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EX-32.1 - EX-32.1 - METALICO INCc62454exv32w1.htm
EX-31.2 - EX-31.2 - METALICO INCc62454exv31w2.htm
EX-32.2 - EX-32.2 - METALICO INCc62454exv32w2.htm
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EX-10.10 - EX-10.10 - METALICO INCc62454exv10w10.htm
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2010
or
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: 001-32453
Metalico, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware   52-2169780
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
         
186 North Avenue East
Cranford, NJ
(Address of Principal Executive Offices)
  07016
(Zip Code)
  (908) 497-9610
(Registrant’s Telephone Number)
 
Securities registered under Section 12(b) of the Exchange Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
None   None
 
Securities registered under Section 12(g) of the Exchange Act:
Common stock, $.001 par value per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
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 voting stock held by non-affiliates of the registrant as of June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter was $153,670,458.
 
Number of shares of Common stock, par value $.001, outstanding as of March 10, 2011: 47,368,641
 
DOCUMENTS INCORPORATED BY REFERENCE
NONE


 

 
METALICO, INC.
 
ANNUAL REPORT ON FORM 10-K
 
FOR THE YEAR ENDED DECEMBER 31, 2010
 
TABLE OF CONTENTS
 
         
        Page
  Business   2
  Risk factors   12
  Properties   23
  Legal Proceedings   26
 
PART II
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   27
  Selected Financial Data   29
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   30
  Quantitative and Qualitative Disclosures About Market Risk   45
  Financial Statements and Supplementary Data   46
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   46
  Controls and Procedures   46
  Other Information   48
 
PART III
  Directors, Executive Officers and Corporate Governance   48
  Executive Compensation   52
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   65
  Certain Relationships and Related Transactions, and Director Independence   67
  Principal Accounting Fees and Services   68
 
PART IV
  Exhibits, Financial Statement Schedules   69
  72
Exhibit Index
  73
 EX-10.10
 EX-21.1
 EX-23.1
 EX-23.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance, and are identified by words such as “may,” “will,” “should,” “expect,” “scheduled,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “potential,” or “continue” or the negative of such terms or other similar words. You should read these statements carefully because they discuss our future expectations, and we believe that it is important to communicate these expectations to our investors. However, these statements are only anticipations. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the factors discussed under “Risk Factors.” These factors may cause our actual results to differ materially from any forward-looking statement.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, we do not assume any responsibility for the accuracy and completeness of such statements in the future. Subject to applicable law, we do not plan to update any of the forward-looking statements after the date of this report to conform such statements to actual results.


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PART I
 
Item 1.   Business
 
Metalico, Inc. (referred to in this 10-K Report as “the Company,” “Metalico,” “we,” “us,” “our,” and similar terms) operates in two distinct business segments: (a) scrap metal recycling (“Scrap Metal Recycling”), and (b) lead metal product fabricating (“Lead Fabricating”). The Company’s operating facilities as of December 31, 2010 included twenty-four scrap metal recycling facilities located in Buffalo, Rochester, Niagara Falls, Ithaca, Lackawanna, and Syracuse, New York; Akron, Youngstown and Warren, Ohio; Newark, New Jersey; Buda and Dallas, Texas; Gulfport, Mississippi; Pittsburgh, Brownsville, Sharon, West Chester and Quarryville, Pennsylvania; and Colliers, West Virginia; an aluminum de-ox plant located in Syracuse, New York; and four lead product manufacturing and fabricating plants located in Birmingham, Alabama; Healdsburg and Ontario, California; and Granite City, Illinois. The Company markets a majority of its products on a national basis but maintains several international customers.
 
Metalico, Inc. was originally organized as a Delaware corporation in 1997. In 1999, the original Metalico was merged into a Colorado corporation. Later that year, the surviving Colorado corporation was merged into a newly organized Delaware corporation named Metalico, Inc., which continues today as our holding company. Our common stock began trading on the American Stock Exchange (now known as NYSE Amex) on March 15, 2005 under the symbol “MEA.”
 
We maintain a small corporate team that sets our strategic goals and overall strategy. We manage our operations on a decentralized basis, allowing each subsidiary autonomy for its purchasing and sales. The corporate team approves all acquisitions and operating budgets, allocates capital to the business units based upon expected returns and risk levels, establishes succession plans, ensures operations maintain a consistent level of quality, evaluates risk and holds the management of each business unit accountable for the performance of its respective business unit.
 
SUMMARY OF BUSINESS
 
Scrap Metal Recycling
 
We have concentrated on acquiring and successfully consolidating scrap operations by initially acquiring companies to serve as platforms into which subsequent acquisitions would be integrated. We believe that through the integration of our acquired businesses, we have enhanced our competitive position and profitability of the operations because of broader distribution channels, elimination of redundant functions, greater utilization of operating assets, and improved managerial and financial resources.
 
We continue to be one of the largest full-service metal recyclers in Central and Western New York, with eleven recycling facilities located in that regional market. We continued the expansion of our regional markets in January 2011 by acquiring Goodman Services, Inc., a full service scrap metal recycler based in Bradford, Pennsylvania with additional operations in Jamestown, New York and Canton, Ohio. We purchased scrap processing facilities in Youngstown and Warren, Ohio in December 2009. These acquisitions complement our platforms in Pittsburgh, Pennsylvania, Akron, Ohio and Buffalo and Rochester, New York.
 
Our operations primarily involve the collection and processing of ferrous and non-ferrous metals. We collect industrial and obsolete scrap metal, process it into reusable forms and supply the recycled metals to our ultimate consumers, including electric arc furnace mills, integrated steel mills, foundries, secondary smelters, aluminum recyclers and metal brokers. We acquire unprocessed scrap metals primarily in our local and regional markets and sell to consumers nationally and in Canada as well as to exporters and international brokers. We are also able to supply quantities of scrap aluminum to our aluminum recycling facility and scrap lead to our lead fabricating subsidiaries. We believe that we provide comprehensive product offerings of both ferrous and non-ferrous scrap metals.
 
Our platform scrap facilities in New York, Ohio and Western Pennsylvania have ready access to highway and rail transportation, a critical factor in our business. In the Pittsburgh market, we have waterfront access with barge loading and unloading capabilities. In addition to buying, processing and selling ferrous and non-ferrous scrap


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metals, we manufacture de-oxidizing aluminum (“de-ox”), a form of alloyed aluminum, for the steel industry. In May 2007, we acquired Tranzact Corporation, a recycler of molybdenum, tantalum and tungsten scrap located in Quarryville, Pennsylvania. In July 2007, we acquired a majority interest in Totalcat Group, Inc., a recycler and manufacturer of catalytic devices from which we obtain platinum, palladium and rhodium, headquartered in Newark, New Jersey. In January 2008, we acquired the assets of American CatCon, another recycler of catalytic devices, in Buda and Dallas, Texas, and Gulfport, Mississippi. In May 2008, we acquired Neville Metals, Assad Iron and Metals, Inc., Neville Recycling LLC and Platt Properties, LLC, an affiliated group of scrap metal recycling operations headquartered in Western Pennsylvania with a satellite yard in Colliers, West Virginia. These acquisitions have demonstrated our strategy of diversifying our metal mix, which we believe mitigates our exposure to volatile commodity prices.
 
Our metal recycling business has collection and processing facilities in the following locations as of the date of this filing:
 
         
Location
  Number of Facilities
 
Buffalo, New York
    2  
Niagara Falls, New York
    1  
Lackawanna, New York (Hamburg)
    1  
Rochester, New York
    3  
Syracuse, New York
    1  
Jamestown, New York*
    1  
Ithaca, New York (50% joint venture)
    1  
Newark, New Jersey
    1  
Akron, Ohio
    1  
Youngstown, Ohio
    1  
Warren, Ohio
    1  
Quarryville, Pennsylvania
    1  
West Chester, Pennsylvania
    1  
Pittsburgh/Western Pennsylvania
    5  
Bradford, Pennsylvania*
    1  
Colliers, West Virginia
    1  
Buda, Texas
    1  
Dallas, Texas
    1  
Gulfport, Mississippi
    1  
 
 
* added with purchase of Goodman Services, Inc. on January 31, 2011
 
Ferrous Scrap Industry.  Our ferrous (iron-based) products primarily include sheared and bundled scrap metal and other scrap metal, such as turnings and busheling and broken cast iron. We, and others in our industry, anticipate that in the long-term, the demand for recycled ferrous metals will increase due to the continuing transformation of the world’s steel producers from virgin iron ore-based blast furnaces to newer, technologically advanced electric arc furnace mini-mills. The electric arc furnace process, which primarily uses recycled metal compared with the traditional steel-making process that uses significantly less recycled metal, is more environmentally sound and energy efficient. By recycling steel, scarce natural resources are preserved and the need to disrupt the environment with the mining of virgin iron ore is reduced. Further, when recycled metal is used instead of iron ore for new steel production, air and water pollution generated by the production process decreases and energy demand is reduced.
 
Non-Ferrous Scrap Industry.  We also sort, process and package non-ferrous metals, which include aluminum, copper, stainless steel, brass, nickel-based alloys and high-temperature alloys, using similar techniques and through application of our technologies. The geographic markets for non-ferrous scrap tend to be larger than those for ferrous scrap due to the higher unit selling prices of non-ferrous metals, which justify the cost of shipping over


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greater distances. Non-ferrous scrap is sold under multi-load commitments or on a single-load spot basis, either mill-direct or through brokers, to intermediate or end-users which include smelters, foundries and aluminum sheet and ingot manufacturers. Secondary smelters, utilizing processed non-ferrous scrap as raw material, can produce non-ferrous metals at a lower cost than primary smelters producing such metals from ore. This is due to the significant savings in energy consumption, environmental compliance and labor costs enjoyed by the secondary smelters. These cost advantages, and the long lead-time necessary to construct new non-ferrous primary smelting facilities, have generally resulted in sustained demand and strong prices for processed non-ferrous scrap during periods of high demand for finished non-ferrous metal products.
 
Platinum Group Metal Scrap Industry.  We recycle the platinum group metals (“PGMs”), platinum, palladium, and rhodium from the substrate material retrieved from the recycling of catalytic converters. The scrap catalytic device collection market is highly fragmented and characterized by a large number of suppliers dealing with a wide range of volumes. Converters for recycling are obtained from networks of auto dismantlers, scrap yards, parts dealers and manufacturers. The supply chain network has tended to develop regionally because the economics of collecting and distributing scrap converters to recyclers requires transportation from local scrap yards, often in small batches. Effective procurement is a key competitive strength and a significant barrier to entry as it requires significant knowledge and experience about the PGM loadings in different types of catalytic devices. The purchase price for converters is determined on the basis of PGM market prices and internal estimates of the amount of PGMs in each converter purchased. Once purchased, the converters are sorted and cut and the substrate material is removed and shipped to third-party processors which remove the PGMs from the substrate material by means of chemical and mechanical processes. We use forward sales contracts with these substrate processors to hedge against volatile metal prices.
 
Lead Fabricating
 
Through four physical operations located in three states, we consume approximately 45 to 50 million pounds of lead metal per year that are utilized in more than one hundred different base products. Our products are sold nationally into diverse industries such as roofing, plumbing, radiation shielding for pharmaceutical and power generation, electronic solders, ammunition, automotive, Department of Defense contractors, and others.
 
Our Lead Fabricating segment has facilities in the following locations:
 
Birmingham, Alabama
 
Granite City, Illinois
 
Healdsburg, California
 
Ontario, California
 
Our sales are concentrated within five main product lines: sheet lead, shot, extruded strip lead, machined lead parts and cast lead. Sheet lead is produced in various sizes, thicknesses, and alloys based upon customer requirements. Sheets are rolled to various thicknesses, cut to customer specifications and shipped to roof flashing manufacturers, fabricators of radiation shielding, sound attenuation and roofing contractors, and other users. Shot is produced and sold nationwide primarily to the recreational re-load market under the Lawrence and West Coast Shot brands. We also sell shot to cartridge manufacturers and industrial consumers. Shot is produced in several lead alloys and sizes. Strip lead is produced in rolls of various widths and lengths. Strip lead is used primarily in the roofing industry. Cast lead is typically sold in pig, ingot, brick and rectangular form. Extruded wire and bar are used in plumbing applications, stained glass production, the electronics industry and the radiation shielding industry. Extruded pipe is used in the plumbing and roofing industries. Extruded products are available in flats, rounds, stars, pipe and custom designed configurations. Other lead products include roof flashings, lead wool, anodes and babbitt. Machined lead parts are sold into a variety of industries and consumers.
 
Business Strategies
 
Our core business strategy is to grow our scrap metal recycling business through acquisitions in existing, contiguous and new markets, and enhance our position as a high quality producer of recycled metal products


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through investments in state-of-the-art equipment and to improve operational density. Scrap metal recycling represented approximately 88.2% and 78.6% of our revenues for the years ended December 31, 2010 and 2009, respectively. Our ferrous and non-ferrous scrap metal recycling operations are the leading processors in their local markets. We intend to continue focusing on increasing our position as one of the largest recycled metals processors in our existing regional markets and exploring growth opportunities in contiguous and new geographic markets.
 
In July 2007, we diversified our commodity base by entering the platinum group metals recycling business through the acquisition of the Totalcat Group with further expansion in January 2008 with the acquisition of American CatCon. In this highly fragmented and competitive segment of the scrap industry, we will look to increase our presence in PGM recycling through internal growth and acquisition.
 
In May 2008, we acquired the assets of the Snyder Group, a group of full service metals recycling companies in the Pittsburgh, Pennsylvania area comprised of two platform facilities and four feeder yards. Most notable to this acquisition was the addition of a state of the art automobile shredder providing Metalico with a strong platform to expand the volume and profitability of the ferrous component of our business. We obtained a second shredder in December 2009 when we acquired the assets of Youngstown Iron & Metal, Inc. and its affiliates in northeastern Ohio.
 
Metalico has grown its lead fabricating business to be the largest non-battery lead fabricator in the U.S. This business does not typically require significant capital expenditures. We intend to improve cash flows and expand our market share in this business primarily by continued focus on operating efficiencies. We continually seek to reduce our largest operating expense, which is our raw material cost, by increasing the number of our suppliers of scrap and refined lead and reduce operating costs through further automation where appropriate. We intend to reduce our other operating and administrative costs through continued integration and further automation of the work flow process at our Alabama and Illinois facilities. In addition, we intend to grow this business through increased sales and marketing efforts.
 
The following are some of our specific business strategies:
 
Improve operating density.  We intend to continue to improve operating density within our existing geographic market. We look to concentrate our customer base by marketing our range of services to existing and potential customers and consumers as well as by supplementing the activities in our existing platforms with complementary tuck-in acquisitions where and as they may become available.
 
Expand scrap metal recycling.  In February 2011, we purchased 44-acres of property in the Buffalo, New York area and announced plans to construct an indoor, heavy-duty 80104 Metal Shredder capable of processing 100 to 120 tons of shredded scrap per hour. The new facility is expected to be operational by the end of 2011. In January 2011, we acquired Goodman Services, Inc. with scrap processing facilities in Bradford, PA and Jamestown, NY. Through our acquisition of Youngstown Iron & Metal, Inc., in December 2009, we obtained our second auto-shredder increasing our scrap processing capacity. We plan to continue leveraging our owned facilities through strategic tuck-in acquisitions. We continue to pursue further development to our auto-shredding capabilities, either through an acquisition or internal development, in order to better compete in that segment of the scrap metal recycling industry. In addition, we intend to grow through sales and marketing and explore select joint ventures with metal processors and suppliers.
 
Complete value-creating acquisitions.  Our strategy is to target acquisition candidates we believe will earn after-tax returns in excess of our cost of capital. In new markets, we seek to identify and acquire platform businesses that can provide market growth and consolidation opportunities. We have had success finding realistically valued acquisition opportunities in markets we target for expansion. However, we may be dependent on tight capital markets that could make these acquisitions difficult.
 
Capture benefits of integration.  When we have made acquisitions, we have historically sought to capture the benefits of business integration whenever possible. For example, the locations of Goodman Services’ operations complement our existing facilities in the Great Lakes corridor: Bradford is 160 miles from our Pittsburgh operations and will become a feed source for the Pittsburgh shredder; Jamestown is 75 miles from our Buffalo yards; and Canton, Ohio is in close proximity to our operations in Akron, Ohio. The Youngstown, Ohio operations complement our Akron scrap operations only 50 miles west of Youngstown and our Pittsburgh regional scrap operations are headquartered only 70 miles east of our Youngstown facilities. Youngstown draws on our extensive network of


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scrap suppliers and capital resources to greatly increase operating capacity and utilization at the shredder and elsewhere in its operations. Our aluminum smelting and recovery facility in Syracuse, New York consumes many of the grades of aluminum scrap that our other scrap yards process. Upon the completion of a planned indoor shredder in the Buffalo area, a portion of its feedstock that currently goes to a company-owned facility in Pittsburgh will be kept local reducing transportation costs and decreasing the time to process material. These relationships allows our subsidiaries to take advantage of transportation efficiencies, avoid some of the processing costs associated with preparing scrap for sale to third parties, internalize pricing mark-ups and expand service to consumers. In addition, we believe we enjoy a competitive advantage over non-vertically integrated lead fabrication companies as a result of our refining capabilities within our lead fabrication operations. Our Granite City, Illinois plant has the ability to process and refine various forms of scrap lead. Typically scrap lead can be purchased, processed and refined for less cost than refined lead can be purchased from existing suppliers. Our Granite City plant has the capacity to supply Mayco with one-half of its refined lead needs on a monthly basis, subject to cost and availability of scrap lead. We also sell batteries to lead smelting operations which in turn supply lead to Mayco through tolling arrangements.
 
Maximize operating efficiencies.  Our goal is to continue improving operating efficiency in both business segments in order to maximize operating margins in our business. We have made significant investments in property, plant and equipment designed to make us a more efficient processor, helping us to achieve economies of scale. The lead rolling mill and upgraded plant facilities in Birmingham, Alabama, our primary lead production facility, have significantly increased the plant’s overall efficiency, both in terms of manufacturing costs and utility costs. We continue to invest in new equipment and make improvements to enhance productivity and to protect the environment, such as upgrading non-ferrous separation systems and installing oil water collectors/separators in our scrap yards.
 
Mitigate commodity price risk.  We strive to maintain an appropriate sales mix of ferrous and non-ferrous metal products to reduce commodity price risk. We believe that in most economic environments, a diversified scrap metal operation minimizes our exposure to fluctuations in any single metal market. We enter into forward sales contracts with PGM substrate processors to limit exposure to rapid and significant fluctuations in platinum prices. Ferrous scrap metal recycling, non-ferrous scrap metal recycling and PGM recycling represented approximately 34.3%, 33.0% and 32.7%, respectively, of our scrap metal revenue for the year ended December 31, 2010 as compared to approximately 34.0%, 35.7% and 30.3%, respectively, for the year ended December 31, 2009. Our non-ferrous sales are spread over five primary metals groups: aluminum, red metals, lead, high-temp alloys and noble metals group.
 
Rapidly turn inventory in order to minimize exposure to commodity price risk and avoid speculation.  We consistently turn scrap inventory as quickly as possible in order to minimize exposure to commodity price swings and maintain consistent cash flow.
 
SCRAP METAL RECYCLING
 
Our recycling operations encompass buying, processing and selling scrap metals. The principal forms in which scrap metals are generated include industrial scrap and obsolete scrap. Industrial scrap results as a by-product generated from residual materials from metal product manufacturing processes. Obsolete scrap consists primarily of residual metals from old or obsolete consumer and industrial products such as doors and window frames, appliances, plumbing fixtures, electrical supply components, automobiles and demolition of structures.
 
Ferrous Operations
 
Ferrous Scrap Purchasing.  We purchase ferrous scrap from two primary sources: (i) manufacturers who generate steel and iron, known as prompt or industrial scrap; and (ii) scrap dealers, peddlers, auto wreckers, demolition firms, railroads and others who generate steel and iron scrap, known as obsolete scrap. We also collect ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing retrieval boxes at these sources. In addition to these sources, we purchase, at auction or through competitive bidding, obsolete steel and iron from large industrial accounts. The primary factors that determine prices are market demand, competitive bidding, and the composition, quality, size, and quantity of the materials.


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Ferrous Scrap Processing.  We prepare ferrous scrap metal for resale through a variety of methods including sorting, torching, shearing, cutting, baling, breaking and shredding. We produce a number of differently sized and shaped products depending upon consumer specifications and market demand.
 
  •  Sorting.  After purchasing ferrous scrap metal, we inspect the material to determine how it can most efficiently be processed to maximize profitability. In some instances, scrap may be sorted and sold without further processing. We separate scrap for further processing according to its size and metallurgical composition by using conveyor systems, crane-mounted electromagnets and/or grapples.
 
  •  Torching, Shearing or Cutting.  Pieces of oversized ferrous scrap, such as obsolete steel girders and used drill pipes, which are too large for other processing, are cut with hand-held acetylene torches, crane-mounted alligator shears or stationary guillotine shears. After being reduced to specific lengths or sizes, the scrap is then sold and shipped to those consumers who can accommodate larger materials in their furnaces, such as mini-mills.
 
  •  Block Breaking.  Obsolete automotive engine blocks are broken into several reusable metal byproducts with specialized machinery that eliminates a labor-intensive process with capability to efficiently and profitably process large volumes. The machinery also includes two oil/water separation systems that partially recover energy from the process.
 
  •  Baling.  We process light-gauge ferrous metals such as clips and sheet iron, and by-products from industrial manufacturing processes, such as stampings, clippings and excess trimmings, by baling these materials into large, dense, uniform blocks. We use cranes, front-end loaders and conveyors to feed the metal into hydraulic presses, which compress the materials into cubes at high pressure to achieve higher density for transportation and handling efficiency.
 
  •  Breaking of Furnace Iron.  We process cast iron which includes blast cast iron, steel pit scrap, steel skulls and beach iron. Large pieces of iron are broken down by the impact of forged steel balls dropped from cranes. The fragments are then sorted and screened according to size and iron content.
 
  •  Shredding.  We process discarded consumer products such as vehicles and large household appliances through our shredder to separate ferrous and non-ferrous metals from waste materials. Magnets extract shredded steel and other ferrous materials while a conveyor system carries the remaining non-ferrous metals and non-metallic waste for additional sorting and grading. Shredded ferrous scrap is primarily sold to steel mini-mills seeking a higher consistency of yield and production flexibility that standard ferrous scrap does not offer.
 
Ferrous Scrap Sales.  We sell processed ferrous scrap to end-users such as steel mini-mills, integrated steel makers and foundries, and brokers who aggregate materials for large consumers. Most of our consumers purchase processed ferrous scrap according to a negotiated spot sales contract that establishes the price and quantity purchased for the month. The price at which we sell our ferrous scrap depends upon market demand and competitive pricing, as well as quality and grade of the scrap. In many cases, our selling price also includes the cost of rail or truck transportation to the buyer. Ferrous scrap is shipped via truck, barge and rail transportation. Ferrous scrap transported via truck is sold predominately to mills usually located in Pennsylvania, New York and metropolitan Toronto within eight hours of our recycling facilities. Ferrous scrap transported via rail can be shipped anywhere in the continental United States. By barge, ferrous scrap is shipped to mills on the Mississippi River and exporters located in the Gulf region. Our recycling facilities ship primarily via rail to consumers in Pennsylvania, Ohio, Illinois, and Indiana. Ferrous scrap metal sales accounted for approximately 30.2% and 26.7% of revenue for the years ended December 31, 2010 and 2009, respectively. We believe our profitability may be enhanced by our offering a broad product line to a diversified group of scrap metal consumers. Our ferrous scrap sales are accomplished through a calendar month sales program managed regionally.
 
Non-Ferrous Operations
 
Non-Ferrous Scrap Purchasing.  We purchase non-ferrous scrap from three primary sources: (i) manufacturers and other non-ferrous scrap sources who generate waste aluminum, copper, stainless steel, brass, nickel-based alloys, high-temperature alloys and other metals; (ii) producers of electricity, telecommunication service


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providers, aerospace, defense, and recycling companies that generate obsolete scrap consisting primarily of copper wire, titanium and high-temperature alloys and used aluminum beverage cans; and (iii) peddlers who deliver directly to our facilities material which they collect from a variety of sources. We also collect non-ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing re-usable retrieval boxes at the sources. The boxes are subsequently transported to our processing facilities usually by company owned trucks.
 
A number of factors can influence the continued availability of non-ferrous scrap such as the level of manufacturing activity and the quality of our supplier relationships. Consistent with industry practice, we have certain long-standing supply relationships which generally are not the subject of written agreements.
 
Non-Ferrous Scrap Processing.  We prepare non-ferrous scrap metals, principally aluminum, stainless steel, copper and brass for resale by sorting, shearing, wire stripping, cutting, chopping, melting or baling.
 
  •  Sorting.  Our sorting operations separate non-ferrous scrap manually and are aided by conveyor systems and front-end loaders. In addition, many non-ferrous metals are identified and sorted by using grinders and spectrometers and by torching. Our ability to identify metallurgical composition is critical to maximizing margins and profitability. Due to the high value of many non-ferrous metals, we can afford to utilize more labor-intensive sorting techniques than are employed in our ferrous operations. We sort non-ferrous scrap for further processing and upgrading according to type, grade, size and chemical composition. Throughout the sorting process, we determine whether the material can be cost effectively processed further and upgraded before being sold.
 
  •  Copper and Brass.  Copper and brass scrap may be processed in several ways. We sort copper predominantly by hand according to grade, composition and size. We package copper and brass scrap by baling, boxing and other repacking methods to meet consumer specifications.
 
  •  Aluminum and Stainless Steel.  We process aluminum and stainless steel based on type of alloy and, where necessary, size the pieces to consumer specifications. Large pieces of aluminum or stainless steel are cut using crane-mounted alligator shears and stationary guillotine shears and are baled individually along with small stampings to produce large bales of aluminum or stainless steel. We also recover aluminum from consumer products such as vehicles and large household appliances through our shredding operations. Smaller pieces of aluminum and stainless steel are boxed individually and repackaged to meet consumer specifications.
 
  •  Thermal Technology.  The aluminum smelting and recovery facility in Syracuse, New York uses a reverberatory furnace for melting various forms of aluminum scrap providing higher throughput, expanded feedstock and greater recovery efficiencies.
 
  •  Other Non-Ferrous Materials.  We process other non-ferrous metals using similar cutting, baling and repacking techniques as are used to process copper and brass. Other significant non-ferrous metals we process come from such sources as molybdenum, tantalum, tungsten, titanium, brass and high-temperature nickel-based alloys which are often hand sorted to achieve maximum value.
 
Non-Ferrous Scrap Sales.  We sell processed non-ferrous scrap to end-users such as specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, and brass and bronze ingot manufacturers. Prices for non-ferrous scrap are driven by demand for finished non-ferrous metal goods and by the general level of national and international economic activity, with prices generally linked to quotations for primary metal on the London Metal Exchange or COMEX Division of the New York Mercantile Exchange. Suppliers and consumers of non-ferrous metals also use these exchanges to hedge against metal price fluctuations by buying or selling futures contracts. Most of our consumers purchase processed non-ferrous scrap according to a negotiated spot sales contract that establishes the price and quantity. Non-ferrous scrap is shipped predominately via third-party truck to consumers generally located east of the Mississippi River. Excluding PGM material, non-ferrous metal sales accounted for approximately 29.1% and 28.1% of our total revenue for the years ended December 31, 2010 and 2009, respectively. We do not use futures contracts to hedge prices for our non-ferrous products.


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Platinum Group Metals Operations
 
Platinum Group Metal Purchasing.  We generally purchase catalytic converters from wholesale sources that include local and regional core buyers and collectors. Purchasing from wholesale sources provides the volume necessary to produce enough substrate material to garner competitive advantages. These wholesalers purchase converters from auto dismantlers, service station and repair shops, auto shredders and towing operators. The purchase price for converters is determined on the basis of PGM market prices and internal estimates of the amount of PGMs in each converter purchased. The expansion of the recycling market has led to a series of increasingly sophisticated players forming the catalytic device recycling supply chain. Recycling business has tended to develop regionally as the economics of collecting and distributing scrap devices involves transportation from local scrap yards, often in small batches. We also occasionally buy converters directly from primary sources when economically feasible.
 
Platinum Group Metal Scrap Processing.  We recover the PGMs from scrap ceramic substrate automobile catalytic converters, scrap metal substrate automotive catalysts as well as from catalysts used in stationary and other industrial applications. The converter substrate is removed from the stainless steel shell of used catalytic converters through the use of hydraulic shears or other mechanical means. Once de-canned, the converter substrate material is aggregated and shipped to several third-party processors which recover the PGMs from the substrate material by means of chemical and mechanical processes.
 
Platinum Group Metal Scrap Sales.  PGM sales are based on the volume and price of PGMs recovered from processing catalytic converters and account for the majority of revenue. The value in PGM is significant enough that it is even profitable to recover minute particles of precious metal from the dust that ends up in the recycling plant’s air handling system. Scrap steel from the tail pipes of the exhaust sections as well as the metal casing of the catalytic converters is sold as ferrous scrap and generates revenues based on the market prices of stainless steel. PGM sales accounted for approximately 28.8% and 23.8% of our total revenue for the years ended December 31, 2010 and 2009, respectively. The Company uses forward sales contacts with its material processing vendors to hedge against price fluctuations for its PGM contained material.
 
Competition
 
The markets for scrap metals are highly competitive, both in the purchase of raw scrap and the sale of processed scrap. We compete to purchase raw scrap with numerous independent recyclers and large public scrap processors as well as larger and smaller scrap companies engaged only in collecting industrial scrap. Many of these producers have substantially greater financial, marketing and other resources. Successful procurement of materials is determined primarily by the price and promptness of payment for the raw scrap and the proximity of the processing facility to the source of the unprocessed scrap. We compete in a global market with regard to the sale of processed scrap. Competition for sales of processed scrap is based primarily on the price, quantity and quality of the scrap metals, as well as the level of service provided in terms of consistency of quality, reliability and timing of delivery. Our competitive advantage derives from our ability to source and process substantial volumes, deliver a broad product line to consumers, transport the materials efficiently, and sell scrap in regional, national and international markets and to provide other value-added services to our suppliers and consumers.
 
We occasionally face competition for purchases of unprocessed scrap from producers of steel products, such as integrated steel mills and mini-mills that have vertically integrated their current operations by entering the scrap metal recycling business. Many of these producers have substantially greater financial, marketing and other resources. Scrap metals processors also face competition from substitutes for prepared ferrous scrap, such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron carbide and other forms of processed iron. The availability and cost of substitutes for ferrous scrap could result in a decreased demand for processed ferrous scrap, which could result in lower prices for such products.


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LEAD FABRICATION
 
Products
 
We manufacture a wide variety of lead-based products through our sheet lead, machined lead, shot, strip lead, and cast lead product lines. Our products are sold nationally into diverse industries such as roofing, plumbing, radiation shielding, healthcare, ammunition, automotive, Department of Defense contractors, and others.
 
         
Products
 
Available Form
 
Application
 
Anodes
  Chunk; Oval; Flat; Round; Star   Plating: Cathodic Protection; Zinc/Copper Production
Antimony Alloys
  Bar; Shot; Sheet Lead   Foundry; Ammunition; Construction
Babbitt Alloys
  Bar; Ingot; Wire   Bearing Assembly and Repair; Capacitor Manufacturing
Britannia Alloys
  Sheet; Strip   Engraving Metal; Organ Pipe; Gasket
Came
  Extruded Channel   Stained Glass Assembly and Repair
Hot Pour
  Molten   Radiation Shielding
Lead Alloys
  Bar; Ingot; Ribbon; Wire; Shot; Sheet; Type; Anode; Wood; Brick; Pipe;   Industrial Assembly and
Repair; Stained Glass;
Plumbing; Radiator; Babbitt;
Pewter; Reloading
Lead Sheet
  Sheet; Roll; Plate; Roof Flashings; Brick   Radiation Shielding; Sound Attenuation; Roof flashing; Storage Tanks; Shower Pans
Machined parts
  Wide variety   Radiation shielding; X-ray shielding; seismic applications
Pewter
  Bar; Ingot   Casting; Forming
Tin Alloys
  Bar; Ingot; Wire; Sheet; Anode; Ribbon   Industrial Assembly and Repair
Type Metals
  Bar; Ingot   Work-holding Applications; Corrosion Protection
 
Manufacturing Process
 
Lead Shot:  Ingot or bulk lead is melted at the top levels of shot towers and poured into steel sizing pans. The molten lead drops several stories through the tower, forming a sphere and hardening while in air and ultimately landing in a water tank. After additional processing, lead shot that meets specifications is sorted by size, polished, weighed and packaged as finished product.
 
Sheet Lead:  Ingot or bulk lead is melted and alloying elements are added. After impurities are removed from the surface, the molten lead is then poured into heated molds to form various sized slabs. The slabs are rolled down into lead sheet, strip, anodes, rolls and plates of desired thickness and cut to size.
 
Extruded Product:  Lead ingots in alloyed form are melted and forced through a precast die providing final shape. The cool, hardened product is then cut to the desired length and its thickness is measured to ensure the product meets specifications.
 
Cast Product:  Lead ingots in alloyed forms are melted and poured into precast molds. The cool hardened lead product is trimmed or machined for final use.
 
Machined parts:  Lead plate, sheet lead and extrusions are cut and formed using a variety of techniques.


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Suppliers
 
We obtain refined lead through multi-month contracts and on occasion on a spot market basis. Principal sources of refined lead are domestic secondary lead smelters, imported primary lead marketed by brokers and, to a lesser extent, domestic primary lead smelters. We also generate refined lead by purchasing an extensive variety of scrap lead and refining it in our processing facilities. 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 consider substitute products. We also refine various forms of scrap lead by melting the scrap in kettles and removing impurities. We have the capacity to provide up to 50% of our refined lead needs through our in-house recovery capabilities.
 
Sales, Markets and Customers Served
 
We sell our lead fabrications nationally. Products are sold to distributors, wholesalers, the plumbing and building trades, equipment manufacturers and other consumers. We have stable, long-standing relationships with many of our customers. We sell substantial volumes of lead products used in home construction, such as lead flashings and sheet, in many parts of the nation.
 
Our sales and marketing department consists of internal salespeople who, in addition to sourcing leads for new business, function in a customer service role, working with existing customers. We also use independent sales representatives and product marketing organizations throughout the country.
 
Competition
 
Our lead fabrication facilities compete against two fabricators of similar but limited products based in the Southwest who distribute nationally and several smaller regional producers of similar products. To a lesser extent, we also compete against products imported from South America, Canada, Europe and Asia.
 
Seasonality and other conditions
 
Both the Scrap Metal Recycling and Lead Fabricating segments of our business generally experience seasonal slowness in the month of July and winter months, as customers tend to reduce production and inventories and winter weather impacts construction and demolition activity. In addition, periodic maintenance shutdowns or labor disruptions at our larger customers may have an adverse impact on our operations. Our operations can be adversely affected as well by protracted periods of inclement weather or reduced levels of industrial production, which may reduce the volume of material processed at our facilities.
 
Employees
 
At March 1, 2011, we had 782 employees. Fifty-five of our employees located at our facility in Granite City, Illinois were represented by the United Steelworkers of America and twenty-two of our employees located at our scrap processing facility in Akron, Ohio were represented by the Chicago and Midwest Regional Joint Board. Our agreement with the United Steelworkers of America expires on March 15, 2011 and our agreement with the Joint Board expires on June 25, 2011.
 
A strike or work stoppage could impact our ability to operate the Granite City facility or the Akron facility. Our profitability could be adversely affected if increased costs associated with any future labor contracts are not recoverable through productivity improvements, price increases or cost reductions. We believe that we have good relations with our employees. However, there can be no guarantee that ongoing or future contract negotiations will be successful or completed without a work stoppage.
 
Recent Developments
 
On February 18, 2011, we purchased a 44-acre parcel of real property that included a 177,500 square-foot building in Western New York State and announced plans to install a heavy-duty 80” x 104” Metal Shredder inside the building. The planned shredder is capable of processing 100 to 120 tons of shredded scrap per hour. The installation will include a new state-of-the-art downstream separation system to maximize the recovery of valuable


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non-ferrous products. The Company expects to make a capital investment of more than $10.0 million for the acquisition of the property, plant and support equipment and related improvements for the shredder project. We will use proceeds from the Credit Agreement, recently amended and described below and available cash. The facility is expected to be operational by the end of 2011.
 
On January 31, 2011, we acquired 100% of the outstanding capital stock of Goodman Services, Inc., a Bradford, Pennsylvania-based full service recycling company with additional operations in Jamestown, New York and Canton, Ohio. The purchase price included cash and Metalico common stock among other items of consideration. Funding for the acquisition included a drawdown under our credit agreement agented by JPMorgan Chase Bank. As part of the purchase price for the acquisition, we issued 782,763 shares of its common stock having an aggregate value to the sellers of $4.4 million determined at a price per share of $5.61.
 
On January 27, 2011 we entered into a Second Amendment (the “Amendment”) to the Credit Agreement dated as of February 26, 2010 (the “Credit Agreement”) among the Company and certain of our direct and indirect subsidiaries as borrowers or guarantors and a syndicate of lenders led by JPMorgan Chase Bank, N.A. and also including RBS Business Capital, a division of RBS Asset Finance, Inc., a subsidiary of RBS Citizens, N.A., and Capital One Leverage Finance Corp. The Amendment provides for an increase in the maximum amount available under the Credit Agreement to $85.0 million, including $70.0 million under the revolving credit facility (up from $57.0 million) and an additional term loan to be available in multiple draws in the aggregate amount of $9.0 million earmarked for contemplated capital expenditures. The term loan funded at the closing of the Credit Agreement continues to amortize. The Amendment increases the advance rate for inventory under the revolving facility’s borrowing base formula. LIBOR-based interest rates have been reduced to the current LIBOR rate plus 3.25% for revolving loans and the current LIBOR rate plus 3.75% for term loans. The Amendment also adjusts the definition of Fixed Charges and several covenants, allowing for increases in permitted indebtedness, capital expenditures, and permitted acquisition baskets, and extends the Credit Agreement’s maturity date from March 1, 2013 to January 23, 2014. The remaining material terms of the Credit Agreement remain unchanged by the Amendment.
 
Segment reporting
 
See Note 20 to the Company’s audited financial statements for the year ended December 31, 2010, located elsewhere in this report.
 
Available Information
 
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy these documents at the SEC’s Public Reference Room, which is located at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the SEC’s Public Reference Room. In addition, the SEC maintains an Internet website at www.sec.gov which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
 
We make available at no cost on our website, www.metalico.com, our reports to the SEC and any amendments to those reports as soon as reasonably practicable after we electronically file or furnish such reports to the SEC. Interested parties should refer to the Investors link on the home page of our website located at www.metalico.com. Information contained on our website is not incorporated into this report. In addition, our Code of Business Conduct and Ethics and Insider Trading Policy, the charters for the Board of Directors’ Audit Committee and Compensation Committee, and the Board’s Statement of Nominating Principles and Procedures, all of which were adopted by our Board of Directors, can be found on the Company’s website through the Corporate Governance link on the Investors page. We will provide these governance documents in print to any stockholder who requests them. Any amendment to, or waiver of, any provision of the Code of Ethics and any waiver of the Code of Business Conduct and Ethics for directors or executive officers will be disclosed on our website under the Corporate Governance link.
 
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.


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Risks Relating To Our Business
 
Prices of commodities we own are volatile, which may adversely affect our operating results and financial condition.
 
Although we seek to turn over our inventory of raw or processed scrap metals as rapidly as markets dictate, 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, have been extremely volatile and we expect this volatility to continue. Such volatility can be due to numerous factors beyond our control, including:
 
  •  general domestic and global economic conditions, including metal market conditions;
 
  •  competition;
 
  •  the financial condition of our major suppliers and consumers;
 
  •  the availability of imported finished metal products;
 
  •  international demand for U.S. scrap;
 
  •  the availability and relative pricing of scrap metal substitutes;
 
  •  import duties and tariffs;
 
  •  currency exchange rates;
 
  •  demand for exchange traded funds; and
 
  •  domestic and international labor costs
 
Although we have historically attempted to raise the selling prices of our lead fabricating and scrap recycling products in response to an increasing price environment, competitive conditions may limit our ability to pass on price increases to our consumers. In a decreasing price environment, we may not have the ability to fully recoup the cost of raw materials used in fabrication and raw scrap we process and sell to our consumers.
 
The volatile nature of metal commodity prices makes it difficult for us to predict future revenue trends as shifting international and domestic demand can significantly impact the prices of our products, supply and demand for our products and affect anticipated future results. Most of our consumers purchase processed non-ferrous scrap according to a negotiated spot sales contract that establishes the price and quantity purchased for the month. We use forward sales contracts with PGM substrate processors to hedge against extremely volatile PGM metal prices. In the event our hedging strategy is not successful, our operating margins and operating results can be materially and adversely affected. In addition, the volatility of commodity prices and variability of yields, and the resulting unpredictability of revenues and costs, can adversely and materially affect our operating margins and other results of operations.
 
The profitability of our scrap recycling operations depends, in part, on the availability of an adequate source of supply.
 
We depend on scrap for our operations and 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 an adequate supply of scrap metal is not available to us, we would be unable to recycle metals at desired volumes and our results of operations and financial condition would be materially and adversely affected.
 
The cyclicality of our industry could negatively affect our sales volume and revenues.
 
The operating results of the scrap metal 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 operating results of scrap metal 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


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experience major cutbacks in production, resulting in decreased demand for steel, copper and aluminum. Cutbacks in the automotive and construction industries can cause significant fluctuations in supply, demand and pricing for our products, which can materially and adversely affect our results of operations and financial condition. Our ability to withstand significant economic downturns that we may encounter in the future will depend in part on our levels of debt and equity capital, operating flexibility and access to liquidity.
 
The volatility of the import and export markets may adversely affect our operating results and financial condition.
 
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 domestically. Our operating results could also be negatively affected by strengthening or weakening in the US dollar. US dollar weakness provides some support to prices of commodities that are denominated in US dollars but with large non-US consumption and cost bases. For example, appreciation in the Chinese and Indian currencies have increased marginal costs of aluminum and iron ore production, thereby increasing the underlying cost basis for prices. 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 further.
 
The volatility of lead pricing may impact our ability to sell product.
 
Our lead fabricating facilities may be adversely impacted by increases or decreases in lead pricing. Changing lead markets may impact our ability to secure the volume of raw materials needed at pricing considered sustainable before driving consumers to substitute products. Disruptions in domestic or foreign lead refining capacity could impact our ability to secure enough raw materials to meet production requirements. Increases in the cost of lead could reduce the demand for lead products by making nonlead-bearing alternatives more cost attractive. Continued economic weakness in the U.S. and abroad will continue to negatively impact demand for our products.
 
Impairment in the carrying value of goodwill or other acquired intangibles could negatively affect our operating results and net worth.
 
The carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of other intangibles represents the fair value of supplier lists, trademarks, trade names and other acquired intangibles. Goodwill and other acquired intangibles expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated by our management at least annually for impairment. Events and conditions that could result in impairment include changes in the industries in which we operate, as well as competition, a significant product liability or environmental claim, or other factors leading to reduction in forecasted sales or profitability. At December 31, 2008, our market capitalization did not exceed total shareholders’ equity, which is one of many factors that are considered when determining goodwill impairment, and it required us to incur a significant charge for impairment. As such, we recorded an impairment charge of $36.3 million to goodwill and $22.8 million to other intangibles for the year ended December 31, 2008. We had no impairments during the years ended December 31, 2010 and 2009. Going forward, if, upon performance of an impairment assessment, it is determined that such assets are impaired, additional impairment charges may be recognized by reducing the carrying amount and recording a charge against earnings. Should current economic and equity market conditions deteriorate, it is possible that we could have additional material impairment charges against earnings in a future period.
 
Our significant indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business downturns.
 
As of December 31, 2010, the total outstanding principal amount of debt outstanding was $127.1 million, before debt discount of $1.2 million related to our 7% convertible notes and the application of cash and cash equivalents of $3.5 million available for repayment of such indebtedness. Subject to certain restrictions, exceptions and financial tests set forth in certain of our debt instruments, we will incur additional indebtedness in the future. We anticipate our debt service payment obligations during the next twelve months, to be approximately $18.9 million,


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comprised of principal coming due within the next twelve months of $11.2 million plus interest of $7.7 million on our total debt outstanding. As of December 31, 2010, approximately $41.3 million of our debt accrued interest at variable rates. 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, 2010, if the interest rate on our variable rate debt were to increase by 1%, our annual debt service payment obligations would increase by $413,000. The degree to which we are leveraged could have important negative consequences to the holders of our securities, including the following:
 
  •  general domestic and global economic conditions, including metal market conditions;
 
  •  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;
 
  •  we have increased vulnerability to adverse general economic and metal recycling industry conditions; and
 
  •  we may be vulnerable to higher interest rates because interest expense on borrowings under our loan agreement is based on margins over a variable base rate.
 
From time to time, we have relied on borrowings under our credit facility and from other lenders to acquire other businesses and to operate our business. However, many financial institutions have been adversely impacted by the recent financial crisis and, as a result, have ceased or reduced the amount of lending they have made available to their customers. As a result, we may have insufficient availability under our existing credit facility or the ability to borrow from other lenders to acquire additional businesses and to operate our business.
 
Our indebtedness contains covenants that restrict our ability to engage in certain transactions and failure to comply with the terms of such indebtedness could result in a default that could have material adverse consequences for us.
 
Under our credit agreement, we are required to satisfy specified financial covenants, including fixed charge coverage ratio and capital expenditure covenants. Although we are currently in compliance with the covenants and satisfy our financial tests, we have in the past been in technical default under certain of our prior loan facilities, all of which had been waived. In addition, we have in the past adjusted covenants contained in our prior loan facilities to protect against noncompliance and prepaid some of our outstanding debt. Our ability to comply with these specified financial covenants may be affected by general economic and industry conditions, as well as market fluctuations in metal prices and other events beyond our control. We do not know if we will be able to satisfy all such covenants in the future. Our breach of any of the covenants contained in agreements governing our indebtedness, including our credit agreement, could result in a default under such agreements. In the event of a default, a lender could elect not to make additional loans to us, could require us to repay some of our outstanding debt prior to maturity, and/or to declare all amounts borrowed by us, together with accrued interest, to be due and payable. In the event that this occurs, we would likely be unable to repay all such accelerated indebtedness.
 
We have pledged substantially all of our assets to secure our borrowings and are subject to covenants that may restrict our ability to operate our business.
 
Any indebtedness that we incur under our existing credit agreement is secured by substantially all of our assets other than real estate, which is subject to a negative pledge. If we default under the indebtedness secured by our assets, those assets would be available to the secured creditors to satisfy our obligations to the secured creditors.
 
We may not generate sufficient cash flow to service all of our debt obligations.
 
Our ability to make payments on our indebtedness and to fund our operations depends on our ability to generate cash in the future. Our future operating performance is subject to market conditions and business factors that are beyond our control. We might not be able to generate sufficient cash flow to pay the principal and interest on our debt. If our cash flows and capital resources are insufficient to allow us to make scheduled payments on our debt, we may have to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our debt. The terms of our debt, including the security interests granted to our lenders, might not allow for these alternative measures, and such measures might not satisfy our scheduled debt service obligations. In addition, in the


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event that we are required to dispose of material assets or restructure or refinance our debt to meet our debt obligations, we cannot assure you as to the terms of any such transaction or how quickly such transaction could be completed.
 
We may seek to make acquisitions that may prove unsuccessful or strain or divert our resources.
 
We continuously evaluate potential acquisitions.  We may not be able to complete any acquisitions on favorable terms or at all. Acquisitions present risks that could materially and adversely affect our business and financial performance, including:
 
  •  the diversion of our management’s attention from our everyday business activities;
 
  •  the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired business, including managing such acquired businesses either through our senior management team or the management of such acquired business; and
 
  •  the need to expand management, administration and operational systems.
 
If we make such acquisitions we cannot predict whether:
 
  •  we will be able to successfully integrate the operations and personnel of any new businesses into our business;
 
  •  we will realize any anticipated benefits of completed acquisitions;
 
  •  economic conditions could deteriorate after closing; or
 
  •  there will be substantial unanticipated costs associated with acquisitions, including potential costs associated with environmental liabilities undiscovered at the time of acquisition.
 
In addition, future acquisitions by us may result in:
 
  •  potentially dilutive issuances of our equity securities;
 
  •  the incurrence of additional debt;
 
  •  restructuring charges; and
 
  •  the recognition of significant charges for depreciation and amortization related to intangible assets.
 
We may in the future make investments in or acquire companies or commence operations in businesses and industries that are outside of those areas that we have operated historically. We cannot assure that we will be successful in managing any new business. If these investments, acquisitions or arrangements are not successful, our earnings could be materially adversely affected by increased expenses and decreased revenues.
 
The markets in which we operate are highly competitive. Competitive pressures from existing and new companies could have a material adverse effect on our financial condition and results of operations.
 
The markets for scrap metal are highly competitive, both in the purchase of raw scrap and the sale of processed scrap. We compete to purchase raw scrap with numerous independent recyclers, large public scrap processors and smaller scrap companies. Successful procurement of materials is determined primarily by the price and promptness of payment for the raw scrap and the proximity of the processing facility to the source of the unprocessed scrap. We occasionally face competition for purchases of unprocessed scrap from producers of steel products, such as integrated steel mills and mini-mills, which have vertically integrated their operations by entering the scrap metal recycling business. Many of these producers have substantially greater financial, marketing and other resources. Our operating costs could increase as a result of competition with these other companies for raw scrap.
 
We compete in a global market with regard to the sale of processed scrap. Competition for sales of processed scrap is based primarily on the price, quantity and quality of the scrap metals, as well as the level of service provided in terms of consistency of quality, reliability and timing of delivery. To the extent that one or more of our competitors becomes more successful with respect to any key factor, our ability to attract and retain consumers


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could be materially and adversely affected. Our scrap metal processing operations also face competition from substitutes for prepared ferrous scrap, such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron carbide and other forms of processed iron. The availability of substitutes for ferrous scrap could result in a decreased demand for processed ferrous scrap, which could result in lower prices for such products.
 
Our lead fabricating operations compete against two fabricators of similar products in the Southwest who distribute nationally, and several smaller regional producers of competing products across much of our product line. To a lesser extent, we also compete against products imported from Central and South America, Canada, Europe and Asia. To the extent that one or more of our competitors becomes more successful with respect to any key factor, or new competition enters our markets, our ability to attract and retain consumers could be materially and adversely affected.
 
Unanticipated disruptions in our operations or slowdowns by our shipping companies could adversely affect our ability to deliver our products, which could materially and adversely affect our revenues and our relationship with our consumers.
 
Our ability to process and fulfill orders and manage inventory depends on the efficient and uninterrupted operation of our facilities. In addition, our products are usually transported to consumers by third-party truck, rail carriers and barge services. As a result, we rely on the timely and uninterrupted performance of third party shipping companies and dock workers. Any interruption in our operations or interruption or delay in transportation services could cause orders to be canceled, lost or delivered late, goods to be returned or receipt of goods to be refused or result in higher transportation costs. As a result, our relationships with our consumers and our revenues and results of operations and financial condition could be materially and adversely affected.
 
Our operations consume large amounts of electricity and natural gas, and shortages, supply disruptions or substantial increases in the price of electricity and natural gas could adversely affect our business.
 
The successful operation of our facilities depends on an uninterrupted supply of electricity. Accordingly, we are at risk in the event of an energy disruption. The electricity industry has been adversely affected by shortages in regions outside of the locations of our facilities. Prolonged black-outs or brown-outs or disruptions caused by natural disasters such as hurricanes would substantially disrupt our production. Any such disruptions could materially and adversely affect our operating results and financial condition. Electricity prices are volatile and are expected to remain so in the near future. Additional prolonged substantial increases would have an adverse effect on the costs of operating our facilities and would negatively impact our gross margins unless we were able to fully pass through the additional expense to our consumers.
 
We depend on an uninterrupted supply of natural gas in our de-ox and lead fabricating facilities. Supply for natural gas depends primarily upon the number of producing natural gas wells, wells being drilled, completed and re-worked, the depth and drilling conditions of these wells and access to dependable methods of delivery. The level of these activities is primarily dependent on current and anticipated natural gas prices. Many factors, such as the supply and demand for natural gas, general economic conditions, political instability or armed conflict in worldwide natural gas producing regions and global weather patterns including natural disasters such as hurricanes affect these prices. Natural gas prices in the past have been very volatile. Additional prolonged substantial increases would have an adverse effect on the costs of operating our facilities and would negatively impact our gross margins unless we were able to fully pass through the additional expense to our consumers. We purchase most of our electricity and natural gas requirements in local markets for relatively short periods of time. As a result, fluctuations in energy prices can have a material adverse effect on the costs of operating our facilities and our operating margins and cash flow.
 
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 ability to manage our business.
 
Our operations depend heavily on the skills and efforts of our senior management team, including Carlos E. Agüero, our Chairman, President and Chief Executive Officer, Michael J. Drury, our Executive Vice-President and Chief Operating Officer for PGM and Lead Operations, and the other employees who constitute our executive


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management team. In addition, we rely substantially on the experience of the management of our subsidiaries with regard to day-to-day operations. We have employment agreements with Messrs. Agüero and Drury and certain other members of our management team that expire in December 2012. However, there can be no assurance that we will be able to retain the services of any of these individuals. We face intense competition for qualified personnel, and many of our competitors have greater resources than we have to hire qualified personnel. The loss of any member of our senior management team or a significant number of managers could have a material adverse effect on our ability to manage our business.
 
The concentration of our consumers and our exposure to credit risk could have a material adverse effect on our results of operations and financial condition.
 
Sales to our ten largest consumers represented approximately 51.8% of consolidated net sales for the year ended December 31, 2010 and 42.4% of consolidated net sales for the year ended December 31, 2009. Sales to our largest consumer represented approximately 23.6% of consolidated net sales for the year ended December 31, 2010 and 18.0% of consolidated net sales for the year ended December 31, 2009. In connection with the sale of our products, we generally do not require collateral as security for consumer receivables and do not maintain credit insurance. We have significant balances owing from some consumers that operate in cyclical industries and under leveraged conditions that may impair the collectability of those receivables. The loss of a significant consumer or our inability to collect accounts receivable would negatively impact our revenues and profitability and could materially and adversely affect our results of operations and 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 our consumers. Although these alternatives have not been a major factor in the industry to date, the use of alternatives to scrap metals may proliferate in the future if the prices for scrap metals rise or if the levels of available unprepared ferrous scrap decrease. As a result, we may be subject to increased competition which could adversely affect our revenues and materially and adversely affect our operating results and financial condition.
 
In order to maintain the supply line of catalytic converters for our PGM operations, we make unsecured advances to vendors. A significant downturn in the price of platinum group metals could result in the loss of a significant portion of those unsecured advances.
 
Vendor advances consist principally of unsecured advances to suppliers for purchase of catalytic converters for recycling. These advances are necessary in order to maintain the supply line of catalytic converters. Management works diligently to monitor such advances. As of December 31, 2010, advances to vendors totaled $2.4 million, and were reduced by an allowance of $116,000 for uncollectible advances. Net advances of $2.3 million are reported in prepaid and other current assets in the consolidated balance sheet as of December 31, 2010. A significant downturn in the price of platinum group metals could result in the loss of a significant portion of these advances and have a negative impact to our operating results.
 
Our operations are subject to stringent regulations, particularly under applicable environmental laws, which could subject us to increased costs.
 
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 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


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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 penalty or other liens to secure the parties’ reimbursement obligations.
 
Environmental legislation, regulation and enforcement continue to evolve 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, as environmental control standards become more stringent, our compliance expenditures could increase substantially. Due to the nature of our lead fabricating 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 we 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 consumers through product price increases.
 
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 fabricating 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 us or our predecessors, we may be fined and held liable for such damage. In addition, we may be required to remedy such conditions and/or change procedures. Thus, liabilities, expenditures, fines and penalties associated with environmental laws and regulations might be imposed on us in the future, and such liabilities, expenditures, fines or penalties might 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.
 
Certain of our sites are contaminated, and we are responsible for certain off-site contamination as well. Such sites may require investigation, monitoring and remediation. The existence of such contamination may result in federal, state, local and/or private enforcement or cost recovery actions against us, 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 our results of operations and financial condition.
 
Environmental impairment liability insurance, which we only carry on our scrap processing facility in Syracuse for conditions existing there prior to our purchase of the property, is prohibitively expensive and limited in the scope of its coverage. Our general liability insurance policies in most cases do not cover environmental damage.


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If we 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 some or all of the costs of certain remediation actions at certain sites. On occasion these costs have been material. Material fines, penalties, damages and expenses resulting from additional compliance issues and liabilities might be imposed on us in the future.
 
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 these properties if we choose to sell such properties, and may generally require us to incur significant costs to take advantage of any future selling opportunities.
 
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.
 
If more of our employees become members of unions, our operations could be subject to interruptions, which could adversely affect our results of operations and cash flow.
 
As of December 31, 2010, approximately 49 of our employees located at our facility in Granite City, Illinois were represented by the United Steelworkers of America and approximately 21 of our employees located at our scrap processing facility in Akron, Ohio were represented by the Chicago and Midwest Joint Board, formerly an affiliate of Unite Here. Our agreement with the United Steelworkers of America expires on March 15, 2011 and our agreement with the Joint Board expires on June 25, 2011. Although we are not aware at this time of any current attempts to organize other employees of ours, our employees may organize in the future. If we are unable to successfully renegotiate the terms of the contracts governing our employees currently or in the future or if we experience any extended interruption of operations at any of our facilities as a result of strikes or other work stoppages, our results of operations and cash flows could be materially and adversely affected.
 
Our operations present significant risk of injury or death. We may be subject to claims that are not covered by or exceed our insurance.
 
Because of the heavy industrial activities conducted at our facilities, there exists a risk of injury or death to our employees or other visitors, notwithstanding the safety precautions we take. Our operations are subject to regulation by federal, state and local agencies responsible for employee health and safety, including the Occupational Safety and Health Administration (“OSHA”), which has from time to time levied fines against us for certain isolated incidents. While we have in place policies to minimize such risks, we may nevertheless be unable to avoid material liabilities for any employee death or injury that may occur in the future. These types of incidents may not be covered by or may exceed our insurance coverage and may have a material adverse effect on our results of operations and financial condition.
 
Our business is seasonal and affected by weather conditions, which could have an adverse effect on our revenues and operating results.
 
Both of our business segments generally experience seasonal slowness in the months of July and December, as consumers tend to reduce production and inventories. In addition, periodic maintenance shutdowns or labor


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disruptions at our larger consumers may have an adverse impact on our operations. Our operations can also be adversely affected by periods of inclement weather, particularly during the winter and during the hurricane season in the Southeast region of the United States, which can adversely impact industrial and construction activity as well as transportation and logistics.
 
We face certain product liability and warranty claims that may harm our business.
 
Both our Scrap Metal Recycling and Lead Fabricating operations expose us to product liability claims if our products cause injury or are otherwise found to be defective. Regardless of their merit or eventual outcome, product liability claims may be time consuming and costly to defend and may result in decreased demand for a product, injury to our reputation and loss of revenues. Thus, whether or not we are insured, a product liability claim or product recall may result in losses that could be material. In addition, if we fail to meet contractual requirements for a product, we may be subject to product warranty costs and claims. These costs could both have a material adverse effect on our financial condition and results of operations and harm our reputation.
 
We intend to develop “greenfield” projects which are subject to risks commonly associated with such projects.
 
We intend to develop “greenfield” projects, either on our own or through joint ventures. There are risks commonly associated with the start-up of such projects which could result in operating difficulties or delays in the start-up period and may cause us not to achieve our planned production, timing, quality, environmental or cost projections, which could have a material adverse effect on our results of operations, financial condition and cash flows. These risks include, without limitation, difficulties in obtaining permits, equipment failures or damage, errors or miscalculations in engineering, design specifications or equipment manufacturing, faulty construction or workmanship, defective equipment or installation, human error, industrial accidents, weather conditions, failure to comply with environmental and other permits, and complex integration of processes and equipment.
 
Our industry is exposed to certain risks due to the bulk nature of materials that require quantity estimates.
 
Scrap metal recycling involves the intake, processing, and transport of bulk materials. Although we make diligent efforts to monitor and confirm exact amounts of inventory at all phases of our operations, inventory counts from time to time may include estimates of material. We believe our estimates to be reasonable and we apply various internal controls (including, among other methods, weighing deliveries and rolling inventory balances using quantities bought and sold) to check their validity. We have experienced no significant discrepancies but there can be no assurance of the strict accuracy of estimates.
 
Risks Relating to Our Common Stock
 
We do not expect to pay any dividends for the foreseeable future. Our stockholders may never obtain a return on their investment.
 
We have never declared or paid dividends on our common stock, and we do not expect to pay cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all our earnings, if any, in the foreseeable future will be used to finance the operation and growth of our business. In addition, our ability to pay dividends to holders of our capital stock is limited by our senior secured credit facilities, term notes and our outstanding convertible notes. Any future determination to pay dividends on our common stock is subject to the discretion of our Board of Directors and will depend upon various factors, including, without limitation, our results of operations and financial condition.
 
Our amended and restated certificate of incorporation, our bylaws, Delaware law and certain instruments binding on us contain provisions that could discourage a change in control.
 
Some provisions of our amended and restated certificate of incorporation and bylaws, as well as Delaware law, may be deemed to have an anti-takeover effect or may delay or make more difficult an acquisition or change in control not approved by our Board of Directors, whether by means of a tender offer, open market purchases, a proxy


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contest or otherwise. These provisions could have the effect of discouraging third parties from making proposals involving an acquisition or change in control, although such a proposal, if made, might be considered desirable by a majority of our stockholders. These provisions may also have the effect of making it more difficult for third parties to cause the replacement of our current management team without the concurrence of our Board of Directors. In addition, our outstanding convertible notes and certain of our warrants also contain change in control provisions that could discourage a change in control.
 
We have incurred and will continue to incur significant increased costs in order to assess our internal controls over financial reporting and our internal controls over financial reporting may be found to be deficient.
 
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to assess its internal controls over financial reporting and requires auditors to attest to that assessment. Current regulations of the Securities and Exchange Commission, or SEC, require us to include this assessment and attestation in our Annual Report on Form 10-K for each of our fiscal years.
 
We have incurred and will continue to incur significant costs in maintaining compliance with existing subsidiaries, implementing and testing controls at recently acquired subsidiaries and responding to the new requirements. In particular, the rules governing the standards that must be met for management to assess its internal controls over financial reporting under Section 404 are complex and require significant documentation, testing and possible remediation. Our process of reviewing, documenting and testing our internal controls over financial reporting may cause a significant strain on our management, information systems and resources. We may have to invest in additional accounting and software systems. We have been and may continue to be required to hire additional personnel and to use outside legal, accounting and advisory services. In addition, we will incur additional fees from our auditors as they perform the additional services necessary for them to provide their attestation. If we are unable to favorably assess the effectiveness of our internal control over financial reporting when we are required to, we may be required to change our internal control over financial reporting to remediate deficiencies. In addition, investors may lose confidence in the reliability of our financial statements causing our stock price to decline.
 
The market price of our common stock has been volatile over the past twelve months and may continue to be volatile.
 
The market price of our common stock has been volatile over the past twelve months and it may continue to be volatile. We cannot predict the price at which our common stock will trade in the future and it may decline. The price at which our common stock trades may fluctuate significantly and may be influenced by many factors, including our financial results, developments generally affecting our industries, the performance of each of our business segments, our capital structure (including the amount of our indebtedness), general economic, industry and market conditions, especially in light of the current economic crisis in the United States and elsewhere, the depth and liquidity of the market for our common stock, fluctuations in metal prices, investor perceptions of our business and us, reports by industry analysts, negative announcements by our customers, competitors or suppliers regarding their own performances, and the impact of other “Risk Factors” discussed in this filing.
 
Future sales of our common stock, including sales of our common stock acquired upon the exercise of outstanding options or warrants or upon conversion of our outstanding convertible notes, may cause the market price of our common stock to decline.
 
We had 46,559,878 shares of common stock outstanding as of December 31, 2010. In addition, options to purchase an aggregate of 2,350,993 shares of our common stock were outstanding, of which 1,386,640 were vested as of December 31, 2010. All remaining options will vest over various periods ranging up to a three-year period measured from the date of grant. As of December 31, 2010, the weighted-average exercise price of the vested stock options was $8.81 per share. As of December 31, 2010, we also had warrants to purchase an aggregate of 1,419,231 shares of common stock outstanding, at an average exercise price of $12.89 per share and convertible notes in the principal amount of $81.1 million outstanding, which are convertible at a price of $14.00 per share. The convertible notes contain “weighted average” anti-dilution protection which provides for an adjustment of the conversion price of the notes in the event that we issue shares of our common stock or securities convertible or


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exercisable for shares of our common stock at a price below the conversion price of the notes. The amount of any such adjustment will depend on the price such securities are sold at and the number of shares issued or issuable in such transaction. We also may issue additional shares of stock in connection with our business, including in connection with acquisitions and financings, including this offering, and may grant additional stock options to our employees, officers, directors and consultants under our stock option plans or warrants to third parties. If a significant portion of these shares were sold in the public market, the market value of our common stock could be adversely affected.
 
Item 2.   Properties
 
Our facilities are generally comprised of:
 
  •  indoor and outdoor processing areas;
 
  •  various pieces of production equipment and transportation related equipment;
 
  •  warehouses for the storage of repair parts and of unprocessed and processed ferrous and non-ferrous scrap;
 
  •  storage yards for unprocessed and processed scrap;
 
  •  machine or repair shops for the maintenance and repair of vehicles and equipment;
 
  •  scales for weighing scrap;
 
  •  loading and unloading facilities;
 
  •  administrative offices; and
 
  •  garages for transportation equipment.
 
Our scrap processing facilities have specialized equipment for processing various types and grades of scrap metal, which may include: grapples and magnets and front-end loaders to transport and process both ferrous and non-ferrous scrap, crane-mounted alligator or stationary guillotine shears to process large pieces of scrap, wire stripping and chopping equipment, balers and torch cutting stations. Processing operators transport inbound and outbound scrap on a fleet of rolloff trucks, dump trucks, stake-body trucks and lugger trucks.
 
A significant portion of our outbound ferrous scrap products are shipped in rail cars generally provided by the railroad company that services seven of our scrap locations.
 
Fabrication facilities include shot towers, rolling mills of various sizes, extrusion presses, mold casting lines and refining kettles used to process and make a variety of lead-based products.
 
The following table sets forth information regarding our principal properties:
 
                         
        Buildings
       
        Approx.
  Approx.
  Leased/
Location
 
Operations
  Square. Ft.   Acreage   Owned
 
Metalico, Inc. 
  Corporate Headquarters     6,190       N/A     Leased(1)
186 North Ave. East
                       
Cranford, NJ
                       
Mayco Industries, Inc. 
  Office/ Lead Product Fabrication and     96,183       7.5     Owned
18 West Oxmoor Rd
  Manufacturing and Storage                    
Birmingham, AL
                       
19 West Oxmoor Rd
  Warehouse     75,000       1.7     Leased(2)
Birmingham, AL
                       
1200 16th St. 
  Office/ Lead Product Fabrication     180,570       12.5     Owned
Granite City, IL
                       


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        Buildings
       
        Approx.
  Approx.
  Leased/
Location
 
Operations
  Square. Ft.   Acreage   Owned
 
Metalico Buffalo, Inc. 
  Office/Scrap Processor/Metal Storage     312,966       24     Owned
127 Fillmore Ave.
                       
Buffalo, NY
                       
2504 South Park Ave.
  Office/Buying Center     4,584       1.0     Leased(3)
Lackawanna, NY
                       
3175 Lake Shore Rd.
  Office/ Scrap Processor/ Metal Storage     177,500       44     Owned(4)
Hamburg, NY
                       
Metalico Rochester, Inc. 
  Office/Scrap Processor/ Metal Storage     74,175       12.7     Owned
1515 Scottsville Rd.
                       
Rochester, NY
                       
50 Portland Ave.
  Office/Scrap Processor/ Metal Storage     27,500       3.2     Owned
Rochester, NY
                       
West Coast Shot, Inc. 
  Office/Storage     6,225       1.5     Owned
32 Red Rock Rd.
                       
Carson City, NV
                       
Metalico Transport, Inc. 
  Office/Scrap Handling/ Rail Sittings     28,992       12     Leased(5)
1951 Hamburg Turnpike
  for Transshipping/Storage                    
Lackawanna, NY
                       
Metalico Aluminum Recovery, Inc. 
  Office/ Scrap Handling/ Aluminum     108,000       22     Owned
6443 Thompson Rd.
  Melting/ De-Ox                    
Dewitt, NY
  Production/Storage                    
Metalico Niagara, Inc. 
  Office/Scrap Processor/ Metal Storage     4,050       1     Leased(6)
2133 Maple Ave
                       
Niagara Falls, NY
                       
Santa Rosa Lead Products, Inc. 
  Office/ Lead Product Fabrication     14,000       1.5     Leased(7)
33 So. University St. 
  and Storage                    
Healdsburg, CA
                       
3949 Guasti Rd.
  Office/Production/Storage     6,160       N/A     Leased(8)
Ontario, CA
                       
Metalico Transfer, Inc. 
  Office/ Waste Transfer Station     35,000       5     Owned
150 Lee Road
                       
Rochester, NY
                       
Totalcat Group, Inc.
  Office/Catalytic Converter Processor/     22,000       N/A     Leased(9)
2-20 E. Peddie Street
  Material Storage                    
Newark, NJ
                       
1075 Andrew Drive
  Office/ Production/ Material Storage     37,702       N/A     Leased(10)
West Chester, PA
                       
Metalico Akron, Inc
  Office/Scrap Processor/ Metal Storage     6,660       10.3     Owned
888 Hazel Street
                       
Akron, OH
                       
943 Hazel Street
  Scrap Processor/ Metal Storage     34,350       19.7     Owned
Akron, OH
                       
Tranzact, Inc.
  Office/ Scrap Processor/ Metal Storage     12,000       2.7     Leased(11)
1185 Lancaster Pike
                       
Quarryville, PA
                       
American CatCon, Inc. 
  /Office/Catalytic Converter Processor     30,000       10     Leased(12)
17401 Interstate Highway 35
  Material Storage                    
Buda, TX
                       
4577 Mint Way
  Office/Catalytic Converter Processor/     6,664       N/A     Leased(13)
Dallas, TX
  Material Storage                    
10123 Southpark Drive
  Office/Catalytic Converter Processor/     10,000       2.5     Owned
Gulfport, MS
  Material Storage                    

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        Buildings
       
        Approx.
  Approx.
  Leased/
Location
 
Operations
  Square. Ft.   Acreage   Owned
 
Metalico Pittsburgh, Inc.
  Office/ Scrap Processor/ Metal Storage     751,878       17.26     Owned
3100 Grand Avenue
                       
Neville Township, PA
                       
3400 Grand Avenue
  Office/ Scrap Processor/ Metal Storage     247,734       5.68     Owned
Neville Township, PA
                       
Albany Road
  Office/ Scrap Processor/ Metal Storage     99,841       12.51     Owned
Brownsville, PA
                       
1093 Fredonia Road
  Office/ Scrap Processor/ Metal Storage     5,096       4.92     Owned
Hadley, PA
                       
2024 Harmon Creek Road
  Office/ Scrap Processor/ Metal Storage     5,050       3.28     Owned
Colliers, WV
                       
96 Oliver Road
  Office/ Scrap Processor/ Metal Storage     4,000       18.6     Leased (14)
Uniontown, PA
                       
Metalico Youngstown, Inc.
  Office/ Scrap Processor/ Metal Storage     5,226       16.86     Owned
100 Division Street
                       
Youngstown, OH
                       
1420 Burton Street SE
  Office/ Scrap Processor/ Metal Storage     6,250       2.15     Owned
Warren, OH
                       
3108 DeForest Road
  Office/ Scrap Processor/ Metal Storage     7,920       4.52     Owned
Warren, OH
                       
Goodman Services, Inc.
  Office/ Scrap Processor/ Metal Storage     20,000       12     Owned
286 High Street
                       
Bradford, PA
                       
5338 Route 474
  Office/ Scrap Processor/ Metal Storage     12,000       12.5     Owned
Ashville, NY
                       
 
 
(1) The lease on our corporate headquarters expires June 30, 2012, subject to an automatic renewal clause for two successive three-year periods that is effective unless we give notice at least 180 days prior to the then-effective termination date. The current annual rent is $162,580.
 
(2) The lease expires January 31, 2012. The lessor may terminate at any time on thirty days’ written notice. The annual rent is $36,000.
 
(3) The lease expires August 31, 2013. We have the right to renew for one additional term of two years. The current aggregate monthly rent is $5,125.
 
(4) We acquired this property February 18, 2011. The facility is not yet operational
 
(5) This is a month to month lease at $3,500 a month that includes access to 750 feet of railroad.
 
(6) The lease expires October 31, 2015. We have rights to renew for an additional consecutive term of five additional years. The annual rent is $30,000. We also have an option to purchase the underlying premises for a price to be determined. The option expires upon the expiration of the term of the lease, including any renewal terms.
 
(7) The lease expires April 30, 2013. The current monthly rent is $8,800 and the annual rent is $105,600.
 
(8) The lease expires August, 2011. Monthly rent is $5,499.
 
(9) The lease expires February 28, 2013. The annual rent is $208,260.
 
(10) The lease expires December 31, 2020. The annual rent for 2011 including common area maintenance charges is $178,878.
 
(11) The lease expires May 31, 2012 with an option to renew for one five-year period. The annual rent for the initial term is $84,000. Annual rent for renewal term is $96,600. Renewal is automatic unless tenant sends written notice not less than six months prior to expiration of first term.
 
(12) The lease expires January 31, 2013. The annual rent is $366,323. Tenant has the right, with at least ninety days prior written notice to the landlord, to extend the lease for one additional five-year term. Annual rent for each

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year in the renewal term would increase in accordance with increases in the Consumer Price Index. Tenant also holds an option to purchase the premises.
 
(13) The lease expires October 2013. Monthly rent is $2,149.
 
(14) The lease expires April 30, 2018. The annual rent is $34,000.
 
We believe that our facilities are suitable for their present and intended purposes and that we have adequate capacity for our current levels of operation.
 
Item 3.   Legal Proceedings
 
From time to time, we are involved in various litigation matters involving ordinary and routine claims incidental to our business. A significant portion of these matters result from environmental compliance issues and workers compensation-related claims applicable to our operations. We are involved in litigation and environmental proceedings as described below.
 
Our Gulf Coast Recycling, Inc. subsidiary (“Gulf Coast”), previously located in Tampa, Florida, is a party to four consent orders and two settlement agreements governing remediation and monitoring of various sites in the greater Tampa area. All agreed remediation under those orders and pursuant to those agreements has been completed. The Company and its subsidiaries are at this time in material compliance with all of their obligations under the consent orders and settlement agreements. Substantially all of Gulf Coast’s assets, including its real property interests, were sold on May 31, 2006 and Gulf Coast is no longer responsible for on-site or adjacent remediation or monitoring.
 
We know of no material existing or pending legal proceedings against the Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest. The outcome of open unresolved legal proceedings is presently indeterminable. Any settlement resulting from resolution of these contingencies will be accounted for in the period of settlement. We do not believe the potential outcome from these legal proceedings will significantly impact our financial position, operations or cash flows.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
None.


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PART II
 
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Trading in our common stock commenced on the American Stock Exchange (now known as NYSE Amex) on March 15, 2005 under the symbol “MEA.” The table below sets forth, on a per share basis for the period indicated, the high and low closing sale prices for our common stock as reported by NYSE Amex.
 
                 
    Price Range
    High   Low
 
Year End December 31, 2010
               
First Quarter
  $ 6.38     $ 4.55  
Second Quarter
  $ 6.65     $ 3.98  
Third Quarter
  $ 4.40     $ 3.08  
Fourth Quarter
  $ 5.88     $ 3.91  
Year End December 31, 2009
               
First Quarter
  $ 3.66     $ 1.41  
Second Quarter
  $ 5.26     $ 1.81  
Third Quarter
  $ 4.99     $ 3.31  
Fourth Quarter
  $ 4.98     $ 3.81  
 
The closing sale price of our common stock as reported by NYSE Amex on March 4, 2011 was $6.08.
 
Holders
 
As of March 4, 2011, there were 296 holders of record of our common stock, 16 holders of warrants to purchase our common stock, and 128 holders of stock options exercisable for shares of our common stock.
 
Dividends
 
We have never declared or paid dividends on our common stock, and we do not expect to pay cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all our earnings, if any, in the foreseeable future will be used to finance the operation and growth of our business. In addition, our ability to pay dividends to holders of our capital stock is limited by our senior secured credit facility. Any future determination to pay dividends on our common stock is subject to the discretion of our Board of Directors and will depend upon various factors, including, without limitation, our results of operations and financial condition. In addition, at this time our senior secured credit facility prohibits the payment of dividends. We have no preferred stock outstanding.
 
EQUITY COMPENSATION PLAN INFORMATION
 
We have two stockholder approved equity compensation plans, the 1997 Long Term Incentive Plan and the 2006 Long-Term Incentive Plan described above. Options generally vest in equal monthly installments over three years and may be exercised for up to five years from the date of grant.


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The following table provides certain information regarding our equity incentive plans as of December 31, 2010.
 
                         
                Number of Securities
 
                Remaining Available for
 
    Number of Securities to
    Weighted-Average Exercise
    Future Issuance Under
 
    be Issued Upon Exercise
    Price of Outstanding
    Equity Compensation Plans
 
    of Outstanding Options,
    Options,
    (Excluding Securities
 
    Warrants and
    Warrants and
    Reflected in
 
Plan Category
  Rights     Rights     Column (a))  
 
Equity compensation plans approved by security holders
    1,386,640     $ 8.81       4,655,988  
Equity compensation plans not approved by security holders
                   
                         
Total
    1,386,640     $ 8.81       4,655,988  
                         
 
Shareholder Performance
 
Set forth below is a line graph comparing the cumulative total stockholder return on our common stock against the cumulative total return of the Russell 2000 Index and the Standard & Poor’s Iron and Steel Industry Index Group from March 15, 2005, the first day of public trading of our common stock on the American Stock Exchange (now known as NYSE Amex), through December 31, 2010. The graph assumes that $100 was invested in the Company’s Common Stock and each index on March 15, 2005, and that all dividends were reinvested.
 
Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate by reference this Form 10-K, in whole or in part, the following Performance Graph shall not be incorporated by reference into any such filings.
 
Comparison of Cumulative Total Return
 
(PERFORMANCE GRAPH)
 
                                         
    December 31,
  December 31,
  December 31,
  December 31,
  December 31,
    2006   2007   2008   2009   2010
 
Metalico, Inc. 
    100.0       214.1       30.7       97.4       116.4  
Russell 2000 Index
    100.0       97.3       63.4       79.4       99.5  
S&P Steel Index
    100.0       119.2       56.1       70.6       79.1  


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Item 6.   Selected Financial Data
 
SELECTED FINANCIAL DATA
 
The selected historical financial data set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. The selected income statement data for the years ended December 31, 2010, 2009 and 2008 and the selected balance sheet data as of December 31, 2010 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this report. The selected income statement data for the years ended December 31, 2007 and 2006 and the selected balance sheet data as of December 31, 2007 and 2006 have been derived from audited consolidated financial statements that are not included in this Form 10-K. The historical results are not necessarily indicative of the results of operations to be expected in the future.
 
                                         
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
 
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
 
    2010     2009     2008     2007     2006  
    ($ thousands, except share data)  
 
Selected Income Statement Data:
                                       
Revenue
  $ 553,253     $ 291,733     $ 818,195     $ 334,213     $ 207,655  
                                         
Costs and expenses
                                       
Operating expenses
    477,066       239,647       756,099       278,256       170,090  
Selling, general and administrative expenses
    26,482       25,994       30,146       20,315       13,772  
Depreciation and amortization
    13,728       13,240       12,864       6,279       3,890  
Gain on insurance recovery
    (513 )                        
Gain on acquisition
          (866 )                  
Impairment charges
                59,043              
                                         
      516,763       278,015       858,152       304,850       187,752  
                                         
Operating income (loss)
  $ 36,490     $ 13,718     $ (39,957 )   $ 29,363     $ 19,903  
                                         
Amounts attributable to common shareholders:
                                       
Income (loss) from continuing operations
  $ 13,471     $ (3,640 )   $ (42,430 )   $ 15,671     $ 11,619  
Discontinued operations
    (9 )     195       (1,230 )     (918 )     (1,291 )
                                         
Net income (loss)
  $ 13,462     $ (3,445 )   $ (43,660 )   $ 14,753     $ 10,328  
                                         
Earnings (loss) per common share:
                                       
Basic:
                                       
Income (loss)from continuing operations
  $ 0.29     $ (0.08 )   $ (1.21 )   $ 0. 54     $ 0. 46  
Discontinued operations, net
                (0.04 )     (0.03 )     (0.05 )
                                         
Net income (loss)
  $ 0.29     $ (0.08 )   $ (1.25 )   $ 0.51     $ 0.41  
                                         
Diluted:
                                       
Income (loss) from continuing operations
  $ 0.29     $ (0.08 )   $ (1.21 )   $ 0.53     $ 0.45  
Discontinued operations, net
                (0.04 )     (0.03 )     (0.05 )
                                         
Net income (loss)
  $ 0.29     $ (0.08 )   $ (1.25 )   $ 0.50     $ 0.40  
                                         
Weighted Average Common Shares Outstanding:
                                       
Basic
    46,454,177       41,200,895       35,136,316       29,004,254       24,922,942  
                                         
Diluted
    46,454,177       41,200,895       35,136,316       29,338,751       26,016,562  
                                         
Selected Balance Sheet Data:
                                       
Total Assets
  $ 328,507     $ 296,701     $ 340,293     $ 269,570     $ 118,407  
Total Debt (Including Current Maturities)
  $ 125,962     $ 116,793     $ 184,709     $ 95,103     $ 18,502  
Redeemable Common Stock
  $     $     $ 4,000     $     $  
Metalico, Inc. Stockholders’ Equity
  $ 167,315     $ 150,257     $ 112,972     $ 124,017     $ 73,713  


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis includes forward-looking statements. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements. Please refer to “Special Note Regarding Forward-Looking Statements” for more information. The results for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.
 
GENERAL
 
We operate in thirty locations primarily in two distinct business segments: (i) ferrous and nonferrous scrap metal recycling (“Scrap Metal Recycling”) and (ii) product manufacturing, fabricating, and refining of lead and other metals (“Lead Fabricating”). The Scrap Metal Recycling segment includes twenty-six scrap metal recycling facilities located in New York, New Jersey, Ohio, Pennsylvania, Texas, Mississippi, and West Virginia, and an aluminum de-ox plant located in Syracuse, New York.
 
The Lead Fabricating segment includes four lead fabrication and recycling plants located in Birmingham, Alabama; Healdsburg and Ontario, California and Granite City, Illinois.
 
CRITICAL ACCOUNTING POLICIES
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Areas that require significant judgments, estimates, and assumptions include accounting for revenues; accounts receivable and allowance for uncollectible accounts receivable; derivatives and hedging activities; environmental and litigation matters; the testing of goodwill; stock-based compensation; and income taxes. Management uses historical experience and all available information to make these judgments, estimates, and assumptions, and actual results may differ from those used to prepare the Company’s Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes provide a meaningful and fair perspective of the Company.
 
The critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements are disclosed in Note 1 to the Consolidated Financial Statements located elsewhere in this filing.
 
Revenue recognition:  Revenue from product sales is recognized as goods are shipped, which generally is when title transfers and the risks and rewards of ownership have passed to customers, based on free on board (“FOB”) terms. Brokerage sales are recognized upon receipt of materials by the customer and reported net of costs in product sales. Historically, there have been very few sales returns and adjustments in excess of reserves for such instances that would impact the ultimate collection of revenues therefore, no material provisions have been made when a sale is recognized.
 
Accounts Receivable and Allowance for Uncollectible Accounts Receivable:  Accounts receivable consists primarily of amounts due from customers from product sales. The allowance for uncollectible accounts receivable totaled $1.0 million and $1.2 million as of December 31, 2010 and December 31, 2009, respectively. Our determination of the allowance for uncollectible accounts receivable includes a number of factors, including the age of the accounts, past experience with the accounts, changes in collection patterns and general industry conditions.
 
Derivatives and Hedging:  We are exposed to certain risks relating to our ongoing business operations. The primary risks currently managed by using derivative instruments are commodity price risk. We use forward sales


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contracts with PGM substrate processors to protect against volatile commodity prices. This process ensures a fixed selling price for the material we purchase and process. We secure selling prices with PGM processors, in ounces of Platinum, Palladium and Rhodium, in incremental lots for material which we expect to purchase within an average 2 to 3 day time period. However, these forward sales contracts with PGM substrate processors are not subject to any hedge designation as they are considered within the normal sales exemption provided by ASC Topic 815.
 
We have in the past entered into interest rate swaps to manage interest rate risk associated with our variable-rate borrowings. In connection with the Credit Agreement entered into on March 2, 2010, with JPM Chase Bank, N.A., the Company was required to terminate the $20.0 million interest rate swap contract. As a result, the Company paid $760,000 to terminate the interest rate swap contract. With the termination of the interest rate swap contract, no other interest rate swap agreement is outstanding.
 
Goodwill:  The carrying amount of goodwill is tested annually as of December 31 and whenever events or circumstances indicate that impairment may have occurred. Judgment is used in assessing whether goodwill should be tested more frequently for impairment than annually. Factors such as unexpected adverse economic conditions, competition and other external events may require more frequent assessments.
 
The goodwill impairment test follows a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.
 
For purposes of this testing, the Company has determined to have seven reporting units as follows: Lead Fabricating and Recycling, New York State Scrap Recycling, Pittsburgh Scrap Recycling, Akron Scrap Recycling, Youngstown Scrap Recycling, Newark PGM Recycling and Texas PGM Recycling.
 
In determining the carrying value of each reporting unit, management allocates net deferred taxes and certain corporate maintained liabilities specifically allocable to each reporting unit to the net operating assets of each reporting unit. The carrying amount is further reduced by any impairment charges made to other indefinite lived intangibles of a reporting unit.
 
Since market prices of our reporting units are not readily available, we make various estimates and assumptions in determining the estimated fair values of the reporting units. The evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. We use a discounted cash flow model (DCF Model) to estimate the current fair value of our reporting units when testing for impairment. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including sales volumes, profit margins, tax rates, capital spending, discount rate, and working capital changes. Forecasts of operating and selling, general and administrative expenses are generally based on historical relationships of previous years. When applying the DCF Model, the cash flows expected to be generated are discounted to their present value equivalent using a rate of return that reflects the relative risk of the investment, as well as the time value of money. This return is an overall rate based upon the individual rates of return for invested capital (equity and interest-bearing debt). The return, known as the weighted average cost of capital (WACC), is calculated by weighting the required returns on interest-bearing debt and common equity in proportion to their estimated percentages in an expected capital structure. For our 2010 analysis, we arrived at a discount rate of 17.2%. The inputs used in calculating the WACC include (i) average of capital structure ratios used in previous Metalico acquisition valuations, (ii) an estimate of combined federal and state tax rates (iii) the cost of Baa rated debt based on Moody’s Seasoned Corporate Bond Yields of 6.10% as of December 1, 2010 and (iv) a 22.0% required return on equity determined under the Modified Capital Asset Pricing (CAPM) model.
 
If the carrying amount of a reporting unit that contains goodwill exceeds fair value, a possible impairment would be indicated. If a possible impairment is indicated, the implied fair value of goodwill would be estimated by comparing the fair value of the net assets of the reporting unit, excluding goodwill, to the total fair value of the unit. If the carrying amount of goodwill exceeds its implied fair value, an impairment charge would be recorded.


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At December 31, 2008, we performed our annual testing for impairment of goodwill. As part of our assessment of the recovery of goodwill, we conducted an extensive valuation analysis using an income approach based upon a five-year financial projection that took into consideration the current weak economic conditions with modest recovery occurring in the second half of 2009. The impairment analysis indicated that impairment existed at four reporting units and the Company recorded a goodwill impairment charge of $36.3 million for the year ended December 31, 2008.
 
Throughout 2009 and into 2010, the financial markets and industries in which we operate improved from the conditions that existed at December 31, 2008. Additionally, we have experienced an increase in the price of our common stock and total market capitalization value. At December 31, 2010 and 2009, the Company’s market capitalization exceeded total stockholders’ equity by approximately $106.5 and $78.2 million, respectively. Significant improvements in economic conditions in industries in which we purchase and sell material have resulted in forecasts which, when used in our DCF model, support the carrying value of our goodwill in all of our reporting units. As a result, no indicators of impairment were identified for the years ended December 31, 2010 and 2009.
 
Intangible Assets and Other Long-Lived Assets:  We test all finite-lived intangible assets (amortizable) and other long-lived assets, such as fixed assets, for impairment only if circumstances indicate that possible impairment exists. To the extent actual useful lives are less than our previously estimated lives, we will increase our amortization expense on a prospective basis. We estimate useful lives of our intangible assets by reference to both contractual arrangements such as non-compete covenants and current, projected, undiscounted cash flows for supplier and customer lists. At December 31, 2010 and 2009, no indicators of impairment were identified and no adjustments were made to the estimated lives of finite-lived assets.
 
The Company tests indefinite-lived intangibles such as trademarks and trade names for impairment by comparing the carrying value of the intangible to its fair value. Fair value of the intangible asset is calculated using the projected discounted cash flows produced from the intangible. If the carrying value exceeds the projected discounted cash flows attributed to the intangible asset, the carrying value is no longer considered recoverable and the Company will record impairment.
 
At December 31, 2008, significant adverse changes in the global economic environment, as well as the business climate for commodities in which we operate, changes to the Company’s operating results and forecasts, and a significant reduction in the Company’s market capitalization, the carrying value of certain items of the Company’s other long-lived assets exceeded their respective fair value as of that date. As such, the Company recorded an impairment charge of $22.8 million to other intangible assets for the year ended December 31, 2008.
 
Stock-based Compensation:  We recognize expense for equity based compensation ratably over the requisite service period based on the grant date fair value. We calculate the fair value of the award on the date of grant using the Black-Scholes method. The fair value of new stock options is estimated using a lattice-pricing model. Determining the fair value of stock options at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility in our stock price, annual forfeiture rates, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
 
Income taxes:  Our provision for income taxes reflects income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.


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RESULTS OF OPERATIONS
 
The Company is divided into two industry segments: Scrap Metal Recycling (which breaks down into three general product categories, ferrous, non-ferrous and platinum group metals), and Lead Fabricating.
 
The following table sets forth information regarding the breakdown of revenues between our Scrap Metal Recycling segment and our Lead Fabricating segment ($ and weights in thousands):
 
                                                                         
    Fiscal Year Ended
    Fiscal Year Ended
    Fiscal Year Ended
 
    December 31, 2010     December 31, 2009     December 31, 2008  
          Net
                Net
                Net
       
    Weight     Revenues     %     Weight     Revenues     %     Weight     Revenues     %  
 
Scrap Metal Recycling
                                                                       
Ferrous metals (weight in tons)
    450.8     $ 167,211       30.2       306.6     $ 77,954       26.7       439.7     $ 214,680       26.2  
Non-ferrous metals (weight in lbs.)
    141,188       161,013       29.1       94,560       81,927       28.1       128,038       172,715       21.1  
Platinum group metals (weight in troy ozs.)
    145.6       159,667       28.9       86.5       69,357       23.8       188.5       336,330       41.1  
                                                                         
Total Scrap Metal Recycling
            487,891       88.2               229,238       78.6               723,725       88.4  
Lead Fabricating (weight in lbs.)
    45,886       65,362       11.8       58,341       62,495       21.4       55,492       89,346       10.9  
Other
                                              5,124       0.7  
                                                                         
Total Revenue
          $ 553,253       100.0             $ 291,733       100.0             $ 818,195       100.0  
                                                                         
 
The following table sets forth information regarding average Metalico selling prices for the past eight quarters. The fluctuation in pricing is due to many factors, including domestic and export demand and our product mix.
 
                                 
            Average
   
    Average
  Average
  PGM
  Average
    Ferrous
  Non-Ferrous
  Price per
  Lead
For the quarter ending:
  Price per ton   Price per lb.   troy oz.(1)   Price per lb.
 
December 31, 2010
  $ 376     $ 1.21     $ 1,117     $ 1.51  
September 30, 2010
  $ 363     $ 1.20     $ 986     $ 1.33  
June 30, 2010
  $ 392     $ 1.11     $ 1,122     $ 1.42  
March 31, 2010
  $ 357     $ 1.05     $ 966     $ 1.46  
December 31, 2009
  $ 292     $ 0.92     $ 801     $ 1.39  
September 30, 2009
  $ 269     $ 0.98     $ 707     $ 1.17  
June 30, 2009
  $ 205     $ 0.83     $ 661     $ 0.94  
March 31, 2009
  $ 252     $ 0.68     $ 571     $ 0.95  
 
 
(1) Average PGM prices are comprised of combined troy ounces of Platinum, Palladium and Rhodium
 
Scrap and Metal Commodity Markets
 
Recycled iron and steel scrap is a vital raw material for the production of new steel and cast iron products. The steel and foundry industries in the United States have been structured to recycle scrap, and, as a result, are highly dependent upon scrap. In the United States, the primary source of old steel scrap is the automobile. The recycling rate for automobiles in 2009, the latest year for which statistics were available, was about 140%, indicating a significant shrinking of the country’s car and light car fleet from a high of 250 million vehicles down to 246 million vehicles. A recycling rate greater than 100% is a result of the steel industry recycling more steel from automobiles than was used in the domestic production of new vehicles. The automotive recycling industry recycled more than 14 million tons of steel from end-of-life vehicles through more than 220 car shredders, the equivalent of more than 14 million automobiles. More than 12,000 vehicle dismantlers throughout North America resell parts.
 
Recycling of scrap plays an important role in the conservation of energy because the remelting of scrap requires much less energy than the production of iron or steel products from iron ore. Also, consumption of iron and


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steel scrap by remelting reduces the burden on landfill disposal facilities and prevents the accumulation of abandoned steel products in the environment. Recycled scrap consists of approximately 58% post-consumer (old, obsolete) scrap, 18% prompt scrap (produced in steel-product manufacturing plants), and 24% home scrap (recirculating scrap from current operations).
 
Steel scrap prices fluctuated widely between about $290 and $367 per metric ton in 2010. Composite prices published by Iron Age Scrap Price Bulletin for No. 1 Heavy Melting steel scrap delivered to purchasers in Chicago, IL, and Philadelphia and Pittsburgh, PA, averaged about $320 per metric ton during the first 8 months of 2010. As reported by Iron Age Scrap Price Bulletin, the average price for nickel-bearing stainless steel scrap delivered to purchasers in Pittsburgh was about $2,273 per metric ton during the first 10 months of 2010, which was 51% higher than the 2009 average price of $1,502 per metric ton. The prices fluctuated widely between a low of $1,711 per metric ton in January 2010 and a high of $2,724 per ton in April and May 2010. Exports of ferrous scrap decreased in 2010 to an estimated 19 million metric tons from 22 million metric tons during 2009, mainly to China, the Republic of Korea, Taiwan, Malaysia, Turkey, and Canada, in descending order of export tonnage.
 
Export scrap value increased from $7.1 billion in 2009 to an estimated $8.0 billion in 2010. North America has been experiencing a shortage of iron and steel scrap, owing to increased export demand, primarily from China, Turkey, and Canada. Even significantly increased prices for scrap have not led to an increase in scrap availability, because almost all old scrap had been collected from farms, ranches, and other sources, and recession hit consumers have been keeping and repairing old appliances rather than disposing of them. Also, manufacturers were decreasing production, thus producing little new scrap for the scrap market.
 
Prices of platinum, palladium, and rhodium trended higher during the first quarter of 2010, decreased in the middle of the year, and increased once again toward year end. The slowly recovering global economy in 2010, compared with the poor economic conditions of 2009 and late 2008, affected the PGM industry. Some mines that had been previously placed on care-and-maintenance status were reopened in response to higher metal prices. Production of and demand for automobiles was higher throughout much of the world, particularly in developing nations such as China and India. This led to increased PGM demand in some regions because catalytic converters are the major end use of PGMs. The proportion of diesel cars in Western Europe, which use platinum in their catalytic converters, returned to around 50% after having dipped to 42% in 2009 as a result of Government scrappage plans. Those plans had led to increased purchases of smaller, more fuel efficient gasoline-powered cars.
 
The global lead market was in surplus during 2010 owing to the continued economic slowdown and weakened demand for lead in many regions. Prices declined and stocks rose throughout the first half of the year. Monthly average London Metal Exchange (LME) lead prices began the year at $2,368 per metric ton in January 2010 and declined by 28% during the first half of 2010. Global stocks of refined lead held in LME warehouses increased by 21% to 190,475 tons during the first 6 months of 2010. Lead prices began to increase in the third quarter of 2010 and LME stock levels appeared to stabilize compared with those earlier in the year.
 
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 
Consolidated net sales increased by $261.6 million, or 89.7%, to $553.3 million in the year ended December 31, 2010, compared to consolidated net sales of $291.7 million in the year ended December 31, 2009. Acquisitions added $39.5 million to consolidated net sales. Excluding acquisitions, the Company reported increases in average metal selling prices representing net sales of $153.1 million and a $68.5 million increase attributable to higher selling volume.
 
Scrap Metal Recycling
 
Ferrous Sales
 
Ferrous sales increased by $89.2 million, or 114.4%, to $167.2 million in the year ended December 31, 2010, compared to ferrous sales of $78.0 million in the year ended December 31, 2009. Acquisitions added $27.9 million to ferrous sales in 2010. Excluding acquisitions, ferrous sales increased by $61.3 million. The increase in ferrous sales was attributable to higher average selling prices totaling $44.3 million and higher volume sold of 67,600 tons


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amounting to $17.0 million. The average selling price for ferrous products was approximately $371 per ton for the year ended December 31, 2010 compared to $254 per ton for the year ended December 31, 2009.
 
Non-Ferrous Sales
 
Non-ferrous sales increased by $79.1 million, or 96.6%, to $161.0 million in the year ended December 31, 2010, compared to non-ferrous sales of $81.9 million in the year ended December 31, 2009. Acquisitions added $11.6 million to non-ferrous sales. Excluding acquisitions, non-ferrous sales increased by $67.5 million. The increase in non-ferrous sales was attributable to higher average selling prices amounting to $38.1 million and higher sales volume totaling $29.4 million. The average selling price for non-ferrous products was approximately $1.14 per pound for the year ended December 31, 2010 compared to $0.87 per pound for the year ended December 31, 2009.
 
Platinum Group Metal Sales
 
Platinum Group Metal (“PGM”) sales include the sale of catalytic converter substrate material which contains the platinum group metals, platinum, palladium, and rhodium. PGM sales increased $90.3 million, or 130.1%, to $159.7 million for the year ended December 31, 2010, compared to $69.4 million for the year ended December 31, 2009. The increase in PGM sales was a result of higher sales volumes totaling $54.8 million and higher average selling prices totaling $35.5 million. The average selling price for PGM material was approximately $1,040 per troy ounce for the year ended December 31, 2010 compared to $720 per troy ounce for the year ended December 31, 2009, an increase of approximately 44.2%. Total PGM sales volumes amounted 145,600 troy ounces for the year ended December 31, 2010, compared to 86,500 troy ounces sold for the year ended December 31, 2009.
 
Lead Fabricating
 
Sales
 
Lead fabrication sales increased by $2.9 million, or 4.6%, to $65.4 million in the year ended December 31, 2010 compared to lead fabrication sales of $62.5 million in the year ended December 31, 2009. The increase was due to higher average selling prices amounting to $16.3 million but was offset by lower volume sold totaling $13.4 million. The average selling price for lead fabricated products was approximately $1.42 per pound for the year ended December 31, 2010, compared to $1.07 per pound for the year ended December 31, 2009, an increase of approximately 32.7%.
 
Operating Expenses
 
Operating expenses increased by $237.5 million, or 99.1%, to $477.1 million for the year ended December 31, 2010 compared to operating expenses of $239.6 million for the year ended December 31, 2009. Acquisitions added $38.7 million to operating expenses. Excluding acquisitions, the increase in operating expenses was due to a $188.1 million increase in the cost of purchased metals and a $10.7 million increase in other operating expenses. These operating expense changes include increases in wages and benefits of $4.3 million, vehicle maintenance and repair expenses of $2.6 million, freight charges of $2.4 million and other operating costs of $160,000. The prior year period also reflected a $1.2 million benefit from legal settlements which was not present in the current year.
 
Selling, General and Administrative
 
Selling, general and administrative expenses increased by $488,000, or 4.8% of sales, to $26.5 million for the year ended December 31, 2010, compared to $26.0 million, or 8.9% of sales for the year ended December 31, 2009. Acquisitions added $882,000 to selling, general, and administrative expenses in 2010. Excluding acquisitions selling, general and administrative costs decreased by $394,000. Significant changes in component expenses of selling, general and administrative costs include increases in wages and benefits of $1.6 million and an increase in advertising and promotional expenses of $222,000. These expenses were offset by a decrease in legal and consulting expense of $2.2 million primarily related to litigation costs incurred in 2009 not incurred in 2010.


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Depreciation and Amortization
 
Depreciation and amortization expenses increased by $488,000 to $13.7 million, or 2.5% of sales, for the year ended December 31, 2010, compared to $13.2 million, or 4.5% of sales, for the year ended December 31, 2009. Acquisitions added $604,000 to depreciation and amortization. Excluding acquisitions depreciation and amortization expense decreased slightly.
 
Operating Income (Loss)
 
Operating income for the year ended December 31, 2010 increased by $22.8 million, or 166.4%, to $36.5 million compared to an operating income of $13.7 million for the year ended December 31, 2009. Acquisitions added $602,000 in operating loss for the year ended December 31, 2010. Excluding acquisitions, operating income increased by $23.4 million. This increase in operating income primarily occurred in the Company’s Scrap metal recycling segment amounting to $23.4 million. The Lead fabricating segment experienced a decrease in operating income of $1.6 million but was offset by a $1.6 million decrease in the operating loss experienced by corporate and other.
 
Financial and Other Income/(Expense)
 
Interest expense was $9.8 million for the year ended December 31, 2010 compared to $15.3 million for the year ended December 31, 2009. The $5.5 million decrease in interest expense was primarily attributable to lower interest rates on a majority of our outstanding debt. In March 2010, the Company refinanced a substantial portion of its debt at reduced interest rates. Most notably, we retired $30.6 million of 14.0% term notes with proceeds of the Credit Agreement with JPMChase at average interest rates ranging from 4.5% to 5.25%. In 2009, we retired $70.4 million in debt through repayments and exchanges, and issued $2.5 million in new debt. In April and June 2009, $18.4 million of debt was extinguished by its conversion into equity and in August 2009, the Company used $18.8 million of proceeds from an equity offering to pay down other debt.
 
Other expense for the year ended December 31, 2010 includes $3.0 million in charges related to the refinancing of our senior credit facilities. The items comprising this amount include the write off of $2.1 million of unamortized deferred financing costs related to our prior credit facilities and $939,000 of costs related to the termination of an interest rate swap agreement related to those prior facilities. The year ended December 31, 2009 include a $542,000 write off of unamortized deferred financing costs resulting from an amendment to the prior credit facility with Wells Fargo Foothill.
 
Other (expense)/income for the year ended December 31, 2010, includes income of $496,000 to adjust financial instruments to their respective fair values as compared to a $2.0 million loss for the year ended December 31, 2009.
 
For the year ended December 31, 2010 we recorded income of $28,000 for our 40% share of income in a manufacturer of radiation shielding solutions for the nuclear medicine community. For the year ended December 31, 2009, we recorded a $3.8 million loss related to our investment in Beacon Energy Holdings Inc. Our loss from Beacon for the year ended December 31, 2009 includes a $2.6 million write-down of the carrying value of our investment in Beacon and $1.2 million loss for our share of Beacon Energy’s loss for the year ended December 31, 2009.
 
For the year ended December 31, 2010 we recorded a gain of $101,000 net of amortized issue costs, for the repurchase, in cash, of $500,000 in convertible notes. For the year ended December 31, 2009, the Company recorded an $8.1 million gain on Convertible Note exchanges entered into with certain holders of the Company’s 7% Convertible Notes.
 
Income Taxes
 
For the year ended December 31, 2010, we recognized income tax expense of $9.8 million on income from continuing operations of $23.3 million resulting in an effective tax rate of 42%. For the year ended December 31, 2009, we recognized income tax expense of $1.7 million on a loss from continuing operations of $1.9 million resulting in an effective tax rate of negative 91%. Our effective tax rate is influenced primarily by permanent


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differences between income for tax purposes and income for book purposes such as fair value adjustments to financial instruments, stock based compensation, amortization of certain intangibles and changes to our valuation reserves on state net operating loss carryforwards and state income tax credits.
 
Discontinued Operations
 
The Company continues to incur environmental monitoring costs of its former secondary lead smelting and refining plant in College Grove, Tennessee and a secondary lead smelting operation based in Tampa, Florida. We incurred nominal amounts for environmental remediation costs, site maintenance and monitoring. Discontinued operations for the year ended December 31, 2010, resulted in a combined loss of $15,000 ($9,000 net of income taxes) for both former facilities. Discontinued operations for the year ended December 31, 2009, include $500,000 in proceeds from a former lead supplier of Gulf Coast Recycling in lieu of future potential liability claims and a $322,000 gain on the sale of the former secondary lead smelting and refining plant in College Grove, Tennessee. Offsetting these gains were environmental maintenance and response costs and legal fees for the Jernigan site in Seffner, Florida and certain other offsite remediation in the vicinity of Gulf Coast’s former smelting facility totaling $280,000.
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Consolidated net sales decreased by $526.5 million, or 64.3%, to $291.7 million in the year ended December 31, 2009, compared to consolidated net sales of $818.2 million in the year ended December 31, 2008. Acquisitions added $14.4 million to consolidated net sales. Excluding acquisitions, the Company reported decreases in average metal selling prices representing net sales of $190.2 million and a $350.7 million decrease attributable to lower selling volume.
 
Scrap Metal Recycling
 
Ferrous Sales
 
Ferrous sales decreased by $136.7 million, or 63.7%, to $78.0 million in the year ended December 31, 2009, compared to ferrous sales of $214.7 million in the year ended December 31, 2008. Acquisitions added $11.0 million to ferrous sales in 2009. Excluding acquisitions, ferrous sales decreased by $147.7 million. The decrease in ferrous sales was attributable to lower average selling prices totaling $60.1 million and lower volume sold of 179,200 tons amounting to $87.6 million. The average selling price for ferrous products was approximately $254 per ton for the year ended December 31, 2009 compared to $488 per ton for the year ended December 31, 2008.
 
Non-Ferrous Sales
 
Non-ferrous sales decreased by $90.8 million, or 52.6%, to $81.9 million in the year ended December 31, 2009, compared to non-ferrous sales of $172.7 million in the year ended December 31, 2008. Acquisitions added $3.5 million to non-ferrous sales. Excluding acquisitions, non-ferrous sales decreased by $94.3 million. The decrease in non-ferrous sales was attributable to a decrease in average selling prices amounting to $42.1 million and lower sales volume totaling $52.2 million. The average selling price for non-ferrous products was approximately $0.87 per pound for the year ended December 31, 2009 compared to $1.35 per pound for the year ended December 31, 2008.
 
Platinum Group Metal Sales
 
Platinum Group Metal (“PGM”) sales include the sale of catalytic converter substrate material which contains the platinum group metals, platinum, palladium, and rhodium. PGM sales decreased $266.9 million, or 79.4%, to $69.4 million for the year ended December 31, 2009, compared to $336.3 million for the year ended December 31, 2008. The decrease in PGM sales was a result of lower sales volumes totaling $210.3 million and lower average selling prices totaling $56.6 million. The average selling price for PGM material was approximately $720 per troy for the year ended December 31, 2009 compared to $42.42 per pound for the year ended December 31, 2008, a decrease of approximately 45.7%. Total PGM sales volumes amounted 3.0 million pounds for the year ended December 31, 2009, compared to 7.9 million pounds sold for the year ended December 31, 2008.


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Lead Fabricating
 
Sales
 
Lead fabrication sales decreased by $26.8 million, or 30.0%, to $62.5 million in the year ended December 31, 2009 compared to lead fabrication sales of $89.3 million in the year ended December 31, 2008. The decrease was due to lower average selling prices amounting to $31.4 million but was offset by higher volume sold totaling $4.6 million. The average selling price for lead fabricated products was approximately $1.07 per pound for the year ended December 31, 2009, compared to $1.61 per pound for the year ended December 31, 2008, a decrease of approximately 33.5%.
 
Operating Expenses
 
Operating expenses decreased by $516.5 million, or 68.3%, to $239.6 million for the year ended December 31, 2009 compared to operating expenses of $756.1 million for the year ended December 31, 2008. Acquisitions added $11.3 million to operating expenses. Excluding acquisitions, the decrease in operating expenses was due to a $505.8 million decrease in the cost of purchased metals and a $22.0 million decrease in other operating expenses. These operating expense changes include decreases in wages and benefits of $7.8 million, vehicle maintenance and repair expenses of $4.7 million, freight charges of $4.1 million, energy costs of $2.2 million, production and fabricating supplies of $1.1 million, other operating costs of $883,000 and a $1.2 million benefit from legal settlements.
 
Selling, General and Administrative
 
Selling, general and administrative expenses decreased by $4.1 million, or 13.6%, to $26.0 million for the year ended December 31, 2009, compared to $30.1 million for the year ended December 31, 2008. Acquisitions added $889,000 to selling, general, and administrative expenses in 2009. Excluding acquisitions, significant changes in component expenses of selling, general and administrative costs include decreases in wages and benefits of $1.5 million, a reduction in reserves on uncollectible accounts receivable of $1.1 million, office expenses of $469,000, travel expenses of $427,000, advertising and promotional expenses of $391,000, commission expenses of $299,000 and other selling general and administrative costs of $893,000.
 
Impairment charges
 
Improvements in the global economic environment and commodity prices experienced throughout 2009 relative to the conditions that existed in the last several months of 2008 resulted in improved operating results in all of our reporting units. Additionally, our market capitalization exceeded the reported value of our net equity by $74.4 million at December 31, 2009. We also performed a review, and where necessary, required testing of long-lived assets. Our analysis indicated that no impairment charges to our goodwill, other intangibles and long-lived assets were required for the year ended December 31, 2009. For the year ended December 31, 2008, we recorded impairment charges of $36.3 million to goodwill and charges of $22.8 million for other intangible assets.
 
Depreciation and Amortization
 
Depreciation and amortization expenses increased by $0.4 million to $13.2 million, or 4.5% of sales, for the year ended December 31, 2009, compared to $12.8 million, or 1.6% of sales, for the year ended December 31, 2008. Acquisitions added $1.5 million to depreciation and amortization. Excluding acquisitions depreciation and amortization expense decreased $1.1 million primarily due to the impairment of amortizable intangible assets in 2008 that were not amortized in 2009.
 
Operating Income (Loss)
 
Operating income (loss) for the year ended December 31, 2009 increased by $53.7 million, or 134%, to $13.7 million compared to an operating loss of $40.0 million for the year ended December 31, 2008. Acquisitions added $1.8 million in operating income for the year ended December 31, 2009. Impairment charges in the year ended December 31, 2008, not incurred in the current year period contributed $59.0 million to the increase in


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operating income. Excluding acquisitions and the absence of impairment charges in 2009, operating income decreased by $7.1 million. This decrease in operating income primarily occurred in the Company’s Scrap metal recycling segment amounting to $19.0 million but was offset by increases in operating income from the Lead fabricating segment amounting to $10.6 million and $1.3 million in corporate and other.
 
Financial and Other Income/(Expense)
 
Interest expense was $15.9 million, or 5.4% of sales, for the year ended December 31, 2009, compared to $17.4 million, or 2.1% of sales, for the year ended December 31, 2008. The decrease in interest expense was the result of lower average outstanding debt balances. In 2009, we retired $70.4 million in debt through repayments and exchanges, and issued $2.5 million in new debt.
 
Other (expense)/income for the year ended December 31, 2009, includes a loss of $2.0 million to adjust financial instruments to their respective fair values as compared to $1.9 million in income for the year ended December 31, 2008.
 
We also recorded a $3.8 million loss for the year ended December 31, 2009 compared to a loss of $3.4 million loss for our share of Beacon Energy Holding, Inc.’s loss for the period beginning July 1, 2008 (the date of deconsolidation) and ended December 31, 2008. Our loss from Beacon for the year ended December 31, 2009 includes a $2.6 million write-down of the carrying value of our investment in Beacon and $1.2 million loss for our share of Beacon’s loss for the year ended December 31, 2009.
 
For the year ended December 31, 2009, the Company recorded an $8.1 million gain on the Convertible Note exchange entered into with certain holders of the Company’s 7% convertible notes. No similar transaction occurred in the year ended December 31, 2008.
 
Income Taxes
 
For the year ended December 31, 2009, we recognized income tax expense of $1.7 million on a loss from continuing operations of $1.9 million resulting in an effective tax rate of negative 91%. For the year ended December 31, 2008, we recognized income tax benefit of $15.5 million on a loss from continuing operations of $58.4 million resulting in an effective income tax rate of approximately 27%. Our effective tax rate is influenced by permanent differences between income for tax purposes and income for book purposes such as fair value adjustments to financial instruments, stock based compensation, amortization of certain intangibles and changes to our valuation reserves on state net operating loss carryforwards.
 
Non-controlling Interest in Losses of Subsidiaries
 
The non-controlling interest in losses of consolidated subsidiaries for the year ended December 31, 2009 was immaterial. The non-controlling interest in losses of consolidated subsidiaries totaling $413,000 for the year ended December 31, 2008 includes $344,000 representing 53% of the net losses of Beacon Energy Corp. for the period beginning January 1, 2008 and ending on June 30, 2008, the date of deconsolidation. On June 30, 2008, Beacon Energy Corp. (now Beacon Energy Holdings, Inc.) ceased to be a consolidated subsidiary resulting from a reduction in our ownership percentage. The year ended December 31, 2008 also includes $69,000 representing 49% of the net loss of a joint venture operation acquired with the Totalcat acquisition.
 
Discontinued Operations
 
For the year ended December 31, 2009, we recorded income from discontinued operations of $357,000 ($195,000 net of income taxes), compared to a loss from discontinued operations of $2.0 million ($1.2 million, net of income tax benefit) for the year ended December 31, 2008. Discontinued operations for the year ended December 31, 2009, include $500,000 in proceeds from a former lead supplier of Gulf Coast Recycling in lieu of future potential liability claims and a $322,000 gain on the sale of the former secondary lead smelting and refining plant in College Grove, Tennessee. Offsetting these gains were environmental maintenance and response costs and legal fees for the Jernigan site in Seffner, Florida and certain other offsite remediation in the vicinity of Gulf Coast’s former smelting facility totaling $280,000. Environmental maintenance and response costs for the year ended


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December 31, 2008 amounted to $1.5 million. We also incurred environmental monitoring costs related to a former secondary lead smelting and refining plant in College Grove, Tennessee. Environmental expenses at the former College Grove facilities amounted to $185,000 and $520,000 for the years ended December 31, 2009 and December 31, 2008, respectively.
 
On May 31, 2006, the Company sold substantially all of the assets of its Gulf Coast Recycling, Inc. subsidiary until then a secondary lead smelting operation based in Tampa, Florida. The Company will continue to incur environmental maintenance and response costs for certain other offsite remediation in the vicinity of Gulf Coast’s former smelting facility.
 
QUARTERLY FINANCIAL INFORMATION
 
                                                                 
    Quarter
    Quarter
    Quarter
    Quarter
    Quarter
    Quarter
    Quarter
    Quarter
 
    Ended
    Ended
    Ended
    Ended
    Ended
    Ended
    Ended
    Ended
 
    3/31/2009     6/30/2009     9/30/2009     12/31/2009     3/31/2010     6/30/2010     9/30/2010     12/31/2010  
    (Unaudited)
 
    (In thousands, except share and per share data)  
 
Selected Income Statement Data:
                                                               
Revenue
  $ 53,284     $ 62,348     $ 91,480     $ 84,621     $ 134,079     $ 144,575     $ 136,956     $ 137,643  
                                                                 
Costs and expenses
                                                               
Operating expenses
    43,473       50,880       72,982       72,312       109,893       128,127       118,161       120,885  
Selling, general and administrative expenses
    6,309       5,399       7,578       6,708       7,181       6,464       6,294       6,543  
Depreciation and amortization
    3,287       3,307       3,174       3,472       3,400       3,236       3,450       3,642  
Gain on insurance recovery
                                        (513 )      
Gain on acquisition
                      (866 )                        
                                                                 
      53,069       59,586       83,734       81,626       120,474       137,827       127,392       131,070  
                                                                 
Operating Income
  $ 215     $ 2,762     $ 7,746     $ 2,995     $ 13,605     $ 6,748     $ 9,564     $ 6,573  
                                                                 
Income (loss) from continuing operations
  $ (3,709 )   $ 1,064     $ 5,059     $ (6,054 )   $ 3,519     $ 4,423       4,491     $ 1,038  
Discontinued operations
    158       24       (5 )     18       (5 )     (5 )     2       (1 )
                                                                 
Net income (loss)
  $ ( 3,551 )   $ 1,088     $ 5,054     $ (6,036 )   $ 3,514     $ 4,418     $ 4,493     $ 1,037  
                                                                 
Earnings (loss) per common share:
                                                               
Basic:
                                                               
Income (loss) from continuing operations
  $ (0.10 )   $ 0.03     $ 0.12     $ (0.13 )   $ 0.08     $ 0.10     $ 0.10     $ 0.02  
Discontinued operations, net
                                               
                                                                 
Net income (loss)
  $ (0.10 )   $ 0.03     $ 0.12     $ (0.13 )   $ 0.08     $ 0.10     $ 0.10     $ 0.02  
                                                                 
Diluted:
                                                               
Income (loss)from continuing operations
  $ (0.10 )   $ 0.03     $ 0.12     $ (0.13 )   $ 0.08     $ 0.10     $ 0.10     $ 0.02  
Discontinued operations, net
                                               
                                                                 
Net income (loss)
  $ (0.10 )   $ 0.03     $ 0.12     $ (0.13 )   $ 0.08     $ 0.10     $ 0.10     $ 0.02  
                                                                 
Weighted Average Common Shares Outstanding:
                                                               
Basic
    36,427,913       38,295,781       43,534,362       46,409,898       46,428,260       46,443,348       46,449,302       46,495,116  
                                                                 
Diluted
    36,427,913       38,354,045       43,534,362       46,409,898       46,439,400       46,463,537       46,449,302       46,495,116  
                                                                 


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LIQUIDITY AND CAPITAL RESOURCES
 
The Company has certain contractual obligations and commercial commitments to make future payments. The following table summarizes these future obligations and commitments as of December 31, 2010 ($ in thousands):
 
                                         
          Less Than
    1-3
    4-5
    After
 
    Total     1 Year     Years     Years     5 Years  
 
Debt Obligations(1)
  $ 122,868     $ 9,867     $ 31,855     $ 80,289     $ 857  
Capital Lease Obligations(2)
    3,094       1,380       1,313       394       7  
Operating Lease Obligations
    3,014       1,456       1,348       131       79  
Letters of Credit
    1,921       1,921                    
Environmental Obligations
    1,564       216       254       79       1,015  
                                         
Total
  $ 132,461     $ 14,840     $ 34,770     $ 80,893     $ 1,958  
                                         
 
 
(1) Approximately 33% of debt obligations as of December 31, 2010 accrued interest at a variable rate (the lender’s base rate plus a margin). The remaining 67% of debt obligations as of December 31, 2010 required accrued interest at fixed rates having a weighted average rate of 7.01%. Interest expense on debt obligation and capital lease obligations for 2011 is estimated to approximate $7.7 million calculated by multiplying the outstanding principal balance by the obligation’s applicable interest rate in effect at December 31, 2010. Interest expense for 2011 and thereafter will increase or decrease based on the amount of outstanding borrowings and fluctuations in market based interest rates.
 
(2) Includes capital leases and installment notes.
 
Cash Flows
 
For the year ended December 31, 2010, we used $5.2 million in our operating activities compared to using $25.7 million for the year ended December 31, 2009. For the year ending December 31, 2010, net income of $13.5 million and net non-cash items totaling $22.5 million was offset by a $41.1 million change in working capital components. Non-cash items included $14.6 million in depreciation and amortization, $2.8 million in stock-based compensation, $2.7 million in changes to deferred income taxes and $2.1 million of deferred financing costs written off due to debt refinancing. These items were offset by other noncash items of $295,000. Changes for reduction in working capital items include $24.3 million in increased accounts receivable balances and $20.9 million for increases in inventory. These working capital items were offset by a $2.5 million in decreases in prepaid and other items and a $1.6 million increase in accounts payable and accrued expenses. For the year ended December 31, 2009, a net loss of $3.4 million and changes in working capital components of $38.8 million was offset by net non-cash items totaling $16.9 million. Non-cash items included $14.5 million in depreciation and amortization, $2.5 million in stock-based compensation expense, $2.0 million in fair value adjustments to financial instruments, $3.5 million in changes to deferred income taxes, $4.2 million for our share of Beacon Energy’s loss and other non-cash items totaling $398,000. These positive non-cash items were offset by $8.1 million gain on debt extinguishment, $1.3 million in gain recorded in settlements of litigation and $866,000 gain recorded on business acquisitions. Changes for reduction in working capital items include $20.2 million for increases in inventory, $9.7 million in increased accounts receivable balances and $15.0 million in reductions in accounts payable and accrued expenses. These working capital items were offset by $6.1 million in decreases in prepaid and other items. For the year ended December 31, 2008, a net loss of $43.7 million was offset by net non-cash items totaling $74.1 million and changes in working capital of $28.6 million. Non-cash items included $59.0 million of impairment charges to goodwill and other intangibles, $13.6 million in depreciation and amortization, $7.8 million in inventory markdowns to market value, $6.2 million in reserve allowances for uncollectible receivables and vendor advances, $3.4 million for our share of Beacon Energy’s loss and a $501,000 gain on the sale of property and equipment. These positive non-cash items were offset by $16.4 million in changes to deferred income taxes. Changes for reduction in working capital items include $24.5 million for reductions in inventory, $23.8 million in reduced accounts receivable balances and $309,000 for reductions in prepaid and other items. These working capital items were offset by $20.0 million in reductions in accounts payable and accrued expenses.


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For the year ended December 31, 2010, we used $4.9 million in cash for investing activities compared to using net cash $5.4 million in net cash for the year ended December 31, 2009. For the year ended December 31, 2010, we paid $5.4 million to purchase equipment and capital improvements and invested $350,000 in a manufacturer of radiation shielding solutions for the nuclear medicine community. These items were offset by $646,000 in proceeds from the sale of property and equipment and a $220,000 change in other assets. For the year ended December 31, 2009, we paid $2.5 million to acquire businesses, and $3.0 million for purchases of equipment and capital improvements. For the year ended December 31, 2008, we paid $107.2 million in cash to acquire businesses, $11.1 million for purchases of equipment and capital improvements and invested $600,000 in biofuel related projects. These uses were offset by a $1.9 million reduction in restricted cash, a $600,000 change to other assets and we received $118,000 for the sale of equipment.
 
For the year ended December 31, 2010, we generated $8.7 million in financing activities compared to using $26.9 million of net cash during the year ended December 31, 2009. For the year ended December 31, 2010, we received $9.5 million in proceeds of new debt, received $4.6 million in net proceeds under our revolving credit facility and received $407,000 in proceeds from the exercise of common stock options. These amounts were offset by debt repayments of $4.5 million and the payment of $1.3 million in debt issue costs. For the year ended December 31, 2009, we repaid $50.3 million of debt, net of new borrowings and paid $1.5 million in debt issue costs on amendments to our loan agreements. These amounts were offset by $24.8 million in proceeds from the sale of our common stock. For the year ended December 31, 2008, we generated $125.3 million from new borrowings primarily the issuance of $100.0 million in 7% convertible notes, $28.5 million from the sale of common stock and $677,000 in proceeds from the exercise of common stock options. Our former Beacon Energy subsidiary received $3.9 million for the sale of its common stock and also received $1.7 million from the sale of convertible notes. Debt repayments totaled $37.1 million and we paid $5.8 million in debt issue costs primarily related to the $100.0 million convertible note offering.
 
Financing and Capitalization
 
On March 2, 2010, we entered into a Credit Agreement (the “Credit Agreement”) with a syndicate of lenders led by JPMorgan Chase Bank, N.A and including RBS Business Capital and Capital One Leverage Finance Corp. The three-year facility consisted of senior secured credit facilities in the aggregate amount of $65.0 million, including a $57.0 million revolving line of credit (the “Revolver”) and an $8.0 million machinery and equipment term loan facility. The Revolver provides for revolving loans which, in the aggregate, were not to exceed the lesser of $57.0 million or a “Borrowing Base” amount based on specified percentages of eligible accounts receivable and inventory and bears interest at the “Base Rate” (a rate determined by reference to the prime rate) plus 1.25% or, at our election, the current LIBOR rate plus 3.5% (an effective rate of 3.99% as of December 31, 2010). The term loan accrued interest at the Base Rate plus 2% or, at our election, the current LIBOR rate plus 4.25% (an effective rate of 4.60% as of December 31, 2010). Under the Agreement, we are subject to certain operating covenants and are restricted from, among other things, paying cash dividends, repurchasing its common stock over certain stated thresholds, and entering into certain transactions without the prior consent of the lenders. In addition, the Agreement contains certain financial covenants, including minimum fixed charge coverage ratios, and maximum capital expenditures covenants. Obligations under the Agreement are secured by substantially all of the Company’s assets other than real property, which is subject to a negative pledge. The proceeds of the Agreement are used for present and future acquisitions, working capital, and general corporate purposes.
 
Upon the effectiveness of the Credit Agreement described in the preceding paragraph, we terminated the Amended and Restated Loan and Security Agreement with Wells Fargo Foothill, Inc. dated July 3, 2007, as amended (the “Loan Agreement”) and repaid outstanding indebtedness under the Loan Agreement in the aggregate principal amount of approximately $13.5 million. We also terminated the Financing Agreement with Ableco Finance LLC dated July 3, 2007, as amended (the “Financing Agreement”) and repaid outstanding indebtedness under the Financing Agreement in the aggregate principal amount of approximately $30.6 million. Outstanding balances under the Loan Agreement and the Financing Agreement were paid with borrowings under the Credit Agreement and available cash.
 
As of December 31, 2010, we had approximately $19.8 million of borrowing availability under the Credit Agreement.


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On January 27, 2011 we entered into a Second Amendment (the “Amendment”) to the Credit Agreement. The Amendment provides for an increase in the maximum amount available under the Credit Agreement to $85.0 million, including $70.0 million under the revolving credit facility (up from $57.0 million) and an additional term loan to be available in multiple draws in the aggregate amount of $9.0 million earmarked for contemplated capital expenditures. The term loan funded at the closing of the Credit Agreement continues to amortize. The Amendment increases the advance rate for inventory under the revolving facility’s borrowing base formula. LIBOR-based interest rates have been reduced to the current LIBOR rate plus 3.25% for revolving loans and the current LIBOR rate plus 3.75% for term loans. The Amendment also adjusts the definition of “Fixed Charges” and several covenants, allowing for increases in permitted indebtedness, capital expenditures, and permitted acquisition baskets, and extends the Credit Agreement’s maturity date from March 1, 2013 to January 23, 2014. The remaining material terms of the Credit Agreement remain unchanged by the Amendment.
 
On April 23, 2008, we entered into a Securities Purchase Agreement with accredited investors (“Note Holders”) which provided for the sale of $100.0 million of Senior Unsecured Convertible Notes (the “Notes”) convertible into shares of our common stock (“Note Shares”). The initial and current conversion price of the Notes is $14.00 per share. The Notes bear interest at 7% per annum, payable in cash, and will mature in April 2028. In addition, the Notes contain (i) an optional repurchase right exercisable by the Note Holders on the sixth, eighth and twelfth anniversaries of the date of issuance of the Notes, whereby each Note Holder will have the right to require the Company to redeem the Notes at par and (ii) an optional redemption right exercisable by the Company beginning on May 1, 2011, the third anniversary of the date of issuance of the Notes, and ending on the day immediately prior to the sixth anniversary of the date of issuance of the Notes, whereby the Company shall have the option but not the obligation to redeem the Notes at a redemption price equal to 150% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon, limited to 30% of the aggregate principal amount of the Notes as of the issuance date, and from and after the sixth anniversary of the date of issuance of the Notes, the Company shall have the option to redeem any or all of the Notes at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon.
 
As of December 31, 2010, the outstanding balance on the Notes was $79.9 million (net of $1.2 million in unamortized discount related to the original fair value warrants issued with the Notes).
 
The Notes also contain (i) certain repurchase requirements upon a change of control, (ii) make-whole provisions upon a change of control, (iii) “weighted average” anti-dilution protection, subject to certain exceptions, (iv) an interest make-whole provision in the event that the Note Purchasers are forced to convert their Notes between the third and sixth anniversaries of the date of issuance of the Notes whereby the Note Purchasers would receive the present value (using a 3.5% discount rate) of the interest they would have earned had their Notes so converted been outstanding from such forced conversion date through the sixth anniversary of the date of issuance of the Notes, and (v) a debt incurrence covenant which limits our ability to incur debt under certain circumstances.
 
On August 26, 2010, the Company repurchased convertible notes totaling $500,000 for $375,000 using proceeds of the Revolver described above resulting in a gain of $101,000 net of unamortized warrant discount.
 
On April 23, 2009 and June 4, 2009, we entered into agreements with certain Note Holders and retired an aggregate $18.4 million in debt principal through the issuance of 3,708,906 shares of common stock. The transactions resulted in an aggregate gain on debt extinguishment of $5.0 million during the second quarter of 2009. The Company received no cash proceeds as a result of the exchanges of its common stock for Convertible Notes and recognized a total of $8.1 million in gain on debt extinguishment.
 
All Convertible Notes surrendered in the repurchase and exchanges were retired and cancelled.
 
Future Capital Requirements
 
As of December 31, 2010, we had $3.5 million in cash and cash equivalents, availability under the Credit Agreement of $19.8 million and total working capital of $109.5 million. As of December 31, 2010, our current liabilities totaled $34.2 million. We expect to fund our current working capital needs, interest payments and capital expenditures over the next twelve months with cash on hand and cash generated from operations, supplemented by borrowings available under the Credit Agreement and potentially available elsewhere, such as vendor financing,


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manufacturer financing, operating leases and other equipment lines of credit that are offered to us from time to time. We may also access equity and debt markets for possible acquisitions, working capital and to restructure current debt.
 
Historically, the Company has entered into negotiations with its lenders when it was reasonably concerned about potential breaches and prior to the occurrences of covenant defaults. A breach of any of the covenants contained in lending agreements could result in default under such agreements. In the event of a default, a lender could refuse to make additional advances under the revolving portion of a credit facility, could require the Company to repay some or all of its outstanding debt prior to maturity, and/or could declare all amounts borrowed by the Company, together with accrued interest, to be due and payable. In the event that this occurs, the Company may be unable to repay all such accelerated indebtedness, which could have a material adverse impact on its financial position and operating performance.
 
If necessary, the Company could use its existing cash balances or attempt to access equity and debt markets or to obtain new financing arrangements with new lenders or investors as alternative funding sources to restructure current debt. Any issuance of new equity could dilute current shareholders. Any new debt financing could be on terms less favorable than those of our existing financing and could subject us to new and additional covenants. Decisions by lenders and investors to enter into such transactions with the Company would depend upon a number of factors, such as the Company’s historical and projected financial performance, compliance with the terms of its current or future credit agreements, industry and market trends, internal policies of prospective lenders and investors, and the availability of capital. No assurance can be had that the Company would be successful in obtaining funds from alternative sources.
 
Off-Balance Sheet Arrangements
 
Other than operating leases, we do not have any significant off-balance sheet arrangements that are likely to have a current or future effect on our financial condition, result of operations or cash flows.
 
Beacon Energy Investment
 
As of December 31, 2010 and 2009, the Company owned 33.1% of the outstanding stock of Beacon Energy Holdings, Inc. (“Beacon”). On January 26, 2011, Beacon announced it had entered into a merger agreement with Environmental Quality Management, Inc. The merger, which closed February 8, 2011, reduced our interest to approximately 5.9%. Our investment in Beacon was totally written off during the fourth quarter of 2009.
 
Acquisitions
 
As discussed in Note 26 to the financial statements, we acquired 100% of the outstanding capital stock of Goodman Services, Inc., a Bradford, Pennsylvania-based full service recycling company with additional facilities in Jamestown, New York and Canton, Ohio. The acquisition is consistent with our expansion strategy of penetrating geographically contiguous markets and benefiting from intercompany and operating synergies that are available through consolidation. Goodman Services locations complement our existing facilities in the Great Lakes corridor. Bradford is 160 miles from our Pittsburgh operations and will become a feed source for the Pittsburgh shredder. Jamestown is 75 miles from our Buffalo yards. Canton, Ohio is in close proximity to our operations in Akron, Ohio.
 
On December 8, 2009, our Metalico Youngstown, Inc. (“Youngstown”) subsidiary closed a purchase of substantially all of the operating assets of Youngstown Iron & Metal, Inc (“YIM”) and Atlas Recycling Inc. (“ARI”) two scrap related scrap recycling facilities principally located in Youngstown, Ohio. The acquisition includes all inventory and equipment including a Newell 80-104 auto shredder located directly adjacent to YIM’s key consumer. The acquisition also included all real estate owned by affiliates of the sellers and used in their businesses. We closed the real estate portion of the transaction June 30, 2010.
 
Contingencies
 
Metalico, Inc.’s subsidiary in Tampa, Florida, Gulf Coast Recycling, Inc. is a party to two settlement agreements arising from contamination at a site in Seffner, Florida (the “Jernigan Site”) alleged to have occurred


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in the 1970s. Required remediation at the Jernigan site was substantially completed in 2008. The Company estimates future maintenance costs for the Jernigan Site at $753,000. The accompanying financial statements do not include any receivables that might result from any additional settlements or recoveries.
 
We are involved in certain other legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such other proceedings and litigation will not materially affect the Company’s financial position, results of operations, or cash flows.
 
The Company does not carry, and does not expect to carry for the foreseeable future, significant insurance coverage for environmental liability (other than conditions existing at the Syracuse facility prior to its acquisition by the Company) because the Company believes that the cost for such insurance is not economical. However, we continue to monitor products offered by various insurers that may prove to be practical. Accordingly, if the Company were to incur liability for environmental damage in excess of accrued environmental remediation liabilities, its financial position, results of operations, and cash flows could be materially adversely affected.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to financial risk resulting from fluctuations in interest rates and commodity prices. We seek to minimize these risks through regular operating and financing activities.
 
Interest rate risk
 
We are exposed to interest rate risk on our floating rate borrowings. As of December 31, 2010, $41.3 million of our outstanding debt consisted of variable rate borrowings pursuant to the Credit Agreement with JPMChase Bank. Borrowings under the Credit Agreement bear interest at either the prime rate of interest plus a margin or LIBOR plus a margin. Increases in either the prime rate or LIBOR may increase interest expense. Assuming our variable borrowings at December 31, 2010 were to equal the average borrowings under our senior secured credit facility during a fiscal year, a hypothetical increase or decrease in interest rates by 1% would increase or decrease interest expense on our variable borrowings by approximately $413,000 per year with a corresponding change in cash flows. We have no open interest rate protection agreements as of December 31, 2010.
 
Commodity price risk
 
We are exposed to risks associated with fluctuations in the market price for both ferrous, non-ferrous, PGM and lead metals which are at times volatile. See the discussion under the section entitled “Risk Factors — The metals recycling industry is highly cyclical and export markets can be volatile” located in this Annual Report. We attempt to mitigate this risk by seeking to turn our inventories quickly as markets allow instead of holding inventories in anticipation of higher commodity prices. We use forward sales contracts with PGM substrate processors to hedge against the extremely volatile PGM metal prices. The Company estimates that if selling prices decreased by 10% in any of the business units in which it operates, there would not be a material write-down of any of its reported inventory values.
 
Foreign currency risk
 
International sales account for an immaterial amount of our consolidated net sales and all of our international sales are denominated in U.S. dollars. We also purchase a small percentage of our raw materials from international vendors and these purchases are also denominated in local currencies. Consequently, we do not enter into any foreign currency swaps to mitigate our exposure to fluctuations in the currency rates.
 
Risk from Common stock market price
 
We are exposed to risks associated with the market price of our own common stock. In connection with certain financings, we have issued warrants that can be “put” to us upon a change of control. We are required to use the value of our common stock as an input variable to determine the fair value of the liability associated with the put warrant. Fluctuations in the market price of our common stock have an effect on the liability. For example, if the price of our common stock was $1.00 higher as of December 31, 2010, the put warrant liability would increase by $964,000.


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Item 8.   Financial Statements and Supplementary Data
 
The financial statements and supplementary data required by this Item 8 are set forth at the pages indicated at Item 15(a)(1).
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
We engaged J.H. Cohn LLP our current Independent Registered Public Accounting Firm in March 2009. There were no disagreements with accountants during 2010.
 
Item 9A.   Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, they have concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report are effective in timely providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.
 
There were no material changes in our internal control over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
The report called for by Item 308(a) of Regulation S-K is included herein as “Management’s Report on Internal Control Over Financial Reporting.”
 
The attestation report called for by Item 308(b) of Registration S-K is included herein as “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.”
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
 
The scope of management’s assessment of the effectiveness of internal control over financial reporting includes all of our businesses. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2010.
 
Our independent registered public accounting firm, J.H. Cohn LLP, audited our internal control over financial reporting as of December 31, 2010. J.H. Cohn’s report dated March 14, 2011 expressed an unqualified opinion on our internal control over financial reporting and is included in this Item 9A.


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Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
 
To the Board of Directors and Stockholders
Metalico, Inc.
 
We have audited Metalico, Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows of the Company for the years then ended, and our report dated March 14, 2011 expressed an unqualified opinion.
 
/s/ J. H. Cohn LLP
 
Roseland, New Jersey
March 14, 2011


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Item 9B.   Other Information
 
None.
 
PART III
 
Item 10.   Directors, Executive Officers, and Corporate Governance
 
The directors and executive officers, their ages, positions held and duration as director as of March 4, 2011, are as follows:
 
                     
Name
 
Age
 
Position and Offices
 
Director Since
 
Carlos E. Agüero
    58     Chairman, President, Chief Executive Officer and Director     1997  
Michael J. Drury
    54     Executive Vice President and Chief Operating Officer for PGM and Lead Operations and Director     1997  
Bret R. Maxwell (1,2,3)
    52     Director     1997  
Walter H. Barandiaran (1,2,3)
    58     Director     2001  
Paul A. Garrett (2,3)
    64     Director     2005  
Sean P. Duffy(1)
    51     Director     2010  
Arnold S. Graber
    57     Executive Vice President, General Counsel and Secretary      
Eric W. Finlayson
    52     Senior Vice President and Chief Financial Officer      
Kenneth P. Mueller
    57     Senior Vice President and Chief Operating Officer of Ferrous and Nonferrous Scrap Metal Recycling      
 
 
(1) Member of Compensation Committee.
 
(2) Member of Audit Committee.
 
(3) Member of Nominating Committee.
 
The terms of all directors will expire at the next annual meeting of stockholders, or when their successors are elected and qualified. Directors are elected each year, and all directors serve one-year terms. Officers serve at the pleasure of the Board of Directors. There are no arrangements or understandings at this time between us and any other person pursuant to which he or she was or is to be selected as a director, executive officer or nominee. We have, however, entered into employment agreements with our named executive officers described in Part III, Item 11 below under the subheading “Employment Agreements.”
 
Mr. Agüero serves as both principal executive officer and chairman at the pleasure of the Board. The directors have determined that Mr. Agüero’s experience in our industry and in corporate transactions, and his personal commitment to the Company as a founder, investor, and employee, make him uniquely qualified to supervise our operations and to execute our business strategies. The Board is also cognizant of the Company’s relatively small size compared to its publicly traded competitors and its relative youth as a corporate organization. Management’s activities are monitored by standing committees of the Board, principally the Audit Committee and the Compensation Committee. Both of these committees are comprised solely of independent directors. For these reasons, the directors deem this leadership structure appropriate for us. We have not designated a lead director.
 
Although our full Board of Directors is ultimately responsible for the oversight of our risk management processes, the Board is assisted in this task by a number of its committees. These committees are primarily responsible for considering and overseeing the risks within their particular areas of concern. For example, the Audit Committee focuses on financial reporting and operational risk. As provided in its charter, the Audit Committee meets regularly with management and our independent registered public accountants to discuss the integrity of our


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financial reporting processes and internal controls as well as the steps that have been take to monitor and control risks related to such matters. Our Compensation Committee, whose duties are described in more detail below, evaluates the risks that our executive compensation programs may generate.
 
Day-to-day risk management responsibilities are assigned to our President and Executive Vice President, who sit on and report to the Board, and our Senior Vice President and Chief Financial Officer.
 
Neither the Board nor the Nominating Committee has adopted a formal policy with regard to the consideration of diversity when evaluating candidates for election to the Board. However, the Nominating Committee believes that Board membership should reflect diversity in its broadest sense, and so it does consider a candidate’s experience, education, geographic location and difference of viewpoint when evaluating his or her qualifications for election to the Board. Whenever the Nominating Committee evaluates a potential candidate, the Committee considers that individual in the context of the composition of the Board as a whole.
 
Biographical Information
 
The following information sets forth the names of, and certain information with respect to, each of our directors and executive officers.
 
Carlos E. Agüero, age 58, founded Metalico in August 1997 and has served as its Chairman of the Board, President and Chief Executive Officer since that time. From 1990 to 1996, he held the positions of President, Chief Executive Officer and a director of Continental Waste Industries, which he founded in 1990 and helped guide through more than thirty acquisitions and mergers. Continental commenced trading on the NASDAQ National Market in 1993 and was acquired by Republic Industries in 1996. Mr. Agüero is also a director of EQM Technologies & Energy, Inc. (“EQM”), the successor by merger to Beacon Energy Holdings, Inc., a corporation organized to produce and market biodiesel within the larger biofuels sector and to invest in other biodiesel producers. We currently own 5.9% of the outstanding common stock of EQM, which trades on the OTC Bulletin Board.
 
Michael J. Drury, age 54, has been an Executive Vice President since our founding in August 1997 and a Director since September 1997. He was additionally named Chief Operating Officer for PGM and Lead Operations in 2011. He served as our Secretary from March 2000 to July 2004. From 1990 to 1997, Mr. Drury was Senior Vice President, Chief Financial Officer and a director of Continental Waste Industries. He has a degree in accounting and is experienced in acquisition development, investor relations, operations and debt management. He has broad knowledge of debt financing and industrial operations.
 
Bret R. Maxwell, age 52, has been a Director since September 1997. He has been the managing general partner of MK Capital LP, a venture capital firm specializing in investments in technology, digital media and outsourcing companies, since its formation in 2002. Beginning in 1982, Mr. Maxwell was employed by First Analysis Corporation, where he founded the venture capital practice in 1985 and was later co-chief executive officer. Since 1985 he has personally led more than forty investments in industries including telecommunication products and services, environmental services, information security and business services and brings an investor’s perspective to the Board. Mr. Maxwell chairs the Board’s Compensation Committee and also serves on the Audit and Nominating Committees.
 
Walter H. Barandiaran, age 58, has been a Director since June 2001. He is a founder and a managing partner of The Argentum Group, a New York-based private equity firm founded in 1987 that serves as a general partner of several investment funds focusing in the healthcare services, information technology, industrial sector, and outsource businesses. Mr. Barandiaran also serves as the chairman of AFS Technologies, Inc., a provider of ERP software to the food industry, since 2003 and EQM Technologies & Energy, Inc., a provider of engineering, consulting and remediation services and biodiesel development and production, since its formation by merger in 2011 and was the chairman of its predecessor, Environmental Quality Management, Inc., from 2007 to the date of the merger. Mr. Barandiaran was also the chief executive officer of HorizonLive, Inc., now known as Wimba, Inc. from 2002 until 2004. He additionally serves on the boards of directors of several privately held corporations in which The Argentum Group or its affiliates have invested. He is as well a trustee of the Baruch College Fund of Baruch College, City University of New York. Mr. Barandiaran has more than fifteen years of private equity


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investment experience, during which time he has led more than thirty investments for Argentum’s funds. His areas of investment expertise include outsourced business services, technology-enabled services, and clean (environmental) technologies and services. Mr. Barandiaran is a member of the Board’s Audit and Compensation Committees and chairs the Nominating Committee.
 
Paul A. Garrett, age 64, has been a Director since March 2005. From 1991 to 1998 he was the chief executive officer of FCR, Inc., an environmental services company involved in the recycling of paper, plastic, aluminum, glass and metals. Upon FCR’s merger in 1998 into KTI, Inc., a solid waste disposal and recycling concern that operated waste-to-energy facilities and manufacturing facilities utilizing recycled materials, he was appointed vice chairman and a member of KTI’s Executive Committee. He held those positions until KTI was acquired by Casella Waste Systems, Inc., in 1999. For a period of ten years before his entry into the recycling industry Mr. Garrett was an audit partner with the former Arthur Andersen & Co. The Board recognized this experience in recommending his election and his appointment to our Audit Committee. He also serves as a director of EQM Technologies & Energy, Inc., an environmental remediation and biodiesel development and production concern. He chairs the Board’s Audit Committee and serves on the Nominating Committee.
 
Sean P. Duffy, age 51, is the President and Chief Operating Officer of Re Community, Inc., an innovative recycling company based in Charlotte, North Carolina, and was the President of FCR Recycling and a Regional Vice President of its parent, Casella Waste Systems, Inc. until the sale of FCR to Re Community in 2011. Re Community processes and resells recyclable materials originating from the municipal solid waste stream, including newsprint, cardboard, office paper, containers and bottles. Mr. Duffy joined FCR at its founding in 1983 and served that company in various capacities, including President, until it was acquired by Casella in 1999. He is an experienced executive with background and perspective in segments of the recycling industry in which the Company has had little or no prior activity. He was elected a director of the Company January 1, 2010. He is a member of the Board’s Compensation Committee.
 
Arnold S. Graber, age 57, has been Executive Vice President and General Counsel of the Company since May 3, 2004 and our Secretary since July 1, 2004. From 2002 until April 2004 he practiced with the firm of Otterbourg, Steindler, Houston & Rosen, P.C. in New York, New York, where he focused on transactional matters and corporate finance. From 1998 to 2001 he served as general counsel of a privately held paging carrier and telecommunications retailer. He is a member of the bars of the States of Illinois, New Jersey, and New York.
 
Eric W. Finlayson, age 52, has been our Senior Vice President and Chief Financial Officer since the Company’s founding in August 1997. Mr. Finlayson is a Certified Public Accountant with more than twenty-five years of experience in accounting. He has extensive background in SEC reporting and compliance. From 1993 through 1997, Mr. Finlayson was Corporate Controller of Continental Waste Industries.
 
Kenneth P. Mueller, age 57, was appointed our Senior Vice President and Chief Operating Officer of Ferrous and Nonferrous Scrap Metal Recycling in 2011. Mr. Mueller began his recycling career in 1976 with Luria Bros. in Peoria, IL. He has held numerous commercial and operations management positions over the years with Luria Bros., The Snyder Group in Pittsburgh (a predecessor to our operations in western Pennsylvania), Columbia Iron and Metal in Cleveland, and Cozzi Iron and Metal, in both Chicago and Pittsburgh. In 1997, Mueller relocated to Phoenix as President of Metal Management AZ. From 2004 to 2010 he was Western Regional President of Sims Metal Management based in Phoenix.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act requires that the Company’s directors, executive officers, and 10% stockholders file reports of ownership and changes in ownership with the SEC and NYSE Amex. Directors, officers, and 10% stockholders are required by the Securities and Exchange Commission to furnish the Company with copies of the reports they file.
 
Based solely on its review of the copies of such reports and written representations from certain reporting persons, we believe that all of our directors, officers, and 10% stockholders complied with all filing requirements applicable to them during the 2010 fiscal year.


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Code of Ethics
 
The Company has adopted a code of business conduct and ethics applicable to its directors, officers (including its principal executive officer, principal financial officer, principal accounting officer, and controller) and employees, known as the Code of Business Conduct and Ethics. The Code is available on the Company’s website at www.metalico.com. In the event that the Company amends or waives any of the provisions of the Code applicable to its principal executive officer, principal financial officer, principal accounting officer, or controller, the Company intends to disclose the same on its website.
 
Audit Committee
 
The Board of Directors has established a standing Audit Committee and pursuant to a written charter approved by the Board. The members of the Audit Committee through 2010 and as of March 4, 2011 were Messrs. Garrett (Committee Chair), Maxwell, and Barandiaran. Each member of the Audit Committee is “independent” as defined in the listing standards of the NYSE Amex and under the SEC’s Rule 10A-3. The Board has determined that Mr. Garrett satisfies the requirements for an “audit committee financial expert” under the rules and regulations of the SEC, based on Mr. Garrett’s experience as set forth in his biographical information above.
 
Functions:
 
  •  Selects the Company’s independent auditor.
 
  •  Reviews the independence of the Company’s independent auditor.
 
  •  Approves the nature and scope of services provided by our independent auditor.
 
  •  Reviews the range of fees and approves the audit fee payable to our independent auditor.
 
  •  Confers with our independent auditor and reviews annual audit results and annual and quarterly financial statements with the independent auditor and the Company’s management.
 
  •  Oversees the Company’s evaluation of the effectiveness of internal controls over our financial reporting.
 
  •  Oversees our internal audit function.
 
  •  Meets with the independent auditor without Company management present; reviews with the independent auditor any audit questions, problems or difficulties and management’s responses to these issues.
 
  •  Meets with the Company’s management to review any matters the Audit Committee believes should be discussed.
 
  •  Reviews with the Company’s legal counsel any legal matters that could have a significant impact on the Company’s financial statements.
 
  •  Oversees procedures for and receipt, retention, and treatment of complaints on accounting, internal accounting controls, or auditing matters.
 
  •  Advises and provides assistance to the Board of Directors with respect to corporate disclosure and reporting practices.
 
A copy of the Company’s Audit Committee Charter is available on the Company’s website, www.metalico.com.
 
Compensation Committee
 
Functions:
 
  •  Conducts a general review of the Company’s compensation and benefit plans to ensure that they meet corporate objectives.
 
  •  Determines the Company’s chief executive officer’s compensation, subject to the approval of the full Board.


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  •  Reviews the Company’s chief executive officer’s recommendations on compensating the Company’s officers and adopting and changing major compensation policies and practices and determines levels of compensation.
 
  •  Administers the Company’s employee benefit plans.
 
  •  Reviews the nature and amount of Director compensation.
 
  •  Administers the Company’s long-term compensation plan and executive bonus plan.
 
  •  Reports its recommendations to the Company’s Board for approval and authorization.
 
A copy of the Company’s Compensation Committee Charter is available on our website, www.metalico.com.
 
Nominating Committee
 
Functions:
 
  •  Identifies and evaluates qualified Director candidates.
 
  •  Recommends appropriate candidates for election to the Board.
 
  •  Monitors Director compensation.
 
  •  Periodically reviews Director orientation and education and the structure and composition of the Board’s committees.
 
A copy of the Company’s Nominating Committee Charter is available on the Company’s website, www.metalico.com.
 
Item 11.   Executive Compensation
 
Compensation Discussion and Analysis
 
The Company’s primary philosophy for compensation is to offer a program that rewards each of the members of senior management commensurately with the Company’s overall growth and performance, including each person’s individual performance during the previous fiscal year. The Company’s compensation program for senior management is designed to attract and retain individuals who are capable of leading the Company in achieving its business objectives in an industry characterized by competitiveness, growth and change. We consider the impact of our executive compensation program, and the incentives created by the compensation awards, on our risk profile. In addition, we review all of our compensation policies and procedures, including the incentives that they create and factors that may reduce the likelihood of excessive risk taking, to determine whether they present a significant risk to us. Based on this review, we have concluded that our compensation policies and procedures are not reasonably likely to have a material adverse effect on us.
 
The Company believes a substantial portion of the annual compensation of each member of senior management should relate to, and should be contingent upon, the success of the Company, as well as the individual contribution of each particular person to that success. As a result, a significant portion of the total compensation package consists of variable, performance-based components, such as bonuses and stock awards, which can increase or decrease to reflect changes in corporate and individual performance.
 
Overview of Cash and Equity Compensation
 
We compensate our executive officers in these different ways in order to achieve different goals. Cash compensation, for example, provides our executive officers a minimum base salary. Incentive bonus compensation is generally linked to the achievement of short-term financial and business goals, and is intended to reward our executive officers for our overall performance, as well as their individual performance in reaching annual goals that are agreed to in advance by management and the Compensation Committee. Stock options and grants of restricted stock are intended to link our executive officers’ longer-term compensation with the performance of our stock and to build executive ownership positions in the Company’s stock. This encourages our executive officers to remain


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with us, to act in ways intended to maximize stockholder value, and to penalize them if we and/or our stock fails to perform to expectations.
 
We view the three components of our executive officer compensation as related but distinct. Although our Compensation Committee does review total compensation, we do not believe that compensation derived from one component of compensation necessarily should negate or reduce compensation from other components. We determine the appropriate level for each compensation component based in part, but not exclusively, on our historical practices with the individual and our view of individual performance and other information we deem relevant. Our Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation, or among different forms of compensation. During 2010, we did not review wealth and retirement accumulation as a result of employment with us in connection with the review of compensation packages.
 
We conduct an annual review of the aggregate level of our executive compensation, as well as the mix of elements used to compensate our executive officers. This review is based on informal samplings of executive compensation paid by companies similarly situated to ours. In addition, our Compensation Committee has historically taken into account input from other corporations in which its members hold positions or manage investments, competitive market practices, and publicly available data relating to the compensation practices and policies of other companies within and outside our industry. Our Compensation Committee realizes that “benchmarking” our compensation against the compensation earned at comparable companies may not always be appropriate, but believes that engaging in a comparative analysis of our compensation practices is useful. We have not retained a compensation consultant to review our policies and procedures with respect to executive compensation.
 
Elements of Compensation
 
The principal elements of our compensation package are base salary, annual cash incentive bonus, long-term incentive plan awards, and perquisites and other compensation. We also provide severance benefits under the terms of our employment agreements with the named executive officers. The details of each of these components are described below.
 
Base Salary
 
Base salary is used to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our named executive officers. Base salary is generally fixed and does not vary based on our financial and other performance. Base salaries for 2008 and 2009 for each of our named executive officers were set under the terms of their respective three-year employment agreements approved by the Board of Directors on March 20, 2007 and terminating December 31, 2009. Base salaries for 2010 for each of our named executive officers were set under the terms of their respective three-year employment agreements approved by the Board of Directors on December 21, 2009 and effective January 1, 2010 through December 31, 2012. Annual increases for the second and third years under both sets of agreements are determined by reference to the Consumer Price Index and fixed in October of the preceding year. However, each of our named executive officers waived his respective right to a contractual salary increase for 2009 and, effective February 15, 2009, agreed to a 10% salary reduction for an indefinite period in recognition of the impact of the global recession on the Company’s performance and resources. Those reductions were rescinded as of September 1, 2009.
 
When establishing base salaries, the Compensation Committee and management consider a number of factors, including the seniority of the individual, the functional role of the position, the level of the individual’s responsibility, the ability to replace the individual, the base salary of the individual at his prior employment or in prior years with the Company as appropriate, and the number and availability of well qualified candidates to assume the individual’s role. Base salary ranges are reviewed and re-established by our Compensation Committee no less often than upon the expiration of each named executive officer’s employment agreement.


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Annual Cash Incentive Bonus
 
Annual cash incentive bonuses are intended to compensate for the achievement of both our annual Company-wide goals and individual annual performance objectives. All of our employees are eligible for annual cash incentive bonuses. We provide this opportunity to attract and retain an appropriate caliber of talent and to motivate executives and other employees to achieve our business goals.
 
The Compensation Committee oversees the administration of an Executive Bonus Plan for the benefit of the named executive officers. Under the terms of the Executive Bonus Plan, through the course of each year the Compensation Committee considers and identifies corporate and individual goals in consultation with management. Named executive officers are allocated responsibility for various goals, which may overlap among executive officers. Individual objectives are necessarily tied to the particular area of expertise or responsibility of the employee and such employee’s performance in attaining those objectives relative to external forces, internal resources utilized and overall individual effort. At the end of each year the Compensation Committee reviews the levels of achievement and performance. The Compensation Committee approves the annual cash incentive award for the Chief Executive Officer and each other named executive officer. The Compensation Committee’s determination, other than with respect to the Chief Executive Officer, is generally based upon the Chief Executive Officer’s recommendations. Exact amounts are confirmed in the discretion of the Committee and recommended to the full Board of Directors for ratification. Employee directors abstain from the Board’s deliberations and votes on their own compensation.
 
We do not have a formal policy on the effect on bonuses of a subsequent restatement or other adjustment to our financial statements, other than the penalties provided by law.
 
Long-Term Incentive Plan Awards
 
We have adopted our 1997 Long-Term Incentive Plan (the “1997 Plan”) and 2006 Long-Term Incentive Plan (the “2006 Plan”) for the purpose of providing additional performance and retention incentives to executive officers and other employees by facilitating their purchase of a proprietary interest in our common stock. The two plans have provided certain of our employees, including our executive officers, with incentives to help align those employees’ interests with the interests of our stockholders and to give those employees a continuing stake in the Company’s long-term success. The Compensation Committee also believes that the use of stock-based awards offers the best approach to achieving our compensation goals. Upon the effectiveness of the 2006 Plan, our Board of Directors ceased issuing awards under the 1997 Plan. The 1997 Plan has expired and no awards granted under it are outstanding. The 2006 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, deferred stock awards and other equity-based rights. In most cases awards under the 2006 Plan have been in the form of stock options.
 
The Compensation Committee administers both plans and determines the types and amounts of awards to be granted to eligible employees. Grants to executive officers are based upon the principles underlying our Executive Bonus Plan described above. All grants are subject to the ratification of the Board of Directors. Employee directors abstain from the Board’s deliberations and votes on their own compensation. The plans permit awards to be made at any time in the Committee’s discretion. Subject to anti-dilution adjustments for changes in our common stock or corporate structure, a number of shares of common stock equal to the number of options granted under the 1997 plan have been reserved for issuance under that Plan and 4,642,522 shares of common stock have been reserved for issuance under the 2006 Plan. As of March 4, 2011 all options for shares of our common stock granted under the 1997 Plan were exercised or expired. As of March 4, 2011, options for 2,610,132 shares of our common stock and 176,000 shares of restricted stock have been granted under the 2006 Plan. Shares subject to awards which expire or are cancelled or forfeited will again become available for issuance under the 2006 Plan. The value of stock options is dependent upon our future stock price.
 
Stock option grants may be made at the commencement of employment for certain managerial-level employees. In accordance with company policy they are generally made once a year thereafter by the Compensation Committee as a component of bonus compensation. Bonus stock options are granted based upon several factors, including seniority, job duties and responsibilities, job performance, and our overall performance. The Compensation Committee considers the recommendations of the Chief Executive Officer with respect to awards for


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employees other than the Chief Executive Officer. Unless otherwise determined by the Compensation Committee at the time of grant, all outstanding awards under the 1997 Plan will become fully vested upon a change in control. Our 2006 Long-Term Incentive Plan provides that in the event of a “change in control,” all unvested options immediately vest and remain exercisable and vested for the balance of their stated term without regard to any termination of employment or service other than a termination for cause and any restriction or deferral on an award immediately lapses. The Compensation Committee determines the terms of all options. In general, stock options vest in equal monthly installments over three years and may be exercised for up to five years from the date of grant at an exercise price equal to the fair market value of our common stock on the trading date occurring immediately prior to the date the grant is approved by our Board. The Compensation Committee believes that the three-year vesting schedule will provide ongoing incentives for executives and other key employees to remain in our service. All outstanding awards will become fully vested upon a change in control. Upon termination of a participant’s service with the Company, he or she may exercise his or her vested options for the period of ninety days from the termination of employment, provided, that if termination is due to death or disability, the option will remain exercisable for twelve months after such termination. However, an option may never be exercised later than the expiration of its term.
 
Perquisites and Other Compensation
 
Under the terms of their respective employment agreements, we provide each named executive officer with a leased or owned car or automotive allowance together with car insurance and life insurance. We also provide general health and welfare benefits, including medical and dental coverage. We offer participation in our defined contribution 401(k) plan. At the beginning of 2009, we contributed matching funds of up to 2% of eligible compensation for every employee enrolled in the 401(k) plan, including named executive officers. As of March 15, 2009, we suspended the contribution. On January 1, 2011, we re-instituted the Company’s 2% matching contribution. We furnish these benefits to provide an additional incentive for our executives and to remain competitive in the general marketplace for executive talent. For additional information concerning Perquisites and Other Compensation see “Employment Agreements” below.
 
Severance Benefits
 
Our named executive officers and certain other executives with employment agreements are covered by arrangements that specify payments in the event the executive’s employment is terminated. Under these employment agreements, in the event that we terminate such executive’s employment without cause (as defined in the applicable employment agreement), we will be required to pay the executive an amount equal to his base salary for twelve months as well as COBRA (health insurance premiums) for the same period. Our primary reason for including severance benefits in compensation packages is to attract and retain the best possible executive talent. For a further description of these severance benefits, see “Employment Agreements” below.
 
Change in Control Benefits
 
Our named executive officers are covered by arrangements specifying that all otherwise unvested stock options fully vest upon a “change in control.” Our primary reason for including change in control benefits in compensation packages is to attract and retain the best possible executive talent.
 
For additional information concerning benefits for named executive officers upon a change in control, see “Employment Agreements” below.
 
Compensation Mix
 
The Compensation Committee determines the mix of compensation, both between short and long-term compensation and cash and non-cash compensation, to design compensation structures that we believe are appropriate for each of our named executive officers. We use short-term compensation (base salaries and annual cash bonuses) and long-term compensation (option and restricted stock awards) to encourage long-term growth in stockholder value and to advance our additional objectives discussed above. Although our Compensation Committee does review total compensation, we do not believe that compensation derived from one component of compensation necessarily should negate or reduce compensation from other components. We determine the


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appropriate level for each compensation component based in part, but not exclusively, on our historical practices with the individual and our view of individual performance and other information we deem relevant. Our Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation, or among different forms of compensation. As the Company’s growth is recent, we have not reviewed wealth and retirement accumulation as a result of employment with us, and we have only focused on fair compensation for the year in question. The summary compensation table below illustrates the long and short-term and cash and non-cash components of compensation.
 
Tax and Regulatory Considerations
 
We account for the equity compensation expense for our employees under the rules of ASC Topic 718 which requires us to estimate and record an expense for each award of equity compensation over the service period of the award. Accounting rules also require us to record cash compensation as an expense at the time the obligation is accrued.
 
Under Section 162(m) of the Internal Revenue Code, a publicly-held corporation may not deduct more than $1 million in a taxable year for certain forms of compensation made to the chief executive officer and other named executive officers listed on the Summary Compensation Table. None of our employees has received annual taxable compensation of $1,000,000 or more. While we believe that all compensation paid to our executives in 2010 was deductible, it is possible that some portion of compensation paid in future years will be non-deductible.
 
Role of Executive Officers in Executive Compensation
 
The Compensation Committee determines the compensation payable to each of the named executive officers as well as the compensation of the members of the Board of Directors. In each case, the determination of the Compensation Committee is subject to the ratification of the full Board. Employee directors abstain from any deliberations or votes on their own compensation. The Compensation Committee formulates its recommendation for the compensation paid to each of our named executive officers, other than with respect to compensation payable to our Chief Executive Officer, based upon advice received from our Chief Executive Officer.


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COMPENSATION COMMITTEE REPORT
 
Under the rules of the SEC, this Compensation Committee Report is not deemed to be incorporated by reference by any general statement incorporating this Annual Report by reference into any filings with the SEC.
 
We, the Compensation Committee of the Board of Directors of Metalico, Inc. (the “Company”), have reviewed and discussed the Compensation Discussion and Analysis set forth above with the management of the Company. Based on such review and discussion, we have recommended to the Board of Directors inclusion of the Compensation Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
 
THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
 
Bret R. Maxwell, Chairman
Walter H. Barandiaran
Sean P. Duffy
 
Summary Compensation Table
 
The following Summary Compensation Table, which should be read in conjunction with the explanations provided above, summarizes compensation information for our named executive officers (our chief executive officer, chief financial officer, and our other two executive officers; we had only four executive officers) for the fiscal year ended December 31, 2010:
 
                                                         
                Stock
      All Other
   
        Salary
  Bonus(1)
  Awards
  Option
  Compensation
  Total
Name and Principal Position
  Year   ($)   ($)   ($)(2)   Awards ($)(3)   ($)   ($)
 
Carlos E. Agüero
    2010       398,591       200,000             494,333       14,171 (4)     1,107,095  
Chairman, President and
    2009       342,744       85,000             520,556       22,430 (4)     970,730  
Chief Executive Officer
    2008       362,250       150,000       96,150       338,926       31,025 (4)     978,351  
Eric W. Finlayson
    2010       182,213       42,000             104,913       8,525 (5)     337,651  
Senior Vice President and
    2009       156,683       35,000             101,033       9,964 (5)     302,680  
Chief Financial Officer
    2008       165,600       30,000       17,628       75,063       19,696 (5)     307,987  
Michael J. Drury
    2010       273,319       125,000             250,567       5,091 (6)     653,977  
Executive Vice President and
    2009       235,025       55,000             255,799       7,874 (6)     553,698  
Chief Operating Officer for
    2008       248,400       75,000       48,075       178,460       18,622 (6)     568,557  
PGM and Lead Operations
                                                       
Arnold S. Graber
    2010       256,237       50,000             133,175       10,400 (7)     449,812  
Executive Vice President,
    2009       220,335       40,000             122,134       14,276 (7)     396,745  
General Counsel and Secretary
    2008       232,875       40,000       22,435       82,103       25,255 (7)     402,668  
 
 
(1) Cash bonuses are included in compensation for the year for which they were earned, even if actually paid or awarded in the subsequent year.
 
(2) Amount reflects the expense recognized for financial reporting purposes in accordance with ASC Topic 718 of restricted stock as of the date of grant.
 
(3) Amount reflects the annual amortized expense, calculated in accordance with ASC Topic 718. See Note 15 of “Notes to Financial Statements — Stock-Based Compensation Plans.”
 
(4) Includes matching contribution payments made to our 401(k) Plan (2% of eligible compensation from January 1, 2009 to March 15, 2009 and 4% of eligible compensation for calendar year 2008) for the benefit of Mr. Agüero of $0, $4,338 and $16,581 and the dollar value of term life insurance premiums paid for the benefit of Mr. Agüero of $1,836, $1,836 and $1,836 for the years ending December 31, 2010, 2009 and 2008


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respectively. Also includes car insurance premiums for additional vehicles of $5,600, $7,000 and $3,352 for the years ending December 31, 2010, 2009 and 2008, respectively and the personal use of a company car of $6,735, $9,256 and $9,256 for the years ending December 31, 2010, 2009, and 2008, respectively.
 
(5) Includes matching contribution payments made to our 401(k) Plan (2% of eligible compensation from January 1, 2009 to March 15, 2009 and 4% of eligible compensation for calendar year 2008) for the benefit of Mr. Finlayson of $0, $1,211 and $9,224 and the dollar value of term life insurance premiums paid for the benefit of Mr. Finlayson of $725, $725 and $725 for the years ending December 31, 2010, 2009 and 2008, respectively and the personal use of a company car of $7,800, $8,028 and $9,747 for the years ending December 31, 2010, 2009, and 2008, respectively.
 
(6) Includes matching contribution payments made to our 401(k) Plan (2% of eligible compensation from January 1, 2009 to March 15, 2009 and 4% of eligible compensation for calendar year 2008) for the benefit of Mr. Drury of $0, $2,417 and $10,359 and the dollar value of term life insurance premiums paid for the benefit of Mr. Drury of $1,451, $1,451 and $1,451 for the years ending December 31, 2010, 2009 and 2008, respectively and the personal use of a company car of $3,640, $4,006 and $6,812 for the years ending December 31, 2010, 2009, and 2008, respectively.
 
(7) Includes matching contribution payments made to our 401(k) Plan (2% of eligible compensation from January 1, 2009 to March 15, 2009 and 4% of eligible compensation for calendar year 2008) for the benefit of Mr. Graber of $0, $1,660 and $13,440 and the dollar value of term life insurance premiums paid for the benefit of Mr. Graber of $1,124, $1,124 and $1,124 for the years ending December 31, 2010, 2009 and 2008 respectively and the personal use of a company car of $9,276, $11,492 and $10,691 for the years ending December 31, 2010, 2009, and 2008, respectively.
 
Grants of Plan-Based Awards
 
During 2010, we granted stock options to our named executive officers pursuant to our 2006 Long-Term Incentive Plan. All of the awarded stock options vest over three years in equal monthly installments from the date of grant and may be exercised for up to five years from the date of grant. Information with respect to each of these awards, including estimates regarding future payouts during the relevant performance period under each of these awards on a grant by grant basis, is set forth in the table below:
 
                                 
        Option Awards:
      Grant
        Number of
  Exercise or
  Date Fair
        Securities
  Base Price
  Value of
        Underlying
  of Option
  Option
    Grant
  Options
  Awards
  Awards(1)
Name
  Date   (#)   ($/Sh)   ($)
 
Carlos E. Agüero, CEO
    August 18, 2010       50,000     $ 3.51     $ 117,000  
Eric W. Finlayson, CFO
    August 18, 2010       30,000     $ 3.51     $ 70,200  
Michael J. Drury
    August 18, 2010       50,000     $ 3.51     $ 117,000  
Arnold S. Graber
    August 18, 2010       30,000     $ 3.51     $ 70,200  
 
 
(1) Amount for option awards reflects the total fair value of stock options in 2010, calculated in accordance with ASC Topic 718. See Note 15 of “Notes to Financial Statements — Stock-Based Compensation Plans.”
 
Narrative Disclosure of Summary Compensation and Grants of Plan-Based Awards
 
Executive Bonus Plan
 
Our Board of Directors has approved the Executive Bonus Plan as an incentive compensation plan for our executive officers to be administered by the Board’s Compensation Committee. Each year, the Compensation Committee considers and identifies a series of corporate and individual goals. Each executive officer is allocated a measure of responsibility for particular goals, which may overlap with assigned goals for other officers. In the past, goals have included such corporate objectives as expanding market share, improving Company efficiencies, and satisfactory execution and supervision of staffing initiatives. Individual incentive awards are based on progress in achieving allocated goals and discretionary evaluations of the eligible employees. Awards included a cash payment under the Bonus Plan and a grant of options to purchase our common stock under the Long-Term Incentive Plans described below.


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1997 Long-Term Incentive Plan
 
We adopted the 1997 Long-Term Incentive Plan (the “1997 Plan”) for the purpose of providing additional performance and retention incentives to officers and employees by facilitating their purchase of a proprietary interest in our common stock. Subject to anti-dilution adjustments for changes in our common stock or corporate structure, the 1997 Plan allowed for a number of shares of our common stock equal to the greater of 525,000 and 10% of the total number of shares of our common stock outstanding to be issued pursuant to awards under the 1997 Plan. The 1997 Plan has expired and no awards granted under it are outstanding. Upon the effectiveness of the 2006 Plan (described below), our Board of Directors ceased issuing awards under the 1997 Plan.
 
The 1997 Plan provided for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, deferred stock awards and other equity-based rights to our officers, consultants and employees as determined by the 1997 Plan administrator from time to time in its discretion. The 1997 Plan was administered by the Compensation Committee of our Board of Directors.
 
Stock options were granted based upon several factors, including seniority, job duties and responsibilities, job performance, and our overall performance. Stock options were typically granted with an exercise price equal to the fair market value of a share of our common stock on the date of grant, and vested at such times as determined by the Compensation Committee in its discretion. In general, stock options vest in equal monthly installments over three years and may be exercised for up to five years from the date of grant. Unless otherwise determined by the Compensation Committee at the time of grant, all outstanding awards under the 1997 Plan will become fully vested upon a change in control.
 
We received no monetary consideration for the granting of stock options pursuant to the 1997 Plan. However, we received the cash exercise price for each option exercised. The exercise of options and payment for the shares received would contribute to our equity.
 
No types of award other than stock options were issued under the 1997 Plan.
 
2006 Long-Term Incentive Plan
 
Our 2006 Long-Term Incentive Plan (the “2006 Plan”) became effective May 23, 2006 upon approval by our stockholders at our 2006 annual meeting. The purpose of the 2006 Plan is to provide additional performance and retention incentives to officers and employees by facilitating their purchase of a proprietary interest in our common stock. Subject to anti-dilution adjustments for changes in our common stock or corporate structure, currently 4,655,988 shares of common stock have been reserved for issuance under the 2006 Plan, which plan enables us to issue awards in the aggregate of up to 10% of our outstanding common stock. As of March 4, 2011, options for 2,610,132 shares of our common stock have been granted and 2,344,993 are outstanding under the 2006 Plan and 176,000 shares of restricted stock have been granted and 17,101 have been forfeited. Of the remaining 158,899 shares outstanding under the plan, 153,274 shares have been fully vested and 5,625 shares remain unvested.
 
The 2006 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, deferred stock awards and other equity-based rights. Awards under the 2006 Plan may be granted to our officers, directors, consultants and employees as determined by the 2006 Plan administrator from time to time in its discretion. The 2006 Plan is currently administered by the Compensation Committee of our Board of Directors.
 
Stock options are granted based upon several factors, including seniority, job duties and responsibilities, job performance, and our overall performance. Stock options are typically granted with an exercise price equal to the fair market value of a share of our common stock on the date of grant, and become vested at such times as determined by the Compensation Committee in its discretion. In general, stock options vest in equal monthly installments over three years and may be exercised for up to five years from the date of grant. Unless otherwise determined by the Compensation Committee at the time of grant, all outstanding awards under the 2006 Plan will become fully vested upon a change in control.


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We receive no monetary consideration for the granting of stock options pursuant to the 2006 Plan. However, we receive the cash exercise price for each option exercised. The exercise of options and payment for the shares received would contribute to our equity.
 
401(k) Plan
 
We maintain a defined contribution employee retirement plan, or 401(k) plan, for our employees. Our executive officers are also eligible to participate in the 401(k) plan on the same basis as our other employees. The 401(k) plan is intended to qualify as a tax-qualified plan under Section 401(k) of the Internal Revenue Code. The plan provides that each participant may contribute a percentage of his or her pre-tax compensation up to the statutory limit, which was $16,500 for calendar year 2010 and is again $16,500 for calendar year 2011. Participants who are age 50 or older can also make “catch-up” contributions, which for calendar years 2010 and 2011 could be up to an additional $5,000 per year above the statutory limit. Under the 401(k) plan, each participant is fully vested in his or her deferred salary contributions when contributed. Participant contributions are held and invested by the plan’s trustee. The plan also permits us to make discretionary contributions and matching contributions, subject to established limits and a vesting schedule. In 2009, we matched 100% of participant contributions up to the first 2% of eligible compensation until March 15, 2009 the date we suspended our employer match. On January 1, 2011, we re-instated the Company match of 2%.
 
Outstanding Equity Awards at Fiscal Year End
 
The following table summarizes equity awards granted to our named executive officers that were outstanding at the end of fiscal 2010.
 
                                 
    Number of
  Number of
       
    Securities
  Securities
       
    underlying
  underlying
       
    unexercised
  unexercised
  Option
  Option
    options
  options
  Exercise
  Expiration
Name
  Exercisable   Unexercisable   Price   Date
 
Carlos E. Agüero, CEO
    5,556       44,444     $ 3.51       8/18/2015  
      22,222       27,778     $ 3.88       8/18/2014  
      145,833       29,167     $ 14.02       7/9/13  
      100,000           $ 7.74       7/27/12  
Eric W. Finlayson, CFO
    3,333       26,667     $ 3.51       8/18/2015  
      11,111       13,889     $ 3.88       8/18/2014  
      25,000       5,000     $ 14.02       7/9/13  
      18,000           $ 7.74       7/27/12  
      12,500           $ 5.50       7/17/11  
Michael J. Drury
    5,556       44,444     $ 3.51       8/18/2015  
      17,778       22,222     $ 3.88       8/18/2014  
      66,667       13,333     $ 14.02       7/9/13  
      50,000           $ 7.74       7/27/12  
      15,000           $ 5.50       7/17/11  
Arnold S. Graber
    3,333       26,667     $ 3.51       8/18/2016  
      15,556       19,444     $ 3.88       8/18/2015  
      33,333       6,667     $ 14.02       7/9/13  
      25,000           $ 7.74       7/27/12  
      12,500           $ 5.50       7/17/11  


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Option Exercises and Stock Vested
 
The following table shows aggregate exercises of stock options and vests of restricted stock by our named executive officers during the year ended December 31, 2010.
 
                                 
    Shares
      Shares
   
    Acquired
      Acquired
   
    on
  Value
  on
  Value
    Exercise
  Realized(1)
  Vesting
  Realized(2)
Name
  (#)   ($)   (#)   ($)
 
Carlos E. Agüero, CEO
    23,333       35,350       10,000       50,113  
Eric W. Finlayson, CFO
    10,000       14,500       1,833       9,187  
Michael J. Drury
    16,667       22,251       5,000       25,056  
Arnold S. Graber
    10,000       22,650       2,333       11,693  
 
 
(1) Value based on the aggregate difference between the exercise price and the average of the high and low market price on the date of exercise.
 
(2) Value based on the dollar amount realized upon each quarterly vesting date by multiplying the number of shares of stock vested by the average of the high and low market price on the vesting date.
 
Pension Benefits
 
Our named executive officers did not participate in, or otherwise receive any benefits under, any pension or retirement plan sponsored by us during the year ended December 31, 2010.
 
Nonqualified Deferred Compensation
 
Our named executive officers did not earn any nonqualified compensation benefits from us during the year ended December 31, 2010.
 
Employment Agreements
 
We have employment agreements with each of our named executive officers. Each agreement has a three-year term.
 
The current agreements with Messrs. Agüero, Drury, Graber and Finlayson expire December 31, 2012. The agreements provide for minimum annual compensation and eligibility to receive annual performance bonuses in a combination of cash payments and option grants. Salaries are specified for the first year of the employment term and thereafter increase each year by a percentage equal to the increase in the Consumer Price Index over the previous year, provided that such increases cannot be greater than 7% or less than 3.5%.
 
The actual amount of the annual bonus is determined based upon the named executive’s performance, our performance and certain performance targets recommended by the Competition Committee under our Executive Bonus Plan and Long-Term Incentive Plans and approved by our Board of Directors.
 
Mr. Mueller’s employment agreement expires February 21, 2014. His agreement is similar to those between the Company and the other named executive officers except that his annual salary increase is equal to the increase in the Consumer Price Index over the previous year but cannot be more than 3.5% and the amount of his annual bonus will be within a range of 20% to 60% of his annual salary.
 
Under their respective agreements we also provide each of Messrs. Agüero, Drury and Mueller with a $500,000 life insurance policy and each of Messrs. Graber and Finlayson with a $300,000 life insurance policy. Each named executive officer is also furnished with the use of a car.
 
If the executive’s employment is terminated on account of death or disability, he is entitled to no further compensation or benefits other than those earned through the month in which such termination occurs. If the executive’s employment is terminated by us for “cause” (as defined in the next paragraph) or if the executive terminates his own employment for any reason other than for “good reason” (as defined in the next paragraph), the executive is entitled to no further compensation or benefits other than those earned through the date of termination.


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If the executive’s employment is terminated by us for any reason other than for cause, death or disability, or if the executive terminates his own employment for good reason, we will provide, as severance benefits, payment of 100% of the executive’s base salary at the rate in effect on the date of termination, continuation of health and medical benefits for the twelve-month period following such termination, and immediate vesting of any unvested options. Payment of the amount of the executive’s base salary is to be made in a lump sum immediately subsequent to the date of termination in the event of a termination in connection with, upon, or within one year after a “change in control” (as defined in the next paragraph) or a termination by the executive for good reason in connection with, upon, or within one year after a change in control, and in installments in accordance with our payroll policy in effect at the time payment is to be made in the event of any other termination entitling the executive to severance. All unvested options vest upon a change in control regardless of whether a termination occurs.
 
An executive may be terminated for “cause” if he (a) neglects his duties and such neglect is not discontinued promptly after written notice, (b) is convicted of any felony, (c) fails or refuses to comply with the reasonable written policies of the Company or directives of executive officers that are not inconsistent with his position and such failure is not discontinued promptly after written notice, or (d) materially breaches covenants or undertakings under his employment agreement and such breach is not remedied promptly. “Good reason” under the employment agreements means the occurrence, without the executive’s prior written consent, of any of the following events: (i) a substantial reduction of the executive’s duties, responsibilities, or status as an officer (except temporarily during any period of disability), or the executive being required to report to any person other than the executive to whom he currently reports; (ii) a change in the office or location where the executive is based on the date of his employment agreement of more than thirty (30) miles, which new location is more than sixty (60) miles from the executive’s primary residence; or (iii) a breach by the Company of any material term of the employment agreement. “Change in control” under the employment agreements means the occurrence of: (i) the acquisition at any time by a “person” or “group” (as those terms are used in Sections 13(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (excluding, for this purpose, the Company or any subsidiary or any benefit plan of the Company or any subsidiary) of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, of securities representing 50% or more of the combined voting power in the election of directors of the then- outstanding securities of the Company or any successor of the Company; (ii) the termination of service as directors, for any reason other than death or disability, from the Board, during any period of two (2) consecutive years or less, of individuals who at the beginning of such period constituted a majority of the Board, unless the election of or nomination for election of each new director during such period was approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of the period; (iii) approval by the stockholders of the Company of any merger or consolidation or statutory share exchange as a result of which the common stock of the Company is changed, converted or exchanged (other than a merger or share exchange with a wholly-owned subsidiary of the Company) or liquidation of the Company or any sale or disposition of 50% or more of the assets or earning power of the Company except for a tax free distribution of any portion of the Company to its stockholders; or (iv) approval by the stockholders of the Company of any merger or consolidation or statutory share exchange to which the Company is a party as a result of which the persons who were stockholders of the Company immediately prior to the effective date of the merger or consolidation or statutory share exchange shall have beneficial ownership of less than 50% of the combined voting power in the election of directors of the surviving corporation following the effective date of such merger or consolidation or statutory share exchange. “Change in control” does not include any reduction in ownership by the Company of a subsidiary of the Company or any other entity designated by the Board in which the Company owns at least a 50% interest (including, but not limited to, partnerships and joint ventures.)
 
Each agreement contains confidentiality restrictions applicable during and after the period of employment, non-solicitation of employees during the period of employment and for two years following termination (or in Mr. Mueller’s case, a variable period up to three years), and non-competition and other non-solicitation provisions applicable during the period of employment and (i) for Mr. Mueller, a variable period up to three years, and (ii) for Messrs. Agüero, Drury, Graber and Finlayson, upon payment of an additional sum equal to the executive’s annual base salary for each year, for up to two years following termination of employment.
 
The following table describes the potential payments to the listed named executive officers (other than Mr. Mueller, who was not a named executive officer in 2010) upon such executives’ termination without cause


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under their respective employment agreements. No additional or alternative salary or benefits would be provided upon a change of control.
 
                                 
        Equity
   
Name
  Salary(1)   Acceleration(2)   Benefits(3)
 
Carlos E. Agüero, CEO
  $ 398,591             $ 160,889     $ 19,386  
Eric W. Finlayson, CFO
  $ 182,213             $ 90,978     $ 19,386  
Michael J. Drury
  $ 273,319             $ 149,778     $ 19,386  
Arnold S. Graber
  $ 256,237             $ 102,089     $ 19,386  
 
 
(1) Represents one year of base salary as of December 31, 2010.
 
(2) Calculated based on a change of control taking place as of December 31, 2010 and assuming a price per share of $5.88, which was the closing price for our stock on December 31, 2010. Represents the full acceleration of unvested stock options held by such named executive officer at that date.
 
(3) Under their respective employment agreements, each named executive officer is entitled to twelve months of continued COBRA health benefits upon termination without cause or for good reason. Amount includes 12 months of health insurance premiums at rates in effect as of December 31, 2010.
 
DIRECTOR COMPENSATION
 
Employee directors do not receive additional compensation for their services as directors. The non-employee members of our Board of Directors are reimbursed for travel, lodging and other reasonable expenses incurred in attending board or committee meetings. The following table summarizes compensation that our directors earned during 2010 for services as members of our Board.
 
                                         
    Fees Earned or
  Stock
  Options
  All Other
   
Name(1)
  Paid in Cash   Awards   Awards(6)   Compensation   Total
 
Sean P. Duffy(2)
  $ 33,250           $ 60,900           $ 94,150  
Bret R. Maxwell(3)
  $ 40,000           $ 60,900           $ 100,900  
Walter H. Barandiaran(4)
  $ 43,750           $ 60,900           $ 104,650  
Paul A. Garrett(5)
  $ 61,500           $ 60,900           $ 122,400  
 
 
(1) Directors Carlos E. Agüero and Michael J. Drury are also executive officers of the Company. They do not receive additional compensation for their services as directors.
 
(2) Mr. Duffy was elected a director of the Company on January 1, 2010. Mr. Duffy was granted options for 15,000 shares of our common stock on April 1, 2010 at an exercise price of $5.99. The options vest over one year in equal monthly installments from the date of grant and may be exercised for up to five years from the date of grant, expiring on April 1, 2015.
 
(3) Mr. Maxwell was granted options for 15,000 shares of our common stock on April 1, 2010 at an exercise price of $5.99. The options vest over one year in equal monthly installments from the date of grant and may be exercised for up to five years from the date of grant, expiring on April 1, 2015. He was also granted options for 10,000 shares of our common stock on August 17, 2009 at an exercise price of $3.88. Those options had an initial vest of one-twelfth of the grant on the date occurring three months after the date of grant, and thereafter vest in equal monthly installments until the third anniversary of the date of grant, and expire on August 17, 2014.
 
(4) Mr. Barandiaran was granted options for 15,000 shares of our common stock on April 1, 2010 at an exercise price of $5.99. The options vest over one year in equal monthly installments from the date of grant and may be exercised for up to five years from the date of grant, expiring on April 1, 2015. He was also granted options for 10,000 shares of our common stock on August 17, 2009 at an exercise price of $3.88. Those options had an initial vest of one-twelfth of the grant on the date occurring three months after the date of grant, and thereafter vest in equal monthly installments until the third anniversary of the date of grant, and expire on August 17, 2014.


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(5) Mr. Garrett was initially elected a director March 16, 2005. Mr. Garrett was granted options for 15,000 shares of our common stock on April 1, 2010 at an exercise price of $5.99. The options vest over one year in equal monthly installments from the date of grant and may be exercised for up to five years from the date of grant, expiring on April 1, 2015. As further consideration for his services as chairman of our Audit Committee he was granted options for an additional 15,000 shares of our common stock on May 1, 2007 at an exercise price of $6.29. Those options vested in equal monthly installments over a period of three years and expire on May 1, 2012. He was granted 5,000 shares of restricted stock on March 31, 2008. These shares vested in equal quarterly installments over a period of three years commencing on the date of grant. He was granted options for an additional 7,500 shares of our common stock on July 9, 2008 at an exercise price of $14.02. Those options vest in equal monthly installments over a period of three years and expire on July 9, 2013. He was granted options for an additional 12,000 shares of our common stock on August 17, 2009 at an exercise price of $3.88. Those options had an initial vest of one-twelfth of the grant on the date occurring three months after the date of grant, and thereafter vest in equal monthly installments until the third anniversary of the date of grant, and expire on August 17, 2014.
 
(6) Value based on the grant date fair value computed in accordance with FASB ASC Topic 718.
 
Non-employee directors receive an annual fee of $24,000, and members of the Audit Committee (other than the chair) receive an annual fee of $6,000, both fees payable in arrears in equal quarterly installments. Non-employee directors are also paid $1,750 for each Board meeting attended in person and $750 for each Board meeting attended telephonically. Independent directors are also entitled to an annual grant of 15,000 stock options on April 1 of each year. Mr. Garrett receives an annual fee of $18,000 for his services as chairman of our Audit Committee, payable in equally quarterly installments. Mr. Maxwell and Mr. Barandiaran have been granted stock options but otherwise were not compensated for service to us or for memberships on committees of the Board before 2010.
 
Limitation of Liability and Indemnification
 
As permitted by the Delaware General Corporation Law, we have adopted provisions in our Fourth Amended and Restated Certificate of Incorporation and bylaws that limit or eliminate the personal liability of our directors. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:
 
  •  any breach of the director’s duty of loyalty to us or our stockholders;
 
  •  any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
 
  •  any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or
 
  •  any transaction from which the director derived an improper personal benefit.
 
These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission.
 
In addition, our bylaws provide that:
 
  •  we will indemnify our directors, officers and, in the discretion of our board of directors, certain employees to the fullest extent permitted by the Delaware General Corporation Law; and
 
  •  we will advance expenses, including attorneys’ fees, to our directors and, in the discretion of our board of directors, to our officers and certain employees, in connection with legal proceedings, subject to limited exceptions.
 
We maintain directors’ and officers’ liability insurance to support these indemnity obligations.
 
Any amendment to or repeal of these provisions will not eliminate or reduce the effect of these provisions in respect of any act or failure to act, or any cause of action, suit or claim that would accrue or arise prior to any amendment or repeal or adoption of an inconsistent provision. If the Delaware General Corporation Law is amended to provide for further limitations on the personal liability of directors of corporations, then the personal


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liability of our directors will be further limited to the greatest extent permitted by the Delaware General Corporation Law.
 
At this time there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.
 
Compensation Committee Interlocks and Insider Participation
 
The members of the Compensation Committee through 2010 were Messrs. Maxwell (Committee Chair) and Barandiaran. Mr. Duffy was appointed to the Committee on March 9, 2010. None of the members of our Compensation Committee has at any time been one of our officers or employees. None of our executive officers serves as a director or compensation committee member of any entity that has one or more of its executive officers serving as one of our Directors or on our Compensation Committee.
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management
 
The following table sets forth information with respect to the beneficial ownership of shares of the Company’s common stock as of March 1, 2011 for (i) each person known by us to beneficially own more than 5% of the Company’s common stock, (ii) each of our Directors and each of our named executive officers listed in the Summary Compensation Table under the caption “Executive Compensation,” and (iii) all of our Directors and named executive officers as a group. The number of shares beneficially owned by each stockholder and each stockholder’s percentage ownership is based on 47,368,641 shares of common stock outstanding as of March 1, 2011. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the “SEC”) and generally includes any shares over which a person possesses sole or shared voting or investment power. Except as otherwise indicated by footnote, to our knowledge, the persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. In calculating the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to warrants and options held by that person that are exercisable as of the date of this table, or will become exercisable within 60 days thereafter, are deemed outstanding, while such shares are not deemed outstanding for purposes of calculating percentage ownership of any other person. Unless otherwise stated, the


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address of each person in the table is c/o Metalico, Inc., 186 North Avenue East, Cranford, New Jersey 07016. Beneficial ownership representing less than 1% of the outstanding shares of common stock is denoted with an “*.”
 
                 
        Percent of
        Outstanding
    Number of
  Common
Name and Address of Beneficial Owner
  Shares(1)   Stock(2)
 
5% Shareholders(3)
               
Directors and Executive Officers
               
Carlos E. Agüero,
    6,060,542 (4)     12.7 %
Director and Chairman, President and Chief Executive Officer
               
Michael J. Drury,
    383,889 (5)     *
Director and Executive Vice President and Chief Operating Officer
for PGM and Lead Operations
               
Bret R. Maxwell, Director
    872,172 (6)     1.8 %
c/o MK Capital
1033 Skokie Boulevard, Suite 430
Northbrook, Illinois 60062
               
Walter H. Barandiaran, Director
    222,952 (7)     *
c/o The Argentum Group
60 Madison Avenue, 7th Floor
New York, New York 10010
               
Paul A. Garrett, Director
    83,916 (8)     *
Sean P. Duffy, Director
    15,000 (9)     *
Arnold S. Graber,
    183,639 (10)     *
Executive Vice President, General Counsel and Secretary
               
Eric W. Finlayson,
    148,089 (11)     *
Senior Vice President and Chief Financial Officer
               
Kenneth P. Mueller,
    1,111 (12)     *
Senior Vice President and Chief Operating Officer of Ferrous and Nonferrous Scrap Metal Recycling
               
Executive Officers and Directors as a group
    7,971,309       16.6 %
(9 persons)
               
 
 
(1) Includes shares of common stock held directly as well as by spouses or minor children, in trust and other indirect ownership, over which shares the individuals effectively exercise sole voting and investment power.
 
(2) Assumes all vested options are exercised with respect to such holder.
 
(3) None except Carlos E. Agüero, a Director and our Chairman, President and Chief Executive Officer.
 
(4) Includes 304,167 shares issuable upon the exercise of options.
 
(5) Includes 173,889 shares issuable upon the exercise of options.
 
(6) Includes (i) 561,415 shares held by Infrastructure & Environmental Private Equity Fund III, LP and 140,479 shares held by Environmental & Information Technology Private Equity Fund III, venture capital funds for which Mr. Maxwell is a common ultimate controlling party, (ii) 149,722 common shares held by the Bret R. Maxwell Revocable Trust, and (iii) 20,556 shares issuable to Mr. Maxwell upon the exercise of options.
 
(7) Includes (i) 202,396 shares held by Argentum Capital Partners, L.P., a venture capital fund for which Mr. Barandiaran is an ultimate controlling party, and (ii) 20,556 shares issuable to Mr. Barandiaran upon the exercise of options.
 
(8) Includes 53,750 shares issuable upon the exercise of options.
 
(9) Includes 15,000 shares issuable upon the exercise of options.
 
(10) Includes 121,389 shares issuable upon the exercise of options.


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(11) Includes 79,389 shares issuable upon the exercise of options.
 
(12) Mr. Mueller became a named executive officer in 2011. Includes 1,111 shares issuable upon the exercise of options.
 
Item 13.   Certain Relationships and Related Party Transactions, and Director Independence
 
In the ordinary course of our business and in connection with our financing activities, we have entered into a number of transactions with our directors, officers and certain 5% or greater shareholders. All of the transactions set forth below were approved by the unanimous vote of our Board of Directors with interested directors abstaining. We believe that we have executed all of the transactions set forth below on terms no less favorable to us than we could have obtained from unaffiliated third parties. Our Board of Directors is responsible for approving related party transactions, as defined in applicable rules by the Securities and Exchange Commission. As a matter of Company policy, all related party transactions are reviewed by the Audit Committee, which then reports its findings to the full Board.
 
  •  Carlos E. Agüero, our Chairman, President and Chief Executive Officer, is a limited partner of Infrastructure & Environmental Private Equity Fund III, L.P., and of Argentum Capital Partners II, L.P., two of the Company’s venture capital investors. His holdings in each fund are less than 1% of such fund’s limited partnership interests.
 
  •  Walter H. Barandiaran, a director of the Company, is a managing partner of The Argentum Group. The Argentum Group, the ultimate controlling party of Argentum Capital Partners, L.P., which holds stock in the Company, also controls partnership interests in two other investment funds that hold a portion of the Company’s stock, Infrastructure & Environmental Private Equity Fund III, LP, and Environmental & Information Technology Private Equity Fund III.
 
  •  The Company owns 5.9% of the outstanding stock of EQM Technologies & Energy, Inc. (“EQM”), a corporation that trades on the OTC Bulletin Board as the successor by merger to Beacon Energy Holdings Inc. (“Beacon”), pursuant to investments approved by our Board of Directors on November 3, 2006 and August 10, 2007. In addition, Mr. Agüero holds approximately 2.1% of the stock of EQM and serves on its board of directors. The Argentum Group holds approximately 56.8% of the stock of EQM primarily through the same funds that hold the Company’s stock. Mr. Barandiaran is the chairman of EQM’s board of directors. Michael J. Drury, our Executive Vice President and Chief Operating Officer for PGM and Lead Operations and a director, holds less than 1% of the stock of EQM. Paul A. Garrett, a director of the Company and chair of our Audit Committee, holds the same positions at EQM. The Beacon investment was reviewed and recommended to the Board by a committee of independent directors having no direct or indirect interests in Beacon. The interests of Mr. Agüero and Mr. Drury were fully disclosed to the committee prior to its review of the investments and to the Board prior to its approval of the investments, and both abstained from the Board’s votes on the matter. The Argentum Group acquired its interests in Beacon in 2008.
 
Director Independence
 
The Board of Directors has determined that each of the Directors other than Carlos E. Agüero and Michael J. Drury is “independent” under the applicable standards of the Securities and Exchange Commission and NYSE Amex.


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Item 14.   Principal Accounting Fees and Services
 
The aggregate fees, including billed and estimated unbilled amounts applicable to the Company and its subsidiaries for the years ended December 31, 2010 and 2009, of the Company’s principal accounting firm, J.H Cohn LLP were approximately:
 
                 
    2010   2009
 
Audit Fees
  $ 460,000     $ 460,000  
Audit Related Fees
    33,050       83,835  
Tax Fees
    147,930       160,675  
All Other
           
 
Audit Fees and Tax Fees comparability is generally affected by the SEC filings made or contemplated and the volume and materiality of the Company’s business acquisitions.
 
Audit Fees.  Consists of fees for professional services rendered for the audit of our financial statements, the audit of internal control over financial reporting, assistance or review of SEC filings, proposed SEC filings and other statutory and regulatory filings, preparation of comfort letters and consents and review of the interim financial statements included in quarterly reports.
 
Audit-Related Fees.  Consists of fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements that are not reported under “Audit Fees”, primarily related to consultations on financial accounting and reporting standards.
 
Tax Fees.  Consists of fees for professional services rendered related to tax compliance, tax advice or tax planning.
 
All Other Fees.  Consists of fees for all other professional services, not covered by the categories noted above.
 
Pursuant to the Company’s Audit Committee policies, all audit and permissible non-audit services provided by the independent auditors and their affiliates must be pre-approved. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of service. The independent auditor and management are required to periodically report to the Audit Committee of the Company regarding the extent of services provided by the independent auditor in accordance with this policy.
 
In considering the nature of the services provided by the independent registered public accountant, the Audit Committee of the Company determined that such services are compatible with the provision of independent audit services. The Audit Committee of the Company discussed these services with the independent registered public accountant and Company management to determine that they are permitted under the rules and regulations concerning auditors’ independence promulgated by the SEC to implement the Sarbanes-Oxley Act of 2002, as well as rules of the American Institute of Certified Public Accountants.


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Item 15.   Financial Statements and Exhibits
 
(a)  FINANCIAL STATEMENTS
 
The following financial statements are included as part of this Form 10-K beginning on page F-1:
 
Index to Financial Statements
 
         
    Page
 
       
       
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  
    F-8  
 
(b)  EXHIBITS
 
The following exhibits are filed as part of this registration statement:
 
         
  3 .1   Fourth Amended and Restated Certificate of Incorporation of Metalico, Inc.; previously filed as Appendix A to Proxy Statement on Schedule 14A for the Company’s 2008 Annual Meeting of Stockholders filed May 15, 2008 and incorporated herein by reference
  3 .2   Third Amended and Restated Bylaws of Metalico, Inc.; previously filed as Exhibit 3.2 to Current Report on Form 8-K filed November 3, 2005 and incorporated herein by reference
  4 .1   Specimen Common Stock Certificate; previously filed as Exhibit 4.1 to Form 10 filed December 20, 2004 and incorporated herein by reference
  10 .3*   Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Carlos E. Agüero; previously filed as Exhibit 10.3 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
  10 .4*   Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Michael J. Drury; previously filed as Exhibit 10.4 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
  10 .5*   Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Arnold S. Graber; previously filed as Exhibit 10.5 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
  10 .6*   Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Eric W. Finlayson; previously filed as Exhibit 10.6 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
  10 .7*   Metalico, Inc. 1997 Long-Term Incentive Plan; previously filed as Exhibit 10.7 to Form 10 filed December 20, 2004 and incorporated herein by reference
  10 .8*   Metalico, Inc. Executive Bonus Plan; previously filed as Exhibit 10.8 to Form 10 filed December 20, 2004 and incorporated herein by reference
  10 .9   Credit Agreement, dated as of February 26, 2010 but entered into March 2, 2010, by and among Metalico, Inc. and its subsidiaries signatory thereto as borrowers and guarantors and JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto; previously filed as Exhibit 10.1 to Current Report on Form 8-K filed March 4, 2010 and incorporated herein by reference


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  10 .10   Second Amendment dated January 27, 2011 to Credit Agreement dated as of February 26, 2010 between and among Metalico, Inc. and its subsidiaries signatory thereto as borrowers or guarantors and JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto
  10 .14*   Employment Agreement dated as of February 11, 2011 effective February 21, 2011 between Metalico, Inc. and Kenneth P. Mueller; previously filed as Exhibit 10.14 to Current Report on Form 8-K filed February 22, 2011 and incorporated herein by reference
  10 .15*   Form of Employee Incentive Stock Option Agreement under Metalico, Inc. 1997 Long-Term Incentive Plan; previously filed as Exhibit 99.1 to Current Report on Form 8-K filed March 17, 2005 and incorporated herein by reference
  10 .18*   Metalico 2006 Long-Term Incentive Plan; previously filed as Appendix A to Proxy Statement on Schedule 14A for the Company’s 2006 Annual Meeting of Stockholders filed April 13, 2006 and incorporated herein by reference
  10 .19*   Form of Employee Incentive Stock Option Agreement under Metalico, Inc. 2006 Long-Term Incentive Plan; previously filed as Exhibit 10.19 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and incorporated herein by reference
  10 .20*   Form of Employee Restricted Stock Grant Agreement under Metalico, Inc. 2006 Long-Term Incentive Plan; previously filed as Exhibit 10.20 to Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference
  10 .21   Securities Purchase Agreement dated as of June 21, 2007 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.1 to Current Report on Form 8-K filed June 22, 2007 and incorporated herein by reference
  10 .22   Registration Rights Agreement dated as of June 21, 2007 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.2 to Current Report on Form 8-K filed June 22, 2007 and incorporated herein by reference
  10 .23   Form of Amended and Restated Stock Subscription Agreement and Stockholder Agreement dated November 30, 2006 among AgriFuel Co. (“AgriFuel”), the purchasers of AgriFuel stock signatory thereto, and Metalico, Inc.; previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference
  10 .24   Form of Amendment No. 1 dated August 22, 2007 to Amended and Restated Stock Subscription Agreement and Stockholder Agreement dated November 30, 2006 among AgriFuel Co., nka Beacon Energy Corp. (“Beacon”), the purchasers of Beacon stock signatory thereto, and Metalico, Inc.; previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference
  10 .25   Form of Series B Stock Subscription Agreement and Stockholder Agreement dated August 22, 2007 among Beacon Energy Corp. (“Beacon”), the purchasers of Beacon stock signatory thereto, and Metalico, Inc.; previously filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference
  10 .26   Form of Subscription and Investment Agreement (Series C) dated May 15, 2008 among Beacon Energy Corp., the investors identified therein, and Metalico, Inc.; previously filed as Exhibit 10.26 to Quarterly Report on Form 10-Q for quarter ended June 30, 2008 and incorporated herein by reference
  10 .28   Securities Purchase Agreement dated as of April 23, 2008 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.1 to Current Report on Form 8-K/A filed April 24, 2008 and incorporated herein by reference
  10 .29   Registration Rights Agreement dated as of April 23, 2008 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.2 to Current Report on Form 8-K/A filed April 24, 2008 and incorporated herein by reference
  10 .30   Form of Senior Unsecured Convertible Note issued to investors party to Agreements identified in Exhibits 10.27 and 10.28 above, previously filed as Exhibit 10.3 to Current Report on Form 8-K filed May 5, 2008 and incorporated herein by reference
  10 .31   Form of Common Stock Purchase Warrant issued to investors party to Agreements identified in Exhibits 10.27 and 10.28 above, previously filed as Exhibit 10.4 to Current Report on Form 8-K/A filed April 24, 2008 and incorporated herein by reference

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  14 .1   Code of Business Conduct and Ethics, available on the Company’s website (www.metalico.com) and incorporated herein by reference.
  21 .1   List of Subsidiaries of Metalico, Inc.
  23 .1   Consent of Independent Registered Public Accounting Firm.
  23 .2   Consent of Independent Registered Public Accounting Firm.
  31 .1   Certification of Chief Executive Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended
  31 .2   Certification of Chief Financial Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended
  32 .1   Certification of Chief Executive Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code
  32 .2   Certification of Chief Financial Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code
 
 
* Management contract or compensatory plan or arrangement.

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
METALICO, INC.
(Registrant)
 
  By: 
/s/  Carlos E. Agüero
Carlos E. Agüero
Chairman, President and Chief Executive Officer
 
Date: March 14, 2011
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  Carlos E. Agüero

Carlos E. Agüero
  Chairman of the Board of Directors, President, Chief Executive Officer and Director   March 14, 2011
         
/s/  Eric W. Finlayson

Eric W. Finlayson
  Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)   March 14, 2011
         
/s/  Michael J. Drury

Michael J. Drury
  Executive Vice President and Chief Operating Officer for PGM and Lead Operations and Director   March 14, 2011
         
/s/  Bret R. Maxwell

Bret R. Maxwell
  Director   March 14, 2011
         
/s/  Walter H. Barandiaran

Walter H. Barandiaran
  Director   March 14, 2011
         
/s/  Paul A. Garrett

Paul A. Garrett
  Director   March 14, 2011
         
/s/  Sean P. Duffy

Sean P. Duffy
  Director   March 14, 2011


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EXHIBIT INDEX
 
         
Number
 
Description of Document
  3 .1   Fourth Amended and Restated Certificate of Incorporation of Metalico, Inc.; previously filed as Appendix A to Proxy Statement on Schedule 14A for the Company’s 2008 Annual Meeting of Stockholders filed May 15, 2008 and incorporated herein by reference
  3 .2   Third Amended and Restated Bylaws of Metalico, Inc.; previously filed as Exhibit 3.2 to Current Report on Form 8-K filed November 3, 2005 and incorporated herein by reference
  4 .1   Specimen Common Stock Certificate; previously filed as Exhibit 4.1 to Form 10 filed December 20, 2004 and incorporated herein by reference
  10 .3*   Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Carlos E. Agüero; previously filed as Exhibit 10.3 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
  10 .4*   Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Michael J. Drury; previously filed as Exhibit 10.4 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
  10 .5*   Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Arnold S. Graber; previously filed as Exhibit 10.5 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
  10 .6*   Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Eric W. Finlayson; previously filed as Exhibit 10.6 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
  10 .7*   Metalico, Inc. 1997 Long-Term Incentive Plan; previously filed as Exhibit 10.7 to Form 10 filed December 20, 2004 and incorporated herein by reference
  10 .8*   Metalico, Inc. Executive Bonus Plan; previously filed as Exhibit 10.8 to Form 10 filed December 20, 2004 and incorporated herein by reference
  10 .9   Credit Agreement, dated as of February 26, 2010 but entered into March 2, 2010, by and among Metalico, Inc. and its subsidiaries signatory thereto as borrowers and guarantors and JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto; previously filed as Exhibit 10.1 to Current Report on Form 8-K filed March 4, 2010 and incorporated herein by reference
  10 .10   Second Amendment dated January 27, 2011 to Credit Agreement dated as of February 26, 2010 between and among Metalico, Inc. and its subsidiaries signatory thereto as borrowers or guarantors and JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto
  10 .14*   Employment Agreement dated as of February 11, 2011 effective February 21, 2011 between Metalico, Inc. and Kenneth P. Mueller; previously filed as Exhibit 10.14 to Current Report on Form 8-K filed February 22, 2011 and incorporated herein by reference
  10 .15*   Form of Employee Incentive Stock Option Agreement under Metalico, Inc. 1997 Long-Term Incentive Plan; previously filed as Exhibit 99.1 to Current Report on Form 8-K filed March 17, 2005 and incorporated herein by reference
  10 .18*   Metalico 2006 Long-Term Incentive Plan; previously filed as Appendix A to Proxy Statement on Schedule 14A for the Company’s 2006 Annual Meeting of Stockholders filed April 13, 2006 and incorporated herein by reference
  10 .19*   Form of Employee Incentive Stock Option Agreement under Metalico, Inc. 2006 Long-Term Incentive Plan; previously filed as Exhibit 10.19 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and incorporated herein by reference
  10 .20*   Form of Employee Restricted Stock Grant Agreement under Metalico, Inc. 2006 Long-Term Incentive Plan; previously filed as Exhibit 10.20 to Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference
  10 .21   Securities Purchase Agreement dated as of June 21, 2007 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.1 to Current Report on Form 8-K filed June 22, 2007 and incorporated herein by reference


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Number
 
Description of Document
  10 .22   Registration Rights Agreement dated as of June 21, 2007 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.2 to Current Report on Form 8-K filed June 22, 2007 and incorporated herein by reference
  10 .23   Form of Amended and Restated Stock Subscription Agreement and Stockholder Agreement dated November 30, 2006 among AgriFuel Co. (“AgriFuel”), the purchasers of AgriFuel stock signatory thereto, and Metalico, Inc.; previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference
  10 .24   Form of Amendment No. 1 dated August 22, 2007 to Amended and Restated Stock Subscription Agreement and Stockholder Agreement dated November 30, 2006 among AgriFuel Co., nka Beacon Energy Corp. (“Beacon”), the purchasers of Beacon stock signatory thereto, and Metalico, Inc.; previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference
  10 .25   Form of Series B Stock Subscription Agreement and Stockholder Agreement dated August 22, 2007 among Beacon Energy Corp. (“Beacon”), the purchasers of Beacon stock signatory thereto, and Metalico, Inc.; previously filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference
  10 .26   Form of Subscription and Investment Agreement (Series C) dated May 15, 2008 among Beacon Energy Corp., the investors identified therein, and Metalico, Inc.; previously filed as Exhibit 10.26 to Quarterly Report on Form 10-Q for quarter ended June 30, 2008 and incorporated herein by reference
  10 .28   Securities Purchase Agreement dated as of April 23, 2008 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.1 to Current Report on Form 8-K/A filed April 24, 2008 and incorporated herein by reference
  10 .29   Registration Rights Agreement dated as of April 23, 2008 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.2 to Current Report on Form 8-K/A filed April 24, 2008 and incorporated herein by reference
  10 .30   Form of Senior Unsecured Convertible Note issued to investors party to Agreements identified in Exhibits 10.27 and 10.28 above, previously filed as Exhibit 10.3 to Current Report on Form 8-K filed May 5, 2008 and incorporated herein by reference
  10 .31   Form of Common Stock Purchase Warrant issued to investors party to Agreements identified in Exhibits 10.27 and 10.28 above, previously filed as Exhibit 10.4 to Current Report on Form 8-K/A filed April 24, 2008 and incorporated herein by reference
  14 .1   Code of Business Conduct and Ethics, available on the Company’s website (www.metalico.com) and incorporated herein by reference
  21 .1   List of Subsidiaries of Metalico, Inc.
  23 .1   Consent of Independent Registered Public Accounting Firm.
  23 .2   Consent of Independent Registered Public Accounting Firm.
  31 .1   Certification of Chief Executive Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended
  31 .2   Certification of Chief Financial Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended
  32 .1   Certification of Chief Executive Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code
  32 .2   Certification of Chief Financial Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code
 
 
Management contract or compensatory plan or arrangement.

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INDEX TO FINANCIAL STATEMENTS
 
The following financial statements are included as part of this Form 10-K beginning on page F-1:
 
 
         
    Page
 
Audited Consolidated Financial Statements of Metalico, Inc. and Subsidiaries:
       
Report of Independent Registered Public Accounting Firm
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  
    F-8  


F-1


Table of Contents

 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholders
Metalico, Inc.
 
We have audited the consolidated balance sheets of Metalico, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and their results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2011, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ J.H. Cohn LLP
 
Roseland, New Jersey
March 14, 2011


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(MCGLADREY & PULLEN LLP LOGO)
 
(MCGLADREY LOGO)
 
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
 
 
To the Board of Directors and Stockholders
Metalico, Inc.
 
We have audited the consolidated statements of operations, stockholders’ equity and cash flows of Metalico, Inc. and subsidiaries (the Company) for the year ended December 31, 2008. 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 audit.
 
We conducted our audit 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 audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company’s operations and cash flows for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
 
As described in Note 25 to the consolidated financial statements, on January 1, 2009, the Company adopted accounting guidance related to noncontrolling interests and retrospectively adjusted the 2008 consolidated financial statements for the change.
 
/s/ McGladrey & Pullen LLP
 
Peoria, Illinois
March 16, 2009, except the retrospective adoption of accounting guidance related to noncontrolling
interests described in Note 25, as to which the date is March 16, 2010
 
McGladrey is the brand under which RSM McGladrey, Inc. and McGladrey & Pullen, LLP serve clients’ business needs. Member of RSM International network, a network of
The two firms operate as separate legal entities in an alternative practice structure. independent accounting, tax and consulting firms.


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Metalico, Inc. and Subsidiaries
 
December 31, 2010 and 2009
 
                 
    2010     2009  
          (Note 1)  
    ($ thousands)  
 
ASSETS
Current Assets
               
Cash
  $ 3,473     $ 4,938  
Trade receivables, less allowance for doubtful accounts 2010 — $1,027; 2009 — $1,187
    55,112       30,977  
Inventories
    73,454       52,614  
Prepaid expenses and other current assets
    6,276       4,333  
Income taxes receivable
    1,386       7,105  
Deferred income taxes
    4,004       2,753  
                 
Total current assets
    143,705       102,720  
Property and equipment, net
    70,215       75,253  
Goodwill
    69,605       69,301  
Other intangibles, net
    38,871       41,602  
Other assets, net
    6,111       7,825  
                 
Total assets
  $ 328,507     $ 296,701  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
               
Short-term debt
  $ 7,051     $  
Current maturities of other long-term debt
    4,196       8,515  
Accounts payable
    18,386       12,526  
Accrued expenses and other current liabilities
    4,561       7,513  
Income taxes payable
          808  
                 
Total current liabilities
    34,194       29,362  
                 
Long-Term Liabilities
               
Senior unsecured convertible notes payable
    79,940       80,374  
Other long-term debt, less current maturities
    34,775       27,904  
Deferred income taxes
    6,726       3,285  
Accrued expenses and other long-term liabilities
    5,557       5,519  
                 
Total long-term liabilities
    126,998       117,082  
                 
Total liabilities
    161,192       146,444  
                 
Commitments and Contingencies (Notes 17 and 18)
               
Stockholders’ Equity
               
Common stock
    46       46  
Additional paid-in capital
    175,094       171,892  
Accumulated deficit
    (7,510 )     (20,972 )
Accumulated other comprehensive loss
    (315 )     (709 )
                 
Total stockholders’ equity
    167,315       150,257  
                 
Total liabilities and stockholders’ equity
  $ 328,507     $ 296,701  
                 
 
See Notes to Consolidated Financial Statements.


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Metalico, Inc. and Subsidiaries
 
Years Ended December 31, 2010, 2009 and 2008
 
                         
    2010     2009     2008  
    ($ thousands, except share data)  
 
Revenue
  $ 553,253     $ 291,733     $ 818,195  
                         
Costs and expenses
                       
Operating expenses
    477,066       239,647       756,099  
Selling, general and administrative expenses
    26,482       25,994       30,146  
Depreciation and amortization
    13,728       13,240       12,864  
Gain on insurance recovery
    (513 )            
Gain on acquisition
          (866 )      
Impairment charges
                59,043  
                         
      516,763       278,015       858,152  
                         
Operating income (loss)
    36,490       13,718       (39,957 )
                         
Financial and other income (expense)
                       
Interest expense
    (9,837 )     (15,315 )     (17,355 )
Accelerated amortization and other costs related to refinancing of senior debt
    (3,046 )     (542 )      
Financial instruments fair value adjustment
    (496 )     (2,035 )     1,943  
Equity in income (loss) of unconsolidated investee
    28       (3,839 )     (3,419 )
Gain on debt extinguishment
    101       8,072        
Other income (expense)
    10       (1,963 )     410  
                         
      (13,240 )     (15,622 )     (18,421 )
                         
Income (loss) from continuing operations before provision (benefit) for income taxes
    23,250       (1,904 )     (58,378 )
Provision (benefit)for federal and state income taxes
    9,779       1,736       (15,535 )
                         
Income (loss) from continuing operations
    13,471       (3,640 )     (42,843 )
Discontinued operations:
                       
Income (loss) from operations less applicable (expense) credit for income taxes 2010 $6; 2009 ($162); 2008 $753;
    (9 )     195       (1,230 )
                         
Net income (loss)
    13,462       (3,445 )     (44,073 )
Non-controlling interest
                413  
                         
Net income (loss) attributable to Company
  $ 13,462     $