CARTER LEDYARD & MILBURN LLP
Counselors at Law
2 Wall Street
New York, NY 10005-2072 1401 Eye Street, N.W.
Washington, DC 20005
Steven J. Glusband o (202) 898-1515
Partner o
o Tel (212) 732-3200 570 Lexington Avenue
Direct Dial: 212-238-8605 Fax (212) 732-3232 New York, NY 10022
E-mail: glusband@clm.com (212) 371-2720
September 8, 2005
Mr. Larry Spirgel
Assistant Director
Securities and Exchange Commission
450 Fifth St., N.W.
Washington, D.C. 20549-0506
Re: Magal Security Systems Ltd.
Form 20-F for the Fiscal Year Ended December 31, 2004
Filed June 30, 2005
File No. 0-21388
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Dear Mr. Spirgel:
On behalf of our client, Magal Security Systems Ltd. (the "Company"), we
are submitting this letter in response to the written comments of the Staff of
the Securities and Exchange Commission (the "Staff"), in a letter to Ms. Raya
Asher, Chief Financial Officer of the Company, dated July 28, 2005 (the "Comment
Letter"), with respect to the Company's Form 20-F for the Fiscal Year Ended
December 31, 2004 filed with the Securities and Exchange Commission on June 30,
2005.
Pursuant to Rule 472 under the Securities Act of 1933, we are
simultaneously filing the Amendment No. 1 to the Company's Form 20-F as
requested in the Comment Letter. We have repeated your numbered comments below
and have provided a response to each comment.
Consolidated Statements of Income, page F-5
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1. State separately your revenues and costs of revenues by goods and
services. Refer to Rule 5-03 of Regulation S-X.
The Staff's comment is duly noted; however, as prescribed in Rule 5-03(b)
of Regulation S-X, each class which does not account for more than 10 percent of
the sum of the items may be combined with another class. The Company's revenues
attributable to services comprise less than 10 percent of total revenues for all
periods presented. Accordingly, they have been combined with total revenues.
Mr. Larry Spirgel 2
Note 2 : Significant Accounting Policies
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Impairment of long lived assets, page F-14
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2. Tell us how you concluded no impairment losses were identified for
your long-lived assets. Specifically, we note that you have $5.8
million in long-lived assets related to your video-monitoring segment,
and this segment has incurred increasing operating losses for the last
three years.
The Company advises the Staff that in all groups of its assets, besides the
Video Monitoring Assets Group ("VMAG"), the Company did not note any events or
changes in circumstances which would indicate that its carrying amount may not
be recoverable. As for the VMAG, the Company considered the current-period
operating loss combined with the history of operating losses as an event which
required recoverability assessment of its long lived assets in compliance with
FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.
The carrying amount of the VMAG is not recoverable if it exceeds the sum of
the undiscounted cash flows expected to result from the use and eventual
disposition of the VMAG. The Company's assessment was based on the carrying
amount and expected undiscounted cash flows of the VMAG at the date it was
tested for recoverability. The cash flow estimate used covered the period which
represented the remaining useful life of the assets and include only the future
cash flows that are directly associated with and that are expected to arise as a
direct result of the use and eventual disposition of the VMAG.
The Company used the current forecast/budget as a starting point and
excluded the impact of future asset acquisitions so that the forecast included
only the costs and revenues associated with current existing assets in the VMAG.
The Company used the 2004 monitoring revenue and cost of sales to project future
cash flows. In addition, the Company reduced the annual VMAG revenue by a 10%
cancellation rate at the renewal stage (which is generally a 5 year contract
period) to account for adverse changes in our industry (based on market
competitors business experience ) and added 5% to the projected cost of sales to
account for increased service/equipment costs and included operating expenses
directly associated with the cash flow generated.
In conclusion, the sum of the identifiable undiscounted cash flows,
approximately $9 million, was greater than the $5.8 million carrying value of
the VMAG long-lived assets. Based upon this analysis, no impairment charge was
required.
The Company supplementally advises the staff that the video monitoring
operations were initiated approximately three years ago and that the historical
operating losses attributable to these operations mainly resulted from
significant initial marketing expenses. These expenses were devoted to gain
future sales and revenues, which will require the purchase of additional assets
when received.
Mr. Larry Spirgel 3
Revenue recognition, page F-15
------------------------------
3. We note that you are using "input method" to recognize revenue from
the installation of comprehensive security systems under the
percentage of completion method. Tell us why you believe the input
measure is a better measure of performance than the contract
milestones, an output measure, which is more reliable than the input
measure.
The Staff's comment is duly noted. According to Statement of Position No.
81-1, Accounting for the Performance of Construction-Type and Certain
Production-Type Contracts, the use of either input or output measures requires
the exercise of judgment and the careful tailoring of the measure to the
circumstances.
The Company supplementally advises the Staff that in its arrangements the
milestones are generally linked to delivery or installation of the projects at
the customer's site. These milestones are technical in their nature and do not
involve riskier ventures or projects. The milestones are merely a means of
setting a payment schedule.
The Company measures progress-to-completion using the input measures and
are made in terms of costs and efforts devoted to a contract. The Company does
not believe that contract milestones, an output measure, are appropriate for
implementation in its arrangements since actual delivery or progress of
installation of a meter fence, which are indicated by milestones, are not
indicative to a contract's progress. The construction of a fence project
includes installation of electronic devices, which represent significant efforts
devoted to the contract. Hence, although the achievement of a contract milestone
may cause the arrangement fee to become billable under the arrangement, the
amount of payments should not be used to measure progress-to-completion because
such amounts are not indicative of such progress.
The Company believes that the use of the percentage of completion method is
appropriate as the Company has the ability to make reasonably dependable
estimates as to the extent of progress towards completion, contract revenues and
contract costs. In addition, the executed contracts contain provisions that
clearly specify the enforceable rights regarding services to be provided and
received by the parties to the contracts, the consideration to be exchanged and
the manner and the terms of settlement, including in cases of termination for
convenience. In all cases the Company expects to perform its contractual
obligations and its customers are expected to satisfy their obligations under
the contract.
Based on the above analysis, the Company believes that "input" measurements
are appropriate to assess a project's progress and to be the method used for
related revenue recognition.
4. Disclose if title and risk of loss transfers to your customer upon
their acceptance of each milestone under your contracts. Also, please
disclose more detail about the origin of your unbilled accounts
receivable. Specifically, disclose why you are recognizing revenue
prior to billing for each milestone under the contract and
Mr. Larry Spirgel 4
the approximate time frame that elapses between an unbilled accounts
receivable and a billed accounts receivable.
The Staff's comment is duly noted and the Company has revised Note 2m to
clarify its disclosure.
Commitments and Contingent Liabilities
--------------------------------------
Guarantees, page F-27
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5. Please revise to comply with the disclosure requirements of FIN 45.
The Company believes that none of its guarantees are under the scope of
FASB Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
45"), since, as specified in paragraph 4 of FIN 45, "...the scope of this
Interpretation does not encompass indemnifications or guarantees of an entity's
own future performance...". The Company has revised Note 9e to clarify its
disclosure.
I have been authorized by the Company to acknowledge that: (i) the Company
is responsible for the accuracy of the disclosure in its filings; (ii) comments
by the Staff, or changes to disclosure in response to comments by the Staff, do
not foreclose the Commission from taking any actions with respect to the
Company's filings; and (iii) 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.
If you have any further questions, please do not hesitate to contact me.
Very truly yours,
/s/Steven J. Glusband
Steven J. Glusband
SJG:tco
Enclosures
cc: Ms. Raya Asher, Chief Financial Officer