This is in relation to Keystone Energy Services:
Please note
From CALIFORNIA ENERGY MARKETS newsletter 3/27/98
reprinted with permission
[] BOTTOM LINES: Keystone Energy Services Puts the Past Behind It _ Even before the new power market opens, some energy services firms are retrenching. Others are restructuring their strategies, personnel and offerings to secure a niche in the uncertain market.
Keystone Energy Services, based in Los Angeles, is an unusual example of a company that has had to clean its house and start all over. Keystone's goal is to become a respected player in a changing electricity market. Given the company's recent history, that will be an ambitious undertaking.
"What happened was that [Keystone] was a company that was involved with people that were much more familiar with the stock market than the energy market," Keystone president and chief executive officer Richard Saxby told CALIFORNIA ENERGY MARKETS. "Unfortunately, we had some bad apples in the early going."
On January 16, 1998, Keystone's board of directors met to discuss what had become an intolerable situation. That same day, Saxby fired Keystone's chief financial officer and the company's corporate secretary. All employees who had been involved with the CFO and his bookkeeper were let go. They did not leave willingly: an armed guard escorted them from the premises. "What we did was take control of the ship at Keystone," Saxby said.
Settlement negotiations with the terminated employees continue.
Marketing materials that had been circulating during much of 1997 have been pulled from the company's Internet site (http://www.kese.com), and Keystone hired a new public relations firm, ending its association with a previous PR consultant. One of the first statements issued under the new regime essentially disavowed previous projections of earnings and expected profits.
Another positive sign of change: In late March, Keystone hired Douglas Mitchell as its operations manager. Mitchell, who has experience in utility resource planning and governmental policy, had worked for San Diego Gas & Electric for 23 years. This week, Keystone named a new chief financial officer soon and elected a new corporate secretary.
How did this all come about?
Keystone Energy Services emerged in April 1997, when it was rolled into an existing public company known as New Environmental Technologies that had been involved in rubber tire recycling. To come up with capital to be a viable energy services provider, Saxby took Keystone public through what is called a reverse merger with a public shell. This allowed the company to have its shares traded publicly without making an initial public offering. IPOs are expensive, time-consuming and are not always successful.
Keystone also obtained an exemption that allowed it to issue stock without registering with or providing audited information to the Securities and Exchange Commission. Keystone, by the way, is traded over the counter and is listed on the NASDAQ bulletin board [stock symbol: KESE].
Usually, the people who control an "empty shell" do not receive a controlling interest in the newly created company. In this case, however, officers of the former company secured control over Keystone. "The shell should not control the company, but the people involved in the shell were controlling the company," Saxby said. "What I was looking for was a vehicle to raise money. It didn't turn out the way I wished."
As Mitchell tells it, Saxby is an adept fund raiser who "basically put Keystone together by buying another company with funds he raised. When he got into the firm, some of the existing management remained with the company." Mitchell said Saxby later "realized that some of those directors were associated with firms associated with pump-and-dump."
"Pump-and-dump" is when a company is hyped to get its stock price up and then insiders dump their stock at its peak. That appears to be what happened to Keystone.
Over a period of several months, Keystone issued a number of news releases via the PR Newswire. Some made whopping earnings projections while others touted contracts that were never finalized or agreements that later fell apart. Announcements extolled transactions with New Energy Ventures, Honeywell, software developer CommUnique Corporation, telemarketer PowerSource, a group called National Community Hospitals and a community aggregator named Astrum Energy Services. Some of these companies contacted by CALIFORNIA ENERGY MARKETS now claim they never authorized the news releases in the first place.
All of those deals are now either off the table or are being reconsidered, according to Saxby.
But during 1997, the string of announcements set the stage for a dramatic increase in trading activity and prices for Keystone stock. Some market analysts even likened the small firm to "the next MCI or Sprint" of electric deregulation. One glowing profile was in actuality a paid advertisement that repeated the company's claims without question.
Even though more skeptical market players doubted the claims, others fell for the line--or saw a quick-profit situation in the making. In a three-week period of frantic trading activity during November, Keystone's stock price nearly tripled--then fell precipitously--bringing fast earnings for a few speculators but losses for more gullible investors who believed a deregulation stock play could bring them instant riches.
Readers are referred to the Stock Detective, an on-line newsletter that profiled Keystone last November, for a detailed account of the situation (http://www.stockdetective.com/stinky/kese.html). A fascinating story is also told in the form of e-mail messages among Keystone investors on an investment chat group devoted to speculative technology stocks (http://www3.techstocks.com/).
But the real story for our purposes is about how the company has tried to get past its stock follies and earn respect as an energy provider.
Saxby claims that he did not pull the plug on the suspect news releases or terminate the responsible parties earlier because he did not have the power to do so at the time. "You just can't stop a big machine, a Sherman tank coming right at you without a strategy to stop it. . . . It's not a question of you didn't know it was going on. It's a question of how you get control of the company to do the right thing."
"The board has a right to restructure the officers based on majority vote. I was the CEO, but I was only one director. It takes a majority vote of the directors, and in turn I had to hold a directors meeting and give proper notices, and there's a timing issue there. There was also a strategy needed. That's why when I found out about this, I didn't just go in and say, 'Everybody stop it.' It just doesn't work that way."
In March 1998, Keystone established a redemption right for all of its shares of preferred stock and called the stock back. All 5 million outstanding shares of Keystone's preferred stock must be redeemed at $0.001 per share during the redemption period through April 11. All preferred stock will cease to exist after that date. Saxby said the action was taken to sever ties with the former company officers. "These guys took 5 million of preferred at ten-to one. We did it and got them to come to the table and they're going away. We cut them off at the pass and turned it into a proper dilution of the shareholders."
At the peak of its stock trading, Keystone had a paper value of nearly $190 million--without any operating history or revenues to speak of. The value of its preferred stock under the call is just $5,000. Keystone common stock currently trades at about $3 per share [update].
Saxby also said that Keystone is in the process of filing with the SEC a Form 10, or EDGAR filing. That will make it a fully-reporting publicly traded company, adding legitimacy. Saxby said the filing will likely be made within the next six to eight weeks. He promised that a newly designed Internet site will include a revamped business plan and other pertinent company information.
As for Keystone's current activity, Saxby stressed that the firm "has a new face." He said that the company is "not moving into this market with tremendous market share," at this point, but he claims the company is in the energy business for the long haul. Keystone has been complying with ever-changing California Public Utilities Commission rules for energy service providers and the firm is trying to put its priorities straight.
Keystone will begin supplying power for a few customers this month with an initial 6-8 MW of load, said Mitchell. According to Keystone, that load represents about $6 million in annual electricity billing. The company has selected Northern California Power Agency as its scheduling coordinator and as a supplier of short-term power, Mitchell said. Keystone is targeting small to mid-sized commercial customers.
Saxby said that, among other services, Keystone is interested in offering schedule coordination, marketing and power procurement to other ESPs--"the other players that don't have enough money to move forward . . . Almost all of the ESPs have good ideas and good intentions, but they don't have enough money to move forward in the marketplace."
"We're doing a lot of load analysis right now to figure out exactly what we've got." said Mitchell. "Our expectation is that by late summer, we will grow to the 100 MW range."
"The interest of Keystone is to become a player in the new electricity arena and not a stock play company," said Saxby. "I'm trying to get rid of all the negative and develop a real company" [Cyril Penn]. |
