SecProbe.io

CORRESP
1
filename1.htm

September 8, 2005

Mr. Brad
Skinner

Accounting Branch Chief

United States Securities and Exchange Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, D.C. 20549

RE: Comment Letter dated August 26, 2005 on Peregrine Systems, Inc. Form 10-K for the Fiscal Year Ended March 31, 2005 filed July 1, 2005
and Report on Form 8-K, filed July 5, 2005

Dear
Mr. Skinner:

In
response to the above-referenced comment letter, we have provided additional information below. We have organized our responses in the same format as your comments to facilitate your review
process.

Please
be advised that management of the Company has completed its assessment of the effectiveness of internal control over financial reporting as of March 31, 2005 as required by
Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX") and is prepared to file an amended annual report on Form 10-K/A for the fiscal year then ended as well as a
Form 10-Q for the quarter ended June 30, 2005 as soon as the comments raised in the Securities and Exchange Commission ("SEC") Staff's letter dated August 26, 2005
have been satisfactorily resolved. As such, we appreciate your prompt review of our responses below and look forward to working with you to resolve
the comments, so that we may file our Form 10-K/A and Form 10-Q as soon as possible.

Form 10-K
for the Fiscal Year Ended March 31, 2005

Item
7. MD&A of Financial Condition and Results of Operations

Revenue
by Segment, page 31

1.You
disclose that approximately 46% of your fiscal 2004 sales are from your international subsidiaries and you indicate that changes in exchange rates may affect your operations.
However, it appears that you neither identify nor quantify the effect of foreign exchange rate fluctuations on your operations. Please explain to us why you have not included such disclosures and how
you considered the guidance in Section III.D of SEC Release No. 33-6835.

Company
Response:

Upon
further review of the guidance in Section III.D of SEC Release No. 33-6835, management proposes to amend its Annual Report on Form 10-K for the fiscal
year ended March 31, 2005 by expanding disclosure of the impact of foreign exchange rate fluctuations on its results of operations for the fiscal year ended March 31, 2005 and the pro
forma combined fiscal year ended March 31, 2004. The Company proposes to amend the Management's Discussion and Analysis ("MD&A") section of the fiscal year 2005 Form 10-K by
adding the following additional language at the end of its discussion of results of operations for each of the comparative periods:

Proposed
additional disclosure at the end of "Comparison of Results of Operations for the Fiscal Year Ended March 31, 2005 with the Pro Forma Combined Fiscal Year Ended
March 31, 2004"

Effect of Foreign Currency Exchange Rate Fluctuations on Results of Operations

Approximately
46% and 42% of our revenue for the fiscal year ended March 31, 2005 and the pro forma combined fiscal year ended March 31, 2004, respectively, were derived from operations
outside the United States. As a consequence, our results are affected by changes in

1

foreign
currency exchange rates. To provide a framework for assessing how our underlying operations performed, excluding the effect of foreign currency exchange rate fluctuations, we have disclosed
below the change in "total revenue" (comprised of licenses, maintenance, and consulting and training), "cost of revenue" (comprised of cost of licenses, maintenance, and consulting and training), and
"operating costs and expenses" (comprised of sales and marketing, research and development, general and administrative, amortization of intangible assets, and restructuring, impairments and other)
attributable to foreign currency exchange rate fluctuations. To do so, we have calculated the impact of foreign currency exchange rate fluctuations in U.S. Dollars by multiplying the fiscal year 2005
activity in local currencies by the difference between the average exchange rates in effect during fiscal year 2005 and the average exchange rates in effect during the pro forma combined fiscal year
ended March 31, 2004.

Total Revenue

Total
revenue for the fiscal year ended March 31, 2005 increased $16.5 million from total revenue for the pro forma combined fiscal year ended March 31, 2004. Approximately
$5.3 million of the increase was the result of foreign currency exchange rate fluctuations.

Cost of Revenue

Cost
of revenue for the fiscal year ended March 31, 2005 increased $2.9 million from cost of revenue for the pro forma combined fiscal year ended March 31, 2004. Approximately
$0.8 million of the increase was the result of foreign currency exchange rate fluctuations.

Operating Costs and Expenses

Operating
costs and expenses for the fiscal year ended March 31, 2005 increased $28.8 million from operating costs and expenses for the pro forma combined fiscal year ended
March 31, 2004. Approximately $3.6 million of the increase was the result of foreign currency exchange rate fluctuations.

Proposed
additional disclosure at the end of "Comparison of Results of Operations of the Pro Forma Combined Fiscal Year Ended March 31, 2004 with the Fiscal Year Ended
March 31, 2003"

Effect of Foreign Currency Exchange Rate Fluctuations on Results of Operations

Approximately
42% and 36% of our revenue for the pro forma combined fiscal year ended March 31, 2004 and the fiscal year ended March 31, 2003, respectively, were derived from operations
outside the United States. As a consequence, our results are affected by changes in foreign currency exchange rates. To provide a framework for assessing how our underlying operations performed,
excluding the effect of foreign currency exchange rate fluctuations, we have disclosed below the change in "total revenue" (comprised of licenses, maintenance, and consulting and training), "cost of
revenue" (comprised of cost of licenses, maintenance, and consulting and training), and "operating costs and expenses" (comprised of sales and marketing, research and development, general and
administrative, amortization of intangible assets, and restructuring, impairments and other) attributable to foreign currency exchange rate fluctuations. To do so, we have calculated the impact of
foreign currency exchange rate fluctuations in U.S. Dollars by multiplying the pro forma combined fiscal year ended March 31, 2004 activity in local currencies by the difference between the
average exchange rates in effect during the pro forma combined fiscal year ended March 31, 2004 and the average exchange rates in effect during fiscal year 2003.

2

Total Revenue

Total
revenue for the pro forma combined fiscal year ended March 31, 2004 decreased $55.5 million from total revenue for the fiscal year ended March 31, 2003. This decrease is net
of a revenue increase of approximately $11.0 million resulting from foreign currency exchange rate fluctuations.

Cost of Revenue

Cost
of revenue for the pro forma combined fiscal year ended March 31, 2004 decreased $35.7 million from cost of revenue for the fiscal year ended March 31, 2003. This decrease is
net of a cost of revenue increase of approximately $1.8 million resulting from foreign currency exchange rate fluctuations.

Operating Costs and Expenses

Operating
costs and expenses for the pro forma combined fiscal year ended March 31, 2004 decreased $196.7 million from operating costs and expenses for the fiscal year ended
March 31, 2003. This overall decrease is net of an operating expense increase of approximately $4.5 million resulting from foreign currency exchange rate fluctuations.

In
addition, the Company intends to include similar disclosures in its future Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

Item
8. Consolidated Financial Statements and Supplementary Data

Consolidated
Statement of Operations, page F-7

2.We
note that you exclude amortization of developed technology from your cost of sales. Please explain to us how you considered the guidance in Question 17 of the FASB Staff
Implementation Guidance on Applying SFAS 86.

Company
Response:

The
Company believes that its current disclosure is consistent with the guidance in Question 17 of FASB Staff Implementation Guidance on Applying SFAS 86 based on the fact that its
Consolidated Statement of Operations is not presented in a gross profit format, and all operating costs and expenses, including cost of licenses, maintenance, and consulting and training as well as
amortization of developed technology, are included in total operating costs and expenses. However, in order to further enhance the disclosure for financial statement users, the Company proposes to
amend its Annual Report on Form 10-K for the fiscal year ended March 31, 2005 to include a footnote on the face of its Consolidated Statements of Operations. The proposed
additional disclosure is as follows:

Proposed
footnote to "Cost of licenses" on the face of the Consolidated Statements of Operations

(1)Excludes
amortization expense of $9,799 and $6,899 related to developed technology for the fiscal year ended March 31, 2005 and the 257-day period ended
March 31, 2004, respectively.

In
addition, the Company intends to include similar disclosures in its future Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

Consolidated
Statement of Cash Flows, page F-9

3.We
note that you reconcile operating cash flows to net income from continuing operations. Please tell us how you considered the guidance in paragraph 28 of SFAS 95 that requires
the use of net income in this reconciliation rather than net income from continuing operations.
3

Company
Response:

Upon
further review of guidance in paragraph 28 of SFAS 95, the Company proposes to amend its Consolidated Statements of Cash Flows included in its Annual Report on
Form 10-K for the fiscal year ended March 31, 2005 to reconcile net loss to net cash (used in) provided by operating activities for the Successor Company for the year ended
March 31, 2005 and the 257-day period ended March 31, 2004 (see Exhibit A for an illustration of the proposed amended disclosure). Management believes that the
presentation of the Predecessor Company reconciliation of net loss from continuing operations to net cash used in (provided by) operating activities is consistent with current practice for companies
reporting discontinued operations and the current presentation appropriately segregates cash flows from discontinued operations within the Consolidated Statement of Cash Flows supplemented by expanded
discontinued operations cash flow information in Note 3 to the Consolidated Financial Statements. Since all required cash flow information for both continuing and discontinued operations has
been disclosed in prior filings and information of the Predecessor Company is dated, the Company believes it is appropriate to maintain the previously filed disclosure for the 109-day
period ended July 18, 2003 and the fiscal year ended March 31, 2003.

Notes
to Consolidated Financial Statements

Note 1.
Company Operations

Fresh-Start
Reporting, page F-10

4.We
were unable to locate disclosure here or in previous filings that provides specific, meaningful information regarding how you determined your reorganization value. Please tell us
how you considered disclosing the following described in paragraph 39 of SOP 90-7:

•Discount
rates, tax rates, the number of years for which cash flows are projected, and the method of determining terminal value;

•Assumptions
about which there is a reasonable possibility of the occurrence of a variation that would have significantly affected measurement of reorganization value; and

•Assumptions
about anticipated conditions that are expected to be different from current conditions, unless otherwise apparent.

Company
Response:

Upon
further review of guidance in paragraph 39 of SOP 90-7, the Company proposes to amend the discussion of fresh-start reporting in both the MD&A section titled "Critical
Accounting Policies and Estimates—Fresh-Start" and Note 1 titled "Company Operations—Fresh Start Reporting" to the consolidated financial statements in its Annual Report
on Form 10-K for the fiscal year ended March 31, 2005, as follows:

Proposed
additional disclosure, which replaces the second paragraph of "Critical Accounting Policies and Estimates—Fresh-Start" in the MD&A section, and is also inserted
after the first paragraph in Note 1 "Company Operations—Fresh-Start Reporting" to the Consolidated Financial Statements:

Management
determined, with the assistance of third-party financial advisors, that the Company's business enterprise value ("BEV") was within the range of $245 million to $309 million.
The range was also approved by the Bankruptcy Court in connection with the Reorganization Plan. For purposes of applying SOP 90-7, the Company used a BEV of $277 million,
representing the mid-point of the range in valuations as management's best estimate of the Company's reorganized BEV. The BEV was based primarily on a discounted cash flow ("DCF") analysis
using projected financial information for fiscal years 2004 through

4

2007,
a discount rate of 20%, a tax rate of 35%, and a terminal value of 2.1 times the forecasted revenue for fiscal year 2007. Financial information used to compute the BEV did not differ materially
from that presented to the Bankruptcy Court in connection with the approval of the Reorganization Plan. Management also validated the range of BEV, which was determined using the DCF analysis, by
using a comparable company analysis, which considers the value of similar companies to determine the value of the Company, and a transaction analysis, which considers transactions involving comparable
companies where willing sellers have transferred control to willing buyers. Management also considered the Company's market capitalization as indicated through the trading price of its common shares
to validate the BEV.

The
valuation relied on a number of estimates and assumptions, including the discount rate, projected growth rates for revenues and expenses, and tax rate. A variation in any of these assumptions
would have resulted in a significant change to the determined BEV.

Note 15.
Segment and Geographic Information, page F-37

5.You
disclose that your Chief Executive Officer evaluates segment financial performance based on segment revenue only. Please explain to us how your CEO assesses performance and makes
decisions regarding the allocation of resources to your operating segments without the benefit of a measure of profit or loss. Describe the type of information that is provided to your CEO in order to
make such decisions and tell us how you considered paragraph 25(b) of SFAS 131.

Company
Response:

The
Company considers its Chief Executive Officer ("CEO") to be the chief operating decision maker ("CODM") as defined in SFAS 131. The CEO reviews the results of operations for the Company on
a weekly, quarterly, and annual basis using consolidated financial information, with the exception of revenue, which is also presented on a geographic basis (as discussed in more detail below). The
CEO retains ultimate decision making authority in deciding how to allocate resources and establishes performance goals based on consolidated financial results, with the exception of revenue targets,
which are based on geography. Although revenue responsibility is managed on a geographical basis, strategic level decisions are made by the CEO.

The
Company prepares consolidated statements of operations and manages its business from an operations point of view as one business since its products fit into a narrow segment of a broader IT market
and are sold principally to a single type of buyer, the IT manager, within its customer base. Therefore, management receives information regarding profitability on a consolidated basis, while
analyzing costs at a functional lev