March 16, 2009
U.S. Securities and Exchange Commission BY EDGAR
100 F Street, N.E.
Washington, DC 20549
Attention: Mr. Kevin Woody
Accounting Branch Chief
Re: Oakridge Holdings, Inc.
Form 10-KSB for the Fiscal Year Ended June 30, 2008
Filed September 29, 2008
Form 10-Q for the Quarterly Period Ended September 30, 2008
Filed November 12, 2008
Form 10-Q for the Quarterly Period Ended December 31, 2008
Filed February 17, 2009
Definitive Proxy Statement
Filed October 27, 2008
File No. 000-01937
Ladies and Gentlemen:
On behalf of Oakridge Holdings, Inc. ("Oakridge" or the "Company"), I am pleased
to submit this response to the comments of the Staff on the above-referenced
filings, as set forth in Mr. Woody's letter to me dated March 3, 2009. For
convenience, the Staff's numbered comments are set forth below, followed by
Oakridge's responses.
Oakridge hereby represents that (i) it is responsible for the adequacy and
accuracy of the disclosure in the filing, (ii) Staff comments or changes to
disclosure in response to Staff comments in the filings reviewed by the Staff do
not foreclose the Securities and Exchange Commission from taking any action with
respect to the filing and (iii) Oakridge may not assert Staff comments as a
defense in any proceeding initiated by the Securities and Exchange Commission or
any person under the federal securities laws of the United States.
FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 2008
Item 1. Business
Cemetery Industry
1. Comment: You state that the U. S. Bureau of the Census expects the number of
deaths in the U.S. to be 302 million in 2025. This amount appears to be a
typographical error. Please revise your filing to correct this typographical
error or advise.
Response: The amount included in the filing is a typographical error. The
correct amount is 3.2 million according to the US Department of Commerce, Bureau
of the Census "Projections of the Population of the United States by Age, Sex,
and Race"; 1988 to 2080 series P-25, No. 1018. The Company will correct this
amount in future filings.
Financial Statements
Consolidated Balance Sheets
2. Comment: Please tell us how you have complied with SFAS 150, or tell us why
you believe it was not necessary to record the non-controlling interest in
preneed trust investments as a liability.
Response: The Company's understanding of SFAS 150 is that it applies to three
classes of freestanding financial instruments including mandatorily redeemable
financial instruments, obligations to repurchase the issuer's equity shares by
transferring assets, and certain obligations to issue a variable number of
shares. The non-controlling interest in the preneed trust investments does not
meet the definition of the three classes of freestanding financial instruments
for classification as a liability.
The non-controlling interest is a result of the consolidation of the trust fund
in the Oakridge Holdings, Inc. consolidated balance sheet in accordance with the
provisions of FIN 46R. Oakridge Holdings, Inc. holds no equity interest in the
trust itself. However, the trust is required to be consolidated in accordance
with FIN 46R.
Prior to the issuance of SFAS 160, there appeared to be diversity in practice
regarding the location of the non-controlling interests in the balance sheet.
Companies showed amounts of non-controlling interests as liabilities, equity, or
in the mezzanine section between liabilities and equity.
Oakridge made the decision to show its non-controlling interest in the preneed
trust investments in the mezzanine section of the balance sheet. Beginning with
the Company's fiscal year 2010, the non-controlling interest will be shown in
the equity section in accordance with SFAS 160.
Consolidated Statements of Operations
3. Comment: You have not provided a complete number for your revenue line item
for the year ended June 30, 2008. Also, you have presented earnings per share
as a negative number instead of a positive number for the year ended June 30,
2008. Please amend your filing to correct these errors.
Response: The correct revenue number is $11,240,378 and the negative number
included as earnings per share should have been a positive number. The Company
will amend this filing to correct these errors.
Consolidated Statements of Cash Flows
4. Comment: Please advise us the nature of the investing cash flows related to
the perpetual care and trust investments. Also, please tell us how you
determined the cash flows would net to zero. Within your response, reference
the authoritative accounting literature management relied upon.
Response: There are two types of trusts - land and preneed. The Company is
required to deposit a certain percentage of cash received from land and
mausoleum sales into a trust. The Company receives the interest and dividends
from the trust assets to be used for the upkeep and care of the cemetery
grounds. The principal amount of the trust will remain in the trust in
perpetuity.
The Company is required to deposit certain percentages of cash received for
preneed goods and services into a trust. Upon providing the goods or services
to the preneed customer, the Company receives the amount deposited in the trust
for that particular customer along with the interest earned on those funds.
The Company records the trust assets and liabilities on its balance sheet in
accordance with FIN 46R. The assets and liabilities on the balance sheet are
always equal in accordance with FIN 46R. Therefore, the change in the trust
assets and liabilities are always equal with no differences. Correspondingly,
the cash inflows and outflows from the trust will always net to zero.
The realized gains and losses on perpetual care and trust investments are offset
by a corresponding expense representing the realized earnings of these trusts
attributable to the non-controlling interest holders. Typically, gains and
losses would be shown as an adjustment to reconcile net income (loss) to net
cash from operating activities. However, the Company determined that such
presentation would not accurately depict cash flows from operations of the
Company as it would adjust net income (loss) when the gain (loss) had no impact
on the consolidated net income (loss). Therefore in a attempt to isolate all
changes in one type of activity, the Company included those gains (losses) in
the investing activity section of the statement of cash flows.
2. Summary of Significant Accounting Policies
Revenue Recognition
Cemetery and Mausoleum Space Revenue
5. Comment: Please tell us what consideration you have given to the bill and
hold criteria found in SAB 104 for certain of your preneed merchandise sales,
such as markers.
Response: Sales of preneed merchandise including grave boxes and markers are
recorded as revenue when the risk of loss has transferred to the customer. The
customer will typically pay for this merchandise prior to delivery of the
merchandise from the Company to the customer. Theses collections are recorded
on the balance sheet as deferred revenue.
Upon transfer of the asset and the risks and rewards of ownership to the
customer, the Company recognizes the sales amount in revenue.
Specifically, markers are paid for by the customer prior to the Company ordering
the marker. The cash received is recorded in deferred revenue on the Company's
balance sheet. Once the marker is fully paid and received, the marker is set on
the grave site and the risks and rewards of ownership are transferred to the
customer, and the Company recognizes revenue.
Aviation Ground Support Equipment
6. Comment: You record revenue from your contract with the U.S. Government on a
completed contract basis. Please describe the material terms of your U.S.
Government contract. Specifically, address how you compiled with ARB 43, SOP
81-1 or SAB 104, as appropriate.
Response: On September 28, 2005, the Company entered into a contract to design
and produce a maintenance lift to service a C5 aircraft for the U.S. Air Force.
The contract called for the design, production, and delivery of one maintenance
lift. It also called for certain deliverables and milestones throughout the
design and production of the equipment. The total amount of the contract is for
$1.3 million and, to date, the Company has received $514,116.6 for the
production of the equipment, welding inspection and engineering calculations.
Amounts remaining unpaid at the present time are for drawings, manual, and video
and the Company has not received full payment for the equipment.
As of June 30, 2006, the Company produced the engineering calculations for
review and met with the government to present the calculations. The Company
received a letter dated August 3, 2006 indicating the government accepted the
calculations and the Company received a payment of $158,500.
The Company has capitalized the cost of working on all aspects of this contract
in the inventory of finished goods on the general ledger. This cost includes
external costs invoiced for outside services and internal costs. The Company
has not recorded any revenue for this contract.
We have reviewed EITF 99-5 in regards to the accounting for pre-production costs
related to long-term supply contracts. While the contract with the government
may not be considered a long-term supply contract the discussion in EITF 99-5 is
relevant to the facts and circumstances surrounding the Company's contract.
The EITF reached consensus that the design and development costs for products
sold under a long-term supply should be expensed as incurred. However, if there
is a contractual guarantee that costs will be reimbursed by a third party, then
those costs should be capitalized and recognized as an asset.
Technically, the Company is not being reimbursed for its costs as there is a
profit built into each deliverable/milestone in the contract. Therefore, EITF
99-5 may not be right on point. However, it does provide guidance and support
to recording the costs associated with fulfilling the contract as an asset.
Outside of the EITF discussion, the contract is a combination of a service and
production contract. Under either circumstances, the costs incurred to fulfill
the obligation of the Company (costs to produce or provide the service) are
capitalized as inventory prior to delivering the equipment and deliverables. In
essence, the Company has an asset which will be converted to cash when the U.S.
Air Force pays the Company upon fulfillment of the contract.
Therefore, based on the EITF discussion and the accounting for costs of
production and costs of revenue, it is proper for the Company to capitalize the
costs incurred to fulfill the contract. Those costs will be capitalized until
the related revenue is recognized. At that time the asset will be expensed to
match the revenue and expenses.
SAB 101, C21, Non-Refundable upfront and milestone payments received in
connection with a research and development or similar arrangement, appears to
address the issue of revenue recognition where there are certain milestones
built into a contract to provide goods or services. SABs 103 and 104 were
issued to amend prior SABs including SAB 101. However, it appears that C21 has
not been amended by the subsequent SABs.
In interpretation of SAB 101, the Staff indicates that it appears as though
three methods of revenue recognition may be used depending on the specific
circumstances. While the interpretation specifically cites a pharmaceutical
company example, the facts and circumstances are relevant in forming a
conclusion on the Company's specific situation.
The revenue recognition model that would fit the Company's situation is the
performance method - actual revenue. Under this method, revenue is recognized
based on the non-refundable cash received to date. Future amounts to be
recognized are considered to be contingent and, therefore, have no impact on the
income recognized in the current period. For purposes of applying this method,
non-refundable cash received to date includes a receivable for a defined
milestone that has been achieved, assuming the collection is reasonably assured.
The percentage of completion model is then applied to the non-refundable cash
received to date to obtain the amount of revenue to be recognized on the
contract. The percentage complete is computed by determining the ratio of costs
incurred to date to the total expected contract costs. This ratio is then
multiplied by the non-refundable cash received to yield the total amount of
revenue to have been recognized.
One could make the argument that at certain points the Company is to provide
deliverables to the U.S. Air Force. At those times, could the Company record
revenue related to the sale of that element of the contract?
There are three easily definable deliverables in the contract - product
drawings, instructional media package, and the equipment. Stinar Corporation, a
subsidiary of the Company, has been in the business of producing equipment for
sixty one years using the completed contract method for recognizing revenue on
the equipment. Because the equipment is under the contract and the customer is
obligated to accept delivery upon inspection of the equipment, the Company
recognizes the revenue upon satisfactory completion of the inspection. The
Company has clearly indicated that the risk of ownership transfers to the
customer upon inspection approval. Therefore, the revenue for the equipment
should not be recognized until the U.S. Air Force inspects and accepts the
equipment.
As for the remaining deliverables, it appears that the deliverables are
milestones leading to the ultimate goal of obtaining the equipment. While
physical items will be delivered to the U.S. Air Force at these points in time,
the deliverables provide little value to the government without the equipment.
The Company does not know whether the U.S. Air Force could take the drawings to
another manufacturer to have the equipment manufactured. However, we do know
the U.S. Air Force is obligated to purchase 18 more pieces of the equipment with
one being under this contract. Therefore, the drawings appear to simply be a
checkpoint or milestone leading to the production of the equipment. To date,
the drawings are still being reviewed by the U.S. Air Force and have not been
accepted due to the U.S. Air Force now wanting to make new safety changes for
the equipment even though the equipment has been accepted.
Likewise, the instructional media package provides the U.S. Air Force no value
until the drawings have been accepted and they can use the equipment.
Therefore, it appears this is simply another milestone within the contract.
Therefore, the Company should recognize revenue on the performance method -
actual revenue received. Upon completion of the contract, all milestones will
be fulfilled and collection of the receivable will be reasonably assured.
However, as the SAB indicates, the revenue recognition method selected should be
based on applicable facts and circumstances in the particular situation. The
facts are that there will only be two payments with one already being received
and the other payment only being received once all the deliverables are
accepted.
As a result, if the Company used the percentage of completion method the Company
would be recognizing a material loss until the final payment is received. Using
the completed contract method provides a reader of the Company's financial
statements with reasonable information on the contract and will not mislead the
reader by reporting material losses in advance of a material profit.
5. Cemetery Perpetual Care Trusts
7. Comment: The narrative disclosure of the increase in trust assets from their
original cost basis does not appear to be consistent with the amounts you have
disclosed in your table.
Response: The amounts reflected in the narrative are the increase over the
original cost basis while the table reflects the current cost basis as of June
30, 2007 and June 30, 2008, respectively.
16. Segment Information
8. Comment: You disclose different amounts for segment operating profit in the
first and second tables than the amounts you disclosed in your reconciliation of
segment operating profit. Please revise or advise.
Response: The segment information in the notes to the audited financial
statements showing net income before taxes is the same information as is on the
income statement. That information shows $189,651 in income before taxes for
2008 and a loss before income taxes of $594,818 for 2007.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
9. Comment: Please disclose the symbol under which you common stock is in
future filings.
Response: The Company will include this information in future filings.
Signatures
10. Comment: In future filings, please include the signatures of your
comptroller or principal accounting officer. Please refer to General
Instructions D of Form 10-K.
Response: Robert Harvey is the Chief Executive Officer, Chief Financial Officer
and principal accounting officer of the Company. Stinar Corporation did have a
chief financial officer during the period of time covered by this report,
however, this individual was not an officer of the Company and reported to Mr.
Harvey who is in charge of the finance and accounting function for the
consolidated enterprise.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
General
11. Comment: Within your Management's Discussion and Analysis of Financial
Condition and Results of Operations, you disclose that you have hired a chief
financial officer. Please tell us how you have complied with the General
Instructions G to the Form 10-Q, or tell us why you believe it was not necessary
to have the new chief financial officer sign the Form 10-Q. Further, please
tell us how you have complied with the Exchange Act Rule 13a-14, or tell us why
you believe it was not necessary to have the new chief financial officer sign
the certification. In addition, please tell us how you determined it was not
necessary to file an Item 5.02 Form 8-K.
Response: Please refer to the Company's response to comment 10. Robert Harvey
is the Company's Chief Financial Officer and held this position during the
entire time period covered by this report and at the time of its filing. The
individual referred to in comment 11 was merely the chief financial officer of a
subsidiary of the Company and never held a position with the Company itself.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008
Consolidated Statements of Cash Flows
12. Comment: Please tell us how you determined it was not necessary to present
investing cash flows related to the perpetual care and trust investments.
Within your response, reference the authoritative accounting literature relied
upon.
Response: The Company determined that this presentation was not necessary due
to the condensed nature of the statement of cash flows and because the amounts
were not considered material as they will net to zero.
DEFINITIVE PROXY STATEMENT
Director Compensation
12. Comment: Please provide a director compensation table in future filings.
Please refer to item 402(r) of Regulation S-K for guidance.
Response: The Company will provide the requested table in future filings.
If we can facilitate the Staff's review of this letter, or if the Staff has any
questions on any of the information set forth herein, please telephone me at
(651) 454-5112. My fax number is (651) 454-5143.
Sincerely,
/s/ Robert C Harvey
Robert C. Harvey
President and Chief Executive Officer
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