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PROXY Governance Report of Voting Recommendations

(August 7, 2007)

PROXY Governance, Inc., the proxy advisory subsidiary of FOLIOfn, Inc., published its CA report on August 7, 2007, recommending that the firm's clients vote their shares against the re-election of director candidate D'Amato but in favor of all other candidates.  The firm had made a similar recommendation for the previous year's annual meeting, prior to the company's February 2007 adoption of majority voting provisions, at which meeting 25.9% of shareholder votes were withheld for D'Amato.  The firm's analysis and rationale of this recommendation is copied below, and the full report is available for downloading from the following link, with the publisher's permission:


PROXY Governance, INC.

Contact: Alesandra Monaco



Annual Meeting


Record Date: 06/28/2007

Meeting Date: 08/22/2007







[pages 9-10]


Proposal Analysis




1 | Elect Nominees

PROXY Governance Vote Recommendation: SPLIT


To elect the following 12 nominees to the board for a one-year term: R. Bromark, A. D'Amato, G. Fernandes, R. La Blanc, C. Lofgren, J.

Lorsch, W. McCracken, L. Ranieri, W. Schuetze, J. Swainson, L. Unger, and R. Zambonini.


§     Board size: 12

§     New directors since last year: 1

§     Independent directors: 11

§     Non-Independent directors: 1

Non-Independent directors: CEO/President J. Swainson

Withhold Vote: At last year's annual meeting, shareholders cast a relatively high percentage of withhold votes for former N.Y. Senator A. D'Amato (25.9%). When directors receive a high percentage of withhold votes in the preceding year, we believe that the proxy statement should address that subject, since the company presumably knows what issue or issues led to the withhold vote, and should discuss what, if any, action was taken on that issue. D'Amato became a director in 1999 (at this point, he is the only holdover director from that era). He currently serves on the Corporate Governance Committee, and has served on the Audit and Compliance Committee since 2000. Shareholders appear to have been voicing displeasure after court filings disclosed that D'Amato, while serving on the CA board in 2000, played an important role in brokering a deal for former CEO Sanjay Kumar to buy the New York Islanders hockey team. Such a deal was possible only because the CA board had, just a few days earlier, eased restrictions on the sale or transfer of Kumar's stock, which allowed him to use the stock as collateral for a $51 million loan used to fund the acquisition. Only a few days after Kumar secured the loan, the company announced that it would miss financial projections, which resulted in a 43% decline in the company's stock and erased $13 billion of the company's market value.

The entire history surrounding the ensuing “35-day month” scandal is tawdry, and it has led to derivative actions and shareholder litigation that have continued to the present. The report of the company’s Special Litigation Committee, issued in April 2007, effectively says that the then current directors, which included D’Amato, were asleep at the switch (“The CA Board, at various points in time, too often accepted the explanations and assurances of CA management and its advisors without applying a high degree of skepticism or fully understanding the details of what was being done. Such skepticism and careful probing of management and advisors might have led the directors to take further action in situations where, although action was not required to satisfy their fiduciary duties under Delaware law, it nonetheless might have benefited the Company and saved it from further harm.”) We recognize that the company has taken pains to portray D'Amato as having been part of the solution to its problems and not part of the problem. However, notwithstanding that the Special Litigation Committee was of the opinion that D'Amato should not be held legally liable to the company, that does not mean, particularly in view of the understated but still devastatingly critical language of the committee's report, that shareholders should vote to continue his presence on the board. We believe that the company, which has spent the last several years striving to put its past behind it, would be better served if the sole remaining director from that era departed from the board. We therefore recommend that shareholders withhold votes for D'Amato.

Recent Developments: In 2002, the U.S. Attorney’s office and the SEC began an investigation into the company’s past accounting practices that centered on the company’s recognition of revenue for periods prior to October 2000, and resulting misstatements of financial information in filings for that period and afterward. The company restated its financial results for fiscal years 2000 and 2001. The investigation eventually led to the resignations of several executives and the criminal convictions of former CEO Kumar, former CFO Ira Zar, former head of Worldwide Sales Stephen Richards, former General Counsel Steven Woghin and several others. Pursuant to an April 2007 settlement agreement with the government, Kumar was ordered to pay restitution of nearly $800 million.

The Special Litigation Committee (noted above) determined in April 2007 to pursue additional claims against former Chairman/CEO Charles Wang and several other former executives, but not against any current executives or directors of the company. While the report was critical of the board’s unquestioning acceptance of management, it stated that directors had satisfied their fiduciary duties to shareholders. However, dissident shareholder Sam Wyly has criticized the report as a "whitewash," noting that one member of the committee (L. Unger) formerly worked for director D'Amato while he was in the U.S. Senate. It should be noted, however, that Ms. Unger was only on the committee in its very early stages and for a very short time.

As the scandal had begun to subside, shareholders were hit with further revelations in 2006 that the company would again restate earnings, this time for the period from 2002 to 2006, primarily to account for additional stock compensation expense of $342 million related to improper reporting of stock option grant dates for the years 1996 to 2002. In addition, management identified several material weaknesses in its internal control over financial reporting, most significantly that monitoring of stock option grants had not been effective to ensure that their valuations were correctly reported. The company states that it has implemented procedures to ensure that option grants are properly communicated to employees, recorded and reported. We note that although almost no directors or executive management remain from that era, the lone remaining director, D'Amato, served on the Stock Option and Compensation Committee during fiscal years 2000 and 2001.

Performance: According to PROXY Governance's performance analysis, the company has underperformed peers over the past five years; the company ranks at the 41st percentile relative to the S&P 1500 compared to peers at the 51st percentile, and is declining relative to peers at a rate of 2 percentile points per year. The company significantly trails peers with regard to return on equity (at the 11th percentile relative to the S&P 1500, compared to peers at the 41st percentile) and revenue/expense ratio (at the 35th percentile compared to peers at the 60th percentile).

On June 20, 2007 the company announced it had repurchased approximately 16.9 million common shares, or 3% of its outstanding common shares, at a cost of approximately $435 million. The repurchase was done under an accelerated share repurchase agreement and was funded with existing cash. Most recently, the company has reported sharply higher net profits. For the quarter ended June 30, earnings of $129 million (on $1 billion in revenue) were more than 3.5x the previous year’s quarter.

Compensation: The average three-year compensation paid to CEO Swainson is 8% above the median paid to CEOs at peer companies and the average three-year compensation paid to the other named executives is 29% below the median paid to executives at peer companies. We note that the company's average compensation numbers are slightly inflated due to the company's double reporting of 2006 LTIP awards in the form of restricted stock grants. The grants, which were valued at approximately $1.0 million for CEO Swainson and from $300,000 to $590,000 for the other named executives, were disclosed in both the company's 2006 and 2007 proxy statements.

The company's executive compensation appears reasonable given its financial performance relative to peers.


PROXY Governance generally believes that the current board is properly discharging its oversight role and adequately policing itself. However, we recommend withholding votes from D'Amato given his role in brokering a major business deal involving Kumar in 2000, which appears to be a clear conflict of interest, and the fact that he is the sole remaining director that served on the board during the period when the company's initial accounting scandal was occurring.







© 2007 by PROXY Governance, Inc.™ All Rights Reserved. The information contained in this proxy analysis is confidential, for internal use only in accordance with the terms of the subscriber’s subscription agreement, and may not be reproduced or redistributed in any manner without prior written consent from PROXY Governance, Inc. All information is provided “as is” and without any warranty to accuracy, is not intended to solicit votes, and has not been submitted to the Securities and Exchange Commission for approval. The information should not be relied on for investment or other purposes.

Proponents and issuers written about in PROXY Governance research reports may be subscribers to PROXY Governance’s proxy voting and/or research services. Although PROXY Governance often confers with both proponents and issuers to ensure the accuracy of data, and to obtain an in-depth understanding of matters and positions, neither proponents nor issuers are involved in the preparation of the report or voting recommendations and PROXY Governance independently prepares such reports and recommendations.





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