UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
SCHEDULE 14A
Proxy Statement Pursuant to Section
14(a) of
the Securities Exchange Act of 1934
(Amendment No. )
______________________
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S | | Definitive Additional Materials |
£ | | Soliciting Material Pursuant to §240.14a-12 |
METALICO, INC.
(Name of Registrant as Specified
In Its Charter)
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Filing Proxy Statement, if other than the Registrant)
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This
definitive additional material should be read in conjunction with the Definitive Proxy Statement on Schedule 14A (the “Definitive
Proxy Statement”) filed with the Securities and Exchange Commission (the “SEC”) by Metalico, Inc.,
a Delaware corporation (the “Company” or “Metalico”), on July 27, 2015, which should be read
in its entirety. Defined terms used but not defined herein have the meanings set forth in the Definitive Proxy Statement.
As
previously disclosed on pages 12, 13 and 48 of the Definitive Proxy Statement, certain litigation was instituted relating to the
Agreement and Plan of Merger, dated as of June 15, 2015, as amended by the First Amendment to Agreement and Plan of Merger, dated
as of June 26, 2015 (as so amended, the “Merger Agreement”), by and among Total Merchant Limited, a Samoan limited
company (“Parent”), TM Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of Parent (“Merger
Sub”), and the Company, providing for the merger (the “Merger”) of Merger Sub with and into the Company.
Since the announcement of the execution of the Merger Agreement on June 16, 2015, six putative stockholder class action complaints
have been filed in the Court of Chancery of the State of Delaware: (1) John Detore v. Metalico, Inc. et al., No. 11177,
filed on June 19, 2015; (2) Radovan Pinto v. Metalico, Inc. et al., No. 11183, filed on June 22, 2015; (3) Charles Morales
v. Metalico, Inc. et al., No. 11187, filed on June 22, 2015; (4) Daniel Malkiel v. Metalico, Inc., et al., No. 11196,
filed on June 24, 2015; (5) David Britten v. Metalico, Inc., et al., No. 11197, filed on June 24, 2015; and (6) Muhammad
A. Arshad v. Carlos E. Agüero et al., No. 11259, filed on July 7, 2015; collectively referred to as the “Delaware
Complaints.” In addition, four putative stockholder class action complaints have been filed in the Superior Court of
New Jersey, Chancery Division, Union County: (1) Robert Lowinger v. Carlos E. Agüero et al., filed on June 22, 2015,
(2) Zlatomir Vergiev v. Carlos E. Agüero et al., filed on June 24, 2015 (the “Vergiev Action”);
(3) Avi Cooper v. Metalico, Inc., et al, filed on June 24, 2015; and (4) John Solak v. Metalico, Inc. et al., filed
on June 29, 2015, collectively referred to as the “New Jersey Complaints.” The New Jersey Complaints have
been consolidated into the Vergiev Action (the “Consolidated Action”), and the plaintiff in the Consolidated
Action has filed an Amended Complaint (the “Amended Consolidated Complaint” and, collectively with the Delaware
Complaints, the “Complaints”).
On August
27, 2015, the defendants entered into a memorandum of understanding (the “MOU”)
with the plaintiffs providing for the settlement of the New Jersey Complaints and the dismissal of the Delaware Complaints. Under
the MOU, and subject to court approval and definitive documentation and other conditions, the plaintiffs and the putative class
agreed to settle the New Jersey Complaints and release the named defendants and their affiliates, agents and advisors from all
claims in the New Jersey Complaints and any potential claim related to (i) the Merger or the Merger Agreement, (ii) any deliberations
in connection with the Merger or the Merger Agreement, including the process of deliberation or negotiation by the defendants,
and any of their respective officers, directors, principals, partners or advisors, (iii) the consideration to be received by class
members in connection with the Merger, (iv) the Definitive Proxy Statement, or any other disclosures made available or filed relating
the Merger, or (v) the fiduciary obligations of the defendants and certain related persons in connection with the Merger. Such
release is subject to certain exceptions.
While the
Company believes that no supplemental disclosure is required under applicable laws, in order to avoid the risk of the putative
stockholder class actions delaying or adversely affecting the Merger and to minimize the expense of defending such actions, the
Company has agreed, pursuant to the terms of the MOU, to make certain supplemental disclosures related to the proposed Merger,
all of which are set forth below. The MOU contemplates that the parties will enter into a stipulation of settlement.
The stipulation of settlement will be subject to customary conditions, including court approval following notice to the Company’s
stockholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which
the Superior Court of New Jersey, Union County will consider the fairness, reasonableness, and adequacy of the settlement.
If the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have
been brought challenging any aspect of the proposed Merger, the Merger Agreement and any disclosure made in connection therewith,
pursuant to terms that will be disclosed to stockholders prior to final approval of the settlement. In addition, in connection
with the settlement, the parties contemplate that plaintiffs’ counsel will file a petition in the Superior Court of New Jersey,
Union County for an award of attorneys’ fees and expenses to be paid by the Company or its successor. The settlement is,
and the payment by the Company of any successor fees will be, contingent on, among other things, the consummation of the merger.
There can be no assurance that the Superior Court of New Jersey, Union County will approve the settlement contemplated by the MOU.
In the event that the settlement is not approved and such conditions are not satisfied, the defendants will continue to vigorously
defend against the allegations in the Complaints, which the defendants believe are without merit.
SUPPLEMENT TO DEFINITIVE PROXY
STATEMENT
In connection
with the settlement of the class action lawsuits as set forth in this definitive additional material, the Company has agreed to
make these supplemental disclosures to the Definitive Proxy Statement. These disclosures should be read in connection with the
Definitive Proxy Statement, which should be read in its entirety. To the extent that information herein differs from or updates
information contained in the Definitive Proxy Statement, the information contained herein supersedes the information contained
in the Definitive Proxy Statement. Defined terms used but not defined herein have the meanings set forth in the Definitive Proxy
Statement.
The following
disclosure supersedes and replaces the first full paragraph on page 21 of the Definitive Proxy Statement under the heading “Background
to the Merger”:
On February
23, 2015, Adam Weitsman, a competitor and stockholder of the Company who, according to a Schedule 13D and amendments filed with
the U.S. Securities and Exchange Commission, had begun accumulating his position in our stock on January 6, 2015, publicly announced
an unsolicited non-binding offer for our remaining outstanding common stock at a price of $0.78 per share, subject to negotiation
and due diligence. Mr. Weitsman has had business and personal relationships with certain of the Company’s executives and
other personnel, in some cases spanning many years. He has communicated with those persons with varying degrees of frequency over
the years, primarily through text message and occasionally through telephone calls and in-person encounters. The nature of these
communications ranged from discussions regarding the sale and purchase of metals between the Company and Mr. Weitsman’s affiliated
companies, industry news and the state of the scrap metal market, to potential direct equity investments by Mr. Weitsman in the
Company, various types of business combinations of the Company with Mr. Weitsman’s affiliated companies, Mr. Weitsman’s
desire to obtain a seat on our board, and the acquisition by Mr. Weitsman of our stock. These informal communications continued
up to and during the period immediately after February 23, 2015, and decreased significantly after late March, 2015.
The following
disclosure supersedes and replaces the second last full paragraph on page 23 of the Definitive Proxy Statement under the heading
“Background to the Merger”:
On April 16,
2015, Mr. Agüero was contacted by Huang Chung Sheng, chairman and principal stockholder of Ye Chiu Metal Recycling, Ltd (referred
to herein as “Ye Chiu”), an Asian corporation publicly traded on the Shanghai Stock Exchange. The Company is a long-time
supplier of aluminum zorba to Ye Chiu through its California based U.S. subsidiary. Mr. Huang is also the principal and controlling
stockholder of Total Merchant Limited (referred to herein as “Total Merchant”), a privately held Samoan investment
firm. He expressed interest in a transaction involving our equity. Prior to April 16, 2015, there had been no material contacts
between any executives or personnel of the Company and Mr. Huang, Ye Chiu, Total Merchant, or any of their respective affiliates,
other than contacts with Ye Chiu’s U.S. subsidiary with respect to the above-described supply by the Company of aluminum
zorba.
The
following disclosure supersedes and replaces the fifth full paragraph on page 24 of the Definitive Proxy Statement under the heading
“Background to the Merger”:
On April 22,
2015, at the request of Total Merchant, we prepared an outline of a proposal we could consider for the sale of the Company. The
outline did not address valuations or prices but identified the elements of our capital structure that would need to be addressed
in an acquisition (i.e., outstanding debt, conversion rights under the New Series Convertible Notes, prepayment premiums and outstanding
stock). The outline also specifically provided for, among other customary items, (i) the purchase of all our issued and outstanding
stock for a price to be determined based on fair market value with an appropriate control premium, (ii) the requirement of the
Company’s receipt of a fairness opinion from a recognized investment bank, (iii) the requirement of various legal and regulatory
approvals, (iv) various other customary closing conditions including our satisfaction with the purchasing entity’s ability
to finance the transaction, the refinancing of our senior secured debt, and the purchase or refinancing of our outstanding New
Series Convertible Notes, and (v) the approval of our senior lenders and each party’s organizational governing bodies as
a condition to the submission of the transaction to our stockholders.
The
following disclosure supersedes and replaces the last paragraph on page 27 and the beginning of page 28 of the Definitive Proxy
Statement under the heading “Background to the Merger”:
During a board
meeting on June 10, 2015 at the offices of Lowenstein in New York, New York, representatives of Gordian presented Gordian’s
financial analyses of the offer, and representatives of Lowenstein reviewed at length the proposed terms of the transaction and
the provisions of the merger agreement, the proposed voting agreement to be entered into among the Company, Mr. Agüero and
Total Merchant (referred to herein as the “Voting Agreement”), and the proposed amendment to our rights plan and responded
to questions from our board. In addition, Lowenstein informed our board that Total Merchant was requesting an employment arrangement
between Mr. Agüero and Total Merchant (referred to herein as the “Employment Letter”), which was requested by
Total Merchant to become effective after the consummation of the Merger and the terms of which were to be proposed by Total Merchant
in the next few days. Mr. Agüero did not discuss with Total Merchant his continued personal employment until after the June
10, 2015 board meeting. Thereafter, our board directed management, Gordian and Lowenstein to continue their respective
discussions of the merger agreement with K&L Gates and the buyer, with attention to specified open issues.
The
following disclosure supersedes and replaces the disclosure set forth under the heading “Discounted Cash Flow Analysis”
in its entirety:
Gordian
performed a discounted cash flow analysis, which is used to estimate the present value of unlevered after-tax free cash flows of
a company on a standalone basis. Gordian’s analysis began with June 2015 through the fiscal year ended December 31, 2019.
These projections did not factor in any potential recession or other potential downturn in the economy and, with management’s
concurrence, Gordian assumed that the final year of the forecast period represented “peak of cycle” performance.[2]
Gordian used the projections prepared by the Company, which included a Base Case and an Upside Case that incorporated the assumption
that scrap margins would recover more rapidly than in the Base Case. The unlevered after-tax free cash flows for these two cases
are summarized below:
Forecast
($ millions) | |
2015E June
- Dec | |
2016E FY | |
2017E FY | |
2018E FY | |
2019E FY |
Base Case | |
$ | (0.46 | ) | |
$ | 0.78 | | |
$ | 6.73 | | |
$ | 8.32 | | |
$ | 10.02 | |
Upside Case | |
| 1.24 | | |
| 1.94 | | |
| 7.91 | | |
| 9.53 | | |
| 11.24 | |
Unlevered
after-tax free cash flow was calculated by subtracting from EBITDA (i) capital expenditures, (ii) changes in non-financial working
capital and (iii) cash taxes at a rate of 37% of EBIT. Gordian then identified a range of implied enterprise values by calculating
the present value of unlevered free cash flows through December 31, 2019 and a terminal value. Gordian calculated the terminal
value based on a perpetual growth rate of 2.0% to 4.0%. Gordian selected the terminal year growth rates in part based on expectations
for global GDP growth as prepared by the OECD. Global growth was incorporated due to the fact that steel and scrap steel are globally
traded commodities whose demand is reliant upon global economic growth. Gordian did not incorporate the Company’s
net operating loss (“NOL”) carryforward in this analysis because the NOL would likely be subject to limitations due
to ownership changes in any recapitalization of the Company, causing uncertainty in the determination of annual limitations. Gordian
did note that it valued any potential value of the NOL to be less than $5 million.
The unlevered
free cash flows were discounted to a present value using a discount rate range of 12.0% to 14.0% which was selected by Gordian
based on its professional judgment and experience, and is representative of Metalico’s weighted average cost of capital,
or WACC. Gordian calculated this WACC range based on an analysis of Metalico’s Peer Group companies identified below using
the capital asset pricing model. In selecting the WACC, Gordian used (i) a cash adjusted unlevered beta of 1.15 (the median of
the Peer Group companies), (ii) an equity risk premium of 5.50%, (iii) a size premium of 5.83%, (iv) a company-specific premium
of 1.5%, (v) an effective tax rate of 37%, (vi) a risk free rate of 2.09%, and (vii) a cost of debt of 5.64% (based on the median
cost of debt of the Peer Group companies). Gordian then applied a debt to equity ratio of 25%/75%, again based upon a review of
the Peer Group companies. This resulted in a WACC of approximately 14.2%, which Gordian expanded to a range of values. Gordian
used a discount range with a high end that was generally equivalent to Metalico’s WACC based on its professional judgment
and experience and for purposes of conservatism.
_____________________
[2] | | As previously noted, the scrap steel
industry is subject to multi-year cycles. Because the Company’s projections include five years of continued growth, the
final year of the projections is assumed to be representative of the high point of the cycle for the industry. |
The range
of enterprise values for Metalico under the Base Case and Upside Case is presented below:[3]
| |
Enterprise
Value | |
TML |
Forecast
($ millions) | |
Low | |
High | |
Offer3 |
Base Case | |
$ | 82.2 | | |
$ | 100.2 | | |
$ | 115.2 | |
Upside Case | |
| 93.2 | | |
| 115.2 | | |
| | |
The following
disclosure supersedes and replaces the disclosure set forth under the heading “Peer Group Company Analysis”
in its entirety:
Gordian
performed an analysis of public Peer Group companies in order to determine an implied enterprise value for Metalico based on similar
companies that are publicly traded. Gordian selected the Peer Group by identifying companies that, in its professional judgment,
share similar business characteristics with Metalico and have similar operating statistics including total revenues, market capitalization,
geographic coverage, and profitability, among other items. Based on this review, Gordian selected the following companies:
·
Commercial Metals Company
·
Industrial Services of America, Inc.
·
Schnitzer Steel Industries, Inc.
·
Sims Metal Management Limited
·
Steel Dynamics, Inc.
The companies
selected for comparative purposes in Gordian’s analysis are not identical or directly comparable to Metalico. All but one
of the Peer Group companies listed above have significantly larger operations than Metalico and also engage in the production and
fabrication of ferrous and non-ferrous products. Therefore, assessing the Peer Group company analysis output from a purely quantitative
standpoint (i.e. taking the mean and median results and simply multiplying by the relevant Metalico data point) is not a meaningful
method of analysis in-and-of itself. A Peer Group analysis requires a detailed evaluation of multiple data points and takes into
account differences in operating characteristics and financial attributes, among other items, that could have a significant impact
on the public trading values of the companies to which Metalico is being compared.
Gordian
noted that compared to the Peer Group companies, Metalico is significantly smaller than all but one of the selected Peer Group.
Additionally, Metalico has generally lower gross margins and EBITDA margins, as seen in the chart below. Consequently, Gordian
used EBITDA and EBIT multiples based on the low to median values in the Peer Group when calculating an implied value.
Peer
Group - LTM Operating Metrics | |
Revenue | |
Gross Margin | |
EBITDA Margin |
Commercial Metals Company | |
$ | 6,896.5 | | |
| 11.4 | % | |
| 6.5 | % |
Industrial Services of America, Inc. | |
$ | 109.9 | | |
| NM | | |
| NM | |
Schnitzer Steel Industries, Inc. | |
$ | 2,324.5 | | |
| 8.4 | % | |
| 3.6 | % |
Sims Metal Management Limited | |
$ | 6,939.1 | | |
| 10.0 | % | |
| 2.4 | % |
Steel Dynamics Inc. | |
$ | 8,973.3 | | |
| 11.0 | % | |
| 9.7 | % |
Metalico Inc. | |
$ | 419.3 | | |
| 5.9 | % | |
| 1.8 | % |
Peer Group |
Mean | |
| | | |
| 10.2 | % | |
| 5.6 | % |
|
Median | |
| | | |
| 10.5 | % | |
| 5.0 | % |
[3] | | Enterprise value for the Transaction is determined by adding (i) payments to stockholders
of sixty cents per share, (ii) principal amount of total debt outstanding as of May 31, 2015, (iii) prepayment premiums on the
convertible notes as contemplated in the exchange agreement, and (iv) $5 million to account for the pre-purchase of materials
by the California-based U.S. subsidiary of Ye Chiu. |
Gordian analyzed
the ratios of total enterprise value to Adjusted EBITDA and enterprise value to EBIT for each of the selected Peer Group companies
for fiscal year 2014 and forecasted 2015. Gordian also incorporated the ratio of total enterprise value to the average of 2008-2014
and 2012-2014 and to peak earnings to account for the cyclicality in the scrap, steel and metals industries. Forecasted 2015 Adjusted
EBITDA and EBIT for each comparable company was based on the publicly available consensus estimate of equity research analysts.
Gordian obtained these estimates from CapitalIQ and used data provided by Bloomberg to confirm the consistency of the forecasts.
Actual results were calculated based on public financials and other publicly available information. For Metalico, Gordian incorporated
the 2015 Base Case forecast provided by our management.
For
purposes of this analysis, total enterprise value is defined as total market capitalization as of May 31, 2015 plus total debt,
plus minority interest, less cash and cash equivalents (which includes short term and other liquid investments). Adjusted EBIT
is defined as net income plus interest, taxes, and any one-time, non-recurring or non-cash items or charges. Depreciation and amortization
are then added to Adjusted EBIT to calculate Adjusted EBITDA.
Using these
calculations, Gordian observed the following ranges for the enterprise value to Adjusted EBITDA and enterprise value to Adjusted
EBIT multiples of the Peer Group companies:
| |
| EBITDA
Multiples
| |
Metric | |
| Low | | |
| Median | | |
| High | |
2015 Consensus Estimates | |
| 6.4 | x | |
| 8.1 | x | |
| 9.4 | x |
2014 Actual | |
| 7.6 | x | |
| 9.0 | x | |
| 12.8 | x |
3-year Average | |
| 7.5 | x | |
| 8.8 | x | |
| 11.4 | x |
7-year Average | |
| 4.7 | x | |
| 8.8 | x | |
| 11.3 | x |
Peak (2008 - 2014) | |
| 2.2 | x | |
| 3.2 | x | |
| 7.5 | x |
| |
| EBITDA
Multiples
| |
Metric | |
| Low | | |
| Median | | |
| High | |
2015 Consensus Estimates | |
| 8.8 | x | |
| 12.6 | x | |
| 95.0 | x |
2014 Actual | |
| 13.5 | x | |
| 20.4 | x | |
| 44.6 | x |
3-year Average | |
| 13.9 | x | |
| 17.3 | x | |
| 29.5 | x |
7-year Average | |
| 8.2 | x | |
| 18.9 | x | |
| 31.3 | x |
Peak (2008 - 2014) | |
| 2.7 | x | |
| 4.0 | x | |
| 9.3 | x |
Based on its
review of the Peer Group companies and using its professional judgment, Gordian applied an implied enterprise value to Adjusted
EBITDA multiple for Metalico of 6.4x-8.1x in 2015, 7.6x-9.0x in 2014, 7.5x - 8.8x in the 2012-2014 period, 4.7x-8.8x in the 2008-2014
period, and 2.2x-3.2x in the peak year. Gordian calculated Adjusted EBITDA for Metalico based on the projections prepared by our
management and made certain adjustments totaling $1 million as estimated by management to account for one-time items that were
primarily related to the merger transaction and other non-operating expenses including legal and advisory fees. This resulted in
an implied range of enterprise values for Metalico of approximately $40 million - $230 million. The results by data point are presented
below:
| |
Implied
Enterprise Value | |
TML |
Peer
Group – EBITDA ($ million) | |
| Low | | |
| High | | |
| Offer | |
2015 Consensus Estimates | |
$ | 41.4 | | |
$ | 52.7 | | |
$ | 115.2 | |
2014 Actual | |
| 106.8 | | |
| 127.4 | | |
| | |
3-year Average | |
| 119.1 | | |
| 139.9 | | |
| | |
7-year Average | |
| 124.6 | | |
| 230.9 | | |
| | |
Peak | |
| 94.8 | | |
| 142.4 | | |
| | |
Based
on its review of the Peer Group companies and using its professional judgment, Gordian applied an implied enterprise value to Adjusted
EBIT multiple for Metalico of 8.8x-12.6x in 2015, 13.5x-20.4x in 2014, 13.9x-17.3x in the 2012-2014 period, 8.2x-18.9x in the 2008-2014
period, and 2.7x-4.0x for the peak year. This resulted in an implied range of enterprise values for Metalico of approximately $10
million - $250 million. Importantly, Metalico’s actual 2014 Adjusted EBIT and expected 2015 Adjusted EBIT are negative and,
consequently, enterprise values cannot be calculated based on these multiples. The results by data point are presented below:
| |
Implied
Enterprise Value | |
TML |
Peer
Group – EBITDA ($ million) | |
| Low | | |
| High | | |
| Offer | |
2015 Consensus Estimates | |
| NM | | |
| NM | | |
$ | 115.2 | |
2014 Actual | |
| NM | | |
| NM | | |
| | |
3-year Average | |
| 12.5 | | |
| 15.4 | | |
| | |
7-year Average | |
| 110.5 | | |
| 254.3 | | |
| | |
Peak | |
| 89.1 | | |
| 131.7 | | |
| | |
The following
disclosure supersedes and replaces the disclosure set forth under the heading “Implied Per Share Value Based on Peer Group
Companies and DCF” in its entirety:
After determining
its range of implied enterprise values under the peer company and discounted cash flow analysis, Gordian calculated an implied
per share value of Metalico. Total equity value was calculated by starting with enterprise value and then subtracting Metalico’s
net debt (total debt plus prepayment penalties less cash and equivalents) as of May 31, 2015. Net debt was calculated by taking
actual balances as of May 31, 2015 and then making pro forma adjustments by adding (i) $3 million of “trapped” cash
that is held by our 33 facilities and used to pay suppliers on a daily basis and (ii) $5 million to account for pre-purchases of
materials made by the California based U.S. subsidiary of Ye Chiu to provide us with near term liquidity. Gordian calculated net
debt to be $69.0 million, which is before any premiums or prepayment penalties on the Series B Convertible Notes. This calculation
resulted in an implied equity value for Metalico. A per share value was determined using our outstanding shares as of May 31, 2015
of 73.4 million.
Based on the
implied per share price under the calculation in the preceding paragraph, adjustments were made to incorporate the full contractual
dilutive impact of Metalico’s Series B Convertible notes if the share price was greater than the Series B conversion price.
Additionally, the prepayment premiums associated with our Series A notes and senior secured credit facility were assumed to be
paid consistent with the full contractual terms of the notes and/or loans. A summary of the ranges of the fully diluted share price
under the Peer Group and discounted cash flow is summarized below[4]:
| |
Implied
Enterprise Value | |
TML |
Peer
Group | |
| Low | | |
| High | | |
| Offer | |
EBIT | |
| | | |
| | | |
$ | 0.60 | |
2015 Consensus Estimates | |
$ | — | | |
$ | — | | |
| | |
2014 Actual | |
| — | | |
| — | | |
| | |
3-year Average | |
| — | | |
| — | | |
| | |
7-year Average | |
| 0.52 | | |
| 2.05 | | |
| | |
Peak (2008 - 2014) | |
| 0.23 | | |
| 0.75 | | |
| | |
EBITDA | |
| | | |
| | | |
| | |
2015 Consensus Estimates | |
$ | — | | |
$ | — | | |
| | |
2014 Actual | |
| 0.47 | | |
| 0.70 | | |
| | |
3-year Average | |
| 0.61 | | |
| 0.84 | | |
| | |
7-year Average | |
| 0.67 | | |
| 1.81 | | |
| | |
Peak | |
| 0.31 | | |
| 0.87 | | |
| | |
DCF | |
| | | |
| | | |
| | |
Base Case | |
$ | 0.15 | | |
$ | 0.40 | | |
| | |
Upside Case | |
| 0.30 | | |
| 0.59 | | |
| | |
[4] | | The 2015 Consensus Estimates value per
share represent the Base Case for both EBITDA and EBIT. Incorporating the Upside Case would also have resulted in an implied value
per share of zero. |
The following
disclosure supersedes and replaces the disclosure set forth under the heading “Summary of the Company’s Projections”
in its entirety:
The Company
does not as a matter of course publicly disclose long-term forecasts or internal projections of its future performance, revenues,
earnings, financial condition or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates.
However, certain non-public, unaudited, stand-alone financial projections prepared by management of the Company were made available
to Gordian in connection with its analyses described under “Opinion of Gordian Group, LLC” that begins on page 30.
A summary
of the projections is provided below. The projections were not prepared with a view toward public disclosure. The projections are
included in this proxy statement because they were, among other items, relied upon by Gordian in its analyses described under “Opinion
of Gordian Group, LLC” beginning on page 30. The projections are not an indication that the Company, the board, Parent, any
advisor (including Gordian) to or representative of any of the foregoing, or any other recipient of this information considered
the projections to be material or necessarily predictive of actual future results, and the projections should not be relied upon
as such.
Management’s
internal financial forecasts and the assumptions upon which the projections were based are subjective in many respects and thus
subject to interpretation. Although presented with numerical specificity in the summary below, the projections are based upon a
significant number of estimates and assumptions made by management with respect to, among other matters, commodity prices, industry
performance, general business, economic, market and financial conditions and other matters, many of which are difficult to predict,
are subject to significant economic and competitive uncertainties, and are beyond the Company’s control. In addition, since
the projections cover multiple years, such information by its nature becomes less reliable with each successive year. As a result,
there can be no assurance that the estimates and assumptions made in preparing the projections will prove accurate, that the projected
results will be realized or that actual results will not materially vary from the projections. Additionally, the scrap recycling
industry is cyclical and the projections assume that the Company’s performance will continue to improve without interruption
over the next five years.
The projections
were not meant to comply with U.S. Generally Accepted Accounting Principles (“GAAP”), the published guidelines of the
SEC regarding financial projections and the use of non-GAAP measures or the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial projections and forecasts. The projections include financial
metrics that were not prepared in accordance with GAAP. Non-GAAP financial measures should not be considered in isolation from,
or as a substitute for, financial information presented in compliance with GAAP and non-GAAP financial measures as used by the
Company may not be comparable to similarly titled GAAP measures in the Company’s historical financial statements or similarly
titled amounts used by other companies.
Neither the
Company’s independent registered public accounting firm nor any other independent registered public accounting firm has examined,
compiled or performed any procedures with respect to the projections, and, accordingly, neither the Company’s independent
registered public accounting firm nor any other public accounting firm expresses an opinion or any other form of assurance with
respect to the projections. Reports of the Company’s independent registered public accounting firm that are incorporated
by reference into this proxy statement relate solely to the Company’s historical financial information. They do not extend
to the prospective financial information and should not be read to do so.
The projections
are forward-looking statements and were based on numerous variables and assumptions that are inherently uncertain. You are encouraged
to review the Company’s most recent SEC filings for a description of the Company’s reported results of operations and
financial condition during the fiscal year ended December 31, 2014 and for the first and second quarters of 2015. See “Special
Note Regarding Forward-Looking Statements” beginning on page 15 of this proxy statement and “Where You Can Find More
Information” beginning on page 81 of this proxy statement. The projections reflect assumptions that are difficult to predict
and subject to change and may not reflect current prospects for the Company’s business, changes in general business or economic
conditions including recessions or expansions, or any other transaction or event that has occurred or that may occur and that was
not anticipated when the projections were prepared. There can be no assurance that the projections will be realized or that the
Company’s future financial results will not materially vary from the projections.
No one has
made or makes any representation regarding the information included in the projections. Readers of this proxy statement are advised
not to rely unduly, if at all, on the projections. Some or all of the assumptions that have been made regarding, among other things,
the timing of certain occurrences or effects, may have changed since the date the projections were prepared. The Company has not
updated and does not intend to update or otherwise revise or reconcile the projections to reflect circumstances existing after
the date when made or to reflect the occurrence or non-occurrence of future events, even if any or all of the assumptions on which
the projections were based are shown to be in error. Except as may be required by applicable securities laws, the Company does
not intend to make publicly available any update or other revision to these management projections, even in the event that any
or all of the assumptions are shown to be in error. The Company has made no representation to Parent or Merger Sub in the merger
agreement or otherwise concerning the projections.
Management
provided Gordian with two sets of forecasts in the projections: (i) a Base Case that assumes modest growth in scrap margins over
the five year forecast period and (ii) an Upside Case that assumes a larger and more rapid increase in scrap margins. Management
believes that the primary drivers of the Company’s financial performance are unit volume and margin forecasts and therefore,
these were the primary drivers of the projections.
The following
summary is derived from the projections:
($ millions) | |
| 2015E | | |
| 2016E | | |
| 2017E | | |
| 2018E | | |
| 2019E | |
Upside
Case Forecast | |
| June
- Dec | | |
| FY | | |
| FY | | |
| FY | | |
| FY | |
Revenue | |
$ | 244.1 | | |
$ | 408.4 | | |
$ | 428.5 | | |
$ | 449.6 | | |
$ | 471.7 | |
Adjusted EBITDA | |
| 11.5 | | |
| 19.0 | | |
| 21.5 | | |
| 24.2 | | |
| 27.1 | |
EBIT | |
| 2.4 | | |
| 3.7 | | |
| 5.9 | | |
| 8.3 | | |
| 10.9 | |
Income Taxes | |
| — | | |
| (1.4 | ) | |
| (2.2 | ) | |
| (3.1 | ) | |
| (4.0 | ) |
Depreciation & Amortization | |
| 9.1 | | |
| 15.3 | | |
| 15.6 | | |
| 15.9 | | |
| 16.2 | |
Change in Working Capital | |
| (6.5 | ) | |
| (7.7 | ) | |
| (3.4 | ) | |
| (3.6 | ) | |
| (3.8 | ) |
Capital Expenditures | |
| (3.8 | ) | |
| (8.0 | ) | |
| (8.0 | ) | |
| (8.0 | ) | |
| (8.0 | ) |
Unlevered Free Cash Flow | |
| 1.2 | | |
| 1.9 | | |
| 7.9 | | |
| 9.5 | | |
| 11.2 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
($ millions) | |
| 2015E | | |
| 2016E | | |
| 2017E | | |
| 2018E | | |
| 2019E | |
Base Case
Forecast | |
| June-Dec | | |
| FY | | |
| FY | | |
| FY | | |
| FY | |
Revenue | |
$ | 244.1 | | |
$ | 408.4 | | |
$ | 428.5 | | |
$ | 449.6 | | |
$ | 471.7 | |
Adjusted EBITDA | |
| 9.8 | | |
| 17.1 | | |
| 19.6 | | |
| 22.3 | | |
| 25.1 | |
EBIT | |
| 0.7 | | |
| 1.9 | | |
| 4.1 | | |
| 6.4 | | |
| 8.9 | |
Income Taxes | |
| — | | |
| (0.7 | ) | |
| (1.5 | ) | |
| (2.4 | ) | |
| (3.3 | ) |
Depreciation & Amortization | |
| 9.1 | | |
| 15.3 | | |
| 15.6 | | |
| 15.9 | | |
| 16.2 | |
Change in Working Capital | |
| (6.5 | ) | |
| (7.7 | ) | |
| (3.4 | ) | |
| (3.6 | ) | |
| (3.8 | ) |
Capital Expenditures | |
| (3.8 | ) | |
| (8.0 | ) | |
| (8.0 | ) | |
| (8.0 | ) | |
| (8.0 | ) |
Unlevered Free Cash Flow | |
| (0.5 | ) | |
| 0.8 | | |
| 6.7 | | |
| 8.3 | | |
| 10.0 | |
Unlevered
after-tax free cash flow was calculated by subtracting from EBITDA (i) capital expenditures, (ii) changes in non-financial working
capital and (iii) cash taxes at a rate of 37% of EBIT. EBITDA is calculated by adding depreciation and amortization expenses to
EBIT.
Of note, the
projections rely upon the assumption that the Company has the necessary sources of liquidity to fund operations on a go forward
basis - whether it be from the current secured lenders or an alternative financing source - and is not subject to the liquidity
constraints the Company encountered in the first half of 2015. These liquidity constraints are discussed in more detail under “Background
of the Merger” beginning on page 19. The Company’s expectations for future financial performance would likely be significantly
worse than as presented in the projections if the Company had not been able to enter into to the forbearance agreements with its
lenders and obtain the $5 million in material pre-purchases from the California-based U. S. subsidiary of Ye Chiu.
IMPORTANT
ADDITIONAL INFORMATION AND WHERE TO FIND IT
In
connection with the Merger, the Company filed the Definitive Proxy Statement and related materials with the SEC on July 27, 2015
and commenced mailing the Definitive Proxy and form of proxy to the stockholders of the Company. Stockholders of the Company are
urged to read the Definitive Proxy Statement and the other relevant materials because they contain important information about
the Company, the Merger and related matters. STOCKHOLDERS ARE URGED TO CAREFULLY READ THE DEFINITIVE PROXY STATEMENT AND THE OTHER
RELEVANT MATERIALS BEFORE MAKING ANY VOTING OR INVESTMENT DECISION WITH RESPECT TO THE PROPOSED MERGER. The Definitive Proxy Statement
and other relevant materials, and any and all documents filed by the Company with the SEC, may also be obtained for free at the
SEC’s website at www.sec.gov.
If
you have
any questions
about the
Definitive Proxy
Statement,
the special
meeting
or the
Merger
or need
assistance with the
voting procedures,
you should
contact our
proxy
solicitor at:
Alliance
Advisors LLC
200
Broadacres
Drive, 3rd
Floor
Bloomfield,
NJ 07003
Telephone:
(855) 973-0093
Banks
and Brokers
Call: (973)
873-7721
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