e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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or
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TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-25679
BROOKE CAPITAL
CORPORATION
(Exact name of registrant as
specified in its charter)
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Kansas
(State or other jurisdiction
of
incorporation or organization)
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48-1187574
(I.R.S. Employer
Identification No.)
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8500 College Boulevard,
Overland Park, Kansas 66210
(Address of principal executive
offices) (Zip Code)
Registrants telephone number:
(913) 661-0123
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, Par Value $.01 per share
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American Stock Exchange
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Securities registered under Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act of
1933. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of
1934. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers in
response to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer, non-accelerated filer and smaller
reporting company in
Rule 12b-2
of the Exchange Act. (Check One):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates, computed by reference to the price at
which the stock was last sold, as of June 30, 2007, was
$6,570,491.*
* Based on a private transaction.
The number of shares of registrants common stock,
$.01 par value, outstanding on February 29, 2008 was
8,475,817.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain specified portions of our definitive information
statement relating to the registrants Annual Meeting of
Stockholders, to be held on April 24, 2008, are
incorporated by reference in Part III to the extent
described therein.
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
We caution you that this annual report on
Form 10-K
includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995
and is subject to the safe harbor created by that Act. Among
other things, these statements relate to our financial
condition, results of operations and business. These
forward-looking statements are generally identified by the words
or phrases will, will allow, will
continue, would, would be,
expect, expect to, intend,
intend to, anticipate, is
anticipated, foresee, estimate,
plan, may, believe,
implement, build, project or
similar expressions and references to strategies or plans.
While we provide forward-looking statements to assist in the
understanding of our anticipated future financial performance,
we caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date that
we make them. Forward-looking statements are subject to
significant risks and uncertainties, many of which are beyond
our control. Although we believe that the assumptions underlying
our forward-looking statements are reasonable, any of the
assumptions could prove to be inaccurate. Actual results may
differ materially from those contained in or implied by these
forward-looking statements for a variety of reasons. These risks
and uncertainties are discussed in more detail under
Business, Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations in this report and
include, but are not limited to:
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A significant part of our business strategy involves adding new
franchise locations, and our failure to grow may adversely
affect our business, prospects, results of operations and
financial condition;
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Our franchisees financial performance may adversely affect
their ability to repay amounts due to us;
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Carrier override and contingent or profit sharing commissions
are difficult to predict, and any decrease in our receipt of
such payments will adversely affect us;
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Potential litigation and regulatory proceedings regarding
commissions, fees, contingency payments, profit sharing and
other compensation paid to brokers or agents could materially
adversely affect our financial condition;
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Our business is impacted by the cyclical pricing of property and
casualty insurance, which may adversely affect our
franchisees performance and, thus, our financial
performance;
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A soft market in the insurance industry may affect
our financial performance;
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We may not be able to successfully convert existing agencies
into new franchises;
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Fluctuation in experience regarding current mortality,
morbidity, persistency and interest rates relative to expected
amounts used in pricing life insurance could adversely affect
our life insurance business;
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Our business, results of operations, financial condition or
liquidity may be materially adversely affected by errors and
omissions;
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We are dependent on key personnel;
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Termination of our professional liability insurance policy would
adversely impact our financial prospects and our ability to
continue our relationships with insurance companies;
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Adverse conditions in credit markets or changes in access to
credit may adversely affect our ability to add new franchise
locations;
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Because a significant part of our insurance-related revenues and
loans derive from operations located in five states, our
business may be adversely affected by conditions in these states;
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We may not be able to accurately report our financial results or
prevent fraud if we fail to maintain an effective system of
internal controls over financial reporting;
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We compete in a highly regulated industry, which may result in
increased expenses or restrictions in our operations;
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Our pending transaction to acquire a non-standard automobile
insurance company may not close or close when expected; and
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Changes in economic, political and regulatory environments,
governmental policies, laws and regulations, including changes
in accounting policies and standards and taxation requirements
(such as new tax laws and new or revised tax law
interpretations) could materially adversely affect our
operations and financial condition.
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We expressly disclaim any obligation to update or revise any of
these forward-looking statements, whether because of future
events, new information, a change in our views or expectations,
or otherwise. We make no prediction or statement about the
market performance of our shares of common stock.
EXPLANATORY
NOTE
On November 15, 2007, Brooke Capital Corporation completed
a merger pursuant to an Agreement and Plan of Merger dated
August 31, 2007, as amended (the Merger
Agreement), by and among Brooke Capital Corporation,
Brooke Corporation and Brooke Franchise Corporation. Pursuant to
the Merger Agreement, Brooke Franchise Corporation was merged
with and into Brooke Capital Corporation, with Brooke Capital
Corporation continuing as the surviving corporation.
At the time of the merger transaction, both Brooke Franchise
Corporation and Brooke Capital Corporation were under the common
control of Brooke Corporation. For this reason, the combination
of the two merged entities has been accounted for in a manner
similar to the pooling of interest method (with assets and
liabilities transferred at their then-current carrying amounts).
Consistent with this method of accounting, Brooke Capital
Corporations results of operations for 2007 are reported
as if the Merger had occurred on January 1, 2007. Financial
statements for prior years are presented in a similar manner for
the period of time during which the entities were under common
control (December 8, 2006 to December 31, 2006). For
all periods prior to December 8, 2006, Brooke Franchise is
deemed to be the predecessor and only its results of operation,
and not those of Brooke Capital Corporation, are presented.
Where deemed relevant for comparative purposes, the results of
operations for Brooke Capital Corporation prior to
December 8, 2006, have been included here and in our
Managements Discussion and Analysis of Financial Condition
and Results of Operations. Such information is identified as
pro forma.
PART I
References in this report to we, us and
our are to Brooke Capital Corporation and one or
more of our subsidiaries, as the context requires.
General
Our companys core business is the operation of insurance
companies that issue policies sold by independent insurance
agents. As the result of our merger with Brooke Franchise
Corporation in November 2007, our insurance company business is
now supported by a large independent insurance agency that
distributes, or sells, policies issued by insurance companies.
As such, we conduct business within two primary business
segments. The first segment consists of our insurance company
operations, including the issuance of life insurance policies
and annuity products by First Life America Corporation, a Kansas
life insurance company, and the proposed issuance of auto
insurance policies by Traders Insurance Company, a Missouri
property and casualty insurance company which we have agreed to
acquire. The second segment consists of our insurance agency
operations, including our insurance agency franchising business
and our insurance agency consulting activities through Brooke
Capital Advisors, Inc.
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We were incorporated under the laws of the State of Kansas on
July 10, 1996, under the name of First American Capital
Corporation. In 2007, we amended our articles of incorporation,
changing our name to Brooke Capital Corporation.
We are a majority owned subsidiary of Brooke Corporation; a
NASDAQ Global Market listed company trading under the symbol
BXXX. Brooke Corporation is a Kansas corporation
that acts as a holding company, including its ownership of
approximately 81% of our common stock and 100% of the common
stock of Delta Plus Holdings, Inc. (Delta Plus),
which owns 100% of Traders Insurance Company (TIC).
Brooke also has a 62% ownership of Brooke Credit Corporation
d/b/a Aleritas Capital Corporation (OTCBB:BRCR)
(Aleritas) and 100% ownership of Brooke Bancshares,
Inc., the parent company of Brooke Savings Bank.
We are the parent company of First Life America Corporation, a
life insurance company (First Life), and Brooke
Capital Advisors, Inc. (BCA), a loan broker and
consultant for general insurance agencies specializing in the
sale of hard-to-place and niche insurance policies. Subject to
the closing of our agreement to acquire Delta Plus, we expect to
become the parent company of Delta Plus and the indirect owner
of TIC.
Insurance
Company Operations
Life
Insurance and Annuity Product Sales.
First Life sells life insurance and annuity products in eight
states throughout the Midwest and brokers life, health,
disability and annuity products of unrelated insurance companies.
Products of First Life. The primary
insurance products currently being marketed by First Life are as
follows:
Golden Eagle Final Expense is permanent whole life
insurance available on a simplified issue or graded death
benefit basis. The simplified issue product is issued for issue
ages 50 to 85 with death benefit coverage ranging from a
minimum of $2,500 to a maximum of $25,000. The graded death
benefit product is for issue ages 50 to 80 with death
benefit coverage ranging from a minimum of $2,000 to a maximum
of $10,000. The policy includes a living benefit rider that pays
the actuarial present value of death benefit upon terminal
illness or permanent confinement to a qualified nursing home.
Premiums are level for life and vary by risk class, sex and
issue age. First Life is in the process of modifying the
premiums from unismoker to non-tobacco/tobacco rates. First Life
expects to bring these new premium rates to the market in 2008.
First Whole Life is a permanent whole life insurance
product with guaranteed level premiums and death benefits. Issue
ages are 0 (30 days) to age 80. Rate classes include
preferred non-tobacco, non-tobacco and tobacco. The product is
non-participating. Available riders include accidental death,
accelerated living benefit, waiver of premium, terminal illness
and long-term care.
First Term is a level term life insurance product with
term periods of 10, 15, 20 and 30 years. Both fully
guaranteed and partially guaranteed premium options are
available. For the partially guaranteed option, premiums are
level for 5 years on the 10 year term, 10 years
on the 15 year term, 13 years on the 20 year term
and 17 years on the 30 year term, increasing annually
thereafter. Rate classes include non-tobacco, preferred tobacco
and tobacco. Issue ages for the 10, 15 and 20 year are 18
to 60 for all classes. Issue ages for
30-year
non-tobacco are 18 to 50, and issue ages for 30 year
preferred tobacco and tobacco are 18 to 45. Available riders
include return of premium, accidental death, accelerated death
benefit and waiver of premium.
Value Builder is a modified payment whole life insurance
policy with a flexible premium deferred annuity rider. The
policy requires premium payments to be made for a certain number
of years after which time the policyholder is entitled to policy
benefits without making future payments. The product combines
both a ten and twenty payment period based on the issue age of
the insured. Issue ages from age 0 (30 days) to 20 and
66 to 80 are ten pay policies and issue ages from 21 to 65 are
twenty pay policies. Premium payments are split between life and
annuity based on percentages established in the product design.
First year premium payments are allocated 100% to life insurance
and renewal payments are split 50% to life and 50% to annuity.
The product is being sold in premium units with the ability to
purchase either fractional or multiple units. At
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the end of the required premium paying period, the policyholder
may continue to make full premium payments into the annuity
rider to provide for greater annuity accumulations.
First Step is a juvenile term product issued from
age 0 (30 days) to age 15. Coverage is sold in
units. One unit, consisting of a single premium payment of $100
purchases $5,000 of death benefit coverage, while two units,
consisting of a single premium payment of $200 purchases $10,000
of coverage. The product contains a conversion provision
allowing it to be converted to a whole life policy up to five
times the initial face amount prior to age 21.
First Flex I is a flexible premium deferred annuity for
ages 0 to 84. The initial interest rate is guaranteed for
one contract year with a minimum guaranteed interest rate of 3%.
The surrender charge period is seven years and up to 15% of the
account value can be withdrawn each year without incurring a
surrender charge. If the owner becomes confined to an extended
care facility or hospital, the surrender charge may be waived up
to a certain limit. The minimum deposit is $100.
First Max I is a single premium deferred annuity for
ages 0 to 90. The initial interest rate is guaranteed for
one contract year with a minimum guaranteed interest rate of 3%.
The surrender charge period is five years and up to 15% of the
account value can be withdrawn each year without incurring a
surrender charge. If the owner becomes confined to an extended
care facility or hospital, the surrender charge may be waived up
to a certain limit. The minimum deposit is $500.
First Max III is a single premium deferred annuity
for ages 0 to 90. The initial interest rate is guaranteed
for three contract years with a minimum guaranteed interest rate
of 3%. The surrender charge period is three years. If the owner
becomes confined to an extended care facility or hospital, the
surrender charge may be waived up to a certain limit. The
minimum deposit is $500.
Easy Pack contains short form applications for simplified
underwriting and quick issue. Products included in the Easy Pack
are First Whole Life, First Term, First Step, Golden Eagle Final
Expense, First Flex I, First Max I and First Max III. The
Easy Pack is designed for the agent and consumer to receive
quick underwriting decisions on the small face policies.
Product Marketing and Sales. First
Lifes marketing strategy is to provide life insurance and
annuity products that are beneficial to the consumer and
profitable. As such, First Life is continually seeking new
markets for its products primarily by utilizing its existing and
new insurance agents to promote the sales of its products. First
Life sells its products through agents. These agents receive
commissions and, subject to qualification, promotional
incentives from First Life based on premiums collected on the
products sold. First Life contracts the independent agents
directly or through independent marketing organizations referred
to as IMOs. IMOs generally are organizations that align multiple
independent agents with specific insurers and products. The IMOs
receive a portion of the overall commissions paid by First Life
on products sold by the agents. The IMOs recruit, train,
contract and provide other support functions to the independent
agents.
First Life is currently licensed to transact life and annuity
business in the states of Kansas, Texas, Ohio, Illinois,
Oklahoma, North Dakota, Kentucky and Nebraska. Due to the varied
processes of obtaining admission to write business in new
states, management cannot reasonably estimate the time frame for
expanding its marketing presence.
Insurance Inforce. The following table
provides certain information about First Lifes volume of
life insurance coverage inforce for each of the last three years:
Amounts of Insurance (1)
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(Shown in Thousands)
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2007
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2006
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2005
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Beginning of the year
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$
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154,674
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$
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163,353
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$
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160,123
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Issued during year
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9,922
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9,937
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26,306
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Reinsurance assumed
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4,991
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4,651
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1,096
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Revived during year
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2,240
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2,168
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2,147
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Lapse, surrender and decreased
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(18,013
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(25,435
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(26,319
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In-force end of year
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$
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153,814
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$
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154,674
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$
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163,353
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(1) |
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Excludes accidental death benefits (shown in thousands) of
$29,594, $31,184 and $33,235 in 2007, 2006, and 2005,
respectively. |
The following table provides certain information about First
Lifes policy count for each of the last three years:
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(Number of Policies)
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2007
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2006
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2005
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Beginning of the year
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9,974
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9,856
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8,318
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Issued during year
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1,101
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1,137
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2,516
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Reinsurance assumed
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142
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135
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55
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Revived during year
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125
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143
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110
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Lapse, surrender and decreased
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(1,010
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(1,297
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(1,143
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In-force end of year
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10,332
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9,974
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9,856
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As evidenced by the tables above, the average face amount per
policy issued has approximated $10,500, $8,700 and $9,000 during
2005, 2006 and 2007 respectively. The relatively small face
amount issued is directly related to increased focus being
placed on production of First Life Final Expense product over
the past three years. The Final Expense product has a maximum
face amount of $25,000, a level significantly less than the
other products historically marketed by First Life.
Reinsurance. In order to reduce the
financial exposure to adverse underwriting results; insurance
companies generally reinsure a portion of their risks with other
insurance companies. First Life has entered into agreements with
Optimum Re Insurance Company (Optimum Re) of Dallas,
Texas, and Wilton Reassurance Company (Wilton Re) of
Wilton, Connecticut, to reinsure portions of the life insurance
risks it underwrites. Pursuant to the terms of the reinsurance
agreements, First Life retains a maximum coverage exposure of
$50,000 on any one insured. In the event that the reinsurance
companies are unable to fulfill their obligations under the
reinsurance agreements, First Life remains primarily liable for
the entire amount at risk.
First Life is party to an Automatic Retrocession Pool Agreement
(the Reinsurance Pool) with Optimum Re, Catholic
Order of Foresters, American Home Life Insurance Company and
Woodmen of the World. The agreement provides for automatic
retrocession of coverage in excess of Optimum Res
retention on business ceded to Optimum Re by the other parties
to the Reinsurance Pool. First Lifes maximum exposure on
any one insured under the Reinsurance Pool is $50,000.
Underwriting. First Life follows
underwriting procedures designed to assess and quantify
insurance risks before issuing life insurance policies. Such
procedures require medical examinations (including blood tests,
where permitted) of applicants for policies of life insurance in
excess of certain policy limits. These requirements are
graduated according to the applicants age and vary by
policy type. The life insurance subsidiary also relies upon
medical records and upon each applicants written
application for insurance, which is generally prepared under the
supervision of a trained agent.
Actuarial Services. First Life has a
contract with a consultant to provide actuarial services.
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Investments. The Kansas Insurance Code
restricts the investments of insurance companies by the type of
investment, the amount that an insurance company may invest in
one type of investment, and the amount that an insurance company
may invest in the securities of any one issuer. The restrictions
of the Kansas Insurance Code are not expected to have a material
effect on the investment return of First Life. Brooke Capital
Corporation is not subject to the limitations, which restrict
only the investments made by First Life. Currently, investments
of First Life are held in both short-term, highly liquid
securities and long-term, higher yield securities. The
investment strategy is focused primarily on matching maturities
to the anticipated cash needs of First Life, but also attempts
to match the investment mix to others within First Lifes
industry peer group.
Financial Information. See Note 11
to Item 8 Financial Statements in this
Form 10-K
for financial information regarding our insurance company
operations.
Contemplated
Non-Standard Automobile Insurance
We plan to offer proprietary non-standard automobile insurance
through independent insurance agencies. For this reason, we
intend to consummate the transactions contemplated in an
Exchange Agreement dated August 31, 2007 among us, Brooke
Corporation, and Delta Plus (the Exchange
Agreement). Under the Exchange Agreement, Brooke
Corporation will contribute to us all of the outstanding stock
of Delta Plus in exchange for consideration equal to
500,000 shares of the Companys common stock, with an
opportunity to receive additional shares of the Companys
common stock pursuant to an earn-out.
Overview. Delta Plus is a holding
company based in Kansas City, Missouri that directly or
indirectly owns 100% of Traders Insurance Connection, Inc.
(Connection), Traders Insurance Company
(TIC), Professional Claims, Inc. (PCI),
and Christopher Joseph & Company (CJC).
TIC is Delta Pluss primary operating subsidiary and the
revenues of Connection and PCI are primarily derived from
providing management, professional and administrative services
to TIC.
TIC is a Missouri domiciled property-casualty insurance company
that writes non-standard private passenger auto liability and
physical damage business in the states of Arkansas, Missouri,
Kansas, Oklahoma and New Mexico. TICs auto insurance
policies are marketed through independent agents. Connection
provides management services to TIC, including marketing, sales,
risk selection and policy administration services. PCI operates
as an independent claims management company for TIC and other
unrelated insurance companies, providing for the management,
investigation and adjusting of insurance claims. CJC is a retail
insurance agency that currently generates a very insignificant
part of Delta Pluss revenues.
Brooke Corporation acquired 100% of Delta Plus on March 30,
2007.
Insurance Company Activities of
TIC. TIC underwrites and sells non-standard
personal automobile insurance policies that provide coverage to
drivers who find it difficult to obtain insurance from standard
automobile insurance companies due to lack of prior insurance,
age, driving record, limited financial resources or other
factors. Non-standard personal automobile insurance policies
generally require higher premiums than standard automobile
insurance policies for comparable coverage. The highest limits
of liability coverage written by TIC are $25,000 per bodily
injury incident with aggregate payments of $50,000 and $25,000
property damage liability coverage. In addition to liability
coverage, TIC offers collision coverage and comprehensive
coverage.
During 2007 approximately 83% of all premiums written by TIC
were for liability coverage and approximately 17% were for
physical damage coverage. During 2007 approximately 41% of total
premiums were written in Oklahoma, 24% in Missouri and 26% in
Kansas.
TIC encounters a very competitive environment in its target
personal auto insurance market. TIC distributes exclusively
through the independent agency system, but it also competes with
direct writers such as Progressive Direct and Geico and captive
standard carriers that typically relax their underwriting
standards during softening markets. Carriers like Phoenix
Indemnity and Bristol West continue their expansion into
TICs markets while current competitors such as Progressive
Direct, Unitrin, Infinity, Dairyland, and Viking implement
moderate pricing reductions. Falling premiums and the resulting
adverse affect on agents top line commission revenues,
creates upward pressure on TICs commission expenses.
However, we believe non-
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standard auto writers are demonstrating a more disciplined
pricing and underwriting response to this softening market than
they did in prior cycles. It is difficult to predict whether
this discipline will continue throughout the cycle or whether
top line growth goals will cause them to abandon the pricing
discipline in exchange for sales.
TIC remains conservatively invested with 94% of its
2007 net admitted invested assets in U.S. Government
or U.S. Government guaranteed obligations, investment grade
corporate bonds or cash. U.S. Government obligations
represented more than 56% of TICs total bond portfolio at
December 31, 2007. TIC utilizes a step-ladder
strategy with its bond portfolio to stagger maturities to
ensure available cash to meet its obligations. The step
ladder strategy is also designed to protect TICs
investment return from volatile swings in interest rates. A
relatively small portion of TICs total bond portfolio is
allocated to equity securities.
TIC utilizes Quota-Share reinsurance that allows it
to reduce underwriting risk and increase underwriting capacity.
TIC has utilized the same reinsurance carrier since 1995 and
transfers about 30% of its underwriting exposure through
reinsurance arrangements. The amount of the cession is reviewed
annually and is increased or decreased based on projected
premium writings and capital and surplus.
TIC is in the second year of a development contract with
Information Distribution and Marketing Inc. (IDMI)
for a web based policy and claims administration system known as
PTS. IDMI granted TIC the right to use the system pursuant to a
Licensing Agreement. TIC hosts PTS on its network while IDMI
provides support and maintenance pursuant to a Maintenance
Agreement. TIC has completed its migration from its legacy
policy administration system to PTS and anticipates completing
development of the claims administration during 2008. PTS
includes a point of sale module that includes automated
underwriting functionality that enables policy issuance at point
of sale.
The Missouri Insurance Department completed its last Market
Conduct Examination of TLC and issued its Report and Order
covering the period of July 1, 2004 through June 30,
2005 wherein its sole findings involved a claim that TIC did not
provide a sufficiently descriptive reason for its non-renewal of
certain policies. The Department did not make any significant
findings of violations or exceptions and did not assess any
fines, settlements or recoveries against TIC. The Missouri
Insurance Department completed a full scope association
financial examination of TIC covering the period of
January 1, 2003 through December 31, 2005 wherein it
made no adverse notes, comments or recommendations.
Managing General Agency Activities of
Connection. Connection is generally delegated
the authority to do all things necessary and incidental to
conduct, on behalf of an insurance company (such as TIC), the
sale, underwriting and servicing of insurance policies. Such
authority includes but is not limited to: selling, underwriting,
accepting, issuing, declining and canceling risks; collecting
premiums and paying return premiums on policies of insurance;
entering into agreements with insurance agents and producers
properly licensed by an insurance company, and paying
commissions to agents and producers for the sale of insurance
policies. Connection also provides the reports required by
insurance companies for their accounting and regulatory
compliance needs.
Connection is paid a commission or a percentage of written
premiums and related fees. From the commissions received from an
insurance company, Connection pays commissions to agents and
producers. For the calendar year 2007 Connection received
$4,247,379 in commissions from insurance companies of which
$4,124,135 was related to premiums produced on behalf of TIC.
The remainder of the commissions was generated on a book of
business produced in the state of Arkansas under a contract with
an unrelated insurance company. Connection paid agents and
producers approximately 50%, or $2,140,242 of the commissions it
received from insurance companies.
Managing General Agency Activities of
PCI. TIC compensates PCI for claims
management services on a cost pass through basis by assessing a
percentage of the compensation, third party vendor adjusting
expenses and other claims related expenses to TIC based on the
ratio that Traders claims represents the total claims
under PCIs administration. The precise compensation terms
are outlined in a Claims Management Agreement and Expense
Sharing Agreement filed with and approved by the Department of
Insurance Financial Institutions and Professional Registration.
10
TICs philosophy on settling claims is to conduct an early
evaluation based upon a thorough investigation. TIC emphasizes
immediate contact with insureds and claimants, sound fundamental
claim handling skills as well as completion of initial
investigation within 15 days. Workloads are kept at a
manageable level which is intended to permit the individual
claim handler to devote sufficient time to all assigned claims
and assure prompt and fair claim settlements and payments. It is
TICs goal to settle claims in which its insureds are
clearly liable if an agreement can be reached regarding the
damages. While TIC prefers a rigorous defense on claims where
liability is questionable or the damages sought are outside the
realm of reasonableness, TIC does evaluate many factors on each
file and makes what it ultimately believes to be the best
decision for it and its policyholders. Working with PCI,
TIC makes every effort to evaluate all claims carefully and
fairly considering the issues of liability, injuries, damages,
cost of defense and compliance with the Unfair Claim Practices
Act.
Insurance
Agency Operations
Franchise
Operations.
We are one of the largest franchisors of property and casualty
insurance agencies in the United States, based on number of
locations. We offer our franchisees network association with an
emerging brand identity, use of our business model, access to
the products of many leading insurance carriers, and use of our
web-based information management system. According to
Entrepreneur Magazine, January 2007, and January 2008, we were
ranked first in our industry category of franchisors of
miscellaneous financial services based on factors such as
financial strength, stability, growth rate and size of system.
Currently, we franchise businesses that primarily sell property
and casualty insurance, such as automobile, homeowners and
business owners insurance products. We have also franchised a
limited number of businesses that primarily sell group and
individual health insurance, life insurance, annuities and
securities, such as mutual funds.
Based on commission revenue for the year ended December 31,
2007, we generated approximately 71% of our retail commission
income from personal lines insurance, such as auto and
homeowners insurance, and approximately 26% from
commercial lines insurance such as commercial general liability
and business owners insurance.
Franchisees. Our franchisees are
typically entrepreneurial individuals with experience in the
sale of insurance. We believe that these entrepreneurial
individuals and the businesses they operate will benefit from
the business, operational and marketing support that we offer.
Because they are locally owned and operated by motivated
entrepreneurs, we believe that our franchises will perform
better than their competitors. Our franchisees generally either
form a new start up insurance agency or convert an existing
insurance agency to a franchise. In January 2006, we began
developing business locations that had not been previously owned
by a franchisee or independent insurance agency. These company
developed stores may be operated by us and then sold to a
franchisee or set up by us for operation, with the franchisee
commencing operations and assuming the operating expenses. As of
December 31, 2007, 2006 and 2005, we had 882, 737 and 552
franchised and company-owned locations, respectively.
11
The following table shows the states that have more than fifteen
of our franchised and company-owned locations as of
December 31, 2007.
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Number of
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Property and
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Company
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State
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Franchise Locations
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Casualty Insurance
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Conversions
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Start Up
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Developed
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Texas
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152
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151
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73
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73
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6
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California
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123
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123
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77
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46
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0
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Florida
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90
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90
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62
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27
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1
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Kansas
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79
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78
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66
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13
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0
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Missouri
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67
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66
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41
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22
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4
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Georgia
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61
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61
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4
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57
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0
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Virginia
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39
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39
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28
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11
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0
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Illinois
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38
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36
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22
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16
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0
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North Carolina
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35
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35
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4
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31
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0
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Colorado
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28
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27
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18
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7
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3
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Arizona
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27
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27
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10
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10
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7
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Michigan
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23
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23
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7
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16
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0
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Ohio
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23
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23
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2
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21
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0
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Oklahoma
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23
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23
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20
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3
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0
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The other 12 states in which we operate had a total of 74
franchised and company-owned locations as of December 31,
2007, of which 74 were property and casualty insurance agencies.
For these 74 agencies, 44 were conversion franchisees, 30 were
start up franchisees, and none were company developed locations.
Dependence on the Availability of Funding for Acquisition
and Operating Needs of our Franchisees.
Our continued growth is dependent upon a number of factors,
including the availability of funding for acquisitions and
operating needs of our franchisees. Aleritas has historically
provided loans to our new franchisees for these purposes.
The ability of Aleritas to be a lending source is dependent upon
a number of factors including: the ability of its borrowers to
repay loans made to them, the willingness of its funding sources
to make loans to Aleritas, its perception with rating agencies
and collateral providers, and other factors, many of which may
be beyond the control of Aleritas. In addition, Aleritas has
announced that it is transitioning from a franchise lender to an
industry lender. Aleritas has also reported that it restricted
the financing of new
start-up
franchise loans during the fourth quarter of 2007 unless such
loans were made in connection with the sale of an inventory
franchise business. Aleritas has advised the Company that it
expects to originate a greater percentage of new loans for
non-franchise retail agencies than franchise agencies in the
future.
Although it is an affiliated company, Aleritas is not required
to make loans to our franchisees. If Aleritas is unable or
unwilling to make loans to our franchisees, our growth strategy
will be negatively impacted. We are monitoring this situation
and seeking additional funding sources.
Support for our franchisees. We believe
we offer to our franchisees the business opportunities,
efficiencies and other resources more typical of a large
company. These include:
Access to the products of leading insurance
carriers. As a general matter, insurance
companies frequently require their independent agents to produce
specified minimum premium volumes in order to continue selling
their products. While smaller insurance agencies may be able to
meet such minimum premium volumes for one or even a few
carriers, it is often difficult for such insurance agencies to
meet these minimum requirements for many carriers, thereby
limiting the agents ability to offer a variety of
insurance products to their customers. We aggregate the
insurance premium volumes generated by our franchisees,
approximately $880,000,000 for the year ended December 31,
2007, in order to gain access to the insurance products of
hundreds of insurance companies, including 14 of the 20 largest
property and casualty insurers in the United States, as measured
by net premiums written, such as Progressive, AIG, Chubb,
Travelers and The Hartford,
12
and other national carriers such as Safeco, Zurich and Liberty
Mutual Companies Insurance. This consolidated purchasing power
generally allows our franchisees to offer more insurance
products than they would have on their own.
Professional marketing. We have an advertising
center facility on our Phillipsburg, Kansas campus and
specialized teams of marketing professionals with expertise in
traditional advertising, direct-mail advertising, yellow pages
advertising, public relations, lead generation and office
location analysis. These professionals assist our franchisees in
identifying potential customers, developing marketing programs,
coordinating advertising purchases, and measuring marketing
effectiveness. Our lead generation system, which includes
referrals from insurance companies, lead brokers,
e-mail
solicitations and our online quote request system, helps our
franchisees identify prospective customers. We employ a total of
41 marketing professionals to serve our growing network of
insurance franchisees.
Facilities support. Facilities support is
provided by professionals who assist franchisees with office
location selection, office setup and ongoing office support. We
have a total of 28 employees on our facilities support
teams.
Business administration. We provide a range of
administrative support services to our franchisees that enhance
operating efficiency. First, we provide cash management services
such as daily consolidation of all cash collected by franchisees
and allocation of sales commissions and other revenue to the
franchisees account statement. As part of our cash
management services, in order to assist our franchisees with the
monthly fluctuation of revenues, we also make short-term
commission advances to our franchisees, which are expected to be
repaid within a
30-day
franchise statement cycle. Any commission advances that remain
unpaid after 120 days are placed on Watch
status. As of December 31, 2007, there was approximately
$9,662,000 of principal amount of these commission advances
outstanding, of which $9,077,000 had been outstanding for more
than 120 days. We also make advances to franchisees for
long-term producer development, including hiring and training of
new franchise employees, and for other reasons not related to
monthly fluctuations of revenues. As of December 31, 2007,
there were approximately $9,798,000 of commission advances
outstanding for the longer-term non-statement balances. Second,
through our Brooke Information System, a document-based
information system, our franchisees access an information and
communication system that is capable of providing authorized
users an online virtual office and, among other things,
facilitates franchisee/franchisor communications regarding
documentation, receipt of premium, commission allocation,
customer ownership identification and record retention. Third,
we have established buying groups to assist our franchisees in
the purchase of office equipment, supplies and services at bulk
discounted rates that may otherwise be unavailable to them.
Financial discipline. We work with our
franchisees to devise budgets and action plans to help enhance
agency performance. We monitor our franchisees performance
and work with our franchisees to address negative operating
trends. As a result, we generally can identify those franchisees
who may have difficulty in meeting their obligations to lenders
or who may become unable to repay short-term commission advances
from us within the specified
120-day
period. In cases where we identify financial or operational
problems, we generally can help instill greater financial
discipline by establishing expense controls, making changes in
management or, in severe cases, assuming day-to-day management
of the franchise pursuant to a management agreement.
We believe that these resources and systems provide our
franchisees the ability to compete favorably against both
independent agencies and captive insurance agencies
controlled by large insurance companies, such as Allstate
Insurance Group, State Farm, Farmers Insurance and Nationwide
Group. We believe that our franchisees have significantly
greater resources, including greater access to insurance
products, than many other independently owned property and
casualty insurance agencies. Further, we believe our
franchisees ability to offer their customers more
insurance products provides them with a competitive advantage
over captive insurance agencies, who generally can
offer their customers only the products of their affiliated
insurance carrier.
13
Business model. We generate revenues
through our network of franchise locations in the following ways:
Share of ongoing revenues. We receive
commission payments from the insurance companies that write the
policies sold by our franchisees through our affiliated company,
BASC LLC. BASC LLC, accounts to us for the commissions earned
and we then remit to our franchisees the balance of these
commissions, net of any loan payments to us or to lenders,
franchise fees, and other fees or amounts owed to us. As part of
our franchise relationship, we also receive a monthly franchise
fee in the form of a percentage of the ongoing revenues of each
franchisee, which is generally 15% of our insurance agency
franchisees revenues. In late 2007, we instituted a
bonus back of a portion of the monthly franchise
fee, which effectively lowers the percentage generally paid by
franchisees to 10%. We receive an additional share of our
franchisees commissions in payment for a franchisees
optional use of our service centers. At such centers, a
franchisee shares the use of office space, customer service
representatives, telephone answering and receptionist services,
and general office management with other franchisees.
Franchise fees. We earn initial franchise fees
from franchisees starting up a new franchise location, from
franchisees acquiring a company developed franchise location,
and from franchisees converting an existing agency into a new
franchise location. These fees include:
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Initial Basic services fees. In exchange for a
initial basic franchise fee of $165,000 per location, we provide
our conversion and start up franchisees with a business model,
use of a registered trade name, access to the products of our
insurance company suppliers, access to the advertising center,
facility support and processing center, and use of our
Internet-based information system.
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Start up assistance program. In 2004, we began
recruiting experienced insurance professionals to start up new
franchise locations, opening 41 new start up locations that
year, 106 new start up locations in 2005, 152 new start up
locations in 2006, and 94 new start up locations in 2007. We did
not charge any additional initial franchise fees for start up
services provided to these franchisees other than our fee for
basic services.
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Seller consulting fees. We consult with owners
of insurance agencies and, to a lesser extent, other businesses,
on the sale of their businesses to our franchisees and, in a
limited number of cases, to unaffiliated third parties. We help
sellers develop business profiles and tabulate revenues, share
sample sales agreements and assist with general sale
preparation. These consulting fees usually equal 10% of the
total purchase price of the agency to be sold.
The following table shows the revenues and fees we received from
our franchisees for the years ended December 31, 2007, 2006
and 2005 (in thousands):
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Year Ended December 31,
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2007
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2006
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2005
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Share of Ongoing Revenues(1)
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$
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25,573
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$
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20,872
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$
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16,257
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Initial Franchise Fees
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Basic Services
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32,505
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31,770
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19,375
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Buyers Assistance
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455
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3,137
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10,133
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Seller Consulting Fees
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1,590
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2,731
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4,916
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(1) |
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Share of ongoing revenues represents insurance commissions less
commission expense. |
Loan
Consulting Fees.
Beginning in December 2006, our wholly owned subsidiary BCA
began operating a business of (1) consulting with managing
general agents and agencies regarding (a) acquisitions of
such agencies, (b) financing of such acquisitions or other
activities or needs of such agencies, and (c) other
borrowers assistance services: (2) referring such
managing general agents and agencies to affiliated and
non-affiliated lenders for the purpose of obtaining commercial
loans from such lenders for such acquisitions, activities or
14
needs and (3) providing collateral preservation services to
such lenders through its MGA and Funeral Loan Programs with
respect to such loans for which BCA receives a fee. These fees
may be funded by the loans of such lenders to the borrowers
and/or
compensation from such lenders for collateral preservation
services.
BCAs Loan Programs originated their first loans in
December 2006. Revenue from this business segment is derived
from commissions and fees generated through the loan brokerage
and collateral preservation activities. Income received by BCA
in 2007 was approximately $11,609,000 of which approximately
$9,246,000 was generated through the Loan Brokerage segment as a
result of collateral preservation fees. Aleritas ability
and willingness to be a funding source for loans to managing
general agencies has been an important factor in BCAs
ability to broker loans to these borrowers and its ability to
generate collateral preservation fees.
Financial
Information.
See Note 11 to Item 8 Financial Statements
in this
Form 10-K
for financial information regarding our insurance agency
operations.
Competition
Insurance Company Operations. The life
insurance industry is extremely competitive. There are a large
number of insurance companies that are substantially larger,
offer more diversified product lines and have larger selling
organizations and customer bases than First Life. The life
insurance sector of the financial services industry is highly
competitive with respect to pricing, selection of products and
quality of service. No single competitor or any small group of
competitors dominates any of the markets in which we operate.
Insurance Agency Operations. As a
franchisor of property and casualty insurance agencies, we seek
to grow our network of franchises primarily through start up
franchise agencies, company developed agencies and conversions
of existing insurance agencies to franchises. Our competition
for these agencies and experienced agents includes large
insurance companies that recruit insurance agents and agencies
into their systems, such as Allstate Insurance Group, Nationwide
Group and State Farm, all of which are larger than we are and
have greater financial resources than we do. Because the larger
insurance brokers and agents generally seek to acquire agencies
with revenues greater than those we acquire, we believe that our
franchising strategy offers an attractive alternative for
smaller insurance agencies. We also face competition from
regional franchisors of insurance agencies, such as Fed USA
Insurance/Financial Services and DCAP Group, Inc., and networks
of independently owned insurance agencies, such as Strategic
Independent Agents Alliance and The Iroquois Group.
Our franchisees primarily compete against independent insurance
agencies located in their communities, against the locally
placed captive insurance agencies of large insurance
companies and against large insurance agencies and brokers. Our
franchisees compete against these companies for the insurance
business of the individual and small business end-customers. The
popularity of Internet sales and the passage of the Financial
Services Modernization Act also have increased the number of
potential insurance and financial services competitors. In the
sale of other financial services, our competitors include
independent securities representatives, life insurance agents
and securities dealers.
There are many independent loan brokers that compete for the
loan brokerage and consulting business sought by BCA. We believe
that our industry contacts and the limited markets in which we
compete for loans distinguish us from other brokers and lenders.
Service
Marks, Trademarks and Patents
We sell our services and products under certain service marks
and trademarks owned by Brooke Corporation, which licenses the
use of these marks to us as the franchisor. Brooke Corporation
authorizes the franchisor to sub license selected marks to our
franchisees. Brooke Corporation has filed for protection of
these marks through their registration with the United States
Patent and Trademark Office. We consider these service marks and
trademarks, in the aggregate, to be of material importance to
our business, particularly our
15
business segments providing services and products under the
B BROOKE design mark and other marks that utilize
the Brooke name.
Employees
We employed 513 people as of December 31, 2007, of
which 478 were employed on a full-time equivalency basis (work
37.5 hours or more per week). As of December 31, 2007,
Delta Plus employed 53 people. We have never had a work
stoppage, and none of our employees are currently represented
under collective bargaining agreements. We consider our
relations with our employees to be good.
Suppliers
Most of our revenues currently result from our franchisees
sales of insurance policies. As such, our primary suppliers are
insurance companies, and we have direct and indirect agency
relationships with several hundred insurance companies,
including several of the leading writers of personal and
commercial lines insurance in the United States and our own Life
and Property and Casualty insurance companies. Our largest
suppliers include Progressive, Safeco, Travelers, AIG and The
Hartford, which together account for approximately 31% of the
commissions generated by our franchisees.
Government
Regulation
Insurance Agency Operations. We are
subject to licensing or regulatory approval by the state
insurance department in each state in which we do business. Each
of our franchise agencies also is subject to licensing or
regulatory approval in the state in which it conducts business.
Our operations depend on the validity of, and our continued good
standing under, the licenses and approvals under which we
operate. Licensing laws and regulations vary from jurisdiction
to jurisdiction. In all jurisdictions, the applicable licensing
laws and regulations are subject to amendment or interpretation
by regulatory authorities, and generally, these authorities are
vested with broad discretion as to grant, renewal and revocation
of licenses and approvals.
We and our franchisees are subject to state laws and regulations
pertaining to the charging of fees by insurance agents and
brokers and the rebating of premiums
and/or
commissions. The charging of fees
and/or
rebating may be prohibited in some states or permitted in others
with or without certain limitations. Where permitted, the
charging of fees may require that certain disclosures be given
to customers
and/or that
customers agree to the fees in writing. Specific state statutes
and regulations regarding rebating may extend to transactions
that involve an agent or agency giving anything of value to a
customer to induce the purchase of a policy.
We must comply with regulations adopted by the Federal Trade
Commission and with several state laws that regulate the offer
and sale of franchises. The Federal Trade Commissions
Trade Regulation Rule on Franchising and certain state laws
require that we furnish prospective franchisees with a franchise
offering circular containing information prescribed by the Trade
Regulation Rule on Franchising and applicable state laws
and regulations.
We also must comply with a number of state laws that regulate
certain substantive aspects of the franchisor-franchisee
relationship. These laws may limit a franchisors business
practices in a number of ways, including limiting the ability
to: (1) terminate or not renew a franchise without good
cause; (2) interfere with the right of free association
among franchisees; (3) disapprove the transfer of a
franchise; and (4) discriminate among franchisees with
regard to charges, royalties and other fees.
We are subject to the unfair trade practices acts of the various
states in which we do business. They each define and prohibit
unfair methods of competition or unfair or deceptive acts or
practices, including misrepresentation of policy terms, false
advertising, making false statements, and defamation. Failure to
comply with such acts or insurance regulations could have a
material adverse effect on us.
There are many states that have statutes regulating the
activities of brokering loans to individuals or businesses. Such
laws may pertain to the receipt of advance fees,
misrepresentations or omissions to state any material facts in
connection with loans or services, engagement in fraud or
deception, or registration.
16
Insurance Company Operations. First
Life is subject to regulation and supervision by the Kansas
Insurance Department and other states in which it operates. The
insurance laws of Kansas give the Insurance Department broad
regulatory authority, including powers to: (1) grant and
revoke licenses to transact business; (2) regulate and
supervise trade practices and market conduct; (3) establish
guaranty associations; (4) license agents; (5) approve
policy forms; (6) approve premium rates for some lines of
business; (7) establish reserve requirements;
(8) prescribe the form and content of required financial
statements and reports; (9) determine the reasonableness
and adequacy of statutory capital and surplus; and
(10) regulate the type and amount of permitted investments.
Without limiting the foregoing, the effect of the regulatory
powers of the Kansas Insurance Department over First Life may
restrict its ability to dividend or otherwise transfer funds
from it to the Company, even if its operations are profitable
and creating positive cash flow, restrict its ability to raise
capital other than by contributions from the Company, and
require that the Company contribute additional capital
to it.
As a result of our ownership of First Life, we are subject to
Kansas laws regulating insurance holding company systems,
including acquisitions, extraordinary dividends, the terms of
affiliate transactions, and other related matters.
Other Regulations. Federal, state,
local and foreign governments and some self-regulatory
organizations have enacted statutes and ordinances,
and/or
adopted rules and regulations, regulating other aspects of the
businesses in which we are involved. We seek to determine the
applicability of such statutes, ordinances, rules and
regulations (collectively, Laws) and comply with
those Laws that apply to our activities. We believe that we are
currently in material compliance with all Laws and government
commitments to which we are subject and we are unaware of any
pending or threatened investigation, action or proceeding by any
state, federal or foreign regulatory agency involving us that
would have a material adverse effect on us. We cannot predict
what effect future Laws, changes in interpretations of existing
Laws, or the results of any regulator inquiries with respect to
the applicability of Laws may have on us or our financial
results.
We manage highly sensitive customer information in all of our
operating businesses, which is regulated by law. Many
states laws require us to make certain disclosures to our
customers regarding our privacy policies and take precautionary
steps to protect the confidentiality of customer information.
Risks
Related to Our Business Operations
A significant part of our business strategy involves
adding new franchise locations and our failure to grow may
adversely affect our business, prospects, results of operations
and financial condition.
Our expansion strategy consists primarily of adding new
franchise locations. Our continued growth is dependent upon a
number of factors, including the availability of adequate
financing and suitable franchise locations on acceptable terms,
experienced management employees, the ability to obtain required
government permits and licenses and other factors, some of which
are beyond our control. In addition, we compete for acquisition
and expansion opportunities with entities that have
substantially greater resources. We cannot assure you that we
will be able to continue to grow our business successfully
through adding new franchise locations or by growing the
operations of existing franchisees. Our failure to grow could
have a material adverse effect on our business, prospects,
results of operations and financial condition.
Our franchisees financial performance may adversely
affect their ability to repay amounts due to us.
We have credit exposure with respect to our franchisees
monthly statement balances. To fund long-term producer
development of our franchisees, including hiring and training
costs, we also extend credit to our franchisees that we refer to
as non-statement balances. Our franchisees depend on
commission income to pay amounts due to us with respect of their
statement, and non-statement balances. If our franchisees are
not successful, our franchisees may be unable to pay statement
or non-statement balances to us which would have a detrimental
effect on us.
17
Our credit loss reserves are determined primarily by our watch
statement balances. Other factors we consider in determining
credit loss reserves are statement loss experience,
managements evaluation of the potential for future losses
and managements evaluation of the potential for future
recoveries. We may not be able to accurately predict credit
losses and, as a result, the amount we have budgeted for credit
losses may not be sufficient to cover future losses, in which
case, our financial condition and results of operations will be
adversely affected.
Carrier override and contingent or profit sharing
commissions are difficult to predict, and any decrease in our
receipt of such payments will adversely affect us.
We derive a portion of our revenues from carrier override and
contingent or profit sharing commissions based upon the terms of
the contractual relationships between the insurance companies
and ourselves. Carrier override commissions are commissions paid
by insurance companies in excess of the standard commission
rates on specific classes of business. These amounts may be, but
are not always, contingent on achieving a specific premium
volume or profitability of the business. Contingent or profit
sharing commissions are commissions paid by insurance companies
based on the estimated profit that the companies make on the
overall volume of business that we place with such companies. We
generally receive these contingent commissions in the first and
second quarters of each year. We do not account for carrier
overrides separately. However, contingent or profit sharing
commissions accounted for approximately three percent of our
total revenues for the year ended December 31, 2007.
Due to the nature of these commissions, it is difficult for us
to predict their payment. Increases in loss ratios experienced
by insurance companies will result in decreased profit to them
and may result in decreases in payments of contingent or profit
sharing commissions to us. Furthermore, we have no control over
insurance companies ability to estimate loss reserves,
which affects our profit sharing calculation. In addition,
tightening of underwriting criteria by certain insurance
companies, due in part to high loss ratios, may result in a
lower volume of business that we are able to place with them.
Our company override and contingent or profit sharing
commissions affect our revenues, and decreases in their payment
to us may have an adverse effect on our results of operations.
Potential litigation and regulatory proceedings regarding
commissions, fees, contingency payments, profit sharing and
other compensation paid to brokers or agents could materially
adversely affect our financial condition.
The insurance industry has in recent years come under a
significant level of scrutiny by various regulatory bodies,
including state Attorneys General and the departments of
insurance for various states, with respect to contingent
compensation and other volume or profit based compensation
arrangements. Attorneys General have issued subpoenas to various
insurance brokerages and insurance companies. Certain of these
investigations have led to complaints being filed against
brokerages and insurance companies and some brokerages and
insurance companies have stated that they will discontinue
accepting or making, respectively, volume based and profit based
payments. In addition to government investigations, class action
lawsuits relating to these business practices have been filed
against various members of the insurance industry. Negative
publicity associated with these investigations, lawsuits and
resulting settlements have precipitated increased volatility in
the prices of securities issued by companies throughout the
insurance industry. We have received inquiries from departments
of insurance which were related to such compensation
arrangements or were related to unethical or unlawful sales
practices. These inquiries were not related to specific or
general allegations of wrongdoing on our part. Rather, these
inquiries were sent to numerous agents and brokers based upon
their status as a licensed agent or broker, the volume of
business they produce or other factors unrelated to allegations
of wrongdoing. We cannot predict whether we will receive further
inquiries or receive subpoenas, or will become subject to
investigations, regulatory actions, proceedings or lawsuits. The
outcome of any such subpoena, investigation, regulatory action,
proceeding or lawsuit could have a material adverse effect on
our business or financial condition.
The insurance industry has also recently come under a
significant level of scrutiny by consumer advocacy groups, and
certain media reports have advocated governmental action with
respect to contingent and other volume or profit based
compensation arrangements. The consumer groups and media reports
typically
18
characterize these payments as creating an unacceptable conflict
of interest and adding an unnecessary or even unfair consumer
cost. If negative characterizations of such compensation
arrangements become accepted by consumers, this could have a
material adverse effect on the demand for our franchisees
products and services and could materially adversely affect our
results of operations and financial condition. Negative
perception of such compensation arrangements or other activities
could also result in us being subject to more restrictive laws
and regulations as well as increased litigation, which may
increase further our costs of doing business and adversely
affect our profitability by impeding our ability to market our
products and services, requiring us to change our marketing
practices, products or services and increasing the regulatory
burdens under which we operate.
Our business is impacted by the cyclical pricing of
property and casualty insurance, which may adversely affect our
franchisees performance and, thus, our financial
performance.
Our franchisees are primarily engaged in insurance agency and
brokerage activities and derive revenues from commissions paid
by insurance companies, which commissions are based in large
part on the amount of premiums paid by their customers to such
insurance companies. In turn, we earn fees from our franchisees
based upon the amount of such commissions payable by insurance
companies, which fees make up a substantial portion of our
revenues. Neither we nor our franchisees determine insurance
premiums. Premium rates are determined by insurers based on a
fluctuating market. Historically, property and casualty
insurance premiums have been cyclical in nature, characterized
by periods of severe price competition and excess underwriting
capacity, or soft markets, which generally have an adverse
effect upon the amount of commissions earned by our franchisees,
followed by periods of high premium rates and shortages of
underwriting capacity, or hard markets. The current insurance
market generally may be characterized as soft, with
a flattening or decreasing of premiums in most lines of
insurance. As insurance carriers continue to outsource the
production of premium revenue to independent brokers or agents,
those insurance carriers may seek to further decrease their
expenses by reducing the commission rates payable to such
brokers or agents. The reduction of these commission rates,
along with general volatility
and/or
declines in premiums, may significantly undermine our
profitability and that of our franchisees. Because we do not
determine the timing and extent of premium pricing changes, we
cannot accurately forecast our commission revenues, including
whether they will significantly decline. As a result, our
budgets for future acquisitions, capital expenditures, credit
loss reserves, loan repayments and similar items may have to be
adjusted to account for unexpected changes in revenues.
We may not be able to successfully convert existing
agencies into new franchises.
Our ability to successfully identify suitable acquisition
candidates, complete acquisitions, convert acquired businesses
into franchisees, and expand into new markets will require us to
continue to implement and improve our operations, financial and
management information systems. Our new franchises may not
achieve levels of revenue, profitability, or productivity
comparable to our existing franchises, or otherwise perform as
expected. In addition, when we make an acquisition and effect a
conversion, we are subject to a number of special risks, such as
entry into unfamiliar markets and unanticipated problems or
legal liabilities, some or all of which could have a material
adverse effect on our results of operations and financial
condition.
We are dependent on key personnel.
We are dependent upon the continued services of senior
management, particularly the services of Kyle L. Garst and Dane
Devlin and Michael Hess. We have entered into an employment
agreement with each of them. The loss of the services of any of
these key personnel, by termination, death or disability, or our
inability to identify, hire and retain other highly qualified
personnel in the future, could have a material adverse effect on
us. We currently do not maintain key employee insurance with
respect to any of our officers or employees.
Our business, results of operations, financial condition
or liquidity may be materially adversely affected by errors and
omissions.
Our franchisees are subject to claims and litigation in the
ordinary course of business resulting from alleged errors and
omissions. Because we are agent of record on policies written
through our franchisees, claims against our franchisees may also
allege liability against us for all or part of the amounts in
question.
19
Claimants may seek large damage awards and these claims may
involve potentially significant defense costs. Errors and
omissions could include, for example, our employees or
sub-agents failing, whether negligently or intentionally, to
place coverage or to notify insurance companies of claims on
behalf of clients, to provide insurance companies with complete
and accurate information relating to the risks being insured or
to appropriately apply funds that we hold for our clients. It is
not always possible to prevent and detect errors and omissions
and the precautions we take may not be effective in all cases.
While most of the errors and omissions claims made against us
have been covered by our professional liability insurance,
subject to our self-insured deductibles, our results of
operations, financial condition or liquidity may be adversely
affected if in the future our insurance coverage proves to be
inadequate or unavailable or there is an increase in liabilities
for which we self-insure. In addition, errors and omissions
claims may harm our reputation or divert management resources
away from operating our business.
Termination of our professional liability insurance policy
would adversely impact our financial prospects and our ability
to continue our relationships with insurance companies.
Without professional liability insurance, it is unlikely that we
would be able to continue our relationships with insurance
companies, which would adversely impact our financial prospects.
Although we have an acceptable claims history, there can be no
assurance that we will be able to maintain our professional
liability insurance and in the event of the termination or
non-renewal of our professional liability insurance policy, we
may be unable to acquire this insurance on acceptable terms, or
at all.
If we fail to maintain an effective system of internal
controls, including those internal controls impacted by the
upgrade of our information technology, we may not be able to
accurately report our financial results or prevent fraud. As a
result, current and potential stockholders could lose confidence
in our financial reporting, which could harm our business and
the trading price of our stock.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. If we
cannot provide reliable financial reports or prevent fraud, our
brand and operating results could be harmed. We have undertaken
to upgrade our information technology systems, which in some
instances are integral to the maintenance and effectiveness of
our internal controls. Any failure to implement these new
controls or ongoing controls, or difficulties encountered in
their implementation, could harm our operating results or cause
us to fail to meet our reporting obligations or to find our
internal controls over financial reporting to be effective.
Failure to achieve and maintain an effective system of internal
controls could have a material adverse effect on our stock price.
Our dependence on initial franchise fees creates an
incentive for us to extend credit to borrowers that may not meet
our underwriting guidelines.
A significant part of our revenues are derived from one-time
initial fees we receive from assisting franchisees and others
with the acquisition of businesses. Generating fees is largely
dependent on our franchisees and others ability to
obtain acquisition financing from us or Aleritas. Our dependence
on these initial fees creates an incentive for us to extend
credit to borrowers that may not meet our underwriting criteria.
Our failure to follow underwriting guidelines could adversely
affect the quality of the loans we make and adversely affect our
financial condition and results of operations.
Because a significant part of our insurance-related
revenues and loans derive from operations located in five
states, our business may be adversely affected by conditions in
these states.
A substantial portion of our insurance-related revenues and
loans derive from operations located in the states of Texas,
California, Kansas, Florida and Missouri. Our franchisees
revenue and profitability and our revenues and profitability are
affected by the prevailing regulatory, economic, demographic,
weather, competitive, industry and other conditions in these
states. Changes in any of these conditions could make it more
costly or difficult for our franchisees and us to conduct our
business. Adverse regulatory or industry developments in these
states, which could include fundamental changes to the design or
implementation of the insurance regulatory framework, could have
a material adverse effect on our results of operations and
financial condition.
20
If we fail to effectively manage our growth, our financial
results could be adversely affected.
We must continue to refine and expand our marketing
capabilities, our management procedures, our network of
suppliers, our internal controls and procedures, our access to
financing sources and our technology to meet or project growth.
As we grow, we must continue to hire, train, supervise and
manage new employees. We may not be able to hire and train
sufficient personnel or develop management and operating systems
to manage our expansion effectively. If we are unable to manage
our growth effectively, our operations and financial results
could be adversely affected.
We may not achieve the same levels of growth in revenues
and profits in the future as we have in the past.
Our business has experienced rapid growth. Our ability to
continue to grow our business will be subject to a number of
risks and uncertainties, some of which are beyond our control,
and will depend in large part on, among other factors:
(1) finding new opportunities in our existing and new
markets; (2) hiring, training and retaining skilled
managers and employees; (3) expanding and improving the
efficiency of our operations and systems; (4) maintaining
loan quality; (5) maintaining and growing our funding
sources and proprietary funding network; and
(vi) maintaining and attracting customers. Accordingly, we
may not achieve the same levels of growth in revenues and
profits as we have historically.
Our reliance on the Internet could have a material adverse
effect on our operations and our ability to meet customer
expectations.
We rely heavily on the Internet in conducting our operations. A
main component of our franchise program is providing franchisees
and their personnel access to documents and other data over the
Internet. This service requires efficient operation of Internet
connections from franchisees and franchisee personnel to our
system. These connections, in turn, depend on efficient
operation of web browsers, Internet service providers and
Internet backbone service providers, all of which have
experienced periodic operational problems or outages in the past
and over which we have no control. Any system delays, failures
or loss of data, whatever the cause, could reduce customer
satisfaction with our services and products. Moreover, despite
the implementation of security measures, our computer system may
be vulnerable to computer viruses, program errors, attacks by
third parties or similar disruptive problems. These events could
have a material adverse effect on our operations and our ability
to meet customer expectations.
Our network may be vulnerable to security breaches and
inappropriate use by Internet users, which could disrupt or
deter future use of our services.
Concerns over the security of transactions conducted on the
Internet and the privacy of users may inhibit the growth of the
Internet and other online services. Our failure to successfully
prevent security breaches could significantly harm our business,
reputation and results of operations and could expose us to
lawsuits by state and federal consumer protection agencies, by
governmental authorities in the jurisdictions in which we
operate, and by consumers. Anyone who is able to circumvent our
security measures could misappropriate proprietary information,
including personal customer data, cause interruptions in our
operations or damage our brand and reputation. A breach of our
security measures could involve the disclosure of personally
identifiable information and could expose us to a material risk
of litigation, liability or governmental enforcement
proceedings. We cannot assure you that our financial systems and
other technology resources are completely secure from security
breaches, password lapses or sabotage, and we have occasionally
experienced attempts at hacking. We may be required
to incur significant additional costs to protect against
security breaches or to alleviate problems caused by any of
these types of breaches. Any well publicized compromise of our
security or the security of any other Internet provider could
deter people from using our services or the Internet to conduct
transactions that involve transmitting confidential information
or downloading sensitive materials, which could have a
detrimental impact on our franchise network. Furthermore,
computer viruses may affect our ability to provide our services
and adversely affect our revenues. Moreover, if a computer virus
affecting our system were highly publicized, our reputation
could be significantly damaged, resulting in the loss of current
and future franchisees and customers.
21
We are in highly competitive markets, which could result
in reduced profitability.
We expect the historical success of our company to attract
others to our target markets who will strive to compete directly
or indirectly against us. Increased competition may reduce
demand for our products and limit the amount of revenues and
earnings we report.
Our franchisees face significant competition. The popularity of
Internet sales and enactment of the Financial Services
Modernization Act have increased the number of potential
competitors and allow highly capitalized competitors, like
banks, to offer certain kinds of insurance products and services
which are competitive with the products and services of our
franchisees and life insurance subsidiary. If our prediction
that the number of agents will increase is accurate, we will
face greater competition for the services we provide to our
franchisees. The life insurance industry is extremely
competitive. There are a large number of insurance companies
that are substantially larger, offer more diversified product
lines and have larger selling organizations and customer bases
than First Life. There are many new changes in technology,
product offerings and regulation in the industries in which we
operate and many of our competitors in such industries have
greater financial resources and market acceptance than we do.
Competitors may develop or offer more attractive or lower cost
products and services than ours which could erode our customer
base.
Our management, facilities and labor force may be
insufficient to accommodate expected growth.
If we grow more quickly than anticipated, our management,
facilities and labor force may become insufficient to
accommodate our expected growth. Also, although we have
safeguards for emergencies and have arranged for
back-up
facilities to process information if the processing center in
Phillipsburg, Kansas, is not functioning, the occurrence of a
major catastrophic event or other system failure at our
processing center could interrupt document processing or result
in the loss of stored data.
We compete in highly regulated industries, which may
result in increased expenses or restrictions in our
operations.
We conduct business in a number of states and are subject to
comprehensive regulation and supervision by government agencies
in many of the states in which we do business. The primary
purpose of such regulation and supervision is to provide
safeguards for policyholders rather than to protect the
interests of shareholders. The laws of the various state
jurisdictions establish regulatory agencies with broad
administrative powers with respect to, among other things,
licensing to transact business, licensing of agents and unfair
trade practices.
Although we believe that we are currently in material compliance
with statutes, regulations and ordinances applicable to our
business and commitments made to government agencies, we cannot
assure you that we will be able to maintain compliance without
incurring significant expense, or at all. There is also no
assurance that we have correctly determined the applicability of
all statutes, regulations, ordinances and government commitments
to our business, including, without limitation, the
applicability of federal preemption of state law for activities
believed by us to be subject to such preemption. In addition,
our franchisees are also subject to comprehensive regulations
and supervision and we cannot ensure their correct determination
of the applicability of statutes, regulations and ordinances to
their businesses and their material compliance therewith. Our
failure to comply, or the failure of our franchisees to comply,
with any current or subsequently enacted statutes, regulations,
ordinances and commitments to government agencies could result
in regulatory actions and negative publicity and have a material
adverse effect on us.
Furthermore, the adoption of additional statutes, regulations
and ordinances, the agreement to further commitments to
government agencies, changes in the interpretation and
enforcement of current statutes, regulations and ordinances,
changes in our ability to exert federal preemption, or the
expansion of our business
22
into jurisdictions that have adopted more extensive regulatory
requirements than those under which we currently conduct
business, could have a material adverse effect on us.
We are subject to franchise law and regulations that
govern our status as a franchisor and regulate some aspects of
our franchise relationships. Our ability to develop new
franchise locations and to enforce contractual rights against
franchisees may be adversely affected by these laws and
regulations, which could cause our franchise revenues to decline
and adversely affect our growth strategy.
We are subject to federal and state laws and regulations,
including the regulations of the Federal Trade Commission, as
well as similar authorities in individual states, in connection
with the offer, grant and termination of franchises and the
regulation of the franchisor-franchisee relationship. Our
failure to comply with these laws could subject us to liability
to franchisees and to fines or other penalties imposed by
governmental authorities. In addition, we may become subject to
litigation with, or other claims filed with state or federal
authorities by, franchisees based on alleged unfair trade
practices, implied covenants of good faith and fair dealing,
payment of royalties, location of stores, advertising
expenditures, franchise renewal criteria or express violations
of franchise agreements. We cannot assure you that we will not
encounter compliance problems from time to time, or that
material disputes will not arise with one or more franchisees.
Accordingly, our failure to comply with applicable franchise
laws and regulations, or disputes with franchisees, could have a
material adverse effect on our results of operations, financial
condition and growth strategy.
A significant factor of our business strategy involves the
ability and willingness of our affiliate, Aleritas, in funding
loans to our franchisees.
Our expansion strategy consists principally of adding new
franchise locations. Continued growth is dependent upon a number
of factors, including the availability of funding for
acquisitions and operating needs of our franchisees.
Historically, Aleritas has provided such funding in the form of
loans for new franchisees. The ability of Aleritas to be a
lending source is dependent upon a number of factors, including
the ability of its borrowers to repay loans made to them, the
willingness of its funding sources to make loans to Aleritas,
its perception with rating agencies and collateral preservation
providers, and other factors, many of which may be beyond the
control of Aleritas. Although Aleritas is an affiliate company,
it is not required to make loans to our franchisees. We cannot
assure you that Aleritas will be able or willing to continue to
provide loans to our franchisees. The inability or unwillingness
of Aleritas to originate loans for acquisitions and franchise
operating needs would negatively impact our ability to grow our
business and our profitability.
We share brand name identity with Brooke Corporation and
other affiliates.
In the event of circumstances involving any of these entities
that have a negative effect on the Brooke brand, we
could likewise suffer if the negative impact harms our
reputation or credibility in the marketplace, which could reduce
the number of independent agencies willing to join our franchise
network or otherwise reduce the number of our franchisees
contracting for our services. In such event, our profitability
and growth prospects would be reduced.
Most of the advances we make are to privately owned small
and medium-sized companies which present a greater risk of loss
than advances to larger companies.
Our advances and extensions of credit are made primarily to
small and medium-sized, privately owned businesses. Compared to
larger, publicly owned firms, these companies generally have
limited access to capital and higher funding costs. They may be
in a weaker financial position and may need more capital to
expand or compete. These financial challenges may make it
difficult for our franchisees to make scheduled payments of
interest and principal on our advances. Accordingly, advances
and extensions of credit made to these types of franchisees
entails higher risks than advances made to companies that are
able to access traditional credit sources.
The expansion of our insurance company operations will be
dependent upon the availability of outside financing.
We plan to expand our insurance company operations by
distributing non-standard auto, life and annuity insurance
products through our franchise network. While we intend to
internally fund a portion of these
23
expansion costs, we anticipate that outside financing will be
required for the expansion. There can be no assurance that
outside financing will be available to us on terms and
conditions acceptable to us.
Insurance company operations could be disrupted by the
failure of their information technology and telecommunications
systems because they are dependent on these systems.
First Life and Delta Pluss business is highly dependent
upon the successful and uninterrupted functioning of our current
information technology and telecommunications systems as well as
current
and/or
future integrated policy and claims system. These systems are
relied upon to process new and renewal business, provide
customer service, make claims payments and facilitate
collections and cancellations, as well as to perform actuarial
and other analytical functions necessary for pricing and product
development. As a result, the failure of these systems could
interrupt operations and adversely affect financial results.
Because information technology and telecommunications systems
interface with and depend on third-party systems, service
denials could be experienced if demand for such service exceeds
capacity or such third-party systems fail or experience
interruptions. If sustained or repeated, a system failure or
service denial could result in a deterioration of our insurance
companys ability to write and process new and renewal
business and provide customer service or compromise its ability
to pay claims in a timely manner. This could result in a
material adverse effect on our insurance companys
operations.
Our insurance companys ability to earn profits may
be restricted by comprehensive regulation.
First Life and Delta Plus are subject to comprehensive
regulation and supervision by government agencies in Kansas and
Missouri, respectively, where each insurance company subsidiary
is domiciled, as well as in the states where First Life and
Delta Pluss insurance companies sell insurance products,
issue policies and handle claims. Certain states impose
restrictions or require prior regulatory approval of certain
corporate actions, which may adversely affect First Life and
Delta Pluss ability to operate, innovate, obtain necessary
rate adjustments in a timely manner or grow its business
profitably. These regulations provide safeguards for policy
owners and are not intended to protect the interests of
stockholders. First Lifes and Delta Pluss ability to
comply with these laws and regulations and to obtain necessary
regulatory action in a timely manner is and will continue to be
critical to their success.
Compliance with laws and regulations addressing these and other
issues often will result in increased administrative costs. In
addition, these laws and regulations may limit First Life and
Delta Pluss ability to underwrite and price risks
accurately, preventing them from obtaining timely rate increases
necessary to cover increased costs and may restrict their
ability to discontinue unprofitable relationships or exit
unprofitable markets. These results, in turn, may adversely
affect First Life and Delta Pluss profitability or their
ability or desire to grow their business in certain
jurisdictions. The failure to comply with these laws and
regulations may also result in actions by regulators, fines and
penalties, and in extreme cases, revocation of First Lifes
or Delta Pluss ability to do business in that
jurisdiction. In addition, First Life and Delta Plus may face
individual and class action lawsuits by policyholders and other
parties for alleged violations of certain of these laws or
regulations.
Insurance company operations could be adversely affected
if regulation becomes more extensive in the future.
New or more restrictive regulation in any state in which First
Life and Delta Plus conducts business could make them more
expensive for them to conduct their business, restrict the
premiums they are able to charge or otherwise change the way
they do business. In such events, First Life and Delta Plus may
seek to reduce their writings in, or to withdraw entirely, from
these states. In addition, from time to time, the United States
Congress and certain federal agencies investigate the current
condition of the insurance industry to determine whether federal
regulation is necessary. First Life or Delta Plus are unable to
predict whether and to what extent new laws and regulations that
would affect their business will be adopted in the future, the
timing of any such adoption and what effects, if any, they may
have on their operations, profitability and financial condition.
24
Insurance company operations failure to meet minimum
capital and surplus requirements could subject them to
regulatory action.
First Life and Delta Pluss insurance companies are subject
to risk-based capital standards and other minimum capital and
surplus requirements imposed under applicable state laws,
including the laws of their states of domicile. The risk-based
capital standards, based upon the Risk-Based Capital Model Act
adopted by the National Association of Insurance Commissioners,
or NAIC, require insurance companies to report their results of
risk-based capital calculations to state departments of
insurance and the NAIC. These risk-based capital standards
provide for different levels of regulatory attention depending
upon the ratio of an insurance companys total adjusted
capital, as calculated in accordance with NAIC guidelines, to
its authorized control level risk-based capital. Authorized
control level risk-based capital is the number determined by
applying the NAICs risk-based capital formula, which
measures the minimum amount of capital that an insurance company
needs to support its overall business operations.
Failure to meet applicable risk-based capital requirements or
minimum statutory capital requirements could subject First Life
and/or Delta
Plus to further examination or corrective action imposed by
state regulators, including limitations on writing of additional
business, state supervision or liquidation. Any changes in
existing risk-based capital requirements or minimum statutory
capital requirements may require First Lifes
and/or Delta
Pluss insurance company to increase its statutory capital
levels.
Insurance company operations profitability could be
adversely affected by negative developments and cyclical changes
in the non-standard personal automobile industry because it has
a concentration in this industry.
Substantially all of First Lifes gross premiums are
generated from the sale of life insurance and fixed annuity
insurance products. All of Delta Pluss gross premiums are
generated from sales of non-standard personal automobile
insurance policies. As a result of a concentration in these
lines of business, negative developments in the business or
economic, competitive or regulatory conditions affecting the
industry could have a negative effect on profitability. Examples
of such negative developments would be increasing trends in
automobile repair costs, automobile parts costs, used car prices
and medical care expenses, increased regulation, as well as
increased litigation of claims and higher levels of fraudulent
claims. All of these events can result in reduced profitability.
In addition, Delta Pluss non-standard personal automobile
insurance industry historically has been cyclical in nature,
characterized by periods of severe price competition and excess
underwriting capacity followed by periods of high premium rates
and shortages of underwriting capacity. These fluctuations in
the non-standard personal automobile insurance business cycle
may negatively impact our profitability.
Our insurance company operations profitability could
be adversely affected by competition.
Both the life and non-standard personal automobile insurance
lines of business are highly competitive and, except for capital
and regulatory considerations, there are relatively few barriers
to entry. Our insurance companies compete with other insurance
companies that sell the same or similar lines of insurance
through independent agencies as well as with insurance companies
that sell such policies directly to their customers. Some
competitors have substantially greater financial and other
resources than our insurance companies have and may offer a
broader range of products or competing products at lower prices.
In addition, existing competitors may attempt to increase market
share by lowering rates and new competitors may enter this
market, particularly larger insurance companies that do not
presently write standard life, final expense, fixed annuity or
non-standard personal automobile insurance. In this environment,
First Life and Delta Plus may experience a reduction in
underwriting margins or sales of insurance policies may decrease
as individuals purchase lower-priced products from other
insurance companies. A loss of business to competitors offering
similar insurance products at lower prices or having other
competitive advantages could negatively affect revenues and net
income.
25
Insurance company operational success depends on their
abilities to price accurately the risks they underwrite.
The results of our operations and the financial condition of our
insurance companies depend on our ability to underwrite and set
premium rates accurately for a wide variety of risks. Rate
adequacy is necessary to generate sufficient premiums to pay
losses, loss adjustment expenses and underwriting expenses and
to earn a profit. In order to price products accurately, First
Life and Delta Plus must collect and properly analyze a
substantial amount of data; develop, test and apply appropriate
rating formulas; closely monitor and timely recognize changes in
trends and project both severity and frequency of losses with
reasonable accuracy. First Lifes and Delta Pluss
ability to undertake these efforts successfully, and as a result
price their products accurately, is subject to a number of risks
and uncertainties, some of which are outside their control.
Consequently, each company could underprice risks, which would
negatively affect profit margins, or each could overprice risks,
which could reduce sales volume and competitiveness. In either
event, the profitability of our insurance companies could be
materially and adversely affected.
Insurance company operations could incur additional
charges to earnings if its actual losses and loss adjustment
expenses exceed loss and loss adjustment expense
reserves.
Both First Life and Delta Plus maintain reserves to cover their
estimated liability for losses and the related loss adjustment
expenses for reported and unreported claims on insurance
policies issued by our insurance company subsidiaries. The
establishment of appropriate reserves is an inherently uncertain
process, involving actuarial and statistical projections of what
our insurance company operations expect to be the cost of the
ultimate settlement and administration of claims. These
projections are based upon historical claims information,
estimates of future trends in claims severity and other variable
factors such as inflation. Due to the inherent uncertainty of
estimating reserves, it has been necessary, and will continue to
be necessary, to revise estimated future liabilities of each
insurance company subsidiarys reserves for claims and
related expenses.
Our insurance company subsidiaries cannot be sure that their
ultimate losses and loss adjustment expenses will not materially
exceed their reserves. To the extent that reserves prove to be
inadequate in the future, our insurance company subsidiaries
would be required to increase reserves for losses and the
related loss adjustment expenses and incur a charge to earnings
in the subsequent period during which such reserves are
increased, which could have a material and adverse impact on our
financial condition and results of operations in the subsequent
period.
Insurance company operations, financial condition and
results of operations could be adversely affected if they are
not successful in reducing risk and increasing underwriting
capacity through reinsurance arrangements.
In order to reduce underwriting risk and increase underwriting
capacity, our insurance company subsidiaries may choose to
transfer portions of its insurance risk to other insurers
through reinsurance contracts. Historically, Delta Plus has
ceded a portion of its non-standard automobile insurance
premiums and losses to unaffiliated reinsurers in accordance
with these contracts. The availability, cost and structure of
reinsurance protection is subject to changing market conditions
that are outside of our insurance subsidiaries control. In
order for these contracts to qualify for reinsurance accounting
and thereby provide the additional underwriting capacity that
may be needed, the reinsurer generally must assume significant
risk and have a reasonable possibility of a significant loss.
Although the reinsurer is liable to the insurance company to the
extent it transfers, or cedes, risk to the
reinsurer, the insurance company remains ultimately liable to
the policyholder on all risks reinsured. As a result, ceded
reinsurance arrangements do not limit our insurers
ultimate obligation to their policyholders to pay claims. Our
insurance company subsidiaries are subject to credit risks with
respect to the financial strength of their reinsurers. They are
also subject to the risk that their reinsurers may dispute their
obligations to pay claims. As a result, our insurance company
subsidiaries may not recover claims made to their reinsurers in
a timely manner, if at all. In addition, if insurance
departments deem that under Delta Pluss existing or future
reinsurance contracts the reinsurer does not assume significant
risk and has a reasonable possibility of
26
significant loss, our insurance company subsidiary may not be
able to increase its ability to write business based on this
reinsurance. Any of these events could have a material adverse
effect on our insurance companys business, financial
condition and results of operations.
Insurance company revenues and business operations could
be adversely affected by new pricing, claim and coverage issues
emerging in the automobile insurance industry.
As insurance industry practices and regulatory, judicial and
consumer conditions change, unexpected and unintended issues
related to claims, coverages, business practices and premium
financing plans may emerge. These issues can have an adverse
effect on Delta Pluss business by changing the way it
prices products, by extending coverage beyond underwriting
intent, or by increasing the size of claims. The effects and
costs of these and other unforeseen emerging issues could
negatively affect Delta Pluss revenues and business
operations.
Insurance company operations, financial results and
capital requirements could be adversely affected if they fail to
pay claims accurately.
Our insurance company subsidiaries must accurately evaluate and
pay claims that are made under their respective policies. Many
factors affect our companys ability to pay claims
accurately, including the training and experience of claims
representatives, the claims organization culture, the
effectiveness of management, the ability to develop or select
and implement appropriate procedures and systems to support
claims functions and other factors. Our insurance company
subsidiaries failure to pay claims accurately could lead
to material litigation, undermine their reputation in the
marketplace, impair their image and negatively affect their
financial results.
Our ability to implement our business strategy could be
adversely affected by our insurance company subsidiaries
inability to retain and recruit qualified personnel.
Our insurance company subsidiaries success depends in part
on their ability to attract and retain qualified personnel. The
inability to recruit and retain qualified personnel could
prevent them from fully implementing their business strategies
and could materially and adversely affect its business, growth
and profitability.
Insurance company operations financial results could
be adversely affected by litigation.
Delta Plus is named as a defendant in a number of lawsuits.
Currently, First Life is not a named defendant in any
litigation. Litigation, by its very nature, is unpredictable and
the outcome of these cases is uncertain. The precise nature of
the relief that may be sought or granted in any lawsuits is
uncertain and may, if these lawsuits are determined adversely to
Delta Plus, negatively impact its earnings.
In addition, potential litigation involving new claim, coverage
and business practice issues could adversely affect our
insurance company subsidiaries business by changing the
way products are priced, extending coverage beyond underwriting
intent or increasing the size of claims. The effects of
unforeseen emerging claims, coverage and business practice
issues could negatively impact their profitability and methods
of doing business.
Insurance company operations investment portfolios
could be adversely affected by adverse securities market
conditions.
Each of our insurance company subsidiaries results of
operations depends in part on the safety and performance of its
invested assets. As of December 31, 2007, virtually all of
our insurance company subsidiaries investment portfolios
were invested in fixed income securities. Certain risks are
inherent in connection with fixed maturity securities including
loss upon default and price volatility in reaction to changes in
interest rates and general market factors. In general, the fair
value of a portfolio of fixed income securities increases or
decreases inversely with changes in the market interest rates,
while net investment income realized from future investments in
fixed income securities increases or decreases along with
interest rates.
27
Severe weather conditions and other catastrophes may
result in an increase in the number and amount of claims filed
against insurance company operations.
First Life and Delta Pluss business is exposed to the risk
of severe weather conditions and other catastrophic events, such
as rainstorms, snowstorms, hail and ice storms, hurricanes,
tornadoes, earthquakes, fires and other events such as
explosions, terrorist attacks and riots. The incidence and
severity of catastrophes and severe weather conditions are
inherently unpredictable. Such conditions generally result in
higher incidence of automobile accidents and an increase in the
number of claims filed, as well as the amount of compensation
sought by claimants.
Policy lapses in excess of those actuarially anticipated
would have a negative impact on our financial
performance.
If our insurance company subsidiaries policy lapse and
surrender rates were to exceed the assumptions upon which we
priced our insurance policies, our business could be adversely
affected. The prices and expected future profitability of our
insurance products are based in part upon expected patterns of
premiums, expenses and benefits, using a number of assumptions,
including those related to persistency, which is the probability
that a policy or contract will remain in-force from one period
to the next. Lapses occur when premium payments are not made.
Surrender of a policy occurs by an affirmative act of the
policyholder and is usually accompanied by an economic benefit
for the policyholder because the policy has accumulated value.
Policy acquisition costs are deferred and recognized over the
life of a policy. Actual persistency that is lower than our
persistency assumptions could have an adverse impact on
profitability, especially in the early years of a policy or
contract, primarily because we would be required to accelerate
the amortization of expenses we deferred in connection with the
acquisition of the policy or contract.
Sales of our products may be reduced if we are unable to
attract and retain marketing representatives or develop and
maintain distribution sources.
Our insurance company subsidiaries distribute insurance products
through a variety of distribution channels, including
independent marketing consultants, employee agents and
third-party marketing organizations. Our relationships with
these persons are significant both for our revenues and profits.
Strong competition exists among insurers to form relationships
with marketers of demonstrated ability. We compete with other
insurers for representatives and consultants primarily on the
basis of our compensation and support services. Any diminishment
in our inability to attract and retain effective sales
representatives could materially adversely affect our results of
operations and financial condition.
We may be required to accelerate the amortization of
deferred acquisition costs which would increase our expenses and
reduce profitability.
Deferred acquisition costs, or DAC, represent costs that vary
with and are primarily related to the sale and issuance of our
insurance policies that are deferred and amortized over the
estimated life of the related insurance policies. These costs
include commissions in excess of ultimate renewal commissions,
solicitation and printing costs, sales material and some support
costs, such as underwriting and contract and policy issuance
expenses. Under U.S. GAAP, DAC is amortized to income over
the lives of the underlying policies, in relation to the
anticipated recognition of premiums. Our amortization of DAC
generally depends upon anticipated profits from investments,
surrender and other policy charges, mortality, morbidity and
maintenance expense margins. Unfavorable experience with regard
to expected expenses, investment returns, mortality, morbidity,
withdrawals or lapses may cause us to increase the amortization
of DAC or to record a charge to increase benefit reserves.
We regularly review DAC quality to determine if they are
recoverable from future income. If these costs are not
recoverable, they are charged to expenses in the financial
period in which we make this determination. For example, if we
determine that we are unable to recover DAC from profits, or if
withdrawals or surrender charges associated with early
withdrawals do not fully offset the unamortized acquisition
costs related to that line of business, we would be required to
recognize the additional DAC amortization as a current-period
expense.
28
DAC costs are amortized primarily over the estimated premium
paying period of the related policies in proportion to the ratio
of the annual premium recognized to the total premium revenue
anticipated, using the same assumptions as were used in
computing liabilities for future policy benefits. Excess policy
lapses, however, would cause the immediate expensing or
amortizing of deferred policy acquisition costs, which would
adversely affect our profitability.
Failure to protect confidential information and privacy
could result in the loss of customers and reductions in our
profitability and subject us to fines and penalties.
Our insurance subsidiaries are subject to privacy regulations
and to confidentiality obligations. We also have legal
obligations to protect certain confidential information we
obtain from our existing vendors. These obligations generally
include protecting confidential information in the same manner
and to the same extent as we protect our own confidential
information. The actions we take to protect confidential
information include among other things: monitoring our record
retention plans and any changes in state or federal privacy and
compliance requirements; maintaining secure storage facilities
for tangible records; and limiting access to electronic
information in order to safeguard certain current information.
In addition, we deliver a notice regarding our privacy policy
both at the delivery of the insurance policy and annually
thereafter. Certain exceptions are allowed for sharing of
information under joint marketing agreements. However, certain
state laws may require individuals to opt in to information
sharing instead of being immediately included. Additionally,
when final U.S. Treasury Department regulations are
promulgated in connection with the USA Patriot Act, we will
likely have to expend additional resources to tailor our
existing efforts to the new rules.
If we do not comply with privacy regulations and protect
confidential information, we could experience adverse
consequences, including regulatory problems, loss of reputation
and litigation.
General economic, financial market and political
conditions may adversely affect our results of operations and
financial condition.
Our results of operations and financial condition may be
materially adversely affected from time to time by general
economic, financial market and political conditions. These
conditions include economic cycles such as:
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insurance industry cycles;
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levels of employment;
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levels of consumer spending;
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levels of inflation; and
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movements of the financial markets.
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Fluctuations in interest rates, monetary policy, demographics,
and legislative and competitive factors also influence our
performance. During periods of economic downturn, individuals
and businesses may choose not to purchase our insurance products
and other related products and services, may terminate existing
policies or contracts, permit them to lapse or may choose to
reduce the amount of coverage purchased.
Our debt instruments contain restrictive covenants and
other requirements that may limit business flexibility by
imposing operating and financial restrictions on
operations.
Certain of the agreements we have governing indebtedness contain
financial covenants that impose ratios, tests and restrictions
on us and our subsidiaries, such as maximum prepayment rate,
maximum loan loss rate, minimum fixed charge coverage ratio,
maximum cash leverage ratio, and maximum total leverage ratio.
These contain other restrictions on us and our subsidiaries,
including but not limited to: incurrence of indebtedness and
liens; restrictions on the reorganization, transfer and merger;
disposition of properties other than in the ordinary course of
business; entering into transactions with affiliates or into
material agreements other than in the ordinary course of
business; entering into pledge and negative pledge agreements;
and the declaration of dividends by us and our subsidiaries,
except in limited circumstances. Our ability and the ability of
our subsidiaries to comply with these ratios or tests may be
affected by events beyond our control, including
29
prevailing economic, financial and industry conditions. These
covenants may prevent us from expanding our operations and
executing our business strategy. In addition, a breach of any of
these covenants, ratios or tests could result in a default under
the agreements governing the indebtedness.
Risks
Related to Our Common Stock
Brooke Corporation is able to exert significant control
over us and may act in a manner that is adverse to our other
stockholders interests.
As of February 29, 2008, Brooke Corporation owned
approximately 81% of our outstanding common stock. As a result,
Brooke Corporation is able to exert significant influence over:
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the nomination, election and removal of our board of directors;
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the adoption of amendments to our charter documents;
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our management and policies; and
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the outcome of any corporate transaction or other matter
submitted to our stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our
assets.
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Brooke Corporations interests may conflict with the
interests of other holders of our common stock and it may take
actions affecting us with which other stockholders may disagree.
For example, in order to retain control in the controlling
group, it may decide not to enter into a transaction in which
our stockholders would receive consideration for their shares
that is much higher than the cost of their investment in our
common stock or than the then current market price of our common
stock. Any decision regarding the ownership of our company that
Brooke Corporation may make at some future time will be in its
absolute discretion.
Our relatively low trading volume may limit
stockholders ability to sell their shares.
Although shares of our common stock are listed on the American
Stock Exchange, our average daily trading volume has been
approximately 1,356 shares during the three months ended
February 29, 2008. As a result of this low trading volume,
stockholders may have difficulty selling a large number of
shares of our common stock in the manner or at the price that
might be attainable if our common stock were more actively
traded.
The price of our common stock may fluctuate significantly,
which may make it difficult for stockholders to resell common
stock when they want or at a price they find attractive.
Since September 2007, our common stock has traded at prices
ranging between $2.80 and $7.20 on the American Stock Exchange.
We expect that the market price of our common stock will
continue to fluctuate. Our common stock price can fluctuate as a
result of a variety of factors, many of which are beyond our
control. These factors include:
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actual or anticipated variations in our quarterly operating
results;
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failure to meet expectations of analysts or investors;
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adverse conditions in the securities or credit markets;
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any claims, litigation or regulatory proceedings that may be
brought against us;
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recommendations by securities analysts;
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changes in interest rates and other general economic conditions;
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significant acquisitions, divestitures or business combinations,
strategic partnerships, joint ventures or capital commitments by
or involving us or our competitors;
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operating and stock price performance of other companies that
investors deem comparable to us;
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news reports relating to trends, concerns, litigation,
regulatory changes and other issues in our industry;
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30
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geopolitical conditions such as acts or threats of terrorism or
military conflicts; and
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relatively low trading volume.
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Kansas law and our articles of incorporation and bylaws
contain anti-takeover provisions that could delay or discourage
takeover attempts that stockholders may consider
favorable.
Certain provisions of our articles of incorporation and our
bylaws and of Kansas law may discourage, delay or prevent
transactions that our stockholders may consider favorable,
including transactions that could provide for payment of a
premium over the prevailing market price of our common stock,
and also may limit the price that investors are willing to pay
in the future for our common stock. For example, our articles of
incorporation contain provisions, such as allowing our board of
directors to issue preferred stock with rights superior to those
of our common stock without the consent of our stockholders,
which could make it more difficult for a third party to acquire
us without the consent of our board of directors. In addition,
our bylaws establish that our independent directors have neither
the right nor the obligation to vote for the nomination,
election or removal of directors of our company; those rights
and obligations rest solely with the representative of our
controlling shareholder.
Our principal executive offices are located in owned premises at
8500 College Boulevard, Overland Park, Kansas 66210, and our
telephone number is
(913) 661-0123.
In addition to serving as our principal executive offices, this
facility will be used to house a center for training franchisees
and employees, and a service center for our franchise
operations. We also lease space in an additional office building
in Overland Park, Kansas.
In Phillipsburg, Kansas, we lease from Brooke Corporation a
processing center and own an advertising center. The advertising
center also houses our facilities teams. We own a building in
Dallas, Texas that houses a regional office and service center.
We lease additional offices in Englewood, Colorado, Nashville,
Tennessee, and Sacramento, California, as well as brokerage
underwriting offices, and franchise customer service centers in
other locations in the United States. We, or our subsidiaries,
may acquire or lease real estate for use in our
subsidiaries operations and for lease, sublease or license
to franchisees.
First Life owns a 20,000 square foot office building on
approximately six and one-half acres of land located in Topeka,
Kansas. First Life occupies approximately 7,500 square feet
of the building, and the remainder of the building is leased to
agencies of the federal government.
The properties from which operations are conducted are not
materially important to us. Management believes that our current
leased and owned facilities are in good repair and adequate for
current and proposed operations. In managements opinion,
adequate insurance has been purchased for each of the
above-referenced properties.
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ITEM 3.
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LEGAL
PROCEEDINGS.
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We and our subsidiaries have from time-to-time been parties to
claims and lawsuits that are incidental to our business
operations. While ultimate liability with respect to these
claims and litigation is difficult to predict, we believe that
the amount, if any, that we are required to pay in the discharge
of liabilities or settlements in these matters will not have a
material adverse effect on our combined results of operations or
financial position.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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A special meeting of our stockholders was held on
November 5, 2007. At the meeting, our stockholders approved
(i) the proposal (the Merger Proposal) to adopt
the Agreement and Plan of Merger dated as of August 31,
2007, as amended, among us, Brooke Corporation and Brooke
Franchise Corporation (Brooke Franchise);
(ii) the proposal (Exchange Proposal) to adopt
the Exchange Agreement, dated as of August 31, 2007, as
amended, among us, Delta Plus. and Brooke Corporation; and
(iii) approved an amendment to the Brooke Capital
Corporation 2007 Equity Incentive Plan (the Equity
Incentive Plan Amendment Proposal) to
31
increase the total number of shares of common stock that may be
awarded under the plan from 400,000 shares to
2,400,000 shares.
Final tabulations of the vote at the special meeting of
stockholders was as follows:
Approval of the Merger Proposal:
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BROKER
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FOR
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AGAINST
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ABSTAIN
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NO VOTE
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2,165,467
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-0-
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-0-
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-0-
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The shares voted for the Merger Proposal represented
approximately 62% of the shares of common stock outstanding and
entitled to vote on the Merger Proposal.
Approval of the Exchange Proposal:
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BROKER
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FOR
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AGAINST
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ABSTAIN
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NO VOTE
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2,165,467
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-0-
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-0-
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-0-
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Approval of the Equity Incentive Plan Amendment Proposal:
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BROKER
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FOR
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AGAINST
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ABSTAIN
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NO VOTE
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2,165,467
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-0-
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-0-
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-0-
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The shares voted for the Exchange Proposal and the Equity
Incentive Plan Amendment Proposal represented 100% of the shares
present in person or represented by proxy and entitled to vote
on these matters. No proxies were solicited in connection with
the matters voted on at the special meeting.
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
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Market
Information.
Our common stock, $.01 par value, has traded under the
symbol BCP on the American Stock Exchange
(AMEX) since August 30, 2007. Prior to that
date, there was no public trading market for our common stock.
During the most recently completed fiscal year, the high and low
prices for our common stock for each of the last two quarters
have been as follows:
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Quarter
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Ending
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High Bid/Sale
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Low Bid/Sale
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Third
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September 30, 2007
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$
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6.85
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$
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5.00
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Fourth
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December 31, 2007
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$
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7.20
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$
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3.50
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On February 29, 2008, the closing price for our common
stock on the AMEX was $3.10 per share.
Holders
of Common Stock.
On February 29, 2008, there were 4,945 stockholders of
record of our common stock and an indeterminate number of
stockholders whose shares are held by brokers or
nominees in street name.
Dividends.
We have not paid any cash dividends. We anticipate that for the
foreseeable future any and all earnings will be retained to fund
the growth of our insurance business and for other working
capital purposes and that as a result no dividends are currently
planned. We are restricted from paying dividends by our debt
instruments.
32
Securities
Authorized for Issuance under Equity Compensation
Plans.
The following table shows information related to the stock
options that have been granted and the number of shares
remaining available for grant under the Companys existing
equity compensation plans as of December 31, 2007.
Equity
Compensation Plan Information
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Number of Securities
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Number of Securities
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Remaining Available for
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to be Issued upon
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Weighted Average
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Future Issuance Under
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Exercise of
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Exercise Price of
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Equity Compensation
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Outstanding Options,
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Outstanding Options,
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Plans (Excluding Securities
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Plan Category
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Warrants and Rights
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Warrants and Rights
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Reflected in First Column)
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Equity compensation plans approved by security holders
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2,010,000
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(1)
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Equity compensation plans not approved by security holders
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Total
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2,010,000
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(1) |
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A total of 2,400,000 shares are authorized for issuance
pursuant to the Brooke Capital Corporation 2007 Equity Incentive
Plan, which became effective on June 7, 2007, upon approval
by our stockholders. On August 15, 2007, 390,000 restricted
share awards were granted under such plan. |
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers.
During the fourth quarter of the fiscal year ended
December 31, 2007, there were no purchases of equity
securities by us or any affiliated purchaser of shares or other
units of any class of equity securities registered by us
pursuant to Section 12 of the Securities Exchange Act of
1934 (the Exchange Act).
33
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA.
|
SELECTED
COMBINED FINANCIAL DATA
The following table sets forth selected historical combined
financial information for the periods ended and as of the dates
indicated.
The following income statement data for the years ended
December 31, 2007, 2006 and 2005 and balance sheet data as
of December 31, 2007 and 2006 are derived from our audited
financial statements, which are included elsewhere in this
report. The following income statement data for the years ended
December 31, 2004 and 2003 and balance sheet data as of
December 31, 2005, 2004 and 2003 represent the financial
position and results of operations for Brooke Franchise
Corporation and are derived from that companys separate
audited financial statements not included in this report. As
discussed in an earlier Explanatory Note, the
periods prior to December 8, 2006, represent those of
Brooke Franchise Corporation as the deemed
predecessor prior to its merger with and into the Company
on November 15, 2007 and have been restated accordingly.
You should read this data together with our financial statements
and related notes included elsewhere in this report and the
information under Managements Discussion and
Analysis of Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance commissions
|
|
$
|
114,588
|
|
|
|
99,190
|
|
|
|
80,490
|
|
|
|
57,619
|
|
|
|
40,111
|
|
Interest income
|
|
|
1,925
|
|
|
|
340
|
|
|
|
139
|
|
|
|
39
|
|
|
|
9
|
|
Consulting fees
|
|
|
10,423
|
|
|
|
3,928
|
|
|
|
4,916
|
|
|
|
5,236
|
|
|
|
4,109
|
|
Gain on sale of businesses
|
|
|
2,057
|
|
|
|
3,059
|
|
|
|
3,091
|
|
|
|
5,261
|
|
|
|
388
|
|
Initial franchise fees for basic services
|
|
|
32,505
|
|
|
|
31,770
|
|
|
|
19,375
|
|
|
|
8,795
|
|
|
|
425
|
|
Initial franchise fees for buyer assistance plans
|
|
|
455
|
|
|
|
3,137
|
|
|
|
10,133
|
|
|
|
8,122
|
|
|
|
8,147
|
|
Insurance premiums earned
|
|
|
3,710
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
5,987
|
|
|
|
2,200
|
|
|
|
874
|
|
|
|
211
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues
|
|
|
171,650
|
|
|
|
143,732
|
|
|
|
119,018
|
|
|
|
85,283
|
|
|
|
53,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions expense
|
|
|
89,182
|
|
|
|
78,342
|
|
|
|
64,233
|
|
|
|
46,725
|
|
|
|
33,689
|
|
Payroll expense
|
|
|
24,900
|
|
|
|
23,153
|
|
|
|
19,620
|
|
|
|
11,262
|
|
|
|
5,433
|
|
Depreciation and amortization
|
|
|
1,749
|
|
|
|
89
|
|
|
|
(14
|
)
|
|
|
429
|
|
|
|
38
|
|
Other operating expense
|
|
|
49,321
|
|
|
|
35,447
|
|
|
|
25,978
|
|
|
|
15,929
|
|
|
|
10,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
165,152
|
|
|
|
137,031
|
|
|
|
109,817
|
|
|
|
74,345
|
|
|
|
49,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
6,498
|
|
|
|
6,701
|
|
|
|
9,201
|
|
|
|
10,938
|
|
|
|
3,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,066
|
|
|
|
1,700
|
|
|
|
1,515
|
|
|
|
1,344
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses
|
|
|
3,066
|
|
|
|
1,700
|
|
|
|
1,515
|
|
|
|
1,344
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
3,432
|
|
|
|
5,001
|
|
|
|
7,686
|
|
|
|
9,594
|
|
|
|
3,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
1,094
|
|
|
|
1,497
|
|
|
|
2,920
|
|
|
|
3,262
|
|
|
|
1,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
2,338
|
|
|
|
3,504
|
|
|
|
4,766
|
|
|
|
6,332
|
|
|
|
2,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share data)
|
|
|
Net Income per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share(1)
|
|
$
|
0.29
|
|
|
|
0.54
|
|
|
|
0.74
|
|
|
|
0.96
|
|
|
|
0.36
|
|
Diluted net income per share(2)
|
|
$
|
0.28
|
|
|
|
0.50
|
|
|
|
0.74
|
|
|
|
0.96
|
|
|
|
0.36
|
|
Weighted average of shares basic outstanding(3)
|
|
|
8,201,026
|
|
|
|
6,497,638
|
|
|
|
6,437,925
|
|
|
|
6,562,359
|
|
|
|
6,562,359
|
|
Weighted average of shares diluted outstanding(3)
|
|
|
8,208,026
|
|
|
|
6,958,672
|
|
|
|
6,437,925
|
|
|
|
6,562,359
|
|
|
|
6,562,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except number of franchises)
|
|
|
Balance Sheet and Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
79,124
|
|
|
|
83,266
|
|
|
|
52,150
|
|
|
|
45,179
|
|
|
|
24,615
|
|
Cash and cash equivalents
|
|
|
2,633
|
|
|
|
14,344
|
|
|
|
5,406
|
|
|
|
6,721
|
|
|
|
9,576
|
|
Accounts and notes receivable, net
|
|
|
30,567
|
|
|
|
20,700
|
|
|
|
9,590
|
|
|
|
4,545
|
|
|
|
2,505
|
|
Investments
|
|
|
18,867
|
|
|
|
12,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
110,205
|
|
|
|
94,300
|
|
|
|
58,141
|
|
|
|
47,300
|
|
|
|
25,277
|
|
Total liabilities
|
|
|
97,458
|
|
|
|
64,062
|
|
|
|
40,583
|
|
|
|
37,508
|
|
|
|
21,817
|
|
Total debt(4)
|
|
|
50,491
|
|
|
|
28,337
|
|
|
|
27,167
|
|
|
|
25,773
|
|
|
|
13,365
|
|
Total stockholders equity
|
|
$
|
12,747
|
|
|
|
30,238
|
|
|
|
17,558
|
|
|
|
9,792
|
|
|
|
3,460
|
|
Number of franchise locations
|
|
|
882
|
|
|
|
737
|
|
|
|
552
|
|
|
|
370
|
|
|
|
234
|
|
|
|
|
(1) |
|
Basic net income per share is calculated by dividing net income
(loss) by the weighted average number of shares of the
Companys common stock outstanding. |
|
(2) |
|
Diluted net income (loss) per share is calculated by including
the weighted average effect of dilutive warrants outstanding
during the periods. |
|
(3) |
|
The weighted average number of shares outstanding has been
adjusted to reflect a
1-for-3
reverse stock split in 2007 and the issuance of
5,000,000 shares of stock in connection with the
November 15, 2007 merger of Brooke Franchise Corporation
with and into Brooke Capital Corporation. |
|
(4) |
|
Includes short-term and long-term debt. |
35
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Amounts in this section have been rounded to the nearest
thousand, except percentages, ratios, per share data, numbers of
franchise locations and numbers of businesses. Unless otherwise
indicated, or unless the context otherwise requires, references
to years in this section mean our fiscal years ended
December 31.
General
Insurance company revenues are generated from the issuance of
life insurance and annuity policies sold by independent
insurance agents through First Life America Corporation (First
Life), a Kansas domiciled life insurance company subsidiary.
Insurance agency revenues are also generated from commissions
paid on the sale of property and casualty insurance policies
issued through third party insurance companies, but sold through
independent insurance agents. Commission revenues typically
represent a percentage of insurance premiums paid by
policyholders. Premium amounts and commission percentage rates
are established by third party insurance companies, so we have
little or no control over the commission amount generated from
the sale of a specific insurance policy. Revenues are also
generated from initial franchise fees, seller consulting fees
and borrower consulting fees.
Results
of Operation
A merger between Brooke Capital Corporation and Brooke Franchise
Corporation occurred November 15, 2007, with Brooke Capital
being the surviving corporation. This merger represented a
transaction between entities under common control. Accordingly,
we have recorded the assets and liabilities of Brooke Franchise
Corporation at their carrying amounts at the date of transfer as
if the transaction had taken place as of the beginning of the
period. In addition, our results of operations and other changes
in financial position for the current year have been reported as
if the merger had occurred at the beginning of the period.
Prior years financial statements and related disclosures
have been restated to furnish comparative information for the
period during which Brooke Franchise and Brooke Capital have
been under common control. As Brooke Corporation (parent to both
Brooke Franchise and Brooke Capital) acquired its controlling
interest in us on December 8, 2006, the combined financial
statements and other information presented for periods prior to
December 8, 2006 represent those of Brooke Franchise
Corporation only.
36
Our combined results of operations have been significantly
impacted by expansion of franchise locations in recent years.
The following table shows income and expenses (in thousands,
except percentages and per share data) for the years ended
December 31, 2007, 2006 and 2005, and the percentage change
from year to year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006%
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
% Increase
|
|
|
Year Ended
|
|
|
Increase
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
(decrease)
|
|
|
December 31,
|
|
|
(decrease)
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
over 2006
|
|
|
2006
|
|
|
over 2005
|
|
|
2005
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance commissions
|
|
$
|
114,588
|
|
|
|
16
|
%
|
|
$
|
99,190
|
|
|
|
23
|
%
|
|
$
|
80,490
|
|
|
|
|
|
Consulting fees
|
|
|
10,423
|
|
|
|
165
|
|
|
|
3,928
|
|
|
|
(20
|
)
|
|
|
4,916
|
|
|
|
|
|
Gain on sale of businesses
|
|
|
2,057
|
|
|
|
(33
|
)
|
|
|
3,059
|
|
|
|
(1
|
)
|
|
|
3,091
|
|
|
|
|
|
Initial franchise fees for basic services
|
|
|
32,505
|
|
|
|
2
|
|
|
|
31,770
|
|
|
|
64
|
|
|
|
19,375
|
|
|
|
|
|
Initial franchise fees for buyers assistance plans
|
|
|
455
|
|
|
|
(85
|
)
|
|
|
3,137
|
|
|
|
(69
|
)
|
|
|
10,133
|
|
|
|
|
|
Insurance premiums earned
|
|
|
3,710
|
|
|
|
3,335
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,925
|
|
|
|
466
|
|
|
|
340
|
|
|
|
145
|
|
|
|
139
|
|
|
|
|
|
Other income
|
|
|
5,987
|
|
|
|
172
|
|
|
|
2,200
|
|
|
|
152
|
|
|
|
874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
171,650
|
|
|
|
19
|
|
|
|
143,732
|
|
|
|
21
|
|
|
|
119,018
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission expense
|
|
|
89,182
|
|
|
|
14
|
|
|
|
78,342
|
|
|
|
22
|
|
|
|
64,233
|
|
|
|
|
|
Payroll expense
|
|
|
24,900
|
|
|
|
8
|
|
|
|
23,153
|
|
|
|
18
|
|
|
|
19,620
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,749
|
|
|
|
1,865
|
|
|
|
89
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
Other operating expenses
|
|
|
49,321
|
|
|
|
39
|
|
|
|
35,447
|
|
|
|
36
|
|
|
|
25,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
165,152
|
|
|
|
21
|
|
|
|
137,031
|
|
|
|
25
|
|
|
|
109,817
|
|
|
|
|
|
Income from operations
|
|
|
6,498
|
|
|
|
(3
|
)
|
|
|
6,701
|
|
|
|
(27
|
)
|
|
|
9,201
|
|
|
|
|
|
Interest expense
|
|
|
3,066
|
|
|
|
80
|
|
|
|
1,700
|
|
|
|
12
|
|
|
|
1,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
3,432
|
|
|
|
(31
|
)%
|
|
$
|
5,001
|
|
|
|
(35
|
)%
|
|
$
|
7,686
|
|
|
|
|
|
Total assets (at period end)
|
|
$
|
110,205
|
|
|
|
17
|
%
|
|
$
|
94,300
|
|
|
|
62
|
%
|
|
$
|
58,141
|
|
|
|
|
|
A more detailed description of our financial condition and
operating results as reported by the insurance company
operations, insurance agency operations and corporate activities
segments follows. The significant changes in revenues, expenses
and net income from the above table are primarily attributable
to our insurance agency segment. (See Insurance Agency
Operation Segment)
37
The following table shows selected assets and liabilities (in
thousands, except percentages) as of December 31, 2007,
2006 and 2005, and the percentage change from year to year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
As of
|
|
|
(decrease)
|
|
|
As of
|
|
|
(decrease)
|
|
|
As of
|
|
|
|
December 31, 2007
|
|
|
over 2006
|
|
|
December 31, 2006
|
|
|
over 2005
|
|
|
December 31, 2005
|
|
|
Investments
|
|
$
|
18,867
|
|
|
|
50
|
%
|
|
$
|
12,582
|
|
|
|
|
|
|
$
|
|
|
Accounts and notes receivable
|
|
|
30,567
|
|
|
|
48
|
|
|
|
20,700
|
|
|
|
116
|
|
|
|
9,590
|
|
Other receivables
|
|
|
2,443
|
|
|
|
52
|
|
|
|
1,604
|
|
|
|
45
|
|
|
|
1,106
|
|
Property and equipment
|
|
|
15,709
|
|
|
|
446
|
|
|
|
2,878
|
|
|
|
1,051
|
|
|
|
250
|
|
Deferred charges
|
|
|
5,406
|
|
|
|
4
|
|
|
|
5,209
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
7,353
|
|
|
|
318
|
|
|
|
1,759
|
|
|
|
40
|
|
|
|
1,252
|
|
Policy and contract liabilities
|
|
|
25,996
|
|
|
|
29
|
|
|
|
20,184
|
|
|
|
|
|
|
|
|
|
Premiums payable
|
|
|
5,322
|
|
|
|
(11
|
)
|
|
|
5,956
|
|
|
|
49
|
|
|
|
4,003
|
|
Debt
|
|
|
50,491
|
|
|
|
78
|
|
|
|
28,337
|
|
|
|
4
|
|
|
|
27,167
|
|
Investments increased as a result of investing premiums
generated from the sale of annuity and other life insurance
products.
Accounts and notes receivable primarily include amounts owed by
our franchisees and increased primarily from continued expansion
of our franchise operations, especially the producer development
program typically associated with start up franchises. A loss
reserve exists for our credit loss exposure to these receivable
balances from franchisees (See Insurance Agency Operation
Segment, below).
Customer receivables, notes receivables, interest earned not
collected on notes and allowance for doubtful accounts are the
items that comprise our accounts and notes receivable, net, as
shown on our combined balance sheet.
Other receivables increased primarily from amounts due from
franchisees for purchase of insurance agencies.
Property and equipment increased from the purchase of franchise
related equipment from the parent company Brooke Corporation in
June of 2007.
Deferred charges include primarily the fees associated with the
costs of acquiring life insurance by First Life. Policy and
contract liabilities increased with the sale of annuities and
other life insurance products
Accounts payable, which includes franchise payables, payroll
payables and other accrued expenses, increased primarily from
the continued expansion of our franchise operations.
The premiums payable liability category is comprised primarily
of amounts due to insurance companies for premiums that are
billed and collected by our franchisees. Premiums payable
decreased primarily from temporary fluctuations in agent billed
activity.
Debt increased primarily as the result of expansion of the
franchise operations.
Analysis
by Segment
Our two reportable segments are Insurance Company Operations and
Insurance Agency Operations.
Our insurance company operations include the issuance of life
insurance policies by First Life America Corporation (First
Life). First Life sells life insurance and annuity products in
eight states throughout the Midwest.
38
Our insurance agency operations include our franchise agency
operations and our insurance agency consulting activities. Our
franchise agency operations include the sale of insurance,
financial and credit services on a retail basis through
franchisees.
Revenues, expenses, assets and liabilities that are not
allocated to one of the two reportable segments are categorized
as Corporate. Activities associated with Corporate
include functions such as accounting, auditing, legal, human
resources and investor relations.
Insurance
Company Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Year Ended
|
|
|
% Increase
|
|
|
23 Days Ended
|
|
|
% Increase
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
(decrease)
|
|
|
December 31,
|
|
|
(decrease)
|
|
|
December 31,
|
|
|
|
2007
|
|
|
over 2006
|
|
|
2006
|
|
|
over 2005
|
|
|
2005
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums earned
|
|
|
3,710
|
|
|
|
3,335
|
%
|
|
|
108
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,410
|
|
|
|
2,069
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
248
|
|
|
|
1,671
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
5,368
|
|
|
|
2,771
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission expense
|
|
|
167
|
|
|
|
596
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
Payroll expense
|
|
|
474
|
|
|
|
1,115
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
805
|
|
|
|
3,733
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
3,791
|
|
|
|
3,976
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,237
|
|
|
|
2,859
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
131
|
|
|
|
1,210
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
131
|
|
|
|
1,210
|
|
|
$
|
10
|
|
|
|
|
|
|
$
|
|
|
Total assets (at period end)
|
|
$
|
33,190
|
|
|
|
16
|
%
|
|
$
|
28570
|
|
|
|
|
%
|
|
$
|
|
|
As noted previously, the financial information reported for us
includes the results of operations and cash flows for the
insurance company operations conducted by First Life America
Corporation (First Life) since December 8,
2006, the date that Brooke Corporation acquired its controlling
interest in First Life. While our reported results of operations
do not include activity related to insurance company operations
prior to December 8, 2006, the discussion that follows
makes reference to certain aspects of the results of operations
as originally reported by First Life and included in the
consolidated financial statements filed by us in prior
years annual reports. This information is being provided
for comparative purposes only, in connection with
managements discussion and analysis of the life insurance
companys operations during 2007 as compared to prior
periods. Income and expenses reported in the table above do not
include results of operations prior to December 8, 2006.
Accordingly, no information is presented prior to
December 8, 2006, including for the year ended
December 31, 2005 and any % increase (decrease) of such
values over 2005, as we did not control the operations of First
Life during that period.
Net premium income levels of $3,710,000 and $3,677,000 reported
during 2007 and 2006 were slightly lower than the $3,793,000
reported during 2005. Net first year premium income increased
10% to $464,000 in 2007 as compared to $422,000 in 2006 due
largely to First Lifes ability to again write new policies
in the state of Ohio. Gross first year premium income had
declined during each of the last three years primarily due to
First Lifes inability to write new business in the state
of Ohio during 2005, 2006 and much of 2007 and due to capital
restrictions that limited its ability to promote other new
business. First Life was released from its Memorandum of
Understanding with the Ohio Department of Insurance on
May 3, 2007 and has now re-established relationships with
agents in that market.
39
Net renewal year premium income reported of approximately
$3,217,000 during 2007 was comparable to the $3,228,000 reported
during 2006 with both years about 8% higher than the $2,973,000
reported during 2005. Renewal premiums reflect the premium
collected in the current year for those policies that have
surpassed their first policy anniversary. Gross renewal premiums
will continue to increase unless premiums lost from surrenders,
lapses, settlement options or application of the non-forfeiture
options, exceed prior years first year premium.
Policy reserve expense of $926,000 during 2007 was 10% higher
than the $841,000 reported during 2006 and significantly lower
than the $1,119,000 reported during 2005. Life insurance
reserves are actuarially determined based on such factors as
insured age, life expectancy, mortality and interest
assumptions. As more life insurance is written and existing
policies reach additional durations, policy reserve requirements
will continue to increase.
Our death claims expense has more than doubled in the past two
years increasing by 42% to $1,049,000 during 2007. Death claims
expense of $737,000 in 2006 was 45% higher than the $507,000
reported during 2005. Increases in death claims expense are
reflective of the continued maturation of the final expense
policies, which are generally purchased by consumers in their
senior years.
Commissions, which totaled $886,000 during 2007 were 9% higher
than the $810,000 reported during 2006; both years were
significantly lower than the $1,201,000 reported during 2005.
Commissions capitalized as part of deferred policy acquisitions
totaled $720,000, $535,000 and $887,000 for 2007, 2006 and 2005,
respectively. Commissions paid are based on a percentage of
premiums and determined in the product design. Additionally,
higher percentage commissions are paid for first year business
than renewal year. The decreased levels of commissions paid
during 2007 and 2006 as compared to 2005 are directly related to
the decrease in gross first year whole life premiums reported
during those years.
Policy acquisition costs deferred decreased by 35% during 2006
as compared to 2005 while increasing 13% during 2007 as compared
to 2006. These acquisition costs result from the capitalization
of costs related to the sales of life insurance and include
commissions on first year business, medical exam and inspection
report fees, and salaries of employees directly involved in the
marketing, underwriting and policy issuance functions. The
overall decline in the level of these costs deferred is directly
related to reduced levels of gross first year whole life
premiums reported during 2007 and 2006. Amortization of deferred
policy acquisition costs were $724,000, $738,000 and $631,000
during 2007, 2006 and 2005, respectively. Management performs
quarterly reviews of the recoverability of deferred acquisition
costs based on current trends as to persistency, mortality and
interest. These trends are compared to the assumptions used in
the establishment of the original asset in order to assess the
need for impairment. Based on the results of the aforementioned
procedures performed by management, no impairments have been
recorded against the balance of deferred acquisition costs.
Interest credited on annuities and premium deposits totaled
$799,000, $579,000 and $406,000 during 2007, 2006 and 2005,
respectively. These increases of 38% and 43% during 2007 and
2006, respectively, reflect the increases in annuity fund
balances resulting from deposits of $5,484,000 and $3,549,000
during each of 2007 and 2006, less surrenders of $1,202,000 and
$766,000 during those two years. Both interest credited on
annuities and premium deposits have increased as a result of the
increase in the number of policies in force (10,332; 9,974 and
9,856 as of December 31, 2007, 2006 and 2005,
respectively). The average interest credit rate on annuities and
premium deposits has ranged from 4.7% to 4.9% during 2005, 2006
and 2007. Management maintains efforts to more effectively
manage the interest rate spread between the rate we earn on our
investment portfolio and the rate being credited to policyholder
accounts. Management introduced several new annuity products
marketed during 2005, 2006 and 2007, which are deemed to be
shorter in duration and thus credit interest at a lesser rate
than other annuities which have historically been offered by us.
Increases in our annuity and policy benefit liabilities are
largely related to increased sales of our various annuity and
life insurance products.
Our available-for-sale fixed maturity securities increased to
$18,675,000 at December 31, 2007 as compared to $12,299,000
at December 31, 2006 as a result of its ability to invest
funds generated from the sale of annuity and other insurance
products and other sources. Purchases of available-for-sale
fixed maturity
40
securities, net of maturities were $6,740,000 during 2007. Net
investment income was 36% higher during 2007 as compared to 2006
primarily as a result of this growth in the portfolio. During
2007, the market value of our available-for-sale fixed maturity
and equity securities decreased by $311,000, due primarily to
changes in interest rates.
Other operating expenses recorded during 2007 (including
salaries, wages and employee benefits expenses related to the
life insurance operations) were similar to those reported during
2006.
Insurance
Agency Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Year Ended
|
|
|
% Increase
|
|
|
Year Ended
|
|
|
% Increase
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
(decrease)
|
|
|
December 31,
|
|
|
(decrease)
|
|
|
December 31,
|
|
|
|
2007
|
|
|
over 2006
|
|
|
2006
|
|
|
over 2005
|
|
|
2005
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance commissions
|
|
$
|
114,588
|
|
|
|
16
|
%
|
|
$
|
99,190
|
|
|
|
23
|
%
|
|
$
|
80,490
|
|
Consulting fees
|
|
|
10,423
|
|
|
|
282
|
|
|
|
2,731
|
|
|
|
(44
|
)
|
|
|
4,916
|
|
Gain on sale of businesses
|
|
|
2,057
|
|
|
|
(33
|
)
|
|
|
3,059
|
|
|
|
(1
|
)
|
|
|
3,091
|
|
Initial franchise fees for basic services
|
|
|
32,505
|
|
|
|
2
|
|
|
|
31,770
|
|
|
|
64
|
|
|
|
19,375
|
|
Initial franchise fees for buyers assistance plans
|
|
|
455
|
|
|
|
(85
|
)
|
|
|
3,137
|
|
|
|
(69
|
)
|
|
|
10,133
|
|
Interest income
|
|
|
408
|
|
|
|
48
|
|
|
|
275
|
|
|
|
97
|
|
|
|
139
|
|
Other income
|
|
|
5,744
|
|
|
|
163
|
|
|
|
2,186
|
|
|
|
150
|
|
|
|
874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
166,180
|
|
|
|
17
|
|
|
|
142,348
|
|
|
|
20
|
|
|
|
119,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission expense
|
|
|
89,015
|
|
|
|
14
|
|
|
|
78,318
|
|
|
|
22
|
|
|
|
64,233
|
|
Payroll expense
|
|
|
23,827
|
|
|
|
3
|
|
|
|
23,114
|
|
|
|
18
|
|
|
|
19,620
|
|
Depreciation and amortization
|
|
|
891
|
|
|
|
1,210
|
|
|
|
68
|
|
|
|
|
|
|
|
(14
|
)
|
Other operating expenses
|
|
|
44,281
|
|
|
|
26
|
|
|
|
35,241
|
|
|
|
36
|
|
|
|
25,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
158,014
|
|
|
|
16
|
|
|
|
136,741
|
|
|
|
25
|
|
|
|
109,817
|
|
Income from operations
|
|
|
8,166
|
|
|
|
46
|
|
|
|
5,607
|
|
|
|
(39
|
)
|
|
|
9,201
|
|
Interest expense
|
|
|
3,066
|
|
|
|
80
|
|
|
|
1,700
|
|
|
|
12
|
|
|
|
1,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
5,100
|
|
|
|
31
|
%
|
|
$
|
3,907
|
|
|
|
(49
|
)%
|
|
$
|
7,686
|
|
Total assets (at period end)
|
|
$
|
66,204
|
|
|
|
5
|
%
|
|
$
|
63,043
|
|
|
|
8
|
%
|
|
$
|
58,141
|
|
Commission Revenues are from sales commissions on policies sold
by its franchisees that are written, or issued, by third-party
insurance companies. Commission revenues typically represent a
percentage of insurance premiums paid by policyholders. Premium
amounts and commission percentage rates are established by
independent insurance companies, so we have little or no control
over the commission amount generated from the sale of a specific
insurance policy written through a third-party insurance
company. We primarily rely on the recruitment of additional
franchisees to increase insurance commission revenues.
Retail insurance commissions have increased primarily as a
result of continued expansion of franchise operations. However,
these revenues are not sufficient to be considered material and
are, therefore, combined with insurance commission revenues.
Commission expense increased because insurance commission
revenues increased and franchisees are typically paid a share of
insurance commission revenue. Commission expense represented
approximately 78%, 79% and 80%, respectively, of insurance
commission revenue for the years ended December 31, 2007,
2006 and 2005. We expect commission expenses to increase in 2008
due to the bonus back of a portion of monthly
franchise fees implemented in late 2007.
We sometimes retain an additional share of franchisees
commissions as payment for franchisee optional use of our
service or sales centers. However, all such payments are applied
to service center/sales center
41
expenses and not applied to commission expense. As of
December 31, 2007 and 2006, service centers/sales centers
totaled 10 and 20, respectively.
Profit sharing commissions, or our share of insurance company
profits paid by insurance companies on policies written by
franchisees, and other such performance compensation, decreased
$303,000, or 5%, to $5,343,000 in 2007 and $607,000, or 12%, to
$5,646,000 in 2006. Profit sharing commissions represented
approximately 5%, 6% and 6%, respectively, of insurance
commissions for the years ended December 31, 2007, 2006 and
2005. Franchisees do not receive any share of profit sharing
commissions.
Net commission refund liability is our estimate of the amount of
our share of retail commission refunds due to insurance
companies resulting from future policy cancellations. As of
December 31, 2007 and 2006, we recorded corresponding total
commission refund liabilities of $481,000 and $535,000,
respectively. Correspondingly, commission refund expense
decreased in 2007 to reflect this lower estimate.
Other operating expenses represented approximately 27%, 25% and
22%, respectively, of total revenues for the years ended
December 31, 2007, 2006 and 2005. Other operating expenses
increased at a faster rate than total operating revenues
primarily as the result of the provision of additional
collateral preservation assistance to franchisees coping with
financial stress resulting from less commission revenue from
reduction of premium rates by insurance companies.
Marketing allowance expense is incurred primarily for the
purpose of providing collateral preservation assistance.
Marketing allowances made to franchisees increased $1,269,000,
or 28%, to $5,802,000 in 2007 from $4,533,000 in 2006. Marketing
allowances made to franchisees increased $901,000, or 25%, to
$4,533,000 in 2006 from $3,632,000 in 2005.
Company-owned stores expense is incurred primarily for the
purpose of providing collateral preservation assistance.
Operating expenses for company-owned stores increased
$5,562,000, or 86%, to $12,056,000 in 2007 from $6,494,000 in
2006. Although operating expenses from company-owned stores
represented a significant part of the overall increase in other
operating expenses, these expenses were mostly offset by
commission revenues generated by company-owned stores totaling
$8,546,000 and $6,151,000, respectively, for the years ended
December 31, 2007 and 2006. Company-owned stores revenues
and expenses for years prior to 2005 are not available.
Advertising expenses decreased $29,000 to $8,276,000 in 2007
from $8,305,000 in 2006. Advertising expenses increased
$2,085,000, or 34%, to $8,305,000 in 2006 from $6,220,000 in
2005.
Expenses for write off of franchise balances increased
$1,065,000, or 30%, to $4,628,000 in 2007. Write off expenses
increased $730,000, or 26%, to $3,563,000 in 2006 from
$2,833,000 in 2005. Total write off expenses increased in 2007
primarily as the result of the provision of additional
collateral preservation assistance to franchisees coping with
financial stress resulting from less commission revenue from
reduction of premium rates by insurance companies, but were
reduced as the result of an agreement with Brooke Corporation to
guarantee franchise balances pursuant to the merger agreement.
The following table summarizes information relating to revenues
and expenses associated with insurance agent relationships
primarily as defined in the franchise agreement.
Comparison
of Net Commissions Breakdown to Corresponding Expenses Breakdown
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
|
|
|
Incurred for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
|
Operation of
|
|
|
Service Center
|
|
|
Expenses
|
|
|
Profit Sharing
|
|
|
Expenses
|
|
|
|
Collected from
|
|
|
Phillipsburg
|
|
|
Fees Collected from
|
|
|
Incurred for
|
|
|
Commissions
|
|
|
Incurred for
|
|
|
|
Franchisees for
|
|
|
Support Services
|
|
|
Franchisees for
|
|
|
Operation of
|
|
|
Collected from
|
|
|
Mass Media &
|
|
|
|
Support Services
|
|
|
Campus
|
|
|
Service Centers
|
|
|
Service Centers
|
|
|
Insurance Cos
|
|
|
Logo Advertising
|
|
|
Year Ended December 31, 2007
|
|
$
|
11,453
|
|
|
$
|
13,078
|
|
|
$
|
3,208
|
|
|
$
|
6,697
|
|
|
$
|
5,343
|
|
|
$
|
8,276
|
|
Year Ended December 31, 2006
|
|
$
|
6,155
|
|
|
$
|
5,815
|
|
|
$
|
10,293
|
|
|
$
|
12,804
|
|
|
$
|
5,646
|
|
|
$
|
8,305
|
|
42
Initial
Franchise Fee Revenue
Basic Services A certain level of basic
services is initially provided to all franchisees, whether they
acquire an existing business and convert it into a Brooke
franchise, start up a new Brooke franchise location or acquire a
company developed franchise location. These basic services
include services usually provided by other franchisors,
including a business model, a license to use registered
trademarks, access to suppliers and a license for an
Internet-based information system. The amount of the initial
franchise fees typically paid for basic services is currently
$165,000.
Revenues from initial franchise fees for basic services are
recognized as soon as we deliver the basic services to the new
franchisee, such as access to insurance company contracts,
access to our information system, and access to our brand name.
Upon completion of this commitment, we have no continuing
obligation to the franchisee with regards to basic services.
A total of 234 and 227 new franchise locations were added during
the years ended December 31, 2007 and 2006, respectively.
The rate of new franchise location growth has slowed primarily
as the result of our New Era initiative beginning in
the fourth quarter of 2007 to emphasize quality of franchisees
over quantity of franchisees.
The following table summarizes information relating to initial
franchise fees for basic services.
Summary
of Initial Franchise Fees for Basic Services
and the Corresponding Number of Locations
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Start-up
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
Related Initial
|
|
|
Conversion
|
|
|
Developed Initial
|
|
|
Total Initial
|
|
|
|
Franchise Fees
|
|
|
Related Initial
|
|
|
Franchise Fees
|
|
|
Franchise Fees
|
|
|
|
for Basic
|
|
|
Franchise Fees
|
|
|
for Basic
|
|
|
for Basic
|
|
|
|
Services
|
|
|
for Basic Services
|
|
|
Services
|
|
|
Services
|
|
|
|
(Locations)
|
|
|
(Locations)
|
|
|
(Locations)
|
|
|
(Locations)
|
|
|
|
(In thousands, except number of locations)
|
|
|
Year Ended December 31, 2007
|
|
$
|
15,510
|
|
|
|
94
|
|
|
$
|
14,355
|
|
|
|
126
|
|
|
$
|
2,640
|
|
|
|
14
|
|
|
$
|
32,505
|
|
|
|
234
|
|
Year Ended December 31, 2006
|
|
|
23,820
|
|
|
|
168
|
|
|
|
7,215
|
|
|
|
55
|
|
|
|
735
|
|
|
|
4
|
|
|
|
31,770
|
|
|
|
227
|
|
Year Ended December 31, 2005
|
|
|
12,375
|
|
|
|
108
|
|
|
|
7,000
|
|
|
|
102
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,375
|
|
|
|
210
|
|
Buyers Assistance Plan Services Buyer
assistance plans provide assistance to franchisees for the
initial acquisition and conversion of businesses. These services
include, for example, compilation of an inspection report. The
amount of the fee charged franchisees for these services
typically varies based on the level of assistance, which in turn
is largely determined by the size of the acquisition. We
therefore typically base our fees for buyers assistance plans on
the estimated revenues of the acquired business. All initial
franchise fees (for both basic services and for buyer assistance
plans) are paid when an acquisition closes. A significant part
of our commission growth has come from such acquisitions of
existing businesses that are subsequently converted into Brooke
franchises.
The total amount of initial fees paid by a franchisee is first
allocated to basic services, and if the franchise is of an
acquired and converted business, the excess of such fees over
the amount allocated to basic services is allocated to buyers
assistance plan services. The initial franchisee fee for basic
services tends to be uniform among franchisees, and the total
initial franchisee fees can be limited by competitive pressures.
The decrease in initial franchise fees for buyers assistance
plans is primarily attributable to an increase in the amount
charged for initial franchise fees for basic services and the
establishment of a cap, or maximum amount, on initial franchise
fees for buyers assistance plans that are charged for each
acquisition.
We perform substantially all of the buyers assistance plan
services before an acquisition closes and, therefore, typically
recognizes all of the initial franchise fee revenue for buyers
assistance plan services at the time of closing.
Buyers assistance plan services are not applicable to the
purchase by franchisees of company-developed or
already-franchised businesses. In addition, buyers assistance
plan services are not typically provided to franchisees selling
to other franchisees and are not provided to franchisees
purchasing businesses that were
43
purchased by us in the preceding 24 months. Businesses that
were converted into Brooke franchises and received buyers
assistance plan services totaled 3, 16 and 87 of new franchise
locations in 2007, 2006 and 2005, respectively.
Seller and Borrower-Related Revenues Seller
and borrower-related revenues typically are generated when a
business is acquired for sale to a franchisee or when assisting
a business in securing a loan. Seller and borrower-related
revenues include consulting fees paid directly by sellers or
borrowers, gains on sale of businesses from deferred payments,
gains on sale of businesses relating to company-owned stores,
and gains on sale of businesses relating to inventory. A primary
aspect of our business is the buying and selling of businesses.
Therefore, all seller and borrower-related revenues are
considered part of normal business operations and are classified
on our income statement as operating revenue. Seller and
borrower-related revenues increased $6,690,000, or 116%, to
$12,480,000, in 2007 and decreased $2,217,000, or 28%, to
$5,790,000, in 2006. The significant increase in seller and
borrower-related revenues from 2006 to 2007 is primarily
attributable to an increase in borrower consulting fees
generated.
Consulting fees. We help sellers prepare their
insurance agency businesses for sale by developing business
profiles, tabulating revenues, sharing its document library and
general sale preparation. We also generate revenues from
consulting with insurance agency borrowers and assisting them in
securing loans. The scope of consulting engagements is largely
determined by the size of the business being sold or the loan
being originated. Consulting fees are typically based on the
transaction value, are contingent upon closing of the
transaction, and are paid at closing. We complete consulting
obligations at closing and are not required to perform any
additional tasks for sellers or borrowers. Therefore, with no
continuing obligation on our part, consulting fees paid directly
by sellers or borrowers are immediately recognized as income.
The significant increase in consulting fees from 2006 to 2007 is
primarily attributable to an increase in borrower consulting
fees generated.
Gains on Sale of Businesses from Deferred
Payments. Our business includes the buying and
selling of insurance agencies and occasionally holding them in
inventory. When purchasing an agency, we typically defer a
portion of the purchase price, at a low or zero interest rate,
to encourage the seller to assist in the transition of the
agency to one of our franchisees. We carry our liability to the
seller at a discount to the nominal amount we owe, to reflect
the below-market interest rate. When we sell an acquired
business to a franchisee (typically on the same day it is
acquired), we generally sell it for the full nominal price (i.e.
before the discount) paid to the seller. When the sale price of
the business exceeds the carrying value, the amount in excess of
the carrying value is recognized as a gain. Gains on sale
resulting primarily from discounted interest rates increased
$119,000, or 9%, to $1,449,000 in 2007 and increased $145,000,
or 12%, to $1,330,000 in 2006.
We regularly negotiate below-market interest rates on the
deferred portion of the purchase prices we pay sellers. We
consider these below market interest rates to be a regular
source of income related to the buying and selling of
businesses. Although we have a continuing obligation to pay the
deferred portion of the purchase price when due, we are not
obligated to prepay the deferred portion of the purchase price
or to otherwise diminish the benefit of the below-market
interest rate upon which the reduced carrying value was based.
44
The calculation of the reduced carrying value, and the resulting
gain on sale of businesses, is made by calculating the net
present value of scheduled future payments to sellers at a
current market interest rate. The following table provides
information regarding the corresponding calculations:
Calculation
of Seller Discounts Based On Reduced Carrying Values
(in thousands, except percentages and number of days)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Used for
|
|
|
|
|
|
Reduced
|
|
|
Gain on Sale
|
|
|
|
Principal
|
|
|
Average
|
|
|
Average
|
|
|
Net Present
|
|
|
Full Nominal
|
|
|
Carrying
|
|
|
from Deferred
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Maturity
|
|
|
Value
|
|
|
Purchase Price
|
|
|
Value
|
|
|
Payments
|
|
|
2007
|
|
$
|
16,345
|
|
|
|
9.75
|
%
|
|
|
330 days
|
|
|
|
9.75
|
%
|
|
$
|
42,604
|
|
|
$
|
41,155
|
|
|
$
|
1,449
|
|
2006
|
|
|
8,047
|
|
|
|
9.41
|
%
|
|
|
691 days
|
|
|
|
9.00-9.75
|
%
|
|
|
23,625
|
|
|
|
22,295
|
|
|
|
1,330
|
|
2005
|
|
|
10,397
|
|
|
|
7.72
|
%
|
|
|
651 days
|
|
|
|
6.75-8.75
|
%
|
|
|
25,746
|
|
|
|
24,561
|
|
|
|
1,185
|
|
Gains on Sale of Businesses Company-owned
Stores. If we expect to own and operate
businesses for more than one year, we consider these businesses
to be company-owned stores and treat such transactions under
purchase accounting principles, including booking intangible
assets and recognizing the related amortization expense. By
contrast, businesses purchased for resale to our franchisees
(usually within one year) are carried at cost as business
inventory, without the booking of intangible assets. There were
no gains on sale resulting from the sale of company-owned stores
in 2007 or 2006.
Gains on Sale of Businesses Inventoried
Stores. As noted above, acquired businesses are
typically sold on the same day as acquired for the same nominal
price paid to the seller. However, this is not always the case
and businesses are occasionally held in inventory. As such,
gains and losses are recorded when an inventoried business is
ultimately sold and carrying values of inventoried businesses
are adjusted to estimated market value when market value is less
than cost. Gains on sale resulting from the sale of inventoried
stores decreased $1,121,000, or 65%, to $608,000 in 2007 from
$1,729,000 in 2006 and decreased $109,000, or 6%, to $1,729,000
in 2006 from $1,838,000 in 2005.
Franchise Collateral Preservation (CPA)
Expenses CPA activities are separated into two
general categories. The first category of CPA activities
consists primarily of support services provided by our
Phillipsburg, Kansas campus personnel for all franchisees
pursuant to a franchise agreement and the corresponding
recurring expenses are paid from recurring franchise fees
collected from franchisees and fees paid by lenders pursuant to
collateral preservation Agreements (see above). The second
category of CPA activities consists primarily of the extra
monitoring and consulting with borrowers provided by national
and regional personnel pursuant to collateral preservation
agreements with lenders.
Contrary to prior years, beginning in 2008, we will invoice the
lender for rehabilitation and management expenses as provided in
the CPA agreement. If, as a result, the lender chooses to reduce
the level of collateral preservation assistance provided, there
will likely be less emphasis on rehabilitating poorly performing
franchisees and more emphasis on moving poorly performing
franchises out of the franchise system. CPA expenses include
national/regional personnel expense, marketing allowance
expenses and company stores expenses. CPA expenses, totaled
$15,634,000 and $10,471,000, respectively, in 2007 and 2006.
Franchise Recruitment Expenses Recruitment of
new franchisees and borrowers is essential to the continued
growth of insurance commissions and loan originations.
Recruitment also plays a critical role in assisting lenders in
the preservation of collateral after a loan is in default, in
that businesses on which the lender has foreclosed or exercised
its private right of sale can be sold to new franchisees who may
be more capable or more willing to successfully operate an
insurance agency. Recruitment expenses totaled $3,278,000 and
$2,834,000, respectively, in 2007 and 2006.
Income Before Income Taxes Income before
income taxes increased $1,193,000, or 31%, to $5,100,000 in 2007
from $3,907,000 in 2006. Income before income taxes decreased
$3,779,000, or 49%, to $3,907,000 in 2006 from $7,686,000 in
2005. The increase in income for 2007 was primarily the result
of our insurance agency consulting activities which more than
offset the reduction in income resulting from increased
collateral
45
preservation expenses incurred while assisting franchisees in
coping with financial stress resulting from less commission
revenues from reduction of premium rates by insurance companies.
Company-Owned Stores Because our franchising
philosophy is predicated on local ownership and generating
revenues from sales commissions paid to franchisees on the sale
of insurance policies issued by third-party insurance companies,
an increasing percentage of inventoried, managed, pending,
franchisor-developed and franchisee-developed stores relative to
franchisee-owned stores is generally undesirable from a
franchising perspective.
This discussion of company-owned stores is separated into five
store types: (1) inventoried stores;
(2) franchisor-developed stores; (3) managed stores;
(4) pending stores; and (5) franchisee-developed
stores.
Company-owned stores identified as inventoried,
franchisor-developed or auto insurance stores are
generally related to recruitment of new franchisees or the
expansion of locations that is essential to the continued growth
of insurance commissions and premiums. Inventoried stores
include businesses purchased for resale to franchisees.
Franchisor-developed stores include business locations
developed by us that have not been previously owned by a
franchisee. Because the store has been developed by us instead
of purchased from third parties, all income and expenses
associated with development and operation of the store are
recorded as income and expenses, but a corresponding asset is
not recorded on the balance sheet. Company-owned stores
identified as managed, pending or franchisee-developed
stores are generally related to assisting lenders in the
preservation of collateral. Managed stores are subject to
agreements between franchisees and us for management of the
stores for purposes of lender collateral preservation, as the
result of the disability or death of the franchisee or under
other circumstances. Pending stores include businesses
that franchisees have contracted to sell, but the transactions
have not yet closed, and we are managing the store to reduce the
likelihood of asset deterioration prior to closing. Managed and
pending stores are not recorded as an asset on our balance
sheet. However, because we are entitled by agreement to the
income and are responsible for the expenses of the business
(excluding owners compensation) until the agreement
terminates or ownership is transferred, income and expenses of
managed and pending stores are recorded to our income statement
and are therefore included in our discussion of company-owned
stores. Franchisee-developed stores include franchise
businesses for which franchisees have paid part or all of the
expenses associated with location development during the
business
start-up
period, but for which the franchisee did not complete the
development process for various reasons including unwillingness
to make the personal sacrifices required when starting a
business.
Inventoried Stores The number of total
businesses purchased into inventory in 2007, 2006 and 2005 was
19, 33 and 69, respectively. At December 31, 2007, 2006 and
2005, respectively, we held 6, 3 and 4 businesses in inventory
with respective total balances, at the lower of cost or market,
of $9,413,000, $2,333,000 and $5,058,000. Write down expense on
inventoried stores, resulting from a decrease in the market
values of inventoried businesses, for the years ended
December 31, 2007, 2006 and 2005 totaled $300,000, $975,000
and $0, respectively. Revenues from the operation of inventoried
stores for 2007 and 2006 totaled $1,636,000 and $941,000,
respectively. Expenses incurred in the operation of inventoried
stores for 2007 and 2006 totaled $1,677,000 and $499,000,
respectively.
The number of businesses twice-purchased into inventory within
twenty-four months is an important indicator of our success in
recruiting qualified buyers. There were 1, 0 and 1 businesses
twice-purchased during 2007, 2006 and 2005, respectively. Some
franchisees have experienced an adverse affect on profitability
and cash flow from increased loan interest rates on agency
acquisition loans and lower commissions resulting from the
effect of decreased premium rates. Otherwise, we are not aware
of any systemic adverse profitability or cash flow trends being
experienced by buyers of businesses from our inventory.
Managed Stores At December 31, 2007 and
2006, the total number of businesses managed under contract, but
not owned, by us were 21 and 13, respectively. Revenues from the
operation of managed stores for the years ended
December 31, 2007 and 2006 totaled $6,256,000 and
$4,261,000, respectively. Operating expenses incurred by managed
stores for the years ended December 31, 2007 and 2006
totaled $4,795,000 and $3,301,000, respectively. Additionally,
owners compensation expenses incurred by managed stores
for the years ended December 31, 2007 and 2006 totaled
$3,408,000 and $1,665,000, respectively.
46
Pending Stores At December 31, 2007 and
2006, the total number of businesses under contract for sale and
managed by us pending closing of a sale was 17 and 11,
respectively. Revenues from the operation of pending stores for
the years ended December 31, 2007 and 2006 totaled $160,000
and $934,000, respectively. Operating expenses incurred by
pending stores for the years ended December 31, 2007 and
2006 totaled $263,000 and $344,000, respectively. Additionally,
owners compensation expenses incurred by pending stores
for the years ended December 31, 2007 and 2006 totaled
$312,000 and $494,000, respectively.
Franshisor-Developed Stores At
December 31, 2007 and 2006, the total number of businesses
owned and under development by us was 10 and 14, respectively.
Revenues from developed stores for the years ended
December 31, 2007 and 2006 totaled $23,000 and $16,000,
respectively. Operating expenses incurred by developed stores
for the years ended December 31, 2007 and 2006 totaled
$390,000 and $190,000, respectively.
Franchisee-Developed Stores At
December 31, 2007 and 2006, the total number of
start-up
business locations for which the development process was
interrupted was 119 and 0, respectively. Revenues from
franchisee-developed stores for the years ended
December 31, 2007 and 2006 totaled $471,000 and $0,
respectively. Operating expenses incurred by
franchisee-developed stores for the years ended
December 31, 2007 and 2006 totaled $716,000 and $0,
respectively. Additionally, owners compensation expense
incurred by franchisee-developed stores for the years ended
December 31, 2007 and 2006 totaled $495,000 and $0,
respectively.
We have improved our process for recruiting and identifying
insurance agents whom we believe have the personal attributes
required to be successful at starting an insurance agency
business, and the length of the
start-up
period is now about 8 months. The
start-up
period is the length of time typically allowed for franchisees
to demonstrate their ability to generate sufficient commission
revenues to qualify for an insurance agency business loan based
on historical revenues. As a result of reducing the length of
the start-up
period, the number of franchisees for which
start-up
periods are expiring in any given month has approximately
doubled. For example, start up periods expire in the same month
for franchisees that began an 18 month start up period in
April 2006 and for franchisees that began an 8 month start
up period in February 2007. It is our experience that
start-up
success rates, (the percentage of franchisees that generate
sufficient commission revenues during the
start-up
period to qualify for an insurance agency business loan based on
historical revenues) is approximately 60%. Correspondingly,
about 40% of all
start-up
franchisees do not have the personal attributes required for
success, but have developed a business location which meets our
demographic criteria and a location for which investments in
advertising, signage and other marketing activities have been
made by the franchisee and us. As such, these
franchisee-developed locations typically represent good
opportunities for other
start-up
franchisees. The number of franchisee-developed stores has
increased temporarily because more
start-up
periods are expiring during any given month as the result of
decreasing the length of the
start-up
period.
Franchise Relocations Sophisticated software has been
purchased to assist us in the on-going analysis of demographic
data and location performance in order to improve its site
selection process. When location facilities are determined to be
unsuitable based on neighborhood demographic or local office
characteristics (as opposed to when individual franchisees are
unsuitable based on personal attributes), then facilities are
closed and relocated to more suitable locations. At
December 31, 2007, we had scheduled 31 facilities to close
and relocate.
Same Store Sales Revenue generation, primarily
commissions from insurance sales, is an important factor in
franchise financial performance and revenue generation is
carefully analyzed by us. Twenty-four months after initial
conversion of an acquired business, we consider a franchise
seasoned and the comparison of current to prior year
revenues a more reliable indicator of franchise performance.
Combined same store sales of seasoned converted franchises and
start up franchises for years ended December 31, 2007 and
2006 decreased 2.37% and 2%, respectively. The median annual
revenue growth rates of seasoned converted franchises and
qualifying start up franchises for the years ended
December 31, 2007 and 2006 were 6.85% and -1%. All same
store calculations exclude profit sharing commissions. Same
store calculations are based entirely on commissions allocated
by us to franchisees monthly statements. Brooke Franchise
is unable to
47
determine the impact, if any, on same store calculations
resulting from commissions that franchisees receive but do not
process through us as required by their franchise agreement.
Same store sales performance has been adversely affected by the
soft property and casualty insurance market, which
is characterized by a flattening or decreasing of premiums by
insurance companies. Our franchisees predominately sell personal
lines insurance with more than 50% of our total commissions
resulting from the sale of auto insurance policies and Brooke
Franchise believes that the insurance market has been
particularly soft with regards to premiums on personal lines
insurance policies.
Franchise Balances We categorize the balances
owed by franchisees as either statement balances or
non-statement balances. Statement balances are generally
short-term and non-statement balances are generally longer term.
We believe the most accurate analysis of franchise balances
occurs immediately after settlement of franchisees monthly
statements and before any additional entries are recorded to
their account. Therefore, the following discussion of franchise
balances is as of the settlement date that follows the
corresponding commission month.
Statement Balances We assist franchisees with
short-term cash flow assistance by advancing commissions and
granting temporary extensions of due dates for franchise
statement balances owed by franchisees to us. Franchisees
sometimes require short-term cash flow assistance because of
cyclical fluctuations in commission receipts. Short-term cash
flow assistance is also required when franchisees are required
to pay us for insurance premiums due to insurance companies
prior to receipt of the corresponding premiums from
policyholders. The difference in these amounts has been
identified as the uncollected accounts balance and
this balance is calculated by identifying all charges to
franchise statements for net premiums due insurance companies
for which a corresponding deposit from policyholders into a
premium trust account has not been recorded. Despite commission
fluctuations and uncollected accounts balances, we expect
franchisees to regularly pay their statement balances within a
30-day
franchise statement cycle. Any commission advance that remains
unpaid after 120 days is placed on watch
status. The increase in watch statement balances is partially
attributable to financial stress resulting from less commission
revenues from reduction of premium rates by insurance companies
and increased expenses from higher interest rates.
The following table summarizes total statement balances,
uncollected account balances and watch statement balances as of
December, 2007 and December, 2006 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total Statement Balances
|
|
$
|
9,662
|
|
|
$
|
6,214
|
|
Uncollected Accounts* (Included in Above Total Statement
Balances)
|
|
$
|
3,688
|
|
|
$
|
3,778
|
|
Watch Statement Balances (Included in Above Total Statement
Balances)
|
|
$
|
9,077
|
|
|
$
|
5,476
|
|
Watch Statement Uncollected Accounts**
|
|
$
|
1,657
|
|
|
$
|
1,804
|
|
|
|
|
* |
|
These amounts are limited to uncollected balances for
franchisees with unpaid statement balances as of December 2007
and 2006. |
|
** |
|
These amounts are limited to uncollected balances for
franchisees with watch statement balances as of December 2007
and 2006. |
Non-statement Balances Separate from short-term statement
balances, we also extends credit to franchisees for long-term
producer development, including hiring and training new
franchise employees, and for other reasons not related to
monthly fluctuations of revenues. These longer term
non-statement balances are not reflected in the short-term
statement balances referenced above and totaled $9,798,000 and
$9,115,000, respectively, as of December 2007 and 2006.
Reserve for Doubtful Accounts As part of the agreement to
merge Brooke Franchise into Brooke Capital, Brooke Corporation
agreed to guarantee the repayment of franchise balances
outstanding as of June 30, 2007, and we have accordingly
reduced our reserve for doubtful accounts to $1,114,000 on
December 31, 2007 from
48
$1,466,000 on December 31, 2006 Franchise balances
outstanding as of December 31, 2007 totaled $19,460,000.
The following table summarizes the Reserve for Doubtful Accounts
activity for December 31, 2007, 2006, and 2005 (in
thousands). Additions to the reserve for doubtful accounts are
charged to expense. Write offs in the table below are net of
reimbursement from Brooke Corporation pursuant to its guaranty
of franchise balances in connection with the merger.
Valuation
and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Write Off
|
|
|
Write Off
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Charges to
|
|
|
Statement
|
|
|
Non-Statement
|
|
|
End of
|
|
|
|
of Year
|
|
|
Expenses
|
|
|
Balances
|
|
|
Balances
|
|
|
Year
|
|
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
575
|
|
|
$
|
2,974
|
|
|
$
|
1,336
|
|
|
$
|
1,497
|
|
|
$
|
716
|
|
Year ended December 31, 2006
|
|
|
716
|
|
|
|
4,313
|
|
|
|
3,026
|
|
|
|
537
|
|
|
|
1,466
|
|
Year ended December 31, 2007
|
|
$
|
1,466
|
|
|
$
|
4,276
|
|
|
$
|
961
|
|
|
$
|
3,667
|
|
|
$
|
1,114
|
|
Insurance
Agency Consulting Activities
Through BCA, we provide consulting services to managing general
agencies and collateral preservation services relating to such
loans. This business expanded in 2007 to include similar
services for funeral home businesses and loans related thereto.
During 2007, BCA generated $8,834,000 in loan brokerage and
other related consulting fees. These amounts, along with other
income derived from collateral preservation services and related
activities represented a total of $11,610,000 during 2007 as
compared to $1,199,000 during 2006. Income before taxes from BCA
was $7,773,000 during 2007 as compared to $1,084,000 during
2006. BCA became a part of the company on December 8, 2006
in connection with Brooke Corporations acquisition of a
controlling interest in the company on that date.
Significant expenses related to the loan brokerage activity
during 2007 included compensation related expenses of
$1,563,000. Other significant expenses during 2007 included loan
brokerage expenses of $721,000 and shared services expenses of
$1,305,000 paid to Brooke Corporation.
49
Corporate
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Year Ended
|
|
|
% Increase
|
|
|
23 Days Ended
|
|
|
% Increase
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
(Decrease)
|
|
|
December 31,
|
|
|
(Decrease)
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Over 2006
|
|
|
2006
|
|
|
Over 2005
|
|
|
2005
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll expense
|
|
|
599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
1,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
(1,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
(1,799
|
)
|
|
|
|
%
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Total assets (at period end)
|
|
$
|
10,811
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
As noted previously, our reported financial information includes
the results of operations and cash flows for corporate
activities since December 8, 2006, the date that Brooke
Corporation acquired controlling interest in the company. The
income and expenses for corporate activities reported during the
23 day period ended December 31, 2006 and for the year
ended December 31, 2005, including any increase (decrease)
of such values over 2005, are not presented above as they were
not significant. No income or expense for corporate activities
are presented for the period prior to December 8, 2006 and
for the year ended December 31, 2005, as Brooke Corporation
did not acquire a controlling interest in the Company until
December 8, 2006.
During April 2007, we completed a tender offer, buying back
379,248 shares (126,416 post split) of our stock for a
price paid to shareholders of $1.60 per share ($4.80 post
split). Also in April, we completed a
1-for-3
reverse stock split buying back 2,253 shares of common
stock resulting from the split. Direct costs associated with the
purchase of these shares have been reported as a part of the
overall cost of acquiring this stock.
Our application with the American Stock Exchange (AMEX) for an
original listing of our common stock was approved and trading in
our stock commenced on August 30, 2007 under the symbol
BCP.
On August 31, 2007, we entered into agreements with Brooke
Corporation and its insurance agency subsidiary, Brooke
Franchise, and Delta Plus, the parent company of Traders
Insurance Company, a non-standard auto insurance company. On
November 15, 2007, Brooke Franchise was merged with and
into the company. It is anticipated that we will acquire a 100%
ownership interest in Delta Plus during the second quarter of
2008 in exchange for 500,000 shares of our common stock. Upon
closing of these transactions, Brooke Corporation is expected to
own over 81% of our outstanding common stock (based on ownership
levels at February 29, 2008).
Consulting, legal, filing and other fees related to the
completed and contemplated transactions involving Brooke
Franchise and Delta Plus and the application filed with the
AMEX, represented approximately $500,000 and have been charged
to expense during 2007. In addition to these costs, we incurred
another $424,000 in professional services and filing fees.
50
Compensation related expenses for our Chief Executive and Chief
Financial Officers are included in this segment. In addition, we
made a severance payment of approximately $150,000 to a former
executive officer of a subsidiary who tendered his resignation
during the third quarter of 2007.
Our recorded combined income tax provisions for 2007 and 2006
reflect an anticipated benefit associated with utilization of
available net operating loss carry-forward amounts attributable
to years prior to 2006, subject to limitations under the tax
code. Our deferred income tax asset and valuation allowance
related to the benefit associated with remaining net operating
loss carry-forward amounts have been adjusted accordingly.
Federal and state income taxes payable have been reduced for
income taxes receivable related to amounts withheld by taxing
authorities on certain lottery cash flow contracts held by us.
We reported receivables from affiliates of $18,441,000 and
$29,122,000 at December 31, 2007 and 2006, respectively.
Our cash balances are sometimes commingled with the balances of
Brooke Corporation and its other subsidiaries for cash
management purposes. We receive
and/or pay
interest for the availability/use of these funds. As mentioned
above, we recorded $2,850,000 in expense during 2007 in
connection with shared services agreements with Brooke
Corporation.
During the third quarter of 2007, the Company granted certain
stock awards to executive officers and directors. Total
compensation expense associated with those awards will aggregate
$1,950,000 over their respective three year vesting periods
ending on August 15, 2010. That expense is being recorded
ratably during the vesting period with $244,000, of such expense
recorded during 2007.
Liquidity
and Capital Resources
Our cash and cash equivalents were $2,633,000 as of
December 31, 2007, a decrease of $11,711,000 from the
$14,344,000 balance at December 31, 2006. During the year
ended December 31, 2007, net cash of $6,232,000 was used in
operating activities which primarily resulted from an increase
in accounts and notes receivable. Net cash of $21,528,000 was
used in investing activities primarily for the purchase of
property and equipment. Net cash of $16,049,000 was provided by
financing activities, primarily from long-term debt proceeds of
$22,528,000, which was partially offset by the dividend required
prior to the merger between Brooke Franchise and Brooke Capital.
Our cash and cash equivalents were $14,344,000 as of
December 31, 2006, an increase of $8,938,000 from the
$5,406,000 balance at December 31, 2006. During the year
ended December 31, 2006, net cash of $8,035,000 was used in
operating activities, consisting primarily of an increase in
accounts and notes receivable. Net cash of $943,000 was provided
by investing activities primarily from the sale of subsidiary
and business assets. Net cash of $16,030,000 was provided by
financing activities, consisting primarily of debt advances of
$8,500,000.
Our current ratios (current assets to current liabilities) were
1.00 and 1.48, at December 31, 2007 and December 31,
2006, respectively.
Insurance Company Operations First Life, our
life insurance company subsidiary, generally receives adequate
cash flow from premium collections and investment income to meet
the obligations of its insurance operations. Insurance policy
liabilities are primarily long-term and generally are paid from
future cash flows. Cash collected from deposits on annuity
contracts and policyholder premium deposits are recorded as cash
flows from operating activities. If First Life is successful in
implementing its marketing plans and its premiums increase
significantly as a result, then First Life may require
additional capital contributions in future periods from the
parent company. In this event, capital contributions are not
expected to exceed $1,000,000 and any such required
contributions are expected to be funded internally.
The Company plans, after the Delta Plus exchange is consummated,
to expand Delta Plus non-standard auto insurance company
activities which may require additional capital. Accordingly,
the Company is exploring strategic alternatives, including
soliciting capital investments from other investors.
Insurance Agency Operations Insurance agency
operations are, or will be, conducted by our Brooke Franchise
division and Brooke Investments and Brooke Capital Advisors
subsidiaries. Insurance agency
51
operations are expected to generate sufficient cash to fund
their operations. However, continued difficulty in the general
credit markets will make loans to franchisees more expensive and
more difficult to obtain, which will have an adverse impact on
revenues from initial franchise fees and consulting fees. In
this event, we may be required to significantly reduce expenses,
raise additional equity or acquire additional loans.
The Companys stock commenced trading on the AMEX on
August 30, 2007. Management believes that such a listing
will improve the Companys prospects for selling additional
equity securities, acquiring a business by merger or issuing
debt. If another suitable insurance company or insurance agency
acquisition opportunity arises, the Company may require
additional capital. In this event, the required capital for an
acquisition is expected to be funded from the sale of common or
preferred equity to public or private investors.
Subject to the above uncertainties, we believe that our existing
cash, cash equivalents and funds generated from operating,
investing and financing activities will be sufficient to satisfy
our normal financial needs. Additionally, subject to the above,
we believe that funds generated from future operating, investing
and financing activities will be sufficient to satisfy our
future financing needs, including the required annual principal
payments of our long-term debt and any future tax liabilities.
Capital
Commitments
The following summarizes our contractual obligations as of
December 31, 2007 and the effect those obligations are
expected to have on our liquidity and cash flow in future
periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Short-term borrowings
|
|
$
|
5,056
|
|
|
$
|
5,056
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Long-term debt
|
|
|
45,435
|
|
|
|
27,066
|
|
|
|
5,657
|
|
|
|
9,234
|
|
|
|
3,478
|
|
Interest payments*
|
|
|
11,082
|
|
|
|
3,935
|
|
|
|
3,449
|
|
|
|
2,640
|
|
|
|
1,058
|
|
Operating leases (facilities)
|
|
|
31,100
|
|
|
|
13,427
|
|
|
|
15,018
|
|
|
|
2,543
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
92,673
|
|
|
$
|
49,484
|
|
|
$
|
24,124
|
|
|
$
|
14,417
|
|
|
$
|
4,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Includes interest on short-term and long-term borrowings.
For additional information on the debt associated with these
interest payments see footnote 6 to our combined financial
statements.
Our principal capital commitments consist of bank lines of
credit, term loans, deferred payments to business sellers and
obligations under leases for our facilities. We have entered
into enforceable, legally binding agreements that specify all
significant terms with respect to the contractual commitment
amounts in the table above.
While annuity contracts have scheduled payments, the timing of
the cash flows associated with life insurance policies is
uncertain and can vary significantly.
Critical
Accounting Policies
Our established accounting policies are summarized in footnote 1
to our combined financial statements for the years ended
December 31, 2007, 2006 and 2005. As part of our oversight
responsibilities, we continually evaluate the propriety of our
accounting methods as new events occur. We believe that our
policies are applied in a manner that is intended to provide the
user of our financial statements with a current, accurate and
complete presentation of information in accordance with
generally accepted accounting principles.
We believe that the following accounting policies are critical.
These accounting policies are more fully explained in the
referenced footnote 1 to our combined financial statements for
the years ended December 31, 2007, 2006 and 2005.
The preparation of our financial statements requires us to make
estimates and judgments that affect the reported amounts of our
assets, liabilities, revenues and expenses. The following
discussions summarize how
52
we identify critical accounting estimates, the historical
accuracy of these estimates, sensitivity to changes in key
assumptions, and the likelihood of changes in the future. The
following discussions also indicate the uncertainties in
applying these critical accounting estimates and the related
variability that is likely to result in 2008.
Franchisees Share of Undistributed Commissions
We are obligated to pay franchisees a share of
all commissions we receive. Prior to allocation of commissions
to a specific policy, we cannot identify the policy owner and do
not know the corresponding share (percentage) of commissions to
be paid. We estimate the franchisees share of commissions
to determine the approximate amount of undistributed commissions
that we owe to franchisees.
An estimate of franchisees shares of undistributed
commissions is made based on historical rates of commission
payout, managements experience and the trends in actual
and forecasted commission payout rates. Although commission
payout rates will vary, we do not expect significant variances
from year to year. We regularly analyze and, if necessary,
immediately change the estimated commission payout rates based
on the actual average commission payout rates. The commission
payout rate used in 2007 to estimate franchisees share of
undistributed commissions was 85% and the actual average
commission payout rate to franchisees (net of profit sharing
commissions) was 79% for the year ended December 31, 2007.
We believe that these estimates will not change substantially
during 2008.
Reserve for Doubtful Accounts Our reserve for
doubtful accounts is comprised primarily of a reserve for
estimated losses related to amounts owed to us by franchisees
for short-term credit advances, which are recorded as monthly
statement balances, and longer-term credit advances, which are
recorded as non-statement balances. Losses from advances to
franchisees are estimated by analyzing all advances recorded to
franchise statements that had not been repaid within the
previous four months; all advances recorded as non-statement
balances for producers who are in the first three months of
development, total franchise statement balances; total
non-statement balances; historical loss rates; loss rate trends;
potential for recoveries; and managements experience. Loss
rates will vary and significant growth in our franchise network
could accelerate those variances. The effect of any such
variances can be significant. The estimated reserve for doubtful
accounts as of December 31, 2007 was $1,114,000. The
estimated reserve was approximately 24% of the actual amount of
losses from advances made to franchisees for the twelve months
ended December 31, 2007, approximately 6% of the actual
total combined franchise statement and non-statement balances as
of December 31, 2007, and approximately 12% of the actual
combined advances recorded to franchise statements that had not
been repaid during the four-month period ended December 31,
2007 and recorded as non-statement balances for producers in the
first three months of development.
Amortization and Useful Lives We acquire
insurance agencies and other businesses that we intend to hold
for more than one year. We record these acquisitions as
Amortizable intangible assets. Accounting for Amortizable
intangible assets, and the subsequent tests for impairment are
summarized in footnote 1(h) to our combined financial statements
for the years ended December 31, 2007 and 2006. The rates
of amortization of Amortizable intangible assets are based on
our estimate of the useful lives of the renewal rights of
customer and insurance contracts purchased. We estimate the
useful lives of these assets based on historical renewal rights
information, managements experience, industry standards,
and trends in actual and forecasted commission payout rates. The
rates of amortization are calculated on an accelerated method
(150% declining balance) based on a
15-year
life. As of December 31, 2007, we tested Amortizable
intangible assets for impairment and the resulting analysis
indicated that our assumptions were historically accurate and
that the useful lives of these assets exceeded the amortization
rate. The Amortizable intangible assets have a relatively stable
life and unless unforeseen circumstances occur, the life is not
expected to change in the foreseeable future. Because of the
relatively large remaining asset balance, changes in our
estimates could significantly impact our results.
Deferred Policy Acquisition Costs Commissions
and other costs of acquiring life insurance, which vary with,
and are primarily related to, the production of new business
have been deferred to the extent recoverable from future policy
revenues and gross profits. The acquisition costs are being
amortized over the premium paying period of the related policies
using assumptions consistent with those used in computing policy
reserves.
53
Future Policy Benefits Traditional life
insurance policy benefit liabilities are computed on a net level
premium method using assumptions with respect to current yield,
mortality, withdrawal rates, and other assumptions deemed
appropriate by the Company.
Future Annuity Benefits Annuity contract
liabilities are computed using the retrospective deposit method
and consist of policy account balances before deduction of
surrender charges, which accrue to the benefit of policyholders.
Premiums received on annuity contracts are recognized as an
increase in a liability rather than premium income. Interest
credited on annuity contracts is recognized as an expense.
Reinsurance Reinsurance is one of the tools
that the Company uses to accomplish its business objectives. A
variety of reinsurance vehicles is currently in use. Reinsurance
supports a multitude of corporate objectives including managing
statutory capital, reducing volatility and reducing surplus
strain. At the customer level it increases the Companys
capacity, provides access to additional underwriting expertise,
and generally makes it possible for the Company to offer
products at competitive levels that the Company could not
otherwise bring to market without reinsurance support.
Investments The Company classifies all of its
fixed maturity and equity investments as available-for-sale.
Available-for-sale fixed maturities are carried at fair value
with unrealized gains and losses, net of applicable taxes,
reported in other comprehensive income. Equity securities are
carried at fair value with unrealized gains and losses, net of
applicable taxes, reported in other comprehensive income.
Mortgage loans on real estate are carried at cost less principal
payments. Other investments are carried at amortized cost.
Discounts originating at the time of purchase, net of
capitalized acquisition costs, are amortized using the level
yield method on an individual basis over the remaining
contractual term of the investment. Policy loans are carried at
unpaid balances. Cash equivalents consist of highly liquid
investments with maturities of three months or less at the date
of purchase and are carried at cost, which approximates fair
value. Realized gains and losses on sales of investments are
recognized in operations on the specific identification basis.
Interest earned on investments is included in net investment
income.
Income Tax Expense An estimate of income tax
expense is based primarily on historical rates of actual income
tax payments. The estimated effective income tax rate used in
2007 to calculate income tax expense was 32%. Although not
expected, significant changes in our estimated tax rate could
significantly impact our results. We believe this estimate will
not change significantly during 2008. Deferred income taxes are
recorded on the differences between the tax bases of assets and
liabilities and the amounts at which they are reported in the
combined financial statements. Recorded amounts are adjusted to
reflect changes in income tax rates and other tax law provisions
as they become enacted.
Revenue Recognition Policies Revenue
recognition is summarized in footnote 1(f) to our combined
financial statements for the years ended December 31, 2007
and 2006.
With respect to the previously described critical accounting
policies, we believe that the application of judgments and
assumptions is consistently applied and produces financial
information which fairly depicts the results of operations for
all years presented.
Recently
Issued Accounting Pronouncements
See footnote 22 to our combined financial statements for a
discussion of the effects of the adoption of new accounting
standards.
Contractual
Obligations
See footnote 6 to our consolidated financial statements for
tabular disclosure of information related to our long term
contractual obligations as of December 31, 2007,
incorporated herein by this reference.
Related
Party Transactions
See footnotes 2 and 12 to our combined financial statements for
information about related party transactions.
54
Impact
of Inflation and General Economic Conditions
Although inflation has not had a material adverse effect on our
financial condition or results of operations, increases in the
inflation rate are generally associated with increased interest
rates. A significant and sustained increase in interest rates
could adversely affect our franchisees ability to repay
their variable rate loans and thereby adversely affect their
operations. Such an interest rate increase could also adversely
affect our profitability by increasing our interest expenses and
other operating expenses. A significant change in the credit
markets could also have an adverse impact on our operations.
A significant change in interest rates or in the willingness to
extend credit could have a significant and adverse impact on
lenders ability to make loans to our franchisees, and, by
extension, on our ability to continue expanding our agency
network.
Our business is also dependent on the cyclical pricing of
property and casualty insurance, which may adversely affect our
franchisees performance and, thus, our financial
performance. Our franchisees primarily derive their revenues
from commissions paid by insurance companies, which commissions
are based largely on the level of premiums charged by such
insurance companies. In turn, we earn fees from our franchisees
based upon the commissions earned by our franchisees. Because
these premium rates are cyclical, our financial performance is
dependent, in part, on the fluctuations in insurance pricing.
Although the current insurance market generally may be
characterized as soft, with a flattening or
decreasing of premiums in most lines of insurance, it is likely
that insurance pricing will decrease further in the future,
subjecting us to lower commissions on the insurance placed by
our franchisees.
A steep decline in insurance pricing could have a significant
and adverse impact on our franchisees, because the commissions
that they earn would likely decrease along with insurance
pricing. That adverse impact would likely reduce our share of
our franchisees insurance commissions and could also hurt our
franchisees ability to make timely payment of principal
and interest on their loans.
A general decline in economic activity in the United States or
in one of the states or geographic regions in which we operate,
such as California, Texas, the Southwest, the Midwest or the
Southeast, could also affect our results and financial condition.
An adverse change in economic activity could reduce the ability
of individuals and small businesses the key
customers for our franchisees to purchase insurance
and other financial services. In such event, the revenue growth
rate of our franchisees could flatten or decline, in turn
reducing our revenues and hurting our franchisees ability
to make timely interest and principal payments on their loans.
All other schedules have been omitted because they are either
inapplicable or the required information has been provided in
the combined financial statements or the notes thereto.
55
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
First Lifes principal investments are held in fixed
maturity securities. Interest rate risk arises from the price
sensitivity of investments to changes in interest rates. Coupon
and dividend income represents the greatest portion of an
investments total return for most fixed income instruments
in stable interest rate environments. The changes in the fair
market price of such investments are inversely related to
changes in market interest rates. As interest rates fall, the
coupon and dividend streams of existing fixed rate investments
become more valuable and the market values rise. As interest
rates rise, the opposite effect occurs.
As interest rates rise, life insurance policyholders may become
more likely to surrender policies or to borrow against cash
values, often to meet sudden needs in an inflationary
environment or to invest in higher yielding opportunities
elsewhere. This risk of disintermediation may force First Life
to liquidate part of its portfolio at a time when the fair
market value of fixed income investments is falling.
At this time, we do not utilize derivative instruments to hedge
against changes in interest rates or for any other purpose.
56
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Brooke Capital Corporation and affiliates:
We have audited the accompanying combined balance sheets of
BROOKE CAPITAL CORPORATION AND AFFILIATES as of
December 31, 2007 and 2006, and the related combined
statements of operations, changes in stockholders equity
and cash flows for each of the years in the three-year period
ended December 31, 2007. Brooke Capital Corporations
management is responsible for these combined financial
statements. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the financial
position of Brooke Capital Corporation and affiliates as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United
States of America.
As discussed in Note 1(b) to the financial statements,
prior year financial statements and related disclosures have
been restated to furnish comparative information for the period
during which the combined entities have been under common
control.
Summers, Spencer & Callison, CPAs, Chartered
Topeka, Kansas
March 13, 2008
57
Brooke
Capital Corporation
Combined Balance Sheets
DECEMBER 31, 2007 AND 2006
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share amounts)
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,633
|
|
|
$
|
14,344
|
|
Restricted cash
|
|
|
171
|
|
|
|
615
|
|
Investment securities available-for-sale
|
|
|
18,867
|
|
|
|
12,582
|
|
Accounts and notes receivable, net
|
|
|
30,567
|
|
|
|
20,700
|
|
Receivables from Parent and affiliates
|
|
|
18,441
|
|
|
|
29,122
|
|
Other receivables
|
|
|
2,443
|
|
|
|
1,604
|
|
Income taxes receivable
|
|
|
1,094
|
|
|
|
|
|
Other current assets
|
|
|
3,979
|
|
|
|
3,837
|
|
Advertising supply inventory
|
|
|
929
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
79,124
|
|
|
|
83,266
|
|
|
|
|
|
|
|
|
|
|
Investment in Businesses
|
|
|
9,413
|
|
|
|
2,333
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
Cost
|
|
|
20,951
|
|
|
|
3,823
|
|
Less: Accumulated depreciation
|
|
|
(5,242
|
)
|
|
|
(945
|
)
|
|
|
|
|
|
|
|
|
|
Net Property and Equipment
|
|
|
15,709
|
|
|
|
2,878
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Deferred charges, net
|
|
|
5,406
|
|
|
|
5,209
|
|
Amortizable intangible assets, net
|
|
|
553
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
Net Other Assets
|
|
|
5,959
|
|
|
|
5,823
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
110,205
|
|
|
$
|
94,300
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Future annuity benefits
|
|
$
|
18,735
|
|
|
$
|
13,658
|
|
Future policy benefits
|
|
|
7,261
|
|
|
|
6,526
|
|
|
|
|
|
|
|
|
|
|
Total Policy and Contract Liabilities
|
|
|
25,996
|
|
|
|
20,184
|
|
Accounts payable
|
|
|
7,353
|
|
|
|
1,759
|
|
Premiums payable to insurance companies
|
|
|
5,322
|
|
|
|
5,956
|
|
Producer payable
|
|
|
4,500
|
|
|
|
4,234
|
|
Interest payable
|
|
|
1,314
|
|
|
|
757
|
|
Income tax payable
|
|
|
|
|
|
|
1,485
|
|
Other current liabilities
|
|
|
2,144
|
|
|
|
842
|
|
Short-term debt
|
|
|
5,056
|
|
|
|
10,208
|
|
Current maturities of long-term debt
|
|
|
27,066
|
|
|
|
10,798
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
78,751
|
|
|
|
56,223
|
|
Non-current Liabilities
|
|
|
|
|
|
|
|
|
Deferred income tax payable
|
|
|
338
|
|
|
|
508
|
|
Long-term debt less current maturities
|
|
|
18,369
|
|
|
|
7,331
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
97,458
|
|
|
|
64,062
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 25,000,000 shares
authorized, 8,475,817 and 2,666,666 shares issued and
outstanding
|
|
|
85
|
|
|
|
27
|
|
Additional paid-in capital
|
|
|
14,372
|
|
|
|
20,459
|
|
(Accumulated deficit) retained earnings
|
|
|
(1,232
|
)
|
|
|
9,919
|
|
Accumulated other comprehensive loss
|
|
|
(478
|
)
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
12,747
|
|
|
|
30,238
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
110,205
|
|
|
$
|
94,300
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
financial statements.
58
Brooke
Capital Corporation
Combined Statements of Operations
YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance commissions
|
|
$
|
114,588
|
|
|
$
|
99,190
|
|
|
$
|
80,490
|
|
Consulting fees
|
|
|
10,423
|
|
|
|
3,928
|
|
|
|
4,916
|
|
Gain on sale of businesses
|
|
|
2,057
|
|
|
|
3,059
|
|
|
|
3,091
|
|
Initial franchise fees for basic services
|
|
|
32,505
|
|
|
|
31,770
|
|
|
|
19,375
|
|
Initial franchise fees for buyer assistance plans
|
|
|
455
|
|
|
|
3,137
|
|
|
|
10,133
|
|
Interest income
|
|
|
1,925
|
|
|
|
340
|
|
|
|
139
|
|
Insurance premiums earned
|
|
|
3,710
|
|
|
|
108
|
|
|
|
|
|
Other income
|
|
|
5,987
|
|
|
|
2,200
|
|
|
|
874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues
|
|
|
171,650
|
|
|
|
143,732
|
|
|
|
119,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions expense
|
|
|
89,182
|
|
|
|
78,342
|
|
|
|
64,233
|
|
Payroll expense
|
|
|
24,900
|
|
|
|
23,153
|
|
|
|
19,620
|
|
Depreciation and amortization
|
|
|
1,749
|
|
|
|
89
|
|
|
|
(14
|
)
|
Other operating expenses
|
|
|
49,321
|
|
|
|
35,447
|
|
|
|
25,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
165,152
|
|
|
|
137,031
|
|
|
|
109,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
6,498
|
|
|
|
6,701
|
|
|
|
9,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,066
|
|
|
|
1,700
|
|
|
|
1,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses
|
|
|
3,066
|
|
|
|
1,700
|
|
|
|
1,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
3,432
|
|
|
|
5,001
|
|
|
|
7,686
|
|
Income tax expense
|
|
|
1,094
|
|
|
|
1,497
|
|
|
|
2,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,338
|
|
|
$
|
3,504
|
|
|
$
|
4,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.54
|
|
|
$
|
0.74
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.50
|
|
|
$
|
0.74
|
|
See accompanying summary of accounting policies and notes to
financial statements.
59
Brooke
Capital Corporation
Combined
Statements of Changes in Stockholders Equity
YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Loss
|
|
|
Stock
|
|
|
Total
|
|
|
|
(In thousands, except common shares)
|
|
|
Balances, December 31, 2004 (Restated)
|
|
|
8,600
|
|
|
$
|
17
|
|
|
$
|
1,026
|
|
|
$
|
8,864
|
|
|
$
|
|
|
|
$
|
(115
|
)
|
|
$
|
9,792
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
Equity contribution
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,766
|
|
|
|
|
|
|
|
|
|
|
|
4,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005 (Restated)
|
|
|
8,600
|
|
|
|
17
|
|
|
|
6,026
|
|
|
|
11,630
|
|
|
|
|
|
|
|
(115
|
)
|
|
|
17,558
|
|
Effects of merger of Brooke Franchise with and into Brooke
Capital Corporation
|
|
|
2,666,666
|
|
|
|
27
|
|
|
|
14,531
|
|
|
|
(5,215
|
)
|
|
|
(167
|
)
|
|
|
|
|
|
|
9,176
|
|
|
|
|
(8,600
|
)
|
|
|
(17
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,504
|
|
|
|
|
|
|
|
|
|
|
|
3,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006 (Restated)
|
|
|
2,666,666
|
|
|
|
27
|
|
|
|
20,459
|
|
|
|
9,919
|
|
|
|
(167
|
)
|
|
|
|
|
|
|
30,238
|
|
Exercise of warrant, net of related costs
|
|
|
547,820
|
|
|
|
5
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393
|
|
Purchase and retirement of common stock
|
|
|
(128,669
|
)
|
|
|
(1
|
)
|
|
|
(737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(738
|
)
|
Restricted stock awards
|
|
|
390,000
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation costs
|
|
|
|
|
|
|
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244
|
|
Issuance of stock in connection with merger
|
|
|
5,000,000
|
|
|
|
50
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend to Parent prior to consummation of merger
|
|
|
|
|
|
|
|
|
|
|
(5,928
|
)
|
|
|
(13,489
|
)
|
|
|
|
|
|
|
|
|
|
|
(19,417
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,338
|
|
|
|
|
|
|
|
|
|
|
|
2,338
|
|
Changes in net unrealized gain (loss) on securities
available-for-sale, net of reclassification adjustment and tax
effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311
|
)
|
|
|
|
|
|
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
8,475,817
|
|
|
$
|
85
|
|
|
$
|
14,372
|
|
|
$
|
(1,232
|
)
|
|
$
|
(478
|
)
|
|
$
|
|
|
|
$
|
12,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
financial statements.
Note: On November 15, 2007, Brooke Franchise
Corporation was merged with and into Brooke Capital Corporation.
Upon closing of the transaction, Brooke Franchise paid out its
total stockholders equity of $19,417,000 in the form of a
dividend to its then-parent, Brooke Corporation. Results of
operations for Brooke Capital and Brooke Franchise have been
combined since the date both companies have been under the
common control of Brooke Corporation (December 8, 2006).
Accordingly, results of operations prior to that date represent
Brooke Franchise only as it has been controlled by Brooke
Corporation for all periods presented. See Note 14.
60
Brooke
Capital Corporation
Combined
Statements of Cash Flows
YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,338
|
|
|
$
|
3,504
|
|
|
$
|
4,766
|
|
Adjustments to reconcile net income to net cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,749
|
|
|
|
89
|
|
|
|
(14
|
)
|
Gain on sale of businesses
|
|
|
(2,057
|
)
|
|
|
(1,370
|
)
|
|
|
(3,091
|
)
|
(Increase) decrease in assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
(10,881
|
)
|
|
|
(8,519
|
)
|
|
|
(5,045
|
)
|
Other receivables
|
|
|
(839
|
)
|
|
|
(1,309
|
)
|
|
|
(247
|
)
|
Other current assets
|
|
|
(1,259
|
)
|
|
|
(663
|
)
|
|
|
(282
|
)
|
Business inventory
|
|
|
(7,080
|
)
|
|
|
2,725
|
|
|
|
(4,036
|
)
|
Purchase of business inventory provided by sellers
|
|
|
12,926
|
|
|
|
12,221
|
|
|
|
14,318
|
|
Payments on seller notes for business inventory
|
|
|
(12,541
|
)
|
|
|
(16,211
|
)
|
|
|
(11,526
|
)
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy and contract liabilities
|
|
|
5,812
|
|
|
|
331
|
|
|
|
|
|
Accounts and expenses payable
|
|
|
5,594
|
|
|
|
364
|
|
|
|
2,120
|
|
Other liabilities
|
|
|
6
|
|
|
|
803
|
|
|
|
(439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(6,232
|
)
|
|
|
(8,035
|
)
|
|
|
(3,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for securities
|
|
|
(6,285
|
)
|
|
|
(219
|
)
|
|
|
|
|
Cash payments for property and equipment
|
|
|
(14,580
|
)
|
|
|
|
|
|
|
|
|
Purchase of subsidiary and business assets
|
|
|
(663
|
)
|
|
|
|
|
|
|
(2,054
|
)
|
Sale of subsidiary and business assets
|
|
|
|
|
|
|
|
|
|
|
3,949
|
|
Net cash received in merger
|
|
|
|
|
|
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(21,528
|
)
|
|
|
943
|
|
|
|
1,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(13,489
|
)
|
|
|
|
|
|
|
(2,000
|
)
|
Capital contribution
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Issuance of stock and warrants
|
|
|
|
|
|
|
2,260
|
|
|
|
|
|
Loan proceeds on debt
|
|
|
22,528
|
|
|
|
8,500
|
|
|
|
10,194
|
|
Advances (payments) with Parent and Affiliates
|
|
|
11,695
|
|
|
|
7,239
|
|
|
|
(2,574
|
)
|
Payments on short-term borrowing
|
|
|
(4,145
|
)
|
|
|
|
|
|
|
|
|
Payments on debt
|
|
|
(540
|
)
|
|
|
(1,969
|
)
|
|
|
(10,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
16,049
|
|
|
|
16,030
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(11,711
|
)
|
|
|
8,938
|
|
|
|
(1,315
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
14,344
|
|
|
|
5,406
|
|
|
|
6,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,633
|
|
|
$
|
14,344
|
|
|
$
|
5,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
financial statements.
61
Brooke
Capital Corporation
Notes to
Combined Financial Statements
YEARS
ENDED DECEMBER 31, 2007, 2006 AND 2005
|
|
1.
|
Summary
of Significant Accounting Policies
|
Brooke Capital Corporation, formerly First American Capital
Corporation, (the Company) is a financial services
company incorporated under the laws of the State of Kansas with
its principal office located in Overland Park, Kansas. The
Company has been listed on the American Stock Exchange since
August 30, 2007 under the symbol BCP. The
Companys primary business purpose is franchising insurance
and related businesses and providing services to its franchisees
through its network of regional offices, service centers and
sales centers. Other business purposes of the Company are to
provide consulting services to business sellers and collateral
preservation assistance to lenders. In addition, the Company
uses its industry contacts and expertise in insurance brokerage
to broker loans for, and consult with, managing general agencies
and managing general agencies that own insurance companies,
specializing in hard-to-place insurance sales, captive insurance
agencies and funeral homes. The Company will also use its
expertise to preserve collateral and monitor insurance agency
borrowers on behalf of lenders.
Affiliates of the Company have entered into revenue sharing
agreements with the Company which provide that any and all
revenues paid under an affiliates name are transferred to
the Company. These combined financial statements represent the
financial position, results of operations, and cash flows of the
resulting economic entity known as Brooke Capital Corporation.
The Company is a majority-owned subsidiary of Brooke Corporation
(sometimes referred to as the Parent Company), a
Kansas corporation, whose stock is listed on the NASDAQ Stock
Exchange under the symbol BXXX. Brooke
Corporations registered office is located in Overland
Park, Kansas.
The subsidiaries of the Company are as follows:
First Life America Corporation (First Life or
FLAC) is a licensed insurance company distributing a
broad range of individual life and annuity insurance products to
individuals in eight states.
Brooke Capital Advisors, Inc. (Brooke Capital
Advisors or BCA), formerly First Life
Benefits, is a broker that in the past offered life, health,
disability and annuity products underwritten by other companies
and complementing those products offered by First Life America
Corporation. Beginning on December 8, 2006, Brooke Capital
Advisors, Inc. began operating a managing general agency loan
brokerage and consulting business.
First Capital Venture, Inc. is a shell company with no
operations and no plans for operations at this time.
Brooke Investments, Inc. is a Kansas corporation that
acquires real estate for lease to franchisees or other purposes.
In addition, to help preserve collateral interests, Brooke
Investments enters into real estate leases that are subleased or
licensed to franchisees.
Brooke Agency, Inc. is a Kansas
corporation. Brooke Agency acquires for investment those
insurance agencies or funeral homes where local ownership is not
considered critical to financial performance. Brooke Agency does
not have any employees or incur operating expenses because the
Company usually retains a share of the commissions to provide
personnel and facilities.
Brooke Life and Health, Inc., a Kansas corporation, is a
licensed insurance agency that sells life and health insurance
through the Companys network of franchise agents,
subagents and insurance producers.
The American Heritage, Inc., a Kansas corporation,
consults with and otherwise assists agent buyers under the trade
name of Heritage Agency Consultants.
First Brooke Insurance and Financial Services,
Inc. is a Texas corporation used for licensing purposes.
62
Brooke
Capital Corporation
Notes to
Combined Financial Statements
The American Agency, Inc., a Kansas corporation, consults
with agent sellers and brokers agency sales under the trade name
of Agency Business Consultants.
Brooke Funeral Services Company, LLC, a Delaware
corporation, was created to offer funeral services and life
insurance through the Companys network of funeral
franchisees. Brooke Funeral Services Company LLC has acquired
ownership of franchise agreements from Brooke Corporation
and/or the
Company as part of an arrangement to preserve collateral on
behalf of Brooke Credit Corporation (d/b/a Aleritas Capital
Corporation beginning in January 2008), a majority-owned
subsidiary of Brooke Corporation, as required by the
securitization process. Brooke Funeral Services Company, LLC has
contracted with Brooke Corporation
and/or the
Company for performance of any obligations to agents associated
with all such franchise agreements.
The affiliates included in these combined statements are as
follows:
Brooke Agency Services Company LLC is licensed as an
insurance agency and was created to offer property, casualty,
life and health insurance through the Companys network of
franchisees. Brooke Agency Services Company LLC has acquired
ownership of certain franchise agreements from Brooke
Corporation
and/or the
Company as part of an arrangement to preserve collateral on
behalf of Brooke Credit Corporation, as required by the
securitization process. Brooke Agency Services Company LLC has
contracted with Brooke Corporation
and/or the
Company for performance of any obligations to agents associated
with all such franchise agreements.
Brooke Agency Services Company of Nevada, LLC, is a
licensed Nevada insurance agency that holds insurance contracts
in Nevada for the Company.
|
|
(b)
|
Basis
of Presentation
|
On November 15, 2007, the Company completed a merger with
Brooke Franchise Corporation (Brooke Franchise)
which was then a wholly-owned subsidiary of Brooke Corporation.
Pursuant to the Merger Agreement, Brooke Franchise was merged
with and into the Company, resulting in the Company being the
survivor. The transaction was accounted for in accordance with
the guidance under Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations,
issued by the Financial Accounting Standards Board.
This merger represented a transaction between entities under
common control. Accordingly, the Company has recorded the assets
and liabilities of Brooke Franchise at their carrying amounts at
the date of transfer as if the transaction had taken place as of
the beginning of the period. In addition, the Companys
results of operations and other changes in financial position
for the current year have been reported as if the merger had
occurred at the beginning of the period.
Prior years financial statements and related disclosures
have been restated to furnish comparative information for the
period during which the Company and Brooke Franchise have been
under common control. As Brooke Corporation did not acquire its
controlling interest in the Company until December 8, 2006,
the consolidated financial statements and other information
presented for periods prior to December 8, 2006 represent
those of Brooke Franchise only.
The accompanying financial statements include the consolidated
financial statements of the Company and its subsidiaries
combined with the financial statements of certain affiliates as
noted above. All significant intracompany accounts and
transactions have been eliminated in both the consolidated and
the combined financial statements.
The accompanying combined financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP),
which for First Life America
63
Brooke
Capital Corporation
Notes to
Combined Financial Statements
Corporation, differ from statutory accounting practices
prescribed or permitted by the Kansas Insurance Department
(KID).
|
|
(c)
|
Use of
Accounting Estimates
|
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of certain assets, liabilities and disclosures. Accordingly, the
actual amounts could differ from those estimates. Any
adjustments applied to estimated amounts are recognized in the
year in which such adjustments are determined. The following are
significant estimates made by management:
|
|
|
|
|
Amount of future policy cancellations which may result in
commission refunds and a corresponding reserve
|
|
|
|
Share of future policy cancellations due from franchisees
|
|
|
|
Amount of allowance for doubtful accounts
|
|
|
|
Share of policy commissions due to franchisees for commissions
received by the Company but not yet distributed to franchisees
|
|
|
|
Useful lives of assets
|
|
|
|
Changes in assumptions related to policy and contract
liabilities and related deferred acquisition costs
|
|
|
|
Amount of future insurance claim losses, loss expense and earned
premium percentages
|
|
|
|
Future interest spreads, mortality margins, expense margins and
premium persistency experience
|
|
|
|
Amortization
|
|
|
|
Amount of current and deferred income tax expense and payable
|
It is at least reasonably possible these estimates will change
in the near term.
For purposes of the statements of cash flows, the Company
considers all cash on hand, cash in banks and short-term
investments purchased with a maturity of three months or less to
be cash and cash equivalents. Restricted cash is not included in
cash equivalents.
|
|
(e)
|
Allowance
for Doubtful Accounts
|
The Company estimates that a certain level of accounts
receivable, primarily franchisee account balances, will be
uncollectible; therefore, allowances of $1,114,000 and
$1,466,000 at December 31, 2007 and 2006, respectively,
have been established. The Company regularly assists its
franchisees with cash flow by providing commission advances
because of cyclical fluctuations in commission receipts, but
expects repayment of all such advances within the 30-day
franchise statement cycle and is placed on a watch list if not
paid within four months. At December 31, 2007, the amount
of allowance was determined after analysis of several specific
factors, including franchise advances classified as
watch status.
The following schedule entitled Valuation and Qualifying
Accounts summarizes the Allowance for Doubtful Accounts
activity for the years ended December 31, 2007, 2006 and
2005. Additions to the allowance for doubtful accounts are
charged to expense. Charges to expense during 2007 were reduced
as a
64
Brooke
Capital Corporation
Notes to
Combined Financial Statements
result of Brooke Corporations guaranty of certain
receivables of Brooke Franchise totaling $2,485,000 in
connection with the November 15, 2007 merger transaction:
Valuation
and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Charges to
|
|
|
|
|
|
Balance at End
|
|
|
|
Year
|
|
|
Expenses
|
|
|
Write Offs
|
|
|
of Year
|
|
|
|
(In thousands)
|
|
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
575
|
|
|
$
|
2,974
|
|
|
$
|
2,833
|
|
|
$
|
716
|
|
Year ended December 31, 2006
|
|
|
716
|
|
|
|
4,313
|
|
|
|
3,563
|
|
|
|
1,466
|
|
Year ended December 31, 2007
|
|
|
1,466
|
|
|
|
4,276
|
|
|
|
4,628
|
|
|
|
1,114
|
|
The Company does not accrue interest on loans that are
90 days or more delinquent and payments received on all
such loans are applied to principal. Loans and accounts
receivable are written off when management determines that
collection is unlikely. This determination is made based on
managements experience and evaluation of the debtors
circumstances.
Commissions. Commission revenue on insurance
policy premiums is generally recognized as of the effective date
of the policies or, in certain cases, as of the effective date
or billing date, whichever is later. Contingent and profit
sharing commissions typically represent a share of insurance
company profits on policies written by the Company. The
calculation of insurance company profits is usually made by the
insurance company by deducting policyholder claims and insurance
company expenses from policy premiums. Although the share of
insurance company profits paid to the Company is affected by
annual premium growth, the Company does not typically receive
contingent commissions based solely on premium volume.
Contingent and profit sharing commissions are generally paid
based on prior year performance and recognized when received.
Premiums due from the insured to the Company are reported as
assets of the Company and as corresponding liabilities, net of
commissions, to the insurance carriers.
In the event of cancellation or reduction in premiums, for
policies billed by an insurance carrier, a percentage of the
commission revenue is often returned to the insurance carrier
and revenues are correspondingly reduced. The commission refunds
are calculated by the insurance carriers and are typically
deducted from amounts due to the Company from insurance
carriers. The Company has estimated and accrued a liability for
commission refunds of $481,000 and $535,000 at December 31,
2007 and 2006, respectively.
Policy fees. The Company receives fees for the
placement and issuance of policies that are in addition to, and
separate from, any sales commissions paid by insurance
companies. As these policy fees are not refundable and the
Company has no continuing obligation, all such revenues are
recognized on the effective date of the policies or, in certain
cases, the billing date, whichever is later.
Interest income, net. The Company recognizes
interest income when earned.
Initial franchise fees. The Company receives
initial franchise fees for two types of initial franchise
services: basic services provided pursuant to a franchise
agreement and buyers assistance plan (BAP) services provided
pursuant to a consulting agreement. Agreements are typically
executed, and initial franchise fees are typically paid, when a
franchise is acquired or opened. Initial franchise fees are
non-refundable after execution of the franchise or consulting
agreement.
The initial franchise fees for basic services cover the
franchisees access to the registered name
Brooke, access to the Companys business model,
access to suppliers, and access to the Companys
Internet-based
65
Brooke
Capital Corporation
Notes to
Combined Financial Statements
information system. These basic services are the types of
services typically provided by franchisors. Delivery of these
services is substantially complete when the franchise location
is opened. Therefore, all such revenues are immediately
recognized.
The initial franchise fees paid for BAP services cover several
separate and distinct consulting tasks such as inspection report
compilation, marketing profile and plan development, and
operations analysis. Most of these services are provided by the
Company before franchise acquisition, resulting in the
recognition of associated revenues when initial franchise fees
are paid at closing. Although substantially all of the BAP
services are performed prior to closing, the Company does not
record any revenues from initial franchise fees until the actual
payment of fees at closing.
Total initial franchise fees for BAP services typically vary
based on a percentage of the acquired businesss revenues
because the time and expertise required of the Company to
perform BAP services generally varies with acquisition size.
However, the time and expertise required of the Company to
provide basic services and the value to franchisees of those
basic services, remains the same for all franchisees (even to
startup or de novo franchisees), so the amount of total initial
franchise fees allocated to basic services does not vary.
Accordingly, total initial franchise fees are first allocated to
initial franchise fees for basic services in the amount
typically charged to startup franchisees and the remainder of
the total initial franchise fees is allocated to BAP services.
Although substantially all of the BAP services are performed
prior to closing, the Company does not record revenues from
initial franchise fees until the actual payment of fees at
closing.
Consulting fees. The Company completes its
consulting obligation to business sellers at closing and is not
required to perform any additional tasks for the seller.
Therefore, revenues from consulting fees are recognized at
closing because the Company has no continuing obligation.
The Company will also use its expertise in the hard-to-place and
niche insurance industry to preserve collateral and monitor
insurance agency borrowers on behalf of lenders. Fees are
received for this collateral preservation activity. An initial
fee is received and recognized upon loan closing. Ongoing fees
are received monthly from these activities and are recognized as
services are provided. These fees are reported as other income
in the statements of operations.
Gain on sale of businesses. The Company
sometimes negotiates below-market interest rates on the deferred
portion of purchase prices paid to business sellers. These
interest rate concessions reduce the Companys carrying
value and increase the Companys gain when sold to
franchisees. Although the Company has a continuing obligation to
pay the deferred portion of the purchase price when due, it is
not obligated to prepay the deferred portion of the purchase
price or to otherwise diminish the benefit of the below-market
interest rate. Therefore, revenues from gains on sale of
businesses resulting from deferred payments to sellers are
recognized at closing because the Company has no continuing
obligation.
The Company sometimes acquires businesses that it plans to own
and operate as part of its business. If it later decides to sell
such businesses for a price greater than their carrying value,
then it recognizes a gain. When the business is sold, the
Company has no continuing obligations and, therefore, revenues
from gains on sale of businesses resulting from agency sales are
recognized immediately at the time of sale.
Premiums. For limited payment and other
traditional life insurance policies, premium income is reported
as earned when due. Profits are recognized over the life of
these contracts by associating benefits and expenses with
insurance in force for limited payment policies and with earned
premiums for other traditional life policies. This association
is accomplished by a provision for liability for future policy
benefits and the amortization of policy acquisition costs.
Reinsurance. Estimated reinsurance receivables
are reported as assets and are recognized in a manner consistent
with the liabilities related to the underlying reinsured
contracts, in accordance with Statement of
66
Brooke
Capital Corporation
Notes to
Combined Financial Statements
Financials Accounting Standards (SFAS) No. 113,
Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts.
|
|
(g)
|
Property
and Equipment
|
Property and equipment are carried at cost less accumulated
depreciation. Depreciation on buildings and land improvements is
calculated using the straight-line method over the estimated
useful lives of the respective assets. Depreciation on
furniture, equipment and automobiles is calculated using both
straight-line and accelerated methods over the estimated useful
lives of the respective assets. The estimated useful lives are
generally as follows:
|
|
|
|
|
Buildings and leasehold improvements
|
|
|
39 years
|
|
Land improvements
|
|
|
15 years
|
|
Furniture and equipment
|
|
|
3 to 10 years
|
|
Automobiles
|
|
|
5 years
|
|
|
|
(h)
|
Amortizable
Intangible Assets
|
Included in other assets are the unamortized costs of renewal
rights (rights to renewal commissions received from insurance
policies) purchased by the Company and through subsidiaries
(Brooke Life and Health, Inc. and The American Agency, Inc.) for
businesses the Company plans to own and operate for more than
one year. The balance is being amortized over a
15-year
period using an accelerated 150% declining balance switching to
straight-line method. The rates of amortization of Amortizable
Intangible Assets are based on an estimate of the useful lives
of the renewal rights of customer and insurance contracts
purchased. Amortization was $61,000, $68,000 and ($14,000) for
the years ended December 31, 2007, 2006 and 2005,
respectively. During 2005, it was determined that amortization
rates in use exceeded the above stated rate. An adjustment was
made in 2005 resulting in negative amortization for that year.
The acquisition of renewal rights by the Company or by its
subsidiaries for businesses the Company plans to own and operate
for less than one year are not classified as Amortizable
Intangible Assets (see Note 1(j)). Recent acquisitions and
divestitures of Amortizable Intangible Assets are discussed in
Note 13.
Subsequent to the initial recording at fair value, the
amortizable intangible asset is evaluated and measured annually
for impairment. The impairment testing is performed by two
different methods of analysis. The first method is a cash flow
analysis to determine if there are sufficient operating cash
flows. The second method is a fair market value analysis based
primarily on comparative sales data. If analysis indicates that
operating cash flows are insufficient or the assets fair
value is less than its book value, then an impairment has
occurred and the Company writes down the asset to the estimated
fair value. No impairment was recognized for the years ended
December 31, 2007, 2006 or 2005.
The Company uses the liability method of accounting for income
taxes. Deferred income taxes are provided for cumulative
temporary differences between balances of assets and liabilities
determined under accounting principles generally accepted in the
United States of America and balances determined for tax
reporting purposes.
|
|
(j)
|
Investment
in Businesses
|
The amount of assets included in the Investment in
Businesses category is the total of purchase prices paid,
or market prices if lower, for business assets, primarily
renewal rights, that the Company acquires to hold in inventory
for sale to its franchisees. Renewal rights associated with
businesses that the Company plans to own and operate for less
than one year are considered inventory and are not amortized
(see Note 1(h))
67
Brooke
Capital Corporation
Notes to
Combined Financial Statements
because the residual values of those assets are expected to be
the same at the time of sale to franchisees as at the time of
acquisition by the Company. Typically, the Company acquires and
sells the business assets simultaneously. If the assets are not
sold simultaneously, then the Company operates the business
until sold and records the income and expense associated with
the business. The amount of income and expenses associated with
inventoried businesses is not considered material by the
Company. The number of businesses purchased for this purpose for
the years ended December 31, 2007 and 2006 was 19 and 33,
respectively. Correspondingly, the number of businesses sold
from inventory for the years ended December 31, 2007 and
2006 was 16 and 34, respectively. At December 31, 2007 and
2006, the Investment in Businesses inventory
consisted of 6 businesses and 3 businesses, respectively, with
fair market values totaling $9,413,000 and $2,333,000,
respectively.
|
|
(k)
|
Gain
or Loss on Sale of Businesses
|
Investment in Businesses gains or losses are the
difference between the sales price and the book value of the
business, which is carried at the lower of cost or fair value.
Businesses are typically sold in the same units as purchased.
However, in instances where a part of a business unit is sold,
then management estimates the fair value of the portion of the
business unit being sold and the difference between the sales
price and the resulting fair value estimation is the amount of
the gain or loss. Any such fair value estimation is evaluated
for reasonableness by comparing the market value estimation of
the portion being sold to the book value for the entire business
unit. Fair value estimations are based on comparable sales
information that takes into consideration business
characteristics such as customer type, customer account size,
supplier size and billing methods.
|
|
(l)
|
Deferred
Policy Acquisition Costs
|
Commissions and other costs of acquiring life insurance, which
vary with, and are primarily related to, the production of new
business have been deferred to the extent recoverable from
future policy revenues and gross profits. The acquisition costs
are being amortized over the premium paying period of the
related policies using assumptions consistent with those used in
computing policy reserves. Deferred policy acquisition costs at
December 31, 2007 and 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred policy acquisition costs
|
|
$
|
10,579
|
|
|
$
|
9,653
|
|
Accumulated amortization
|
|
|
(5,173
|
)
|
|
|
(4,444
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
5,406
|
|
|
$
|
5,209
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs amortization of $724,000 was
recorded during 2007.
|
|
(m)
|
Net
Earnings Per Share Data
|
Basic net income per common share is calculated by dividing net
income by the weighted average number of shares of the
Companys common stock outstanding. Diluted net income is
calculated by including the weighted average effect of dilutive
warrants outstanding during the periods. The weighted average
number of shares issuable upon the exercise of outstanding
warrants assumes that the applicable proceeds from such
exercises are used to acquire treasury shares at the average
price of common stock during the periods. Basic and diluted
earnings per share for 2007, 2006 and 2005 were determined as
follows (adjusted for the
1-for-3
68
Brooke
Capital Corporation
Notes to
Combined Financial Statements
reverse stock split effective in April 2007 and the issuance of
5,000,000 shares in connection with the merger of Brooke
Franchise with and into the Company):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income numerator for basic earnings per share
|
|
$
|
2,338
|
|
|
$
|
3,504
|
|
|
$
|
4,766
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share
|
|
$
|
2,338
|
|
|
$
|
3,504
|
|
|
$
|
4,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding (after the effect of
1-for-3
reverse stock split and issuance of 5,000,000 shares to
effect merger) used for basic earnings per share
|
|
|
8,201,026
|
|
|
|
6,497,638
|
|
|
|
6,437,925
|
|
Dilutive effect of assumed exercise of outstanding warrants, net
of adjustment to reflect purchase of treasury shares with
proceeds
|
|
|
7,000
|
|
|
|
461,034
|
|
|
|
|
|
Shares used for diluted earnings per share
|
|
|
8,208,026
|
|
|
|
6,958,672
|
|
|
|
6,437,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.54
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.50
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(n)
|
Buyers
Assistance Plans
|
As part of its initial services to franchisees, the Company
sometimes assists franchisees with the conversion of acquired
businesses into its franchise system pursuant to a Buyers
Assistance Plan (BAP). Substantially all of the BAP services
(inspection reports, operations analysis and marketing plan
development) are typically provided by the Company before
franchise acquisition.
|
|
(o)
|
Accounts
and Notes Receivable, Net
|
The net notes receivable included as a part of the
Accounts and Notes Receivable, Net asset category
are made up primarily of accounts receivable from franchisees as
well as loans to businesses and others. Based on
managements experience, the carrying values of accounts
and notes receivable approximate their fair values and such
notes may be sold. The Companys allowance for doubtful
accounts is discussed earlier in this Note 1 to the
financial statements.
Other Receivables are primarily reimbursements due from
franchisees and agents for possible cancellation of policies,
and receivables from sellers for consulting fees and other
services. Most of these amounts are collected within
30 days from franchisees, borrowers or agents and all
amounts are collected within 12 months from date of
recording.
The Company has purchased certain lottery prize cash flows,
representing the assignments of the future payment rights from
lottery winners at a discounted price. Payments on these cash
flows will be made by state
69
Brooke
Capital Corporation
Notes to
Combined Financial Statements
run lotteries and as such are backed by the general credit of
the respective states. At December 31, 2007 and 2006, the
carrying value of these other assets was approximately
$3,527,000 and $3,067,000, respectively. Also included in other
current assets are certain deposits and prepaid and other
current amounts.
The Company expenses the costs of advertising as they are
incurred. Total advertising and marketing expenses for the years
ended December 31, 2007, 2006 and 2005 was $14,078,000,
$12,838,000 and $9,852,000, respectively.
The Company holds insurance commissions for the special purpose
entities Brooke Acceptance Company, LLC, Brooke Captive
Credit Company 2003, LLC, Brooke Securitization Company 2004A,
LLC, Brooke Capital Company, LLC, Brooke Securitization
Company V, LLC, and Brooke Securitization Company
2006-1,
LLC wholly-owned subsidiaries of Brooke Credit Corporation,
for the purpose of making future loan payments and the use of
these funds is restricted. The amount of commissions held at
December 31, 2007 and 2006 was $171,000 and $615,000,
respectively.
|
|
(t)
|
Stock-Based
Compensation
|
The Company has granted restricted stock awards to certain
officers and directors pursuant to The Brooke Capital
Corporation 2007 Equity Incentive Plan. Compensation costs were
determined based upon the fair value of the awards on their
respective grant dates and are being recorded as expense over
the related vesting periods.
The Company classifies all of its fixed maturity and equity
investments as available-for-sale. Available-for-sale fixed
maturities are carried at fair value with unrealized gains and
losses, net of applicable taxes, reported in other comprehensive
income. Equity securities are carried at fair value with
unrealized gains and losses, net of applicable taxes, reported
in other comprehensive income. Realized gains and losses on
sales of investments are recognized in operations on the
specific identification basis. Interest earned on investments is
included in net investment income. See Note 3 for
additional information about the Companys investments.
|
|
(v)
|
Policy
and Contract Liabilities
|
Annuity contract liabilities (future annuity benefits) are
computed using the retrospective deposit method and consist of
policy account balances before deduction of surrender charges,
which accrue to the benefit of policyholders. Premiums received
on annuity contracts are recognized as an increase in a
liability rather than premium income. Interest credited on
annuity contracts is recognized as an expense. The range of
interest crediting rates for annuity products was 4.25 to
5.25 percent in 2007 and 4.25 to 5.35 percent in 2006.
Traditional life insurance policy benefit liabilities (future
policy benefits) are computed on a net level premium method
using assumptions with respect to current yield, mortality,
withdrawal rates, and other assumptions deemed appropriate by
the Company. Reserve interest assumptions, including the impact
of grading for possible adverse deviations, ranged from 4.00 to
7.25 percent.
Policy claim liabilities represent the estimated liabilities for
claims reported plus claims incurred but not yet reported. The
liabilities are subject to the impact of actual payments and
future changes in claim factors.
Policyholder premium deposits represent premiums received for
payment of future premiums on existing policyholder contracts.
Interest was credited on these deposits at a rate of
4 percent in 2007 and 2006,
70
Brooke
Capital Corporation
Notes to
Combined Financial Statements
respectively. The premium deposits are recognized as an increase
in a liability rather than premium income. Interest credited on
the premium deposits is recognized as an expense.
|
|
(w)
|
Advertising
Supply Inventory
|
In conjunction with the construction of an advertising/marketing
center in Phillipsburg, Kansas the Company now retains large
quantities of marketing materials that franchisees use to
promote their businesses. These marketing supplies may be held
in inventory for a period of up to 12 months before
delivery to franchisees.
SFAS No. 130, Reporting Comprehensive
Income, requires unrealized gains and losses on the
Companys available-for-sale securities to be recorded as a
component of accumulated other comprehensive income. Unrealized
gains and losses recognized in accumulated other comprehensive
income that are later recognized in net income through a
reclassification adjustment are identified on the specific
identification method.
|
|
2.
|
Transactions
with Parent Company
|
The Company is a majority-owned subsidiary of Brooke
Corporation. The Company relies on Brooke Corporation to provide
facilities, administrative support, cash management, and
accounting services. During 2007, the Company paid a monthly
administrative fee for these shared services. For the years
ended December 31, 2007, 2006 and 2005, the total amount
paid to the Parent Company was $2,850,000, $4,800,000 and
$5,100,000, respectively.
In December 2004, Brooke Franchise acquired 100% of the
outstanding shares of Brooke Life and Health, Inc. and The
American Agency, Inc. from Brooke Corporation for $379,000.
The majority of cash required for operations is kept in a common
corporate checking account and amounts due to or amounts due
from the Parent Company are netted, and recorded on the balance
sheet as a Parent Company receivable or Parent Company payable,
accordingly. The Parent Company receivable at December 31,
2007 and 2006 resulted primarily from the additional cash
generated from the Companys purchase and sale of business
activity. At December 31, 2007 and 2006, the Company
reported receivables from its Parent Company and other related
parties of $18,441,000 and $29,122,000, respectively, as a
result of this and other transactions with affiliates. Included
in the current balance is $4,700,000 related to the Delta Plus
Holdings transaction of retail business along with $1,000,000
for the guarantee of accounts receivable. Transactions between
affiliates in the normal course of operations were $2,075,000
with the remaining in common accounts.
On March 30, 2007, Brooke Corporation acquired Delta Plus
Holdings, Inc., a holding company based in Missouri. At the same
time, all of the insurance agency assets of Christopher
Joseph & Company, a direct subsidiary of Delta Plus
Holdings, Inc., were sold to Brooke Franchise Corporation for
$8,984,000. Christopher Joseph & Company operated
retail insurance offices in Missouri, Kansas, Florida and
Oklahoma, marketing personal and commercial products for other
affiliated and non-affiliated insurance companies. The retail
offices of Christopher Joseph & Company have since
been sold or converted to Brooke franchise offices.
At December 31, 2007 and 2006, the Company reported income
taxes receivable (payable) to Parent of $1,094,000 and
($1,485,000), respectively.
In accordance with the shared services agreement with Brooke
Corporation, property and equipment for Brooke Capital were to
be provided by Brooke Corporation. On June 30, 2007, Brooke
Franchise purchased property and equipment from Brooke
Corporation related to franchise operations. The Company, as
successor
71
Brooke
Capital Corporation
Notes to
Combined Financial Statements
in interest, has continued to make such purchases since that
date. Accordingly, the fees paid by the Company to Brooke
Corporation in connection with the shared services agreement
were reduced during 2007. See Notes 1(g) and 5 for more
information on the Companys property and equipment. Brooke
Corporation has guaranteed loans on behalf of the Company.
The amortized cost and fair value of investments at
December 31, 2007 and 2006 are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency
|
|
$
|
2,132
|
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
2,153
|
|
Corporate bonds
|
|
|
17,094
|
|
|
|
129
|
|
|
|
700
|
|
|
|
16,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,226
|
|
|
|
150
|
|
|
|
700
|
|
|
|
18,676
|
|
Equity securities
|
|
|
239
|
|
|
|
7
|
|
|
|
55
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,465
|
|
|
$
|
157
|
|
|
$
|
755
|
|
|
$
|
18,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency
|
|
$
|
1,559
|
|
|
$
|
10
|
|
|
$
|
18
|
|
|
$
|
1,551
|
|
Corporate bonds
|
|
|
10,973
|
|
|
|
75
|
|
|
|
300
|
|
|
|
10,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,532
|
|
|
|
85
|
|
|
|
318
|
|
|
|
12,299
|
|
Equity securities
|
|
|
258
|
|
|
|
29
|
|
|
|
4
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,790
|
|
|
$
|
114
|
|
|
$
|
322
|
|
|
$
|
12,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of fixed maturities at
December 31, 2007, by contractual maturity, are shown below
(in thousands). Actual maturities may differ from contractual
maturities because certain borrowers may have the right to call
or prepay obligations:
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Due in one year or less
|
|
$
|
799
|
|
|
$
|
794
|
|
Due after one year through five years
|
|
|
4,165
|
|
|
|
4,100
|
|
Due after five years through ten years
|
|
|
7,996
|
|
|
|
7,703
|
|
Due after ten years
|
|
|
5,898
|
|
|
|
5,708
|
|
Mortgage-backed securities
|
|
|
368
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,226
|
|
|
$
|
18,676
|
|
|
|
|
|
|
|
|
|
|
The fair values for investments in fixed maturities are based on
quoted market prices.
Included in investments are securities, which have been pledged
to various state insurance departments. The fair values of these
securities were $2,279,000 and $2,061,000 at December 31,
2007 and 2006, respectively.
During 2007, the Company had gross realized investment gains of
$84,000 and gross realized investment losses of $0.
72
Brooke
Capital Corporation
Notes to
Combined Financial Statements
Interest income consists of dividends and interest earned on
available-for-sale securities and certain other assets.
Following are the components of interest income for the years
ended December 31, 2007, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
959
|
|
|
$
|
62
|
|
|
$
|
|
|
Equity securities
|
|
|
19
|
|
|
|
3
|
|
|
|
|
|
Other, net
|
|
|
947
|
|
|
|
275
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
1,925
|
|
|
$
|
340
|
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a policy and process in place to identify
securities that could potentially have an impairment that is
other-than-temporary. This process involves monitoring market
events that could impact issuers credit ratings, business
climate, management changes, litigation and government actions,
and other similar factors. On a regular basis, all securities
are reviewed in an effort to determine each issuers
ability to service its debts and the length of time the security
has been trading below cost. This process includes an assessment
of the credit quality of each investment in the securities
portfolio. The Company considers relevant facts and
circumstances in evaluating whether the impairment of a security
is other-than-temporary. Relevant facts and circumstances
considered include: (1) the length of time the fair value
has been below cost; (2) the financial position of the
issuer, including the current and future impact of any specific
events; and (3) the Companys ability and intent to
hold the security to maturity or until it recovers in value.
Based on the performance of these procedures, no securities are
deemed to be other-than-temporarily impaired by the Company.
There are a number of significant risks and uncertainties
inherent in the process of monitoring impairments and
determining if an impairment is other-than-temporary. These
risks and uncertainties include: (1) the risk that the
Companys assessment of an issuers ability to meet
all of its contractual obligations will change based on changes
in the credit characteristics of that issuer, (2) the risk
that the economic outlook will be worse than expected or have
more of an impact on the issuer than anticipated, (3) the
risk that fraudulent information could be provided to the
Companys investment professionals who determine the fair
value estimates and other-than-temporary impairments, and
(4) the risk that new information obtained by the Company
or changes in other facts and circumstances lead the Company to
change its intent to hold the security to maturity or until it
recovers in value. Any of these situations could result in a
charge to income in a future period.
The Company owned 75 and 68 securities that were in an
unrealized loss position at December 31, 2007 and 2006,
respectively. The following tables provide information regarding
unrealized losses on investments available for sale, as of
December 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
4,180
|
|
|
$
|
180
|
|
|
$
|
5,610
|
|
|
$
|
520
|
|
|
$
|
9,790
|
|
|
$
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
52
|
|
|
$
|
38
|
|
|
$
|
83
|
|
|
$
|
17
|
|
|
$
|
135
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
Brooke
Capital Corporation
Notes to
Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency
|
|
$
|
|
|
|
$
|
|
|
|
$
|
695
|
|
|
$
|
18
|
|
|
$
|
695
|
|
|
$
|
18
|
|
Corporate bonds
|
|
|
4,360
|
|
|
|
78
|
|
|
|
4,743
|
|
|
|
222
|
|
|
|
9,103
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,360
|
|
|
$
|
78
|
|
|
$
|
5,438
|
|
|
$
|
240
|
|
|
$
|
9,798
|
|
|
$
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
96
|
|
|
$
|
4
|
|
|
$
|
96
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys other comprehensive loss
and related tax effects during 2007 are as follows (in
thousands):
|
|
|
|
|
|
|
Amount
|
|
|
Unrealized holding losses on available-for-sale securities:
|
|
|
|
|
Unrealized holding losses during the period
|
|
$
|
(305
|
)
|
Less: Reclassification adjustment for gains included in net
income
|
|
|
84
|
|
Tax benefit
|
|
|
78
|
|
|
|
|
|
|
Other comprehensive loss
|
|
$
|
(311
|
)
|
|
|
|
|
|
|
|
4.
|
Accounts
and Notes Receivable, net
|
At December 31, 2007 and 2006, accounts and notes
receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Business loans
|
|
$
|
6,763
|
|
|
$
|
|
|
Less: Business loans sold
|
|
|
(1,662
|
)
|
|
|
|
|
Plus: loan participation classified as secured borrowing
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes receivable, net
|
|
|
6,763
|
|
|
|
|
|
Interest earned no collected on notes
|
|
|
322
|
|
|
|
233
|
|
Customer receivables
|
|
|
24,596
|
|
|
|
21,933
|
|
Allowance for doubtful accounts
|
|
|
(1,114
|
)
|
|
|
(1,466
|
)
|
|
|
|
|
|
|
|
|
|
Total accounts and notes receivable, net
|
|
$
|
30,567
|
|
|
$
|
20,700
|
|
|
|
|
|
|
|
|
|
|
Loan participations represent the transfer of notes receivable,
by sale, to participating lenders. These transfers
are accounted for by the criteria established by SFAS 140,
Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. Of the
notes receivable sold, at December 31, 2007 none were
accounted for as sales because the transfers did not meet the
criteria established by SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.
74
Brooke
Capital Corporation
Notes to
Combined Financial Statements
|
|
5.
|
Property
and Equipment
|
A summary of property and equipment at December 31, 2007
and 2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
559
|
|
|
$
|
358
|
|
Buildings and leasehold improvements
|
|
|
9,482
|
|
|
|
2,855
|
|
Furniture and equipment
|
|
|
5,844
|
|
|
|
144
|
|
Computer Equipment
|
|
|
4,015
|
|
|
|
357
|
|
Automobiles
|
|
|
1,051
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
20,951
|
|
|
|
3,823
|
|
Accumulated depreciation and amortization
|
|
|
(5,242
|
)
|
|
|
(945
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
15,709
|
|
|
$
|
2,878
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $964,000 for the year ended
December 31, 2007. Depreciation expense recorded during
2006 was not significant.
As discussed in Note 2, on June 30, 2007, Brooke
Franchise acquired property and equipment from Brooke
Corporation related to franchise operations. In the past,
property and equipment were provided to the franchise operations
by Brooke Corporation in connection with a shared services
agreement. Property and equipment received from Brooke
Corporation was recorded by Brooke Franchise using the initial
cost basis and accumulated depreciation of the assets
transferred.
75
Brooke
Capital Corporation
Notes to
Combined Financial Statements
|
|
6.
|
Bank
Loans, Notes Payable, and Other Long-Term Obligations
|
At December 31, 2007 and 2006, bank loans, notes payable
and other long-term obligations consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Seller notes payable. These notes are payable to the
sellers of businesses that the Company has purchased and are
collateralized by assets of the businesses purchased. Some of
these notes have an interest rate of 0% and have been discounted
at a rate of 5.50% to 9.75% and maturities range from January
2008 to January 2011. A particular seller note payable has an
interest rate of 7.00% and matures September 2015.
|
|
$
|
19,123
|
|
|
$
|
18,738
|
|
Columbian Bank and Trust Company, due January 2008.
Interest rate is variable and was 8.25% at December 31,
2007. Interest and principal are due in one payment at maturity.
Collateralized by accounts receivable.
|
|
|
4,355
|
|
|
|
8,500
|
|
Citizens Bank and Trust Company, due February 2009.
Interest rate is variable and is due quarterly with principal
due at maturity. Interest rate was 7.25% at December 31,
2007. Parent Company has pledged stock it owns in Brooke Credit
Corporation and the Company.
|
|
|
9,000
|
|
|
|
|
|
Brooke Holdings, Inc., due December 2011. Interest rate
is variable and was 10.5% at December 31, 2007. Principal
payments of $1,265,000; $1,404,000; $1,559,000 and $8,154,000
are due in 2008, 2009, 2010 and 2011, respectively.
Collateralized by stock in subsidiary and other assets.
|
|
|
12,382
|
|
|
|
|
|
Brooke Credit Corporation, due September, 2015. Interest
rate is variable and was 10.75% at December 31, 2007.
Interest and principal are payable in 120 monthly payments
of $16,080. Collateralized by various assets of the
Company.
|
|
|
1,022
|
|
|
|
1,099
|
|
First National Bank of Phillipsburg, variable interest
rate (7.75% at December 31, 2007) with scheduled
principal payments through maturity at August 2017.
Collateralized by real estate.
|
|
|
728
|
|
|
|
|
|
Brooke Credit Corporation, various notes with variable
interest rates from 10.75% to 11.25% at December 31, 2007,
with maturities ranging from October 2011 to January 2021.
Principal payments are scheduled on each note through its
respective maturity date. Collateralized by real estate.
|
|
|
1,891
|
|
|
|
|
|
Fidelity Bank, variable interest rate (7.75% at
December 31, 2007) with scheduled principal payments
through maturity at September 2021. Collateralized by real
estate.
|
|
|
1,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bank loans and notes payable
|
|
|
50,491
|
|
|
|
28,337
|
|
Less: Current maturities and short-term debt
|
|
|
(32,122
|
)
|
|
|
(21,006
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
18,369
|
|
|
$
|
7,331
|
|
|
|
|
|
|
|
|
|
|
Seller notes payable are typically the deferred portion of
purchase prices paid by the Company to acquire insurance
agencies for resale by the Company to franchisees. Seller notes
payable are secured by a collateral interest in the insurance
policy renewal rights purchased by the Company. Sellers
typically agree that their security interests are subordinate to
Brooke Credit Corporations security interests in the
renewal rights of the agency, which also collateralize the loans
by Brooke Credit Corporation to franchisees. The renewal rights
associated with the collateral interests of seller notes payable
had estimated annual commissions of $47,282,000 and $38,726,000
at December 31, 2007 and 2006, respectively.
In connection with the outstanding loans and related debt
agreements with Citizens Bank and Trust Company and Brooke
Holdings, the Company has committed to certain covenants wherein
(1) the Company, certain of the Companys subsidiaries
and/or
Parent will maintain certain benchmarks with respect to their:
76
Brooke
Capital Corporation
Notes to
Combined Financial Statements
(a) regulatory status, (b) outstanding litigation,
(c) liquidity and (d) solvency; and (2) the
Company and certain of its subsidiaries shall maintain minimum
tangible net worth, as defined in the relevant agreement.
In addition, the Company has agreed to certain restrictions
applicable to it and certain of its subsidiaries regarding,
among other things, (1) investment in other affiliates;
(2) payment of any dividends or distributions,
(3) incurrence of additional debt, (4) pledging of
certain assets (5) reorganization and merger, and (6)
disposition of assets.
None of the Amortizable Intangible Assets described in
Note 1(h) and none of the Acquisitions and Divestitures
described in Note 13 were financed with seller notes
payable at December 31, 2007.
Interest incurred on bank loans and notes payable for the years
ended December 31, 2007, 2006 and 2005 was $3,066,000,
$1,700,000 and $1,515,000, respectively. Interest payable was
$1,314,000 and $757,000 at December 31, 2007 and 2006,
respectively.
The future scheduled maturities of debt are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Amount
|
|
|
|
|
|
2008
|
|
$
|
32,122
|
|
|
|
|
|
2009
|
|
|
3,018
|
|
|
|
|
|
2010
|
|
|
2,639
|
|
|
|
|
|
2011
|
|
|
8,697
|
|
|
|
|
|
2012
|
|
|
537
|
|
|
|
|
|
Thereafter
|
|
|
3,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company occupies approximately 7,500 square feet of its
building in Topeka, Kansas. The Company has leased
10,000 square feet under a lease that runs through
June 30, 2011. The lease agreement calls for minimum
monthly base lease payments of $15,500.
The remaining 2,500 square feet are leased for a period
that will end on August 31, 2010. That lease will
automatically renew for another five years, if not terminated on
or after August 15, 2010. The lease agreement calls for
minimum monthly base lease payments of $4,366 through
August 31, 2010. The lease payments will decrease to $3,100
per month for the period September 1, 2010 through
August 31, 2015. Tenant improvement costs of $103,372 are
being depreciated on a straight line basis over the lease term
ending August 31, 2010.
The future minimum lease amounts to be received under non
cancelable lease agreements at December 31, 2007 are
approximately as follows (in thousands):
|
|
|
|
|
Years Ending
|
|
|
|
December 31,
|
|
Amount
|
|
|
2008
|
|
$
|
240
|
|
2009
|
|
|
240
|
|
2010
|
|
|
222
|
|
2011
|
|
|
187
|
|
|
|
|
|
|
Total
|
|
$
|
889
|
|
|
|
|
|
|
77
Brooke
Capital Corporation
Notes to
Combined Financial Statements
The Company leases space for itself and on behalf of its agents.
Future long-term payments related to these operating leases at
December 31, 2007 are as follows (in thousands):
|
|
|
|
|
Years Ending
|
|
|
|
December 31,
|
|
Amount
|
|
|
2008
|
|
$
|
13,427
|
|
2009
|
|
|
10,127
|
|
2010
|
|
|
4,891
|
|
2011
|
|
|
2,095
|
|
2012
|
|
|
448
|
|
2103 and thereafter
|
|
|
112
|
|
|
|
|
|
|
|
|
$
|
31,100
|
|
|
|
|
|
|
The Companys current and deferred income tax expense for
the years ended December 31, 2007, 2006 and 2005 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Current
|
|
$
|
1,185
|
|
|
$
|
1,497
|
|
|
$
|
2,920
|
|
Deferred
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,094
|
|
|
$
|
1,497
|
|
|
$
|
2,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense differs from the amount computed by
applying the statutory Federal income tax rate for 2007, 2006
and 2005 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. Federal statutory tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
State statutory rate
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
Increase (decrease) in valuation allowance
|
|
|
(7
|
)%
|
|
|
(6
|
)%
|
|
|
|
|
Miscellaneous
|
|
|
|
|
|
|
(3
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
%
|
|
|
30
|
%
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are recorded to recognize
the future tax consequences of temporary differences between
financial reporting amounts and the tax basis of existing assets
and liabilities based on
78
Brooke
Capital Corporation
Notes to
Combined Financial Statements
currently enacted tax laws and tax rates in effect for the years
in which the differences are expected to reverse. Significant
components of the Companys net deferred tax liability are
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
$
|
903
|
|
|
$
|
874
|
|
Other
|
|
|
38
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
941
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,806
|
|
|
$
|
2,020
|
|
Net unrealized investment loss
|
|
|
120
|
|
|
|
41
|
|
Other
|
|
|
111
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
2,037
|
|
|
|
2,085
|
|
Valuation allowance
|
|
|
(1,434
|
)
|
|
|
(1,688
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
603
|
|
|
|
397
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
338
|
|
|
$
|
508
|
|
|
|
|
|
|
|
|
|
|
The Company has net operating loss carryforwards of
approximately $5,741,000 on a consolidated basis. Net operating
loss carryforwards of $168,000 resulted from non-life insurance
operations and were generated prior to the base period for tax
consolidation purposes. These loss carryforwards expire in 2011
and 2012 and can only be used to offset taxable income resulting
from non-life insurance operations. Net operating loss
carryforwards of $4,608,000 resulted from non-life insurance
operations and were generated either during or subsequent to the
base period for tax consolidation purposes. These loss
carryforwards expire in 2018 through 2025 and can be used to
offset either taxable income resulting from non-life insurance
operations or 35% of taxable income resulting from life
insurance operations subject to certain limitations. Net
operating loss carryforwards of $965,000 resulted from life
insurance operations and were generated either during or
subsequent to the base period for tax consolidation purposes.
These loss carryforwards expire in 2022 through 2025. Capital
loss carryforwards of $44,000 will expire in 2009 and 2010.
The Company filed a consolidated federal income tax return with
First Life and Brooke Capital Advisors for the year ended
December 31, 2006 and plans to do so for the period ended
November 15, 2007 (the effective date of its merger with
Brooke Franchise Corporation). The Company plans to file as a
part of the Brooke Corporation consolidated federal return for
the remaining portion of 2007. First Life is taxed as a life
insurance company under the provisions of the Internal Revenue
Code and will be required to file a separate tax return for the
five years following the November 15, 2007 merger
transaction. Brooke Franchise Corporation has historically filed
as a part of the consolidated returns filed by Brooke
Corporation.
|
|
9.
|
Employee
Benefit Plans
|
Substantially all of the Companys employees are eligible
to participate in Brooke Corporations defined contribution
retirement plan. Employees may contribute up to the maximum
amount allowed pursuant to the Internal Revenue Code, as
amended. The Company will match 50% of employee contributions up
to a maximum of $3,000 or 3% of compensation and may contribute
an additional amount to the plan at the discretion of the Board
of Directors. During 2007, the Company recorded $235,000 in
employer contributions to the plan. No employer contributions
were charged to expense for the years ended December 31,
2006 and 2005.
79
Brooke
Capital Corporation
Notes to
Combined Financial Statements
|
|
10.
|
Concentration
of Credit Risk
|
Credit risk is limited by emphasizing investment grade
securities and by diversifying the investment portfolio among
various investment instruments. Certain cash balances exceed the
maximum insurance protection of $100,000 provided by the Federal
Deposit Insurance Corporation. The Company has not experienced
any losses in such accounts and believes it is not exposed to
any significant credit risk on cash and cash equivalents. At
December 31, 2007, the Company had account balances of
$5,761,000 that exceeded the insurance limit of the Federal
Deposit Insurance Corporation.
|
|
11.
|
Segment
and Related Information
|
The Companys two reportable segments consisted of its
Insurance Company Operations and its Insurance Agency
Operations. Insurance company operations include the issuance of
life insurance policies by First Life America Corporation. First
Life sells life insurance and annuity products in eight states
throughout the Midwest.
The Companys insurance agency operations include its
franchise operations and the insurance agency consulting
activities conducted through Brooke Capital Advisors. Franchise
operations include the sale of insurance, financial and credit
services on a retail basis through franchisees. Through Brooke
Capital Advisors, consulting services are provided to managing
general agencies and collateral preservation services relating
to such agencies loans. This business expanded in 2007 to
include similar services for funeral home businesses and loans
related thereto. Revenues, expenses, assets and liabilities that
are not allocated to one of the two reportable segments are
categorized as Corporate. Activities associated with
Corporate include functions such as accounting, auditing, legal,
human resources and investor relations.
The results of each segment are separately audited and the
segments accounting policies are the same as those
described in the summary of significant accounting policies.
80
Brooke
Capital Corporation
Notes to
Combined Financial Statements
The table below reflects summarized financial information
concerning the Companys reportable segments for the years
ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
|
|
|
Elimination of
|
|
|
|
|
|
|
Agency
|
|
|
Company
|
|
|
|
|
|
Intersegment
|
|
|
Consolidated
|
|
|
|
Operations
|
|
|
Operations
|
|
|
Corporate
|
|
|
Activity
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance commissions
|
|
$
|
114,588
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
114,588
|
|
Insurance premiums earned
|
|
|
|
|
|
|
3,710
|
|
|
|
|
|
|
|
|
|
|
|
3,710
|
|
Interest income
|
|
|
408
|
|
|
|
1,410
|
|
|
|
112
|
|
|
|
(5
|
)
|
|
|
1,925
|
|
Consulting fees
|
|
|
10,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,423
|
|
Initial franchise fees for basic services
|
|
|
32,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,505
|
|
Initial franchise fees for buyers assistance plans
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
455
|
|
Gain on sale of businesses
|
|
|
2,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,057
|
|
Other income
|
|
|
5,744
|
|
|
|
248
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
5,987
|
|
Total Operating Revenues
|
|
|
166,180
|
|
|
|
5,368
|
|
|
|
112
|
|
|
|
(10
|
)
|
|
|
171,650
|
|
Interest expense
|
|
|
3,066
|
|
|
|
|
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
3,066
|
|
Commissions expense
|
|
|
89,015
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
89,182
|
|
Payroll expense
|
|
|
23,827
|
|
|
|
474
|
|
|
|
599
|
|
|
|
|
|
|
|
24,900
|
|
Depreciation and amortization
|
|
|
891
|
|
|
|
805
|
|
|
|
53
|
|
|
|
|
|
|
|
1,749
|
|
Other operating expenses
|
|
|
44,281
|
|
|
|
3,791
|
|
|
|
1,254
|
|
|
|
(5
|
)
|
|
|
49,321
|
|
Income Before Income Taxes
|
|
|
5,100
|
|
|
|
131
|
|
|
|
(1,799
|
)
|
|
|
|
|
|
|
3,432
|
|
Segment assets
|
|
|
66,204
|
|
|
|
33,190
|
|
|
|
10,811
|
|
|
|
|
|
|
|
110,205
|
|
Expenditures for segment assets
|
|
|
14,540
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
14,580
|
|
Separate segment information has not been presented for 2006 and
2005 as: (1) the Companys 2005 statement of
operations represents the results of operations as previously
reported by Brooke Franchise Corporation only, and (2) the
Companys 2006 statement of operations represents the
results of operations as previously reported by Brooke Franchise
plus the last 23 days of December 2006 for Brooke Capital
Corporation. All of the 2005 results of operations and
substantially all of the 2006 results of operations represent
the activities of the insurance agency operations. Accordingly,
presentation of segment information for those years would not be
meaningful.
|
|
12.
|
Related
Party Information
|
Transactions with Brooke Corporation, the Parent Company are
described in Note 2.
Brooke Credit Corporation, a majority-owned subsidiary of Brooke
Corporation, is a licensed finance company that originates loans
to franchisees of the Company. Brooke Credit Corporation funds
the loans it originates by selling loan participation and asset
backed securities to community banks and other finance
companies. In 2003, Brooke Credit Corporation worked with
Standard and Poors, to create a new securitization asset class
for insurance agency loans. To date there have been six
securitizations completed. Brooke Credit Corporation has
executed promissory notes with a majority of businesses that
have franchise agreements with the Company. Proceeds from these
notes reduce the receivables for the Company from franchisees.
In connection with originated loans through Brooke Credit
Corporation, beginning in 2004, the Company has entered into
separate Collateral Preservation Agreements with Brooke Credit
Corporation. Under these agreements, the Company provides Brooke
Credit Corporation with collateral preservation services and
81
Brooke
Capital Corporation
Notes to
Combined Financial Statements
assistance with loss mitigation of distressed loans. On certain
loan types, the Company is compensated by upfront and ongoing
fees paid by Brooke Credit Corporation. For the years ended
December 31, 2007, 2006 and 2005, $5,468,000, $2,114,000
and $727,000 in compensation was paid to the Company for
services provided under these agreements. At December 31,
2007 Brooke Credit Corporation owed $449,000 to the Company
under this agreement. In 2007 net compensation received by the
Company totalled $4,422,000 under these agreements.
In August 2005, Brooke Credit Corporation made a loan to Brooke
Franchise, in the amount of $1,200,000, with a maturity date of
September 15, 2020. Terms of the loan state a variable
interest rate, daily adjustable, of 2.00% above the New York
Prime rate with payments of principal and interest due monthly.
In April, 2006, the principal balance and interest were paid in
full.
In September 2005, Brooke Credit Corporation made a loan to
Brooke Franchise, in the amount of $1,190,000, with a maturity
date of September 15, 2015. (Balance of this loan totalled
$1,022,000 at December 31, 2007.) Terms of the loans state
a variable interest rate, daily adjustable, of 3.50% above the
New York Prime rate with payments of principal and interest due
monthly. At December 31, 2007 and 2006, respectively,
interest payable on this loan totaled $5,000 and $6,000.
During 2005 and 2006, Brooke Credit Corporation made various
loans to Brooke Franchise (totaling $1,891,000 at
December 31, 2007) with variable interest rates and
maturities ranging from October 2011 to January 2021. Principal
payments are scheduled on each note through its respective
maturity date and interest rates were 10.75% to 11.25% at
December 31, 2007. At December 31, 2007 and 2006,
respectively, interest payable on these loans totaled $8,000 and
$11,000.
At December 31, 2007, 2006 and 2005, interest expense on
these loans with Brooke Credit Corporation totaled $352,000,
$163,000 and $392,000, respectively.
In December 2007, Brooke Holdings, Inc. loaned $12,382,000 to
the Company. Brooke Holdings, Inc. owned almost 43% of the
outstanding common stock in Brooke Corporation at
December 31, 2007. Brooke Holdings, Inc. is controlled by
Robert D. Orr, Chairman of the Board of the Company, and Leland
G. Orr, Chief Financial Officer of the Company, who owned 73.65%
and 21.72%, respectively, of its outstanding shares of stock as
of February 29, 2008. The interest rate on the loan is
variable, at 4.50% over the Prime Rate as published in the Wall
Street Journal, and annual principal payments are scheduled with
a final payment of $8,154,000 due in December 2011. Payment of
the loan is secured by a pledge of the Companys stock in
First Life. The Company has also agreed to pledge its stock in
TIC, upon its acquisition of Delta Plus.
The DB Group, Ltd., a wholly-owned subsidiary of Brooke
Brokerage Corporation, is a captive insurance company
incorporated in Bermuda. The DB Group, Ltd. insures a portion of
the professional insurance agents liability exposure of
the Company, its affiliated companies and its franchisees and
had a policy in force on December 31, 2006 that provided
$5,000,000 of excess professional liability coverage.
In November 2005, Brooke Brokerage Corporation transferred its
interest in the outstanding shares of Texas All Risk General
Agency, Inc. and TAR Holding Company, Inc. to the Company. The
consideration for this transfer was $2,054,000, which
represented the book value on November 30, 2005. Therefore,
Brooke Brokerage Corporation did not record a gain on this
transfer. The Company immediately sold 100% of the outstanding
shares of Texas All Risk General Agency, Inc. and TAR Holding
Company, Inc. to an unrelated party. The sale price was
$3,450,000. The gain on sale of $1,396,000 was recognized by the
Company. The Company paid consulting fees to CJD &
Associates in the amount of $1,396,000. CJD &
Associates is a subsidiary of Brooke Brokerage Corporation, a
wholly-owned subsidiary of Brooke Corporation.
In November 2005, Brooke Brokerage Corporation entered into a
Buyers Assistance Plan (BAP) agreement with West Point
Underwriters, LLC. Brooke Brokerage Corporation transferred its
interest and obligations in the BAP agreement to the Company.
Therefore, the Company recorded $270,000 BAP income
82
Brooke
Capital Corporation
Notes to
Combined Financial Statements
in connection with this particular transaction. The Company
agreed to retain Brooke Brokerage Corporation to perform the
consulting services set forth in the BAP agreement. The
consideration for this service, paid from the Company to Brooke
Brokerage Corporation was $270,000. Therefore, the Company also
recorded $270,000 consulting expense in connection with this
transaction and Brooke Brokerage Corporation recorded consulting
income of $270,000.
Anita Lowry is the sister of Robert D. Orr, Chairman of the
Board of Brooke Capital Corporation and Leland G. Orr, Chief
Financial Officer of Brooke Capital Corporation and is the
mother of Michael S. Lowry, Chief Executive Officer of Brooke
Credit Corporation and is married to Don Lowry. Don and Anita
Lowry are shareholders of American Heritage Agency, Inc. of
Hays, Kansas. The Company and American Heritage Agency, Inc.
entered into a franchise agreement on February 28, 1999
pursuant to which American Heritage Agency, Inc. participates in
the Companys franchise program. Don and Anita Lowry sold
American Heritage Agency, Inc. in 2008.
The Company maintains deposit accounts with Brooke Savings Bank,
a wholly-owned subsidiary of Brooke Bancshares, Inc. which is a
wholly-owned subsidiary of Brooke Corporation. At
December 31, 2007, the Company had $2,613,000 on deposit
with the bank.
|
|
13.
|
Acquisitions
and Divestitures
|
In December 2004, Brooke Franchise acquired 100% of the
outstanding shares of Brooke Life and Health, Inc. and The
American Agency, Inc. from Brooke Corporation for $379,000.
In February 2004, Brooke Franchise acquired insurance agency
renewal rights from Brent and Haeley Mowery for $499,000. The
Company operated this business asset under the trade name of
Brooke Auto Insurance Services of San Leandro, California.
This agency was subsequently sold to a franchisee in July 2005
for $499,000, which resulted in a gain on sale of $68,000 from
amortization recorded in prior periods.
On March 30, 2007, Brooke Franchise acquired all of the
insurance agency assets of Christopher Joseph &
Company, a subsidiary of Delta Plus Holdings, Inc., from Brooke
Corporation. Christopher Joseph & Company was acquired
on that same date by Brooke Corporation in connection with its
acquisition of Delta Plus. See Note 2 for more information
about this transaction.
During May 2007, Brooke Franchise acquired a 100% interest in
Brooke Investments, Inc., from Brooke Corporation. Brooke
Investments acquires real estate for lease to franchisees, for
corporate use and other purposes. See Note 7 for more
information regarding the Companys operating leases.
On September 28, 2007, Brooke Franchise acquired 60
insurance agency locations from entities associated with
Chicago-based J and P Holdings Inc. The agencies currently sell
auto insurance under the trade names of Lone Star Auto,
Insurance Xpress, Car Insurance Store, Hallberg Insurance Agency
and Hallberg Xpress in Colorado, Illinois, Kansas, Missouri and
Texas. The acquired agencies will be converted into Brooke
franchises or merged into existing Brooke franchise locations.
At December 31, 2007, 36 of the acquired agencies had been
sold.
|
|
14.
|
Stockholders
Equity Transactions
|
On December 8, 2006 the Company closed on a Stock Purchase
and Sale Agreement (2006 Stock Purchase Agreement)
with Brooke Corporation. Pursuant to the agreement, the Company
committed, through a series of steps, to sell shares of common
stock that would represent approximately 55% of the outstanding
shares of the Company to Brooke Corporation in exchange for
$3,000,000 in cash and execution of a Brokerage Agreement. At
closing, the Company issued 3,742,943 shares of common
stock (1,247,647 shares after the effects of the April 2007
1-for-3
reverse stock split) to Brooke Corporation, representing
approximately 46.8% of the Companys then authorized,
issued and outstanding common stock, for $2,552,000 and
83
Brooke
Capital Corporation
Notes to
Combined Financial Statements
executed and delivered the Brokerage Agreement. As part of the
closing, the Company issued Brooke Corporation a warrant to
purchase an additional 1,643,460 shares of common stock
(547,820 shares, post-split) for $448,000, such shares to
be authorized for issuance pursuant to then forthcoming
amendments to the Companys Articles of Incorporation. The
Articles of Incorporation were amended on January 31, 2007
and Brooke Corporation exercised the Warrant on the same day.
As part of the consideration under the 2006 Stock Purchase
Agreement, Brooke Capital Advisors, a subsidiary of the Company,
and CJD & Associates, L.L.C. (CJD), Brooke
Corporations brokerage subsidiary, entered into an
agreement by which, as of that date, Brooke Capital Advisors
began transacting all new managing general agent loan brokerage
business (formerly operated by CJD). CJD operated such a
business prior to Closing and, as part of the Brokerage
Agreement, agreed not to engage in any new managing general
agent loan brokerage business. Pursuant to the terms of the 2006
Stock Purchase Agreement, Brooke Corporation will contribute
funds to the Company as additional consideration for the
issuance of the shares of the Companys common stock
acquired, to the extent the pretax profits of Brooke Capital
Advisors do not meet a three-year $6 million pretax profit
goal in accordance with an agreed upon schedule set forth in the
2007 Stock Purchase Agreement. Brooke Capital Advisors reported
pretax income of approximately $7,773,000 and $1,084,000 during
2007 and 2006, respectively.
The Warrant issued in connection with the above Agreement was
exercised by Brooke Corporation on January 31, 2007.
Warrants outstanding at December 31, 2007 include one
issued to a former officer and another to a former outside
Director of the Company for 16,666 and 33,333 shares,
respectively. These warrants were authorized by the
Companys former Board of Directors prior to the closing of
the above Agreement. The warrants became exercisable on
December 8, 2006 either in whole or in part for a period of
10 years from that date at an exercise price of $1.72 per
share, the assumed market price of the Companys stock at
the date of grant ($5.16 per share after the effects of the
April 2007
1-for-3
reverse stock split). The fair value of these warrants was
estimated as of the grant date using an accepted valuation model
in accordance with SFAS No. 123R, Share-Based
Payment. Significant assumptions included a risk-free
rate of 4.56%, and expected volatility of 10% and a dividend
rate of 0%. In the case of the former officer, the estimated
value of the warrant, $32,000, was recorded as compensation
expense. In the case of the former Director, the estimated value
of the warrant, $64,000, was recorded as a reduction of related
stock issuance costs. Warrants outstanding are considered in the
Companys reported diluted earnings per share to the extent
they are deemed to have a dilutive effect on reported earnings.
Coincident with the closing of the 2006 Stock Purchase
Agreement, other warrants previously issued by the Company and
held by Brooke Corporation were cancelled. Three separate
warrants would have allowed Brooke Corporation to purchase up to
50,000 shares of common stock (for each warrant) at prices
of $1.71, $3.35 and $5.00, respectively, beginning in 2012 or
immediately prior to any earlier change of control involving the
Company and were due to expire no later than 2015. The warrants
were issued in connection with an earlier transaction wherein
the Company acquired 450,500 shares of its common stock
previously held by Brooke Corporation for a purchase price of
$770,000 ($1.71 per share). All but $200,000 of the purchase
price was financed by Brooke Credit Corporation, the finance
subsidiary of Brooke Corporation at that time, at a fixed
interest rate of 8% over a ten year period. The note to Brooke
Credit Corporation was paid in full prior to the closing of the
2006 Stock Purchase Agreement.
On January 31, 2007, the Companys shareholders
approved certain amendments to the Companys Articles of
Incorporation to: (1) increase its authorized shares of
common stock from 8,000,000 to to 25,000,000 million shares;
(2) increase its authorized shares of preferred stock from
550,000 to 1,550,000; and (3) reduce the par value of its
common stock from $.10 to $.01 per share. In addition, the
shareholders approved a
1-for-3
reverse stock split by which each three shares of outstanding
common stock would be reverse split into one share of common
stock. The reverse split was effective on April 13, 2007.
84
Brooke
Capital Corporation
Notes to
Combined Financial Statements
On April 2, 2007, the Company concluded a modified
Dutch auction tender offer for shares of its common
stock purchasing 379,248 shares (126,416 shares
post-split) at a price of $1.60 per share ($4.80 per share
post-split) for an aggregate purchase price of approximately
$607,000. Upon completion of the offer and the following reverse
stock split (effective on April 13, 2007), the Company had
3,085,817 shares of common stock outstanding (after the
purchase of fractional shares representing the equivalent of
2,253 shares).
As discussed in Note 15, on August 15, 2007, the
Companys Board of Directors awarded 390,000 restricted
shares of its common stock to officers and directors of the
Company under The Brooke Capital Corporation 2007 Equity
Incentive Plan.
On November 15, 2007, the Company issued
5,000,000 shares of its common stock to Brooke Corporation
in connection with the completion of its merger with Brooke
Franchise Corporation wherein Brooke Franchise was merged with
and into the Company, resulting in the Company being the
survivor. An additional 2,250,000 shares of the
Companys common stock has been reserved for issuance to
Brooke Corporation as merger consideration pursuant to
contingent earn-out payments tied to adjusted earnings of the
Company (excluding its subsidiaries) in calendar years 2007 and
2008. The Company did not achieve the 2007 adjusted earnings
goals and thus will not issue 1,125,000 of the shares otherwise
reserved as additional contingent merger consideration
applicable to the 2007 earn-out. Pursuant to the Agreement and
Plan of Merger dated August 31, 2007, as amended
September 20, 2007, as amended November 15, 2007, by
and among Brooke Corporation, Brooke Franchise and the Company;
Brooke Corporation has agreed it will not transfer the
Companys common stock that it received in the merger
transaction for a period of 180 days after the closing date
unless the Company would otherwise consent.
As previously noted, the merger of Brooke Franchise with and
into the Company was accounted for in a manner similar to the
pooling of interests method and was consummated on
November 15, 2007. Prior to consummation, the previously
separate companies reported the following in connection with
their results of operations for the nine month period ended
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2007
|
|
|
|
Brooke Capital
|
|
|
Brooke Franchise
|
|
|
|
(In thousands)
|
|
|
Total operating revenues
|
|
$
|
11,675
|
|
|
$
|
119,906
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2,502
|
|
|
|
2,164
|
|
|
|
|
|
|
|
|
|
|
Changes in stockholders equity related to this merger have
been reported in the Companys consolidated statements of
stockholders equity included in these financial
statements. Transactions between the companies were not material
prior to the merger.
Prior years financial statements and related disclosures
have been restated to furnish comparative information for the
period during which the Company and Brooke Franchise have been
under common control. As Brooke Corporation acquired its
controlling interest in the Company on December 8, 2006,
the financial statements and other information presented for
periods prior to December 8, 2006 represent that of Brooke
Franchise only.
85
Brooke
Capital Corporation
Notes to
Combined Financial Statements
Following is a summary of the amounts of revenue and net income
reported in these financial statements for 2006 and 2005 as
compared to amounts previously reported by the Company (in
thousands):
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
Operating Revenues
|
|
|
Net Income (Loss)
|
|
|
Brooke Franchise
|
|
|
|
|
|
|
|
|
12 Months Ended December 31, 2006
|
|
$
|
142,348
|
|
|
$
|
2,422
|
|
Brooke Capital
|
|
|
|
|
|
|
|
|
23 Days Ended December 31, 2006
|
|
|
1,384
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
On a combined basis
|
|
$
|
143,732
|
|
|
$
|
3,504
|
|
|
|
|
|
|
|
|
|
|
As previously reported by Brooke Capital
Year Ended December 31, 2006
|
|
$
|
6,162
|
|
|
$
|
756
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brooke Franchise
|
|
$
|
119,018
|
|
|
$
|
4,766
|
|
|
|
|
|
|
|
|
|
|
As previously reported by Brooke Capital
|
|
$
|
4,861
|
|
|
$
|
(701
|
)
|
|
|
|
|
|
|
|
|
|
Prior to the merger, Brooke Corporation owned 100% of Brooke
Franchise and 53% of the Company. As a result of the closing of
the merger, Brooke Corporation owned approximately 81% of the
Companys common stock.
|
|
15.
|
Stock-Based
Compensation
|
The Brooke Capital Corporation 2007 Equity Incentive Plan (the
Plan), which is shareholder-approved, allows the
Company to provide incentives and rewards to those employees and
directors largely responsible for the success and growth of
Brooke Capital Corporation and its direct and indirect
subsidiaries. The Company believes that such incentives and
rewards more closely align the interests of such persons with
those of the shareholders of Brooke Capital Corporation.
The Plan authorizes the issuance of up to 2,400,000 shares
of Company common stock to be issued pursuant to awards made
under the Plan in the form of non-qualified stock options,
incentive stock options, restricted shares of common stock,
stock appreciation rights, performance units and restricted
share units. On August 15, 2007, the Compensation Committee
of the Board of Directors of Brooke Capital Corporation awarded
390,000 restricted shares to officers and directors of the
Company or its subsidiary.
Pursuant to the Restricted Shares Agreement between the Company
and each recipient, the recipients are entitled to receive
dividends and vote their shares in matters submitted to
shareholder vote. Transfer restrictions lapse in one-third
annual increments and will automatically lapse upon the sale of
all or substantially all of the assets of the Company or the
sale by Brooke Corporation, the Companys controlling
shareholder, of all of its Company common stock.
The fair value of an award is determined based upon the market
price for the Companys common stock during the 10
consecutive trading days immediately preceding the valuation
date, as set forth in the Plan. As the shares of the
Companys common stock were not listed for trading on any
exchange on the award date (prior to their listing on the
American Stock Exchange on August 30, 2007), the
Compensation Committee determined the fair value for the
restricted share awards granted on August 15, 2007 to be
$5.00 per share, as provided under the terms of the Plan.
During 2007, the Company recorded approximately $244,000 in
compensation cost along with related deferred income tax
benefits of $93,000. As of December 31, 2007, there was
$1,706,000 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under
86
Brooke
Capital Corporation
Notes to
Combined Financial Statements
the Plan. That cost is expected to be recognized on a
straight-line basis over the remaining terms of the three year
vesting periods ending on August 15, 2010.
|
|
16.
|
Amortizable
Intangible Assets
|
There are no intangible assets with indefinite useful lives at
December 31, 2007 and 2006. The intangible assets with
definite useful lives had values of $553,000 and $614,000 at
December 31, 2007 and 2006, respectively. Amortization
expense on intangible assets, including those sold during the
year, was $61,000, $68,000, and ($14,000) for the years ended
December 31, 2007, 2006 and 2005.
Amortization expense for amortizable intangible assets for the
years ended December 31, 2008, 2009, 2010, 2011 and 2012 is
estimated to be $55,000, $50,000, $44,000, $39,000 and $36,000,
respectively.
|
|
17.
|
Supplemental
Cash Flow Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash paid for interest
|
|
$
|
2,510
|
|
|
$
|
1,640
|
|
|
$
|
1,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income tax
|
|
$
|
1,410
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business inventory increased from December 31, 2006 to
December 31, 2007. During the years ended December 31,
2007, 2006 and 2005, the statements of cash flows reflect the
purchase of businesses into inventory provided by sellers
totaling $12,926,000, $12,221,000 and $14,318,000, respectively,
the write down to realizable value of inventory of $300,000,
$975,000 and $0, respectively, and the change in inventory of
$7,080,000, $2,725,000 and $4,036,000, respectively. Payments on
seller notes were $12,541,000 and $16,211,000 in 2007 and 2006,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Purchase of business inventory
|
|
$
|
(32,400
|
)
|
|
$
|
(25,254
|
)
|
|
$
|
(27,536
|
)
|
Sale of business inventory
|
|
|
37,946
|
|
|
|
39,225
|
|
|
|
37,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from sale of business inventory
|
|
|
5,546
|
|
|
|
13,971
|
|
|
|
10,282
|
|
Cash provided by sellers of business inventory
|
|
|
(12,926
|
)
|
|
|
(12,221
|
)
|
|
|
(14,318
|
)
|
Write down to realizable value of inventory
|
|
|
300
|
|
|
|
975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in inventory on balance sheet
|
|
$
|
(7,080
|
)
|
|
$
|
2,725
|
|
|
$
|
(4,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
Statutory
Requirements
|
The Companys life insurance subsidiary, First Life America
Corporation (First Life), prepares its
statutory-basis financial statements in accordance with
statutory accounting practices (SAP) prescribed or
permitted by the Kansas Insurance Department (KID).
Currently, prescribed statutory accounting practices
include state insurance laws, regulations, and general
administrative rules, as well as the National Association of
Insurance Commissioners (NAIC) Accounting Practices
and Procedures Manual and a variety of other NAIC publications.
Permitted statutory accounting practices encompass
all accounting practices that are not prescribed; such practices
may differ from state to state, may differ from company to
company within a state, and may change in the future. During
1998, the NAIC adopted codified statutory accounting principles
(Codification). Codification replaced the NAIC
Accounting Practices and Procedures Manual and was effective
January 1, 2001. The impact of Codification was not
material to First Lifes statutory-basis financial
statements.
87
Brooke
Capital Corporation
Notes to
Combined Financial Statements
Capital and surplus at December 31, 2007 and 2006 for the
Companys life insurance operations as reported in these
financial statements prepared in accordance with generally
accepted accounting principles (GAAP) as compared to amounts
reported in accordance with SAP prescribed or permitted by the
KID are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Capital and Surplus
|
|
|
|
|
|
|
|
|
GAAP
|
|
$
|
7,480
|
|
|
$
|
7,659
|
|
SAP
|
|
|
3,801
|
|
|
|
3,966
|
|
Principal differences between GAAP and SAP include:
a) costs of acquiring new policies are deferred and
amortized for GAAP; b) benefit reserves are calculated
using more realistic investment, mortality and withdrawal
assumptions for GAAP; c) statutory asset valuation reserves
are not required for GAAP; and d) available-for-sale fixed
maturity investments are reported at fair value with unrealized
gains and losses reported as a separate component of
shareholders equity for GAAP.
Statutory restrictions limit the amount of dividends, which may
be paid by First Life to the Company. Generally, dividends
during any year may not be paid without prior regulatory
approval, in excess of the lesser of (a) 10% of statutory
shareholders surplus as of the preceding December 31,
or (b) statutory net operating income for the preceding
year. In addition, First Life must maintain the minimum
statutory capital and surplus required for life insurance
companies in those states in which it is licensed to transact
life insurance business.
The KID imposes on insurance enterprises minimum risk-based
capital (RBC) requirements that were developed by
the NAIC. The formulas for determining the amount of RBC specify
various weighing factors that are applied to financial balances
or various levels of activity based on the perceived degree of
risk. Regulatory compliance is determined by ratio of the
enterprises regulatory total adjusted capital, as defined by the
NAIC, to its authorized control level RBC, as defined by
the NAIC. Enterprises below specific trigger points or ratios
are classified within certain levels, each of which requires
specified corrective action. First Life has a ratio that is in
excess of the minimum RBC requirements; accordingly, the
Companys management believes that First Life meets the RBC
requirements.
In order to reduce the risk of financial exposure to adverse
underwriting results, insurance companies reinsure a portion of
their risks with other insurance companies. First Life has
entered into agreements with Optimum Re Insurance Company
(Optimum Re) of Dallas, Texas, and Wilton
Reassurance Company (Wilton Re) of Wilton, CT, to
reinsure portions of the life insurance risks it underwrites.
Pursuant to the terms of the agreements, First Life retains a
maximum coverage exposure of $50,000 on any one insured. At
December 31, 2007 and 2006, First Life ceded inforce
amounts totaling $24,038,000 and $27,346,000 of ordinary
business and $29,744,000 and $31,184,000 of accidental death
benefit risk, respectively.
Pursuant to the terms of the agreement with Optimum Re, First
Life generally pays no reinsurance premiums on first year
individual business. However, SFAS No. 113,
Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts, requires
the unpaid premium to be recognized as a first year expense and
amortized over the estimated life of the reinsurance policies.
First Life records this unpaid premium as reinsurance
premiums payable in the accompanying balance sheet and as
reinsurance premiums ceded in the accompanying
income statement. At December 31, 2007 and 2006,
respectively, the unpaid reinsurance premiums net of
amortization totaled $8,000 and $11,000. To the extent that the
reinsurance companies are unable to fulfill their obligations
under the reinsurance agreements, First Life remains primarily
liable for the entire amount at risk.
88
Brooke
Capital Corporation
Notes to
Combined Financial Statements
First Life is party to an Automatic Retrocession Pool Agreement
(the Reinsurance Pool) with Optimum Re, Catholic
Order of Foresters, American Home Life Insurance Company and
Woodmen of the World. The agreement provides for automatic
retrocession of coverage in excess of Optimum Res
retention on business ceded to Optimum Re by the other parties
to the Reinsurance Pool. First Lifes maximum exposure on
any one insured under the Reinsurance Pool is $50,000. During
2007 and 2006, First Life assumed inforce amounts totaling
$27,368,000 and $22,377,000, respectively.
During the second quarter of 2008, the Company is expected to
issue 500,000 shares of its common stock to Brooke
Corporation in connection with the completion of the Exchange
Agreement, dated August 31, 2007, as amended, among Brooke
Corporation, Delta Plus Holdings, Inc. and the Company wherein
the Company will receive all of the outstanding stock of Delta
Plus. An additional 125,000 shares of the Companys
common stock has been reserved for issuance to Brooke
Corporation as additional exchange consideration pursuant to
contingent earn-out payments tied to 2008 reported earnings of
Delta Plus.
Prior to consummation of the exchange, Brooke Corporation owns
100% of Delta Plus and 81% of the Company. As a result of
closing the exchange agreement, Brooke Corporation is expected
to own approximately 82% of the Companys common stock.
The following pro forma information is presented for the year
ended December 31, 2007, assuming the exchange transaction
involving Delta Plus took place on March 30, 2007, the date
it was acquired by Brooke Corporation:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Total operating revenues
|
|
|
|
|
As reported by Brooke Capital Corporation in these financial
statements
|
|
$
|
171,650
|
|
As reported by Delta Plus
|
|
|
9,164
|
|
|
|
|
|
|
On a combined basis
|
|
$
|
180,814
|
|
|
|
|
|
|
Net income
|
|
|
|
|
As reported by Brooke Capital Corporation in these financial
statements
|
|
$
|
2,338
|
|
As reported by Delta Plus
|
|
|
327
|
|
|
|
|
|
|
On a combined basis
|
|
$
|
2,665
|
|
|
|
|
|
|
Various lawsuits have arisen in the ordinary course of the
Companys business. In each of the matters and
collectively, the Company believes the ultimate resolution of
such litigation will not result in any material adverse impact
to the financial condition, operations or cash flows of the
Company.
|
|
21.
|
Other
Regulatory Matters
|
First Life is currently licensed to transact life and annuity
business in the states of Kansas, Texas, Illinois, Oklahoma,
North Dakota, Kentucky and Nebraska. Due to the varied processes
of obtaining admission to write business in new states,
management cannot reasonably estimate the time frame of
expanding its marketing presence.
On May 3, 2007, First Life was released from its Memorandum
of Understanding with the Ohio Department of Insurance. First
Lifes license had been previously suspended as its
statutory capital had fallen below the minimum required level in
Ohio of $2,500,000. While the license had been reinstated during
2006,
89
Brooke
Capital Corporation
Notes to
Combined Financial Statements
the Company had been prohibited from writing new business in
that state while under the Memorandum. At December 31,
2007, First Lifes statutory basis capital and surplus was
$3,801,000, which is in excess of the aforementioned minimum
requirement.
|
|
22.
|
New
Accounting Standards
|
In September 2006, the FASB issued SFAS 157, Fair
Value Measurements, which provides enhanced guidance
for using fair value measurements in financial reporting. While
the standard does not expand the use of fair value in any new
circumstance, it has applicability to several current accounting
standards that require or permit entities to measure assets and
liabilities at fair value. This standard defines fair value,
establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements. Application
of this standard is required for the Company beginning in 2008.
It is not expected that adoption of this Statement will have a
material impact on the Companys results of operations and
financial position.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of
SFAS No. 115. This standard permits an
entity to choose to measure many financial instruments and
certain other items at fair value. Most of the provisions in
Statement 159 are elective; however, the amendment to
SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, applies to
all entities with available-for-sale and trading securities. The
fair value option established by Statement 159 permits all
entities to choose to measure eligible items at fair value at
specified election dates. A business entity will report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. Statement 159 is effective for the Companys
financial statements covering periods after December 31,
2007. It is not expected that adoption of this Statement will
have a material impact on the operating results or financial
condition of the Company.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations. This
Statement establishes principles and requirements for how an
acquirer recognizes and measures tangible assets acquired,
liabilities assumed, goodwill and any noncontrolling interests
and identifies related disclosure requirements for business
combinations. Measurement requirements will result in all
assets, liabilities, contingencies and contingent consideration
being recorded at fair value on the acquisition date, with
limited exceptions. Acquisition costs and restructuring costs
will generally be expensed as incurred. This Statement is
effective for the Company for business combinations in which the
acquisition date is on or after January 1, 2009. Management
is currently assessing what impact, if any, the application of
this standard could have on the Companys results of
operations and financial position.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements. This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. Minority interests will be recharacterized as
noncontrolling interests and classified as a component of
equity. This Statement is effective for the Company beginning on
January 1, 2009. It is not expected that adoption of this
Statement will have a material impact on the operating results
or financial condition of the Company.
Certain accounts in the prior period financial statements have
been reclassified for comparative purposes to conform with the
presentation in the current year financial statements.
90
Brooke
Capital Corporation
Notes to
Combined Financial Statements
|
|
24.
|
Quarterly
Operating Results (unaudited)
|
Operating results for the years ended 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
48,685
|
|
|
$
|
43,164
|
|
|
$
|
39,732
|
|
|
$
|
40,069
|
|
Total expenses
|
|
|
44,255
|
|
|
|
41,150
|
|
|
|
38,957
|
|
|
|
43,856
|
|
Income before income taxes
|
|
|
4,430
|
|
|
|
2,014
|
|
|
|
775
|
|
|
|
(3,787
|
)
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.34
|
|
|
|
0.17
|
|
|
|
0.07
|
|
|
|
(0.27
|
)
|
Diluted
|
|
|
0.34
|
|
|
|
0.17
|
|
|
|
0.07
|
|
|
|
(0.27
|
)
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
35,285
|
|
|
$
|
38,328
|
|
|
$
|
34,876
|
|
|
$
|
35,243
|
|
Total expenses
|
|
|
31,699
|
|
|
|
36,248
|
|
|
|
36,450
|
|
|
|
34,334
|
|
Income before income taxes
|
|
|
3,586
|
|
|
|
2,080
|
|
|
|
(1,574
|
)
|
|
|
909
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.35
|
|
|
|
0.20
|
|
|
|
(0.15
|
)
|
|
|
0.14
|
|
Diluted
|
|
|
0.35
|
|
|
|
0.20
|
|
|
|
(0.17
|
)
|
|
|
0.13
|
|
The earnings per share is based on the weighted average number
of shares outstanding at the end of each quarter. Basic and
diluted earnings per share for all periods presented reflect the
effects of the
1-for-3
reverse stock split effective in April 2007 and the issuance of
5,000,000 shares in connection with the merger of Brooke
Franchise Corporation with and into the Company.
Quarterly financial information is affected by seasonal
variations. The timing of contingent commissions, policy
renewals and acquisitions may cause revenues, expenses and net
income to vary significantly between quarters.
On March 11, 2008 Keith Bouchey, President and CEO of
Brooke Corporation resigned and on March 12, 2008 the stock
price of Brooke Credit Corporation fell below the stated value
in the loan covenants on the $9,000,000 Citizens Bank and Trust.
Citizens Bank and Trust has no intentions of accelerating the
note maturity at this time. However, based on the covenants for
default both of these require reclassifying the debt to current
maturities of long-term debt.
91
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
On November 1, 2006, our independent registered public
accountant, BKD, LLP, (BKD) notified us that it was
resigning as our independent registered public accounting firm.
BKD stated that its resignation was not a result of any
disagreements with either the management or audit committee of
the company. BKDs accountants reports for our
financial statements for the two most recent fiscal years, or
any later interim period, did not contain adverse opinions or
disclaimers of opinion, nor were any reports modified as to
uncertainty, audit scope or accounting principles. BKDs
resignation was of its own volition and a change of accountants
was not recommended or approved by the board of directors or an
audit or similar committee of the board of directors.
At no time in fiscal years 2004, 2005, or any subsequent interim
period preceding November 1, 2006 did we have any
disagreements with BKD on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to BKDs satisfaction,
would have caused BKD to make reference to the subject matter of
the disagreement in connection with its accountants report.
During the two fiscal years prior to the change and through
November 1, 2006, there were no reportable events (as
defined in
Regulation S-B
Item 304(a)(1)(iv)(B)).
We requested that BKD furnish us with a letter addressed to the
Securities and Exchange Commission stating whether or not it
agrees with the above statements. A copy of such letter, dated
November 14, 2006, was filed as Exhibit 16.1 to our
Form 8-K/A
filed November 15, 2006.
On November 6, 2006, we engaged Summers,
Spencer & Callison, CPAs, Chartered (SSC),
of Topeka, Kansas, to be our new independent certified public
accounting firm. SSC was selected by us due to, among other
factors, its proximity to First Lifes location in Topeka,
Kansas and the familiarity of SSC with the industry within which
we operate. During the two most recent fiscal years and through
November 6, 2006, we did not consult with SSC regarding
either (i) the application of accounting principles to a
specific completed or contemplated transaction, or the type of
audit opinion that might be rendered on the companys
financial statements and either written or oral advice was
provided that SSC concluded was an important factor considered
by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in
Item 304(a)(1)(iv) of
Regulation S-K
and the related instructions to Item 304 of
Regulation S-K,
or a reportable event, as that term is defined in
Item 304(a)(1)(iv) of
Regulation S-K.
|
|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES.
|
We have adopted and maintain disclosure controls and procedures
(as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) that are designed to ensure that
information required to be disclosed in our reports under the
Exchange Act is recorded, processed, summarized and reported
within the time periods required under the Securities and
Exchange Commissions rules and forms and that the
information is gathered and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
As of the end of the period covered by this report, we have
carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures.
Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective in alerting management on a timely
basis of material information required to be disclosed in our
reports at the reasonable assurance level.
92
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
company in accordance with procedures defined in
Rule 13a-15(f)
and
15d-15(f)
under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures
that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being
make only in accordance with the authorizations of our
management and directors;
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control
over financial reporting as of the year ended December 31,
2007. Management based this assessment on criteria for effective
internal control over financial reporting described in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management
determined that as of December 31, 2007, internal control
over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control
over financial reporting. Managements report was not
subject to attestation by our registered public accounting firm
pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only managements
report in this annual report.
There was no change in our internal control over financial
reporting that occurred during the fiscal quarter ended
December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION.
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
All executive officers are elected by and serve at the
discretion of our Board of Directors. Certain of the executive
officers have employment agreements with the company. Except for
Kyle Garst and Dane Devlin who were specifically designated in
the Merger Agreement to be appointed directors of the company,
there are no arrangements or understandings between the
executive officers and any other person pursuant to which he or
she was or is to be selected as an officer, except with respect
to the executive officers who have entered into employment
agreements, which agreements designate the position or positions
to be held by the executive officer. Except in the case of
Robert Orr and Leland Orr, none of the executive officers are
related to one another or to any of the members of the Board of
Directors.
Robert D. Orr, age 54, was named our Chairman
of the Board, President, Chief Executive Officer and Director on
January 31, 2007. On November 15, 2007, he resigned
from his positions as President and Chief Executive Officer.
Mr. Orr is the founder of Brooke Corporation and has been a
Brooke Corporation director
93
and its Chief Executive Officer since its inception in 1986.
Mr. Orr was Brooke Corporations President from 1986
until 1991. Mr. Orr has been a director of Brooke Brokerage
Corporation, a wholly owned subsidiary of Brooke Corporation,
since December 2005, has been its Chairman of the Board and
Chief Executive Officer since March 2006, and was its President
from December 2005 until March 2006. Mr. Orr served as
President of Farmers State Bank, Phillipsburg, Kansas, Chairman
of the Board of Brooke State Bank, Jewell, Kansas, President of
First National Bank, Smith Center, Kansas, and a self-employed
insurance agent for American Family Insurance Company.
Mr. Orr is an honors graduate from Fort Hays State
University in Hays, Kansas, with a Bachelor of Arts Degree in
Political Science. He also completed the Graduate School of
Banking program at the University of Colorado. Mr. Orr is
the author of a book published in 2000 about the sale of
insurance and financial services in the Internet age entitled
Death of an Insurance Salesman?. Robert Orr and Leland
Orr are brothers.
Kyle L. Garst, age 38, was appointed our
President and Chief Executive Officer on November 15, 2007.
Mr. Garst served as Chairman and Chief Executive Officer of
Brooke Franchise from June 2007 until the merger. Previously,
Mr. Garst was the Senior Vice President and a director of
Brooke Franchise, serving in such capacity since September 2004,
with responsibility for managing Brooke Franchises
franchise sales activities. Mr. Garst joined Brooke
Franchise as a sales representative in 1994. From 1997 to 1999,
he was a sales representative and profit center leader for Koch
Industries in Phoenix, Arizona. In March 1999, Mr. Garst
returned as Brooke Franchises State Manager for Oklahoma
and, in August 2000, he was named its Vice President and
Regional Sales Manager for Texas, Oklahoma and Louisiana. In
December 2001, Mr. Garst became Brooke Franchises
Vice President and Investment Sales Manager, as well as its
Investor Relations Manager, and served in those capacities until
September 2004 when he assumed the position as Chief Executive
Officer of Brooke Franchise.
Leland G. Orr, age 45, was appointed our
Chief Financial Officer on November 15, 2007.
Mr. Leland Orr currently serves as Director, Chief
Financial Officer, Treasurer and Assistant Secretary of Brooke
Corporation and has served as a director and officer of Brooke
Corporation since its inception in 1986. Mr. Orr has been
Brooke Corporations Chief Financial Officer since 1995,
Treasurer since 1986, and Assistant Secretary since 2001. He
served as Brooke Corporations President from 2003 until
January 2005 and as Secretary from 1986 until 2001. In addition
to his other responsibilities, Mr. Orr manages our
processing center in Phillipsburg, Kansas. Prior to assuming the
role of Chief Financial Officer for Brooke Corporation,
Mr. Orr served as President of Brooke State Bank, Jewell,
Kansas, and as an accountant with Kennedy McKee and Company, LLP
(formerly Fox & Company) in Dodge City, Kansas. He is
a Certified Public Accountant and a member of each of the
American Institute of Certified Public Accountants and the
Kansas Society of Certified Public Accountants. Mr. Orr
received a Bachelor of Science Degree in Accounting from
Fort Hays State University in Hays, Kansas.
Michael Hess, age 52, has served as a
Director and Vice President of the Company since
January 31, 2007. On June 7, 2007, he was appointed
Vice Chairman of the Board of Directors. Mr. Hess has also
served as President of BCA since January 31, 2007.
Mr. Hess was an original investor in Brooke Corporation and
served on its Board of Directors from 1990 until January 2005,
as its President from 1996 until 2003, and as its Vice President
from 1988 until 1996. From its acquisition by Brooke Corporation
in 2002 until January 2007, Mr. Hess was president and a
director of CJD & Associates, L.L.C., a wholesale
insurance broker that later also began providing loan brokerage
and consulting services to managing general agencies and funeral
homes. He was a director and President of Brooke Brokerage
Corporation, a wholly owned subsidiary of Brooke Corporation and
the parent corporation of CJD from December 2004 until December
2005 and has been its Vice President since December 2005.
Mr. Hess has been a director of Brooke Savings Bank, a
federal savings bank, since January 8, 2007. Prior to
joining the Brooke organization, Mr. Hess was employed by
Western Resources, Inc. (now Westar Energy, Inc.), a utility
company in Topeka, Kansas. Mr. Hess also previously served
as director of Patrons Insurance Company and Great Plains Mutual
Insurance Companies.
Dane S. Devlin, age 44, was appointed our
Executive Vice President and Chief Operating Officer on
November 15, 2007. Mr. Devlin served as President and
Chief Operating Officer of Brooke Franchise from June 2007 until
the merger. Mr. Devlin joined Brooke Franchise in December
1999 as the Missouri State Manager. In August 2000,
Mr. Devlin had assumed the position of Kansas City Regional
Manager and was
94
promoted to National Operations Manager by October 2001.
Mr. Devlin was further promoted to Brooke Franchises
National Vice President in January 2003 and has served as Senior
Vice President since his appointment in September 2005. Prior to
the merger, he was a member of the Board of Directors of Brooke
Franchise. Prior to joining Brooke Franchise, Mr. Devlin
acted as a Marketing Representative with Alliance Insurance
Companies from 1998 to November 1999. In addition to his
position with Alliance and his first positions with Brooke
Franchise, Mr. Devlin also served as an insurance franchise
owner from 1996 to 2001.
James Zuhlke, age 61, was appointed as our
Executive Vice President of Insurance Company Operations on
January 24, 2008. Prior to joining the Company,
Mr. Zuhlke served as President and Chief Executive Officer
of Kingsway America, Inc., and was a Director of its parent,
Kingsway Financial Services, Inc., a NYSE-listed company until
January of 2004. During his tenure at Kingsway America,
Mr. Zuhlke assisted in the acquisition of six insurance
businesses and managed the integration and assimilation of their
operations by strengthening planning, budgeting, financial
reporting, underwriting, and claims handling disciplines.
Mr. Zuhlke also founded Washington International Insurance
Company in 1976 and co-founded Intercargo Corporation in 1980,
which became a Nasdaq-listed company in 1988 and was ultimately
sold to XL Capital Ltd. in 1998. Mr. Zuhlke holds
Bachelors and Juris Doctor Degrees from the University of
Wisconsin and is a member of the Wisconsin, Illinois and
American Bar Associations.
The information called for by this item with respect to our
directors, a code of ethics and compliance with
Section 16(a) of the Exchange Act is included under the
captions Directors and Nominees for Director,
Corporate Governance and Board Matters, and
Section 16(a) Beneficial Ownership Reporting
Compliance, in our definitive information statement filed
pursuant to Regulation 14C not later than 120 days
after December 31, 2007, and is incorporated herein by
reference.
We have adopted a Code of Ethics that applies to directors,
officers (including, among others, our principal executive
officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions)
and employees. We have posted our Code of Ethics on our Internet
website at www.brookeagent.com. We will also post on this
Internet website any amendments to, or waivers from, a provision
of its Code of Ethics that apply to our principal executive
officer, principal financial officer, principal accounting
officer, or persons performing similar functions as required by
applicable rules and regulations.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION.
|
The information called for by this item is contained in our
definitive information statement filed pursuant to
Regulation 14C not later than 120 days after
December 31, 2007, in the sections entitled Corporate
Governance and Board Matters, and Executive
Compensation, and is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
The information called for by this item is contained in our
definitive information statement filed pursuant to
Regulation 14C not later than 120 days after
December 31, 2007, in the section entitled Security
Ownership Of Certain Beneficial Owners and Security
Ownership of Management, and in Item 5, Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities, in this report
on
Form 10-K
in the section entitled Securities Authorized for Issuance
under Equity Compensation Plans, and is incorporated
herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
The information called for by this item is contained in our
definitive information statement filed pursuant to
Regulation 14C not later than 120 days after
December 31, 2007, in the sections entitled Directors
and Nominees for Director, Corporate Governance and
Board Matters, and Certain Relationships and Related
Party Transactions, and is incorporated herein by this
reference.
95
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
|
The information called for by this item is contained in our
definitive information statement filed pursuant to
Regulation 14C not later than 120 days after
December 31, 2007, in the section entitled
Ratification of Appointment of Independent Auditor,
under the subsection entitled Fees of Independent
Auditor, and is incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
|
Documents filed as a part of this report:
1. The following financial statements appearing in
Item 8, Financial Statements and Supplementary Data:
Combined Balance Sheets, Combined Statements of Operations,
Combined Statements of Changes in Stockholders Equity, and
Combined Statements of Cash Flows.
2. All financial statement schedules are omitted since they
are not required, are inapplicable, or the required information
is included in the financial statements or the notes thereto.
3. The following is a complete list of exhibits filed as
part of this
Form 10-K.
The registrant has incorporated by reference certain exhibits as
specified below pursuant to
Rule 12b-22
of the Exchange Act.
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger by and between Brooke Corporation,
the Registrant and Brooke Franchise Corporation, dated
August 31, 2007, incorporated herein by reference to
Annex A of the Registrants Definitive Information
Statement on Schedule 14C filed on October 16, 2007
(the Definitive Information Statement).
|
|
2
|
.2
|
|
Agreement and Plan of Merger by and between Brooke Corporation,
the Registrant and Brooke Franchise Corporation, as amended
September 24, 2007, incorporated herein by reference to
Annex A of the Definitive Information Statement.
|
|
2
|
.3
|
|
Exchange Agreement by and between Brooke Corporation, the
Registrant and Delta Plus Holdings, Inc., dated August 31,
2007, incorporated herein by reference to Annex B of the
Definitive Information Statement.
|
|
2
|
.4
|
|
Exchange Agreement by and between Brooke Corporation, the
Registrant, and Delta Plus Holdings, Inc., as amended
September 24, 2007.
|
|
3
|
.1
|
|
Articles of Incorporation of First American Capital Corporation
(Incorporated by reference from Exhibit 2.1 to the
Registrants amended
Form 10-SB
filed August 13, 1999)
|
|
3
|
.2
|
|
Certificate of Amendment of Articles of Incorporation of First
American Capital Corporation adopted January 31, 2007
(Incorporated by reference from Exhibit 3.1 to the
Registrants S-K filed on February 2, 2007)
|
|
3
|
.3
|
|
Certificate of Amendment of Articles of Incorporation of First
American Capital Corporation adopted June 7, 2007,
incorporated by reference to Exhibit 3.3 of the
Registrants
Form 10-QSB
filed on July 27, 2007.
|
|
3
|
.4
|
|
Copy of the Articles of Incorporation of First American Capital
Corporation, as amended by the Certificate of Amendment adopted
January 31, 2007 and the Certificate of Amendment adopted
June 7, 2007, incorporated by reference to Exhibit 3.4
of the Registrants
Form 10-QSB
filed on July 27, 2007.
|
|
3
|
.5
|
|
Amended and Restated Bylaws of First American Capital
Corporation adopted April 7, 2005 (Incorporated by
reference from Exhibit 3.2 to the Registrants
Form 8-K
filed April 11, 2005).
|
|
3
|
.6
|
|
Amendment to Amended and Restated Bylaws dated April 7,
2005 (Adopted June 7, 2007) (Incorporated by reference from
Exhibit 3.1 to the Registrants
Form 8-K
filed June 12, 2007).
|
|
3
|
.7
|
|
Copy of Amended and Restated Bylaws of First American Capital
Corporation, as amended by the Board of Directors on
June 7, 2007, incorporated by reference to Exhibit 3.7
to the Registrants
Form 10-QSB
filed on July 27, 2007.
|
96
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
4
|
.0
|
|
Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations, and Restrictions Thereof
of 6% Non-Cumulative, Convertible, Callable Preferred Stock
(Incorporated by reference from Exhibit 3 to the
Registrants amended
Form 10-SB
filed August 13, 1999)
|
|
10
|
.1
|
|
Service Agreement amended and restated effective January 1,
2002 between First American Capital Corporation and First Life
America Corporation (Incorporated by reference from
Exhibit 10.3 to the Registrants
Form 10-KSB
filed March 31, 2003)
|
|
10
|
.2
|
|
Automatic Umbrella and Bulk ADB Reinsurance Agreements effective
September 1, 1998 between First Life America Corporation
and Business Mens Assurance Company of America
(Incorporated by reference from Exhibit 6.8 to the
Registrants
Form 10-SB
filed August 13, 1999)
|
|
10
|
.3
|
|
Intercompany Tax Sharing Agreement dated December 31, 2003
between First American Capital Corporation and First Life
America Corporation (Incorporated by reference from
Exhibit 10.6 to the Registrants
Form 10-KSB
filed March 29, 2004)
|
|
10
|
.4
|
|
Automatic Reinsurance Agreement between First Life America
Corporation and Wilton Reassurance Company effective
January 1, 2005 (Incorporated by reference from
Exhibit 10.13 to the Registrants
Form 10-KSB
filed March 31, 2006)
|
|
10
|
.5
|
|
Stock Purchase and Sale Agreement between First American Capital
Corporation and Brooke Corporation dated October 6, 2006
(Incorporated by reference from Exhibit 7a to the
Registrants Schedule 13 D/A filed December 19,
2006)
|
|
10
|
.6
|
|
Brokerage Agreement between First Life Brokerage, Inc. and
CJD & Associates, L.L.C. dated December 8, 2006
(Incorporated by reference from Exhibit 10.7 to the
Registrants
Form 10-KSB
filed on March 1, 2007.)
|
|
10
|
.7
|
|
Servicing Agreement between First American Capital Corporation
and Brooke Corporation dated December 8, 2006 (Incorporated
by reference from Exhibit 10.8 to the Registrants
Form 10-KSB
filed on March 1, 2007.)
|
|
10
|
.8
|
|
Employment Agreement dated December 8, 2006 between First
American Capital Corporation and Michael S. Hess (Incorporated
by reference from Exhibit 10.10 to the Registrants
Form 10-KSB
filed on March 1, 2007.)
|
|
10
|
.9
|
|
Warrant for 50,000 shares of First American Capital
Corporation common stock for $1.72 per share issued on
October 5, 2006 to John F. Van Engelen. (Incorporated by
reference from Exhibit 10.11 to the Registrants
Form 10-KSB
filed on March 1, 2007.)
|
|
10
|
.10
|
|
Warrant for 100,000 shares of First American Capital
Corporation common stock for $1.72 per share issued on
October 5, 2006 to Thomas M. Fogt. (Incorporated by
reference from Exhibit 10.12 to the Registrants
Form 10-KSB
filed on March 1, 2007.)
|
|
10
|
.11
|
|
Warrant for 1,643,460 shares of First American Capital
Corporation common stock for an aggregate exercise price of
$447,818.00 issued December 8, 2006 to Brooke Corporation.
(Incorporated by reference from Exhibit 10.13 to the
Registrants
Form 10-KSB
filed on March 1, 2007.)
|
|
10
|
.12
|
|
Commercial Lease Agreement between First Life America
Corporation and First American Capital Corporation dated
May 1, 2006 (Incorporated by reference from
Exhibit 10.14 to the Registrants
Form 10-KSB
filed on March 1, 2007.)
|
|
10
|
.13
|
|
Brooke Capital Corporation 2007 Equity Incentive Plan, as
amended by Stockholder vote on November 5, 2007.(*)
|
|
10
|
.14
|
|
Servicing Agreement between Brooke Corporation and Brooke
Capital Advisors, Inc. dated March 21, 2007 (Incorporated
by reference from the Registrants
Form 10-QSB
filed as Exhibit 10.1 on April 25, 2007.
|
|
10
|
.15
|
|
Executive Employment Agreement between Brooke Franchise
Corporation and Kyle L. Garst filed as Exhibit 10.1 to
Brooke Corporations current report on
Form 8-K
filed on March 30, 2005.
|
|
10
|
.16
|
|
Tax Sharing Agreement dated as of November 15, 2007 by and
between the Registrant and Brooke Corporation. (Incorporated by
reference from the Registrants
Form 8-K
filed on November 19, 2007)
|
97
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.17
|
|
Trademark Licensing Agreement dated as of November 15, 2007
by and between the Registrant and Brooke Corporation.
(Incorporated by reference from the Registrants
Form 8-K
filed on November 19, 2007)
|
|
10
|
.18
|
|
Amended and Restated Servicing and Tax Allocation Agreement
dated as of November 15, 2007 by and between the Registrant
and Brooke Corporation. (Incorporated by reference from the
Registrants
Form 8-K
filed on November 19, 2007)
|
|
10
|
.19
|
|
Promissory Note payable to Citizens Bank & Trust dated
December 31, 2007. (Incorporated by reference from the
Registrants
Form 8-K
filed as Exhibit 10.1 on January 4, 2008)
|
|
10
|
.20
|
|
Pledge Agreement between Brooke Corporation and Citizens
Bank & Trust dated December 31, 2007.
(Incorporated by reference from the Registrants
Form 8-K
filed as Exhibit 10.2 on January 4, 2008)
|
|
10
|
.21
|
|
Termination Agreement between Registrant and Brooke Brokerage
Corporation dated December 12, 2007(*)
|
|
10
|
.22
|
|
Restricted Shares Agreement with Michael Hess dated
August 15, 2007.(*)
|
|
10
|
.23
|
|
Restricted Shares Agreement with Paul E. Burke, Jr. dated
August 15, 2007.(*)
|
|
10
|
.24
|
|
Restricted Shares Agreement with Keith E. Bouchey dated
August 15, 2007.(*)
|
|
10
|
.25
|
|
Restricted Shares Agreement with Richard E. Gill dated
August 15, 2007.(*)
|
|
10
|
.26
|
|
Restricted Shares Agreement with William R. Morton, Jr. dated
August 15, 2007.(*)
|
|
10
|
.27
|
|
Amendment to Restricted Shares Agreement with William R. Morton,
Jr. dated August 15, 2007.(*)
|
|
10
|
.28
|
|
Commercial Loan Agreement dated December 31, 2007 between
Brooke Capital Corporation and Brooke Capital Advisors, Inc.(*)
|
|
10
|
.29
|
|
Stock Pledge and Security Agreement dated December 31, 2007
granted by Brooke Capital Corporation for the benefit of Brooke
Capital Advisors, Inc.(*)
|
|
16
|
.1
|
|
Letter on Change in Certifying Accountant (Incorporated by
reference from Exhibit 16.1 to the Registrants
Form 8-KA
filed November 15, 2006)
|
|
21
|
.01
|
|
Subsidiaries of Brooke Capital Corporation(*)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.(*)
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.(*)
|
|
32
|
.1
|
|
Certificate of Chief Executive Officer pursuant to
Section 18 U.S.C. Section 1350.(*)
|
|
32
|
.2
|
|
Certificate of Chief Executive Officer pursuant to
Section 18 U.S.C. Section 1350.(*)
|
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BROOKE CAPITAL CORPORATION
Kyle L. Garst
President and Chief Executive Officer
Date: March 13, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
D. Orr
Robert
D. Orr
|
|
Chairman of the Board and Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Kyle
L. Garst
Kyle
L. Garst
|
|
President, Chief Executive Officer and Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Leland
G. Orr
Leland
G. Orr
|
|
Chief Financial Officer
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Michael
Hess
Michael
Hess
|
|
Director and Vice Chairman of the Board
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Paul
E. Burke, Jr.
Paul
E. Burke, Jr.
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Richard
E. Gill
Richard
E. Gill
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Dane
S. Devlin
Dane
S. Devlin
|
|
Director
|
|
March 13, 2008
|
99
INDEX TO
EXHIBITS
The following exhibits are attached hereto. See
Part IV Item 15 of this Annual Report on
Form 10-K
for a complete list of exhibits. *
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.13
|
|
Brooke Capital Corporation 2007 Equity Incentive Plan as amended
by Stockholder vote on November 5, 2007.
|
|
10
|
.21
|
|
Termination Agreement between Registrant and Brooke Brokerage
Corporation dated December 12, 2007.
|
|
10
|
.22
|
|
Restricted Shares Agreement with Michael Hess dated August 15,
2007.
|
|
10
|
.23
|
|
Restricted Shares Agreement with Paul E. Burke, Jr. dated August
15, 2007.
|
|
10
|
.24
|
|
Restricted Shares Agreement with Keith E. Bouchey dated August
15, 2007.
|
|
10
|
.25
|
|
Restricted Shares Agreement with Richard E. Gill dated August
15, 2007.
|
|
10
|
.26
|
|
Restricted Shares Agreement with William R. Morton, Jr. dated
August 15, 2007.
|
|
10
|
.27
|
|
Amendment to Restricted Shares Agreement with William R. Morton,
Jr. dated August 15, 2007.
|
|
10
|
.28
|
|
Commercial Loan Agreement dated December 31, 2007 between Brooke
Capital Corporation and Brooke Capital Advisors, Inc.
|
|
10
|
.29
|
|
Stock Pledge and Security Agreement dated December 31, 2007
granted by Brooke Capital Corporation for the benefit of Brooke
Capital Advisors, Inc.
|
|
21
|
.01
|
|
Subsidiaries of Brooke Capital Corporation.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certificate of Chief Executive Officer pursuant to Section
18 U.S.C. Section 1350.
|
|
32
|
.2
|
|
Certificate of Chief Executive Officer pursuant to Section
18 U.S.C. Section 1350.
|
|
|
|
* |
|
The exhibits shown in Part IV Item 15 of
this Annual Report on
Form 10-K
as incorporated by reference are not attached hereto but are on
file with the Securities and Exchange Commission. |
100