Chapman Chides Vitesse, Again
Robert Chapman, the fund's principal, is back, writing another nastygram -- though the letter lacks some of the biting prose of past missives. In a letter and press release dated Dec. 6, Chapman calls for the removal of deposed CEO Louis Tomasetta and outside director James Cole, a partner in Windward Ventures . He's asking Vitesse to declare a special shareholder meeting to vote on the matter.
Vitesse is one of the many companies looking into the possible back-dating of stock options. The practice wasn't illegal before 2002, but now that it's come to light, most of the affected companies say they'll have to restate earnings. (See Feeling Less Marvell-ous, Juniper Readies Restatements, and Broadcom to Restate Earnings.)
Chapman Capital's demands came in a Securities and Exchange Commission (SEC) 13-D filing this week that's a lot more sober than the one it filed last year. That file was filled with such phrases as "hot air bellowing from your crusty mouth" and "past-expiration bags of stale potato chips." (See Hedge Fund Vents on Vitesse.)
It's all business as usual for Chapman Capital, which prides itself on "activist" investing, as Chapman puts it, and company turnarounds. Chapman Capital researches a struggling company, buys up a stake, and usually presses for the sale of a company or at least a restructuring. Naturally, the hedge fund seeks to make a profit as the target firm's stock rises after the improvements.
This year's tone might be more civil, but the 13-D sets up the impression that Chapman has reached a boiling point. It includes a six-month chain of emails from Robert Chapman to various Vitesse officials, mostly chief financial officer Shawn Hassel.
In the emails, Chapman notes events such as Unitedhealth Group Inc. forcing two top executives to give up $390 million in stock-option gains, and CA Technologies (Nasdaq: CA) suing its former CEO to recoup legal fees spent in his defense.
Chapman is impatient that Vitesse's internal investigation hasn't produced similar results yet. He's also concerned about the cost.
On conference calls with analysts, Vitesse execs said the company paid $4.9 million in "professional costs" during the September quarter. Vitesse also had a cash burn of $2.8 million in the quarter, triggering this rant in Chapman's Nov. 19 email:
"Thus, the extraordinary 'professional expense' of $4.9 million (or nearly $20 million annually, just under 10% of a revenue base over $200 million per year) caused Vitesse to be cash flow negative in the 4QFY2006," Chapman writes (in bold-face type, with italics included).
"I remain confused as to how Vitesse has demonstrated 'best in class performance' when nearly $20 million annually of its owners’ scarce cash is being spent to rectify alleged improprieties of identified fiduciaries and current Compensation Committee members," the latter camp including Cole, he continues.
Which brings us to the matter of the board. Chapman is upset that Tomasetta, who was fired in May, "perplexingly" remains a director. Cole, meanwhile, sits on the compensation and audit committees that supposedly let the back-dating occur and, according to Chapman, is a personal friend of Tomasetta and of Eugene Hovenac, another fired exec. (See Vitesse Execs Get the Axe.)
"However illegitimate their directorships may be, Chapman Capital believes that Messrs. Tomasetta and Cole have ulterior (non-fiduciary) motives to keep their 'sheriff badges' pinned onto their pinstriped lapels, and as such do not appear willing to resign on their own volition," Chapman writes. "On behalf of Vitesse’s entire ownership base, Chapman Capital demands that Mr. [John C.] Lewis, as Chairman of the Board, immediately take actions to call a Special Meeting of shareholders to remove Messrs. Tomasetta and Cole from the Board. I have little doubt that requisite votes shall be tallied in support of such a referendum." The 13-D also reveals Chapman Capital has decreased its stake in Vitesse, to about 13.8 million shares (6.2%) from 16.2 million (7.3%) a year ago. But that's enough to make the fund the single largest shareholder, Chapman notes repeatedly in the filing.
Neither Vitesse nor James Cole returned a call for comment. Robert Chapman could not immediately be reached for comment, but he makes his position pretty clear in the 13-D.
— Craig Matsumoto, Senior Editor, Light Reading