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Fund Investor Says Public Company Boards Should Reassess Oversight

Ralph Whitworth, principal for Del Mar’s Relational Investors, a $7 billion investment fund, thinks a lot of corporate board members aren’t conducting sufficient oversight, especially when it comes to his communicating to the public.

Speaking at the Jan. 14 Corporate Directors Forum at the University of San Diego, Whitworth provided a critical assessment of what’s happening in many boardrooms these days.

In many cases, executives and directors are sending mixed messages about their companies and their operations, leading to misunderstandings and credibility problems.

In his speech, Whitworth, whose firm engaged in a bitter proxy battle with Philadelphia’s Sovereign Bancorp Inc. in 2006, opined on a variety of topics, all of which were “off the record.” But he agreed to a short interview after his talk to expound on some points.

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In one memorable instance, he said the chief executive of Tektronix Inc., with U.S. headquarters in Beaverton, Ore., was trying to turn things around but faced a credibility gap. The reason, Whitworth said, was the CEO consistently said the company would be profitable in the next quarter. Unfortunately, the company failed to make a profit, but the CEO continued saying it would be the next quarter for 12 consecutive quarters.

He said directors need to get involved in managing company communications , in succinct, plain English, and consistent with what was said in the past.

Citing another well-known scandal, Whitworth said several executives for Computer Associates International Inc. of New York “said something completely different to the same analyst within a three-month period.”

In 2004, the Securities and Exchange Commission filed charges against former executives of CA. In 2006, CEO Sanjay Kumar pleaded guilty to security fraud and other felonies and was sentenced to a 12-year prison term.

Other CA executives pleaded guilty to various fraud charges at the Long Island, N.Y., software firm that involved the backdating of contracts. The deception allowed the company to inflate sales figures and fool investors.

Of course, the whole thrust behind last week’s conference was to ensure that type of communication breakdown doesn’t even get close.

In the wake of corporate frauds that surfaced earlier in this decade, Congress passed laws to ensure greater board oversight, yet in reality, many directors just aren’t paying enough attention to what their companies are doing and saying, Whitworth said.

“They’re not digging in on the level that they need to,” he said. “They’re sometimes thinking of themselves as exalted directors, not as shareholder representatives.”

Whitworth, the founder of Relational, has sat on several boards and chaired a few turnarounds, including Houston-based Waste Management Inc. in 1999, where he orchestrated the replacement of its management.

He is also an expert on corporate governance issues and has testified to Congress, the SEC, the Federal Reserve Board and several other federal agencies.

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Leap Shares Rise On Increased Customers:

Nothing like exceeding expectations to capture some headlines and send shares rising.

That’s what happened when Leap Wireless International Inc. said net new subscribers for the fourth quarter reached 152,000 , above the company’s guidance of between 70,000 and 130,000.

On Jan. 8, shares of Leap rose by more than 2 points to above $40, and by Jan. 14, the Nasdaq stock was up to $45.05.

Of course it seems like it was just yesterday, really July, when LEAP was reaching a peak of $99.04, and looking like a huge winner for stockholders.

The San Diego-based provider of flat-rate cell phone service in midmarket cities is growing steadily, but not at the same rate as a year ago.

The most recent gains in the fourth quarter resulted in a net gain of 634,000 customers for 2007. That brought the total customers overall for Leap Wireless to 2.86 million, up from 2.2 million at the end of 2006.

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PriceSmart On Track For $1 Billion:

Looking at its first-quarter results, another billion-dollar company may be on the horizon among local public firms.

PriceSmart Inc., the operator of 25 warehouse stores, mainly in the Caribbean and Central America, reported revenue was up 24 percent in its first quarter ended Nov. 30 to $250 million. Assuming it stays on this pace, the company could pass $1 billion since its December sales showed a 25 percent increase to $123 million.

For the quarter, the company reported a net profit of $6.7 million, up from $4 million in the prior year’s first quarter.

For PriceSmart’s full fiscal year ended Aug. 31, it had a net profit of $12.9 million on revenue of $889 million.

The news sent PriceSmart’s shares, traded under PSMT on Nasdaq, above $30, and flirting with $31 on Jan. 9, but it fell a bit subsequently and closed at $30.72 on Jan. 14. For the year, PSMT has gained more than 75 percent, one of the best performers among local public companies.

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Dot Hill Sees Better Fourth-Quarter Revenue:

Carlsbad-based Dot Hill Systems Corp., a maker of data-storage equipment, said its fourth-quarter revenue will be in the range of $50 million to $52 million, above the previous guidance range of $44 million to $48 million.

It also said Jan. 7 that it extended an agreement with Hewlett-Packard Co. to provide its equipment to the Palo Alto-based computer and printing giant from one to five years, a change that will likely increase revenue this year. But Dot Hill didn’t get specific.

The company said it expects to post a diluted net loss per share of 10 cents to 15 cents for the quarter ended Dec. 31.

For the nine months ended Sept. 30, Dot Hill reported a net loss of $13.8 million on revenue of $155.3 million. That compared to a net loss of $71.7 million on revenue of $179.8 million for the like period of 2006.

Traded on Nasdaq under HILL, shares closed Jan. 14 at $3.52, and have ranged from $2.12 to $4.33 during the past 52 weeks.

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Ashworth Has Reduced Loss:

Ashworth Inc., the Carlsbad sportswear maker, reported a net loss of $3.5 million for its fourth quarter ended Oct. 31 on revenue of $54.6 million. That compared to a net loss of $4.4 million on revenue of $50.2 million in the prior year’s fourth quarter.

For the full fiscal year, Ashworth reported a net loss of $14.1 million, compared to a net profit of $1 million in the prior year.

Revenue for 2007 was $202 million, down 4 percent from $209.6 million in the prior year.

It was a volatile year for the sportswear firm, with a management shakeup in October that brought in a new CEO, CFO, president, and senior sales executive.

CEO Alan Fletcher said the new team is working hard to make the changes that will return the company to profitability, but a completed turnaround will take time and “may result in short-term peaks and valleys.”

Traded on Nasdaq under ASHW, shares have been rising a bit in the last week or so, and closed Jan. 14 at $3.15. Its 52-week range was between $2.49 and $8.61.

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Ticker Takes:

SAIC Inc. was awarded a few more contracts from Uncle Sam, one for $10 million from General Services Administration, and another for more than $46 million, if all options are exercised, by NASA Leap Wireless International’s Cricket Communications Inc. introduced a new cell phone, the Motorazer V3a with Bluetooth software, and camera with video capture and playback capability Javo Beverage Co. Inc. said it signed a contract with Premier Inc. to offer Javo’s hot and cold coffee drinks to its network of 1,700 nonprofit hospitals and 49,000 other health care businesses. Javo said the contract is the largest in its history … Sempra Energy proposed building a new oil storage terminal at Port Arthur, Texas, where Sempra also has plans for a liquefied natural gas terminal ViaSat Inc. said it entered into a contract with Loral Space and Communications Systems Inc. to build a new satellite that would expand high-speed Internet services to rural areas of the nation.


Send any news of locally based public companies to Mike Allen via e-mail at

mallen@sdbj.com

. He can be reached at (858) 277-6359.

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