Is the Management of American International Industries Running Scared?

June 24, 2011

I previously mentioned in my article titled American International Industries: Activist Investors Knocking On The Door that two investors who have a history of challenging management were building a stake in American International Industries, Inc. (AMIN). As of June 15, 2011 Baker Street Capital had built a 9.98% position in the company and Ephraim Fields had built a 7.7% position based on a 13D filing dated February 17, 2011. However the holdings of Mr. Fields have since been diluted.

Since these filings were made public, AMIN has made a couple of strategic moves of which at least one was a direct attempt to thwart any challenge by either investor to make a move on the company. The most damaging was the amendment and restatement of the Employment Agreement with Chief Executive Officer and President Daniel Dror and the issuance of preferred stock. The egregious highlights are as follows:

  • The Board of Directors has discretion to determine the bonuses of Mr. Dror. This is the same Board of Directors that has sat silently by as shareholder value has been destroyed.
  • Mr. Dror will receive 10,000 shares of restricted stock each month. This award seems excessive considering it amounts to 1% of the outstanding stock per year. However this would not necessarily be as much of a negative if the company could be trusted to execute on any of its previously announced share buyback programs. Programs which I believe were announced only as an attempt to stem the losses on a sliding stock price. Questionable press releases to say the least.
  • Mr. Dror is entitled to a special bonus in the event lenders or investment bankers working with the company require his personal guarantee. I do not have a problem with Mr. Dror being compensated for the additional risk, however it is far too ambiguous.
  • In the event of a change of control resulting in the duties of Mr. Dror as the company’s CEO, President and Chairman being terminated, Mr Dror is entitled to a sum equal to five years of his base salary plus $1M in cash for a total payout of $1.6 million. Keep in mind the current market capitalization of the company is only approximately $7 million. The company is also responsible for paying the premiums for a life insurance policy on Mr. Dror up to $3 million in coverage with beneficiary designated by Mr. Dror. Trust me, the beneficiary will not be American International Industries, Inc.
  • Finally, the most egregious of all is the issuance of 1,000 Series A Preferred Stock supposedly for consideration for guarantying multiple loans one of which has already been satisfied. The company’s Bylaws and Articles of Incorporation were amended to give the newly issued preferred stock some very powerful rights. First, the 1,000 shares of preferred stock have voting rights of 30% regardless of the number of common shares outstanding. This is important because the brother of Mr. Dror through International Diversified Corporation, Ltd had a 22.2% stake in the company as of a May 6, 2011 filing. I guess blood is thicker than shareholder returns. In addition, it takes a 66-2/3% favorable vote of the preferred stock to make any amendments or changes to the company’s Bylaws, Articles of Incorporation, Certificate of Designations establishing the Series A Preferred Stock or effect any reclassification of the Series A Preferred Stock. We can be assured with Mr. Dror currently owning 100% of the preferred that any changes will only benefit Mr Dror and not the company or the shareholders. Finally, during the term of the Employment Agreement of Mr. Dror, the company may redeem the preferred shares at the bargain price of $2,000 per share or $2 million. Keep in mind, the total market capitalization of the entire company is approximately $7 million.

Such moves should be criminal when they are clearly put in place to protect an inept management and not for the benefit of shareholders. Unfortunately many states such as the State of Nevada where AMIN is incorporated consistently support and protect inept management. Management should be able to fully protect their personal assets unless of course they are involved in criminal activity, however they should be able to protect themselves from their own shareholders. Someone should inform Mr. Dror that the best way to protect yourself from your own shareholders is to engender trust and deliver positive performance. Mr. Dror has done neither.

Earlier today it was announced that the Board of Directors of American International Industries, Inc. had appointed Mr. S. Scott Gaille as the new President. Mr. Gaille will be responsible for evaluating the company’s strategic business plans and additional business opportunities as well as making recommendations regarding the company’s existing assets and existing management team (Mr. Dror excluded I assume). While this certainly is not a negative for shareholders, it is more likely being done to protect Mr. Dror from having Section 5(c) of his Employment Agreement enacted which allows the company to begin the process to terminate the Agreement if Mr. Dror willfully engages in misconduct which is materially injurious to the Company, monetarily, or otherwise. We know he is either guilty of such willful misconduct in the past, but his appointment will give him the scapegoat he requires going forward.

Shareholders of AMIN can only hope that Mr. Gaille has the ability and is given the latitude to monetize the existing assets of the company and create long-term value for the shareholders, but as I have said before… don’t hold your breath.

Print Friendly

Previous post:

Next post: