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Peregrine Untangles Financial Mess as It Rebuilds

Peregrine Systems Inc., a San Diego-based business software developer that saw a massive accounting fraud revealed three years ago, continues to lose money.

The latest annual loss is partly due to Peregrine’s spending millions of dollars to unravel a complex financial web set up before the company failed, CEO John Mutch said.

Mutch blamed the company’s $25.4 million loss for the 12 months ended March 31 on efforts to “unwind” finances involving global subsidiaries.

“The capital and financial structures of Peregrine Systems were extraordinarily complex,” he said. “There were over 150 international subsidiaries that were created for tax advantages. We’re having to spend an extraordinary amount of money to unwind those structures.”

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Peregrine spent $52.4 million, or 27 percent of its revenue, on general and administrative expenses (mainly labor) in the 2005 fiscal year through March, Mutch said.

In the prior fiscal year, Peregrine spent $33.5 million.


People Power

To get its finances in order, Peregrine has had to hire twice as many financial professionals than a similar size company would need, Mutch said.

“The way we will be able to produce accurate financial statements is to put more people on the process than we ordinarily would,” Mutch said. “We throw bodies at the problem.”

Mutch declined to disclose exactly how many bodies were thrown at the issue last year.

Arguably San Diego’s most notorious high-tech failure, Peregrine Systems first reported “accounting irregularities” in May 2002. By September 2002, the company filed for bankruptcy protection.

In disclosures the company made after a re-audit, Peregrine said it had inflated revenue by $509 million for three fiscal years starting in 1999. Instead of a net loss of $1.5 billion in the three years, the company said it actually lost more than $4 billion.

Criminal investigations and civil suits ensued. Last year, the Department of Justice indicted 11 Peregrine executives and outside business partners on a variety of criminal felonies. Six employees have pleaded guilty since the scandal erupted and charges are pending against nine others.

John Moores, Peregrine’s former chairman who sold about $600 million worth of company stock from 1997 to 2000, has not been charged in the criminal case or a parallel civil case by the Securities and Exchange Commission against several of the company’s top executives.

A federal lawsuit against Moores, owner of the San Diego Padres, and other Peregrine directors, was dismissed this year.

Peregrine released its fiscal year results this month, reporting a net loss of $25.4 million, versus a loss of $17.9 million for the 257 days after Peregrine emerged from bankruptcy in 2003.

The company’s revenue for the 12 months was $191 million, up from $126 million in sales for the post-bankruptcy period.

With Peregrine’s emergence from Chapter 11, the company uses a “fresh start” accounting method that requires carrying an annual charge of $23 million on its books for the next seven years, Mutch said.

The charge makes achieving profitability “somewhat difficult,” he said.

Without it, the company would have reported an operating loss of $2.6 million, Mutch said.


Revenue Growth

The company is showing improvement in revenue and customer retention.

Peregrine’s software helps large corporations track and monitor assets such as computer networks.

In its latest filings, Peregrine said it still has not filed a report regarding its internal financial controls as required by Section 404 of the Sarbanes-Oxley Act, the accounting reform law enacted in 2002.

Peregrine Chief Financial Officer Ken Saunders said the company should file the report with the Securities and Exchange Commission within 60 days.

Peregrine has spent $4 million to $5 million for outside auditing costs related to complying with SOX 404, Saunders said.

“It doesn’t have its house in order,” Martha Doran, a San Diego State University accounting professor, said of Peregrine. “That doesn’t mean it may not be sincere in its efforts, but it hasn’t gotten there yet.”


Adding Jobs

As of June 30, Peregrine had about 700 employees, up from a little more than 600 at the end of March 2004. About 365 people work at Peregrine’s Carmel Valley headquarters. The jobs added locally were in product marketing and development, customer service, sales and financing, Mutch said.

At its peak in early 2000, Peregrine had about 4,000 employees worldwide, including more than 800 in Carmel Valley. It also had a soaring stock price that resulted in a market capitalization of about $9 billion.

Mutch declined to respond to a request from the company’s largest shareholder to sell the company. In a June 30 letter, Richard Conway, the manager of LC Capital Master Fund, which owns 8.1 percent of the stock, called on Peregrine Chairman James Jenkins to put the company on the block.

“They’re a shareholder and we run the company to create shareholder value, and we appreciate their expressing how they want the company run,” Mutch said.

He would not comment on whether any directors agreed with the sale suggestion.

Peregrine shares, now traded on the low-profile Pink Sheets Exchange, closed at $20.50 on July 12, giving the company a market value of $309 million.

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