STEL is a POS
Stellent's Long List of Little Pals
By Herb Greenberg
Senior Columnist
03/25/2002 09:22 AM EST
Related parties always raise red flags. The more there are, and the closer the ties, the more you should wonder whether sales would've occurred if the relationships hadn't existed.
Which brings us to Stellent (STEL:Nasdaq - news - commentary - research - analysis), the story of a company with relationships, some of which have the appearance of -- shall we say -- being too close for comfort. We're talking relationships with public companies and relationships with private companies, many of which, like Stellent, have headquarters in and around the Twin Cities, Minn.
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You almost need a scorecard to keep track of the players. And while one or two related-party dealings of this sort may raise eyebrows, looking at an entire string of them, involving various relationships with companies and insiders, paints a twisted tale that raises more questions about the company than it answers.
Consider Stellent's relationship with software maker Active IQ Technologies (AIQT:Nasdaq - news - commentary - research - analysis). As I originally reported in a Feb. 7 Street View, Stellent struck an exclusive three-year, $2 million software-licensing deal with Active four days before the end of Stellent's fiscal third quarter. (The company reported $26.6 million in sales for the third quarter.) However, Stellent didn't formally tell its investors about the Active deal until filing its 10-Q with the Securities and Exchange Commission 41 days later. And it wasn't until that 10-Q that Stellent first disclosed that (oh, by the way) it owns 8.5% of Active. (Details, details!)
As it turns out, Stellent's CEO Vern Hanzlik and CFO Gregg Waldon, until earlier this year, owned shares in Active. (But their ownership was disclosed by Active, not Stellent.)
The relationship doesn't end there (and neither does the confusion): Like Stellent, Active was created through a reverse merger. Stellent's reverse merger was with a company that made sporting goods; Active's was with a company that used to operate gas stations. Both deals were engineered by Henry Fong, a former Stellent director who is president and treasurer of Equitex (EQTX:Nasdaq - news - commentary - research - analysis), which helps other companies structure and complete mergers involving shells. (In 1994, Fong agreed, without admitting or denying wrongdoing, to pay $73,775 to settle a 4-year-old SEC investigation into the demise of a once-highflying penny stock brokerage firm.)
Fong, in turn, has long-standing ties with Ron Eibensteiner, a Minneapolis venture capitalist and the chairman of the Minnesota Republican Party. (Ah, the ties that bind.) Eibensteiner either is now or has been a director and/or investor in at least five other Fong-related entities, including Stellent and Active; he's also secretary of Active.
In an interview, Hanzlik and Waldon say that Eibensteiner was never on the boards of Active and Stellent simultaneously. "He rolled off our board in March," Waldon says; one month later, Eibensteiner joined Active's board. However, according to several places in Active's prospectus, before joining Active's board in April, Eibensteiner was a director of what is now known as the "Old AIQ." Old AIQ was better known, prior to its merger with a Fong-supplied shell, as ActiveIQ Technologies -- then a private company with which Stellent had long-standing ties. (The only difference is that the words "Active" and "IQ" were crunched together in the old company.) "Mr. Eibensteiner was a director of both our company and Stellent at the time this transaction took place," the prospectus says.
Eibensteiner, who says he serves on the boards of 18 mostly tiny companies, told me he's not sure whether he was or wasn't on the board of Active when he was on Stellent's board. "I'd have to go back and check," he says. "My recollection is that I got off the board of Stellent and soon thereafter went on the board of Active IQ. I don't believe I was on the board of Active at the same time. I know they talked to me about joining the board of Active IQ long before I actually joined the board. I wasn't a member of the board prior to the merger. That's probably a mistake. I'd have to check on it."
"But Active's proxy says you were on the board," I point out.
"I've got to do some research on it," he responded. That was Wednesday. Still haven't heard back. (How hard could it be to determine whether he was on Active's board before last April? He is, after all, Active's secretary!)
Stellent also is an investor a number of companies that are also Stellent customers. (Get out your lineup cards.) For example, in late 2000, Stellent invested in Ubiquio and Wireless Ronin, two Minnesota start-ups. At or around the same time, the company issued press releases about sales of software to each company. Doesn't that suggest a circular flow of money? Says Waldon, who insists the companies would have bought from Stellent regardless of Stellent's investment, "All of the companies we invest in have in some way, shape or form, synergistic pieces, either on the technological side or to help us move product into other verticals."
But, wait, there's more: In 2000, Stellent, which competes with the likes of Vignette (VIGN:Nasdaq - news - commentary - research - analysis), Documentum (DCTM:Nasdaq - news - commentary - research - analysis) and Interwoven (IWOV:Nasdaq - news - commentary - research - analysis), struck a deal to sell software to Merrill Lynch. As part of the deal, Merrill got warrants to buy 225,000 Stellent shares in return for "services" rendered by Merrill. What services? Merrill, Hanzlik explains, served as a reference when Stellent tried to sell its software to other companies. "They've helped us solidify and close on millions of dollars of software deals," he says. "We used them extensively." A Merrill representative declined to comment.
Relationships, in Stellent's world, show up in other forms as well. (Pull out those lineup cards again.) For example, in its latest 10-Q, in addition to disclosing the Active IQ relationship, Stellent disclosed that it lent $3.5 million to "one of our partners." Which "partner" might that be?
Stellent won't say, but two analysts who have been fans of Stellent wrote, independent of one another, that the money went to a certain key distributor of two key Stellent products, Transit and Quick View Plus. The money, RBC Capital Markets analyst Stephen Sigmond wrote in a report, was used "to help the distributor increase its working capital in order to handle more of the distribution for Stellent's legacy products." (Put another way, Stellent made a loan to a distributor, which in turn bought Stellent products.)
According to Stellent's own Web site, the two products in question are distributed by "our worldwide distributor, Avantstar," which is based in the Twin Cities.
Yet when asked if Stellent made the loan to privately held Avantstar, Avantstar President Pat Bray told me his company has "no financial relationship" with Stellent. He said he didn't know anything about the loan, or, as it's called in Stellent's 10-Q, the "note receivable."
It so happens that Bray's partner is Pete Rockers, former president of Active IQ. (Those darn ties that bind.) When I caught up with Rockers last week and asked him about the loan -- and what the analysts said -- he replied that Avantstar is only one of Stellent's distributors.
"Maybe," I pointed out, "but according to Stellent's Web site, Avantstar was the distributor of those two products. What about the loan?"
"Our finances as a private company," he said tersely, "are nobody's business but ours." (End of conversation.)
Well, then, what about the analysts' comments? They surely point to Avantstar. Waldon told my colleague, Mark Martinez, that the analysts' comments were "conjecture." He repeated the same to me when I called. "We don't control or say what the sell-side analysts say," he told me.
Maybe not, but two analysts coming to the same conclusion? What do the analysts say? One is on vacation and the other, Sigmond, didn't return multiple calls, even after I left a message saying that Stellent was suggesting that what he wrote was erroneous.
Funny, on Friday -- two days after my last query -- Sigmond cut estimates on Stellent for its fourth audited quarter to 1 cent a share from 10 cents. Yet two weeks ago he was defending Stellent, saying that "following a round of checks, we believe business momentum at Stellent is healthy and tracking to our estimates ... of $0.10 per share." Can't imagine what made him shift gears so quickly.
If he's right, who knows -- maybe Stellent suddenly ran out of relationships. |
