Universal Stainless & Alloy Products Annual Report 2001

← All annual reports

FY2001 Annual Report · Universal Stainless & Alloy Products

Loading PDF…

2001

ANNUAL REPORT

Un i v e r s a l St a i n l e s s & A l l o y Pr o d u c t s , I n c .

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

c a p i t a l e x p e n d i t u r e s
i n m i l l i o n s

8 . 1

1 2 . 1

3 . 4

4 . 6

5 . 3

e m p l o y e e s

2 7 0

2 8 0

2 7 7

2 8 0

3 0 4

c u s t o m e r s

1 6 7

2 0 0

2 3 5

2 5 0

2 8 8

TABLE OF CONTENTS

LETTER TO OUR STOCKHOLDERS

UNIVERSAL STAINLESS & ALLOY PRODUCTS STRATEGY

FACILITIES & PRODUCTS

MANAGEMENT’S DISCUSSION AND ANALYSIS

REPORT OF INDEPENDENT ACCOUNTANTS

CONSOLIDATED STATEMENT OF OPERATIONS

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENT OF CASH FLOWS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

PRICE RANGE OF COMMON STOCK

FIVE-YEAR SUMMARY

DIRECTORS, OFFICERS & MANAGEMENT

L e t t e r t o O u r St o c k h o l d e r s

In a year marked by industry, economic and national challenges,
Universal Stainless & Alloy Products achieved record sales and
earnings, substantially outperforming our peers and even our own
projections. Why?

OUR NICHE MARKET STRATEGY. We focused on the right markets and
the right niches within them. Power generation and aerospace saw
especially robust performance. We not only increased sales to existing
customers, but also added new ones.

BY LISTENING TO OUR CUSTOMERS. We made the right investments by
responding to changing customer needs and market opportunities with
the highest quality products and the greatest level of dependability.

THE COMMITMENT OF OUR EMPLOYEES. We challenged our employees, who
share directly in our profits, to help reduce our costs. The manufacturing
process for specialty steels requires advanced technical expertise and
exacting production methods. We see the dedication and commitment
of our employees as not simply an ideal, but an everyday necessity.

These factors combined to make 2001 an outstanding year for Universal
Stainless. Net income increased by 51%, reaching $7.6 million or
$1.25 per diluted share, up from $5.1 million or $0.83 per diluted
share in 2000. Net sales on shipments increased by 20% to $90.7 million,
up from $75.9 million in 2000. Earnings before interest, taxes,
depreciation and amortization totaled $15.4 million or $2.53 per
share. Each of these increases set new records for the Company.
Universal Stainless ended 2001 with one of the strongest balance

Clarence M. McAninch President and Chief Executive Officer (center)

Paul A. McGrath Vice President of Operations, General Counsel & Secretary (left)

Richard M. Ubinger Vice President of Finance, Chief Financial Officer and Treasurer (right)

sheets in our industry. Our debt-to-total
capitalization ratio was just 13%, and our
book value reached $9.28 per share.

In last year’s message, I outlined a number
of areas we would emphasize in 2001. Let’s
quickly review the progress made in those areas:

IDENTIFYING NEW MARKET NICHES AND ADDITIONAL
COST-REDUCTION OPPORTUNITIES. We achieved 10%
growth in the number of customers we served
in 2001, and this growth occurred across the
board. No single market segment dominated
our growth pattern.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

This reflects positively on Universal Stainless’
balanced revenue stream and on our ability to
generate customer satisfaction and loyalty in
all of the market segments that we pursue.

We have seen substantial growth in our bar
mill products, as a result of gaining customer
acceptance and capturing new market niches.
In addition, the profitability of bar mill
products increased by $1.9 million in 2001
compared with the prior year.

REDUCED PRODUCTION CYCLE TIMES AND ENHANCED

COST-EFFICIENCY TO MEET THE GROWING DEMAND.
Our new ingot grinder and billet grinder – both
installed to enhance our in-house capabilities,
reduce costs and improve quality – have resulted
in higher customer satisfaction. We have installed
improved environmental controls, including an
upgraded hazardous waste system that contri-
butes to greater efficiency of operations. We
also installed a new electro-slag remelt furnace,
now operating to meet customer demand for
ultra-clean steels. This unit, our fourth ESR
furnace, came online flawlessly – so much so,
that we were able to ship to a customer the
first ingot processed in January 2002. That’s
virtually unheard of in the steel industry.

IMPROVED ON-TIME DELIVERY AND REDUCED INVENTORY LEVELS. We have
reduced our inventory in relation to our backlog as a result of
implementing the i2 Technologies RHYTHM Factory Planner inventory
tracking software. This system enables us to quote customers more
accurate lead-times, to schedule material through the melt shop and
the rest of the facility more effectively, and to track output in a
more timely fashion. This process reduces our overall inventory and
ultimately the cost to carry that inventory. While our on-time delivery
performance improved after the software was installed, we anticipate
further improvements in 2002.

As we enter 2002, we are seeing the continuation of the difficult
economy. Power consumption has declined and natural gas costs have
decreased with the idling of manufacturing facilities, impacting demand
for power generation and petrochemical products. The commercial
aerospace industry has reduced its production plans as a result of
the September 11 tragedy. When economic conditions improve, we
will capitalize on the accomplishments of the past year and these
anticipated opportunities:

CERTAIN MARKETS ARE POISED FOR CONTINUED GROWTH. Several of our forging
and OEM customers serving the power generation and petrochemical
industries have informed us that demand for their products will improve
with the economy during 2002. The addition of our fourth ESR furnace
will enable us to respond to an increase in demand promptly.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

Similarly, several market indicators point to the demand in the aerospace
market improving in spite of the commercial aviation slowdown
experienced after the September 11 tragedy. These indicators include
proposed higher defense spending at the federal level and placement
of orders for jet fighter aircraft and for refueling aircraft to replace the
aged KC 135 tankers. Lower inventory levels among service centers
supplying the aerospace market represent another positive sign for us.

OUR INDUSTRY REMAINS RIPE FOR CONSOLIDATION. Universal Stainless will
continue to look for acquisition opportunities to add to our product
line, offer cost-efficiencies and enhance profitability.

In line with this strategy, we recently announced the acquisition of
the assets of Empire Specialty Steel, Inc., located in Dunkirk, New
York. The addition of finished specialty steel rod and wire products
and the expanded line of bar products will enable Universal Stainless
to broaden our product offerings to existing customers within our
markets and to enter new niches. It will also permit us to more fully
utilize the production capacity of our Bridgeville and Titusville
facilities to create additional higher value products. Building on our
reputation for producing the highest quality products, we now will
be able to offer the marketplace a desirable alternative to imports
in a broad range of finished product categories.

Without question, 2001 has been a unique year, yet we have achieved
record sales and net income results based on adherence to our proven
strategy. Our business model, which has been in place since we began
operations more than seven years ago, is built on serving niche markets

with dedicated employees and on developing
deep, long-term customer relationships, some
of which we highlight in the following pages.

Customer relationships remain the lifeblood of
our success. We work hard to provide a quality
product and deliver it on a timely basis. Our
customers know we want to improve their
bottom-line profitability to ensure our bottom-
line profitability. This is our distinguishing
factor – proving every day to our customers that
Universal Stainless is the best possible supplier
they can find in the marketplace.

On behalf of our board of directors and our
employees, thank you for your ongoing belief
in Universal Stainless. We will keep you
informed on our performance throughout
the coming year.

Clarence M. “Mac” McAninch
President and Chief Executive Officer
Universal Stainless & Alloy Products, Inc.

“We outperformed our industry and our own expectations in 2001 through the

disciplined execution of our business strategy. It is the same strategy that we

will pursue in 2002 and beyond.”

Clarence M. “Mac” McAninch
President and Chief Executive Officer

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

Un i v e r s a l St a i n l e s s
& Al l o y Pr o d u c t s St ra t e g y

Universal Stainless & Alloy Products has
succeeded in a traditionally difficult industry
because it remains steadfast in its pursuit of
three key strategies:

Reinvest profits to enhance customer
service and reduce costs.

>> Maintain a niche market focus.

Remember that the customer is number
one and that our employees are critical
to our success.

Since we began operations, we have stressed
that only through the dedication of our people
can Universal Stainless outperform the industry
and achieve profitable growth. That is why
the Company makes the special effort to make
sure employees share in our success.

The remaining elements of Universal Stainless’
three-part strategy deal with relationships
between the Company and its customers. The
stories that follow highlight specific instances
illustrating the ideals that have kept Universal
Stainless on the path to profitable growth.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

R e i n v e s t Pr o f i t s

When your name’s on the company letterhead, you make sure everything is top notch –
including the material received from your suppliers. Ron Cincinnati of the Cincinnati
Tool Steel Company of Rockford, Illinois, can vouch for that.

His company purchases hot rolled and annealed plate from Universal Stainless, which
is then ground from top and bottom and cut into bar stock for sale to its customers.
Ron praises Universal Stainless for its high standard of business ethics, loyalty to its
customers, consistent service and cost competitiveness. But he saves his highest praise
for the unquestioned quality of the steel he receives from Universal Stainless.

Plate product received from Universal Stainless must be flat to ensure that the product
cleans up and reduces machining time. Universal Stainless understands the critical nature
of this particular customer’s specifications and, according to Ron, the product received
is always excellent. Consistent reinvestment in Universal Stainless’ engineering and
production capabilities gets the credit.

“The steel needs to be flatter than their competitors’ steel,” Ron said. “Universal Stainless
stands behind its product and has served us well. We’re dealing with the best when we
deal with Universal Stainless. But they understand that being competitive, supplying a
quality product and meeting delivery requirements is what gets my business.”

“The steel needs to be flatter than their competitors’ steel,” Ron said. “Universal Stainless stands behind

its product and has served us well. We’re dealing with the best when we deal with Universal Stainless.”

Ron Cincinnati
President and Owner
Cincinnati Tool Steel Company

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

En h a n c e Cu s t o m e r S e r v i c e

Just as a chain is only as strong as its weakest link, a company
like Pratt & Whitney-Canada knows that each individual
component that goes into its aircraft engines must be flawless.
High quality standards are only the cost of admission –
it’s all but assumed that suppliers have superior products,
otherwise they wouldn’t even be included in the mix.

That, in turn, makes attributes such as accountability and
responsibility all the more important in keeping relationships
alive and flourishing. That’s why Pratt & Whitney-Canada
values its relationship with Universal Stainless.

Universal Stainless produces premium rolled steel at its
Titusville plant for Pratt & Whitney-Canada. The steel
is cut into size by Pratt & Whitney-Canada and used in
compressor mains inside aircraft engines. End-users of these
engines include Cessna, Raytheon, Piper and Air Tractor,
among others.

During a particular production run in 2001, the shape
began to deviate from the required specifications. Universal
Stainless stopped the run, corrected the problem and had
material in production again. It also notified Pratt &
Whitney-Canada that a problem had existed. This kind
of up-front, honest, ethical behavior has earned Universal
Stainless the respect and continued business of Pratt &
Whitney-Canada.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

R e d u c e C o s t s

Reliability means a lot when you promise a quicker turnaround than your competitors.
T&W Forge, based in Alliance, Ohio, has promoted shorter lead times as a primary
competitive advantage. That makes imperative the time-sensitivity of its partners, as well.

After purchasing bars from Universal Stainless, T&W Forge cuts, heats and forges them
for ultimate use within the power generation industry. Universal Stainless is one of a few
mills certified to meet this industry’s stringent specifications.

“Business as usual with Universal Stainless is really business as unusual,” explained Larry
Stalnaker, president of T&W Forge. “Our lead times are about 50% shorter than our
competition. Universal Stainless keeps billets on hand for us, so that they can get rolled
and shipped quickly. Because they’re certified, we don’t have to go shopping around.

“They’re dependable – we’ve never missed a shipment to one of our customers due to a
delay in receiving a shipment from Universal Stainless,” Larry said. “Cost isn’t always the
price you pay up front. It’s how much cost you have in the delivered goods. We’re pretty
happy with the costs from Universal Stainless. That’s because when we make our promises
to customers, we know Universal Stainless will back us up.”

“When we make our promises to customers, we know Universal Stainless will back us up.”

Larry Stalnaker
President
T&W Forge

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

M a i n t a i n a Ni c h e Cu s t o m e r Fo c u s

Exploiting a niche in the marketplace enables companies to succeed on an ongoing
basis, as Fry Steel Company of Los Angeles can attest. It acts as a classic example of
a distributor, purchasing bar product from Universal Stainless and selling it in smaller
chunks to its customers.

“We buy by the ton and sell by the pound,” is how company President Steve Fry explains
it. “We buy stainless bars from Universal Stainless and have been buying from them for
as long as they’ve been in business.”

Universal Stainless knows what Fry Steel
needs, how it sells to its customers, and
how to consistently provide it with stainless
steel bars that keep the Fry sales cycle
moving. According to Steve, quality of the
bar product purchased is never in question,
and savings achieved through efficiency
and volume sales are passed on by Universal
Stainless. All of which is appreciated by
Steve, but there’s one factor in the relationship
that has carried the day from the start.

“There are items Universal Stainless can
make that others can’t,” Steve said. “That
means as they grow, our business with
them will grow accordingly. If Universal
Stainless makes it, we’ll buy it.”

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

“There are items Universal Stainless can make that others can’t. That means as they grow,

our business with them will grow accordingly. If Universal Stainless makes it, we’ll buy it.”

Steve Fry
Chairman, President and Chief Executive Officer
Fry Steel Company

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

R e m e m b e r t h e Cu s t o m e r i s Nu m b e r O n e

When a client has a quality-related issue, Universal Stainless offers not only its operating
professionals to assist in solving it, but also its technical staff. The goal is to help the
client succeed in serving its customer so that it continues to get new orders. Universal
Stainless operates on the philosophy that by making the customer number one – by helping
its customers win – it will continue to win as well.

For example, in the case of Talley Metals Technology Inc., its
long-term relationship with Universal Stainless continued after
Talley was acquired by Carpenter Technology Corp. in 1998.
The following year, Talley and Universal Stainless implemented
a supply agreement that remains in place today. Talley expects –
and receives – a quality product that adheres to rigid specifications
and that is delivered on time.

According to Talley, “Universal Stainless is flexible and will do
what is necessary to support Talley with new chemistry ranges
or accelerated delivery schedules. The key to this business relation-
ship is trust in each other’s commitment and capabilities.”

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

“Universal Stainless is flexible and will do what is necessary to support Talley with new chemistry

ranges or accelerated delivery schedules. The key to this business relationship is trust in each

other’s commitment and capabilities.”

Talley Metals

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

Bridgeville

Titusville

Dunkirk

Fa c i l i t i e s

MELTING AND REFINING

ROLLING

FINISHING

Pr o d u c t s

50-ton electric arc furnace
50-ton AOD vessel
Ladle treatment facility with wire feed
100% bottom pour ingot casting
4 electro-slag remelt furnaces
5 vacuum-arc remelt furnaces

High-lift universal rolling mill
5 hot rolling bar mills
Rod and bar mill
Precision cold rolling mills

Round bar finishing facility
Flat bar finishing facility
Wire finishing facility
Plate flattening and saw cutting
4 milling and grinding machines
Heat treating and annealing facilities

INGOT
REROLL OR FORGING BILLET
FORGED ROUNDS
SLAB
PLATE
BAR

Round
Hexagon
Square
Flat

REBAR
ROD
WIRE
SPECIAL SHAPES

As required
2" – 14" RCS
6" – 15" diameter
6" – 12" thick • 26" – 52" wide
0.5" – 6" thick • 26" – 42" wide
0.187" – 6"
0.187" – 1.875"
0.187" – 3"
0.250" – 9" thick • 0.625" – 18" wide
Sizes #3 to #11
0.217" – 0.843"
0.040" – 0.750"
0.035" – 0.375" thick • 2" – 9" wide

Conversion melting, remelting and rolling are available.

C o n t a c t In f o r m a t i o n

Toll-Free

Phone

Fax

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

600 Mayer Street, Bridgeville, PA 15017
121 Caldwell Street, Titusville, PA 16354

DUNKIRK SPECIALTY STEEL, LLC

88 Howard Avenue, Dunkirk, NY 14048

800.625.7610
800.743.5970

412.257.7600
814.827.9723

412.257.7640
814.827.2766

800.916.9133

716.366.1000

716.366.0478

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

M a n a g e m e n t’s D i s c u s s i o n a n d An a l y s i s
o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e ra t i o n s

R e s u l t s o f O p e ra t i o n s

During 2000, the Company adopted the provisions of the Securities and Exchange Commission’s
(“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” The
application of the SEC’s guidance to the language contained in the Company’s Standard Terms and
Conditions of Sale existing at the time of adoption required the Company to defer revenue until
cash was collected, even though risk of loss passed to the buyer at the time of shipment. This had
the effect of deferring certain sale transactions previously recognized in 1999 into 2000. During the
fourth quarter of 2000, the Company modified its Standard Terms and Conditions of Sale to more
closely reflect the substance of its sale transactions, which resulted in revenue being recorded at the
time of shipment rather than when cash was received. As a result, revenue and cost information in
2000 include amounts related to shipments made during the year as well as amounts deferred from
1999. In order to facilitate analysis of the Company’s results of operations, amounts in the tables
below summarize revenue and cost information based on shipments made by the Company in the
respective years. Such amounts are then reconciled to reported amounts as necessary.

An analysis of the Company’s operations is as follows:

Amount

2001
%

Amount

2000
%

Amount

1999
%

(dollars in thousands)

NET SALES

Stainless steel
Tool steel
High-strength low alloy steel
High-temperature alloy steel
Conversion services
Other
Net sales on shipments
Effect of accounting change
Total net sales

COST OF PRODUCTS SOLD

Raw materials
Other
Total cost of products shipped
Effect of accounting change
Total cost of products sold
Selling and administrative

expenses

Operating income from shipments
Effect of accounting change
Operating income

$ 76,908
4,503
3,379
2,471
3,054
343
90,658
–
90,658

25,791
46,124
71,915
–
71,915

6,199
12,544
–
$ 12,544

84.8%
5.0
3.7
2.7
3.4
0.4
100.0
–
100.0

28.5
50.9
79.4
–
79.4

6.8
13.8
–
13.8%

$ 62,346
6,960
2,161
1,754
2,309
355
75,885
12,462
88,347

26,290
35,583
61,873
9,988
71,861

4,998
9,014
2,474
$ 11,488

Net sales on shipments by market segment are as follows:

(dollars in thousands)

Rerollers
Service centers
Forgers
Original equipment manufacturers
Conversion services
Miscellaneous
Total

Amount

$ 31,936
19,178
18,484
17,714
3,054
292
$ 90,658

2001
%

35.2%
21.2
20.4
19.5
3.4
0.3
100.0%

Amount

$ 33,549
16,137
14,288
9,321
2,309
281
$ 75,885

70.6%
7.9
2.4
2.0
2.6
0.4
85.9
14.1
100.0

29.7
40.3
70.0
11.3
81.3

5.7
10.2
2.8
13.0%

2000
%

44.2%
21.3
18.8
12.3
3.0
0.4
100.0%

$ 55,255
6,055
1,327
2,124
1,807
95
66,663
–
66,663

24,732
33,901
58,633
–
58,633

4,299
3,731
–
$ 3,731

Amount

$ 36,522
11,130
9,185
7,761
1,807
258
$ 66,663

82.9%
9.1
2.0
3.2
2.7
0.1
100.0
–
100.0

37.1
50.9
88.0
–
88.0

6.4
5.6
–
5.6%

1999
%

54.8%
16.7
13.8
11.6
2.7
0.4
100.0%

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

2001 RESULTS AS COMPARED TO 2000 The increase in net sales on shipments in 2001 reflects increased
shipments within each market segment, except Reroller, partially offset by price decreases related
to lower raw material costs. The Company shipped approximately 46,800 tons in 2001, compared
to shipments of 41,800 tons in 2000. The increased sales were primarily due to increased shipments
of power generation, aerospace and petrochemical products to the Company’s reroller, forging,
service center and OEM markets. These increases were partially offset by lower sales of commodity
products to the reroller market and of tool steel products to the service center market, primarily
due to imports and the recessionary economy experienced during 2001.

Cost of products sold, as a percent of net sales, decreased in 2001 as compared to 2000. This
decrease was primarily due to the impact of the change in the mix of products shipped and
the improved operating results at the bar mill. Natural gas costs increased by approximately
$1.3 million in 2001 in comparison to 2000 because of higher rates.

Selling and administrative expenses increased by $1.2 million in 2001 as compared to 2000.
This increase primarily reflects higher insurance and other costs associated with the revenue
growth experienced during 2001. In addition, the Company recorded a $200,000 charge
to demolish certain vacant buildings within the Bridgeville facility, a $190,000 obligation
to its former Vice President of Operations and a $115,000 charge for the services of an
investment banking firm previously engaged to evaluate various strategic alternatives to
increase shareholder value.

Interest expense and other financing costs decreased from $905,000 in 2000 to $576,000 in
2001 primarily due to the continued reduction of long-term debt outstanding and a reduction
in interest rates on the PNC Term Loan.

The 2001 effective income tax rate was 36.5% compared to 37.5% in 2000. The decrease in
the effective income tax rate is primarily attributable to the application of the Extraterritorial
Income Exclusion provisions for federal tax purposes and state tax credits made available to
the Company during 2001.

2000 RESULTS AS COMPARED TO 1999 The increase in net sales on shipments in 2000 reflects an
improved sales mix of products and price increases to cover higher material and energy costs
partially offset by lower shipment volumes. The Company shipped approximately 41,800 tons
in 2000, compared to shipments of 44,800 tons in 1999. The improved sales mix was primarily
due to increased shipments of power generation, aerospace and petrochemical products to the
Company’s reroller, forging and OEM market customers, and tool steel and bar mill products
to the Company’s service center customers. These increases were partially offset by the impact
of lower sales of commodity products due to increased imports.

Cost of products sold, as a percent of net sales, decreased in 2000 as compared to 1999. This
decrease was primarily due to the impact of the change in the mix of products shipped, improved
operating results at the bar mill and higher sales prices.

Selling and administrative expenses increased by $699,000 in 2000 as compared to 1999. This
increase reflects higher employment and insurance costs.

Interest expense and other financing costs increased from $736,000 in 1999 to $905,000 in 2000
primarily due to a reduction in capitalized interest and higher interest rates on the PNC Term Loan.

The 2000 effective income tax rate was 37.5% compared to 30.5% in 1999. The increase in
the effective income tax rate is primarily attributable to the reduced impact of the Company’s
permanent state tax deductions resulting from higher income levels in 2000.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

L i q u i d i t y a n d C a p i t a l R e s o u r c e s

The Company generated cash flow from operations in 2001 and 2000 of $11.9 million and
$6.3 million, respectively. This increase is primarily due to the increase in net income and the
impact of changes in deferred taxes, partially offset by an increase in working capital.

At December 31, 2001, working capital approximated $28.7 million, as compared to $23.6 million
at December 31, 2000. The ratio of current assets to current liabilities at December 31, 2001 and
2000, was 4.0:1 and 3.2:1, respectively. The debt to capitalization ratio was 13% at December 31,
2001 and 17% at December 31, 2000. The increase in working capital is primarily attributable
to the increase in cash and cash equivalents generated from operations.

CAPITAL EXPENDITURES AND INVESTMENTS The Company’s capital expenditures were approximately
$5.3 million and $4.6 million in 2001 and 2000, respectively, which primarily reflect the installation
of a new electro-slag remelt furnace and building improvements at the Bridgeville facility. Capital
expenditures not associated with the acquisition described below are expected to approximate
$4.0 million in 2002 and will be used primarily to complete projects previously initiated and
to upgrade or replace various pieces of equipment at the Bridgeville and Titusville facilities.
These expenditures are expected to be funded substantially from internally generated funds and
additional borrowings.

The Company does not maintain off-balance sheet arrangements nor does it participate in
non-exchange traded contracts requiring fair value accounting treatment or material related
party transaction arrangements.

PNC CREDIT AGREEMENT On June 29, 2001 the Company entered into a third amendment to the
second amended and restated credit agreement with PNC Bank which extended the term of
the $6.5 million revolving credit facility (“PNC Line”) to April 30, 2003. This credit agreement
also includes a term loan (“PNC Term Loan”) scheduled to mature in June 2006 and is collater-
alized by substantially all of the Company’s assets.

Interest on borrowings under the PNC Line and the PNC Term Loan is based on short-term
market rates, which may be further adjusted based upon the Company maintaining certain
financial ratios. As a condition of the PNC Line and the PNC Term Loan, the Company is
required to maintain certain levels of net worth, working capital and other financial ratios;
to limit the amount of capital expenditures it may incur without PNC Bank’s approval; and to
restrict the payment of dividends. As of December 31, 2001, the Company was in compliance
with all financial ratios and restrictive covenants.

STOCK REPURCHASE PROGRAM On October 19, 1998, the Company initiated a stock repurchase
program to repurchase up to 315,000 shares of its outstanding Common Stock in open market
transactions at market prices. There were 12,000 shares of Common Stock repurchased by the
Company during 2001. The Company is authorized to repurchase an additional 45,100 shares
of Common Stock as of December 31, 2001.

SUPPLY CONTRACT The Company maintains a supply contract agreement with Talley Metals
Technology, Inc., a subsidiary of Carpenter Technology Corporation, which is currently effective
through December 2002. Under terms of the agreement, the Company will supply Talley Metals
with an average of 1,250 tons of stainless reroll billet products per month. The value of the contract
on a monthly basis will depend on product mix and key raw material prices.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

ENVIRONMENTAL MATTERS The Company, as well as other steel companies, is subject to demanding
environmental standards imposed by federal, state and local environmental laws and regulations.
In connection with the 1994 acquisition of the Bridgeville facility assets from Armco, which merged
with and into AK Steel in 1999 (“Armco”), Armco agreed to retain responsibility for liabilities
asserted against it under environmental laws with respect to environmental conditions existing
at the Bridgeville facility prior to commencement of the long-term net lease of that facility on
August 15, 1994, and to indemnify the Company up to $6.0 million in the aggregate over ten
years. Such indemnification expires on August 15, 2004.

In connection with the Company’s June 2, 1995 agreement with Armco to purchase certain assets
and a parcel of real property located at Titusville, Armco agreed to indemnify the Company up to
$3.0 million in the aggregate for liabilities under environmental laws arising out of conditions on
or under the Titusville property existing prior to June 2, 1995. Armco’s obligation to indemnify
the Company for any liabilities arising out of environmental conditions existing off-site as of
June 2, 1995, is not subject to the $3.0 million limitation.

Management is not aware of any financial difficulties being experienced by AK Steel, as successor
to Armco, that would prevent its performance under the acquisition agreements. In addition,
management is not aware of any environmental conditions or the incurrence of other liabilities
at the Bridgeville or Titusville facilities, for which Armco has agreed to indemnify the Company,
nor of any material environmental condition requiring remediation and affecting the Company.

CRITICAL ACCOUNTING POLICIES Revenue recognition is the most critical accounting policy of
the Company. The Company manufactures specialty steel product in accordance with customer
purchase orders that contain specific product requirements. Each purchase order provides detailed
information regarding the requirements for product acceptance. Executed material certification
forms are completed indicating the Company’s compliance with the customer purchase order
before the specialty steel products are packaged and shipped to the customer. Revenue is generally
recognized at point of shipment because risk of loss and title have transferred. During 2001,
revenue was recognized in certain situations in which products available for shipment are held
at the Company’s facility beyond the stated shipment date at the customer’s specific request.

In addition, management constantly monitors the ability to collect its unpaid sales invoices and
the valuation of its inventory. The allowance for doubtful accounts includes the value of out-
standing invoices issued to customers currently operating under the protection of the federal
bankruptcy law and other amounts that are deemed potentially not collectable. An inventory
reserve is provided for material on hand for which management believes cost exceeds fair market
value and for certain material on hand not assigned to a specific customer order.

NEW ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board (“FASB”) Statement
No. 133, “Accounting for Derivative Instruments and Hedging Activities” was issued in June
1998, and amended in June 1999 and in June 2000, pursuant to FASB Statement No. 137,
“Accounting for Derivative Instruments and Hedging Activities: Deferral of the Effective Date
of FASB Statement No. 133” and FASB Statement No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Activities: an amendment of FASB No. 133,” respectively.
These statements require that an entity recognize certain derivative instruments as either assets
or liabilities in the statement of financial position and measure those instruments at fair value.
The adoption of these statements on January 1, 2001, did not impact the Company’s results
of operations or financial condition.

In July 2001, the FASB issued Statement No. 141, “Business Combinations” and Statement
No. 142, “Goodwill and Other Intangible Assets.” In August 2001, the FASB issued Statement
No. 143, “Accounting for Asset Retirement Obligations.” In October 2001, the FASB issued
Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” These
statements will be adopted in 2002 and are not expected to impact the Company’s results of
operations or financial condition.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

SHORT- AND LONG-TERM LIQUIDITY The Company expects to meet substantially all of its short-term
liquidity requirements with internally generated funds and borrowings under the PNC Credit
Agreement. At December 31, 2001, the Company had $5.5 million in cash and $6.5 million
available under the PNC Line.

The Company’s long-term liquidity depends upon its ability to obtain additional orders from
its customers, attract new customers and control costs during periods of low demand or pricing.
At this time, management intends to closely monitor its discretionary spending until general
economic conditions improve.

SECTION 201 On October 22, 2001, the U.S. International Trade Commission (“ITC”) determined
that imports of certain stainless steel and alloy tool steel products are seriously injuring the domestic
specialty steel industry. This determination allows the President of the United States, under Section
201 of the 1974 Trade Act, to restrict imports or impose tariffs on some or all of the products at
issue. On March 5, 2002, the President imposed tariffs on certain imported stainless steel rod, bar
and wire products ranging from 6% to 15% over the next three years. At this time, the Company
is unable to determine the potential impact of the imposed remedy on the Company’s future results
of operations and liquidity requirements.

SUBSEQUENT EVENT On February 14, 2002, the Company, through its wholly owned subsidiary,
Dunkirk Specialty Steel, LLC (“Dunkirk Specialty Steel”) acquired from the New York Job
Development Authority (“JDA”) certain assets formerly owned by Empire Specialty Steel, Inc.
(“Empire”) at its idled production facility located in Dunkirk, NY (the “Dunkirk facility”). The
assets acquired include the inventory; property, plant and equipment; and selected intangible
assets. The purchase price of $4.0 million will be funded with $1.0 million in cash, paid at
closing, and ten-year, 5% interest bearing notes payable to the JDA in the amount of $3.0 million.
No principal or interest payments are payable during the first year. The Company will not assume
any liabilities of Empire. Capital expenditures are expected to approximate $6.0 million at the
Dunkirk facility in 2002.

GENERAL Actual results will be affected by a wide range of factors including the start-up of the
Dunkirk, New York production facility; the receipt, pricing and timing of future customer orders;
changes in product mix; the concentrated nature of the Company’s customer base to date and the
Company’s dependence on its significant customers; the Company’s reliance on certain critical
manufacturing equipment; the limited number of raw material and energy suppliers and significant
fluctuations that may occur in raw material and energy prices; and the Company’s ongoing require-
ment for continued compliance with environmental laws. Any unfavorable change in the foregoing
or other factors could have a material adverse effect on the Company’s business, financial condition
and results of operations. Many of these factors are not within the Company’s control, and there can
be no assurances regarding the Company’s future sales or earnings. For a discussion of these and
other matters, refer to the Company’s Annual Report on Form-10K for the year ended December 31,
2001 and other reports on file with the Securities and Exchange Commission.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

R e p o r t o f In d e p e n d e n t Ac c o u n t a n t s

To t h e B o a rd o f D i re c t o r s a n d St o c k h o l d e r s o f Un i v e r s a l St a i n l e s s & Al l o y Pr o d u c t s , In c .

In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations and of cash flows present fairly, in all material respects, the financial
position of Universal Stainless & Alloy Products, Inc., and its subsidiary (the “Company”) at
December 31, 2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial statements are
the responsibility of the Company’s management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Note 1 to the financial statements, the Company adopted the provisions of the
Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, “Revenue Recognition
in Financial Statements,” in 2000.

PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania
January 18, 2002, except for Note 12,
which is as of February 14, 2002

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

C o n s o l i d a t e d St a t e m e n t o f O p e ra t i o n s

For the years ended December 31,

(dollars in thousands, except per share information)

Net sales
Cost of products sold
Selling and administrative expenses
Operating income
Interest expense and other financing costs
Other income (expense), net
Income before taxes and cumulative effect of accounting change
Provision for income taxes
Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
Net income

EARNINGS PER COMMON SHARE

Basic
Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
Net income

Diluted
Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
Net income

2001

2000

1999

$ 90,658
71,915
6,199
12,544
(576)
57
12,025
4,386
7,639
–
$ 7,639

1.26
–
1.26

1.25
–
1.25

$ 88,347
71,861
4,998
11,488
(905)
(3)
10,580
3,970
6,610
(1,546)
$ 5,064

1.09
(0.26)
0.83

$ 66,663
58,633
4,299
3,731
(736)
30
3,025
922
2,103
–
$ 2,103

0.34
–
0.34

Weighted average number of shares of Common Stock outstanding

6,080,045

6,074,701

6,110,911

The accompanying notes are an integral part of these consolidated financial statements.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

C o n s o l i d a t e d B a l a n c e S h e e t s

December 31,

(dollars in thousands)

ASSETS

Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for doubtful accounts of $434 and $192)
Inventory
Deferred taxes
Other current assets
Total current assets
Property, plant and equipment, net
Other assets
Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Trade accounts payable
Outstanding checks in excess of bank balance
Current portion of long-term debt
Accrued employment costs
Other current liabilities
Total current liabilities
Long-term debt
Deferred taxes
Total liabilities

Commitments and Contingencies
Stockholders’ Equity
Senior Preferred Stock, par value $.001 per share; liquidation

value $100 per share; 2,000,000 shares authorized;
0 shares issued and outstanding

Common Stock, par value $.001 per share; 10,000,000 shares authorized;

6,347,172 and 6,339,128 shares issued

Additional paid-in capital
Retained earnings
Treasury Stock at cost; 269,900 and 257,900 common shares held
Total stockholders’ equity
Total liabilities and stockholders’ equity

The accompanying notes are an integral part of these consolidated financial statements.

2001

2000

$ 5,454
13,257
17,900
1,022
460
38,093
41,202
151
$ 79,446

$ 4,597
857
1,832
1,562
590
9,438
6,490
7,146
23,074

$ 1,109
12,819
18,788
958
389
34,063
39,090
594
$ 73,747

$ 5,624
1,445
1,808
1,297
331
10,505
8,199
6,276
24,980

–

6
25,941
32,056
(1,631)
56,372
$ 79,446

6
25,888
24,417
(1,544)
48,767
$ 73,747

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

C o n s o l i d a t e d St a t e m e n t o f C a s h Fl o w s

For the years ended December 31,

(dollars in thousands)

Cash flows from operating activities
Net income
Adjustments to reconcile to net cash and cash equivalents

provided by operating activities:
Depreciation and amortization
Deferred taxes

Changes in assets and liabilities:
Accounts receivable, net
Inventory
Accounts payable
Accrued employment costs
Other, net

Net cash provided by operating activities

Cash flows from investing activities
Capital expenditures
Net cash used in investing activities

Cash flows from financing activities
Proceeds from long-term debt
Long-term debt repayment
Borrowings under revolving line of credit
Repayments under revolving line of credit
Increase (decrease) in outstanding checks in excess of bank balance
Proceeds from issuance of Common Stock
Purchase of Treasury Stock
Net cash used in financing activities
Net increase (decrease) in cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

Supplemental disclosure of cash flow information
Interest paid (net of amount capitalized)
Income taxes paid

The accompanying notes are an integral part of these consolidated financial statements.

2001

2000

1999

$ 7,639

$ 5,064

$ 2,103

2,782
1,087

(438)
888
(1,027)
265
709
11,905

(5,253)
(5,253)

136
(1,821)
8,893
(8,893)
(588)
53
(87)
(2,307)
4,345
1,109
$ 5,454

2,466
1,509

(706)
(3,058)
147
570
293
6,285

(4,598)
(4,598)

–
(1,834)
14,107
(14,107)
338
50
–
(1,446)
241
868
$ 1,109

2,101
354

(3,270)
452
2,311
(230)
1,146
4,967

(3,366)
(3,366)

–
(1,117)
22,310
(22,310)
(38)
51
(1,066)
(2,170)
(569)
1,437
868

$
605
$ 3,144

$
827
$ 1,593

$
$

774
388

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

No t e s t o t h e C o n s o l i d a t e d F i n a n c i a l St a t e m e n t s

No t e 1 : S i g n i f i c a n t Ac c o u n t i n g Po l i c i e s

DESCRIPTION OF THE COMPANY Universal Stainless & Alloy Products, Inc. (the “Company”)
manufactures and markets semi-finished and finished specialty steel products, including stainless
steel, tool steel and certain other alloyed steels. The Company’s manufacturing process involves
melting, remelting, treating and hot and cold rolling of semi-finished and finished specialty steels.
The Company’s products are sold to rerollers, forgers, service centers and original equipment
manufacturers, which primarily include the power generation and aerospace industries. The
Company also performs conversion services on materials supplied by customers that lack certain
of the Company’s production facilities or that are subject to their own capacity constraints.

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

BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation.

CASH AND CASH EQUIVALENTS Cash equivalents are stated at cost plus accrued interest, which
approximates market value. Cash equivalents include only securities having a maturity of three
months or less at the time of purchase.

CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to
concentrations of credit risk are cash and cash equivalents and accounts receivable. The Company
limits its credit risk associated with cash and cash equivalents by placing its investments in high-
grade short-term instruments. With respect to accounts receivable, the Company limits its credit
risks by performing ongoing credit evaluations and, when deemed necessary, requiring letters
of credit, guarantees or collateral.

INVENTORIES Inventories are stated at the lower of cost or market with cost principally determined
by the first-in, first-out (FIFO) method. The average cost method is also utilized. Such costs include
the acquisition cost for raw materials and supplies, direct labor and applied manufacturing overhead.
Provisions are made for slow moving inventory based upon management’s expected method of disposition.

Scrap metal together with alloy additives, principally nickel, chrome and molybdenum, currently
account for more than 35% of the Company’s total cost of products sold. A substantial portion of
the alloy additives is available only from foreign sources, some of which are located in countries
that may be subject to unstable political and economic conditions. Those conditions might disrupt
supplies or affect the prices of the raw materials used by the Company. The Company maintains
sales price surcharges to help offset the impact of raw material price fluctuations.

Included in inventory are operating materials consisting of production molds and rolls that will
normally be consumed within one year.

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Costs incurred in
connection with the construction or major rebuild of facilities, including interest directly related to the
project, are capitalized as construction in progress. No depreciation is recognized on these assets
until placed in service. Maintenance and repairs are charged to expense as incurred, and costs of
improvements and renewals are capitalized. Major maintenance costs are expensed in the same annual
period as incurred; however, the estimated costs are expensed throughout the year on a pro rata basis.

Depreciation and amortization are computed using the straight-line method based on the estimated
useful lives of the related assets. The estimated useful lives of plant and equipment range from
three to twenty years. Depreciation expense for fiscal year 2001, 2000 and 1999 is $2,764,000,
$2,448,000 and $2,083,000, respectively.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

The Company’s manufacturing processes are dependent upon certain pieces of specialty steelmaking
equipment, such as the Company’s electric arc furnace and universal rolling mill. In the event a
critical piece of equipment should become inoperative as a result of an unexpected equipment failure,
there can be no assurance that the Company’s operations would not be substantially curtailed.

SFAS 121 IMPAIRMENT Long-lived assets, including property, plant and equipment are evaluated for
impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable in relation to the operating performance and future undiscounted
cash flows of the underlying assets. Adjustments are made if the sum of expected future cash flows
is less than book value. Based on management’s assessment of the carrying values of such long-lived
assets, no impairment reserve has been deemed necessary as of December 31, 2001 and 2000.

CAPITALIZATION OF SOFTWARE COSTS Direct costs incurred in the development and implementation
of internal-use software is capitalized and amortized on a straight-line basis over its anticipated
useful life, which generally does not exceed three years.

REVENUE RECOGNITION Revenue from the sale of products is recognized when both risk of loss and title
has transferred to the customer, which in most cases coincides with shipment of the related products.
Revenue from conversion services is recognized when the performance of the service is complete.

INCOME TAXES Deferred income taxes are provided for the tax effect of temporary differences between
the tax basis of assets and liabilities and their reported amounts in the financial statements. The
Company uses the liability method to account for income taxes, which requires deferred taxes to be
recorded at the statutory rate expected to be in effect when the taxes are paid. Deferred tax assets
are reduced by a valuation allowance if it is more likely than not that the asset will not be realized.

EARNINGS PER COMMON SHARE Basic earnings per common share is computed by dividing net income
by the weighted-average number of common shares outstanding during the period. Diluted earnings
per common share is computed by dividing net income by the weighted-average number of
common shares outstanding plus all dilutive potential common shares outstanding during the
period. Dilutive common shares are determined using the treasury stock method. Under the
treasury stock method, exercise of options and warrants are assumed at the beginning of the period
when the average stock price during the period exceeds the exercise price of outstanding options
and warrants and, common shares are assumed issued. The proceeds from exercise are assumed to
be used to purchase common stock at the average market price during the period. The incremental
shares to be issued are considered to be the dilutive potential common shares outstanding.

In 2000, the Company changed its method of accounting for revenue

ACCOUNTING CHANGE
recognition in accordance with the provisions of the Securities and Exchange Commission’s (“SEC”)
Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.”
SAB 101, required to be adopted retroactive to January 1, 2000, outlined certain criteria that
must be met to recognize revenue. As a result of the adoption of SAB 101, the Company determined
that the application of the SEC’s guidance to the language that existed in the Company’s Standard
Terms and Conditions of Sale required the Company to defer revenue recognition until cash was
collected, even though risk of loss transferred to the buyer at time of shipment. This had the effect
of deferring certain 1999 sale transactions aggregating $12,462,000 into 2000. The cumulative
effect of this change in accounting principle was a charge of $1,546,000, net of tax benefits of
$928,000. Pro forma earnings per share amounts for the year ended December 31, 1999, assuming
SAB 101 had been applied retroactively, is as follows:

(dollars in thousands, except per share information)

Net income
Basic earnings per share
Diluted earnings per share

As Reported

Pro Forma

$ 2,103
$ 0.34
$ 0.34

$ 1,854
$ 0.30
$ 0.30

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

NEW ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board (“FASB”) Statement
No. 133, “Accounting for Derivative Instruments and Hedging Activities” was issued in June 1998,
and amended in June 1999 and in June 2000, pursuant to FASB Statement No. 137, “Accounting
for Derivative Instruments and Hedging Activities: Deferral of the Effective Date of FASB Statement
No. 133” and FASB Statement No. 138, “Accounting for Certain Derivative Instruments and Certain
Hedging Activities: an amendment of FASB No. 133,” respectively. These statements require that an
entity recognize certain derivative instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The adoption of these statements
on January 1, 2001, did not impact the Company’s results of operations or financial condition.

No t e 2 : In v e n t o r y

The major classes of inventories are as follows:

December 31,

(dollars in thousands)

Raw materials and supplies
Semi-finished and finished steel products
Operating materials
Total inventory

No t e 3 : Pr o p e r t y, P l a n t a n d E q u i p m e n t

Property, plant and equipment consists of the following:

December 31,

(dollars in thousands)

Land and land improvements
Buildings
Machinery and equipment
Construction in progress

Accumulated depreciation
Property, plant and equipment, net

2001

2000

$ 1,880
13,593
2,427
$ 17,900

$ 1,695
13,916
3,177
$ 18,788

2001

2000

822
4,701
43,572
2,641
51,736
(10,534)
$ 41,202

822
3,889
39,838
2,311
46,860
(7,770)
$ 39,090

Property, plant and equipment includes a capital lease with Armco, which merged with and into
AK Steel in 1999 (“Armco”), for the land and certain buildings and structures located in Bridgeville
(the “Bridgeville Lease”). The Bridgeville Lease is for a ten-year term which commenced on August 15,
1994, with three five-year options to renew on the same terms at the Company’s discretion at a
rental of $1 per year plus payment of real and personal property taxes and other charges associated
with the property. The Company also has an option under the lease to buy substantially all of the
leased premises for $1 at any time during the term of the Bridgeville Lease prior to August 15, 2015.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

No t e 4 : L o n g - Te r m D e b t a n d O t h e r F i n a n c i n g

Long-term debt consists of the following:

December 31,

(dollars in thousands)

PNC Term Loan
Government debt
Capital lease obligations

Less amounts due within one year
Total long-term debt

2001

2000

$ 6,500
1,598
224
8,322
(1,832)
$ 6,490

$ 7,900
1,922
185
10,007
(1,808)
$ 8,199

On June 29, 2001, the Company entered into a third amendment to the second amended and
restated credit agreement with PNC Bank which extended the term of the $6.5 million revolving
credit facility (“PNC Line”) to April 30, 2003. This credit agreement, which also includes a term
loan (“PNC Term Loan”) scheduled to mature in June 2006, is collateralized by substantially all
of the Company’s assets.

Interest on borrowings under the PNC Line and the PNC Term Loan is based on short-term
market rates, which may be further adjusted based upon the Company maintaining certain
financial ratios. The PNC Term Loan currently bears interest at a rate equal to the Euro-dollar
rate plus an interest rate spread not to exceed 175 basis points. As a condition of the PNC
Line and the PNC Term Loan, the Company is required to maintain certain levels of net worth,
working capital and other financial ratios; to limit the amount of capital expenditures it may
incur without PNC Bank’s approval; and to restrict the payment of dividends.

The Company has entered into several separate loan agreements with the Commonwealth of
Pennsylvania’s Department of Commerce aggregating $1,600,000 with terms ranging from
seven to twenty years. In 1996, the Company entered into a ten-year loan agreement with the
Redevelopment Authority of Allegheny County Economic Development Fund in the amount
of $1,514,000. The loans bear interest at rates ranging from 5% to 6% per annum.

Scheduled maturities of long-term obligations for the next five years are as follows:

(dollars in thousands)

2002
2003
2004
2005
2006
Thereafter

1,832
1,723
1,662
1,747
1,042
316

No t e 5 : In c o m e Ta x e s

Components of the provision for income taxes are as follows:

For the years ended December 31,

2001

2000

1999

(dollars in thousands)

Current provision:
Federal
State

Deferred provision (benefit):
Federal
State

Provision for income taxes

$ 3,160
139
3,299

903
184
1,087
$ 4,386

$ 2,461
–
2,461

1,238
271
1,509
$ 3,970

512
56
568

457
(103)
354
922

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

The income tax benefit resulting from recording the cumulative effect on prior years due to the
change in revenue recognition policy was $928,000.

A reconciliation of the federal statutory tax rate and the Company’s effective tax rate is as follows:

For the years ended December 31,

2001

2000

1999

Federal statutory tax
State income taxes, net of federal benefit
Other, net
Effective tax rate

34.0%
2.3
0.2
36.5%

34.0%
3.3
0.2
37.5%

34.0%
(2.2)
(1.3)
30.5%

Deferred taxes result from the following:

December 31,

(dollars in thousands)

Deferred tax assets:
Receivables
Inventory
Net operating loss carry forwards
Accrued liabilities

Deferred tax liabilities:
Property, plant and equipment

2001

2000

187
600
–
235
$ 1,022

77
736
281
145
$ 1,239

$ 7,146

$ 6,276

No t e 6 : St o c k h o l d e r s’ E q u i t y

(dollars in thousands)

Balance at

December 31, 1998

Common Stock issuance
under Employee Stock
Purchase Plan

Purchase of Treasury Stock
Net income
Balance at

December 31, 1999

Common Stock issuance
under Employee Stock
Purchase Plan

Net income
Balance at

December 31, 2000

Common Stock issuance
under Employee Stock
Purchase Plan

Purchase of Treasury Stock
Net income

Balance at

Common
Shares
Outstanding

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Treasury
Shares

Treasury
Stock

6,320,036

$ 6

$ 25,787

$ 17,250

75,000

(478)

10,380

6,330,416

8,712

6,339,128

182,900

(1,066)

2,103

25,838

19,353

257,900

(1,544)

5,064

25,888

24,417

257,900

(1,544)

8,044

12,000

(87)

7,639

December 31, 2001

6,347,172

$ 6

$ 25,941

$ 32,056

269,900

$ (1,631)

On October 19, 1998, the Company’s Board of Directors authorized a stock repurchase program.
Under the program, the Company may repurchase up to 315,000 shares, or approximately 5%,
of the Company’s Common Stock in open market transactions at market prices. At December 31,
2001, the Company is authorized to repurchase 45,100 additional shares of the Company’s
Common Stock.

The Company has 2,000,000 authorized shares of Senior Preferred Stock. At December 31, 2001
and 2000, there were no shares issued or outstanding.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

No t e 7 : B a s i c a n d D i l u t e d E a r n i n g s Pe r C o m m o n S h a re

The computation of basic and diluted earnings per share for the years ended December 31, 2001,
2000 and 1999 is performed as follows:

Income

2001
Shares

Income

2000
Shares

Income

1999
Shares

(dollars in thousands, except share amounts and per share amounts)

Income available to common

Stockholders

Effect of dilutive securities
Income available to common

Stockholders plus
assumed conversion

$ 7,639

6,080,045
17,379

$ 5,064

6,074,701
5,057

$ 2,103

6,110,911
–

$ 7,639

6,097,424

$ 5,064

6,079,758

$ 2,103

6,110,911

Basic earnings per common share
Income before cumulative

effect of accounting change

Net income

Diluted earnings per common share
Income before cumulative effect

of accounting change

Net income

$ 1.26
$ 1.26

$ 1.25
$ 1.25

No t e 8 : St o c k C o m p e n s a t i o n P l a n s

$ 1.09
$ 0.83

$ 0.34
$ 0.34

At December 31, 2001, the Company has two stock-based compensation plans that are
described below:

INCENTIVE COMPENSATION PLAN

On September 23, 1994, the Company’s Board of Directors adopted the Company’s 1994 Stock
Incentive Plan as amended (the “1994 Plan”) for the purpose of issuing stock options to non-
employee directors, other than those directors owning more than 5% of the Company’s outstanding
Common Stock, officers and other key employees of the Company who are expected to contribute
to the Company’s future growth and success. Under the 1994 Plan, the Company may grant
options up to a maximum of 650,000 shares of Common Stock. Options granted to non-employee
directors vest over a three-year period, and options granted to employees vest over a four-year
period. All options under the 1994 Plan will expire no later than ten years after the grant date.

A summary of the 1994 Plan activity as of and for the years ended December 31, 2001, 2000
and 1999 is presented below:

522,500
100,000
–
(5,000)
617,500
472,746

2001
Weighted-
Average
Exercise
Price

$ 9.58
8.22
–
9.88
$ 9.36

$ 4.07

482,500
40,000
–
–
522,500
414,287

2000
Weighted-
Average
Exercise
Price

$ 9.79
7.13
–
–
$ 9.58

$ 3.63

488,500
40,000
–
(46,000)
482,500
364,165

1999
Weighted-
Average
Exercise
Price

$ 10.10
6.06
–
9.90
$ 9.79

$ 2.89

Fixed options
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Options exercisable at year-end
Weighted-average fair value of

options granted during the year

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

The following table summarizes information about stock options outstanding at December 31, 2001.

Range of
Exercise Prices

$6.06 to $12.25

Weighted-
Average
Remaining
Contractual Life

Options Outstanding
Weighted-
Average
Exercise
Price

Options Exercisable
Weighted-
Average
Exercise
Price

Number
Exercisable

Number
Outstanding

617,500

6.0

9.36

472,746

$ 9.82

EMPLOYEE STOCK PURCHASE PLAN

Under the 1996 Employee Stock Purchase Plan, the Company is authorized to issue up to 90,000
shares of Common Stock to its full-time employees, nearly all of whom are eligible to participate.
Under the terms of the plan, employees can choose as of January 1 and July 1 of each year to
have up to 10% of their total earnings withheld to purchase shares of the Company’s Common
Stock. The purchase price of the stock is 85% of the lower of its beginning-of-the-period or
end-of-the-period market prices. At December 31, 2001, the Company has issued 45,539 shares
of Common Stock since the plan’s inception.

The Company applies Accounting Principles Board Opinion 25 and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plan and its stock purchase plan. Had compensation cost
for the Company’s stock-based compensation plans been determined based on the fair value of
the awards at the grant dates in accordance with Financial Accounting Standards Board Statement
123, the Company’s net income and earnings per share would have been reduced to the pro forma
amounts indicated below:

For the years ended December 31,

2001

2000

1999

(dollars in thousands, except per share amounts)

Net income

As reported
Pro forma

Basic earnings per share

As reported
Pro forma

$ 7,639
$ 7,508

$ 1.26
$ 1.23

$ 5,064
$ 4,714

$ 0.83
$ 0.78

$ 2,103
$ 1,704

$ 0.34
$ 0.28

The fair value of each option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for grants issued in
2001, 2000 and 1999 respectively; dividend yield of 0.0% for each year; interest rate of 5.0%,
6.0% and 6.0%; expected volatility of 50.0%, 50.0% and 45.0%; and expected lives for options
of five years.

CASH-INCENTIVE PLANS

The Company has a management cash-incentive plan covering certain key executives and employees and
profit-sharing plans that cover the remaining employees. The profit-sharing plans provide for the sharing
of pre-tax profits in excess of specified amounts. For the years ended December 31, 2001, 2000 and
1999, the Company expensed $1,949,000, $1,328,000 and $445,000, respectively, under these plans.

No t e 9 : R e t i re m e n t P l a n s

The Company has defined contribution retirement plans that cover substantially all employees.
The Company accrues its contributions to the hourly employee plan based on time worked
while contributions to the salaried plan are accrued as a fixed amount per month. Company
contributions to both plans are funded periodically. The total expense for the years ended
December 31, 2001, 2000 and 1999 was $413,000, $320,000 and $284,000, respectively.

No other post-retirement benefit plans exist.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

No t e 1 0 : C o m m i t m e n t s a n d C o n t i n g e n c i e s

The Company, as well as other steel companies, is subject to demanding environmental standards
imposed by federal, state and local environmental laws and regulations. In connection with the 1994
acquisition of the Bridgeville facility assets from Armco, Armco agreed to retain responsibility for
liabilities asserted against it under environmental laws with respect to environmental conditions
existing at the Bridgeville facility prior to commencement of the Bridgeville Lease on August 15,
1994, and to indemnify the Company up to $6.0 million in the aggregate over ten years. Such
indemnification expires on August 15, 2004.

The Company maintains insurance for both property damage and business interruption applicable
to its production facilities, including the universal rolling mill.

The Company maintains a supply contract agreement with Talley Metals Technology, Inc., a
subsidiary of Carpenter Technology Corporation, which is currently effective through December
2002. Under terms of the agreement, the Company will supply Talley Metals with an average of
1,250 tons of stainless reroll billet products per month. The value of the contract on a monthly
basis will depend on product mix and key raw material prices.

No t e 1 1 : S e g m e n t a n d R e l a t e d In f o r m a t i o n

The Company is comprised of two operating locations, the Bridgeville facility and the Titusville
facility, and one corporate headquarters. The nature of the products and services, production
processes, customer type and distribution methods are generally similar for both operating
locations. In addition, the assessment of performance and allocation of resources is performed
by the chief operating decision-maker at the corporate level rather than by operating location.
As such, the Company operates as a single segment.

The following table presents net sales by product line:

(dollars in thousands)

Stainless steel
Tool steel
High-strength low alloy steel
High-temperature alloy steel
Conversion services
Other
Net sales on shipments
Effect of accounting change
Total net sales

2001

2000

1999

$ 76,908
4,503
3,379
2,471
3,054
343
90,658
–
$ 90,658

$ 62,346
6,960
2,161
1,754
2,309
355
75,885
12,462
$ 88,347

$ 55,255
6,055
1,327
2,124
1,807
95
66,663
–
$ 66,663

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

Net sales on shipments from the Company’s largest customer and its affiliates, which were generated
primarily from the Bridgeville operations, approximated 32%, 39% and 48% of 2001, 2000 and
1999 net sales, respectively. Net sales on shipments from the Company’s second largest customer
and its affiliates, which were generated from the Bridgeville and Titusville operations, approximated
12%, 6% and 6% of 2001, 2000 and 1999 net sales, respectively. The accounts receivable balances
from these two customers comprised approximately 29% and 36% of total accounts receivable at
December 31, 2001 and 2000, respectively.

The Company derives less than 10% of its revenues from markets outside of the United States
and the Company has no assets located outside the United States.

No t e 1 2 : Su b s e q u e n t Ev e n t

On February 14, 2002, the Company, through its wholly owned subsidiary, Dunkirk Specialty
Steel, LLC (“Dunkirk Specialty Steel”) acquired from the New York Job Development Authority
(“JDA”) certain assets formerly owned by Empire Specialty Steel, Inc. (“Empire”) at its idled
production facility located in Dunkirk, NY (the “Dunkirk facility”). The assets acquired include
the inventory; property, plant and equipment; and selected intangible assets. The purchase price of
$4.0 million will be funded with $1.0 million in cash, paid at closing, and ten-year, 5% interest
bearing notes payable to the JDA in the amount of $3.0 million. No principal or interest payments
are payable during the first year. The Company will not assume any liabilities of Empire. Capital
expenditures are expected to approximate $6.0 million at the Dunkirk facility in 2002.

No t e 1 3 : Q u a r t e r l y F i n a n c i a l D a t a ( u n a u d i t e d )

In 2000, the Company adopted the provisions of SAB 101 retroactive to January 1, 2000.

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

(dollars in thousands, except per share amounts)

2001 DATA

Net sales
Gross profit
Operating income
Net income

Earnings per common share:
Basic
Diluted

2000 DATA

Net sales
Gross profit
Operating income
Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
Net income (loss)

Earnings per common share:
Basic

Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
Net income (loss)

Diluted

Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
Net income (loss)

$ 21,259
4,138
2,580
1,512

$ 24,233
5,026
3,210
1,908

$ 23,344
5,152
3,851
2,330

$ 21,822
4,427
2,903
1,889

$
$

0.25
0.25

$
$

0.31
0.31

$
$

0.38
0.38

$
$

0.31
0.31

$ 17,770
3,044
1,941
1,128
(1,546)
(418)

0.19
(0.26)
$ (0.07)

$ 18,522
2,640
1,207
622
–
622

0.10
–
0.10

$ 18,587
3,676
2,406
1,273
–
$ 1,273

0.21
–
0.21

$ 33,468(a)
7,126
5,934
3,587
–
$ 3,587

0.59
–
0.59

(a) During the fourth quarter of 2000, the Company modified its Standard Terms and Conditions of Sale to more closely reflect the substance of its sale transactions,

which resulted in revenue being recorded at the time of shipment rather than when cash was received.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

Pr i c e R a n g e o f C o m m o n St o c k

The Common Stock is listed on the NASDAQ National Market under the symbol “USAP.” The
following table sets forth the range of high and low sale prices per share of Common Stock,
for the periods indicated below:

YEAR 2001

First quarter
Second quarter
Third quarter
Fourth quarter

YEAR 2000

First quarter
Second quarter
Third quarter
Fourth quarter

High

Low

$ 8.06
$ 10.40
$ 10.73
$ 8.49

$ 7.56
$ 7.75
$ 7.19
$ 8.25

$ 7.00
$ 7.19
$ 6.84
$ 6.85

$ 5.69
$ 5.63
$ 6.38
$ 6.69

The Company has never paid a cash dividend on its Common Stock and currently has no plans to
pay dividends in the foreseeable future. The PNC Credit Agreement contains restrictions on the
Company’s ability to pay dividends on Common Stock.

Fo r w a rd - L o o k i n g In f o r m a t i o n a n d S a f e Ha r b o r

This Annual Report contains historical information and forward-looking statements. Statements
looking forward in time, including statements regarding future growth, cost savings, expanded
production capacity, broader product lines, greater capacity to meet customer quality reliability,
price and delivery needs, enhanced competitive posture and the effect of new accounting pronounce-
ments are included in this Annual Report pursuant to the “safe harbor” provision of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties
that may cause the Company’s actual results in future periods to be materially different from any
future performance suggested herein. Further, the Company operates in an industry sector where
securities values may be volatile and may be influenced by economic and other factors beyond the
Company’s control. In the context of the forward-looking information provided in this Annual
Report, please refer to the discussions of risk factors detailed in, as well as the other information
contained in, this Annual Report and the Company’s filings with the Securities and Exchange
Commission during the past 12 months.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

F i v e - Ye a r Su m m a r y

For the years ended December 31,

2001

2000(a)

1999

1998

1997

(dollars in thousands, except per share amounts)

SUMMARY OF OPERATIONS

Net sales
Operating income
Income before cumulative effect

of accounting change

Cumulative effect of accounting

change, net of tax

Net income

PRO FORMA SUMMARY OF OPERATIONS (b)

Net sales
Operating income
Net income

FINANCIAL POSITION AT YEAR-END

Working capital
Total assets
Total debt
Stockholders’ equity

COMMON SHARE DATA

Basic earnings per share:

As reported
Pro Forma under SAB 101 (b)

Diluted earnings per share:

As reported
Pro Forma under SAB 101 (b)

Stockholders’ equity

OTHER DATA

EBITDA(c)
Capital expenditures
Depreciation and amortization
Return on stockholders’ equity
Debt to total capitalization
Employees
Customers

$ 90,658
12,544

$ 88,347
11,488

$ 66,663
3,731

$ 72,595
7,566

$ 81,301
11,574

–

6,610

–
7,639

(1,546)
5,064

$ 90,658
12,544
7,639

$ 28,655
79,446
8,322
56,372

1.26
1.26

1.25
1.25
9.28

$ 15,365
5,253
2,782

$ 88,347
11,488
6,610

$ 23,558
73,747
10,007
48,767

0.83
1.09

0.83
1.09
8.03

$ 11,459
4,598
2,466

–

–
2,103

$ 63,330
3,373
1,854

$ 20,800
68,179
11,841
43,653

0.34
0.30

0.34
0.30
7.19

$ 5,844
3,366
2,101

–

–
5,004

$ 78,170
8,437
5,558

$ 21,829
64,450
12,958
42,565

0.79
0.88

0.79
0.87
6.82

$ 8,960
12,146
1,516

–

–
7,206

$ 76,229
11,049
6,875

$ 20,086
56,151
5,779
37,768

1.15
1.09

1.12
1.07
6.00

$ 12,741
8,145
1,109

13.6%
12.9
304
288

10.4%
17.0
280
250

4.8%

21.3
277
235

11.8%
23.3
280
200

19.1%
13.3
270
167

AVERAGE SHARES OUTSTANDING (in thousands)

Basic
Diluted

6,080
6,097

6,075
6,080

6,111
6,111

6,305
6,355

6,286
6,417

(a) Includes $12,462,000 of net sales and $9,988,000 of costs of sales associated with revenues recognized in 1999 but deferred until 2000 as a result of implementing

Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” The 2000 results of operations also include the impact of changing the Company’s

Standard Terms and Conditions to more closely reflect the substance of its sales transactions.

(b) Includes the effect of implementing Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” as required under generally accepted accounting

principles in 2000.

Universal Stainless & Alloy Products, Inc. 2001 Annual Report

D i re c t o r s

C o r p o ra t e In f o r m a t i o n

DOUGLAS M. DUNN

EXECUTIVE OFFICES

Universal Stainless & Alloy Products, Inc.
600 Mayer Street
Bridgeville, PA 15017
Telephone: 412-257-7600

ANNUAL MEETING

The Annual Meeting of Stockholders will be
held at 10 a.m. on Tuesday, May 21, 2002, at
the Southpointe Golf Club, Canonsburg, PA.

STOCKHOLDER INFORMATION

Universal Stainless & Alloy Products, Inc.’s
Annual Report, Form 10-K and other reports
filed with the Securities and Exchange
Commission can be obtained, without charge,
by writing to the Vice President of Finance
at the Executive Offices.

TRANSFER AGENT AND REGISTRAR

Continental Stock Transfer & Trust Company
2 Broadway
New York, NY 10004

STOCK LISTING

NASDAQ Symbol: USAP

WEB SITE ADDRESS

www.univstainless.com

Dean of Graduate School
of Industrial Administration
Carnegie Mellon University

GEORGE F. KEANE

President Emeritus
Common Fund Group

CLARENCE M. McANINCH

President and Chief Executive Officer
Universal Stainless & Alloy Products, Inc.

UDI TOLEDANO

President
Millennium 3 Capital, Inc.

D. LEONARD WISE

Former President and Chief Executive Officer
Carolina Steel Corporation

O f f i c e r s

CLARENCE M. McANINCH

President and Chief Executive Officer

RICHARD M. UBINGER

Vice President of Finance,
Chief Financial Officer and Treasurer

PAUL A. McGRATH

Vice President of Operations,
General Counsel and Secretary

M a n a g e m e n t

MICHAEL J. OBIECUNAS

Director, Employee Relations

BRUCE A. KRAMER

Director, Purchasing and Production Planning

KEITH A. ENGLEKA

Director, Technology

DAVID M. BLANCHARD

Manager, PRP Division

Design Mizrahi Design Associates, Inc. www.mizrahidesign.com Printing Broudy Printing Inc.

Universal Stainless & Alloy Products, Inc.

600 Mayer Street
Bridgeville, PA 15017

P: 412.257.7600
F: 412.257.7640