BROOKE CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(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, 2004

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

For the transition period from to

Commission file number: 000-31698

BROOKE CORPORATION

(Exact name of registrant as specified in its charter)

Kansas

48-1009756

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

10950 Grandview Drive, Suite 600, Overland Park, Kansas 66210

(Address of principal executive offices) (Zip Code)

Issuer’s telephone number: (913) 661-0123

Indicate by check mark whether the registrant (1) has 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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of June 30, 2004 there were 9,361,798 shares of the registrant’s sole class of common stock outstanding.

Brooke Corporation

Consolidated Financial Statements

For the Six Months Ended June 30, 2004 and 2003

Contents


INDEPENDENT ACCOUNTANTS’ REPORT		3

CONSOLIDATED FINANCIAL STATEMENTS		4

CONSOLIDATED BALANCE SHEETS		4-5

CONSOLIDATED STATEMENTS OF INCOME - THREE MONTHS ENDED JUNE 30, 2004 AND 2003		6

CONSOLIDATED STATEMENTS OF INCOME - SIX MONTHS ENDED JUNE 30, 2004 AND 2003		7

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY		8

CONSOLIDATED STATEMENTS OF CASH FLOWS		9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		10-38

Brooke Corporation

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, 2004 and 2003, and the related consolidated statements of income for the three-month and six-month periods then ended and the changes in stockholders’ equity and cash flows for the six months then ended. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board, 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 interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

Summers, Spencer & Callison, CPAs, Chartered

Topeka, Kansas

July 30, 2004

PART I – FINANCIAL STATEMENTS

Item 1. Financial Statements

Brooke Corporation

Consolidated Balance Sheets

(unaudited)

JUNE 30, 2004 and 2003


ASSETS

	2004			2003
Current Assets
Cash	$	12,902,890		$	5,365,953
Accounts and notes receivable, net		27,541,586			13,283,358
Note receivable, parent company		—			608,189
Other receivables		1,688,784			1,040,967
Securities		18,674,370			3,253,221
Interest-only strip receivable		2,689,601			2,411,050
Deposits		272,954			337,726
Prepaid expenses		586,418			1,109,884

Total Current Assets		64,356,603			27,410,348

Investment in Businesses		366,983			366,983

Property and Equipment
Cost		5,571,312			4,471,703
Less: Accumulated depreciation		(1,939,304	)		(2,060,499	)

Net Property and Equipment		3,632,008			2,411,204

Other Assets
Excess of cost over fair value of net assets		6,542,518			2,334,627
Less: Accumulated amortization		(897,639	)		(516,309	)
Prepaid finders fee		—			13,578
Contract database		572,535			35,437
Servicing asset		1,786,413			1,225,309
Agency assets		6,465,081			328,527
Restricted cash		244,208			306,185

Net Other Assets		14,713,116			3,727,354

Total Assets	$	83,068,710		$	33,915,889


See accompanying notes to financial statement and independent accountants’ review report		4

Brooke Corporation

Consolidated Balance Sheets

(unaudited)

JUNE 30, 2004 and 2003

LIABILITIES AND STOCKHOLDERS’ EQUITY


	2004		2003
Current Liabilities
Accounts payable	$	7,225,847	$	4,267,920
Premiums payable to insurance companies		8,535,137		5,443,461
Payable under participation agreements		3,538,716		—
Unearned buyer assistance plan fees		445,660		1,174,042
Accrued commission refunds		882,137		433,325
IBNR loss reserve		75,000		—
Unearned insurance premiums		249,859		—
Income tax payable		1,968,733		1,208,510
Deferred income tax payable		260,540		123,199
Short-term debt		3,684,287		1,335,661
Current maturities of long-term debt		9,654,991		2,932,639

Total Current Liabilities		36,520,907		16,918,757

Non-current Liabilities
Servicing liability		42,366		49,332
Long-term debt less current maturities		38,692,716		12,103,426

Total Liabilities		75,255,989		29,071,515

Stockholders’ Equity
Common stock, $.01 par value, 99,500,000 shares authorized, 9,361,798 and 4,639,294 shares issued and outstanding		93,618		46,393
Preferred stock, $75 par value, 1,000 shares authorized, 0 and 433 shares issued and outstanding		—		32,500
Preferred stock, $25 par value, 464,625 shares authorized, 49,667 shares issued and outstanding		1,241,675		1,241,675
Preferred stock, $32 par value, 34,375 shares authorized, 24,331 shares issued and outstanding		778,592		778,592
Additional paid-in capital		4,656,667		4,606,561
Retained earnings (deficit)		536,415		(2,100,498	)
Accumulated other comprehensive income		505,754		239,151

Total Stockholders’ Equity		7,812,721		4,844,374

Total Liabilities and Stockholders’ Equity	$	83,068,710	$	33,915,889


See accompanying notes to financial statement and independent accountants’ review report		5

Brooke Corporation

Consolidated Statements of Income

(unaudited)

THREE MONTHS ENDED JUNE 30, 2004 AND 2003


	2004			2003
Operating Income
Insurance commissions	$	15,010,752		$	10,785,698
Interest income (net)		1,085,084			422,354
Facilitator fees		1,293,739			1,339,285
Gain on sale of businesses		197,902			163,009
Buyer assistance plan fees		3,263,949			2,028,177
Gain on sale of notes receivable		2,143,037			510,709
Gain (loss) on extinguishment of debt		(917	)		—
Insurance premiums earned		47,888			—
Policy fee income		526,008			115,572
Other income		26,153			4,231

Total Operating Income		23,593,595			15,369,035

Operating Expenses
Commissions expense		11,671,451			8,618,171
Payroll expense		4,627,581			2,612,513
Depreciation and amortization		584,880			309,750
Insurance loss and loss expense incurred		30,000			—
Other operating expenses		3,631,917			2,405,297
Bond interest expense		166,887			166,090

Total Operating Expenses		20,712,716			14,111,821

Income from Operations		2,880,879			1,257,214

Other Expenses
Interest expense		500,453			113,789

Total Other Expenses		500,453			113,789

Income Before Income Taxes		2,380,426			1,143,425
Income tax expense		810,339			388,765

Net Income	$	1,570,087		$	754,660

Net Income per Share:
Basic		.16			.07
Diluted		.15			.07


See accompanying notes to financial statement and independent accountants’ review report.		6

Brooke Corporation

Consolidated Statements of Income

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003


	2004		2003
Operating Income
Insurance commissions	$	31,188,567	$	22,439,299
Interest income (net)		1,877,018		823,106
Facilitator fees		2,727,989		1,879,410
Gain (loss) on sale of businesses		401,546		(627	)
Buyer assistance plan fees		6,475,004		4,239,602
Gain on sale of notes receivable		1,948,396		1,413,632
Gain (loss) on extinguishment of debt		24,083		5,000
Insurance premiums earned		268,347		—
Policy fee income		877,880		208,020
Other income		108,547		36,684

Total Operating Income		45,897,377		31,044,126

Operating Expenses
Commissions expense		22,687,544		16,695,986
Payroll expense		8,927,174		5,236,834
Depreciation and amortization		1,091,647		606,304
Insurance loss and loss expense incurred		30,000		—
Other operating expenses		6,237,962		4,412,271
Bond interest expense		333,773		328,993

Total Operating Expenses		39,308,100		27,280,388

Income from Operations		6,589,277		3,763,738

Other Expenses
Interest expense		923,601		209,299

Total Other Expenses		923,601		209,299

Income Before Income Taxes		5,665,676		3,554,439
Income tax expense		1,857,435		1,208,510

Net Income	$	3,808,241	$	2,345,929

Net Income per Share:
Basic		.40		.24
Diluted		.37		.22


See accompanying notes to financial statement and independent accountants’ review report.		7

Brooke Corporation

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

Common
Stock

Preferred
Stock

Treasury
Stock

Add’l Paid-
In Capital

Retained
Earnings

Accum Other
Comprehensive
Income

Total

Balances, December 31, 2002

774,973