| METALICO INC Item 1A Risk Factors Set forth below are risks that we believe are material to our business operations |
| Additional risks and uncertainties not known to us or that we currently deem immaterial may also impair our business operations |
| We are highly leveraged |
| As of December 31, 2005, we had dlra27dtta5 million of total debt outstanding, net of cash and cash equivalents of dlra1dtta9 million |
| Subject to certain restrictions, exceptions and financial tests set forth in certain of our debt instruments, we may incur additional indebtedness in the future |
| We anticipate our debt service payment obligations during the next twelve months to be approximately dlra13dtta1 million, comprised of principal coming due within the next twelve months of dlra11dtta0 million plus interest of dlra2dtta1 million |
| As of December 31, 2005, approximately dlra17dtta8 million of our debt bears interest at variable rates and we may experience material increases in our interest expense as a result of increases in general interest rate levels |
| Based on actual amounts outstanding as of December 31, 2005, if the interest rate on our variable rate debt were to increase by 1prca, our annual debt service payment obligations would increase by approximately dlra178cmam000 |
| The degree to which we are leveraged could have important negative consequences to the holders of our securities, including the following: • a substantial portion of our cash flow from operations will be needed to pay debt service and will not be available to fund future operations; • our ability to obtain additional future financing for acquisitions, capital expenditures, working capital or general corporate purposes could be limited; • we have increased vulnerability to adverse general economic and metals recycling industry conditions; and • we are vulnerable to higher interest rates because interest expense on borrowings under our credit agreement (the “Credit Agreement”) is based on margins over a variable base rate |
| Our business may not generate sufficient cash flow from operations and future working capital borrowings may not be available in an amount sufficient to enable us to service our indebtedness, or make necessary capital expenditures |
| All borrowings under our Credit Agreement will come due when it terminates in May 2009 and we may be unable to find replacement financing |
| Our indebtedness contains covenants that restrict our ability to engage in certain transactions |
| Our Credit Agreement contains covenants that, among other things, restrict our ability to: • incur additional indebtedness; 13 _________________________________________________________________ [62]Table of Contents • pay dividends; • prepay subordinated indebtedness; • dispose of some types of assets; • make capital expenditures; • create liens and make acquisitions; and • engage in some fundamental corporate transactions |
| Under our Credit Agreement, we are required to satisfy specified financial covenants, including an EBITDA covenant and a capital expenditure covenant |
| Although we currently expect to be in compliance with the covenants and to satisfy our financial tests, our ability to comply with these covenants may be affected by general economic conditions, industry conditions, severe negative market fluctuations in metal prices, and other events beyond our control |
| Our breach of any of these covenants could result in a default under our Credit Agreement |
| In the event of a default, the lender could elect not to make additional loans to us and to declare all amounts borrowed under our Credit Agreement, together with accrued interest, to be due and payable |
| In that event we would likely be unable to repay all such accelerated indebtedness |
| The metals recycling industry is highly cyclical |
| The operating results of the scrap metals recycling industry in general, and our operations specifically, are highly cyclical in nature |
| They tend to reflect and be amplified by general economic conditions, both domestically and internationally |
| Historically, in periods of national recession or periods of slowing economic growth, the operations of scrap metals recycling companies have been materially and adversely affected |
| For example, during recessions or periods of slowing economic growth, the automobile and the construction industries typically experience major cutbacks in production, resulting in decreased demand for steel, copper and aluminum |
| This leads to significant fluctuations in demand and pricing for our products |
| Economic downturns in the national and international economy would likely materially and adversely affect our results of operations and financial condition |
| Our ability to withstand significant economic downturns in the future will depend in part on our levels of capital, debt and liquidity |
| Our business may be adversely affected by increases in steel imports into the United States which will generally have an adverse impact on domestic steel production and a corresponding adverse impact on the demand for scrap metals |
| We could also be negatively affected by strengthening in the US Dollar |
| For example, beginning in July 1998, the domestic steel industry and, in turn, the metals recycling industry suffered a dramatic and precipitous collapse, resulting in a significant decline in the price and demand for scrap metals |
| The decline in the steel and scrap metal sectors was the result, in large part, of the increase in steel imports flowing into the United States 14 _________________________________________________________________ [63]Table of Contents during the last six months of 1998 and our results of operations were adversely impacted by reduced steel production in the United States during fiscal 1999 |
| Export markets, including Asia and in particular China, are important to the scrap metal recycling industry |
| Weakness in economic conditions in Asia and in particular slowing growth in China could negatively affect us |
| Changing lead markets may impact the Company’s ability to secure the volume of raw materials needed at pricing considered sustainable before driving consumers to substitute products |
| Our lead fabrication and recycling facilities may be adversely impacted by increases or decreases in lead pricing |
| A drop in the commodity price of lead would reduce revenues at the secondary lead smelter |
| The lead smelter may not be able to reduce costs enough to offset the impact of lost revenues |
| An increase in the cost of lead, the raw material of our lead fabrication and recycling facilities, could reduce the demand for product by making nonlead-bearing alternatives more cost attractive |
| Additionally, fluctuations in lead pricing could negatively impact the supply of raw material for either or both the secondary lead smelter and the fabricators |
| Prices of commodities we own may be volatile |
| Although we seek to turn over our inventory of raw or processed scrap metals as rapidly as possible, we are exposed to commodity price risk during the period that we have title to products that are held in inventory for processing and/or resale |
| Prices of commodities, including scrap metals, can be volatile due to numerous factors beyond our control, including: • general economic conditions; • labor costs; • competition; • financial condition of our major customers; • the availability of imports; • the availability and relative pricing of scrap metal substitutes; • import duties; and • tariffs and currency exchange rates |
| In an increasing price environment, competitive conditions may limit our ability to pass on price increases to our customers |
| In a decreasing price environment, we may not have the ability to fully recoup the cost of raw scrap we process and sell to our customers |
| The profitability of our scrap recycling operations depends, in part, on the availability of an adequate source of supply |
| We acquire our scrap inventory from numerous sources |
| These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metals to us |
| In periods of low industry prices, suppliers may elect to hold scrap waiting for higher prices |
| If a substantial number of scrap suppliers cease selling scrap metals to us, we would be unable to recycle metals at desired 15 _________________________________________________________________ [64]Table of Contents levels and our results of operations or financial condition would be materially and adversely affected |
| We depend on third-party carriers for a significant portion of our outbound product distribution |
| Our products are usually transported to consumers from our facilities by third-party truck and rail carriers |
| Any interruption or delay in transportation services or any significant change in transportation costs could adversely affect our results of operations or financial condition |
| The loss of any member of our senior management team or a significant number of our managers could have a material adverse effect on our operations |
| Our operations depend heavily on the skills and efforts of our senior management team, including Carlos E Aguero, our Chairman, President and Chief Executive Officer, Michael J Drury, our Executive Vice-President and four other employees who constitute our Executive Management Team |
| In addition, we rely substantially on the experience of the management of our subsidiaries with regard to day-to-day operations |
| While we have employment agreements with Messrs |
| Aguero and Drury and certain other members of our management team, we may nevertheless be unable to retain the services of any of those individuals |
| The loss of any member of our senior management team or a significant number of managers could have a material adverse effect on our operations |
| The concentration of our customers and our exposure to credit risk could have a material adverse effect on our results of operations or financial condition |
| Sales to the Company’s ten largest customers represented approximately 26dtta6prca of consolidated net sales for the year ended December 31, 2005 |
| Sales to our largest customer represented approximately 6dtta4prca of consolidated net sales for the year ended December 31, 2005 |
| The loss of a significant customer or our inability to collect accounts receivable would negatively impact our revenues and profitability |
| The loss of export markets utilized by the industry could adversely affect our results of operations or financial condition |
| The loss of any significant customers could adversely affect our results of operations or financial condition |
| In connection with the sale of our products, we generally do not require collateral as security for customer receivables |
| We have significant balances owing from some customers that operate in cyclical industries and under leveraged conditions that may impair the collectibility of those receivables |
| Failure to collect a significant portion of amounts due on those receivables could have a material adverse effect on our results of operations or financial condition |
| A significant increase in the use of scrap metal alternatives by current consumers of processed scrap metals could reduce demand for our products |
| During periods of high demand for scrap metals, tightness can develop in the supply and demand balance for ferrous scrap |
| The relative scarcity of ferrous scrap, particularly the “cleaner” grades, and its high price during such periods have created opportunities for producers of alternatives to scrap metals, such as pig iron and direct reduced iron pellets, to offer their products to 16 _________________________________________________________________ [65]Table of Contents our consumers |
| Although these alternatives have not been a major factor in the industry to date, we cannot assure you that the use of alternatives to scrap metals may not proliferate in the future if the prices for scrap metals rise or if the levels of available unprepared ferrous scrap decrease |
| Our operations are subject to stringent regulations, particularly under applicable environmental laws |
| We believe that we are currently in material compliance with applicable statutes and regulations governing the protection of human health and the environment, including employee health and safety |
| We can give no assurance, however, that we will continue to be in compliance or to avoid material fines, penalties and expenses associated with compliance issues in the future |
| The nature of our business and previous operations by others at facilities owned or operated by us make us subject to significant government regulation, including stringent environmental laws and regulations |
| Among other things, these laws and regulations impose comprehensive local, state, federal, foreign and supranational statutory and regulatory requirements concerning, among other matters, the treatment, acceptance, identification, storage, handling, transportation and disposal of industrial by-products, hazardous and solid waste materials, waste water, storm water effluent, air emissions, soil contamination, surface and ground water pollution, employee health and safety, operating permit standards, monitoring and spill containment requirements, zoning, and land use, among others |
| Various laws and regulations set prohibitions or limits on the release of contaminants into the environment |
| Such laws and regulations also require permits to be obtained and manifests to be completed and delivered in connection with the operations of our businesses, and in connection with any shipment of prescribed materials so that the movement and disposal of such material can be traced and the persons responsible for any mishandling of such material can be identified |
| This regulatory framework imposes significant actual, day-to-day compliance burdens, costs and risks on us |
| Violation of such laws and regulations may and do give rise to significant liability, including fines, damages, fees and expenses, and closure of a site |
| Generally, the governmental authorities are empowered to act to clean up and remediate releases and environmental damage and to charge the costs of such cleanup to one or more of the owners of the property, the person responsible for the release, the generator of the contaminant and certain other parties or to direct the responsible party to take such action |
| These authorities may also impose a tax or other liens to secure the parties’ reimbursement obligations |
| Environmental legislation and regulations have changed rapidly in recent years, and it is possible that we will be subject to even more stringent environmental standards in the future |
| For these reasons, future capital expenditures for environmental control facilities cannot be predicted with accuracy; however, if environmental control standards become more stringent, one may expect that the expenditures necessary to comply with them could increase substantially |
| Due to the nature of our Lead Fabrication and Recycling and Scrap Metal Recycling businesses, it is likely that inquiries or claims based upon environmental laws may be made in the future by governmental bodies or individuals against us and any other scrap metal recycling entities that the Company may acquire |
| The location of some of our facilities in urban areas may increase the risk of scrutiny and claims |
| We cannot predict whether any such future inquiries or claims will in fact arise or the outcome of such matters |
| Additionally, it is not possible to predict the amounts of all capital expenditures or of any increases in operating costs or other expenses that we may incur to comply with applicable environmental requirements, or whether these costs can be passed on to customers through product price increases |
| 17 _________________________________________________________________ [66]Table of Contents Moreover, environmental legislation has been enacted, and may in the future be enacted, to create liability for past actions that were lawful at the time taken but that have been found to affect the environment and to create public rights of action for environmental conditions and activities |
| As is the case with lead fabrication and recycling and scrap metal recycling businesses in general, if damage to persons or the environment has been caused, or is in the future caused, by hazardous materials activities of the Company or its predecessors, the Company may be fined and held liable for such damage |
| In addition, we may be required to remedy such conditions and/or change procedures |
| Thus, there can be no assurance that potential liabilities, expenditures, fines and penalties associated with environmental laws and regulations will not be imposed on us in the future or that such liabilities, expenditures, fines or penalties will not have a material adverse effect on our results of operations and financial condition |
| We are subject to potential liability and may also be required from time to time to clean up or take certain remedial action with regard to sites currently or formerly used in connection with our operations |
| Furthermore, we may be required to pay for all or a portion of the costs to clean up or remediate sites we never owned or on which we never operated if we are found to have arranged for transportation, treatment or disposal of pollutants or hazardous or toxic substances on or to such sites |
| We are also subject to potential liability for environmental damage that our assets or operations may cause nearby landowners, particularly as a result of any contamination of drinking water sources or soil, including damage resulting from conditions existing prior to the acquisition of such assets or operations |
| Any substantial liability for environmental damage could materially adversely affect our operating results and financial condition, and could materially adversely affect the marketability and price of our stock |
| Contamination exists at certain of our sites, and we are responsible for certain off-site contamination as well |
| Such sites require investigation, monitoring and remediation |
| The existence of such contamination typically results in federal, state, local and/or private enforcement or cost recovery actions against the Company, possibly resulting in disruption of our operations, and/or substantial fines, penalties, damages, costs and expenses being imposed against us |
| We expect to require future cash outlays as we incur costs relating to the remediation of environmental liabilities and post-remediation compliance |
| These costs may have a material adverse effect on the Company’s results of operation and financial condition |
| Environmental impairment liability insurance, which we carry on our lead smelting facility, is prohibitively expensive and limited in the scope of its coverage |
| Our general liability insurance policies in most cases do not cover environmental damage |
| If we were to incur significant liability for environmental damage not covered by insurance; or for which we have not adequately reserved; or for which we are not adequately indemnified by third parties; our results of operations and financial condition could be materially adversely affected |
| In the past we have upon occasion been found not to be in compliance with certain environmental laws and regulations, and have incurred fines associated with such violations which have not been material in amount |
| We may in the future incur additional fines associated with similar violations |
| We have also paid a portion of the costs of certain remediation actions at certain sites |
| No assurance can be given that material fines, penalties, damages and expenses resulting from additional compliance issues and liabilities will not be imposed on us in the future |
| 18 _________________________________________________________________ [67]Table of Contents There are risks associated with certain by-products of our operations |
| Our operations produce recurring amounts of wastes |
| For example, our secondary lead smelter generates slag as a waste product of the lead smelting process |
| The slag is tested for hazardous materials and if determined non-hazardous, disposed of at a local sanitary landfill |
| Slag that tests hazardous is put back into the furnace feedstock and rerun through the furnace |
| We can give no assurance, however, that such a process will be successful in continuing to remove hazardous contaminants or that higher charges for waste handling and disposal will be avoided |
| Due diligence reviews in connection with our acquisitions to date and environmental assessments of our operating sites conducted by independent environmental consulting firms have revealed that some soil, surface water and/or groundwater contamination, including various metals, arsenic, petrochemical byproducts, waste oils, and volatile organic compounds, is present at certain of our operating sites |
| Based on our review of these reports, we believe that it is possible that migratory contamination at varying levels may exist at some of our sites, and we anticipate that some of our sites could require investigation, monitoring and remediation in the future |
| Moreover, the costs of such remediation could be material |
| The existence of contamination at some of our facilities could adversely affect our ability to sell our properties, and, will generally require us to incur significant costs to take advantage of selling opportunities |
| Descriptions |