Peregrine Seeks Chapter 11; Sells Remedy

Embattled software maker Peregrine
said Sunday that it has filed for Chapter 11 of the U.S.
Bankruptcy Code. The move ostensibly led Peregrine to sell its Remedy
business to Houston rival BMC Software
for $350 million to stay afloat. The U.S. Department of Justice put the finishing touches on Peregrine’s day by opening an investigation into its practices.

In the Chapter 11 filing, San Diego’s Peregrine cited the financial and legal stumbling blocks raised
by the company’s inability to file audited financial reports for the 2000,
2001, and 2002 fiscal years. The Securities and Exchange Commission suspects Peregrine of misstating revenue.

Peregrine, which makes infrastructure software for service desks and was among the top three players in its field a couple of years ago, said it has
received a commitment for up to $110 million in debtor-in-possession (DIP)
financing from BMC to replace the company’s existing senior credit facility.
The funds will be used compensate employees and fund vendor obligations
going forward, among other things.

It goes to follow that the proceeds from the sale of Remedy will be used to
pay back the DIP financing and to settle past debts. The remaining proceeds
from the sale will provide the company with funds to continue operating its

Kris Brittain, Research Director for IT Services and Support at Gartner, said Peregrine’s move to protect its interests comes as no surprise. However, while the Chapter 11 protection filing may be vanilla, the Remedy sale is by no means a sure thing.

“The U.S. Bankruptcy Court has to approve the deal before BMC can take the title [to Remedy],” Brittain told

Compounding what is already a messy situation, Brittain said, is the fact that the DOJ has announced that it is investigating the purchase of Remedy by Peregrine.

In the final step of this announcement, Peregrine filed a lawsuit against
Arthur Andersen, LLP, Arthur Andersen Germany and Arthur Andersen Worldwide
S.C., Daniel Stulac, the audit partner on the account, and other defendants
to be named later. Peregrine is seeking damages of more than $250 million
for each of the four causes of action in the complaint.

In claims that drum up memories of the Enron debacle, for which Arthur Andersen was
the auditor, the lawsuit alleges that the defendants were negligent, engaged
in fraud and breached their audit and accounting duties and

The lawsuit alleged: “As a result of the negligence, fraud and the breach of
audit and accounting duties and responsibilities by Andersen, [Arthur
Andersen Germany, Andersen Worldwide] and Stulac, two of Peregrine’s
previously audited statements have been withdrawn and Peregrine is in the
process of re-auditing those years of operations. The Defendants’ conduct
has also resulted in a delay in completing Peregrine’s audit of the last
financial year. The negative impact of these events, caused by the conduct
of Andersen, Andersen Worldwide, and Stulac has been significant.”

While it might be tempting to place culpability on the side of Arthur Andersen in light of recent accounting scandals, Gartner’s Brittain expressed doubt that Peregrine executives weren’t aware of some fiscal foul play.

“It’s certainly hard to fathom the level of senior management that was not aware of inaccuracies,” Brittain said. “The court may find out where the truth lies in that.”

Peregrine said in a public statement that the sale of Remedy, which it paid about $1
for in 2001, should ensure security for the employees
and customers of Peregrine and Remedy. Remedy boasts a worldwide customer base of 6,000. The business employs approximately 700 people.

Daily operations at Peregrine’s business units, Peregrine and Remedy, will
continue as usual, aacording to the companies. Employees will continue to report to work and will be paid and suppliers will be paid in the ordinary course of business for goods
and services provided following the filing.

Brittain said Peregrine became the majority leader for the mid-tier enterprise segment of service desk software when it bought IBM’s “Tivoli Service Desk” line for $105 million in cash and stock. It essentially became the market powerhouse the following year after its purchase of rival Remedy, owning more than half of the market share. But customer confidence took a nosedive after accounting irregularities were revealed. The company has spent the last several months trying to salvage itself.

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