Universal Stainless & Alloy Products Annual Report 2003

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FY2003 Annual Report · Universal Stainless & Alloy Products

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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

2003 ANNUAL REPORT

1
2
1

4
1.
1

1
8

0
3

3
5

6
4

2
4

4
3

1
1.

Capital Expenditures

in millions

3
9
3

3
8
3

0
8
0 2
7
2

7
7
2

4
0
0 3
8
2

8
0
2

2
7
1

4
0
1

Employees

9
9
3

2
7
3

8
8
2

0
5
5 2
3
2

0
0
2

7
6
1

6
3
1

7
7

5
2

Customers

Letter to Our Stockholders

2003 was marked by a weak economy, softness in the aerospace and power generation markets, and erosion
of market prices by desperate competitors. We worked hard at maintaining pricing discipline, reducing costs and
increasing efficiency. We attained sales of $69 million, about even with last year, but incurred a net loss of $1.4 million
or $0.23 per diluted share compared with net income of $2.1 million or $0.34 per diluted share in 2002. Our balance
sheet remained strong, however, and by year-end our cash position neared $5 million and our debt to total capitalization
ratio was one of the best in the industry.

Despite the year’s challenges, we made progress in every quarter and emerged stronger, smarter and more assured
of the soundness of the decisions made and actions taken in the past year and since the Company’s inception in
1994. As we enter 2004, we are increasingly confident that we have turned the corner toward renewed growth.

Our strategic principles are the same today as they were 10 years ago when we started Universal Stainless
& Alloy Products:

n Focus on niche markets as the primary source of profitable growth.

n Maintain positive employee relations as the backbone of efficient and productive operations.

n Lower costs and make strategic investments as the constant, day-to-day means of maintaining

a well-run company.

n Build stockholder value as the engine of ongoing success.

One of our main areas of focus in 2003 was Dunkirk Specialty Steel. The customer count grew from 98 to 164 at
Dunkirk and its backlog doubled. However, Dunkirk’s markets were particularly hard hit in 2003. Troubled competitors,
in an effort to survive, undermined product pricing. We had to forego many orders to maintain our pricing discipline
and, as a result, did not reach our sales goal. Nevertheless, we are confident that our discipline will ensure
Dunkirk’s long-term profitability and expect to begin delivering on its substantial potential in 2004.

Another area of focus this past year was to streamline production across all our facilities. The demands of each
customer for on-time delivery and ever increasing quality required us to add a new level of control to the manufacturing
side of the business, which included standardization of certain manufacturing processes and the installation of
our enhanced i2 Factory Planner production scheduling system. Our customers historically have chosen Universal
Stainless for the superior quality of our products, and these improvements will enable us to deliver on that promise
to an even greater extent.

Effective sales and marketing are key to our future success both at Dunkirk and company-wide. We recognize
that customer service and satisfaction are key to the implementation of our business strategy. To that end, we
have added a Vice President of Sales and Marketing for Universal Stainless, Dudley Merchant, who has more
than 25 years of experience in the specialty steel industry. By taking this step, we will be able to pursue additional
opportunities to serve our customers in our niche markets.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

2003 ANNUAL REPORT

We have entered 2004 with many reasons for optimism. The U.S. economy is moving in the right direction.
Our backlog at year-end 2003 was at an 18-month high and continues to improve. Our company-wide customer
count continues to grow. We are seeing signs of recovery in the power generation market, petrochemical sales
remain strong and we are gaining share in the aerospace market.

We also are executing our strategy with very specific initiatives:

n We remain focused on raising efficiency and lowering costs. We have achieved the lowest per-unit and

per-man-hour costs in our history. We will continue to improve through our upgraded inventory management
system as well as through careful capital investments in new and upgraded equipment to enhance performance
and control quality and costs. The new state-of-the-art gas system recently installed on our AOD vessel is one
example of this focus.

n We are maintaining our pricing discipline, which is especially important in the current climate of high raw

material costs.

n We are maintaining our focus on niche markets and working firm-wide to seize the sales potential of the
re-emerging power generation market as well as the aerospace market. Selling commodity products may
have a place at Universal Stainless at some point, but it will be at a point of our choosing.

n The benefits of our enhanced sales capability and the improving economy are already being seen at Dunkirk.
We are fully committed to utilizing our Dunkirk plant for the purpose we envisioned – to transform Universal
Stainless into a fully integrated specialty steel producer capable of serving more than 90 percent of domestic
steel needs.

A decade of discipline has helped us emerge from 2003 viable, healthy and ready to capitalize on a wider economic
recovery that is now coming into view. On the following pages, we recap highlights from our first 10 years in
business. The point to be illustrated is that the history of Universal Stainless is one of clear direction, great people
and adherence to an effective strategy. We believe our next 10 years – and beyond – will continue that legacy.

On behalf of our employees and our board of directors, we thank you for your continued support and belief in this
strategic approach in 2003. We look forward to a strong performance in 2004 as we work to maximize your return
on investment in this Company.

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

Executive Team

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
Richard J. Pincoski, General Manager, Dunkirk Specialty Steel, LLC
Randall J. Lehrian, Acting General Manager, Titusville Operation

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

4 A DECADE OF DISCIPLINE

FOLLOWING THE PATH TO GROWTH:
THE FIRST 10 YEARS

The Universal Stainless & Alloy Products strategy was at the foundation

of everything we accomplished in 2003.

Our adherence to our strategy since 1994 has enabled the Company

to achieve steady growth from the start and to weather the down economy

for the past two years. Today, with an economy on the rise, we are confident

that our original strategy will carry us forward into a new period of growth.

On these pages, you will see specific examples of how we applied our

strategy since our inception – all of which offer evidence that Universal

Stainless has identified a sound path to ongoing growth. We plan to keep

following it.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

OUR STRATEGY AT WORK IN 2003

Expand our range of higher value products offered within niche markets.

With the continued progress of Dunkirk Specialty Steel in 2003, Universal Stainless increased its sales in two

of its key niche markets — aerospace and petrochemical. In fact, Dunkirk’s sales to those markets more than

doubled over 2002.

5
9
9
1

The Titusville acquisition expands the Company’s

product offerings to the aerospace and power

generation markets.

Universal Stainless comes to life with the first

melt of specialty steel product on September 9.

4
9
9
1

The Bridgeville Melt Shop and Universal
Rolling Mill represent the core assets that
will generate future growth.

5
9
9
1

The Titusville facility converts coiled strip,
flat bar and extruded bar into customized,
precision-rolled special shapes.

Maintain a productive alliance with our employees.

We challenged our employees in 2003 to identify and implement cost reduction initiatives. They met that

challenge by standardizing manufacturing processes in connection with the melting and remelting of our

specialty steel grades. In addition, Dunkirk’s standardization efforts resulted in a 50-basis-point improvement

in their direct margin.

6
9
9
1

Capital investments begin with the

rebuild of the 50-ton electric arc

furnace in the Bridgeville Melt Shop.

7
9
9
1

The addition of the bar mill allows

Universal Stainless to serve the

flat bar segment. The capabilities

8
9
9
1

The addition of the round bar

finishing facility represents

Bridgeville’s entry into the

of the mill were expanded to also

finished product market.

serve the round bar segment.

The round bar finishing technology meets
expanded customer demand efficiently.

8
9
9
1

Identify opportunities to lower manufacturing costs of high-quality products.

Capital spending in the melt shop was continued in 2003 to keep efficiency and performance high. The company

upgraded controls on all four ESR furnaces and the AOD vessel, which also received a new gas system. We continue

to enhance our manufacturing scheduling functions through the upgrade of our existing Factory Planner software.

9
9
9
1

New hood-type annealing furnaces

meet the needs of our targeted

niche markets.

The addition of the billet grinder addresses

forging market requirements.

0
0
0
2

The Oliver plate saw enables expansion
into plate product markets.

0
0
0
2

1
0
0
2

Fourth electro-slag remelt furnace comes
on line flawlessly to meet anticipated

power generation market demands.

Focus on building value for stockholders.

Our cost reduction efforts combined with carefully targeted and controlled capital expenditures enabled us to

maintain positive cash flow and a strong balance sheet during a challenging economic period. A decade of

discipline has helped us emerge from 2003 viable, healthy and ready to capitalize on a wider economic recovery

that is now coming into view.

The Olson furnace is used to provide

quality rod and wire products.

2
0
0
2

The Dunkirk Specialty Steel acquisition

increases the Company’s capability

to participate in the finished specialty

3
0
0
2

The upgrade of the i2 Technologies’

Factory Planner software will provide

new opportunities to improve the supply

steel market from 25 percent to more

chain between facilities and generate

than 90 percent.

additional cost savings.

3
0
0
2

Disciplined execution of our
strategies over the past decade
positions us to build profitable
growth, one step at a time.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

BRIDGEVILLE

TITUSVILLE DUNKIRK

BRIDGEVILLE

TITUSVILLE

DUNKIRK

FACILITIES

Melting and Refining

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

Rolling

High-lift universal rolling mill

5 hot rolling bar mills

Rod and bar mill

Precision cold rolling mills

Finishing

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

PRODUCTS
Ingot

Reroll or forging billet

Forged rounds

Round

Hexagon

Square

Flat

Slab

Plate

Bar

Rebar

Rod

Wire

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

0.200" – 0.843"

0.030" – 0.750"

Special shapes

0.035" – 0.375" thick • 2" – 9" wide

Conversion melting, remelting and rolling are available.

CONTACT INFORMATION

Universal Stainless & Alloy Products, Inc.
600 Mayer Street

121 Caldwell Street

Bridgeville, PA 15017

800.625.7610

412.257.7600

412.257.7640 FAX

Titusville, PA 16354

800.743.5970

814.827.9723

814.827.2766 FAX

Dunkirk Specialty Steel, LLC

88 Howard Avenue

Dunkirk, NY 14048

800.916.9133

716.366.1000

716.366.0478 FAX

2003 FINANCIAL REVIEW

8 Management’s Discussion and Analysis of Financial Condition

and Results of Operations

17 Report of Management

17 Report of Independent Accountants

18 Consolidated Statement of Operations

19 Consolidated Balance Sheets

20 Consolidated Statement of Cash Flows

21 Notes to the Consolidated Financial Statements

32 Five-Year Summary

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

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

Results of Operations

On February 8, 2002, the Company, through its wholly-owned subsidiary, Dunkirk Specialty Steel, LLC (“Dunkirk Specialty
Steel”) entered into a Property Asset Purchase Agreement and a Real Property Purchase Agreement (the “Purchase
Agreements”) with the New York Job Development Authority (the “JDA”) to acquire certain assets and real property formerly
owned by Empire Specialty Steel, Inc. at its idled production facility located in Dunkirk, New York. These transactions were
completed on February 14, 2002 and the facility became operational on March 14, 2002.

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

For the years ended December 31,

Amount

2003
%

Amount

2002
%

Amount

2001
%

(dollars in thousands)

Net Sales

Stainless steel
Tool steel
High-strength low alloy steel
High-temperature alloy steel
Conversion services
Other

$ 52,546
9,673
2,869
2,482
1,079
340

76.2%
14.0
4.1
3.6
1.6
0.5

$ 56,813
6,643
2,213
3,474
1,495
239

80.1%
9.4
3.1
4.9
2.1
0.4

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

84.8%
5.0
3.7
2.7
3.4
0.4

Total net sales
Total cost of products sold
Selling and administrative expenses

68,989
65,534
5,837

100.0
95.0
8.5

70,877
61,971
5,883

100.0
87.4
8.3

90,658
71,915
6,199

100.0
79.4
6.8

Operating income (loss)

$ (2,382)

(3.5)% $

3,023

4.3%

$ 12,544

13.8%

Net sales by market segment are as follows:

For the years ended December 31,

(dollars in thousands)

Service centers
Rerollers
Forgers
Original equipment manufacturers
Wire redrawers
Conversion services
Miscellaneous

Net sales

Tons shipped

Amount

2003
%

Amount

2002
%

Amount

2001
%

$ 29,150
20,240
9,773
5,124
3,328
1,079
295

42.3%
29.3
14.2
7.4
4.8
1.6
0.4

$ 23,478
26,791
8,370
8,578
1,926
1,495
239

33.1%
37.8
11.8
12.1
2.7
2.1
0.4

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

21.2%
35.2
20.4
19.5
—
3.4
0.3

$ 68,989

100.0%

$ 70,877

100.0%

$ 90,658

100.0%

35,100

38,400

46,800

2003 Results as Compared to 2002 The decrease in net sales in 2003 reflects reduced demand for commodity reroller
and power generation products, which was partially offset by increased demand for petrochemical, tool steel and
aerospace products. During the first half of 2002, demand for commodity reroller products had increased as a result of
the Section 201 tariffs imposed by President Bush in March 2002 on imported specialty steel products. This trend did not
continue beyond that period. The decline in demand for power generation products continued in 2003 primarily due to
production cutbacks of power generation equipment initiated in 2002. Increased demand for aerospace and petrochemical
products is primarily due to the increased product capabilities resulting from the acquisition of Dunkirk Specialty Steel in
2002. The increase in tool steel demand is primarily attributable to the Company increasing its market share from a new
customer obtained in 2002.

Cost of products sold, as a percent of net sales, increased in 2003 as compared to 2002. This increase is primarily due to
higher raw material, labor and energy costs, as well as shifts in product mix and lower production volumes during the first six
months of 2003. In addition, Dunkirk Specialty Steel has not generated sufficient production volumes to operate profitably.

Selling and administrative expenses remained relatively constant between 2002 and 2003. Increased business insurance
costs in 2003 were more than offset by a $267,000 one-time charge for production process, security and maintenance
modifications enacted while the Bridgeville facility operated under a day-to-day extension of its collective bargaining
agreement from August 31, 2002 to December 7, 2002.

Interest expense and other financing costs decreased from $455,000 in 2002 to $383,000 in 2003. The decrease was
primarily due to the Company continuing to fund the scheduled payments on existing debt without incurring additional debt.

Other income (expense), net decreased from $457,000 in 2002 to $128,000 in 2003. The decrease was primarily due to
the receipt of $310,000, net of expenses, under the Continued Dumping and Subsidy Act of 2000 (“CDSOA”) in 2002.
In 2003, the Company received notice that it was awarded $604,000, of which $10,000 was received. The remaining
payment has been delayed pending the outcome of a hearing before the U.S. Court of Appeals for the Federal Circuit in
a lawsuit challenging the distribution method of the import duties. The Company will not record the uncollected portion of
the award as income unless the funds are collected.

The 2003 effective income tax rate was 46.3% compared to 30.8% in 2002. The increase in the effective income tax
rate is primarily attributable to the impact of recognizing a loss in 2003 against the tax credit benefits generated by the
Company from operating Dunkirk Specialty Steel within a New York State Empire Zone. The Company recognized
$185,000 of these income tax credits in 2003 in comparison to $340,000 in 2002.

2002 Results as Compared to 2001 The decrease in net sales in 2002 reflects reduced demand from two important end
markets, aerospace and power generation. Net sales to those markets in 2002 decreased 36% and 53%, respectively,
from 2001. These declines are primarily due to production cutbacks of power generation equipment and commercial
aircraft. Sales of bar, rod and wire products from Dunkirk Specialty Steel, and increased sales of tool steel and commodity
reroller products have partially offset the lower sales to the power generation and aerospace markets. During the first half
of 2002, management believed the increase in demand for tool steel products represented the beginning of an economic
recovery. In addition, the increase in demand for commodity reroller products reflected the impact of the Section 201 tariffs
imposed by President Bush in March 2002 on imported specialty steel products. These trends did not continue during the
second half of the year.

Cost of products sold, as a percent of net sales, increased in 2002 as compared to 2001. This increase is primarily due to
the shift in product mix, lower production volumes at the Bridgeville and Titusville facilities, and the start-up costs incurred
relating to Dunkirk Specialty Steel.

Selling and administrative expenses decreased by $316,000 in 2002 as compared to 2001. The Bridgeville facility
operated under a day-to-day extension of its collective bargaining agreement from August 31, 2002 to December 7, 2002.
While the facility operated under the extension, management modified certain aspects of the facility’s normal operations
relating to production processes, security and maintenance to accommodate the situation. These modifications resulted in
a $267,000 increase in selling and administrative expenses. This event and the inclusion of direct expenses of $740,000
associated with Dunkirk Specialty Steel were more than offset by a $283,000 decrease in bad debt expense and the
absence of several significant charges in 2001. The 2001 charges included a $200,000 charge to demolish certain vacant
buildings within the Bridgeville facility, a $190,000 obligation to a former Vice President of Operations and a $115,000
charge for the services of an investment banking firm.

Interest expense and other financing costs decreased from $576,000 in 2001 to $455,000 in 2002. The decrease was
primarily due to a reduction in borrowings under the revolving line of credit with PNC Bank and lower interest rates
between the two periods. This decrease was partially offset by the amortization of the discount recognized on the debt
issued in conjunction with the acquisition of the Empire Specialty Steel assets by Dunkirk Specialty Steel.

Other income (expense), net increased from $57,000 in 2001 to $457,000 in 2002. The increase was primarily due to an
increase in cash available for investing during the respective periods and the receipt of $310,000, net of expenses, under
the CDSOA.

The 2002 effective income tax rate was 30.8% compared to 36.5% in 2001. The decrease in the effective income tax rate
is primarily attributable to tax credit benefits and the impact of permanent tax differences applied against lower levels of
income in 2002. Dunkirk Specialty Steel operates within a New York State Empire Zone that allowed the Company to
recognize $340,000 of income tax credits in 2002.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

Business Segment Results

The Company is comprised of three operating locations and one corporate headquarters. For segment reporting, the
Bridgeville and Titusville facilities have been aggregated into one reportable segment, Universal Stainless & Alloy Products,
because of the management reporting structure in place. The Universal Stainless & Alloy Products manufacturing process
involves melting, remelting, treating and hot and cold rolling of semi-finished and finished specialty steels. A second
reportable segment, Dunkirk Specialty Steel, was created in 2002 as a result of the acquisition of certain assets and real
property formerly owned by Empire Specialty Steel, Inc. Dunkirk Specialty Steel’s manufacturing process involves hot
rolling and finishing specialty steel bar, rod and wire products.

Universal Stainless & Alloy Products Segment An analysis of the segment’s operations is as follows:

For the years ended December 31,

(dollars in thousands)

Net Sales

Stainless steel
Tool steel
High-temperature alloy steel
High-strength low alloy steel
Conversion services
Other

Intersegment

Total net sales
Material cost of sales
Operation cost of sales
Selling and administrative expenses

Amount

2003
%

Amount

2002
%

Amount

2001
%

$ 35,946
9,097
1,965
1,672
926
302

49,908
9,677

59,585
28,969
26,947
3,918

60.3%
15.3
3.3
2.8
1.6
0.5

83.8
16.2

100.0
48.6
45.2
6.6

$ 48,193
6,568
3,237
1,922
1,400
220

61,540
8,580

70,120
30,084
30,466
4,557

68.7%
9.4
4.6
2.8
2.0
0.3

87.8
12.2

100.0
42.9
43.4
6.5

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

90,658
—

90,658
25,990
45,925
6,199

84.8%
5.0
3.7
2.7
3.4
0.4

100.0
—

100.0
28.7
50.7
6.8

Operating income (loss)

(249)

(0.4)% $

5,013

7.2%

$ 12,544

13.8%

Net sales for the year ended December 31, 2003 decreased $10.5 million, or 15%, in comparison to the year ended
December 31, 2002 primarily due to a 47% and 32% decline in revenues associated with commodity reroll and power
generation products, respectively. These declines were partially offset by a 39% increase in tool steel product revenues.
Operating income (loss) for the year ended December 31, 2003 decreased $5.3 million primarily due to higher raw
material, labor and energy costs, partially offset by an improved product mix.

Net sales for the year ended December 31, 2002 decreased $20.5 million, or 23%, in comparison to the year ended
December 31, 2001 primarily due to a 57% and 43% decline in revenues associated with power generation and aerospace
products, respectively. These declines were partially offset by a 62% and 46% increase in commodity reroll and tool steel
product revenues, respectively. Operating income for the year ended December 31, 2002 decreased $7.5 million primarily
due to lower production volumes and an unfavorable shift in product mix.

Dunkirk Specialty Steel Segment An analysis of the segment’s operations is as follows:

For the years ended December 31,

(dollars in thousands)

Net Sales

Stainless steel
High-strength low alloy steel
Tool steel
High-temperature alloy steel
Conversion services
Other

Intersegment

Total net sales
Material cost of sales
Operation cost of sales
Selling and administrative expenses

Amount

2003
%

Amount

2002
%

$ 16,600
1,197
576
517
153
38

19,081
794

19,875
11,080
9,009
1,919

83.5%
6.0
2.9
2.6
0.8
0.2

96.0
4.0

8,620
291
75
237
95
19

9,337
1,146

100.0
55.7
45.3
9.7

10,483
5,945
5,202
1,326
(10.7)% $ (1,990)

82.2%
2.8
0.7
2.3
0.9
0.2

89.1
10.9

100.0
56.7
49.6
12.7

(19.0)%

Operating income (loss)

$ (2,133)

Net sales for the year ended December 31, 2003 increased $9.4 million, or 90%, in comparison to the year ended
December 31, 2002 primarily due to more than 100% increases in revenue associated with aerospace and petrochemical
products. The operating loss for the year ended December 31, 2003 increased $143,000 primarily due to a $947,000
increase in fixed manufacturing costs and selling and administrative costs partially offset by higher direct margins
attributable to cost reduction initiatives implemented in the manufacturing process.

Net sales for the year ended December 31, 2002 primarily reflect sales of commodity, aerospace and petrochemical
products to service centers, OEMs and wire redrawers. The operating loss primarily relates to the start-up costs incurred
since February 14, 2002 and production volumes below the level necessary to sufficiently absorb the period costs incurred.

Liquidity and Capital Resources

The Company generated cash flow from operations of $3.8 million in each year ended December 31, 2003 and 2002.
Cash received from sales of $68.4 million and $72.2 million for the years ended December 31, 2003 and 2002,
respectively, represent the primary source of cash from operations. An analysis of the primary uses of cash is as follows:

For the years ended December 31,

(dollars in thousands)

Raw material purchases
Employment costs
Utilities
Other

Total uses of cash

Amount

2003
%

Amount

2002
%

$ 22,628
19,518
9,689
12,828

35.0%
30.2
15.0
19.8

$ 23,548
19,383
7,960
17,498

34.5%
28.3
11.6
25.6

$ 64,663

100.0%

$ 68,389

100.0%

Raw material purchases decreased in 2003 in comparison to 2002 primarily due to lower quantities of product purchased
partially offset by higher transaction prices. Increased employment and utility costs are primarily due to higher costs and
the impact of Dunkirk Specialty Steel operating for the full year of 2003, partially offset by lower production volumes at
the Company’s Bridgeville and Titusville facilities. The reduction in other uses of cash is primarily attributable to receiving
$1.5 million of federal and state income tax refunds in 2003 as compared to paying $1.3 million for federal and state
income taxes in 2002, as well as lower production volumes.

At December 31, 2003, working capital approximated $33.4 million, as compared to $33.5 million at December 31, 2002.
Reductions in inventory during 2003 were partially offset by increased raw material costs incurred during the year. The cost
of raw materials contained within work-in-process inventory is approximately $2.1 million higher at December 31, 2003, as
compared to December 31, 2002, as a result of increased raw material transaction prices. The Company continuously
monitors market price fluctuations of its key raw materials. The following table reflects the average market value per pound
for selected months during the last twelve-month period.

Nickel
Chrome
Molybdenum
Carbon Scrap

December
2002

3.26
0.33
3.51
0.06

$
$
$
$

March
2003

3.80
0.40
4.68
0.07

$
$
$
$

June
2003

4.03
0.45
5.63
0.06

$
$
$
$

September
2003

December
2003

$
$
$
$

4.52
0.47
6.14
0.08

$
$
$
$

6.43
0.54
7.10
0.09

Increased demand from foreign (primarily China) and domestic sources caused raw material market values to rise
significantly between June 2003 and December 2003. The market values for these raw materials, most notably carbon
scrap, have continued to increase in 2004. In response, the Company announced sales price increases of 3% effective
January 2, 2004 and an additional 4% effective February 4, 2004. In addition, the Company began to calculate its nickel
surcharge using an $0.18 per pound premium over the London Metal Exchange prices on February 4, 2004. In response
to the unprecedented market value increase in carbon scrap of approximately 40% since December 2003, the Company
changed its raw material surcharge formula to include an iron surcharge component on February 16, 2004. There can be
no assurance that these sales price increases will completely offset its rising costs or that adequate supplies of raw
materials will continue to be available to meet market demand.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

Capital Expenditures and Investments The Company’s capital expenditures, excluding the costs of the Dunkirk Specialty
Steel acquisition in 2002, were approximately $1.2 million and $4.2 million in 2003 and 2002, respectively. The reduction
in capital expenditures in 2003 is primarily due to the market conditions experienced during the first half of 2003. In
addition, the 2003 capital expenditures were partially offset by the Company entering into a $200,000 Deferred Loan
Agreement maturing on December 31, 2006 with the Dunkirk Local Development Corporation. No principal or interest
payments will be required under the Deferred Loan Agreement provided that the Company hires 30 new employees and
more than 50% of those jobs are made available to certain Dunkirk City residents. The Company believes that it will meet
the conditions of the Deferred Loan Agreement, although it can make no assurances to that effect. Therefore, the proceeds
have been applied to reduce the acquisition cost of new equipment at the Company’s Dunkirk facility.

Capital expenditures are expected to approximate $4.0 million in 2004, based on current market conditions, and will be
used primarily to upgrade or replace various pieces of equipment at the Bridgeville, Titusville and Dunkirk facilities.
Commitments of additional capital expenditures may occur if market conditions continue to improve.

Capital Resources Including Off-Balance Sheet Arrangements 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 The Company maintains a credit agreement with PNC Bank for a $6.5 million revolving credit
facility (“PNC Line”) through April 30, 2005. This credit agreement also includes a term loan (“PNC Term Loan”) scheduled
to mature in June 2006 and 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. In addition, the Company pays a commitment
fee of 0.5% per annum on the unused portion of the PNC Line. 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.

In 2003, the Company executed the Seventh Amendment to the Second Amended and Restated Credit Agreement with
PNC Bank. The amendment replaced certain financial covenants with an asset-based funding formula that will permit the
Company full access to the PNC Line. As of December 31, 2003, the Company was in compliance with all financial ratios
and restrictive covenants in effect. The Company believes it will maintain compliance with the financial covenants in effect
throughout 2004.

Government Financing Programs The Company has entered into several separate loan agreements with the Commonwealth
of Pennsylvania’s Department of Commerce aggregating $1.6 million with terms ending between the years 2002 and
2016. The loans bear interest at rates ranging from 5% to 6% per annum. In 1996, the Company entered into a ten-year,
6% interest-bearing loan agreement with the Redevelopment Authority of Allegheny County Economic Development Fund
in the amount of $1,514,000.

On February 14, 2002, Dunkirk Specialty Steel issued two ten-year, 5% interest-bearing notes payable to the JDA (the
“JDA Notes”) for the combined amount of $3.0 million. No principal or interest payments were due under the notes during
the first year. The notes were recorded net of a $143,000 debt discount, of which $125,000 was amortized in 2002 and
included as interest expense. The balance was amortized and included as interest expense in 2003.

Stock-Based Financing Activity The Company issued 9,768 and 207,366 shares of its Common Stock for the years ended
December 31, 2003 and 2002, respectively, through its two stock-based compensation plans. In 2002, certain members
of the Company’s Board of Directors exercised 200,000 stock options issued under the Stock Incentive Plan for $1.9 million
plus related tax benefits of $417,000. The remaining shares were issued to employees participating in the Employee Stock
Purchase Plan.

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. The Company repurchased no shares of
Common Stock during 2003 and 2002. The Company is authorized to repurchase 45,100 additional shares of Common
Stock under this program as of December 31, 2003.

Short- and Long-Term Liquidity The Company expects to meet substantially all of its short-term liquidity requirements
resulting from operations and current capital investment plans with internally generated funds and borrowings under the
PNC Credit Agreement. At December 31, 2003, the Company had $4.7 million in cash and $6.5 million available under
the PNC Line. In addition, the ratio of current assets to current liabilities at December 31, 2003 was 4.2:1 and the debt
to total capitalization ratio was 11.3%.

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 continue
monitoring its discretionary spending closely until the Company returns to profitable operations.

Contractual Obligations At December 31, 2003, the Company had the following contractual obligations:

(dollars in thousands)

Long-term debt
Capital lease obligations
Operating lease obligations
Purchase obligations

Total

8,476
80
206
1,931

Less than
1 Year

2,219
33
67
1,931

1-3
Years

3,717
47
86
—

Total contractual obligations

$ 10,693

4,250

3,850

3-5
Years

936
—
53
—

989

More than
5 Years

1,604
—
—
—

1,604

Long-term debt includes the PNC Term Loan. The Company has fixed the rate of interest at 3.77% through December 12,
2004. The table assumes the Company will maintain that interest rate until maturity. Purchase obligations include the value
of all open purchase orders with established quantities and purchase prices as well as minimum purchase commitments
under various utility contracts. One utility contract expires in August 2004. The table assumes the minimum monthly
payment under this contract is $60,000.

Market Risk The Company does not use derivative financial instruments to reduce its financial risk. The Company’s
customers and suppliers absorb fluctuations in foreign currency exchange rates. In addition, the Company does not
maintain long-term, fixed cost supply agreements for its major raw material and natural gas requirements. Prices for the
Company’s raw materials and natural gas requirements are subject to frequent market fluctuations, and profit margins may
decline in the event market values increase. Selling price increases and surcharges are implemented to offset raw material
and natural gas market price increases.

The Company is exposed to market risk from changes in interest rates related to its long-term debt. At December 31,
2003, $3.8 million of the Company’s total long-term debt and capital lease obligations has fixed interest rates. The
remaining $3.7 million represents the PNC Term Loan outstanding balance that bears a variable interest rate.

Supply Contract The Company maintains a supply contract agreement with Talley Metals Technology, Inc., a subsidiary of
Carpenter Technology Corporation (“Talley Metals”). While the initial term of the agreement expired December 31, 2002,
the agreement continues to automatically renew with the placement of new orders each month and requires a 90-day
written notice to terminate by either party. In addition, Talley Metals is required under the agreement to purchase a minimum
of 1,000 tons of stainless reroll billet products each calendar month and average at least 1,250 tons per month during the
last twelve-month period. The value of the contract on a monthly basis will depend on product mix and key raw material
prices. During 2002 and 2003, Talley Metals did not comply with the monthly minimum purchase requirement due to
market conditions. The Company has entered into negotiations with Talley Metals to modify the terms of the agreement.
The Company has granted a waiver and expects to continue granting a waiver from this requirement until the terms of the
contract are renegotiated.

Import Protections On October 22, 2001, the U.S. International Trade Commission determined that imports of certain
stainless steel and alloy tool steel products were seriously injuring the domestic specialty steel industry. On March 5, 2002,
President Bush imposed tariffs on certain imported stainless steel rod, bar and wire products ranging from 6% to 15%
over the next three years under Section 201 of the 1974 Trade Act. During the 2002 second quarter, the Company
experienced a significant increase in demand for commodity reroller products. This trend did not continue beyond the
2002 second quarter. President Bush ended the imposed tariffs on December 4, 2003.

The assets purchased by Dunkirk Specialty Steel were previously owned and operated by AL Tech Specialty Steel, Inc.
and Empire Specialty Steel, Inc. During their ownership, both organizations participated in several anti-dumping lawsuits
with other domestic specialty steel producers. CDSOA provides for payment of import duties collected by the U.S.
Treasury to domestic companies injured by unfair foreign trade practices. In accordance with CDSOA, the Company filed
claims to receive their appropriate share of the import duties collected and received $310,000, net of expenses in 2002.
In 2003, the Company received notice that it was awarded $604,000, of which $10,000 was received. The remaining
payment has been delayed pending the outcome of a hearing before the U.S. Court of Appeals for the Federal Circuit
(“U.S. Court of Appeals”) in a lawsuit challenging the distribution method of the import duties. The Company will not
record the uncollected portion of the award as income unless the funds are collected.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

The Company expects to benefit from CDSOA in future years unless the Act is repealed or the U.S. Court of Appeals
renders an unfavorable decision. The amount of future benefits is dependent on the amount of import duties collected and
the relationship of Dunkirk Specialty Steel’s claim in relation to claims filed by other domestic specialty steel producers.

Bridgeville Lease 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 at a rental of $1 per year plus payment
of real and personal property taxes and other charges associated with the property. In 2003, the Company exercised its
option to purchase all of the property permitted under the capital lease with Armco for $1.

The ESR building, which houses the Company’s four electro-slag remelting furnaces and ancillary equipment, was not
included in the option to purchase. The Company will continue to operate the equipment in the ESR building under the
existing lease that was extended to March 8, 2005. The Company has entered into negotiations with AK Steel to purchase
the ESR building. In the event the ESR building is not purchased, or the lease is not extended beyond March 8, 2005,
the relocation of the ESR equipment would have an adverse material effect on the financial condition of the Company.

Contingent Items

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. The Company is not aware of any environmental
condition that currently exists at any of its facilities that would cause a material adverse effect on the financial condition
of the Company.

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 also agreed to indemnify the Company for any liabilities arising out of environmental conditions existing off-site
as of June 2, 1995, and that indemnification is not subject to the $3.0 million limitation.

The Company has filed no claims against Armco since the inception of the acquisition agreement. In addition, 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 agreement.

In connection with the acquisition of the Dunkirk facility, Dunkirk Specialty Steel entered into an order with the New York
State Department of Environmental Conservation (“NY DEC”) that precludes NY DEC from bringing any action against
the Company. In addition, the order releases the Company from any and all claims and liabilities arising from, or related to,
the existing environmental conditions at the Dunkirk facility. There can be no assurance that any other party will not assert
any claims with respect to environmental conditions at the Dunkirk facility, or that the Company will have the financial
resources to discharge any liabilities if legally compelled to do so.

Legal Matter On June 29, 2001, suit was filed against the Company in the Court of Common Pleas of Allegheny County,
Pennsylvania by Teledyne Technologies, Incorporated (“Teledyne”). The suit alleges that steel product manufactured by the
Company was defective and the Company was or should have been aware of the defects. Teledyne has alleged that the
defective steel supplied by the Company caused certain crankshafts sold by Teledyne for use in aircraft engines to be
defective. As a result, Teledyne is claiming damages relating to the recall, replacement and repair of aircraft engines.

In 2002, Teledyne was unsuccessful in its pursuit of a similar claim brought against another specialty steel producer who
supplied the same steel product. After in-depth investigation, it is the Company’s position that the suit is without merit
and it intends to vigorously defend that position. Additionally, the Company believes that it has insurance coverage that is
available for this claim. At this time, the Company is engaged in discovery and believes that the final disposition of this suit
will not have a material adverse effect on the financial condition and the results of operations of the Company.

On April 7, 2003, United States Aviation Underwriters, Inc. (“USAU”), a New York corporation, as managers and on behalf
of United States Aircraft Insurance Group (“USAIG”), the Company’s Aircraft Products Liability insurance carrier, filed suit
in the Court of Common Pleas of Allegheny County, Pennsylvania asking the court for a declaratory judgment as to what
actual liability and obligations were applicable to USAIG relating to the insurance policy issued to the Company, and the
allegations made by Teledyne. At this time, the Company is engaged in discovery and believes that USAIG is responsible
for providing defense and damage coverage with regard to the Teledyne allegations. To date, USAIG has provided for and
continues to provide for a defense to the Teledyne claim. While the Company believes that insurance coverage is available
for the defense and damages, if any, relating to the Teledyne claim, an unfavorable ruling in both the USAIG suit and the
Teledyne claim could have a material adverse effect on the Company’s financial condition.

Critical Accounting Policies and New Accounting Pronouncements

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 has transferred. Revenue is also 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 outstanding invoices issued to customers currently operating
under the protection of the federal bankruptcy law and other amounts that are deemed potentially not collectible. An
inventory reserve is provided for material on hand for which management believes cost exceeds fair market value and for
material on hand for more than one year not assigned to a specific customer order.

Long-lived assets are reviewed for impairment annually by operating facility. An impairment write-down will be recognized
whenever events or changes in circumstances indicate that the carrying value may not be recoverable through estimated
future undiscounted cash flows. The Company has not recognized an impairment write-down on any of its assets held at
December 31, 2003.

In addition, management assesses the need to record a valuation allowance to reduce deferred tax assets to the amount that
is more likely than not to be realized. The Company believes it will generate sufficient income in addition to taxable income
generated from the reversal of its temporary differences to utilize the deferred tax assets recorded at December 31, 2003.

New Accounting Pronouncements In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with
Exit or Disposal Activities” (“SFAS 146”). This statement supersedes Emerging Issues Task Force Issue No. 94-3 “Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring).” SFAS 146 requires the recognition of a liability for costs associated with an exit or disposal
activity when incurred. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value.
The Company adopted the provisions of SFAS 146 in 2003, which did not have a material impact on the Company’s
consolidated financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that upon issuance
of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45
also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations
associated with guarantees issued. The recognition provisions of FIN 45 will be effective for any guarantees that are issued
or modified after December 31, 2002. The Company adopted the provisions of FIN 45 in 2003, which did not have a
material impact on the Company’s consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and
Disclosure — an Amendment of FASB Statement No. 123” (“SFAS 148”). This statement amends SFAS No. 123
“Accounting for Stock-Based Compensation” to provide alternative methods of voluntarily transitioning to the fair value
based method of accounting for stock-based employee compensation. SFAS 148 also requires disclosure of the method
used to account for stock-based employee compensation and the effect of the method on reported results in both annual
and interim financial statements. The Company does not intend to change its current method of accounting for stock-based
employee compensation unless required by the issuance of a new pronouncement. The Company adopted the disclosure
requirements of SFAS 148 as of December 31, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities (“VIE”) – an
Interpretation of ARB No. 51” which was revised in December 2003 (“FIN 46”). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties. The Company adopted the provisions of
FIN 46 in 2003, which did not have a material impact on the Company’s consolidated financial position or results of operations.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

In April 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and
Hedging” (“SFAS 149”). This statement amends and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement
No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The Company adopted the provisions of SFAS 149
in 2003, which did not have a material impact on the Company’s consolidated financial position or results of operations.

In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity” (“SFAS 150”). This statement establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances). The Company adopted the provisions of SFAS 150
in 2003, which did not have a material impact on the Company’s consolidated financial position or results of operations.

Future Outlook

The Company enters 2004 with a total backlog of $21 million and expects demand for power generation, petrochemical
and tool steel products to improve throughout the year. The Company also expects that its results will improve in 2004 in
conjunction with the pace of the domestic economy’s recovery, the market’s increasing acceptance of Dunkirk Specialty
Steel as a reliable supplier of quality specialty steel bar, rod and wire products, and the acceptance of sales price
increases beyond raw material surcharges.

Forward-Looking Information Safe Harbor

The Management’s Discussion and Analysis and other sections of this Annual Report contain forward-looking statements
that reflect the Company’s current views with respect to future events and financial performance. 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,
effect of new accounting pronouncements and no material financial impact from litigation or contingencies are included in
this Annual Report pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995.

The Company’s actual results will be affected by a wide range of factors including the limited operating history of Dunkirk
Specialty Steel, LLC; the concentrated nature of the Company’s customer base to date and the Company’s dependence
on its significant customers; the receipt, pricing and timing of future customer orders; changes in product mix; the limited
number of raw material and energy suppliers and significant fluctuations that may occur in raw material and energy prices; the
Company’s reliance on certain critical manufacturing equipment; the ability to acquire the ESR Building prior to the expiration
of the Armco Lease; the Company’s ongoing requirement for continued compliance with environmental laws; and the ultimate
outcome of the Company’s current and future litigation matters. Many of these factors are not within the Company’s control
and 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. 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.

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. For a discussion of these and other matters, refer to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and other reports on file with the
Securities and Exchange Commission.

REPORT OF MANAGEMENT

To the Stockholders of Universal Stainless & Alloy Products, Inc.

The financial statements and related information contained in this report were prepared in conformity with accounting principles
generally accepted in the United States of America and, as such, include amounts based on management’s best judgments
and estimates. We maintain a system of policies, procedures and controls designed to provide reasonable assurance that
transactions are properly executed, recorded and included within the financial statements and that the Company’s assets are
safeguarded from improper or unauthorized use. The Audit Committee of the Board of Directors, composed of independent
directors, meets regularly with management and our independent accountants to discuss audit results and financial reporting
matters. The independent accountants have full access to the Audit Committee without our presence.

Clarence M. McAninch
President and Chief Executive Officer

February 23, 2004

REPORT OF INDEPENDENT ACCOUNTANTS

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

To the Board of Directors and Stockholders of Universal Stainless
& Alloy Products, Inc.

We have audited the accompanying consolidated balance sheet of Universal Stainless & Alloy Products, Inc. and
subsidiaries (the Company) as of December 31, 2003, and the related consolidated statements of operations, and cash
flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated
financial statements of Universal Stainless & Alloy Products, Inc. as of December 31, 2002 and 2001 were audited by other
auditors whose report dated February 18, 2003 expressed an unqualified opinion on those statements.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Universal Stainless & Alloy Products, Inc. and subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the
United States of America.

Schneider Downs and Co., Inc.
Pittsburgh, Pennsylvania

February 23, 2004

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

CONSOLIDATED STATEMENT OF OPERATIONS

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 (loss)
Interest expense and other financing costs
Other income (expense), net

Income (loss) before taxes
Provision (benefit) for income taxes

Net income (loss)

Earnings (Loss) Per Common Share

Basic
Diluted

Weighted average number of shares of

Common Stock outstanding

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

2003

2002

2001

$ 68,989
65,534
5,837

$ 70,877
61,971
5,883

$ 90,658
71,915
6,199

(2,382)
(383)
128

(2,637)
(1,220)

3,023
(455)
457

3,025
933

12,544
(576)
57

12,025
4,386

(1,417)

2,092

7,639

$
$

(0.23)
(0.23)

$
$

0.34
0.34

$
$

1.26
1.25

6,287,088

6,203,800

6,080,045

CONSOLIDATED BALANCE SHEETS

December 31,
(dollars in thousands)

Assets

Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for
doubtful accounts of $163 and $298)

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 $0.001 per share;

1,980,000 shares authorized;
0 shares issued and outstanding

Common Stock, par value $0.001 per share;

10,000,000 shares authorized;
6,564,306 and 6,554,538 shares issued

Additional paid-in capital
Retained earnings
Treasury Stock at cost;

269,900 common shares held

Total stockholders’ equity

2003

2002

4,735

3,308

12,690
22,281
1,222
3,063

43,991
40,176
758

11,550
22,717
1,127
2,454

41,156
42,246
642

$ 84,925

$ 84,044

6,792
813
1,944
833
195

10,577
5,599
9,313

25,489

$ 4,190
275
1,971
1,019
163

7,618
7,502
8,123

23,243

—

7
28,329
32,731

(1,631)

59,436

7
28,277
34,148

(1,631)

60,801

Total liabilities and stockholders’ equity

$ 84,925

$ 84,044

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

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

CONSOLIDATED STATEMENT OF CASH FLOWS

For the years ended December 31,
(dollars in thousands, except per share information)

Cash Flows from Operating Activities

Net income (loss)
Adjustments to reconcile to net cash and cash equivalents

provided by operating activities:
Depreciation and amortization
Deferred taxes
Tax benefit from exercise of stock options

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

Net cash provided by operating activities

Cash Flows from Investing Activities

Acquisition of assets and real property through

purchase agreements

Capital expenditures

Net cash used in investing activities

Cash Flows from Financing Activities

Proceeds from long-term debt
Proceeds from deferred loan agreement
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 and cash equivalents
Cash and cash equivalents at beginning of period

2003

2002

2001

$ (1,417)

2,092

7,639

3,093
996
—

(1,140)
436
2,602
(186)
(729)
123

3,778

3,271
596
417

1,150
(859)
(407)
(543)
(990)
(903)

3,824

—

(1,193)

(1,283)
(4,194)

(5,477)

—
200
(1,948)
—
—

538
52
—

(1,158)

1,427
3,308

—
—
(1,831)
—
—

(582)
1,920
—

(493)

(2,146)
5,454

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

Cash and cash equivalents at end of period

4,735

$ 3,308

$ 5,454

Supplemental Disclosure of Cash Flow Information

Interest paid (net of amount capitalized)
Income taxes paid (refund)

$
348
$ (1,453)

$
$

318
1,329

605

$
$ 3,144

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Significant Accounting Policies

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, original equipment
manufacturers, which primarily include the power generation and aerospace industries, and wire redrawers. 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 accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements. The estimates and assumptions used in these consolidated financial statements
are based on known information available as of the balance sheet date. Actual results could differ from those estimates.

Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company has no interests
in any unconsolidated entity nor does it have any off-balance sheet financing arrangements other than operating leases.

Cash and Cash Equivalents Cash equivalents are stated at cost plus accrued interest, which approximates market value,
and 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. The allowance for doubtful accounts includes the value of outstanding invoices issued to
customers currently operating under the protection of the federal bankruptcy law and other amounts that are deemed
potentially not collectible.

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.

The Company purchases scrap metal and alloy additives, principally nickel, chrome and molybdenum, for its melting
operation. 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.
Maintenance expense for the fiscal year 2003, 2002 and 2001 was $6,151,000, $6,390,000 and $6,611,000, respectively.

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 buildings and land improvements are between 5 and 25 years, and the
estimated useful lives of machinery and equipment are between 5 and 20 years. Direct costs incurred in the development
and implementation of internal-use software are capitalized and recorded within property, plant and equipment, and amortized
on a straight-line basis over its anticipated useful life, which generally does not exceed three years. Depreciation and
amortization expense for fiscal year 2003, 2002 and 2001 was $3,063,000, $3,130,000 and $2,764,000, respectively.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 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.

Long-Lived Asset 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, 2003 and 2002.

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, and collection is reasonably assured.
Revenue from conversion services is recognized when the performance of the service is complete. Invoiced shipping and
handling costs are also accounted for as revenue. Customer claims are accounted for primarily as a reduction to gross
sales after the matter has been researched and an acceptable resolution has been reached.

Income Taxes Deferred income taxes are provided for unused tax credits earned and 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. Valuation allowances are provided for a deferred tax asset when it is more likely than
not that such asset will not be realized.

Stock-Based Compensation Plans The Company accounts for stock-based employee and director compensation using the
intrinsic value method. No stock-based employee compensation cost is reflected in net income unless the exercise price of
the options granted does not equal market value of the underlying common stock on the date of grant. The tax effects of
exercising stock options are added to additional paid-in capital at the exercise date.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of issued Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-
Based Compensation” (“SFAS 123”), to stock-based employee compensation:

For the years ended December 31,
(dollars in thousands, except per share information)

Net income (loss), as reported
Total stock-based compensation expense determined

under fair value based method, net of taxes

Pro forma net income (loss)

Earnings (Loss) Per Share

Basic — as reported
Basic — pro forma

Diluted — as reported
Diluted — pro forma

2003

2002

2001

$ (1,417)

2,092

7,639

(118)

(129)

(131)

$ (1,535)

1,963

7,508

$
$

(0.23)
(0.24)

$
$

0.34
0.32

0.34
0.31

$
$

1.26
1.23

1.25
1.23

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 2003, 2002 and 2001, respectively: dividend yield
of 0.0% for each year; interest rate of 3.0%, 3.7% and 5.0%; expected volatility of 54.0%, 53.0% and 50.0%; and
expected lives for options of five years.

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 assumed proceeds from the exercise of stock options and warrants are 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 November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that upon issuance of a
guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also
requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated
with guarantees issued. The recognition provisions of FIN 45 will be effective for any guarantees that are issued or modified
after December 31, 2002. The Company adopted the provisions of FIN 45 in 2003, which did not have a material impact on
the Company’s consolidated financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities (“VIE”) –
an Interpretation of ARB No. 51” which was revised in December 2003 (“FIN 46”). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other parties. The Company adopted the provisions of
FIN 46 in 2003, which did not have a material impact on the Company’s consolidated financial position or results of operations.

Note 2: Inventory

The major classes of inventory are as follows:

December 31,
(dollars in thousands)

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

Total inventory

2003

2002

2,265
17,743
2,273

1,719
18,588
2,410

$ 22,281

$ 22,717

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

Note 3: Property, Plant and Equipment

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

2003

2002

953
5,987
49,801
141

56,882
(16,706)

822
5,987
48,110
980

55,899
(13,653)

$ 40,176

$ 42,246

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 at a rental of $1 per year plus payment of real and
personal property taxes and other charges associated with the property. In 2003, the Company exercised its option to
purchase all of the property permitted under the capital lease with Armco for $1.

In 2003, the Company entered into a $200,000 Deferred Loan Agreement maturing on December 31, 2006 with the
Dunkirk Local Development Corporation. No principal or interest payments will be required under the Deferred Loan
Agreement provided that the Company hires 30 new employees and more than 50% of those jobs are made available to
certain Dunkirk City residents. The Company believes that it will meet the conditions of the Deferred Loan Agreement,
although it can make no assurances to that effect. Therefore, the proceeds have been applied to reduce the acquisition
cost of new equipment at the Company’s Dunkirk facility.

Note 4: Long-Term Debt and Other Financing

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

2003

2002

3,700
3,770
73

7,543
(1,944)

5,100
4,252
121

9,473
(1,971)

5,599

7,502

The Company maintains a credit agreement with PNC Bank for a $6,500,000 revolving credit facility (“PNC Line”) through
April 30, 2005. This credit agreement, which also includes a term loan scheduled to mature in June 2006 (“PNC Term
Loan”), is collateralized by substantially all of the Company’s assets.

The Company has entered into several separate loan agreements with the Commonwealth of Pennsylvania’s Department of
Commerce aggregating $1,600,000 with terms ending between the years 2002 and 2016. The loans bear interest at rates
ranging from 5% to 6% per annum. In 1996, the Company entered into a ten-year, 6% interest-bearing loan agreement
with the Redevelopment Authority of Allegheny County Economic Development Fund in the amount of $1,514,000.

On February 14, 2002, Dunkirk Specialty Steel, LLC (“Dunkirk Specialty Steel”) issued two ten-year, 5% interest-bearing
notes payable to the New York Job Development Authority (the “JDA”) for the combined amount of $3,000,000 (“JDA
Notes”). No principal or interest payments are due under the JDA Notes during the first year. The JDA Notes were
recorded net of a $143,000 debt discount, of which $125,000 was amortized in 2002 and included as interest expense.
The balance was amortized and included as interest expense in 2003.

The Company leases certain equipment and vehicles. The aggregate annual principal payments due under the Company’s
long-term debt and minimum lease payments under capitalized and operating leases are as follows:

For the years ended December 31,
(dollars in thousands)

Long-term debt
Capital lease minimum payments
Operating lease minimum payments

Note 5: Income Taxes

2004

2005

2006

2007

2008

Thereafter Deductions

Total

$ 1,915 $ 2,013 $1,341 $ 364 $ 383 $1,454
—
—

—
30

14
36

33
50

—
23

33
67

— $ 7,470
73
(7)
206
—

Components of the provision (benefit) for income taxes are as follows:

For the years ended December 31,
(dollars in thousands)

Current Provision (Benefit)

Federal
State

Deferred Provision (Benefit)

Federal
State

Provision (benefit) for income taxes

2003

2002

2001

$ (2,217)
1
(2,216)

1,271
(275)
996
$ (1,220)

453
(116)
337

602
(6)
596
933

3,160
139
3,299

903
184
1,087
4,386

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

For the years ended December 31,

Federal statutory tax
State income taxes, net of federal tax impact
Government grants, net of federal tax impact
Other, net
Effective income tax rate

2003

(34.0)%
(5.5)
(4.9)
(1.9)
(46.3)%

2002

34.0%
4.5
(7.2)
(0.5)
30.8%

2001

34.0%
2.7
(0.4)
0.2
36.5%

Dunkirk Specialty Steel operates in a New York State Empire Zone and is qualified to benefit from investments made and
employees hired at the Dunkirk, NY facility for up to fifteen years. The Company recognized tax credit benefits of $195,000
and $340,000 for fiscal year 2003 and 2002, respectively, of which $10,000 and $170,000 was applied against the
respective year’s current tax provision. The balance will be applied against future tax liabilities for income apportioned to
New York State. The Company believes it will generate sufficient income in addition to taxable income generated from the
reversal of its temporary differences to utilize this tax credit.

Deferred taxes result from the following:

December 31,
(dollars in thousands)

Deferred Tax Assets

Receivables
Inventory
Accrued liabilities

Federal and state tax carryforwards

Deferred Tax Liabilities

Property, plant and equipment

2003

2002

70
1,010
142
1,222
570
1,797

130
861
136
1,127
470
1,597

9,313

8,123

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

Federal and state tax carryforwards as of December 31, 2003 include federal alternative minimum tax and New York
Empire Zone tax credits totaling $243,000 with no expiration date. The remaining balance relates to net operating loss
carryforwards allocated to certain states which expire within 5 to 20 years.

Note 6: Stockholders’ Equity

(dollars in thousands)

Balance at December 31, 2000
Common Stock issuance under

Common
Shares
Outstanding

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Treasury
Shares

Treasury
Stock

6,339,128

$ 25,888

$ 24,417

257,900

$ (1,544)

Employee Stock Purchase Plan

8,044

Purchase of Treasury Stock
Net income

Balance at December 31, 2001
Common Stock issuance under

Employee Stock Purchase Plan

Exercise of Stock Options
Tax benefit from exercise of

Stock Options

Net income

6,347,172

7,366
200,000

Balance at December 31, 2002
Common Stock issuance under

6,554,538

Employee Stock Purchase Plan

9,768

Net loss

25,941

44
1,875

417

28,277

7,639

32,056

12,000

(87)

269,900

(1,631)

269,900

(1,631)

2,092

34,148

(1,417)

Balance at December 31, 2003

6,564,306

$ 28,329

$ 32,731

269,900

$ (1,631)

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. The Company is authorized to repurchase
45,100 additional shares of Common Stock under this program as of December 31, 2003.

The Company has 1,980,000 authorized shares of Senior Preferred Stock. At December 31, 2003 and 2002, there were
no shares issued or outstanding.

Note 7: Basic and Diluted Earnings Per Share

The computation of basic and diluted earnings per share for the years ended December 31, 2003, 2002 and 2001 is
performed as follows:

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

Income

2003
Shares

Income

2002
Shares

Income

2001
Shares

Income (loss) available to
common Stockholders
Effect of dilutive securities

Income available to

common Stockholders plus
assumed conversion

$ (1,417)

6,287,088
—

2,092

6,203,800
32,048

7,639 6,080,045
17,379

$ (1,417)

6,287,088

2,092

6,235,848

7,639 6,097,424

Earnings (Loss) Per Common Share

Basic
Diluted

$
$

(0.23)
(0.23)

$
$

0.34
0.34

$
$

1.26
1.25

The Company had 10,536 common stock equivalents outstanding for fiscal 2003 which were not included in the common
share computations for earnings (loss) per share as the common stock equivalents are anti-dilutive.

Note 8: Stock-Based Compensation Plans

At December 31, 2003, the Company has three incentive compensation plans that are described below:

Stock Incentive Plan

The Company maintains the Stock Incentive Plan that has been adopted and amended from time to time by the Company’s
Board of Directors, and approved by its stockholders. The Stock Incentive Plan permits the issuance of 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. The Company may grant options up to a maximum of 950,000 shares of Common Stock, of which 246,668 are
available for grant at December 31, 2003. The option price is equal to the fair market value of the Common Stock at the
date of grant. 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 Stock Incentive Plan will expire no later than ten years after the grant date.

A summary of the Stock Incentive Plan activity as of and for the years ended December 31, 2003, 2002 and 2001 is
presented below:

2003
Weighted-Average
Exercise
Price

2002
Weighted-Average
Exercise
Price

2001
Weighted-Average
Exercise
Price

Fixed Options

Outstanding at beginning of year 427,999
56,500
Granted
—
Exercised
(1,500)
Forfeited

9.38
5.91
—
7.10

Outstanding at end of year

482,999

8.99

Options exercisable at year-end
Weighted-average fair value of

options granted during the year

379,160

2.93

617,500
25,000
(200,000)
(14,501)

427,999

331,996

9.36
10.31
9.40
9.86

9.38

5.09

522,500
100,000
—
(5,000)

617,500

472,746

9.58
8.22
—
9.88

9.36

4.07

The following table summarizes information about stock options outstanding at December 31, 2003:

Number
Outstanding

177,166
182,533
123,300

482,999

Weighted-Average
Remaining
Contractual Life

Options Outstanding

Weighted-Average
Exercise
Price

7.7
4.2
3.1

5.2

$
$
$

6.50
9.61
11.66

8.99

Number
Exercisable

91,664
168,364
119,132

379,160

Options Exercisable

Weighted-Average
Exercise
Price

$
$
$

6.83
9.65
11.52

9.55

Range of Exercise Prices

$ 5.12 to $ 7.35
$ 8.00 to $ 9.94
$10.25 to $15.60

Outstanding at end of year

Employee Stock Purchase Plan

Under the 1996 Employee Stock Purchase Plan (the “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 up to 100 shares of the Company’s Common Stock each six-month period. 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, 2003,
the Company has issued 62,663 shares of Common Stock since the plan’s inception.

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, 2003, 2002 and 2001, the Company expensed $168,000,
$511,000 and $1,949,000, respectively, under these plans.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

Note 9: Retirement Plans

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.

Effective January 6, 2003, the Company began to participate in the Steelworkers Pension Trust (“Trust”), a multi-employer
defined benefit pension plan that is open to all hourly and salaried employees associated with the Bridgeville facility. The
Company makes periodic contributions to the Trust based on hours worked at a fixed rate for each hourly employee and a
fixed monthly contribution on behalf of each salaried employee. The hourly employees may continue their contributions to the
defined contribution retirement plan even though the Company contributions ceased. The Company also makes a contribution
to the defined contribution retirement plan on behalf of each salaried employee participating in the Trust. The amount of the
contribution will be dependent upon each salaried employee’s contribution to the defined contribution retirement plan.

The total expense for the years ended December 31, 2003, 2002 and 2001 was $512,000, $418,000 and
$413,000, respectively.

No other post-retirement benefit plans exist.

Note 10: Commitments and Contingencies

The Company, as well as other steel companies, is subject to demanding environmental standards imposed by federal,
state and local environmental laws and regulations. The Company is not aware of any environmental condition that currently
exists at any of its facilities that would cause a material adverse effect on the financial condition of the Company.

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 $3,000,000 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 also agreed to indemnify the Company for any liabilities arising out of environmental conditions existing off-site as
of June 2, 1995, and that indemnification is not subject to the $3,000,000 limitation.

In connection with the acquisition of the Dunkirk facility, Dunkirk Specialty Steel entered into an order with the New York
State Department of Environmental Conservation (“NY DEC”) that precludes NY DEC from bringing any action against the
Company. In addition, the order releases the Company from any and all claims and liabilities arising from, or related to, the
existing environmental conditions at the Dunkirk facility. There can be no assurance that any other party will not assert any
claims with respect to environmental conditions at the Dunkirk facility, or that the Company will have the financial resources
to discharge any liabilities if legally compelled to do so.

On June 29, 2001, suit was filed against the Company in the Court of Common Pleas of Allegheny County, Pennsylvania
by Teledyne Technologies, Incorporated (“Teledyne”). The suit alleges that steel product manufactured by the Company
was defective and the Company was or should have been aware of the defects. Teledyne has alleged that the defective
steel supplied by the Company caused certain crankshafts sold by Teledyne for use in aircraft engines to be defective.
As a result, Teledyne is claiming damages relating to the recall, replacement and repair of aircraft engines.

In 2002, Teledyne was unsuccessful in its pursuit of a similar claim brought against another specialty steel producer who
supplied the same steel product. After in-depth investigation, it is the Company’s position that the suit is without merit and
it intends to vigorously defend that position. Additionally, the Company believes that it has insurance coverage that is
available for this claim. At this time, the Company is engaged in discovery and believes that the final disposition of this
suit will not have a material adverse effect on the financial condition and the results of operations of the Company.

The Company maintains a supply contract agreement with Talley Metals Technology, Inc., a subsidiary of Carpenter
Technology Corporation (“Talley Metals”). While the initial term of the agreement expired December 31, 2002, the
agreement continues to automatically renew with the placement of new orders each month and requires a 90-day notice
to terminate. In addition, Talley Metals is required under the agreement to purchase a minimum of 1,000 tons of stainless
reroll billet products each calendar month and average at least 1,250 per month during the last twelve-month period. The
value of the contract on a monthly basis will depend on product mix and key raw material prices. During 2002 and 2003,
Talley Metals did not comply with the monthly minimum purchase requirement due to market conditions. The Company has
entered into negotiations with Talley Metals to modify the terms of the agreement. The Company has granted a waiver and
expects to continue granting a waiver from this requirement until the terms of the contract are renegotiated.

Note 11: Segment and Related Information

The Company is comprised of three operating locations and one corporate headquarters. For segment reporting, the
Bridgeville and Titusville facilities have been aggregated into one reportable segment, Universal Stainless & Alloy Products,
because of the management reporting structure in place. The Universal Stainless & Alloy Products manufacturing process
involves melting, remelting, treating and hot and cold rolling of semi-finished and finished specialty steels. A second
reportable segment, Dunkirk Specialty Steel, was created in 2002 with the acquisition of certain assets and real property
formerly owned by Empire Specialty Steel, Inc. Dunkirk Specialty Steel’s manufacturing process involves hot rolling and
finishing specialty steel bar, rod and wire products.

The accounting policies of both reportable segments are the same as those described in the Summary of Significant
Accounting Policies. Sales between the segments are generally made at market-related prices. Corporate assets are primarily
cash and cash equivalents, prepaid expenses, deferred income taxes and property, plant and equipment.

For the years ended December 31,
(dollars in thousands)

Net Sales

Universal Stainless & Alloy Products
Dunkirk Specialty Steel
Intersegment

Operating Income (Loss)

Universal Stainless & Alloy Products
Dunkirk Specialty Steel

Interest Expense and Other Financing Costs(a)

Universal Stainless & Alloy Products
Dunkirk Specialty Steel

Other Income (Expense), Net

Universal Stainless & Alloy Products
Dunkirk Specialty Steel

Depreciation and Amortization

Universal Stainless & Alloy Products
Dunkirk Specialty Steel

Capital Expenditures

Universal Stainless & Alloy Products
Dunkirk Specialty Steel
Corporate

2003

2002

2001

$ 59,585
19,875
(10,471)

$ 68,989

$ 70,120
10,483
(9,726)

$ 70,877

$ 90,658
—
—

$ 90,658

(249)
(2,133)

$ (2,382)

238
145

383

85
43

128

2,961
102

5,013
(1,990)

3,023

$ 12,544
—

$ 12,544

330
125

455

119
338

457

3,049
81

576
—

576

57
—

2,764
—

3,063

$ 3,130

2,764

940
253
—

1,193

2,104
1,928
162

4,194

5,253
—
—

5,253

(a) Includes amortization of deferred financing costs and debt discount of $30,000, $141,000 and $18,000 for the years ended December 31, 2003, 2002 and

2001, respectively.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

December 31,
(dollars in thousands)

Assets

Universal Stainless & Alloy Products
Dunkirk Specialty Steel
Corporate

The following table presents net sales by product line:

For the years ended December 31,
(dollars in thousands)

Stainless steel
Tool steel
High-strength low alloy steel
High-temperature alloy steel
Conversion services
Other

Total net sales

2003

2002

$ 65,025
11,128
8,772

$ 84,925

$ 65,413
12,337
6,294

$ 84,044

2003

2002

2001

$ 52,546
9,673
2,869
2,482
1,079
340

$ 68,989

$ 56,813
6,643
2,213
3,474
1,495
239

$ 70,877

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

$ 90,658

Net sales to the Company’s largest customer and its affiliates, which were generated primarily from the Bridgeville
operation, approximated 25%, 35% and 32% of total 2003, 2002 and 2001 sales, respectively. The accounts receivable
balances from this customer comprised approximately 24% and 26% of total accounts receivable at December 31, 2003
and 2002, 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.

Note 12: Acquisition

On February 8, 2002, Dunkirk Specialty Steel entered into a Personal Property Asset Purchase Agreement and a Real
Property Purchase Agreement (the “Purchase Agreements”) with the JDA to acquire certain assets and real property
formerly owned by Empire Specialty Steel, Inc., at its idled production facility located in Dunkirk, New York. These
transactions were completed on February 14, 2002 and the plant became operational on March 14, 2002. Pursuant to the
Purchase Agreements, Dunkirk Specialty Steel paid $1,283,000 in cash and issued the JDA Notes. The purchase price,
including related acquisition costs and adjustments for the discounted value of the JDA Notes, was $4,140,000.
$3,958,000 was allocated to inventory and $182,000 was allocated to assets held for sale.

Through December 31, 2003, the Company has sold certain assets for $31,000 and has invested $33,000 to prepare
certain assets for sale. While the specific identification of individual assets to be sold continues, management intends to
sell an office building located on the property. Based on available information, management believes the market value of the
office building supports the recorded asset value. Future costs will be expensed as incurred in accordance with SFAS 146.

The assets purchased by Dunkirk Specialty Steel were previously owned and operated by AL Tech Specialty Steel, Inc. and
Empire Specialty Steel, Inc. During their ownership, both organizations participated in several anti-dumping lawsuits with
other domestic specialty steel producers. The Continued Dumping and Subsidy Act of 2000 (“CDSOA”) provides for
payment of import duties collected by the U.S. Treasury to domestic companies injured by unfair foreign trade practices.
In accordance with CDSOA, the Company filed claims to receive their appropriate share of the import duties collected.
In 2002, the Company received $310,000, net of expenses, which is included in other income. In 2003, the Company
received notice that it was awarded $604,000, of which $10,000 was received. The remaining payment has been delayed
pending the outcome of a hearing before the U.S. Court of Appeals for the Federal Circuit in a lawsuit challenging the
distribution method of the import duties. The Company will not record the uncollected portion of the award as income
unless the funds are collected.

Note 13: Quarterly Financial Data (unaudited)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

(dollars in thousands, except per share amounts)

2003 Data

Net sales
Gross profit
Operating income (loss)
Net income (loss)

Earnings (loss) per common share:

Basic
Diluted

2002 Data

Net sales
Gross profit
Operating income (loss)
Net income (loss)

Earnings (loss) per common share:

Basic
Diluted

$ 14,700
20
(1,373)
(583)

$ 16,837
896
(629)
(440)

$ 18,625
1,329
(178)
(121)

$ 18,827
1,210
(202)
(273)

$
$

(0.09)
(0.09)

$
$

(0.07)
(0.07)

$
$

(0.02)
(0.02)

$
$

(0.04)
(0.04)

$ 17,596
3,351
1,978
1,206

$ 21,422
2,848
1,311
777

$ 15,919
1,739
198
191

$ 15,940
968
(464)
(82)

$
$

0.20
0.20

$
$

0.13
0.12

$
$

0.03
0.03

$
$

(0.01)
(0.01)

Earnings per share amounts for each quarter are required to be computed independently. As a result, their sum may not
equal the total year earnings per share amounts.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 2003 ANNUAL REPORT

FIVE-YEAR SUMMARY

For the years ended December 31,
(dollars in thousands, except per share amounts)

Summary of Operations

Net sales
Operating income (loss)
Income (loss) before cumulative
effect of accounting change
Cumulative effect of accounting

change, net of tax

Net income (loss)

2003

2002

2001

2000(a)

1999

$ 68,989
(2,382)

$ 70,877
3,023

$ 90,658
12,544

$ 88,347
11,488

$ 66,663
3,731

(1,417)

—
(1,417)

2,092

—
2,092

7,639

—
7,639

6,610

(1,546)
5,064

2,103

—
2,103

Pro Forma Summary of Operations(b)

Net sales
Operating income (loss)
Net income (loss)

$ 68,989
(2,382)
(1,417)

$ 70,877
3,023
2,092

$ 90,658
12,544
7,639

$ 88,347
11,488
6,610

$ 63,330
3,373
1,854

Financial Position at Year-End

Working capital
Total assets
Total debt
Stockholders’ equity

Common Share Data

$ 33,414
84,925
7,543
59,436

$ 33,538
84,044
9,473
60,801

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

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

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

Basic earnings (loss) per share:

As reported
Pro forma under SAB 101(b)
Diluted earnings (loss) per share:

As reported
Pro forma under SAB 101(b)

Stockholders’ equity

(0.23)
(0.23)

(0.23)
(0.23)
9.44

Other Data

Cash flow provided by (used in):

Operating activities
Investing activities
Financing activities
Capital expenditures
Depreciation and amortization
Return on stockholders’ equity
Debt to total capitalization
Employees
Customers

Average Shares Outstanding

(in thousands)

Basic
Diluted

3,378
(1,193)
(1,158)
1,193
3,093

(2.3)%
11.3
383
399

0.34
0.34

0.34
0.34
9.67

1.26
1.26

1.25
1.25
9.28

3,824
(5,477)
(493)
4,194
3,271

3.7%

13.5
393
372

$ 11,905
(5,253)
(2,307)
5,253
2,782
13.6%
12.9
304
288

0.83
1.09

0.83
1.09
8.03

6,285
(4,598)
(1,446)
4,598
2,466

10.4%
17.0
280
250

0.34
0.30

0.34
0.30
7.19

4,967
(3,366)
(2,170)
3,366
2,101

4.8%

21.3
277
235

6,287
6,287

6,204
6,236

6,080
6,097

6,075
6,080

6,111
6,111

(a) Includes $12,462,000 of net sales and $9,988,000 of cost 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” (SAB 101). 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 SAB 101 as required under generally accepted accounting principles in 2000.

DIRECTORS, OFFICERS AND MANAGEMENT

Directors

Douglas M. Dunn
Managing Partner
Dunn Associates

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.

Officers

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

Management

Dudley J. Merchant
Vice President of Sales and Marketing

Michael J. Obiecunas
Director, Employee Relations

Bruce J. Kramer
Director, Purchasing and Production Planning

Keith A. Engleka
Director, Technology

Richard J. Pincoski
General Manager, Dunkirk Specialty Steel, LLC

Design: Mizrahi Design Associates, Inc.

Photography: Mark Perrott

Printer: Broudy Printing Inc.

Corporate Information

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

Annual Meeting
The Annual Meeting of Stockholders
will be held at 10 a.m. on Tuesday,
May 18, 2004, at the Southpointe Golf Club,
Canonsburg, PA.

Price Range of Common Stock
The Common Stock is listed on the Nasdaq National Market
under the symbol “USAP”. There were 183 stockholders of
record as of February 23, 2004. The following table sets forth
the range of high and low sale prices per share of Common
Stock, for the periods indicated below:

Year 2003

First quarter
Second quarter
Third quarter
Fourth quarter

Year 2002

First quarter
Second quarter
Third quarter
Fourth quarter

High

Low

$
$
$
$

6.44
6.60
8.14
11.73

11.59
16.40
11.75
7.65

$
$
$
$

4.92
4.40
5.86
7.62

8.30

10.36
5.26
4.86

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.

Shareholder Information
Universal Stainless & Alloy Products, Inc.’s Annual Report on
Form 10-K and other reports filed with the Securities and
Exchange Commission can be obtained, without charge,
through the Company’s web site address below or at
www.sec.gov, the web site for the Securities and Exchange
Commission, or 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

Web Site Address
www.univstainless.com
www.dunkirkspecialtysteel.com

Universal Stainless & Alloy Products, Inc.

600 Mayer Street
Bridgeville, PA 15017

P : 412.257.7600
F : 412.257.7640