Mail Stop 0510
February 18, 2005
via U.S. mail and facsimile
Mr. James E. Reeder
Vice President Finance
Special Devices, Inc.
14370 White Sage Road
Moorpark, CA 93021
RE: Form 10-K for the fiscal year ended October 31, 2004
File No. 333-75869
Dear Mr. Reeder:
We have reviewed these filings and have the following
comments.
If you disagree with a comment, we will consider your explanation
as
to why our comment is inapplicable or a revision is unnecessary.
Please be as detailed as necessary in your explanation. In some
of
our comments, we may ask you to provide us with supplemental
information so we may better understand your disclosure. After
reviewing this information, we may or may not 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 on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
FORM 10-K FOR THE YEAR ENDED OCTOBER 31, 2004
Comments applicable to your overall filing
1. Where a comment below requests additional disclosures or other
revisions to be made, please show us in your supplemental response
what the revisions will look like. These revisions should be
included in your future filings.
Item 7 - Management`s Discussion and Analysis
Results of Operations, page 16
2. Please discuss in greater detail the business reasons for the
changes between periods in gross profit (loss) and your operating
expenses. Please also discuss the business reasons for the change
between periods in the depreciation and amortization line item.
In
doing so, please disclose the amount of each significant change in
line items between periods and the business reasons for it. In
circumstances where there is more than one business reason for the
change, attempt to quantify the incremental impact of each
individual
business reason discussed on the overall change in the line item.
Please show us what your revised MD&A for 2004 as compared to 2003
will look like. See Item 303(a)(3) of Regulation S-K and
Financial
Reporting Codification 501.04.
Contractual Obligations, page 18
3. Please revise your table of contractual cash obligations to
include the estimated interest payments on your debt. Because the
table is aimed at increasing transparency of cash flow, we believe
these payments should be included in the table. Please also
disclose
any assumptions you made to derive these amounts.
Financial Statements
Note 2 - Summary of Significant Accounting Policies, page F-6
4. Please disclose the types of expenses that you include in the
cost
of sales line item and the types of expenses that you include in
the
operating expenses line item. Please also disclose whether you
include inbound freight charges, purchasing and receiving costs,
inspection costs, warehousing costs, internal transfer costs, and
the
other costs of your distribution network in the cost of sales line
item. With the exception of warehousing costs, if you currently
exclude a portion of these costs from cost of sales, please
disclose:
* in a footnote the line items that these excluded costs are
included
in and the amounts included in each line item for each period
presented, and
* in MD&A that your gross margins may not be comparable to those
of
other entities, since some entities include all of the costs
related
to their distribution network in cost of sales and others like you
exclude a portion of them from gross margin, including them
instead
in a line item, such as operating expenses.
5. Please disclose more information regarding your revenue
recognition policy. In doing so, please also disclose whether
your
stated shipping terms are FOB shipping point or FOB destination
pursuant to your sales agreements with customers. In addition,
please disclose whether your sales agreements contain right of
inspection or acceptance provisions and whether you replace goods
damaged or lost in transit. Even if your sales agreements state
that
title passes upon shipment, customer acceptance provisions or a
history of your replacing goods damaged or lost in transit may
also
make the recognition of revenue upon delivery to and acceptance by
the customer more appropriate. See the Interpretive Response to
Question 3 of SAB Topic 13:A.3.b.
Note 6 - Investment in SDI-Molan, page F-11
6. You have a 50% ownership interest in SDI-Molan. Please provide
us
with your significance tests under Rule 3-09 of Regulation S-X for
each period presented. If in any period this investment was
significant in excess of the 20% level, SDI-Molan`s separate
financial statements are required to be included in your October
31,
2004 Form 10-K for all periods presented. These separate
financial
statements must be audited for periods that the 20% significance
level was exceeded and may be unaudited for each other period.
7. Please disclose how you are accounting for your guarantee of
the
bank loans made to SDI-Molan, the amount that you recorded in your
financial statements and the line item it is included in. If you
have not recorded anything in your financial statements related to
the guarantee, please disclose why not. See FIN 45.
8. Please disclose the approximate term of the guarantee, the
events
or circumstances that would require performance under the
guarantee,
and the nature of any recourse provisions that would enable you to
recover any of the amounts paid under the guarantee.
Note 11 - Redeemable Common Stock, page F-17
9. Please disclose the conditions in which stockholders can
require
you to purchase all or a portion of the redeemable common stock.
Note 12 - Stockholders` Equity, page F-17
10. For each issuance of warrants, please disclose the fair value
of
the warrants at the date of issuance. Please also disclose
whether
you used the Black-Scholes model for your issuances of warrants to
non-employees, including the assumptions you used.
Note 17 - Commitments and Contingencies, page F-23
11. Please disclose how you account for (a) step rent provisions
and
escalation clauses and (b) capital improvement funding and other
lease concessions, which may be present in your leases. Paragraph
5.n. of SFAS 13, as amended by SFAS 29, discusses how lease
payments
that depend on an existing index or rate, such as the consumer
price
index or the prime interest rate, should also be included in your
minimum lease payments. If, as we assume, they are taken into
account in computing your minimum lease payments and the minimum
lease payments are recognized on a straight-line basis over the
minimum lease term, the note should so state. If our assumption
is
incorrect, please tell us how your accounting complies with SFAS
13
and FTB 88-1.
* * * *
Please respond to these comments within 10 business days, or
tell us when you will provide us with a response. Please provide
us
with a supplemental response letter that keys your responses to
our
comments and provides any requested supplemental information.
Detailed letters greatly facilitate our review. Please file your
supplemental response on EDGAR as a correspondence file. Please
understand that we may have additional comments after reviewing
your
responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings 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 their filings;
* 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.
If you have any questions regarding these comments, please
direct them to Jeffrey Gordon, Staff Accountant, at (202) 824-5685
or, in his absence, to the undersigned at (202) 942-1774.
Sincerely,
Rufus Decker
Accounting Branch Chief
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Mr. James E. Reeder
February 18, 2005
Page 1 of 5
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0510
DIVISION OF
CORPORATION FINANCE