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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number: 001-13122

RELIANCE STEEL & ALUMINUM CO.

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

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

      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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of 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.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes o          No þ

      The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on the New York Stock Exchange on February 28, 2003 was $488,818,876.65.

      As of February 28, 2003, 31,752,087 shares of the registrant’s common stock, no par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 21, 2003 (the “Proxy Statement”) are incorporated by reference into Part III of this report.

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INDEX

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SAFE HARBOR STATEMENT UNDER THE PRIVATE

      This Annual Report on Form 10-K and the documents incorporated in this Annual Report on Form 10-K by reference contain forward-looking statements. You should read carefully any statements containing the words “expect,” “believe,” “anticipate,” “project,” “estimate,” “predict,” “intend,” “should,” “could,” “may,” “might,” or similar expressions or the negative of any of these terms.

      Forward-looking statements involve known and unknown risks and uncertainties. Various factors, such as the “Risk Factors” listed below may cause our actual results, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Among the factors that could cause our results to differ are the following:

	•	Our interest rates on our debt could change. Our variable rate debt is currently at historically low levels and we anticipate that these rates will increase in the future.
	•	Foreign currency exchange rates could change, which could affect the price we pay for metals and the results of our foreign operations.
	•	Our acquisitions might fail to perform as we anticipate. This could result in an impairment charge to write off some or all of the goodwill for that entity.
	•	Our future operating results depend on a number of factors beyond our control, such as the prices for and the availability of metals, which could cause our results to fluctuate over time. During periods of low customer demand, it could be more difficult for us to pass through price increases to our customers, which could reduce our gross margin and net income.
	•	We service industries that are highly cyclical, and any further downturn in our customers’ industries could reduce our revenue and profitability.
	•	The success of our business is affected by general economic conditions, and, accordingly, our business was adversely impacted by the economic slowdown or recession in 2002 and 2001. We expect this to continue into 2003.
	•	Our business is very competitive and increased competition could reduce our gross margins and net income. The low demand levels in 2002 increased competitive pricing pressures and lowered our gross margin. This has continued into 2003.
	•	As a decentralized business, we depend on both senior management and our operating employees; if we are unable to attract and retain these individuals, our results of operations may decline.
	•	We may not be able to consummate future acquisitions, and those acquisitions which we do complete may be difficult to integrate into our business.
	•	We are subject to various environmental and other governmental regulations which may require us to expend significant capital and incur substantial costs.
	•	If existing shareholders sell their shares, the market price of our common stock could be depressed.
	•	Principal shareholders who own a significant number of our shares may have interests that conflict with yours.
	•	We have implemented anti-takeover provisions that may adversely impact your rights as a holder of our common stock.

      Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future performance or results. We are not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should consider these risks when reading any forward-looking statements.

      This Annual Report on Form 10-K includes trademarks and service marks of the Company and its subsidiaries.

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PART I

Item 1.     Business.

      We are one of the five largest metals service center companies in the United States. Our network of 24 divisions, 18 operating subsidiaries and one 50.5%-owned company operates 99 processing and distribution facilities in 27 states, Belgium, France and South Korea. Through this network, we provide metals processing services and distribute a full line of more than 85,000 metal products, including alloy, aluminum, brass, copper, carbon steel, titanium, stainless steel and specialty steel products, to more than 85,000 customers in a broad range of industries. Many of our metals service centers provide processing services for specialty metals only. We deliver products from facilities in Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Montana, Nevada, New Jersey, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah and Washington. One of our subsidiaries has two international locations, with a French subsidiary operating a distribution center in Fuveau, France and a 69.5% ownership interest in a joint venture company operating a manufacturing facility near Seoul, South Korea. Another subsidiary opened a metals service center in Gosselies, Belgium in January 2003 to service the European aerospace market.

      Our primary business strategy is to enhance our operating results through strategic acquisitions and expansion of our existing operations. This strategy and our proven operating methods have enabled us to outperform most of our competitors in the metals service center industry. In 2002, we had net sales of $1.75 billion and net income of $30.2 million.

Industry Overview

      Metals service centers acquire products from primary metals producers and then process carbon steel, aluminum, stainless steel and other metals to meet customer specifications, using techniques such as blanking, leveling (or cutting-to-length), sawing, shape cutting and shearing. These processing services save our customers time, labor, and expense and reduce their overall manufacturing costs. Specialized equipment used to process the metals requires high-volume production to be cost effective. Many manufacturers are not able or willing to invest in the necessary technology, equipment, and inventory to process the metals for their own manufacturing operations. Accordingly, industry dynamics have created a niche in the market. Metals service centers purchase, process, and deliver metals to end-users in a more efficient and cost-effective manner than the end-user could achieve by dealing directly with the primary producer or with an intermediate steel processor. Industry analysts estimate that, historically in the United States, based on tonnage, metals service centers and processors annually purchase and distribute approximately:

	•	30% of all carbon industrial steel products produced in the United States;
	•	45% of all stainless steel produced in the United States; and
	•	36% of all aluminum sold in the mill/distributor shared markets (which excludes that sold for aluminum cans, among other things).

      These percentages have not changed significantly in the last five years. The metals distribution industry is currently estimated to generate more than $75 billion in revenues in the United States.

      The metals service center industry is highly fragmented and intensely competitive within localized areas or regions. Many of our competitors operate single stand-alone service centers. According to industry sources, the number of intermediate steel processors and metals service center facilities in the United States has decreased from approximately 7,000 in 1980 to approximately 3,400 in 2002. This consolidation trend could create new opportunities for us to make acquisitions.

      Metals service centers are generally less susceptible to market cycles than producers of the metals, because service centers are usually able to pass on all or a portion of price increases to their customers. In 2002, it was more difficult to pass through price increases of certain carbon steel products, as the increased

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      Customers purchase from service centers to obtain value-added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size, and quality control. Many customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum orders specified by mills or because those customers require intermittent deliveries over long or irregular periods. Metals service centers respond to a niche market created because of the focus of the capital goods and related industries on just-in-time inventory management and materials management outsourcing, and because integrated mills have reduced in-house direct sales efforts to small sporadic purchasers to enhance their production efficiency.

History of Reliance

      Reliance Steel & Aluminum Co. was organized as a California corporation on February 3, 1939, and commenced business in Los Angeles, California fabricating steel reinforcing bar. Within ten years, we had become a full-line distributor of steel and aluminum, operating a single metals service center in Los Angeles. In the early 1950’s, we automated our materials handling operations and began to provide processing services to meet our customers’ requirements. In the 1960’s, we began to acquire other companies to establish additional service centers, expanding into other geographic areas.

      In the mid-1970’s, we began to establish specialty metals centers stocked with inventories of selected metals such as aluminum, stainless steel, brass, and copper, and equipped with automated materials handling and precision cutting equipment. We have continued to expand our network, with a focus on servicing our customers as opposed to merely distributing metal. We formed RSAC Management Corp., a California corporation, to operate as a holding company for our subsidiaries and to provide administrative and management services to our metals service centers. We operate metals service centers under the following trade names:

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      We serve our customers primarily by providing quick delivery, metals processing and inventory management services. We purchase a variety of metals from primary producers and sell these products in

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      Historically, we have expanded both through acquisitions and internal growth. Since our initial public offering in September 1994, we have successfully purchased more than thirty businesses. In 2002, we acquired certain assets of a Metals USA, Inc. business, Metals USA Specialty Metals Northwest, Inc., (now operating as Pacific Metal Company), the net assets and business of Central Plains Steel Co., and the stock of Olympic Metals, Inc. In addition, we began to consolidate the financial results of American Steel, L.L.C. (“American Steel”) because we increased our ownership interest to 50.5% and eliminated all super-majority veto rights. From 1984 to September 1994, we acquired twenty businesses.

      On September 9, 2002, through a newly-formed company, we purchased certain assets of a Metals USA, Inc. business, Metals USA Specialty Metals Northwest, Inc., for approximately $30 million, after final approval of the U.S. Bankruptcy Court, through the Metals USA bankruptcy procedures. The business is now operating under its original name, Pacific Metal Company. Pacific Metal Company has locations in Portland, Eugene and Medford, Oregon; Kent (Seattle) and Spokane, Washington; Billings, Montana; and Boise, Idaho and processes and distributes mainly aluminum and coated carbon steel products. Pacific Metal Company had net sales of approximately $22 million for the period September 9, 2002 to December 31, 2002.

      On April 1, 2002, we purchased substantially all of the net assets and business of Central Plains Steel Co. through a newly-formed subsidiary that is now operating under the same name. Central Plains Steel Co. is a full-line carbon steel service center operating facilities in Kansas City and Wichita, Kansas, and had net sales of approximately $25 million for the nine-months ended December 31, 2002.

      Also, on April 1, 2002, we acquired all of the outstanding stock of Olympic Metals, Inc., a metals service center in Denver, Colorado. Olympic Metals, Inc. specializes in the processing and distribution of aluminum, copper, brass and stainless steel products and had net sales of approximately $5 million for the nine months ended December 31, 2002. Effective December 31, 2002, we merged Olympic Metals, Inc. into the Company and it now operates as a division.

      Effective May 1, 2002, we obtained one additional membership unit of American Steel giving us a 50.5% ownership interest. In addition, the Operating Agreement was amended to eliminate all super-majority and unanimous voting rights, among other changes. Due to these changes, we began consolidating American Steel’s financial results as of May 1, 2002. There was no cost involved in this transaction, which was completed to facilitate the renewal of American Steel’s credit facility. American Steel had net sales of approximately $38 million for the eight months ended December 31, 2002.

      On July 2, 2001, we purchased the net assets of the steel service centers division of Pitt-Des Moines, Inc., through our newly-formed subsidiary, PDM Steel Service Centers, Inc., for approximately $93.2 million. PDM processes and distributes carbon steel products consisting primarily of structurals and plate for the capital goods and construction industries. PDM had seven metals service center facilities in Fresno, Santa Clara and Stockton (headquarters), California; Cedar Rapids, Iowa; Sparks, Nevada; Spanish Fork, Utah; and Woodlands, Washington, and had net sales of approximately $153 million for the year ended December 31, 2002. When we acquired these net assets, the Woodlands, Washington facility was operating as General Steel Corporation, a subsidiary of Pitt-Des Moines, Inc. We acquired the stock of General Steel Corporation on July 2, 2001, and merged General Steel into PDM on December 31, 2001. Effective April 1, 2002, the Cedar Rapids, Iowa facility became a division of our subsidiary Liebovich Bros., Inc. In February 2003, PDM opened a sales and distribution location in Las Vegas, Nevada.

      Effective January 19, 2001, we acquired 100% of the outstanding stock of Aluminum and Stainless, Inc., that operates a metals service center based in Lafayette, Louisiana. Aluminum and Stainless provides non-ferrous products primarily related to the marine industry for use in the production of large commercial vessels

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      Effective January 18, 2001, we purchased 100% of the stock of Viking Materials, Inc., based in Minneapolis, Minnesota, and a related company, Viking Materials of Illinois, Inc., based near Chicago, Illinois. These service centers provide primarily carbon steel flat-rolled products to their customers in the Midwest region of the United States. Viking Illinois operated as a subsidiary of Viking Materials from the acquisition date through the close of business on December 31, 2001, and now operates as a division of Viking Materials, which operates as a wholly-owned subsidiary of the Company. Viking Materials had net sales of approximately $74 million for the year ended December 31, 2002.

      In January 2003, AMI Metals, Inc. opened a subsidiary, AMI Metals Europe, SPRL, in Gosselies, Belgium. This location distributes and processes heat-treated aluminum products primarily to the aerospace market. In December 2002, Phoenix Metals Company completed construction of a new facility near Nashville, Tennessee and relocated its existing Nashville service center to this facility from a leased building. This new facility provided increased capacity to support Phoenix’s business in the Nashville area.

      In July 2002, we closed our Jacksonville, Florida facility that operated as part of our Chatham Steel Corporation subsidiary and combined the Jacksonville business with Chatham’s Orlando operation. In January 2002, we combined our Arrow Metals, San Antonio location that we acquired in late 1999 with our existing Reliance Metalcenter, San Antonio location. The specialty products sold by Arrow Metals are now sold and serviced through our Reliance Metalcenter location in the San Antonio market.

      In early 2001, our Phoenix Metals Company, Tampa operation relocated to a newly-constructed facility in Tampa, Florida. The 82,000 square foot facility replaced a much smaller one, that was sold. The new facility has a more efficient layout and material flow and a new 72-inch wide leveling line.

      Valex Corp., our 97%-owned subsidiary, is a leading domestic manufacturer of electropolished stainless steel tubing and fittings primarily used in the construction and maintenance of semiconductor manufacturing plants and in the biotech and pharmaceutical industries. Valex formed a joint venture in 1999 establishing a Korean company, Valex Korea Co., Ltd., and increased Valex Corp.’s ownership interest to 69.5% in February 2003, from 66.5%.

      Our executive officers maintain financial controls and establish general policies and operating guidelines, while our division managers and subsidiary officers have virtual autonomy with respect to day-to-day operations. This balanced, yet entrepreneurial management style has enabled us to improve the productivity and profitability both of acquired businesses and of our own expanded operations. Successful division managers and other management personnel are awarded incentive compensation based in part on the profitability of their particular division or subsidiary and in part on our overall profitability.

      We seek to increase our profitability by expanding our existing operations and acquiring businesses that diversify or enhance our customer base, product range and geographic coverage. We have developed an excellent reputation in the industry for our integrity and the quality and timeliness of our service to customers.

Customers

      Our customers purchase from us and other metals service centers to obtain value-added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size, and quality control. Many of our customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum orders specified by mills or because those customers require intermittent deliveries over long or irregular periods. We believe that metals service centers have also enjoyed an increasing share of total metal shipments because of the focus of the capital goods and related industries on just-in-time inventory management and materials management outsourcing and because metal producers have reduced in-house direct sales efforts to small sporadic purchasers in order to enhance their production efficiency.

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      We have more than 85,000 metals service center customers in various industries. In 2002, no single customer accounted for more than 1% of our sales and more than 80% of our orders were from repeat customers. Our customers are manufacturers and end users in the general manufacturing, construction (both commercial and residential), transportation (rail, truck and auto), aerospace and semiconductor fabrication industries. Our metals service centers wrote and delivered over 2,100,000 orders during 2002 at an average price of approximately $830. Most of our metals service center customers are located within a 150-mile radius of the metals service center serving them. The proximity of our centers to our customers helps us provide just-in-time delivery to our customers. With our fleet of approximately 675 trucks (some of which are leased) we are able to service many smaller customers. Moreover, our computerized order entry system and flexible production scheduling enable us to meet customer requirements for short lead times and just-in-time delivery. Less than 2% of our sales were to international customers in 2002, with approximately one-fourth of these sales from Valex’s international locations, serving the European and Asian markets.

      We believe that our long-term relationships with many of our customers significantly contribute to the success of our business. Providing prompt and efficient services and quality products at reasonable prices are important factors in maintaining these relationships.

      Our customers’ demand may change from time to time based on, among other things, general economic conditions and industry capacity. Many of the industries in which our customers compete are cyclical in nature. Because we sell to a wide variety of customers in several industries, we believe that the effect of such changes on us is significantly reduced. However, in 2001 and 2002, we experienced lower sales levels due to a broad-based economic downturn that affected all industries. We experienced lower demand at all of our locations in 2001 as compared to 2000 and further declines in 2002 from 2001 levels. Aerospace was the exception, with strong demand through the first eight months of 2001, but then slowed post-September 11th. This resulted in significant declines in 2002 for our businesses that service the aerospace market. Metals pricing declined for most of our products in 2001 and remained at these low levels through 2002 except that we experienced increased pricing for certain of the carbon steel products that we sell during 2002, due to U. S. Government tariffs on imported steel and also due to reduced domestic production capacity, as discussed below.

      California has been our largest market for many years, but we have been expanding our geographic coverage in recent years and the Southeast region of the United States was our largest market in 2002. California represented 27% of our 2002 sales, which was a significant decrease from 45% of our 1997 sales. The Southeast region of the United States represented 28% of our 2002 sales compared to 18% of our 1997 sales and the Midwest region, that we entered in 1999, represented 16% of our 2002 sales.

Suppliers

      We purchase our inventory from the major metals mills, both domestic and foreign, and have multiple suppliers for all of our product lines. Our major suppliers of domestic carbon steel products include California Steel Industries, Inc., Chapparal Steel, Nucor Corporation and Steel Dynamics, Inc. Allegheny Technologies Incorporated, International Stainless Steel Co. and North American Stainless supply stainless steel products. We are a recognized distributor for various major aluminum companies, including Alcoa Inc., Alcan Aluminum Limited, Commonwealth Aluminum Corp., Kaiser Aluminum Corp., Ormet Aluminum Mill Products Corporation and Pechiney Rolled Products. During 2001, many domestic steel mills entered bankruptcy proceedings and certain of those mills temporarily closed a portion of their production capacity in 2002. Also in 2001, the Bush Administration enacted tariffs on certain metal products from specified countries under Section 201 of the Trade Act of 1974 to provide protection for the United States steel industry. The combination of reduced domestic production capacity and fewer imports resulted in significant price increases for carbon steel flat-rolled products during 2002. Because of our total volume of purchases and our long-term relationships with our suppliers, we believe that we were able to purchase inventory at the best prices offered by the suppliers, given the order size. We believe that we are not dependent on any one of our suppliers for metals and that our relationships with our suppliers are very strong. We have worked closely with our suppliers in order to become an important customer for each major supplier of metals for our core product lines.

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Backlog

      Because of the just-in-time delivery policy and the short lead time nature of our business, we do not believe the information on backlog of orders is material to an understanding of our metals service center business.

Products and Processing Services

      We provide a wide variety of processing services to each customer’s specifications and deliver products to manufacturers and other end users. We maintain a wide variety of products in inventory. For orders other than those requiring extensive or specialized processing, we often deliver to the customer within 24 hours after receiving the order. Our 2002 sales were comprised of the following approximate percentages, by product:

	•	12% carbon steel structurals
	•	11% carbon steel plate
	•	10% carbon steel tubing
	•	9% stainless steel plate, sheet and coil
	•	9% galvanized steel sheet and coil
	•	8% heat treated aluminum plate, sheet and coil
	•	8% common alloy aluminum plate, sheet and coil
	•	7% carbon steel bar
	•	6% aluminum bar and tube
	•	6% hot rolled steel sheet and coil
	•	5% stainless steel bar and tube
	•	4% cold rolled steel sheet and coil
	•	4% miscellaneous, including brass, copper and titanium
	•	1% electropolished stainless steel tubing and fittings

      We do not depend on any particular customer group or industry because we process a variety of metals. Because of this diversity of product type and material, we believe that we are less exposed to fluctuations or other weaknesses in the financial or economic stability of particular customers or industries. We also are less dependent on particular suppliers.

      For our largest product type (sheet and coil), we purchase coiled metal from primary producers in the form of a continuous sheet, typically 36 to 60 inches wide, between .015 and .25 inches thick, and rolled into 3 to 20 ton coils. The size and weight of these coils require specialized equipment to move and process the coils into smaller sizes and various products. Few of our customers have the capability of processing the metal into the desired products.

      After receiving an order, we enter it into our computerized order entry system, select appropriate inventory and schedule the processing to meet the specified delivery date. About 40% of the orders specify delivery within 24 hours. We attempt to maximize the yield from the various metals that we process by combining customer orders to use each purchased product to the fullest extent practicable.

      Few metals service centers offer the full scope of processing services and metals that we provide. Our primary processing services are described below:

	•	Bar turning involves machining a metal bar into a smaller diameter.
	•	Bending is the forming of metals into various angles.

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	•	Blanking is the cutting of metals into close tolerance square or rectangular shapes.
	•	Deburring is the process used to smooth the sharp, jagged edges of a cut piece of metal.
	•	Electropolishing is the process used on stainless steel tubing and fittings to simultaneously smooth, brighten, clean, and passivate the interior surfaces of these components. Electropolishing is an electrochemical removal process that selectively removes a thin layer of metal, including surface flaws and imbedded impurities. Electropolishing is a required surface treatment process for all ultra high-purity components used in the gas distribution systems of semiconductor manufacturers worldwide and many sterile water distribution systems of pharmaceutical and biotechnology companies.
	•	Fabricating includes performing second and/or third stage processing per customer specifications, typically to provide a part, casing or kit, which is used in the customer’s end product.
	•	Forming involves bending and forming plate or sheet products into customer specified shapes and sizes with press brakes.
	•	Grinding or blanchard grinding involves grinding the top and/or bottom of carbon or alloy steel plate or bars into close tolerance.
	•	Leveling (cutting-to-length) involves cutting metal along the width of a coil into specified lengths of sheets or plates.
	•	Machining refers to performing multiple processes to a piece of metal to produce a customer specified component part.
	•	Pipe threading refers to the cutting of threads around the circumference of the pipe.
	•	Precision plate sawing involves sawing plate (primarily aluminum plate products) into square or rectangular shapes to tolerances as close as 0.003 of an inch.
	•	Punching is the cutting of holes into carbon steel beams or plates by pressing or welding per customer specifications.
	•	Routing produces various sizes and shapes of aluminum plate according to customer-supplied drawings through the use of CNC controlled machinery.
	•	Sawing involves cutting metal into customer specified lengths, shapes or sizes.
	•	Shape cutting, or burning, can produce various shapes according to customer-supplied drawings through the use of CNC controlled machinery. This procedure can include the use of oxy-fuel, plasma, high-definition plasma, laser burning or water jet cutting for carbon, aluminum and stainless steel sheet and plate.
	•	Shearing is the cutting of metal into small precise pieces.
	•	Skin milling grinds the top and/or bottom of a large aluminum plate into close tolerance.
	•	Slitting involves cutting metal to specified widths along the length of the coil.
	•	Tee splitting involves splitting metal beams. Tee straightening is the process of straightening split beams.
	•	Twin milling grinds one or all six sides of a small square or rectangular piece of aluminum plate into close tolerance.
	•	Welding is the joining of two or more pieces of metal.
	•	Wheelabrating, shotblasting and bead blasting involves pressure blasting metal grid into carbon steel products to remove rust and scale from the surface.

      We generally process specific metals to non-standard sizes only at the request of customers pursuant to purchase orders. We do not maintain an inventory of finished products, but we carry a wide range of metals to

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Marketing

      Our more than 740 sales personnel are located in thirty-one states, Belgium, France and South Korea and provide marketing services throughout each of those locations. The sales personnel are organized by division or subsidiary among our profit centers and are divided into two groups. Those sales personnel who travel throughout a specified geographic territory maintain relationships with our existing customers and develop new customers; we consider them our outside sales personnel. Those who remain at the facilities to write and price orders are our inside sales personnel. The inside sales personnel generally receive incentive compensation, in addition to their base salary, based on the gross profit or pretax profit of their particular profit center. The outside sales personnel generally receive incentive compensation based on the gross profit from their particular geographic territories.

50.5%-Owned Company

      Beginning July 1, 1995, we owned 50% and had operational control of American Steel, L.L.C., a limited liability company. Effective May 1, 2002, we increased our ownership interest to 50.5% and amended the Operating Agreement to eliminate all super-majority and unanimous voting rights, among other things. There was no cost involved in this transaction, which was completed to facilitate the renewal of American Steel’s credit agreement. American Steel operates metals service centers in Portland, Oregon and Kent, Washington. American Industries, Inc. owns the other 49.5% of American Steel. We are entitled to purchase the remaining 49.5% of American Steel during the ninety days following the earlier of the death of the owner of American Industries or April 1, 2006 and are required to purchase the remaining 49.5% of American Steel if American Industries so elects during the 90 days following the earlier of the death of the owner of American Industries or January 1, 2006. From July 1, 1995 through April 30, 2002, we accounted for our 50% investment in American Steel by the equity method, and included 50% of American Steel’s earnings in our net income and earnings per share amounts. Beginning May 1, 2002, we consolidate American Steel’s financial results and record American Industries 49.5% ownership as minority interest. American Metals, which operates three metals service centers located in the Central Valley of California, was a wholly-owned subsidiary of American Steel until October 1, 1998, when we acquired all of the stock of American Metals.

Industry and Market Cycles

      We distribute metal products to our customers in a variety of industries, including manufacturing, construction, transportation, aerospace and semiconductor fabrication. Many of the industries our customers compete in are cyclical in nature and are subject to changes in demand based on general economic conditions. We sell to a wide variety of customers in diverse industries to reduce the effect of changes in these cyclical industries on our results. During the 2002 year, all of the industries that we sell to experienced lower demand levels due to the poor economic conditions. The United States economy began to experience a general slowing in the second half of 2000 that led to an economic recession in 2001 with a slight improvement early in 2002. Later in 2002, particularly near the year’s end, demand for our products weakened further. We were significantly impacted by the economic downturn in both 2001 and 2002. If the economic downturn worsens in 2003, the negative impact to our financial results may increase.

      The semiconductor fabrication industry, aerospace industry and truck trailer and rail car industries have experienced cycles over the last few years that have affected our results. The semiconductor fabrication industry is highly cyclical in nature and is subject to changes in demand based on, among other things, general economic conditions and industry capacity. After a substantial period of growth from 1993 to 1996, this industry experienced a significant slowdown from mid-1996 through mid-1999. In the second half of 1999, the semiconductor industry began to improve and provided strong demand throughout 2000. In early 2001, there was a sudden and significant decline in demand from the semiconductor and related industries. This demand continued to decline throughout 2001 and remained at these low levels during 2002. We expect demand to remain at its current low levels through most of 2003, with some improvement expected late in 2003. The

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      Fluctuations in the costs of our materials also affect the prices we can charge to our customers. By selling a diverse product mix, we are able to somewhat offset fluctuations in our costs of materials. However, during 2001, metals costs of most products reached their lowest levels experienced in over twenty years. This occurred due to overcapacity at the producer level in both domestic and foreign markets, along with the weak demand experienced in 2001. Due to the continued low demand in 2002, costs of most metals remained at or near the 2001 levels throughout 2002, with costs of metals sold to the aerospace industry declining further. However, costs of carbon steel flat-rolled products increased significantly in 2002 due to supply constraints, as certain producers reduced capacity and because of government restrictions on foreign imports. These increased costs began to decline slightly near the end of 2002 because of the continued low end-user demand; however, increases for many of these products have been announced in the first quarter of 2003. We have historically been able to pass the increases in metal costs on to our customers as costs typically increase due to strong demand. However, in 2002 carbon steel flat-rolled costs increased significantly, but demand for these products declined. Although we were able to pass on most of these cost increases to our customers, we did experience some margin pressure, especially late in 2002 due to the lower demand levels of our customers. This caused some of our competitors to dump their product into the market at low prices. This has continued into the early part of 2003, but we expect the announced price increases to stabilize the dumping. We cannot guarantee that the spread between our metal costs and selling prices will continue at the levels experienced during 2002 especially if demand does not improve. Increased metals costs and related selling prices should, however, allow us to record increased revenue and gross margin dollars on a consistent volume basis.

Competition

      The metals distribution industry is highly fragmented and competitive. We have numerous competitors in each of our product lines and geographic locations, although competition is most frequently local or regional. Although most of our competitors are smaller than we are, we face strong competition from national, regional and local independent metals distributors, subsidiaries of metal producers and the producers themselves, some of which have greater resources than us. Based on an industry report, it is estimated that there were approximately 3,400 intermediate steel processors and metals service center facilities in the United States in 2002. We are one of the five largest service center companies in the United States. Competition is based on price, service, quality and availability of products. We maintain centralized relationships with our suppliers and a decentralized operational structure. We believe that this division of responsibility has increased our ability to obtain competitive prices of metals and to provide more responsive service to our customers. In addition, we believe that the size of our inventory, the different metals and products we have available and the wide variety of processing services we provide distinguish us from our competition. We believe that we increased our market share during 2002 due to our strong financial condition, as many of our competitors were facing capital constraints.

Quality Control

      Procuring high quality metal from suppliers on a consistent basis is critical to our business. We have instituted strict quality control measures to assure that the quality of purchased raw materials will enable us to meet our customers’ specifications and to reduce the costs of production interruptions. We perform physical and chemical analyses on selected raw materials to verify that their mechanical and dimensional properties,

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      We established a program to obtain certification for most of our divisions and certain of our subsidiaries under the ISO 9002 internationally-accepted quality standard. We have obtained ISO 9002 certification at certain of our locations. We believe that such certification is beneficial for our business and operations and that this certification provides us with access to additional customers. We plan to re-certify these locations under the new ISO standards in 2003. We may obtain this certification for additional locations.

Systems

      We have converted our Reliance divisions and certain of our subsidiaries from various software programs to the Stelplan^TM manufacturing and distribution information system. Stelplan^TM is a registered trademark of Invera, Inc. Stelplan^TM is an integrated business application system with functions ranging from order entry to the generation of financial statements. Stelplan^TM was developed specifically for the metals service center and processor industry. Stelplan^TM also provides information in real time, such as inventory availability, location and cost. With this information, our marketing and sales personnel can respond to the customer’s needs more efficiently and more effectively and quickly provide a product price.

      Certain of our subsidiaries use other vendor packages or in-house developed systems to support their operations. The basic functionality of the software is similar to Stelplan^TM. A common financial reporting system is used company-wide.

Government Regulation

      Our metals service centers are subject to many federal, state and local requirements to protect the environment, including hazardous waste disposal and underground storage tank regulations. The only hazardous wastes that we use in our operations are lubricants and cleaning solvents. We frequently examine ways to minimize any impact on the environment and to effect cost savings relating to environmental compliance. We pay state certified private companies to haul and dispose of our hazardous waste.

      Our operations are also subject to laws and regulations relating to workplace safety and worker health, principally the Occupational Health and Safety Act and related regulations, which, among other requirements, establish noise, dust and safety standards. We have a very strict safety policy, which we believe is one of the best in the industry. We are in material compliance with applicable laws and regulations and do not anticipate that future compliance with such laws and regulations will have a material adverse effect on our results of operations or financial condition.

Environmental

      We have no material outstanding unresolved issues with environmental regulators, and our products and processes present no environmental concerns. We do not expect any material expenditures to meet environmental requirements. Some of the properties we own or lease are located in industrial areas, however, with histories of heavy industrial use. We may incur some environmental liabilities because of the location of these properties. Any such liabilities would arise from causes other than our operations, but we do not expect that these liabilities would have a material adverse impact on our results of operations, financial condition or liquidity.

Employees

      As of March 1, 2003, we had approximately 4,500 employees. We reduced our employee count by over 650 employees, or 13%, in 2001 and by an additional 270 employees, or 5.8%, in 2002 in response to the poor economic conditions. Approximately 765 employees are covered by collective bargaining agreements, which expire at various times over the next four years. We have entered into collective bargaining agreements with twenty-three union locals at twenty-two of