Mail Stop 4561
August 25, 2005
Brian E. Dearing
Chairman of the Board,
Chief Executive Officer and President
ARI Network Systems, Inc.
11425 W. Lake Park Drive
Milwaukee, Wisconsin 53224
Re: ARI Network Services, Inc.
Form 10-K for the Fiscal Year Ended
July 31, 2004
Filed October 29, 2004
Forms 10-QSB for the fiscal quarters ended October 31, 2004,
January 31, 2005 and April 30, 2005
Forms 8-K filed October 14, 2004, December 2, 2004, February 24,
2005
and May 19, 2005
File No. 000-19608
Dear Mr. Dearing:
We have reviewed the above referenced filings and have the
following comments. Please note that we have limited our review
to
the matters addressed in the comments below. We may ask you to
provide us with supplemental information so we may better
understand
your disclosure. Please be as detailed as necessary in your
explanation. After reviewing this information, we may raise
additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
General
1. We note your use of non-GAAP measures throughout your 10-KSB,
10-
QSB`s and the Form 8-K`s noted above. Please address the
following
and tell us how you have considered the guidance in Regulation G,
Item 10 of Regulation S-B and the guidance set forth in the
Frequently Asked Questions Regarding the Use of Non-GAAP Financial
Measures:
* The statement of operations data you present in (1) the Form 8-
K`s
noted above, (2) the 10-QSB`s noted above, (3) on page 10 and 16
in
your MD&A discussion in your 10-KSB and (4) on page 7 of the
financial statements in your 10-KSB, presents a number of non-GAAP
measures, specifically "operating expenses before amounts
capitalized." Tell us how your presentation complies with the
guidance in Regulation G for each of these non-GAAP items.
* In your 8-K`s noted above, we note your use of the non-GAAP
measures EBITDA and Earn (Burn) Rate. Tell us how you considered
Question 8 of Frequently Asked Questions Regarding the Use of Non-
GAAP Financial Measures to include the following disclosures:
* the manner in which management uses the non-GAAP measure to
conduct
or evaluate its business;
* the economic substance behind management`s decision to use such
a
measure;
* the material limitations associated with use of the non-GAAP
financial measure as compared to the use of the most directly
comparable GAAP financial measure;
* the manner in which management compensates for these limitations
when using the non-GAAP financial measure; and
* the substantive reasons why management believes the non-GAAP
financial measure provides useful information to investors.
In addition define "Earn (Burn) Rate" in your response.
Note 1. Description of Business and Significant Accounting
Policies
Revenue Recognition, page 11
2. We note that you recognize revenue from software licenses in
multiple element arrangements ratably over the contractual term of
the arrangement. Tell us why you are recognizing revenue under
such
arrangements ratably over the contractual term. In this regard,
tell
us whether separate sales exist for your software licenses and
maintenance and whether you are able to determine vendor-specific
objective evidence (VSOE) of fair value for each element in your
multiple element arrangements. Please advise.
Note 3. Notes Payable, page 15
3. We note your disclosure on page 15 of your financial statements
that you restructured certain debt and have accounted for this
restructuring as a troubled debt restructuring in accordance with
SFAS 15. Tell us how you determined that this modification or
exchange of debt instruments represented a troubled debt
restructuring. In this regard, tell us how you considered the
model
provided in paragraph 6 of EITF 02-4 in determining whether this
modification or exchange of debt is within the scope of SFAS 15.
Please address each of the factors provided in paragraphs 9
through
12 of EITF 02-4 in your response.
4. We also note in your disclosure that the liability in excess of
the future cash flows of the new debt is being amortized as a
reduction of interest expense over the life of the new debt. Tell
us
what accounting literature you are relying on in amortizing such
amounts over the life of the new debt. In this regard, tell us
how
you considered paragraph 19 of SFAS 15 in determining whether to
recognize a gain in the period of restructuring.
* * * * *
As appropriate, please amend your filing and respond to
these
comments within 10 business days or tell us when you will provide
us
with a response. Please submit all correspondence and
supplemental
materials on EDGAR as required by Rule 101 of Regulation S-T. You
may wish to provide us with marked copies of any amendment to
expedite our review. Please furnish a cover letter with any
amendment that keys your responses to our comments and provides
any
requested information. Detailed cover letters greatly facilitate
our
review. Please understand that we may have additional comments
after
reviewing any amendment and your responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Patrick Gilmore at (202) 551-3406, Thomas
Ferraro at (202) 551-3225 or me at (202) 551-3499 if you have
questions regarding comments on the financial statements and
related
matters.
Sincerely,
Kathleen Collins
Accounting Branch Chief
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Brian E. Dearing
ARI Networks, Inc.
August 25, 2005
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