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

|Includes: CRFT, P & F Industries, Inc. (PFIN), QEPC, SNA, SWK
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.