NEW YORK, June 10, 2013 /PRNewswire/ -- Balch Hill
Partners, L.P., a Delaware limited
partnership, together with its affiliates, with approximately 9.9%
of the outstanding common stock of STEC, Inc., a California corporation (the "Company"),
announced today that they have delivered an open letter to
shareholders of the Company.
The full text of the letter is included below:
BALCH HILL CAPITAL, LLC
2778 Green Street
San Francisco, CA 94123
June 10, 2013
Dear Fellow STEC Shareholder,
CHANGE IS NEEDED AT STEC
Vote the GOLD Proxy Card Today to Support Our
Highly-Qualified and Experienced Nominees to Rebuild Shareholder
Value
Balch Hill Partners, L.P., a Delaware limited partnership (together with
its affiliates, "Balch Hill"),
currently owns approximately 9.9% of the outstanding common stock
of STEC, Inc. ("STEC" or the "Company"), making us the largest
independent shareholder of the Company. We are seeking your
support on the GOLD proxy card to elect our slate of three
highly qualified and independent candidates - Adam Leventhal, Clark
Masters and Eric Singer, to
replace three of STEC's eight director nominees to the Board of
Directors (the "Board") at the Company's 2013 Annual Meeting of
Shareholders to be held on July 12,
2013 (the "Annual Meeting"). We are pursuing this
action because since 2009, the current Board has overseen a
dramatic deterioration of the Company's stock price and operating
and financial performance. During this time, we believe the
Board has failed to anticipate market share losses, has failed to
understand the cause of such market share losses, has responded
with a misguided business strategy, and has failed to hold its
senior management accountable for this dismal performance. We
also believe that the Board has an abysmal corporate governance
culture and in particular has failed to hold accountable its
current and former CEOs, Mark and Manouch
Moshayedi, with respect to their questionable trading
practices, even after the SEC commenced a formal enforcement action
against Manouch Moshayedi for
insider trading.
Given our significant stake in the Company, our only goal is to
increase shareholder value. We are not seeking control of the
Board. We are seeking to improve the composition of the Board
by electing directors who will bring much needed accountability and
transparency to the Board. Please support our efforts
by signing, dating and returning your GOLD proxy card in the
envelope provided.
THE BOARD MUST BE HELD ACCOUNTABLE FOR OVERSEEING THE
DESTRUCTION OF OVER $1.3 BILLION OF
SHAREHOLDER VALUE
On August 5, 2009, Manouch and Mark Moshayedi sold $279 million of STEC stock (or approximately 18%
of the Company's outstanding stock) in a registered public offering
approved by the then existing Board, at a price of $31.00 per share. Three months later, on
November 3, 2009, Manouch Moshayedi revealed on the Company's
earnings conference call that the end-user demand of its largest
customer was lower than expected, resulting in an unexpected
inventory build up at that customer. STEC's shares closed the
next day at $14.14, representing a
one day drop of approximately 39%, and a decline of 54% from the
$31.00 per share offering price
at which the Moshayedis sold their stock. On July 20, 2012, the SEC formally charged
Manouch Moshayedi with insider
trading in connection with his 2009 sale of stock, alleging
that not only did Manouch Moshayedi
know that its largest customer's true demand was lower than
expected at the time of the offering, he also engaged in a
fraudulent scheme to conceal the truth from the investing
public. Since then, STEC's stock price has declined even
further. On June 7, 2013,
STEC's shares closed at $3.37, an
approximately 90% decline in the stock price since the
Moshayedi stock sale in August 2009,
resulting in the destruction of over $1.3
Billion in shareholder value.
In addition, as shown in the chart below, not only has the stock
seen a precipitous decline over the past three and a half years,
STEC has significantly underperformed against the NASDAQ composite
and the S&P 500, which have rallied 75.6% and 66.3%,
respectively, since August 5,
2009.
(Photo:
http://photos.prnewswire.com/prnh/20130610/NY28818-a )
THE BOARD MUST BE HELD ACCOUNTABLE FOR THE COMPANY'S POOR
OPERATING AND FINANCIAL PERFORMANCE
The Results Speak For Themselves
The current Board and executive management team have presided
over a massive loss of revenue and market share in the Company's
core OEM enterprise SSD market, even as that market grows
strongly.
- Total revenue for the three months ended March 31, 2013 are down 56% from the same
period a year ago and down 77% from the same period two
years ago, despite significant increases in R&D
spending. STEC has spent over $66 million in R&D for the year ended
December 31, 2012, an over 68%
increase since fiscal 2008, and only began to reduce its R&D
spending after we filed our initial Schedule 13D and sent an open
letter to the Board calling upon the Board to reduce its R&D
spending or justify the expense to shareholders.
- Revenues from sales to STEC's three largest customers in 2011
have declined by more than 84% in the first quarter of 2013,
with revenues falling from $69
million in the first quarter of 2011 to less than
$11 million in the first quarter of
2013, despite significant growth in the enterprise SSD
market.
(Photo: http://photos.prnewswire.com/prnh/20130610/NY28818-b
)
(Photo:
http://photos.prnewswire.com/prnh/20130610/NY28818-c )
(Photo:
http://photos.prnewswire.com/prnh/20130610/NY28818-d )
In addition, STEC has suffered operating losses of over
$103 million for the year ended
December 31, 2012, an over 510%
decline in operating income from the year earlier.
Operating losses have continued in 2013, with the Company reporting
an operating loss of over $25 million
in the three months ended March 31,
2013.
(Photo:
http://photos.prnewswire.com/prnh/20130610/NY28818-e
)
The Company's cash and liquid assets are also in serious decline
and we have serious concerns that the Company may burn through its
cash by mid-2014.
(Photo: http://photos.prnewswire.com/prnh/20130610/NY28818-f
)
We are very concerned that the Company is nearing a point of no
return and believe that immediate action must be taken to stop the
erosion of further shareholder value.
THIS BOARD HAS NO VIABLE PLAN TO RESTORE
PROFITABILITY
We believe the Company has lost incredible market share in the
wake of increasing competition because the Board first failed to
anticipate such market share losses and then, in response to rising
competition, decided to pursue a flawed strategy that is focused on
going after its direct end users (its customer's customers) rather
than trying to repair its relationships with its large storage OEM
customers who have historically been the source of over 80% of
STEC's SSD revenues, a strategy that Manouch Moshayedi himself once considered "not a
long-term strategy."
At the same time, we believe the Company's spending has been
excessive and ineffective. The Company has increased its
R&D spending for years without seeing commensurate increases in
revenue or income. We believe the Company's precipitous
decline over the past year clearly demonstrates that the Company's
strategy is not working. We believe that the only means
to recapture the loss of market share and unlock the value of the
Company's underlying assets is to reconstitute the Board with truly
independent directors who will act in your best interests.
INDUSTRY ANALYSTS AGREE - CHANGE IS NEEDED
Consider the following:
- "It's clear that despite strong products, STEC's traditional
OEM customers appear to be abandoning the company. While management
continues to discuss progress in diversifying its customer base, we
find it difficult to not conclude that STEC faces a challenging
uphill battle building out its direct enterprise business. We
still see a strong technology story here, but struggle to see how
or when it will be realized in the stock." ─ March 14, 2013, Lazard Capital Markets
- "...the Board and management team have proven wholly
incompetent at creating long term value for its shareholders.
The most recent earnings report and guide is simply further
confirmation of the fact that this turnaround is not likely to work
before most - if not all - of STEC's cash reserves are burned and
the stock sees a significant readjustment in valuation as a
result." ─ March 28, 2013,
Seeking Alpha
- "STEC results have been dire; there is no immediate
remedy at hand, and it was on existing management's watch that
things fell apart ... the STEC chairman has so few good
cards to play and is saying, in effect: "Trust us. (Whisper; we
fouled up, but) we're best placed to repair things." ─
March 26, 2013, The Register
- "Until the market gets a better sense of how fast STEC can
reach breakeven, we think the stock will be under pressure. The
only event that can relieve that pressure in the near-term, in our
opinion, is activist success, and that is the only reason why
we do not have a Sell rating at this time." ─ May 9, 2013, Craig-Hallum Capital Group
STEC'S BOARD AND EXECUTIVE MANAGEMENT TEAM MUST BE
RECONSTITUTED FOR UNDERLYING VALUE TO BE REALIZED
We are soliciting proxies to elect not only our three Nominees,
but also the candidates who have been nominated by the Company
other than Manouch Moshayedi,
Mark Moshayedi and Matthew Witte. In addition to the
reasons set forth above, we have specifically targeted these
long-serving incumbent directors for the following reasons:
- Manouch Moshayedi has been
charged with insider trading by the SEC and only recently
stepped down as the Company's CEO and Chairman, pending the
resolution of the SEC action against him.We believe his change in
title to Founder and continuation as a director of the Company are
cosmetic changes. Why, for example, did Manouch Moshayedi continue to receive the same
salary and benefits following his resignation as Chairman and CEO
until both Mark and Manouch
Moshayedi decided to reduce their salaries to $1.00 in December
2012, shortly after the filing of our initial Schedule
13D? We strongly believe that Manouch Moshayedi's continued presence at the
Company is detrimental to STEC and he should be removed from the
Board.
- Mark Moshayedi has a
significant cloud over him regarding his questionable trading
practices and the continued underperformance of the Company under
his leadership. Although Mark
Moshayedi has not been charged, he has been investigated by
the SEC for insider trading, served as the President and Chief
Operating Officer for the Company during the events that are the
subject of the SEC action against Manouch
Moshayedi, and sold stock alongside Manouch Moshayedi. Since Mark Moshayedi
was appointed CEO of the Company, the Company has continued to
underperform. Given his long tenure at the Company, his
questionable trading practices, and his close alignment with his
brother, Manouch Moshayedi, we
believe Mark Moshayedi should be
removed from the Board.
- Matthew Witte has been
the Chairman of the Nominating and Corporate Governance Committee
(the "Nominating and Governance Committee") since 2009. Under
his leadership, the Nominating and Governance Committee has failed
to launch a proper CEO search and has continued to re-nominate both
Manouch and Mark Moshayedi, despite
their questionable trading practices, despite an SEC action brought
against Manouch Moshayedi, and
despite the Company's deteriorating financial performance. It
also appears to us that the Nominating and Governance Committee has
not taken any steps to independently investigate the SEC's
allegations or the numerous shareholder lawsuits and derivative
actions filed against the Company involving the trading practices
of Manouch and Mark Moshayedi.
For these reasons, we believe Mr. Witte should be removed from the
Board.
OUR NOMINEES HAVE THE EXPERIENCE TO IMPROVE THE PERFORMANCE
OF STEC AND THEREFORE THE VALUE OF ITS STOCK
We have nominated three highly qualified director nominees -
Adam Leventhal, Clark Masters and Eric
Singer - who we believe are each uniquely qualified to help
develop and execute a successful turnaround of STEC. Complete
biographies are available in the proxy materials filed today as
well as on our website, www.myproxyonline.com/STEC.
Adam Leventhal has served
as the Chief Technology Officer for Delphix Corp., an agile data
management company, since January
2013, and has been with Delphix since September 2010, previously serving as Director of
Systems Engineering. He is a co-inventor of DTrace and the
winner of several industry awards, including the top prize for the
2005 WSJ Technology Innovation Awards program, the 2005 InfoWorld
Innovator program, and the USENIX STUG award in 2008. From
August 2001 until August 2010, Mr. Leventhal worked in the Solaris
kernel group of Sun Microsystems, Inc. and was a founding engineer
in Sun's Fishworks group. He also led the flash memory
technology team at Sun and later at Oracle Corporation following
its acquisition of Sun in January
2010. Mr. Leventhal currently sits on the Illumos
Developer Council, and has 11 patents filed or pending.
Clark Masters has over 30
years of experience in the technology industry and currently serves
as Senior Vice President, HANA Cloud Computing for SAP AG, a
multinational software corporation, since July 2012. From
August 2010 until July 2012, Mr. Masters served as a consultant to
various technology start-ups and fortune 500 companies. From
December 2007 to August 2010, Mr. Masters was a member of the
board of directors and Chairman of the compensation commission of
SonicWALL, Inc., a network security software/appliance company with
unique technology for deep packet inspection. From
August 2007 to June 2010, Mr. Masters was the President and
Chief Executive Officer of Astute Networks, a venture capital
funded network storage provider for the telecommunications and
government markets. From July
1996 to January 2007, Mr.
Masters held several executive positions with Sun Microsystems,
including President and Chairman of Sun Microsystems Federal Inc.,
a wholly owned subsidiary of Sun Microsystems, Executive Vice
President of Industry Sales, and Executive Vice President of
Enterprise Systems Products.
Eric Singer has served as
a co-managing member of Potomac Capital Management II, L.L.C and
Potomac Capital Management III, L.L.C, since March 2012 and was previously an advisor to
Potomac Capital Management, L.L.C. and its related entities
since May 2009. Mr. Singer is the Chairman of the Board
of Sigma Designs, Inc., a public semiconductor company, and has
been a Board member since August
2012. From August 2008
until its sale in February 2010, Mr.
Singer served as a director of Zilog Corporation, a public
semiconductor company. From July
2007 to April 2009, Mr. Singer
was a senior investment analyst at Riley Investment Management and
previously managed private portfolios for Alpine Resources LLC from
January 2003 to July 2007.
Our nominees are well qualified, highly experienced and are
committed to working as independent fiduciaries to maximize
shareholder value. Each nominee's accomplishments and reputation
speak for itself. Our nominees are committed to working
constructively with the other members of the Board and using their
experience to help effect more prudent and thoughtful decision
making, thus helping management to reverse the recent significant
underperformance and execute a successful strategic plan for the
Company. If elected, our nominees intend to submit the
following plans and proposals for enhancing shareholder value:
- Immediately hire an interim CEO;
- Launch a search for a permanent CEO to assist in the
reengagement of large OEM customers;
- Refocus the business on SAS SSD sales to large storage OEM
customers;
- Critically examine the Company's operating expenses and improve
capital allocation;
- Reevaluate the direction of the Company's PCI Express, SATA,
I/O software, and other business initiatives; and
- Explore all strategic alternatives, including a possible sale
of the Company if the Company cannot remain a stand-alone
entity.
YOU HAVE THE OPPORTUNITY TO PROTECT YOUR INVESTMENT
By voting for our nominees, you empower our nominees, from a
minority position, to re-evaluate management's plan, and any other
alternatives to maximize shareholder value. They can, and
will, appropriately represent the shareholder's best interests.
VOTE FOR CHANGE AT STEC -- PLEASE SIGN, DATE
AND MAIL THE ENCLOSED GOLD PROXY CARD TODAY
If you have any questions, require assistance
in voting your GOLD proxy card, or need additional
copies of Balch Hill Partnership's proxy materials, please
contact Okapi Partners at the phone numbers or email listed
below.
OKAPI PARTNERS LLC
437 Madison Avenue, 28th Floor
New York, N.Y. 10022
(212) 297-0720
Call Toll-Free at: (877) 566-1922
E-mail:
info@okapipartners.com
Sincerely,
BALCH HILL PARTNERS, L.P.
By: Balch Hill Capital, LLC,
its general
partner
By: /s/ Simon J.
Michael
Name: Simon J. Michael
Title:
Manager
Contact:
Simon J. Michael
Balch Hill Partners, L.P.
(415) 474-7055
SOURCE Balch Hill Partners, L.P.