same period in 2002. Wire rod shipments during the first nine months of 2003
declined 2% over the first nine months of 2002 while per-ton selling prices
increased 3%. Industrial wire shipments during the first nine months of 2003
increased 1% over the first nine months of 2002 while per-ton selling prices
declined 1%. Fabricated wire products shipments during the first nine months of
2003 declined 12% as compared to the first nine months of 2002 while per-ton
selling prices declined 1%. Despite increases in per-ton selling prices of wire
rod, overall average per-ton selling prices declined between the first nine
months of 2002 and 2003 due to declines in the per-ton selling prices of
industrial wire and fabricated wire products. Management believes the decline in
shipment volume during the first nine months of 2003 was due to large volumes of
imported product throughout the nine month period and softening demand due in
part to prolonged winter weather throughout most of the United States and
uncertainties regarding military action in the Middle East during the first six
months of 2003.

Billet production during the third quarter of 2003 decreased 30,000 tons or
15% to 172,000 tons from 202,000 tons during the third quarter of 2002. The
primary reason for the lower production levels during the 2003 third quarter was
intentional production curtailments as a result of weakening demand and excess
inventory levels. Wire rod production during the third quarter of 2003 declined
to 158,000 tons as compared to production of 182,000 tons in the 2002 third
quarter, primarily as a result of the lower billet production during the 2003
third quarter.

Billet production during the first nine months of 2003 declined by 76,000
tons to 510,000 tons from 586,000 tons during the first nine months of 2002. The
primary reason for the lower production levels in the first nine months of 2003
was intentional production curtailments as a result of weakening demand and
excess inventory levels. Lower wire rod production during the first nine months
of 2003, as compared to the first nine months of 2002, resulted in a decline of
66,000 tons of wire rod produced during the first nine months of 2003 to 490,000
tons from 556,000 tons during the first nine months of 2002. The low wire rod
production throughout the first nine months of 2003 was due primarily to the
lower billet production throughout the nine month period and unplanned
production outages during the 2003 first quarter to effect repairs to the
Company's rod mill.

Gross profit during the 2003 third quarter declined to a negative $3.3
million from a $4.3 million profit in the 2002 third quarter as the Company's
gross margin declined from 5.2% in the 2002 period to a negative 4.1% in the
2003 third quarter. This decline in gross margin was due primarily to the lower
overall average per-ton steel and wire product selling prices and higher costs



for ferrous scrap, Keystone's primary raw material. The higher ferrous scrap
costs during the 2003 third quarter adversely impacted gross profit by
approximately $2.9 million.

Gross profit during the first nine months of 2003 declined to $2.0 million
from $23.9 million in the first nine months of 2002 as the Company's gross
margin declined from 8.7% to .8%. This decline in gross margin was due primarily
to lower overall average per-ton selling prices of the Company's steel and wire
products combined with substantially higher costs for ferrous scrap as well as
higher costs for natural gas all partially offset by increased production
efficiencies in the Company's steel and wire mills. The higher costs for ferrous
scrap and natural gas adversely impacted gross profit by $11.9 million and $3.3
million, respectively. In addition, during the first nine months of 2002,
Keystone received $800,000 of insurance proceeds from business interruption
policies related to incidents in prior years as compared to none received during
the first nine months of 2003.

Selling expense of $1.7 million during the third quarter of 2003
approximated selling expenses during the 2002 third quarter. Selling expense of
$6.2 million during the first nine months of 2003 was approximately $981,000
higher than the same period in 2002. The primary reasons for the increased
selling expenses during the 2003 periods were increased advertising costs and
employee related expenses.

General and administrative expenses during the 2003 third quarter declined
from $5.7 million in the 2002 third quarter to $5.4 million due primarily to
lower employee related and travel costs. Due to the decline in general and
administrative expenses during each of the first three quarters of 2003 as
compared to each of the 2002 first three quarters, general and administrative
expenses for the first nine months of 2003 declined $2.9 million from $16.2
million in 2002 to $13.3 million in 2003.

During the third quarter of 2003, Keystone recorded defined benefit pension
expense of $1.8 million as opposed to $297,000 recorded in the third quarter of
2002. During the first nine months of 2003, Keystone recorded defined benefit
pension expense of $5.2 million as opposed to a $1.2 million credit recorded
during the first nine months of 2002. Keystone currently anticipates the total
2003 pension expense will approximate $6.9 million. The anticipated higher
pension expense in 2003 is due primarily to a $50 million decline in plan assets
during 2002 and the resulting lower expected return on plan assets component of
defined benefit pension plan expense. However, cash contributions by the Company
for defined benefit pension plans will not be required in 2003.

General corporate expenses during the third quarter of 2003 declined from
$645,000 during the 2002 third quarter to an $87,000 credit. The primary reason
for this decline was due primarily to lower employee related and legal and
professional costs during the 2002 third quarter. General corporate expenses
during the first nine months of 2003 in the amount of $2.3 million were
approximately $600,000 lower than general corporate expenses during the first
nine months of 2002 due primarily to lower employee related and legal and
professional costs.

Interest expense in the third quarter of 2003 approximated the interest
expense during the third quarter of 2002. Average borrowings by Keystone
approximated $101.9 million in the third quarter of 2003 as compared to $97.1
million in the third quarter of 2002. During the third quarter of 2003,
Keystone's weighted-average interest rate was 2.6% per annum as compared to 2.9%
per annum in the third quarter of 2002.

Interest expense in the first nine months of 2003 was lower than the first
nine months of 2002 due principally to lower debt levels and interest rates.
Average borrowings by Keystone approximated $104.9 million in the first nine
months of 2003 as compared to $110.5 million in the first nine months of 2002.
During the first nine months of 2003, Keystone's weighted-average interest rate
was 2.8% per annum as compared to 4.9% per annum in the first nine months of
2002.

As a result of the Company's debt restructuring completed in March 2002,
Keystone recognized a $54.7 million pre-tax gain ($33.1 million net of tax) in
the first nine months of 2002.

In July 2003, Garden Zone purchased Keystone's 51% ownership in Garden Zone
for approximately $1.1 million in cash. In addition, Garden Zone repaid a
$493,000 advance that had been made in a prior year, and Keystone was released
from its guarantee of 51% of Garden Zone's revolving credit facility. Keystone
reported a pre-tax gain of approximately $786,000 in the third quarter of 2003
as a result of this transaction.


In August 2003, Keystone sold substantially all of the assets of its
Keystone Fasteners business for $2.2 million in cash. Keystone reported a
pre-tax gain of approximately $287,000 in the third quarter of 2003 as a result
of this transaction.

The principal reasons for the difference between the U.S. federal statutory
income tax rate and the Company's effective income tax rates are explained in
Note 5 to the Consolidated Financial Statements. At September 30, 2003, the
Company had recorded a deferred tax asset valuation allowance of $99.1 million
resulting in no net deferred tax assets. Keystone periodically reviews the
recoverability of its deferred tax assets to determine whether such assets meet
the "more-likely-than-not" recognition criteria. The Company will continue to
review the recoverability of its deferred tax assets, and based on such periodic
reviews, Keystone could recognize a change in the recorded valuation allowance
related to its deferred tax assets in the future. As a result of the deferred
tax asset valuation allowance, the Company does not anticipate recognizing a tax
benefit associated with its expected pre-tax losses during 2003 will be
appropriate.

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. As
a result of adopting SFAS No. 142, negative goodwill of approximately $20.0
million recorded at December 31, 2001 was eliminated as a cumulative effect of
change in accounting principle.

As a result of the items discussed above, Keystone recorded a net loss
during the third quarter of 2003 of $11.8 million as compared to a net loss of
$4.8 million in the third quarter of 2002, and a net loss during the first nine
months of 2003 of $27.0 million as compared to net income in the first nine
months of 2002 of $49.2 million.

SEGMENT RESULTS OF OPERATIONS:

Keystone's operating segments are defined as components of consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. David L. Cheek, President and Chief Executive Officer of
Keystone. Each operating segment is separately managed, and each operating
segment represents a strategic business unit offering different products. During
2003, the Company expanded the composition of its reportable segments. The
corresponding segment information for prior periods has been restated to conform
to the current year presentation. See Note 2 to the Consolidated Financial
Statements.

The Company's operating segments are organized along its manufacturing
facilities and include two reportable segments: (i) Keystone Steel and Wire
("KSW") which manufacturers and sells wire rod, wire and wire products for
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer markets and, (ii) Engineered Wire Products
("EWP") which manufactures and sells welded wire reinforcement in both roll and
sheet form that is utilized in concrete construction products including pipe,
pre-cast boxes and applications for use in roadways, buildings and bridges.

Prior to July 2003, the Company owned a 51% interest in Garden Zone, a
distributor of wire, plastic and wood lawn and garden products to retailers. In
July 2003, Keystone sold its 51% ownership in Garden Zone.

In addition, prior to July 2003, Keystone also operated three businesses
that did not constitute reportable business segments. These businesses sell wire
and wire products for agricultural, industrial, construction, commercial,
original manufacturers and retail consumer markets. The results of operations of
these businesses are aggregated and included under the "All Other" heading in



the following tables. During July 2003, Keystone transferred its operations at
one of these three businesses to other Keystone facilities, and during August
2003 Keystone sold another of the businesses. As a result, as of August 2003,
the "All Other" heading in the following tables only includes Sherman Wire.

The net proceeds from the sale of Garden Zone and Keystone Fasteners
aggregated $3.3 million. The gain on the sale of these businesses, as well as
the results of operations of each of Garden Zone and Keystone Fasteners are not
significant, individually and in the aggregate. Accordingly, the Company has
elected not to present their results of operations as discontinued operations
for all periods presented due to their immateriality.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that (i) defined benefit
pension expense for each segment is recognized and measured on the basis of
estimated current service cost of each segment, with the remainder of the
Company's net defined benefit pension expense or credit not allocated to each
segment but still is reported as part of operating profit or loss, (ii) segment
OPEB expense is recognized and measured based on the basis of the estimated
expense of each segment, with the remainder of the Company's actual OPEB expense
not allocated to each segment but still is reported as part of operating profit
or loss, (iii) elimination of intercompany profit or loss on ending inventory
balances is not allocated to each segment but still is reported as part of
operating profit or loss, (iv) LIFO inventory reserve adjustments are not
allocated to each segment but still are reported as a part of operating profit
or loss, and (v) amortization of goodwill and negative goodwill are included in
general corporate expenses and are not allocated to any segment and are not
included in total reported operating profit or loss. General corporate expense
also includes OPEB and environmental expense relative to facilities no longer
owned by the Company. Intercompany sales between reportable segments are
generally recorded at prices that approximate market prices to third-party
customers.



Principal
Business Segment entities Location Products


Keystone Steel & Wire Keystone Steel & Wire Peoria, IL Billets, wire rod, industrial
wire and fabricated wire products

Engineered Wire Products Engineered Wire Products Upper Sandusky, Fabricated wire products
OH

Garden Zone Garden Zone (1) Charleston, SC Wire, wood and plastic lawn and
garden products

All Other Sherman Wire Sherman, TX Industrial wire and fabricated
wire products
Sherman Wire of Caldwell(2) Caldwell, TX Industrial wire and fabricated
wire products
Keystone Fasteners(3) Springdale, AR Fabricated wire products


(1) 51.0% subsidiary - interest sold in July 2003.
(2) Transferred operations in July 2003 to Sherman Wire and Keystone Steel &
Wire.
(3) Business sold in August 2003.





Three months ended Nine months ended
September 30, September 30,
--------------------- -----------------
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)

Revenues:

Keystone Steel and Wire ......... $ 73,099 $ 71,230 $ 237,253 $ 229,333
Engineered Wire Products ........ 10,692 11,559 25,914 26,853
Garden Zone ..................... 1,347 371 9,481 12,082
All other ....................... 10,444 5,585 36,746 25,150

Elimination of intersegment
revenues ...................... (11,738) (8,293) (36,104) (35,128)
-------- --------- --------- ---------

$ 83,844 $ 80,452 $ 273,290 $ 258,290
======== ========= ========= =========

Operating profit (loss):
Keystone Steel and Wire ......... $ (1,447) $ (7,671) $ 3,246 $ (16,370)
Engineered Wire Products ........ 1,025 1,136 2,515 2,293
Garden Zone ..................... (200) (58) 404 700
All Other ....................... (1,305) (1,380) (2,258) (3,240)
GAAP adjustments and eliminations (1,410) (4,166) (297) (6,028)
-------- --------- --------- ---------

$ (3,337) $ (12,139) $ 3,610 $ (22,645)
======== ========= ========= =========



Keystone Steel & Wire

KSW's 2003 third quarter net sales of $71.2 million declined approximately
$1.9 million, or 3%, from the same period during 2002 due to lower shipment
volumes and lower overall per-ton product selling prices. During the 2003 third
quarter, KSW sold 2,000 less tons of product than the 2002 third quarter. KSW's
per-ton product selling prices during the 2003 third quarter were approximately
$6 per-ton lower than the per-ton selling prices of the 2002 third quarter.
During the first nine months of 2003, KSW's net sales of $229.3 million declined
$7.9 million or 3%, from the first nine months of 2002 due primarily to lower
shipment volumes partially offset by higher product per-ton selling prices.
During the first nine months of 2003, KSW sold 23,000 less tons of product than
the first nine months of 2002 at per-ton selling prices that were $3 per-ton
higher than the same period in 2002. During both the three and nine month
periods ended September 30, 2003, approximately 10% of KSW's net sales were made
to other Keystone entities. The majority of these sales were sales of wire rod.

During the third quarter of 2003, KSW recorded a $7.7 million operating
loss as compared to a $1.4 million operating loss recorded during the 2002 third
quarter due primarily to the lower selling prices and higher ferrous scrap and
natural gas costs during the 2003 third quarter. KSW recorded a $16.4 million
operating loss during the first nine months of 2003 as compared to $3.2 million
of operating income recorded during the first nine months of 2002 due primarily
to the lower selling prices and higher ferrous scrap and natural gas costs
during the 2003 second and third quarters all partially offset by increased
production efficiencies in KSW's steel and wire mills. In addition, during the
first nine months of 2002, KSW received $800,000 of insurance proceeds from
business interruption policies related to incidents in prior years as compared
to none received in the same period during 2003.




Engineered Wire Products

EWP's sales of $11.6 million during the third quarter of 2003 were
approximately 8% higher than sales during the third quarter of 2002 of $10.7
million due primarily to higher shipment volume as well as higher per-ton
product selling prices. EWP's shipment volume during the 2003 third quarter
increased 6% over the same quarter in 2002 and per-ton product selling prices
increased 2%. EWP's sales of $26.9 million during the first nine months of 2003
were approximately 4% higher than sales during the first nine months of 2003 of
$25.9 million due primarily to a 2% increase in both shipment volume and per-ton
product selling prices.

During the third quarter of 2003, EWP recorded $1.1 million of operating
profit as compared to an operating profit of $1.0 million recorded in the 2002
third quarter. This 11% increase in operating profit was primarily a result of
increased per-ton product selling prices partially offset by an increase in the
cost of wire rod, EWP's primary raw material. EWP purchases substantially all of
its wire rod requirements from KSW. Despite increased sales by EWP during the
2003 first nine months as compared to the same periods in 2002, operating income
during the first nine months of 2003 declined by $222,000 to $2.3 million. The
primary reason for the decline in EWP's operating income levels during the first
nine months of 2003 as compared to the first nine months of 2002 was an increase
in the cost of wire rod.

Garden Zone

Keystone sold its 51% interest in Garden Zone in July 2003. As such,
Keystone only included in its results of operations for the 2003 third quarter,
18 days of Garden Zone's operations during the 2003 third quarter as compared to
a full quarter included during the 2002 third quarter. As a result, Garden
Zone's net sales during the three months ended September 30, 2003 declined to
$400,000 as compared to $1.3 million during the third quarter of 2002. Despite
only recording a partial quarter of sales during the 2003 third quarter, Garden
Zone's net sales during the first nine months of 2003 increased to $12.1 million
as compared to $9.5 million during the first nine months of 2002. The primary
reason for the increased sales during the first nine months of 2003 was
increased market penetration by Garden Zone. Garden Zone recorded an operating
loss of $58,000 during the third quarter of 2003 as compared to a $200,000
operating loss during the 2002 third quarter and Garden Zone recorded operating
income of $700,000 during the first nine months of 2003 as compared to $404,000
during the first nine months of 2002. The increased operating profit during the
first nine months of 2003 as compared to the first nine months of 2002 was due
primarily to the increased sales levels during that same period.

All Other

Keystone transferred its operations at one of these three locations
(Sherman Wire of Caldwell, Inc.) during July 2003 to Sherman Wire and Keystone
Steel & Wire and sold a second one of these locations (Keystone Fasteners)
during August 2003. Primarily as a result of these transactions, net sales
during the third quarter of 2003 at these three locations declined by $4.9
million to approximately $5.6 million as compared to $10.4 million during the
third quarter of 2002. During the first nine months of 2003, these three
locations recorded net sales of $25.7 million as compared to $36.7 million
during the first nine months of 2002. In addition to the 2003 third quarter
disposition and termination of operations, the primary reason for the decline in
sales during the first nine months of 2003 was lower shipment volumes and lower
per-ton product selling prices. During the third quarter of 2003 and the first



nine months of 2003, shipment volume at these locations declined 46% and 28%,
respectively from the same periods in 2002 due primarily to lower volume at the
Sherman Wire of Caldwell facility. In addition, shipment volume at Keystone
Fasteners during the 2003 periods was also down significantly from the same
periods during 2002 due primarily to increased competition from import
producers. In prior periods, the Sherman Wire of Caldwell facility provided
substantially all of Keystone Fastener's industrial wire requirements. During
2003, the Company began transitioning the manufacturing of Keystone Fastener's
industrial wire to other Keystone facilities. See Note 10 to the Consolidated
Financial Statements. The per-ton product selling prices for these locations
during the 2003 third quarter and the first nine months of 2003 declined by 2%
and 5%, respectively from the same periods during 2002. Keystone Fasteners
purchased substantially all of its industrial wire requirements, their primary
raw material, from either Sherman Wire or Sherman Wire of Caldwell, Inc.

During the third quarter of 2003, these three locations recorded an
operating loss of $1.4 million as compared to a $1.3 million operating loss
during the 2002 third quarter and during the first nine months of 2003, these
three locations recorded an operating loss of $3.2 million as compared to a $2.3
million operating loss during the first nine months of 2002. The primary reasons
for the increased operating losses during the 2003 periods was the lower sales
volume and overall per-ton product selling prices and higher cost for wire rod.
These locations purchase substantially all of their wire rod requirements from
KSW.

GAAP adjustments and eliminations in the above table consisted primarily of
adjustments to reflect the difference between the defined benefit pension
expense or credit and OPEB expense allocated to the segments and the actual
expense or credit included in the determination of operating profit or loss.
GAAP adjustments and eliminations included a defined benefit pension credit of
$528,000 during the three months ended September 30, 2002 and defined benefit
pension expense of $1.0 million during the three months ended September 30,
2003. GAAP adjustments and eliminations included a defined benefit pension
credit of $3.7 million during the nine months ended September 30, 2002 and
defined benefit pension expense of $2.9 million during the nine months ended
September 30, 2003. During the three month and nine month periods ended
September 30, 2002, GAAP adjustments and eliminations included OPEB expense of
$1.6 million and $3.8 million, respectively. GAAP adjustments and eliminations
during both the three and nine month periods ended September 30, 2003, included
OPEB expense of $3.2 million.

Outlook for 2003

Due to continued high levels of steel and wire product imports, management
currently believes capacity utilization and shipment volumes in 2003 will be
less than 2002 levels and overall average per-ton selling prices for the year
2003 will be less than those of 2002. In addition, management currently believes
these volumes and overall average per-ton selling prices combined with
anticipated continued higher energy costs, higher scrap costs, an $8.4 million
increase in defined benefit pension expense and a $3.2 million increase in OPEB
expense will result in Keystone recording a loss before income taxes and
cumulative effect of change in accounting principle for calendar 2003 in excess
of the comparable amount in 2002 (exclusive of the $54.7 million gain in 2002 on
early extinguishment of debt). The Company does not currently anticipate that
recognizing a tax benefit associated with its pre-tax losses during 2003 will be
appropriate.


LIQUIDITY AND CAPITAL RESOURCES:

The Company's cash flows from operating activities are affected by the
seasonality of its business as sales of certain products used in the
agricultural and construction industries are typically highest during the second
quarter and lowest during the fourth quarter of each year. These seasonal
fluctuations impact the timing of production, sales and purchases and have
typically resulted in a use of cash from operations and increases in the
outstanding balance under the Company's revolving credit facilities during the
first quarter of each year.

At September 30, 2003 Keystone had negative working capital of $85.0
million, including $2.1 million of notes payable and current maturities of
long-term debt, $29.3 million of long-term debt classified as current as a
result of the Company's failure to comply with certain financial covenants in
the Keystone Revolver as well as outstanding borrowings under the Company's
revolving credit facilities of $37.1 million. The amount of available borrowings
under these revolving credit facilities is based on formula-determined amounts
of trade receivables and inventories, less the amount of outstanding letters of
credit. At September 30, 2003, unused credit available for borrowing under
Keystone's $45 million revolving credit facility (the "Keystone Revolver"),
which expires in March 2005 and EWP's $7 million revolving credit facility,
which expires in June 2004, (the "EWP Revolver") were $2.9 million and $5.0
million, respectively. The Keystone Revolver requires daily cash receipts be
used to reduce outstanding borrowings, which results in the Company maintaining
zero cash balances when there are balances outstanding under this credit
facility. A wholly-owned subsidiary of Contran has agreed to loan Keystone up to
an aggregate of $6 million under the terms of a revolving credit facility that
matures on November 30, 2003. Through November 14, 2003, the Company had not
borrowed any amounts under such facility.

Relative changes in assets and liabilities generally result from the timing
of production, sales and purchases. Such relative changes can significantly
impact the comparability of cash flow from operations from period to period, as
the statement of operations impact of such items may occur in a different period
from when the underlying cash transaction occurs. For example, raw materials may
be purchased in one period, but the payment for such raw materials may occur in
a subsequent period. Similarly, inventory may be sold in one period, but the
cash collection of the receivable may occur in a subsequent period.

During the first nine months of 2003, notes and accounts receivable
increased by $14.5 million and inventories declined by $16.4 million. These
changes in accounts receivable and inventory balances from December 31, 2002 to
September 30, 2003 are consistent with trends in prior years. The Company's
business is highly seasonal due to Keystone's principal wire products markets,
including the agricultural and construction markets. As a result of this
seasonality, the Company must typically build inventory levels during the first
and fourth quarters of each year in order to serve its customers thoughout the
peak selling season that generally lasts through May of each year. During the
second and third quarters of each year, these high inventory levels are reduced
as the inventory is converted to sales and there is a corresponding seasonal
increase in accounts receivable balances. The seasonal decline in inventory
levels did not occur during the 2002 period due to abnormally low levels of
inventory at the end of 2001. Liquidity constraints during the last quarter of
2001 prevented the Company from building its normal inventory levels. These
liquidity constraints were resolved during the first and second quarter of 2002.


Keystone's cash flows from operations declined from a net $5.0 million of
cash provided in the first nine months of 2002 to a net $7.5 million of cash
used in the first nine months of 2003. The $12.5 million net reduction is due
primarily to (i) the $26.3 million decline in operating income (loss) during
such periods (ii) a higher amount of net cash provided from changes in the
Company' inventories, receivables, payables and accruals of $14.1 million in the
first nine months of 2003. Relative changes in accounts receivable are affected
by, among other things, the timing of sales and the collection of the resulting
receivable. Relative changes in inventories, accounts payable and accrued
liabilities are affected by, among other things, the timing of raw material
purchases and the payment for such purchases and the relative difference between
production volume and sales volume.

Keystone's total debt balances during the first nine months of 2003
increased by $7.1 million. The Company's operations used $7.5 million of cash,
capital expenditures amounted to $2.4 million and Keystone made principal
payments of $2.1 million on long-term debt. In addition, the company received
$3.3 million in total proceeds from the sale of its interest in Garden Zone and
the sale of substantially all the assets of its Keystone Fasteners business.
These uses of cash resulted in an increase of $9.1 million in borrowings under
the Company's revolving credit facilities.

During the first nine months of 2003, Keystone made capital expenditures of
$2.4 million as compared to $4.8 million in the first nine months of 2002.
Capital expenditures for calendar year 2003 are currently estimated to be
approximately $3.0 million and are related primarily to upgrades of production
equipment. Keystone currently anticipates these capital expenditures will be
funded using cash flows from operations together with borrowing availability
under the Company's credit facilities.

See Notes 7 and 8 to the Consolidated Financial Statements for discussions
of the Company's environmental liabilities and current litigation.

The Company periodically reviews the recoverability of its deferred tax
assets to determine whether such assets meet the "more-likely-than-not"
recognition criteria. At September 30, 2003, after considering all factors
believed to be relevant, including the Company's recent operating results, its
expected future near-term productivity rates; cost of raw materials,
electricity, labor and employee benefits, environmental remediation, and retiree
medical coverage; interest rates; product mix; sales volumes and selling prices
and the fact that accrued OPEB expenses will become deductible over an extended
period of time and require the Company to generate significant amounts of future
taxable income, the Company believes the gross deferred tax assets may not
currently meet the "more-likely-than-not" realizability test. As such, at
September 30, 2003 the Company has a deferred tax asset valuation allowance of
approximately $12.6 million. The Company will continue to review the
recoverability of its deferred tax assets, and based on such periodic reviews,
the Company could change the valuation allowance related to its deferred tax
assets in the future. The Company does not currently expect it will be
appropriate to recognize a tax benefit associated with its expected pre-tax
losses during 2003.

Keystone incurs significant ongoing costs for plant and equipment and
substantial employee medical benefits for both current and retired employees. As
such, Keystone is vulnerable to business downturns and increases in costs, and
accordingly, routinely compares its liquidity requirements and capital needs
against its estimated future operating cash flows. In addition to planned
reductions in fixed costs and announced increases in certain product selling
prices, Keystone is taking additional action towards improving its liquidity.
These actions include, but are not limited to, reducing inventory levels through
more efficient production schedules, modifying coverages and participant
contribution levels of medical plans for both employees and retirees, attempting
to restructure certain indebtedness, restructuring the terms of its collective
bargaining agreement with the labor union at its Peoria facility to reduce the
Company's operating costs and reducing capital expenditures. With respect to the
Company's attempt to restructure the terms of its collective bargaining

agreement, the Company has initiated discussions in an attempt to renegotiate
the existing terms of the collective bargaining agreement that currently expires
in 2006. The Company is seeking, among other things, to achieve modifications
that will result in a reduction of its annual operating costs at the Peoria
facility. Discussions with union representatives are ongoing and no specific
terms or agreement has been reached to date. Keystone has also sold, and may in
the future consider, the sale of certain divisions or subsidiaries that are not
necessary to achieve the Company's long-term business objectives. However, there
can be no assurance Keystone will be successful in any of these or other
efforts, or that if successful, they will provide sufficient liquidity for the
Company's operations during the next year.

At September 30, 2003, Keystone was not in compliance with certain
financial covenants included in the Keystone Revolver. Under the terms of the
Keystone Revolver, failure to comply with these covenants is considered an event
of default and gives the lender the right to accelerate the maturity of both the
Keystone Revolver and the Keystone Term Loan. The Company is currently
negotiating with the Keystone Revolver and Keystone Term Loan lender to obtain
waivers of such financial covenants or otherwise amend the respective loan
agreements to cure the defaults. As a result of these events of default, the
lender has placed a $5.5 million reserve on the Company's available borrowing
base. There can be no assurance Keystone will be successful in obtaining such
waivers or amendments, and if Keystone is unsuccessful, there is no assurance
the Company would have the liquidity or other financial resources sufficient to
repay the Keystone Revolver and the Keystone Term Loan if such indebtedness is
accelerated. The indenture governing Keystone's 8% Notes provides the holders of
such Notes with the right to accelerate the maturity of the Notes in the event
of a default by Keystone resulting in acceleration of the maturity of any of the
Company's other secured debt.

The prolonged downturn in the steel industry and the $5.5 million reserve
placed on the Company's available borrowing base by the lender on Keystone's
primary revolving credit facility continue to adversely effect Keystone's
liquidity and capital resources. In response, the Company has been required to
defer capital expenditures, defer maintenance expenditures and delay payments to
vendors and other creditors to the extent possible. Despite these measures, the
Company's availability under its primary revolving credit facility is extremely
limited and a significant portion of the Company's accounts payable are past due
compared to stated terms. Keystone continues to evaluate possible restructuring
alternatives to improve its overall financial condition. In this regard, and as
a result of ongoing negotiations with its lenders, the Company has retained
financial advisors to assist the Company in the process of evaluating possible
restructuring alternatives.

Management currently believes funds available under the Company's credit
facilities may not be sufficient to fund the anticipated needs of the Company's
operations and capital improvements for the year ending December 31, 2003. This
belief is based upon management's assessment of various financial and
operational factors, including, but not limited to, assumptions relating to
product shipments, product mix and selling prices, production schedules,
productivity rates, raw materials, electricity, labor, employee benefits and
other fixed and variable costs, interest rates, repayments of long-term debt,
capital expenditures, and available borrowings under the Company's credit



facilities. There are many factors that could cause actual future results to
differ materially from management's current assessment, as discussed above, and
actual results could differ materially from those forecasted or expected which
could materially adversely effect the future liquidity, financial condition and
results of operations of the Company. Additionally, significant declines in the
Company's end-user markets or market share, the inability to maintain
satisfactory billet and wire rod production levels, or other unanticipated
costs, if significant, could result in a need for funds greater than the Company
currently has available. The Company's inability to obtain adequate additional
sources of liquidity, or its inability to successfully restructure the terms of
its collective bargaining agreement to allow the Company to reduce its operating
costs, could have a material adverse effect on Keystone's ability to continue as
a going-concern. There can be no assurance the Company would be able to obtain
an adequate amount of additional liquidity. See Notes 13 and 15 to the
Consolidated Financial Statements in the Annual Report.






ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of David L. Cheek, the Company's
President and Chief Executive Officer, and Bert E. Downing, Jr., the Company's
Vice President, Chief Financial Officer, Corporate Controller and Treasurer,
have evaluated the Company's disclosure controls and procedures as of September
30, 2003. Based upon their evaluation, these executive officers have concluded
that the Company's disclosure controls and procedures are effective as of the
date of such evaluation.

The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP)", and
includes those policies and procedures that:

o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.

There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.







PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Reference is made to disclosure provided under the caption "Current
litigation" in Notes 7 and 8 to the Consolidated Financial Statements.


ITEM 6. Exhibits and Reports on Form 8-K

(a) The Company has retained a signed original of any exhibit listed below that
contains signatures, and the Company will provide any such exhibit to the
Commission or its staff upon request. The following exhibit is included
herein:

4.1 Fifth Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of August 31, 2003, by and between Registrant and EWP
Financial LLC.

4.2 Sixth Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of September 30, 2003, by and between Registrant and EWP
Financial LLC.

4.3 Seventh Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of October 31, 2003, by and between Registrant and EWP
Financial LLC.

31.1 Certification.

31.2 Certification.

32.1 Certification.

(b) Reports on Form 8-K filed during the quarter ended September 30, 2003:

August 14, 2003 - Reported Item 5.





S I G N A T U R E S



Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


Keystone Consolidated Industries, Inc.
(Registrant)



Date: November 19, 2003 By /s/Bert E. Downing, Jr.
-------------------------------------
Bert E. Downing, Jr.
Vice President, Chief Financial
Officer, Corporate Controller
and Treasurer
(Principal Financial and Accounting
Officer)