BROOKE CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________TO _____________________

COMMISSION FILE NUMBER: 000-31789

BROOKE CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

KANSAS 48-1009756
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

10895 GRANDVIEW DRIVE, SUITE 250, OVERLAND PARK, KANSAS 66210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

ISSUER'S TELEPHONE NUMBER: (913) 661-0123

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
(Check One): Yes |X| No |_|

As of June 30, 2002 there were 763,123 shares of the registrant's sole class
of common stock outstanding.

Transitional Small Business Disclosure Format (Check One):
Yes |_| No |X|

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL INFORMATION

BROOKE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Contents

INDEPENDENT ACCOUNTANTS' REPORT 2

CONSOLIDATED FINANCIAL STATEMENTS 3

CONSOLIDATED BALANCE SHEETS........................................................................4-5
CONSOLIDATED STATEMENTS OF INCOME - THREE MONTHS ENDED.............................................6
CONSOLIDATED STATEMENTS OF INCOME - SIX MONTHS ENDED...............................................7
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY.........................................8
CONSOLIDATED STATEMENTS OF CASH FLOWS..............................................................9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.........................................................10-42

1

INDEPENDENT ACCOUNTANTS' REPORT

To the Board of Directors
Brooke Corporation:

We have reviewed the accompanying consolidated balance sheets of

BROOKE CORPORATION

as of June 30, 2002 and 2001, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the six month
periods then ended. These financial statements are the responsibility of the
Company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, 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
Topeka, Kansas
August 15, 2002

2

BROOKE CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

3

BROOKE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 2002 AND 2001

ASSETS

2002 2001
----------------- ------------------

CURRENT ASSETS
Cash $ 4,753,902 $ 3,853,166
Accounts and notes receivable, net 8,760,500 4,471,323
Note receivable, parent company 506,909 267,075
Other receivables 1,349,123 358,346
Securities 1,198 1,198
Interest-only strip receivable 896,466 144,343
Deposits 1,531,187 50,769
Prepaid expenses 312,486 102,707
----------------- ------------------
TOTAL CURRENT ASSETS 18,111,771 9,248,927
----------------- ------------------
INVESTMENT IN AGENCIES 594,446 -
----------------- ------------------
PROPERTY AND EQUIPMENT
Cost 3,108,394 2,351,501
Less: Accumulated depreciation (1,892,324) (1,705,446)
----------------- ------------------
NET PROPERTY AND EQUIPMENT 1,216,070 646,055
----------------- ------------------
OTHER ASSETS
Excess of cost over fair value of net assets 892,848 892,848
Less: Accumulated amortization (295,189) (215,749)
Prepaid commission guarantee 14,100 48,134
Covenants not to compete - 4,888
Goodwill - 3,174
Prepaid finders fee 14,086 14,594
Contract database 38,275 41,108
Servicing asset 715,769 146,779
Restricted cash 364,690 -
Deferred tax asset 67,665 480,716
----------------- ------------------
NET OTHER ASSETS 1,812,244 1,416,492
----------------- ------------------
TOTAL ASSETS $ 21,734,531 $ 11,311,474
================= ==================

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.

4

BROOKE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 2002 AND 2001

LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
---------------- ------------------

CURRENT LIABILITIES
Accounts payable $ 1,134,457 $ 1,012,229
Premiums payable to insurance companies 1,971,048 2,518,691
Unearned buyer assistance plan fees 1,270,697 100,846
Accrued commission refunds 326,306 267,217
Short-term debt 793,431 986,674
Current maturities of long-term debt 4,121,307 2,141,277
---------------- ------------------
TOTAL CURRENT LIABILITIES 9,557,246 7,026,934

NON-CURRENT LIABILITIES
Servicing liability 46,399 18,211
Long-term debt less current maturities 8,479,227 3,964,379
---------------- ------------------
TOTAL LIABILITIES 18,142,872 11,009,524
---------------- ------------------

STOCKHOLDERS' EQUITY
Common stock, $1 par value, 9,500,000 shares
authorized, 774,173 and 704,018 shares issued
and 763,123 and 692,968 shares outstanding 774,173 704,018
Preferred stock, $75 par value, 1,000 shares
authorized, 781 shares issued and outstanding 58,600 58,600
Preferred stock, $25 par value, 464,625 shares
authorized, 49,667 and 17,639 shares issued and outstanding 1,241,675 440,975
Preferred stock, $32 par value, 34,375 shares
authorized, 24,331 shares issued and outstanding 778,592 -
Less: Treasury stock, 11,050 shares at cost (39,500) (39,500)
Additional paid-in capital 2,105,839 951,989
Retained earnings (1,359,994) (1,820,194)
Accumulated other comprehensive income 32,274 6,062
---------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 3,591,659 301,950
---------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,734,531 $ 11,311,474
================ ==================

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.

5

BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2002 AND 2001

2002 2001
---------------- -----------------

OPERATING INCOME
Insurance commissions $ 7,441,079 $ 5,557,361
Interest income (net) 217,670 121,507
Finder's fee 336,106 -
Gain on sale of agencies 34,161 449,580
Buyer assistance plan fees 616,558 317,203
Gain on sale of notes receivable 530,607 100,955
Gain on extinguishment of debt 397,306 -
Other income 8,164 -
---------------- ----------------
TOTAL OPERATING INCOME 9,581,651 6,546,606
---------------- ----------------

OPERATING EXPENSES
Commissions expense 6,174,404 4,547,920
Payroll expense 1,525,640 968,148
Depreciation and amortization 160,365 118,565
Other operating expenses 1,154,096 451,130
Bond interest expense 122,574 78,518
---------------- ----------------
TOTAL OPERATING EXPENSES 9,137,079 6,164,281
---------------- ----------------

INCOME FROM OPERATIONS 444,572 382,325
---------------- ----------------

OTHER EXPENSES
Interest expense 29,946 32,205
---------------- ----------------
TOTAL OTHER EXPENSES 29,946 32,205
---------------- ----------------

INCOME BEFORE INCOME TAXES 414,626 350,120

Income tax expense 140,973 119,041
---------------- ----------------
NET INCOME $ 273,653 $ 231,079
================ ================

NET INCOME PER SHARE:
Basic .27 .32
Diluted .31 .31

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.

6

BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

2002 2001
---------------- ----------------

OPERATING INCOME
Insurance commissions $13,497,693 $10,252,831
Interest income (net) 436,198 119,939
Finder's fee 661,271 175,000
Gain on sale of agencies 128,103 449,580
Buyer assistance plan fees 1,677,627 317,203
Gain on sale of notes receivable 1,190,892 286,145
Gain on extinguishment of debt 397,306 -
Other income 14,030 -
---------------- ----------------
TOTAL OPERATING INCOME 18,003,120 11,600,698
---------------- ----------------

OPERATING EXPENSES
Commissions expense 11,210,737 7,377,527
Payroll expense 2,984,151 1,832,972
Depreciation and amortization 305,855 230,648
Other operating expenses 1,922,005 833,220
Bond interest expense 248,199 138,217
---------------- ----------------
TOTAL OPERATING EXPENSES 16,670,947 10,412,584
---------------- ----------------

INCOME FROM OPERATIONS 1,332,173 1,188,144
---------------- ----------------

OTHER EXPENSES
Interest expense 72,880 90,026
---------------- ----------------
TOTAL OTHER EXPENSES 72,880 90,026
---------------- ----------------

INCOME BEFORE INCOME TAXES 1,259,293 1,098,088

Income tax expense 428,160 373,350
---------------- ----------------
NET INCOME $ 831,133 $ 724,738
================ ================

NET INCOME PER SHARE:
Basic .98 1.03
Diluted .95 1.01

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.

7

BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

8

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.

BROOKE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

9

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS'
REVIEW REPORT.

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

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 67.87% of the Company's common stock. The
Company recruits fully vested franchise agents to sell insurance and financial
services. 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.

All of the Company's subsidiaries are 100% owned and controlled by the
Company. Other than Brooke Credit Corporation and Brooke Bancshares, Inc.,
the subsidiaries' 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 through the issuance of
bonds.

The Company's other subsidiaries include:

BROOKE LIFE AND HEALTH, INC., is a licensed insurance agency that sells life and
health insurance through the Company's network of franchise agents, subagents
and insurance producers.

BROOKE AGENCY, INC., is a licensed insurance agency that sells property and
casualty insurance through the Company's network of franchise agents, subagents
and insurance producers.

BROOKE INVESTMENTS, INC., may offer insurance annuities and mutual funds for
sale through the Company's network of franchise agents, subagents and insurance
producers. Brooke Investments, Inc. will determine whether registration as a
broker-dealer is required and will register, if required, before investment
services and securities are offered.

INTERSTATE INSURANCE GROUP, LTD, is a licensed insurance agency that may sell
insurance programs and "targeted market" policies through the Company's
network of agents and through agents not necessarily affiliated with the
Company under the trade name of American Interstate Insurance Agency.

THE AMERICAN AGENCY, INC., consults with agent sellers and brokers agency
sales under the trade name of Agency Business Brokers. This subsidiary is
also a licensed insurance agency that may sell insurance programs and
"targeted market" policies through the Company's network of agents and
through agents not necessarily affiliated with the Company under the trade
name of American Insurance Agency.

THE AMERICAN HERITAGE, INC., consults with and otherwise assists agent buyers
under the trade name of Heritage Agency Consultants. This subsidiary is also a
licensed insurance agency that sells insurance programs and "targeted market"
policies through the Company's network of agents and through agents not
necessarily affiliated with the Company under the trade name of American
Heritage Insurance Agency.

10

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

BROOKE CORPORATION OF NEVADA, is a licensed Nevada insurance agency that sells
insurance through the Company's network of franchise agents, subagents and
insurance producers. This subsidiary may also sell the programs and "targeted
market" policies in Nevada through the Company's network of agents and through
agents not necessarily affiliated with the Company.

BROOKE BANCSHARES, INC. was incorporated in January of 2002 for the specific
purpose of acquiring and owning one or more commercial banks that will
distribute banking services and products through the Company's agents. If the
Company is successful in acquiring a bank, this subsidiary will become a bank
holding company as defined pursuant to the Bank Holding Company Act of 1956, as
amended.

BROOKE AGENCY SERVICES COMPANY LLC (BASC) is a limited liability company
organized under the laws of the state of Delaware on June 24, 2002. It is a
bankruptcy-remote special purpose entity, is licensed as an insurance agency and
was created to offer property, casualty, life and health insurance through
certain agents with loans originated by Brooke Credit Corporation.

FIRST BROOKE INSURANCE AND FINANCIAL SERVICES, INC. is a Texas corporation
controlled through a contractual agreement with stockholders. The corporation is
used for licensing purposes. The corporation is consolidated with Brooke
Corporation for financial statement reporting.

(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.

The following are significant estimates made by management: accrued commission
refund obligations, reimbursement from agents for commission refund obligations,
Buyers Assistance Program unearned and earned percentages, and the fair value
assumptions utilized for interest-only strip receivables. It is at least
reasonably possible these estimates will change in the near term.

(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 amounts.

11

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

(e) REVENUE RECOGNITION

Commission revenue on insurance policy premiums is generally recognized as of
the effective date of the policies or, in certain cases, as of the effective
date or billing date, whichever is later. Contingent and profit sharing
commissions are generally recognized when received. Premiums due from the
insured to the Company are reported as assets of the Company and as
corresponding liabilities, net of commissions, to the insurance carriers.

In the event of cancellation or reduction in premiums, for policies billed by an
insurance carrier, a percentage of the commission revenue is often returned to
the insurance carrier. The commission refunds are calculated by the insurance
carriers and are typically deducted from amounts due to the Company from
insurance carriers. The Company has estimated and accrued a liability for
commission refunds of $326,306 and $267,217 as of June 30, 2002 and 2001,
respectively.

The Company provides consulting, marketing and cash flow assistance to agency
owners during the first year of agency ownership through a Buyers Assistance
Plan ("BAP") program. The Company has allocated the fees paid by agents for BAP
assistance to each of the services provided by the Company and the fee
associated with a particular service is recognized as revenue using the
percentage of completion accounting method by referencing the costs incurred to
date. Many of the BAP services (inspection reports, operations analysis,
marketing plan development) are provided by the Company before, or within thirty
days after, agency acquisition so approximately 58% of BAP fees are immediately
recognized as revenue. An additional 20% of BAP and related fees are recognized
during the first year of agency ownership leaving approximately 22% of related
fees unearned, and the revenue recognized, after the BAP period expires. The
allocation of fees may change if the nature, or timing, of BAP related services
change. Unearned BAP fees were $1,270,697 and $100,846 at June 30, 2002 and
2001, respectively.

Revenues from finders fees, gains on sale of agencies and seller discounts are
recognized immediately because the Company has no continuing obligation.

(f) PROPERTY AND EQUIPMENT

Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over the
estimated useful lives of the assets.

(g) EXCESS COST OF PURCHASED SUBSIDIARY

Included in other assets are unamortized costs of purchased subsidiaries (Brooke
Life and Health, Inc. and The American Agency, Inc.) in excess of the fair value
of underlying net tangible assets acquired. The balance is being amortized over
a 15-year period using an accelerated 150% declining balance switching to
straight-line method. Amortization expense (excluding servicing asset
amortization expense of $109,079) was $56,776 for the period ended June 30,
2002. The "excess cost of purchased subsidiary" resulted from the purchase of a
subsidiary corporation. In 2001, management elected to reclassify Investment in
Agencies of $316,520 to this account because management's intention was no
longer to sell these agencies, which, primarily consisted of an agency doing
business as Brooke Life/Health.

12

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

In the third and fourth quarters of 2000, Interstate Insurance Group, LTD's
primary supplier began exiting the limousine insurance market, which comprised
virtually all of Interstate's insurance business, and revenues began decreasing.
Based on these circumstances, revenue and cash flow projections were revised,
resulting in the recognition of impairment losses in the Interstate unit of the
insurance agency business segment of $300,000 and $162,877, in 2000 and 2001,
respectively. The amount of the Interstate impairment losses corresponds to the
amounts recorded as Excess Cost of Purchased Subsidiary as disclosed in footnote
15.

(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 assets included in the "Investment in Agencies" category is the purchase
price paid for agency assets. These assets are available for sale and are
carried at the lower of cost or market. The Company acquires insurance agency
assets to hold in inventory for sale to its agents. The number of agencies
purchased for this purpose for the period ending June 30, 2002 and 2001 was
15 and 10, respectively. Correspondingly, the number of agencies sold from
inventory for the period ending June 30, 2002 and 2001 was 16 and 10,
respectively. At June 30, 2002 the "Investment in Agencies" inventory
consisted of a Texas agency purchased during 2001, at a total cost of
$594,446.

In 2001, management elected to reclassify Investment in Agencies of $316,520 to
other assets because management's intention was no longer to sell these
agencies, which primarily consists of an agency doing business as Brooke
Life/Health.

(j) GAIN OR LOSS ON SALE OF ASSETS

"Investment in Agencies" gains or losses are the difference between the
insurance agency's sales price and the insurance agency's book value, which is
carried at the lower of cost or fair value. Insurance agencies are typically
sold in the same units as purchased. However, in instances where a part, or
segment, of an insurance agency unit is sold, then management estimates the fair
value of the segment of the insurance agency unit being sold and the difference
between the sales price and the resulting fair value estimation is the amount of
the gain or loss. Any such fair value estimation is evaluated for reasonableness
by comparing the market value estimation of the segment to the book value for
the entire insurance agency unit. Fair value estimations are based on comparable
sales information that takes into consideration agency characteristics such as
customer type, customer account size, supplier size and billing methods.

(k) CONTRACTS DATABASE

This asset consists of standardized loan documents which have been developed by
Brooke Corporation. These contracts are available for sale to others that make
these types of loans, by first purchasing a license from Brooke Corporation. A
complete review and revision is scheduled for all loan documents every five
years, therefore, the asset is being amortized over a five year period.

13

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

(l) DEFERRED CHARGES

Deferred charges relate to costs associated with the public offering of
preferred stock and bonds. Selling expenses, auditor fees, legal costs and
filing charges associated with the Company's public offering of stock totaled
$810,337 and have been offset against stock proceeds. Similar costs associated
with the Company's public offering of bonds totaled $291,371 and are classified
as prepaid expenses that are amortized over a period ending at bond maturity.
Net of amortization, the balance of all such prepaid expenses as of June 30,
2002 was $189,323.

(m) EQUITY RIGHTS AND PRIVILEGES

Convertible preferred stockholders shall be entitled to a 9% cumulative dividend
in cash of the liquidation value of such stock per share per annum, as
determined by the Board of Directors. Convertible preferred stock may convert to
common stock at a rate of 13 shares of common stock for 1 share of preferred
stock. Convertible preferred stock has no voting rights. Holders of convertible
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. In
addition to the convertible preferred stock, the Company is authorized to issue
499,000 shares of preferred stock. The authorized shares consist of 100,000
shares of 2002 convertible preferred stock, 10,000 shares of 2002A convertible
preferred stock, and 34,375 shares of 2002B convertible preferred stock. The
remaining 354,625 shares are "undesignated" preferred stock. The holders of the
2002 and 2002A convertible preferred stock are entitled to receive a cumulative
dividend in cash at the rate of 10% of the liquidation value of such stock per
share per annum if determined by the Board of Directors. Prior to April 1, 2002,
the holders of 2002 and 2002A convertible preferred stock converted 60,333 of
their preferred shares into 60,333 shares of common stock. The holders of 2002
and 2002A convertible preferred stock that did not convert their shares to
common shares prior to April 1, 2002 have no conversion rights. In the case of
liquidation or dissolution of the Company, the holders of the 2002 or 2002A
convertible preferred stock shall be entitled to be paid in full the liquidation
value, $25 per share, after payment of full liquidation value to the holders of
convertible preferred stock and before the holders of common stock. The holders
of 2002B convertible preferred stock are entitled to receive a cumulative
dividend in cash at the rate of 9% of the liquidation value of such stock per
share per annum if determined by the Board of Directors. On or prior to May 15,
2002, the holders of 2002B convertible stock converted 9,822 of their preferred
shares into 9,822 shares of common stock. The holders of 2002B convertible
preferred stock that did not convert their shares to common shares on or prior
to May 15, 2002 have no conversion rights. In the case of liquidation or
dissolution of the Company, the holders of the 2002B convertible preferred stock
shall be entitled to be paid in full the liquidation value, $32 per share, after
payment of full liquidation value to the holders of convertible preferred stock,
2002 convertible preferred stock, 2002A convertible preferred stock, and before
the holders of common stock. The common stockholders shall possess all rights
and privileges afforded to capital stock by law, subject to holders of
convertible preferred stock.

14

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

(n) PER SHARE DATA

Basic net income per share is calculated by dividing net income, less preferred
stock dividends declared in the period (whether or not paid) and the dividends
accumulated for the period on cumulative preferred stock (whether or not
earned), by the average number of shares of the Company's common stock
outstanding. Total preferred stock dividends declared during the periods ended
June 30, 2002 and 2001 were $114,299 and $8,979, respectively. Diluted net
income per share is calculated by including the probable conversion of preferred
stock to common stock, and then dividing net income, less preferred stock
dividends declared on non-convertible stock during the period (whether or not
paid) and the dividends accumulated for the period on non-convertible cumulative
preferred stock (whether or not earned), by the adjusted average number of
shares of the Company's common stock outstanding.

15

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

(o) BUYER ASSISTANCE PLAN

The Company introduced a consulting program (Buyer Assistance Plan or "BAP") to
provide assistance to agency buyers during the first months of insurance agency
ownership. Although most of the BAP services provided by the Company are
performed in the first month of agency ownership, some of the BAP services are
performed later and a portion of BAP fees are therefore deferred until the cost
of providing the service is incurred. Unearned buyer assistance plan fees are
$1,270,697 and $100,846 at June 30, 2002 and 2001, respectively.

(p) 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.

(q) ACCOUNTS AND NOTES RECEIVABLE, NET

The net notes receivable included as part of the "Accounts and Notes Receivable,
Net" asset category are available for sale and are carried at the lower of cost
or market. Accordingly, any changes in the net notes receivable balances are
classified as an operating activity.

(r) OTHER RECEIVABLES

Included in this category are reimbursements due from agents for possible
cancellation of policies, advances of commission to agents, receivables from
sellers on contracts of services and advances to vendors on behalf of franchise
agents. Most of these amounts are collected within 30 days from borrowers or
agents and all amounts are collected within 12 months from date of recording.

(s) ADVERTISING

The Company expenses the costs of advertising as they are incurred. Total
advertising expense for the period ending June 30, 2002 and 2001 was $266,072
and $40,515, respectively.

16

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

2. NOTES RECEIVABLE

At June 30, 2002 and 2001, notes receivable consist of the following:

06/30/2002 06/30/2001
---------- ----------

Agency loans $46,912,632 $ 29,941,485
Less: Agency loan participation (44,468,620) (29,497,403)
Equipment loans 0 941
Less: Equipment loan participation 0 (941)
Consumer loans 156,017 154,783
Less: Consumer loan participation (78,419) (154,783)
---------------- ------------------

Total notes receivable, net 2,521,610 444,082
Interest earned not collected on notes * 376,762 509,531
Customer receivables 5,862,128 3,517,710
---------------- ------------------

Total accounts and notes receivable, net $ 8,760,500 $ 4,471,323
================ ==================

*The Company has a corresponding liability for interest payable to participating
lenders in the amounts of $306,330 and $317,236 at June 30, 2002 and 2001,
respectively.

Loan participation represents the transfer of notes receivable, by sale, to
"participating" banks and finance companies. The Company receives
consideration from the participating entities. In accordance with SFAS 140
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 receivable) 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 Company does not maintain control over
the transferred assets and the transfer agreements do not entitle the Company
or obligate the Company to repurchase or redeem the notes receivable before
their maturity. Based on management's experience the carrying value for notes
receivable approximates the fair value.

When the Company sells participation in notes receivable to investors, it
retains servicing rights and interest income which are retained interests in the
loan participations. Gain or loss on sales of the notes receivable depends in
part on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interests based on
their relative fair value at the date of transfer.

In all loan participation sales, the Company retains servicing responsibilities
for which it typically receives annual servicing fees ranging from .25% to
1.375% of the outstanding balance. In those instances whereby annual service
fees received by the Company are less than the cost of servicing, which is
estimated at .25% of the outstanding balance, a servicing liability is recorded.
Additionally, the Company often retains interest income. The Company's right to
interest income is not subordinate to the investor's interests and the Company
shares interest income with investors on a prorata basis. Although not
subordinate to investor's interests, the Company's retained interest is subject
to credit and prepayment risks on the transferred financial assets.

17

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

2. NOTES RECEIVABLE (CONT.)

During the period ended June 30, 2002, the Company sold $27,564,256 (138) loan
participations for which servicing rights and interest receivable was retained.
Corresponding pre-tax gains of $1,190,892 were recorded for the period ending
June 30, 2002. During the period ended June 30, 2001, the Company sold
$9,055,783 (47) loan participations for which servicing rights and interest
receivable was retained. Corresponding pre-tax gains of $286,145 were recorded
for the period ending June 30, 2001. Subsequent to the initial recording at fair
value, the servicing asset is amortized in proportion to and over the period of
estimated net servicing income. Additionally, impairment of the servicing asset
is subsequently evaluated and measured. Subsequent to the initial recording at
fair value, interest only receivables are measured as debt securities classified
as available for sale.

Of the agency loans at June 30, 2002 and 2001, $9,993,743 and $7,993,732,
respectively, are sold to various participating lenders with recourse to Brooke
Credit Corporation. Such recourse is limited to the amount of actual principal
and interest loss incurred and any such loss is not due for payment to the
participating lender until such time as all collateral is liquidated, all
actions against the borrower are completed and all liquidation proceeds applied.
However, participating lenders may be entitled to periodic advances from Brooke
Credit Corporation against liquidation proceeds in the amount of regular loan
payments. Brooke Credit Corporation is not obligated, under any circumstances,
to repurchase any loans sold to participating lenders prior to maturity or final
resolution. All such recourse loans: a) have no balances more than 60 days past
due; b) have adequate collateral; c) and are not in default.

The expense provision associated with the Company's recourse obligation is based
on the estimated fair value of the obligation. During the periods ended June 30,
2002 and June 30, 2001, the Company sold $2,191,074 and $2,804,385,
respectively, of loan participations for which the Company provided recourse.

To obtain fair values of retained interests and recourse obligations, quoted
market prices are used if available. However, quotes are generally not
available for retained interests, so the Company typically estimates fair
value based on the present value of future expected cash flows estimated
using management's best estimates of key assumptions, credit losses,
prepayment speed and discount rates commensurate with the risks involved.

The predominant risk characteristics of the underlying loans of the Company's
servicing assets have been analyzed by management to identify how to stratify
servicing assets for the purpose of evaluating and measuring impairment. The
underlying loans are very similar in virtually all respects, however management
has concluded that those underlying loans with adjustable interest rates should
be evaluated separately from loans with fixed interest rates. Accordingly,
different key economic assumptions would be used when determining the fair value
of fixed rate loans than have been used for adjustable rate loans. However, the
total amount of underlying loans that are fixed rate is not material so no
evaluation of fair value has been made for the fixed rate loan stratum. As such,
all underlying loans are part of the same stratum and have been evaluated using
the key economic assumptions identified for adjustable rate loans. No valuation
allowance has been established because the fair value for the adjustable rate
loan stratum is not less than the carrying amount of the servicing assets.

18

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

2. NOTES RECEIVABLE (CONT.)

Although substantially all of the company's loans are adjustable, a discount
rate has been applied to reflect the net present value of future revenue
streams. As such, changes in the net present value rate, or discount rate,
resulting from interest rate variations, would adversely affect the asset's fair
value.

The fair value of the interest-only strip receivable is calculated by estimating
the net present value of interest income on loans sold using the discount rate
and prepayment speeds noted in the following table. The fair value of the
interest-only strip receivable is reduced by the amount of estimated credit
losses, which are calculated using the estimated credit loss percentage noted in
the following table. On June 30, 2002 and 2001, the fair value of the
interest-only strip receivable recorded by the Company was $896,466 and
$144,343, respectively. The Company has classified the interest-only receivable
asset as available for sale.

The fair value of the "Servicing Asset" (or liability) is calculated by
estimating the net present value of net servicing income (or expense) on loans
sold using the discount rate and prepayment speeds noted in the following table.
On June 30, 2002 and 2001, the fair value of the servicing asset recorded by the
Company was $715,769 and $146,779, respectively.

Key economic assumptions used in measuring the retained interests and recourse
obligations at the date of loan participation sales completed during the year
were as follows (rates per annum):

Agency Loans (Adjustable Rate Agency Loans (Fixed-Rate Stratum)
Stratum)*

Prepayment speed 10% 10%
Weighted average life (MONTHS) 101.18 N/A
Expected credit losses 5% 5%
Discount rate 8.5% 11.00%

*Rates for these loans are adjusted based on an index (for most loans, the New
York prime rate plus 3.50%). Contract terms vary but, for most loans, the rate
is adjusted annually on December 31st.

At June 30, 2002, key economic assumptions and the sensitivity of the current
fair value of residual cash flows to immediate 10 percent and 20 percent adverse
changes in those assumptions are as follows:

Agency Loans Agency Loans
(Adjustable Rate (Fixed Rate
Stratum) Stratum)

PREPAYMENT SPEED ASSUMPTION (ANNUAL RATE) 10% N/A
Impact on fair value of 10% adverse change $(51,304) N/A
Impact on fair value of 20% adverse change $(88,501) N/A

EXPECTED CREDIT LOSSES (ANNUAL RATE) 5% N/A
Impact on fair value of 10% adverse change $(10,382) N/A
Impact on fair value of 20% adverse change $(21,049) N/A
DISCOUNT RATE (ANNUAL) 8.5% N/A
Impact on fair value of 10% adverse change $(53,118) N/A
Impact on fair value of 20% adverse change $(92,341) N/A

19

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

2. NOTES RECEIVABLE (CONT.)

These sensitivities are hypothetical and should be used with caution. The effect
of a variation in a particular assumption on the fair value of the servicing
asset and recourse liability is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities. The numbers used above are
actual dollar amounts and not listed in the thousands.

The above adverse changes are calculated on the Company's retained interests in
loans sold to participating lenders totaling $44,547,040 and excludes unsold
loans totaling $2,521,609. The above adverse changes for expected credit losses
are calculated on the Company's retained interests in loans sold with recourse
to participating lenders totaling $9,993,743 and excludes unsold and
non-recourse loans totaling $37,074,906.

The following illustrate how the changes in fair values were calculated for 10%
and 20% adverse changes in key economic assumptions (prepayment speed of 10%,
credit loss rate of 5% and discount rate of 8.5%).

10% ADVERSE CHANGE IN PREPAYMENT SPEED ON RETAINED SERVICING INTEREST:
- ----------------------------------------------------------------------

Estimated cash flows from loan servicing fees @ 11% prepay speed $ 1,425,129
Servicing expense @ 11% prepay speed 373,150
Discount of estimated cash flows to present value @ 8.5% discount rate 365,575
Carrying value of retained servicing interest in loan participations (adverse) 686,404
Carrying value of retained servicing interest in loan participations (normal) 715,769
Decrease of carrying value due to adverse change $ 29,365

20% ADVERSE CHANGE IN PREPAYMENT SPEED ON RETAINED SERVICING INTEREST
- ---------------------------------------------------------------------

Estimated cash flows from loan servicing fees @ 12% prepay speed $ 1,388,350
Servicing expense @ 12% prepay speed 362,587
Discount of estimated cash flows to present value @ 8.5% discount rate 357,267
Carrying value of retained servicing interest in loan participations (adverse) 668,496
Carrying value of retained servicing interest in loan participations (normal) 715,769
Decrease of carrying value due to adverse change $ 47,273

20

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

2. NOTES RECEIVABLE (CONT.)

10% ADVERSE CHANGE IN PREPAYMENT SPEED ON RETAINED INTEREST (STRIP RECEIVABLE):
- -------------------------------------------------------------------------------

Estimated cash flows from interest income @ 11% prepay speed $ 1,347,240
Estimated credit loss on recourse loans @ 5% credit loss/11% prepay speed 187,782
Discount of estimated cash flows to present value @ 8.5% discount rate 284,931
Carrying value of retained interest in loan participations (adverse) 874,527
Carrying value of retained interest in loan participations (normal) 896,466
Decrease of carrying value due to adverse change $ 21,939

20% ADVERSE CHANGE IN PREPAYMENT SPEED ON RETAINED INTEREST (STRIP RECEIVABLE):
- -------------------------------------------------------------------------------

Estimated cash flows from interest income @ 12% prepay speed $ 1,313,005
Estimated credit loss on recourse loans @ 5% credit loss/12% prepay speed 182,189
Discount of estimated cash flows to present value @ 8.5% discount rate 275,578
Carrying value of retained interest in loan participations (adverse) 855,238
Carrying value of retained interest in loan participations (normal) 896,466
Decrease of carrying value due to adverse change $ 41,228

10% ADVERSE CHANGE IN CREDIT LOSS RATE ON RETAINED INTEREST (STRIP RECEIVABLE):
- -------------------------------------------------------------------------------

Estimated cash flows from interest income @ 10% prepay speed $ 1,383,320
Estimated credit loss on recourse loans @ 5.5% credit loss/10% prepay sp 207,138
Discount of estimated cash flows to present value @ 8.5% discount rate 290,098
Carrying value of retained interest in loan participations (adverse) 886,084
Carrying value of retained interest in loan participations (normal) 896,466
Decrease of carrying value due to adverse change $ 10,382

20% ADVERSE CHANGE IN CREDIT LOSS RATE ON RETAINED INTEREST (STRIP RECEIVABLE):
- -------------------------------------------------------------------------------

Estimated cash flows from interest income @ 10% prepay speed $ 1,383,320
Estimated credit losses on recourse loans @ 6% credit loss /10% prepay sp 220,605
Discount of estimated cash flows to present value @ 8.5% discount rate 287,298
Carrying value of retained interest in loan participations (adverse) 875,417
Carrying value of retained interest in loan participations (normal) 896,466
Decrease of carrying value due to adverse change $ 21,049

21

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

2. NOTES RECEIVABLE (CONT.)

10% ADVERSE CHANGE IN DISCOUNT RATE ON RETAINED SERVICING INTEREST:
- -------------------------------------------------------------------

Estimated cash flows from loan servicing fees @ 10% prepay speed $ 1,463,888
Servicing expense @ 10% prepay speed 384,292
Discount of estimated cash flows to present value @ 9.35% discount rate 393,710
Carrying value of retained servicing interest in loan participations (adverse) 685,886
Carrying value of retained servicing interest in loan participations (normal) 715,769
Decrease of carrying value due to adverse change $ 29,883

20% ADVERSE CHANGE IN DISCOUNT RATE ON RETAINED SERVICING INTEREST:
- --------------------------------------------------------------------

Estimated cash flows from loan servicing fees @ 10% prepay speed $ 1,463,888
Servicing expense at 10% prepay speed 384,292
Discount of estimated cash flows to present value @ 10.2% discount rate 412,256
Carrying value of retained servicing interest in loan participations (adverse) 667,340
Carrying value of retained servicing interest in loan participations (normal) 715,769
Decrease of carrying value due to adverse change $ 48,429

10% ADVERSE CHANGE IN DISCOUNT RATE ON RETAINED INTEREST (STRIP RECEIVABLE):
- ----------------------------------------------------------------------------

Estimated cash flows from interest income @ 10% prepay speed $ 1,383,320
Estimated credit losses on recourse loans @ 5% loss rate 193,670
Discount of estimated cash flows to present value @ 9.35% discount rate 316,419
Carrying value of retained interest in loan participations (adverse) 873,231
Carrying value of retained interest in loan participations (normal) 896,466
Decrease of carrying value due to adverse change $ 23,235

20% ADVERSE CHANGE IN DISCOUNT RATE ON RETAINED INTEREST (STRIP RECEIVABLE):
- ----------------------------------------------------------------------------

Estimated cash flows from interest income @ 10% prepay speed $ 1,383,320
Estimated credit losses on recourse loans @ 5% loss rate 193,670
Discount of estimated cash flows to present value @ 10.2% discount rate 337,096
Carrying value of retained interest in loan participations (adverse) 852,554

Carrying value of retained interest in loan participations (normal) 896,466
Decrease of carrying value due to adverse change $ 43,912

22

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

2. NOTES RECEIVABLE (CONT.)

The following is an illustration of disclosure of expected static pool credit
losses for loan participations sold with recourse to the Company. "Static pool
credit loss" is an analytical tool that matches credit losses with the
corresponding loans so that loan growth does not distort or minimize actual loss
rates. The Company discloses static pool loss rates by measuring credit losses
for loans originated in each of the last three years.

AGENCY RECOURSE LOANS SOLD IN
ACTUAL & PROJECTED CREDIT LOSSES (%) AS OF: 1999 2000 2001

December 31, 2001 0 0 0
December 31, 2000 0 0
December 31, 1999 0

The following table presents quantitative information about delinquencies, net
credit losses and components of loan participations sold with recourse as of and
for the period ended June 30:

TOTAL PRINCIPAL AMOUNT PRINCIPAL AMOUNTS NET CREDIT
OF LOANS 60 OR MORE DAYS LOSSES***
PAST DUE*
TYPE OF LOAN 2002 2001 2002 2001 2002 2001

Participations Sold with Recourse $9,993,743 $7,993,732 $0 $0 $0 $0
Portfolio Loans 2,521,609 444,082 $0 $0 $0 $0
---------------- --------------- -- -- -- --

Total Loans Managed** $12,515,352 $8,437,814 $0 $0 $0 $0
================= ===============

*Loans 60 days or more past due are based on end of period total loans.
** Owned and participated loans in which the Company has a risk of loss.
*** Net credit losses are charge-offs and are based on total loans outstanding.
****Represents the principal amount of the loan. Interest receivable and
servicing rights held for participation loans are excluded from this table
because they are recognized separately.

As an employment incentive, Brooke Credit Corporation has loaned money to
certain employees for the purpose of acquiring the Company's common stock. Of
the consumer loans at June 30, 2002 and 2001, $84,712 and $175,463,
respectively, have been made to employees for this purpose. All such loans have
been sold to unaffiliated third parties without recourse.

23

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

3. PROPERTY AND EQUIPMENT

A summary of property and equipment and depreciation is as follows:

2002 2001
---- ----

Furniture and fixtures $ 368,825 $ 304,855
Office and computer equipment 1,561,602 1,460,891
Automobiles 714,525 585,755
Building, construction in process 463,442 -
------------ ------------
3,108,394 2,351,501
Less: Accumulated depreciation (1,892,324) (1,705,446)
------------ ------------

Property and equipment, net $ 1,216,070 $ 646,055
============ ============

Depreciation expense $ 140,000 $ 140,000
============ ============

24

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

4. BANK LOANS, NOTES PAYABLE, AND OTHER LONG-TERM OBLIGATIONS

2002 2001
---- ----

First National Bank & Trust, Phillipsburg, KS, line of credit, $960,000
available, $0 not utilized. Due January 2003. Interest rate is 8%.
Collateralized by accounts receivable. $ 960,000 $ 600,000

State Bank of Colwich, Colwich, KS, due August 2004. Interest rate is 11.75%,
payable $1,435 monthly. Collateralized by insurance agency assets. 31,475 44,173

Chrysler Financial, Overland Park, KS, due February 2001 to December 2003.
Interest rates are 7.80% to 8.94%, payable monthly. Collateralized by
automobiles. 159,490 145,213

Colonial Pacific, Portland, OR, due December 2001. Interest rate is 14.811%
payable $2,083 monthly. Collateralized by personal guaranty of certain
officers of Brooke Corporation. - 11,766

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. 76,457 88,751

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. - 6,672

Premier Insurance Agency, Poplar Bluff, MO. Interest rate is 5.00%, balance
due January 2002. 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

McCrory & Associates, due October 2005. Interest rate is 0%, payable $30,000
annually. Collaterized by certain agency assets by Brooke Corporation. 10,000

Anderson Insurance Agency, Inc., Ballwin, MO, due June 2006. Interest rate
is 7%, first installment of $146,805 due July 2001, and annual installments of
$133,250 thereafter. Collaterized by certain agency assets acquired by Brooke
Corporation. 693,225

Anderson Insurance Agency, Inc., Ballwin, MO, due June 2006. Interest rate is
7%, first installment of $7,543 due July 2001, and annual installments of
$6,708 thereafter. Collaterized by certain agency assets acquired by Brooke
Corporation. 35,000

Ely Insurance Services, Inc., Tampa, FL, due June 2002. Interest rate is 0%,
entire balance is due at maturity. Collaterized by certain agency assets
acquired by Brooke Corporation. 82,549

Roppolo Insurance, Shreveport, LA, due July 2001. Interest rate is 0%, entire
balance is due at maturity. Collateralized by certain agency assets acquired
by Brooke Corporation. - 115,285

25

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

4. BANK LOANS, NOTES PAYABLE, AND OTHER LONG-TERM OBLIGATIONS (CONT.)

Dawn Insurance Agency, Inc. Strasburg, CO, due May 2003. Interest rate is 0%,
payable $43,322 annually. Collateralized by certain agency assets acquired by
Brooke Corporation. $ 43,322 $ 86,644

Phares and Lites Agency, Inc., Many, LA, due June 2001. Interest rate is 0%,
entire balance is due at maturity. Collaterized by certain agency assets
acquired by Brooke Corporation. 207,825

Bruner Insurance Agency, Marianna, FL, due June 2004. Interest rate is 5%,
payable $101,900 annually. Collaterized by certain agency assets acquired by
Brooke Corporation. 277,500

Lalumondier Insurance, Inc., Kearney, MO, due September 1, 2004. Interest
rate is 5%, annual installments of $68,219 thereafter. Collateralized by
certain agency assets acquired by Brooke Corporation. 204,656 -

Anderson Insurance Agency, Inc, Ballwin, MO, due May 2002. Interest rate is
7.5%, entire balance is due at maturity. Collateralized by certain agency
assets acquired by Brooke Corporation. - 163,300

Bond-Pyatt Insurance Agency, Inc., St. Louis, MO, due August 2006. Interest
rate at prime rate, first installment of $89,465 due January 2002, and annual
installments of $89,465 thereafter. Collateralized by certain agency assets
acquired by Brooke Corporation. 447,326 -

All Drivers Insurance Inc., Colorado Springs, CO, due September 2003.
Interest rate is 5%, annual payments of $112,500. Collateralized by certain
agency assets acquired by Brooke Corporation. 225,000 -

Gateway Realty of Columbus, Inc., Columbus, NE, due September 2010. Interest
rate is 7%, annual principal payments of $67,345. Collateralized by certain
agency assets acquired by Brooke Corporation. 606,109 -

Gary Karch & Associates A-1 Insurance, Mt. Vernon, IL, due December 2002.
Interest rate is 0%. Collaterized by certain agency assets acquired by Brooke
Corporation. 67,500 -

Kohn-Senf Insurance Agency, Inc., St. Louis, MO, due December 2002. Interest
rate is 5%, entire balance due at maturity. Collaterized by certain agency
assets acquired by Brooke Corporation. 80,500 -

Sun Century Insurance Agency, Inc., Phoenix, AZ, due December 2003. Interest
rate is 5%, annual principal payments of $67,333. Collaterized by certain
agency assets acquired by Brooke Corporation. 134,667 -

W.I. of Florida, Inc., Tampa, FL, due December 2003. Interest rate is 0%,
annual payments of $73,176. Collaterized by certain agency assets acquired
by Brooke Corporation. 146,352 -

26

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

4. BANK LOANS, NOTES PAYABLE, AND OTHER LONG-TERM OBLIGATIONS (CONT.)

Auto Insurors, due October, 2002. Interest rate is 0%, and one payment of
remaining balance is due October, 2002. Collaterized by certain agency assets
acquired by Brooke Corporation. $ 60,000 -

Barry James Christensen, due January 2005. Interest rate is 0%, annual
payments of $93,333. Collaterized by certain agency assets acquired by Brooke
Corporation. 210,667 -

Service First Insurance, due January 2005. Interest rate is 0%, annual
payments of $281,375. Collaterized by certain agency assets acquired by
Brooke Corporation. 636,305 -

Goodman Insurance, due February 2004. Interest rate is 0%, annual payments of
$186,063. Collaterized by certain agency assets acquired by Brooke
Corporation. 293,710 -

JD Failla & Associates, due February 2003. Interest rate is 0%, quarterly
payments of $127,188. Collaterized by certain agency assets acquired by
Brooke Corporation. 395,431 -

Donna Sue Saffel, due March 2003. Interest rate is 0%, annual payments of
$62,500. Collaterized by certain agency assets acquired by Brooke Corporation. 62,500 -

All Insurance, due March 2005. Interest rate is 0%, annual payments of
$25,196. Collaterized by certain agency assets acquired by Brooke Corporation. 75,589 -

Jim Bob Nation Insurance, due March 2005. Interest rate is 0%, annual
payments of $116,746. Collaterized by certain agency assets acquired by
Brooke Corporation. 260,000 -

Able Insurance, due March 2006. Interest rate is 0%, annual payments of
$45,867. Collaterized by certain agency assets acquired by Brooke Corporation. 183,469 -

Rebel Auto Insurance, Inc., due May, 2003. Interest rate is 0% and one
payment of remaining balance is due May, 2003. Collaterized by certain agency
assets acquired by Brooke Corporation. 87,500 -

Crouch Insurance Agency, LLC due May 2004. Interest rate is 0%, annual pay
payments of $97,970. Collaterized by certain agency assets acquired by Brooke
Corporation. 195,940 -

Turner Insurance, Inc., due May, 2003. Interest rate is 0% and one payment of
remaining balance is due May, 2003. Collaterized by certain agency assets
acquired by Brooke Corporation. 40,000 -

NCMIC Finance Corporation, due August, 2002. Interest rate is 7.75% and one
payment of remaining balance is due August, 2002. Loan is unsecured. 1,500,000 -
--------------- ---------------

Total bank loans and notes payable 7,183,965 3,537,330
Bonds payable (See Note 5) and Capital lease obligation (See Note 6) 6,210,000 3,555,000
--------------- ---------------

Total bank loans, notes payable and other long-term obligations 13,393,965 7,092,330

Less: Current maturities and short-term debt (4,914,738) (3,127,951)
--------------- ---------------

Total long-term debt $8,479,227 $3,964,379
=============== ===============

27

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

4. BANK LOANS, NOTES PAYABLE, AND OTHER LONG-TERM OBLIGATIONS (CONT.)

None of the bank loans, notes payable and other long term obligations contain
covenants that: require the Company to maintain minimum financial ratios or
net worth; restrict management's ability to pay dividends; restrict
management's ability to buy or sell assets; restrict management's ability to
incur additional debt; or contain any subjective acceleration clauses.

Interest incurred on bank loans, notes payable and other long-term
obligations for the period ended June 30, 2002 and 2001 is $321,079 and
$228,243, respectively. Short-term debt represents the non-cash investing
transactions utilized to purchase agency assets.

Bank loans, notes payable and other long-term obligations mature as follows:

28

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

5. 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, 1998E, and 2001F) for sale
to the public in $5,000 denominations. These bonds are issued in registered
form with interest payable semi-annually on January 1st and July 1st of each
year. These bonds are not callable by Brooke Credit Corporation and are not
redeemable by the bondholder until maturity.

Brooke Credit Corporation covenants to use all bond proceeds for the purposes
of funding loans or purchasing receivables. Brooke Credit Corporation has no
debt and covenants not to incur obligations superior to its obligations to
bondholders. Therefore, the obligation to bondholders is guaranteed by the
assets and the equity of Brooke Credit Corporation.

At June 30, 2002 and 2001, the bonds payable consist of:

Interest payable is $248,199 and $138,217 at June 30, 2002 and 2001,
respectively.

29

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

6. LONG-TERM DEBT, CAPITAL LEASES

Phillips County, Kansas has issued Industrial Revenue Bonds for the purpose
of purchasing, renovating, and equipping an office building in Phillipsburg,
Kansas. The total bonds issued were $825,000 with various maturities through
2012.

The Company leases the building from Phillips County, Kansas which may be
purchased for a nominal amount at the expiration of the lease agreement. The
Company is required to provide insurance coverage on the building as
specified by the lessor. Under the criteria established by SFAS 13, this
asset has been capitalized in the Company's financial statements.

RESTRICTED CASH Cash restricted at June 30, 2002 represents proceeds received
from the issuance of Industrial Revenue Bonds that are to be used for the
purpose of purchasing, renovating and equipping a processing facility in
Phillipsburg, Kansas. The restricted cash at June 30, 2002 was $364,690.
Interest earned on the restricted cash totaled $3,132.

BUILDING UNDER CONSTRUCTION The total cash used for the purchase and
renovation of the building at June 30, 2002 was $463,442.

Future capital lease payments and long term operating lease payments are as
follows:

30

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

7. INCOME TAXES

The elements of income tax expense (benefit) are as follows:

The Company's net operating loss carryforwards are used to offset the current
tax expense by decreasing the deferred tax asset

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:

Reconciliation of deferred tax asset:

Expiration dates of net operating loss carryforwards:

2020 $ 199,015

31

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

8. EMPLOYEE BENEFIT PLANS

The Company has a defined contribution retirement plan covering substantially
all employees. Employees may contribute up to 15% of their compensation. The
Company may contribute an additional amount to the plan at the discretion of
the Board of Directors. No employer contributions were charged to expense for
periods ended June 30, 2002 and 2001.

9. CONCENTRATION OF CREDIT RISK

The Company maintains cash balances at several banks. On June 30, 2002 and
2001, the Company had account balances of $330,465 and $2,803,085,
respectively, with one bank which exceeds the $100,000 insurance limit of the
Federal Deposit Insurance Corporation.

The Company sells participation loans to several banks. On June 30, 2002, the
Company had participation loans sold of $22,401,435 to one bank. This
represents 50.4% of participations sold at June 30, 2002.

10. SEGMENT AND RELATED INFORMATION

The Company's two reportable segments as of and for the years ended June 30,
2002 and 2001 consisted of its insurance agency business and its financial
services business. The insurance agency business includes the Company's
wholly-owned subsidiaries which are licensed insurance agencies operating in
the states of Arizona, Colorado, Florida, Iowa, Illinois, Kansas, Louisiana,
Missouri, Nebraska, Nevada, New Mexico, Oklahoma, Texas, and Utah. The
Company sells insurance through its network of exclusive franchise agents,
franchise sub-agents, 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 sub-agents, 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 years ended June 30, 2002 and 2001:

32

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

10. SEGMENT AND RELATED INFORMATION (CONT.)

33

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

11. NEW ACCOUNTING STANDARD

In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS" which amends SFAS No. 19 "FINANCIAL ACCOUNTING AND REPORTING BY
OIL AND GAS PRODUCING COMPANIES". This statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and (or)
the normal operation of a long-lived asset, except for certain obligations of
lessees. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The provisions of SFAS 143 are required to be applied
starting with fiscal years beginning after June 15, 2002. Management
continues to evaluate the impact that adoption of SFAS 143 will have on its
consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS" which supersedes FASB No. 121 "ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF", and the accounting and reporting provisions of APB Opinion No.
30, "REPORTING THE RESULTS OF OPERATIONS-REPORTING THE EFFECTS OF DISPOSAL OF
A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS". SFAS 144 also amends ARB No. 51
"Consolidated Financial Statements". SFAS 144 has been applied to the second
quarter 2002 financial statements.

12. SUBSEQUENT EVENTS

Brooke Bancshares did not receive regulatory approval to consummate its
agreement of February 22, 2002 to purchase a Kansas bank prior to the
agreement termination date of June 30, 2002, so Brooke Bancshares withdrew
its regulatory application in July 2002.

Brooke Acceptance Company LLC is a limited liability company organized under
the laws of the state of Delaware on July 31, 2002. It is a bankruptcy-remote
special purpose entity of Brooke Credit Corporation and is the anticipated
purchaser of Brooke Credit Corporation loans and issuer of certain floating
rate asset backed notes. Its registered office is in Wilmington, Delaware and
its principal office is in Overland Park, Kansas.

CJD & Associates, L.L.C., of which 100% ownership interest was acquired by
the Company on July 1, 2002, is a limited liability company organized under
the laws of the state of Kansas on June 11, 1997. It is a licensed insurance
agency that sells insurance programs and "targeted market" policies though
the Company's network of agents and through agents not necessarily affiliated
with the Company under the trade name of Davidson-Babcock. Its registered and
principal offices are in Overland Park, Kansas.

34

BROOKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001

13. RELATED PARTY INFORMATION

Robert D. Orr, Leland G. Orr and Michael Hess (the principals) own 100% of
the voting stock of GI Agency, Inc. GI Agency, Inc. owns franchise agencies
which purchase Master Agent services and obtain loans from the Company at the
same general prices and general terms as provided to other unaffiliated
franchise agents. As of June 30, 2002, the total outstanding balance of all
loans made to GI Agency, Inc. by the Company's finance subsidiary, Brooke
Credit Corporation, was $1,285,849. Except for retained principal loan
balances totaling $76,616, all GI Agency, Inc. loans made by Brooke Credit
Corporation have been sold without recourse to an unaffiliated lender. As
such, the total loss exposure to the Company for loans made to GI Agency
totals $76,616. All GI Agency, Inc. borrowings are secured by hypothecation
of certain shares of the Company's common stock owned by Brooke Holdings,
Inc. which currently represents 67.87% of the total shares outstanding.
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.

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. On occasion, the Company has
assigned all of its rights, title and interest in agreements to purchase
insurance agencies to GI Agency, Inc., without consideration from GI Agency,
Inc. From January 1, 2002 through June 30, 2002, GI Agency collected no
commissions on assets subject to such assignments.

Robert D. Orr, Leland G. Orr and Michael Hess have, in some cases, each
guaranteed amounts due 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 guarantees is important to the Company's prospects.

The Company has extended a $495,000 line of credit loan to Brooke Holdings,
Inc. which owns 67.87% of the Company's common stock. This line of credit is
unsecured and was renewed on December 31, 2001 bearing interest at a rate of
9.5% per annum and maturing on December 31, 2002. The outstanding principal
balance on the line of credit as of June 30, 2002 was $495,0