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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
BROOKE CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
KANSAS 48-1009756
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
10895 GRANDVIEW DRIVE, SUITE 250, OVERLAND PARK, KS 66210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (913) 661-0123
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
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TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS..................................................................1
PART I......................................................................................2
ITEM 1 DESCRIPTION OF BUSINESS.....................................................2
ITEM 2 DESCRIPTION OF PROPERTY.....................................................9
ITEM 3 DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES.....................9
ITEM 4 REMUNERATION OF DIRECTORS AND OFFICERS.....................................11
ITEM 5 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITYHOLDERS VOTING SECURITIES AND PRINCIPAL HOLDERS:...........................12
ITEM 6 INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS.......................................................................12
ITEM 7 DESCRIPTION OF SECURITIES..................................................14
PART II....................................................................................14
ITEM 1 MARKET PRICE OF AND DIVIDENDS ON THE COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS..........................................................14
ITEM 2 LEGAL PROCEEDINGS...........................................................14
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS...............................15
ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES.....................................15
ITEM 5 INDEMNIFICATION OF DIRECTORS AND OFFICERS...................................15
PART F/S...................................................................................17
PART III...................................................................................18
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FORWARD-LOOKING STATEMENTS
The following cautionary statement is made for the purpose of taking
advantage of any defenses that may exist under the law, including common law.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, future events or performance and underlying
assumptions and other statements that are not statements of historical facts.
This document contains forward-looking statements which can be identified by
the use of words such as "intend," "anticipate," "believe," "estimate,"
"project," or "expect" or other similar statements. These forward-looking
statements involve risks and uncertainties which could cause actual results
or outcomes to differ materially from those expressed in the forward-looking
statements. Brooke Corporation's (the "Company") expectations, beliefs and
projections are expressed in good faith and are believed by the Company to
have a reasonable basis, including without limitation, management's
examination of historical operating trends, data contained in the Company's
records and data available from third parties. However, there can be no
assurance that management's expectations, beliefs or projections will occur
or be achieved or accomplished. In addition to other factors and matters
discussed elsewhere, the following are important factors that, in the view of
the Company, could cause actual results to differ materially from those
discussed in the forward-looking statements:
(a) the growth projected by the Company, if achieved,
must be efficiently and effectively managed;
(b) the Company's financial results will depend upon the
success of its marketing efforts and its ability to attract and retain
key personnel;
(c) recently enacted federal legislation (Financial
Services Modernization Act) may impact the Company's agents in ways
that are not anticipated; and
(d) the Company must use the Internet and other
technology to manage projected growth.
The Company does not undertake to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
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PART I
The Company has elected to report under Disclosure Alternative 2 under
Form 10-SB.
ITEM 1 DESCRIPTION OF BUSINESS
(Form 1-A Model B Item 6)
NATURE OF THE BUSINESS. The Company engages in the business of
selling insurance and financial services through independent agents and
brokers. Virtually all of the Company's current revenues are derived from the
sale of property and casualty insurance policies, although the Company
intends to increasingly sell other insurance and financial services,
including life and health insurance, credit services, investment services and
other related financial services.
The Company provides third-party administration (processing) to
independent insurance agents and bank insurance agents using the "Master
Agent" program pioneered by the Company. The basic premise of the Company's
Master Agent program is the concept that agents must outsource administrative
activities to a Master Agent that can generate sufficient economies of scale
to reduce administrative expenses and increase agent productivity. As such,
the Company has developed detailed processing standards for third-party
processing by a Master Agent. Administrative and processing services provided
by the Company to the agents under the Master Agent program include, but are
not limited to, accounting, data maintenance and payment services.
In connection with the Master Agent program, the Company prepares,
reconciles and distributes monthly statements to each of its franchise
agents. Such monthly statements list all credits and debits and represent a
comprehensive reconciliation of Company commissions, receipts from agent's
customers, checks issued to an agent's customer and vendors, and pass-through
or journal entries for amounts due the Company in its capacity as Master
Agent.
The Master Agent program also promotes agency efficiency through data
maintenance services. All customer account documents are provided to the
Company for imaging or other electronic storage. Agents are then provided
passwords so documents associated with an agency may be viewed by such
agency's personnel from any location via the Internet.
In addition, the Company provides marketing assistance to its network
of agents through brand name development. By participating in the Master
Agent program, agents gain the power of a common brand name through the
Company. The Company believes that associating products and services with a
trusted brand name can result in additional sales, much as additional sales
can result from a product endorsement. Although a trusted brand name may
attract an Internet customer, because of the complexity of many insurance
products and financial services, the assistance of a local agent to provide
individualized customer support is often required. The Company believes that
agents with a trusted brand name, local agency presence and Master Agent
support are well-positioned in business-to-business Internet sales of
insurance and financial services.
Another aspect of the Master Agent program that is advantageous to
the agents is the Company's purchasing power. By consolidating purchasing
activities, the Company believes that a Master Agent is able to negotiate
better commissions and has access to more insurance companies.
The Company also provides loans to independent insurance agents for
acquisition of insurance agencies, matches agency buyers with sellers and
generally assists agents with increasing agency value and liquidity. The
Company believes that independent insurance agents, as small business owners,
distribute financial services less expensively because they are more
motivated and willing to defer some
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of their compensation until the agency business is sold. Therefore, as part
of the effort to make agents more efficient, the Company attempts to make
ownership more attractive by facilitating ownership transfers through
development of detailed legal standards, increasing credit availability by
developing agency lending standards, and making ownership value easier to
measure with standards for appraisals for insurance agencies.
BUSINESS HISTORY. The Company was incorporated under the laws of the
State of Kansas on January 17, 1986, under the name of Brooke Financial
Services, Inc. The Company subsequently amended its articles of
incorporation, changing its name to Brooke Corporation. In the early years of
the Company's operations, the Company sold its services primarily to bank
insurance agencies; however, the bank market was limited because only the
smallest banks were authorized to sell insurance. Therefore, the Company
began focusing on the sale of its services to independent insurance agents.
Several significant events occurred in 1996 which affected the
Company's operations including: the expansion of the Company's processing
center into a larger facility in Phillipsburg, Kansas, the adoption of a
"franchise" approach to expansion, and the development of a lending program
for agency acquisition by franchise agents.
From 1996 to 1999 the Company spent significant resources researching
and developing the processing, legal, lending, and valuation standards
described herein, which collectively represent the foundation of the
Company's Master Agent program. During this period of time, the Company also
rewrote its document management and commissions accounting software to
accommodate these standards and began presentation of documents and
commissions over the Internet.
In 1998, the Company developed a sales organization which had a full
support staff in each state where the Company conducted operations. The
result was the creation of a sales and support organization that was
expensive and required more management resources than the Company could
afford. In 2000, a regional office approach was adopted to consolidate state
office facilities and staff.
BUSINESS STRATEGY. The Company believes that independent insurance
agencies represent an increasingly popular means for distributing certain
financial services and that the Company's Master Agent concept will become
increasingly important to the future success of independent insurance agents.
As such, the Company expects the demand for its processing, marketing and
lending services to grow rapidly.
During 2000 and 2001, the Company does not expect to develop any new
products because demand for existing products is anticipated to fully utilize
the Company's capacity to manage and staff regional offices. However, the
Company does expect to revise or enhance existing products based on agent
comments and suggestions. Accordingly, it is expected that a certain amount
of additional research and development expense will be incurred during this
time period.
SERVICES AND PRODUCTS. The Company has two product lines, the first
of which is the Master Agent program, which was developed exclusively by the
Company and to which the Company believes is unique to the industry. The
Company's secondary line of products is specialty programs, such as the
Company's agency lending program and insurance programs for industry niches.
Document management and commissions accounting are an agency's
primary administrative functions and may be outsourced to the Company's
processing center as part of the services offered through the Master Agent
program. Documents and accounting information are presented to the agents by
the processing center through the processing center's Web site. The Master
Agent program also
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provides for development of a national brand name for agents and
consolidation of agent's purchasing power with insurance companies and other
financial services suppliers.
The Company's secondary product line is specialty programs, the most
successful of which is the lending program, but also includes insurance
programs for various industry niches.
The Company, through its wholly-owned finance subsidiary, Brooke
Credit Corporation, originates loans to agents primarily for the purpose of
insurance agency acquisition. Such loans are secured by, among other things,
insurance agency assets. The Company's lending program features standardized
legal documentation and established standards for credit approval and ongoing
credit review.
The origination of agency acquisition loans to agents is expected to
increase demand for the Company's Master Agent services. The Company believes
that many traditional lenders are reluctant to lend money for acquisition of
an insurance agency because the primary collateral for such loans, insurance
commissions, could be jeopardized in the event of a borrower default. To
protect itself from such a risk, the Company requires all borrowers of the
Company's lending program to enroll in the Master Agent program. Under the
Master Agent program, the Company is listed as the agent-of-record for
policies written by an agent. Thus, in the event that the agent/borrower
defaults on its obligations under the agency acquisition loan, the Company
continues to collect payments and services the defaulted agent's accounts.
This arrangement minimizes the impact of an agent/borrower's default and
protects the collateral pledged under the terms of the agency acquisition
loan.
In addition to the Company's lending program, the Company, through
its wholly-owned subsidiaries, The American Agency, Inc., The American
Heritage, Inc., and Interstate Insurance Group, L.L.C., sells insurance
programs and "targeted market" policies through its network of agents and
through agents not affiliated with the Company. In connection with such
specialty programs, agents offer insurance coverage to targeted classes of
business which may not be obtained from standard markets at all or which
cannot be obtained from standard markets on a favorable basis. Such target
classes of business include limousine companies and meat processors. Although
specialty programs may be offered through any duly licensed agent, it is
typical for specialty programs to be "cross sold" to agents that purchase the
Master Agent services.
CUSTOMERS. The Company's customers are independent insurance agents
and bank insurance agents. The Company currently sells its products and
services through approximately 90 agencies that employ or retain
approximately 300 agents in the States of Colorado, Kansas, Louisiana,
Missouri, Nebraska, Oklahoma and Texas.
It has been the experience of the Company that independent insurance
agents are more willing to sell their agency businesses. The Company's agency
lending program is a source of credit for prospective purchasers of agency
businesses. The relative success of the Company's agency lending program is
attributable to the loan collateral enhancements and protections provided by
the Company's Master Agent concept. As such, the Company expects that as the
demand for agency acquisition loans from independent insurance agents
increases, the demand for the Company's Master Agent services will increase
as well.
Although a significant number of the Company's current customers are
bank insurance agents, such agents represent a relatively small portion of
the Company's overall commissions because they are generally agents from
small banks in small communities. With the passage of the Financial Services
Modernization Act, larger banks in larger communities are now authorized to
sell insurance. The Company anticipates that larger banks will engage in the
business of selling insurance, which, in turn, the Company believes will lead
to a greater demand for the services offered under the Company's Master
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Agent program. By outsourcing agency administration to a Master Agent and
with the purchasing power provided by a Master Agent, the Company believes
that bank insurance agents can immediately take advantage of the expanded
insurance powers available under the Financial Services Modernization Act.
INSURANCE MARKET. Although the Company's revenues are comprised
primarily of the sales commission portion of insurance premiums, most
industry analysis is based on premiums. Based on typical sales commission
rates, the Company has estimated its gross annualized premiums to be $100
million to $110 million.
According to the Insurance Information Institute, insurance premiums
in the United States totaled $636.8 billion in 1998, which was 8.1% more than
in 1997. Premiums in the property and casualty sector totaled $281.5 billion
and life and health premiums totaled $355.3 billion. World insurance premiums
totaled $2.13 trillion in 1997 (latest data available from the Insurance
Information Institute).
The Company's agents sell insurance to both personal and commercial
customers; however, as a group, the agents sell more commercial insurance
than personal insurance. Independent insurance agents, such as the Company's
franchise agents, sold 75.6% of the commercial insurance sold by the Company
in 1998. Commercial policy premiums in the United States grew from $132.7
billion in 1997 to $137.6 billion in 1998 (latest data available) according
to A.M. Best Company.
COMPETITION. The Company is unaware of any direct competitors in the
United States for the Master Agent services that are offered to independent
insurance agents and bank insurance agents. Although the Company is aware of
other insurance companies that offer similar services to agents, to the best
of the Company's knowledge, such services do not allow agents exclusive
agency ownership and/or require that such agents sell exclusively for one
insurance company. Also, insurance companies sometimes offer assistance to
agents' policyholders that have purchased policies from their specific
insurance company. However, there does not appear to be a service, such as
the Company's Master Agent program, that attempts to provide a comprehensive
solution to the efficiency problems encountered by independent insurance
agents and bank insurance agents.
The Company has more competition for the sale of its specialty
programs, especially insurance programs, than it does for the sale of its
Master Agent services. Many independent insurance agents and brokers are
developing insurance programs for specific market niches. However, those that
purchase the Company's Master Agent services are a receptive audience for the
Company's specialty programs which the Company believes gives it a
significant advantage within its Master Agent organization.
The competition for agency loans comes primarily from banks and other
traditional lenders, many of which are larger and have larger resources than
that of the Company. However, the Company is not aware of any lenders that
have developed the comprehensive legal and lending standards that are
required to protect and preserve the intangible assets that serve as
collateral for insurance agency loans originated by the Company.
Additionally, as previously noted, the Master Agent program is critical to
collateral preservation and the Company believes that the entire package of
services offered under the Master Agent program are not currently available
from others.
SALES AND MARKETING. Most of the Company's marketing activities are
currently conducted from its Kansas City, Dallas, or Denver area regional
offices. The Company expects to open an additional regional office in
Atlanta, Georgia in the fourth quarter of 2000.
The Company's regional managers market the Master Agent program to
independent insurance agents using a description of "franchise agents"
because, as a part of the Master Agent program, independent insurance agents
use a common trade name and share many other characteristics of a
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franchise relationship. Accordingly, the Company discloses information
relating to the Master Agent program to prospective agents using the Uniform
Franchise Offering Circular format.
The services offered under the Company's Master Agent program are
also marketed to bank insurance agents; however, bank insurance agents
typically use a trade name associated with the sponsoring bank instead of the
common trade name used by franchise agents. Therefore, the term "bank agents"
is used to differentiate franchise agents from bank agents. Unlike franchise
agents, the services offered under the Master Agent program to bank agents
are limited to insurance, as most bank agents also want to sell the banking,
investment or lending services of the sponsoring bank.
Those agents selling the Company's specialty programs are identified
as "broker agents." Broker agents provide expertise in a specific industry
niche to other agents, typically franchise or bank agents that purchase the
Company's Master Agent services. Additional revenues are created when the
Company's franchise agents or bank agents purchase expertise from the
Company's broker agents. For example, the Company's agency lending program
requires enrollment in the Master Agent program and, as a result, is the
largest source of Master Agent program sales.
In the spirit of multilevel sales organizations, the Company
encourages its franchise, bank and broker agents to recruit subagents to
purchase the services offered under the Master Agent program and specialty
programs. Franchise agents can build a sales organization of smaller
subagents and, because of growth and size bonuses, receive a larger share of
commissions from the Company. Correspondingly, bank agents can use the Master
Agent's services to recruit other banks as subagents.
EMPLOYEES. The Company currently employs a total of approximately 82
employees of which a significant number are part-time employees employed by
the processing center. On a full-time equivalency basis, the Company employs
approximately 70 individuals.
SUPPLIERS. The Company has agency relationships with a large number
of insurance companies. The Company has direct agency relationships with five
of the six leading writers of commercial insurance in the United States
(based on 1998 premiums). The Company's largest suppliers include Safeco
Insurance Company, Allied Insurance Company, Employers Mutual Companies,
Columbia Insurance Company and Allstate Insurance Company.
REGULATIONS. The Company's insurance activities are generally
regulated by the insurance departments of individual states. The Company must
maintain valid insurance agency licenses in most of the states in which the
Company transacts its insurance and financial services business.
Periodically, agency insurance licenses must be renewed by and license fees
must be remitted to the individual states.
The Company's lending programs are targeted to businesses and are
generally unregulated. Although the Company does not typically make consumer
loans, the Company's finance company subsidiary is licensed as a consumer
finance company by the States of Kansas and Nebraska. The Company's
franchising activities are also regulated, to a certain extent, by the
Federal Trade Commission and state regulators. The Company believes that it
is currently in compliance with all state and federal regulations to which it
is subject and is unaware of any pending or threatened investigation, action
or proceeding by any state or federal regulatory agency involving the Company.
CORPORATE STRUCTURE. All of the Company's subsidiaries are 100% owned
and controlled by the Company. With the notable exception of Brooke Credit
Corporation, all of the Company's subsidiaries are held primarily for
regulatory licensing and insurance company contracting purposes and for which
financial statements are not separately prepared. Brooke Credit Corporation,
a Kansas corporation, is a licensed finance company that originates loans
primarily to the Company's agents. Separate financial
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statements are regularly prepared for Brooke Credit Corporation, and Brooke
Credit Corporation borrows money in its own right primarily through the
issuance of bonds.
The Company's other subsidiaries include:
BROOKE LIFE AND HEALTH, INC., is a licensed insurance agency which
sells life and health insurance through the Company's network of franchise
agents, subagents, bank agents, broker agents and insurance producers.
BROOKE AGENCY, INC., is a licensed insurance agency which sells
property and casualty insurance through the Company's network of franchise
agents, subagents, bank agents, broker agents and insurance producers.
BROOKE INVESTMENTS, INC., develops investment services for sale
through the Company's network of franchise agents, subagents, bank agents,
broker agents and insurance producers.
INTERSTATE INSURANCE GROUP, LLC, is a licensed insurance agency which
sells insurance programs and "targeted market" policies through the Company's
network of agents and through agents not necessarily affiliated with the
Company. Interstate was acquired by the company at the end of the second
quarter of calendar year 2000.
THE AMERICAN AGENCY, INC., is a licensed insurance agency which sells
insurance programs and "targeted market" policies through the Company's
network of agents and through agents not necessarily affiliated with the
Company.
THE AMERICAN HERITAGE, INC., is a licensed insurance agency which
also sells insurance programs and "targeted market" policies through the
Company's network of agents and through agents not necessarily affiliated
with the Company.
For licensing purposes, the Company also controls First Brooke
Insurance and Financial Services, Inc., which is a Texas corporation owned by
a licensed Texas insurance agent but is controlled by the Company through a
contractual arrangement.
SPECIAL CHARACTERISTICS OF THE COMPANY'S OPERATIONS. The following
items represent distinct or special characteristics of the Company's
operations which may have a material impact upon the Company's future
financial performance:
MARKET UNCERTAINTIES. One of the primary markets for the Company's
services is independent property and casualty insurance agents. The
popularity of Internet sales may adversely impact independent property and
casualty insurance agents and result in a general decline in the demand for
the Company's services. In addition, the recent enactment of the Financial
Services Modernization Act allows highly capitalized competitors, such as
banks, to offer certain insurance services, where once the extent such
entities could engage in insurance related activities was more restricted.
PRODUCTION UNCERTAINTIES. The processing services provided by the
Company are primarily completed at a processing center located in
Phillipsburg, Kansas. Although contrary to the Company's expectations, the
processing center's management, facilities, and labor force may be
insufficient to accommodate the Company's expected growth. Also, although the
Company has safeguards for emergencies, it does not have 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
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failure at the Company's processing center in Phillipsburg, Kansas could
interrupt document processing or result in the loss of stored data.
DEPENDENCE ON INTERNET. The Company relies heavily on the Internet in
conducting its operations. A main component of the Master Agent program is
providing agency personnel access to agency documents over the Internet. Such
service requires efficient operation of Internet connections from agencies and
agency personnel to the Company's 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. Any system delays, failures or loss of data,
whatever the cause, could reduce customer satisfaction with the services and
products offered by the Company. Moreover, despite the implementation of
security measures, the Company's computer system may be vulnerable to computer
viruses, program errors, attacks by third parties or similar disruptive
problems. Such events could have a material adverse effect on the Company's
operations and its ability to meet customer expectations.
GUARANTEES. The Company has guaranteed the repayment of bonds issued by
its finance company subsidiary and, if the finance company incurs significant
loan losses or its ability to repay the bonds is otherwise impaired, then the
Company's financial condition may be adversely affected. In some instances, the
Company's finance company subsidiary has sold loans to investors with full
recourse which may cause an adverse financial effect on the Company in the event
it is required to repurchase loans of poor quality. In addition, in connection
with the Company's activities of matching agency purchasers and sellers, the
Company sometimes guarantees payments to agency sellers, which may cause an
adverse financial effect on the Company in the event such a purchaser defaults
on its obligations to such a seller.
INSURANCE AGENCY COLLATERAL. The Company makes loans to agents primarily
for the purpose of insurance agency acquisition and which are secured by, among
other things, insurance agency assets. Insurance agency assets in some cases are
intangible, and the value of such assets may rapidly deteriorate if borrowers do
not adequately serve their policyholders or if the policies offered are not
competitively priced. Reduction in the value of the insurance agency's assets
would result in a reduction of the value of the Company's secured interest. This
could result in these loans being under secured which could adversely affect the
Company in the event of default on such loans.
VARIABLE INTEREST RATES ON LOANS. The interest rate on most of the
Company's existing loans varies annually to an outside index that is not
controlled by the Company. Although most of the Company's existing loans have
been sold to loan participants, if the Company repurchases these variable rate
loans or makes additional variable rate loans and market interest rates
decrease, then the Company may collect less interest than it pays on its bonds
or other funding sources.
DEPENDENCE ON SUPPLIERS. The Company is dependent on others,
particularly property and casualty insurance companies, to supply the products
sold by its agents. A majority of the Company's products are supplied by five
property and casualty insurance companies. The loss of the representation of any
one of these companies, for any reason, would adversely affect the financial
condition of the Company. While the Company believes it maintains strong
relationships with these companies, there can be no assurance that these
companies will not impose conditions to the relationship, such as lower
commission rates, larger premium volume requirements, or loss ratios that the
Company will not be able to satisfy.
DEPENDENCE ON PROFESSIONAL LIABILITY CARRIER. Without professional
liability insurance, it is unlikely that the Company can continue its
relationships with insurance companies. Although the Company has an excellent
claims history and believes it has a good relationship with its professional
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liability insurance carrier, termination of the Company's professional liability
insurance policy may adversely impact the Company's financial prospects.
COMPETITION. The Company's agents face significant competition. The
popularity of Internet sales and passage of the Financial Services Modernization
Act has increased the number of potential competitors. If the Company's
prediction that agent distribution will become more widespread is accurate, then
the Company will face greater competition for the services it provides to its
agents. Many of the Company's potential competitors have greater financial
resources and market acceptance than the Company.
ITEM 2 DESCRIPTION OF PROPERTY
(Form 1-A Model B Item 7)
The Company's principal executive offices are located at 10895 Grandview
Drive, Building 24, Suite 250, Overland Park, Kansas 66210 and its telephone
number is (913) 661-0123. In addition to serving as the executive offices of the
Company, this facility also functions as the Company's national sales office and
as one of its regional sales offices. The facility consists of over 6,000 square
feet of office space, leased for $12,754 per month. The lease expires on
December 31, 2003.
The Company also maintains a processing center and two additional
regional offices. The processing center is located in Phillipsburg, Kansas, and
consists of 6,000 square feet of office space. With respect to the processing
center, the Company has a year to year lease that is renewable at its option,
that provides for lease payments of $2,500 per month, subject to annual
adjustments. The two additional regional offices are located in Dallas, Texas
and Westminster, Colorado, which are subject to lease payments of $2,961 and
$675, respectively, per month. The lease on the Dallas facility expires on April
30, 2003, and the lease on the Westminster facility expires on April 30, 2001.
The Company anticipates leasing additional office space in or around
Atlanta, Georgia, during the fourth quarter of this year to conduct operations
in the Southeast. Management believes that the Company's facilities (coupled
with the Atlanta property yet to be identified) will be adequate for current and
proposed operations. In management's opinion, adequate insurance has been
purchased for the Company's properties.
ITEM 3 DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
(Form I-A Model B Item 8)
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
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NAME AGE POSITION
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Robert D. Orr 47 Chairman of the Board of Directors, Chief
Executive Officer and Director
Michael Hess 44 President and Director
Leland G. Orr 38 Secretary, Treasurer, Chief Financial Officer and
Director
Anita Larson 38 Vice President and General Counsel
</TABLE>
Robert Orr and Leland Orr are brothers.
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Directors of
the Company serve without cash compensation and
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without other fixed remuneration. Officers are appointed by the Board of
Directors and serve until their successors are appointed by the Board of
Directors. Remuneration of the officers is set forth under "ITEM 4
REMUNERATION OF DIRECTORS AND OFFICERS" herein. Biographical resume of each
director and executive officer are set forth below:
Robert D. Orr, 47, Director, Chairman of the Board and Chief Executive
Officer, is the founder of the Company. From 1992 to 1996, Mr. Orr served as
President of Farmers State Bank, Phillipsburg, Kansas. From 1989 to 1991, Mr.
Orr served as Chairman of the Board of Brooke State Bank, Jewell, Kansas; and
from 1987 to 1989, Mr. Orr served as President of First National Bank, Smith
Center, Kansas. Mr. Orr has also been a self-employed insurance agent for
American Family Insurance Company. Mr. Orr is an honors graduate of Fort Hays
State University with a Bachelor of Arts degree in Political Science. Mr. Orr
also completed the Graduate School of Banking program at the University of
Colorado. Mr. Orr is the author of a book on independent insurance agents titled
"Death of an Insurance Salesman?"
Leland G. Orr, 38, Director, Secretary, Treasurer and Chief Financial
Officer, has been an officer and director of the Company since its inception.
Mr. Orr is a certified public accountant and, from January 1991 to December
1994, served as President of Brooke State Bank, Jewell, Kansas. From January
1984 to September 1987, Mr. Orr worked for Kennedy, McKee & Company (formerly
Fox & Company) (an accounting firm) of Dodge City, Kansas. Mr. Orr is a graduate
of Fort Hays State University with a Bachelor of Science Degree in Accounting
and is a member of the American Institute of Certified Public Accountants, the
Kansas Society of Certified Public Accountants and the Central Kansas Chapter of
Certified Public Accountants.
Michael Hess, 44, Director and President, was an original investor in
the Company. From 1975 to 1989, Mr. Hess was employed by Western Resources (a
utility company). In 1989, Mr. Hess began his employment with the Company as
Vice President. As a result of his success within the Company and his
familiarity with the Company's operations, Mr. Hess was appointed President and
National Sales Manager of the Company in 1996. Mr. Hess has also owned several
small businesses and currently serves as a director of Patrons Insurance Company
and Great Plains Mutual Insurance Company.
Anita Larson, 38, Vice President and General Counsel, joined the
Company in 1999. Prior to joining the Company, Ms. Larson was employed by The
Equitable Life Assurance Society of the United States, New York, New York, where
she was Vice President and Counsel from May 1996 to May 1999. From January 1995
to May 1996, Ms. Larson was Chief Administrative Officer of First Security
Benefit Life Insurance and Annuity Company of New York. Ms. Larson started her
career at Security Benefit Group, Inc. where she was Second Vice President and
Counsel. Ms. Larson received a bachelors degree from the University of Kansas
and a Juris Doctorate from the University of Kansas School of Law.
10
<PAGE>
ITEM 4 REMUNERATION OF DIRECTORS AND OFFICERS
(Form 1-A Model B Item 9)
The following table sets forth the aggregate annual remuneration of each
of the three highest paid persons who were directors or executive officers
during the period for the fiscal year ending December 31, 1999.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL ANNUAL LONG-TERM ALL OTHER AGGREGATE
POSITION COMPENSATION COMPENSATION COMPENSATION REMUNERATION
<S> <C> <C> <C> <C>
Michael Hess(1) $120,628 0 0 $120,628
(President)
Leland G. Orr(1) 112,333 0 0 112,333
(Secretary,
Treasurer)
Anita Larson(2) 35,227 0 0 35,227
(Vice President)
</TABLE>
----------
(1) In addition to the compensation set forth above, Leland G. Orr and Michael
Hess receive use of a vehicle for personal and commuting use.
(2) Anita Larson's compensation is for the period June 14, 1999 to December 31,
1999 and Ms. Larson receives use of a vehicle for commuting purposes.
Pursuant to the terms of an at will employment agreement between Ms.
Larson and the Company, Ms. Larson has been retained as the manager of Brooke
Life and Health, Inc., a wholly-owned subsidiary of the Company. Ms. Larson's
annual salary for such employment is $66,000. Ms. Larson is also entitled to
quarterly bonuses equal to 5% of the quarterly growth of the Company's life and
health insurance programs. In addition, Ms. Larson is eligible for an annual
bonus of $30,000, contingent upon the Company's consolidated operating income
attaining certain specified goals. The Company anticipates that for the calendar
year 2000, in the aggregate Ms. Larson's bonuses will not exceed $15,000.
11
<PAGE>
ITEM 5 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS VOTING
SECURITIES AND PRINCIPAL HOLDERS:
(Form 1-A Model B Item 10)
VOTING SECURITIES.
<TABLE>
<CAPTION>
NAME AND NUMBER OF PERCENTAGE
ADDRESS OF OWNER TITLE OF CLASS SHARES OWNED OF CLASS(1)
<S> <C> <C> <C>
Anita Larson
627 Louisiana Street
Lawrence, Kansas 66044 Common Stock 12,000 1.73%
Leland G. Orr
501 Berglund Drive
Phillipsburg, Kansas 67661 Common Stock 3,400 0.49
Michael Hess
516 South Grant
Smith Center, Kansas 66967 Common Stock 2,200 0.32
All Executive Officers and
Directors As a Group (4
persons) Common Stock 32,050 4.63
Brooke Holdings, Inc.(2)
205 F Street
Phillipsburg, Kansas 67661 Common Stock 510,271 73.66
</TABLE>
--------------------
(1) Percentage based on 692,768 shares of common stock outstanding.
(2) As of September 30, 2000, Brooke Holdings, Inc., owned 510,271 shares of the
Company's common stock which represents 73.66% of the 692,768 shares of common
stock outstanding. Robert D. Orr, Leland G. Orr and Michael Hess beneficially
own 46.34%, 13.67% and 7.28%, respectively, of the shares of common stock of
Brooke Holdings, Inc.
NON-VOTING SECURITIES. None of the officers or directors own non-voting
securities of the Company. The Company is unaware of any shareholder who owns
more than 10% of the Company's non-voting securities.
OPTIONS, WARRANTS, AND RIGHTS. There are no options, warrants or rights
outstanding with respect to the securities of the Company.
ITEM 6 INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
(Form 1-A Model B Item 11)
Brooke Holdings, Inc., owns 100% of the common stock of GI Agency, Inc.
Accordingly, through their ownership interest in Brooke Holdings, Inc., Robert
D. Orr, Leland G. Orr and Michael Hess control 100% of the voting stock of GI
Agency, Inc. GI Agency, Inc. owns franchise agencies which purchase Master Agent
services and obtain loans from the Company at the same general prices and
general terms as provided to other unaffiliated franchise agents. As of
September 30, 2000, the total outstanding balance of all loans made to GI
Agency, Inc. by the Company's finance subsidiary, Brooke
12
<PAGE>
Credit Corporation, was $600,914. Amounts owed to the Company by GI Agency,
Inc. are secured by all the shares of the Company's common stock owned by
Brooke Holdings, Inc. which currently represents 73.66% of the total shares
outstanding. All of the loans made to GI Agency, Inc., have been sold to an
unaffiliated lender. Because of the relationships described above, certain
conflicts of interest may arise ebtween the Company and its agents in
attempting to resolve disputes that occur as a result of such relationships.
The Company has assigned all of its right, title and interest in
agreements to purchase insurance agencies to GI Agency, Inc., without
consideration from GI Agency, Inc. In its role of matching agency buyers and
sellers, the Company from time to time executes purchase agreements to acquire
agency assets and assigns them to prospective or existing franchise agents. In
the event that agency assets purchased by the Company are not sold to a
prospective or existing franchise agent, the Company may assign it rights and
obligations pursuant to such purchase agreement to GI Agency, Inc. Such
assignments allow the Company to avoid retail competition with its franchise
agents and positions GI Agency, Inc. to operate such agencies until a purchaser
can be identified. From January 1, 2000 through September 30, 2000, GI Agency
has collected commissions on the assets subject to such assignments in the
amount of $300,212.
The Company shares office facilities with GI Agency, Inc. at its Grand
Island, Nebraska office location. In 1999, GI Agency, Inc. reimbursed the
Company $346,009 for personnel expenses and $10,202 for office facilities
expenses. Although expenses are allocated between the Company and GI Agency,
Inc., the expense allocation has not been independently evaluated to determine
fairness.
Robert D. Orr, Leland G. Orr and Michael Hess have each guaranteed
certain of the Company's obligations to banks. As of September 30, 2000, the
amount of such obligations outstanding were $889,039 and are scheduled to mature
no later than December 12, 2006. In addition, Robert D. Orr, Leland G. Orr and
Michael Hess have, in some cases, each guaranteed amounts due to suppliers under
certain agency agreements. The amounts guaranteed under such agency agreements
varies depending on the value of premiums to be collected under such agency
agreements. The continuance of these guaranties is important to the Company's
prospects.
Brooke Holdings, Inc. borrowed $300,000 from the Company with repayment
secured by Brooke Holdings, Inc.'s ownership of 73.66% of the Company's common
stock. As of September 30, 2000, the amount outstanding on such loan was
$192,189. The loan bears interest at a rate of 11.50% per annum and is scheduled
to mature on December 31, 2000.
Anita Larson is married to John Arensberg, a partner in Arensberg
Insurance of Lawrence, Kansas and Overland Park, Kansas. The Company and
Arensberg Insurance have entered into a franchise agreement pursuant to which
Arensberg Insurance participates in the Company's Master Agent program. In
addition, the Company's finance subsidiary, Brooke Credit Corporation, has made
three loans to Arensberg Insurance. As of September 30, 2000, the total
outstanding balance of such loans was $868,346. Each of the loans bears interest
at a rate adjusted annually and equal to 3.5% per annum over the New York prime
rate, which as of the last date of determination was 11.5% for each loan. One of
the loans is scheduled to mature on October 1, 2008 and the remaining two loans
are both scheduled to mature on July 1, 2009. All of the loans made to Arensberg
Insurance have been sold to an unaffiliated lender.
Ms. Anita Larson borrowed $30,000 from Brooke Credit Corporation. The
loan bears interest at a rate adjusted annually and equal to 2.5% per annum over
the New York prime rate, which as of the last date of determination was 12%. The
loan is scheduled to mature on August 1, 2005. The purpose of the loan was to
allow Ms. Larson to purchase stock of the Company.
13
<PAGE>
ITEM 7 DESCRIPTION OF SECURITIES
(Form 1-A Model B Item 12)
The Company is authorized to issue 1,485,000 shares of common stock, par
value $1.00 per share, of which 692,768 shares are issued and outstanding and
11,250 shares are held in the Company's treasury. The Company is also authorized
to issue 15,000 shares of convertible preferred stock, par value $75 per share,
of which 781.33 shares are issued and outstanding. The shareholders of common
stock have no preemptive or other rights to subscribe to additional shares
offered by the Company. All outstanding shares are fully paid and
non-assessable.
Each outstanding share of common stock will be entitled to one vote on
each matter submitted to a vote of stockholders, including one vote for each
directorship to be filled. All voting is on a non-cumulative basis. Accordingly,
holders of a majority of the shares of common stock present or represented by
proxy at a meeting of stockholders will be able to elect all the Board of
Directors and minority shareholders will not be able to elect representatives to
the Board. Subject to any preferences granted to holders of outstanding
preferred stock, holders of shares of common stock are entitled to receive such
dividends as may be legally payable in the discretion of the Board of Directors
and to participate pro rata in any distribution of the Company's assets after
payment or reservation of funds for payment of its liabilities.
The holders of the Company's preferred stock are entitled to receive
quarterly cumulative dividends at a rate of 9% per annum payable quarterly.
Holders of preferred stock, upon liquidation or dissolution of the Company, are
entitled to be paid an amount equal to $75 for each share of preferred stock not
converted into common stock before any amount may be paid to holders of common
stock. The preferred stock, which is non-voting, is convertible into common
stock on the basis of 13 shares of common stock for each share of preferred
stock so converted. The holders of preferred stock have no right to proceed
against the Company for unpaid dividends unless and until the same are declared
by the Board of Directors. As of the date of this prospectus, 781.33 shares of
convertible preferred stock were outstanding, which are convertible into
10,157.29 shares of common stock.
PART II
ITEM 1 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
There is currently no public trading market for the Company's common or
preferred stock. The Company's preferred stock is convertible into the Company's
common stock at the rate of 13 shares of common stock for each share of
preferred stock so converted. The Company's common stock has approximately 170
holders of record. The Company has paid cash dividends on its common stock of
$0.06 in each quarter for the last two years. There can be no assurances given
as to the payment of any dividends in the future.
ITEM 2 LEGAL PROCEEDINGS
The Company is unaware of any legal proceedings 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.
14
<PAGE>
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The Company's principal independent accountants are Summers, Spencer &
Cavanaugh, CPAs, Chartered, of Topeka, Kansas. There have been no changes in or
disagreements with the Company's accountants during the two most recent fiscal
years.
ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES
In December 1997, the Company issued 30,000 shares of common stock at a
price of $6 per share, in an offering exempt from registration under Section
4(2) of the Securities Act of 1933, as amended. The shares were issued to three
individuals, each of whom was an officer and/or director of the Company, each of
whom was a sophisticated investor able to understand and bear the economic risk
of the investment, and each of whom had access to all information about the
Company, including the same information as would be included in a registration
statement prepared by the Company.
Additionally, from the period beginning October 1997 and ending December
1999, Brooke Credit Corporation, a wholly-owned subsidiary of the Company,
issued a total of $1,680,000 in bonds through both public and private offerings.
The bonds issued to the public were offered only to Kansas residents in
transactions that were exempt from registration under Section 3(a)(11) of the
Securities Act of 1933, as amended, and Rule 147 promulgated by the Securities
and Exchange Commission. The remaining bonds were privately offered to
institutional investors and were exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated
thereunder. The privately placed bonds were issued only to "accredited
investors," as such term is defined by Rule 501 of Regulation D, each of whom
were or were controlled by persons sophisticated in business and financial
affairs and each of whom were capable of bearing the risk of the investment. All
bonds were issued at par value.
ITEM 5 INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 17-6305 of the Kansas General Corporation Code provides that a
corporation may indemnify any person who was or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigation, by reason of the fact that
such person is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, judgments, fines and amounts paid in
settlement actually and personally incurred by such person in connection with
such action, suit or proceeding, including attorney fees, if such person acted
in good faith and in a manner such person personally believed to be in or not
opposed to the best interests of the corporation; and with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. The Company's articles of incorporation allow the Company
to indemnify a director, officer, employee or agent of the Company in connection
with any proceedings described above, to the fullest extent permitted under
Kansas law.
Kansas law also permits a corporation to advance expenses incurred by a
director or officer in defending a civil or criminal action, suit or proceeding
in advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the director or officer to repay
such amount if it is ultimately determined that the director or officer is not
entitled to be indemnified by the corporation under Kansas law. The Company's
articles of incorporation allow the Company to advance expenses to a director,
officer, employee or agent of the Company in connection with such proceedings,
to the fullest extent permitted under Kansas law.
15
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in such act, and is
therefore unenforceable.
16
<PAGE>
PART F/S
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Accountants' Reporting relating to
Consolidated Financial Statements for Six Months
Ended June 30, 2000 and 1999...............................................................F-1
Consolidated Balance Sheets for Six Months
Ended June 30, 2000 and 1999...............................................................F-2
Consolidated Statements of Income for Six Months
Ended June 30, 2000 and 1999...............................................................F-3
Consolidated Statements of Changes in Stockholders
Equity for Six Months Ended June 30, 2000 and 1999.........................................F-4
Consolidated Statements of Cash Flows
for Six Months Ended June 30, 2000 and 1999................................................F-5
Notes to Consolidated Financial Statements for
Six Months Ended June 30, 2000 and 1999....................................................F-6
Independent Auditors' Report relating to
the audited Consolidated Financial Statement
for Years Ended December 31, 1999 and 1998................................................F-16
Consolidated Balance Sheets for Years Ended
December 31, 1999 and 1998................................................................F-17
Consolidated Statements of Income for Years
Ended December 31, 1999 and 1998..........................................................F-18
Consolidated Statements of Changes in Stockholders'
Equity for Years Ended December 31, 1999 and 1998.........................................F-19
Consolidated Statements of Cash Flows for Years
Ended December 31, 1999 and 1998..........................................................F-20
Notes to Consolidated Financial Statements for
Years Ended December 31, 1999 and 1998....................................................F-21
</TABLE>
17
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
Brooke Corporation:
We have reviewed the accompanying consolidated balance sheets of
BROOKE CORPORATION
as of June 30, 2000 and 1999, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the six month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
Summers, Spencer & Cavanaugh, CPAs, Chartered
September 27, 2000
F-1
<PAGE>
BROOKE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,634,919 $ 1,165,645
Accounts and notes receivable, net 2,667,709 1,987,830
Note receivable, parent company 131,364 165,582
Other receivables 180,451 99,727
Securities 1,198 1,198
Prepaid expenses 112,480 63,055
------------ ------------
TOTAL CURRENT ASSETS 4,728,121 3,483,037
------------ ------------
INVESTMENT IN AGENCIES 316,520 316,520
------------ ------------
PROPERTY AND EQUIPMENT
Cost 2,185,979 1,637,056
Less: Accumulated depreciation (1,419,837) (928,986)
------------ ------------
NET PROPERTY AND EQUIPMENT 766,142 708,070
------------ ------------
OTHER ASSETS
Excess of cost over fair value of net assets 1,776,328 644,828
Less: Accumulated amortization (110,146) (67,154)
Prepaid commission guarantee 88,002 127,868
Covenants not to compete 24,504 43,461
Goodwill 10,650 10,734
Prepaid finders fee 61,885 --
Deferred tax asset 408,456 298,605
------------ ------------
NET OTHER ASSETS 2,259,679 1,058,342
------------ ------------
TOTAL ASSETS $ 8,070,462 $ 5,565,969
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 243,625 $ 153,591
Premiums payable to insurance companies 1,944,412 824,171
Current maturities of long-term debt 1,063,536 421,449
------------ ------------
TOTAL CURRENT LIABILITIES 3,251,573 1,399,211
LONG-TERM DEBT 4,534,015 3,435,797
------------ ------------
TOTAL LIABILITIES 7,785,588 4,835,008
------------ ------------
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 (1,501,946) (1,055,859)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 284,874 730,961
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,070,462 $ 5,565,969
============ ============
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.
F-2
<PAGE>
BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
OPERATING INCOME
Insurance commissions $ 5,748,814 $ 4,365,463
Interest income 612,349 372,492
Less: Participating interest expense (575,597) (293,344)
Gain (loss) on sale of inventory (58,500) 237,060
------------ ------------
TOTAL OPERATING INCOME 5,727,066 4,681,671
------------ ------------
OPERATING EXPENSES
Commissions expense 4,050,334 2,894,912
Payroll expense 1,041,133 931,451
Depreciation and amortization 194,715 149,900
Other operating expenses 641,986 428,568
------------ ------------
TOTAL OPERATING EXPENSES 5,928,168 4,404,831
------------ ------------
INCOME (LOSS) FROM OPERATIONS (201,102) 276,840
------------ ------------
OTHER EXPENSES
Interest expense 189,159 159,514
------------ ------------
TOTAL OTHER EXPENSES 189,159 159,514
------------ ------------
NET INCOME (LOSS) BEFORE INCOME TAXES (390,261) 117,326
Income tax expense (benefit) (112,690) 29,007
------------ ------------
NET INCOME (LOSS) $ (277,571) $ 88,319
============ ============
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.
F-3
<PAGE>
BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 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 -- -- -- -- (84,499) (84,499)
Net income -- -- -- -- 88,319 88,319
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, JUNE 30, 1999 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $ (1,055,859) $ 730,961
============ ============ ============ ============ ============ ============
BALANCES, DECEMBER 31, 1999 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $ (1,138,557) $ 648,263
Dividends paid -- -- -- -- (85,818) (85,818)
Net loss -- -- -- -- (277,571) (277,571)
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, JUNE 30, 2000 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $ (1,501,946) $ 284,874
============ ============ ============ ============ ============ ============
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.
F-4
<PAGE>
BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
NET INCOME (LOSS) $ (277,571) $ 88,319
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Depreciation 140,000 58,619
Amortization 54,715 26,297
(Gain) loss on sale of inventory 58,500 (237,060)
Deferred income tax expense (benefit) (112,690) 29,007
(INCREASE) DECREASE IN ASSETS:
Accounts and notes receivables, net (346,911) 386,704
Prepaid expenses and other assets (21,984) 9,468
INCREASE (DECREASE) IN LIABILITIES:
Accounts and expenses payable (398,291) (467,533)
Other liabilities 1,294,367 (1,570,993)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 390,135 (1,677,172)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
Cash payments for property and equipment (323,031) (122,764)
Purchase of insurance agency (412,885) --
Sale of insurance agency inventory -- 1,444,634
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (735,916) 1,321,870
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------
Advances of long-term debt 1,386,367 61,935
Cash proceeds from bond isssuance -- 150,000
Long-term line of credit advance 660,000 660,000
Net short-term borrowing 448,058 (28,211)
Payments on long-term debt (2,416,270) (605,510)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 78,155 238,214
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (267,626) (117,088)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,902,545 1,282,733
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,634,919 $ 1,165,645
============ ============
SUPPLEMENTAL DISCLOSURES:
-------------------------
Cash paid for interest $ 723,890 $ 327,157
============ ============
Cash paid for income tax $ 0 $ 0
============ ============
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.
F-5
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 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.
F-6
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 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 $21,496 and $21,496 for the six months ended
June 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.
F-7
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
3. NOTES RECEIVABLE
At June 30, 2000 and 1999 notes receivables consist of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Agency loans $ 16,405,426 $ 6,052,127
Less: Agency loan participation (15,999,478) (5,897,928)
Equipment loans 14,556 18,142
Less: Equipment loan participation (10,556) (15,142)
Consumer loans 167,049 346,374
Less: Consumer loan participation (167,049) (346,374)
------------ ------------
Total notes receivable, net 409,948 157,199
Customer and profit sharing receivable 2,257,761 1,830,631
------------ ------------
Total accounts and notes receivable, net $ 2,667,709 $ 1,987,830
============ ============
</TABLE>
Of the agency loans at June 30, 2000 and 1999, $537,127 and $454,806,
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 June 30, 2000 and 1999.
4. PROPERTY AND EQUIPMENT
A summary of property and equipment and depreciation is as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Furniture and fixtures $ 288,081 $ 176,239
Office and computer equipment 1,408,954 1,080,493
Automobiles 488,944 380,324
------------ ------------
2,185,979 1,637,056
Less: Accumulated depreciation 1,419,837 928,986
------------ ------------
Property and equipment, net $ 766,142 $ 708,070
============ ============
Depreciation expense $ 140,000 $ 117,238
============ ============
</TABLE>
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SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-8
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 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 July 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 904,281 990,358
State Bank of Colwich, Colwich, KS, due January 2003. Interest
rate is 10.75%, payable $1,435 monthly. Collateralized by
insurance agency assets 47,022 59,142
Chrysler Financial, Overland Park, KS, due February 2000 to
November 2002. Interest rates are 7.80% to 8.50%, payable
monthly. Collateralized by automobiles 155,780 108,181
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 33,265 51,808
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. 99,879 109,953
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. 20,016 33,360
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 673,432 --
------------ ------------
Total bank loans and notes payable 3,917,461 2,457,246
</TABLE>
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SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-9
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
5. BANK LOANS, NOTES PAYABLE, AND OTHER LONG-TERM OBLIGATIONS (CONT.)
<TABLE>
<S> <C> <C>
Bonds payable (See Note 6) $ 1,680,000 $ 1,400,000
------------ ------------
Total bank loans, notes payable and other long-term obligations 5,597,461 3,857,246
Less: Current maturities 1,063,446 421,449
------------ ------------
Total long-term debt $ 4,534,015 $ 3,435,797
============ ============
</TABLE>
Interest incurred on bank loans, notes payable and other long-term obligations
for the six months ended June 30, 2000 and 1999 is $159,514 and $189,159,
respectively.
Bank loans, notes payable, and other long-term obligations mature as follows:
<TABLE>
<CAPTION>
BANK LOANS
& NOTES BONDS
PAYABLE PAYABLE TOTAL
<S> <C> <C> <C>
2001 $868,923 $165,000 $1,033,923
2002 1,150,438 1,270,000 2,420,438
2003 461,460 245,000 706,460
2004 461,964 - 461,964
2005 493,756 - 493,756
Thereafter 480,920 - 480,920
------------ ------------ ------------
$3,917,461 $1,680,000 $5,597,461
============ ============ ============
</TABLE>
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SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-10
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 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 June 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 520,000 340,000
----------- ------------
Total $1,680,000 $1,400,000
</TABLE>
Interest payable is $84,336 and $63,638 at June 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:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Office and computer equipment $ 415,843 $ 415,843
Less: Accumulated amortization 361,429 303,067
------------ ------------
$ 54,414 $ 112,776
============ ============
</TABLE>
Capital lease amortization is included in depreciation expense
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-11
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
8. INCOME TAXES
The elements of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current $ 0 $ 0
Deferred (112,690) 29,007
------------ ------------
$ (112,690) $ 29,007
============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
U.S. federal statutory tax rate 30% 30%
State statutory tax rate 4% 4%
Effect of the utilization of net operating loss carryforwards (4%) (6%)
Miscellaneous (1%) (3%)
---- ----
Effective tax rate 29% 25%
==== ====
</TABLE>
Reconciliation of deferred tax asset:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Beginning balance, January 1 $295,766 $327,612
Deferred income tax (expense) benefit 112,690 (29,007)
---------- ---------
Balances balance, June 30 $408,456 $298,605
========== =========
</TABLE>
Expiration dates of net operating loss carryforwards:
<TABLE>
<CAPTION>
<S> <C>
2010 $811,081
2020 390,261
-------------
Total $1,201,342
=============
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-12
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 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 June 30, 2000 and 1999.
10. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at several banks. On June 30, 2000 and 1999
the Company had account balances of $1,147,458 and $857,030, 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
June 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
June 30:
<TABLE>
<CAPTION>
INSURANCE FINANCIAL ELIMINATION OF
AGENCY SERVICES INTERSEGMENT CONSOLIDATED
BUSINESS BUSINESS ACTIVITY TOTALS
-------- -------- -------- ------
<S> <C> <C> <C> <C>
1999
Insurance commissions $4,365,463 $ - $ - $4,365,463
Interest income - 410,028 (37,536) 372,492
Interest expense 159,514 293,344 - 452,858
Commissions expense 2,894,912 - - 2,894,912
Depreciation and amortization 149,900 - - 149,900
Segment assets 4,412,233 1,489,743 (336,007) 5,565,969
Expenditures for segment assets 144,426 - - 144,426
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-13
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
11. SEGMENT AND RELATED INFORMATION - CONT.
<TABLE>
<CAPTION>
INSURANCE FINANCIAL ELIMINATION OF
AGENCY SERVICES INTERSEGMENT CONSOLIDATED
BUSINESS BUSINESS ACTIVITY TOTALS
-------- -------- -------- ------
<S> <C> <C> <C> <C>
2000
Insurance commissions $5,748,814 $ - $ - $5,748,814
Interest income - 679,932 (67,583) 612,349
Interest expense 189,159 575,597 - 764,756
Commissions expense 4,050,334 - - 4,050,334
Depreciation and amortization 194,715 - - 194,715
Segment assets 7,268,648 1,282,276 (517,849) 8,033,075
Expenditures for segment assets 693,349 - - 693,349
</TABLE>
<TABLE>
<CAPTION>
PROFIT (LOSS) 2000 1999
---- ----
<S> <C> <C>
Total segment profit $ 351,358 $ 1,240,285
Unallocated amounts:
Gain (loss) on sale of investments (58,500) 237,060
Other corporate expenses 1,683,119 1,360,019
------------ ------------
Income (loss) before income taxes $ (390,261) $ 117,326
============ ============
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-14
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 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.
-------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Brooke Corporation:
We have audited the accompanying consolidated balance sheets of
BROOKE CORPORATION
As of December 31, 1999 and 1998, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the years then ended.
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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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 financial statements referred to above present fairly,
in all material respects, the financial position of BROOKE CORPORATION as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Summers, Spencer & Cavanaugh, CPAs, Chartered
March 2, 2000
F-16
<PAGE>
BROOKE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,902,545 $ 1,282,733
Accounts and notes receivables 12,615,302 7,538,244
Less: Notes receivables sold (10,346,959) (5,130,265)
Note receivable, parent company 236,189 223,582
Other receivables 128,081 8,282
Securities 1,198 1,198
Prepaid expenses 90,496 72,523
Deferred tax asset 295,766 327,612
------------ ------------
TOTAL CURRENT ASSETS 4,922,618 4,323,909
------------ ------------
INVESTMENT IN AGENCIES 316,520 831,520
------------ ------------
PROPERTY AND EQUIPMENT
Cost 1,862,948 1,492,630
Less: Accumulated depreciation (1,071,767) (811,748)
------------ ------------
NET PROPERTY AND EQUIPMENT 791,181 680,882
------------ ------------
OTHER ASSETS
Excess of cost over fair value of net assets 644,828 1,867,240
Less: Accumulated amortization (88,650) (92,745)
Prepaid commission guarantee 107,936 112,800
Covenants not to compete 34,312 52,917
Goodwill 8,844 12,624
------------ ------------
NET OTHER ASSETS 707,270 1,952,836
------------ ------------
TOTAL ASSETS $ 6,737,589 $ 7,789,147
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 641,916 $ 621,124
Premiums payable to insurance companies 650,045 2,395,164
Current maturities of long-term debt 464,722 615,478
------------ ------------
TOTAL CURRENT LIABILITIES 1,756,683 3,631,766
------------ ------------
LONG-TERM DEBT 4,332,643 3,430,240
------------ ------------
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 (1,138,557) (1,059,679)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 648,263 727,141
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,737,589 $ 7,789,147
============ ============
</TABLE>
-------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-17
<PAGE>
BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
OPERATING INCOME
Insurance commissions $9,056,721 $7,437,626
Interest income 915,400 441,831
Less: Participating interest expense (796,495) (315,087)
Gain on sale of inventory 268,759 271,587
------------- -------------
TOTAL OPERATING INCOME 9,444,385 7,835,957
------------- -------------
OPERATING EXPENSES
Commissions expense 5,824,660 4,130,381
Payroll expense 1,836,014 1,480,109
Depreciation and amortization 365,260 370,070
Other operating expenses 973,271 1,076,473
------------- -------------
TOTAL OPERATING EXPENSES 8,999,205 7,057,033
------------- -------------
OTHER EXPENSES
Interest expense (320,576) (344,878)
------------- -------------
TOTAL OTHER EXPENSES (320,576) (344,878)
------------- -------------
NET INCOME BEFORE INCOME TAXES 124,604 434,046
Income tax expense 31,846 147,576
------------- -------------
NET INCOME $92,758 $286,470
============= =============
</TABLE>
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-18
<PAGE>
BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<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, 1997 $704,018 $58,600 $(39,500) $1,063,702 $(1,174,513) $612,307
(As Restated)
Dividends paid (171,636) (171,636)
Net income 286,470 286,470
------------- ------------- ------------- ------------- -------------- -------------
BALANCES, DECEMBER 31, 1998 704,018 58,600 (39,500) 1,063,702 (1,059,679) 727,141
(As Restated)
Dividends paid (171,636) (171,636)
Net income 92,758 92,758
------------- ------------- ------------- ------------- -------------- -------------
BALANCES, DECEMBER 31, 1999 $704,018 $58,600 $(39,500) $1,063,702 $(1,138,557) $648,263
============= ============= ============= ============= ============== =============
</TABLE>
-------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-19
<PAGE>
BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 92,758 $ 286,470
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FLOWS FROM OPERATING ACTIVITIES:
Depreciation 260,019 228,044
Amortization 105,241 142,026
(Gain) on sale of inventory (268,759) (271,587)
Deferred income tax expense 31,846 147,576
(INCREASE) DECREASE IN ASSETS:
Accounts and notes receivables, net 7,230 (1,043,093)
Prepaid expenses and other assets (17,973) (50,983)
INCREASE (DECREASE) IN LIABILITIES:
Accounts and expenses payable 20,792 522,066
Other liabilities (1,745,119) 1,878,921
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,513,965) 1,839,440
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (370,318) (153,873)
Purchase of insurance agency inventory (250,000) (1,538,691)
Sale of insurance agency inventory 1,987,412 0
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,367,094 (1,692,564)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances of long-term debt 920,464 792,000
Dividends paid (171,636) (171,636)
Cash proceeds from bond issuance 580,000 350,000
Long-term line of credit advance 660,000 660,000
Net short-term borrowing (150,756) (128,559)
Payments on long-term debt (1,071,389) (571,249)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 766,683 930,556
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 619,812 1,077,432
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,282,733 205,301
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR 1,902,545 1,282,733
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1,029,061 $ 659,965
============ ============
Cash paid for income tax $ 0 $ 0
============ ============
</TABLE>
-------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-20
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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 principal offices are located in Phillipsburg,
Kansas. Brooke Holdings, Inc. owns 78.2% 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.
(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.
F-21
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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 insured are reported as assets of
the Company and as corresponding liabilities, net of commissions, to the
insurance carriers.
(f) PROPERTY, PLANT 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 is unamortized costs of purchased subsidiaries in
excess of the fair value of underlying net tangible assets acquired. The
balance of $644,828 and $1,867,240 at December 31, 1999 and 1998,
respectively, is being amortized over a 15-year period using the
straight-line method. Amortization expense was $42,992 and $89,640 for the
years ended December 31, 1999 and 1998, 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.
F-22
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
3. NOTES RECEIVABLE
At December 31, 1999 and 1998 notes receivables consist of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Agency loans $ 10,637,185 $ 5,170,625
Less: Agency loan participation (10,312,874) (4,962,900)
Equipment loans 16,791 176,242
Less: Equipment loan participation (12,791) (162,917)
Consumer loans 21,295 4,448
Less: Consumer loan participation (21,295) (4,448)
------------ ------------
Total notes receivable, net 328,311 221,050
------------ ------------
Customer and profit sharing receivable 1,940,032 2,186,929
------------ ------------
Total accounts and notes receivable, net $ 2,268,343 $ 2,407,979
============ ============
</TABLE>
At December 31, 1999 and 1998 there is $565,766 and $335,019, respectively, of
agency loans 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 December 31, 1999 and 1998.
4. PROPERTY AND EQUIPMENT
A summary of property and equipment and depreciation is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Furniture and fixtures $ 206,147 $ 176,239
Office and computer equipment 1,167,857 998,002
Automobiles 488,944 318,389
------------ ------------
1,862,948 1,492,630
Less: Accumulated depreciation 1,071,767 811,748
------------ ------------
Property and equipment, net $ 791,181 $ 680,882
============ ============
Depreciation expense $ 260,019 $ 228,044
</TABLE>
-------------------------------------------------------------------------------
BROOKE CORPORATION
F-23
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
5. BANK LOANS, NOTES PAYABLE, AND OTHER LONG - TERM OBLIGATIONS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
First National Bank & Trust, Phillipsburg, KS line of credit,
$660,000 available, $0 not utilized. Due January 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 941,760 1,030,137
Mid America Bank, Esbon, KS, due December 2007. Interest rate is
9.50%, payable $290 monthly. Collateralized by an automobile 0 20,903
State Bank of Colwich, Colwich, KS, due January 2003. Interest
rate is 10.75%, payable $1,435 monthly. Collateralized by
insurance agency assets 53,226 64,786
Chrysler Financial, Overland Park, KS, due February 2000 to
November 2002. Interest rates are 7.80%to 8.50%, payable
monthly. Collateralized by automobiles 169,892 75,654
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 42,882 60,121
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 Investment, Inc. 105,041 114,626
James M. Flynn, due June 1999. Interest rate is 0%, payable
$4,700 monthly. Collateralized by certain agency assets acquired
by The American Agency, Inc. 0 23,500
Sampson Insurance Agency, Inc., Stanley, KS, due April 1999
Interest rate is 6.00%. Entire balance due at maturity
Collateralized by certain agency assets acquired by The American
Agency, Inc. 0 34,750
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. 26,688 40,032
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 444,444 666,668
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 673,432 0
Howard J. Handler, Leawood, KS, due February 1999. Interest rate
is 7.75%. Collateralized by 500 shares of American Agency, Inc.
common stock 0 125,000
------------ ------------
Total bank loans and notes payable 3,117,365 2,916,177
</TABLE>
-------------------------------------------------------------------------------
BROOKE CORPORATION
F-24
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
5. BANK LOANS, NOTES PAYABLE, AND OTHER LONG-TERM OBLIGATIONS (CONT.)
<TABLE>
<S> <C> <C>
Bonds payable (See Note 6) $ 1,680,000 $ 1,100,000
Obligations under capital leases (See Note 7) 0 29,541
------------ ------------
Total bank loans, notes payable and other long - term obligations 4,797,365 4,045,718
Less: Current maturities 464,722 615,478
------------ ------------
Total long-term debt $ 4,332,643 $ 3,430,240
============ ============
</TABLE>
Interest incurred on bank loans, notes payable and other long-term obligations
for the years ended December 31, 1999 and 1998 is $1,117,071 and $659,965,
respectively.
Bank loans, notes payable, and other long-term obligations mature as follows:
<TABLE>
<CAPTION>
BANK LOANS
& NOTES BONDS
PAYABLE PAYABLE TOTAL
<S> <C> <C> <C>
2000 $431,027 $0 $431,027
2001 1,208,881 760,000 1,968,881
2002 280,168 675,000 955,168
2003 266,113 245,000 511,113
2004 287,578 0 287,578
There After 643,598 0 643,598
------------ ------------ ------------
$3,117,365 $1,680,000 $4,797,365
============ ============ ============
</TABLE>
-------------------------------------------------------------------------------
BROOKE CORPORATION
F-25
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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 these bonds 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 the Brooke Credit Corporation.
At December 31, 1999 and 1998 the bonds payable consists of:
<TABLE>
<CAPTION>
1999 1998
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% January 1, 2001 595,000 595,000
1998E 10.125% January 1, 2002 520,000 40,000
----------- ------------
Total $1,680,000 $1,100,000
=========== ============
</TABLE>
Interest payable is $80,187 and $54,463 at December 31, 1999 and 1998,
respectively.
The aggregate annual maturities of long - term bonds payable at December 31,
1999 and 1998 is as follows:
<TABLE>
<S> <C>
2001 $760,000
2002 675,000
2003 245,000
-----------
Total $1,680,000
===========
</TABLE>
-------------------------------------------------------------------------------
BROOKE CORPORATION
F-26
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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. Property and equipment includes the following
amounts reflecting the capitalization of these assets:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Office and computer equipment $ 415,843 $ 415,843
Less: Accumulated depreciation 336,253 269,881
------------ ------------
$ 79,590 $ 145,962
============ ============
</TABLE>
Capital lease depreciation is included in depreciation expense. The December 31,
1998 balance of future minimum lease payments obligation of $29,541 was paid in
1999.
-------------------------------------------------------------------------------
BROOKE CORPORATION
F-27
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
8. INCOME TAXES
The elements of income tax expense are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current $ 0 $ 0
Deferred 31,846 147,576
------------ ------------
$ 31,846 $ 147,576
============ ============
</TABLE>
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 carryfwards 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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
U.S. federal tax rate as applied to pretax income 38% 38%
Effect of the utilization of net operating loss carryforwards (12%) (4%)
------- -------
Effective tax rate 26% 34%
======= =======
</TABLE>
Reconciliation of deferred tax asset:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning balance, January 1 $327,612 $475,188
Deferred income tax expense 31,846 147,576
---------- ---------
Balances balance, December 31 $295,766 $327,612
========== =========
</TABLE>
-------------------------------------------------------------------------------
BROOKE CORPORATION
F-28
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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. Employer contributions charged to expense for 1999 and 1998
were $0 and $1,350, respectively.
10. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at several banks. On December 31, 1999 and
1998 the Company had account balances of $1,231,830 and $1,258,243,
respectively, with one bank which exceeds the $100,000 insurance limit of the
Federal Deposit Insurance Corporation.
-------------------------------------------------------------------------------
BROOKE CORPORATION
F-29
<PAGE>
PART III
ITEM 1 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
2.01 Articles of Incorporation of Brooke Financial Services, Inc.,
filed with the Secretary of State for the State of Kansas on
January 22, 1986
2.02 Certificate of Amendment to the Articles of Incorporation of
Brooke Financial Service, Inc., filed with the Secretary of State
for the State of Kansas on June 1, 1987
2.03 Certificate of Amendment to the Articles of Incorporation of the
Company, filed with the Secretary of State for the State of
Kansas on May 31, 1989
2.04 Certificate of Amendment to the Articles of Incorporation of the
Company, filed with the Secretary of State for the State of
Kansas on November 9, 1992
2.05 Certificate of Amendment to the Articles of Incorporation of the
Company, filed with the Secretary of State for the State of
Kansas on February 23, 1993
2.06 Certificate of Amendment to the Articles of Incorporation of the
Company, filed with the Secretary of State for the State of
Kansas on February 7, 1994
2.07 Certificate of Amendment to the Articles of Incorporation of the
Company, filed with the Secretary of State for the State of
Kansas on February 21, 1995
2.08 By-laws of Brooke Financial Services, Inc.
2.09 Minutes of special meeting of stockholders of Brooke Financial
Services, Inc., dated May 10, 1986, amending the by-laws
2.10 Minutes of special meeting of stockholders of Brooke Financial
Services, Inc., dated January 31, 1987, amending the by-laws
2.11 Minutes of special meeting of stockholders of the Company, dated
January 26, 1991, amending the by-laws
2.12 Certificate of Amendment to the By-laws of the Company, dated
July 3, 2000
3.01 Indenture dated as of July 31, 1997 (the "Indenture"), by and
between Brooke Credit Corporation and The First National Bank and
Trust Company, relating to the issuance of the Brooke Credit
Corporation, Series 1997A, Series 1997B and Series 1997C Bonds
3.02 Addendum to the Indenture dated as of November 13, 1997, relating
to the issuance of the Brooke Credit Corporation, Series 1997D
Bonds
3.03 Addendum to the Indenture dated as of August 28, 1998, relating
to the issuance of the Brooke Credit Corporation, Series 1997E
Bonds
18
<PAGE>
3.04 Guaranty dated as of December 18, 1997, executed by Brooke
Corporation guaranteeing payment of principal and interest on the
Brooke Credit Corporation, Series 1997A, Series 1997B, Series
1997C and Series 1997D Bonds
6.01 Representative Agency Agreement between the Company and Safeco
Insurance Company
6.02 Representative Agency Agreement between the Company and Allied
Group
6.03 Representative Agency Agreement between the Company and EMC
Insurance Companies
6.04 Representative Agency Agreement between the Company and Columbia
Insurance Group
6.05 Representative Agency Agreement between the Company and Allstate
Insurance Company
6.06 Agreement for Advancement of Loan dated as of September 12, 1997,
by and between GI Agency, Inc. and Brooke Credit Corporation
6.07 Agreement for Advancement of Loan dated as of December 1, 1997,
by and between GI Agency, Inc. and Brooke Credit Corporation
6.08 Agreement for Advancement of Loan dated as of December 31, 1997,
by and between GI Agency, Inc. and Brooke Credit Corporation
6.09 Agreement for Advancement of Loan dated as of September 1, 1998,
by and between GI Agency, Inc. and Brooke Credit Corporation
6.10 Guaranty dated as of January 2, 1998, of Robert Orr, Leland Orr
and Michael Hess guaranteeing payment of amounts due Brooke
Credit Corporation by GI Agency, Inc.
6.11 Hypothecation Agreement dated as of January 2, 1998, executed by
Robert Orr pledged certain assets as collateral for amount due
Brooke Credit Corporation by GI Agency, Inc.
6.12 Franchise Agreement dated as of September 4, 1997, by and the
Company and GI Agency, Inc.
6.13 Assignment of Contract Agreement dated as of June 30, 1999, by
and between GI Agency, Inc., and the Company
6.14 Assignment of Contract Agreement dated as of July 15, 1999, by
and between GI Agency, Inc., and the Company
6.15 Assignment of Contract Agreement dated as of July 15, 1999, by
and between GI Agency, Inc., and the Company
6.16 Assignment of Contract Agreement dated as of September 23, 1999,
by and between GI Agency, Inc., and the Company
6.17 Assignment of Contract Agreement dated as of October 1, 1999, by
and between GI Agency, Inc., and the Company
6.18 Purchase Agreement dated as of June 13, 2000, by and between
Gerald Lanio and William
19
<PAGE>
Tyer and the Company
6.19 Agreement for Sale of Insurance Agency Assets dated as of March
31, 1999, by and among Royal Specialty Underwriting, Inc., The
American Agency, Inc., and the Company
6.20 Personal Guaranties dated as of May 15, 2000, of Robert Orr,
Leland Orr and Michael Hess guaranteeing payment of amounts due
Brooke Credit Corporation by Austin Agency
6.21 Form of Assignment of Stock dated as of May 15, 2000, by and
among Bob Austin, Sr., as assignor and Michael Hess, Robert Orr,
Leland Orr and Shawn Lowry, as assignee
6.22 Life & Health Manager's Employment Agreement dated as of April
16, 1999, by and between Brooke Corporation and Anita Larson
6.23 Lease Agreement relating to Phillipsburg, Kansas facility
6.24 Lease Agreement relating to Overland Park, Kansas facility
6.25 Promissory Note between Brooke Credit Corporation and Anita
Larson
10.1 Consent of Accountants
20
<PAGE>
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Brooke Corporation
Date OCT. 17, 2000 By /s/ Robert D. Orr
-------------- -----------------------------------------------
Robert D. Orr, Chief Executive Officer
21
