Mail Stop 03-09
Via Facsimile and U.S. Mail
May 12, 2005
Mr. Robert D. Orr
Chairman of the Board and Chief Executive Officer
Brooke Corporation
10950 Grandview Drive, Suite 600
Overland Park, Kansas 66210
RE: Brooke Corporation
Form 10-K for the fiscal year ended December 31, 2004
Filed March 31, 2005
File No. 001-31698
Dear Mr. Orr:
We have reviewed your filing and have the following
comments. We have limited our review to only your financial
statements and related disclosures. Where our comments call for
disclosure, we think you should amend your document in response to
these comments. In some of our comments, we ask you to provide us
with supplemental information so that we may better understand
your
disclosure. Please amend your Form 10-K for the fiscal year ended
December 31, 2004 and respond to these comments within 15 business
days or tell us when you will provide a response prior to the
expiration of the 15-day period. If we have requested additional
information as well as an amendment or if you disagree with any
comment that calls for disclosure, please provide this letter
prior
to your amendment. You may wish to provide us with marked copies
of
the amendment to expedite our review. Your letter should key your
responses to our comments. Detailed letters greatly facilitate our
review. Please file your letter on EDGAR under the form type label
CORRESP. Please understand that we may have additional comments
after
reviewing your amendment and responses to our 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 comment 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 fiscal year ended December 31, 2004
Management`s Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Non-GAAP Financial Measures, page 30
1. Your disclosure of non-GAAP financial measures includes
presentations of recurring and non recurring revenues, and
recurring
and non-recurring expenses. The elimination of recurring items
from
the most comparable GAAP measure appears to have the effect of
smoothing earnings. While the acceptability of a non-GAAP
financial
measure that eliminates recurring items from the most comparable
GAAP
measure depends on all facts and circumstances, we do not believe
that a non-GAAP measure that has the effect of smoothing earnings
is
appropriate. In addition, we note that the items you exclude have
the following attributes.
? there is a past pattern of these items occurring in each
reporting period;
? the financial impact of these items will not disappear or
become
immaterial in the future; and,
? there is no unusual reason that the company can substantiate
to
identify the special nature of these items.
These attributes raise significant questions about
management`s
assertions as to the usefulness of this measure for investors and
the
appropriateness of its presentation in accordance with Item 10 of
Regulation S-K. Please refer to "Frequently Asked Questions
Regarding the Use of Non-GAAP Financial Measures" on our website
at
www.sec.gov/divisions/corpfin/faqs/nongaapfaq.htm that we issued
on
June 13, 2003. Please revise your filing to remove all references
to
these measures or tell us how your disclosure complies with Item
10
of Regulation S-K.
Analysis by Segment, pages 32 - 43
2. An objective of MD&A is to provide information about the
quality
and potential variability of a company`s earnings and cash flow to
facilitate investors` determination of the likelihood that past
performance is indicative of future performance. This disclosure
should include a discussion of known trends and uncertainties. In
particular, we noted insufficient explanations for the 2004
increase
in gain on sale of businesses and initial franchise fees for basic
services, the 2004 decrease in commissions paid to franchisees as
a
percentage of commissions received from insurers and the 2004
decrease in participating interest expense as a percentage of
interest income. Also, it is unclear to us how the $1.4 million
increase in policy fee income could relate primarily to Texas All
Risk General Agency, which you acquired for $1 million. Please
expand
your MD&A to fully explain and quantify the factors underlying
changes in these income statement amounts for each period
presented.
3. Please expand your discussion in MD&A relating to the following
activities.
* Explain specifically how commissions paid to franchisees are
reduced for franchisee use of your sales/service centers. Describe
how these costs are allocated and the expected impact of such
franchisee support programs on the level of future commissions
paid.
* Explain specifically how initial franchise fees are classified
as
fees for basic services or fees for buyers` assistance plans
("BAP").
Include a discussion of the facts and circumstances underlying
your
decision in fourth quarter of 2003 to categorize a significantly
greater share of initial franchise fees as initial fees for basic
services.
* Disclose, and explain to us, how your BAP consulting fees are
structured, for example hourly, retainer or contingent, how they
are
billed in relation to agency acquisition and integration, and how
you
determined that you have no continuing obligation upon receipt of
these consulting fees.
* Provide a full description of your accounting for gains on sale
of
businesses. Given your disclosure that this gain results primarily
from discounted interest rates on amounts owed to sellers, we do
not
understand how the 2004 sale of six agencies produced a 49% gain
over
the original purchase price.
* Provide a full description of your accounting for seller
consulting
fees. Your disclosure appears to indicate that this consulting
process spans the period from initial discussions between you and
the
agency, agency purchase by you, sale of the agency to a franchisee
and subsequent operational integration. Tell us how your
consulting
fees are structured, for example hourly, retainer or contingent,
how
they are billed in relation to agency acquisition and integration
structure and how you determined that you have no continuing
obligation upon receipt of these consulting fees.
* Clarify the nature of your expected profit pattern related to
the
sale of notes receivable. Your disclosure appears to indicate that
the full amount of expected spreads on both the servicing and
interest benefits associated with securitized notes are recognized
immediately. Future profit appears to represent only the return
assumption implicit in the discount rate used to compute present
value.
* Explain fully the term, seller discounts, and disclose the
related
amounts and income statement classification. Tell us how you
determined that you have no continuing obligation upon receipt of
these seller discounts.
4. Based on the preceding comment, please revise your revenue
recognition disclosure in Note 1, as appropriate.
Liquidity and Capital Resources, page 43
5. Please provide a robust discussion of your expected sources and
needs for capital that covers planned capital commitments for
agency
acquisitions and franchise statement balances, expected cash flows
related to the purchase and sale of your business inventory and
subsidiaries, for example insurance agencies, and expected
proceeds
from your loan securitization program. Discuss the impact of known
trends and uncertainties on the expected mix and cost of capital
resources. Also, on page 43, you have vague references to the
expected cash flows and timeframes related to the sale of note
participations or business inventory. Please quantify these
expected
amounts and specify the timeframes.
Capital Commitments, page 44
6. Please include purchase obligations related to capital
commitments
for planned franchisee acquisitions and financing of franchise
statement balances and purchase of business inventory in the Table
of
Contractual Obligations or tell us why these obligations are not
included.
7. It appears that scheduled interest payments on long-term debt
are
excluded from the table. Please include interest payments in the
table or disclose, and explain to us, why interest payments are
excluded. If you believe that interest payments should be
excluded
from the table, please expand your liquidity and capital resources
disclosures to discuss the amount and timing of interest payments
necessary to understand your future cash requirements. Please
refer
to section IV of Financial Reporting Release 72.
Critical Accounting Policies, page 44
8. We note that you list critical accounting estimates but provide
no
further discussion or analysis. Please expand your disclosure to
include an analysis of the uncertainties in applying the critical
accounting policies and the related variability that is reasonably
likely to result over time. This discussion should cover how you
identified your critical accounting estimates, the historical
accuracy of this estimate, its sensitivity to changes in key
assumptions and the expected likelihood of changes in the future.
We
believe that disclosures explaining the likelihood that materially
different amounts would be reported under different conditions or
using different assumptions is consistent with the objective of
MD&A.
Please refer to Section V of SEC Release No. FR-72.
Off Balance Sheet Arrangements, page 45
Please provide in a separate section of MD&A the information
required
by Item 303(a)(4) of Regulation S-K. 9.
Quantitative and Qualitative Disclosures about Market Risk, page
45
10. Please revise to provide the disclosures required by Item 305
of
Regulation S-K outside of the financial statements. Please refer
to
our Questions and Answers about the New "Market Risk" Disclosure
Rules dated July 31, 1997.
Consolidated Financial Statements
Consolidated Statements of Operations, page 49
11. It appears that your presentation of "Operating Income" lines
items does not comply with the presentation of Net sales and gross
revenues under Article 5-03 of Regulation S-X. Please tell us how
items, such as interest income (net), gain on sale of businesses,
gain on sale of notes receivable, and gain on extinguishment of
debt
are considered revenues under Article 5 of Regulation S-X.
Note 1. Summary of Significant Accounting Policies
(e) Revenue Recognition, pages 55 and 56
12. Please expand your disclosure to address the following:
* Clarify the terms of your contingent and profit sharing
arrangements with insurance companies.
* It appears that your franchises are revenue arrangements with
multiple deliverables. Please provide the disclosures required by
paragraph 18 of EITF 00-21. Please clarify how you allocate the
initial franchise fee to BAP related services included in the
initial
fee. Disclose the input and output measures used to recognize
fees
associated with a particular service using the percentage of
completion method.
* Please disclose how you recognize loan origination fees and
related
direct costs.
(g) Amortization of Intangible Assets, page 57
13. Please tell us the contractual nature of renewal rights
purchased
in connection with youryour` acquisition of insurance agencies and
explain the basis for your conclusion that an appropriate
amortization period for these rights is 15 years. Also, it is
unclear
to us how these renewal rights relate to agency acquisitions
described in Note 1(i). Please provide appropriate clarification
in
your disclosure here and linkage with disclosures in Notes 1(i)
and
12. If renewal rights relate to agencies that have been resold or
are
planned to be resold, please refer us to the technical guidance
upon
which you based your decision to capitalize and amortize these
assets.
(i) Investment in Businesses, page 58
14. Please provide references to the authoritative literature that
served as the basis for your accounting for investments in
businesses
that are acquired but not resold "simultaneously". Provide
expanded
your disclosure describing those factors that distinguish between
insurance agencies acquired to be resold as disclosed in Note 1(i)
and insurance agencies acquired to be held for investment and
operated by youyou as disclosed in Note 12. Tell us the income and
expenses for each period presented relating to agencies held for
sale,not resold "simultaneously",", and agencies held and used .
(p) Principles of Consolidation, pages 60-61
15. Please tell us the basis for your conclusion that the
franchisees
are not variable interest entities under FIN 46R. Please expand
your disclosures to clarify why Brooke Acceptance Company LLC,
Brooke
Captive Credit Company 2003 LLC and Brooke Securitization Company
2004A LLC are not consolidated.
(u) Securities, page 61
16. We note that your asset securitizations include retained
interests, retained equity and interest-only strip receivables.
Please expand your accounting policy for securities and add an
accounting policy for interest-only strip receivables to provide
the
disclosures required under SFAS 140. Also, provide a separate
footnote with the disclosures required by SFAS 115 for both
securities and interest-only strip receivables.
Note 2. Notes Receivable, page 63
17. Please provide us with the basis for your conclusions that
Brooke
Acceptance Company LLC, Brooke Captive Credit Company 2003 LLC and
Brooke Securitization Company 2004A LLC met the criteria as
qualified
special purpose entities listed in paragraph 35 of SFAS 140.
Note 4. Bank Loans, Notes Payable and Other Long-Term Obligations,
page 70
18. Please disclose the amount and classification of assets and
liabilities relating to businesses purchased that collateralize
sellers notes payable. Link this disclosure to Note (g), Note (i)
and
Note 12.
Note 10. Segment and Related Information, page 74
19. Please provide the information about reported segment profit
or
loss in the summaries for each year presented. We were unable to
determine how these summaries reconciled to segment profits in the
table on page 32 of MD&A. Provide the reconciliations as required
by
paragraph 32 of SFAS 131.
Note 17. Contingencies, page 82
20. Please expand this disclosure to cover all material
commitments,
including those related to planned agency acquisitions, funding of
franchise statement balances and financial guarantee insurance.
* * * * *
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.
Since the company and its management are in possession of all the
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 comment, 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 filings;
* Staff comments or changes to disclosure in response to staff
comments in the filings reviewed by the staff 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 Frank Wyman, Staff Accountant at (202) 942-
2851
or Don Abbott, Senior Staff Accountant, at (202) 551-3608, if you
have questions regarding the comment. In this regard, do not
hesitate
to contact me at (202) 942-1803.
Sincerely,
Jim B. Rosenberg
Senior Assistant Chief Accountant
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Mr. Robert D. Orr
Brooke Corporation
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