RELIANCE STEEL & ALUMINUM CO, 10-K, 1999-03-29

RELIANCE STEEL & ALUMINUM CO
10-K, 1999-03-29
METALS SERVICE CENTERS & OFFICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

COMMISSION FILE NUMBER: 001-13122

RELIANCE STEEL & ALUMINUM CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<TABLE>
<S> <C>
CALIFORNIA 95-1142616
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>

2550 EAST 25TH STREET
LOS ANGELES, CALIFORNIA 90058
(323) 582-2272
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
COMMON STOCK NEW YORK STOCK EXCHANGE
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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 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, based on the closing price on the New York Stock Exchange on
February 26, 1999 was $444,720,756.31.

As of February 26, 1999, 18,460,677 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 19, 1999 (the "Proxy Statement") are
incorporated by reference into Part III of this report.

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INDEX

<TABLE>
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Industry Overview........................................... 1
History of Reliance......................................... 1
Customers................................................... 4
Suppliers................................................... 5
Backlog..................................................... 6
Products and Processing Services............................ 6
Marketing................................................... 8
50%-Owned Company........................................... 8
Industry and Market Cycles.................................. 8
Competition................................................. 8
Quality Control............................................. 9
Systems..................................................... 9
Government Regulation....................................... 9
Employees................................................... 10
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 Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 22
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 44

PART III

Item 10. Directors and Executive Officers of the Registrant.......... 44
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 44
Item 13. Certain Relationships and Related Transactions.............. 44

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 44

SIGNATURES.............................................................. 47
</TABLE>

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SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report on Form 10-K may include forward-looking statements that
involve risks and uncertainties. Reliance Steel & Aluminum Co. ("the Company")
is subject to risks inherent in the industries which the Company serves, such
as, the volatility of the transportation, construction, general manufacturing,
aerospace and semiconductor fabrication industries to which the Company sells
products. These industries, and therefore the Company, are subject to changes in
the economy in general. The Company has increased its long-term debt as a result
of its recent acquisitions and is subject to increased risks as a result of this
higher leverage. The Company's metals service centers are subject to
fluctuations in the price of raw materials, although the Company is generally
able to pass-through increases in costs of raw materials to its customers. The
Company's relationship to and business dealings with significant vendors and
customers and the intense price competition in the Company's markets also may
affect the Company's results. Recent acquisitions of the Company may not perform
as the Company anticipates after the change in ownership. Accordingly, the
actual results realized by the Company could differ materially from the
statements made herein. You should not rely on the forward-looking statements
made in this Annual Report on Form 10-K.

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PART I

ITEM 1. BUSINESS.

Reliance Steel & Aluminum Co. ("Reliance" or the "Company") is one of the
largest metals service center companies in the United States. The Company has a
network of 20 divisions and 12 subsidiaries operating metals service centers,
with 66 processing and distribution facilities (excluding American Steel,
L.L.C.'s two facilities) in 22 states and France. Through this network, the
Company provides value-added materials management and metals processing services
and distributes a full line of more than 70,000 metal products, including
carbon, alloy, stainless and specialty steel, aluminum, brass and copper
products to more than 50,000 customers in a broad range of industries. Some of
these metals service centers provide processing services for specialty metals
only. The Company's products are currently delivered from facilities in Alabama,
Arizona, California, Colorado, Florida, Georgia, Illinois, Kansas, Maryland,
Michigan, New Jersey, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania,
South Carolina, Tennessee, Texas, Utah, Washington and Wyoming. In addition, one
of the Company's subsidiaries has an international subsidiary operating a
distribution center in Fuveau, France. The Company also has a 50% ownership
interest in and operational control of American Steel, L.L.C., which operates
two metals service centers in the Pacific Northwest.

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 cutting-to-length (or
leveling), slitting, blanking, shape cutting, shearing, sawing, precision plate
sawing, twin milling, skin milling, tee splitting and straightening, forming,
pipe threading, welding, bending and electropolishing. These processing services
help customers save time, labor and expense which reduces 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 forces have
created a market which allows metals service centers, such as Reliance, to
purchase, process and deliver metals to end users in a more efficient and
cost-effective manner than the end user could achieve in 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 purchased approximately 30% of all carbon
industrial steel products and 45% of all stainless steel produced in the United
States, and 37% of all aluminum sold in the mill/distributor shared markets
(which excludes that sold for aluminum cans, among other things). The metals
distribution industry is currently estimated at 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 the Company's 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 been reduced from approximately 7,000 in 1980 to
approximately 3,400 in 1998. The Company believes that this consolidation trend
creates new opportunities for acquisitions.

HISTORY OF RELIANCE

Reliance was organized as a California corporation on February 3, 1939 and
commenced business in Los Angeles fabricating steel reinforcing bar. Within ten
years, it had become a full-line distributor of steel and aluminum, operating a
single metals service center in Los Angeles, California. In the early 1950's,
the Company automated its materials handling operations and began to provide
processing services to meet its customers' requirements. In the 1960's, the
Company began to expand its operations through acquisitions of other companies
and the development of additional service centers and began to establish branch
metals service centers in other geographic areas.

In the mid-1970's, the Company began to establish specialty metals service
centers stocked with inventories of selected metals such as aluminum, stainless
steel, brass and copper, and equipped with

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automated materials handling and precision cutting equipment and has continued
to expand its network through acquisitions. The Company currently has 55
specialty metals service centers and eleven full-line facilities, not including
American Steel, L.L.C., which processes and distributes primarily carbon steel
products from two metals service centers. The Company's metals service centers
are operated under the following trade names:

<TABLE>
<CAPTION>
NO. OF
TRADE NAME LOCATIONS PRIMARY PRODUCTS PROCESSED & DISTRIBUTED
---------- --------- ----------------------------------------
<S> <C> <C>
RELIANCE DIVISIONS
Affiliated Metals..................... 1 Flatrolled Aluminum and Stainless Steel
Bralco Metals......................... 2 Aluminum, Brass, Copper and Stainless
Steel
MetalCenter........................... 1 Aluminum and Stainless Steel
Reliance Metalcenter.................. 11 Variety of Metal Products
Reliance Steel Company................ 2 Carbon Steel
Tube Service Co. ..................... 5 Specialty Tubing
AMERICAN METALS CORPORATION............. 3 Carbon Steel
AMI METALS, INC......................... 6 Heat-Treated Aluminum
CCC STEEL, INC.
CCC Steel............................. 1 Structural Steel, Carbon Steel Bar and
Pipe
IMS Steel Co.......................... 1 Structural Steel, Carbon Steel Bar and
Pipe
CHATHAM STEEL CORPORATION
Chatham Steel......................... 5 Full-line Service Centers
Chatham Processing Services........... 1 Metal Fabrication
DURRETT SHEPPARD STEEL CO., INC. ....... 1 Carbon Steel Plate, Bar and Structural
ENGBAR PIPE & STEEL CO.................. 1 Carbon Steel Bar, Pipe and Tubing
LIEBOVICH BROS., INC.
Liebovich Steel & Aluminum Company.... 1 Full-line Service Center
Architectural Metals, Inc............. 1 Metal Fabrication
Good Metals, Inc...................... 1 Alloy and Tool Steels
Liebovich Custom Fabricating 1 Metal Fabrication
Company............................
LUSK METALS............................. 1 Precision Cut Aluminum Plate and Sheet
PHOENIX CORPORATION
Phoenix Metals Company................ 4 Flatrolled Aluminum, Stainless Steel and
Coated Steel
Steel Bar Corporation................. 1 Carbon Steel Bar and Tubing
SERVICE STEEL AEROSPACE CORP............ 3 Stainless and Alloy Specialty Steels
SISKIN STEEL & SUPPLY COMPANY, INC.
Siskin Steel.......................... 4 Full-line Service Centers
Georgia Steel Supply Company.......... 1 Full-line Service Center
VALEX CORP.
Valex................................. 5 Electropolished Specialty Tubing and
Fittings
Valex S.A.R.L. ....................... 1 Electropolished Specialty Tubing and
Fittings
</TABLE>

The Company serves its customers primarily by providing quick delivery,
metals processing and inventory management services. The Company purchases a
variety of metals from primary producers and sells these products in smaller
quantities. For approximately 50% of its sales, the Company performs metals
processing, or first stage processing, services before distributing the product
to manufacturers and end users, generally within 24 hours from receipt of an
order, for orders that do not require extensive or customized processing. Metals
processing services include leveling, slitting, blanking, shape cutting,
shearing, sawing, precision plate sawing, twin milling, skin milling, tee
splitting and straightening, forming, pipe threading, welding, bending and
electropolishing, all to customer specifications. See "Business -- Products and
Processing Services".

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These services save time, labor and expense for customers and reduce customers'
overall manufacturing costs. During 1998, the Company's metals service centers
handled approximately 6,250 transactions per business day, with an average
revenue of approximately $1,000 per transaction. Total revenues of the Company
for 1998 were $1.35 billion.

The Company has a history of expansion through acquisitions, as well as
from internal growth. Since its initial public offering in September 1994,
Reliance has successfully completed and integrated sixteen acquisitions. The
acquisition of Liebovich Bros., Inc. occurred in 1999. The Company has
historically been aggressive in making acquisitions, with twenty acquisitions
from 1984 to September 1994.

On March 1, 1999, the Company acquired 100% of the outstanding shares of
Liebovich Bros., Inc. ("LBI"), a privately-held metals service center company
headquartered in Rockford, Illinois, for $60 million in cash. This acquisition
provided the Company an entry into a new market, the Midwest area of the United
States. LBI provides primarily carbon steel products and has a metals service
center facility and two metal fabrication facilities in Rockford, Illinois, as
well as a service center in Wyoming (Grand Rapids), Michigan. LBI's 1998 sales
were approximately $130 million.

On October 5, 1998, the Company acquired Engbar Pipe & Steel Co.
("Engbar"), a privately-held metals service center company headquartered in
Denver, Colorado. Engbar's products primarily include carbon steel bars, pipe
and tubing. Net sales of Engbar for the twelve months ended December 31, 1997,
were approximately $14 million.

On October 1, 1998, Phoenix Corporation, a wholly-owned subsidiary of the
Company, acquired Steel Bar Corporation ("Steel Bar"), a privately-held metals
service center in Greensboro, North Carolina. Steel Bar's products include,
primarily, carbon steel bars and tubing. Steel Bar's net sales for the twelve
months ended December 31, 1997, were approximately $13 million.

Also on October 1, 1998, the Company acquired American Metals Corporation
("American Metals"), based in West Sacramento, California, with additional
service centers in Redding and Fresno, California. American Metals was
previously owned by American Steel, L.L.C. ("American Steel"), in which the
Company owns a 50% interest. American Metals' net sales for the nine month
period ended September 30, 1998, were approximately $44 million, which include,
primarily, sales of carbon steel plate, bars, structurals and sheet and aluminum
and stainless steel sheet products.

On September 18, 1998, the Company acquired 100% of the stock of Lusk
Metals, a privately-held metals service center with headquarters in Hayward,
California (near San Francisco). Lusk Metals had net sales of approximately $30
million for the twelve months ended February 28, 1998, and processes and
distributes primarily precision cut aluminum plate and aluminum sheet and
extrusions.

Effective July 1, 1998, the Company acquired 100% of the stock of Chatham
Steel Corporation ("Chatham"), a privately-held metals service center company
headquartered in Savannah, Georgia. Chatham has additional facilities in
Columbia, South Carolina; Durham, North Carolina; Orlando, Florida;
Jacksonville, Florida; and Birmingham, Alabama. Chatham's products include
primarily carbon steel structurals, plate, pipe and tube, bars, sheet and coil
and some stainless steel. Chatham's net sales for the year ended December 31,
1997, were approximately $166 million.

On January 30, 1998, the Company acquired all of the outstanding capital
stock of Phoenix Corporation, doing business as Phoenix Metals Company ("Phoenix
Metals"). Phoenix Metals operates metals service centers specializing in
non-ferrous products in Birmingham, Alabama; Norcross (Atlanta), Georgia; Tampa,
Florida; and Charlotte, North Carolina. Phoenix Metals had net sales of
approximately $130 million in the eleven months ended December 31, 1998.

Also on January 30, 1998, the Company purchased the assets and business of
Durrett-Sheppard Steel Co., L.L.C. and its subsidiary Durrett-Sheppard Steel of
Pennsylvania, Inc., through its newly-formed subsidiary, Durrett Sheppard Steel
Co., Inc. ("Durrett"). Durrett consists of one carbon steel metals service
center located in Baltimore, Maryland. Durrett had revenues of approximately $52
million for the eleven months ended December 31, 1998.

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On December 1, 1997, Siskin Steel & Supply Company, Inc. ("Siskin"), a
wholly-owned subsidiary of the Company, acquired 100% of the outstanding common
stock of Georgia Steel Supply Company, Inc. ("Georgia Steel"), which operated
one metals service center in Atlanta, Georgia. Georgia Steel processes and
distributes primarily carbon steel products. Georgia Steel operated as a
wholly-owned subsidiary of Siskin until January 1, 1999, when Georgia Steel was
merged into Siskin. Georgia Steel now operates as a division of Siskin. Georgia
Steel's net sales for the twelve months ended December 31, 1998 were
approximately $24 million.

On October 1, 1997, the Company acquired 100% of the outstanding common
stock of Service Steel Aerospace Corp. ("SSA"), which operates metals service
centers in Tacoma, Washington; North Canton, Ohio; and Long Beach, California.
SSA specializes in stainless and alloy specialty steel products primarily for
the aerospace industry. Net sales of SSA for the twelve months ended December
31, 1998, were approximately $57 million.

On April 30, 1997, the Company acquired 100% of the outstanding capital
stock of Amalco Metals, Inc. ("Amalco"). Amalco was a leading non-ferrous metals
service center located in northern California, processing and distributing
aluminum products primarily for the electronics industry. The Company combined
the business of Amalco with one of Reliance's existing metals service centers
upon completion of a new, enlarged, state-of-the-art facility in Union City,
California, in 1998. Amalco operated as a wholly-owned subsidiary of the Company
until its merger into the Company effective April 27, 1998.

On April 2, 1997, the Company acquired 100% of the capital stock of AMI
Metals, Inc. ("AMI"). AMI is headquartered in Brentwood, Tennessee, with
additional operating facilities in Fontana, California; Wichita, Kansas; Fort
Worth, Texas; Kent, Washington; and Swedesboro, New Jersey. During 1998, AMI
opened a facility in Atlanta, Georgia, moving its Brentwood warehouse operations
to this facility. AMI specializes in the processing and distribution of aluminum
plate, sheet and bar products primarily for the aerospace industry. AMI's net
sales were approximately $176 million for the twelve months ended December 31,
1998.

Valex Corp. ("Valex"), a 97%-owned subsidiary of the Company that is a
leading domestic manufacturer of electropolished stainless steel tubing and
fittings primarily used in the construction and maintenance of semiconductor
manufacturing plants, formed its first foreign subsidiary and opened an
international distribution center in 1999 in Fuveau, France. This replaces
Valex's international sales office which was maintained in Marseilles, France
since 1996. Also in February 1999, Valex purchased certain of the assets of one
of its leading domestic competitors, Advanced MicroFinish, Inc., which further
strengthens Valex's dominant position in supplying the United States market for
the semiconductor manufacturing industry.

The Company's executive officers maintain financial controls and establish
general policies and operating guidelines, while its division managers and
subsidiary officers have virtual autonomy with respect to day-to-day operations.
This balanced, yet entrepreneurial management style has enabled the Company to
improve the productivity and profitability both of acquired businesses and of
its 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 the overall
profitability of the Company.

The Company seeks to increase its profitability through expansion of its
existing operations and acquisitions of businesses that diversify or enhance the
Company's customer base, product range and geographic coverage. The Company has
developed an excellent reputation in the industry for its integrity and the
quality and timeliness of its service to customers.

CUSTOMERS

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. The Company
believes 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

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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.

The Company has more than 50,000 customers. In 1998, only one customer
accounted for more than 1% of the Company's sales, with sales to this one
customer representing 5.1% of total Company sales. During 1998, more than 85% of
the Company's orders were from repeat customers. Reliance's customers are
manufacturers and end users in the general manufacturing, construction (both
commercial and residential), transportation (rail, truck and auto after-market),
aerospace and semiconductor manufacturing industries. The Company's metals
service centers wrote and delivered over 1,350,000 orders from its customers, at
an average price of approximately $1,000, during 1998. Most of the customers who
purchase from the Company's various metals service centers are located within a
150-mile radius of the metals service centers; the proximity of the centers to
the customers assists the Company in providing just-in-time delivery to its
customers on its fleet of 419 owned or leased trucks. Moreover, Reliance's
computerized order entry system and flexible production scheduling also enables
the Company to meet customer requirements for short lead times and just-in-time
delivery. Less than 3% of the Company's sales were to international customers in
1998. Valex has a network of distribution centers throughout the United States
which provide quick and personal service to its customers, which the Company
believes is unmatched by any of Valex's competitors. To provide support to the
European market, Valex opened an international distribution center during 1999.

The Company believes that its long-term relationships with many of its
customers significantly contribute to the success of its business. Providing
prompt and efficient services and quality products at a reasonable price is an
important factor in maintaining these relationships.

The Company's customers are subject to changes in demand based on, among
other things, general economic conditions and industry capacity. Many of the
industries in which the Company's customers compete are cyclical in nature and
are subject to changes in demand based on general economic conditions. Because
the Company sells to a wide variety of customers in several industries,
management believes that the effect of such changes on the Company is
significantly reduced. The Company can give no assurance, however, that it will
be able to increase or maintain its level of sales in periods of economic
downturn. Currently, the semiconductor manufacturing industry in which Valex's
customers operate, which is highly cyclical in nature and subject to changes in
demand based on, among other things, general economic conditions and industry
capacity, has suffered a significant slowdown. This has also impacted the
Company's other locations who service the Silicon Valley of California. However,
this decline was offset by strong economies in the southeastern United States
and Southern California during 1998. In addition, the aerospace industry
experienced a significant improvement during 1997, which continued for most of
1998.

Historically, the Company's largest market for its products has been
California, representing 34% of the Company's 1998 sales, decreasing
significantly from 45% of 1997 sales. This reduction was caused by the Company's
growth outside of California, as total sales in California increased slightly in
1998 over 1997. Although California continues to be the largest market for the
Company's products, the Company has expanded its facilities geographically as a
result of strategic acquisitions and has increased its physical capabilities
through capital expenditures to reduce the impact of any regional economic
recession on the Company's operations.

SUPPLIERS

Reliance purchases its products from the major metals producers, both
domestic and foreign, and has multiple suppliers for all of its product lines.
The Company's major suppliers of domestic carbon steel products include
California Steel Industries, Huntco Steel, Nucor Steel, Nucor Yamato and
USS-POSCO Industries. Allegheny Ludlum Steel Corp., Latrobe Steel Company,
Lukens, Inc. and North American Stainless supply stainless steel products. The
Company is a recognized distributor for various major aluminum companies,
including Aluminum Company of America ("Alcoa"), Alcan Aluminum Limited, Alumax
Mill Products, Century Aluminum, Commonwealth Aluminum, Kaiser Aluminum, McCook
Metals L.L.C. and Norandal USA. Although the Company has historically purchased
the majority of its metals domestically, the amount of foreign steel purchases
increased during 1998 due to favorable foreign pricing. There was a significant

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amount of steel exported to the United States during 1998, which caused
reductions in steel costs in the United States. The Company's total volume of
purchases generally enables it to purchase substantially all of its inventory at
the best prices offered by the suppliers. The Company believes that it is not
dependent on any one of its suppliers for metals and that its relationships with
its suppliers are very strong. The Company has worked closely with its suppliers
in order to become an important customer for each major supplier of the
Company's metals for its core product lines.

BACKLOG

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

PRODUCTS AND PROCESSING SERVICES

The Company has reduced its dependence on any particular customer group or
industry by processing a variety of metals. This diversification of product type
and material has reduced the Company's exposure to fluctuations or other
weaknesses in the financial or economic stability of particular customers or
industries, as well as reducing its dependence on particular suppliers. At its
metals service centers, the Company provides processing services, such as
leveling, slitting, blanking, shape cutting, shearing, sawing, precision plate
sawing, twin milling, skin milling, tee splitting and straightening, forming,
pipe threading, welding, bending or electropolishing to each customer's
specifications and delivers the products to manufacturers and other end users.
For orders other than those requiring extensive or specialized processing,
delivery to the customer generally occurs within 24 hours from receipt of the
initial order. The Company's sales of its more than 70,000 products in 1998
comprised the following approximate percentages by commodity and product:

- 19% heat treated aluminum plate, sheet and coil

- 12% carbon steel structurals

- 8% stainless steel plate, sheet and coil

- 8% common alloy aluminum plate, sheet and coil

- 8% carbon steel plate

- 7% carbon steel tubing

- 7% carbon steel bar

- 7% galvanized steel sheet and coil

- 7% stainless steel bar and tube

- 6% aluminum bar and tube

- 3% cold rolled steel sheet and coil

- 3% hot rolled steel sheet and coil

- 1% electropolished stainless steel tubing and fittings

- 4% miscellaneous, such as brass and copper

The Company maintains a wide variety of products in inventory. For the
Company's largest product type (sheet and coil), the Company purchases coiled
metal from primary producers in the form of a continuous sheet, typically 36 to
60 inches wide, between .25 and .015 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 the
Company's customers have the capability of processing the metal into the desired
products.

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Reliance enters its customer orders, once received, in a computerized order
entry system, selects appropriate inventory and schedules the processing in
accordance with the specified delivery date, generally within 24 hours for the
majority of its orders. The Company attempts to maximize the yield from the
various metals that it processes 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 Reliance uses to produce the desired end products. Following are
descriptions of the primary processing services performed by the Company:

- Leveling (cutting-to-length) involves cutting metal along the width of
a coil into specified lengths of sheets or plates.

- Slitting involves cutting metal to specified widths along the length
of the coil.

- Blanking cuts the metal into close tolerance, square or rectangular
shapes.

- 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, or laser burning for carbon and stainless
steel plate and routing for aluminum plate.

- Shearing cuts the metal into small precise pieces.

- 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.

- Twin milling grinds one or all six sides of a small square or
rectangular piece of aluminum plate into close tolerance.

- Skin milling grinds the top and/or bottom of a large aluminum plate
into close tolerance.

- Tee splitting involves splitting metal beams. Tee straightening is the
process of straightening split beams.

- Forming involves bending and forming plate or sheet products into
customer specified shapes and sizes with press brakes.

- Pipe threading cuts threads around the circumference of the pipe.

- Welding is the joining of two or more pieces of metal.

- Bending is the forming of metals into various angles.

- 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 now 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.

Reliance generally processes specific metals to non-standard sizes only at
the request of customers pursuant to purchase orders rather than maintaining an
inventory of finished products. The Company is required to carry a wide range of
inventories of metals, however, to meet the short lead time and just-in-time
delivery requirements of its customers. Each of the Company's metals service
centers maintains equipment selected to meet the needs of that facility's
customers.

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MARKETING

Reliance's more than 600 sales personnel are located in twenty-five states
and France to provide marketing services throughout each of the geographic
locations served. The sales personnel are organized by division or subsidiary
among the Company's profit centers and are divided into two groups: those who
travel throughout a specified geographic territory to maintain relationships
with the Company's existing customers and to develop new customers ("outside
sales personnel") and those who remain at the facilities to write and price
orders ("inside sales personnel"). The inside sales personnel generally receive
incentive compensation, in addition to their base salary, based on the
respective profit center's gross profit, and the outside sales personnel
generally receive incentive compensation based on gross profit from their
respective geographic territories.

50%-OWNED COMPANY

On July 1, 1995, the Company acquired a 50% interest in and operational
control of American Steel, L.L.C. ("American Steel"), the then newly-formed
limited liability company. As part of the acquisition, the Company contributed
cash, American Industries, Inc. ("Industries") contributed assets and each also
contributed its 50% ownership in American Metals Corporation ("American
Metals"), a joint venture established between the Company and Industries in
1993. The purchase agreement allows the Company to acquire the remaining 50% of
American Steel at a future date. American Steel consisted of three metals
service centers in the Pacific Northwest, including a facility in Canada which
was sold in January 1997. These service centers were previously wholly-owned by
Industries. This 50% investment in American Steel is accounted for by the equity
method, whereby the Company includes 50% of American Steel's earnings in the
Company's net income and earnings per share amounts. 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 the Company acquired 100% of the stock of American Metals.

INDUSTRY AND MARKET CYCLES

The Company distributes metal products to customers in a variety of
industries, including manufacturing, construction, transportation, aerospace and
semiconductor fabrication. Many of the industries in which the Company's
customers compete are cyclical in nature and are subject to changes in demand
based on general economic conditions. Because the Company sells to a wide
variety of customers in several industries, management believes that the effect
of such changes on the Company is significantly reduced. The Company can give no
assurance, however, that it will be able to increase or maintain its level of
sales in periods of economic downturn.

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 significant period of growth from 1993
to 1996, this industry has experienced a significant slowdown which began in
mid-1996. The aerospace industry experienced a significant improvement during
1997, which continued for most of 1998. But management does not expect such
trend to continue due to overcapacity and lower demand in the aerospace
industry. These industries are subject to changes in demand based on, among
other things, general economic conditions and industry capacity.

The Company's largest markets for its products are California and the
southeast region of the United States. The Company has continued to expand its
facilities geographically by strategic acquisitions and through capital
expenditures to reduce the impact of any regional economic recession on the
Company's operations.

COMPETITION

The metals distribution industry is highly fragmented and competitive. The
Company has numerous competitors in each of its product lines and geographic
locations, although competition is most frequently local or regional. Most of
these competitors are smaller than the Company. Nonetheless, the Company faces
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 the Company. Based on an industry
8
<PAGE> 12

report, it is estimated that there were approximately 3,400 intermediate steel
processors and metals service center facilities in the United States in 1998.
The Company believes that it is one of the five largest service center companies
in the United States. Competition is based on price, service, quality and
availability of products. The Company maintains centralized relationships with
its suppliers and a decentralized operational structure. The Company believes
that this division of responsibility has increased its ability to obtain
competitive prices of metals and to provide more responsive service to its
customers. In addition, Reliance believes that the size of inventory it
maintains, the different metals and products it has available and the wide
variety of processing services it provides distinguish the Company from its
competition.

QUALITY CONTROL

The procurement of high quality metal from suppliers on a consistent basis
is critical to the Company's business. The Company has instituted strict quality
control measures to assure that the quality of purchased metals will enable the
Company to meet the specifications of its customers and to reduce the costs of
production interruptions. Physical and chemical analyses are performed on
selected metals to verify that their mechanical and dimensional properties,
cleanliness and surface characteristics meet the Company's requirements. Similar
analyses are conducted on processed metal on a selected basis before delivery to
the customer. The Company believes that maintenance of high standards for
accepting metals ultimately results in reduced return rates from its customers.

The Company established a program to obtain certification of its Reliance
divisions and certain of its subsidiaries under the ISO 9002
internationally-accepted quality standard. ISO 9002 certification has been
attained at all of these locations. The Company is currently evaluating its
recently-acquired subsidiaries to determine if obtaining such certification
would be beneficial for the business and operations of each specific subsidiary.
Management believes this certification may provide access to additional
customers and improve operating efficiencies.

SYSTEMS

The Company is in the process of converting its Reliance divisions and
certain of its subsidiaries to the Stelplan manufacturing and distribution
information system, which uses IBM RS6000 multi-processor based hardware.
Nineteen of the twenty Reliance divisions, along with AMI, American Metals, SSA
and American Steel have been fully converted to Stelplan. Conversion of the one
remaining Reliance division, Durrett and Lusk Metals are scheduled to be
completed during 1999. Stelplan is an integrated business application system
with functions ranging from order entry to the generation of financial
statements. Stelplan is a registered trademark of Planmatics Corp. Stelplan was
developed specifically for the metals service center and processor industry.
Stelplan also provides real time availability of information such as inventory
availability, location and cost. Access to this information allows the Company's
marketing and sales personnel to respond to the customer's needs more
efficiently and more effectively and to provide quickly a product price. In
addition, the Company has received a letter from Planmatics Corp. certifying
that Stelplan is "Year 2000" compliant. The Company has performed in-house
testing which confirmed the vendor's "Year 2000" certification. The Company,
working with its respective software vendors, has adopted plans to make the
minor modifications required with respect to those of its subsidiaries that are
not converting to Stelplan before the Year 2000. These subsidiaries are
currently in the testing or modification phase, with final testing and
modifications expected to be completed by August 1999. Refer to Management's
Discussion and Analysis section of this document for complete Year 2000
disclosure.

GOVERNMENT REGULATION

The Company's metals service centers are subject to many federal, state and
local requirements relating to the protection of the environment including
hazardous waste disposal and underground storage tank regulations. The only
hazardous wastes that the Company uses in its operations are lubricants and
cleaning solvents. The Company frequently examines ways to minimize any impact
on the environment and to effect cost savings relating to environmental
compliance. The Company pays state certified private companies to haul and
dispose of its hazardous waste.
9
<PAGE> 13

Management believes that the Company is in material compliance with all
applicable environmental laws and that the Company's products and processes do
not present any unusual environmental concerns. The Company does not anticipate
any material expenditures to meet environmental requirements. Some of the
properties owned or leased by the Company are located in industrial areas,
however, with histories of heavy industrial use. The location of these
properties may result in the Company incurring environmental liabilities that
arise from causes other than the operations of the Company, but the Company does
not expect that any such liabilities will have a material adverse impact on the
Company's results of operations, financial condition or liquidity. In addition,
environmental audits are performed during the due diligence process for
acquisitions, so that the Company does not assume any material environmental
exposure as the result of an acquisition.

The Company's operations are also governed by laws and regulations relating
to workplace safety and worker health, principally the Occupational Health and
Safety Act and regulations thereunder, which, among other requirements,
establish noise, dust and safety standards. Reliance has established a strict
safety policy, which it believes is one of the best in the industry. Management
believes that the Company is in material compliance with applicable laws and
regulations and does not anticipate that future compliance with such laws and
regulations will have a material adverse effect on the results of operations or
financial condition of the Company.

EMPLOYEES

As of March 1, 1999, the Company had a total of approximately 3,700
employees. Approximately 600 of these employees are covered by collective
bargaining agreements, which expire at various times over the next five years.
The Company has entered into collective bargaining agreements with fourteen
different union locals at fourteen of its locations. The Company has not found
that these collective bargaining agreements have had a material impact either
favorably or unfavorably on the Company's revenues or profitability at its
various locations. The Company has generally maintained excellent relations with
its employees and has never experienced a significant work stoppage.

ITEM 2. PROPERTIES.

The Company maintains 66 metals service center processing and distribution
facilities (not including American Steel), in 22 states and France, plus its
corporate headquarters. All of the Company's properties are in good or excellent
condition and are adequate for its existing operations. These facilities
generally operate at about 60% of capacity, with each division averaging
slightly less than two shifts operating at full capacity for a five-day work
week. Twenty-five of these facilities are leased. Siskin leases a portion of its
facilities in Chattanooga, Tennessee, as does LBI in Rockford, Illinois and
Chatham in Columbia, South Carolina. In addition, Durrett leases off-site space
near its facility in Baltimore, Maryland. The leases are for terms expiring at
various times through 2011 and have an aggregate monthly rent of approximately
$350,000. The Company owns all other properties. In 1998, the Company relocated
and combined the businesses of its Reliance Metalcenter in Santa Clara,
California and Amalco Metals into its new, enlarged, state-of-the-art facility
in Union City, California. The following table sets forth certain information
with respect to each facility:

FACILITIES AND PLANT SIZE

<TABLE>
<CAPTION>
PLANT SIZE
LOCATION (SQ. FT.)
-------- ----------
<S> <C>
Alabama:
Birmingham
(Chatham).............................................. 137,000
(Phoenix Metals)....................................... 40,000
(Siskin)............................................... 107,000
</TABLE>

10
<PAGE> 14

<TABLE>
<CAPTION>
PLANT SIZE
LOCATION (SQ. FT.)
-------- ----------
<S> <C>
Arizona:
Phoenix
(Bralco Metals)........................................ 46,000
(Reliance Metalcenter)................................. 104,000
(Tube Service)......................................... 23,000
(Valex)................................................ 2,100*
California:
El Cajon (Tube Service)................................... 18,000
Fontana (AMI)............................................. 103,000
Fresno (American Metals).................................. 51,000*
Hayward (Lusk Metals)..................................... 47,000*
La Mirada (Bralco Metals)................................. 140,000
Long Beach (SSA).......................................... 8,000*
Los Angeles
(Corporate Office)..................................... 22,000
(Reliance Steel Company)............................... 270,000*
Milpitas (Tube Service)................................... 58,000
National City (Reliance Metalcenter)...................... 74,000
Rancho Dominguez (CCC Steel).............................. 316,000
Redding (American Metals)................................. 42,000*
Santa Clara (Valex)....................................... 6,000*
Santa Fe Springs
(MetalCenter).......................................... 155,000
(Tube Service)......................................... 66,000
Union City (Reliance Metalcenter)......................... 145,000
Ventura (Valex)........................................... 87,000
West Sacramento (American Metals)......................... 108,000*
Colorado:
Colorado Springs (Reliance Metalcenter)................... 68,000
Denver
(Engbar)............................................... 36,000*
(Tube Service)......................................... 21,000*
Florida:
Jacksonville (Chatham).................................... 34,000
Orlando (Chatham)......................................... 127,000
Tampa (Phoenix Metals).................................... 32,000
Georgia:
Atlanta (Georgia Steel)................................... 81,000
Forest Park (AMI)......................................... 41,000*
Norcross (Phoenix Metals)................................. 170,000
Savannah (Chatham)........................................ 178,000
Illinois:
Rockford (LBI)............................................ 387,000
Rockford (LBI)............................................ 30,000
Rockford (LBI)............................................ 10,000
</TABLE>

11
<PAGE> 15

<TABLE>
<CAPTION>
PLANT SIZE
LOCATION (SQ. FT.)
-------- ----------
<S> <C>
Kansas:
Wichita
(AMI).................................................. 35,000*
(Reliance Metalcenter)................................. 45,000*
Maryland:
Baltimore (Durrett)....................................... 260,000
Michigan:
Wyoming (LBI)............................................. 65,000
New Jersey:
Swedesboro (AMI).......................................... 22,000*
New Mexico:
Albuquerque
(Reliance Metalcenter)................................. 44,000
(Reliance Steel Company)............................... 34,000
North Carolina:
Charlotte (Phoenix Metals)................................ 41,000*
Durham (Chatham).......................................... 110,000
Greensboro (Steel Bar).................................... 43,000*
Ohio:
North Canton (SSA)........................................ 20,000*
Oregon:
Portland
(Reliance Metalcenter)................................. 44,000
(Valex)................................................ 8,000*
Pennsylvania:
Allentown (Valex)......................................... 5,000*
South Carolina:
Columbia (Chatham)........................................ 81,000
Spartanburg (Siskin)...................................... 96,000
Tennessee:
Chattanooga (Siskin)...................................... 439,000
Nashville (Siskin)........................................ 117,000
Texas:
Arlington (Reliance Metalcenter).......................... 107,000
Austin (Valex)............................................ 8,000*
Fort Worth (AMI).......................................... 75,000*
San Antonio (Reliance Metalcenter)........................ 77,000
Utah:
Salt Lake City
(Affiliated Metals).................................... 86,000
(CCC Steel)............................................ 51,000
(Reliance Metalcenter)................................. 105,000
Washington:
Auburn (AMI).............................................. 27,000*
Tacoma (SSA).............................................. 26,000*
</TABLE>

12
<PAGE> 16

<TABLE>
<CAPTION>
PLANT SIZE
LOCATION (SQ. FT.)
-------- ----------
<S> <C>
Wyoming:
Casper (Reliance Metalcenter)............................. 11,000*
International Distribution Center
Fuveau, France (Valex).................................... 2,500*
</TABLE>

- ---------------
* Leased. All other facilities owned.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, the Company is named as a defendant in legal actions
arising out of its normal course of business. The Company is not a party to any
pending legal proceedings other than routine litigation incidental to the
business. Management believes that the resolution of such matters will not have
a material adverse effect on the Company's results of operations or financial
condition. The Company maintains liability insurance against risks arising out
of its normal course of business.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.

PART II

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

The Company's Common Stock is listed for trading on the New York Stock
Exchange and was first traded on September 16, 1994. The following table
reflects the range of high and low selling prices of the Company's Common Stock
by quarter for 1998 and 1997. This information is based on closing composite
selling prices reported by the New York Stock Exchange.

<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
HIGH LOW HIGH* LOW*
------- ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter....................... $38.500 $28.875 $23.167 $17.583
Second Quarter...................... 40.875 36.125 26.250 19.583
Third Quarter....................... 38.000 28.750 32.625 25.625
Fourth Quarter...................... 32.938 25.500 30.625 26.500
</TABLE>

- ---------------
* Adjusted to reflect the 3:2 common stock split in June 1997.

As of March 19, 1999, there were approximately 298 record owners of
Reliance Common Stock.

The Company has paid quarterly cash dividends on its Common Stock for
approximately 39 years. In 1996, the Company paid regular quarterly cash
dividends at the rate of $0.02 per share and paid a special annual dividend of
$0.04 per share. In 1997, the Company paid quarterly dividends of $0.035 per
share, resulting in quarterly dividends of $0.12 after the effect of the 3:2
common stock split in June 1997. The Company paid a special annual dividend of
$0.05 per share in 1997. In 1998, the Company paid quarterly dividends of $.06
per share. The 1998 quarterly dividend was increased to include the annual
special dividend paid in prior years in the quarterly dividend. From time to
time, the Company has also paid stock dividends. Most recently, the Company
effected a 3:2 stock split in the form of a 50% stock dividend in June 1997,
which is reflected in the above dividend amounts.

In February 1999, the Company announced that it had increased the regular
quarterly dividend to $0.065 per share. At the present time, the Company intends
to continue paying regular quarterly cash dividends, but the Board of Directors
may reconsider or revise this policy from time to time based on conditions then
existing, including the Company's earnings, financial condition and capital
requirements, as well as other factors the Board of Directors may deem relevant.
It is likely that the Board of Directors will continue to

13
<PAGE> 17

declare and pay dividends in the future, provided that earnings are legally
available for dividends, but the Board also intends to continue its present
policy of retaining a portion of earnings for reinvestment in the operations of
the Company and the expansion of its business. The Company can give no
assurance, however, that either cash or stock dividends will be paid in the
future, or that, if paid, the dividends will be at the same amount or frequency
as paid in the past.

The private placement debt agreements for the unsecured senior notes
contain covenants which, among other things, require the maintenance of a
minimum net worth that may restrict the Company's ability to pay dividends. In
addition, the syndicated line of credit agreement limits cash dividends payable
by the Company to not more than 35% of the Company's net income for the
immediately preceding fiscal year commencing in 1998 and not more than 25%
thereafter. Since its initial public offering in September 1994, the Company has
paid between 6% and 10% of its earnings to its shareholders as dividends.

The following table sets forth certain information with respect to cash
dividends paid by the Company during the past two fiscal years:

<TABLE>
<CAPTION>
DATE OF DECLARATION RECORD DATE PAYMENT DATE DIVIDENDS(1)
- ------------------- ----------- ------------ ---------------
<C> <C> <C> <S>
11/19/98..... 12/18/98 1/8/99 $.06 per share
8/27/98...... 9/8/98 9/15/98 $.06 per share
5/20/98...... 6/2/98 6/12/98 $.06 per share
2/23/98...... 3/16/98 4/6/98 $.06 per share
11/21/97..... 12/19/97 1/9/98 $.035 per share
8/22/97...... 9/2/97 9/10/97 $.035 per share
5/22/97...... 6/5/97 6/12/97 $.023 per share
2/21/97...... 3/14/97 4/4/97 $.023 per share
2/21/97...... 3/14/97 4/4/97 $.047 per share
</TABLE>

- ---------------
(1) Amounts have been restated to reflect the June 1997 3:2 common stock split.

14
<PAGE> 18

ITEM 6. SELECTED FINANCIAL DATA.

The Selected Consolidated Financial Data presented below should be read in
connection with the accompanying Consolidated Financial Statements of the
Company and the notes related thereto and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales......................... $1,352,807(1) $961,518(1) $653,975(1) $561,341(1) $446,866
Cost of sales..................... 1,024,214 737,500 492,199 432,059 344,705
---------- -------- -------- -------- --------
Gross profit...................... 328,593 224,018 161,776 129,282 102,161
Warehouse, delivery, selling,
general and administrative
expenses(2)..................... 239,651 164,580 118,089 94,609 77,638
---------- -------- -------- -------- --------
Income from operations............ 88,942 59,438 43,687 34,673 24,523
Other income (expense):
Interest expense................ (17,585) (10,861) (3,940) (1,595) (2,120)
Other income.................... 3,042 3,611 4,464 2,318(3) 1,799(3)
Equity in earnings of 50%-owned
company and joint venture....... 5,873 5,798 5,340 3,199 48
---------- -------- -------- -------- --------
Income before income taxes........ 80,272 57,986 49,551 38,595 24,250
Income taxes...................... (32,597) (23,810) (19,761) (15,893) (9,840)
---------- -------- -------- -------- --------
Net income........................ $ 47,675 $ 34,176 $ 29,790 $ 22,702 $ 14,410
========== ======== ======== ======== ========
Earnings per
share -- diluted(4)(5).......... $ 2.53 $ 2.15 $ 1.90 $ 1.45 $ 1.14
Earnings per
share -- basic(4)(5)............ $ 2.54 $ 2.17 $ 1.93 $ 1.46 $ 1.14
Weighted average common shares
outstanding -- diluted(4)....... 18,870 15,875 15,680 15,591 12,624
Weighted average common shares
outstanding -- basic(4)......... 18,768 15,736 15,460 15,520 12,597
Cash dividends per
share -- diluted(4)............... $ .24 $ .16 $ .12 $ .10 $ .10
Balance Sheet Data (December 31):
Working capital................... $ 291,170 $213,252 $136,765 $100,731 $ 84,490
Total assets...................... 841,395 583,866 391,176 260,473 199,421
Long-term debt.................... 343,250 143,350 107,450 30,350 8,532
Shareholders' equity.............. 345,802 313,164 192,642 163,917 149,983
</TABLE>

- ---------------
(1) Does not include consolidated revenues of $177.2 million, $183.7 million,
$178.9 million and $86.4 million for American Steel, L.L.C. for the twelve
months ended December 31, 1998, 1997 and 1996, and the period July 1 to
December 31, 1995, respectively. This 50% investment is accounted for by the
equity method, so the Company includes 50% of American Steel's earnings in
the Company's net income and earnings per share amounts.

(2) Includes depreciation and amortization amounts.

(3) Includes income received from rental agreements with and services provided
to Feralloy Reliance Company, L.P., a joint venture in which the Company
owned a 50% interest, which was dissolved effective September 30, 1995.

(4) Amounts have been retroactively adjusted to reflect the June 1997 3:2 stock
split.

(5) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings
Per Share. For further discussion of earnings per share and the impact of
Statement No. 128, see Note 11 to the Consolidated Financial Statements.

15
<PAGE> 19

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

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

OVERVIEW

Although the metals service center industry was faced with multiple
challenges during 1998, the Company experienced record sales and earnings
results, primarily due to the inclusion of sales and earnings of companies
acquired by Reliance during 1998 and 1997. The Company experienced pricing
pressures for most of its products during 1998; however, the Company was able to
increase its gross margins during this period due to lower costs of those
products and superior inventory turnover rates. The expanded product and
geographic diversity obtained through recent acquisitions also contributed to
the record results. In addition, the demand for heat treated aluminum by the
aerospace industry, which allowed higher prices to be realized on sales of these
products during 1997, continued through most of 1998. The Company believes its
results have been less volatile to the economic trends affecting the industry
because its operations are geographically diversified, it has a wide range of
products, and its customer base and the industries to which it sells are highly
diversified.

Reliance's diversification and financial performance have benefited from
several significant acquisitions during the reported periods, each of which has
been immediately accretive to earnings. Additionally, the Company's successful
efforts to continue to expand through strategic acquisitions and to increase its
efficiencies and physical capacities through capital expenditure programs have
enabled it to lessen the impact of regional economic recessions on the overall
results of its operations. Management believes that the Company is positioned to
take full advantage of improved economic environments, while at the same time it
is poised to operate efficiently in less favorable economies because of its
tight cost controls, high inventory turnover and diversification. Management
does not anticipate the same rate of growth in revenues and net income in 1999
as in recent years, due to lower selling prices and costs of materials for most
of its products, net of the impact of any acquisitions made during 1999.

RECENT DEVELOPMENTS

The Company completed seven acquisitions during 1998, and has already
completed its first acquisition in 1999. These acquisitions were financed by a
secondary public equity offering completed in 1997, the private placement of
$150 million of senior unsecured debt in November 1998 and borrowings under a
syndicated bank line of credit.

On March 1, 1999, the Company acquired 100% of the outstanding shares of
Liebovich Bros., Inc. ("LBI"), a privately-held metals service center company
headquartered in Rockford, Illinois, for approximately $60 million in cash. This
acquisition provided the Company an entry into a new market, the Midwest area of
the United States. LBI provides primarily carbon steel products and has a metals
service center facility and two metal fabrication facilities in Rockford,
Illinois, as well as a service center in Wyoming (Grand Rapids), Michigan. LBI
is operated as a wholly-owned subsidiary of the Company. LBI's 1998 sales were
approximately $130 million.

On October 5, 1998, the Company acquired Engbar Pipe & Steel Co.
("Engbar"), a privately-held metals service center company headquartered in
Denver, Colorado. Engbar operates as a wholly-owned subsidiary of the Company.
Engbar's products primarily include carbon steel bars, pipe and tubing. Net
sales of Engbar for the twelve months ended December 31, 1997, were
approximately $14 million.

On October 1, 1998, the Company acquired Steel Bar Corporation ("Steel
Bar"), a privately-held metals service center in Greensboro, North Carolina.
Steel Bar operates as a wholly-owned subsidiary of Phoenix Corporation, which is
a wholly-owned subsidiary of the Company. Steel Bar's products include,
primarily, carbon steel bars and tubing. Steel Bar's net sales for the twelve
months ended December 31, 1997, were approximately $13 million.

16
<PAGE> 20

Also on October 1, 1998, the Company acquired American Metals Corporation
("American Metals"), based in West Sacramento, California, with additional
service centers in Redding and Fresno, California. American Metals was
previously owned by American Steel, L.L.C. ("American Steel"), in which the
Company owns a 50% interest. American Metals operates as a wholly-owned
subsidiary of the Company. The Company will continue to account for its
investment in American Steel using the equity method of accounting, which
excludes American Metals effective October 1, 1998. American Metals' net sales
for the nine month period ended September 30, 1998, were approximately $44
million, which include, primarily, sales of carbon steel plate, bars,
structurals, sheet and aluminum and stainless steel sheet products.

On September 18, 1998, the Company acquired 100% of the stock of Lusk
Metals, a privately-held metals service center with headquarters in Hayward,
California (near San Francisco), for approximately $22 million in cash. Lusk
Metals operates as a wholly-owned subsidiary of the Company. Lusk Metals had net
sales of approximately $30 million for the twelve months ended February 28,
1998, and processes and distributes primarily precision cut aluminum plate and
aluminum sheet and extrusions.

Effective July 1, 1998, the Company acquired 100% of the stock of Chatham
Steel Corporation ("Chatham"), a privately-held metals service center
headquartered in Savannah, Georgia for approximately $68 million in cash.
Chatham has additional facilities in Columbia, South Carolina; Durham, North
Carolina; Orlando, Florida; Jacksonville, Florida; and Birmingham, Alabama.
Chatham's products include primarily carbon steel structurals, plate, pipe and
tube, bars, sheet and coil and some stainless steel. Chatham's net sales for the
year ended December 31, 1997, were approximately $166 million.

On January 30, 1998, the Company completed its acquisition of all the
outstanding capital stock of Phoenix Corporation, doing business as Phoenix
Metals Company ("Phoenix Metals"), a privately-held metals service center
company located in Norcross (Atlanta), Georgia, for approximately $21 million in
cash. Phoenix operates as a wholly-owned subsidiary of the Company and has
facilities in Birmingham, Alabama; Tampa, Florida; and Charlotte, North
Carolina; in addition to its headquarters in Atlanta. Phoenix Metals' products
include primarily flat-rolled aluminum, stainless steel and coated steel.
Phoenix Metals' revenues for the eleven months ended January 29, 1998, were
approximately $120 million

Also on January 30, 1998, the Company completed its acquisition of the
assets and business of Durrett-Sheppard Steel Co., L.L.C. and its subsidiary
Durrett-Sheppard Steel of Pennsylvania, Inc., through its newly-formed
subsidiary, Durrett Sheppard Steel Co., Inc. ("Durrett"), a carbon steel metals
service center, for approximately $30.5 million in cash. Durrett is located in
Baltimore, Maryland, and operates as a wholly-owned subsidiary of the Company.
Durrett-Sheppard Steel Co., L.L.C.'s revenues for the twelve months ended
September 30, 1997, were approximately $47 million.

17
<PAGE> 21

RESULTS OF OPERATIONS

The following table sets forth certain income statement data for each of
the three years in the period ended December 31, 1998 (dollars are shown in
thousands and certain amounts may not calculate due to rounding):

<TABLE>
<CAPTION>
1998 1997 1996
----------------------- --------------------- ---------------------
% OF % OF % OF
$ NET SALES $ NET SALES $ NET SALES
---------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales................. $1,352,807 100.0% $961,518 100.0% $653,975 100.0%
Gross profit.............. 328,593 24.3 224,018 23.3 161,776 24.7
Operating expenses........ 239,651 17.7 164,580 17.1 118,089 18.0
---------- ----- -------- ----- -------- -----
Income from operations.... $ 88,942 6.6% $ 59,438 6.2% $ 43,687 6.7%
========== ===== ======== ===== ======== =====
FIFO income from
operations.............. $ 84,303 6.2% $ 61,380 6.4% $ 38,436 5.9%
========== ===== ======== ===== ======== =====
</TABLE>

Substantially all inventories for the Company's metals service centers have
been stated on the last-in, first-out ("LIFO") method. The Company uses the LIFO
method of inventory valuation for these inventories because it results in a
better matching of costs and revenues. Under the LIFO method, the effect of
suppliers' price increases or decreases is reflected directly in the cost of
goods sold. During periods of decreasing prices, which the Company experienced
during 1998, LIFO accounting will cause reported income to be higher than would
otherwise result from the use of the first-in, first-out ("FIFO") method of
inventory valuation. A number of the Company's competitors use the FIFO method
of inventory valuation. Had the Company valued its inventories on the FIFO
method, FIFO income from operations would have been as indicated above.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 (DOLLAR
AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)

Consolidated net sales increased $391,289, or 40.7%, for the year 1998
compared to 1997, which reflects an increase in tons sold of 47.2% and a
decrease in the average selling price per ton of 4.5%. The increase in sales
volume during 1998 was primarily due to the inclusion of twelve months of sales
from AMI Metals, Inc. ("AMI"), Service Steel Aerospace Corp. ("SSA"), and
Georgia Steel Supply Company ("Georgia Steel"), which were acquired during 1997,
along with sales from companies acquired in 1998, which include Phoenix Metals,
acquired January 30, 1998; Durrett, acquired January 30, 1998; Chatham, acquired
July 1, 1998; Lusk Metals, acquired September 18, 1998; American Metals,
acquired October 1, 1998; Steel Bar, acquired October 1, 1998; and Engbar,
acquired October 5, 1998 (collectively, the "Acquisitions"). The average selling
price for 1998 decreased 4.5% from the 1997 average selling price due to lower
selling prices based on lower costs of material for most of the Company's
products, a shift in product mix and continued lower selling prices for
electropolished stainless steel tubing and fittings sold to the semiconductor
manufacturing industry in 1998, as compared to 1997. As most of the companies
acquired during 1998 sell primarily carbon steel products, which generally have
a lower selling price than other products sold by the Company, the shift in
product mix has contributed to lower selling prices. Also, because the selling
prices of electropolished stainless steel tubing and fittings sold to the
semiconductor manufacturing industry are significantly higher than most other
products sold by the Company, the reduced quantities of this product sold during
1998 resulted in a significant decline in the overall average selling price.
Excluding sales of the Acquisitions, the Company reported a 0.7% increase in
tons sold, which is primarily due to general economic improvements and an
increased market share in the Company's market areas, especially in the
southeastern United States market, and a 3.9% decrease in the average selling
price from 1998 to 1997 primarily due to reduced selling prices of
electropolished stainless steel tubing and fittings, as discussed above, and a
greater shift toward carbon steel products.

Included in other income for 1997 is a net gain of $1,008 realized on the
sale of real property at the former Santa Clara, California location.

Total gross profit increased $104,575, or 46.7%, compared to 1997, due
mainly to the additional gross profit generated by the Acquisitions. Expressed
as a percentage of sales, gross profit increased to 24.3% for

18
<PAGE> 22

1998, compared to 23.3% in 1997. This increase was primarily due to costs of raw
materials declining at a more rapid rate than selling prices for most of the
Company's products during 1998, from 1997 levels. In addition, the Company's
ability to turn its inventory faster than most of its competitors allowed the
Company to maximize its gross margins. The significant decline in raw material
costs during 1998, especially for carbon steel products in the fourth quarter of
the year, contributed to the decrease in LIFO costs of $4,639. Although the
costs of certain products declined in 1997, a net increase in LIFO costs of
$1,942 was recorded in the 1997 period primarily due to significant increases in
the costs and sales volume of heat treated aluminum products during 1997. On a
FIFO basis, gross profit in 1998 was 23.9% of sales, compared to 23.5% in 1997.
The FIFO gross profit remained relatively constant, with a slight increase due
to lower costs of material and superior inventory turns during the 1998 period,
as discussed above.

Warehouse, delivery, selling, and general and administrative expenses
increased $68,790, or 45.4%, for 1998 compared to 1997. These expenses
represented 16.3% and 15.8% of sales in 1998 and 1997, respectively. The dollar
increase in expenses reflects the increase in sales volume for the 1998 period,
which includes the sales and related operating expenses of the Acquisitions. The
increase in expenses as a percentage of sales is primarily due to selling prices
declining throughout 1998, while volume was increasing, and fixed costs remained
constant.

Depreciation and amortization expense increased 47.7% for 1998 compared to
1997. The increase is primarily due to the inclusion of depreciation expense and
the amortization of goodwill related to the Acquisitions.

Income from operations increased 49.6% from $59,438 in 1997 to $88,942 in
1998. The increase was mainly attributable to increased gross profit and the
inclusion in 1998 of operating income from the Acquisitions.

Interest expense increased $6,724 in 1998 compared to 1997 due to an
increase in the average debt outstanding to fund the Acquisitions.

The effective income tax rate of the Company decreased from 41.0% in 1997
to 40.6% in 1998, mainly due to the election of a tax treatment that allows the
amortization of goodwill for certain of the Acquisitions.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 (DOLLAR
AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE AMOUNTS)

Consolidated net sales increased $307,543, or 47.0%, for the year 1997
compared to 1996, which reflects an increase in tons sold of 51.9% and a
decrease in the average selling price per ton of 2.7%. The increase in sales
volume during 1997 was primarily due to the inclusion of sales from CCC Steel,
Inc. ("CCC Steel"), which was acquired April 2, 1996; from Siskin Steel & Supply
Company, Inc. ("Siskin"), which was acquired October 1, 1996; from AMI, which
was acquired April 2, 1997; from Amalco Metals, Inc. ("Amalco"), which was
acquired April 30, 1997, and merged into the Company in April 1998; from SSA,
which was acquired October 1, 1997; and from Georgia Steel, which was acquired
December 1, 1997 (collectively, the "1997 Acquisitions"). The average selling
price for 1997 decreased 2.7% from the 1996 average selling price primarily due
to, generally, a more competitive market and supply in excess of demand for the
electropolished stainless steel tubing and fittings sold to the semiconductor
manufacturing industry. The selling prices of these products are significantly
higher than most other products sold by the Company, resulting in a decline in
the overall average selling price even though the quantities are a small
percentage of the total. Excluding the sales of the 1997 Acquisitions, the
Company reported a 9.8% increase in tons sold, which is primarily due to general
economic improvements and an increased market share in the Company's market
areas, and a 3.0% decrease in the average selling price from 1997 to 1996
primarily due to reduced selling prices of electropolished stainless steel
tubing and fittings, as discussed above.

Included in other income for 1997 is a net gain of $1,008 realized on the
sale of real property at the former Santa Clara, California location. Included
in 1996 is a net gain of $1,519 realized on the sale of real property near Los
Angeles, California.

19
<PAGE> 23

Total gross profit increased $62,242, or 38.5%, compared to 1996, due to
the additional gross profit generated by the 1997 Acquisitions. Expressed as a
percentage of sales, gross profit decreased to 23.3% for 1997, compared to 24.7%
in 1996. This decrease was primarily due to decreased selling prices of certain
of the Company's raw materials during 1997, from 1996 levels. During 1996, the
Company experienced declining raw material costs primarily for its common alloy
aluminum and stainless steel products, resulting in a net decrease in LIFO costs
of $5,251. Although stainless steel costs continued to decline in 1997, the
Company experienced significant increases in the costs of heat treated aluminum
products, along with increased sales of these products, resulting in a net
increase in LIFO costs of $1,942 in 1997. On a FIFO basis, gross profit in 1997
was 23.5% of sales, compared to 23.9% in 1996. The FIFO gross profit remained
relatively constant, with a slight decrease due to declining margins for
electropolished stainless steel tubing and fittings sold to the semiconductor
manufacturing industry resulting from a more competitive sales environment and
increased customer demand for certain lower margin products sold to the
semiconductor manufacturing industry.

Warehouse, delivery, selling, and general and administrative expenses
increased $41,790, or 38.1%, for 1997 compared to 1996. These expenses
represented 15.8% and 16.8% of sales in 1997 and 1996, respectively. The dollar
increase in expenses reflects the increase in sales volume for the 1997 period,
which includes the sales and related operating expenses of the 1997
Acquisitions. The decrease in expenses as a percentage of sales is primarily due
to a $1,000 charge included in 1996 related to the termination of the Company's
pension plan, and due to the reductions in workforce and operating expenses at
Valex Corp., a 97%-owned subsidiary of the Company, related to the slowdown in
the semiconductor manufacturing industry.

Depreciation and amortization expense increased 55.5% for 1997 compared to
1996. The increase is primarily due to the inclusion of depreciation expense and
the amortization of goodwill related to the 1997 Acquisitions.

Income from operations increased 36.1% from $43,687 in 1996 to $59,438 in
1997. The increase was mainly attributable to the inclusion in 1997 of operating
income from the 1997 Acquisitions.

Interest expense increased $6,921 in 1997 compared to 1996 due to an
increase in the average debt outstanding to fund the 1997 Acquisitions.

The effective income tax rate of the Company increased from 39.9% in 1996
to 41.0% in 1997, mainly due to the increased non-deductible amortization of
goodwill from the 1997 Acquisitions.

Earnings per share, on a diluted basis, for 1997 and 1996 of $2.15 and
$1.90, respectively, includes $0.04 and $0.06 per share, respectively,
attributable to the sale of real property in each of those periods.

LIQUIDITY AND CAPITAL RESOURCES (DOLLAR AMOUNTS IN THOUSANDS OTHER THAN SHARE
AND PER SHARE AMOUNTS)

At December 31, 1998, working capital amounted to $291,170, compared to
$213,252 at December 31, 1997. The increase in working capital is due to the
working capital of companies acquired during 1998, and cash generated from
operations. The ratio of current assets to current liabilities was 3.3:1 at the
end of 1998 compared to 3.0:1 at the end of 1997. Current assets continue to
increase, reflected principally in higher inventory and receivable levels due to
the Acquisitions. The Company's capital requirements are primarily for working
capital, acquisitions, and capital expenditures for continued improvements in
plant capacities and material handling and processing equipment.

The Company's primary sources of liquidity are generally from internally
generated funds from operations and the Company's revolving line of credit.
Additionally, in October 1998, the Company entered into agreements with
insurance companies for private placements of senior unsecured notes in the
aggregate amount of $150,000, which was funded in November 1998. The proceeds of
the debt were used to refinance the borrowings under the Company's revolving
credit facility made to fund acquisitions during 1998, and borrowings for
general working capital purposes. The senior notes that were issued in the
private placement have maturity dates ranging from 2005 to 2010, with an average
life of 10.3 years, and bear interest at an average rate of 6.55% per annum.

20
<PAGE> 24

In 1997, the Company entered into a syndicated credit facility with a
borrowing limit of $200,000 with an allowance to use up to $175,000 of the line
of credit to make acquisitions. In the same transaction, the Company entered
into an agreement that allows the Company to issue and have outstanding letters
of credit in an amount not to exceed $10,000. Also during 1997, proceeds for
private placements of debt of $65,000 and $75,000 were funded in September 1997
and January 1997, respectively.

In November 1997, the Company issued 3,595,000 new shares of its Common
Stock in a public equity offering, resulting in net proceeds of $93,908. The
proceeds from this offering were used to pay down outstanding bank debt,
including the debt incurred to fund the acquisition of SSA, and to fund the
acquisition of Georgia Steel. At December 31, 1997, the balance of the proceeds
was invested in high quality short-term investments (classified as cash
equivalents), which, along with bank debt, was then used to fund the
acquisitions of Durrett and Phoenix Metals on January 30, 1998.

Such sources of liquidity, as discussed above, were sufficient to fund the
Acquisitions. The purchase price of the acquisitions made in 1998 totaled
approximately $160,000. See "Recent Developments" section for a complete
discussion of the acquisitions made in 1998.

Net capital expenditures, excluding acquisitions, were $23,671 for the 1998
year. The Company had no material commitments for capital expenditures as of
December 31, 1998. The Company anticipates that the funds generated from
operations and funds available under its line of credit will be sufficient to
meet its working capital needs for the foreseeable future. The purchase of LBI
was funded with cash generated from operations and borrowings on the Company's
line of credit.

On August 31, 1998, the Board of Directors of the Company approved the
purchase of up to an additional 2,500,000 shares of the Company's outstanding
Common Stock through its Stock Repurchase Plan, for a total of 4,000,000 shares.
The Company has purchased a total of 1,781,550 shares of its Common Stock, at an
average purchase price of $14.86 per share, as of December 31, 1998, all of
which are being treated as authorized but unissued shares. The Company
repurchased 430,800 of those shares during 1998, at an average purchase price of
$25.79 per share. The Company believes such purchases enhance shareholder value
and reflect its confidence in the long-term growth potential of the Company.

INFLATION

The Company's operations have not been, nor are they expected to be,
materially affected by general inflation. Historically, the Company has been
successful in raising prices to its customers in periods of increasing metal
prices and has had to reduce prices to its customers in periods of declining
metal prices. Changes in metal prices, therefore, affect the Company's sales and
earnings.

SEASONALITY

The Company recognizes that some of its customers may be in seasonal
businesses, especially customers in the construction industry. As a result of
the Company's geographic, product and customer diversity, however, the Company's
operations have not shown any material seasonal trends, although the months of
November and December traditionally have been less profitable because of a
reduced number of working days for shipments of the Company's products and
holiday closures for some of its customers. There can be no assurance that
period-to-period fluctuations will not occur in the future. Results of any one
or more quarters are therefore not necessarily indicative of annual results.

IMPACT OF YEAR 2000

The Company does not anticipate that there would be a material impact on
the results of operations or cash flows of the Company related to the Company's
Year 2000 Issue. The Year 2000 Issue addresses computer programs which have
time-sensitive software that recognizes a date using "00" as the year 1900
rather than the year 2000. As the Company consists of a chain of metals service
centers which do not produce a date sensitive product or have highly automated
operations, the primary Year 2000 exposure is related to the business
applications software used by the Company to perform purchasing, inventory
management, process-

21
<PAGE> 25

ing, production scheduling, sales order entry and invoicing, routing and
shipping, and accounts payable and general ledger accounting. A majority of the
Company's locations began converting to new business applications software and
related hardware systems to obtain additional functionality in 1994. This
conversion is substantially complete. This software has since been certified
Year 2000 compliant by the Company's software vendor. In addition to the
vendor's certification, the Company has an ongoing program to test its systems
for such compliance. The testing performed by the Company has confirmed the
vendor's certification. Additionally, certain of the subsidiaries acquired by
the Company will be converted to this system during 1999, as their current
systems are not considered to be Year 2000 compliant. At the Company's
subsidiaries that are not being converted to this system, assessments of the
existing systems have occurred, which indicated that certain subsidiaries
require minor modifications to their existing software, while other subsidiaries
are in the testing or modification phases. Any additional modifications or
testing are expected to be completed by August 1999.

With respect to other equipment used in the Company's operations, Year 2000
certifications are being obtained from vendors and testing is being performed,
where practical. As the Company utilizes minimal date dependent processing and
delivery equipment in its operations, management does not expect a material
impact on the Company's operations due to the failure of other equipment in the
Year 2000. The major business systems of the Company are not vulnerable to third
parties' failure to remediate their own Year 2000 Issues, as the Company's
interface with third parties, including customers and vendors, does not involve
heavily automated computer dependent communications. The Company has estimated
costs related to the Year 2000 Issue of approximately $1.5 million, with
approximately $.75 million of these costs expected to be capitalized, as they
relate primarily to purchases of software. As such, the Company does not
anticipate a material impact on the results of operations or cash flows related
to the Year 2000 Issue. The Company has not obtained independent verification to
assure the reliability of the Year 2000 risk and cost estimates.

The Company believes that with the conversions to new software and
modifications to existing software, the Year 2000 Issue will not pose
significant operational problems for its computer system. In the event the
remaining conversions and modifications are not made, or are not completed
timely, the Year 2000 Issue is not expected to have a material impact on the
operations of the Company, as the products sold by the Company and the
processing and delivery equipment used are not date dependent, minimizing the
impact of any Year 2000 Issues related to meeting customer requirements. In
addition, in the worst case scenario, if the business applications software or
other equipment fail due to Year 2000 issues, other locations of the Company can
fulfill the customer requirements for any failed systems or equipment.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company's results of operations are affected by numerous external
factors, such as general economic conditions, domestic and foreign competition,
and steel pricing and availability. The Company is also exposed to changes in
interest rates primarily from its long-term debt issued at a fixed rate. Under
its current policies, the Company does not use interest rate derivative
instruments to manage exposure to interest rate changes. Based on the current
holdings of debt, the exposure to interest rate risk is not considered to be
material. Fixed rate debt obligations currently issued by the Company are not
callable until maturity.

22
<PAGE> 26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

RELIANCE STEEL & ALUMINUM CO.

AUDITED FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. 24
Consolidated Balance Sheets at December 31, 1998 and 1997... 25
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996.......................... 26
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997
and 1996.................................................. 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... 28
Notes to Consolidated Financial Statements.................. 29
</TABLE>

23
<PAGE> 27

REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
Reliance Steel & Aluminum Co.

We have audited the accompanying consolidated balance sheets of Reliance
Steel & Aluminum Co. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Reliance Steel
& Aluminum Co. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presented fairly, in all material respects the
information set forth therein.

/s/ ERNST & YOUNG LLP

Long Beach, California
February 9, 1999

24
<PAGE> 28

RELIANCE STEEL & ALUMINUM CO.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,496 $ 34,047
Accounts receivable, less allowance for doubtful accounts
of $5,816 in 1998 and $4,343 in 1997................... 156,150 117,733
Inventories............................................... 240,697 158,736
Prepaid expenses and other current assets................. 4,071 2,472
Deferred income taxes..................................... 12,899 9,086
-------- --------
Total current assets........................................ 420,313 322,074
Property, plant and equipment, at cost:
Land...................................................... 31,202 26,348
Buildings................................................. 125,051 95,424
Machinery and equipment................................... 137,841 104,064
Allowances for depreciation............................... (81,013) (64,872)
-------- --------
213,081 160,964
Investment in 50%-owned company............................. 24,942 28,760
Goodwill, net of accumulated amortization of $7,161 in 1998
and $3,390 in 1997........................................ 176,949 67,258
Other assets................................................ 6,110 4,810
-------- --------
Total assets................................................ $841,395 $583,866
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 91,615 $ 82,947
Accrued expenses.......................................... 17,768 8,969
Wages and related accruals................................ 10,010 7,658
Deferred income taxes..................................... 9,650 9,148
Current maturities of long-term debt...................... 100 100
-------- --------
Total current liabilities................................... 129,143 108,822
Long-term debt.............................................. 343,250 143,350
Deferred income taxes....................................... 23,200 18,530
Commitments................................................. -- --
Shareholders' equity:
Preferred stock, no par value:
Authorized shares -- 5,000,000
None issued or outstanding............................. -- --
Common stock, no par value:
Authorized shares -- 100,000,000
Issued and outstanding shares 18,449,802 in 1998 and
18,831,458 in 1997, stated capital.................... 151,903 154,761
Retained earnings......................................... 193,899 158,403
-------- --------
Total shareholders' equity.................................. 345,802 313,164
-------- --------
Total liabilities and shareholders' equity.................. $841,395 $583,866
======== ========
</TABLE>

See accompanying notes.
25
<PAGE> 29

RELIANCE STEEL & ALUMINUM CO.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $ 1,352,807 $ 961,518 $ 653,975
Gain on sale of real estate......................... -- 1,008 1,519
Other income........................................ 3,042 2,603 2,945
----------- ----------- -----------
1,355,849 965,129 658,439
Costs and expenses:
Cost of sales..................................... 1,024,214 737,500 492,199
Warehouse, delivery, selling, administrative and
general........................................ 220,205 151,415 109,625
Depreciation and amortization..................... 19,446 13,165 8,464
Interest.......................................... 17,585 10,861 3,940
----------- ----------- -----------
1,281,450 912,941 614,228
----------- ----------- -----------
Income before equity in earnings of 50%-owned
company and income taxes.......................... 74,399 52,188 44,211
Equity in earnings of 50%-owned company............. 5,873 5,798 5,340
----------- ----------- -----------
Income before income taxes.......................... 80,272 57,986 49,551
Income taxes........................................ 32,597 23,810 19,761
----------- ----------- -----------
Net income.......................................... $ 47,675 $ 34,176 $ 29,790
=========== =========== ===========
Earnings per share -- diluted....................... $ 2.53 $ 2.15 $ 1.90
=========== =========== ===========
Weighted average shares outstanding -- diluted...... 18,870,125 15,874,684 15,679,963
=========== =========== ===========
Earnings per share -- basic......................... $ 2.54 $ 2.17 $ 1.93
=========== =========== ===========
Weighted average shares outstanding -- basic........ 18,768,367 15,736,241 15,460,009
=========== =========== ===========
Cash dividends declared............................. $ .24 $ .16 $ .12
=========== =========== ===========
</TABLE>

See accompanying notes.
26
<PAGE> 30

RELIANCE STEEL & ALUMINUM CO.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED
SHARES AMOUNT EARNINGS
---------- -------- --------
<S> <C> <C> <C>
Balance at January 1, 1996................................ 15,408,460 $ 60,344 $103,573
Net income for the year................................. -- -- 29,790
Stock options exercised................................. 56,110 404 --
Stock issued under incentive bonus plan................. 24,860 383 --
Cash dividends -- $.12 per share........................ -- -- (1,852)
---------- -------- --------
Balance at December 31, 1996.............................. 15,489,430 61,131 131,511
Net income for the year................................. -- -- 34,176
Stock options exercised................................. 97,900 787 1,243
Stock issued under incentive bonus plan................. 22,178 449 --
Cash dividends -- $.16 per share........................ -- -- (2,605)
Repurchase of stock..................................... (373,050) (1,514) (5,922)
Issuance of stock, net of offering costs of $371........ 3,595,000 93,908 --
---------- -------- --------
Balance at December 31, 1997.............................. 18,831,458 154,761 158,403
Net income for the year................................. -- -- 47,675
Stock options exercised................................. 43,459 527 --
Stock issued under incentive bonus plan................. 5,685 196 --
Cash dividends -- $.24 per share........................ -- -- (4,502)
Repurchase of stock..................................... (430,800) (3,581) (7,677)
---------- -------- --------
Balance at December 31, 1998.............................. 18,449,802 $151,903 $193,899
========== ======== ========
</TABLE>

See accompanying notes.
27
<PAGE> 31

RELIANCE STEEL & ALUMINUM CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 47,675 $ 34,176 $ 29,790
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 19,446 13,165 8,464
Deferred taxes........................................ (199) 1,299 1,535
Loss (gain) on sales of equipment..................... 345 (265) 459
Net gain on sale of real estate....................... -- (1,008) (1,519)
Equity in earnings of 50%-owned company............... (5,644) (5,109) (4,823)
Changes in operating assets and liabilities:
Accounts receivable................................ 15,187 (16,302) 16,445
Inventories........................................ (3,256) 548 (6,687)
Prepaid expenses and other assets.................. (3,497) 1,075 3,625
Accounts payable and accrued expenses.............. (39,122) 12,179 (10,863)
--------- --------- ---------
Net cash provided by operating activities............... 30,935 39,758 36,426

INVESTMENT ACTIVITIES
Purchases of property, plant and equipment.............. (23,671) (26,561) (21,395)
Proceeds from sales of equipment........................ 2,415 3,276 1,082
Acquisitions of metals service centers.................. (152,350) (80,514) (95,909)
Dividends received from 50%-owned company............... 1,200 5,307 1,426
--------- --------- ---------
Net cash used in investing activities................... (172,406) (98,492) (114,796)

FINANCING ACTIVITIES
Proceeds from borrowings................................ 363,000 256,000 105,273
Principal payments on long-term debt and short-term
borrowings............................................ (234,043) (250,380) (43,035)
Dividends paid.......................................... (4,502) (2,605) (1,852)
Issuance of common stock................................ 723 95,144 787
Exercise of stock options............................... -- 1,243 --
Repurchase of common stock.............................. (11,258) (7,436) --
--------- --------- ---------
Net cash provided by financing activities............... 113,920 91,966 61,173
--------- --------- ---------
(Decrease) increase in cash and cash equivalents........ (27,551) 33,232 (17,197)
Cash and cash equivalents at beginning of year.......... 34,047 815 18,012
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 6,496 $ 34,047 $ 815
========= ========= =========
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES:

During 1997, certain assets of the Company were exchanged in non-monetary
transactions. The asset values exchanged were approximately $1,900 and $1,200,
respectively.

See accompanying notes.
28
<PAGE> 32

RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Reliance Steel & Aluminum Co. and its wholly-owned subsidiaries, which include
American Metals Corporation, AMI Metals, Inc., CCC Steel, Inc., Chatham Steel
Corporation, Durrett Sheppard Steel Co., Inc., Engbar Pipe & Steel Co., Lusk
Metals, Phoenix Corporation (including Steel Bar Corporation), Service Steel
Aerospace Corp., and Siskin Steel & Supply Company, Inc. (including Georgia
Steel Supply Company), and 97%-owned Valex Corp., on a consolidated basis ("the
Company"). All significant intercompany transactions have been eliminated in
consolidation. The Company accounts for its 50% investment in American Steel,
L.L.C. on the equity method of accounting.

Business

The Company operates a metals service center network of 62 processing and
distribution facilities (not including American Steel, L.L.C.) within 20 states,
which provide value-added metals processing services and distribute a full line
of more than 70,000 metal products.

Accounting Estimates

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

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of trade receivables. The
Company sells its products to a geographically diverse customer base in various
industries. Credit is extended based upon an evaluation of each customer's
financial condition, with terms consistent in the industry and no collateral
required. Losses from credit sales are provided for in the financial statements
and consistently have been within the allowance provided.

Fair Values of Financial Instruments

Fair values of cash and cash equivalents, short-term borrowings and the
current portion of long-term debt approximate cost due to the short period of
time to maturity. Fair values of long-term debt, which have been determined
based on borrowing rates currently available to the Company for loans with
similar terms or maturity, approximate the carrying amounts in the consolidated
financial statements.

Cash Equivalents

The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents are held by major financial institutions.

29
<PAGE> 33
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Depreciation and Amortization

The provision for depreciation of property, plant and equipment is
generally computed on the straight-line method at rates designed to distribute
the cost of assets over the useful lives, estimated as follows:

<TABLE>
<S> <C>
Buildings...................................... 31 1/2 years
Machinery and equipment........................ 3 - 10 years
</TABLE>

Goodwill, representing the excess of the purchase price over the fair
values of the net assets of acquired entities, is being amortized on a straight
line basis over the period of expected benefit of 40 years. Covenants not to
compete and other intangible assets are being amortized over the period of
expected benefit, generally five years.

Revenue Recognition

The Company recognizes revenue from product sales at the time of shipment.
Provisions are made currently for estimated returns.

Stock-Based Compensation

The Company grants stock options with an exercise price equal to the fair
value of the stock at the date of grant. The Company elected to continue to
account for stock-based compensation plans using the intrinsic value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25
("APB25"), Accounting for Stock Issued to Employees and related interpretations.
Under APB25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock at the date of grant, no
compensation expense is recognized.

Impact of Recently Issued Accounting Standards

The Company adopted Financial Accounting Standards Board ("FASB") Statement
No. 130, Reporting Comprehensive Income, effective January 1, 1998. This
Statement establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. There was no impact on
the financial statements of the Company due to the adoption of Statement 130.

Statement No. 131, Disclosures About Segments of an Enterprise and Related
Information, was also adopted on January 1, 1998, which requires the Company to
report financial and descriptive information about its reportable operating
segments. There was no impact on the Company's financial statements due to the
adoption of Statement 131.

Also effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. This statement supersedes the disclosure requirements
in Statements of Financial Accounting Standards 87, Employers' Accounting for
Pensions, 88, Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and 106, Employers'
Accounting for Postretirement Benefits Other than Pensions. The objective of
SFAS 132 is to improve and standardize disclosures regarding pensions and
post-retirement benefits.

In March 1998, Statement of Position (SOP) 98-1 was issued, which is
effective for fiscal years beginning after December 15, 1998. SOP 98-1 requires
capitalization and amortization of qualified computer software costs over their
estimated useful life. There will be no impact on the Company's earnings or
financial position due to the adoption of SOP 98-1. In June 1998, the FASB
issued Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, which is required to be adopted in years beginning after June 15,
1999. Because of the Company's minimal use of derivatives there will be no
impact on the Company's earnings or financial position once Statement 133 is
adopted.

30
<PAGE> 34
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Reclassifications

Certain reclassifications have been made to the 1997 balances to conform to
the 1998 presentation.

2. ACQUISITIONS

On October 5, 1998, the Company acquired 100% of the outstanding stock of
Engbar Pipe & Steel Co. ("Engbar"), a privately-held metals service center
company headquartered in Denver, Colorado. Engbar operates as a wholly-owned
subsidiary of the Company. The purchase of Engbar was funded with borrowings
under the Company's line of credit.

On October 1, 1998, Phoenix Corporation, which is a wholly-owned subsidiary
of the Company, acquired 100% of the outstanding stock of Steel Bar Corporation
("Steel Bar"), a privately-held metals service center in Greensboro, North
Carolina. Steel Bar operates as a wholly-owned subsidiary of Phoenix
Corporation. The purchase of Steel Bar was funded with borrowings under the
Company's line of credit.

Also effective October 1, 1998, American Steel, L.L.C. ("American Steel")
distributed equally to its members, the Company and American Industries
("Industries"), 100% of the outstanding stock of its wholly-owned subsidiary,
American Metals Corporation ("American Metals"). Simultaneously with the
distribution, American Metals redeemed the stock owned by Industries for real
property of approximately $6,670,000 and cash of $1,800,000. The real property
is being leased back to Industries. American Metals is based in West Sacramento,
California, with additional service centers in Redding and Fresno, California.
American Metals operates as a wholly-owned subsidiary of the Company. The
Company will continue to account for its investment in American Steel using the
equity method of accounting.

On September 18, 1998, the Company acquired 100% of the stock of Lusk
Metals, a privately-held metals service center with headquarters in Hayward,
California (near San Francisco), for approximately $22,000,000 in cash. Lusk
Metals is operating as a wholly-owned subsidiary of the Company. The purchase of
Lusk Metals was funded with borrowings under the Company's line of credit.

Effective July 1, 1998, the Company acquired 100% of the stock of Chatham
Steel Corporation ("Chatham"), a privately-held metals service center company
headquartered in Savannah, Georgia for approximately $68,000,000 in cash.
Chatham has additional facilities in Columbia, South Carolina; Durham, North
Carolina; Orlando, Florida; Jacksonville, Florida; and Birmingham, Alabama.
Chatham is operating as a wholly-owned subsidiary of the Company. The purchase
of Chatham was funded with borrowings under the Company's line of credit.

On January 30, 1998, the Company acquired 100% of the outstanding capital
stock of Phoenix Corporation, doing business as Phoenix Metals Company ("Phoenix
Metals"), for approximately $21,000,000 in cash. Phoenix Metals is headquartered
in Norcross (Atlanta), Georgia, with additional metals service centers in
Birmingham, Alabama; Tampa, Florida; and Charlotte, North Carolina. Phoenix
Metals is operating as a wholly-owned subsidiary of the Company. The purchase of
Phoenix Metals was funded with a portion of the proceeds from the 1997 equity
offering and borrowings under the Company's line of credit.

Also on January 30, 1998, the Company purchased the assets and business of
Durrett-Sheppard Steel Co., L.L.C. and its subsidiary, Durrett-Sheppard Steel of
Pennsylvania, Inc., through its newly-formed subsidiary, Durrett Sheppard Steel
Co., Inc. ("Durrett"), for approximately $30,500,000 in cash. Durrett is a
metals service center located in Baltimore, Maryland, which is operating as a
wholly-owned subsidiary of the Company. This purchase was funded with a portion
of the proceeds from the 1997 equity offering and borrowings under the Company's
line of credit.

Effective December 1, 1997, the Company purchased 100% of the outstanding
common stock of Georgia Steel Supply Company ("Georgia Steel"), a privately-held
metals service center in Atlanta, Georgia. This purchase was funded with a
portion of the proceeds of a public equity offering issued in November 1997.
31
<PAGE> 35
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Georgia Steel operated as a wholly-owned subsidiary of Siskin Steel & Supply
Company, Inc. ("Siskin"), until its merger into Siskin effective January 1,
1999.

Effective October 1, 1997, the Company acquired 100% of the outstanding
common stock of Service Steel Aerospace Corp. ("SSA") for approximately
$26,000,000 in cash. SSA operates metals service centers in Tacoma, Washington;
North Canton, Ohio; and Long Beach, California. SSA is operating as a wholly-
owned subsidiary of the Company. The purchase of SSA was funded by drawing on
the Company's line of credit, which was paid off with a portion of the proceeds
from the public equity offering in November 1997.

Effective April 30, 1997, the Company purchased 100% of the outstanding
shares of Amalco Metals, Inc. ("Amalco"), a privately-held metals service center
located in Union City, California. This purchase was funded by drawings on the
Company's revolving line of credit, which was later replaced with the issuance
of a private placement of debt. Amalco operated as a wholly-owned subsidiary of
the Company until it was merged with Reliance in April 1998, and relocated to a
new facility, combining operations with an existing Reliance operation.

Effective April 2, 1997, the Company acquired 100% of the outstanding
capital stock of AMI Metals, Inc. ("AMI") for $38,500,000 in cash. AMI operates
metals service centers and is headquartered in Brentwood, Tennessee, with
additional locations in Fontana, California; Wichita, Kansas; Fort Worth, Texas;
Kent, Washington; and Swedesboro, New Jersey. In November 1998, AMI transferred
its Brentwood warehouse operations to Forest Park (Atlanta), Georgia, with its
corporate headquarters remaining in Brentwood. AMI operates as a wholly-owned
subsidiary of the Company. The purchase of AMI was funded by drawings on the
Company's revolving line of credit, which was later replaced with the issuance
of a private placement of debt.

Effective October 1, 1996, the Company purchased 100% of the outstanding
capital stock of Siskin for $71,000,000 in cash. Siskin was a privately-held
metals service center in the Southeastern United States, with locations in
Chattanooga and Nashville, Tennessee; Spartanburg, South Carolina; and
Birmingham, Alabama. Siskin operates as a wholly-owned subsidiary of the
Company. The purchase of Siskin was funded by drawing $6,000,000 on the
Company's revolving line of credit and issuing $65,000,000 of promissory notes.
The promissory notes were redeemed on January 2, 1997, from the proceeds of a
private placement of debt of $75,000,000.

Effective April 3, 1996, the Company purchased 100% of the outstanding
capital stock of CCC Steel, Inc. ("CCC Steel") for approximately $25,000,000 in
cash. CCC Steel was a privately-held carbon steel service center, with
facilities in Los Angeles, California, and Salt Lake City, Utah. CCC Steel
operates as a wholly-owned subsidiary of the Company. The purchase was funded
through the Company's revolving line of credit.

These transactions were accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and the liabilities assumed based on the estimated fair values at the date of
the acquisition. The excess of purchase price over the estimated fair values of
the net assets acquired has been recorded as goodwill, resulting in goodwill
additions of $109,100,000 and $52,914,000, for the years ended December 31, 1998
and 1997, respectively. Related amortization expense amounted to approximately
$3,454,000, $1,468,000 and $300,000 for the years ended December 31, 1998, 1997
and 1996, respectively.

32
<PAGE> 36
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The operating results of these acquisitions are included in the Company's
consolidated results of operations from the date of each acquisition. The
following unaudited proforma summary presents the consolidated results of
operations as if the acquisitions had occurred at the beginning of each period
after the effect of certain adjustments, including amortization of goodwill,
interest expense on the acquisition debt and related income tax effects. These
proforma results have been presented for comparative purposes only and are not
indicative of what would have occurred had the acquisition been made as of
January 1, 1998, 1997, or 1996, appropriately, or of any potential results which
may occur in the future.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Proforma (unaudited):
Net sales............................... $1,539,102 $1,510,628 $946,523
Net income.............................. 50,136 43,409 31,500
Earnings per share -- diluted........... $ 2.66 $ 2.73 $ 2.01
Earnings per share -- basic............. $ 2.67 $ 2.76 $ 2.04
</TABLE>

3. INVENTORIES

Inventories of the Company have primarily been stated on the last-in,
first-out ("LIFO") method, which is not in excess of market. The Company uses
the LIFO method of inventory valuation because it results in a better matching
of costs and revenues. At December 31, 1998 and 1997, cost on the first-in,
first-out ("FIFO") method exceeds the LIFO value of inventories by $24,774,000
and $27,254,000, respectively. Inventories of $41,011,000 and $27,231,000 at
December 31, 1998 and 1997, respectively, were stated on the FIFO method, which
is not in excess of market.

4. INVESTMENT IN 50%-OWNED COMPANY

The Company maintains a 50% interest in the Membership Units of American
Steel, which operates metals service centers in Portland, Oregon and Kent
(Seattle), Washington. In 1997, American Steel sold a metals service center in
Vancouver, British Columbia. The Operating Agreement provides that the Company
may purchase the remaining 50% of American Steel during a term of three years
following the earlier of the death of the owner of Industries, or December 31,
2005. The price shall be the greater of Industries' current Capital Account or
50% of the fair market value of American Steel. The Operating Agreement gives
the Company complete control over the assets and operations of American Steel.
Additionally, until October 1, 1998, American Steel owned 100% of American
Metals, which was previously a joint venture between the Company and Industries.
As discussed in Note 2 to the consolidated financial statements, the Company now
owns 100% of the stock of American Metals. Summarized financial information for
American Steel, which

33
<PAGE> 37
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

includes American Metals through September 30, 1998, accounted for by the equity
method, is as follows as of and for the twelve months ended:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets......................................... $ 35,636 $ 54,982
Property, plant, and equipment and other assets........ 35,625 46,840
Total assets........................................... 71,261 101,822
Current liabilities.................................... 6,638 11,892
Long-term liabilities.................................. 14,687 3,078
Net sales.............................................. 177,153 183,717
Gross profit........................................... 44,624 46,846
Income before income taxes............................. 11,645 11,138
Net income............................................. 10,771 9,747
</TABLE>

The consolidated retained earnings of the Company includes the
undistributed earnings of American Steel. The Company's share of undistributed
earnings included in consolidated retained earnings amounted to $9,437,000 and
$4,993,000 as of December 31, 1998 and 1997, respectively.

5. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving line of credit ($200,000,000 limit) due
October 22, 2002, interest at variable rates,
weighted average rate of 5.8% during 1998............ $ 50,000 $ --
Senior unsecured notes due January 2, 2004 to January
2, 2009, average interest rate 7.22%................. 75,000 75,000
Senior unsecured notes due January 2, 2002 to January
2, 2008, average interest rate 7.02%................. 65,000 65,000
Senior unsecured notes due October 15, 2005 to October
15, 2010, average interest rate 6.55%................ 150,000 --
Variable Rate Demand Industrial Development Revenue
Bonds, Series 1989 A, due July 1, 2014, with interest
payable quarterly; average interest rate during 1998
of 3.5%.............................................. 3,350 3,450
-------- --------
343,350 143,450
Less amounts due within one year....................... (100) (100)
-------- --------
$343,250 $143,350
======== ========
</TABLE>

During 1998, the Company issued $150,000,000 of senior unsecured notes in a
private placement of debt. The proceeds were funded on November 3, 1998, and
were used to pay off bank debt in connection with recent acquisitions. In
October 1997, the Company entered into a syndicated credit agreement with five
banks which increased the Company's borrowing limit on the revolving line of
credit to $200,000,000. The syndicated credit agreement allows the Company to
use up to $175,000,000 of the revolving line of credit for acquisitions. The
weighted average interest rates on the line of credit were 5.375% and 6.0% as of
December 31, 1998 and 1997, respectively. In October 1997, the Company also
entered into a credit agreement that allows the Company to issue and have
outstanding up to $10,000,000 of letters of credit.

34
<PAGE> 38
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's long term loan agreements require the maintenance of a
minimum net worth and include certain restrictions on the amount of cash
dividends payable, among other things.

Interest paid during 1998, 1997, and 1996 amounted to $15,595,000,
$12,079,000, and $2,550,000, respectively. The syndicated credit facility
includes a commitment fee on the unused portion at an annual rate of 0.125%.

The following is a summary of aggregate maturities of long-term debt for
each of the next five years (in thousands):

<TABLE>
<S> <C>
1999.............................. $ 100
2000.............................. 100
2001.............................. 100
2002.............................. 60,100
2003.............................. 100
Thereafter........................ 282,850
--------
$343,350
========
</TABLE>

6. INCOME TAXES

Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The provision for income taxes reflects the taxes to be
paid for the period and the change during the period in the deferred tax assets
and liabilities. Significant components of the Company's deferred tax assets and
liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accrued expenses not currently deductible for tax......... $ 8,465 $ 6,186
Unicap.................................................... 1,376 567
Bad debt.................................................. 1,876 1,647
Goodwill.................................................. 1,182 686
-------- --------
Total deferred tax assets................................... 12,899 9,086
-------- --------
Deferred tax liabilities:
Tax over book depreciation................................ (16,074) (11,311)
Book basis in excess of tax basis on:
Inventory acquired..................................... (7,906) (7,906)
Property, plant and equipment acquired................. (7,591) (8,044)
Other, net................................................ (1,279) (417)
-------- --------
Total deferred tax liabilities.............................. (32,850) (27,678)
-------- --------
Net deferred liabilities.................................... $(19,951) $(18,592)
======== ========
</TABLE>

35
<PAGE> 39
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Significant components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal..................................... $27,004 $17,927 $14,598
State....................................... 5,792 4,584 3,628
------- ------- -------
32,796 22,511 18,226
Deferred:
Federal..................................... (164) 1,269 1,232
State....................................... (35) 30 303
------- ------- -------
(199) 1,299 1,535
------- ------- -------
$32,597 $23,810 $19,761
======= ======= =======
</TABLE>

The reconciliation of income tax at the U.S. federal statutory tax rates to
income tax expense is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Income tax at U.S. statutory tax rates................. 35.0% 35.0% 35.0%
State income tax, net of federal tax effect............ 5.0 5.0 5.0
Other.................................................. .6 1.0 (.1)
---- ---- ----
Effective tax rate..................................... 40.6% 41.0% 39.9%
==== ==== ====
</TABLE>

Income tax payments during 1998, 1997, and 1996 were $34,760,000,
$20,551,000 and $22,922,000, respectively.

7. STOCK OPTION PLANS

During 1989, the Company adopted a Non-Qualified Stock Option Plan that
provided for the granting of options to key employees to purchase up to 630,000
shares of the Company's Common Stock at a price at least equal to the fair
market value of the stock at the grant date. The Plan expired on December 31,
1993. No options were exercisable until after one year from the grant date, and
in each of the following four years, 25% of the options became exercisable on a
cumulative basis. Options were exercisable for a period of five years from the
date of grant. All options outstanding under the 1989 Plan expired during 1997.
During 1997 and 1996, options to purchase 81,776 and 56,110 shares,
respectively, were exercised at $7.19 per share, and 6,300 and 4,725 options,
respectively, expired under this plan.

In 1994, the Board of Directors of the Company adopted an Incentive and
Non-Qualified Stock Option Plan (the "1994 Plan"). There are 1,125,000 shares of
Common Stock reserved for issuance under the 1994 Plan. The 1994 Plan provides
for granting of stock options that may be either "incentive stock options"
within the meaning of Section 422A of the Internal Revenue Code of 1986 (the
"Code") or "non-qualified stock options," which do not satisfy the provisions of
Section 422A of the Code. Options are required to be granted at an option price
per share equal to the fair market value of Common Stock on the date of grant,
except that the exercise price of incentive stock options granted to any
employee who owns (or, under pertinent Code provisions, is deemed to own) more
than 10% of the outstanding Common Stock of the Company, must equal at least
110% of fair market value on the date of grant. Stock options may not be granted
longer than 10 years from the date of the 1994 Plan. All options granted have
five year terms and vest at the rate of 25% per year, commencing one year from
the date of grant.

36
<PAGE> 40
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Transactions under the 1994 Plan are as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
STOCK OPTIONS SHARES EXERCISE PRICE
------------- ------- ----------------
<S> <C> <C>
Outstanding at January 1, 1996..................... -- --
Granted.......................................... 332,250 $12.17
Exercised........................................ -- --
Expired.......................................... -- --
------- ------
Outstanding at December 31, 1996................... 332,250 $12.17
Granted.......................................... 82,500 $25.71
Exercised........................................ (16,375) $12.17
Expired.......................................... (38,625) $12.17
------- ------
Outstanding at December 31, 1997................... 359,750 $15.27
Granted.......................................... 193,000 $32.77
Exercised........................................ (43,250) $12.17
Expired.......................................... (19,750) $13.68
------- ------
Outstanding at December 31, 1998................... 489,750 $22.51
======= ======
</TABLE>

In May 1998, the shareholders approved the adoption of a Directors Stock
Option Plan for non-employee directors (the "Directors Plan"). There are 200,000
shares of the Company's Common Stock reserved for issuance under the Directors
Plan. In February 1999, the Directors Plan was amended to allow the Board of
Directors of the Company to grant additional options to acquire the Company's
Common Stock to non-employee directors. Options under the Directors Plan are
non-qualified stock options, with an exercise price at fair market value at the
date of grant. All options granted expire five years from the date of grant.
None of the stock options become exercisable until one year after the date of
the grant, unless specifically approved by the Board of Directors. In each of
the following four years, 25% of the options become exercisable on a cumulative
basis. Options to acquire 5,000 shares were granted to each non-employee
director upon approval of the Directors Plan on May 20, 1998. A total of 25,000
options were granted at an exercise price of $39.13 per share, all of which were
outstanding as of December 31, 1998. No options under the Directors Plan were
exercisable as of December 31, 1998. On January 20, 1999 and February 17, 1999,
options to purchase 5,000 shares of the Company's Common Stock were granted at
$27.875 and $27.06 per share, respectively, under the Directors Plan.

The following tabulation summarizes certain information concerning
outstanding and exercisable options at December 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ---------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT CONTRACTUAL LIFE EXERCISE AT EXERCISE PRICE
EXERCISE PRICE 12/31/98 IN YEARS PRICE 12/31/98 OPTIONS EXERCISABLE
-------------- ----------- ---------------- -------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
$12 - $19......................... 244,500 2.2 $12.97 115,125 $12.59
29 - 30......................... 143,250 4.4 $29.61 13,063 $29.25
35 - 40......................... 127,000 4.3 $36.14 -- --
------- --- ------ ------- ------
$12 - $40......................... 514,750 3.3 $23.31 128,188 $14.29
</TABLE>

37
<PAGE> 41
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

If the Company had elected to recognize compensation cost based on the fair
value of the options granted at the grant date as prescribed by Statement of
Financial Accounting Standards No. 123, net income and earnings per share would
have been reduced to the pro forma amounts shown below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Pro forma:
Net income............................... $47,223 $33,803 $29,584
Earnings per share:
Diluted............................. $ 2.50 $ 2.13 $ 1.89
Basic............................... $ 2.52 $ 2.15 $ 1.91
</TABLE>

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model using the following weighted
average assumptions:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate................................ 6.00% 6.00% 6.50%
Expected life in years................................. 4 4 4
Expected volatility.................................... .11 .37 .37
Expected dividend yield................................ .50% .20% .20%
</TABLE>

8. EMPLOYEE BENEFITS

The Company has an employee stock ownership plan ("the ESOP") and trust
that has been approved by the Internal Revenue Service as a qualified plan. The
ESOP is a noncontributory plan that covers salaried and certain hourly employees
of the Company. The amount of the annual contribution is at the discretion of
the Board of Directors of the Company, except that the minimum amount must be
sufficient to enable the ESOP Trust to meet its current obligations.

The Company had a noncontributory defined benefit pension plan covering
salaried and certain hourly employees of the Company, which was terminated in
February 1997. Benefits were based upon the employees' earnings. The annual
contribution was based upon the minimum funding requirement under Section 412 of
the Internal Revenue Code. There was no past service liability in connection
with the pension plan. The assets of the pension plan consisted primarily of
investments in short-term money market funds, common stock of publicly traded
companies, and the Company's Common Stock. On July 5, 1996, benefits under the
pension plan were frozen, as the Company elected to replace the pension plan
with a 401(k) plan. During 1996, the Company recorded an additional net pension
expense of approximately $1,000,000 related to termination of the plan. The
Board of Directors of the Company approved the termination of the pension plan
in February 1997. Distributions under the pension plan were made in 1997.

The net periodic pension costs for the plan were as follows for the year
ended December 31, 1996 (in thousands):

<TABLE>
<S> <C>
Service costs -- benefits earned during the year.... $ 308
Interest cost on projected benefit obligation....... 525
Actual return on assets............................. (949)
Net amortization and deferral....................... 573
Curtailment/termination expense..................... 1,000
------
$1,457
======
</TABLE>

38
<PAGE> 42
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Various 401(k) and profit sharing plans were maintained by the Company and
its subsidiaries. Effective in 1998, the Reliance Steel & Aluminum Co. Master
401(k) Plan (the "Master Plan") was established, which combined several of the
various 401(k) and profit sharing plans of the Company and its subsidiaries into
one plan. Salaried and certain hourly employees of the Company and its
participating subsidiaries are covered under the Master Plan. The Master Plan
will continue to allow each subsidiary's Board of Directors to determine
independently the annual matching percentage and maximum compensation limits or
annual profit sharing contribution. Eligibility occurs after three months of
service, and the Company contribution vests at 25% per year, commencing one year
after the employee enters the Master Plan. Other 401(k) and profit sharing plans
exist as certain subsidiaries have not yet combined their plans into the Master
Plan as of December 31, 1998.

Effective January 1996, the Company adopted a Supplemental Executive
Retirement Plan ("SERP"), which is a nonqualified pension plan that provides
post-retirement benefits to key officers of the Company. The SERP is
administered by the Compensation and Stock Option Committee of the Board of
Directors. Benefits are based upon the employees' earnings. Life insurance
policies were purchased for most individuals covered by the SERP and are funded
by the Company. The SERP does not maintain its own plan assets, therefore plan
assets and related disclosures have been omitted. A separate SERP plan exists
for one of the companies acquired during 1998, which provides post-retirement
benefits to its key employees.

The net periodic pension cost for the plan was as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.......................................... $195 $142 $148
Interest cost......................................... 263 147 191
Recognized gains or (losses).......................... (21) (61) --
Prior service cost recognized......................... 196 196 196
---- ---- ----
$633 $424 $535
==== ==== ====
</TABLE>

39
<PAGE> 43
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following is a summary of the status of the funding of the SERP plan:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..... $ 2,247 $ 2,883 $ 2,544
Benefit obligation from acquired company.... 2,137 -- --
Service cost................................ 195 142 148
Interest cost............................... 263 147 191
Actuarial losses (gains).................... 1,005 (847) --
Benefits paid............................... (83) (78) --
------- ------- -------
Benefit obligation at end of year........... $ 5,764 $ 2,247 $ 2,883
======= ======= =======
FUNDED STATUS
Funded status of the plan (underfunded)..... $(5,764) $(2,247) $(2,883)
Unrecognized net acturial losses (gains).... 240 (786) --
Unamortized prior service cost.............. 1,957 2,152 2,348
------- ------- -------
Net amount recognized....................... $(3,567) $ (881) $ (535)
======= ======= =======
AMOUNTS RECOGNIZED IN THE STATEMENT OF
FINANCIAL POSITION:
Accrued benefit liability................... $(3,713) $(1,339) $(1,884)
Intangible asset............................ 146 458 1,349
------- ------- -------
Net amount recognized....................... $(3,567) $ (881) $ (535)
======= ======= =======
</TABLE>

In determining the actuarial present value of projected benefit obligations
for the Company's SERP, the assumptions were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted average assumptions
Discount rate......................................... 6.5% 7.5% 7.5%
Rate of compensation increase......................... 6.0% 6.0% 6.0%
</TABLE>

The Company's contribution expense for Company sponsored retirement plans
were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Master 401(k) Plan............................... $2,965 $ 972 $ 546
Employee Stock Ownership Plan.................... 800 800 600
Supplemental Executive Retirement Plans.......... 681 644 575
Pension Plan..................................... -- -- 1,457
------ ------ ------
$4,446 $2,416 $3,178
====== ====== ======
</TABLE>

The Company participates in various multi-employer pension plans covering
certain employees not covered under the Company's benefit plans pursuant to
agreements between the Company and collective bargaining units who are members
of such plans. The Company is unable to determine its relative position with
regard to defined benefit plans to which contributions are made as a result of
collective bargaining agreements.

40
<PAGE> 44
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has a "Key-Man Incentive Plan" (the "Incentive Plan") for
division managers and officers, which is administered by the Compensation and
Stock Option Committee of the Board of Directors. For 1998, 1997 and 1996, this
incentive compensation bonus was payable 75% in cash and 25% in the Company's
Common Stock, with the exception of the 1998 and 1997 bonus to officers, which
may be paid 100% in cash at the discretion of the individual. The Company
accrued $1,993,000, $1,797,000, and $1,763,000 under the Incentive Plan as of
December 31, 1998, 1997, and 1996, respectively. In March 1998 and 1997, the
Company issued 5,685 and 22,177 shares of Common Stock to employees under the
incentive bonus plan for the years ended December 31, 1997 and 1996,
respectively.

9. SHAREHOLDERS' EQUITY

In August 1998, the Board of Directors approved the purchase of up to an
additional 2,500,000 shares of the Company's outstanding Common Stock through
its Stock Repurchase Plan, for a total of up to 4,000,000 shares. The Stock
Repurchase Plan was initially established in December 1994 and authorizes the
Company to purchase shares of its Common Stock from time to time in the open
market or in privately-negotiated transactions. Repurchased shares are redeemed
and treated as authorized but unissued shares. As of December 31, 1998, the
Company had repurchased a total of 1,781,550 shares of its Common Stock under
the Stock Repurchase Plan, at an average cost of $14.86 per share. During 1998,
430,800 shares were repurchased by the Company at an average price of $25.79 per
share.

In May 1998, the Company amended its Articles of Incorporation to increase
the number of authorized common shares from 20,000,000 to 100,000,000.

In November 1997, the Company issued 3,595,000 new shares at an offering
price of $27.625 per share in a secondary public offering. The proceeds of
$93,908 (net of underwriter commissions and offering costs) were used to pay
down bank debt, to fund the acquisition of Georgia Steel, and to fund a portion
of the acquisitions of Durrett and Phoenix Metals.

10. COMMITMENTS AND CONTINGENCIES

The Company leases land, buildings and equipment under noncancelable
operating leases expiring in various years through 2011. Several of the leases
have renewal options providing for additional lease periods. Future minimum
payments, by year and in the aggregate, under the noncancelable leases with
initial or remaining terms of one year or more, consisted of the following at
December 31, 1998 (in thousands):

<TABLE>
<S> <C>
1999............................... $10,029
2000............................... 8,898
2001............................... 7,151
2002............................... 5,939
2003............................... 4,347
Thereafter......................... 8,670
-------
$45,034
=======
</TABLE>

Total rental expense amounted to $7,563,000, $6,228,000, and $3,858,000 for
1998, 1997, and 1996, respectively.

The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters will not have a material adverse effect on the financial position,
results of operations or cash flow of the Company.

41
<PAGE> 45
RELIANCE STEEL & ALUMINUM CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. EARNINGS PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to the Statement 128 requirements. The
following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Numerator:
Net income.................................. $47,675 $34,176 $29,790
======= ======= =======
Denominator:
Denominator for basic earnings per share --
weighted average shares.................. 18,768 15,736 15,460
======= ======= =======
Effect of dilutive securities:
Employee stock options...................... 102 139 220
------- ------- -------
Denominator for dilutive earnings per share --
Adjusted weighted average shares and assumed
conversions.............................. 18,870 15,875 15,680
======= ======= =======
Earnings per share -- diluted................. $ 2.53 $ 2.15 $ 1.90
======= ======= =======
Earnings per share -- basic................... $ 2.54 $ 2.17 $ 1.93
======= ======= =======
</TABLE>

All weighted shares and per-share amounts have been adjusted for the 3:2
common stock split that occurred in June 1997. The computation of earnings per
share for 1998 does not include 127,000 shares of stock options because their
inclusion would have been anti-dilutive.

12. SUBSEQUENT EVENTS

On March 1, 1999, the Company acquired 100% of the outstanding shares of
Liebovich Bros., Inc. ("LBI"), for approximately $60,000,000 in cash. LBI was a
privately-held metals service center company with one full-line metals service
center and two metals fabrication facilities in Rockford, Illinois, and a metals
service center in Wyoming (Grand Rapids), Michigan. LBI operates as a
wholly-owned subsidiary of the Company. The purchase of LBI was funded with cash
generated from operations and borrowings on the Company's syndicated credit
facility.

42
<PAGE> 46

RELIANCE STEEL & ALUMINUM CO.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the quarterly results of operations for the
years ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998:
Net sales................. $315,468 $326,184 $357,819 $353,336
Cost of sales............. 241,722 248,390 271,486 262,616
Net income................ 11,759 12,504 11,938 11,474
Earnings per share --
diluted................ .62 .66 .63 .62
1997:
Net sales................. $201,591 $243,824 $254,236 $261,867
Cost of sales............. 155,454 187,922 197,718 196,406
Net income................ 6,924 8,374 8,415 10,464
Earnings per share --
diluted................ .45 .55 .55 .60
1996:
Net sales................. $157,634 $164,628 $153,395 $178,318
Cost of sales............. 120,585 125,506 115,767 130,341
Net income................ 7,844 7,766 6,973 7,207
Earnings per
share -- diluted....... .51 .49 .45 .46
</TABLE>

Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year shown elsewhere in the annual report
and SEC Form 10-K. The 1996 and first three quarters of 1997 earnings per share
amounts have been restated to comply with Statement of Financial Accounting
Standards No. 128, Earnings per Share. All per share amounts have been adjusted
for the June 1997 3:2 common stock split.

43
<PAGE> 47

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

There have been no changes in or disagreements with the Company's
accountants on any accounting or financial disclosure issues.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The narrative and tabular information included under the caption
"Management" on pages 5 through 6 and under the caption "Compliance with Section
16(a)" on page 17 of the Proxy Statement are incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The narrative and tabular information, including footnotes thereto,
included under the caption "Executive Compensation" on pages 10 through 14 of
the Proxy Statement are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The narrative and tabular information, including footnotes thereto,
included under the caption "Securities Ownership of Certain Beneficial Owners
and Management" on pages 3 and 4 of the Proxy Statement are incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The narrative information included under the caption "Certain Transactions"
on page 17 of the Proxy Statement is incorporated herein by reference.

PART IV

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

(a) The following documents are filed as part of this report:

(1) Financial Statements (Included in Item 8.)

Report of Independent Auditors

Consolidated Balance Sheets at December 31, 1998 and 1997

Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996

Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996

Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996

Notes to Consolidated Financial Statements

Quarterly Results of Operations (Unaudited) for the Years Ended December
31, 1998, 1997 and 1996

(2) Financial Statement Schedules

Schedule II -- Valuation and Qualifying Accounts

All other schedules have been omitted since the required information is
not significant or is included in the Consolidated Financial Statements
or notes thereto or is not applicable.

(3) Exhibits
44
<PAGE> 48

<TABLE>
<C> <S>
3.01 Registrant's Restated Articles of Incorporation(1)
3.02 Registrant's Amended and Restated Bylaws(1)
3.03 Amendment to Registrant's Restated Articles of Incorporation
dated May 20, 1998(6)
10.01 Registrant's 1994 Incentive and Non-Qualified Stock Option
Plan and the Forms of Agreements related thereto(1)
10.02 Registrant's Form of Indemnification Agreement for officers
and directors(1)
10.03 Incentive Bonus Plans(1)
10.04 Registrant's Supplemental Executive Retirement Plan dated
January 1, 1996(3)
10.05 Credit Agreement for the $200 Million Syndicated Credit
Facility dated October 22, 1997(4)
10.06 Amendment No. Two to Credit Agreement dated October 22,
19997(5)
10.07 Amendment No. Three to Credit Agreement dated October 22,
1997(5)
21.01 Subsidiaries of Registrant
23.01 Consent of Ernst & Young LLP
24.01 Power of Attorney(2)
</TABLE>

- ---------------
(1) Incorporated by reference from Exhibits to Registrant's Registration
Statement on Form S-1, as amended, originally filed on May 25, 1994
as Commission File No. 33-79318.

(2) Set forth on pages 47 and 48 of this report.

(3) Incorporated by reference from Exhibits to Registrant's Form 10-K,
for the year ended December 31, 1996.

(4) Incorporated by reference from Exhibits to Registrant's Form 10-Q,
for the quarter ended September 30, 1997.

(5) Incorporated by reference from Exhibits to Registrant's Form 10-Q,
for the quarter ended September 30, 1998.

(6) Incorporated by reference from Exhibits to Registrant's Proxy
Statement for Annual Meeting of Shareholders held May 20, 1998.

(b) Reports on Form 8-K

Registrant filed a Report on Form 8-K dated January 30, 1998, reporting the
acquisition of Phoenix Corporation and the purchase of the assets and business
of Durrett-Sheppard Steel Co., L.L.C. and its subsidiary, Durrett-Sheppard Steel
of Pennsylvania, Inc.

Registrant filed a Report on Form 8-K dated July 1, 1998, reporting the
acquisition of Chatham Steel Corporation.

45
<PAGE> 49

RELIANCE STEEL & ALUMINUM CO. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Reserve and allowances deducted from
asset accounts.......................
Allowance for uncollectible accounts.... $3,253 $ 723 $ 110 $1,187(1) $2,899
Year Ended December 31, 1997
Reserve and allowances deducted from
asset accounts.......................
Allowance for uncollectible accounts.... $2,899 $1,277 $ 692 $ 525(1) $4,343
Year Ended December 31, 1998
Reserve and allowances deducted from
asset accounts.......................
Allowance for uncollectible accounts.... $4,343 $2,206 $1,736 $2,469(1) $5,816
</TABLE>

- ---------------
(1) Uncollectible accounts written off, net of recoveries.

46
<PAGE> 50

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on this 29th
day of March, 1999.

RELIANCE STEEL & ALUMINUM CO.

By: /s/ DAVID H. HANNAH
------------------------------------
David H. Hannah
President and Chief Executive
Officer

POWER OF ATTORNEY

The officers and directors of Reliance Steel & Aluminum Co. whose
signatures appear below hereby constitute and appoint David H. Hannah and Gregg
J. Mollins, or either of them, to act severally as attorneys-in-fact and agents,
with power of substitution and resubstitution, for each of them in any and all
capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or substitute or substitutes, may do or cause to be done
by virtue hereof.

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

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ DAVID H. HANNAH President and Chief Executive March 29, 1999
- -------------------------------------------------------- Officer (Principal Executive
David H. Hannah Officer); Director

/s/ GREGG J. MOLLINS Executive Vice President and March 29, 1999
- -------------------------------------------------------- Chief Operating Officer;
Gregg J. Mollins Director

/s/ KARLA R. MCDOWELL Vice President and March 29, 1999
- -------------------------------------------------------- Chief Financial Officer
Karla R. McDowell (Principal Financial Officer;
Principal Accounting Officer)

/s/ JOE D. CRIDER Chairman of the Board; March 29, 1999
- -------------------------------------------------------- Director
Joe D. Crider

/s/ THOMAS W. GIMBEL Director March 29, 1999
- --------------------------------------------------------
Thomas W. Gimbel

/s/ DOUGLAS M. HAYES Director March 29, 1999
- --------------------------------------------------------
Douglas M. Hayes
</TABLE>

47
<PAGE> 51

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ ROBERT HENIGSON Director March 29, 1999
- --------------------------------------------------------
Robert Henigson

/s/ KARL H. LORING Director March 29, 1999
- --------------------------------------------------------
Karl H. Loring

/s/ WILLIAM I. RUMER Director March 29, 1999
- --------------------------------------------------------
William I. Rumer

/s/ LESLIE A. WAITE Director March 29, 1999
- --------------------------------------------------------
Leslie A. Waite
</TABLE>

48
<PAGE> 52

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
3.01 Registrant's Restated Articles of Incorporation(1)..........
3.02 Registrant's Amended and Restated Bylaws(1).................
3.03 Amendment to Registrant's Restated Articles of Incorporation
dated May 20, 1998(6)
10.01 Registrant's 1994 Incentive and Non-Qualified Stock Option
Plan and the Forms of Agreements related thereto(1).........
10.02 Registrant's Form of Indemnification Agreement for officers
and directors(1)............................................
10.03 Incentive Bonus Plan(1).....................................
10.04 Registrant's Supplemental Executive Retirement Plan dated
January 1, 1996(3)..........................................
10.05 Credit Agreement for the $200 Million Syndicated Credit
Facility Dated October 22, 1997(4)..........................
10.06 Amendment No. Two to Credit Agreement dated October 22,
1997(5).....................................................
10.07 Amendment No. Three to Credit Agreement dated October 22,
1997(5).....................................................
21.01 Subsidiaries of Registrant..................................
23.01 Consent of Ernst & Young LLP................................
24.01 Power of Attorney(2)........................................
</TABLE>

- ---------------
(1) Incorporated by reference from Exhibits to Registrant's Registration
Statement on Form S-1, as amended, originally filed on May 25, 1994 as
Commission File No. 33-79318.

(2) Set forth on pages 47 and 48 of this report.

(3) Incorporated by reference from Exhibits to Registrant's Form 10-K, for the
year ended December 31, 1996.

(4) Incorporated by reference from Exhibits to Registrant's Form 10-Q, for the
quarter ended September 30, 1997.

(5) Incorporated by reference from Exhibits to Registrant's Form 10-Q, for the
quarter ended September 30, 1998.

(6) Incorporated by reference from Exhibits to Registrant's Proxy Statement for
Annual Meeting of Shareholders held May 20, 1998.

<PAGE> 1

EXHIBIT 21.01

SUBSIDIARIES OF REGISTRANT

American Metals Corporation
AMI Metals, Inc.
CCC Steel, Inc.
Chatham Steel Corporation
Durrett Sheppard Steel Co., Inc.
Engbar Pipe & Steel Co.
Liebovich Bros., Inc.
Lusk Metals
Phoenix Corporation
Service Steel Aerospace Corp.
Siskin Steel & Supply Company, Inc.
Steel Bar Corporation
Valex Corp.

<PAGE> 1

EXHIBIT 23.01

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the Reliance Steel & Aluminum Co. 1994 Incentive and
Non-Qualified Stock Option Plan and the 1989 Employee Non-Qualified Stock Option
Plan of our report dated February 9, 1999, with respect to the consolidated
financial statements and schedule of Reliance Steel & Aluminum Co. included in
the Annual Report (Form 10-K) for the year ended December 31, 1998.

/s/ ERNST & YOUNG LLP
Long Beach, California
March 29, 1999

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,496
<SECURITIES> 0
<RECEIVABLES> 161,966
<ALLOWANCES> (5,816)
<INVENTORY> 240,697
<CURRENT-ASSETS> 420,313
<PP&E> 294,094
<DEPRECIATION> (81,013)
<TOTAL-ASSETS> 841,395
<CURRENT-LIABILITIES> 129,143
<BONDS> 0
0
0
<COMMON> 151,903
<OTHER-SE> 193,899
<TOTAL-LIABILITY-AND-EQUITY> 841,395
<SALES> 1,352,807
<TOTAL-REVENUES> 1,355,849
<CGS> 1,024,214
<TOTAL-COSTS> 1,024,214
<OTHER-EXPENSES> 239,651
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,585
<INCOME-PRETAX> 80,272
<INCOME-TAX> 32,597
<INCOME-CONTINUING> 47,675
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,675
<EPS-PRIMARY> 2.54<F1>
<EPS-DILUTED> 2.53

<FN>
<F1>For Purposes of This Exhibit, Primary Means Basic.
</FN>

</TABLE>