(5) Includes total bank loans, notes payable and other long-term obligations.
Monitoring our revenues from franchise network expansion is also important to us because our profitability currently is largely determined by our ability to add new franchise locations and to earn the associated initial franchise fees. “Revenues from franchise network expansion” are defined as initial franchise fees, seller consulting fees, gains on sales of businesses and gains on loan sales. A leveling or declining amount of revenues from franchise network expansion could indicate that our overall profitability is leveling or declining.
expansion of Brooke Franchise’s franchise operations and the corresponding increase in business acquisitions and franchise conversions by Brooke Franchisees.
Brooke Credit-Bank Lines of Credit A primary Brooke Credit objective is to increase interest income by holding more loans for longer periods of time prior to their sale as loan participations or asset-backed securities. Brooke Credit has secured two bank lines of credit with combined limits of $84,000,000 for the purpose of funding these loans until sold. We intend to increase our existing bank lines of credit, or acquire additional bank lines of credit, as circumstances require.
The rates of amortization of Servicing Assets are based on our estimate of repayment rates, and the resulting estimated maturity dates, of the loans that we service. Loan repayment rates are determined using assumptions about credit losses and prepayment speed as outlined in the above discussion about the fair values of servicing assets. As of December 31, 2005, an analysis of prepayments speeds and credit losses indicated that our assumptions were historically accurate and the maturity date estimates were reasonable. Although significant changes in estimates are not expected, because of the relatively large remaining asset balance, changes in our estimates that significantly shorten the estimated maturity dates could significantly impact our results. We believe that these estimates will not change in 2006.
At December 31, 2005, 2004 and 2003, we had transferred assets with balances totaling $233,473,000, $138,740,000 and $101,922,000, respectively that were accounted for as true sales, resulting in pre-tax gains for the years ended December 31, 2005, 2004 and 2003 of $7,435,000, $2,475,000 and $4,368,000, respectively. Purchasers of these notes receivable obtained full control over the transferred assets (i.e. notes receivable) and obtained the right, free of conditions that constrain them from taking advantage of that right, to pledge or exchange the notes receivable. Furthermore, the agreements to transfer assets do not entitle, or obligate, us to repurchase or redeem the notes receivable before their maturity, except in the event of an uncured breach of a representation or warranty.
At December 31, 2005 and 2004, we recorded the value of the servicing asset at $2,650,000 and $2,909,000, respectively, and the value of the servicing liability at $34,000 and $39,000, respectively. At December 31, 2005 and 2004, we recorded the fair value of retained interest at $12,570,000 and $5,893,000, respectively, with $1,412,000 and $2,484,000, respectively, listed as Interest-only strip receivable on our balance sheet, and $11,158,000 and $3,409,000, respectively, in retained interest carried in our securities.
In connection with the recognition of non-cash gains for the interest benefits of asset-backed securities sales, the present value of future cash flows were recorded as an interest receivable asset and included on the balance sheet as part of the investment securities balance. Components of the interest receivable asset as of December 31, 2005 were as follows (in thousands):
changes in interest rates and their impact on credit losses and prepayment speed;
We have audited the accompanying consolidated balance sheets of BROOKE CORPORATION as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
Amount of unearned initial franchise fees for Buyers Assistance Plans resulting from services and assistance not yet performed
Except for the credit loss allowances included in the calculations of retained interests in loans sold, no loss allowances have been made for loans originated by the Company’s finance subsidiary primarily because these loans are typically held for less than one year before sold to investors and, therefore, have a short-term exposure to loss. Additionally, commissions received by the Company’s franchise subsidiary are typically distributed to the finance subsidiary for loan payments prior to distribution of commissions to the franchisee borrower and most other creditors. As a result, the Company’s primary credit exposure more likely results from the collection of franchisees’ account balances than from the collection of loan payments.
The initial franchise fees for basic services cover the franchisees’ access to the registered name “Brooke,” access to suppliers, and access to the Company’s Internet-based management software program. 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.
Premiums. Through its subsidiary, DB Indemnity Ltd, excess liability premiums are recorded on the written basis and recorded as revenues over the term of the policies. Unearned premium reserves are established to cover the unexpired portion of premiums written and assumed and revenues are correspondingly reduced.
Operating interest expense includes interest paid by the Company’s finance subsidiary to DZ BANK AG Deutsche Zentral-Genossenschaftsbank on a line of credit loan for the purpose of originating insurance agency loans and is, therefore, an operating expense. The interest paid to DZ BANK AG for the years ending December 31, 2005 and 2004 was $1,675,000 and $291,000, respectively. No interest was paid prior to 2004. The finance subsidiary also paid interest to bondholders until the bonds were called in August 2005 and paid in full. The funds received from the sale of the bonds were for the purpose of originating loans and the associated interest expense is, therefore, an operating expense. Bond interest expenses for the years ended December 31, 2005, 2004 and 2003 were $245,000, $427,000 and $458,000, respectively. The Company also paid interest to debenture holders. The funds received from the sale of debentures were used by the finance subsidiary to originate loans and the associated interest expense is, therefore, an operating expense. The debenture interest expenses for the years ended December 31, 2005, 2004 and 2003 were $202,000, $209,000 and $207,000, respectively. The debentures were called and paid in full in December 2005.
On loan securitizations, the Company is typically paid annual servicing fees ranging from 0.10% to 0.25% of the outstanding securitized loan balances. Additionally, the Company often retains interest income. The Company’s right to interest income is subordinate to the investor’s interests. As such, the Company’s retained interest is subject to credit and prepayment risks on the transferred assets.
July 1st of each year. Holders of series 2000F bonds representing $4,315,000 in principal value elected to modify the terms of their bonds by extending the maturity date to July 1, 2006 and permitting the bonds to be called by Brooke Credit Corporation during the period from the original maturity date to the extended maturity date. These bonds were called during August 2005 and paid in full. Holders of series 2000F bonds representing the remaining $705,000 in principal value elected not to modify the terms of their bonds and were paid in full at maturity, July 1, 2004. In connection with the bonds, Brooke Credit Corporation covenanted not to incur debt or obligations superior to its obligations to bondholders or pay dividends to shareholders.
The Company offered unsecured debentures (Series A and Series B) for sale to the public in denominations of $1,000 with a minimum purchase amount of $5,000. The debentures were issued in book-entry for and registered in the name of The Depository Trust Company or its nominee. Interest was paid semi-annually on December 1st and June 1st The Series B debentures were callable on the third anniversary of the date of issuance of the debentures. These debentures were called during December 2005 and paid in full. The Company used the debenture sale proceeds to acquire businesses for inventory, make corporate acquisitions, purchase loan participation certificates and make short-term working capital loans to businesses or other Company subsidiaries.
Interest payable was $0 and $214,000 at December 31, 2005 and 2004, respectively.