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ADAPTEC, INC.
(Name of Registrant as specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
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On October 13, 2009, Adaptec, Inc. made the following presentation to Proxy Governance, Inc., and Risk Metrics Group:
adaptec
A Global Leader In I/O Innovation
Mission Statement: To deliver high-yielding I/O solutions that protect, accelerate, optimize and condition data in today’s most demanding data center environments
adaptec
Safe Harbor Statement
Some of the statements today may include forward-looking statements regarding future events and/or projections of the financial performance of the company, including the expected benefits of the company’s new products, which statements are based on our current expectations. These statements contain significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements.
We refer you to the documents that Adaptec filed with the SEC, specifically our most recent Form 10-K and 10-Q under the caption “Risk Factors.” These documents identify important risk factors that could cause actual results to differ materially from expectations.
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Why We Are Here
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Board is Committed to Creating Value for ALL Stockholders
Turnaround momentum
Strong corporate governance
Steel’s false choice
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Turnaround is Gaining Traction
New product launches well received by customers
$4.6 million in cash from operations last quarter
Right team in place, aligned with stockholder interests
Board is focused on driving Adaptec to the next level
Steel’s actions are not constructive nor productive
Threaten to expose the assets to greater risks
Distract operating management
Cause our customers and employees uncertainty
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Management and the Board have been willing to explore all strategic options
We are not opposed to a sale
Stockholders will get more value when the market recovers
Between 2005 to 2007, multiple discussions with strategic and financial parties to sell the company
Technology company value is based on core IP, strategic customer engagements and revenue growth
Our new product growth is on the cusp of offsetting legacy product declines
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Steel Threatens to Derail Turnaround
Steel seeks consent solicitation to:
Obtain effective control of Adaptec without paying control premium
Remove CEO as a Board member
Gives Steel four of the seven Board seats
Jack Howard - Steel principal, designated to Board by Steel
John Quicke - Steel principal, designated to Board by Steel
John Mutch - designated to Board by Steel
Laurence Ruisi - introduced to Board by Steel; served on Board of Rowan Companies following settlement with Steel; personal relationship with John Quicke
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Our Financial Record
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Where We Were Before CEO Joined ADPT in 2005
Market for core products was shrinking
Multiple acquisitions gave ADPT unrelated technologies
Cash burn was ongoing
Strategic plans for future were undefined
Conclusions - the Board chose to:
Refocus business
Optimize legacy products and IP portfolio
Preserve cash to weather transformation
Invest in new products and technologies to capitalize on market’s direction
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What We Did to Deliver Value:
Divested non-core businesses
Outsourced manufacturing
Improved operational and asset metrics
Focused business and launched new products targeted at high-growth I/O opportunities
Explored strategic alternatives including sale of company multiple times between 2005 – 2007
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New Products are Gaining Traction
Non IBM Legacy
IBM Legacy
New Products
$ Millions
$60
$50
$40
$30
$20
$10
$0
Q3’07
Q4’07
Q1’08
Q2’08
Q3’08
Q4’08
Q1’09
Q2’09
Q3’09
Q4’09
Q1’10
(Fiscal Year Ended March 31)
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Our Turnaround is Gaining Momentum
Improved gross margins from 30% in Q1 of fiscal 2006 to 46% in Q1 fiscal 2010
Cut our combined R&D and SG&A expenses in half from $125.9 million in fiscal 2006 to $61.9 million in fiscal 2009
Reduced headcount from 1,128 at the end of fiscal 2006 to 232 at the end of fiscal 2009
Since Sundi became CEO the company’s operating results have improved
The company has swung to a total net profit of $4 million on a GAAP basis since he has been CEO
For the same period prior to his appointment as CEO net losses totaled $240 million
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Revenue, R&D, and SG&A Expense
As legacy revenue declined, we cut expenses proportionately greater then the revenue decline
Net Revenue
R&D & SG&A Expense
$40 $35 $30 $25 $20 $15 $10 $5 $0
$36
23.9
Q1’08
$38
22.4
Q2’08
$36
19.6
Q3’08
$36
18.5
Q4’08
$32
15.4
Q1’09
$32
13.7
Q2’09
$28
17.2
Q3’09
$23
15.8
Q4’09
$22
14.2
Q1’10
Continued to invest in R&D for long-term growth
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GAAP Gross Margins – Improved Despite a Decline in Legacy Sales
50% 40% 30% 20% 10% 0%
32%
Q1’08
36%
Q2’08
42%
Q3’08
46%
Q4’08
47%
Q1’09
42%
Q2’09
40%
Q3’09
44%
Q4’09
46%
Q1’10
Improved product mix and cost control has driven stronger margins
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And, our balance sheet is stronger
Increased cash balance, net of outstanding debt, from $240 million in Q1 fiscal 2006 to $382 million in Q1 fiscal 2010
Paid off substantially all of our convertible debt of $240 million. Approximately $0.4 million remains
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Balance Sheet Change Since CEO Joined
Increased net cash position from $240 Million in 1Q06 to $382 Million in 1Q10
Net Cash Debt
$39 million to acquire Aristos Logic
$450 $400 $350 $300 $250 $200 $150 $100 $50 $0
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
$450 $400 $350 $300 $250 $200 $150 $100 $50 $0
All values in $ Millions
Achieved positive cash flow from operations of $14M for FY’09
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Our Technology Position - And Our Path Forward
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Adaptec Market Landscape
Internal RAID (DAS)
Application
Filesystem
Storage Interface
Disk Storage
Storage Interface
Opportunities for Adaptec products
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OEM + Channel Products
External RAID (NAS)
Application
Filesystem
Network Interface
Network
Filesystem
Storage Interface
Disk Storage
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Channel Products
External RAID (SAN)
Application
Filesystem
Network Interface
Network
Storage Interface
Disk Storage
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OEM Products
Blade Servers
Application
Filesystem
Network Interface
Network
Storage Interface
Disk Storage
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OEM Products
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Adaptec’s New Market Opportunity
Value Proposition: Delivering extraordinary value to Next-Gen enterprise and cloud data centers through new products that help to:
Lower capital equipment costs
Reduce operating and energy costs
Maximize system performance
Improve scalability
Achieve “green IT” objectives
… By efficiently managing and conditioning data in the I/O path
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Growth Drivers
Cloud Computing and Server Virtualization
Rapid Pace of Technology Innovation
Building more intelligence in the I/O path
High performance RAID silicon and software solutions
Large growing server and storage segments
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Aristos Logic Advances Growth Strategy
2008 acquisition unanimously approved by Board
Steel’s directors voted to approve acquisition
Adds to our industry-leading storage solutions
Building blocks for I/O strategy as legacy products run off
Supports our product roadmap
Creates opportunities in high-growth segments
Only acquisition under current CEO
Write off triggered by stock market conditions
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Executing on the Innovation Roadmap
Adaptec Data Conditioning Platform
March 2008 Nov 2008 July 2008 June 2009 Sept 2009
Series 5 RAID controller family
The industry benchmark for RAID performance
IBM RAID Storage Switch Module
High availability storage solution for IBM Blade Center S storage
Intelligent Power Management Software
Reduces storage energy costs by up to 70%
GREEN POWER
Series 5Z with Zero Maintenance Cache Protection
No hassle battery-less controller cache protection
MaxIQ SSD Performance Cache Solution
Up to 4x improvement in application performance
Max IQ
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New Products are Gaining Traction
$ Millions
Non IBM Legacy IBM Legacy New Products
$60 $50 $40 $30 $20 $10 $0
Q3'07
Q4'07
Q1'08
Q2'08
Q3'08
Q4'08
Q1'09
Q2'09
Q3'09
Q4'09
Q1'10
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Adaptec Corporate Governance
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The Adaptec Board
Highly qualified and engaged
Diverse mix of industry expertise
Deep understanding of Company’s business
Chairman’s tech experience strengthens Board
Committed to protecting and delivering superior stockholder value
Attempted repeatedly to accommodate Steel
Committed to interests of all stockholders
Newly appointed Chairman, approved by a majority of the Board, brings strong technology expertise to guide Board
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A Record of Good Corporate Governance
Adaptec Board:
Annually elected
All independent except CEO
Average director tenure ~5 years
Simple majority vote requirement
Majority voting for uncontested director elections
Stockholders will be heard – without consent solicitation
Stockholders may act by written consent
No poison pill
History of working with stockholders (Steel included)
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Board has Been Prudent About Acquisitions
Explored both small and large acquisitions
Executed only one acquisition during CEO’s tenure
Even before Steel, the Board’s philosophy was to seek stockholder approval on large acquisitions
Steel confuses collaborative exploration with proposals
At this time, we have no large acquisitions planned
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The Financial Advisor has made no Recommendations
Engaged Financial Advisor to explore strategic alternatives
1. Use of cash (dividends, buyback, tender, etc.),
2. Sale or separation of operating assets and/or company
3. Scale up with acquisition
Advisor not asked to address any real estate or IP sales
The Board guided Advisor to explore alternative 2 in more detail, since it was complex and had multiple scenarios
The financial advisor concluded that within alternative 2, a sale of the operating assets was the best option
Advisor did not make a recommendation across all three alternatives – that work is still pending
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What’s at Stake
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What’s At Stake
Steel seeks consent solicitation to:
Obtain effective control of Board without paying control premium
Remove CEO from the Board (after trying to recruit him for alternate slate)
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Steel’s Actions Speak for Themselves
Does Steel’s represent good corporate governance? No!
Steel would obtain effective control of company without paying a control premium
Steel’s track record has been poor
Do Steel’s proposals serve interests of other stockholders? No!
Steel is willing to take risky bets and has expressed an interest in investing in banking via the corporate shell
Steel wants to insert itself as “portfolio manager” of assets
Is Steel’s performance record commendable? No!
Its 2008 decline was double the average hedge fund loss
Steel’s own investors in its fund, including Carl Icahn, sued Steel when Steel refused to give their money back following poor performance of the fund
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Steel’s Actions Speak for Themselves (cont’d)
Will Steel’s proposals hurt shareholder value? Yes!
Steel calls for selling Adaptec into down market – potentially at a fire sale price
Steel is still silent about plans for the sale proceeds
Steel’s attack came during Adaptec’s major product launch
Are Steel’s actions and arguments inconsistent? Yes!
Invited CEO to join its slate – and called to remove him from the Board
All Steel directors voted to approve Aristos acquisition, but now complain about it
Distributed large position of Adaptec’s shares this summer amid price declines – and now seeks effective control of the Board
Steel established the program for the stock repurchase earlier this year and now blame management when results are less then expected
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Settlement Discussions
Repeated Attempts Made by Adaptec to Settle the Consent Solicitation, all of which have been rejected by Steel
Adaptec proposed multiple drafts of settlement agreements to and had multiple telephone conversations with Steel, including provisions for the following:
Amending or waiving the bylaws to allow Steel to make director nominations for the 2009 Annual Meeting of Stockholders
A mutually agreeable slate of 7 director nominees, including 2 Steel directors (which representation would be disproportionately greater than Steel’s ownership stake)
The inclusion by Adaptec of 2 strategic advisory proposals for stockholder vote at the 2009 Annual Meeting of Stockholders
In return, Steel would terminate the consent solicitation, agree to a standstill for 18 months and enable Adaptec to conduct its business without further interference by Steel
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Adaptec is on a Path to Create Value
Steel’s proposals could mean:
Missing the up-side of the turnaround plans
Discarding promising I/O technologies that trends favor
Using investors’ money to pursue unrelated business when investors chose to invest in technology
The Board and management are focused on executing the business plan
The Board is committed to exploring all options to enhance value for all stockholders while adhering to good corporate governance
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We’ve Made Substantial Progress
“Over the past few years, Adaptec has made significant R&D investments and made the business model leaner to focus on growth going forward. We believe it would be more beneficial for shareholders if Adaptec were allowed to pursue its current business plan than be sold off at this time.”
– Morgan Keegan analyst Brian Freed 9/29/09
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APPENDIX
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Significant Market Opportunities:
Cloud Server Unit
Total Addressable Market
Shipments (CY2008-2012)
23% CAGR
Rack-Mounted Server Units
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
2008
2009
2010
2011
2012
Source: Gartner, October 2008
Worldwide Enterprise SSD Forecast
Worldwide Enterprise SSD Unit Forecast
58% CAGR
SSD Units
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
-
2008
2009
2010
2011
2012
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Adaptec at a Glance
Global leader in Input/Output innovation – 28-year history
Targeting high-growth I/O market opportunities:
Virtual server, blade storage and green data center
On-demand cloud computing environments
Traditional enterprise data centers
Designs & delivers hardware and software solutions that serve as data conditioning platform – routes, optimizes and protects data
RAID controllers, ASICs, HBAs, complete software solutions
New products built on our position in the I/O channel – e.g.: delivering performance while cutting power and maintenance costs
More than 400 technology patents
Mission Statement
To deliver high-yielding I/O solutions that protect, accelerate, optimize and condition data in today’s most demanding data center environments
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