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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
To
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..........................................10
ITEM 3 DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES..........11
ITEM 4 REMUNERATION OF DIRECTORS AND OFFICERS...........................12
ITEM 5 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITYHOLDERS VOTING SECURITIES AND PRINCIPAL HOLDERS:.................13
ITEM 6 INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS........13
ITEM 7 DESCRIPTION OF SECURITIES........................................15
PART II...........................................................................15
ITEM 1 MARKET PRICE OF AND DIVIDENDS ON THE COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS................................................15
ITEM 2 LEGAL PROCEEDINGS.................................................16
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.....................16
ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES...........................16
ITEM 5 INDEMNIFICATION OF DIRECTORS AND OFFICERS.........................16
PART F/S..........................................................................18
PART III..........................................................................19
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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. The Company is filing this Form 10-SB registration statement on a
voluntary basis.
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,
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distribute financial services less expensively because they are more motivated
and willing to defer some 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. The Company is controlled by Brooke
Holdings, Inc., which owned 73.66% of the outstanding common stock of the
Company as of September 30, 2000.
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. Since
1999 the Company has maintained a web site at www.brookecorp.com, which provides
general information about the Company and hyperlinks to other related web sites.
In addition, the Company maintains a web site at www.brookeprocessing.com, which
the Company utilizes to provide document and commission information to its
agents. The contents of such web sites (including any web site connected by
hyperlink) are not incorporated herein by reference.
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.
In 2000, the Company purchased Interstate Insurance Group, LTD., 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.
Also in 2000, pursuant to this registration statement, the Company
elected to register its common stock under Section 12(g) of the Securities
Exchange Act of 1934. The Company believes that such registration will, among
other things, provide a familiar and consistent format for disclosure to the
Company's existing and future shareholders; provide a familiar and consistent
format for disclosure to the Company's existing and future holders of bonds
issued by the Company's finance company subsidiary; and promote shareholder
liquidity through facilitating a possible future listing of its securities on a
trading or quotation system requiring reporting company status.
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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 at
www.brookeprocessing.com (the contents of which are not incorporated by
reference). The Master Agent program also 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
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any duly licensed agent, it is typical for specialty programs to be "cross sold"
to agents that purchase the Master Agent services.
A typical transaction occurs when an insurance policy is sold by one of
the Company's agents and the premium is paid by the customer directly to an
insurance company. On a periodic (usually monthly) basis, insurance companies
pay commissions to the Company for the sale of insurance policies which the
Company records as commission income. The Company then pays a share of sales
commissions to its agents which is recorded by the Company as commission
expense.
The Company is solely responsible for payment to insurance companies of
premiums collected from customers for the sale of insurance policies even if its
agents mishandle premium collection. Accordingly, the Company is the recipient
and owner of all commissions paid by insurance companies resulting from the sale
of insurance policies by the Company's agents. The Company's agents have an
exclusive contractual relationship with the Company and generally do not have
any contractual relationship with the insurance companies. As such, payment of a
share of sales commissions to the agents is an obligation of the Company and is
not an obligation of any insurance company. Furthermore, for income tax
purposes, the Company is required to record all commissions received from
insurance companies as income and correspondingly reports to the appropriate tax
authorities all commissions expense paid to agents.
Commission expenses as a percentage of commission income has increased
from 55% in 1998 to 64% in 1999 to 70% in 2000, primarily as a result of the
following. First, the Company has gradually increased the share of sales
commissions paid to agents during the last several years. It is the Company's
plan to pay an increasing share of sales commissions to its agents as the
Company grows and marginal expenses decrease from economies of scale. Secondly,
the Company's commissions from the sale of policies by The American Agency, Inc.
have decreased as a result of the discontinuance of one of The American Agency
Inc's specialty insurance programs. The ratio of commission expense to
commission income for insurance programs or "targeted market" insurance policies
is generally less than from the sale of other insurance policies.
The typical transaction outlined above provides for the billing and
collection of premiums directly by insurance companies because the Company's
agents are required to use direct insurance company billing when available.
However, in those instances where direct company billing is not available, the
Company is responsible to the insurance company for billing and collecting the
full premium from customers. The Company then remits to insurance companies the
amount of the customer's premiums, net of sales commissions, when the Company is
billed by insurance companies. As a result, the Company records an account
receivable for the amount owed by the customer to the Company and simultaneously
records a payable for the amount owed by the Company to the related insurance
company.
Customer receivables are included in the balance sheet category for
accounts and notes receivable. This category also includes receivables from
insurance companies for commissions on direct company billed policies, profit
sharing commissions and certain notes receivables held by the Company's finance
company subsidiary. Customer receivables result when the Company assumes
responsibility for the billing and collection of premiums that is typically the
responsibility of the insurance companies. To accommodate customers when direct
company billing is not available, the Company sometimes permits flexible premium
payments by not requiring full premium payment prior to policy delivery. This
resembles the premium payment flexibility offered by insurance companies when
premiums are direct company billed. Consequences to the Company of providing
this flexibility include collection risk and reduced cash balances from payment
of premiums to insurance companies prior to premium collection from customers.
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CUSTOMERS. The Company's customers are independent insurance agents and
bank insurance agents. The Company currently sells its products and services
through over 100 agencies that employ or retain over 350 agents in the States of
Colorado, Florida, Kansas, Louisiana, Missouri, Nebraska, Nevada, 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 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
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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 opened an additional regional office in Nashville,
Tennessee 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 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 141
employees of which a significant number are part time and temporary employees
employed by the processing center. On a full-time equivalency basis (those
employees who regularly work 37.5 hours or more per week), 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
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Company and Allstate Insurance Company. The Company has entered into
agency agreements with each of the suppliers listed above, examples of which are
attached hereto as Exhibits 6.01 to 6.05.
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 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 marketing purposes, the name of this subsidiary was recently
changed from Heritage Marketing Services, Inc.
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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 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
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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 Company's contracts with these suppliers can
be terminated by the supplier without cause upon advance written notice. 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
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 three 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 three additional regional offices are located in Dallas, Texas,
Westminster, Colorado and Nashville, Tennessee, which are subject to lease
payments of $2,961, $675 and $1,645, respectively, per month. The lease on the
Dallas facility expires on April 30, 2003, and the leases on the Westminster and
Nashville facilities expire on April 30, 2001. All of the above described leases
are with lessors unaffiliated with the Company.
10
<PAGE>
Management believes that the Company's facilities will be adequate for
current and proposed operations. In management's opinion, adequate insurance has
been purchased for each of 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:
NAME AGE POSITION
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 Treasurer, Chief Financial Officer,
Assistant Secretary and Director
Anita Larson 39 Vice President, Secretary and General
Counsel
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 without other fixed
remuneration. Officers are appointed annually 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?" which was written and published in 2000. From
1996 through the present, Mr. Orr's business activities have been focused on
performing the functions of Chairman of the Board and Chief Executive Officer of
the Company.
Leland G. Orr, 38, Director, Assistant 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. From 1995 through the
present, Mr. Orr's business activities have included performing the functions
of Director, Secretary or Assisitant Secretary, Treasurer and Chief Financial
Officer of the Company. In addition, during this time period, Mr. Orr has
managed the Company's processing center in Phillipsburg, Kansas.
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
11
<PAGE>
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. Since his
appointment as President and National Sales Manager in 1996, Mr. Hess' primary
business activities have been the strategic development of the Company's
relationships with suppliers and growth of the Company's Master Agent program.
In 2000, Mr. Hess ceased performing the functions of National Sales Manager in
order to focus his activities as President of the Company on developing
relationships with national suppliers and the Company's specialty programs.
Anita Larson, 39, Vice President, General Counsel and Secretary,
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.
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 COMPENSATION LONG-TERM ALL OTHER COMPENSATION AGGREGATE
POSITION 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. Ms.
Larson's employment agreement contains a covenant not to compete. Although the
Company believes this covenant to by fully enforceable in accordance with its
terms, a court of competent jurisdiction may determine not to enforce the
covenant or only partially enforce the covenant.
12
<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(2)
627 Louisiana Street
Lawrence, Kansas 66044 Common Stock 12,000 1.73%
Leland G. Orr(2)
501 Berglund Drive
Phillipsburg, Kansas 67661 Common Stock 3,400 0.49
Michael Hess(2)
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), (3)
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) The person or entity specified above has sole voting power and sole
investment power of their respective shares of the Company's common stock.
(3) 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
13
<PAGE>
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 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
between 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. Brooke Investments, Inc., a wholly-owned
subsidiary of the Company, leases the Grand Island property from an unaffiliated
lessor. The Company reimburses Brooke Investments, Inc. for payments made in
connection with the lease and GI Agency, Inc. reimburses the Company for its use
of the facilities. 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.
14
<PAGE>
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.
The Company's employee handbook contains conflicts of interest guidelines
which are applicable to Company management and employees. The purpose of the
guidelines is to prevent an employee in a position to influence a decision
regarding the Company to use such influence for personal gain. Pursuant to the
guidelines, an employee in such a position is required to notify an officer of
the Company of the existence of such a situation.
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
$0.24 in each of its last two fiscal years. There can be no assurances given
as to the payment of any
15
<PAGE>
dividends in the future. To the best knowledge of the Company, as of the date
hereof 540,271 shares of the Company's common stock are eligible for transfer
pursuant to Rule 144 promulgated by Securities and Exchange Commission under the
Securities Act of 1933, as amended.
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.
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 Kansas corporation and wholly-owned
subsidiary of the Company, issued a total of $1,680,000 in bonds through both
public and private offerings of five bond series: Bond Series 1997A, 1997B,
1997C, 1997D and 1998E which raised $165,000, $155,000, $245,000, $595,000 and
$520,000, respectively. The bonds issued to the public 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, as the
securities were sold solely to Kansas residents and the issuer was incorporated
in and doing business in the State of Kansas. 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.
In December 2000, Brooke Credit Corporation filed a registration
statement with the Kansas Securities Commission in connection with the offering
of Brooke Credit Corporation bonds, Series 2000F. Brooke Credit Corporation is
publicly offering a maximum of $5,000,000 in bonds solely to Kansas residents.
Pursuant to Section 3(a)(11) of the Securities Act of 1933, as amended, and Rule
147 promulgated by the Securities and Exchange Commission, the offered bonds are
exempt from registration as they will be offered solely to Kansas residents by
an issuer incorporated in and doing business in Kansas. All bonds were issued at
par value.
16
<PAGE>
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.
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.
17
<PAGE>
PART F/S
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Accountants' Reporting relating to
Consolidated Financial Statements for Nine Months
Ended September 30, 2000 and 1999......................................................F-1
Consolidated Balance Sheets for Period
Ended September 30, 2000 and 1999......................................................F-2
Consolidated Statements of Income for Nine Months
Ended September 30, 2000 and 1999......................................................F-3
Consolidated Statements of Changes in Stockholders
Equity for Nine Months Ended September 30, 2000 and 1999...............................F-4
Consolidated Statements of Cash Flows
for Nine Months Ended September 30, 2000 and 1999......................................F-5
Notes to Consolidated Financial Statements for
Nine Months Ended September 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-19
Consolidated Balance Sheets for Years Ended
December 31, 1999 and 1998............................................................F-20
Consolidated Statements of Income for Years
Ended December 31, 1999 and 1998......................................................F-21
Consolidated Statements of Changes in Stockholders'
Equity for Years Ended December 31, 1999 and 1998.....................................F-22
Consolidated Statements of Cash Flows for Years
Ended December 31, 1999 and 1998......................................................F-23
Notes to Consolidated Financial Statements for
Years Ended December 31, 1999 and 1998................................................F-24
</TABLE>
18
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
Brooke Corporation:
We have reviewed the accompanying consolidated balance sheets of
BROOKE CORPORATION
as of September 30, 2000 and 1999, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the nine 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
November 8, 2000
F-1
<PAGE>
BROOKE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,146,217 $ 2,447,431
Accounts and notes receivable, net 3,170,221 1,866,394
Note receivable, parent company 209,816 72,950
Other receivables 320,964 118,183
Securities 1,198 1,198
Prepaid expenses 190,562 39,223
----------- -----------
TOTAL CURRENT ASSETS 5,038,978 4,545,379
----------- -----------
INVESTMENT IN AGENCIES 316,520 316,520
----------- -----------
PROPERTY AND EQUIPMENT
Cost 2,264,952 1,776,253
Less: Accumulated depreciation (1,489,837) (987,605)
----------- -----------
NET PROPERTY AND EQUIPMENT 775,115 788,648
----------- -----------
OTHER ASSETS
Excess of cost over fair value of net assets 1,776,328 644,828
Less: Accumulated amortization (140,894) (77,902)
Prepaid commission guarantee 78,035 117,902
Covenants not to compete 19,600 37,990
Goodwill 6,009 10,802
Prepaid finders fee 14,974 -
Deferred tax asset 348,700 293,859
----------- -----------
NET OTHER ASSETS 2,102,752 1,027,479
----------- -----------
TOTAL ASSETS $ 8,233,365 $ 6,678,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 199,654 $ 788,799
Premiums payable to insurance companies 1,396,085 1,147,747
Current maturities of long-term debt 2,386,184 429,208
----------- -----------
TOTAL CURRENT LIABILITIES 3,981,923 2,365,754
LONG-TERM DEBT 3,893,482 3,616,796
----------- -----------
TOTAL LIABILITIES 7,875,405 5,982,550
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 1,485,000 shares
authorized, 704,018 shares outstanding 704,018 704,018
Preferred stock, $75 par value, 15,000 shares
authorized, 781 shares outstanding 58,600 58,600
Less: Treasury stock, 11,050 shares at cost (39,500) (39,500)
Additional paid-in capital 1,063,702 1,063,702
Retained earnings (1,428,860) (1,091,344)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 357,960 695,476
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,233,365 $ 6,678,026
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.
F-2
<PAGE>
BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
OPERATING INCOME
<S> <C> <C>
Insurance commissions $ 9,551,920 $ 6,566,708
Interest income 1,209,639 593,459
Less: Participating interest expense (1,090,688) (507,074)
Gain (loss) on sale of assets (58,500) 237,060
----------- -----------
TOTAL OPERATING INCOME 9,612,371 6,890,153
----------- -----------
OPERATING EXPENSES
Commissions expense 6,550,720 4,261,010
Payroll expense 1,626,622 1,369,706
Depreciation and amortization 313,642 254,748
Other operating expenses 1,068,839 642,852
----------- -----------
TOTAL OPERATING EXPENSES 9,559,823 6,528,316
----------- -----------
INCOME FROM OPERATIONS 52,548 361,837
----------- -----------
OTHER EXPENSES
Interest expense 267,058 232,341
----------- -----------
TOTAL OTHER EXPENSES 267,058 232,341
----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES (214,510) 129,496
Income tax expense (benefit) (52,934) 33,753
----------- -----------
NET INCOME (LOSS) $ (161,576) $ 95,743
=========== ===========
NET INCOME (LOSS) PER SHARE:
Basic and diluted (0.23) 0.14
</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)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
COMMON PREFERRED TREASURY ADD'L PAID- RETAINED
STOCK STOCK STOCK IN CAPITAL EARNINGS TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1998 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $(1,059,679) $ 727,141
Dividends paid - - - - (127,408) (127,408)
Net income - - - - 95,743 95,743
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, SEPTEMBER 30, 1999 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $(1,091,344) $ 695,476
=========== =========== =========== =========== =========== ===========
BALANCES, DECEMBER 31, 1999 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $(1,138,557) $ 648,263
Dividends paid - - - - (128,727) (128,727)
Net loss - - - - (161,576) (161,576)
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, SEPTEMBER 30, 2000 $ 704,018 $ 58,600 $ (39,500) $ 1,063,702 $(1,428,860) $ 357,960
=========== =========== =========== =========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.
F-4
<PAGE>
BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (161,576) $ 95,743
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH FLOWS FROM OPERATING
ACTIVITIES:
Depreciation 210,000 175,857
Amortization 103,642 78,891
(Gain) loss on sale of assets 58,500 (237,060)
Deferred income tax expense (benefit) (52,934) 33,753
(INCREASE) DECREASE IN ASSETS:
Accounts and notes receivables, net (1,068,388) 582,316
Prepaid expenses and other assets (100,066) 33,300
INCREASE (DECREASE) IN LIABILITIES:
Accounts and expenses payable (442,262) 167,675
Other liabilities 746,040 (1,247,417)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (707,044) (316,942)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payments for property and equipment (402,004) (122,764)
Purchase of insurance agency (412,885) -
Sale of insurance agency inventory 153,000 1,444,634
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (661,889) 1,321,870
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances of long-term debt 2,141,462 70,693
Cash proceeds from bond issuance - 150,000
Long-term line of credit advance 660,000 660,000
Net short-term borrowing 464,722 (81,675)
Payments on long-term debt (2,653,579) (639,248)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 612,605 159,770
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (756,328) 1,164,698
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,902,545 1,282,733
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,146,217 $ 2,447,431
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1,286,313 $ 724,846
============ ============
Cash paid for income tax $ 0 $ 0
============ ============
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.
F-5
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
Brooke Corporation was incorporated under the laws of the State of Kansas on
January 17, 1986. The Company's registered offices are located in Phillipsburg,
Kansas. Brooke Holdings, Inc. owns 73.66% of the Company's common stock. The
Company recruits fully vested franchise agents to sell insurance and financial
services. The Company also owns and operates insurance agencies all of which are
held for sale to franchise agents. Most of the Company's revenues result from
the sale of property and casualty insurance, however, the Company also offers
life and health insurance services, investment services and credit services.
The Company's subsidiaries are:
BROOKE CREDIT CORPORATION, a 100% owned subsidiary, is a licensed finance
company and licensed insurance agency. Brooke Credit Corporation
originates loans to Brooke Corporation's franchise agents, franchise
subagents, insurance producers and insurance policyholders.
BROOKE LIFE AND HEALTH, INC., a 100% owned subsidiary, is a licensed
insurance agency which sells life and health insurance through Brooke
Corporation's network of exclusive franchise agents, franchise subagents
and insurance producers.
BROOKE AGENCY, INC., a 100% owned subsidiary, is a licensed insurance
agency which sells property and casualty insurance through Brooke
Corporation's network of exclusive franchise agents, franchise subagents
and insurance producers.
BROOKE INVESTMENTS, INC., a 100% owned subsidiary, develops investment
services for sale through Brooke Corporation's network of exclusive
franchise agents, franchise subagents and insurance producers.
THE AMERICAN AGENCY, INC., a 100% owned subsidiary, is a licensed
insurance agency which sells insurance programs and "targeted market"
policies through a network of non-exclusive brokers that are not
necessarily affiliated with Brooke Corporation.
THE AMERICAN HERITAGE, INC., a 100% owned subsidiary, is a licensed
insurance agency which sells insurance programs and "targeted market"
policies through a network of non-exclusive brokers that are not
necessarily affiliated with Brooke Corporation. For marketing purposes the
name of this subsidiary was recently changed from Heritage Marketing
Services, Inc.
INTERSTATE INSURANCE GROUP, LTD, a 100% owned subsidiary, is a licensed
insurance agency which sells insurance programs and "targeted market"
policies through a network of non-exclusive brokers that are not
necessarily affiliated with Brooke Corporation.
(b) USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets, liabilities and disclosures.
Accordingly, the actual amounts could differ from those estimates. Any
adjustments applied to estimated amounts are recognized in the year in which
such adjustments are determined.
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-6
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
(c) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all cash on
hand, cash in banks and short-term investments purchased with a maturity of
three months or less to be cash and cash equivalents.
(d) ALLOWANCE FOR BAD DEBTS
The Company considers all accounts and notes receivable to be fully collectible,
therefore no allowance has been recognized for uncollectible accounts.
(e) REVENUE RECOGNITION
Commission revenue on insurance premiums is recognized as of the effective date
of the insurance policy. In the event of cancellation or reduction in premium,
the Company is generally obligated to return a portion of sales commissions to
the insurance carriers and commissions revenue is reduced accordingly.
Commission refunds are calculated by the insurance carriers and are typically
deducted from the total commissions due to the Company from insurance carriers.
Insurance premiums due the Company from customers 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
"Excess of cost over fair value of net assets" represents the amount paid for
stock in a subsidiary company which exceeds the Company's initial ownership
interest in the subsidiary's net tangible book value. The balance of $1,844,828
is being amortized over a 15 year period using the straight line method.
Amortization expense was $52,244 and $32,244 for the nine months ended September
30, 2000 and 1999, respectively. "Goodwill" represents an allocation of agency
asset purchase price made by The American Agency, Inc. and Interstate Insurance
Group, Ltd. prior to the Company's acquisition of those subsidiaries.
Although an account retention analysis conducted several years ago indicates
that the annual rate of account attrition is approximately 5% (20 year
amortization period), because a maximum amortization period of 15 years has been
established by the Internal Revenue Service for income tax purposes, the Company
has adopted an amortization period of 15 years for Excess of cost over fair
value of net assets and Goodwill.
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-7
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
(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.
(i) INVESTMENT IN AGENCIES
The balances of the "Investment of Agencies" asset category represent the
purchase prices paid by the Company for agency assets. The Company's agency
assets are available for sale and, as such, the Company estimates the market
value of these assets each year based on comparable sales information. If the
market value is less than the original purchase price, then the asset balance is
reduced to its market value. However, if the market value is more than the
original purchase price, then the asset balance is not increased from the
original purchase price.
(j) GAIN OR LOSS ON SALE OF ASSETS
Gains or losses on "Investment in Agencies" represent the difference between the
selling price of agency assets sold by the Company and the purchase price paid
by the Company for said assets. The total purchase price is allocated at
purchase according to comparable sales information compiled by the Company for
specific types of agency assets (i.e. personal lines assets, commercial lines
assets, life health assets, program assets) in the event that the agency assets
purchased by the Company are sold in part.
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-8
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
3. NOTES RECEIVABLE
At September 30, 2000 and 1999 notes receivables consist of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Agency loans $ 17,979,071 $ 9,104,056
Less: Agency loan participation (17,687,730) (8,792,101)
Equipment loans 7,564 17,962
Less: Equipment loan participation (3,464) (13,862)
Consumer loans 162,307 343,498
Less: Consumer loan participation (162,307) (343,498)
----------------- ------------------
Total notes receivable, net 295,441 316,055
Customer , sales commission and profit sharing receivable 2,874,780 1,550,339
----------------- ------------------
Total accounts and notes receivable, net $ 3,170,221 $ 1,866,394
================= ==================
</TABLE>
Of the agency loans at September 30, 2000 and 1999, $513,556 and $658,869,
respectively, are sold with recourse to the buyer for the principal outstanding
and interest hereafter accruing from the loan. There is no default by any
debtor, and hence, there is no accrued liability at September 30, 2000 and 1999.
Loan participation represents the transfer of note receivables, by sale, to
"participating" banks and finance companies. The Company receives consideration
from the participating entities. Per SFAS 125 (Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities), these
transfers are accounted for as sales. The transferred assets (i.e. notes
receivables) are isolated from the Company. The participating companies obtain
the right - free of conditions that constrain it from taking advantage of that
right - to pledge or exchange the notes receivables. In addition, the transfer
agreements do not entitle the Company or obligate the Company to repurchase or
redeem the note receivables before their maturity.
Sales commission receivable is the amount of sales commissions earned but not
received from insurance carriers as of September 30, 2000 and 1999.
Profit sharing receivable is the amount of contingent commissions earned but not
received from insurance carriers as of September 30, 2000 and 1999. In addition
to sales commissions, insurance carriers pay the Company contingent commissions
which are based on factors such as underwriting profits, persistency, loss
ratios, growth and other criteria.
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-9
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 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 $ 296,958 $ 185,874
Office and computer equipment 1,435,309 1,149,701
Automobiles 532,685 440,678
--------------- ---------------
2,264,952 1,776,253
Less: Accumulated depreciation 1,489,837 987,605
--------------- ---------------
Property and equipment, net $ 775,115 $ 788,648
=============== ===============
Depreciation expense $ 210,000 $ 175,857
=============== ===============
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-10
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
5. BANK LOANS, NOTES PAYABLE, AND OTHER LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
First National Bank & Trust, Phillipsburg, KS line of credit, $660,000
available, $0 not utilized. Due October 2001. Interest rate is 10.50%.
Collateralized by account receivable. $ 660,000 $ 660,000
Farmers State Bank, Phillipsburg, KS, due December 2006. Interest rate is
10.75%, payable $15,500 monthly. Collateralized by stock, inventory, fixed
assets and personal guaranty of certain officers of Brooke Corporation. 881,318 969,675
State Bank of Colwich, Colwich, KS, due January 2003. Interest rate is 10.75%,
payable $1,435 monthly. Collateralized by insurance agency assets. 43,809 56,219
Chrysler Financial, Overland Park, KS, due February 2000 to November 2002.
Interest rates are 7.80% to 8.50%, payable monthly. Collateralized by
automobiles. 153,853 150,677
Colonial Pacific, Portland, OR, due December 2001. Interest rate is 14.875%
payable $2,083 monthly. Collateralized by personal guaranty of certain
officers of Brooke Corporation. 28,190 47,437
Brooke Investments, Inc., Phillipsburg, KS, due February 2007. Interest rate
is 10.00%, payable $1,718 monthly. Note is sold to participating bank.
Collateralized by certain agency assets acquired by Brooke Investments, Inc. 97,200 107,528
David Patterson, Sr., Phoenix, AZ, due March 2008. Interest rate is 0%,
payable $1,112 monthly. Unsecured deferred compensation agreement provided by
The American Agency, Inc. 16,680 30,024
Robert B. Patterson, Overland Park, KS, due February 2001. Interest rate is
7.75%, payable $222,222 principal plus accrued interest annually.
Collateralized by 500 shares of American Agency, Inc. common stock and the
guaranty of certain officers of Brooke Corporation. 222,222 444,444
Hartley Agency, Inc., Baxter Springs, KS, due June 2001. Interest rate is 0%,
entire balance is due at maturity. Collateralized by certain agency assets
acquired by Brooke Corporation 201,564 -
Gerald Lanio and William Tyer, Independence, MO; due June 2005. Interest rate
is 5%, payable $207,877 annually. Collateralized by 900 shares of Interstate
Insurance Group, LTD common stock. 900,000 -
Premier Insurance Agency, Poplar Bluff, MO, due July 2005. Interest rate is
5.00%, payable $147,763 annually. Collateralized by certain agency assets
acquired by Brooke Corporation. 639,737 -
Stewart Insurance, Monroe, LA, due August 2001. Interest rate is 0%, entire
balance is due at maturity. Collateralized by certain agency assets acquired
by Brooke Corporation 252,245 -
APB Insurers, Crane, MO, due July 2001. Interest rate is 0%, entire balance
is due at maturity. Collateralized by certain agency assets acquired by
Brooke Corporation. 77,445 -
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-11
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
5. BANK LOANS, NOTES PAYABLE, AND OTHER LONG-TERM OBLIGATIONS (CONT.)
<TABLE>
<S> <C> <C>
Roppolo Insurance, Shreveport, LA, due July 2001. Interest rat is 0%, entire
balance is due at maturity. Collateralized by certain agency assets acquired
by Brooke Corporation. $ 115,283 $ -
Mesa Insurance Agency, Pueble, CO, due February 2001. Interest rate is 0%,
entire balance is due at maturity. Collateralized by certain agency assets
acquired by Brooke Corporation. 100,000 -
Wayne White, Hutchinson, KS, due April 2002. Interest rate is 8%, payable
105,060 annually. Collateralized by certain agency assets acquired by Brooke
Corporation. 210,120 -
Bonds payable (See Note 6) 1,680,000 1,580,000
--------------- ---------------
Total bank loans, notes payable and other long-term obligations 6,279,666 4,046,004
Less: Current maturities 2,386,184 429,208
--------------- ---------------
Total long-term debt $3,893,482 $3,616,796
=============== ===============
</TABLE>
Interest incurred on bank loans, notes payable and other long-term obligations
for the nine months ended September 30, 2000 and 1999 is $267,058 and $232,341,
respectively.
Bank loans, notes payable, and other long-term obligations mature as follows:
<TABLE>
<CAPTION>
BANK LOANS & BONDS
NOTES PAYABLE PAYABLE TOTAL
<S> <C> <C> <C>
2001 $ 1,626,184 $ 760,000 $ 2,386,184
2002 1,248,598 675,000 1,923,598
2003 459,186 245,000 704,186
2004 472,187 - 472,187
2005 504,717 - 504,717
Thereafter 288,794 - 288,794
---------------- ---------------- ---------------
$ 4,599,666 $ 1,680,000 $ 6,279,666
================ ================ ===============
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-12
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
6. LONG-TERM DEBT, BONDS PAYABLE
Brooke Credit Corporation has offered bonds (series 1997A, 1997B and 1997C) for
sale to institutional investors in $5,000 denominations. Brooke Credit
Corporation has also offered bonds (series 1997D and 1998E) for sale to the
public in $5,000 denominations. These bonds are issued in registered form with
interest payable semi-annually on January 1st and July 1st of each year. These
bonds are not callable by Brooke Credit Corporation and are not redeemable by
the bondholder until maturity.
Brooke Credit Corporation covenants to use all bond proceeds for the purposes of
funding loans or purchasing receivables. Brooke Credit Corporation has no debt
and covenants not to incur obligations superior to its obligations to
bondholders. Therefore, the obligation to bondholders is guaranteed by the
assets and the equity of Brooke Credit Corporation.
At September 30, 2000 and 1999 the bonds payable consists of:
<TABLE>
<CAPTION>
2000 1999
---- ----
PRINCIPAL PRINCIPAL
BOND SERIES RATE MATURITY VALUE VALUE
----------- ---- -------- ----- -----
<S> <C> <C> <C> <C>
1997A 10.000% January 1, 2001 $ 165,000 $ 165,000
1997B 10.250% January 1, 2002 155,000 155,000
1997C 10.500% January 1, 2003 245,000 145,000
1997D 10.125% July 1, 2001 595,000 595,000
1998E 10.125% January 1, 2002 520,000 520,000
-------------- --------------
Total $1,680,000 $1,580,000
============== ==============
</TABLE>
Interest payable is $43,103 and $34,052 at September 30, 2000 and 1999,
respectively.
7. LONG-TERM DEBT, CAPITAL LEASES
The Company leases various equipment which may be purchased for a nominal amount
at the expiration of the lease agreements. The Company is required to provide
insurance coverage on the equipment as specified by the lessor. Under the
criteria established by SFAS 13, these assets have been capitalized in the
Company's financial statements. The capital lease obligations have all been paid
in full. Property and equipment includes the following amounts reflecting the
capitalization of these assets:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Office and computer equipment $ 415,843 $ 415,843
Less: Accumulated amortization 386,605 319,660
-------------- -------------
$ 29,238 $ 96,183
============== =============
</TABLE>
Capital lease amortization is included in depreciation expense.
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-13
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
8. INCOME TAXES
The elements of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current $ 0 $ 0
Deferred (52,934) 33,753
------------- -------------
$ (52,934) $ 33,753
============= =============
</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 (8%) (5%)
Miscellaneous (1%) (3%)
--------- ---------
Effective tax rate 25% 26%
========= =========
</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 52,934 (33,753)
------------- ------------
Balances balance, June 30 $348,700 $ 293,859
============= ============
</TABLE>
Expiration dates of net operating loss carryforwards:
<TABLE>
<S> <C>
2010 $811,081
2020 214,510
---------------
Total $1,025,589
===============
</TABLE>
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SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-14
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan covering substantially
all employees. Employees may contribute up to 15% of their compensation. The
Company may contribute an additional amount to the plan at the discretion of the
Board of Directors. No employer contributions were charged to expense for
periods ended September 30, 2000 and 1999.
10. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at several banks. On September 30, 2000 and
1999 the Company had account balances of $769,807 and $1,879,124, respectively,
with one bank which exceeds the $100,000 insurance limit of the Federal Deposit
Insurance Corporation.
11. SEGMENT AND RELATED INFORMATION
The Company's two reportable segments as of and for the six month periods ended
September 30, 2000 and 1999 consisted of its insurance agency business and its
finance services business. The insurance agency business includes the Company's
wholly-owned subsidiaries which are licensed insurance agencies operating in the
states of Kansas, Nebraska, Missouri, Colorado, Texas and Oklahoma. The Company
sells insurance through its network of exclusive franchise agents, franchise
subagents, non-exclusive brokers and insurance producers. The finance services
business includes the Company's wholly-owned subsidiary, which is a licensed
finance company. The Company originates loans to Brooke Corporation's franchise
agents, franchise subagents, insurance producers and insurance policyholders.
Unallocated corporate-level expenses are reported in the reconciliation of the
segment totals to the related consolidated totals as "other corporate expenses."
Management evaluates the performance of its segments and allocates resources to
them based on the net income before income taxes. The segments' accounting
policies are the same as those described in the summary of significant
accounting policies.
The table below reflects summarized financial information concerning the
Company's reportable segments for the six month periods ending September 30:
<TABLE>
<CAPTION>
INSURANCE FINANCIAL ELIMINATION OF
AGENCY SERVICES INTERSEGMENT CONSOLIDATED
BUSINESS BUSINESS ACTIVITY TOTALS
-------- -------- -------- ------
<S> <C> <C> <C> <C>
1999
Insurance commissions $ 6,566,708 $ - $ - $ 6,566,708
Interest income - 559,951 (33,508) 593,459
Interest expense 232,341 507,074 - 739,415
Commissions expense 4,261,010 - - 4,261,010
Depreciation and amortization 254,748 - - 254,748
Segment assets 5,866,237 1,192,597 (380,808) 6,678,026
Expenditures for segment assets 283,623 - - 283,623
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-15
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
11. SEGMENT AND RELATED INFORMATION - CONT.
<TABLE>
<CAPTION>
INSURANCE FINANCIAL ELIMINATION OF
AGENCY SERVICES INTERSEGMENT CONSOLIDATED
BUSINESS BUSINESS ACTIVITY TOTALS
-------- -------- -------- ------
<S> <C> <C> <C> <C>
2000
Insurance commissions $ 9,551,920 $ - $ - $ 9,551,920
Interest income - 1,340,943 (131,304) 1,209,639
Interest expense 267,058 1,090,688 - 1,357,746
Commissions expense 6,550,720 - - 6,550,720
Depreciation and amortization 313,642 - - 313,642
Segment assets 8,100,805 308,775 (176,215) 8,233,365
Expenditures for segment assets 772,322 - - 772,322
</TABLE>
<TABLE>
<CAPTION>
PROFIT (LOSS) 2000 1999
---- ----
<S> <C> <C>
Total segment profit $2,539,451 $1,904,994
Unallocated amounts:
Gain (loss) on sale of inventory (58,500) 237,060
Other corporate expenses 2,695,461 2,012,558
------------------- ------------------
Income (loss) before income taxes $(214,510) $ 129,496
=================== ==================
</TABLE>
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SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-16
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
12. NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued by the Financial
Accounting Standards Board in June 1998. This Statement establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
recognition of all derivatives as either assets or liabilities on the balance
sheet and measurement of those instruments at fair value. If certain conditions
are met, a derivative may be designated specifically as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or
unrecognized firm commitment referred to as a fair value hedge, (b) a hedge of
the exposure to variability in cash flows of a forecasted transaction (a cash
flow hedge), or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a forecasted transaction. The Company anticipates some of these
types of hedges, and will comply with the requirements of SFAS 133 when it is
adopted. The Company expects to adopt SFAS 133 beginning January 1, 2001. We
have not yet determined the effect of adopting SFAS 133.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 in the fourth quarter of 2000
(retroactive to January 1, 2000) and is awaiting interpretive guidance, not yet
issued by the SEC, to complete its assessment of the impact of SAB 101 may have
on the Company's financial statements.
13. BUSINESS ACQUISITION
The Company acquired 100% of the common stock of Interstate Insurance Group, LTD
on June 30, 2000 for a total purchase price of $1,322,885. The base stock
purchase price of $1,200,000 was increased in accordance with the purchase
agreement by the amount of Interstate's net tangible book value, which was
defined as the difference between the book value of all tangible assets and the
book value of all liabilities as of April 30, 2000.
<TABLE>
<S> <C>
Book Value on April 30, 2000 $ 126,581
Less: Book Value of Goodwill 3,696
--------
Net Tangible Book Value 122,885
Base Price 1,200,000
----------
Total Purchase Price $1,322,885
</TABLE>
As a result of the purchase of Interstate, the Company's Excess of cost over
fair value of net assets increased by a net amount at September 30, 2000 of
$1,180,000 ($1,200,000 less $20,000 amortization to date).
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-17
<PAGE>
BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
13. BUSINESS ACQUISITION (CONT.)
The following summary consolidated actual and pro forma financial information
should be read in conjunction with our consolidated financial statements and
their related notes. The consolidated statement of operations data for the years
ended December 31, 1999 and 1998 labeled "Actual" are derived from, and are
qualified by reference to, the audited financial statements included. The
consolidated statement of operations data for the years ended December 31, 1999
and 1998 labeled "Pro Forma" are unaudited and derived from and qualified by
reference to the pro forma consolidated statements of operations included. The
consolidated balance sheet data at December 31, 1999 and 1998 labeled "Actual"
are derived from, and are qualified by reference to, the audited financial
statements included. The consolidated balance sheet data at December 31, 1999
and 1998 labeled "Pro Forma" are unaudited and derived from and qualified by
reference to the pro forma consolidated balance sheet included.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998
---- ----
ACTUAL PRO FORMA ACTUAL PRO FORMA
------ --------- ------ ---------
<S> <C> <C> <C> <C>
OPERATING INCOME $9,444,385 $10,562,961 $7,835,957 $9,132,171
OPERATING EXPENSES 8,999,205 10,114,198 7,057,033 8,180,531
NET INCOME (LOSS) $ 92,758 $ 96,341 $ 286,470 $ 459,186
NET INCOME (LOSS) PER SHARE: 0.13 0.14 0.41 0.65
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------ --------- ------ ---------
<S> <C> <C> <C> <C>
CASH $1,902,545 $3,155,106 $1,282,733 $2,703,013
ACCOUNTS AND NOTES RECEIVABLE, NET 2,268,343 2,459,236 2,407,979 2,461,891
NET PROPERTY AND EQUIPMENT 791,181 802,451 680,882 699,498
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS 644,828 644,828 1,867,240 1,867,240
ACCOUNTS PAYABLE 641,916 795,402 621,124 674,140
PREMIUMS PAYABLE TO INSURANCE COMPANIES 650,045 1,869,553 2,395,164 3,752,127
LONG-TERM DEBT 4,332,643 4,332,643 3,430,240 3,430,240
STOCKHOLDERS' EQUITY 648,263 772,365 727,141 847,660
</TABLE>
--------------------------------------------------------------------------------
SEE ACCOMPANYING INDEPENDENT ACCOUNTANTS' REVIEW REPORT.
F-18
<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-19
<PAGE>
BROOKE CORPORATION
CONSOLIDATED BLANACE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
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-20
<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>
--------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-21
<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-22
<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-23
<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.
--------------------------------------------------------------------------------
BROOKE CORPORATION
F-24
<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.
--------------------------------------------------------------------------------
BROOKE CORPORATION
F-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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
19
<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 Tyer and the Company
20
<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
* Filed previously
21
<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 January 16, 2001 By /s/ Robert D. Orr
---------------------- --------------------------------
Robert D. Orr, Chief Executive
Officer
22
