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Balch Hill Capital Believes Change Is Needed At STEC

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:


2778 Green Street San Francisco, CA 94123

June 10, 2013

Dear Fellow STEC Shareholder,


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.


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. 



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 .  

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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.

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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. 

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