SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

o		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.

California		95-1142616
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

		Name of each exchange on
Title of each class		which registered
Common Stock		New York Stock Exchange

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ      No o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o      No þ

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No o

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ      Accelerated filer o       Non-accelerated filer o

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

     The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on the New York Stock Exchange on June 30, 2006 was $3,014,507,619.

     As of January 31, 2007, 75,849,932 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 16, 2007 (the “Proxy Statement”) are incorporated by reference into Part III of this report.

 

 

INDEX

		Page
PART I
Item 1. Business			1
Industry Overview			1
History of Reliance			2
Customers			5
Suppliers			6
Backlog			7
Products and Processing Services			7
Marketing			9
Industry and Market Cycles			9
Competition			11
Quality Control			11
Systems			11
Government Regulation			12
Environmental			12
Employees			12
Available Information			12
Item 1A. Risk Factors			13
Item 1B. Unresolved Staff Comments			20
Item 2. Properties			20
Item 3. Legal Proceedings			24
Item 4. Submission of Matters to a Vote of Security Holders			24
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			25
Item 6. Selected Financial Data			27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			39
Item 8. Financial Statements and Supplementary Data			40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			82
Item 9A. Controls and Procedures			82
Item 9B. Other Information			82
PART III
Item 10. Directors and Executive Officers and Corporate Governance			84
Item 11. Executive Compensation			84
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			84
Item 13. Certain Relationships and Related Transactions			84
Item 14. Principal Accountant Fees and Services			84
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K			85
SIGNATURES			87
EXHIBIT 21
EXHIBIT 23
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

  i

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

     This Annual Report on Form 10-K and the documents incorporated by reference contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements include discussions of our business strategies and our expectations concerning future operations, margins, profitability, liquidity and capital resources. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “thinks,” “estimates,” “seeks,” “predicts,” “potential” and similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those in the future that are implied by these forward-looking statements. These risks and other factors include those described under “Risk Factors” and elsewhere in this Annual Report on Form 10-K and the documents incorporated by reference. These factors, among others, could cause our actual results and performance to differ materially from the results and performance projected in, or implied by, the forward-looking statements. As you read and consider this Annual Report and the documents incorporated by reference, you should carefully understand that the forward-looking statements are not guarantees of performance or results.

     All future written and oral forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us. We assume no obligation to update any forward-looking statements after the date of this Annual Report as a result of new information, future events or developments, except as required by the federal securities laws.

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

	•		The interest rates on our debt could change. The interest rates on our variable rate debt increased steadily during 2005 and 2006 and these rates may continue to increase through 2007.
	•		Foreign currency exchange rates could change, which could affect the price we pay for certain metals and the results of our foreign operations, which have grown as a percentage of our total operations.
	•		Our future operating results depend on a number of factors beyond our control, such as the prices for and the availability of metals, which could cause our results to fluctuate significantly over time. During periods of low customer demand it could be more difficult for us to pass through price increases to our customers, which could reduce our gross profit and net income. A significant or rapid increase or decrease in costs from current levels could also have a severe negative impact on our gross profit.
	•		We service industries that are highly cyclical, and downturns in our customers’ industries could reduce our revenue and profitability.
	•		The success of our business is affected by general economic conditions and, accordingly, our business was adversely impacted by the economic slowdown or recession in 2001, 2002 and 2003. This could occur in future periods.
	•		We operate in a very competitive industry and increased competition could reduce our gross profit margins and net income.
	•		As a decentralized business, we depend on both senior management and our operating employees; if we are unable to attract and retain these individuals, our results of operations may decline.
	•		We may not be able to consummate future acquisitions, and those acquisitions that we do complete may be difficult to integrate into our business.
	•		Our acquisitions might fail to perform as we anticipate. This could result in an impairment charge to write off some or all of the goodwill for that entity. Acquisitions may also result in our becoming responsible for unforeseen liabilities that may adversely affect our financial condition and liquidity. If our acquisitions do not perform as anticipated, our operating results also may be adversely affected.
	•		We are subject to various environmental and other governmental regulations which may require us to expend significant capital and incur substantial costs.

  ii

	•		We may discover internal control deficiencies in our decentralized operations or in an acquisition that must be reported in our SEC filings, which may result in a negative impact on the market price of our common stock or the ratings of our debt.
	•		If existing shareholders sell their shares, the market price of our common stock could decline.
	•		Principal shareholders who own a significant number of our shares may have interests that conflict with yours.
	•		We have implemented a staggered or classified Board that may adversely impact your rights as a shareholder.

     The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future performance or results. We are not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should consider these risks when reading any forward-looking statements and review carefully the section captioned “Risk Factors” in this Annual Report on Form 10-K for a more complete discussion of the risks of an investment in the stock.

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

  iii

PART I

Item 1. Business

     We are one of the largest metals service center companies in the United States. Our network of 27 divisions, 25 operating subsidiaries and a 70%-owned company operates more than 180 locations in 37 states, Belgium, Canada, China and South Korea. Through this network, we provide metals processing services and distribute a full line of more than 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, titanium, stainless steel and specialty steel products, to more than 125,000 customers in a broad range of industries. Many of our metals service centers process and distribute only specialty metals. In addition to being diversified by product and customers, we are geographically diversified. We deliver products from facilities located across the United States. One of our subsidiaries has an international location in South Korea that serves the Asian semiconductor market. Another subsidiary has a metals service center in Belgium to service the European aerospace market. On March 1, 2006, our 70%-owned joint venture company, based in Singapore, acquired a metals service center company in China that mainly serves the electronics industry in China. We also entered the Canadian market in April 2006 through an acquisition and expanded our presence in Canada as a result of another acquisition in February 2007.

     Our primary business strategy is to enhance our operating results through strategic acquisitions, expansion of our existing operations and improved operating performance at our locations. We believe that our geographic, customer and product diversification also makes us less vulnerable to regional or industry specific economic volatility. Following the economic recession in 2001, 2002 and 2003, our industry experienced a broad-based significant and unprecedented upturn in 2004 that continued for many of our products throughout 2005 and 2006. In 2006, we achieved our highest ever levels of net sales of $5.74 billion and net income of $354.5 million.

Industry Overview

     Metals service centers acquire products from primary metals producers and then process carbon steel, aluminum, stainless steel and other metals to meet customer specifications, using techniques such as blanking, leveling (or cutting-to-length), sawing, shape cutting, shearing and slitting. These processing services save our customers time, labor, and expense and reduce their overall manufacturing costs. Specialized equipment used to process the metals requires high-volume production to be cost effective. Many manufacturers are not able or willing to invest in the necessary technology, equipment, and inventory to process the metals for their own manufacturing operations. Accordingly, industry dynamics have created a niche in the market. Metals service centers purchase, process, and deliver metals to end-users in a more efficient and cost-effective manner than the end-user could achieve by dealing directly with the primary producer or with an intermediate steel processor. Service centers comprise the largest single customer group for North American mills, buying and reselling about 30% of all the carbon, alloy, stainless and specialty steels, aluminum, copper, brass and bronze, and superalloys produced in the U.S. and Canada each year (Purchasing magazine, May 2006).

     In May 2006, the magazine Purchasing also reported that the North American (U.S. and Canada) metals distribution industry was estimated to have generated record revenues of about $115 billion in 2005 (the latest year for which such information is available), up from $85 billion in 2004, with the increase being due to a revived metalworking economy that boosted the nation’s need for metals and increased prices for steel and nonferrous metals.

     The metals service center industry is highly fragmented and intensely competitive within localized areas or regions. Many of our competitors operate single stand-alone service centers. According to Purchasing, the number of intermediate steel processors and metal center facilities in North America has decreased from approximately 7,000 locations in 1980 to approximately 3,500 locations operated by more than 1,300 companies in 2003. This consolidation trend creates opportunities for us to make acquisitions.

     Metals service centers are generally less susceptible to market cycles than producers of the metals, because service centers are usually able to pass on all or a portion of increases in metal costs to their customers. In 2002 and 2003, it was more difficult for our industry to pass through price increases of certain carbon steel products as the increased costs resulted from supply constraints rather than customer demand, which is more typical. In 2004, these dynamics changed significantly as domestic mill shutdowns and increased global demand limited availability of several carbon steel products. This limited supply, along with somewhat improved U.S. demand, allowed service centers to increase their selling prices and pass these costs on to their customers. In 2005, although supply was not as limited as in 2004 and carbon steel prices had declined from 2004 levels, the consolidation at the carbon steel mill level resulted in a more stable pricing environment for carbon steel products. Demand and pricing for carbon steel products improved near the end of 2005 with this improvement continuing through most of 2006. Demand remained strong across most end markets in 2006, with the exception of the domestic auto market, although our exposure to this market is very limited. For the most part, pricing increased through the first nine months of 2006 but declined somewhat in the fourth quarter due to lower demand for some products and increased imports to the U.S. that resulted in higher

inventory levels at distributors. Certain domestic mills reduced capacity in early 2007 which resulted in somewhat improved pricing. Aluminum and stainless steel pricing rose throughout 2005, with significant and rapid price and demand increases for aerospace-related products during 2005. In 2006, the prices of aluminum products, excluding specialty aerospace products, increased somewhat and were fairly steady at high levels. The prices of aerospace related aluminum products continued to increase in 2006, but at a slower rate than in 2005. In 2006, the prices of stainless steel products increased significantly to record levels, primarily due to increased nickel surcharges resulting from global nickel shortages. We expect that stainless steel prices will decline in the future if supply increases or demand declines, but we are uncertain as to when this may occur or how significant price declines may be. A rapid and significant decline could negatively impact our results of operations. We believe that service centers, like Reliance, with the most rapid inventory turnover are generally the least vulnerable to changing metals prices.

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

History of Reliance

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

     In the mid-1970’s, we began to establish specialty metals centers stocked with inventories of selected metals such as aluminum, stainless steel, brass, and copper, and equipped with automated materials handling and precision cutting equipment. We have continued to expand our network, with a focus on servicing our customers as opposed to merely distributing metal. In 2003, we acquired a company that processes metal for a fee without taking ownership of the metal. In the past twelve months we have expanded our geographic and product base significantly through our acquisitions. We have not diversified outside of our core business and we strive to consistently perform as one of the best in our industry. We currently operate metals service centers under the following trade names:

		No. of
Trade Name		Locations		Primary Products Processed & Distributed
Reliance Divisions
Affiliated Metals		1		Plate and flat-rolled aluminum and stainless steel
Bralco Metals		6		Aluminum, brass, copper and stainless steel
Central Plains Steel Co		2		Carbon steel
Engbar Pipe & Steel Co		1		Carbon steel bars, pipe and tubing
MetalCenter		1		Flat-rolled aluminum and stainless steel
Olympic Metals		1		Aluminum, brass, copper and stainless steel
Reliance Metalcenter		9		Variety of carbon steel and non-ferrous metal products
Reliance Steel Company		2		Carbon steel
Tube Service Co		6		Specialty tubing
Allegheny Steel Distributors, Inc.		1		Carbon steel
Aluminum and Stainless, Inc.		2		Aluminum sheet, plate and bar
American Metals Corporation		3		Carbon steel
American Steel, L.L.C.		2		Carbon steel
AMI Metals, Inc.
AMI Metals		6		Heat-treated aluminum sheet and plate
AMI Metals Europe S.P.R.L		1		Heat-treated aluminum sheet and plate
CCC Steel, Inc.
CCC Steel		1		Structural steel
IMS Steel		1		Structural steel
Chapel Steel Corp.		5		Carbon steel plate

		No. of
Trade Name		Locations		Primary Products Processed & Distributed
Chatham Steel Corporation		5		Full-line service centers
Crest Steel Corporation		2		Carbon steel flat-rolled, plate, bar and structurals
Durrett Sheppard Steel Co., Inc.		1		Carbon steel plate, bar and structurals
Earle M. Jorgensen Company
Earle M. Jorgensen		33		Specialty bar and tubing
Earle M. Jorgensen (Canada) Inc.		5		Specialty bar and tubing
Steel Bar.		1		Carbon steel bars and tubing
Everest Metals (Suzhou) Co., Ltd.		1		Aluminum Plate and Bar
Liebovich Bros., Inc.
Liebovich Steel & Aluminum Company.		3		Full-line service centers
Custom Fabricating Co.		1		Tool and alloy steels
Good Metals Company		1		Plate and flat-rolled carbon steel
Hagerty Steel & Aluminum Company		1		Metal fabrication
Lusk Metals .		1		Precision cut aluminum plate and aluminum sheet and extrusions
Pacific Metal Company		7		Aluminum and coated carbon steel
PDM Steel Service Centers, Inc.		7		Carbon steel structurals and plate
Phoenix Corporation
Phoenix Metals Company		7		Flat-rolled aluminum, stainless steel and coated carbon steel
Precision Strip, Inc.		10		Toll processing (slitting, leveling, blanking) of aluminum, stainless steel and carbon steel
RSAC Canada Limited
Encore Coils		4		Flat-rolled carbon steel
Encore Metals		4		Stainless and alloy bar, plate and tube
Encore Metals (USA) Inc.		3		Stainless and alloy bar, plate and tube
Team Tube Canada		6		Alloy and carbon steel tubing
Service Steel Aerospace Corp.
Service Steel Aerospace		2		Stainless and alloy specialty steels
United Alloys Aircraft Metals		1		Titanium products
Siskin Steel & Supply Company, Inc.
Siskin Steel		4		Full-line service centers
Athens Steel		1		Carbon steel structurals, flat-rolled and ornamental iron
East Tennessee Steel Supply		1		Carbon steel plate, bar and structurals
Georgia Steel Supply Company		1		Full-line service center
Industrial Metals and Surplus, Inc.		1		Carbon steel structurals, flat-rolled and ornamental iron
Toma Metals, Inc.		1		Stainless steel sheet and coil
Valex Corp.
Valex		2		Electropolished stainless steel tubing and fittings
Valex Korea Co., Ltd.		1		Electropolished stainless steel tubing and fittings
Viking Materials, Inc.		2		Flat-rolled carbon steel
Yarde Metals, Inc.		7		Stainless steel and aluminum plate, rod and bar

     We serve our customers primarily by providing quick delivery, metals processing and inventory management services. We purchase a variety of metals from primary producers and sell these products in small quantities based on our customers’ needs. In connection with approximately 40% of our sales orders in 2006, we performed metals processing services, or first-stage processing, before distributing the product to manufacturers and other end-users, often within 24 hours from receipt of an order, if the order does not require extensive or customized processing. These services save time, labor, and expense for our customers and reduce their overall manufacturing costs. During 2006, we handled approximately 17,275 transactions per business day, with an average price of approximately $1,320 per transaction. Our net sales were $5.74 billion for the 2006 year. We believe that our focus on small orders with quick turnaround differentiates us from many of the other large public metals service center companies and allows us to generate higher profits than those companies.

     Historically, we have expanded both through acquisitions and internal growth. Since our initial public offering in September 1994, we have successfully purchased more than 40 businesses. In 2006, we significantly increased the size of our company through acquisitions, primarily as a result of the Earle M. Jorgensen Company and Yarde Metals, Inc. acquisitions. From 1984 to September 1994, we acquired 20 businesses. We continue to evaluate acquisition opportunities and expect to continue to

grow our business through acquisitions and internal growth initiatives, particularly those that will diversify our products, customer base and geographic locations.

Acquisitions

     On August 1, 2006 we acquired Yarde Metals, Inc., a metals service center company headquartered in Southington, Connecticut. We paid $100 million in cash for all of the outstanding common stock of Yarde Metals and assumed approximately $101 million of its net debt. Yarde Metals was founded in 1976 and specializes in the processing and distribution of stainless steel and aluminum plate, rod and bar products. Yarde has additional metals service centers in Pelham, New Hampshire; East Hanover, New Jersey; Hauppauge, New York; High Point, North Carolina; Streetsboro, Ohio; and Limerick, Pennsylvania and a sales office in Ft. Lauderdale, Florida. Yarde’s net sales for the five months ended December 31, 2006 were approximately $181.7 million.

     On April 3, 2006 we completed the acquisition of Earle M. Jorgensen Company (“EMJ”) which was our first acquisition of a public company. EMJ, headquartered in Lynwood, California, is one of the largest distributors of metal products in North America with 40 service and processing centers. The transaction was valued at approximately $984 million, including the assumption of EMJ’s net debt. We paid $6.50 in cash and issued .1784 of a share (split adjusted) of Reliance common stock for each share of EMJ common stock outstanding. This also was the first acquisition where we used our stock as consideration. EMJ’s net sales for the nine months ended December 31, 2006 were approximately $1.45 billion.

     On March 27, 2006, through Precision Strip, Inc. (“Precision Strip”), a wholly-owned subsidiary, we completed the acquisition of certain assets and business of Flat Rock Metal Processing, LLC. (“Flat Rock”). The Flat Rock toll processing businesses in Perrysburg, Ohio and Portage, Indiana, are operated by Precision Strip.

     In January 2006, we purchased the remaining 49.5% of American Steel, L.L.C. From its inception on July 1, 1995 through April 30, 2002, we owned a 50% interest in the Membership Units of American Steel, which operates metals service centers in Portland, Oregon and Kent, Washington and processes and distributes primarily carbon steel products. We retained operating control over the assets and operations of American Steel. American Industries, Inc. owned the other 50% interest. Effective May 1, 2002, we increased our ownership to 50.5% of the outstanding Membership Units of American Steel and began consolidating its financial results. We purchased American Industries’ 49.5% interest on January 3, 2006 and eliminated the related minority interest expense.

     In October 2005, we formed Reliance Pan Pacific Pte., Ltd. (“RPP”) with our joint venture partner Manufacturing Network Pte. Ltd. (“MNPL”). We own 70% of RPP and MNPL owns the remaining 30%. On March 1, 2006, RPP acquired 100% of the outstanding equity interest in Everest Metals (Suzhou) Co., Ltd. (“Everest Metals”), a metals service center company near Shanghai, People’s Republic of China. Everest Metals was previously wholly owned by MNPL. Everest Metals sells aluminum products to the Chinese electronics market and had sales for the ten months ended December 31, 2006 of approximately $5.8 million.

     On July 1, 2005, we acquired all of the outstanding capital stock of Chapel Steel Corp. (“Chapel Steel”), a privately held metals service center company founded in 1972 that processes and distributes carbon and alloy steel plate products from five facilities in Pottstown (Philadelphia), Pennsylvania; Bourbonnais (Chicago), Illinois; Houston, Texas; Birmingham, Alabama; and Portland, Oregon. Chapel Steel also warehouses and distributes its products in Cincinnati, Ohio and Hamilton, Ontario, Canada. Chapel Steel is headquartered in Spring House (Philadelphia), Pennsylvania. We paid approximately $94.2 million in cash for the equity of Chapel Steel and assumed approximately $16.8 million of Chapel Steel’s debt. Chapel Steel’s net sales for 2006 were approximately $341.9 million.

Recent Developments

     As of February 1, 2007 we acquired the net assets and business of the Encore Group of metals service center companies (Encore Metals, Encore Metals (USA), Inc., Encore Coils, and Team Tube in Canada) headquartered in Edmonton, Alberta, Canada. Encore was organized in 2004 in connection with the buyout by management and a private equity fund managed by HSBC Capital (Canada) Inc. of certain former Corus CIC and Corus America businesses. Encore specializes in the processing and distribution of alloy and carbon bar and tube, as well as stainless steel sheet, plate and bar and carbon steel flat-rolled products, through its 17 facilities located mainly in Western Canada. Encore’s unaudited net sales for the year ended December 31, 2006 were approximately C$259 million. We acquired the Encore Group assets through RSAC Canada Limited, our wholly-owned Canadian subsidiary, and RSAC Canada (Tube) ULC, its wholly-owned subsidiary.

     On January 2, 2007, we acquired Crest Steel Corporation (“Crest”), a metals service center company headquartered in Carson, California with facilities in Riverside, California and Phoenix, Arizona. Crest was founded in 1963 and specializes in the processing and distribution of carbon steel products including flat-rolled, plate, bars and structurals. Crest’s unaudited net sales for the year ended December 31, 2006 were approximately $133 million.

     Also, on January 2, 2007, our wholly-owned subsidiary, Siskin Steel & Supply Company, Inc., based in Chattanooga, Tennessee, acquired Industrial Metals and Surplus, Inc. (“Industrial Metals”) a metals service center company headquartered in Atlanta, Georgia and a related company, Athens Steel, Inc. located in Athens, Georgia. Industrial Metals was founded in 1978 and specializes in the processing and distribution of carbon steel structurals, flat-rolled and ornamental iron products. Industrial Metals’ unaudited net sales (including Athens Steel) for the twelve months ended December 31, 2006 were approximately $105 million. Athens Steel, Inc. was merged with and into Industrial Metals which now operates as a wholly-owned subsidiary of Siskin. Siskin’s Georgia Steel Supply Company division located in Atlanta will be combined with the Industrial Metals operation in 2007.

Other Developments

     In 2006, we experienced substantial organic growth by opening new facilities, building or expanding facilities and adding processing equipment. In 2006, Liebovich Bros. opened a new location near Green Bay, Wisconsin to further penetrate that geographic area and expanded its Cedar Rapids, Iowa location. Phoenix Metals Company opened a new location near Philadelphia, Pennsylvania in 2006 as a new entry into that geographic region. Phoenix Metals also relocated an existing operation to a new, larger more efficient facility in Birmingham, Alabama; is building a new facility for its Charlotte, North Carolina operation; and is adding processing equipment in both of these locations to better support its customers in those areas. Allegheny Steel Distributors expanded its Indianola, Pennsylvania facility to make room for additional equipment to help support its increased business. Siskin Steel & Supply Company is expanding its Chattanooga, Tennessee warehouse. Precision Strip is expanding its Talladega, Alabama facility and added processing equipment in its Talladega and Bowling Green, Kentucky locations in 2006. Also in 2006, Toma Metals, Inc. expanded its Johnstown, Pennsylvania facility and Service Steel Aerospace relocated its United Alloys Aircraft Metals division to a larger facility near Los Angeles, California. Earle M. Jorgensen Company opened a satellite location in Lafayette, Louisiana in April 2006 and relocated its Portland, Oregon operation to a new, larger more efficient facility in early 2007. EMJ also expanded its Kansas City facility in 2006. AMI Metals Europe, S.P.R.L., expanded its warehouse facility in Belgium to better service its increased share of the European aerospace business. In 2006, Valex Korea Co., Ltd., a 99%-owned subsidiary of Valex Corp., based near Seoul, South Korea, expanded its facility. The current environment supports strong organic growth and we expect to continue to expand our business in 2007 by continuing to build and expand facilities and add processing equipment.

     Due to the increased size of our company, late in 2006 we recapitalized the Company by issuing $600 million of debt securities, increasing the availability of our credit facility to $1.1 billion, and repurchasing approximately $250 million of outstanding 9.75% senior secured notes of EMJ. These activities lowered our cost of capital and provide for our future growth.

     We formed RSAC Management Corp., a California corporation, in 1999 to operate as a holding company for our subsidiaries and to provide administrative and management services to our metals service centers. Our executive officers maintain a control environment that is focused on integrity and ethical behavior, establish general policies and operating guidelines and monitor adherence to proper financial controls, while our division managers and subsidiary officers have virtual autonomy with respect to day-to-day operations. This balanced, yet entrepreneurial, management style has enabled us to improve the productivity and profitability both of acquired businesses and of our own expanded operations. Division managers and other management personnel are eligible for incentive compensation based, in part, on the profitability of their particular division or subsidiary and, in part, on the Company’s overall profitability.

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

Customers

     Our customers purchase from us and other metals service centers to obtain value-added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size and quality control. Many of our customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum orders specified by mills, because those customers require intermittent deliveries over long or irregular periods, or because those customers require specialized processing services. We believe that metals service centers have also enjoyed an increasing share of total metal shipments due to the focus of the capital goods and other manufacturing industries on just-in-time inventory management

and materials management outsourcing, and because metal producers have reduced in-house direct sales efforts to small sporadic purchasers in order to enhance their production efficiency.

     We have more than 125,000 metals service center customers in various industries. In 2006, no single customer accounted for more than 1.5% of our sales, and approximately 80% of our orders were from repeat customers. Our customers are manufacturers and end-users in the general manufacturing, construction (mainly non-residential), transportation (rail, truck trailer and shipbuilding), aerospace, energy, electronics and semiconductor fabrication and related industries. In 2003, many of our suppliers also became our customers as a result of our purchase of Precision Strip, which typically sells processing services, but not metal, to larger customers, such as mills and original equipment manufacturers (OEM’s), and in larger annual volumes than we have experienced historically. Precision Strip has also indirectly increased our participation in the auto and appliance end markets. Our metals service centers wrote and delivered over 4,095,000 orders during 2006 at an average price of approximately $1,320. Most of our metals service center customers are located within a 200-mile radius of the metals service center serving them. The proximity of our centers to our customers helps us provide just-in-time delivery to our customers. With our fleet of approximately 1,265 trucks (some of which are leased), we are able to service many smaller customers. Moreover, our computerized order entry system and flexible production scheduling enable us to meet customer requirements for short lead times and just-in-time delivery. In 2006, our international presence increased significantly through the Canadian service centers of EMJ. Approximately 5% of our sales were to international customers in 2006, with approximately 62% of these sales to Canadian customers. Approximately 57% of our Canadian sales were made by our EMJ Canada locations. We believe that our long-term relationships with many of our customers significantly contribute to the success of our business. Providing prompt and efficient services and quality products at reasonable prices are important factors in maintaining these relationships.

     Customer demand may change from time to time based on, among other things, general economic conditions and industry capacity. Many of the industries in which our customers compete are cyclical in nature. Because we sell to a wide variety of customers in several industries, we believe that the effect of such changes on us is significantly reduced. However, from 2001 through August 2003, we experienced lower sales levels due to a broad-based economic downturn that affected all industries. We experienced lower demand in each successive year from 2000 until September 2003 when we experienced an improvement in our customer demand, as well as pricing, for most of the products we sell. Customer demand levels continued to increase in 2004. In 2005, demand rose for some of our products (primarily those related to aerospace) and for other products was fairly steady with 2004 levels, until late 2005 when we saw significant increases in many markets, especially the non-residential construction market. The improved demand levels continued through 2006, with strength in almost all of our end markets.

     Pricing for carbon steel products increased to record highs in 2004, primarily due to raw material shortages for the mills which increased their costs, and due to reduced supply resulting from the shutdown of some domestic capacity and from increased global demand that reduced the amount of import material available in the U.S. as it was re-routed to strong foreign markets such as China. Although carbon steel prices declined during most of 2005, they rebounded slightly in late 2005 and continued to increase through the first half of 2006, and then prices for certain products began to decline. The range of volatility in carbon steel prices has moderated and pricing is at relatively high levels. Pricing for aluminum and stainless steel products increased steadily throughout 2005 as demand increased, especially for aerospace products. There were significant and rapid increases for both pricing and demand of aerospace products throughout 2005, with increases continuing into 2006 but at a lesser rate than in 2005. Pricing for stainless steel products increased significantly throughout 2006, mainly because of global nickel shortages, and are at historical highs.

     California was our largest market for many years, but we have expanded our geographic coverage in recent years and the Midwest region of the United States has become our largest market followed closely by the Southeast region. Although our sales dollars in each of these regions have increased, the percent of total sales in each region has changed due to our growth. California represented 17% of our 2006 sales, which was a significant decrease from 45% of our 1997 sales. The Southeast region of the United States represented 20% of our 2006 sales compared to 18% of our 1997 sales, and the Midwest region, which we entered in 1999 and is now our largest market, represented 23% of our 2006 sales. Our 2006 acquisitions continued our geographic diversification, especially in the Midwest, and facilitated our entry into the Northeast. The geographic breakout of our sales for 2006 was as follows: Midwest – 23%; Southeast – 20%; California – 17%; West/Southwest – 15%; Pacific Northwest – 9%; Mountain – 5%; Mid-Atlantic – 4%; International – 4%; Northeast – 3%.

Suppliers

     We purchase our inventory from the major metals mills, both domestic and foreign, and have multiple suppliers for all of our product lines. Our major suppliers of domestic carbon steel products include California Steel Industries, Inc., Chaparral Steel Company, IPSCO, Inc., Mittal Steel, Nucor Corporation, Oregon Steel Mills, Steel Dynamics, Inc. and United States Steel Corporation. Allegheny Technologies Incorporated, AK Steel, and North American Stainless supply stainless steel products.

We are a recognized distributor for various major aluminum companies, including Alcoa Inc, Alcan Aluminum Limited, Aleris International, Inc. (formerly Commonwealth Aluminum Corp.) and Kaiser Aluminum Corp.

     During 2001 through 2003, many domestic steel mills entered bankruptcy proceedings and certain of those mills temporarily closed a portion of their production capacity. Beginning in 2003 and continuing into 2004, many of the bankrupt mill facilities were acquired and some production was re-started. Mill pricing for steel products stabilized in mid-2003 mainly because of the consolidation that occurred at the mill level that improved capacity and mill-pricing discipline. Beginning in late 2003, steel mills began to experience significant increases in their raw material costs due to shortages caused by increased global demand. In 2004 they instituted surcharges on top of base price increases and consistently implemented significant increases through most of 2004. In 2005 and 2006, the domestic mills exercised pricing discipline by shutting down excess capacity, when appropriate, which has provided a more stable pricing environment, and at relatively high levels, than our industry has experienced historically. Costs for aluminum and stainless steel products continued to increase steadily throughout 2004 and 2005. Aluminum prices continued to increase somewhat in 2006 and then leveled off at relatively high levels. Costs for specialty aluminum and stainless steel products sold to the aerospace industry increased significantly in 2005 and 2006 due to limited supply caused by strong demand, and due to increased raw material costs. Stainless steel costs increased significantly in 2006, primarily due to the global shortage of nickel that is used in stainless steel production. The nickel shortage is due to various factors, including the closure of mines due to strikes and fires, some of which is expected to be temporary.

     Because of our total volume of purchases and our long-term relationships with our suppliers, we believe that we are generally able to purchase inventory at the best prices offered by the suppliers, given the order size. We believe that we are not dependent on any one of our suppliers for metals. In 2004, when carbon steel supply was tight, we believe that these relationships provided an advantage to us in our ability to source product and have it available for our customers. Also, mill consolidation has somewhat reduced the number of suppliers. The favorable market conditions being experienced in the U.S. could cause new capacity to be built or could cause foreign mills to increase their exports to the U.S. In 2006, China became a net exporter of metals which caused concern about the impact on the U.S. and other markets. We have not seen a significant disruption in the U.S. market because of this; however, continued and increased imports of Chinese metals into the U.S. market could negatively impact pricing.

Backlog

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

Products and Processing Services

     We provide a wide variety of processing services to meet each customer’s specifications and deliver products to fabricators, manufacturers and other end users. We maintain a wide variety of products in inventory. Flat-rolled carbon steel products are generally the most volatile and competitive products in terms of pricing and account for only about 10% of our 2006 sales. For orders other than those requiring extensive or specialized processing, we often deliver to the customer within 24 hours after receiving the order. Our 2006 sales were comprised of the following approximate percentages of products or services:

		•			13	%		carbon steel plate
		•			10	%		carbon steel tubing
		•			9	%		carbon steel bar
		•			7	%		carbon steel structurals
		•			5	%		galvanized steel sheet and coil
		•			3	%		hot rolled steel sheet and coil
		•			2	%		cold rolled steel sheet and coil
Carbon					49	%
		•			6	%		heat-treated aluminum plate
		•			6	%		aluminum bar and tube
		•			4	%		common alloy aluminum sheet and coil
		•			1	%		common alloy aluminum plate
		•			1	%		heat-treated aluminum sheet and coil
Aluminum					18	%

		•			8	%		stainless steel bar and tube
		•			6	%		stainless steel sheet and coil
		•			3	%		stainless steel plate
		•			1	%		electropolished stainless steel tubing and fittings
Stainless					18	%
		•			5	%		alloy bar and tube
		•			1	%		alloy plate, sheet and coil
Alloy					6	%
		•			2	%		toll processing of aluminum, carbon steel and stainless steel
		•			7	%		miscellaneous, including brass, copper and titanium

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

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

     After receiving an order, we enter it into our computerized order entry system, select appropriate inventory and schedule the processing to meet the specified delivery date. In 2006, we delivered more than 40% of our orders within 24 hours. We attempt to maximize the yield from the various metals that we process by combining customer orders to use each product that we purchase to the fullest extent practicable.

     Few metals service centers offer the full scope of processing services and metals that we provide. In 2006, we performed processing services for approximately 40% of our sales orders. Our primary processing services are described below:

	•		Bar turning involves machining a metal bar into a smaller diameter.
	•		Bending is the forming of metals into various angles.
	•		Blanking is the cutting of metals into close-tolerance square or rectangular shapes.
	•		Deburring is the process used to smooth the sharp, jagged edges of a cut piece of metal.
	•		Electropolishing is the process used on stainless steel tubing and fittings to simultaneously smooth, brighten, clean and passivate the interior surfaces of these components. Electropolishing is an electrochemical removal process that selectively removes a thin layer of metal, including surface flaws and imbedded impurities. Electropolishing is a required surface treatment for all ultra high-purity components used in the gas distribution systems of semiconductor manufacturers worldwide and many sterile water distribution systems of pharmaceutical and biotechnology companies.
	•		Fabricating includes performing second- and/or third-stage processing per customer specifications, typically to provide a part, casing or kit which is used in the customer’s end product.
	•		Forming involves bending and forming plate or sheet products into customer-specified shapes and sizes with press brakes.
	•		Grinding or blanchard grinding involves grinding the top and/or bottom of carbon or alloy steel plate or bars into close tolerance.
	•		Leveling (cutting-to-length) involves cutting metal along the width of a coil into specified lengths of sheets or plates.
	•		Machining refers to performing multiple processes to a piece of metal to produce a customer-specified component part.
	•		Oscillate slitting involves slitting the metal into specified widths and then oscillating the slit coil when it is wound. The oscillated coil winds the strip metal similar to the way fishing line is wound on a reel rather than standard ribbon winding. An oscillate coil can typically hold five to six times more metal than a standard coil, which allows

			customers to achieve longer production run times by reducing the number of equipment shut-downs to change coils.
	•		Pipe threading refers to the cutting of threads around the circumference of the pipe.
	•		Polishing changes the texture of the surface of the metal to specific finishes in accordance with customer specifications.
	•		Precision plate sawing involves sawing plate (primarily aluminum plate products) into square or rectangular shapes to tolerances as close as 0.003 of an inch.
	•		Punching is the cutting of holes into carbon steel beams or plates by pressing or welding per customer specifications.
	•		Routing produces various sizes and shapes of aluminum plate according to customer-supplied drawings through the use of CNC controlled machinery.
	•		Sawing involves cutting metal into customer-specified lengths, shapes or sizes.
	•		Shape cutting, or burning, can produce various shapes according to customer-supplied drawings through the use of CNC controlled machinery. This procedure can include the use of oxy-fuel, plasma, high-definition plasma, laser burning or water jet cutting for carbon, aluminum and stainless steel sheet and plate.
	•		Shearing is the cutting of metal into small, precise square or rectangular pieces.
	•		Skin milling grinds the top and/or bottom of a large aluminum plate into close tolerance.
	•		Slitting involves cutting metal to specified widths along the length of the coil.
	•		Tee splitting involves splitting metal beams. Tee straightening is the process of straightening split beams.
	•		Twin milling grinds one or all six sides of a small square or rectangular piece of aluminum plate into close tolerance.
	•		Welding is the joining of one or more pieces of metal.
	•		Wheelabrating, shotblasting and bead-blasting involve pressure blasting metal grid onto carbon steel products to remove rust and scale from the surface.

     We generally process specific metals to non-standard sizes only at the request of customers pursuant to purchase orders. We do not maintain a significant inventory of finished products, but we carry a wide range of metals to meet the short lead time and just-in-time delivery requirements of our customers. Our metals service centers maintain inventory and equipment selected to meet the needs of that facility’s customers.

Marketing

     As of year-end 2006, we had approximately 1,300 sales personnel located in 41 states, Belgium, Canada, China, France, South Korea and the United Kingdom that provide marketing services throughout each of those areas, as well as nearby locations. The sales personnel are organized by division or subsidiary among our profit centers and are divided into two groups. Our outside sales personnel are considered those personnel who travel throughout a specified geographic territory to maintain relationships with our existing customers and develop new customers. Those sales personnel who remain at the facilities to write and price orders are our inside sales personnel. The inside sales personnel generally receive incentive compensation, in addition to their base salary, based on the gross profit or pretax profit of their particular profit center. The outside sales personnel generally receive incentive compensation based on the gross profit from their particular geographic territories.

Industry and Market Cycles

     We distribute metal products to our customers in a variety of industries, including construction, manufacturing, transportation, aerospace, energy and semiconductor fabrication. Many of the industries in which our customers compete are cyclical in nature and are subject to changes in demand based on general economic conditions. We sell to a wide variety of customers in diverse industries to reduce the effect of changes in these cyclical industries on our results. During 2001 and 2002 and until August 2003, all of the industries to which we sell experienced low demand levels due to the poor economic conditions in the U.S. Demand for most of our products improved beginning in September 2003 and the improvement continued through most of 2004 and 2005 for some of our products. In late 2005, we saw improvement in demand for most products that we sell, especially for non-residential construction, which we believe is our largest end market measured by our net sales to this market. The improved demand levels continued through 2006. Our results were significantly impacted by the economic downturn from 2001 through 2003, but reacted positively to the favorable pricing environment that began in 2004 and has continued. This environment, combined with our acquisitions, has resulted in record profitability levels for us in each year since 2004. A significant drop in current pricing levels or demand could result in a negative impact to our financial results. However, if current pricing levels do not change significantly and demand improves, our financial results could be positively impacted.

     The semiconductor fabrication industry, aerospace industry, energy (oil and gas), and truck trailer and rail car industries have historically experienced cycles that may have an impact on our results if they repeat in the future. 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. There has been a substantial shift in this market, with many U.S. companies moving their semiconductor fabrication operations to Asia. We are participating in the Asian market through our Valex Korea subsidiary.

     In 2003, aerospace demand remained fairly consistent with the low levels experienced in 2002, but in 2004 we experienced steady improvement throughout the year. Aerospace demand, as well as pricing, increased rapidly and significantly throughout 2005. Demand remained strong through 2006 and pricing continued to increase, although at a more moderate rate than in 2005.

     With our acquisition of EMJ in April 2006, we gained exposure to the oil and gas market, which is a volatile industry. Demand and pricing are currently at high levels which has favorably impacted our 2006 financial results. Our acquisition of Encore in early 2007 increases our exposure to the oil and gas industry.

     The heavy truck, truck trailer and rail car industries experienced a substantial slowing in demand beginning in 2000 that continued through 2002, which materially impacted our operations in the Pacific Northwest. We did experience some improvement for short periods during 2003 and saw significant improvements in truck trailer demand throughout 2004 that continued at healthy levels in 2005 and 2006.

     Fluctuations in the cost of our materials also affect the prices we can charge to our customers. By selling a diverse product mix, we are able to somewhat offset fluctuations in our costs of materials. However, because of weak demand and overcapacity at the producer level in both domestic and foreign markets in 2001, the costs of most metal products reached their lowest levels experienced in over 20 years. Due to the continued low demand, costs of most metals remained at or near the 2001 levels throughout 2002 and most of 2003. However, costs of carbon steel flat-rolled products increased significantly in the second half of 2002 due to supply constraints as a result of certain producers reducing capacity and government restrictions on foreign imports. These increased costs began to decline slightly near the end of 2002 and early 2003 because of the continued low end-user demand. In the second half of 2003, costs for carbon steel products again increased significantly and rapidly due to improved demand and increased scrap, raw material and energy costs for steel producers. This trend continued through most of 2004 with pricing at all time highs. Increased global demand limited availability of many of these products in the U.S. allowing the significant increases in prices. During the fourth quarter of 2004, increased amounts of import material arrived in the U.S. putting some downward pressure on pricing for carbon steel products. In the first eight months of 2005, there was downward pressure on carbon steel prices which we believe was mainly due to excess inventory in the supply chain. Pricing for carbon steel products improved in late 2005 in part due to increased end user demand. Prices for carbon steel products remained at high levels, and experienced some increases, in 2006, until the latter part of the year when lower demand along with increased imports resulted in high inventory levels at distributors causing pricing pressures. However, pricing remains at strong levels and certain domestic mills reduced capacity in early 2007 and pricing improved somewhat. Costs for aluminum and stainless steel products increased in the second half of 2003 and throughout 2004 and 2005 due to supply constraints and improved customer demand. Aluminum costs increased somewhat in 2006 and have leveled off at relatively high prices. Pricing for aerospace related aluminum, stainless steel and titanium products experienced significant cost increases in 2005 which we believe was due to improved demand and supply constraints that continued into 2006 although the increases were more moderate than in 2005 except for stainless steel products. Stainless steel costs increased significantly in 2006 due to nickel shortages. Overall, most products that we sell are at or near historically high price levels due to supply issues and strong end market demand.

     We have historically been able to pass increases in metal costs on to our customers as costs typically increase due to strong demand. In 2004, supply limitations for carbon steel products allowed us to pass through significant cost increases well in advance of our receipt of the higher cost material, which resulted in significantly higher gross profit margins in 2004, especially in the 2004 second quarter. Our gross profit margins declined somewhat from 2004 levels in 2005 because of declining costs during the first eight months of 2005. Our gross profit margins in 2006 were fairly consistent with 2005 levels until the end of the year when increased supply in the U.S. caused some pressure on pricing. Due to supply limitations in 2005, we were able to increase our selling prices for aerospace products more than our costs increased, raising our 2005 gross profit margins for these products. Our margins on aerospace products continued at strong levels in 2006. We cannot guarantee that the margin between our metal costs and selling prices will remain at the levels experienced during 2006, especially if demand declines or if costs of domestic metals decline due to increased availability or reduced global demand. If metals costs and related selling prices remain at current levels or increase, we should be able to record consistent or increased revenue and gross profit dollars on a consistent volume basis.

Competition

     The metals distribution industry is highly fragmented and competitive. We have numerous competitors in each of our product lines and geographic locations, although competition is most frequently local or regional. Most of our competitors are smaller than we are, but we still face strong competition from national, regional and local independent metals distributors and the producers themselves, some of which have greater resources than we do. As reported in the May 2003 issue of Purchasing magazine, it is estimated that there were approximately 3,500 intermediate steel processors and metals service center facilities in North America in 2003. Purchasing magazine has identified us as the second largest metals service center company in North America (based upon 2005 revenue). According to the May 2006 issue of the magazine Purchasing, the 2005 revenues for the five largest North American metals service center companies ranged from $2.1 billion to $5.8 billion for total revenues of $16.3 billion, which represents approximately 14% of the estimated $115 billion of total revenue for the metals service center industry in 2005. Reliance’s 2005 sales of $3.4 billion represented approximately 3% of the estimated $115 billion industry total. Because of the significant acquisitions that we have made in 2006, beginning with the second quarter of 2006, we are now the largest North American metals service center company based on quarterly revenues (as reported in SEC filings). We compete with other companies on price, service, quality and availability of products. We maintain centralized relationships with our major suppliers and a decentralized operational structure. We believe that this division of responsibility has increased our ability to obtain competitive prices of metals and to provide more responsive service to our customers. In addition, we believe that the size of our inventory, the different metals and products we have available, and the wide variety of processing services we provide, distinguish us from our competition. We believe that we have increased our market share during recent years due to our strong financial condition, our high quality of service, our acquisitions and opportunities created by activities of certain of our competitors.

Quality Control

     Procuring high quality metal from suppliers on a consistent basis is critical to our business. We have instituted strict quality control measures to assure that the quality of purchased raw materials will enable us to meet our customers’ specifications and to reduce the costs of production interruptions. We perform physical and chemical analyses on selected raw materials to verify that their mechanical and dimensional properties, cleanliness and surface characteristics meet our requirements. We conduct similar analyses on selected processed metal before delivery to the customer. We believe that maintaining high standards for accepting metals ultimately results in reduced return rates from our customers.

     In 2006, 22 divisions and eight subsidiaries of Reliance, at a total of 73 facilities, have maintained ISO 9002 certifications and were certified for ISO 9001-2000, but we do not expect to obtain the certification for any additional facilities at this time. As of December 15, 2003, ISO 9001-2000 replaced ISO 9002. The ISO 9001-2000 quality standard added a matrix to record and review customer satisfaction and reorganized the requirements for the quality standard from 20 elements to eight elements. The certification takes approximately one year to obtain. Each facility seeking ISO certification is required to establish a quality system that is documented in a quality control manual and that affects all aspects of the facility’s operations, including sales, product inspections, product storage, delivery and documentation. A certifying agent performs a physical audit of each facility every six months to determine that the facility is in fact following the procedures set forth in the quality control manual. A recertification is required for each facility every three years. Initially in 1996, when we first began the certification process, we expected that more customers would require such certification, but we have learned that for the types of products and services which most of our facilities provide, very few of our customers require such certification and most of our customers have responded that they would purchase products from Reliance or its subsidiaries regardless of such certification. However, we believe that going through the certification process allowed our facilities to improve their efficiency and the quality of products and services provided to our customers.

     In addition, our subsidiary Precision Strip maintains ISO/TS 16949:2002 certifications at eight of its ten facilities. The two facilities acquired in 2006 are in the process of becoming ISO/TS 16949:2002 certified. ISO/TS 16949:2002 is an ISO Technical Specification, which aligns existing American (QS-9000), German (VDA6.1), French (EAQF) and Italian (AVSQ) automotive quality systems standards within the global automotive industry. Quality System Requirements QS-9000 (“QS-9000”) is the common quality standard for automotive suppliers and is based upon the 1994 edition of ISO 9001, with additional requirements specific to the automotive industry. The International Automotive Sector Group is an international ad hoc working group that monitors interpretation issues related to the standard.

Systems

     We have converted our Reliance divisions and certain of our subsidiaries from various software programs to the StelplanÔ manufacturing and distribution information system. StelplanÔ is a registered trademark of Invera, Inc. StelplanÔ is an

integrated business application system with functions ranging from order entry to the generation of financial statements. StelplanÔ was developed specifically for the metals service center and processor industry. StelplanÔ also provides information in real time, such as inventory availability, location and cost. With this information, our marketing and sales personnel can respond to our customers’ needs more efficiently and more effectively.

     Certain of our subsidiaries use other vendor or in-house developed systems to support their operations, including EMJ that has 41 locations. The basic functionality of the software is similar to StelplanÔ but in many instances has been designed specifically for each of their operations with features to accommodate the products that they carry, automated equipment interfaces, or other specialized needs. These systems are included in our internal control testing. A common financial reporting system is used company-wide.

Government Regulation

     Our metals service centers are subject to many foreign, federal, state and local requirements to protect the environment, including hazardous waste disposal and underground storage tank regulations. The only hazardous substances that we generally use in our operations are lubricants, cleaning solvents and petroleum for fueling our trucks. We pay state-certified private companies to haul and dispose of our hazardous waste.

     Our operations are also subject to laws and regulations relating to workplace safety and worker health, principally the Occupational Health and Safety Act and related regulations, which, among other requirements, establish noise, dust and safety standards. We maintain comprehensive health and safety policies and encourage our employees to follow established safety practices. We do not anticipate that future compliance with such laws and regulations will have a material adverse effect on our results of operations or financial condition.

Environmental

     Some of the properties we own or lease are located in industrial areas with histories of heavy industrial use. We may incur some environmental liabilities because of the location of these properties. In addition, we are currently investigating and remediating contamination at certain properties we have acquired or that acquired subsidiaries previously owned, but we do not expect that these liabilities would have a material adverse impact on our results of operations. All scrap metal produced by our operations is sold to independent scrap metal companies and we believe is recycled.

Employees

     As of December 31, 2006, we had approximately 8,600 employees. Approximately 15% of the employees are covered by collective bargaining agreements, which expire at various times over the next four years. We have entered into collective bargaining agreements with 30 union locals at 34 of our locations. These collective bargaining agreements have not had a material impact either favorably or unfavorably on our revenues or profitability at our various locations. We have always maintained excellent relations with our employees. In 2005, we experienced a work stoppage by our drivers at one of our locations, but it did not have a material impact on our operations at that location. This contract expired and the drivers at that location are now non-union employees. We have never experienced a significant work stoppage.

Available Information

     We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a Website that contains reports, proxy information statements and other information regarding issuers, including our Company, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

     We also make available free of charge on or through our Internet Website (http://www.rsac.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Reference to our Website is not intended to incorporate anything on the Website into this report.

Item 1A. Risk Factors

Set forth below are the risks that we believe are material to our investors. Our business, results of operations and financial condition may be materially adversely affected due to any of the following risks. The risks described below are not the only ones we face. Additional risks of which we are not presently aware or that we currently believe are immaterial may also harm our business. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements set forth at the beginning of this Report.

Risks Related to Our Business and Industry

Our indebtedness could impair our financial condition and reduce the funds available to us for other purposes and our failure to comply with the covenants contained in our debt instruments could result in an event of default that could adversely affect our operating results.

     We have substantial debt service obligations. As of December 31, 2006, we had aggregate outstanding indebtedness of approximately $1.1 billion, with a significant increase in 2006 that is attributable to our 2006 acquisitions. This indebtedness could adversely affect us in the following ways:

	•		our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired;
	•		a significant portion of our cash flow from operations must be dedicated to the payment of interest and principal on our debt, which reduces the funds available to us for our operations or other purposes;
	•		some of the interest on debt is, and will continue to be, accrued at variable rates, which may result in higher interest expense in the event of increases in interest rates, which may occur in 2007;
	•		because we may be more leveraged than some of our competitors, our debt may place us at a competitive disadvantage;
	•		our leverage may increase our vulnerability to economic downturns and limit our ability to withstand adverse events in our business by limiting our financial alternatives; and
	•		our ability to capitalize on significant business opportunities, including potential acquisitions, and to plan for, or respond to, competition and changes in our business may be limited.

     Our existing debt agreements contain, and our future debt agreements may contain, financial and restrictive covenants that limit our ability to incur additional debt, including to finance future operations or other capital needs, and to engage in other activities that we may believe are in our long-term best interests, including to dispose of or acquire assets or other companies or to pay dividends to our shareholders. Our failure to comply with these covenants may result in an event of default which, if not cured or waived, could accelerate the maturity of our indebtedness or prevent us from accessing availability under our credit facility. If our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned.

We may not be able to generate sufficient cash flow to meet our existing debt service obligations.

     Our annual debt service obligations until November 8, 2011, when our revolving credit facility is scheduled to mature, will be primarily limited to interest and principal payments on multiple series of privately placed senior notes and our outstanding debt securities with an aggregate principal amount of $898 million, and on borrowings under our $1.1 billion credit facility. Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. For example, we may not generate sufficient cash flow from our operations or new acquisitions to repay amounts drawn under our credit facility when it matures in 2011, our private notes when they mature on various dates between 2007 and 2013, our debt securities when they mature in 2016 and 2036 or our industrial revenue bonds when they mature in 2009 and 2014. If we do not generate sufficient cash flow from operations to satisfy our debt obligations, we expect to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We may not be able to consummate any such transaction at all or on a timely basis or on terms, and for proceeds, that are acceptable to us. These transactions may not be permitted under the terms of our various debt instruments then in effect, however, our inability to generate sufficient cash flow to satisfy our debt obligations, or

to timely refinance our obligations on acceptable terms, could adversely affect our ability to serve our customers and could cause us to reduce or discontinue our planned operations.

The costs that we pay for metals fluctuate due to a number of factors beyond our control, and such fluctuations could adversely affect our operating results, particularly if we cannot pass on higher metal prices to our customers.

     We purchase large quantities of carbon, alloy and stainless steel, aluminum and other metals, which we sell to a variety of end-users. In 2004 the costs for carbon steel increased significantly and rapidly from historically low levels. Although these costs declined somewhat through mid-2005, the costs increased in the fourth quarter of 2005, with moderate increases in 2006. Overall carbon steel costs remain at relatively high levels. Costs for aluminum products, excluding aerospace-related products, rose steadily in 2004 with continued increases in 2005 and 2006. Costs for stainless steel products rose steadily in 2004 and increased more rapidly in 2005 and 2006. Stainless steel costs are currently at unprecedented high levels, primarily due to the high nickel surcharges resulting from low global nickel supply. Costs for aerospace-related products increased significantly beginning in late 2004 and continued to increase through all of 2005 and into 2006, although at a slower rate than in 2005. We attempt to pass these cost increases on to our customers with higher selling prices but we may not always be able to do so. The costs to us for these metals and the prices that we charge customers for our products may change depending on many factors outside of our control, including general economic conditions (both domestic and international), competition, production levels, customer demand levels, import duties and other trade restrictions, currency fluctuations and surcharges imposed by our suppliers.

     We maintain substantial inventories of metal to accommodate the short lead times and delivery requirements of our customers. Our customers typically purchase products from us pursuant to purchase orders and typically do not enter into long-term purchase agreements or arrangements with us. Accordingly, we purchase metal in quantities we believe to be appropriate to satisfy the anticipated needs of our customers based on information derived from customers, market conditions, historic usage and industry research. Commitments for metal purchases are generally at prevailing market prices in effect at the time orders are placed or at the time of shipment. During periods of rising prices for metal, we may be negatively impacted by delays between the time of increases in the cost of metals to us and increases in the prices that we charge for our products if we are unable to pass these increased costs on to our customers immediately. In addition, when metal prices decline, customer demand for lower prices could result in lower sale prices for our products and, as we use existing inventory that we purchased at higher metal prices, lower margins. Consequently, during periods in which we use this existing inventory, the effects of changing metal prices could adversely affect our operating results.

Our business could be adversely affected by economic downturns.

     Demand for our products is affected by a number of general economic factors. A decline in economic activity in the U.S. and other markets in which we operate could materially affect our financial condition and results of operation.

The prices of metals are subject to fluctuations in the supply and demand for metals worldwide and changes in the worldwide balance of supply and demand could negatively impact our revenues, gross profit and net income.

     Metal prices are volatile due to, among other things, fluctuations in foreign and domestic production capacity, raw material availability, metals consumption and foreign currency rates. For example, in the past few years, China has significantly increased both its consumption and production of metals and metal products. Initially, China’s large and growing demand for metals significantly affected the metals industry by diverting supply to China and contributing to the global increases in metal prices. With China’s increased production of metals, it has recently become a net exporter of certain metals and this has somewhat reduced metal prices both within and outside of China. While this development can affect global pricing, it has yet to have a significant impact on U.S. pricing or the pricing for our products. Any future downturn in China’s general economic conditions or increases in its export of metals could cause a reduction in metal prices globally, which could adversely affect our revenues, gross profit and net income. Additionally, significant currency fluctuations in the United States or abroad could negatively impact our cost of metals and the pricing of our products. The decline in the dollar relative to foreign currencies in recent years has resulted in increased prices for metals and metal products in the United States as imported metals have become relatively more expensive. If, in the future, the dollar increases in value relative to foreign currencies, the U.S. market may be more attractive to foreign producers, resulting in increased supply that could cause decreased metal prices and adversely affect our revenues, gross profit and net income.

We operate in an industry that is subject to cyclical fluctuations and any downturn in general economic conditions or in our customers’ specific industries could negatively impact our revenues, gross profit and net income.

     The metals service center industry is cyclical and impacted by both market demand and metals supply. Periods of economic slowdown or recession in the United States or other countries, or the public perception that these may occur, could decrease the

demand for our products and adversely affect our pricing. For example, the general slowing of the economy in 2001, 2002 and 2003 adversely impacted our product sales and pricing. While we have been experiencing significantly improved pricing and healthy demand levels since 2004, this trend may not continue. Changing economic conditions could depress or delay demand for our products, which could adversely affect our revenues, gross profit and net income.

     We sell many products to industries that are cyclical, such as the non-residential construction, semiconductor, energy and transportation industries, including aerospace. The demand for our products is directly related to, and quickly impacted by, demand for the finished goods manufactured by our customers in these industries, which may change as a result of changes in the general U.S. or worldwide economy, domestic exchange rates, energy prices or other factors beyond our control. If we are unable to accurately project the product needs of our customers over varying lead times or if there is a limited availability of products through allocation by the mills or otherwise, we may not have sufficient inventory to be able to provide products desired by our customers on a timely basis. In addition, if we are not able to diversify our client base and/or increase sales of products to customers in other industries when one or more of the cyclical industries that we serve is experiencing a decline, our revenues, gross profit and net income may be adversely affected.

We compete with a large number of companies in the metals service center industry, and, if we are unable to compete effectively, our revenues, gross profit and net income may decline.

     We compete with a large number of other general-line distributors and specialty distributors in the metals service center industry. Competition is based principally on price, inventory availability, timely delivery, customer service, quality and processing capabilities. Competition in the various markets in which we participate comes from companies of various sizes, some of which have greater financial resources than we do and some of which have more established brand names in the local markets that we serve. Accordingly, these competitors may be better able to withstand adverse changes in conditions within our customers’ industries and may have greater operating and financial flexibility than we have. To compete for customer sales, we may lower prices or offer increased services at a higher cost, which could reduce our revenues, gross profit and net income.

If we were to lose any of our primary suppliers or otherwise be unable to obtain sufficient amounts of necessary metals on a timely basis, we may not be able to meet our customers’ needs and may suffer reduced sales.

     We have few long-term contracts to purchase metals. Therefore, our primary suppliers of carbon steel, alloy steel, stainless steel, aluminum or other metals could curtail or discontinue their delivery of these metals to us in the quantities we need with little or no notice. Our ability to meet our customers’ needs and provide value-added inventory management services depends on our ability to maintain an uninterrupted supply of high quality metal products from our suppliers. If our suppliers experience production problems, lack of capacity or transportation disruptions, the lead times for receiving our supply of metal products could be extended and the cost of our inventory may increase. If, in the future, we are unable to obtain sufficient amounts of the necessary metals at competitive prices and on a timely basis from our traditional suppliers, we may not be able to obtain these metals from acceptable alternative sources at competitive prices to meet our delivery schedules. Even if we do find acceptable alternative suppliers, the process of locating and securing these alternatives may be disruptive to our business, which could have an adverse impact on our ability to meet our customers’ needs and reduce our sales, gross profit and net income. In addition, if a significant domestic supply source is discontinued and we cannot find acceptable domestic alternatives, we may need to find a foreign source of supply. Dependence on foreign sources of supply could lead to longer lead times, increased price volatility, less favorable payment terms, increased exposure to foreign currency movements and certain tariffs and duties and require greater levels of working capital.

If we do not successfully implement our acquisition growth strategy, our ability to grow our business could be impaired.

     We may not be able to identify suitable acquisition candidates or successfully complete any acquisitions or integrate any other businesses into our operations. If we cannot identify suitable acquisition candidates or are otherwise unable to complete acquisitions, we are unlikely to sustain our historical growth rates, and, if we cannot successfully integrate these businesses, we may incur increased or redundant expenses. Moreover, any additional indebtedness we incur to pay for these acquisitions could adversely affect our liquidity and financial condition.

Acquisitions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of any transaction.

     Historically, we have expanded both through acquisitions and internal growth. Since our initial public offering in September 1994, we have successfully purchased more than 40 businesses. From 1984 to September 1994, we acquired 20 businesses. We continue to evaluate acquisition opportunities and expect to continue to grow our business through acquisitions. Risks we may encounter in acquisitions include:

	•		the acquired company may not further our business strategy, or we may pay more than it is worth;
	•		the acquired company may not perform as anticipated, which could result in an impairment charge or otherwise impact our results of operations;
	•		we may not realize the anticipated increase in our revenues if a larger than predicted number of customers decline to continue purchasing products from us;
	•		we may have to delay or not proceed with a substantial acquisition if we cannot obtain the necessary funding to complete the acquisition in a timely manner;
	•		we may significantly increase our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition or assume existing debt of an acquired company which, among other things, may result in a downgrade of our debt ratings;
	•		we may have multiple and overlapping product lines that may be offered, priced and supported differently, which could cause our gross profit margins to decline;
	•		our relationship with current and new employees, customers and suppliers could be impaired;
	•		our due diligence process may fail to identify risks that could negatively impact our financial condition;
	•		we may lose anticipated tax benefits or have additional legal or tax exposures if we have prematurely or improperly combined entities;
	•		we may face contingencies related to product liability, intellectual property, financial disclosures, tax positions and accounting practices or internal controls;
	•		the acquisition may result in litigation from terminated employees or third parties;
	•		our management’s attention may be diverted by transition or integration issues; and
	•		we may be unable to obtain timely approvals from governmental authorities under competition and antitrust laws.

     These factors could have a material adverse effect on our business, results of operations, financial condition or cash flows, particularly in the case of a larger acquisition or a number of acquisitions.

As a decentralized business, we depend on both senior management and our key operating employees; if we are unable to attract and retain these individuals, our ability to operate and grow our business may be adversely affected.

     Because of our decentralized operating style, we depend on the efforts of our senior management, including our chief executive officer, David H. Hannah, our president and chief operating officer, Gregg J. Mollins, and our executive vice president and chief financial officer, Karla Lewis, as well as our key operating employees. We may not be able to retain these individuals or attract and retain additional qualified personnel when needed. We do not have employment agreements with any of our officers or employees, so they may have less of an incentive to stay with us when presented with alternative employment opportunities. In addition, our senior management and key operating employees hold stock options that have vested and may also hold common stock in our employee stock ownership plan. These individuals may, therefore, be more likely to leave us if the shares of our common stock significantly appreciate in value. The loss of any key officer or employee will require remaining officers and employees to direct immediate and substantial attention to seeking a replacement. Our inability to retain members of our senior management or key operating employees or to find adequate replacements for any departing key officer or employee on a timely basis could adversely affect our ability to operate and grow our business.

We are subject to various environmental, employee safety and health and customs and export laws and regulations, which could subject us to significant liabilities and compliance expenditures.

     We are subject to various foreign, federal, state and local environmental laws and regulations concerning air emissions, wastewater discharges, underground storage tanks and solid and hazardous waste disposal at or from our facilities. Our operations are also subject to various employee safety and health laws and regulations, including those concerning occupational

injury and illness, employee exposure to hazardous materials and employee complaints. We are also subject to customs and exporting laws and regulations for international shipment of our products. Environmental, employee safety and health and customs and export laws and regulations are comprehensive, complex and frequently changing. Some of these laws and regulations are subject to varying and conflicting interpretations. We may be subject from time to time to administrative and/or judicial proceedings or investigations brought by private parties or governmental agencies with respect to environmental matters, employee safety and health issues or customs and exporting issues. Proceedings and investigations with respect to environmental matters, any employee safety and health issues or customs and exporting issues could result in substantial costs to us, divert our management’s attention and result in significant liabilities, fines or the suspension or interruption of our service center activities. Some of our current properties are located in industrial areas with histories of heavy industrial use. The location of these properties may require us to incur environmental expenditures and to establish accruals for environmental liabilities that arise from causes other than our operations. In addition, we are currently investigating and remediating contamination in connection with certain properties we have acquired. Future events, such as changes in existing laws and regulations or their enforcement, new laws and regulations or the discovery of conditions not currently known to us, could result in material environmental compliance or remedial liabilities and costs, constrain our operations or make such operations more costly.

Our operating results have fluctuated, and are expected to continue fluctuating, depending on the season.

     Many of our customers are in seasonal businesses, including customers in the construction and related industries. In addition, our revenues in the months of July, November and December traditionally have been lower than in other months because of increased vacation days and holiday closures for various customers. Consequently, you should not rely on our results of operations during any particular quarter as an indication of our results for a full year or any other quarter.

Ongoing tax audits may result in additional taxes.

     Reliance and our subsidiaries are undergoing various tax audits. These tax audits could result in additional taxes, plus interest and penalties being assessed against Reliance or any of our subsidiaries and the amounts assessed could be material.

Damage to our computer infrastructure and software systems could harm our business.

     The unavailability of any of our information management systems for any significant period of time could have an adverse effect on our operations. In particular, our ability to deliver products to our customers when needed, collect our receivables and manage inventory levels successfully largely depends on the efficient operation of our computer hardware and software systems. Through information management systems, we provide inventory availability to our sales and operating personnel, improve customer service through better order and product reference data and monitor operating results. Difficulties associated with upgrades, installations of major software or hardware, and integration with new systems could lead to business interruptions that could harm our reputation, increase our operating costs and decrease our profitability. In addition, these systems are vulnerable to, among other things, damage or interruption from power loss, computer system and network failures, loss of tele-communications services, operator negligence, physical and electronic loss of data, or security breaches and computer viruses.

     We have contracted with a third-party service provider that provides us with backup systems in the event that our information management systems are damaged. The backup facilities and other protective measures we take could prove to be inadequate.

The value of your investment may be subject to sudden decreases due to the potential volatility of the price of our common stock.

     The market price of our common stock may be highly volatile and subject to wide fluctuations in response to various factors, including variations in our quarterly results of operations. Other factors may include matters discussed in other risk factors and the following factors:

	•		changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
	•		developments affecting our Company, our customers or our suppliers;
	•		changes in the legal or regulatory environment affecting our business;
	•		press releases, earnings releases or publicity relating to us or our competitors or relating to trends in the metals service center industry;

	•		inability to meet securities analysts’ and investors’ quarterly or annual estimates or targets of our performance;
	•		a decline in our credit rating by the rating agencies;
	•		the operating and stock performance of other companies that investors may deem comparable;
	•		sales of our common stock by large shareholders;
	•		general domestic or international economic, market and political conditions.

     These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance. In addition, the stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. In the past, some shareholders have brought securities class action lawsuits against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation, regardless of whether our defense is ultimately successful, could result in substantial costs and divert management’s attention and resources.

Principal shareholders who own a significant number of shares may have interests that conflict with yours.

     Florence Neilan, our largest shareholder, through a revocable trust, owns 11% of the outstanding shares of our common stock. She or Thomas W. Gimbel, one of our directors who is trustee of her trust, may have the ability to significantly influence matters requiring shareholder approval. In deciding how to vote on such matters, these shareholders may be influenced by interests that conflict with yours.

We have implemented anti-takeover provisions that may adversely impact your rights as a holder of Reliance common stock.

     Certain provisions in our articles of incorporation and our bylaws could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the price of our common stock and the rights of our shareholders. We are authorized to issue 5,000,000 shares of preferred stock, no par value, with the rights, preferences, privileges and restrictions of such stock to be determined by our board of directors, without a vote of the holders of common stock. Our board of directors could grant rights to holders of preferred stock to reduce the attractiveness of Reliance as a potential takeover target or make the removal of management more difficult. In addition, our articles of incorporation and bylaws (1) impose advance notice requirements for shareholder proposals and nominations of directors to be considered at shareholder meetings and (2) establish a staggered or classified board of directors. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors other than the candidates nominated by our board of directors. In addition, our credit facility and the provisions of our senior private notes and debt securities contain limitations on our ability to enter into change of control transactions.

Risks Related to our Debt Securities

Because our senior debt securities and the related guarantees are not secured and are effectively subordinated to the rights of secured creditors, the debt securities and the related guarantees will be subject to the prior claims of any secured creditors, and if a default occurs, we may not have sufficient funds to fulfill our obligations under the debt securities or the related guarantees.

     Certain risks may be specifically applicable to the holders of our outstanding debt securities. These risks are set forth in that Registration Statement on Form S-4 (No. 333-139790) filed with the Securities and Exchange Commission.

The guarantees may be unenforceable due to fraudulent conveyance statutes and, accordingly, the holders of our debt securities may not have a claim against the subsidiary guarantors.

     The obligations of each subsidiary guarantor under its guarantee will be limited as necessary to prevent that guarantee from constituting a fraudulent conveyance or fraudulent transfer under applicable law. However, a court in some jurisdictions could, under fraudulent conveyance laws, further subordinate or void the guarantee of any subsidiary guarantor if it found that such guarantee was incurred with actual intent to hinder, delay or defraud creditors, or such subsidiary guarantor did not receive fair consideration or reasonably equivalent value for the guarantee and that the subsidiary guarantor was any of the following:

insolvent or rendered insolvent because of the guarantee, engaged in a business or transaction for which its remaining assets constituted unreasonably small capital, or intended to incur, or believed that it would incur, debts beyond its ability to pay such debts at maturity.

     If a court were to void the guarantee of a subsidiary guarantor as the result of a fraudulent conveyance, or hold it unenforceable for any other reason, holders of the notes would cease to have a claim against that subsidiary guarantor on its guarantee and would be creditors solely of Reliance and any other subsidiary guarantor whose guarantee is not voided or held to be unenforceable.

The guarantees will be released under certain circumstances.

     The debt securities will be guaranteed by any subsidiary guarantor for so long as such subsidiary guarantor is a borrower or a guarantor of obligations under our credit agreement and our private notes. In the event that, for any reason, the obligations of any subsidiary guarantor terminate as a borrower or guarantor under our credit agreement and our private notes, that subsidiary guarantor will be deemed released from all of its obligations under the indenture and its guarantee of the notes will terminate. A subsidiary guarantor’s guarantee will also terminate and such subsidiary guarantor will be deemed released from all of its obligations under the indenture with respect to the notes of a series upon legal defeasance of such series or satisfaction and discharge of the indenture as it relates to such series. A subsidiary guarantor’s guarantee will also terminate and such subsidiary guarantor will be deemed released from all of its obligations under the indenture with respect to each series of notes in connection with any sale or other disposition by Reliance of all of the capital stock of that subsidiary guarantor (including by way of merger or consolidation) or other transaction such that after giving effect to such transaction such subsidiary guarantor is no longer a domestic subsidiary of Reliance. If the obligations of any subsidiary guarantor as a guarantor terminate or are released, the risks applicable to our subsidiaries that are not guarantors upon consummation of the offering will also be applicable to such subsidiary guarantor.

We will depend on the receipt of dividends or other intercompany transfers from our subsidiaries to meet our obligations under the notes. Claims of creditors of our subsidiaries may have priority over your claims with respect to the assets and earnings of our subsidiaries.

     We conduct a substantial portion of our operations through our subsidiaries. We will therefore be dependent upon dividends or other intercompany transfers of funds from our subsidiaries in order to meet our obligations under the notes and to meet our other obligations. Generally, creditors of our subsidiaries will have claims to the assets and earnings of our subsidiaries that are superior to the claims of our creditors, except to the extent the claims of our creditors are guaranteed by our subsidiaries. All of our wholly-owned domestic subsidiaries, which constitute the substantial majority of our subsidiaries, guarantee the notes. As of December 31, 2006, Reliance and the subsidiary guarantors accounted for approximately $3.5 billion, or 97%, of our total consolidated assets. Reliance and the subsidiary guarantors accounted for approximately $5.5 billion, or 97%, of our total consolidated revenue for the year ended December 31, 2006.

     In the event of the bankruptcy, insolvency, liquidation, reorganization, dissolution or other winding up of Reliance, the holders of our notes may not receive any amounts with respect to the notes until after the payment in full of the claims of creditors of our subsidiaries that are not subsidiary guarantors.

We are permitted to incur more debt, which may intensify the risks associated with our current leverage, including the risk that we will be unable to service our debt.

     Subject to certain limitations, our existing credit facility and private notes permit us to incur additional debt. The indenture governing the notes does not limit the amount of additional debt that we may incur. If we incur additional debt, the risks associated with our leverage, including the risk that we will be unable to service our debt, will increase.

The provisions in the indenture that governs the notes relating to change of control transactions will not necessarily protect the holders of our notes in the event of a highly leveraged transaction.

     The provisions contained in the indenture will not necessarily afford the holders of our notes protection in the event of a highly leveraged transaction that may adversely affect them, including a reorganization, restructuring, merger or other similar transaction involving us. These transactions may not involve a change in voting power or beneficial ownership or, even if they do, may not involve a change of the magnitude required under the definition of change of control repurchase event in the indenture to trigger these provisions, notably, that the transactions are accompanied or followed within 60 days by a downgrade in the rating of the notes. Except in the event of a change of control, the indenture does not contain provisions that permit the holders of the notes to require us to repurchase the notes in the event of a takeover, recapitalization or similar transaction.

Reliance may not be able to repurchase all of the notes upon a change of control repurchase event.

     We will be required to offer to repurchase certain outstanding senior notes upon the occurrence of a change of control repurchase event. We may not have sufficient funds to repurchase the notes in cash at such time or have the ability to arrange necessary financing on acceptable terms. In addition, our ability to repurchase the notes for cash may be limited by law or the terms of other agreements relating to our indebtedness outstanding at the time. Under the terms of our new credit facility, we are prohibited from repurchasing the notes if we are in default under such credit facility.

There is no prior market for the notes. If one develops, it may not be liquid.

     We do not intend to list our notes on any national securities exchange or to seek their quotation on any automated dealer quotation system. We cannot assure you that any liquid market for our notes will ever develop or be maintained. There can be no assurances as to the ability to sell our notes or the price at which they may be sold. Future trading prices of the notes will depend on many factors, including prevailing interest rates, our financial condition and results of operations, the then-current ratings assigned to the notes and the market for similar securities. Any trading market that develops would be affected by many factors independent of and in addition to the foregoing, including:

	•		time remaining to the maturity of the notes;
	•		outstanding amount of the notes;
	•		the terms related to optional redemption of the notes; and
	•		level, direction and volatility of market interest rates generally.

Ratings of our notes may change after issuance and affect the market price and marketability of the notes.

     The notes are rated by Moody’s Investors Service Inc. and Standard & Poor’s. Such ratings are limited in scope, and do not address all material risks relating to an investment in the notes, but rather reflect only the view of each rating agency at the time the rating is issued. An explanation of the significance of such rating may be obtained from such rating agency. There is no assurance that such credit ratings will be issued or remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in each rating agency’s judgment, circumstances so warrant. It is also possible that such ratings may be lowered in connection with future events, such as future acquisitions. Holders of our notes have no recourse against us or any other parties in the event of a change in or suspension or withdrawal of such ratings. Any lowering, suspension or withdrawal of such ratings may have an adverse effect on the market price or marketability of the notes. In addition, any decline in the ratings of the notes may make it more difficult for us to raise capital on acceptable terms.

Item 1B. Unresolved Staff Comments

     None.

Item 2. Properties.

     As of December 31, 2006, we maintained more than 160 metals service center processing and distribution facilities in 37 states, and in Belgium, Canada, China and South Korea, and a sales office in France, plus our corporate headquarters. All of our service center facilities are in good or excellent condition and are adequate for our existing operations. These facilities generally operate at about 60% of capacity based upon a 24-hour seven-day week, with each location averaging slightly less than two shifts operating at full capacity for a five-day work week. Seventy-five of these processing and distribution facilities are leased. In addition, we lease our corporate headquarters in Los Angeles, California. Siskin leases a portion of its facilities in Chattanooga, Tennessee, and Liebovich leases a portion of its facilities in Rockford, Illinois. AMI Metals leases its corporate office space in Brentwood, Tennessee. Chapel Steel leases its sales office in Chicago, Illinois and its corporate office in Lower Gwynedd, Pennsylvania. Our international sales office in France is also leased. The lease terms expire at various times through 2026 and the aggregate monthly rent amount is approximately $2.2 million. We own all other properties.

     The following table sets forth certain information with respect to each facility. Any leased portions of owned facilities are not significant and are included in the square footage information following.

FACILITIES AND PLANT SIZE

Location		Plant Size (Sq. ft.)
Alabama:
Birmingham
(Chapel)			98,000	*
(Chatham)			110,000
(EMJ)			80,000
(Phoenix Metals)			73,000
(Siskin)			107,000
Talladega (Precision)			272,000
Arizona:
Phoenix
(Bralco Metals)			46,000
(EMJ)			72,000
(Reliance Metalcenter)			104,000
(Tube Service)			23,000
Arkansas:
Little Rock (EMJ)			28,000	*
California:
El Cajon (Tube Service)			18,000
Fontana (AMI)			105,000
Fresno
(American Metals)			125,000	*
(PDM)			102,000
Hayward
(EMJ)			91,000
(Lusk Metals)			47,000	*
La Mirada (Bralco Metals)			140,000
Los Angeles
(Corporate Office)			45,000	*
(EMJ)			319,000
(Reliance Steel Company)			270,000
Milpitas (Tube Service)			58,000
National City (Reliance Metalcenter)			74,000
Pico Rivera (United)			50,000	*
Rancho Dominguez (CCC Steel)			316,000
Redding (American Metals)			42,000	*
Santa Clara (PDM)			61,000
Santa Fe Springs
(MetalCenter)			155,000
(Tube Service)			66,000
Stockton (PDM)			189,000
Union City (Reliance Metalcenter)			145,000
Ventura (Valex)			87,000
West Sacramento (American Metals)			108,000	*
Colorado:
Colorado Springs (Reliance Metalcenter)			68,000
Denver
(EMJ)			77,000	*
(Engbar)			36,000
(Olympic)			20,000	*
(Tube Service)			21,000	*
Connecticut:
Hartford (EMJ)			33,000	*
Southington (Yarde)			535,000	*
Florida:
Orlando
(Chatham)			127,000
(EMJ)			30,000	*
Tampa (Phoenix Metals)			83,000
Georgia:
Atlanta (Georgia Steel)			88,000
Norcross (Phoenix Metals)			170,000
Savannah (Chatham)			178,000
Idaho:
Boise (Pacific)			40,000	*
Illinois:
Bourbonnais (Chapel)			120,000	*
Chicago (EMJ)			604,000
Franklin Park (Viking)			91,000	*
Peoria (Hagerty)			223,000

Location		Plant Size (Sq. ft.)
Rockford
(Custom Fab)			30,000
(Liebovich)			452,000
Indiana:
Anderson (Precision)			152,000
Indianapolis (EMJ)			225,000
Portage (Precision)			15,000	*
Rockport (Precision)			55,000	*
Iowa:
Cedar Rapids (Liebovich)			52,000
Eldridge (EMJ)			141,000	*
Kansas:
Kansas City (Central Plains)			141,000
Wichita
(AMI)			40,000	*
(Bralco Metals)			45,000	*
(Central Plains)			87,000
Kentucky:
Bowling Green (Precision)			308,000	*
Louisiana:
Lafayette
(A&S)			40,000	*
(EMJ)			65,000
New Orleans (A&S)			70,000	*
Maryland:
Baltimore (Durrett)			250,000
Massachusetts:
Boston (EMJ)			64,000
Michigan:
Detroit (EMJ)			29,000	*
Wyoming (Good Metals)			65,000
Minnesota:
Minneapolis
(EMJ)			169,000
(Viking)			122,000
Missouri:
Kansas City (EMJ)			147,000	*
St. Louis
(AMI)			49,000	*
(EMJ)			108,000	*
Montana:
Billings (Pacific)			12,000	*
Nevada:
Las Vegas (PDM)			29,000	*
Sparks (PDM)			44,000
New Hampshire:
Pelham (Yarde)			47,000	*
New Jersey:
East Hanover (Yarde)			26,000	*
Swedesboro (AMI)			36,000	*
New Mexico:
Albuquerque
(Bralco Metals)			44,000
(Reliance Steel Company)			34,000
New York:
Hauppauge (Yarde)			49,000	*
Rochester (EMJ)			32,000	*
North Carolina:
Charlotte
(EMJ)			175,000
(Phoenix Metals)			41,000
Durham (Chatham)			110,000
Greensboro (EMJ)			43,000	*
High Point (Yarde)			34,000	*
Ohio:
Cincinnati (EMJ)			125,000	*
Cleveland
(EMJ)			200,000
(EMJ)			138,000
Kenton (Precision)			450,000
Massillon (SSA)			27,000
Middletown (Precision)			458,000
Minster (Precision)			417,000
Monroe (Phoenix Metals)			32,000	*

Location		Plant Size (Sq. ft.)
Perrysburg (Precision)			291,000	*
Streetsboro (Yarde)			57,000	*
Tipp City (Precision)			291,000
Oklahoma:
Tulsa (EMJ)			149,000
Oregon:
Eugene (Pacific)			32,000
Medford (Pacific)			5,000	*
Portland
(American Steel)			270,000	*
(Chapel)			52,000	*
(EMJ)			34,000	*
(Pacific)			111,000
(Reliance Metalcenter)			44,000
(Tube Service)			17,000	*
Pennsylvania:
Allentown (Valex)			8,000	*
Chester Springs (Phoenix Metals)			43,000	*
Indianola (Allegheny)			82,000
Johnstown (Toma Metals)			88,000
Limerick (Yarde)			14,000	*
Philadelphia (EMJ)			27,000	*
Pottstown (Chapel)			127,000	*
Wrightsville (EMJ)			125,000	*
South Carolina:
Columbia (Chatham)			117,000
Spartanburg (Siskin)			96,000
Tennessee:
Chattanooga (Siskin)			386,000
Memphis (EMJ)			57,000	*
Morristown (East Tennessee)			38,000	*
Nashville (Siskin)			117,000
Spring Hill (Phoenix Metals)			66,000
Texas:
Arlington (Reliance Metalcenter)			107,000
Dallas (EMJ)			133,000
Fort Worth (AMI)			75,000	*
Garland (Bralco Metals)			45,000
Houston
(Chapel)			104,000	*
(EMJ)			95,000
(EMJ)			17,000	*
(Reliance Metalcenter)			30,000
San Antonio (Reliance Metalcenter)			77,000
Utah:
Salt Lake City
(Affiliated Metals)			86,000
(CCC Steel)			51,000
(EMJ)			25,000	*
(Reliance Metalcenter)			105,000
Spanish Fork (PDM)			42,000
Washington:
Auburn (AMI)			27,000	*
Kent
(American Steel)			168,000	*
(Bralco Metals)			48,000	*
Seattle (EMJ)			84,000	*
Spokane
(EMJ)			15,000	*
(Pacific)			49,000
Tacoma (SSA)			26,000	*
Tukwila (Pacific)			76,000
Woodland (PDM)			130,000
Wisconsin:
Kaukauna (Liebovich)			48,000	*
International Distribution Centers
Gosselies, Belgium (AMI Europe)			64,000
Edmonton, Alberta, Canada (EMJ)			26,000	*
North Bay, Ontario, Canada (EMJ)			10,000	*
Toronto, Ontario, Canada (EMJ)			92,000	*
Quebec City, Quebec, Canada (EMJ)			20,000	*
Montreal, Quebec, Canada (EMJ)			83,000	*
Suzhou, China (Everest)			20,000	*
International Manufacturing Facility
Seoul, South Korea (Valex Korea)			85,000

Item 3. Legal Proceedings.

     From time to time, we are named as a defendant in legal actions. Generally, these actions arise out of our normal course of business. We are not a party to any pending legal proceedings other than routine litigation incidental to the business. We expect that these matters will be resolved without having a material adverse effect on our results of operations or financial condition. We maintain liability insurance against risks arising out of our 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.

     Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “RS” and was first traded on September 16, 1994. The following table sets forth the high and low reported closing sale prices of the common stock on the NYSE Composite Tape for the stated calendar quarters.

		2006								2005
		High				Low				High				Low
First Quarter		$	46.96			$	31.45			$	23.68			$	18.15
Second Quarter		$	48.77			$	33.76			$	21.81			$	17.52
Third Quarter		$	41.83			$	29.22			$	26.47			$	18.76
Fourth Quarter		$	40.75			$	31.16			$	33.32			$	24.58

     As of February 15, 2007, there were 271 record holders of our common stock.

     We have paid quarterly cash dividends on our common stock for 47 years. In July 2006, the regular quarterly dividend was increased 20% from $.05 to $.06 per share of common stock. Since July 2004, our quarterly dividend has been increased 100%. In July 2006, we effected a 2:1 stock split in the form of a stock dividend (all share and per share information has been adjusted to reflect this two-for-one stock split). Our Board of Directors has increased the quarterly dividend rate on a periodic basis. In February 2007 the Board again increased the quarterly dividend amount 33% from $.06 to $.08 per share of common stock. The Board may reconsider or revise this policy from time to time based on conditions then existing, including our earnings, cash flows, financial condition and capital requirements, or other factors the Board may deem relevant. We expect to continue to declare and pay dividends in the future, if earnings are available to pay dividends, but we also intend to continue to retain a portion of earnings for reinvestment in our operations and expansion of our business. We cannot assure you 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 our senior notes and our syndicated credit facility contain covenants which, among other things, require us to maintain a minimum net worth, which may restrict our ability to pay dividends. Since our initial public offering in September 1994 through 2005, we have paid between 5% and 25% of earnings to our shareholders as dividends. In 2003, our dividend payments represented 22% of our earnings due to the low earnings in 2003 as a result of the poor economic conditions. In 2006, our dividend payments represented 5% of earnings.

     The following table sets forth certain information with respect to our cash dividends declared during the past two fiscal years:

Date of Declaration		Record Date		Payment Date		Dividends
10/18/06		12/8/06		1/5/07		$.06 per share
7/19/06		8/25/06		9/15/06		$.06 per share
4/19/06		5/26/06		6/16/06		$.05 per share
2/15/06		3/10/06		3/31/06		$.05 per share
10/18/05		12/9/05		1/6/06		$.05 per share
7/20/05		8/12/05		9/2/05		$.05 per share
4/20/05		5/13/05		6/3/05		$.045 per share
2/16/05		3/11/05		4/1/05		$.045 per share

     Although we have not offered any securities for sale in the last three years, we have issued restricted stock on exercise of stock options granted pursuant to the Directors’ Stock Option Plan, as amended, which was approved by shareholders. Proceeds from the exercise of these options were used for working capital. Shares of our common stock were issued only to directors in the following transactions exempt from registration under Sections 4(2) and 4(6) of the Securities Act:

Number of Shares		Exercise Price				Date of Exercise
15,000		$	13.20			11/24/06
3,750		$	17.16			7/20/06
15,000		$	8.56			5/15/05

     Restricted shares of common stock were also issued under the Key-Man Incentive Plan, which we have maintained since 1965. The recipients of the restricted stock are restricted from trading the shares for a period of two years from the date of the grant. There were no proceeds received from the restricted stock granted under the Key-Man Incentive Plan. Shares of our common stock were issued only to a limited number of key employees in the following transactions exempt from registration under Sections 4(2) and 4(6) of the Securities Act:

Number of Shares		Market Value				Date of Grant
5,202		$	42.77			3/1/06
11,164		$	22.00			2/21/05

Item 6. Selected Financial Data.

     We have derived the following selected summary consolidated financial and operating data for the five years ended December 31, 2006 from our audited consolidated financial statements. You should read the information below with our Consolidated Financial Statements, including the notes related thereto, and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

SELECTED CONSOLIDATED FINANCIAL DATA

		Year Ended December 31,
		2006				2005				2004				2003				2002
		(In thousands, except per share data)
Income Statement Data: (1)
Net sales		$	5,742,608			$	3,367,051			$	2,943,034			$	1,882,933			$	1,745,005
Cost of sales			4,231,386				2,449,000				2,110,848				1,372,310				1,268,251
Gross profit			1,511,222				918,051				832,186				510,623				476,754
Operating expenses (2)			876,977				550,411				525,306				430,493				406,479
Operating profit			634,245				367,640				306,880				80,130				70,275
Other income (expense):
Interest expense			(61,692	)			(25,222	)			(28,690	)			(26,745	)			(22,605	)
Other income, net			5,768				3,671				4,168				2,837				3,266
Amortization expense			(6,883	)			(4,125	)			(3,208	)			(2,304	)			(1,355	)
Equity earnings of 50%-owned company			–				–				–				–				263
Minority interest			(306	)			(8,752	)			(9,182	)			938				(124	)
Income before income taxes			571,132				333,212				269,968				54,856				49,720
Provision for income taxes			(216,625	)			(127,775	)			(100,240	)			(20,846	)			(19,553	)
Net income		$	354,507			$	205,437			$	169,728			$	34,010			$	30,167
Earnings per Share:
Income from continuing operations – diluted (3)		$	4.82			$	3.10			$	2.60			$	.53			$	.47
Income from continuing operations – basic (3)		$	4.85			$	3.12			$	2.61			$	.53			$	.48
Weighted average common shares outstanding – diluted (3)			73,600				66,195				65,351				63,733				63,598
Weighted average common shares outstanding – basic (3)			73,134				65,870				64,960				63,706				63,374
Other Data:
EBITDA (4)		$	695,298			$	405,065			$	343,285			$	118,471			$	100,871
Cash flow from operations			190,964				272,219				121,768				107,820				90,638
Capital expenditures			108,742				53,740				35,982				20,909				18,658
Cash dividends per share (3)			.22				.19				.13				.12				.12
Balance Sheet Data (December 31):
Working capital		$	1,124,650			$	513,529			$	458,551			$	341,762			$	390,201
Total assets			3,614,173				1,769,070				1,563,331				1,369,424				1,139,758
Long-term debt (5)			1,088,051				306,790				380,850				469,250				344,080
Shareholders’ equity			1,746,398				1,029,865				822,552				647,619				610,435

		2006				2005				2004				2003				2002
Reconciliation of EBIT and EBITDA:
Income from continuing operations before income taxes		$	571,132			$	333,212			$	269,968			$	54,856			$	49,720
Interest expense			61,692				25,222				28,690				26,745				22,605
EBIT			632,824				358,434				298,658				81,601				72,325
Depreciation expense			55,591				42,506				41,419				34,566				27,191
Amortization expense			6,883				4,125				3,208				2,304				1,355
EBITDA		$	695,298			$	405,065			$	343,285			$	118,471			$	100,871

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

     In 2006, we generated higher revenues, profits and cash flows than our Company has ever experienced. This resulted mainly because of the significant acquisitions that we made in 2006, along with a healthy business environment for our products. We completed four acquisitions in 2006, with EMJ and Yarde Metals being the most significant, adding $1.6 billion to our 2006 consolidated sales. EMJ and Yarde significantly transformed our Company in terms of size, geographic spread and product diversification. We now have a much larger position in the Midwest region of the United States and we have meaningful exposure to the New England and Canadian markets, primarily in specialty products. We also increased our exposure to the energy, oil and gas industry with our acquisition of EMJ. We have already completed the acquisition of three metals service center companies in 2007 that had combined 2006 revenues of approximately $450 million. We continue to focus on growing our Company with accretive acquisitions that enhance our product, geographic and customer diversity.

     In 2006 we also spent $108.7 million on capital expenditures that supported our organic growth, including the expansion of our existing facilities and penetration of new markets. Strong business conditions created some unique opportunities for us in 2006.

     To support our growth, we also completed important financing transactions in 2006. This included a tender offer to purchase approximately $250 million of 9.75% senior secured notes issued by EMJ, replacing our $700 million credit facility with a new five-year, unsecured $1.1 billion syndicated credit facility, and issuing $600 million of senior unsecured notes with $350 million of ten-year notes at 6.20% and $250 million of thirty-year notes at 6.85%. These activities lowered our cost of capital and significantly increased our ability to fund our existing operations and provide for future growth.

     Demand for most products that we sell was strong throughout 2006, most significantly for products that we sell to the non-residential construction, aerospace and energy markets. Pricing was also strong for most products that we sell. Carbon steel products have been at relatively high levels since 2004. Although pricing declined somewhat in the fourth quarter of 2006 from earlier in the year due to increased imports and inventory destocking at the distributor level, we expect this to have only a temporary impact on pricing. Carbon steel prices are not at the record levels experienced in 2004; however, fluctuations in pricing have moderated at these higher levels. Pricing for aluminum products was steady to up slightly in 2006; at high levels compared to historical prices, especially for aerospace products. Stainless steel prices reached unprecedented levels in 2006 and have continued to rise in 2007. This is primarily due to a global shortage of nickel resulting from mine closures. We expect stainless steel prices to decline from current levels but we are uncertain as to the timing or severity of the declines.

     Because of the overall healthy demand in 2006, we were typically able to increase our selling prices for most products at a rate equal to or above our cost increases. However, pressures on carbon steel pricing during the fourth quarter of the year resulted in reduced gross profit margins for these products during that time.

     We are proud of our record 2006 financial results. In addition to profitability, we focus on working capital management which allows us to generate cash flow to further expand and strengthen our business and reduce debt during most environments. Our 2006 cash flow from operations was very strong, reflecting the quality of our earnings. We completed four acquisitions in 2006, grew our existing operations, and continued to evaluate opportunities that would allow us to improve our profitability.

     We believe the steps that we took during the difficult years of 2001 through 2003 positioned us to take full advantage of the improved economic conditions we have experienced since 2004. However, as evidenced by our performance during the difficult years, we take the necessary actions to allow us to operate efficiently and profitably even in less favorable economies. We believe this is because of our focus on cost controls and inventory turnover and our product, customer and geographic diversification. Our product and geographic diversification should continue to benefit us in 2007. We are optimistic about business conditions in 2007. Significant declines in demand or pricing for our products, although not expected, could reduce our gross profit margins. Also, if we cannot obtain a sufficient supply of metals for our customers in 2007, or if domestic availability of our products increases significantly in 2007, this could negatively impact our 2007 financial results, especially as compared to our 2006 results.

     Customer demand can have a significant impact on our results of operations. When volume increases, our revenue dollars increase, which contributes to increased gross profit dollars. Variable costs may also increase with volume including increases in

our warehouse, delivery, selling, general and administrative expenses. Conversely, when volume declines, we typically produce fewer revenue dollars which can reduce our gross profit dollars. We can reduce certain variable expenses when volumes decline, but we cannot easily reduce our fixed costs.

     Pricing for our products can have a more significant impact on our results of operations than customer demand levels. As pricing increases, so do our revenue dollars. Our pricing usually increases when the cost of our materials increases. If prices increase and we maintain the same gross profit percentage, we generate higher levels of gross profit and pre-tax income dollars. Conversely, if pricing declines, we will typically generate lower levels of gross profit and pre-tax income dollars. Because changes in pricing do not require us to adjust our expense structure, the impact on our results of operations is much greater than the effect of volume changes.

     Also, when volume or pricing increases, our working capital requirements typically increase, which may require us to increase our outstanding debt. This could increase our interest expense. When our customer demand falls, we can typically generate strong levels of cash flow from operations as our working capital needs decrease.

2006 Acquisitions

     On August 1, 2006 we acquired Yarde Metals, Inc., a metals service center company headquartered in Southington, Connecticut. We paid $100 million in cash and assumed approximately $101 million of net debt for all of the outstanding common stock of Yarde Metals. Yarde Metals was founded in 1976 and specializes in the processing and distribution of stainless steel and aluminum plate, rod and bar products. Yarde Metals has additional metals service centers in Pelham, New Hampshire; East Hanover, New Jersey; Hauppauge, New York; High Point, North Carolina; Streetsboro, Ohio; and Limerick, Pennsylvania and a sales office in Ft. Lauderdale, Florida. Yarde’s net sales for the five months ended December 31, 2006 were approximately $181.7 million.

     On April 3, 2006 we completed the acquisition of Earle M. Jorgensen Company (“EMJ”) which was our first acquisition of a public company. EMJ, headquartered in Lynwood, California, is one of the largest distributors of metal products in North America with 40 service and processing centers. The transaction was valued at approximately $984 million, including the assumption of EMJ’s net debt. We paid $6.50 in cash and issued .1784 of a share of Reliance common stock for each share of EMJ common stock outstanding. This also was the first acquisition where we used our stock as consideration. EMJ’s net sales for the nine months ended December 31, 2006 were approximately $1.45 billion.

     On March 27, 2006, through Precision Strip, Inc. (“Precision Strip”), a wholly-owned subsidiary, we completed the acquisition of certain assets and business of Flat Rock Metal Processing, L.L.C. (“Flat Rock”). The Flat Rock toll processing business in Perrysburg, Ohio and Portage, Indiana, are operated by Precision Strip.

     In January 2006, we purchased the remaining 49.5% of American Steel, L.L.C. From its inception on July 1, 1995 through April 30, 2002, we owned a 50% interest in the Membership Units of American Steel, which operates metals service centers in Portland, Oregon and Kent, Washington and processes and distributes primarily carbon steel products. We retained operating control over the assets and operations of American Steel and American Industries, Inc. owned the other 50% interest. Effective May 1, 2002, we increased our ownership to 50.5% of the outstanding Membership Units of American Steel and began consolidating its financial results. We now own 100% of American Steel.

     In October 2005, we formed Reliance Pan Pacific Pte., Ltd. (“RPP”) with our joint venture partner Manufacturing Network Pte. Ltd. (“MNPL”). We own 70% of RPP and MNPL owns the remaining 30%. On March 1, 2006, RPP acquired 100% of the outstanding equity interest in Everest Metals (Suzhou) Co., Ltd. (“Everest Metals”), a metals service center company near Shanghai, People’s Republic of China. Everest Metals was previously wholly owned by MNPL. Everest Metals sells aluminum products to the Chinese electronics market and had sales for the ten months ended December 31, 2006 of approximately $5.8 million.

Recent Developments

     As of February 1, 2007 we acquired the net assets and business of the Encore Group of metals service center companies (Encore Metals, Encore Metals (USA), Inc., Encore Coils and Team Tube in Canada) headquartered in Edmonton, Alberta, Canada. Encore was organized in 2004 in connection with the buyout by management and a private equity fund managed by HSBC Capital (Canada) Inc. of certain former Corus CIC and Corus America businesses. Encore specializes in the processing and distribution of alloy and carbon bar and tube, as well as stainless steel sheet, plate and bar and carbon steel flat-rolled products, through its 17 facilities located mainly in Western Canada. Encore’s unaudited net sales for the year ended

December 31, 2006 were approximately C$259 million. We acquired the Encore Group assets through RSAC Canada Limited, our wholly-owned Canadian subsidiary, and RSAC Canada (Tube) ULC, its wholly-owned subsidiary.

     On January 2, 2007, we acquired the capital stock of Crest Steel Corporation (“Crest”), a metals service center company headquartered in Carson, California with facilities in Riverside, California and Phoenix, Arizona. Crest was founded in 1963 and specializes in the processing and distribution of carbon steel products including flat-rolled, plate, bars and structurals. Crest’s unaudited net sales for the year ended December 31, 2006 were approximately $133 million. Crest operates as a subsidiary of RSAC Management Corp., a wholly-owned subsidiary of the Company.

     Also, on January 2, 2007, our wholly-owned subsidiary, Siskin Steel & Supply Company, Inc., acquired Industrial Metals and Surplus, Inc. (“Industrial Metals”) a metals service center company headquartered in Atlanta, Georgia and a related company, Athens Steel, Inc. located in Athens, Georgia. Industrial Metals was founded in 1978 and specializes in the processing and distribution of carbon steel structurals, flat-rolled and ornamental iron products. Industrial Metals’ unaudited net sales (including Athens Steel) for the year ended December 31, 2006 were approximately $105 million. Athens Steel, Inc. was merged with and into Industrial Metals, which now operates as a wholly-owned subsidiary of Siskin. Siskin’s Georgia Steel Supply Company division located in Atlanta will be combined with the Industrial Metals operation.

Other Developments

     In 2006, we experienced substantial organic growth by opening new facilities, building or expanding facilities and adding processing equipment. In 2006, Liebovich Bros. opened a new location near Green Bay, Wisconsin to further penetrate that geographic area and expanded its Cedar Rapids, Iowa location. Phoenix Metals Company opened a new location near Philadelphia, Pennsylvania in 2006 as a new entry into that geographic region. Phoenix Metals also relocated an existing operation to a new, larger more efficient facility in Birmingham, Alabama; is building a new facility for its Charlotte, North Carolina operation; and is adding processing equipment in both of these locations to better support its customers in those areas. Allegheny Steel Distributors expanded its Indianola, Pennsylvania facility to make room for additional equipment to help support its increased business. Siskin Steel & Supply Company is expanding its Chattanooga, Tennessee warehouse. Precision Strip is expanding its Talladega, Alabama facility and added processing equipment in its Talladega and Bowling Green, Kentucky locations in 2006. Also in 2006, Toma Metals, Inc. expanded its Johnstown, Pennsylvania facility and Service Steel Aerospace relocated its United Alloys Aircraft Metals division to a larger facility near Los Angeles, California. Earle M. Jorgensen Company opened a satellite location in Lafayette, Louisiana in April 2006 and relocated its Portland, Oregon operation to a new, larger more efficient facility in early 2007. EMJ also expanded its Kansas City facility in 2006. AMI Metals Europe, S.P.R.L. expanded its warehouse facility in Belgium to better service its increased share of the European aerospace business. In 2006, Valex Korea Co., Ltd., a 99%-owned subsidiary of Valex Corp., based near Seoul, South Korea, expanded its facility. The current environment supports strong organic growth and we expect to continue to expand our business in 2007 by continuing to build and expand facilities and add processing equipment.

     Due to the increased size of our Company, late in 2006 we recapitalized the Company by issuing $600 million of debt securities, increasing the availability of our new credit facility to $1.1 billion, and repurchasing approximately $250 million of outstanding 9.75% senior secured notes of EMJ. These activities lowered our cost of capital and provide for our future growth.

Results of Operations

     The following table sets forth certain income statement data for each of the three years in the period ended December 31, 2006 (dollars are shown in thousands and certain amounts may not calculate due to rounding):

		2006								2005								2004
						% of								% of								% of
		$				Net Sales				$				Net Sales				$				Net Sales
Net sales		$	5,742,608				100.0	%		$	3,367,051				100.0	%		$	2,943,034				100.0	%
Gross profit			1,511,222				26.3				918,051				27.3				832,186				28.3
S,G&A expenses			821,386				14.3				507,905				15.1				483,887				16.4
Depreciation expense			55,591				1.0				42,506				1.3				41,419				1.4
Operating profit (1)		$	634,245				11.0	%		$	367,640				10.9	%		$	306,880				10.4	%

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

     Net Sales. Our 2006 consolidated net sales were a record $5.74 billion, an increase of 70.6%, compared to $3.37 billion in 2005. Our acquisitions of EMJ and Yarde Metals in 2006 contributed significantly to our increased sales levels. Our 2006 sales include an increase in our tons sold of 44.6% and an increase in our average selling price per ton sold of 19.7% (the tons sold and average selling price per ton sold exclude amounts related to Precision Strip). Same-store sales, which exclude the sales of our 2005 and 2006 acquisitions, were $3.75 billion in 2006, up 15.9% from 2005, with a 6.1% increase in our tons sold and a 9.8% increase in our average selling price per ton sold.

     Our 2006 tons sold increased significantly because of our acquisitions but also increased on a same-store basis due to strong demand throughout the year in most end markets that we sell to. Our average selling price per ton sold was up because of a shift to a greater percentage of higher-value products due to our 2006 acquisitions and because of increased pricing for most products that we sell compared to 2005 levels, especially for stainless steel products. The acquisitions of EMJ and Yarde Metals significantly increased our stainless steel exposure with sales of stainless and alloy steel products representing 23% of our 2006 sales, compared to 15% of our 2005 sales.

     Gross Profit. Our total gross profit of $1.51 billion, up 64.6% from 2005, increased mainly because of our higher net sales level in 2006. Our gross profit as a percentage of sales was 26.3% in 2006, down from 27.3% in 2005. In 2006 our gross profit margins declined somewhat due to our acquisitions and because of competitive pressure on sales of carbon steel products late in the year. Our 2006 same-store gross profit margin was 27.6%. Also, our 2006 LIFO expense was significantly higher than in 2005. We recorded LIFO expense, which is included in our cost of sales, of $94.1 million during 2006, compared to $16.6 million in 2005. Our LIFO expense in 2006 resulted mainly from the increased costs of stainless steel and aluminum products and higher quantities of inventory on hand at year-end compared to the beginning of the year because of improved demand levels for most products.

     Expenses. Warehouse, delivery, selling, general and administrative expenses (“S,G&A expenses”) for 2006 increased $313.5 million, or 61.7% from 2005 mainly due to our 2005 and 2006 acquisitions and additional selling expenses from our increased sales levels. The expenses as a percent of sales in 2006 were 14.3% compared to 15.1% in the 2005 period. The decrease in our S,G&A expenses as a percentage of sales was due mainly to our increased sales and effective expense control.

     Depreciation expense increased $13.1 million in 2006 mainly because of our 2005 and 2006 acquisitions and because of depreciation of our 2006 capital expenditures. Our amortization expense increased $2.8 million in 2006 mainly because of our 2006 acquisitions.

     Operating Profit. Operating profit, calculated as gross profit less S,G&A expenses and depreciation expense, was $634.2 million in 2006, resulting in an operating profit margin of 11.0%, compared to 2005 operating profit of $367.6 million and an operating profit margin of 10.9%. The increased profit is mainly due to higher gross profit dollars resulting from increased sales levels, along with our effective expense control.

     Other Income and Expense. Interest expense was $61.7 million in 2006 compared to $25.2 million in 2005. The increase was mainly due to increased borrowings to fund our 2006 acquisitions.

     Minority interest expense decreased in 2006 compared to 2005 mainly due to our purchase of the remaining 49.5% minority interest in American Steel, L.L.C. Effective January 3, 2006, we own 100% of American Steel. Because of this change in ownership, we no longer record minority interest expense for American Steel. Our 2006 minority interest expense consists of the net income for the approximately 3% of Valex Corp. and the 1% of Valex Korea that we do not own, and also for the 30% of Everest Metals that we do not own.

     Income Tax Rate. Our effective income tax rate was 37.9% in 2006, down from 38.3% in 2005, mainly due to slightly higher international profits that are taxed at lower rates and tax benefits carried over from EMJ.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

     Net Sales. Our 2005 consolidated net sales were $3.37 billion, an increase of 14.4%, compared to $2.94 billion in 2004. This increase includes the additional sales from Chapel Steel of $130.7 million that we acquired in July 2005. Our increased sales include an increase in our tons sold of 1.8% and an increase in our average selling price per ton sold of 12.5%. Same-store sales, which exclude the sales of Chapel Steel, were $3.24 billion in 2005, up 10% from 2004, with a 3.9% decrease in our tons sold and a 14.4% increase in our average selling price per ton sold.

     Our 2005 volume increased due to the added sales of Chapel Steel, however, on a same-store basis, our 2005 volume was down from 2004 mainly because of the heavy buying that occurred in 2004 when our customers were trying to build inventory ahead of the significant carbon steel price increases. Because carbon steel prices were declining for most of 2005, our customers were not building inventory until late in the 2005 third quarter. We experienced demand improvement beginning late in the 2005 third quarter that continued throughout the fourth quarter. This was due to improved end markets for most products we sell, with non-residential construction and aerospace being significant contributors to the strong end market demand.

     Our average selling price per ton sold was higher in 2005 than in 2004 mainly because of increased costs for most products that we sell and due to a small shift in product mix to a higher percentage of aluminum and stainless steel products as compared to 2004. Although carbon steel costs declined during the first eight months of 2005, the 2005 average cost for the full year remained above the 2004 average. Aluminum and stainless steel costs began increasing in 2004 and continued to increase throughout 2005, with significant and rapid increases in the costs of aerospace products. The improved demand for aerospace products resulted in a slight shift in product mix to higher-priced products that contributed to our increased average selling prices in 2005.

     Gross Profit. Our total gross profit of $918.1 million, up 10.3% from 2004, increased mainly because of our higher net sales amount in 2005. Our gross profit as a percentage of sales was 27.3% in 2005, down from 28.3% in 2004. In 2005 our gross profit margins declined mainly because of the pressure on our selling prices for carbon steel products resulting from lower costs, especially compared to 2004 when we experienced high profitability levels for these products because of limited availability and significant cost increases. Gross profit margins for aerospace related products were higher in 2005 because we were able to increase our selling prices ahead of our costs. The acquisition of Chapel Steel lowered our gross profit margin somewhat, as its business is more of a wholesale distribution business that operates at a lower gross profit margin than our consolidated average. Our 2005 same-store gross profit margin was 27.7%. Also, our 2005 LIFO expense was significantly lower than in 2004 primarily due to decreases in carbon steel costs, with the impact somewhat offset by the rising costs of aerospace products. We recorded LIFO expense of $16.6 million during 2005, compared to $110.8 million in 2004. Most of our 2005 LIFO expense was due to increased costs for aerospace related aluminum, titanium, and stainless steel products.

     Expenses. S,G&A expenses for 2005 increased $24.0 million, or 5.0% from 2004. The expenses as a percent of sales in 2005 were 15.1% compared to 16.4% in the 2004 period. The dollar increase in S,G&A expenses was mostly because Chapel Steel was included beginning in the third quarter, as well as general cost increases. The decrease in our S,G&A expenses as a percentage of sales was due mainly to our increased sales levels and because Chapel Steel’s S,G&A expenses are lower than the Company’s average as a percentage of sales.

     Depreciation expense increased $1.1 million in 2005 because of the additional expense from Chapel Steel and expense on our 2005 fixed asset additions. Amortization expense increased $0.9 million in 2005 primarily due to the write-off of financing costs related to our $335 million syndicated credit facility that we replaced in June of 2005 and because of the amortization expense from Chapel Steel.

     Operating Profit. Operating profit was $367.6 million in 2005, resulting in an operating profit margin of 10.9%, compared to 2004 operating profit of $306.9 million and an operating profit margin of 10.4%. The improvement resulted from our higher sales levels that provided increased operating profit dollars in 2005, along with our healthy gross profit margins and lower S,G&A expenses as a percentage of sales, as discussed above.

     Other Income and Expense. Interest expense was $25.2 million in 2005 compared to $28.7 million in 2004. The decrease was mainly due to lower borrowing levels because of the increased cash flow from operations that we generated in 2005. Our 2005 interest expense includes interest on our borrowings of approximately $111 million to fund the acquisition of Chapel Steel on July 1, 2005, which we had fully repaid as of December 31, 2005.

     Minority interest expense decreased in 2005 compared to 2004 mainly because we purchased the remaining 30.5% interest in Valex Korea from our partner in July 2004. The 2005 minority interest expense represents the net income attributed to the 49.5% of American Steel, L.L.C that we did not own.

     Income Tax Rate. Our effective income tax rate was 38.3% in 2005, up from 37.1% in 2004, mainly due to an increase in our state rate because of shifts in the geographic composition of our 2005 income, resulting mainly from our acquisition of Chapel Steel and the increased profitability from our locations that serve the aerospace market.

Liquidity and Capital Resources

     At December 31, 2006, our working capital was $1.12 billion, up from $513.5 million at December 31, 2005. The overall increase was primarily from the additional working capital of EMJ and Yarde Metals. Excluding the initial effect of acquisitions, the increase in working capital is mainly due to an increase in our accounts receivable of $50.6 million and an increase in our inventory of $89.4 million, resulting from improved demand and pricing that we experienced for most of our products in 2006 as compared to 2005.

     To manage our working capital, we focus on our days sales outstanding to monitor accounts receivable and on our inventory turnover rate to monitor our inventory levels, as receivables and inventory are our two most significant elements of working capital. As of December 31, 2006, our days sales outstanding were approximately 41 days, up slightly from our December 31, 2005 rate of 40 days. (We calculate our days sales outstanding as an average of the most recent two-month period.) Our inventory turn rate at December 31, 2006 was about 4.4 times (or 2.7 months on hand), down from 5.7 times during 2005, but still at a level well above the industry average of 3.3 months on hand. Our 2006 inventory turn rate was negatively impacted by our acquisitions of EMJ and Yarde Metals because they carry many products that do not typically turn at rates as high as many of our other products. Although we do not expect EMJ and Yarde Metals to turn their inventory at the same rate as most of our other businesses, we do expect improvement from current levels. Excluding the effect of EMJ and Yarde Metals, our inventory turn for 2006 was 4.9 times. As demand and pricing for our products increase or decrease, our working capital needs increase or decrease, respectively. We expect to finance increases in our working capital needs through operating cash flow or with borrowings on our syndicated credit facility.

     Our primary sources of liquidity are generally from internally generated funds from operations and our revolving line of credit. Cash flow provided by operations decreased to $191.0 million in 2006 compared to $272.2 million in 2005. Although our 2006 cash flow from operations was strong, it was down from 2005 primarily due to the additional working capital requirements in 2006 that resulted from increased demand and pricing.

     Our outstanding debt (including capital lease obligations) at December 31, 2006 was $1.1 billion, up from $356.9 million at 2005 year-end, mainly due to the financing of our 2006 acquisitions. At December 31, 2006, we had $203 million borrowed on our $1.1 billion revolving line of credit, which includes $49 million to pay off private placement notes that matured. Our net debt-to-total capital ratio was 37.6% at December 31, 2006, up from our year-end 2005 rate of 23.8% (net debt-to-total capital is calculated as total debt, net of cash, divided by shareholders’ equity plus total debt, net of cash). On January 2, 2007 we paid off a $20 million private placement note that matured and funded our acquisitions of Crest and Industrial Metals with borrowings on our credit facility. On February 1, 2007, we borrowed additional funds under our credit facility for the purchase of the net assets and business of the Encore Group.

     During 2006 we used our borrowings and operating cash flow to fund our increased working capital needs, capital expenditures of approximately $108.7 million and acquisitions of approximately $542.6 million. The acquisitions include the purchase of the remaining interest in American Steel, the purchase of the assets and business of Flat Rock, the purchase of Everest Metals through our 70% interest in Reliance Pan Pacific, the cash portion of the purchase of EMJ, and the purchase of Yarde Metals.

     On April 3, 2006, we completed our acquisition of EMJ with a transaction value of approximately $984 million. We funded the purchase with $368.9 million of cash through our credit facility and issued approximately 9 million shares of our common stock at a value of $360.5 million in equity. We assumed approximately $252.9 million of EMJ’s debt, $250 million of which was 9.75% senior secured notes that were to mature in 2012 with the first call date on June 1, 2007 at 104.875% of face value. The $250 million EMJ senior notes were subsequently purchased in November 2006 as discussed later in this section. The cash portion of the purchase of EMJ included the cash out of certain EMJ stock option holders for consideration of approximately $29.5 million. We also assumed an EMJ stock option plan with options to purchase 287,886 Reliance shares and an EMJ obligation to contribute 258,006 shares of our common stock to an EMJ retirement plan. We contributed 78,288 shares to the plan during 2006 and paid out $0.4 million in lieu of 9,686 shares. At December 31, 2006 the remaining obligation consisted of the cash equivalent of 170,032 shares of Reliance common stock to be contributed to a phantom stock plan supplementing the EMJ retirement plan.

     We obtained amendments from our bank group and private placement note holders to assume the EMJ secured debt. The EMJ indenture included a change-of-control provision that allowed the note holders to put their notes to EMJ at 101% of face value. We increased our syndicated credit facility from $600 million to $700 million upon closing of the EMJ transaction to provide adequate financing if the note holders were to all put their notes to EMJ. Under the change of control provision, $5,000 of notes were tendered and purchased in May 2006.

     On July 31, 2006, we entered into a 364-day $100 million credit facility to provide adequate funding for our purchase of Yarde Metals on August 1, 2006 and to allow us to meet our working capital needs.

     On October 12, 2006, EMJ made a cash tender offer to purchase any and all of its outstanding 9.75% senior secured notes and solicited consent to amend the indenture governing the notes to eliminate substantially all of the restrictive covenants and security interests in EMJ’s assets. The tender offer expired November 9, 2006 with sufficient notes tendered (approximately $249.7 million) to effect the requested amendments. The tender offer was made pursuant to the terms set forth in that Offer to Purchase and Consent Solicitation Statement that was filed by the Company with the SEC on a Current Report on Form 8-K on October 16, 2006. The total consideration for the EMJ notes was $1,069.85 per $1,000 principal amount of the notes, including a $20.00 payment (a “Consent Payment”), payable to the noteholders who validly consented to the amendments. Holders who validly tendered their notes after the consent date were not eligible to receive the Consent Payment. In addition, all holders whose notes were purchased pursuant to the tender offer were paid accrued and unpaid interest on their purchased notes up to, but not including, the settlement date of November 9, 2006. The Company funded the purchase of tendered notes through its syndicated credit facility. Notes with a total principal amount of $249.7 million were tendered and purchased, which had an aggregate carrying value of approximately $269.5 million, inclusive of unamortized debt premium. The gain from this debt extinguishment of approximately $2.3 million has been included in the Other income, net caption of the statement of operations.

     We funded the purchase of tendered notes through our increased, unsecured syndicated credit facility of $1.1 billion that replaced the $700 million and $100 million existing bank credit lines. Our five-year $1.1 billion credit facility, which can be increased to $1.6 billion with the approval of our lenders, is with fifteen lenders and included improved pricing and flexibility compared to the $700 million facility.

     Following the redemption of the EMJ senior secured notes and the placement of our increased credit facility, on November 20, 2006, we entered into an Indenture (the “Indenture”), for the issuance of $600 million of unsecured debt securities which are guaranteed by all of our direct and indirect, wholly-owned domestic subsidiaries and any entities that become such subsidiaries during the term of the Indenture (collectively, the “Subsidiary Guarantors”). None of our foreign subsidiaries or our non-wholly-owned domestic subsidiaries is a guarantor. The total debt issued was comprised of two tranches, (a) $350 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.20% per annum, maturing on November 15, 2016 and (b) $250 million aggregate principal amount of senior unsecured notes bearing interest at the rate of 6.85% per annum, maturing on November 15, 2036. The notes are senior unsecured obligations and rank equally with all of our other existing and future unsecured and unsubordinated debt obligations. At our option, we may redeem all or part of the notes of either series at any time prior to their maturity by paying a redemption price equal to the greater of 100% of the aggregate principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments (as defined in the Indenture), plus, in each case, accrued and unpaid interest thereon to, but not including, the redemption date.

     Our 2006 financing activities lowered our cost of capital and significantly increased our availability to fund our working capital and general corporate needs, including acquisitions.

     At December 31, 2006, we also have $298 million of outstanding senior unsecured notes issued in private placements of debt. The outstanding senior notes bear interest at an average fixed rate of 6.08% and have an average remaining life of 3.8 years, maturing from 2007 to 2013. In 2007, $20 million of these notes will mature. Our $1.1 billion syndicated credit facility and our senior notes require that we maintain a minimum net worth and interest coverage ratio, and a maximum leverage ratio and include change of control provisions, among other things.

     Upon our acquisition of Chapel Steel, we assumed noncancelable capital leases related to three buildings with terms expiring at various years through 2018. At December 31, 2006, total obligations under these capital leases were $5.5 million. All three leases were with related parties of Chapel Steel.

     Capital expenditures, excluding acquisitions, were $108.7 million for the 2006 year. Our 2007 capital expenditures are currently budgeted at approximately $130 million, excluding acquisitions. Our 2007 budget includes several growth initiatives to expand or relocate existing facilities and to add or upgrade equipment. Any capital expenditure commitments that existed at December 31, 2006 are included in the below table of contractual obligations. Our capital and operating lease commitments are discussed in Note 13 of the Notes to Consolidated Financial Statements and are also included in the contractual obligations table below. Our capital requirements are primarily for working capital, acquisitions, debt repayments and capital expenditures for continued improvements in plant capacities and materials handling and processing equipment.

     On May 17, 2006 our Board of Directors declared a two-for-one stock split, in the form of a 100% stock dividend on our common stock and a 20% increase in the dividend rate. The common stock split was effected by issuing one additional share of common stock for each share held by shareholders of record on July 5, 2006. The additional shares were distributed on July 19, 2006.

On February 14, 2007, our Board of Directors declared a 33% increase in the regular quarterly cash dividend to $.08 per share of common stock.

     In May 2005, our Board of Directors amended and restated our stock repurchase program authorizing up to an additional 12 million shares of our common stock to be repurchased. Repurchased shares are treated as authorized but unissued shares. As of December 31, 2006, and prior to the additional authorization in May 2005, we had repurchased a total of 11 million shares of our common stock under this plan, at an average cost of $7.47 per share. We have not repurchased any shares of our common stock since 2000. We believe such purchases, given appropriate circumstances, enhance shareholder value and reflect our confidence in the long-term growth potential of our Company. Proceeds from the issuance of common stock upon the exercise of stock options during 2006 were $7.1 million.

     We anticipate that funds generated from operations and funds available under our $1.1 billion credit facility will be sufficient to meet our working capital, capital expenditure and senior debt repayment needs in the near term. We also anticipate that we will be able to fund acquisitions with borrowings under our line of credit.

Contractual Obligations and Other Commitments

     The following table summarizes our contractual cash obligations as of December 31, 2006. Certain of these contractual obligations are reflected on our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States.

		Payments due by Year
		(in thousands)
						Less than												More than
Contractual Obligations		Total				1 year				1-3 years				3-5 years				5 years
Long Term Debt Obligations(1)		$	1,107,697			$	22,257			$	67,790			$	341,500			$	676,150
Capital Lease Obligations			6,557				780				1,560				1,560				2,657
Operating Lease Obligations			210,179				41,219				61,226				38,996				68,738
Purchase Obligations –Other (2)			149,856				93,272				51,464				2,384				2,736
Other Long-Term Liabilities Reflected on the Balance Sheet under GAAP (3)			42,614				7,237				5,619				4,735				25,023
Total		$	1,516,903			$	164,765			$	187,659			$	389,175			$	775,304

     Contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding on our Company and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current needs and are typically fulfilled by our vendors within short time periods. In addition, some of our purchase orders represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of goods specifying minimum quantities and set prices that exceed our expected requirements for three months. Therefore, agreements for the purchase of goods and services are not included in the table above except for certain purchases where we have significant lead times or corresponding long-term sales commitments, typically for aerospace materials.

     The expected timing of payments of the obligations above is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.

Inflation

     Our operations have not been, and we do not expect them to be, materially affected by general inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in metal prices.

Seasonality

     Some of our customers may be in seasonal businesses, especially customers in the construction industry. As a result of our geographic, product and customer diversity, however, our operations have not shown any material seasonal trends. Revenues in the months of July, November and December traditionally have been lower than in other months because of a reduced number of working days for shipments of our products, resulting from vacation and holiday closures at some of our customers. We cannot assure you 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.

Goodwill

     Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $784.9 million at December 31, 2006, or approximately 21.7% of total assets or 44.9% of consolidated shareholders’ equity. Under Statement of Financial Accounting Standards (“SFAS” or “Statement”) No. 142, Goodwill and Other Intangible Assets, goodwill deemed to have indefinite lives is no longer amortized but is subject to annual impairment tests in accordance with the Statement. Other intangible assets continue to be amortized over their useful lives. We review the recoverability of goodwill annually or whenever significant events or changes occur which might impair the recovery of recorded costs. We measure possible impairment based on either significant losses of an entity or the ability to recover the balance of the long-lived asset from expected future operating cash flows on an undiscounted basis. If impairment is identified, we would calculate the amount of such impairment based upon the discounted cash flows or the market values as compared to the recorded costs. We have performed tests of goodwill as of November 1, 2005 and 2006, and believe that the recorded amounts for goodwill are recoverable and that no impairment currently exists.

Critical Accounting Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical accounting estimates include those related to accounts receivable, inventories, income taxes, goodwill and intangible assets and long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

     We believe the following critical accounting estimates, as discussed with our Audit Committee, affect our more significant judgments and estimates used in preparing our consolidated financial statements. (See Note 1 of the Notes to Consolidated Financial Statements for our Summary of Significant Accounting Policies.) There have been no material changes made to the critical accounting estimates during the periods presented in the Consolidated Financial Statements. We also have other policies that we consider key accounting policies, such as for revenue recognition, however these policies do not require us to make subjective estimates or judgments.

     Accounts Receivable

We maintain an allowance for doubtful accounts to reflect our estimate of the uncollectibility of accounts receivable based on an evaluation of specific potential customer risks. Assessments are based on legal issues (bankruptcy status), our past collection history, current financial and credit agency reports, and the experience of our credit personnel. Accounts which we determine to be uncollectible are reserved for or written off in the period in which the determination is made. Additional reserves are maintained based on our historical and estimated future bad debt experience. If the financial condition of our customers were to deteriorate beyond our estimates, resulting in an impairment of their ability to make payments, we might be required to increase our allowance for doubtful accounts.

Inventories

We maintain allowances for estimated obsolescence or unmarketable inventory to reflect the difference between the cost of inventory and the estimated market value based on an evaluation of slow moving products and current replacement costs. If actual market conditions are less favorable than those anticipated by management, additional allowances may be required.

Income Taxes

We currently have significant deferred tax assets, which are subject to periodic recoverability assessments. Realizing our deferred tax assets principally depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.

For information regarding our provision for income taxes as well as information regarding differences between our effective tax rate and statutory rates, see Note 9 of the Notes to Consolidated Financial Statements. Our tax rate may be affected by future acquisitions, changes in the geographic composition of our income from operations, changes in our estimates of credits or deductions including those that may result from the American Jobs Creation Act of 2004, changes in our assessment of tax exposure items, and the resolution of issues arising from tax audits with various tax authorities.

Goodwill and Intangible Assets

In assessing the recoverability of our goodwill and other intangibles we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. We have performed impairment testing in accordance with SFAS No. 142. We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill is impaired. Our impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. We estimate the reporting unit’s fair value based on a discounted future cash flow approach that requires us to estimate income from operations based on historical results and discount rates based on a weighted average cost of capital of comparable companies. A key assumption made is that, in general, our revenues will grow at 3% to 5% per year, adjusted for the current economic outlook. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded.

Long-Lived Assets

We review the recoverability of our long-lived assets as required by SFAS No. 144 and must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded.

Impact of Recently Issued Accounting Standards

     In April 2005, the United States Securities and Exchange Commission (“SEC”) approved a new rule that delayed the effective date of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. Except for this deferral of the effective date, the guidance in SFAS No. 123R was unchanged. Under the SEC’s rule, SFAS No. 123R became effective for us for annual, rather than interim, periods that began after June 15, 2005. We began applying this Statement to all awards granted on or after January 1, 2006 and to awards modified, repurchased, vested or cancelled after that date. The stock-based compensation expense in accordance with FAS 123R was $6,060,000 for the year ended December 31, 2006 recorded in Warehouse, delivery, selling, general and administrative expense caption of our Consolidated Statement of Income. The implementation of this standard is further discussed in Note 10, Stock Option Plans.

     In July 2006, the FASB issued Interpretation No. 48 (“FIN No. 48”) Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006, or as of January 1, 2007 for us. Although we are currently under audit by various tax authorities, we do not believe the adoption of FIN No. 48 will have a material impact on our beginning retained earnings.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 is not expected to have a material impact on our financial position, results of operations or cash flows.

     In September 2006 the FASB also issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132(R). This Standard requires recognition of the funded status of a benefit plan in the statement of financial position. The Standard also requires recognition in other comprehensive income of certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. SFAS No. 158 provides recognition and disclosure elements to be effective as of the end of the fiscal year after December 15, 2006 and measurement elements to be effective for fiscal years ending after December 15, 2008. We adopted the recognition provisions of SFAS No. 158 and applied them to the funded status of our defined benefit and postretirement plans as of December 31, 2006. The initial recognition of the funded status of our defined benefit and postretirement plans resulted in a decrease in Shareholders’ Equity of $3.7 million, which was net of a tax benefit of $2.3 million. The implementation of this standard is further discussed in Note 11, Employee Benefit Plans.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

     In the ordinary course of business, we are exposed to various market risk factors, including changes in general economic conditions, domestic and foreign competition, foreign currency exchange rates, and metals pricing and availability.

Commodity price risk

     Metal prices are volatile due to, among other things, fluctuations in foreign and domestic production capacity, raw material availability, metals consumption and foreign currency rates. Decreases in metal prices could adversely affect our revenues, gross profit and net income. Because we primarily purchase and sell in the “spot” market (i.e., without long-term contracts) we are able to react quickly to changes in metals pricing.

Foreign exchange rate risk

     Because we have foreign operations, we are exposed to foreign currency exchange gains and losses. Volatility in these markets could impact our net income. Based on our limited foreign operations and the currencies in which they transact business, we do not consider this risk to be material.

Interest rate risk

     We are exposed to market risk related to our fixed-rate and variable-rate long-term debt. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. Changes in interest rates may affect the market value of our fixed-rate debt. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes and we do not currently anticipate repayment of our fixed-rate long-term debt prior to its scheduled maturities.

     Market risk related to our variable-rate debt is estimated as the potential decrease in pretax earnings resulting from an increase in interest rates. Based on $203 million of variable-rate debt outstanding on our syndicated credit facility as of December 31, 2006, a hypothetical one percent increase in interest rates would not result in a material impact to earnings.

Item 8. Financial Statements and Supplementary Data.

RELIANCE STEEL & ALUMINUM CO.

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

		Page
Report of Independent Registered Public Accounting Firm			41
Consolidated Balance Sheets at December 31, 2006 and 2005			42
Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004			43
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004			44
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004			45
Notes to Consolidated Financial Statements			46
Quarterly Results of Operations (Unaudited)			80
FINANCIAL STATEMENT SCHEDULE:
Schedule II – Valuation and Qualifying Accounts			81

     All other schedules are omitted because either they are not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. 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, presents fairly in all material respects the information set forth therein.

     As discussed in Note 1 to the consolidated financial statements, Reliance Steel & Aluminum Co. changed its method of accounting for Share-Based Payments in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) on January 1, 2006.

     Additionally, as discussed in Note 11 to the consolidated financial statements, Reliance Steel & Aluminum Co. changed its method of accounting for Defined Benefit Pension and Other Postretirement Plans in accordance with Statement of Financial Accounting Standards No. 158 on December 31, 2006.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Reliance Steel & Aluminum Co.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California
February 28, 2007

RELIANCE STEEL & ALUMINUM CO.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

		December 31,
		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	57,475			$	35,022
Accounts receivable, less allowance for doubtful accounts of $16,755 and $10,511 at December 31, 2006 and 2005, respectively			666,273				369,931
Inventories			904,318				387,385
Prepaid expenses and other current assets			22,179				19,009
Income taxes receivable			25,144				—
Deferred income taxes			—				36,001
Total current assets			1,675,389				847,348
Property, plant and equipment, at cost:
Land			108,022				60,207
Buildings			385,851				281,986
Machinery and equipment			565,951				403,403
Accumulated depreciation			(317,152	)			(265,877	)
			742,672				479,719
Goodwill			784,871				384,730
Intangible assets, net			354,195				44,384
Cash surrender value of life insurance policies, net			41,190				7,299
Other assets			15,856				5,590
Total assets		$	3,614,173			$	1,769,070
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	340,356			$	188,584
Accrued expenses			36,481				19,234
Accrued compensation and retirement costs			92,905				52,354
Accrued insurance costs			34,475				23,372
Deferred income taxes			23,706				214
Current maturities of long-term debt			22,257				49,525
Current maturities of capital lease obligations			559				536
Total current liabilities			550,739				333,819
Long-term debt			1,083,095				301,275
Capital lease obligations			4,956				5,515
Long-term retirement costs and other long-term liabilities			46,111				15,660
Deferred income taxes			181,628				65,808
Minority interest			1,246				17,128
Commitments and contingencies			—				—
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 — 75,702,046 and 66,217,998 at December 31, 2006 and 2005, respectively, stated capital			701,690				325,010
Retained earnings			1,046,339				704,530
Accumulated other comprehensive (loss) income			(1,631	)			325
Total shareholders’ equity			1,746,398				1,029,865
Total liabilities and shareholders’ equity		$	3,614,173			$	1,769,070

See accompanying notes to consolidated financial statements.

RELIANCE STEEL & ALUMINUM CO.

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)

		Year Ended December 31,
		2006				2005				2004
Net sales		$	5,742,608			$	3,367,051			$	2,943,034
Other income, net			5,768				3,671				4,168
			5,748,376				3,370,722				2,947,202
Costs and expenses:
Cost of sales (exclusive of depreciation and amortization shown below)			4,231,386				2,449,000				2,110,848
Warehouse, delivery, selling, general and administrative			821,386				507,905				483,887
Depreciation and amortization			62,474				46,631				44,627
Interest			61,692				25,222				28,690
			5,176,938				3,028,758				2,668,052
Income before minority interest and income taxes			571,438				341,964				279,150
Minority interest			(306	)			(8,752	)			(9,182	)
Income from continuing operations before income taxes			571,132				333,212				269,968
Provision for income taxes			216,625				127,775				100,240
Net income		$	354,507			$	205,437			$	169,728
Earnings per share:
Income from continuing operations – diluted		$	4.82			$	3.10			$	2.60
Weighted average shares outstanding – diluted			73,599,681				66,194,724				65,350,758
Income from continuing operations – basic		$	4.85			$	3.12			$	2.61
Weighted average shares outstanding – basic			73,134,102				65,870,068				64,960,202
Cash dividends per share		$	.22			$	.19			$	.13