United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2008.

o		Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________.

Commission file number: 1-33677

BROOKE CAPITAL CORPORATION

(Exact Name of registrant in its charter)

Kansas		48-1187574
(State of incorporation)		(I.R.S. Employer Identification Number)

8500 College Boulevard, Overland Park, Kansas 66210
(Address of principal executive offices)
Issuer’s telephone number (913) 383-9700

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 15, 2008, there were 10,455,817 shares of the registrant’s sole class of common stock, $.01 par value, outstanding.

 

 

Brooke Capital Corporation
INDEX TO FORM 10-Q

		Page Numbers
PART I FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitive and Qualitative Disclosure About Market Risk			50
Item 4. Controls and Procedures			50
PART II OTHER INFORMATION			50
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			51
Item 4. Submission of Matters to a Vote of Security Holders			51
Item 5. Other Information			51
Item 6. Exhibits			52
SIGNATURES			53
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Brooke Capital Corporation
Combined Balance Sheets
(in thousands, except share amounts)
ASSETS

		(unaudited)
		June 30, 2008				December 31, 2007
Current Assets
Cash		$	229			$	2,174
Restricted cash			234				171
Accounts and notes receivable, net			19,109				28,067
Receivables from Parent and affiliates			22,862				18,441
Other receivables			1,749				2,086
Income taxes refundable			11,322				1,187
Other current assets			1,539				175
Advertising supply inventory			664				929
Assets of discontinued operation, held-for-sale			26,860				25,987
Total Current Assets			84,568				79,217
Investment in Businesses			951				9,413
Property and Equipment
Cost			16,239				17,339
Less: Accumulated depreciation			(4,244	)			(4,162	)
Net Property and Equipment			11,995				13,177
Other Assets
Non-current assets of discontinued operation, held-for-sale			8,196				8,124
Amortizable intangible assets, net			525				553
Net Other Assets			8,721				8,677
Total Assets		$	106,235			$	110,484

See accompanying summary of accounting policies and notes to financial statements.

Brooke Capital Corporation
Combined Balance Sheets
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

		(unaudited)
		June 30, 2008				December 31, 2007
Current Liabilities
Accounts payable		$	21,837			$	7,141
Premiums payable to insurance companies			3,001				5,322
Producer payable			4,626				4,496
Interest payable			973				1,314
Other current liabilities			3,757				2,330
Short-term debt			8,063				5,056
Current maturities of long-term debt			24,986				27,066
Liabilities of discontinued operation, held-for-sale			28,076				26,643
Total Current Liabilities			95,319				79,368
Non-Current Liabilities
Long-term debt less current maturities			16,339				18,369
Total Liabilities			111,658				97,737
Stockholders’ (Deficit) Equity
Common stock, $.01 par value, 25,000,000 shares authorized, 10,455,817 and 8,475,817 shares issued and outstanding			105				85
Additional paid-in capital			14,671				14,372
Accumulated deficit			(19,154	)			(1,232	)
Accumulated other comprehensive loss			(1,045	)			(478	)
Total Stockholders’ (Deficit) Equity			(5,423	)			12,747
Total Liabilities and Stockholders’ (Deficit) Equity		$	106,235			$	110,484

See accompanying summary of accounting policies and notes to financial statements.

Brooke Capital Corporation
Combined Statements of Operations
UNAUDITED
(in thousands, except per share data)

		For three-month periods ended
						(restated)
		June 30, 2008				June 30, 2007
Operating Revenues
Insurance commissions		$	27,201			$	27,615
Collateral preservation			3,557				1,363
Consulting fees			—				3,740
Gain (loss) on sale of business			(3,631	)			1,161
Initial franchise fees for basic services			—				7,095
Initial franchise fees for buyer assistance plans			—				70
Loss on sale of assets			(1,323	)			—
Interest income			71				177
Other income			175				696
Total Operating Revenues			26,050				41,917
Operating Expenses
Commissions expense			22,072				22,126
Payroll expense			6,070				6,187
Depreciation and amortization			492				42
Provision for doubtful accounts			8,076				1,337
Other operating expenses			13,025				9,760
Total Operating Expenses			49,735				39,452
Income (Loss) From Operations			(23,685	)			2,465
Other Expenses
Interest expense			642				705
Total Other Expenses			642				705
Income (Loss) from Continuing Operations Before Income Taxes			(24,327	)			1,760
Income tax expense (benefit)			(9,237	)			612
Net Income (Loss) from continuing operations			(15,090	)			1,148
Net Income from discontinued operation			56				216
Net Income (Loss)		$	(15,034	)		$	1,364
Net Income (Loss) Per Share:
Basic and diluted
Net income (loss) from continuing operations		$	(1.78	)		$	0.14
Net income from discontinued operation			0.01				0.03
Net income (loss)		$	(1.77	)		$	0.17

See accompanying summary of accounting policies and notes to financial statements.

Brooke Capital Corporation
Combined Statements of Operations
UNAUDITED
(in thousands, except per share data)

		For six-month periods ended
						(restated)
		June 30, 2008				June 30, 2007
Operating Revenues
Insurance commissions		$	60,798			$	59,623
Collateral preservation			9,270				2,254
Consulting fees			250				4,730
Gain (loss) on sale of business			(4,477	)			1,842
Initial franchise fees for basic services			1,320				19,965
Initial franchise fees for buyer assistance plans			—				455
Loss on sale of assets			(1,323	)			—
Interest income			84				262
Other income			366				19
Total Operating Revenues			66,288				89,150
Operating Expenses
Commissions expense			46,982				44,967
Payroll expense			12,101				11,973
Depreciation and amortization			962				73
Provision for doubtful accounts			8,428				4,383
Other operating expenses			25,199				20,311
Total Operating Expenses			93,672				81,707
Income (Loss) From Operations			(27,384	)			7,443
Other Expenses
Interest expense			1,632				1,258
Total Other Expenses			1,632				1,258
Income (Loss) from Continuing Operations Before Income Taxes			(29,016	)			6,185
Income tax expense (benefit)			(11,015	)			2,328
Net Income (Loss) from continuing operations			(18,001	)			3,857
Net Income from discontinued operation			79				223
Net Income (Loss)		$	(17,922	)		$	4,080
Net Income (Loss) Per Share:
Basic and diluted
Net income (loss) from continuing operations		$	(2.12	)		$	0.48
Net income from discontinued operation			0.01				0.03
Net income (loss)		$	(2.11	)		$	0.51

See accompanying summary of accounting policies and notes to financial statements.

Brooke Capital Corporation
Combined Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss)
(in thousands, except per share data)

														Retained				Accumulated
										Additional				Earnings				Other
		Common				Common				Paid-In				(Accumulated				Comprehensive
		Shares				Stock				Capital				Deficit)				Loss				Total
Balances, December 31, 2006 (Restated)			2,666,666			$	27			$	20,459			$	9,919			$	(167	)		$	30,238
Exercise of warrant, net of related costs			547,820				5				388				—				—				393
Purchase and retirement of common stock			(128,669	)			(1	)			(737	)			—				—				(738	)
Restricted stock awards			390,000				4				(4	)			—				—				—
Equity compensation costs			—				—				244				—				—				244
Issuance of stock in connection with merger			5,000,000				50				(50	)			—				—				—
Dividend to Parent prior to consummation of merger			—				—				(5,928	)			(13,489	)			—				(19,417	)
Comprehensive income:
Net income			—				—				—				2,338				—				2,338
Changes in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects			—				—				—				—				(311	)			(311	)
Total comprehensive income																							2,027
Balances, December 31, 2007			8,475,817				85				14,372				(1,232	)			(478	)			12,747
Equity compensation costs			—				—				319				—				—				319
Restricted stock forfeited			(10,000	)			—				—				—				—				—
Restricted stock awards			1,990,000				20				(20	)			—				—				—
Comprehensive loss:
Net loss			—				—				—				(17,922	)			—				(17,922	)
Changes in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment and tax effects			—				—				—				—				(567	)			(567	)
Total comprehensive loss																							(18,489	)
June 30, 2008 (unaudited)			10,455,817			$	105			$	14,671			$	(19,154	)		$	(1,045	)		$	(5,423	)

Note: On November 15, 2007, Brooke Franchise Corporation was merged with and into Brooke Capital Corporation. Upon closing of the transaction, Brooke Franchise paid out its total stockholders’ equity of $19,417,000 in the form of a dividend to its then-parent, Brooke Corporation. Results of operations for Brooke Capital and Brooke Franchise have been combined since the date both companies have been under the common control of Brooke Corporation (December 8, 2006).

See accompanying summary of accounting policies and notes to financial statements.

Brooke Capital Corporation
Combined Statements of Cash Flows
UNAUDITED
(in thousands)

		For six-month periods ended
						(restated)
		June 30, 2008				June 30, 2007
Cash flows from operating activities:
Net (loss) income		$	(17,922	)		$	4,080
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization			962				73
Loss (gain) on sale of businesses			4,477				(1,842	)
Loss (gain) on sale of assets			1,323				—
(Increase) decrease in assets:
Accounts and notes receivable			8,958				119
Other receivables			274				(7,433	)
Other current assets			(11,234	)			3,629
Business inventory			4,831				(1,733	)
Purchase of business inventory provided by sellers			105				11,021
Payments on seller notes for business inventory			(2,970	)			(4,790	)
Increase (decrease) in liabilities:
Accounts and expenses payable			14,696				4,855
Other liabilities			(1,105	)			2,526
Net cash provided by operating activities			2,395				10,505
Cash flows from investing activities:
Cash payments for property and equipment			(1,048	)			(6,553	)
Net cash used in investing activities			(1,048	)			(6,553	)
Cash flows from financing activities:
Advances to Parent and Affiliates			(4,421	)			1,172
Increases in short-term borrowings			3,007				—
Proceeds on debt			—				3,992
Payments on debt			(1,878	)			(355	)
Net cash used in financing activities			(3,292	)			4,809
Net increase (decrease) in cash and cash equivalents			(1,945	)			8,761
Cash and cash equivalents, beginning of period			2,174				12,366
Cash and cash equivalents, end of period		$	229			$	21,127

See accompanying summary of accounting policies and notes to financial statements.

Brooke Capital Corporation
Notes to Combined Financial Statements
UNAUDITED

1. Summary of Significant Accounting Policies

(a) Organization

Brooke Capital Corporation, formerly First American Capital Corporation (the “Company”), is a financial services company incorporated under the laws of the State of Kansas with its principal office located in Overland Park, Kansas. The Company has been listed on the American Stock Exchange since August 30, 2007 under the symbol “BCP.” The Company’s primary business purpose is franchising insurance and related businesses and providing services to its franchisees through its network of regional offices, service centers and sales centers. Other business purposes of the Company are to provide consulting services to business sellers and collateral preservation assistance to lenders. In addition, the Company uses its industry contacts and expertise in insurance brokerage to broker loans for, and consult with, managing general agencies and managing general agencies that own insurance companies, specializing in hard-to-place insurance sales, captive insurance agencies and funeral homes. The Company will also use its expertise to preserve collateral and monitor insurance agency borrowers on behalf of lenders.

Affiliates of the Company have entered into revenue sharing agreements with the Company, which provide that any and all revenues paid under an affiliate’s name are transferred to the Company. These combined financial statements represent the financial position, results of operations, and cash flows of the resulting economic entity known as Brooke Capital Corporation.

The Company is a majority-owned subsidiary of Brooke Corporation (sometimes referred to “Parent” or as the “Parent Company”), a Kansas corporation, whose stock is listed on the NASDAQ Stock Exchange under the symbol “BXXX.” Brooke Corporation’s registered office is located in Overland Park, Kansas.

The subsidiaries of the Company are as follows:

First Life America Corporation (“First Life” or “FLAC”) is a licensed insurance company distributing a broad range of individual life and annuity insurance products to individuals in eight states. As a sale of First Life is pending, it has been presented as a discontinued operation and its assets and liabilities being sold are presented as held-for-sale in these financial statements.

Brooke Capital Advisors, Inc. (“Brooke Capital Advisors” or “BCA”), formerly First Life Benefits, is a broker that in the past offered life, health, disability and annuity products underwritten by other companies and complementing those products offered by First Life America Corporation. Beginning on December 8, 2006, Brooke Capital Advisors, Inc. began operating a managing general agency loan brokerage and consulting business.

Brooke Investments, Inc. is a Kansas corporation that acquires real estate for lease to franchisees or other purposes. In addition, to help preserve collateral interests, Brooke Investments enters into real estate leases that are subleased or licensed to franchisees. Effective July 1, 2008, all franchise operations were transferred to Brooke Investments, Inc. and it became the named franchisor.

Brooke Agency, Inc. is a Kansas corporation. Brooke Agency acquires for investment those insurance agencies or funeral homes where local ownership is not considered critical to financial performance. Brooke Agency does not have any employees or incur operating expenses because the Company usually retains a share of the commissions to provide personnel and facilities.

Brooke Life and Health, Inc., a Kansas corporation, is a licensed insurance agency that sells life and health insurance through the Company’s network of franchise agents, subagents and insurance producers.

The American Heritage, Inc., a Kansas corporation, consults with and otherwise assists agent buyers under the trade name of Heritage Agency Consultants.

First Brooke Insurance and Financial Services, Inc. is a Texas corporation used for licensing purposes.

The American Agency, Inc., a Kansas corporation, consults with agent sellers and brokers agency sales under the trade name of Agency Business Consultants.

Brooke Funeral Services Company, LLC, a Delaware corporation, was created to offer funeral services and life insurance through the Company’s network of funeral franchisees. Brooke Funeral Services Company, LLC has acquired ownership of franchise agreements from Brooke Corporation and/or the Company as part of an arrangement to preserve collateral on behalf of Aleritas Capital Corp., a majority-owned subsidiary of Brooke Corporation, as required by the securitization process. Brooke Funeral Services Company, LLC has contracted with Brooke Corporation and/or the Company for performance of any obligations to agents associated with all such franchise agreements.

First Capital Venture, Inc. is a shell company with no operations and no plans for operations at this time.

The affiliates included in these combined statements are as follows:

Brooke Agency Services Company LLC is licensed as an insurance agency and was created to offer property, casualty, life and health insurance through the Company’s network of franchisees. Brooke Agency Services Company LLC has acquired ownership of certain franchise agreements from Brooke Corporation and/or the Company as part of an arrangement to preserve collateral on behalf of Aleritas Credit Corp., as required by the securitization process. Brooke Agency Services Company LLC is a wholly-owned subsidiary of Brooke Corporation and has contracted with Brooke Corporation and/or the Company for performance of any obligations to agents associated with all such franchise agreements.

Brooke Agency Services Company of Nevada, LLC, is a licensed Nevada insurance agency, wholly-owned by Brooke Corporation, that holds insurance contracts in Nevada for the Company.

The Company has business transactions with another affiliate, Aleritas Capital Corp., “Aleritas,” a Delaware corporation, operating as a specialty finance company lending primarily to locally-owned businesses that sell insurance. Aleritas is a majority-owned subsidiary of Brooke Corporation and its stock is traded over the counter (OTCBB: BRCR).

(b) Basis of Presentation

On November 15, 2007, the Company completed a merger with Brooke Franchise Corporation (“Brooke Franchise”), which was then a wholly-owned subsidiary of Brooke Corporation. Pursuant to the Merger Agreement, Brooke Franchise was merged with and into the Company, resulting in the Company being the survivor. The transaction was accounted for in accordance with the guidance under Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” issued by the Financial Accounting Standards Board (“FASB”).

This merger represented a transaction between entities under common control. Accordingly, the Company has recorded the assets and liabilities of Brooke Franchise at their carrying amounts at the date of transfer as if the transaction had taken place as of the beginning of the fiscal year 2007. In addition, the Company’s results of operations and other changes in financial position for 2007 have been reported as if the merger had occurred at the beginning of the period.

Prior periods’ financial statements and related disclosures have been restated to furnish comparative information for the periods during which the Company and Brooke Franchise have been under common control.

The accompanying financial statements include the consolidated financial statements of the Company and its subsidiaries combined with the financial statements of certain affiliates as noted above. All significant intracompany accounts and transactions have been eliminated in both the consolidated and the combined financial statements.

The accompanying combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which for First Life America Corporation, differ from statutory accounting practices prescribed or permitted by the Kansas Insurance Department (“KID”).

A complete summary of significant accounting policies is included in Note 1 to the audited financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2007.

Discontinued Operation - On July 18, 2008, the Company entered into an agreement to sell its wholly-owned life insurance subsidiary, First Life America Corporation (“First Life” or “FLAC”) to First Trinity Financial Corporation. The sale is subject to customary regulatory approval by the Kansas Insurance Department. During the second quarter 2008, the Company had committed to a plan to sell First Life. Accordingly, as of June 30, 2008, First Life has been presented as a discontinued operation and its assets and liabilities being sold are presented as held-for-sale in the Company’s combined financial statements. All periods presented have been reclassified to reflect this discontinued operation. See additional information in Note 20.

(c) 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. It is at least reasonably possible these estimates will change in the near term.

(d) 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. Restricted cash is not included in cash equivalents. The carrying value of cash and cash equivalents approximates their estimated fair values.

(e) Allowance for Doubtful Accounts

The Company estimates that a certain level of accounts receivable, primarily franchisee account balances, will be uncollectible; therefore, allowances of $6,700,000 and $1,114,000 at June 30, 2008 and December 31, 2007, respectively, have been established. The Company has historically assisted its franchisees with cash flow by providing commission advances because of cyclical fluctuations in commission receipts, but expects repayment of all such advances within the 30-day franchise statement cycle and is placed on a watch list if not paid within four months. At June 30, 2008, the amount of allowance was determined after analysis of several specific factors, including franchise advances classified as “watch” status. Effective August 15, 2008, the Company will no longer provide commission advances.

The following schedule entitled “Valuation and Qualifying Accounts” summarizes the Allowance for Doubtful Accounts activity for the periods ended June 30, 2008 and December 31, 2007. Additions to the allowance for doubtful accounts are charged to expense. Charges to expense during 2007 were reduced as a result of Brooke Corporation’s guaranty of certain receivables of Brooke Franchise totaling $2,485,000 in connection with the November 15, 2007 merger transaction:

Valuation and Qualifying Accounts
(in thousands)

		Balance at
		Beginning of				Charges to								Balance at
		Period				Expenses				Write Offs				End of Period
Allowance for Doubtful Accounts
Year ended December 31, 2007		$	1,466			$	4,276			$	4,628			$	1,114
Period ended June 30, 2008		$	1,114			$	6,645			$	1,059			$	6,700

The Company does not accrue interest on loans that are 90 days or more delinquent and payments received on all such loans are applied to principal. Loans and accounts receivable are written off when management determines that collection is unlikely. This determination is made based on management’s experience and evaluation of the debtor’s circumstances.

(f) Revenue Recognition

Commissions. The Company has estimated and accrued a liability for commission refunds of $404,000 and $481,000 at June 30, 2008 and December 31, 2007, respectively.

Interest income, net. The Company recognizes interest income when earned.

(g) Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation on buildings and land improvements is calculated using the straight-line method over the estimated useful lives of the respective assets. Depreciation on furniture, equipment and automobiles is calculated using both straight-line and accelerated methods over the estimated useful lives of the respective assets. The estimated useful lives are generally as follows:

Buildings and leasehold improvements		39 years
Land improvements		15 years
Furniture and equipment		3 to 10 years
Automobiles		5 years

(h) Amortizable Intangible Assets

Amortization was $28,000 and $31,000 for the six-month periods ended June 30, 2008 and 2007, respectively.

(i) Income Taxes

The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under accounting principles generally accepted in the United States of America and balances determined for tax reporting purposes.

(j) Investment in Businesses

The number of businesses purchased to hold in inventory for sale for the six-month periods ended June 30, 2008 and 2007 was 2 and 11, respectively. Correspondingly, the number of businesses sold from inventory for the six-month periods ended June 30, 2008 and 2007 was 5 and 9, respectively. At June 30, 2008 and December 31, 2007, the “Investment in Businesses” inventory consisted of 3 businesses and 6 businesses, respectively, with fair market values totaling $951,000 and $9,413,000, respectively.

(k) Net Earnings Per Share Data

Basic net income per common share is calculated by dividing net income by the weighted average number of shares of the Company’s common stock outstanding. Diluted net income is calculated by including the weighted average effect of dilutive warrants outstanding during the periods. The weighted average number of shares issuable upon the exercise of outstanding warrants assumes that the applicable proceeds from such exercises are used to acquire treasury shares at the average price of common stock during the periods. Basic and diluted earnings per share from continuing operations for the three and six-month periods ended June 30, 2008 and 2007 were determined as follows (adjusted for the 1-for-3 reverse stock split effective in April 2007 and the issuance of 5,000,000 shares in connection with the merger of Brooke Franchise with and into the Company):

		Three-Month Periods Ended								Six-Month Periods Ended
		June 30,								June 30,
(in thousands, except share data)		2008				2007				2008				2007
Numerator:
Net income (loss) — from continuing operations — numerator for basic earnings per share		$	(15,090	)		$	1,148			$	(18,001	)		$	3,857
Effect of dilutive securities			0				0				0				0
Numerator for diluted earnings per share			(15,090	)			1,148				(18,001	)			3,857
Denominator:
Average common shares outstanding (after the effect of 1-for-3 reverse stock split and issuance of 5,000,000 shares to effect merger) used for basic and diluted earnings per share			8,487,685				8,101,568				8,480,652				8,063,890
Earnings (loss) per share from continuing operations:
Basic and diluted		$	(1.78	)		$	0.14			$	(2.12	)		$	0.48

Diluted earnings per share for the above periods excludes the impact of outstanding warrants to purchase 49,999 shares as the impact would be antidilutive.

(l) Other Current Assets

Included in other current assets are certain deposits and prepaid and other current amounts. The carrying values of these other assets approximate their fair values.

(m) Advertising

Total advertising and marketing expenses for the six-month periods ended June 30, 2008 and 2007 were $6,673,000 and $7,371,000, respectively.

(n) Restricted Cash

The Company holds insurance commissions for the special purpose entities Brooke Acceptance Company, LLC, Brooke Captive Credit Company 2003, LLC, Brooke Securitization Company 2004A, LLC, Brooke Capital Company, LLC, Brooke Securitization Company V, LLC, and Brooke Securitization Company 2006-1, LLC, all wholly-owned subsidiaries of Aleritas Capital Corp., for the purpose of making future loan payments, and the use of these funds is restricted. The amount of commissions held at June 30, 2008 and December 31, 2007 was $234,000 and $171,000, respectively.

(o) Stock-Based Compensation

The Company has granted restricted stock awards to certain officers and directors pursuant to The Brooke Capital Corporation 2007 Equity Incentive Plan. Compensation costs were determined based upon the fair value of the awards on their respective grant dates and are being recorded as expense over the related vesting periods.

2. Transactions with the Parent Company

The Company is a majority-owned subsidiary of Brooke Corporation. The Company relies on Brooke Corporation to provide facilities, administrative support, cash management, and accounting services. The Company pays a monthly administrative fee for these shared services. For the three-month periods ended June 30, 2008 and 2007, the total amount paid to the Parent Company was $450,000 and $735,000, respectively. For the six-month periods ended June 30, 2008 and 2007, the total amount paid to the Parent Company was $900,000 and $1,935,000, respectively.

The majority of cash required for operations is kept in a common corporate checking account and amounts due to or amounts due from the Parent Company are netted, and recorded on the balance sheet as a Parent Company receivable or Parent Company payable, accordingly. The Parent Company receivable at June 30, 2008 and December 31, 2007 resulted primarily from the additional cash generated from the Company’s purchase and sale of a business activity. At June 30, 2008 and December 31, 2007, the Company reported receivables from its Parent Company and other related parties of $22,862,000 and $18,441,000, respectively, as a result of this and other transactions with affiliates. Included in the current balance is $4,700,000 related to the Delta Plus Holdings transaction of retail business, along with $1,014,000 for the guarantee of accounts receivable. Transactions between affiliates in the normal course of operations were $4,236,000 with the remaining in common accounts.

On March 30, 2007, Brooke Corporation acquired Delta Plus Holdings, Inc., a holding company based in Missouri. At the same time, all of the insurance agency assets of Christopher Joseph & Company, a direct subsidiary of Delta Plus Holdings, Inc., were sold to Brooke Franchise Corporation for $8,984,000. Christopher Joseph & Company operated retail insurance offices in Missouri, Kansas, Florida and Oklahoma, marketing personal and commercial products for other affiliated and non-affiliated insurance companies. The retail offices of Christopher Joseph & Company have since been sold or converted to Brooke franchise offices.

At June 30, 2008 and December 31, 2007, the Company reported income taxes refundable of $11,322,000 and $1,187,000, respectively. These amounts represent income taxes expected to be refunded as a result of the Company’s ability to carry back current net operating losses through its consolidated returns filed with the Parent Company in prior years.

In accordance with the shared services agreement with Brooke Corporation, property and equipment for the Company were to be provided by Brooke Corporation. On June 30, 2007, Brooke Franchise purchased property and equipment from Brooke Corporation related to franchise operations. The Company, as successor in interest, has continued to make such purchases since that date. Accordingly, the fees paid by the Company to Brooke Corporation in connection with the shared services agreement were reduced during 2007.

Brooke Corporation has guaranteed loans on behalf of the Company.

3. Accounts and Notes Receivable, net

At June 30, 2008 and December 31, 2007, accounts and notes receivable consist of the following (in thousands):

		June 30, 2008				December 31, 2007
Business loans		$	3,600			$	4,263
Less: Business loans sold			(3,134	)			(1,662	)
Plus: Loan participation classified as secured borrowing			3,134				1,662
Allowance for loan losses			(800	)			—
Total notes receivable, net			2,800				4,263
Interest earned not collected on notes			81				322
Customer receivables			22,928				24,596
Allowance for doubtful accounts			(6,700	)			(1,114	)
Total accounts and notes receivable, net		$	19,109			$	28,067

Loan participations represent the transfer of notes receivable, by sale, to “participating” lenders. These transfers are accounted for by the criteria established by SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Of the notes receivable sold at June 30, 2008 and December 31, 2007, none were accounted for as sales because the transfers did not meet the criteria established by SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

4. Property and Equipment

A summary of property and equipment at June 30, 2008 and December 31, 2007 is as follows (in thousands):

		June 30, 2008				December 31, 2007
Land		$	202			$	202
Buildings and leasehold improvements			6,811				6,767
Furniture and equipment			5,014				5,664
Computer equipment			3,234				3,655
Automobiles			978				1,051
Total property and equipment			16,239				17,339
Accumulated depreciation and amortization			(4,244	)			(4,162	)
Net property and equipment		$	11,995			$	13,177

Depreciation expense was $935,000 and $42,000 during the six-month periods ended June 30, 2008 and 2007, respectively.

As discussed in Note 2, on June 30, 2007, Brooke Franchise acquired property and equipment from Brooke Corporation related to franchise operations. In the past, property and equipment were provided to the franchise operations by Brooke Corporation in connection with a shared services agreement. Property and equipment received from Brooke Corporation was recorded by Brooke Franchise using the initial cost basis and accumulated depreciation of the assets transferred.

5. Bank Loans, Notes Payable, and Other Long-Term Obligations

At June 30, 2008 and December 31, 2007, bank loans, notes payable and other long-term obligations consist of the following (in thousands):

		June 30,				December 31,
		2008				2007
Seller notes payable. These notes are payable to the sellers of businesses that the Company has purchased and are collateralized by assets of the businesses purchased. Some of these notes have an interest rate of 0% and have been discounted at a rate of 5.50% to 9.75% and maturities ranging through January 2011. A particular seller note payable has an interest rate of 7.00% and matures September 2015.		$	16,154			$	19,123
Columbian Bank and Trust Company, due July 2008. Interest rate is variable and was 5.00% at June 30, 2008. Interest and principal are due in one payment at maturity. Collateralized by accounts receivable.			7,500				4,355
Citizens Bank and Trust Company, due August 2008. Interest rate is variable at Prime plus 3.00% and is due quarterly with principal due at maturity. Interest rate was 8.00% at June 30, 2008. Parent Company has pledged stock it owns in Aleritas Credit Corp. and the Company.			8,750				9,000
Participating Lenders, due December 2011. Interest rate is variable and was 9.50% at June 30, 2008. Principal payments are scheduled during the note’s term with the unpaid balance due at maturity (December 31, 2011). Collateralized by stock in subsidiary and other assets.			12,137				12,382
Aleritas Credit Corp., due September 2015. Interest rate is variable and was 8.50% at June 30, 2008. Interest and principal are due monthly. Collateralized by various assets of the Company.			383				1,022
First National Bank of Phillipsburg, variable interest rate (7.75% at June 30, 2008) with scheduled principal payments through maturity at August 2017. Collateralized by real estate.			707				728
Aleritas Credit Corp., various notes with variable interest rates from 8.50% to 9.00% at June 30, 2008, with maturities ranging from October 2011 to January 2021. Principal payments are scheduled on each note through its respective maturity date. Collateralized by real estate.			1,807				1,891
Fidelity Bank, variable interest rate (7.75% at June 30, 2008) with scheduled principal payments through maturity at September 2021. Collateralized by real estate.			1,950				1,990
Total bank loans and notes payable			49,388				50,491
Less: Current maturities and short-term debt			(33,049	)			(32,122	)
Total long-term debt		$	16,339			$	18,369

The renewal rights associated with the collateral interests of seller notes payable had estimated annual commissions of $37,165,000 and $47,282,000 at June 30, 2008 and December 31, 2007, respectively.

In connection with the outstanding loan and related debt agreements with Citizens Bank and Trust Company and various participating lenders, the Company has committed to certain covenants wherein the Company, certain of the Company’s subsidiaries and/or Parent will maintain certain benchmarks with respect to their: (1) regulatory status; (2) outstanding litigation; (3) liquidity; and (4) solvency as defined in the relevant agreement.

In addition, the Company has agreed to certain restrictions applicable to it and certain of its subsidiaries regarding, among other things, (1) investment in other affiliates, (2) payment of any dividends or distributions, (3) incurrence of additional debt, (4) pledging of certain assets, (5) reorganization and merger, and (6) disposition of assets.

On March 11, 2008, Keith Bouchey, President and CEO of Brooke Corporation, resigned and on March 12, 2008, the stock price of Aleritas fell below the stated value in the loan covenants on the Citizens Bank and Trust note. During March 2008, the note was renegotiated with a maturity of May 30, 2008 and a new minimum stated value for Aleritas stock held as collateral. Since that time, the stock has traded below the current minimum stated value and the maturity date was extended to August 29, 2008. In connection with the recently announced sale of First Life, the Company has committed that it will apply the proceeds from this sale toward the ultimate retirement of this note. Accordingly, Citizens has agreed in principle to extend the note until the sale of First Life is consummated. The sale is subject to customary regulatory approval by the Kansas Insurance Department and is expected to close before the end of 2008.

None of the Amortizable Intangible Assets described in Note 15 and none of the Acquisitions and Divestitures described in Note 12 were financed with seller notes payable at June 30, 2008.

Interest incurred on bank loans and notes payable for the six-month periods ended June 30, 2008 and 2007 was $1,632,000 and $1,258,000, respectively. Interest payable was $973,000 and $1,314,000 at June 30, 2008 and December 31, 2007, respectively.

The future scheduled maturities of debt are as follows (in thousands):

Twelve-Month Periods Ending
June 30,
2009		$	33,049
2010			3,225
2011			2,611
2012			7,312
2013			413
Thereafter			2,778
		$	49,388

6. Leases

The Company leases space for itself and on behalf of its agents. Future long-term payments related to these operating leases at June 30, 2008 are as follows (in thousands):

Twelve-Month Periods Ending
June 30,
2009		$	8,729
2010			5,810
2011			2,563
2012			798
2013			279
Thereafter			204
Total		$	18,383

7. Income Taxes

Federal income tax expense differs from the amount computed by applying the statutory Federal income tax rate for the six-month periods ended June 30, 2008 and 2007 as follows:

		Six-Month Periods Ended
		June 30,
		2008				2007
U.S. Federal statutory tax rate			(35	)%			35	%
State statutory rate			(4	)			4
Miscellaneous			1				(1	)
			(38	)%			38	%

Deferred tax assets and liabilities are recorded to recognize the future tax consequences of temporary differences between financial reporting amounts and the tax basis of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the years in which the differences are expected to reverse. The Company’s net deferred tax assets/liabilities arising from continuing operations at June 30, 2008 include the benefit associated with net operating loss carryforwards and this amount is largely offset by a valuation allowance.

At December 31, 2007, the Company had net operating loss carryforwards of approximately $5,741,000 on a consolidated basis. Net operating loss carryforwards of $168,000 resulted from non-life insurance operations and were generated prior to the base period for tax consolidation purposes. These loss carryforwards expire in 2011 and 2012 and can only be used to offset taxable income resulting from non-life insurance operations. Net operating loss carryforwards of $4,608,000 resulted from non-life insurance operations and were generated either during or subsequent to the base period for tax consolidation purposes. These loss carryforwards expire in 2018 through 2025 and can be used to offset either taxable income resulting from non-life insurance operations or 35% of taxable income resulting from life insurance operations subject to certain limitations.

The Company filed a consolidated federal income tax return with First Life and Brooke Capital Advisors for the year ended December 31, 2006 and plans to do so for the period ended November 15, 2007 (the effective date of its merger with Brooke Franchise). The Company filed as a part of the Brooke Corporation consolidated federal return for the remaining portion of 2007 and plans to so file for the period ended June 29, 2008 as Brooke Corporation’s ownership of the Company exceeded 80% through that date. Prior to the merger, Brooke Franchise had historically been included as a part of the consolidated returns filed by Brooke Corporation.

8. Employee Benefit Plans

Substantially all of the Company’s employees are eligible to participate in Brooke Corporation’s defined contribution retirement plan. Employees may contribute up to the maximum amount allowed pursuant to the Internal Revenue Code, as amended. The Company will match 50% of employee contributions up to a maximum of $3,000 or 3% of compensation and may contribute an additional amount to the plan at the discretion of the Board of Directors. During the six-month period ended June 30, 2008, the Company recorded $128,000 in employer contributions to the plan. No employer contributions were recorded during the six months ended June 30, 2007.

9. Concentration of Credit Risk

Credit risk is limited by emphasizing investment grade securities and by diversifying the investment portfolio among various investment instruments. Certain cash balances exceed the maximum insurance protection of $100,000 provided by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. At June 30, 2008, the Company had account balances of $3,146,000 that exceeded the insurance limit of the Federal Deposit Insurance Corporation.

10. Segment and Related Information

The Company’s operations are conducted through its Insurance Agency Operations and Corporate segments.

The Company’s insurance agency operations include its franchise operations and the insurance agency consulting activities conducted through Brooke Capital Advisors. Franchise operations include the sale of insurance, financial and credit services on a retail basis through franchisees. Through Brooke Capital Advisors, consulting services are provided to managing general agencies and collateral preservation services relating to such agencies’ loans. This business expanded in 2007 to include similar services for funeral home businesses and loans related thereto. Revenues, expenses, assets and liabilities that are not allocated to one of the two reportable segments are categorized as “Corporate.” Activities associated with Corporate include functions such as accounting, auditing, legal, human resources and investor relations.

As of June 30, 2008, the related financial results of First Life America Corporation are presented as a discontinued operation and the assets and liabilities of that business are presented as held-for-sale in the combined financial statements. First Life sells life insurance and annuity products in eight states throughout the Midwest. All periods presented have been reclassified to reflect this discontinued operation. See Note 20 for additional information.

The segments’ accounting policies and reporting practices are the same as those described in the summary of significant accounting policies.

The tables below reflect summarized financial information concerning the Company’s reportable segments for the three and six-month periods ended June 30, 2008 and 2007 (in thousands):

										Elimination
		Insurance								of
		Agency								Intersegment				Continuing				Discontinued
		Operations				Corporate				Activity				Operations				Operation
Three-Month Period Ended June 30, 2008
Insurance commissions		$	27,201			$	—			$	—			$	27,201			$	—
Collateral preservation			3,557				—				—				3,557				—
Insurance premiums earned			—				—				—				—				898
Interest income			130				70				129				71				408
Consulting fees			—				—				—				—				—
Initial franchise fees for basic services			—				—				—				—				—
Loss on sale of businesses and assets			(4,954	)			—				—				(4,954	)			—
Other income			175				—				—				175				61
Total Operating Revenues			26,109				70				129				26,050				1,367
Interest expense			696				75				129				642				—
Commissions expense			22,072				—				—				22,072				49
Payroll expense			6,018				52				—				6,070				134
Depreciation and amortization			479				13				—				492				195
Provision for doubtful accounts			8,076				—				—				8,076				—
Other operating expenses			12,865				160				—				13,025				933
Income Before Income Taxes			(24,097	)			(230	)			—				(24,327	)			56
Segment assets			75,000				12,000				(16,000	)			71,000				35,000
Expenditures for segment assets		$	368			$	—			$	—			$	368			$	—
Three-Month Period Ended June 30, 2007
Insurance commissions		$	27,615			$	—			$	—			$	27,615			$	—
Collateral preservation			1,363				—				—				1,363				—
Insurance premiums earned			—				—				—				—				849
Interest income			95				82				—				177				352
Consulting fees			3,740				—				—				3,740				—
Initial franchise fees for basic services			7,095				—				—				7,095				—
Initial franchise fees for buyers assistance plans			70				—				—				70				—
Gain on sale of businesses			1,161				—				—				1,161				—
Other income			696				—				—				696				60
Total Operating Revenues			41,835				82				—				41,917				1,261
Interest expense			705				—				—				705				—
Commissions expense			22,126				—				—				22,126				50
Payroll expense			5,997				190				—				6,187				116
Depreciation and amortization			31				11				—				42				212
Provision for doubtful accounts			1,337				—				—				1,337				—
Other operating expenses			9,503				257				—				9,760				667
Income Before Income Taxes			2,136				(376	)			—				1,760				216
Segment assets			86,000				1,000				—				87,000				31,000
Expenditures for segment assets		$	6,551			$	—			$	—			$	6,551			$	—

The table below reflects summarized financial information concerning the Company’s reportable segments for the six-month periods ended June 30, 2008 and 2007 (in thousands):

										Elimination
		Insurance								of
		Agency								Intersegment				Continuing				Discontinued
		Operations				Corporate				Activity				Operations				Operation
Six-Month Period Ended June 30, 2008
Insurance commissions		$	60,798			$	—			$	—			$	60,798			$	—
Collateral preservation			9,270				—				—				9,270				—
Insurance premiums earned			—				—				—				—				2,000
Interest income			590				132				638				84				805
Consulting fees			250				—				—				250				—
Initial franchise fees for basic services			1,320				—				—				1,320				—
Loss on sale of businesses and assets			(5,800	)			—				—				(5,800	)			—
Other income			360				6				—				366				121
Total Operating Revenues			66,788				138				638				66,288				2,926
Interest expense			2,127				143				638				1,632				—
Commissions expense			46,982				—				—				46,982				104
Payroll expense			12,026				75				—				12,101				312
Depreciation and amortization			937				25				—				962				385
Provision for doubtful accounts			8,428				—				—				8,428				—
Other operating expenses			24,884				315				—				25,199				2,046
Income Before Income Taxes			(28,596	)			(420	)			—				(29,016	)			79
Segment assets			75,000				12,000				(16,000	)			71,000				35,000
Expenditures for segment assets		$	1,035			$	—			$	—			$	1,035			$	13
Six-Month Period Ended June 30, 2007
Insurance commissions		$	59,623			$	—			$	—			$	59,623			$	—
Collateral preservation			2,254				—				—				2,254				—
Insurance premiums earned			—				—				—				—				1,922
Interest income			173				89				—				262				667
Consulting fees			4,730				—				—				4,730				—
Initial franchise fees for basic services			19,965				—				—				19,965				—
Initial franchise fees for buyers assistance plans			455				—				—				455				—
Gain on sale of businesses			1,842				—				—				1,842				—
Other income			19				—				—				19				124
Total Operating Revenues			89,061				89				—				89,150				2,713
Interest expense			1,258				—				—				1,258				—
Commissions expense			44,967				—				—				44,967				109
Payroll expense			11,759				214				—				11,973				240
Depreciation and amortization			46				27				—				73				394
Provision for doubtful accounts			4,383				—				—				4,383				—
Other operating expenses			19,927				384				—				20,311				1,747
Income Before Income Taxes			6,721				(536	)			—				6,185				223
Segment assets			86,000				1,000				—				87,000				31,000
Expenditures for segment assets		$	6,551			$	—			$	—			$	6,551			$	_2

11. Related Party Information

Transactions with Brooke Corporation, the Parent Company, are described in Note 2.

Aleritas, a majority-owned subsidiary of Brooke Corporation, is a licensed finance company that originates loans to franchisees of the Company. Aleritas funds the loans it originates by selling loan participation and asset-backed securities to community banks and other finance companies. In 2003, Aleritas worked with Standard and Poors to create a new securitization asset class for insurance agency loans. To date there have been six securitizations completed. Aleritas has executed promissory notes with a majority of businesses that have franchise agreements with the Company. Proceeds from these notes reduce the receivables for the Company from franchisees.

In connection with loans originated through Aleritas, beginning in 2004, the Company has entered into separate Collateral Preservation Agreements with Aleritas. Under these agreements, the Company provides Aleritas with collateral preservation services and assistance with loss mitigation of distressed loans. On certain loan types, the Company is compensated by upfront and ongoing fees paid by Aleritas. For the six-month periods ended June 30, 2008 and 2007, $9,270,000 and $2,254,000 in compensation was paid to the Company for services provided under these agreements. At June 30, 2008 and December 31, 2007, Aleritas owed $1,161,000 and $449,000, respectively, to the Company under this agreement. During the six-month periods ended June 30, 2008 and 2007, net compensation received by the Company totaled $8,416,000 and $291,000, respectively, under these agreements.

In September 2005, Aleritas made a loan to Brooke Franchise, in the amount of $1,190,000, with a maturity date of September 15, 2015. The balance of this loan was $383,000 at June 30, 2008 and $1,022,000 at December 31, 2007. Terms of the loan state a variable interest rate, daily adjustable, of 3.50% above the New York Prime Rate with payments of principal and interest due monthly. At June 30, 2008 and December 31, 2007, respectively, interest payable on this loan totaled $1,000 and $5,000.

During 2005 and 2006, Aleritas made various loans to Brooke Investments (totaling $1,807,000 at June 30, 2008 and $1,891,000 at December 31, 2007) with variable interest rates and maturities ranging from October 2011 to January 2021. Principal payments are scheduled on each note through its respective maturity date and interest rates were 8.50% to 9.00% at June 30, 2008. At June 30, 2008 and December 31, 2007, respectively, interest payable on these loans totaled $7,000 and $8,000.

During the six-month periods ended June 30, 2008 and 2007, interest expense on these loans with Aleritas totaled $116,000 and $180,000, respectively.

In December 2007, Brooke Capital Advisors, Inc., a wholly-owned subsidiary of the Company, loaned $12,382,000 to the Company. The interest rate on the loan is variable, at 4.50% over the Prime Rate as published in The Wall Street Journal, and monthly payments of $222,000 are scheduled with a final payment of $5,910,000 due in December 2011. Payment of the loan is secured by the guaranty of Brooke Corporation and by the Company’s pledge of its stock in First Life. Upon the expected closing of the sale of First Life by the Company and the pay-off of the loan from Citizens Bank and Trust, Brooke Corporation intends to pledge five million of its shares of Company common stock as replacement collateral. The Company has also agreed to pledge its stock in Delta Plus Holdings, Inc. and certain Delta Plus subsidiaries, including Traders Insurance Company, upon the acquisition of Delta Plus from Brooke Corporation. Brooke Capital Advisors initially sold the entire participating interest in this loan to Brooke Holdings, Inc.; however, at June 30, 2008, all but $1,061,000 of the $12,137,000 amount outstanding has been sold to other participating lenders, and $6,554,000 remained payable to Brooke Holdings, Inc. The amount payable to Brooke Holdings is reported as a part of accounts payable. In addition, during March 2008, the Company loaned $1,980,000 to Brooke Holdings, Inc. At June 30, 2008, all but $480,000 of this amount had been sold to a participating lender. Brooke Holdings, Inc. is controlled by Robert D. Orr, Chairman of the Board and Chief Executive Officer of the Company, and Leland G. Orr, President and Chief Executive Officer of Brooke Corporation and formerly Chief Financial Officer of the Company, who owned approximately 74% and 22%, respectively, of its outstanding shares of stock as of August 15 2008.

The DB Group, Ltd., a wholly-owned subsidiary of Brooke Brokerage Corporation, is a captive insurance company incorporated in Bermuda. The DB Group, Ltd. insures a portion of the professional insurance agents’ liability exposure of the Company, its affiliated companies and its franchisees and had a policy in force on June 30, 2008 that provided $5,000,000 of excess professional liability coverage. Brooke Brokerage Corporation is a wholly-owned subsidiary of Brooke Corporation that serves as a parent holding company to the DB Group, Ltd. and other subsidiaries involved in the brokerage business.

Anita Lowry is the sister of Robert D. Orr, Chairman of the Board and Chief Executive Officer of the Company and Leland G. Orr, President and Chief Executive Officer of Brooke Corporation and formerly Chief Financial Officer of Brooke Capital Corporation and is the mother of Michael S. Lowry, Vice President of Aleritas, and is married to Don Lowry. Don and Anita Lowry are shareholders of American Heritage Agency, Inc. of Hays, Kansas. The Company and American Heritage Agency, Inc. entered into a franchise agreement on February 28, 1999 pursuant to which American Heritage Agency, Inc. participates in the Company’s franchise program. Don and Anita Lowry sold American Heritage Agency, Inc. during the first quarter of 2008.

The Company maintains deposit accounts with Brooke Savings Bank, a wholly-owned subsidiary of Brooke Bancshares, Inc., which is a wholly-owned subsidiary of Brooke Corporation. At June 30, 2008 and December 31, 2007, the Company had $4,813,000 and $2,613,000, respectively, on deposit with the Bank.

12. Acquisitions and Divestitures

On March 30, 2007, Brooke Franchise acquired all of the insurance agency assets of Christopher Joseph & Company, a subsidiary of Delta Plus Holdings, Inc., from Brooke Corporation. Christopher Joseph & Company was acquired on that same date by Brooke Corporation in connection with its acquisition of Delta Plus. See Note 2 for more information about this transaction.

During May 2007, Brooke Franchise acquired a 100% interest in Brooke Investments, Inc., from Brooke Corporation. Brooke Investments acquires real estate for lease to franchisees, for corporate use and other purposes. See Note 6 for more information regarding the Company’s operating leases. Effective July 1, 2008, all franchise operations were transferred to Brooke Investments, Inc. and it became the named franchisor.

On September 28, 2007, Brooke Franchise acquired 60 insurance agency locations from entities associated with Chicago-based J and P Holdings Inc. The agencies currently sell auto insurance under the trade names of Lone Star Auto, Insurance Xpress, Car Insurance Store, Hallberg Insurance Agency and Hallberg Xpress in Colorado, Illinois, Kansas, Missouri and Texas. The acquired agencies will be converted into Brooke franchises or merged into existing Brooke franchise locations. At June 30, 2008, 53 of the acquired agencies had been so converted or merged.

13. Stockholders’ Equity Transactions

On December 8, 2006, the Company closed on a Stock Purchase and Sale Agreement (“2006 Stock Purchase Agreement”) with Brooke Corporation. Pursuant to the agreement, the Company committed, through a series of steps, to sell shares of common stock that would represent approximately 55% of the outstanding shares of the Company to Brooke Corporation in exchange for $3,000,000 in cash and execution of a Brokerage Agreement. At closing, the Company issued 3,742,943 shares of common stock (1,247,647 shares after the effects of the April 2007 1-for-3 reverse stock split) to Brooke Corporation, representing approximately 46.8% of the Company’s then authorized, issued and outstanding common stock, for $2,552,000 and executed and delivered the Brokerage Agreement. As part of the closing, the Company issued Brooke Corporation a warrant to purchase an additional 1,643,460 shares of common stock (547,820 shares, post-split) for $448,000, such shares to be authorized for issuance pursuant to then forthcoming amendments to the Company’s Articles of Incorporation. The Articles of Incorporation were amended on January 31, 2007, and Brooke Corporation exercised the Warrant on the same day.

As part of the consideration under the 2006 Stock Purchase Agreement, Brooke Capital Advisors and CJD & Associates, L.L.C. (“CJD”), Brooke Corporation’s brokerage subsidiary, entered into an agreement by which, as of that date, Brooke Capital Advisors began transacting all new managing general agent loan brokerage business (formerly operated by CJD). CJD operated such a business prior to closing of the 2006 Stock Purchase Agreement and, as part of the Brokerage Agreement, agreed not to engage in any new managing general agent loan brokerage business. Pursuant to the terms of the 2006 Stock Purchase Agreement, Brooke Corporation will contribute funds to the Company as additional consideration for the issuance of the shares of the Company’s common stock acquired, to the extent the pretax profits of Brooke Capital Advisors do not meet a three-year $6 million pretax profit goal in accordance with an agreed upon schedule set forth in the 2006 Stock Purchase Agreement. Brooke Capital Advisors reported pretax income of approximately $7,773,000 and $1,084,000 during 2007 and 2006, respectively. During the first six months of 2008, Brooke Capital Advisors reported a pretax loss of $1,705,000.

The Warrant issued in connection with the 2006 Stock Purchase Agreement was exercised by Brooke Corporation on January 31, 2007. Warrants outstanding at December 31, 2007 and June 30, 2008 include one issued to a former officer and another to a former outside director of the Company for 16,666 and 33,333 shares, respectively. These warrants were authorized by the Company’s former Board of Directors prior to the closing of the 2006 Stock Purchase Agreement. The warrants became exercisable on December 8, 2006 either in whole or in part for a period of ten years from that date at an exercise price of $1.72 per share, the assumed market price of the Company’s stock at the date of grant ($5.16 per share after the effects of the April 2007 1-for-3 reverse stock split). The fair value of these warrants was estimated as of the grant date using an accepted valuation model in accordance with SFAS No. 123R, “Share-Based Payment.” Significant assumptions included a risk-free rate of 4.56%, and expected volatility of 10% and a dividend rate of 0%. In the case of the former officer, the estimated value of the warrant, $32,000, was recorded as compensation expense. In the case of the former director, the estimated value of the warrant, $64,000, was recorded as a reduction of related stock issuance costs. Warrants outstanding are considered in the Company’s reported diluted earnings per share to the extent they are deemed to have a dilutive effect on reported earnings.

 

23

Coincident with the closing of the 2006 Stock Purchase Agreement, other warrants previously issued by the Company and held by Brooke Corporation were cancelled. Three separate warrants would have allowed Brooke Corporation to purchase up to 50,000 shares of common stock (for each warrant) at prices of $1.71, $3.35 and $5.00, respectively, beginning in 2012 or immediately prior to any earlier change of control involving the Company and were due to expire no later than 2015. The warrants were issued in connection with an earlier transaction wherein the Company acquired 450,500 shares of its common stock previously held by Brooke Corporation for a purchase price of $770,000 ($1.71 per share). All but $200,000 of the purchase price was financed by Aleritas, a wholly-owned subsidiary of Brooke Corporation at that time, at a fixed interest rate of 8% over a ten-year period. The note to Aleritas was paid in full prior to the closing of the 2006 Stock Purchase Agreement.

On January 31, 2007, the Company’s shareholders approved certain amendments to the Company’s articles of incorporation to: (1) increase its authorized shares of common stock from 8,000,000 to 25,000,000 million shares; (2) increase its authorized shares of preferred stock from 550,000 to 1,550,000; and (3) reduce the par value of its common stock from $.10 to $.01 per share. In addition, the shareholders approved a 1-for-3 reverse stock split by which each three shares of outstanding common stock would be reverse split into one share of common stock. The reverse split was effective on April 13, 2007.

On April 2, 2007, the Company concluded a modified “Dutch auction” tender offer for shares of its common stock, purchasing 379,248 shares (126,416 shares post-split) at a price of $1.60 per share ($4.80 per share post-split) for an aggregate purchase price of approximately $607,000. Upon completion of the offer and the following reverse stock split (effective on April 13, 2007), the Company had 3,085,817 shares of common stock outstanding (after the purchase of fractional shares representing the equivalent of 2,253 shares).

As discussed in Note 14, during 2007 and 2008 the Company’s Board of Directors made awards of restricted shares of its common stock to officers and directors of the Company under The Brooke Capital Corporation 2007 Equity Incentive Plan.

On November 15, 2007, the Company issued 5,000,000 shares of its common stock to Brooke Corporation in connection with the completion of its merger with Brooke Franchise wherein Brooke Franchise was merged with and into the Company, resulting in the Company being the survivor. An additional 2,250,000 shares of the Company’s common stock has been reserved for issuance to Brooke Corporation as merger consideration pursuant to contingent earn-out payments tied to adjusted earnings of the Company (excluding its subsidiaries) in calendar years 2007 and 2008. The Company did not achieve the 2007 adjusted earnings goals and thus will not issue 1,125,000 of the shares otherwise reserved as additional contingent merger consideration applicable to the 2007 earn-out.

Changes in stockholders’ equity related to this merger have been reported in the Company’s consolidated statements of stockholders’ equity included in these financial statements. Transactions between the companies were not material prior to the merger.

Prior year’s financial statements and related disclosures have been restated to furnish comparative information for the period during which the Company and Brooke Franchise have been under common control.

Following is a summary of the amounts of revenue and net income reported in these financial statements for 2007 as previously reported by the separate companies (in thousands):

Six-Month Period Ended June 30, 2007		Operating Revenues				Net Income (Loss)
Brooke Franchise		$	84,820			$	2,348
Brooke Capital			7,043				1,732
On a combined basis			91,863				4,080
Less discontinued operation			2,713				223
From continuing operations		$	89,150			$	3,857

Prior to the merger, Brooke Corporation owned 100% of Brooke Franchise and 53% of the Company. As a result of the closing of the merger, Brooke Corporation owned approximately 81% of the Company’s common stock. At June 30, 2008, Brooke Corporation owned approximately 66% of the Company’s stock.

14. Stock-Based Compensation

The Brooke Capital Corporation 2007 Equity Incentive Plan (the “Plan”), which is shareholder-approved, allows the Company to provide incentives and rewards to those employees and directors largely responsible for the success and growth of the Company and its direct and indirect subsidiaries. The Company believes that such incentives and rewards more closely align the interests of such persons with those of the shareholders of the Company.

The Plan authorizes the issuance of up to 2,400,000 shares of Company common stock to be issued pursuant to awards made under the Plan in the form of non-qualified stock options, incentive stock options, restricted shares of common stock, stock appreciation rights, performance units and restricted share units. On August 15, 2007 and June 30, 2008, the Compensation Committee of the Board of Directors of the Company awarded restricted shares of 390,000 and 1,990,000, respectively, to officers and directors of the Company or its affiliates. At June 30, 2008, a total of 2,370,000 of these restricted shares remain outstanding.

Pursuant to the Restricted Shares Agreement between the Company and each recipient, the recipients are entitled to receive dividends and vote their shares in matters submitted to shareholder vote. Transfer restrictions lapse in one-third annual increments and will automatically lapse for approximately 1,900,000 of the shares awarded upon the sale of all or substantially all of the assets of the Company or the sale by Brooke Corporation, the Company’s controlling shareholder, of all of its Company common stock. For the remaining shares outstanding, transfer restrictions will lapse for 50% of all remaining unvested shares upon such a sale or change in control, and will lapse for all remaining unvested shares upon the first anniversary of such an event.

The fair value of an award is determined based upon the market price for the Company’s common stock during the ten consecutive trading days immediately preceding the valuation date, as set forth in the Plan. Accordingly, the fair value for the restricted share awards granted on June 30, 2008 were determined to be $2.32 per share. As the shares of the Company’s common stock were not listed for trading on any exchange on the August 15, 2007 award date (prior to their listing on the American Stock Exchange on August 30, 2007), the Compensation Committee determined the fair value for the restricted share awards granted on August 15, 2007 to be $5.00 per share, as provided under the terms of the Plan.

During the six-month period ended June 30, 2008, the Company recorded approximately $319,000 in compensation cost along with related deferred income tax benefits of $121,000. As of June 30, 2008, there was $5,955,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized on a straight-line basis over the remaining terms of the three year vesting periods ending on August 15, 2010 and June 30, 2011.

Accordingly, the Company expects to record additional compensation cost related to this plan as follows:

Periods Ended December 31,
Six months then ended 2008		$	1,084,000
Year ended 2009			2,169,000
Year ended 2010			1,932,000
Year ended 2011			770,000
Total		$	5,955,000

15. Amortizable Intangible Assets

There are no intangible assets with indefinite useful lives at June 30, 2008. The intangible assets with definite useful lives had values of $525,000 and $553,000 at June 30, 2008 and December 31, 2007, respectively. Amortization expense on intangible assets, including those sold during the year, was $28,000 and $31,000 for the six-month periods ended June 30, 2008 and 2007.

Amortization expense for amortizable intangible assets for the twelve-month periods ending June 30, 2009, 2010, 2011, 2012 and 2013 is estimated to be $53,000, $47,000, $42,000, $37,000 and $29,000, respectively.

16. Supplemental Cash Flow Disclosures

		Six-Month Periods Ended
		June 30, 2008				June 30, 2007
Supplemental disclosures (in thousands):
Cash paid for interest		$	1,973			$	600
Cash paid for income tax		$	—			$	—

Business inventory decreased from December 31, 2007 to June 30, 2008. During the six-month periods ended June 30, 2008 and 2007, the statements of cash flows reflect the purchase of businesses into inventory provided by sellers totaling $105,000 and $11,021,000, respectively, the write down to realizable value of inventory of $4,317,000 and $300,000, respectively, and the change in inventory of $8,462,000 and $(1,433,000), respectively. Payments on seller notes were $2,970,000 and $4,790,000 in 2008 and 2007, respectively.

		Six-Month Periods Ended
(in thousands)		June 30, 2008				June 30, 2007
Purchase of business inventory		$	(370	)		$	(18,439	)
Sale of business inventory			4,620				27,727
Net cash provided from sale of business inventory			4,250				9,288
Cash provided by sellers of business inventory			(105	)			(11,021	)
Write down to realizable value of inventory			4,317				300
(Increase) decrease in inventory on balance sheet		$	8,462			$	(1,433	)

17. Contingencies

Previously, the Company had been expected to issue 500,000 shares of its common stock to Brooke Corporation in connection with the completion of the Exchange Agreement, dated August 31, 2007, as amended, among Brooke Corporation, Delta Plus and the Company wherein the Company would have received all of the outstanding stock of Delta Plus. Continued difficulty in the general credit markets has required the Company to forego committing capital for insurance company operations. Accordingly, the Company is exploring strategic alternatives, including the currently pending sale of First Life and either the termination of the Exchange Agreement or the sale of Delta Plus by the Company if the Exchange Agreement is completed. The Company intends to use proceeds from the sale of First Life to repay short-term bank debt.

Brooke Corporation currently owns 100% of Delta Plus and 66% of the Company. If the Exchange Agreement is completed, Brooke Corporation is expected to own approximately 67% of the Company’s common stock.

Various lawsuits have arisen in the ordinary course of the Company’s business. In each of the matters and collectively, the Company believes the ultimate resolution of such litigation will not result in any material adverse impact to the financial condition, operations or cash flows of the Company.

18. New Accounting Standards

(a) Adoption of New Accounting Standards

Fair Value Option and Fair Value Measurement - In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157.” This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard was effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

Fair Value Measurement - Statement 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Statement 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

	•		Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
	•		Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.
	•		Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

(b) Not Yet Effective

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.” This Statement establishes principles and requirements for how an acquirer recognizes and measures tangible assets acquired, liabilities assumed, goodwill and any noncontrolling interests and identifies related disclosure requirements for business combinations. Measurement requirements will result in all assets, liabilities, contingencies and contingent consideration being recorded at fair value on the acquisition date, with limited exceptions. Acquisition costs and restructuring costs will generally be expensed as incurred. This Statement is effective for the Company for business combinations in which the acquisition date is on or after January 1, 2009. Management is currently assessing what impact, if any, the application of this standard could have on the Company’s results of operations and financial position.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. This Statement is effective for the Company beginning on January 1, 2009. It is not expected that adoption of this Statement will have a material impact on the operating results or financial condition of the Company.

19. Reclassifications

Certain accounts in the prior period financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements.

20. Discontinued Operation — Disclosure

On July 18, 2008, the Company entered into an agreement to sell its wholly owned life insurance subsidiary, First Life America Corporation (“First Life” or “FLAC”) to First Trinity Financial Corporation. During the second quarter 2008, the Company had committed to a plan to sell First Life. Accordingly, as of June 30, 2008, First Life has been presented as a discontinued operation and its assets and liabilities being sold are presented as held-for-sale in the Company’s combined financial statements. All periods presented have been reclassified to reflect this discontinued operation.

(a) Financial Statement Presentation

At June 30, 2008, no impairment charges have been required in connection with the Company’s assessment of the assets and liabilities of the discontinued operation. Reported results for the discontinued operation do not include the allocation of interest expense on debt that will be repaid as a result of the sale as such debt was not incurred for or otherwise used in connection with the life insurance subsidiary’s operation. No other consolidated interest expense was allocated to the discontinued operation for the periods ended June 30, 2008 and 2007.

The major classes of assets and liabilities reported as held-for-sale are as follows (in thousands):

		(unaudited)
		June 30, 2008				December 31, 2007
Cash		$	1,210			$	459
Investment securities available-for-sale			18,675				18,867
Other current assets			6,975				6,661
Total Current Assets			26,860				25,987
Net Property and Equipment			2,693				2,718
Deferred charges, net			5,503				5,406
Total Assets			35,056				34,111
Future annuity benefits			19,565				18,735
Future policy benefits			7,580				7,035
Other liabilities			931				873
Total Liabilities			28,076				26,643
Net Assets		$	6,980			$	7,468