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| 8-K - SMF ENERGY CORP | v205231_8k.htm |
Exhibit
99.1
Chairman’s
Report
The Company has received a great deal
of feedback from shareholders over the past year concerning the continuing slump
in the Company’s stock price. Some shareholders have suggested that the
Company’s best response would be to improve profitability which, in fact, we
have done and hope to continue to do so. Other shareholders have
requested that the Company buy shares of its common stock in an open market
purchase program or in a tender offer. Still others have suggested
that the Company declare a one-time cash dividend, or a series of cash
dividends, to foster an increase in the trading price of the stock and return
capital to shareholders. In addition, many shareholders have proposed
that our officers and directors increase their stockholdings in the Company,
both to support the trading price of the stock and to better align their
interests with those of the shareholders, and not just in the form of stock
options but in common stock as well.
The Company’s Board of Directors shares
the concerns expressed about the continuing weakness of the trading market for
its common stock, both in terms of trading volumes and market
prices. Accordingly, the Board carefully considered all of the
foregoing comments and implemented a comprehensive plan designed to respond to
each of them. While the Company’s response is constrained by the
current financial environment and by longstanding restrictions in its loan
agreement with its principal lender, the Board nevertheless believes that it has
initiated a response that may prove to be effective in addressing the problems
cited. In particular, the Board has put the following programs in
place:
Share
Repurchase Program
In July of this year, the Board
approved an open market share repurchase program to purchase up to five percent
of its outstanding capital stock. Pursuant to the program,
repurchases have been and continue to be made on the open market at prevailing
market prices. The Company has funded, and will continue to fund, the
repurchases from its available cash under its revolving line of credit with its
principal lender, whose approval was necessary to begin the
program. As previously disclosed, our principal lender approved a
total of $840,000 in capital stock repurchases by the Company, subject to a
ceiling of $200,000 in repurchases in any fiscal quarter.
While the Company has authorized its
agent to purchase the maximum number of shares allowed under our lender
authorizations, to date, the repurchase program has been limited because of
restrictions imposed by federal securities laws, particularly those arising from
“trading windows” and from the selling efforts of certain large shareholders,
which selling efforts have recently ceased. Notwithstanding those
restrictions, the Company believes that the program has already had the effect
of stabilizing the stock price by reducing the downward price pressure cause by
short-sellers and other market speculators that has no relationship to the
operating results or enterprise value of the Company. It is our hope
that, with the elimination of such market manipulators, investors who recognize
the value of the Company’s steady improvement in profitability will feel more
confident about buying shares in the market and will be rewarded by a steady
increase in the market price commensurate with the improved operating
results.
Restricted
Stock Grant Program
The Board also recognized, however,
that with only 8.55 million shares issued and outstanding, the Company’s
repurchases of its common stock could reduce the already limited liquidity of
that stock when the repurchased stock was put back into treasury or
retired. For this and other reasons, the Board decided to redesign
its existing equity incentive compensation program to increase the number of
shares held by officers and directors by granting restricted shares rather than
stock options under the Company’s Equity Incentive Plan.
Beginning
in fiscal 2011, officers will be granted restricted shares on a yearly basis as
determined by the Compensation Committee as based on the recommendation of the
CEO. In order to ensure officers receiving such grants continue to
hold the shares and do not sell them back into the market, grants will typically
vest 25% per year.
Also
beginning in fiscal 2011, directors are now granted shares of common stock on
the last day of each fiscal quarter instead of stock options, as was the
practice in the past. In order to avoid directors having to sell a
portion of these shares in the market to pay the income taxes on the shares,
directors also receive a cash payment to cover the taxes and permit them to hold
on to all of the stock for the long term.
The Board
feels the restricted shares stock program will serve the dual goals of
increasing director and officer ownership stakes, as encouraged by the
shareholders, and minimize any liquidity pressure caused by the share repurchase
program by keeping the number of outstanding shares relatively
stable.
Potential
Dividends
While the
Board of Directors has not categorically eliminated the idea of declaring a cash
dividend on the Company’s common stock, it has determined that a cash dividend
program is not feasible for the Company at this time. While
management acknowledges the importance of putting cash into the hands of
shareholders, it is prohibited by the terms of its bank loan agreement from
declaring any dividends. Moreover, at this point in time, there is no
assurance that, even if the Company could get bank approval to begin a modest
dividend program, it would have the financial resources to continue that program
for the foreseeable future. Management also believes that the
termination of a nascent dividend program could have an even more detrimental
effect on the market price of the Company’s stock than never beginning such a
program in the first place. Beyond that, the feedback from numerous
investment banking groups is that new investor participation is predicated on
the Company continuing to execute on its growth and expansion strategy, which
requires the use of cash flow from operations in support of that
strategy.
Combined
Effect of Programs in Place
By simultaneously conducting an open
market repurchase program and issuing additional shares to officers and
directors via an equity incentive program that does not encourage resales of
those shares back into the market, the Board intends to (a) reduce the impact of
market speculators on the price and trading volume of the Company’s common
stock, (b) avoid diminishment of the number of outstanding shares by the open
market stock repurchase program. (c) place additional shares of the Company’s
stock into the hands of officers and directors to better align their interests
with those of the Company’s shareholders, (d) preserve cash by paying a portion
of the compensation of officers and directors in stock; and (e) provide equity
incentive compensation to officers and directors without the adverse market
impact of stock options, where shares are typically sold either to pay taxes or
cash out gains, often blunting market price gains.
The Board
recognizes that its solutions are far from perfect. Nevertheless, the
Board believes that, given the Company’s current constraints, including but not
limited to a flat prohibition of cash dividends in its loan covenants, these two
programs represent the best alternatives available to the Company at this
time.
The
Company continues to look for long term solutions that will again provide its
shareholders with something closer to the true enterprise value of the
Company. First and foremost, the Company will try to continue to
report improving results of operations notwithstanding the longstanding
depressed economic conditions affecting many of its customers. The
Board of Directors will also continue to consider other ways to strengthen the
market for its stock, including a forward stock split. The Board also
continues to seek a reduction of the costs of being a public company, and has
and will actively consider any feasible going-private
transaction. Regrettably, however, any “going private” transaction
that would be viable for the Company would require, in addition to the
participation of major shareholders and the current management team, a
significant infusion of new equity capital. And as many of you are
aware, the current environment for obtaining new equity capital for smaller
companies remains one of the worst markets in decades. I will assure
you, however, that we continue to investigate every alternative presented, since
we continue to believe that one of the best ways for us to improve our
profitability and our competitiveness would be to shed our public reporting
responsibilities. At the same time, the merger and acquisition horizon is full
of opportunities and the Company’s ability with financial operating performance
and a clean balance sheet to reengage its historical acquisition program and to
pursue accretive transactions is being heavily weighed by the
Board.
Your
Board of Directors will continue to listen to you, our shareholders, and we
pledge to do our utmost to deliver more value to you for your investment in your
Company.