UNIVERSAL STAINLESS & ALLOY PRODUCTS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1996
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the Transition Period from ______ to ______
Commission File Number 0-25032

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 25-1724540
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

600 Mayer Street
Bridgeville, PA 15017
(Address of principal executive offices, including zip code)

(412) 257-7600
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g)
of the Act:

Title of Class
Common Stock, $0.001 par value

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

Yes /X/ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 25, 1997, based on the closing price of these shares of $9
7/8 on that date, was $54,149,602. For the purposes of this disclosure only, the
registrant has assumed that its directors, executive officers, and beneficial
owners of 5% or more of the registrant's Common Stock are the affiliates of the
registrant.

As of March 25, 1997, there were 6,283,734 shares of the Registrant's Common
Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1996, and definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held May 21, 1997, are incorporated by reference
into Parts II and III of this Form 10-K.

TABLE OF CONTENTS

- -
PART I

Item 1. Business..................................................................................... 1
Item 2. Properties.................................................................................. 10
Item 3. Legal Proceedings............................................................................13
Item 4. Submission of Matters to a Vote of Security Holders..........................................13

PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.....................14
Item 6. Selected Financial Data......................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.........................................................................16
Item 8. Financial Statements and Supplementary Data..................................................16
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure..................................................................16

PART III

Item 10. Directors and Executive Officers of the Registrant...........................................17
Item 11. Executive Compensation.......................................................................17
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................18
Item 13. Certain Relationships and Related Transactions...............................................18
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................18

PART I

ITEM 1. BUSINESS

General

Universal Stainless & Alloy Products, Inc. (the "Company"), manufactures and
markets semi-finished and precision cold-rolled products, including stainless
steel, tool steel and certain other alloyed steels. The Company's products are
sold to rerollers, forgers, service centers and original equipment
manufacturers. The Company's products are then finished by its customers and
marketed for use primarily in the heavy equipment manufacturing, power
generation and aerospace industries. The Company also provides 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.

While the Company operates in a manner characteristic of a mini-mill,
emphasizing a low operating cost structure, efficient use of production and
management personnel and flexible production capabilities, the Company's
extensive range of manufacturing equipment allows it to achieve product breadth
and quality similar to that of a large, integrated specialty steel producer. The
Company's products are manufactured in a wide variety of grades, widths and
gauges in response to customer specifications. The Company is capable of
fabricating semi-finished specialty steel products that include both long
products (ingots, blooms, billets and bars), which are used by customers to
produce bar, rod and wire, and flat rolled products (slabs and plates), which
are used by customers to produce fine-gauge plate, sheet and strip products. The
Company also produces customized shapes that are cold rolled from purchased
coiled strip, flat bar or extruded bar.

The Company was incorporated in Delaware on June 27, 1994. On July 29, 1994, the
Company completed a stock-for-stock merger with a corporation of the same name
organized in Pennsylvania in January 1994 (the "Pennsylvania Corporation"), for
the principal purpose of acquiring from Armco, Inc. (Armco), and operating
substantially all of the equipment and related assets (the "Assets") of Armco's
Stainless and Alloy Products Division ("ASAP"), formerly owned by Cyclops
Industries, Inc. ("Cyclops"), that are located at Bridgeville, Pennsylvania (the
"Bridgeville Facility"). Prior to the Merger, the Pennsylvania Corporation had
no operating history and no material assets. Through August 15, 1994, the date
the acquisition was consummated, the Company was solely involved in
organizational and financing activities.

On June 2, 1995, the Company acquired its precision rolled products business
from the Cytemp division of Armco (the "PRP Business"). Simultaneously, the
Company acquired from the Cytemp division five vacuum-arc remelting furnaces and
certain ancillary equipment that was not operationally related to the PRP
Business and had been idled since January 1994.

Industry Overview

The specialty steel industry is a relatively small but distinct segment of the
overall steel industry. According to the Specialty Steel Institute of North
America (the "SSNA"), specialty steels are among the highest-valued steel
products produced.

Specialty steels include stainless steels, high speed and tool steels,
electrical steels, high temperature alloys and magnetic and electronic alloys.
Specialty steels are made with a high alloy content, which enables their use in
environments that demand exceptional hardness, toughness, strength and
resistance to heat, corrosion or abrasion, or combinations thereof. Specialty
steels generally must conform to more demanding customer specifications for
consistency, straightness and surface finish than carbon steels.

The Company primarily manufactures stainless steel, tool steel, and certain
other alloyed steels:

1

Stainless Steel. Stainless steel, which represents the largest part of the
specialty steel market, contains elements such as nickel, chrome and molybdenum
that give it unique qualities of resistance to rust, corrosion and heat, high
strength, good wear characteristics, natural attractiveness, and ease of
maintenance. Stainless steel is used, among other applications, in the
automotive, aircraft and aerospace industries and in the manufacture of food
handling, chemical processing, pollution control and medical and health
equipment. The large number of applications for stainless steel has resulted in
the development of a greater variety of stainless steel metallurgical grades
than carbon steel.

Stainless steel was created in response to a need for materials that would
provide better resistance to corrosion than carbon steel. Adding chrome to
carbon steel makes it more rust and stain resistant and adding nickel to chrome
stainless steel enhances the mechanical properties and fabrication
characteristics of the steel. Stainless steel's resistance to many corrosive
conditions, such as exposure to water, air, food and alkalis, is provided by a
thin, transparent protective chrome oxide film that forms on its exterior. When
this film is scratched, nicked or otherwise penetrated, a fresh film immediately
forms to preserve the corrosion resistance.

Stainless steel is manufactured in different types, or grades, but each type
contains at least 10% chrome, along with other elements that are added to
develop specific properties. Depending on the quantity of the various elements
present in a stainless steel alloy, it will have a metallurgical structure
characteristic of one of three basic stainless steel groups-austenitic,
martensitic or ferritic. The Company makes products in each of those groups, but
most of the Company's products are in the austenitic category.

Austenitic stainless steels, unlike the other two groups of stainless steel
alloys, contain 4-35% nickel. Austenitic stainless steels, which are
non-magnetic, have outstanding ductility and can be cold worked so that the
final condition attained has the most advantageous combination of strength and
toughness. In addition, certain austenitic stainless steels may be used at
temperatures from -200~C to 1,100~C and still maintain their formability and
strength. These physical properties make austenitic stainless steels the most
popular grades.

Martensitic stainless steels contain 10-18% chrome for corrosion resistance, can
be hardened by heat treating to a wide variety of mechanical properties and are
magnetic under all conditions. These steels are generally used where abrasion
resistance and high strength are important requirements.

Ferritic stainless steels generally contain a similar amount of chrome as
martensitic stainless steels but have a lower carbon content. However, chrome
content in this stainless steel group can range as high as 27% for maximum
oxidation resistance at high temperatures. As with the martensitic group, the
addition of other elements to the basic alloy brings about special properties
for particular end uses. Ferritic steels are also magnetic under all conditions.
Ferritic stainless steels are less susceptible to stress corrosion cracking
problems and are generally cheaper to produce than austenitic stainless steels
because they do not contain nickel. However, because they do not contain nickel,
ferritic stainless steels are less malleable than austenitic grades and have
fewer applications.

Tool Steel. Tool steels contain elements of manganese, silicon, chrome and
molybdenum to produce specific hardness characteristics that enable them to
form, cut, shape and shear other materials in the manufacturing process. These
hardness characteristics are brought out by heating and cooling at precise rates
in the annealing process. Tool steels are utilized in the manufacture of metals,
plastics, pharmaceuticals, electronics, optics and paper and aluminum
extrusions.

High Strength Low Alloy Steel. High strength low alloy steel is a relative term
that refers to those steels that maintain alloying elements that range in
versatility. The alloy element of such steels as nickel, chrome and molybdenum
typically exceed the alloy element of carbon steel but not that of high
temperature alloy steel.

High Temperature Alloy Steel. These steels are designed to meet critical
requirements of heat resistance and structural integrity. They generally have a
very high nickel content relative to other types of specialty steels. High
temperature alloy steels are manufactured for use generally in the aerospace
industry.

2

Net sales by principal product line were as follows:

1996 1995 1994
---- ---- ----

Stainless steel $46,903,000 $38,292,000 $4,192,000
Tool steel 8,019,000 4,080,000 1,212,000
Conversion services 3,804,000 3,272,000 188,000
Other 1,532,000 1,348,000 151,000
--------------------------- ---------------------------- ---------------------------
$60,258,000 $46,992,000 $5,743,000
--------------------------- ---------------------------- ---------------------------

Raw Materials

Scrap Metal

The Company's major raw material is ferrous scrap metal, which is generated
principally from industrial, automotive, demolition and railroad sources and is
purchased in the open market through a number of scrap brokers and dealers or by
direct purchase. The Company purchases approximately 80% of its scrap metal from
six principal domestic suppliers. The long-term demand for scrap metal and its
importance to the domestic specialty steel industry may be expected to increase
as steelmakers continue to expand scrap metal-based electric furnace capacity
with additions to or replacements of existing integrated specialty steel
manufacturing facilities that use iron ore, coke and limestone as their raw
materials. The high quality of the Company's products requires use of premium
grades of scrap metal, the supply of which is more limited. The Company has not
experienced difficulty to date in purchasing adequate scrap metal for its
production processes. The Company believes that adequate supplies of scrap metal
will continue to be available in sufficient quantities for the foreseeable
future. Raw material prices vary based on numerous factors, including quality,
and are subject to frequent market fluctuations and future prices cannot be
predicted with any degree of certainty.

Alloys

The Company purchases various materials for use as alloy additions, some of
which come from Canada (principally nickel) and other foreign countries. Certain
of those alloys (principally chrome) are supplied by South African manufacturers
and any political disruptions in that country could interfere with the delivery
of those materials.

The cost of scrap metal together with alloy additives is more than 50% of the
Company's total cost of products sold. The Company has established arrangements
with certain raw material suppliers that permit the Company to purchase certain
raw materials at set prices for up to 30 to 90 days, which may protect the
Company against short-term price increases in raw materials after it has agreed
to manufacture products for its customers at specified prices, which reflect
those set raw material prices.

PRP Business

The PRP Business' principal starting materials consist of metallic flat bar,
extruded "near shaped" bar and coiled strip, which the Company cold rolls to
customer specification to produce special shapes. The Company generally
purchases those starting materials from steel strip coil suppliers, extruders,
flat rolled producers and service centers. The Company believes that adequate
supplies of starting material for the PRP Business will continue to be available
in sufficient quantities for the foreseeable future.

The Company does not maintain any long-term written agreements with any of its
raw material suppliers.

3

Energy Agreements

The production of steel requires the ready availability of substantial amounts
of energy. Electricity is the major energy source consumed in the Company's
operations. The Company believes that its energy arrangements allow it to
compete effectively within its industry. The Company also uses natural gas in
certain of its furnaces, and certain industrial and refining gases, including
oxygen, nitrogen and argon, in connection with its AOD operations. A curtailment
or interruption in energy supplies could adversely affect the performance of the
Company, as could an increase in energy-related costs.

At the Bridgeville Facility, the Company purchases electricity from Duquesne
Light Company ("DLC") pursuant to a five-year supply agreement entered into in
July 1994, with one-year renewal options. Under that agreement, the Company has
been granted significant reductions in DLC's posted base demand rates,
particularly if, as the Company plans, it conducts its principal melting
operations in off-peak hours, which for purposes of the DLC agreement are
between 6 p.m. and 10 a.m. (16 hours) daily and up to 24 hours a day on
weekends. The Company purchases natural gas from Columbia Energy Services
Corporation on a month-to-month basis.

At the Titusville Facility, the Company purchases electricity from Pennsylvania
Electric Company pursuant to a one-year supply agreement entered into in June
1995, with one-year renewal options. QSE&P, Inc., a wholly owned subsidiary of
Quaker State Corporation, supplies all the Company's natural gas requirements at
that location pursuant to a one-year supply agreement entered into in May 1995,
which is eligible for renewal thereafter.

Air Products and Chemicals, Inc. supplies all the Company's liquid gas for
industrial requirements for its AOD operations pursuant to a five-year agreement
entered into in July 1994, which contains one-year renewal options.

Customers

As of March 24, 1997, the Company has approximately 140 active customers. The
Company's principal customers are rerollers, forgers, service centers and
original equipment manufacturers, which primarily include the power generation
and aerospace industries. A principal element of the Company's business strategy
is to seek new customers so that over time it will reduce its dependence on one
or a small number of customers. For the year ended December 31, 1996, Talley
Metals Technology, Inc., a subsidiary of Talley Industries, Inc., accounted for
44% of the Company's total net sales.

The Company's products are marketed directly to its customers by Company
personnel, including the Company's President and Chief Executive Officer, its
PRP Division General Manager, five full-time sales persons and two independent
sales representatives. Many of the Company's current customers had pre-existing
business relationships with the Company's management prior to the formation of
the Company. In view of the relatively small number of prospective customers for
the Company's customized products, the strong business relationships with its
customers and the thorough product knowledge and substantial experience with
actual and prospective customers of those management and marketing persons, the
Company believes its sales force is adequate for its current and immediately
foreseeable needs. The Company does not have any long-term written agreements
with any of its customers.

Backlog

The Company manufactures products to meet specific customer orders, generally
fulfilling orders in eight weeks or less, and consequently does not manufacture
for inventory purposes. The Company's backlog of orders on hand as of March 24,
1997, was approximately $18.5 million as compared to approximately $11.0 million
at the same time in 1996. Customer orders are generally subject to cancellation
with the payment of a penalty charge prior to shipment. The Company's backlog
may not be indicative of actual sales and therefore should not be used as a
measure of future revenue.

4

Seasonality of Business

The Company's sales and earnings are influenced by seasonal factors. Results in
each third fiscal quarter (three months ending September 30) are expected to be
adversely affected by the Company's annual week-long plant vacation closing
during the July 4 holiday period as well as vacation closings of many of its
customers during that period. Results in each fourth fiscal quarter (three
months ending December 31) are adversely affected by the Company's vacation
closings during the Christmas holiday periods, as well as by the vacation
closings of many of its customers during this period, and by order slowdowns as
customers fulfill their annually budgeted inventory requirements.

Competition

The Company believes itself to be one of approximately 20 domestic manufacturers
that produce specialty steel and one of approximately six domestic specialty
steel manufacturers that produce special shapes. Of that number of firms that
produce specialty steel, the Company believes six companies currently compete
with the Company in the semi-finished specialty steel sector, although other
specialty steel mills have the capability of producing, and hence competing
with, some of or all the Company's semi-finished specialty steel products.

Major competitors of the Company in the semi-finished specialty steel market
include fully integrated specialty steel producers such as Allegheny-Teledyne,
Inc.; Carpenter Technology Corporation; AL Tech Specialty Steel Corporation;
Republic Engineered Steels, Inc.; Slater Steels Corporation; and The Timken
Company; and with respect to the special shapes market served by the PRP
Business, competitors include Rathbone Precision Metals, Inc.; Precision Shapes,
Inc.; and J.T. Slocomb Company. Although Electralloy, a subsidiary of G.O.
Carlson Inc., and First Mississippi Steels, Inc. generally produce only
stainless steel ingots, they can also compete with the Company by utilizing
outside conversion services. Additionally, there are several smaller electric
arc furnace melt shops that also produce specialty steel.

The principal methods of competition in the Company's markets are product
quality, delivery capability, and service and price. Maintaining high standards
of product quality while keeping production costs at competitive levels is
essential to the Company's ability to compete in its markets. The ability of a
manufacturer to respond quickly to customer orders currently is, and is expected
to remain, important in the Company's semi-finished specialty steel market. The
Company believes its universal rolling mill provides it with a competitive
advantage as the only domestic mini-mill that can produce both long product
(billets and blooms, used by customers to produce bar, rod and wire) and flat
rolled product (slabs and plates, used by customers to produce fine gauge plate,
sheet and strip products). Moreover, because the Company's focus is on the
manufacture and supply of semi-finished specialty steel, the Company, unlike an
integrated specialty steel mill, does not have to interrupt a production
schedule devoted in part to the manufacture of finished products or
non-specialty steel, in order to meet its customers' orders for semi-finished
specialty steel products. The Company believes it has the ability to fill
customers' orders in a shorter lead time for delivery of those products than a
fully-integrated specialty steel mill currently can achieve, which provides it
with another competitive advantage. The short lead time may also enable the
Company to avoid maintaining a high level of inventory of raw materials, thereby
reducing the Company's cost of production.

The domestic semi-finished specialty steel industry is frequently affected
by economic conditions generally. Further, the Company also faces competition
from producers of certain materials, particularly aluminum, composites and
plastics, that compete with steel in many markets. In addition, many of the
finished products sold by the Company's customers are in direct competition with
finished products manufactured by foreign sources, a number of which are
government owned and/or subsidized. Increases in levels of imported products
could adversely affect future market prices and demand levels for the finished
products manufactured by the Company's customers. Any competitive factor that
adversely affects these markets could indirectly adversely affect the demand for
the Company's semi-finished products.

5

Employee Relations

The Company considers the maintenance of good relations with its employees to be
important to the successful conduct of its business. The Company has instituted
profit sharing for all of its USWA Employees and has instituted equity ownership
programs for all of its employees, in an effort to forge an alliance between its
employees' interests and those of the Company's stockholders. At December 31,
1996, the Company had 153 employees at the Bridgeville Facility and 55 employees
at the Titusville Facility, of whom 117 and 46 were USWA members located in
Bridgeville and Titusville, respectively.

USWA Agreements

In connection with the Company's acquisition of the Bridgeville Facility from
Armco, the Company and the USWA completed negotiation of a four-year
comprehensive collective bargaining labor agreement that recognizes the USWA as
the exclusive representative for the Company's hourly Bridgeville employees with
respect to the terms and conditions of their employment. The Company believes
that the USWA Agreement at Bridgeville contains certain wage, benefit and work
rule terms more favorable to the Company than those contained in domestic
specialty steel industry collective bargaining labor agreements generally. The
terms include a decrease in the number of job classifications, a combining of
jobs and the lack of a guarantee of a minimum number of work hours under the
USWA Agreement at Bridgeville. The USWA Agreement at Bridgeville requires all
employees to take yearly vacations during weeks when the Company is closed.
Moreover, the Company is not obligated to contribute to any of the USWA
multi-employer retirement and benefit plans. Also, the Company negotiated and
has achieved in the USWA Bridgeville Agreement favorable terms as to overtime,
work rules, seniority and vacations.

In connection with the PRP/VAR Agreement in 1995, the Company entered into a
five-year collective bargaining agreement with the USWA covering employees at
the Titusville Facility. That Agreement contains substantially similar terms to
those included in the USWA Agreement at Bridgeville, but each of the USWA
Agreements is separate and neither USWA Agreement is conditioned on the renewal
of or compliance with the other USWA Agreement.

The Company's USWA Bridgeville employees share in the profit generated at the
Bridgeville Facility in an aggregate amount equal to 8% of the Company's annual
pre-tax profit in excess of $1.0 million generated at that location. The
Company's USWA Titusville employees share in the profit generated at the
Titusville Facility in an aggregate amount equal to 8% of the Company's annual
pre-tax profit in excess of $500,000 generated at that location. Pre-tax annual
profit for this purpose is defined as the Company's income before income taxes
reduced by scheduled debt principal payments. The Company maintains separate
401(k) retirement plans for its union and salaried employees. Pursuant to each
plan, beginning January 1, 1995, participants may elect to make pre-tax
contributions to the plan, subject to certain limitations imposed under the
Internal Revenue Code of 1986, as amended (the "Code"). The Company is required
to make profit-sharing contributions to the plans as follows: $80 per month per
participant in the salaried plan and $0.40 per hour of service worked per
participant in the union plan. Company matching contributions are not permitted
under the plans. The Company also provides health coverage for its union and
salaried employees.

Armco also retained responsibility for any employee benefit obligations existing
prior to August 15, 1994, with respect to persons previously employed at the
Bridgeville Facility. In addition, Armco agreed to indemnify the Company up to
$3.0 million in the aggregate with respect to any such liabilities that may
arise prior to August 15, 2004, and with respect to any other non-environmental
liabilities that may arise under the Agreement between the Company and Armco
prior to August 15, 1997.

On October 6, 1994 and on May 22, 1996, the Company's Board of Directors adopted
employee stock plans for the purpose of issuing 100 shares of Common Stock of
the Company at no cost to eligible employees, which consist of non-executive
employees not eligible for stock options under the 1994 Stock Incentive Plan.
Pursuant to the employee stock plans, the Company issued 6,900 and 11,300 shares
of the Company's Common Stock in 1994 and 1996, respectively. The costs of these
issuances were recorded as compensation expense. These plans were terminated.

6

Employee Stock Purchase Plan Under the 1996 Employee Stock Purchase Plan (the
"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, 1996, the end of the initial
purchase period under the Plan, the Company issued 2,434 shares of Common Stock
to 33 employees at $7.44 per share.

Safety

The Company has established and seeks to maintain appropriate safety standards
and policies for its employees. To encourage plant safety, the USWA Agreements
provide that employees will be entitled to receive ratably 50% of the savings,
if any, of reduced workers' compensation premiums obtained by the Company.

Patents and Trademarks

The Company does not consider its business to be materially dependent on patent
or trademark protection, and believes it owns or maintains effective licenses
covering all the intellectual property used in its business. The Company seeks
to protect its proprietary information by use of confidentiality and
non-competition agreements with certain employees.

Risk Factors

The Company's business and results of operations are subject to a wide range of
substantial business and economic factors discussed below, many of which are not
within the Company's control.

Limited Operating History

The Company has only a limited operating history from which an evaluation of the
Company's prospects may be made. Those prospects must be considered in light of
the numerous risks, expenses, problems and difficulties frequently encountered
in connection with the establishment of a business and the competitive
environment in which the Company operates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
"Financial Statements."

Significant Customer and Concentrated Customer Base

For the year ended December 31, 1996, the Company's largest customer, Talley
Metals Technology, Inc., a subsidiary of Talley Industries, Inc., accounted for
approximately 44% of the Company's net sales. The Company's five largest
customers in the aggregate accounted for approximately 63% of net sales. An
adverse change in, or termination of, the Company's relationship with one or
more of its major customers could have a material adverse effect upon the
Company. While the Company has approximately 140 active customers, the Company
does not have long term written contracts with any of its customers, and
customer orders are generally subject to cancellation with the payment of a
penalty charge prior to delivery. In addition, there can be no assurance that
the Company's current customers will continue to purchase product or services
from the Company at current levels or that they will continue to maintain
relationships with the Company. See "Business--Customers."

Reliance on Critical Manufacturing Equipment

The Company's manufacturing processes are dependent upon certain critical pieces
of specialty steelmaking equipment, such as the Company's melt shop and
universal rolling mill. In the event a critical piece of equipment should become
inoperative as a result of unexpected equipment failure, there can be no
assurance that the Company's operations would not be substantially curtailed. In
that respect, in July and August 1995 the Company experienced an electrical
component breakdown in a drive motor that resulted in an approximately six-week
production halt of the universal rolling mill at the Bridgeville Facility.
Unexpected interruptions in the Company's production capabilities could create
fluctuations in the Company's sales and income. The average age of the Company's

7

equipment is more than ten years. There can be no assurance that a shutdown of
the Company's facilities will not occur in the future or that a shutdown would
not have a material adverse effect on the Company. See "Properties--Capital
Expenditures and Facilities Maintenance Programs."

Competition

The Company competes with domestic mills that produce semi-finished specialty
steel products and, with respect to certain parts of their product line, with
domestic fully integrated specialty steel mills. The Company also experiences
competition from foreign sources of semi-finished specialty steels. In addition,
many of the finished products sold by the Company's customers are in direct
competition with finished products manufactured by foreign sources, which may
affect the demand for those customers' products. Any competitive factor that
adversely affects the market for finished products manufactured by the Company's
customers could indirectly adversely affect the demand for the Company's
semi-finished products. Many of the Company's competitors are larger and have
significantly greater resources than the Company, and a number have recently
undergone restructurings and modernization programs designed to enhance their
competitive positions. Additionally, the Company's products compete with
products fashioned from alternative materials such as aluminum, composites and
plastics, the production of which includes domestic and foreign enterprises with
long operating histories and significant financial and other resources.
Competition in the Company's field is intense and is expected to continue to be
so in the foreseeable future. Also, a number of the Company's competitors are
also customers for certain of the Company's products and services. There can be
no assurance that the Company will be able to compete successfully in the
future. See "Business--Competition."

Environmental Issues

The Company is subject to demanding federal, state and local environmental laws
and regulations (the "Environmental Laws") governing, among other things, air
emissions, waste water discharge and solid and hazardous waste disposal. The
Company leases or owns certain real property and operates equipment previously
owned and used in the manufacture of steel products by Armco. In connection with
the Company's August 15, 1994 agreement with Armco to purchase substantially all
the assets and related equipment of the Armco Stainless and Alloy Products
Division located at the Bridgeville Facility and to lease the Bridgeville
Facility, Armco agreed to retain responsibility for liabilities asserted against
Armco under the Environmental Laws arising out of conditions existing prior to
August 15, 1994, and to indemnify the Company up to $6.0 million in the
aggregate over ten years from August 1994 with respect to any claims in
connection with, or costs incurred by, the Company related to such liabilities.
In connection with the Company's June 2, 1995 agreement with Armco to purchase
the PRP Business, the VAR Assets and a parcel of real property located at
Titusville, Pennsylvania, Armco agreed to indemnify the Company up to $3.0
million in the aggregate for liabilities under the Environmental Laws arising
out of conditions on or under the Titusville property existing prior to June 2,
1995. Armco's obligation to indemnify the Company for any liabilities arising
out of environmental conditions existing offsite as of June 2, 1995, is not
subject to the $3.0 million limitation. The Titusville Facility is located in an
industrial area where contamination by petroleum hydrocarbons is widespread.

Because the indemnification is the Company's exclusive remedy against Armco for
a given environmental liability, the Company will be materially dependent upon
that indemnity should any environmental liability arise. There can be no
assurance that the indemnities from Armco will fully cover any or all
environmental liabilities, and there can be no assurance that the Company will
have the financial resources to discharge the liabilities if legally compelled
to do so. Certain environmental conditions have been identified at the
Bridgeville Facility that Armco in accordance with its agreement with the
Company and pursuant to a consent decree between Armco and the Pennsylvania
Department of Environmental Resources, is addressing at Armco's sole expense.
There can be no assurance that Armco will satisfactorily complete the work
required under the consent decree. There may be other environmental conditions
at the Bridgeville Facility or at the Titusville Facility that have not been
previously identified by regulatory authorities but that may later be determined
to require remediation. The Company is not currently a party to any lawsuit or
proceeding involving alleged violations of any Environmental Laws and believes
that its business, operations and facilities are being operated in compliance in
all material respects with applicable Environmental Laws. However, environmental
laws and regulations have changed rapidly in recent years, and the Company may
be subject to increasingly stringent environmental standards in the future. The
Armco indemnities do not cover liability with respect to violations of the
Environmental Laws or the existence of environmental conditions stemming from
any changes, modifications or amendments to the Environmental Laws effective
after

8

August 15, 1994, with respect to the Bridgeville Facility, or effective
after June 2, 1999, with respect to the Titusville Facility, and there is no
assurance that the Company will not incur any such liability. The Company
anticipates that, from time to time, it will make capital expenditures in
connection with environmental matters. It is impossible, however, currently to
predict the amount of future expenditures that may be required in connection
with environmental compliance. There can also be no assurance that additional
future developments, administrative actions or liabilities relating to
environmental matters will not have a material adverse effect on the Company's
financial condition and results of operations. See "Business--Environmental
Compliance."

Supply of Raw Materials and Cost of Raw Materials

The Company relies on a limited number of suppliers for its raw material needs.
The Company does not maintain long-term supply agreements with any of its
independent suppliers. If its supply of raw materials were interrupted, the
Company might not be able to obtain sufficient quantities of raw materials, or
obtain sufficient quantities of such materials at satisfactory prices, which, in
either case, could adversely affect the Company's results of operations.
Significant increases in the price of the Company's principal raw materials
could adversely affect the Company's financial results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Raw Materials."

Scrap metal is the principal raw material used in the Company's products. Scrap
metal together with alloy additives, principally nickel, chrome and molybdenum,
currently account for more than 50% of the Company's total cost of products
sold. Scrap metal prices are affected by cyclical, seasonal and other market
factors, and therefore future prices cannot be predicted with any degree of
certainty. Consequently, scrap metal prices frequently fluctuate as a result of
factors affecting the supply of scrap metal as well as the demand for steel. In
addition, the supply of premium grades of scrap metal used by the Company is
more limited than the supply of lower grades of scrap metal. Further, nickel and
chrome, key ingredients in certain alloys produced by the Company and
significant cost components, are available substantially 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. There can be no
assurance that the price of the Company's raw materials will remain at current
levels. Furthermore, an increase in the price that the Company pays for its raw
materials could have a material adverse effect on the results of operations of
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Raw Materials."

9

ITEM 2. PROPERTIES

The Company leases its Bridgeville Facility and owns the Titusville Facility.
The Bridgeville Facility is leased pursuant to a long-term net lease from Armco
for ten years from August 15, 1994, which includes the payment by the Company of
real and personal property taxes, water and sewage charges, special assessment
and insurance premiums associated therewith, with three five-year options to
renew on the same terms at the sole discretion of the Company. The Armco Lease
provides the Company with an option to purchase substantially all of the leased
premises for $1 any time during the term of the Armco Lease prior to August 15,
2015. The building that houses the electro-slag remelting equipment, which is
nearby, but not contiguously located, to the other facilities, is included in
the ten-year initial lease term only. The Company anticipates relocating the
equipment it owns in that facility in close proximity to the melt shop complex
in an existing building prior to the expiration of that initial ten-year term.
The Armco Lease is assignable with the written consent of Armco, which consent
cannot be unreasonably withheld. The Company is responsible for compliance with
all environmental laws related to the property subsequent to August 15, 1994,
subject to liabilities Armco retained under the Asset Agreement and Armco's
indemnification obligations.

The Bridgeville Facility consists of approximately 600,000 square feet of floor
space on approximately 50 acres. The Titusville Facility consists of more than
approximately 10 acres and includes seven separate buildings, including two
principal buildings of approximately 265,000 square feet in total area. The
following table sets forth information concerning the principal production and
process components of the Company's business. Certain of the components contain
more than one structure.

Capital Expenditures and Facilities Maintenance Programs
Steel production is generally considered to be a capital intensive industry. The
Company believes it will continue to require capital from time to time to add
new equipment and to repair or replace existing equipment to remain competitive
and, in conjunction with a continuing rigorous maintenance program, to enable it
to manufacture quality products and provide delivery and other support service
assurances to its customers.

In January 1997, the Company completed a capital expenditures program at an
aggregate cost to the Company of approximately $15.0 million. The funds for the
capital expenditures program were expended primarily at the Bridgeville
Facility, to a lesser extent at the Titusville Facility and in part to relocate
certain equipment from Titusville to Bridgeville, primarily as set forth in the
following table:

Location Principal Additions and Improvements Anticipated Results

BRIDGEVILLE

Melt Shop Upgrade 50 ton electric arc furnace, AOD and Reduce melt time.
overhead crane system.

Universal Modification to add high lift rolling Permit production of rolled slab, large bloom
rolling mill capability; add plate descaler. and heavier plate products; improve yield and
complex quality of rolled slab and plate products.

Upgrade drive equipment, reheat furnaces and Improve production efficiency; reduce natural
controls. gas usage.

10

Location Principal Additions and Improvements Anticipated Results

Electro-slag Upgrade electrical and mechanical systems and Improve efficiency in the production of high
remelting controls. temperature alloys for the power generation
complex and aerospace industries.

Overall plant Add roller leveler and flattening press. Flatten certain plate products, replacing
previously outsourced operations.

Add cutting equipment. Permit large ingots to be cropped.
Upgrade various systems and controls. Improve real-time operating control and
information flow.
TITUSVILLE
PRP Area Upgrade various equipment. Improve efficiency; lower production costs.
Relocation and utilization of certain Improve production flow and reduce costs.
equipment.

The Company believes the capital expenditures program will improve its ability
to retain its existing customers and attract new customers by enabling it to
provide a wider range of high quality products, ensure timely delivery of its
products and increase production flexibility.

Environmental Compliance

The Company is subject to demanding federal, state and local environmental laws
and regulations (the "Environmental Laws"), including those governing discharges
of pollutants into the air and water, the generation, handling and disposal of
solid and hazardous substances and the remediation of contamination associated
with generation, handling and disposal activities. The Company is subject
periodically to environmental compliance reviews by various regulatory offices.
Additionally, the Company monitors its compliance with Environmental Laws
applicable to it and, accordingly, believes that it is currently in compliance
with all laws and regulations in all material respects. The Company did not make
during fiscal year 1996, and does not expect to make during fiscal year 1997,
any expenditures for environmental control facilities, but could incur costs,
which may be significant, related to environmental compliance at any time or
from time to time in the future.

Bridgeville Facility

The Company has not incurred to date and does not anticipate incurring any
remediation costs from environmental conditions at the Bridgeville Facility. The
Company does not expect that any remediation that may be required at the
Bridgeville Facility will have a material adverse effect on the Company's
results of operations, liquidity or financial condition. The Company operates
production and processing equipment, which it owns, on real property that is
leased from Armco. Armco remains contractually obligated for environmental
matters, including compliance with laws governing the removal of hazardous
materials and the elimination of hazardous conditions, which stem from any
operations or activities at the leased Bridgeville Facility prior to August 15,
1994. In addition, Armco has agreed to indemnify the Company against any
liability arising as a result of any of those matters with respect to the
Bridgeville Facility to the extent of $6.0 million in the aggregate until 2004
and has further agreed (subject to the indemnity limits) to pay up to $250,000
for each 30-day period and up to $1.0 million in reimbursement for certain
non-recoverable operating costs should the Company's business be interrupted by
reason of matters arising under Environmental Laws that stem from occurrences
prior to August 15, 1994. Except as required by law or for the protection of
public health or the safety of its employees, the Company is contractually
prohibited from taking voluntary or discretionary action to accelerate or delay
the timing, or increase the cost of, Armco's environmental obligations with
respect to the Bridgeville Facility. Prior to entering into the Asset Agreement,
Armco and the Company identified certain environmental conditions existing at
the Bridgeville Facility, including asbestos in various structures, oils and
electrical devices containing PCBs, that Armco or the Company has remediated at
Armco's expense. Armco also remains responsible, without cost to the Company,
for complying with a 1993

11

consent decree with the Pennsylvania Department of Environmental Resources
pursuant to which it is remediating certain contamination at the universal
rolling mill complex. That contamination stemmed from the release of oils
affecting soil and water conditions due to inadequate wastewater treatment. The
Company believes that Armco is in compliance with that consent decree and such
remediation is not expected to adversely impact the Company's use of the
facility. Pending the completion of the remediation by Armco, the Company is
operating, and thereafter intends to operate, the universal rolling mill in a
manner designed to avoid contamination. The Company's Bridgeville Facility
includes an overhead and rooftop system (the "bag house") to remove waste gases
generated by its melting operations. The bag house facility associated with that
system collects oxides and non-metallic residue for reclaiming purposes. An
independent reclaiming contractor purchases the oxides and non-metallic residue,
removes the residue and converts it into metallic form for sale back to the
Company as scrap metal. This reclaiming process enables the Company to dispose
of the unwanted residue, while at the same time recovering some raw materials
for the manufacture of semi-finished specialty steel.

Titusville Facility

The Company operates its production and processing equipment that was acquired
from Armco on real property the Company owns. Armco has agreed to indemnify the
Company to the extent of $3.0 million in the aggregate against liability for
environmental matters, including compliance with laws governing the removal of
hazardous materials and the elimination of hazardous conditions, which pertain
to environmental conditions existing on or under the Titusville Facility prior
to June 2, 1995. In addition, Armco has agreed to indemnify the Company for any
liabilities arising out of environmental conditions existing offsite as of June
2, 1995, and that indemnification is not subject to the $3.0 million limitation.
In connection with the PRP/VAR Agreement, the Company conducted a Phase I and
Phase II environmental study (the "Study") of the parcel of real estate acquired
by the Company, and the Company believes the amount and terms of Armco's
indemnity are sufficient to protect the Company against environmental
liabilities arising at the Titusville Facility from environmental conditions
existing as of June 2, 1995. The Study revealed asbestos in certain areas
adjacent to the Titusville Facility, which Armco has remediated at its expense,
and some electrical equipment containing PCBs that the Company is remediating at
its expense, which is not material. Additionally, the Study noted that as is
typical of the Titusville, Pennsylvania area generally, there is regional soil
and groundwater hydrocarbon contamination present at above applicable cleanup
standards, reflecting the fact that this area contains natural petroleum
deposits and that petroleum refining operations had been conducted nearby. Any
contamination of this type on the Company's property flows from outside its
boundaries, to the extent it is not indigenous to the underlying ground. The
Company believes it unlikely that it or Armco will be required to provide
cleanup at the Titusville Facility for the local hydrocarbon contamination or,
if it were, the Company believes this action would be part of a large program
addressing the entire area. To date, the Company has not been contacted by any
environmental governmental authority concerning this matter. Notwithstanding
Armco's indemnification obligations, with respect to the Titusville Facility, if
the Company accelerates the timing or increases the cost of any environmental
obligation retained by Armco except as required by law or for the protection of
public health or the safety of its employees, the Company shall bear such
accelerated or increased cost. If the Company accelerates the timing or
increases the cost of any environmental obligation retained by Armco with
respect to the Titusville Facility as a result of seeking financing or the sale
of less than a controlling interest in the voting stock of the Company, such
accelerated or increased cost shall be borne equally by Armco and the Company.
Armco has agreed to allow the Company to operate the business and the assets at
the Titusville Facility under Armco's National Pollution Discharge Elimination
System permit pending issuance of a modified permit to the Company.
Additionally, certain other processes that were employed by Armco, and certain
facilities used by Armco that may have involved or been the site of activities
that could have caused environmental pollution at the Titusville Facility, are
not employed or used by the Company. There may be other environmental conditions
that have not been identified by regulatory authorities but which may later be
determined to require remediation.

The Company's exclusive remedies for reimbursement from Armco for losses
stemming from pre-closing environmental conditions at each of the Bridgeville
Facility and the Titusville Facility are the indemnities agreed to with respect
to each of the facilities. There can be no assurance that those indemnities will
fully cover all environmental liabilities, especially if the relevant regulatory
authorities or others were to proceed solely against the Company with respect to
those liabilities at the Bridgeville Facility that arise out of conditions
existing prior to the commencement of the Armco Lease on August 15, 1994 (an
event the Company believes is unlikely), and there can

12

be no assurance that the Company will have the financial resources to discharge
those liabilities if legally compelled to do so. See "Risk Factors--
Environmental Issues."

Based on the foregoing and the experience of its senior executives with respect
to both Armco's and the Company's facilities and the equipment and processes
employed at the Bridgeville Facility, and the results of the Phase I and Phase
II environmental study of the Titusville Facility, the Company believes the
amount and terms of the Armco indemnities are sufficient to protect the Company
against environmental liabilities arising from environmental conditions prior to
August 15, 1994, with respect to the Bridgeville Facility, and prior to June 2,
1995, with respect to the Titusville Facility.

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings pending or, to the Company's best knowledge,
threatened against the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None during the fourth quarter of 1996.

13

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

Price Range of Common Stock

The Common Stock was accepted for trading on the NASDAQ National Market
beginning on August 24, 1995, and from December 14, 1994, the Common Stock had
traded on the NASDAQ Small Cap Market. The Common Stock has always traded under
the symbol "USAP". The following table sets forth the range of high and low sale
prices per share of Common Stock, as reported by the NASDAQ Small Cap Market and
the NASDAQ National Market, as the case may be, for the periods indicated below:

High Low
- -------------------------------------------------------------------------------------------------------------------

Year 1996

First quarter $13-3/8 $ 9-1/4
Second quarter $12-1/4 $ 8-1/2
Third quarter $10-5/8 $ 8-3/4
Fourth quarter $ 9-1/4 $ 8
- -------------------------------------------------------------------------------------------------------------------

Year 1995

First quarter $10-1/2 $ 8
Second quarter $12-7/8 $ 9
Third quarter $16 $11-1/4
Fourth quarter $13 $ 9
- -------------------------------------------------------------------------------------------------------------------

On March 25, 1997, the last sale price of the Company's Common Stock as reported
by the NASDAQ National Market was $10 per share. At that date, there were
approximately 237 record holders of the Company's Common Stock.

Dividend Policy

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 Company presently
intends to retain its earnings, if any, to finance the development of its
business. Any future dividend policy will be determined by the Company's Board
of Directors, and the payment of any dividend in the future will be based upon
conditions then existing, including the Company's earnings, financial condition
and capital requirements, as well as such economic and other factors as the
Board of Directors may deem relevant at the time. The PNC Agreement contains
restrictions on the Company's ability to pay dividends on the Common Stock.

14

ITEM 6. SELECTED FINANCIAL DATA

Statement of operations data:

For the Preoperating
and Operating Period
Year Ended December 31
Ended
1996 1995 December 31, 1994
------------------- -------------------- ----------------------

Net sales $60,258 $46,992 $5,743

Income (loss) before extraordinary items 4,793 2,723 (1,842)
Extraordinary items (2) -- __ (634)

Net income (loss) 4,793 2,723 (2,476)
=================== ==================== ======================

Net income (loss) per share of Common Stock:
Operations $0.76 $0.57 ($0.84)
Extraordinary items -- -- ($0.22)
------------------- ----------------------

- ---------------------------------------------
Net income (loss) $0.76 $0.57 ($0.84)

6,270,952
=================== ==================== ======================
Weighted average number of shares of
Common Stock outstanding 6,270,952 4,745,384 2,935,646
=================== ==================== ======================

Balance sheet data:

December 31,
1996 1995 1994
---- ---- ----

Working capital $15,981 $19,283 $6,857
Total assets 42,098 32,437 14,757
Long-term debt (2) 2,534 462 762
Total stockholders' equity (3) 30,497 25,591 8,875

- ---------------------------

1) The Company began operating the Bridgeville Facility on August 15, 1994,
and initial shipments of semi-finished specialty steel were made on
September 19, 1994. Due to significant differences between the operations
conducted by Cyclops and Armco at the Bridgeville Facility and those
conducted by the Company, financial data prior to such time is not
comparable and therefore is not presented. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Pre-Acquisition
Financial Information".
2) During 1994, the Company recorded an extraordinary loss in the early
extinguishment of debt in connection with the retirement of the Armco Note,
and the 8% Subordinated Note, and the early termination of a bank loan
agreement.
3) In 1994, the Company completed an initial public offering of 1,625,000
shares of its Common Stock for net proceeds of $10,748,000. In 1995, the
Company completed additional offerings, issuing 1,750,600 shares of its
Common Stock for net proceeds of $13,993,000.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

The information called for by this item is set forth on Pages 14 through 18 of
the Annual Report to Stockholders for the year ended December 31, 1996, which
are incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information called for by this item is set forth on Pages 19 through 34 of
the Annual Report to Stockholders for the year ended December 31, 1996, which
are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

There were none.

16

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the directors of the Company is set forth in the
Proxy Statement (the "Proxy Statement") to be sent to stockholders in connection
with the Company's Annual Meeting of Stockholders to be held on May 21, 1997,
under the heading "Proposal No. 1--Election of Directors," which information is
incorporated herein by reference.

The following table sets forth, as of December 31, 1996, certain information
with respect to the executive officers of the Company:

NAME (AGE) EXECUTIVE OFFICER SINCE POSITION

Clarence M. McAninch (61) 1994 President and Chief Executive Officer
Bradford C. Bowman (47) 1996 Chief Operating Officer
Daniel J. DeCola, Sr. (44) 1994 Vice President, Operations
Richard M. Ubinger (37) 1994 Chief Financial Officer, Principal
Accounting Officer and Treasurer
Paul A. McGrath (45) 1997 Secretary and General Counsel

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission and
the NASDAQ National Market System reports of ownership and changes in ownership
of Common Stock and other equity securities of the Company. Officers, directors
and greater than 10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.

Based solely on review of the copies of such reports furnished to the Company or
written representations that no other reports are required, the Company believes
that, during the 1996 fiscal year, all filing requirements applicable to its
officers, directors and greater than 10% of beneficial owners were met except
that one report filed by Mr. Ubinger was inadvertently filed late.

With the exception of the information specifically incorporated herein by
reference, the Company's Proxy Statement is not to be deemed filed as part of
this report for the purposes of this Item.

ITEM 11. EXECUTIVE COMPENSATION

The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated by reference. With the exception of the information specifically
incorporated herein by reference, the Company's Proxy Statement is not to be
deemed filed as part of this report for the purposes of this Item.

17

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information concerning security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated by reference. With the exception of the information specifically
incorporated herein by reference, the Company's Proxy Statement is not to be
deemed filed as part of this report for the purposes of this Item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information concerning certain relationships and related transactions is set
forth in the Proxy Statement under the heading "Certain Transactions," which
information is incorporated by reference. With the exception of the information
specifically incorporated herein by reference, the Company's Proxy Statement is
not to be deemed filed as part of this report for the purposes of this Item.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

The following documents are filed as part of this Annual Report on Form 10-K:

1) Consolidated Financial Statements:
The consolidated financial statements, together with the report thereon of
Price Waterhouse LLP, appearing on Pages 19 through 34 of the accompanying
Annual Report to Stockholders, are incorporated by reference in this Form
10-K Annual Report.

2) Consolidated Financial Statement Schedules:

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and have therefore been
omitted.

3) Exhibits:

EXHIBIT
NUMBER DESCRIPTION
2.1* Certificate of Merger, dated July 29, 1994, between Universal
Stainless & Alloy Products, Inc., a Pennsylvania corporation, and
the Company.
2.2* Agreement and Plan of Merger, dated July 28, 1994, among Universal
Stainless & Alloy Products, Inc., a Pennsylvania corporation, and
the Company.

2.3** Asset and Real Property Purchase Agreement, dated as of June 2,
1995, by and between Armco Inc. and the Company.

3.1* Amended and Restated Certificate of Incorporation.
3.2* By-laws of the Company.
4.1* Specimen Copy of Stock Certificate for shares of Common Stock.

18

4.2* Form of Representative's Warrant Agreement (including Form of
Representative's Warrant Certificate).

10.1* Base Contract for Sale of Natural Gas, dated July 1, 1993, by and
between the Company and Columbia Energy Services Corporation.

10.2* Electric Service Contract, dated July 27, 1994, by and between the
Company and Duquesne Light Company, with Schedule of Rates.
10.3* Product Supply Agreement, dated August 16, 1994, by and between Air
Products and Chemicals, Inc., and the Company.

10.4* Management Stock Disposition Agreement, dated July 28, 1994, by
and between the Company and Daniel J. DeCola, Sr.

10.5* Management Stock Disposition Agreement, dated July 28, 1994, by and
between the Company and Clarence M. McAninch.

10.6* Non-Management Stock Disposition Agreement, dated July 28, 1994, by
and between the Company and Samuel P. Gerace, Sr.

10.7* Securities Purchase Agreement, dated July 29, 1994, by and among
the Company and Herbert V. Turk.

10.8* Stockholders Agreement, dated as of August 1, 1994, by and among
the Company and its existing stockholders.

10.9* Lease Agreement, dated August 15, 1994, by and between Armco Inc.
and the Company.

10.10* Employment Agreement, dated August 15, 1994, by and between the
Company and Daniel J. DeCola, Sr.

10.11* Employment Agreement, dated August 15, 1994, by and between the
Company and Clarence M. McAninch.

10.12* Asset Purchase Agreement, dated August 15, 1994, by and between the
Company and Armco Inc., as amended by letter agreement, dated
October 5, 1994, by and between the Company and Armco Inc.
10.13* Loan and Security Agreement, dated August 15, 1994, by and between
the Company and Mellon Bank, N.A., as amended by letter agreement,
dated October 11, 1994.
10.14* Subordination and Intercreditor Agreement, dated August 15, 1994,
by and among Armco Inc., the Company and Mellon Bank, N.A.

10.15* Subordination and Intercreditor Agreement, dated August 15, 1994,
by and among Armco Inc., the Company and Herbert V. Turk.

10.16* Subordination and Intercreditor Agreement, dated August 15, 1994,
by and among Herbert V. Turk, the Company and Mellon Bank, N.A.

10.17* Open-End Leasehold Mortgage and Security Agreement, dated August
15, 1994, by the Company, in favor of Mellon Bank, N.A.

10.18* Promissory Note, dated August 15, 1994, for the principal sum of
$1,850,000.00, by the Company, in favor of Armco Inc.

10.19* Subordinated Note, dated August 15, 1994, for the principal sum of
$2,000,000.00, by the Company, in favor of Herbert V. Turk.

10.20* Note, dated August 15, 1994, for the principal sum of
$4,500,000.00, by the Company, in favor of Mellon Bank, N.A.

10.21* Security Agreement, dated August 15, 1994, by and between the
Company and Armco Inc.

19

10.22* Junior Security Agreement, dated August 15, 1994, by and between
the Company and Herbert V. Turk.

10.23* Surety Agreement, dated August 15, 1994, by Daniel J. DeCola, and
Linda D. DeCola, in favor of Mellon Bank, N.A.

10.24* Surety Agreement, dated August 15, 1994, by Clarence M. McAninch
and Kay L. McAninch, in favor of Mellon Bank, N.A.

10.25* 1994 Stock Incentive Plan.
10.26* Employee Stock Plan.
10.27* Letter Agreement, dated July 15, 1994, by and between the Company
and Tradition (North America), Inc.
10.28* Collective Bargaining Agreement, dated August 24, 1994, by and
between the Company and United Steelworkers of America.

10.29* Subscription Agreement, dated October 14, 1994, by and between
Edelson Technology Partners III, L.P. and the Company.

10.30* Escrow Letter, dated November 22, 1994, between the Company and PNC
Bank, National Association.
10.31* Credit Agreement, dated as of November 18, 1994, between the
Company and PNC Bank, National Association, with Exhibits and
Schedules.
10.32* Security Agreement and Collateral Assignment, dated as of November
18, 1994, by and between the Company and PNC Bank, National
Association.

10.33* Note, dated as of November 18, 1994, by and between the Company and
PNC Bank, National Association.

10.34* Landlord's Waiver, dated as of November 18, 1994, by Armco Inc.
10.35* Open-End Leasehold Mortgage, Collateral Assignment and
Security Agreement dated as of November 18, 1994, by the Company in
favor of PNC Bank, National Association. 10.36* Pledge and Security
Agreement, dated as of November 18, 1994, between the Company and
PNC Bank, National Association. 10.37** First Amendment to Credit
Agreement and Waiver, dated as of March 30, 1995, by and between
the Company and PNC Bank, National Association. 10.38** Second
Amendment to Credit Agreement and Waiver, dated as of May 31, 1995,
by and between the Company and PNC Bank, National Association.
10.39** Third Amendment to Credit Agreement and Waiver, dated as of
August 25, 1995, by and between the Company and PNC Bank, National
Association. 10.40** Fourth Amendment to Credit Agreement and
Waiver, dated as of October 3, 1995, by and between the Company and
PNC Bank, National Association. 10.41** Fifth Amendment to Credit
Agreement and Waiver, dated as of October 9, 1995, by and between
the Company and PNC Bank, National Association. 10.42** Collective
Bargaining Agreement, dated May 3, 1995, by and between the Company
and United Steelworkers of America.

10.43** Promissory note, dated June 2, 1995, by and between the Company and
Armco Inc.

10.44** Security Agreement, dated as of June 2, 1995, by and between the
Company and Armco Inc.

10.45** Mortgage, dated as of June 2, 1995, by and between the Company and
Armco Inc.

20

10.46** Letter Agreement, dated July 6, 1995, by and between the Company
and Commonwealth of Pennsylvania.

10.47** Loan Agreement, dated October 3, 1995, by and between the Company
and Commonwealth of Pennsylvania.

10.48** Note, dated October 3, 1995, for the principal sum of $500,000, by
the Company, in favor of the Commonwealth of Pennsylvania.

10.49** Security Agreement, dated October 3, 1995, by and between the
Company and the Commonwealth of Pennsylvania.

10.50** Letter Agreement, dated June 30, 1995, by and between the Company
and the Commonwealth of Pennsylvania.

10.51** Letter Agreement, dated September 20, 1995, by and between the
Company and the Commonwealth of Pennsylvania.

10.52* Underwriting Agreement, dated December 14, 1995, among the Company
and Keane Securities Co., Inc., as representatives of the several
underwriters.
10.53** Form of Underwriting Agreement among the Company and Oppenheimer &
Co., Inc., and Furman Selz Incorporated, as representatives of the
several underwriters.
10.54*** First Amendment to Registration Rights Agreement, dated as of July
3, 1995, by and between the Company and Edelson Technology Partners
III, L.P.

10.55 Employment Agreement, dated October 8, 1996, by and between the
Company and Bradford C. Bowman.

13 Selected pages of the Company's 1996 Annual Report to Shareholders
incorporated by reference into Part II of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
23.1 Consent of Price Waterhouse LLP.
24 Powers of Attorney (included on the signature page hereto).
27 Financial Data Schedule.

- ---------------------------

* Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-85310).

** Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-97896).

*** Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-98534).

b) No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1994.

c) See Item 14(a)(3) above.
d) None.

21

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on March 27,
1996.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

By: /s/ Clarence M. McAninch
---------------------------
Clarence M. McAninch
President and Chief Executive Officer

POWER OF ATTORNEY

Each of the officers and directors of Universal Stainless & Alloy Products,
Inc., whose signature appears below in so signing also makes, constitutes and
appoints Clarence M. McAninch and Daniel J. DeCola, Sr., and each of them acting
alone, his true and lawful attorney-in-fact, with full power of substitution,
for him in any and all capacities, to execute and cause to be filed with the
Securities Exchange Commission any and all amendment or amendments to this
Report on Form 10-K, with exhibits thereto and other documents connected
therewith and to perform any acts necessary to be done in order to file such
documents, and hereby ratifies and confirms all that said attorney-in-fact or
his substitute or substitutes, may do or cause to be done by virtue hereof.

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

SIGNATURE TITLE DATE

/s/ Clarence M. McAninch President, Chief Executive Officer March 27, 1997
- ---------------------------------------
Clarence M. McAninch and Director
March 27, 1997
/s/ Bradford C. Bowman Chief Operating Officer
- ---------------------------------------
Bradford C. Bowman and Director

/s/ Daniel J. DeCola, Sr. Vice President, Operations March 27, 1997
- ---------------------------------------
Daniel J. DeCola, Sr. Director

/s/ Richard M. Ubinger Chief Financial Officer, Principal Accounting March 27, 1997
- ---------------------------------------
Richard M. Ubinger Officer and Treasurer

/s/ Udi Toledano Director March 27, 1997
- ---------------------------------------
Udi Toledano

/s/ Orit Gadiesh Director March 27, 1997
- ---------------------------------------
Orit Gadiesh

/s/ George F. Keane Director March 27, 1997
- ---------------------------------------
George F. Keane

/s/ D. Leonard Wise Director March 27, 1997
- ---------------------------------------
D. Leonard Wise

22

Exhibit Index

EXHIBIT
NUMBER DESCRIPTION

2.1* Certificate of Merger, dated July 29, 1994, between Universal
Stainless & Alloy Products, Inc., a Pennsylvania corporation, and
the Company.
2.2* Agreement and Plan of Merger, dated July 28, 1994, among Universal
Stainless & Alloy Products, Inc., a Pennsylvania corporation, and
the Company.
2.3** Asset and Real Property Purchase Agreement, dated as of June 2, 1995, by and between Armco Inc. and the
Company.
3.1* Amended and Restated Certificate of Incorporation.
3.2* By-laws of the Company.
4.1* Specimen Copy of Stock Certificate for shares of Common Stock.
4.2* Form of Representative's Warrant Agreement (including Form of Representative's Warrant Certificate).
10.1* Base Contract for Sale of Natural Gas, dated July 1, 1993, by and between the Company and Columbia Energy
Services Corporation.
10.2* Electric Service Contract, dated July 27, 1994, by and between the
Company and Duquesne Light Company, with Schedule of Rates.
10.3* Product Supply Agreement, dated August 16, 1994, by and between Air
Products and Chemicals, Inc., and the Company.
10.4* Management Stock Disposition Agreement, dated July 28, 1994, by and between the Company
and Daniel J. DeCola, Sr.
10.5* Management Stock Disposition Agreement, dated July 28, 1994, by and between the Company
and Clarence M. McAninch.
10.6* Non-Management Stock Disposition Agreement, dated July 28, 1994, by and between the
Company and Samuel P. Gerace, Sr.
10.7* Securities Purchase Agreement, dated July 29, 1994, by and among the Company and Herbert
V. Turk.
10.8* Stockholders Agreement, dated as of August 1, 1994, by and among the Company and its
existing stockholders.
10.9* Lease Agreement, dated August 15, 1994, by and between Armco Inc. and the Company.
10.10* Employment Agreement, dated August 15, 1994, by and between the Company and
Daniel J. DeCola, Sr.
10.11* Employment Agreement, dated August 15, 1994, by and between the Company and Clarence M.
McAninch.
10.12* Asset Purchase Agreement, dated August 15, 1994, by and between the
Company and Armco Inc., as amended by letter agreement, dated
October 5, 1994, by and between the Company and Armco Inc.
10.13* Loan and Security Agreement, dated August 15, 1994, by and between
the Company and Mellon Bank, N.A., as amended by letter agreement,
dated October 11, 1994.
10.14* Subordination and Intercreditor Agreement, dated August 15, 1994,
by and among Armco Inc., the Company and Mellon Bank, N.A.
10.15* Subordination and Intercreditor Agreement, dated August 15, 1994, by and among Armco Inc.,
the Company and Herbert V. Turk.
10.16* Subordination and Intercreditor Agreement, dated August 15, 1994, by and among Herbert V.
Turk, the Company and Mellon Bank, N.A.
10.17* Open-End Leasehold Mortgage and Security Agreement, dated August
15, 1994, by the Company, in favor of Mellon Bank, N.A.
10.18* Promissory Note, dated August 15, 1994, for the principal sum of $1,850,000.00, by the
Company, in favor of Armco Inc.
10.19* Subordinated Note, dated August 15, 1994, for the principal sum of $2,000,000.00, by the
Company, in favor of Herbert V. Turk.
10.20* Note, dated August 15, 1994, for the principal sum of $4,500,000.00, by the Company, in
favor of Mellon Bank, N.A.
10.21* Security Agreement, dated August 15, 1994, by and between the Company and Armco Inc.
10.22* Junior Security Agreement, dated August 15, 1994, by and between the Company and
Herbert V. Turk.
10.23* Surety Agreement, dated August 15, 1994, by Daniel J. DeCola, and Linda D. DeCola, in
favor of Mellon Bank, N.A.
10.24* Surety Agreement, dated August 15, 1994, by Clarence M. McAninch and Kay L. McAninch, in
favor of Mellon Bank, N.A.
10.25* 1994 Stock Incentive Plan.
10.26* Employee Stock Plan.
10.27* Letter Agreement, dated July 15, 1994, by and between the Company
and Tradition (North America), Inc.
10.28* Collective Bargaining Agreement, dated August 24, 1994, by and
between the Company and United Steelworkers of America.
10.29* Subscription Agreement, dated October 14, 1994, by and between Edelson Technology Partners
III, L.P. and the Company.
10.30* Escrow Letter, dated November 22, 1994, between the Company and PNC
Bank, National Association.
10.31* Credit Agreement, dated as of November 18, 1994, between the
Company and PNC Bank, National Association, with Exhibits and
Schedules.
10.32* Security Agreement and Collateral Assignment, dated as of November
18, 1994, by and between the Company and PNC Bank, National
Association.
10.33* Note, dated as of November 18, 1994, by and between the Company and PNC Bank, National
Association.
10.34* Landlord's Waiver, dated as of November 18, 1994, by Armco Inc.
10.35* Open-End Leasehold Mortgage, Collateral Assignment and Security
Agreement dated as of November 18, 1994, by the Company in favor of
PNC Bank, National Association.
10.36* Pledge and Security Agreement, dated as of November 18, 1994,
between the Company and PNC Bank, National Association.
10.37** First Amendment to Credit Agreement and Waiver, dated as of March
30, 1995, by and between the Company and PNC Bank, National
Association.
10.38** Second Amendment to Credit Agreement and Waiver, dated as of May
31, 1995, by and between the Company and PNC Bank, National
Association.
10.39** Third Amendment to Credit Agreement and Waiver, dated as of August
25, 1995, by and between the Company and PNC Bank, National
Association.
10.40** Fourth Amendment to Credit Agreement and Waiver, dated as of
October 3, 1995, by and between the Company and PNC Bank, National
Association.
10.41** Fifth Amendment to Credit Agreement and Waiver, dated as of October
9, 1995, by and between the Company and PNC Bank, National
Association.
10.42** Collective Bargaining Agreement, dated May 3, 1995, by and between the Company and United
Steelworkers of America.
10.43** Promissory note, dated June 2, 1995, by and between the Company and Armco Inc.
10.44** Security Agreement, dated as of June 2, 1995, by and between the Company and Armco Inc.
10.45** Mortgage, dated as of June 2, 1995, by and between the Company and Armco Inc.
10.46** Letter Agreement, dated July 6, 1995, by and between the Company and Commonwealth of
Pennsylvania.
10.47** Loan Agreement, dated October 3, 1995, by and between the Company and Commonwealth of
Pennsylvania.
10.48** Note, dated October 3, 1995, for the principal sum of $500,000, by the Company, in favor
of the Commonwealth of Pennsylvania.

10.49** Security Agreement, dated October 3, 1995, by and between the Company and the
Commonwealth of Pennsylvania.
10.50** Letter Agreement, dated June 30, 1995, by and between the Company and the Commonwealth of
Pennsylvania.
10.51** Letter Agreement, dated September 20, 1995, by and between the Company and the
Commonwealth of Pennsylvania.
10.52* Underwriting Agreement, dated December 14, 1995, among the Company
and Keane Securities Co., Inc., as representatives of the several
underwriters.
10.53** Form of Underwriting Agreement among the Company and Oppenheimer &
Co., Inc., and Furman Selz Incorporated, as representatives of the
several underwriters.
10.54*** First Amendment to Registration Rights Agreement, dated as of July
3, 1995, by and between the Company and Edelson Technology Partners
III, L.P.
10.55 Employment Agreement, dated October 8, 1996, by and between the Company and Bradford C.
Bowman.
13.1 Selected pages of the Company's 1996 Annual Report to Shareholders
incorporated by reference into Part II of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
23.1 Consent of Price Waterhouse LLP.
24 Powers of Attorney (included on the signature page hereto).
27 Financial Data Schedule

- ---------------------------

* Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-85310).

** Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-97896).

*** Incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-98534).

b) No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1994.
c) See Item 14(a)(3) above.
d) None.