Surviving a Corporate Death

Keeping the Party Going

This much is certainly true: As at many high-flying public companies in the 1990s, executives at Peregrine lived large while the going was good. There was the requisite boom-era Gulfstream 4 corporate jet, the lavish company parties, the yachts executives were able to buy. Launched in 1981 by former IBM engineers, Peregrine attracted big-time investors including Moores, who earned his first fortune as the founder of software shop BMC. William Savoy, the former money manager for Microsoft cofounder Paul Allen, also briefly sat on Peregrine's board.

Shortly after Peregrine went public, Stephen Gardner was installed as CEO, and set out on an acquisition binge. Between 1997 and 2000, Peregrine acquired 18 separate companies, boosting the company from just 180 employees at the end of fiscal 1997 to more than 3,000 at the end of fiscal 2002. And as long as the markets continued to soar, it was hard to tell what effect the aggressive strategy was having on Peregrine. Between 1997 and 2001, the company reported 17 straight quarters of revenue growth, and its stock performed accordingly: Shares soared from a split-adjusted $2.25 to nearly $80 by spring 2000.

But once the market and the economy turned, Peregrine could no longer keep delivering--at least not legitimately. Pressured to keep the stock up, Peregrine's executives began inflating the numbers. Some of this was accomplished by selling accounts receivable that were either nonexistent or had already been sold, the offense to which Cappel pled guilty. And at least one sales representative, Steven Spitzer, has since pleaded guilty to securities fraud for prematurely reporting revenues on his sales contracts that were incomplete, could still be canceled, or were structured to produce no revenue for Peregrine at all.

"I knew that if we could save the customers, we could save Peregrine," says the man brought in to perform emergency surgery on the company.

As these and other misdeeds became known, Peregrine fell into what looked like a death spiral. The accounting investigation meant Peregrine would further delay filing its 10K with the SEC, and on May 23, Peregrine issued a warning that its financial restatement would ulti- mately stretch back to April 1999. These actions called Peregrine's creditworthiness into question, and it soon became clear that the company could not meet its $40 million-a-month payroll. By June, the board concluded that Peregrine needed more than an interim CEO: It needed a surgeon. On June 3, 2002, just four days after he first met with Peregrine's board, Gary Greenfield walked in the door as the new CEO. Interim boss Rick Nelson remained at the company as chief operating officer.

A graduate of both the Naval Academy and Harvard Business School, Greenfield, 49, wasted no time on pleasantries when he arrived at his first meeting with Peregrine's senior staff. "He introduced himself, said he knew we'd already been through a lot, and told us to focus on customers," says marketing chief Eagan, 39. "Gary told us that he'd consult with us on issues, but that his decisions would be final. He said to keep our employees motivated, focused on how the customer uses our software rather than everything else that was going on." With that, Greenfield excused himself to meet with CFO Gerson. By the time he left, he hadn't even asked the names or occupations of the 15 people in the room. "I felt like I was being dropped into the middle of a forest fire," Greenfield recalls now. "The whole first week is a blur."

But at the end of that first week, each executive vice president received a first assignment from the new boss: Greenfield wanted a body count. That was because his initial review of Peregrine's financials showed that the company had only enough cash to exist for another 10 days. There were some obvious first steps, like selling the company jet. Greenfield also secured $50 million in bridge financing from a group of high-risk equity firms. But it wasn't enough.

Survivor Guilt

Greenfield quickly estimated an annual revenue run rate for Peregrine's core businesses of no more than $170 million--a far cry from the estimated $700 million in revenues initially booked by Gless for the 2002 fiscal year that ended March 31. (Gless's figure included revenues from divisions that Greenfield already decided to sell to keep Peregrine afloat.) Using a cost estimate of $200,000 per employee per year to the company, Greenfield conservatively figured Peregrine could support only about 650 workers, not 3,000. The ranks would have to be slashed by upward of 80% in some divisions. He gave each of his division heads 48 hours to come up with The List. The layoffs were to begin June 18, just two weeks into his tenure as CEO.