Peregrine Accounting Woes Not Uncommon
BY MIKE ALLEN
Senior Staff Writer
Peregrine Systems’ accounting inaccuracies regarding how it booked revenues is at the crux of its recent problems, but it’s the same issue that many software and high-tech companies have been dealing with for years.
“It’s an industry that has been fraught with revenue recognition and manipulation for decades,” said Stephen Austin, managing partner of Swenson Advisors, an accountancy specializing in technology firms.
Last week, Peregrine said new auditor, KPMG, uncovered inaccuracies that triggered an internal investigation to determine whether it will have to restate financial results for the past two fiscal years. Peregrine hired KPMG last month to replace its former auditor, Arthur Andersen.
Peregrine executives gave few details about the possible irregularities in a conference call with analysts, but said it may have to reverse as much as $100 million in sales made through its indirect channels.
At the same time, Peregrine announced the resignations of CEO Stephen Gardner and CFO Matt Gless, and the return of former Chairman John Moores to his old job to spearhead a turnaround.
Helping Moores, the owner of the San Diego Padres and Peregrine’s chairman from 1990 to 2000, is Chuck La Bella as acting senior counsel, and Fred Gerson as acting CFO. La Bella is the former U.S. attorney and current attorney at McKenna & Cuneo. Gerson is the Padres’ CFO.
Stock in Nasdaq-traded Peregrine had been falling for weeks, but the latest news sent shares tumbling more than 65 percent to 89 cents at May 6. It closed at 88 cents on May 8, or 97 percent off its 52-week high of $33.55.
Moores and new CEO Rick Nelson were mum as to when the audit would be completed, or the firm’s strategy for turning things around.
“We’re going to stay focused on our customers,” Nelson said. “We’re going to turn this company into a profitable company and a company with positive cash flow and focus on opportunities where we can.”
Analysts Predict Revenue Hike
Peregrine is a maker of asset management software that helps companies manage their equipment or facilities, such as keeping track of a vehicle fleet. The company has grown aggressively in the past four years, purchasing 16 separate companies.
Its worldwide employment is 3,500, including 800 workers at its headquarters complex in Del Mar Heights, which consists of five buildings.
For its fiscal year ended March 31, it reported a net loss of $852 million on revenues of $564.7 million. The analysts’ consensus for the 2002 fiscal year was $698 million in revenues.
Software companies, along with all public companies, have been facing incredible pressure in this slumbering economy when even a slight miss on projected earnings or sales can result in huge hits to the stock, said Ken Bender, president of Software Equity Group, a San Diego-based mergers adviser.
“For public companies, there’s extraordinary pressure to meet quarterly forecasts, and that pressure at times can get almost unbearable and can sometimes bring honest people to do things that aren’t in accord with SEC rules or FASB (the Financial Accounting Standards Board) rules,” he said, referring to all software companies and not necessarily Peregrine.
Different Set Of Rules
The critical issue confronting many software companies is revenue recognition, the process of reporting their sales after signing a contract with a customer.
During the 1980s, many companies were booking entire contracts as revenue at the time the deal was struck, even though no product was delivered, and contracts usually included maintenance services spread out over several years, said accountant Austin.
Another problem occurred when some of the delivered product failed to sell and was returned. With a limited lifespan, the returned software couldn’t be resold and had to be reported later as an expense, he said.
Government regulators cracked down on this and other accounting maneuvers in the 1990s, particularly in 1999, when they mandated stricter requirements covering when sales could be recognized, Austin said.
While he wasn’t aware of what Peregrine did, Bender said the company “isn’t an Enron.”
Rather, the firm seems to have stumbled in pursuing an aggressive growth strategy, including overpaying for some of its acquisitions. Bender said Peregrine overpaid by about $1 billion for its purchase of Harbinger Corp. in 2000. After it failed to integrate the firm, Peregrine put the unit up for sale this year, he said.
Peregrine’s problems weren’t all self-inflicted and likely a result of tougher scrutiny for any company whose books were audited by Andersen, according to some.
“If you change auditors now, especially if it was Andersen, the new auditors are going to be as conservative as conceivable, because the entire accounting profession is under intense public scrutiny,” said Bruce Ahern, a local technology analyst.
Noting the company’s cash reserves of about $100 million, Ahern said Peregrine was down but not even close to going under.
“It may take 18 months for them to get back on their feet,” he said. “Realistically, they’ll be back but it’s going to take a while and there will be a lot of people that won’t be working there anymore.”
If prospects appeared dim for shareholders, law firms didn’t waste any time filing class-action suits against the company. As of last week, eight suits alleging the company artificially inflated its performance and misrepresented its true numbers were filed nationally.
Ironically, Bill Lerach, whose firm Milberg Weiss Bershad Hynes & Lerach LLP, has made a name for shareholder litigation passed on filing against Peregrine. Lerach said it wouldn’t be right since Moores is on the board of regents of the University of California, his client and the lead in the class-action civil suit against Enron Corp.
In another bit of irony, Peregrine’s woes were announced the same day the federal criminal trial against Enron opened.
