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Activist Investor Lawndale votes against P&F Industries bonus plan; sends letter to Board

May 25, 2011 12:05 PM ETPFIN, QEPC, SWK, SNA, CRFT1 Comment
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Andrew Shapiro is President of Lawndale Capital Management, an investment manager of small- and micro-cap activist hedge funds for over 29 years, one of the longest periods of experience deploying an activist/relational investment strategy today. In addition to leading Lawndale, Mr. Shapiro has also served as an Officer, Director, or Observer on many boards and debt and equity bankruptcy committees. He was most recently Chairman of the Official Equity Committee in the Premier Exhibitions/RMS Titanic bankruptcy. He also serves as Immediate Past Board Chair/President, Governance/Nominating Committee Chair and on the Investment Committee of the Mill Valley Library Foundation, on whose board he has served for many years and is a Board Member of the Jewish Sports Hall of Fame Northern California. Mr. Shapiro is a long-time member and Board Leadership Fellow of the National Association of Corporate Directors (NACD), a member of the Private Directors Association and, via Lawndale, an Associate Member of the Council of Institutional Investors (CII) for almost two decades. Mr. Shapiro has more than three decades of portfolio management and analytically varied experience from a number of buy-side positions, employing a rare combination of credit, legal, equity and workout skills. Prior to founding the Lawndale organization in 1992, Mr. Shapiro managed the workout and restructuring of large portfolios of high-yield bonds, distressed equities and risk arbitrage securities for the Belzberg family office, First City Capital. Before joining First City, Mr. Shapiro was involved in numerous corporate LBO and recapitalization transactions for Manufacturers Hanover Trust and the Spectrum Group, a private equity firm. Mr. Shapiro was selected to the NACD Directorship 100 in 2012, a list of the most influential leaders in the boardroom and corporate governance community. He is a frequent speaker on corporate governance, fiduciary duty and activist investing topics, including on panels for the Council of Institutional Investors, Corporate Directors Forum, Society For Corporate Governance, SEC Advisory Committee on Small Public Companies and the National Investor Relations Institute. Mr. Shapiro has been a faculty member of the corporate governance/director’s education programs of UCLA Anderson and the National Association of Corporate Directors and presents often at several other director education programs. In addition to being a Contributing Author to Seeking Alpha, Mr. Shapiro has received national recognition through feature articles, in Forbes, Barron’s, Institutional Investor and a Business Week article that labeled him “The Gary Cooper of Governance.” Mr. Shapiro received dual JD and MBA degrees from UCLA, where he was an Olin Fellow at the UCLA School of Law and a Venture Capital Fellow at the UCLA Anderson School of Management. Mr. Shapiro received a BS in Business Administration from UC Berkeley's Haas School of Business, where he periodically guest lectures. Mr. Shapiro started Lawndale’s funds in 1993 with only $188,000 under management and, through performance and additional capital, has grown the firm’s managed assets substantially. Lawndale applies a private equity approach through active and relational ownership of public company securities. In most investments, Lawndale plays a constructive relational role by collaboratively working with boards and management teams to help them achieve their strategic and operating goals. In other instances, Lawndale is a direct value-unlocking catalyst, utilizing a range of tools that include aggressively promoting improvements in a company's governance and operational structures, proxy actions, asserting shareowner’s legal rights and taking active roles in restructuring and buyout proposal negotiations.
Lawndale Capital Mgmt files amended 13D in P&F Industries (O-PFIN) increasing position to 9.95%;
Votes AGAINST executive bonus plan and director; Letter calls for reduced CEO compensation and increased Board independence;

In a filing with the SEC on May 25, 2011, Mill Valley, CA-based Lawndale Capital Management, LLC and its affiliates (“Lawndale”) filed SEC form 13D/A #3 in P&F Industries ("PFIN") triggered by a May 24, 2011 letter to PFIN’s Board and Lawndale’s announced vote at PFIN’s 2011 Annual Meeting AGAINST the proposed executive bonus plan and director Mitch Solomon. Lawndale’s position also increased its ownership from its last filing to just shy of 10% of P&F.  

(See Lawndale's May 24, 2011 letter to the P&F Board here.) 

The Item 4 language of Lawndale’s filing is set forth, below, and the actual P&F 13D filing and May 24, 2011 letter exhibit can be found in SEC EDGAR filings for PFIN here

Lawndale's earlier letters from September 17, 2010 and May 25, 2010 (the “2010 Letters) referred to in the May 24, 2011 letter filed with this amended 13D showing analysis of PFIN CEO compensation excess can be found here.

P&F Industries, Inc., through its two wholly-owned subsidiaries, Continental Tool Group Inc., which manufactures and/or imports air-powered tools sold principally to the industrial, retail and automotive markets, and Countrywide Hardware, Inc, which manufactures and/or imports various residential hardware such as kitchen and bath hardware, fencing hardware and door and window hardware, primarily to the housing industry. P&F’s products are sold under their own trademarks, as well as under the private labels of major manufacturers and retailers. Further information on P&F can be found at P&F's corporate website

Lawndale Capital Management, LLC is Mill Valley, CA-based investment advisor that manages activist hedge funds focusing on creating and unlocking shareholder value in small- and micro-cap companies for more than 18 years.  

Item 4.            Purpose of Transaction

As disclosed in prior filings, the Filers ("Lawndale") have been in contact with P&F Industries ("PFIN") management and members of PFIN’s Board of Directors (the “Board”) regarding certain operational and corporate governance concerns that include, but are not limited to, what Lawndale believes to be excessive compensation paid to PFIN’s senior management, particularly its Chairman and CEO, Richard Horowitz.  This leads to additional serious concerns Lawndale has regarding the Board’s composition and independence.

On May 25, 2010 and September 17, 2010 Lawndale sent PFIN’s Board members letters (the “2010 Letters”), (copies of which are attached as Exhibit 1 to Exhibit B hereto, and incorporated by reference to this filing) informing them of the rationale for Lawndale concerns leading it to vote “Withhold” on the re-election of PFIN’s slate of directors at last year’s 2010 Annual Meeting. Voting results from the June 3, 2010, Annual Meeting disclosed roughly 30% of the votes cast for each of PFIN’s nominees were voted Withhold.

Subsequent to the 2010 Annual Meeting, PFIN has taken some rudimentary steps towards improving its corporate governance, including, on July 29, 2010, expanding its Board to nine directors by adding to its Board one of five individuals recommended by Lawndale.  

The September 17, 2010 letter sent by Lawndale to PFIN’s Board expressed Lawndale’s view that PFIN’s governance “reforms”, to date, were merely cosmetic.  In summary, the 2010 Letters, detailed ways in which Lawndale thought the Board could both:
  • Eliminate Mr. Horowitz’ egregious compensation through P&F’s sale or a greatly reduced contract. 
  • Improve the independent composition of P&F’s Board by removing or replacing conflicted directors. 
On May 24, 2011, Lawndale sent a letter regarding the 2011 Annual Meeting (the “May 24th Letter”) to PFIN’s Board, (a copy of which is attached at Exhibit B hereto, and incorporated by reference to this filing) informing them of Lawndale's increased ownership in PFIN and Lawndale’s vote of 359,710 shares (equal to almost 10% of eligible shares) “AGAINST” approval of Proposal 3, the Executive 162(m) Bonus Plan and to “WITHHOLD” authority on NOMINEE 02, MITCHELL A. SOLOMON, on Proposal 1, Election of Directors.

The May 24th letter explained Lawndale’s rationale for its vote and detailed certain changes Lawndale would like to see in PFIN’s executive compensation, currently or when Mr. Horowitz’ employment agreement expires at the end of 2011.  This letter also informed the PFIN Board that should it address what Lawndale views as compensation abuses, Lawndale would support a new bonus plan with lower annual grant caps on next year’s proxy.

The May 24th letter expressed Lawndale’s view that if Mr. Horowitz chooses to leave the company because he does not receive his desired compensation, the Board should show him the door.

In the May 24th Letter, Lawndale also requested that PFIN’s Board:
  • Consider strategic alternatives, including the sale of the company for a control premium to a synergistic buyer, prior to renewing Mr. Horowitz’ contract 
  • Reduce or eliminate the egregious compensation terms such that any new contract with Mr. Horowitz contains lower “guaranteed” base compensation, greatly reduced supplemental profit sharing payments, and no “Golden Parachute” severance terms
  • Restructure COO/CFO Joe Molino’s compensation package
  • Improve PFIN Board’s independent composition and reduce its size by removing or replacing conflicted directors, particularly Director Dennis Kalick, one of Mr. Horowitz’ personal tax advisors
Lawndale has offered to source additional director candidates to PFIN’s Board as needed, and requested a meeting or conference call with PFIN’s independent Board members to discuss constructive actions to further improve corporate governance and maximize value for all P&F shareowners.

Lawndale believes the public market value of PFIN is undervalued by not adequately reflecting the value of PFIN’s business segments and other assets, including certain long-held real estate.

While Lawndale acquired the Stock solely for investment purposes, Lawndale has been and may continue to be in contact with PFIN management, members of PFIN’s Board, other significant shareholders and others regarding alternatives that PFIN could employ to maximize shareholder value. Lawndale may from time to time take such actions, as it deems necessary or appropriate to maximize its investment in the Company's shares. Such action(s) may include, but is not limited to, buying or selling the Company's Stock at its discretion, communicating with the Company's shareholders and/or others about actions which may be taken to improve the Company's financial situation or governance policies or practices, as well as such other actions as Lawndale, in its sole discretion, may find appropriate.

Disclosure: At time of writing, funds author manages hold a long position in this issuer and is a 13D filer. The funds or its affiliates may buy or sell securities of this issuer at any time.

Disclosure: I am long PFIN.

Additional disclosure: At time of writing, funds author manages hold a long position in this issuer and is a 13D filer. The funds or its affiliates may buy or sell securities of this issuer at any time.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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