FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number__________
BROOKE CORPORATION
------------------
(Exact name of small business issuer as specified in its charter)
Kansas 48-1009756
------ ----------
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
10895 Grandview Drive, Suite 250, Overland Park, KS 66210
---------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number: (913) 661-0123
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 __ No _X_
As of September 30, 2000, there were 692,768 shares of the registrant's
sole class of common stock outstanding.
Transitional Small Business Disclosure Format Yes No |X|
<PAGE>
BROOKE CORPORATION
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements................................................2
Consolidated Balance Sheets.......................................2
Consolidated Statements of Income.................................3
Consolidated Statements of Change
In Stockholder's Equity...........................................4
Consolidated Statements of Cash Flow..............................5
Notes to Consolidated Financial Statements........................6
Item 2 - Management's discussion and Analysis or Plan of Operation.........16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..................................................17
Item 2 - Changes In Securities..............................................17
Item 3 - Default upon Senior Securities.....................................18
Item 4 - Submission of Matters to a Vote of Security Holders................18
Item 5 - Other Information..................................................18
Item 6 - Exhibits and Reports On Form 8-K...................................18
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
BROOKE CORPORATION
Consolidated Balance Sheets
(unaudited)
SEPTEMBER 30, 2000 AND 1999
ASSETS
2000 1999
---- ----
Current Assets
Cash $ 1,146,217 $ 2,447,431
Accounts and notes receivable, net 3,170,221 1,866,394
Note receivable, parent company 209,816 72,950
Other receivables 320,964 118,183
Securities 1,198 1,198
Prepaid expenses 190,562 39,223
----------- -----------
Total Current Assets 5,038,978 4,545,379
----------- -----------
INVESTMENT IN AGENCIES 316,520 316,520
----------- -----------
PROPERTY AND EQUIPMENT
Cost 2,264,952 1,776,253
Less: Accumulated depreciation (1,489,837) (987,605)
----------- -----------
Net Property and Equipment 775,115 788,648
----------- -----------
OTHER ASSETS
Excess of cost over fair value of
net assets 1,776,328 644,828
Less: Accumulated amortization (140,894) (77,902)
Prepaid commission guarantee 78,035 117,902
Covenants not to compete 19,600 37,990
Goodwill 6,009 10,802
Prepaid finders fee 14,974 --
Deferred tax asset 348,700 293,859
----------- -----------
Net Other Assets 2,102,752 1,027,479
----------- -----------
TOTAL ASSETS $ 8,233,365 $ 6,678,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 199,654 $ 788,799
Premiums payable to insurance companies 1,396,085 1,147,747
Current maturities of long-term debt 2,386,184 429,208
----------- -----------
Total Current Liabilities 3,981,923 2,365,754
LONG-TERM DEBT 3,893,482 3,616,796
----------- -----------
TOTAL LIABILITIES 7,875,405 5,982,550
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 1,485,000
shares authorized, 704,018 shares
outstanding 704,018 704,018
Preferred stock, $75 par value,
15,000 shares authorized, 781 shares
outstanding 58,600 58,600
Less: Treasury stock, 11,050 shares
at cost (39,500) (39,500)
Additional paid-in capital 1,063,702 1,063,702
Retained earnings (1,428,860) (1,091,344)
----------- -----------
Total Stockholders' Equity 357,960 695,476
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,233,365 $ 6,678,026
=========== ===========
--------------------------------------------------------------------------------
See accompanying notes to financial statements and independent accountants'
review report.
2
<PAGE>
BROOKE CORPORATION
Consolidated Statements Of Income
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
2000 1999
---- ----
Operating Income
Insurance commissions $ 9,551,920 $ 6,566,708
Interest income 1,209,639 593,459
Less: Participating interest expense (1,090,688) (507,074)
Gain (loss) on sale of inventory (58,500) 237,060
------------- ---------------
Total Operating Income 9,612,371 6,890,153
------------- ---------------
OPERATING EXPENSES
Commissions expense 6,550,720 4,261,010
Payroll expense 1,626,622 1,369,706
Depreciation and amortization 313,642 254,748
Other operating expenses 1,068,839 642,852
------------- ---------------
Total Operating Expenses 9,559,823 6,528,316
------------- ---------------
INCOME FROM OPERATIONS 52,548 361,837
------------- ---------------
OTHER EXPENSES
Interest expense 267,058 232,341
------------- ---------------
Total Other Expenses 267,058 232,341
------------- ---------------
NET INCOME (LOSS) BEFORE INCOME TAXES (214,510) 129,496
Income tax expense (benefit) (52,934) 33,753
------------- ---------------
NET INCOME (LOSS) $ (161,576) $ 95,743
============= ===============
--------------------------------------------------------------------------------
See accompanying notes to financial statements and independent accountants'
review report.
3
<PAGE>
BROOKE CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
COMMON PREFERRED TREASURY ADD'L PAID- RETAINED
STOCK STOCK STOCK IN CAPITAL EARNINGS TOTAL
-------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1998 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $(1,059,679) $ 727,141
Dividends paid - - - - (127,408) (127,408)
Net income - - - - 95,743 95,743
-------------- ------------- -------------- ------------- -------------- -------------
BALANCES, SEPTEMBER 30, 1999 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $(1,091,344) $ 695,476
============== ============= ============== ============= ============== =============
BALANCES, DECEMBER 31, 1999 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $ (1,138,557) $ 648,263
Dividends paid - - - - (128,727) (128,727)
Net loss - - - - (161,576) (161,576)
-------------- ------------- -------------- ------------- -------------- -------------
BALANCES, SEPTEMBER 30, 2000 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $ (1,428,860) $ 357,960
============== ============= ============== ============= ============== =============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to financial statements and independent accountants'
review report.
4
<PAGE>
BROOKE CORPORATION
Consolidated Statements of Cash Flows
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
NET INCOME (LOSS) $ (161,576) $ 95,743
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Depreciation 210,000 175,857
Amortization 103,642 78,891
(Gain) loss on sale of inventory 58,500 (237,060)
Deferred income tax expense (benefit) (52,934) 33,753
(Increase) decrease in assets:
Accounts and notes receivables, net (1,068,388) 582,316
Prepaid expenses and other assets (100,066) 33,300
Increase (decrease) in liabilities:
Accounts and expenses payable (442,262) 167,675
Other liabilities 746,040 (1,247,417)
----------- -----------
Net cash used in operating activities (707,044) (316,942)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payments for property and equipment (402,004) (122,764)
Purchase of insurance agency (412,885) --
Sale of insurance agency inventory 153,000 1,444,634
----------- -----------
Net cash provided by (used in) investing activities (661,889) 1,321,870
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances of long-term debt 2,141,462 70,693
Cash proceeds from bond issuance -- 150,000
Long-term line of credit advance 660,000 660,000
Net short-term borrowing 464,722 (81,675)
Payments on long-term debt (2,653,579) (639,248)
----------- -----------
Net cash provided by financing activities 612,605 159,770
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (756,328) 1,164,698
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,902,545 1,282,733
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,146,217 $ 2,447,431
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1,286,313 $ 724,846
=========== ===========
Cash paid for income tax $ 0 $ 0
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to financial statements and independent accountants'
review report.
5
<PAGE>
BROOKE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Brooke Corporation was incorporated under the laws of the State of Kansas on
January 17, 1986. The Company's registered offices are located in Phillipsburg,
Kansas. Brooke Holdings, Inc. owns 73.66% of the Company's common stock. The
Company recruits fully vested franchise agents to sell insurance and financial
services. The Company also owns and operates insurance agencies all of which are
held for sale to franchise agents. Most of the Company's revenues result from
the sale of property and casualty insurance, however, the Company also offers
life and health insurance services, investment services and credit services.
The Company's subsidiaries are:
BROOKE CREDIT CORPORATION, a 100% owned subsidiary, is a licensed finance
company and licensed insurance agency. Brooke Credit Corporation
originates loans to Brooke Corporation's franchise agents, franchise
subagents, insurance producers and insurance policyholders.
BROOKE LIFE AND HEALTH, INC., a 100% owned subsidiary, is a licensed
insurance agency which sells life and health insurance through Brooke
Corporation's network of exclusive franchise agents, franchise subagents
and insurance producers.
BROOKE AGENCY, INC., a 100% owned subsidiary, is a licensed insurance
agency which sells property and casualty insurance through Brooke
Corporation's network of exclusive franchise agents, franchise subagents
and insurance producers.
BROOKE INVESTMENTS, INC., a 100% owned subsidiary, develops investment
services for sale through Brooke Corporation's network of exclusive
franchise agents, franchise subagents and insurance producers.
THE AMERICAN AGENCY, INC., a 100% owned subsidiary, is a licensed
insurance agency which sells insurance programs and "targeted market"
policies through a network of non-exclusive brokers that are not
necessarily affiliated with Brooke Corporation.
THE AMERICAN HERITAGE, INC., a 100% owned subsidiary, is a licensed
insurance agency which sells insurance programs and "targeted market"
policies through a network of non-exclusive brokers that are not
necessarily affiliated with Brooke Corporation. For marketing purposes the
name of this subsidiary was recently changed from Heritage Marketing
Services, Inc.
INTERSTATE INSURANCE GROUP, LTD, a 100% owned subsidiary, is a licensed
insurance agency which sells insurance programs and "targeted market"
policies through a network of non-exclusive brokers that are not
necessarily affiliated with Brooke Corporation.
(b) 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.
--------------------------------------------------------------------------------
See accompanying independent accountants' review report.
6
<PAGE>
BROOKE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
(c) Cash Equivalents
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.
d) Allowance for Bad Debts
The Company considers all accounts and notes receivable to be fully collectible,
therefore no allowance has been recognized for uncollectible accounts.
(e) Revenue Recognition
Commission revenue on insurance premiums is recognized on the effective date of
the policy. Premiums which are due from the insured are reported as assets of
the Company and as corresponding liabilities, net of commissions, to the
insurance carriers.
(f) Property and Equipment
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over the
estimated useful lives of the assets
(g) Excess Cost of Purchased Subsidiary
Included in other assets are unamortized costs of purchased subsidiaries in
excess of the fair value of underlying net tangible assets acquired. The balance
of $1,844,828 is being amortized over a 15-year period using the straight-line
method. Amortization expense was $52,244 and $32,244 for the nine months ended
September 30, 2000 and 1999, respectively.
(h) Income Taxes
Income taxes are provided for the tax effect of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related to net operating loss carryforwards that are available to offset future
taxable income. The company files its federal income tax return on a
consolidated basis with its subsidiaries.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation of the financial statements.
--------------------------------------------------------------------------------
See accompanying independent accountants' review report.
7
<PAGE>
BROOKE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
3. NOTES RECEIVABLE
At September 30, 2000 and 1999 notes receivables consist of the following:
2000 1999
---- ----
Agency loans $17,979,071 $9,104,056
Less: Agency loan participation (17,687,730) (8,792,101)
Equipment loans 7,564 17,962
Less: Equipment loan participation (3,464) (13,862)
Consumer loans 162,307 343,498
Less: Consumer loan participation (162,307) (343,498)
--------------- -------------
Total notes receivable, net 295,441 316,055
Customer and profit sharing receivable 2,874,780 1,550,339
--------------- -------------
Total accounts and notes receivable, net $ 3,170,221 $1,866,394
=============== =============
Of the agency loans at September 30, 2000 and 1999, $513,556 and $658,869,
respectively, are sold with recourse to the buyer for the principal outstanding
and interest hereafter accruing from the loan. There is no default by any
debtor, and hence, there is no accrued liability at September 30, 2000 and 1999.
4. PROPERTY AND EQUIPMENT
A summary of property and equipment and depreciation is as follows:
2000 1999
---- ----
Furniture and fixtures $ 296,958 $ 185,874
Office and computer equipment 1,435,309 1,149,701
Automobiles 532,685 440,678
------------- ---------------
2,264,952 1,776,253
Less: Accumulated depreciation 1,489,837 987,605
Property and equipment, net $ 775,115 $ 788,648
Depreciation expense $ 210,000 $ 175,857
============= ===============
--------------------------------------------------------------------------------
See accompanying independent accountants' review report.
8
<PAGE>
BROOKE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
5. BANK LOANS, NOTES PAYABLE, AND OTHER LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
First National Bank & Trust, Phillipsburg, KS line of credit, $660,000
available, $0 not utilized. Due October 2001. Interest rate is 10.50%.
Collateralized by accounts receivable. $ 660,000 $ 660,000
Farmers State Bank, Phillipsburg, KS, due December 2006. Interest rate is
10.75%, payable $15,500 monthly. Collateralized by stock, inventory, fixed
assets and personal guaranty of certain officers of Brooke Corporation. 881,318 969,675
State Bank of Colwich, Colwich, KS, due January 2003. Interest rate is 10.75%,
payable $1,435 monthly. Collateralized by insurance agency assets. 43,809 56,219
Chrysler Financial, Overland Park, KS, due February 2000 to November 2002.
Interest rates are 7.80% to 8.50%, payable monthly. Collateralized by
automobiles. 153,853 150,677
Colonial Pacific, Portland, OR, due December 2001. Interest rate is 14.875%
payable $2,083 monthly. Collateralized by personal guaranty of certain
officers of Brooke Corporation. 28,190 47,437
Brooke Investments, Inc., Phillipsburg, KS, due February 2007. Interest rate
is 10.00%, payable $1,718 monthly. Note is sold to participating bank.
Collateralized by certain agency assets acquired by Brooke Investments, Inc. 97,200 107,528
David Patterson, Sr., Phoenix, AZ, due March 2008. Interest rate is 0%,
payable $1,112 monthly. Unsecured deferred compensation agreement provided by
The American Agency, Inc. 16,680 30,024
Robert B. Patterson, Overland Park, KS, due February 2001. Interest rate is
7.75%, payable $222,222 principal plus accrued interest annually.
Collateralized by 500 shares of American Agency, Inc. common stock and the
guaranty of certain officers of Brooke Corporation. 222,222 444,444
Hartley Agency, Inc., Baxter Springs, KS, due June 2001. Interest rate is 0%,
entire balance is due at maturity. Collateralized by certain agency assets
acquired by Brooke Corporation 201,564 -
Gerald Lanio and William Tyer, Independence, MO; due June 2005. Interest rate
is 5%, payable $207,877 annually. Collateralized by 900 shares of Interstate
Insurance Group, LTD common stock. 900,000 -
Premier Insurance Agency, Poplar Bluff, MO, due July 2005. Interest rate is
5.00%, payable $147,763 annually. Collateralized by certain agency assets
acquired by Brooke Corporation. 639,737 -
Stewart Insurance, Monroe, LA, due August 2001. Interest rate is 0%, entire
balance is due at maturity. Collateralized by certain agency assets acquired
by Brooke Corporation 252,245 -
APB Insurers, Crane, MO, due July 2001. Interest rate is 0%, entire balance
is due at maturity. Collateralized by certain agency assets acquired by
Brooke Corporation. 77,445 -
--------------------------------------------------------------------------------
See accompanying independent accountants' review report.
9
<PAGE>
BROOKE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
5. BANK LOANS, NOTES PAYABLE, AND OTHER LONG-TERM OBLIGATIONS (CONT.)
Roppolo Insurance, Shreveport, LA, due July 2001. Interest rat is 0%, entire
balance is due at maturity. Collateralized by certain agency assets acquired
by Brooke Corporation. $ 115,283 $ -
Mesa Insurance Agency, Pueblo, CO, due February 2001. Interest rate is 0%,
entire balance is due at maturity. Collateralized by certain agency assets
acquired by Brooke Corporation. 100,000 -
Wayne White, Hutchinson, KS, due April 2002. Interest rate is 8%, payable
105,060 annually. Collateralized by certain agency assets acquired by Brooke
Corporation. 210,120 -
Bonds payable (See Note 6) 1,680,000 1,580,000
--------------- ---------------
Total bank loans, notes payable and other long-term obligations 6,279,666 4,046,004
Less: Current maturities 2,386,184 429,208
--------------- ---------------
Total long-term debt $3,893,482 $3,616,796
=============== ===============
</TABLE>
Interest incurred on bank loans, notes payable and other long-term obligations
for the nine months ended September 30, 2000 and 1999 is $267,058 and $232,341,
respectively.
Bank loans, notes payable, and other long-term obligations mature as follows:
BANK LOANS
& NOTES BONDS
PAYABLE PAYABLE TOTAL
2001 $ 1,626,184 $ 760,000 $ 2,386,184
2002 1,248,598 675,000 1,923,598
2003 459,186 245,000 704,186
2004 472,187 - 472,187
2005 504,717 - 504,717
Thereafter 288,794 - 288,794
---------------- ---------------- ---------------
$ 4,599,666 $ 1,680,000 $ 6,279,666
================ ================ ===============
--------------------------------------------------------------------------------
See accompanying independent accountants' review report.
10
<PAGE>
BROOKE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
6. LONG-TERM DEBT, BONDS PAYABLE
Brooke Credit Corporation has offered bonds (series 1997A, 1997B and 1997C) for
sale to institutional investors in $5,000 denominations. Brooke Credit
Corporation has also offered bonds (series 1997D and 1998E) for sale to the
public in $5,000 denominations. These bonds are issued in registered form with
interest payable semi-annually on January 1st and July 1st of each year. These
bonds are not callable by Brooke Credit Corporation and are not redeemable by
the bondholder until maturity.
Brooke Credit Corporation covenants to use all bond proceeds for the purposes of
funding loans or purchasing receivables. Brooke Credit Corporation has no debt
and covenants not to incur obligations superior to its obligations to
bondholders. Therefore, the obligation to bondholders is guaranteed by the
assets and the equity of Brooke Credit Corporation.
At September 30, 2000 and 1999 the bonds payable consists of:
<TABLE>
<CAPTION>
2000 1999
---- ----
PRINCIPAL PRINCIPAL
--------- ---------
BOND SERIES RATE MATURITY VALUE VALUE
----------- ---- -------- ----- -----
<S> <C> <C> <C> <C>
1997A 10.000% January 1, 2001 $ 165,000 $ 165,000
1997B 10.250% January 1, 2002 155,000 155,000
1997C 10.500% January 1, 2003 245,000 145,000
1997D 10.125% July 1, 2001 595,000 595,000
1998E 10.125% January 1, 2002 520,000 520,000
-------------- --------------
Total $1,680,000 $1,580,000
============== ==============
</TABLE>
Interest payable is $43,103 and $34,052 at September 30, 2000 and 1999,
respectively.
7. LONG-TERM DEBT, CAPITAL LEASES
The Company leases various equipment which may be purchased for a nominal amount
at the expiration of the lease agreements. The Company is required to provide
insurance coverage on the equipment as specified by the lessor. Under the
criteria established by SFAS 13, these assets have been capitalized in the
Company's financial statements. The capital lease obligations have all been paid
in full. Property and equipment includes the following amounts reflecting the
capitalization of these assets:
2000 1999
---- ----
Office and computer equipment $ 415,843 $ 415,843
Less: Accumulated amortization 386,605 319,660
-------------- -------------
$ 29,238 $ 96,183
============== =============
Capital lease amortization is included in depreciation expense.
--------------------------------------------------------------------------------
See accompanying independent accountants' review report.
11
<PAGE>
BROOKE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
8. INCOME TAXES
The elements of income tax expense (benefit) are as follows:
2000 1999
---- ----
Current $ 0 $ 0
Deferred (52,934) 33,753
------------- -------------
$ (52,934) $ 33,753
============= =============
The current income tax provisions differ from amounts that would be calculated
by applying federal statutory rates to income before income taxes due to net
operating loss carryforwards available to offset future taxable income.
Reconciliation of the U.S. federal statutory tax rate to Brooke Corporation's
effective tax rate on pretax income, based on the dollar impact of this major
component on the current income tax expense:
2000 1999
---- ----
U.S. federal statutory tax rate 30% 30%
State statutory tax rate 4% 4%
Effect of the utilization of net operating
loss carryforwards (8%) (5%)
Miscellaneous (1%) (3%)
--------- ---------
Effective tax rate 25% 26%
========= =========
Reconciliation of deferred tax asset:
2000 1999
---- ----
Beginning balance, January 1 $295,766 $ 327,612
Deferred income tax (expense) benefit 52,934 (33,753)
----------- ------------
Balances balance, June 30 $348,700 $ 293,859
=========== ============
Expiration dates of net operating loss carryforwards:
2010 $811,081
2020 214,510
---------------
Total $1,025,589
===============
--------------------------------------------------------------------------------
See accompanying independent accountants' review report.
12
<PAGE>
BROOKE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan covering substantially
all employees. Employees may contribute up to 15% of their compensation. The
Company may contribute an additional amount to the plan at the discretion of the
Board of Directors. No employer contributions were charged to expense for
periods ended September 30, 2000 and 1999.
10. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at several banks. On September 30, 2000 and
1999 the Company had account balances of $769,807 and $1,879,124, respectively,
with one bank which exceeds the $100,000 insurance limit of the Federal Deposit
Insurance Corporation.
11. SEGMENT AND RELATED INFORMATION
The Company's two reportable segments as of and for the six month periods ended
September 30, 2000 and 1999 consisted of its insurance agency business and its
finance services business. The insurance agency business includes the Company's
wholly-owned subsidiaries which are licensed insurance agencies operating in the
states of Kansas, Nebraska, Missouri, Colorado, Texas and Oklahoma. The Company
sells insurance through its network of exclusive franchise agents, franchise
subagents, non-exclusive brokers and insurance producers. The finance services
business includes the Company's wholly-owned subsidiary, which is a licensed
finance company. The Company originates loans to Brooke Corporation's franchise
agents, franchise subagents, insurance producers and insurance policyholders.
Unallocated corporate-level expenses are reported in the reconciliation of the
segment totals to the related consolidated totals as "other corporate expenses."
Management evaluates the performance of its segments and allocates resources to
them based on the net income before income taxes. The segments' accounting
policies are the same as those described in the summary of significant
accounting policies.
The table below reflects summarized financial information concerning the
Company's reportable segments for the six month periods ending September 30:
<TABLE>
<CAPTION>
INSURANCE FINANCIAL ELIMINATION OF
AGENCY SERVICES INTERSEGMENT CONSOLIDATED
BUSINESS BUSINESS ACTIVITY TOTALS
-------- -------- -------- ------
1999
<S> <C> <C> <C> <C>
Insurance commissions $6,566,708 $ -- $ -- $6,566,708
Interest income -- 559,951 (33,508) 593,459
Interest expense 232,341 507,074 -- 739,415
Commissions expense 4,261,010 -- -- 4,261,010
Depreciation and amortization 254,748 -- -- 254,748
Segment assets 5,866,237 1,192,597 (380,808) 6,678,026
Expenditures for segment assets 283,623 -- -- 283,623
</TABLE>
--------------------------------------------------------------------------------
See accompanying independent accountants' review report.
13
<PAGE>
BROOKE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
11. SEGMENT AND RELATED INFORMATION - CONT.
<TABLE>
<CAPTION>
INSURANCE FINANCIAL ELIMINATION OF
AGENCY SERVICES INTERSEGMENT CONSOLIDATED
BUSINESS BUSINESS ACTIVITY TOTALS
-------- -------- -------- ------
2000
<S> <C> <C> <C> <C>
Insurance commissions $9,551,920 $ -- $ -- $9,551,920
Interest income -- 1,340,943 (131,304) 1,209,639
Interest expense 267,058 1,090,688 -- 1,357,746
Commissions expense 6,550,720 -- -- 6,550,720
Depreciation and amortization 313,642 -- -- 313,642
Segment assets 8,100,805 308,775 (176,215) 8,233,365
Expenditures for segment assets 772,322 -- -- 772,322
</TABLE>
PROFIT (LOSS) 2000 1999
---- ----
Total segment profit $2,539,451 $1,904,994
Unallocated amounts:
Gain (loss) on sale of inventory (58,500) 237,060
Other corporate expenses 2,695,461 2,012,558
------------- -------------
Income (loss) before income taxes $(214,510) $ 129,496
============= =============
--------------------------------------------------------------------------------
See accompanying independent accountants' review report.
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BROOKE CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
12. NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities, was issued by the Financial
Accounting Standards Board in June 1998. This Statement establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
recognition of all derivatives as either assets or liabilities on the balance
sheet and measurement of those instruments at fair value. If certain conditions
are met, a derivative may be designated specifically as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or
unrecognized firm commitment referred to as a fair value hedge, (b) a hedge of
the exposure to variability in cash flows of a forecasted transaction (a cash
flow hedge), or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a forecasted transaction. The Company anticipates some of these
types of hedges, and will comply with the requirements of SFAS 133 when it is
adopted. The Company expects to adopt SFAS 133 beginning January 1, 2001. We
have not yet determined the effect of adopting SFAS 133.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 in the fourth quarter of 2000
(retroactive to January 1, 2000) and is awaiting interpretive guidance, not yet
issued by the SEC, to complete its assessment of the impact of SAB 101 may have
on the Company's financial statements.
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company's discussion of its financial condition, operating results and plan
of operations includes forward-looking statements. Forward-looking statements
are necessarily based upon estimates and assumptions that are inherently subject
to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond the Company's control and are subject to
change. Actual operating and financial results of the Company and the Company's
actual plan of operations may differ materially from the stated plan of
operations. Other factors which may cause the actual results of the Company or
its actual plan of operations to vary include, without limitation, decisions of
the board of directors not to pursue the stated plan of operations based on
re-assessment by the board of directors of the plan which is in the best
interests of the Company, changes in competition and/or suppliers. The Company
disclaims any obligation to update forward looking statements.
RESULTS OF OPERATIONS
In April of 1999, the Company approved an expansion of its insurance agency
operations which resulted in quarterly losses from the fourth quarter of 1999
through the second quarter of 2000. The Company returned to profitability in the
third quarter of 2000.
THREE MONTHS ENDED
Net income for the third quarter of 2000 was $115,995, or $0.17 per share,
compared with net income in the third quarter of 1999 of $7,424 or $0.01 per
share. Commissions for the third quarter of 2000 where $3,803,106 which is an
increase of approximately 73% from commissions of $2,201,245 during the
comparable period of the prior year. This increase is the result of the
Company's recent expansion of its insurance agency operations. Net interest
income on the Company's loan portfolio for the third quarter of 2000 was $82,199
compared with net interest income of $7,237 in the third quarter of 1999. This
increase is the result of a larger loan portfolio and increased margins on loans
sold to participating lenders.
Payroll expenses increased to $585,489 in the third quarter of 2000 from
$438,255 in the third quarter of 1999. Commissions paid to agents increased to
$2,500,386 in the third quarter of 2000 from $1,366,098 in the third quarter of
1999. Other operating expenses increased to $426,851 in the third quarter of
2000 from $214,284 in the third quarter of 1999. These expenses increased
primarily as a result of the Company's expansion of its insurance agency
operations.
NINE MONTHS ENDED
The Company's net loss for the nine months ended September 30, 2000 was
$161,576, or $0.23 per share, compared with net income for the nine months ended
September 30, 1999 of $95,743, or $0.14 per share. Losses during the first and
second quarters of 2000 resulted primarily from the expansion of the Company's
insurance agency operations during this period.
Commissions for the nine months ended September 30, 2000 were $9,551,920 which
is an increase of approximately 45% from commissions of $6,566,708 during the
comparable period of the prior year. This increase is the result of the
Company's recent expansion of its insurance agency operations. Net interest
income on the Company's loan portfolio for the nine months ended September 30,
2000, was $118,951, compared with net interest income of $86,385 for the
comparable period of the prior year. This increase is the result of a larger
loan portfolio and increased margins on loans sold to participating lenders.
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The Company expects to typically record profits on sale of insurance agencies
held in inventory, however a net loss of $58,500 was incurred on sale of
insurance agencies during the first nine months of 2000 compared to a net gain
of $237,060 on sale of insurance agencies during the first nine months of 1999.
The Company typically expects to receive 8% to 10% of total commissions as a
share of insurance company profits on policies written by the Company. However,
the Company expects lower profit sharing commissions during 2000 as a result of
higher than anticipated claims during the last year. As a result, profit sharing
commissions were estimated to be $305,000 for the period ending September 30,
2000, which was approximately 3% of total commissions on policies written by the
Company. During the comparable period for the prior year, profit sharing
commissions were estimated to be $750,000, which was approximately 11% of total
commissions.
ANALYSIS BY SEGMENT
The Company separates insurance agency operations from finance company
operations when analyzing performance. For performance comparisons of insurance
agency operations, the Company typically analyzes operating profits and
operating profit margins. Operating profits for the Company's insurance agency
operations are defined as earnings before interest, taxes, depreciation and
amortization.
The Company typically expects operating profit margins from insurance agency
operations in excess of 10%. For the nine month period ending September 30,
2000, the Company's insurance agency operating profits were $247,239 on
insurance commissions of $9,551,920, resulting in an operating profit margin of
approximately 3%. During the comparable period for the prior year, operating
profits for insurance agency operations were $530,200 on insurance commissions
of $6,566,708, resulting in an operating of approximately 8%. The decrease in
operating profit margins was primarily the result of the Company's expansion of
insurance agency operations and margins are expected to increase in the future.
LIQUIDITY AND CAPITAL RESOURCES
For the nine month period ending September 30, 2000, $707,044 in cash was used
to fund operating activities and $661,889 in cash was used to acquire insurance
agencies and other property. Net cash of $612,605 was provided by financing
activities, so the Company's cash balance of $1,146,217 at September 30, 2000
decreased by $756,328 from $1,902,545 at December 31, 1999.
The Company had a current ratio (current assets to current liabilities) ratio of
1.27 as of September 30, 2000, compared to 2.80 as of December 31, 1999. The
decrease in the Company's current ratio is primarily due to an increase of
$1,921,462 in the current portion of long term debt.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
During the third quarter of 2000 no legal proceedings were commenced to which
the Company is a party or to which its property is subject that will result in a
judgment against the Company for an amount in excess of 10% of the current
assets of the Company, nor to the best of the Company's knowledge are any
material legal or other governmental proceedings contemplated.
ITEM 2 - CHANGES IN SECURITIES
During the third quarter of 2000, there were no changes in securities.
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ITEM 3 - DEFAULT UPON SENIOR SECURITIES
There have been no defaults upon senior securities.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders in the third quarter of
2000.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
Exhibit 27 Financial Data Schedule
(B) REPORTS ON FORM 8-K: During the third quarter of 2000 no reports on Form
8-K were filed.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Brooke Corporation
November 14, 2000 /s/ Leland Orr
-------------------------------------
Leland Orr, Chief Financial Officer
See notes to the financial statements.
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