Monday, April 02, 2007

Chapman Capital Plans to Solicit Buyers, Recruit New Management for FSI Int'l (FSII)

In a 13D filing Friday afternoon on FSI Int'l (Nasdaq: FSII), Chapman Capital disclosed a 6.5% stake (1.99 million shares) in the company noting it has become increasingly disconcerted by the apparent divergence between ownership and management of the company. Chapman Capital said they plan to solicit interest in acquiring the company by prospective strategic buyers and plan the recruitment of alternate management and corporate governors for FSI.

Robert Chapman said he was "astonished" that the CEO's wife answered the telephone at his primary place of conducting the company's business.

From the 'Purpose of Transaction' section of the filing:

On December 26, 2006, Mr. Chapman contacted Mr. Benno G. Sand (“Mr. Sand”), the Issuer’s Secretary and Executive Vice President of Business Development. Given that in approximately 75% of the fiscal quarters that comprised FY2000-FY2006 (inclusive) the Issuer had reported net losses, Mr. Chapman requested justification from Mr. Sand for the Issuer’s a) continued independence as a public company vs. sale to a more diversified player in the semiconductor equipment sector, b) Chief Executive Officer Donald S. Mitchell (“Mr. Mitchell”) being paid millions of dollars in cash compensation and hundreds of thousands of free Common Stock options while owning less than 30,000 shares of the Issuer’s Common Stock, and c) CEO Mr. Mitchell being allowed by the Issuer’s Board of Directors (the “Board”) to reside in sunny San Diego, California while the Issuer’s headquarters and core loyal employee base “shivers” in climatically disadvantaged Chaska, Minnesota. Mr. Sand responded, “In this industry, it doesn’t matter where the CEO lives because the customers are in Asia, Japan, China and Israel; he has commuted for six years, [and] I don’t view it as a perk.” Mr. Chapman contested Mr. Sand’s statement, asserting Chapman Capital’s view that it could not be beneficial to the morale of the Issuer’s employees to have the Issuer’s CEO living across the country in a vacation destination, taking millions of dollars in cash compensation, while the Issuer routinely reported millions of dollars of net losses and engaged in sporadic and significant employee layoffs. Dissatisfied with Mr. Sand’s insouciant and phlegmatic response, Mr. Chapman requested that Mr. Mitchell contact Chapman Capital, in its capacity as advisor to one of the largest blocks of the Issuer’s ownership, as soon as possible. Mr. Sand rejected Mr. Chapman’s request, stating that Mr. Sand was “joined at the hip with” Mr. Mitchell. Mr. Chapman reiterated his request that Mr. Mitchell contact Chapman Capital at Mr. Mitchell’s earliest convenience.

On December 29, 2006, Mr. Sand left a voice mail message for Mr. Chapman refusing to acquiesce to Chapman Capital’s request for a conference call with Mr. Mitchell that did not exacerbate the Issuer’s net losses by squandering cash on unnecessary telephone company-assisted conference calls. Mr. Chapman previously had offered to have Chapman Capital incur any and all expenses associated with a three-way conference call between Mr. Chapman, Mr. Sand and Mr. Mitchell; however, Mr. Sand intransigently rejected Chapman Capital’s offer to arrange for, an incur all expenses associated with, this simple three way conference call. Mr. Chapman had rationalized his insistence on the Issuer accommodating Chapman Capital’s request by explaining that though the actual expense incurred by the Issuer for arranging this one particular conference call was relatively small, it was Chapman Capital’s view that the Issuer’s poor financial performance dictated that it begin to eliminate any and all unnecessary corporate expenses, particularly those incurred by the Issuer’s leadership. On this date, Mr. Chapman contacted Mr. Sand once again to argue that the goal of conducting a three-way conference call, itself necessary due to Mr. Mitchell’s enjoyment of his location in San Diego, California, would be 100% attained via Chapman Capital’s arrangement and financial coverage thereof. Mr. Chapman demanded that Mr. Sand explain why the Issuer would refuse to engage in a conference call that was arranged and paid for by Chapman Capital, but would agree to one arranged for and paid for by the Issuer, which had reported net losses in approximately 75% of the past seven years’ fiscal quarters. Mr. Sand again refused to allow Chapman Capital to reduce the Issuer’s telecommunications expense, without offering any explanation besides the hackneyed, “because that’s how we do it.” Mr. Chapman communicated to Mr. Sand that Chapman Capital suspected that the true motives of Messrs. Sand and Mitchell were the unauthorized a) inclusion of additional surveillance, and b) recording of the conference call. Mr. Sand did not deny such accusation, and the call ended abruptly following Mr. Chapman’s conveyance to Mr. Sand that Mr. Chapman had come to understand why another significant owner of the Issuer had depicted Mr. Sand in a corpulently priapic fashion.

On December 29, 2006, in order to communicate with the Issuer’s most senior executive, Mr. Chapman telephoned Mr. Mitchell at his publicly listed telephone number in San Diego, California, where Mr. Mitchell presumably acts out his role as the Issuer’s Chief Executive Officer and President. Mr. Chapman was greeted by what he presumed was Mr. Mitchell’s secretary, a woman who identified herself as “Linda.” However, when Mr. Chapman attempted to identify the title and position of this counterparty, she corrected Mr. Chapman and stated that she was Mr. Mitchell’s wife. Mr. Chapman conveyed his astonishment that Mr. Mitchell’s wife had answered the telephone at Mr. Mitchell’s primary place of conducting the Issuer’s business, but regained sufficient composure to ask Linda Mitchell to have her husband return Mr. Chapman’s call at his earliest convenience. As of March 30, 2007, some three months later, neither Mr. Mitchell nor his wife and home office secretary Linda has returned Mr. Chapman’s telephone call.

On March 20, 2007, the Issuer reported a 2QFY2007 net loss of $4.3 million, or $0.14 per share of Common Stock, a net loss 16% higher than the $3.7 million net loss reported for the 2QFY2006. In addition, the Issuer reported backlog and deferred revenue as of February 24, 2007 (the end of 2QFY2007) of $26.8 million, backlog and deferred revenue 35% lower than that reported as of November 25, 2006 (the end of the 1QFY2007). Furthermore, the Issuer reported orders for the 2QFY2007 of $19.2 million, orders some 44% lower than that reported for the 1QFY2007 ending November 25, 2006, leading to a dismal 3QFY2007 revenue outlook of $22-25 million, 16-25% lower than the revenues reported for the 3QFY2006. Consistent with the string of Issuer net losses under Mr. Mitchell’s and Mr. Sand’s management, the Issuer forecast a net loss of $3.0 - 4.0 million for the 3QFY2007. Admitting that he had misguided forecasts of the “recovery in the semiconductor device segments” served by the Issuer, Mr. Mitchell announced his decision to reduce the Issuer’s employee head count by approximately 11% and implement other operating cost reductions. However, Mr. Mitchell did not announce any reduction of his own compensation or that of Mr. Sand, arguably the two individuals most responsible for the Issuer’s purported mismanagement, recurrent net losses and potentially conflicted strategic planning.

As a result of the matters described above, Chapman Capital has become increasingly disconcerted by the apparent divergence between ownership and management of the Issuer. Consequently, Chapman Capital intends to engage in the following actions to protect and enhance the value of direct investments in Common Stock made by the Issuer’s actual owners (as compared to members of the Issuer’s management receiving free stock option grants): a) the solicitation of interest in acquiring the Issuer by prospective strategic buyers; b) the recruitment of alternate management and corporate governors for the Issuer.

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