A "one quarter" problem:
nytimes.com
March 5, 2001
Critical Path Says Problems Were Limited
to One Quarter
By CHRIS GAITHER
AN FRANCISCO, March 4 — The
new management of Critical Path, an
Internet software company, said late last week
that the questionable accounting practices that
left its reputation in tatters were largely
confined to its fourth-quarter sales in the
United States.
Three top executives broke their silence on
Friday for the first time since improper
accounting forced the company, once a Wall
Street darling, to revise last quarter's revenues
at least $6.5 million lower.
"We're now extremely comfortable that that's
the extent of the problem, that we know
where it is and why it happened," said David Hayden, the founder and
executive chairman. He resumed control of daily operations after three
top executives left the company in February. "Even though the
investigation is ongoing and it will continue for some time, the company is
moving forward," Mr. Hayden added.
Critical Path's stock closed at $2.66 on Friday, down from a peak of
$119.50 in March 2000. Investors have initiated dozens of class-action
lawsuits against the company, which provides corporate e-mail and
messaging software, accusing executives of manipulating its books to
inflate the stock price.
On Jan. 18, after promising for months that the fourth quarter would be
the company's first profitable period, Critical Path stunned Wall Street by
announcing a loss, excluding special charges, of 16 cents a share.
Executives said they and their auditors had decided to spread $7 million
from software licensing deal over several quarters, instead of recognizing
it as revenue all at once.
"We had a bottom-line miss regardless of that," Lawrence Reinhold, the
chief financial officer, said in an interview on Friday. "That just made it
worse."
While distancing himself from the previous team's bullish views, Mr.
Hayden said the overly ambitious forecasts had been a response to Wall
Street's increasing demand to see profits at Internet companies.
"There was a lot of internal pressure on the company to fulfill its
promises," he said. "However, in hindsight, it looks like we were
unnecessarily and unduly aggressive in forecasting profitability for the
fourth quarter."
Analysts had said they were willing to forgive Critical Path for missing its
earnings targets. But on Feb. 2, the company dropped a bigger
bombshell: Its board had suspended two top executives and started an
internal investigation into its financial practices.
The whistle-blower, the company said last week, was Larry Reinhold,
the new chief financial officer. On Jan. 29, Mr. Reinhold said, he
received worrisome information about some contracts that had been
executed in December. In an interview, he would not describe the
"questionable transactions" other than to say that they concerned sales of
the software line Critical Path acquired when it purchased Isocor in
January 2000.
For the next two days, Mr. Reinhold discussed his findings with the
company's lawyers. On Feb. 1, he called an emergency board meeting
that began in the early afternoon and ran into the early hours of Feb. 2.
Later that day, Critical Path placed David A. Thatcher, the president,
and William Rinehart, the vice president for worldwide sales, on
administrative leave and announced an internal inquiry. Nasdaq officials,
asking for more information, halted trading in the stock.
On Feb. 8, Critical Path said that Doug Hickey, its chief executive
officer, had resigned, and that Mr. Thatcher and Mr. Rinehart "are no
longer employed by the company." Diana Whitehead, a senior vice
president, replaced Mr. Thatcher, and Mr. Hayden returned from a
year-long hiatus to fill the duties of Mr. Hickey while the company
searches for a new chief executive.
The next week, Critical Path said its investigation had determined that the
prior quarter's financial figures were inaccurate. The company will lower
its reported revenues by $6.5 million, to $8 million. Its net loss will
increase to between $19 million and $21.5 million, compared with the
$11.5 million previously reported.
Several members of Critical Path's sales team resigned or were dismissed
following the shake-up. Despite the recent troubles, Mr. Hayden said, no
customers have left. |
