Mail Stop 6010
Via Facsimile and U.S. Mail
June 24, 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 response letter dated May 31,
2005 to our comment letter dated May 12, 2005 and have the
following
comments. Where indicated, we think you should revise your
document
in response to these comments. If you disagree, 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 ask you to provide us with information
so
that we may better understand your disclosure. 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 on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Management`s Discussion and Analysis
Results of Operations
Analysis by Segment, pages 32-43
1. We have read your response to prior comment 2a. We understand
that
gains on sale of businesses result from your acquisition and
immediate resale of an insurance agency, financial service firm or
funeral home. The amount of these gains represent the difference
between consideration paid by you to sellers, which includes notes
payable at below-market interest, and the greater amount of
consideration received by you from your franchisees. Please
describe
the typical form of consideration received by you from your
franchisees. If this consideration includes notes receivable,
describe the principal terms of these instruments and, if
applicable,
the process, timing and frequency for including these notes in
your
securitization program. Describe the continuity of former agency
owner/management during agency acquisition, resale and integration
with your franchise system. Tell us the current presence of former
agency owner/management in your franchise system and describe how
they are compensated.
2. We note that the amounts presented in the disclosure proposed
in
your response to prior comment 2a did not aggregate to the income
statement caption, gain on sale of businesses. Also, the 2004 gain
on
sale from deferred payments disclosed in the table differs from
related disclosure in the first paragraph of your proposed
disclosures. Please provide MD&A disclosure that is internally
consistent and integrated with the applicable financial statement
captions for each year presented.
3. We have read your responses to prior comments 2d and 11. It
appears that your income statement presentation should be revised
so
that interest income is presented separately from participating
interest expense. Please tell us your basis under GAAP for this
net
presentation.
4. Please refer to your response to prior comment 3. Please
address
the following:
* Please tell us your basis under GAAP for netting the
franchisees`
use of your sales/service centers against commissions owed to
franchisees. Explain to us why the additional share of commissions
received by Brooke Franchise for the use of your sale/service
centers
is not considered rental income.
* Please expand your disclosure to clarify how you determine the
allocation of initial franchise fees between basic services and
Buyers Assistance Plan. Clarify why only the amount in excess of
the
initial franchise fee for $125,000 is allocated to the Buyers
Assistance Plan. Tell us how your accounting complies with
paragraph
13 of SFAS 45 and if the franchisee has commenced operations at
the
time these services are provided.
*
In your response to prior comment 12 you state that the Buyer
Assistance Plans services are provided under consulting
agreements.
Tell us if the fees for the various services provided are
specified
in the consulting agreements and whether the various services are
sold separately to support your statement that each service has
standalone value.
* It appears that providing post-closing marketing plan
adjustments,
advertising and training assistance are important services under
your
Buyers Assistance Plans. Please explain to us why you believe that
you perform substantially all the Buyer Assistance Plan services
before an acquisition closes. Tell us your basis under SFAS 45 and
EITF 00-21 for recognizing some of the fees immediately and
deferring
a relatively small portion of the initial fee until these services
are performed.
Capital Commitments, page 44
5. We have read your proposed revisions in response to prior
comments
6 and 7. It appears that the level of expected interest payments
is
high in relation to long-term debt. Please add footnote
disclosure
to the table that explains the nature of interest payments and
your
other contractual payments.
Off Balance Sheet Arrangements, page 45
6. We have read your response to prior comment 9. Please describe
specifically the obligations or liabilities, including contingent
obligations, arising from your off balance sheet activities that
are
reasonably likely to become material and the related possible
triggering events or state that none are known to exist. Describe
known trends or uncertainties that would reasonably result in a
material reduction of the availability of your off balance sheet
arrangements and the course of action that you would propose to
take
in response to such circumstances. Integrate your new disclosure
relating to transferred assets from loan sales and securitizations
with the amounts in Note 2.
Consolidated Financial Statements
Consolidated Statements of Operations, page 49
7. In your proposed disclosures in response to prior comments 2a
and
12 you state that you have a continuing obligation to pay the
deferred portion of the purchase price when due and you are not
obligated to prepay the deferred portion of the purchase price or
to
otherwise diminish the benefit of the below-market interest rate.
Please explain to us further your basis for classifying gain on
extinguishment of debt as revenues since it appears that gains
from
extinguishment of debt is incidental to your operations and not a
part of your major ongoing or central operations. Please cite
authoritative accounting literature to support your presentation.
Note 1. Summary of Significant Accounting Policies
(e) Revenue Recognition, pages 55 and 56
8. We note in your response to prior comment 12 that you recognize
initial franchise fees for BAP services using the percentage of
completion method. However, elsewhere you disclose that all
initial
franchise fees are contingent and paid only when an acquisition
closes. Please clarify how you recognize initial franchise fees
paid
for BAP services.
9. We note in your response to prior comment 15 that franchisees
typically borrow money from Brooke Credit to acquire agency assets
to
be converted into your franchise system or to pay initial
franchise
fees. Please explain to us your basis under GAAP for the immediate
recognition of gain on the sale of businesses to franchisees.
Tell
us your consideration of the guidance in SAB Topic 5:U.
(u) Securities, page 61
10. Your response does not appear to adequately address all issues
raised in prior comment 16. Please provide a separate accounting
policy for interest-only strip receivables and include all
disclosures required by SFAS 115. Tell us how the interest only
strip
receivables that are classified as part of securities differ from
those classified in a separate balance sheet caption. Explain your
basis for this separate classification.
Note 2. Notes Receivable, page 63
11. We have read your response to prior comment 17. Please provide
a
more detailed description of the basis for your conclusion that
the
qualifying SPEs are demonstrably distinct from the transferor as
stipulated in paragraph 36 of SFAS 140. Provide the computation
and
related analyses supporting your conclusion that at least 10% of
the
fair value of the beneficial interests in these qualifying SPEs is
held by parties other than the transferor, its affiliates or
agents.
Explain to us how you considered the following rights you retain
to
specified cash flows and your related activities and obligations
in
this evaluation:
* Interest only strip receivables
* Retained interests
* Servicing assets
* Financial guaranty coverage issued by DB Indemnity for business
loans transferred to qualified SPEs
* Collateralization provided by you or your franchisees for
business
loans transferred to qualified SPEs
* Your obligation to repurchase or redeem notes receivable
transferred to qualified SPEs before their maturity in the event
of
an uncured breech of warranty
12. We note that this 10% test is an ongoing test. Describe the
events or conditions that could cause these qualified SPEs to fail
the 10% test, the likelihood that such failures could occur in the
future and your basis for excluding this calculation from critical
accounting estimates.
13. In the Limited Liability Company Agreement that you provided
to
us, Lori Gebron appeared to be the only third party holder of
beneficial interests in this qualified SPE. In general and for
this
specific qualified SPE, describe the basis for your conclusion
that
such third parties were not affiliates or agents, as described in
paragraph 36 of SFAS 140, and that the transferor, its affiliates
and
agents could not unilaterally dissolve these qualified SPEs.
Describe
the consideration paid by such third parties in their purchase of
these beneficial interests. Demonstrate that Lori Gebron`s
ownership
of beneficial interest met the 10% test under SFAS 140.
* * * * *
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. You may wish to provide us with marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested information. Detailed letters
greatly facilitate our review. Please understand that we may have
additional comments after reviewing your amendment and responses
to
our comments.
You may contact Frank Wyman, Staff Accountant at (202) 551-
3660
or Don Abbott, Senior Staff Accountant, at (202) 551-3608, if you
have questions regarding comments on the financial statements and
related matters. In this regard, do not hesitate to contact me at
(202) 551-3679.
Sincerely,
Jim B. Rosenberg
Senior Assistant Chief Accountant
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Mr. Robert D. Orr
Brooke Corporation
June 24, 2005
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