Posted on 03/01/2003 11:41:27 AM PST by Steven W.
In fiscal 2000 Peregrine reported losses of $18 million. Yesterday, the number was revised to $217 million.
In fiscal 2001, the company claimed losses of $852 million. Now, Peregrine says that number was really $1.84 billion.
In the first three quarters of fiscal 2002, Peregrine claimed losses of $677 million. Yesterday, it revised the number to show losses of $2.03 billion.
Peregrine Systems has finally tallied up the extent of its massive accounting fraud. The San Diego software maker acknowledged yesterday that the scope of the fraud is more than twice as large as it reported last summer, shortly before filing for bankruptcy.
Instead of overstating its revenue by $250 million, as Peregrine announced then, yesterday's financial restatement shows its revenue for 33 months was inflated by $509 million.
It was the latest – and by far the biggest – in a series of revisions the company has made since May, when it announced it had uncovered "accounting irregularities."
First, the company said revenue was overstated by $100 million. Then, in August, after hiring accountants and lawyers to conduct an internal investigation, Peregrine said the amount had increased to $250 million. The company also acknowledged the discrepancy was caused by accounting fraud.
That was enough to trigger investigations by the Securities and Exchange Commission and the Justice Department. By September, Peregrine had filed for bankruptcy reorganization.
But to the public, the extent of the fraud remained unclear. Though Peregrine had said nothing about its losses, the company's revisions now show they were colossal.
Peregrine had told investors and government regulators that its losses from April 1999 to December 2001 amounted to $1.54 billion. The restatement shows those losses were $4.09 billion.
"What the restatement tells me is this company wasn't nearly the growth company we thought it was," said Ken Nunes of Caliber Advisors, a San Diego financial advisory firm.
At a time when Peregrine appeared to be a fast-growing high-technology company, Nunes said, its business was in much worse shape than anyone outside the company realized.
Moreover, yesterday's restatement provides a financial picture that is a year old, ending March 31, 2002. Peregrine's results since then still aren't ready, although company spokeswoman MeeLin Nakata said last night that they should be released soon.
As a result, Nunes said it's still not possible to tell if Peregrine has enough profitable product lines and services to support its current debt.
More troubling than the delays is the company's penchant for downplaying bad news, said Bruce Bennett, the chief bankruptcy lawyer for Peregrine's creditors.
By "systematically understating their historical financial problems," Peregrine avoided unwanted comparisons to Enron and WorldCom, the nation's biggest corporate scandals, Bennett said.
Now it is clear that in percentage terms, Peregrine's "revisions are substantially greater than the publicly announced adjustments for either WorldCom or Enron," Bennett said.
Ken Sexton, Peregrine's new chief financial officer, said yesterday that last year's figures for overstated revenue "were the best estimate we had at the time."
Gary Greenfield, who was named chief executive last summer, said yesterday's restatement reflects "Peregrine's commitment to putting our financial house in order.
"We conducted a thorough investigation, identified issues and have taken corrective measures to prevent or detect future occurrences," Greenfield said. "The restatement is behind us."
Peregrine's restatement came as four directors, including Chairman John Moores, agreed to resign as part of a cease-fire agreement the company reached this week with its creditors.
Moores, who owns the San Diego Padres, owned roughly 83 percent of Peregrine's stock at the time of the company's initial public offering in 1997.
Subsequent stock sales by Moores and affiliated entities reaped him more than $611 million and made Moores and other board members a lightning rod for shareholder lawsuits.
In light of the magnitude of the restatement, it's hard to understand how the board could have approved the company's financial statements when the business they were running was so dramatically smaller, Bennett said.
"It appears that probably two-thirds of the company's licensing revenue never existed," said Bennett J. Murphy, who is working with Bennett. "That's a bombshell, and the implications for the company's bankruptcy case are enormous."
The restatement also shows that as much as $225 million in fictitious software sales was recorded as revenue. The company sent the software to middlemen, who could not show that it was ever sold to an end user. In the restatement, the company called the sales "non-substantiated transactions."
Another $70 million was deleted from sales and applied toward acquisitions and investments.
The company also disclosed that $203 million in deferred revenue had been booked up front rather than reported over time. About $180 million of that still may be reported as revenue in the future, Peregrine said.
While Peregrine was pursuing a fast-paced, growth-by-acquisition strategy, the restatement shows the company improperly recorded many aspects of the businesses that were acquired. In some cases, reciprocal licensing deals that should have reduced acquisition costs were instead recorded as revenue from customers.
Peregrine also said that it had added $141.6 million in loans to its balance sheet as of March 31, 2002, to properly account for receivables it had sold to banks.
Shares of Peregrine, which had traded near $80 in 2000, were delisted by the Nasdaq Stock Market in August. The stock now trades on the over-the-counter market, where it closed yesterday at 41 cents a share.
In documents filed as part of Peregrine's bankruptcy reorganization, the company outlined many of the misleading accounting practices behind its financial fraud. The disclosures include:
Peregrine said its former management did not maintain adequate records, including detailed accounts receivable and sub-ledgers that reconciled with Peregrine's general ledger, balance sheet and financial statements.
To create the appearance that receivables were being paid promptly, Peregrine's former management sold large amounts of accounts receivable to purchaser banks. The transactions disguised the fact that many "channel" sales would not be realized and should have been accounted for as loans – not sales.
To cleanse Peregrine's books of "stale" receivables in which payments did not occur, the company improperly disguised large "write-offs" in accounts receivable as part of acquisition costs or other liabilities.
Former management inflated Peregrine's revenue by engaging in transactions that should have been accounted for as "bartering transactions." In these "wash sales," two companies "sold" software to one another, exchanged checks and each recognized revenue.
Peregrine awarded stock option grants to employees, but it did not record the grants as a compensation expense. As a result, compensation expenses were understated by many millions of dollars.
Well, gee whiz, you don't say.
This scam artist still owns the Padres? Not up to the standards of anything but the Church of Ponzi Priesthood I would say.
Ping to the (un)usual suspects.
Richard W.
Nice analysis, Steve. Gramps is gonna love this.
Tenure at Peregrine Haunts Richardson
By Thomas J. Cole / 10/27/02
Albuquerque Journal Investigative Reporter
Public reports filed by Peregrine Systems while Bill Richardson was a director showed the company was headed toward possible failure at a time it spent millions of dollars on bonuses and golf-club memberships for executives.
Investors in the San Diego-based software company, including pension and school funds in New Mexico, have suffered losses totaling hundreds of millions of dollars and the company has filed for bankruptcy protection.
Richardson, a Democrat and apparent front-runner in the New Mexico governor's race, said Friday he wasn't aware of the company's problems at the time because they were hidden by the accounting firm Arthur Andersen.
But he acknowledged in an interview while campaigning in western New Mexico on Friday that he missed board meetings and didn't read key corporate reports while serving as a director.
Richardson said he "didn't have the time" to read corporate reports or attend all board meetings but said he was confident he had fulfilled his legal duties as a director to the corporation and to its shareholders.
Richardson, who served as a director from February 2001 to June of this year, said he was recruited by Stephen Gardner, who was then chairman, president and chief executive officer of Peregrine. Gardner is a brother-in-law of Richardson's wife, Barbara, and one of the executives who received bonuses.
The company since May has disclosed accounting irregularities, laid off at least 1,400 workers and filed for U.S. Bankruptcy Court protection while attempting to reorganize its finances. Peregrine is also under investigation by Congress, the Justice Department and the Securities and Exchange Commission.
The company has blamed its troubles on Arthur Andersen, which it fired in April and has sued for $1 billion. Arthur Andersen, in turn, has pointed the finger at Peregrine's board of directors.
Some shareholders have joined in class-action lawsuits against Peregrine, and Richardson is a defendant in some of those suits.
John Sanchez, the Republican nominee for governor, has made an issue of Richardson's connection to Peregrine, saying in a series of television advertisements that Richardson was "an insider who got paid, while honest people got hurt."
Richardson has said he was paid $10,000 by Peregrine for attending board meetings.
He said in the interview that he was also awarded stock options for his work as a director but didn't exercise them. "Now they're worth nothing," he said.
Richardson has countered in his commercials that he helped to uncover the accounting irregularities at Peregrine by voting to replace Arthur Andersen with the firm of KPMG, which found the problems.
Fighting Shareholder Suits
That's encouraging
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.