As filed with the Securities and Exchange Commission on May 28, 2008
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Brooke Corporation
(Exact name of registrant as specified in its charter)
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Kansas
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6411
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48-1009756
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code No.)
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(I.R.S. Employer
Identification No.)
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8500 College Boulevard
Overland Park, Kansas 66210
(913) 661-0123
(Address including zip code, area code and
telephone number, of Registrants principal executive offices)
Leland G. Orr
Chief Executive Officer, President and Vice Chairman of the Board
8500 College Boulevard
Overland Park, Kansas 66210
(913) 661-0123
(Name, address, including zip code, area code
and telephone number of agent for service)
With copies sent to:
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Robert J. Ahrenholz, Esq.
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Carl Baranowski, General Counsel
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Kutak Rock LLP
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Brooke Corporation
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1801 California Street, Suite 3100
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8500 College Boulevard
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Denver, Colorado 80202
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Overland Park, Kansas 66210
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(303) 297-2400
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(913) 661-0123
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Approximate date of commencement of the proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered pursuant to dividend or
interest reinvestment plans, please check the following box.
o
If any of the securities being registered on this Form are to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box.
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If this Form is filed to register additional securities for an offering pursuant to Rule 462(b)
under the Securities Act, please check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering.
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
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If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective
amendment thereto that shall become effective upon filing with the Commission pursuant to Rule
462(e) under the Securities Act, check the following box.
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If this Form is a post-effective amendment to a registration statement filed pursuant to General
Instruction I.D. filed to register additional securities or additional classes of securities
pursuant to Rule 413(b) under the Securities Act, check the following box.
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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
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Accelerated filer
þ
Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Proposed
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Title of each class
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Amount
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maximum
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Proposed maximum
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Amount of
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of securities to
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to be
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offering price
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aggregate offering
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registration
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be registered
(1)
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registered
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per share
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price
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fee
(3)
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Common Stock, $0.01 par
value per share
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15,934,706
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$0.965
(5)
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$15,376,991
(2)
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$604.32
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Rights to purchase Common
Stock, par value $0.01 per
share
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15,934,706
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N/A
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N/A
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$0.00
(4)
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(1)
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This registration statement relates to (a) non-transferable rights to purchase
Common Stock of Brooke Corporation, or the Registrant, which rights will be issued to holders of
Common Stock and holders of series 2006 preferred stock of the Registrant and (b) the Common Stock
deliverable upon the exercise of the non-transferable rights pursuant to the rights offering. This
registration statement also covers any additional number of Common Stock as may become issuable
pursuant to Rule 416 due to adjustments for changes resulting from stock dividends, stock splits,
recapitalizations, mergers, reorganizations, combinations or exchanges or other similar events.
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(2)
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Represents the aggregate gross proceeds from the exercise of the maximum number of
rights that may be issued.
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(3)
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Registration fee calculations are based on the filing fee of $39.30 per $1,000,000
of securities registered.
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(4)
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The rights are being issued for no consideration. Pursuant to Rule 457(g) under the
Securities Act of 1933, as amended, no separate registration fee is payable.
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(5)
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Calculated as of May 27, 2008 pursuant to prices of the Registrants common stock
as reported by the NASDAQ Global Market as of such date.
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The registrant hereby amends this registration statement on such date or dates as may be
necessary to delay its effective date until the registrant shall file a further amendment that
specifically states that this registration statement shall thereafter become effective in
accordance with
Section 8(a)
of the Securities Act of 1933, as amended, or until this registration
statement shall become effective on such date as the commission, acting pursuant to Section
8(a)
,
may determine.
The information in this prospectus is not complete and may be changed. A registration statement
relating to these securities has been filed with the Securities and Exchange Commission. These
securities may not be sold nor may offers to buy these securities be accepted until that
registration statement becomes effective. This prospectus is not an offer to sell securities and it
is not soliciting an offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to completion, dated May 28, 2008
PROSPECTUS
Brooke Corporation
15,934,706 Shares of Common Stock
Rights to purchase up to 15,934,706 Shares of Common Stock at $ per Share
We are distributing at no charge non-transferable subscription rights to purchase shares of
our common stock to holders of our common stock and to holders of our 13% Perpetual Convertible
Preferred Stock Series 2006 and our series 2006 stock purchase warrants. You will receive one
subscription right for each share of common stock owned, or in the case of the series 2006
preferred stock and the series 2006 warrants, one subscription right for every share issuable upon
conversion or exercise, at the close of business on
___, 2008. We are distributing
subscription rights exercisable for up to an aggregate of 15,934,706 shares of our common stock.
The proceeds from this rights offering will be used to pay debt and for general corporate purposes.
We expect the total purchase price of the shares offered in this rights offering to be
approximately $
million, assuming full participation.
Each subscription right will entitle you, as a holder of our common stock or series 2006
preferred stock or series 2006 warrant, to purchase one share of our common stock at a subscription
price of $ per share. Subscribers who exercise their rights in full may over-subscribe for
additional shares, subject to certain limitations, to the extent shares are available. The
subscription rights will expire if they are not exercised by 5:00 p.m., Eastern Daylight Time, on
___, 2008, unless extended.
You should carefully consider whether to exercise your subscription rights before the
expiration of the rights offering period. Unless our board of directors withdraws or terminates the
rights offering, all exercises of subscription rights are irrevocable. Our board of directors is
making no recommendation regarding your exercise of the subscription rights. The subscription
rights may not be sold or transferred, except under limited circumstances described herein.
We may withdraw or terminate the rights offering at any time prior to its expiration upon
determination of our board of directors. If we withdraw or terminate this offering, we will return
your subscription price, but without any payment of interest.
The shares are being offered directly by us without the services of an underwriter or selling
agent.
Shares of our common stock are traded on the NASDAQ Global Market under the symbol BXXX. On
___, 2008, the closing sales price for our common stock was $ per share. The shares of
common stock issued in the rights offering will also be listed on the NASDAQ Global Market under
the same symbol.
Investing in our common stock involves a high degree of risk. See RISK FACTORS beginning on
page 12 to read about factors you should consider before you make your investment decision.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved any of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is
__, 2008.
TABLE OF CONTENTS
You should only rely on the information contained in this prospectus. We have not authorized any
person to provide you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You should assume that the
information appearing in this prospectus is accurate as of the date on the front cover of this
prospectus only. Our business, financial condition, results of operations, and prospects may have
changed since that date.
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FORWARD-LOOKING STATEMENTS
We caution you that this prospectus includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 and is subject to the safe harbor created
by that act. Among other things, these statements relate to our financial condition, results of
operations and business. These forward-looking statements are generally identified by the words or
phrases would be, will allow, expect to, intend to, will continue, is anticipated,
estimate, plan, may, believe, implement, build, project or similar expressions and
references to strategies or plans.
While we provide forward-looking statements to assist in the understanding of our anticipated
future financial performance, we caution readers not to place undue reliance on any forward-looking
statements, which speak only as of the date that we make them. Forward-looking statements are
subject to significant risks and uncertainties, many of which are beyond our control. Although we
believe that the assumptions underlying our forward-looking statements are reasonable, any of the
assumptions could prove to be inaccurate. Actual results may differ materially from those contained
in or implied by these forward-looking statements for a variety of reasons. These risks and
uncertainties are discussed in more detail under Risk Factors in this prospectus and include, but
are not limited to:
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prevailing economic conditions, either nationally or locally in some or all
areas in which we conduct business or conditions in the securities markets or the
banking industry;
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changes in interest rates, deposit flows, loan demand, real estate values and
competition, which can materially affect, among other things, consumer banking
revenues, origination levels in our lending businesses and the level of defaults,
losses and prepayments on loans made by us, whether held in portfolio or sold in the
secondary markets;
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operational issues and/or capital spending necessitated by the potential need
to adapt to industry changes in information technology systems, on which our banking
segment is highly dependent;
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changes in accounting principles, policies, and guidelines; changes in any
applicable law, rule, regulation or practice with respect to tax or legal issues; risks
and uncertainties related to mergers and related integration and restructuring
activities; conditions in the securities markets or the banking industry;
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our borrowers financial performance and their potential ability to repay amounts due to us;
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inability to fund our loans through sales to third parties;
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inability to secure the lines of credit and additional sources of funding
necessary to accommodate our growth;
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certain assumptions regarding the profitability of our securitizations, loan
participations, warehouse lines of credit and other funding vehicles, which may not
prove to be accurate;
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the value of the collateral securing our loans;
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potential litigation and regulatory proceedings regarding commissions, fees,
contingency payments, profit sharing and other compensation paid to brokers or agents;
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dependence on key personnel; and
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the level of expenditures required to comply with the Sarbanes-Oxley Act and
the potential material adverse effects of not complying with the Sarbanes-Oxley Act.
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We expressly disclaim any obligation to update or revise any of these forward-looking
statements, whether because of future events, new information, a change in our views or
expectations, or otherwise. We make no prediction or statement about the market performance of our
shares of common stock.
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QUESTIONS AND ANSWERS RELATING TO THE RIGHTS OFFERING
The following are examples of what we anticipate will be common questions about our rights
offering. The answers are based on selected information from this prospectus and the documents
incorporated by reference herein. The following questions and answers do not contain all of the
information that may be important to you and may not address all of the questions that you may have
about our rights offering. This prospectus and the documents incorporated by reference herein
contain more detailed descriptions of the terms and conditions of the rights offering and provide
additional information about us and our business, including potential risks related to the rights
offering, the common stock of the Company and our business.
Exercising the rights and investing in our common stock involves risks. We urge you to
carefully read the section entitled RISK FACTORS beginning on page 12 of this prospectus and the
section entitled Risk Factors in our Annual Report on Form 10-K for the year ended December 31,
2007, and all other information included or incorporated herein by reference in this prospectus in
its entirety before you decide whether to exercise your rights.
What is a rights offering?
We are distributing to holders of our common stock, to holders of our 13% Perpetual
Convertible Preferred Stock Series 2006 (series 2006 preferred stock) and to holders of our
series 2006 warrants (the series 2006 warrants and, together with the series 2006 preferred
stock, the series 2006 securities) as of 5:00 p.m. Eastern Daylight Time on
___, 2008 (the
record date), at no charge, subscription rights to purchase shares of our common stock. You will
receive one subscription right for each share of common stock you owned at the close of business on
the record date. Holders of the series 2006 securities will be entitled to acquire one subscription
right for each share of common stock acquirable by such holder immediately prior to the record
date. The subscription rights will be evidenced by rights certificates.
What is a right?
Each whole right gives our shareholders the opportunity to purchase one share of our common
stock for $
per share and carries with it a basic subscription privilege (a basic
subscription privilege) and an over-subscription privilege (an over-subscription privilege).
When you exercise a subscription right, you choose to purchase one share of common stock that the
subscription right entitles you to purchase. You may exercise any number of your subscription
rights, or you may choose not to exercise any subscription rights. See THE RIGHTS
OFFERINGSubscription Privileges.
How many shares may I purchase if I exercise my rights?
We are granting to you, as a shareholder of record on the record date, one subscription right
for every share of common stock you owned (or in the case of series 2006 securities, one
subscription right for every share of common stock issuable upon conversion or exercise) at the
close of business on
___, 2008, the record date. Each right contains the basic subscription
privilege and the over-subscription privilege. If you hold your shares in the name of a broker,
dealer, or other nominee who uses the services of The Depository Trust Company, or DTC, then DTC
will issue one right to the nominee for each share of our common stock you own at the record date.
Each right can then be used to purchase one share of common stock for $
per share.
What is the over-subscription privilege?
The over-subscription privilege of each right entitles you, if you have fully exercised your
basic subscription privilege, to subscribe for additional shares of our common stock (up to the
number of shares for which you subscribed under your basic subscription privilege) at the same
subscription price per share on a pro rata basis if any shares are not purchased by other holders
of subscription rights under their basic subscription privileges as of the expiration date. Pro
rata means in proportion to the number of shares of our common stock that all subscription rights
holders who have fully exercised their basic subscription privileges on their common stock and as
converted common stock holdings have requested to purchase pursuant to the over-subscription
privilege. See THE RIGHTS OFFERINGSubscription Privileges.
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What if there is an insufficient number of shares to satisfy the over-subscription requests?
If there is an insufficient number of shares of our common stock available to fully satisfy
the over-subscription requests of rights holders, subscription rights holders who exercised their
over-subscription privilege will receive the available shares pro rata based on the number of
shares each subscription rights holder has subscribed for under the over-subscription privilege.
Any excess subscription payments will be returned, without interest or deduction, promptly after
the expiration of the rights offering. See THE RIGHTS OFFERINGSubscription Privileges.
Why are we conducting the rights offering?
We are making the rights offering to raise additional capital for general corporate purposes
and to retire debt. A rights offering provides our shareholders the opportunity to participate in
this transaction and minimizes the dilution of their ownership interest in the Company.
How was the subscription price of $
per share determined?
Our board of directors determined the subscription price after considering the likely cost of
capital from other sources, the price at which our shareholders might be willing to participate in
the rights offering, and historical and current trading prices for our common stock. The
subscription price for a subscription right is $
per share. The subscription price does not
necessarily bear any relationship to the book value of our assets or our past operations, cash
flows, losses, financial condition, net worth or any other established criteria used to value
securities. You should not consider the subscription price to be an indication of the fair value of
the common stock offered in the rights offering. See THE RIGHTS OFFERINGDetermination of
Subscription Price.
Am I required to exercise all of the rights I receive in the rights offering?
No. You may exercise any number of your rights, or you may choose not to exercise any rights.
If you do not exercise any rights, the number of shares of our common stock you own will not
change. However, because shares are expected to be purchased by other shareholders in the rights
offering, your percentage ownership after the exercise of the rights will be diluted.
How soon must I act to exercise my rights?
The rights may be exercised only during a very limited period beginning on the date of this
prospectus through the expiration date, which is
___, 2008, at 5:00 p.m., Eastern Daylight
Time, unless extended by us. If you elect to exercise any rights, the subscription agent must
actually receive all required documents and payments from you or your broker or nominee at or
before the end of the 20-day subscription period. Although we have the option of extending the
expiration date of the subscription period, we currently do not intend to do so.
May I transfer my rights?
No. Should you choose not to exercise your subscription rights, you may not sell, give away or
otherwise transfer your subscription rights. Subscription rights will, however, be transferable by
operation of law (for example, upon the death of the recipient). See THE RIGHTS
OFFERINGNon-transferability of the Subscription Rights.
Are we requiring a minimum subscription to complete the rights offering?
No.
Can the board of directors withdraw, terminate, amend or extend the rights offering?
Yes. The period for exercising your subscription rights may be extended by our board of
directors, although we do not presently intend to do so. Our board of directors may withdraw or
terminate the rights offering in its sole discretion at any time on or before the expiration of the
rights offering for any reason (including, without limitation,
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a change in the market price of our common stock). In the event that the rights offering is
withdrawn or terminated, all funds received from subscriptions by shareholders will be returned.
Interest will not be payable on any returned funds. We also reserve the right to amend the terms of
the rights offering.
Has our board of directors made a recommendation to our shareholders regarding the exercise of
rights under the rights offering?
No. Our board of directors has not made, and will not make, any recommendation to shareholders
regarding the exercise of rights under the rights offering and we have not requested or received a
fairness opinion with respect to the offering. You should make an independent investment decision
about whether to exercise your rights. Shareholders who exercise rights will risk investment loss
on new money invested. We cannot assure you that the market price for our common stock will remain
above the subscription price or that anyone purchasing shares at the subscription price will be
able to sell those shares in the future at the same price or a higher price. If you do not exercise
your rights, you will lose any value represented by your rights and your percentage ownership
interest in the Company will be diluted. For more information on the risks of participating in the
rights offering, see the section of this prospectus entitled RISK FACTORS.
How do I exercise my rights? What forms and payment are required to purchase the shares of common
stock?
If you wish to participate in the rights offering, you must take the following steps, unless
your shares are held by a broker, dealer or other nominee:
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deliver payment in full for the exercise of your basic subscription rights and
over-subscription rights by cashiers or certified check drawn upon a United States
bank payable to American Stock Transfer & Trust Company, as Subscription Agent or by
wire transfer of immediately available funds, to the subscription account maintained by
the subscription agent at JP Morgan Chase Bank, ABA #021000021, Account No.
957-341-237; and
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deliver a properly completed rights certificate to American Stock Transfer &
Trust Company, who is the subscription agent, before 5:00 p.m., Eastern Daylight Time,
on
___, 2008, unless extended.
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If you send a payment that is insufficient to purchase the number of shares you requested, or
if the number of shares you requested is not specified in the forms, the payment received will be
applied to exercise your basic subscription privilege. Unless you have specified the number of
shares you wish to purchase upon exercise of your over-subscription privilege, any payment in
excess of that required to exercise your basic subscription privilege will be refunded. If the
payment exceeds the subscription price for the full exercise of the basic and over-subscription
privileges (to the extent specified by you), the excess will be refunded. You will not receive
interest on any payments refunded to you under the rights offering. See THE RIGHTS OFFERINGHow to
Exercise Your Rights.
What should I do if I want to participate in the rights offering but my shares are held in the name
of my broker, dealer, or other nominee?
If you hold shares through a broker, custodian bank or other nominee, we will ask your broker,
custodian bank or other nominee to notify you of the rights offering. If you wish to exercise your
subscription rights, you will need to have your broker, custodian bank or other nominee act for
you. To indicate your decision, you should complete and return to your broker, custodian bank or
other nominee the form entitled Beneficial Owner Election Form. You should receive this form from
your broker, custodian bank or other nominee with the other rights offering materials. You should
contact your broker, custodian bank or other nominee if you believe you are entitled to participate
in the rights offering but you have not received this form. THE RIGHTS OFFERING Beneficial
Owners.
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When will I receive my new shares?
If you purchase shares of common stock in the rights offering, you will receive your new
shares promptly after the closing of the rights offering.
After I send in my payment and rights certificate, may I change or cancel my exercise of rights?
No. Unless our board of directors withdraws or terminates the rights offering, all exercises
of rights are irrevocable, even if you later learn information that you consider to be unfavorable
to the exercise of your rights. You should not exercise your rights unless you are certain that you
wish to purchase additional shares of our common stock at a price of $
per share.
How much money will the Company receive from the rights offering?
While the rights offering has no minimum purchase requirement, if we sell all of the shares
being offered, we will receive proceeds of approximately $ million in cash, before deducting
estimated offering expenses. In addition, Brooke Holdings, Inc., our largest shareholder who owned
44.2% of our outstanding common stock as of May 27, 2008, intends to retire outstanding debt as
payment for exercise of its basic subscription privilege and may retire additional outstanding debt
to the extent it exercises its over-subscription privilege. Thus, for those rights exercised by
Brooke Holdings, Inc., we will retire outstanding indebtedness owned by Brooke Holdings, Inc. in
lieu of receiving cash proceeds. See USE OF PROCEEDS and PLAN OF DISTRIBUTION for more
information.
Are there risks in exercising my subscription rights?
Yes. The exercise of your subscription rights involves risks. Exercising your subscription
rights means buying additional shares of our common stock and should be considered as carefully as
you would consider any other equity investment. You should carefully read the section entitled
RISK FACTORS beginning on page 12 of this prospectus and the section entitled Risk Factors in
our Annual Report on Form 10-K for the year ended December 31, 2007, and all other information
included or incorporated herein by reference in this prospectus in its entirety before you decide
whether to exercise your rights.
How many shares of common stock will be outstanding after the rights offering?
As of May 20, 2008, we had 14,523,941 shares of common stock and 20,000 shares of series 2006
preferred stock and series 2006 warrants issued and outstanding. Based upon the maximum of
15,934,706 shares that may be issued pursuant to the rights offering, we would have 30,458,647
shares of common stock outstanding after the closing of the rights offering assuming the exercise
of all subscription rights.
If the rights offering is not completed, will my subscription payment be refunded to me?
Yes. The subscription agent will hold all funds it receives in a segregated bank account until
completion of the rights offering. If the rights offering is not completed, we will promptly
instruct the subscription agent to return your payment in full. If you own shares in street name,
it may take longer for you to receive payment because the subscription agent will send payments
through the record holder of your shares. Any funds returned will be returned without interest or
deduction.
Will the rights be listed on a stock exchange or national market?
The rights themselves will not be listed on the NASDAQ Global Market or any other stock
exchange or national market. Our common stock will continue to trade on the NASDAQ Global Market
under the symbol BXXX, and the shares issued in connection with the rights offering will be
eligible for trading on the NASDAQ Global Market.
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What fees or charges apply if I purchase shares of common stock?
We are not charging any fee or sales commission to issue rights to you or to issue shares to
you if you exercise your rights. We will pay all fees charged by the information agent and the
subscription agent. In addition, we will pay all fees payable pursuant to tail rights existing in
underwriting agreements entered into as part of the private placement of the Companys securities
in 2006 and 2007 should the investors from those transactions elect to exercise their basic or
over-subscription privileges. If you exercise your rights through the record holder of your shares,
you are responsible for paying any fees your record holder may charge you.
What are the U.S. federal income tax consequences of exercising rights?
A holder of common stock should not recognize income or loss for United States federal income
tax purposes in connection with the receipt or exercise of subscription rights in the rights
offering. A holder of series 2006 securities may recognize dividend income for federal income tax
purposes in connection with the receipt of subscription rights in the offering but should not
recognize income or loss for federal income tax purposes in connection with the exercise of the
subscription rights. You should consult your tax advisor as to the particular consequences to you
of the rights offering. For a detailed discussion, see MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES.
To whom should I send my forms and payment?
If your shares are held in the name of a broker, dealer or other nominee, then you should send
your subscription documents, rights certificate and payment to that record holder in accordance
with the instructions you receive from that record holder. If you are the record holder, then you
should send your subscription documents, rights certificate and payment by hand delivery, first
class mail, or courier service to the subscription agent whose address and contact information is
on page 34. You are solely responsible for completing delivery to the subscription agent of your
subscription documents, rights certificate, and payment. We urge you to act quickly to allow
sufficient time for delivery of your subscription materials to the subscription agent.
Whom should I contact if I have other questions?
If you have other questions or need assistance, please contact the information agent, The
Altman Group, Inc., at:
Holders call (866) 207-2239
Banks & Brokers call (201) 806-7300
For a complete description of the rights offering, see THE RIGHTS OFFERING beginning on page
29.
7
PROSPECTUS SUMMARY
The following summary provides an overview of selected information and does not contain all of
the information that you should consider before investing in the securities offered by this
prospectus. Therefore, you should also read the more detailed information set out in this
prospectus, including the risk factors and the consolidated financial statements and related notes
included in or incorporated by reference into this prospectus. In this prospectus, unless the
context requires otherwise or unless as otherwise expressly stated, references to we, our,
us, the Company, and Brooke refer collectively to Brooke Corporation and its subsidiaries.
The Company
General
Brooke Corporation was incorporated as a Kansas corporation on January 22, 1986 under the name
of Brooke Financial Services, Inc. We subsequently amended our articles of incorporation, changing
our name to Brooke Corporation. Our principal executive offices are located at 8500 College
Boulevard, Overland Park, Kansas 66210. Our telephone number is (913) 661-0123. We maintain a
website at www.brookecorp.com. The information contained in our website is not part of this
prospectus and you should not rely on it in deciding whether to invest in our common stock. We are
a holding company that owns, directly or indirectly through another subsidiary, 100% of the voting
common stock or other ownership interests of all our subsidiaries, except for our majority
ownership interest in Aleritas Capital Corp. and Brooke Capital Corporation. We make and manage
investments in the insurance, banking and financial services industries through our holdings in two
publicly-traded companies, Brooke Capital Corporation (AMEX:BCP) and Aleritas Capital Corp.
(OTCBB:BRCR), and two wholly-owned, privately-held companies, Brooke Brokerage Corporation and
Brooke Bancshares, Inc.
Description of Business
We are a leading provider of insurance and other financial services with operations throughout
the United States and we also provide banking services on a regional basis. Through our
subsidiaries, we provide clients with analysis, advice and transactional capabilities across four
operating segments: Banking Services; Brokerage Business; Insurance Services; and Lending Services.
In addition, we operate certain captive insurance companies that self-insure portions of the
professional insurance agents liability exposure of Brooke Franchise Corporation, its affiliated
companies and its franchisees and provide financial guaranty policies to Aleritas Capital Corp. and
its participating lenders.
The Rights Offering
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Securities offered
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We are distributing to you, at no charge, one
non-transferable subscription right for every share
of our common stock that you owned (or in the case
of series 2006 preferred stock and series 2006
warrants, one subscription right for every share of
common stock issuable upon conversion or exercise)
at 5:00 p.m., Eastern Daylight Time, on ___ __,
2008, either as a holder of record or, in the case
of shares held of record by brokers, banks or other
nominees, on your behalf, as a beneficial owner of
such shares.
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Basic subscription privilege
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Each right gives you the opportunity to purchase
one share of our common stock for $ per share.
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Over-subscription privilege
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If you elect to exercise your basic subscription
privilege in full, you may also subscribe for
additional shares (up to the number of shares for
which you subscribed under
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your basic subscription
privilege) at the same subscription price per
share. If an insufficient number of shares are
available to satisfy fully the over-subscription
privilege requests, the available shares will be
distributed proportionately among rights holders
who exercised their over-subscription privilege
based on the number of shares each rights holder
subscribed for under the over-subscription
privilege. The subscription agent will return any
excess payments by mail without interest or
deduction promptly after the expiration of the
rights offering.
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Record date
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5:00 p.m. Eastern Daylight Time on
___ __, 2008.
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Expiration date
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5:00 p.m. Eastern Daylight Time on
___ __,
2008, unless extended by us, in our sole
discretion. Any rights not exercised at or before
that time will expire without any payment to the
holders of those unexercised rights.
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Subscription price
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$___ per share, payable in cash, except as
described below.
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Use of proceeds
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Assuming full participation, the proceeds from the
rights offering is expected to be $ million in
cash, before deducting expenses relating to the
rights offering. The proceeds from the rights
offering will be used for general corporate
purposes including providing financing to our
subsidiaries for general operating purposes. In
addition, Brooke Holdings, Inc., our largest
shareholder who owned 44.2% of our outstanding
common stock as of May 27, 2008, intends to retire
outstanding debt currently outstanding in the
amount of approximately $11,500,000 as payment for
exercise of its basic subscription privilege and
may also retire additional outstanding debt to the
extent it exercises its over-subscription
privilege. Thus, for those rights exercised by
Brooke Holdings, Inc., we will retire a portion of
the outstanding indebtedness owned by Brooke
Holdings, Inc. in lieu of receiving cash.
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Non-transferability of rights
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The subscription rights may not be sold,
transferred or assigned (except by operation of
law) and will not be listed for trading on the
NASDAQ Global Market or on any stock exchange or
market or on the OTC Bulletin Board.
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No board recommendation
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Our board of directors makes no recommendation to
you about whether you should exercise any rights.
You are urged to make an independent investment
decision of whether to exercise your rights based
on your own assessment of our business and the
rights offering. Please see the section of this
prospectus entitled RISK FACTORS for a discussion
of some of the risks involved in investing in our
common stock.
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No revocation
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If you exercise any of your rights, you will not be
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permitted to revoke or change the exercise or
request a refund of monies paid.
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U.S. federal income tax considerations
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A holder of common stock should not recognize
income or loss for United States federal income tax
purposes in connection with the receipt or exercise
of subscription rights in the rights offering. A
holder of series 2006 securities may recognize
dividend income for federal income tax purposes in
connection with the receipt of subscription rights,
but should not recognize income or loss for federal
income tax purposes in connection with the exercise
of the subscription rights. You should consult your
tax advisor as to the particular consequences to
you of the rights offering. For a detailed
discussion, see MATERIAL UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES.
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Extension, withdrawal, termination and amendment
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The period for exercising your subscription rights
may be extended by our board of directors, although
we do not presently intend to do so. Our board of
directors may withdraw or terminate the rights
offering in its sole discretion at any time on or
before the expiration of the rights offering for
any reason (including, without limitation, a change
in the market price of our common stock). In the
event that the rights offering is withdrawn or
terminated, all funds received from subscriptions
by shareholders will be returned. Interest will not
be payable on any returned funds. We also reserve
the right to amend the terms of the rights
offering.
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Procedure for exercising rights
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If you are the record holder of shares of our
common stock, to exercise your rights you must
complete the rights certificate and deliver it to
the subscription agent, American Stock Transfer &
Trust Company, together with full payment for all
the subscription rights you elect to exercise. The
subscription agent must receive the proper forms
and payments on or before the expiration of the
rights offering. You may deliver the documents and
payments by mail or commercial courier. If regular
mail is used for this purpose, we recommend using
registered mail, properly insured, with return
receipt requested. If you are a beneficial owner of
shares of our common stock, you should instruct
your broker, custodian bank or nominee in
accordance with the procedures described in the
section of this prospectus entitled THE RIGHTS
OFFERINGBeneficial Owners.
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Subscription agent
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American Stock Transfer & Trust Company.
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Information agent
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The Altman Group, Inc.
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Questions
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Questions regarding the rights offering should be
directed to our Information Agent, at:
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Holders call (866) 207-2239
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Banks & Brokers call (201) 806-7300
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Common Stock outstanding before the rights offering
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14,523,941 shares as of May 27, 2008.
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Common Stock outstanding after completion of the
rights offering
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Up to 30,458,647 shares of our common stock will be
outstanding immediately after completion of the
rights offering (assuming 100% participation and
excluding shares issued upon conversion of certain
other securities). This includes our common shares
that may be issued pursuant to rights issuable to
the holders of our series 2006 preferred stock and
the series 2006 warrants.
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Issuance of our common stock
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If you purchase shares of common stock through the
rights offering, we will issue certificates
representing those shares to you or DTC on your
behalf, as the case may be, promptly after the
completion of the rights offering.
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Fees and expenses
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We will bear the fees and expenses relating to the
rights offering. If you exercise your rights
through the record holder of your shares, you are
responsible for paying any fees your record holder
may charge you.
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NASDAQ Global Market trading symbol
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Shares of our common stock are currently listed for
quotation on the NASDAQ Global Market under the
symbol BXXX, and the shares to be issued to you
in connection with the rights offering will be
eligible for trading on the NASDAQ Global Market.
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Proposed Development
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Reverse Stock Split
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Subsequent to the termination of the rights
offering, we currently intend to effect a reverse
stock split in order to increase the market price
of our common stock. No reverse split ratio has yet
been determined. The stock split will not have the
effect of causing us to become a private company
and we intend that our common stock will continue
to be listed on the NASDAQ Global Market. See
CAPITALIZATION for more information.
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Risk Factors
Your investment in our common stock offered by this prospectus involves a high degree of risk.
See RISK FACTORS beginning on page 12.
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RISK FACTORS
You should carefully consider the following risk factors, together with all of the other
information included in or incorporated by reference into this prospectus, including our financial
statements and related notes, in evaluating an investment in our common stock. If any of the
following risks were actually to occur, our business, financial condition or results of operations
could be materially adversely affected. The trading price of our common stock also could decline as
a result of one or more of these risks occurring, and you may lose all or part of your investment.
Risks Related to the Rights Offering
The price of our common stock is volatile and may decline before or after the subscription rights
expire.
The market price of our common stock could be subject to wide fluctuations in response to
numerous factors, including factors that have little or nothing to do with us or our performance,
and these fluctuations could materially reduce our stock price. These factors include, among other
things, actual or anticipated variations in our operating results and cash flow, the nature and
content of our earnings releases and our competitors and customers earnings releases,
announcements of technological innovations that affect our products, customers, competitors, or
markets, changes in financial estimates by securities analysts, business conditions in our markets
and the general state of the securities markets and the market for similar stocks, the number of
shares of our common stock outstanding, changes in capital markets that affect the perceived
availability of capital to companies in our industries, governmental legislation or regulation,
currency and exchange rate fluctuations, as well as general economic and market conditions, such as
recessions. In addition, the stock market historically has experienced significant price and volume
fluctuations. These fluctuations are often unrelated to the operating performance of particular
companies. These broad market fluctuations may cause declines in the market price of our common
stock.
We cannot assure you that the public trading market price of our common stock will not decline
after you elect to exercise your rights. If that occurs, you may have committed to buy shares of
common stock in the rights offering at a price greater than the prevailing market price and could
have an immediate unrealized loss. Moreover, we cannot assure you that, following the exercise of
your rights, you will be able to sell your common stock at a price equal to or greater than the
subscription price, and you may lose all or part of your investment in our common stock. Until
shares are delivered upon expiration of the rights offering, you will not be able to sell the
shares of our common stock that you purchase in the rights offering. Certificates representing
shares of our common stock purchased will be delivered promptly after expiration of the rights
offering. We will not pay you interest on funds delivered to the subscription agent pursuant to the
exercise of rights.
If the rights offering is consummated, your relative ownership interest may experience significant
dilution.
If you do not exercise your subscription rights and shares are purchased by other shareholders
in the rights offering, your proportionate voting and ownership interest will be reduced and the
percentage that your original shares represent of our expanded equity after exercise of the
subscription rights will be diluted. Even if the holders of our common stock choose to exercise
their subscription rights in full, their percentage ownership of our common stock could still
decrease because we are also providing subscription rights to holders of our series 2006
securities. The magnitude of the reduction of your percentage ownership will depend upon the extent
to which you subscribe in the rights offering. If you do not exercise your basic subscription
rights and the offering is fully subscribed, you will experience a ___% dilution in your ownership
percentage of common stock and a ___% dilution in your ownership percentage of common stock
assuming the exercise in full of the subscription rights held by the holders of the series 2006
securities.
The subscription rights are not transferable, and there is no market for the subscription rights.
You may not sell, give away or otherwise transfer your subscription rights. The subscription
rights are only transferable by operation of law. Because the subscription rights are
non-transferable, there is no market or other means for you to directly realize any value
associated with the subscription rights. You must exercise the
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subscription rights and acquire additional shares of our common stock to realize any value
from your subscription rights.
We may withdraw the rights offering.
We may unilaterally withdraw or terminate this rights offering in our discretion until the
expiration of the rights offering. If we elect to withdraw or terminate the rights offering,
neither we nor the subscription agent will have any obligation with respect to the subscription
rights except to return, without interest or penalty, any subscription payments.
The subscription price determined for the rights offering is not an indication of the fair value of
our common stock.
Our board of directors determined the subscription price considering the likely cost of
capital from other sources, the price at which our shareholders might be willing to participate in
the rights offering, and historical and current trading prices for our common stock. The
subscription price for a subscription right is $ per share, which is ___% of the closing
price of our common stock on
___, 2008. The subscription price does not necessarily bear
any relationship to the book value of our assets or our past operations, cash flows, losses,
financial condition, net worth or any other established criteria used to value securities. You
should not consider the subscription price to be an indication of the fair value of the common
stock to be offered in the rights offering. After the date of this prospectus, our common stock may
trade at prices above or below the subscription price.
You may not revoke your subscription exercise and could be committed to buying shares above the
prevailing market price.
Once you exercise your subscription rights, you may not revoke the exercise. The public
trading market price of our common stock may decline before the subscription rights expire. If you
exercise your subscription rights and, afterwards, the public trading market price of our common
stock decreases below the subscription price, you will have committed to buying shares of our
common stock at a price above the prevailing market price. Our common stock is traded on the NASDAQ
Global Market under the symbol BXXX, and the last reported sales price of our common stock on the
NASDAQ Global Market on ___ ___, 2008 was
$___ per share. Moreover, you may be unable to sell your
shares of common stock at a price equal to or greater than the subscription price you paid for such
shares.
As a result of the rights offering, Robert D. Orr and Brooke Holdings Inc. may acquire more than
50% ownership of our common stock resulting in us becoming a controlled company.
As of May 28, 2008, Robert D. Orr and Brooke Holdings, of which Robert D. Orr is the majority
shareholder, own 44.5% of our outstanding common stock. Through the full exercise of their rights
pursuant to this rights offering, Robert D. Orr and Brooke Holdings may acquire enough common stock
to increase their percentage ownership of our common stock above 50%. Should Robert D. Orr and
Brooke Holdings acquire sufficient common stock to increase their percentage ownership of our
common stock above 50%, we will become a controlled company for purposes of the listing rules for
the NASDAQ Global Market. Should we become a controlled company, we will be exempt for certain
NASDAQ listing rules, including the majority independent board requirement, executive compensation
oversight by independent director requirement and director nominee selection by independent
director requirement.
As a result of the rights offerings, holders of our series 2006 preferred stock and warrants issued
in a private placement in 2006 will experience an immediate reduction in the conversion and
exercise price of their outstanding securities, which could cause further dilution of your relative
ownership interest.
In a private offering in September 2006, we issued 20,000 shares of the series 2006 preferred
stock, which is convertible at a price of $17.00 per share initially into 1,176,471 shares of
common stock, and series 2006 warrants to purchase 235,294 shares of common stock exercisable at an
exercise price of $23.9954 per share. Both the series 2006 preferred stock conversion price and the
series 2006 warrants are subject to an anti-dilution
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provision, which reduces the price for exercise or conversion upon the issuance of common
stock to the per share price applicable to the offering of common stock hereby. Thus, upon the
closing of the rights offering, the series 2006 preferred stock conversion price will be reduced
from $17.00 per share to $___ per share and the series 2006 warrant exercise price will be
reduced from $23.9954 per share to $___ per share. Purchasers of our common stock in the rights
offering may experience further dilution of the net tangible book value of their common stock
should the holders of the series 2006 securities choose to exercise and/or convert their
outstanding interests due to the reduction in the exercise or the conversion price.
If you do not act promptly and follow the subscription instructions, your exercise of subscription
rights may be rejected because it may be untimely.
If you desire to purchase shares in this rights offering, you must act promptly to ensure that
all required forms and subscription payments are actually received by the subscription agent at or
prior to 5:00 p.m., Eastern Daylight Time, on ___ ___, 2008, the expiration of the rights
offering. If you fail to complete and sign the required subscription forms, send an incorrect
payment amount, or otherwise fail to follow the subscription procedures that apply to your desired
transaction, we may, depending on the circumstances, reject your subscription or accept it to the
extent of the payment received. If your exercise is rejected, your payment of the exercise price
will be promptly returned. Neither we nor our subscription agent undertakes to contact you
concerning, or attempt to correct, an incomplete or incorrect subscription form or payment. We have
the sole discretion to determine whether a subscription exercise properly follows the subscription
procedures and to decide all questions as to the validity, form and eligibility (including times of
receipt and beneficial ownership). Alternative, conditional or contingent subscriptions will not be
accepted. We reserve the absolute right to reject any subscriptions not properly submitted. In
addition, we may reject any subscription if the acceptance of the subscription would be unlawful.
We also may waive any irregularities (or conditions) in the subscription. If you are given notice
of a defect in your subscription, you will have five business days after the giving of notice to
correct it. You will not, however, be allowed to cure any defect later than 5:00 p.m., Eastern
Daylight Time, on the expiration date. We are not obligated to give you notification of defects in
your subscription. We will not consider an exercise to be made until all defects have been cured or
waived.
Risks Related to Brooke Corporation
A significant part of our business strategy involves adding new franchise locations, originating new loans, and providing collateral preservation services, and our failure to grow may adversely affect our business, prospects, results of operations and financial condition.
Our expansion strategy consists principally of adding new franchise locations, originating new
loans and providing collateral preservation services for such loans. Our continued growth is
dependent upon a number of factors, including the availability of adequate financing and suitable
franchise locations on acceptable terms, experienced management employees, the ability to obtain
required government permits and licenses and other factors, some of which are beyond our control.
In addition, we compete for acquisition and expansion opportunities with entities that have
substantially greater resources than us. We cannot assure you that we will be able to continue to
provide effective collateral preservation services or grow our business successfully through adding
new franchise locations or by growing the operations of existing franchisees. Our failure to grow
could have a material adverse effect on our business, prospects, results of operations and
financial condition.
Borrowers financial performance may adversely affect their ability to repay amounts due to us.
We have credit exposure with respect to loans made by Brooke Capital Corporation and Aleritas
Capital Corp. (Aleritas) and to franchisees, with respect to the franchisees monthly statement
balances and with respect to loans by those companies and Brooke Corporation to other borrowers .
Together, we lend money to franchisees, other insurance agencies and funeral home owners to start
up or acquire businesses and we may assist these borrowers by loaning working capital. In addition,
we assist franchisees by financing long-term producer development, cyclical fluctuations of
revenues, receivables and payables. We make loans to help franchisees with monthly fluctuations of
revenues and record these advances on franchisees monthly statements. We also grant temporary
extensions of due dates for franchisee statement balances owed by franchisees to us. To fund
long-term producer development of franchisees, including hiring and training costs, we also extend
credit to franchisees, which
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we refer to as non-statement balances. Franchisees and other borrowers depend on commission
income to pay amounts due to us in respect of their loans, in respect of their statement balances,
and in respect of their non-statement balances used to finance long-term producer development. If
franchisees and other borrowers are not successful, franchisees may be unable to pay statement or
non-statement balances to us and our borrowers may be unable to repay their loans, any of which
would have a detrimental effect on us.
Our credit loss reserves are determined primarily by our watch statement balances. Other
factors we consider in determining credit loss reserves are statement loss experience, managements
evaluation of the potential for future losses and managements evaluation of the potential for
future recoveries. We may not be able to accurately predict credit losses and, as a result, the
amount we have budgeted for credit losses may not be sufficient to cover future losses, in which
case, our financial condition and results of operations will be adversely affected. In addition,
our borrowers adverse financial performance may result in a downgrade or withdrawal of ratings
given to securities previously issued in our securitizations, or keep us from getting favorable
ratings on future securitized pools of our loans.
The ability of borrowers to repay loans made to them by our majority-owned subsidiary Aleritas
Capital may be adversely affected by an increase in market interest rates.
Loans made to franchisees and other borrowers by Aleritas typically bear interest at a
variable or floating interest rate. To the extent that market interest rates increase, borrowers
may be unable to make debt service payments. As a result, an increase in market interest rates will
increase the risk of default on the loans made by us. The risk associated with rising interest
rates will increase with respect to our insurance agency borrowers if coupled with a flattening or
decreasing of property and casualty insurance premiums, and thus commissions. As well, an increase
in interest rates could cause certain insurance companies to reduce their premium rates in an
effort to sell more insurance and invest the resulting premiums in fixed-income securities to get
the benefit of these higher rates. In such event, the amount of commissions our franchisees and
other insurance agency borrowers earn could be adversely affected, further increasing the risk of
default on loans made by us to these borrowers.
Our financial condition could be adversely affected if we are unable to fund our loans through
sales to third parties.
In an effort to broaden our funding sources and to provide an additional source of liquidity,
we have sold participation interests in our loans and have accessed, and intend to attempt to
continue to access, the asset-backed securitization and warehouse funding markets.
Under a typical asset-backed securitization, we sell a pool of secured loans to a
special-purpose entity, generally a limited liability company. The special-purpose entity, in turn,
typically issues securities that are collateralized by the pool and the holders of the securities
are entitled to participate in certain pool cash flows. Several factors will affect our ability to
sell participation interests in our loans, to fund our financing through warehouse facilities, and
to complete securitizations, including:
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conditions in the securities markets, generally;
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conditions in the asset-backed securities markets;
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the credit quality and performance of our financial instruments and loans;
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our ability to adequately service our financial instruments and loans;
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our ability to monitor our borrowers and to implement collateral preservation; and
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the absence of any downgrading or withdrawal of ratings given to securities
previously issued in our securitizations.
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We make certain assumptions regarding the profitability of our securitizations, participations,
warehouse lines and other funding vehicles which may not prove to be accurate.
In a securitization, participation or warehouse sale transaction, we may recognize a gain on
sale resulting from related retained interest and/or servicing rights when we sell the assets. The
value assigned to the retained interest and/or servicing asset depends upon certain assumptions we
make about future performance of the sold loans, including the level of credit losses and the rate
of prepayments. If actual credit losses or prepayment rates differ from the original assumptions,
the value of the retained interest and/or servicing asset may decrease materially. The value of the
retained interest and/or servicing asset may also decrease materially as a result of changes in
market interest rates.
In addition, changes in the volume of loans sold due to our inability to access the
asset-backed securitization markets, or other funding sources, could have a material adverse effect
on our business, financial condition and results of operations. Decreases in the value of the
retained interests and/or servicing asset in securitizations or warehouses that we have completed
or loan participations we have sold due to market interest rate fluctuations or higher than
expected credit losses on prepayments also could have a material adverse effect on our business,
financial condition and results of operations.
The value of the collateral securing our loans to borrowers may be adversely affected by our
borrowers actions.
We make loans to franchisees, other insurance agency borrowers, funeral home owners, and other
borrowers primarily for the purpose of allowing them to acquire businesses. These loans are secured
by, among other things, the business value, such as insurance agency assets. These assets in most
cases are intangible, and the value of these assets may rapidly deteriorate if our borrowers do not
adequately serve their customers or if the products and services they offer are not competitively
priced. Reduction in the value of such assets could result in these loans being inadequately
secured, which could adversely affect us in the event of a default on these loans.
Carrier override and contingent or profit sharing commissions are difficult to predict, and any
decrease in our receipt of such payments will adversely affect us.
We derive a portion of our revenues from carrier override and contingent or profit sharing
commissions based upon the terms of the contractual relationships between our insurance companies
and us. Carrier override commissions are commissions paid by insurance companies in excess of the
standard commission rates on specific classes of business. These amounts may be, but are not
always, contingent on achieving a specific premium volume or profitability of the business.
Contingent or profit sharing commissions are commissions paid by insurance companies based on the
estimated profit that the companies make on the overall volume of business that we place with such
companies. We generally receive these contingent commissions in the first and second quarters of
each year. We do not account for carrier overrides separately. However, contingent or profit
sharing commissions accounted for approximately three percent of our total revenues for the year
ended December 31, 2007.
Due to the nature of these commissions, it is difficult for us to predict their payment.
Increases in loss ratios experienced by insurance companies will result in a decreased profit to
them and may result in decreases in payments of contingent or profit sharing commissions to us.
Furthermore, we have no control over insurance companies ability to estimate loss reserves, which
affects our profit sharing calculation. In addition, tightening of underwriting criteria by certain
insurance companies, due in part to high loss ratios, may result in a lower volume of business that
we are able to place with them. Our company override and contingent or profit sharing commissions
affect our revenues, and decreases in their payment to us may have an adverse effect on our results
of operations.
Potential litigation and regulatory proceedings regarding commissions, fees, contingency payments,
profit sharing and other compensation paid to brokers or agents could materially adversely affect
our financial condition.
The insurance industry has in recent years come under a significant level of scrutiny by
various regulatory bodies, including state Attorneys General and the departments of insurance for
various states, with respect to contingent compensation and other volume or profit based
compensation arrangements. Attorneys General have
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issued subpoenas to various insurance brokerages and insurance companies. Certain of these
investigations have led to complaints being filed against brokerages and insurance companies and
some brokerages and insurance companies have stated that they will discontinue accepting or making,
respectively, volume based and profit based payments. In addition to government investigations,
class action lawsuits relating to these business practices have been filed against various members
of the insurance industry. Negative publicity associated with these investigations, lawsuits and
resulting settlements have precipitated increased volatility in the prices of securities issued by
companies throughout the insurance industry. We received inquiries from departments of insurance
which were related to such compensation arrangements or were related to unethical or unlawful sales
practices. These inquiries were not related to specific or general allegations of wrongdoing on our
behalf. Rather, these inquiries were sent to numerous agents and brokers based upon their status as
a licensed agent or broker, the volume of business they produce or other factors unrelated to
allegations of wrongdoing. We cannot predict whether we will receive further inquiries or will
receive subpoenas, or will become subject to investigations, regulatory actions, proceedings or
lawsuits. The outcome of any such subpoena, investigation, regulatory action, proceeding or lawsuit
could have a material adverse effect on our business or financial condition.
The insurance industry has also recently come under a significant level of scrutiny by
consumer advocacy groups, and certain media reports have advocated governmental action with respect
to contingent and other volume or profit based compensation arrangements. The consumer groups and
media reports typically characterize these payments as creating an unacceptable conflict of
interest and adding an unnecessary or even unfair consumer cost. If negative characterizations of
such compensation arrangements become accepted by consumers, this could have a material adverse
effect on the demand for our franchisees products and services and could materially adversely
affect our results of operations and financial condition. Negative perception of such compensation
arrangements or other activities could also result in us being subject to more restrictive laws and
regulations as well as increased litigation, which may increase further our costs of doing business
and adversely affect our profitability by impeding our ability to market our products and services,
requiring us to change our marketing practices, products or services and increasing the regulatory
burdens under which we operate.
Our business is dependent on the cyclical pricing of property and casualty insurance, which may
adversely affect our franchisees performance and, thus, our financial performance.
Our franchisees and other borrowers are primarily engaged in insurance agency and brokerage
activities and derive revenues from commissions paid by insurance companies, which commissions are
based in large part on the amount of premiums paid by their customers to such insurance companies.
In turn, we earn fees from our franchisees based upon the amount of such commissions payable by
insurance companies, which fees make up a substantial portion of our revenues. Neither we nor our
franchisees or other insurance agency borrowers determine insurance premiums. Premium rates are
determined by insurers based on a fluctuating market. Historically, property and casualty insurance
premiums have been cyclical in nature, characterized by periods of severe price competition and
excess underwriting capacity, or soft markets, which generally have an adverse effect upon the
amount of commissions earned by our franchisees or other insurance agency borrowers, followed by
periods of high premium rates and shortages of underwriting capacity, or hard markets. The current
insurance market generally may be characterized as soft, with a flattening or decreasing of
premiums in most lines of insurance. As insurance carriers continue to outsource the production of
premium revenue to independent brokers or agents, such as our franchisees, those insurance carriers
may seek to reduce further their expenses by reducing the commission rates payable to such brokers
or agents. The reduction of these commission rates, along with general volatility and/or declines
in premiums, may significantly undermine the profitability of our franchisees and other insurance
agency borrowers, and our profitability. A reduction in commission rates may significantly
undermine our borrowers ability to repay loans to us. Because we do not determine the timing and
extent of premium pricing changes, we cannot accurately forecast our commission revenues, including
whether they will significantly decline. As a result, our budgets for future acquisitions, capital
expenditures, credit loss reserves, dividend payments, loan repayments and similar items may have
to be adjusted to account for unexpected changes in revenues.
We may not be able to successfully convert new franchises.
Our ability to successfully identify suitable acquisition candidates, complete acquisitions,
convert acquired businesses into our franchisees, and expand into new markets will require us to
continue to implement and improve our operations, financial and management information systems. Our
new franchises may not achieve levels of
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revenue, profitability, or productivity comparable to our existing franchises, or otherwise
perform as expected. In addition, when we make an acquisition and effect a conversion, we are
subject to a number of special risks, such as entry into unfamiliar markets and unanticipated
problems or legal liabilities, some or all of which could have a material adverse effect on our
results of operations and financial condition.
We may be required to repurchase loans sold with recourse or make payments on guarantees.
In some instances, Aleritas has sold loans to investors with full or partial recourse, which
may adversely affect our financial condition or results of operations in the event Aleritas is
required to repurchase loans of poor quality. In addition, in connection with our activities of
matching business purchasers and sellers, we have sometimes guaranteed payments from purchasers to
sellers, which may adversely affect us in the event such a purchaser defaults on its obligations to
such a seller.
We will be adversely affected if we do not have alternative sources of funds to repay our
obligations as they mature.
Loans made by Aleritas are usually amortized for a period of between twelve years and fifteen
years. We have funded a portion of our loan portfolio with funding facilities which will require
all or partial repayment by us prior to the time that loans made by us are scheduled to be repaid,
and we will be adversely affected if we do not have alternative sources of funds to repay these
obligations as they mature.
We are dependent on key personnel.
We are dependent upon the continued services of senior management, particularly the services
of Robert D. Orr, Leland G. Orr, Michael Hess and Kyle Garst. We have entered into an employment
agreement with each of them. The loss of the services of any of these key personnel, by
termination, death or disability, or our inability to identify, hire and retain other highly
qualified personnel in the future, could have a material adverse effect on us. We currently do not
maintain key employee insurance with respect to any of our officers or employees.
With our method of funding our loans, our leverage may increase.
If we fund more of our loans with our cash or warehouse facilities that do not qualify as true
sales pursuant to the criteria established by SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, our current liabilities will increase. Our
network of participating lenders and other business partners may become uncomfortable with such an
increase in current liabilities. As a result, we may not be able to sell loans we originate on
terms acceptable to us or at all, which would have a material adverse effect on our operations and
prospects for growth.
Our business, results of operations, financial condition or liquidity may be materially adversely
affected by errors and omissions.
Our franchisees are subject to claims and litigation in the ordinary course of business
resulting from alleged errors and omissions. Because we are agent of record on policies written
through our franchisees, claims against our franchisees may also allege liability against us for
all or part of the amounts in question. Claimants may seek large damage awards and these claims may
involve potentially significant defense costs. Errors and omissions could include, for example, our
employees or sub-agents failing, whether negligently or intentionally, to place coverage or to
notify insurance companies of claims on behalf of clients, to provide insurance companies with
complete and accurate information relating to the risks being insured or to appropriately apply
funds that we hold for our clients. It is not always possible to prevent and detect errors and
omissions and the precautions we take may not be effective in all cases. While most of the errors
and omissions claims made against us have been covered by our professional liability insurance,
subject to our self-insured deductibles, our results of operations, financial condition or
liquidity may be adversely affected if in the future our insurance coverage proves to be inadequate
or unavailable or there is an increase in liabilities for which we self-insure. In addition, errors
and omissions claims may harm our reputation or divert management resources away from operating our
business.
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Termination of our professional liability insurance policy would adversely impact our financial
prospects and our ability to continue our relationships with insurance companies.
Without professional liability insurance, it is unlikely that we would be able to continue our
relationships with insurance companies, which would adversely impact our financial prospects.
Although we have an acceptable claims history, there can be no assurance that we will be able to
maintain our professional liability insurance and in the event of the termination or non-renewal of
our professional liability insurance policy, we may be unable to acquire this insurance on
acceptable terms, or at all.
Insufficient internal controls may negatively impact our financial integrity, operations, financial
reporting and, ultimately, have a material adverse effect on our stock price.
Effective internal controls over financial reporting are necessary for us to provide reliable
financial reports, effectively prevent fraud and operate successfully as a public company. If we
cannot provide reliable financial reports or prevent fraud, our reputation and operating results
will be harmed. For example, we restated the presentation of our cash flow statements for years
ended December 31, 2004, 2005 and 2006 as well as for the three months ended March 31, 2007 to
record activity on securitization-related bank lines of credit as financing activities instead of
operating activities. Correction of this accounting error resulted in no changes in our net cash
flows, net income, assets, liabilities, retained earnings, or earnings per share. The restatement
of our previously issued financial statements could expose us to legal and regulatory risk. The
defense of any such actions could cause the diversion of managements attention and resources, and
we could be required to pay damages to settle such actions if any such actions are not resolved in
our favor. Even if resolved in our favor, such actions could cause us to incur significant legal
and other expenses. Moreover, we may be the subject of negative publicity focusing on the financial
statement inaccuracies and resulting restatement and negative reactions from our shareholders,
creditors or others with which we do business. The occurrence of any of the foregoing could harm
our business and reputation and cause the price of our securities to decline.
Our dependence on initial franchise fees creates an incentive for us to extend credit to borrowers
that may not meet our stringent underwriting guidelines.
A significant part of our revenues are derived from one-time initial fees we receive from
assisting franchisees and others with the acquisition of businesses. Generating fees is largely
dependent on our franchisees and others ability to obtain acquisition financing from Aleritas.
Our dependence on these initial fees creates an incentive for us to extend credit to borrowers that
may not meet our stringent underwriting criteria. Our failure to follow stringent underwriting
guidelines could adversely affect the quality of the loans we make and adversely affect our
financial condition and results of operations.
Some of the initiatives we have undertaken to improve franchisee quality and to reduce the time
allowed for franchisees to demonstrate their success may reduce initial franchise fees, cash flow
and profitability.
In October 2007, Brooke Capital announced a New Era initiative that emphasizes franchisee
quality over location growth. As a result of the New Era initiative, the amount of initial
franchise fees will likely be reduced in future years, which could have an adverse impact on cash
flows and profitability. Furthermore, the New Era initiative provided for a decrease in the rate of
monthly franchise fees, or royalties, assessed to franchisees which could also have an adverse
impact on cash flows and profitability.
In the later part of 2005, Brooke Capital reduced, from 18 months to 8 months, the amount of
time that start up franchisees were allowed to demonstrate their success. As a result, the number
of franchisee developed locations has increased and lenders have experienced increased
delinquencies related to loans to start up franchisees secured by locations. This may have an
adverse impact on Brooke Capitals ability to generate initial franchise fees from start up
franchisees.
Because a significant part of our insurance-related revenues and loans derive from operations
located in five states, our business may be adversely affected by conditions in these states.
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A substantial portion of our insurance-related revenues and loans derive from operations
located in the states of Texas, California, Kansas, Florida and Missouri. Our franchisees and our
revenues and profitability are affected by the prevailing regulatory, economic, demographic,
weather, competitive, industry and other conditions in these states. Changes in any of these
conditions could make it more costly or difficult for our franchisees and us to conduct our
business. Adverse regulatory or industry developments in these states, which could include
fundamental changes to the design or implementation of the insurance regulatory framework, could
have a material adverse effect on our results of operations and financial condition.
A significant part of Aleritas business strategy involves the success of its affiliate, Brooke
Capital Advisors, Inc. (Capital Advisors), in sourcing managing general agency (MGA) and
funeral home loans for us, and its failure to generate adequate lending opportunities may adversely
affect our business, prospects, results of operations and financial condition.
Aleritas obtains a substantial portion of its business through loans to MGAs and funeral homes
sourced by Capital Advisors and Capital Advisors provides, or contracts with third parties to
provide, collateral preservation services with respect to these loans. We cannot assure you that
Capital Advisors will be able to identify a sufficient number of loan opportunities to enable
Aleritas to continue the rate of growth we have seen in our MGA and funeral home loan portfolio.
Capital Advisors failure to identify and present lending opportunities to Aleritas or Capital
Advisors failure to provide or contract with third parties to provide collateral preservation
services with respect to these loans could have a material adverse effect on our business,
prospects, results of operations and financial condition.
If we fail to effectively manage our growth, our financial results could be adversely affected.
We must continue to refine and expand our marketing capabilities, our management procedures,
our network of suppliers, our internal controls and procedures, our access to financing sources and
our technology. As we grow, we must continue to hire, train, supervise and manage new employees. We
may not be able to hire and train sufficient personnel or develop management and operating systems
to manage our expansion effectively. If we are unable to manage our growth effectively, our
operations and financial results could be adversely affected.
We may not achieve the same levels of growth in revenues and profits in the future as we have in
the past.
Our business has experienced rapid growth. Our ability to continue to grow our business will
be subject to a number of risks and uncertainties and will depend in large part on, among other
factors: (1) finding new opportunities in our existing and new markets; (2) hiring, training and
retaining skilled managers and employees; (3) expanding and improving the efficiency of our
operations and systems; (4) maintaining loan quality; (5) maintaining and growing our funding
sources and proprietary funding network; (6) growing and maintaining our network of proprietary
loan sources; (7) maintaining and growing our network of collateral preservation providers; and (8)
maintaining and attracting customers. Accordingly, we may not achieve the same levels of growth in
revenues and profits as we have historically.
Aleritas has transferred a significant amount of assets and liabilities off balance sheet in
reliance on Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. In the event transfer of such assets and liabilities is challenged by the SEC, or
SFAS 140 is amended based on the provisions of the exposure draft, Aleritas current off-balance
sheet assets and liabilities could be required to be consolidated in our financial statements.
In the ordinary course of business, Aleritas sells its loans to special purpose entities. Some
of these sale transactions are classified as true sales pursuant to the FASB Statement of Financial
Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS 140). Transactions involving sales of assets classified as
true sales under SFAS 140 have historically been subject to significant scrutiny by the Securities
and Exchange Commission and have been an area of debate with the FASB. In August 2005, the FASB
issued an exposure draft which amends SFAS 140. This exposure drafts seeks to clarify the
derecognition requirements for financial assets and the initial measurement of interests related to
transferred financial assets. During July 2006, the FASB continued re-deliberations on the August
2005 revised exposure draft.
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Aleritas has transferred a significant amount of assets and liabilities off balance sheet in
reliance on SFAS 140. In the event our transfer of such assets and liabilities is challenged by the
SEC, or SFAS 140 is amended based on the provisions of the exposure draft, Aleritas current
off-balance sheet liabilities could be required to be consolidated in our financial statements.
Our debt instruments contain restrictive covenants and other requirements that may limit our
business flexibility by imposing operating and financial restrictions on our operations.
Certain of our agreements governing indebtedness contain financial covenants that impose
ratios, tests, and restrictions on us, such as maximum prepayment rate; a maximum loan loss rate; a
minimum fixed charge coverage ratio; a maximum cash leverage ratio; and a maximum total leverage
ratio. Some of our notes also contain other restrictions, including, but not limited to: the
incurrence of indebtedness and liens; the disposal of our properties other than in the ordinary
course of business; entering into transactions with affiliates or into material agreements other
than in the ordinary course of business; entering into pledge and negative pledge agreements; and
the declaration of dividends, except in limited circumstances. Our ability to comply with the
ratios or tests may be affected by events beyond our control, including prevailing economic,
financial and industry conditions. These covenants may prevent us from expanding our operations and
executing our business strategy. In addition, a breach of any of these covenants, ratios or tests
could result in a default under the agreements governing our indebtedness.
The cash flows we receive from the interests we retain in our securitizations could be delayed or
reduced due to the requirements of the agreements we have signed, which could impair our ability to
operate.
We retain a subordinate interest in our asset-backed securitization transactions. As a result,
our receipt of future cash flows is governed by provisions that control the distribution of cash
flows from the loans underlying our asset-backed securities. In some circumstances, cash flows from
the underlying loans must be used to reduce the outstanding balance of the senior notes issued in
the term debt transactions and are not available to us until the full principal balance of the
senior notes has been repaid. On a monthly basis, cash flows from the underlying loans in our
securitizations must first be used to pay the interest on the senior notes, to pay expenses of the
term debt transaction, and to maintain certain required reserves. Poor performance of a pool of
loans we securitize could affect future cash flows and, therefore, could impair our ability to
operate.
When we sell loans classified as a true sale pursuant to the criteria established by SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, we
record a retained interest and/or servicing asset on our balance sheet. The amount we record is
determined based upon certain assumptions made by management. If these assumptions are materially
inaccurate, we may be required to write down these assets.
Subsequent to the initial calculation of the fair value of retained interest and servicing
assets, we utilize a fair market calculation methodology to determine their ongoing fair market
value. Ongoing fair value is calculated using the then current outstanding principal of the
transferred notes receivable and the outstanding balances due unaffiliated purchasers, which are
reflective of credit losses and prepayments prior to the fair value recalculation. The rates of
write down of the retained interest are based on the current interest revenue stream. This revenue
stream is based on the loan balances at the date the impairment test is completed, which will
include actual prepayments on loans and any credit losses for those loans. If the assumptions used
by management in the initial recording of the retained interest or servicing asset prove to be
materially inaccurate, the future fair value of the retained interest or servicing asset may be
less than originally expected resulting in an impairment loss. Impairment is evaluated and measured
annually. An impairment loss could have a material adverse effect on our business, prospects,
results of operations and financial condition.
Most of the loans we make are to privately-owned small- and medium-sized companies, which present a
greater risk of loss than loans to larger companies.
Aleritas portfolio consists primarily of commercial loans to small and medium-sized,
privately owned businesses. Compared to larger, publicly owned firms, these companies generally
have more limited access to capital and higher funding costs, may be in a weaker financial position
and may need more capital to expand or compete. These financial challenges may make it difficult
for our borrowers to make scheduled payments of interest
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or principal on our loans. Accordingly, advances made to these types of borrowers entail
higher risks than advances made to companies who are able to access traditional credit sources.
The collateral securing a loan may not be sufficient to protect us from a partial or complete loss
if the loan becomes non-performing, and we are required to foreclose.
While most of Aleritas loans are secured by a lien on specified collateral of the borrower,
there is no assurance that the collateral securing any particular loan will protect us from
suffering a partial or complete loss if the loan becomes non-performing and we move to foreclose on
the collateral. The collateral securing our loans is subject to inherent risks that may limit our
ability to recover the principal of a non-performing loan. Listed below are some of the risks that
may affect the value of different types of collateral in which we typically take a security
interest.
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our valuation of the collateral at the time we made the loan was not accurate;
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there is a reduction in the demand for a borrowers products or services;
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the value of the collateral decreases due to loss of key customers, key
employees or producers, changes in market or industry conditions (including the
softening insurance market environment), borrower actions, ineffective or poor
management, increased competition or other reason; and
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the failure of the borrower to adequately maintain existing or recruit new customers;
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Our insurance agency and managing general agency loans are not generally secured by tangible
assets. Furthermore, our funeral home loans are generally not fully secured by tangible assets.
Consequently, if any of these loans becomes non-performing, we could suffer a loss of some or all
of our value in the loan. Our lending involves lending money to a borrower based primarily on the
expected cash flow, profitability and enterprise value of a borrower rather than on the value of
its tangible assets. Thus, if one of our loans becomes non-performing, our primary recourse to
recover some or all of the principal of our loan would be to force the sale of the entire company
as a going concern. The risks inherent in our type of lending include, among other things, the
following:
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reduced use of or demand for the borrowers products or services and, thus,
reduced cash flow of the borrower to service the loan, as well as reduced value of the
borrower as a going concern;
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poor accounting systems of the borrower which adversely affect our ability to
accurately predict the borrowers cash flows;
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economic downturns, political events and changes, regulatory changes,
litigation that affects the borrowers business, financial condition and prospects; and
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poor management performance.
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Additionally, many of our borrowers use the proceeds of our loans to make acquisitions. Poorly
executed or poorly conceived acquisitions can tax management, systems and the operations of the
existing business, causing a decline in both the borrowers cash flow as well as the value of its
business as a going concern. In addition, many acquisitions involve new management teams taking
over control of a business. These new management teams may fail to execute at the same level as the
former management team, which could reduce the cash flow of the borrower to service the loan as
well as reduce the value of the borrower as a going concern.
We may incur lender liability as a result of our lending activities.
In recent years, a number of judicial decisions have upheld the right of borrowers to sue
lending institutions on the basis of various evolving legal theories, collectively termed lender
liability. Generally, lender liability is founded on the premise that a lender has either violated
a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has
assumed a degree of control over the borrower resulting in the creation of a
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fiduciary duty owed to the borrower or its other creditors or shareholders. We may be subject
to allegations of lender liability. We cannot assure you that these claims will not arise or that
we will not be subject to significant liability if a claim of this type did arise.
Aleritas loans to foreign borrowers may involve significant risks in addition to the risks
inherent in loans to U.S. borrowers.
As of May 28, 2008, approximately $11.6 million of our on-balance sheet loan portfolio are
balances of Canadian borrowers. These loans may expose us to risks not typically associated with
loans to U.S. borrowers. These risks include changes in exchange control regulations, political and
social instability, expropriation, imposition of foreign taxes, less liquid markets and less
available information than is generally the case in the United States, higher transaction costs,
less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform
accounting and auditing standards and greater price volatility. To the extent that any of our loans
are denominated in foreign currency, they will be subject to the risk that the value of a
particular currency will change in relation to one or more other currencies. Among the factors that
may affect currency values are trade balances, the level of short-term interest rates, differences
in relative values of similar assets in different currencies, long-term opportunities for
investment and capital appreciation, and political developments. We do not currently employ hedging
techniques to minimize these risks.
Many of Aleritas borrowers are captive insurance agents, and, therefore, are dependent on the
continued success, competitiveness, credit quality and financial condition of the captive carrier
they represent.
Many of our borrowers are captive agents and, therefore, represent primarily one insurance
carrier and derive revenues from commissions paid by primarily one carrier. If this carriers
products become uncompetitive, the carrier is subject to negative publicity, the carrier
experiences regulatory concerns, the commission rate the carrier pays its agents is reduced, the
premiums charged to the carriers customers is reduced and, correspondingly, the commissions based
on such premiums are reduced, the rating of the carrier is lowered, or the carrier otherwise
experiences a material adverse condition or event, our borrower may likewise experience a material
adverse effect which could have a material adverse effect on our results of operations and
financial condition.
Losses sustained by our Bermuda captive insurance companies may adversely affect us.
Our captive insurance company subsidiaries, DB Indemnity, Ltd. and The DB Group, Ltd.,
domiciled in Bermuda, are directly liable for losses and loss adjustment expenses under the terms
of the insurance policies that they write. DB Indemnity and The DB Group are required by Bermuda
law to maintain minimum levels of statutory capital and surplus. In addition, each of DB Indemnity
and The DB Group is required to maintain a minimum liquidity ratio whereby the value of its
relevant assets is not less than a specified percentage of the amount of its relevant liabilities.
If DB Indemnity and The DB Group fail to accurately assess the risks they assume, they may
fail to establish appropriate premium rates and their reserves may be inadequate to cover their
losses. Claim reserves represent estimates involving actuarial and statistical projections at a
given point in time of expectations of the ultimate settlement and administrative costs of claims
incurred. Captives use actuarial models as well as historical industry loss development patterns to
assist in the establishment of appropriate claim reserves. For both casualty and property losses,
actual claims and claim expenses paid may deviate, perhaps substantially, from the reserve
estimates of DB Indemnity and The DB Group. If the claim reserves of DB Indemnity and/or The DB
Group are determined to be inadequate, one or both of them will be required to increase claim
reserves with a corresponding reduction in net income in the period in which the deficiency is
rectified. Even though most insurance contracts have policy limits, the nature of property and
casualty insurance and reinsurance is that losses can exceed policy limits for a variety of reasons
and could significantly exceed the premiums received on the underlying policies. Our captives have
not incurred any claims or claims expenses; however, claims, claims settlement patterns,
legislative activity, social and economic patterns, and litigation and regulatory trends, all of
which are difficult to predict, may have a substantial impact on the future loss experience of DB
Indemnity and/or The DB Group. If the reserves of DB Indemnity and/or The DB Group are insufficient
to cover claims, this could have a material adverse effect on future earnings DB Indemnity and/or
The DB Group contribute to us and, accordingly, could have a material adverse effect on our
prospects. In addition, if the reserves of DB Indemnity or The DB Group are insufficient to cover
claims,
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because the risks insured are risks of the Company and its franchisees, in some instances, we
may have to pay losses for which the reserves of DB Indemnity or The DB Group were not adequate to
cover.
Our reliance on the Internet could have a material adverse effect on our operations and our ability
to meet customer expectations.
We rely heavily on the Internet in conducting our operations. A main component of our
franchise program is providing franchisees and their personnel access to documents and other data
over the Internet. This service requires efficient operation of Internet connections from
franchisees and franchisee personnel to our system. These connections, in turn, depend on efficient
operation of web browsers, Internet service providers and Internet backbone service providers, all
of which have experienced periodic operational problems or outages in the past and over which we
have no control. Any system delays, failures or loss of data, whatever the cause, could reduce
customer satisfaction with our services and products. Moreover, despite the implementation of
security measures, our computer system may be vulnerable to computer viruses, program errors,
attacks by third parties or similar disruptive problems. These events could have a material adverse
effect on our operations and our ability to meet customer expectations.
Our network may be vulnerable to security breaches and inappropriate use by Internet users, which
could disrupt or deter future use of our services.
Concerns over the security of transactions conducted on the Internet and the privacy of users
may inhibit the growth of the Internet and other online services. Our failure to successfully
prevent security breaches could significantly harm our business, reputation and results of
operations and could expose us to lawsuits by state and federal consumer protection agencies, by
governmental authorities in the jurisdictions in which we operate, and by consumers. Anyone who is
able to circumvent our security measures could misappropriate proprietary information, including
personal customer data, cause interruptions in our operations or damage our brand and reputation. A
breach of our security measures could involve the disclosure of personally identifiable information
and could expose us to a material risk of litigation, liability or governmental enforcement
proceedings. We cannot assure you that our financial systems and other technology resources are
completely secure from security breaches, password lapses or sabotage, and we have occasionally
experienced attempts at hacking. We may be required to incur significant additional costs to
protect against security breaches or to alleviate problems caused by any of these types of
breaches. Any well publicized compromise of our security or the security of any other Internet
provider could deter people from using our services or the Internet to conduct transactions that
involve transmitting confidential information or downloading sensitive materials, which could have
a detrimental impact on our franchise network. Furthermore, computer viruses may affect our ability
to provide our services and adversely affect our revenues. Moreover, if a computer virus affecting
our system were highly publicized, our reputation could be significantly damaged, resulting in the
loss of current and future franchisees and customers.
We are in highly competitive markets, which could result in reduced profitability.
We expect the historical success of our company to attract others to our target markets who
will strive to compete directly or indirectly against us. Increased competition may reduce demand
for our products and limit the amount of revenues and earnings we report.
Our franchisees face significant competition. The popularity of Internet sales and enactment
of the Financial Services Modernization Act have increased the number of potential competitors and
allow highly capitalized competitors, like banks, to offer certain kinds of insurance products and
services which are competitive with the products and services of our franchisees and life insurance
subsidiary. If our prediction that the number of agents will increase is accurate, we will face
greater competition for the services we provide to our franchisees. The life insurance industry is
extremely competitive. There are a large number of insurance companies that are substantially
larger, offer more diversified product lines and have larger selling organizations and customer
bases than First Life America Corporation. The banking industry is also highly competitive. Brooke
Savings Bank competes with a large number of federal and state banks for deposits and loans, and
with savings and loan associations and credit unions for deposits. There are many new changes in
technology, product offerings and regulation in the industries in which we operate and many of our
competitors in such industries have greater
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financial resources and market acceptance than we do. Competitors may develop or offer more
attractive or lower cost products and services than ours which could erode our customer base.
Our management, facilities and labor force may be insufficient to accommodate expected growth.
If we grow more quickly than anticipated, our management, facilities and labor force may
become insufficient to accommodate our expected growth. Also, although we have safeguards for
emergencies and have arranged for back-up facilities to process information if the processing
center in Phillipsburg, Kansas is not functioning, the occurrence of a major catastrophic event or
other system failure at our processing center could interrupt document processing or result in the
loss of stored data.
We compete in highly regulated industries, which may result in increased expenses or restrictions
in our operations.
We conduct business in a number of states and are subject to comprehensive regulation and
supervision by government agencies in many of the states in which we do business. The primary
purpose of such regulation and supervision is to provide safeguards for policyholders rather than
to protect the interests of shareholders. The laws of the various state jurisdictions establish
supervisory agencies with broad administrative powers with respect to, among other things,
licensing to transact business, licensing of agents and unfair trade practices.
We are a federal savings and loan holding company subject to regulation by the Office of
Thrift Supervision and Federal Deposit Insurance Corporation, and subject to the laws and
regulations of the State of Kansas and other states relating to insurance holding companies.
Regulation of holding companies includes reporting requirements, maintenance of capital and
financial condition, restrictions on affiliate transactions, restrictions on dividends, corporate
governance requirements and commitments made during the holding company application process.
Although we believe that we are currently in material compliance with statutes, regulations
and ordinances applicable to our business and commitments made to government agencies, we cannot
assure you that we will be able to maintain compliance without incurring significant expense, or at
all. There is also no assurance that we have correctly determined the applicability of all
statutes, regulations, ordinances and government commitments to our business, including, without
limitation, the applicability of federal preemption of state law for activities believed by us to
be subject to such preemption. In addition, our franchisees are also subject to comprehensive
regulations and supervision and we cannot ensure their correct determination of the applicability
of statutes, regulations and ordinances to their businesses and their material compliance
therewith. Our failure to comply, or the failure of our franchisees to comply, with any current or
subsequently enacted statutes, regulations, ordinances and commitments to government agencies could
result in regulatory actions and negative publicity and have a material adverse effect on us.
Furthermore, the adoption of additional statutes, regulations and ordinances, the agreement to
further commitments to government agencies, changes in the interpretation and enforcement of
current statutes, regulations and ordinances, changes in our ability to exert federal preemption,
or the expansion of our business into jurisdictions that have adopted more stringent regulatory
requirements than those in which we currently conduct business, could have a material adverse
effect on us.
We are subject to franchise law and regulations that govern our status as a franchisor and regulate
some aspects of our franchise relationships. Our ability to develop new franchise locations and to
enforce contractual rights against franchisees may be adversely affected by these laws and
regulations, which could cause our franchise revenues to decline and adversely affect our growth
strategy.
We are subject to federal and state laws and regulations, including the regulations of the
Federal Trade Commission, as well as similar authorities in individual states, in connection with
the offer, grant and termination of franchises and the regulation of the franchisor-franchisee
relationship. Our failure to comply with these laws could subject us to liability to franchisees
and to fines or other penalties imposed by governmental authorities. In addition, we may become
subject to litigation with, or other claims filed with state or federal authorities by, franchisees
based
25
on alleged unfair trade practices, implied covenants of good faith and fair dealing, payment
of royalties, location of stores, advertising expenditures, franchise renewal criteria or express
violations of franchise agreements. We cannot assure you that we will not encounter compliance
problems from time to time, or that material disputes will not arise with one or more franchisees.
Accordingly, our failure to comply with applicable franchise laws and regulations, or disputes with
franchisees, could have a material adverse effect on our results of operations, financial condition
and growth strategy.
Risks Related to Our Common Stock
Our Chairman of the Board, Robert D. Orr, is able to exert significant control over us and may act in a manner that is adverse to our other shareholders interests.
As of May 28, 2008, Robert D. Orr, our Chairman of the Board, beneficially owned approximately
45.4% of our outstanding common stock. As a result, he is able to exert significant influence over:
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the nomination, election and removal of our board of directors;
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the adoption of amendments to our charter documents;
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our management and policies; and
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the outcome of any corporate transaction or other matter submitted to our
shareholders for approval, including mergers, consolidations and the sale of all or
substantially all of our assets.
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Mr. Orrs interests may conflict with the interests of other holders of our common stock and
he may take actions affecting us with which other shareholders may disagree. For example, in order
to retain his relative ownership position in our common stock, Mr. Orr may decide not to enter into
a transaction in which our shareholders would receive consideration for their shares that is much
higher than the cost of their investment in our common stock or than the then current market price
of our common stock. Any decision regarding the ownership of our company that Mr. Orr may make at
some future time will be in his absolute discretion
Our relatively low trading volume may limit shareholders ability to sell their shares.
Although shares of our common stock are listed on the NASDAQ Global Market, our average daily
trading volume has been approximately 40,600 shares during the three month period ended March 31,
2008. As a result of this low trading volume, shareholders may have difficulty selling a large
number of shares of our common stock in the manner or at the price that might be attainable if our
common stock were more actively traded.
The price of our common stock may fluctuate significantly, which may make it difficult for
shareholders to resell common stock when they want or at a price they find attractive.
Since January 1, 2005, our common stock has traded at prices ranging between $0.96 and $31.50
on the American Stock Exchange (until June 2005) and the NASDAQ Global Market. We expect that the
market price of our common stock will continue to fluctuate. Our common stock price can fluctuate
as a result of a variety of factors, many of which are beyond our control. These factors include:
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actual or anticipated variations in our quarterly operating results;
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actual or anticipated changes in the dividends we pay on our common stock;
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recommendations by securities analysts;
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changes in interest rates and other general economic conditions;
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26
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significant acquisitions, divestitures or business combinations, strategic
partnerships, joint ventures or capital commitments by or involving us or our
competitors;
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operating and stock price performance of other companies that investors deem comparable to
us;
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news reports relating to trends, concerns, litigation, regulatory changes and
other issues in our industry;
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geopolitical conditions such as acts or threats of terrorism or military conflicts; and
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relatively low trading volume.
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Kansas law and our articles of incorporation and bylaws contain anti-takeover provisions that could
delay or discourage takeover attempts that shareholders may consider favorable.
Certain provisions of our articles of incorporation and our bylaws and of Kansas law may
discourage, delay or prevent transactions that our shareholders may consider favorable, including
transactions that could provide for payment of a premium over the prevailing market price of our
common stock, and also may limit the price that investors are willing to pay in the future for our
common stock. For example, our articles of incorporation contain provisions, such as allowing our
board of directors to issue preferred stock with rights superior to those of our common stock
without the consent of our shareholders, which could make it more difficult for a third party to
acquire us without the consent of our board of directors. In addition, our bylaws establish that
our independent directors have neither the right nor the obligation to vote for the nomination,
election or removal of directors of our company; those rights and obligations rest solely with the
representative of our controlling shareholder group.
Under certain circumstances, we may be required to redeem the series 2006 preferred stock at a
premium.
The certificate of designations of the series 2006 preferred stock provides that, if a
triggering event occurs, the holder of series 2006 preferred stock may require us to redeem all or
part of such holders series 2006 preferred stock at a price not less than 115 percent of the
stated value of, plus accrued dividends on, the series 2006 preferred stock being redeemed. The
triggering events that require us, at the option of the holder of series 2006 preferred stock, to
redeem the stock include, among others and subject to certain conditions and to the extent within
our control, our failure to have or maintain an effective registration statement for the sale of
the underlying common stock, our suspension from trading or failure to have our common stock listed
on the NASDAQ Global Market or a similar market, our failure to convert the series 2006 preferred
stock into common stock pursuant to the terms of the certificate of designations, our failure to
pay any required dividends to the holder of the series 2006 preferred stock, or our commencing
bankruptcy proceedings or being adjudicated bankrupt or insolvent.
USE OF PROCEEDS
The maximum proceeds to us from the sale of our common stock in this rights offering are
estimated to be approximately $___ million in cash before deducting offering expenses allocable to
and payable by us.
We intend to use the net cash proceeds of the rights offering for general corporate purposes
including providing financing to our subsidiaries for general operating purposes. In addition, our
debt in the aggregate amount of approximately $11,500,000 to Brooke Holdings, Inc. will be reduced
with respect to the exercise of their basic subscription privilege, and may be reduced further with
respect to the exercise of their over-subscription privilege. The amount of such reduction cannot
be determined at this time because of the limitation described in the following sentence. At no
time will Brooke Holdings, Robert D. Orr or Leland G. Orr and any other of our officers or
directors exercise their basic and over-subscription privileges if such exercise would cause Brooke
Holdings, Robert D. Orr or Leland G. Orr and any other of our officers or directors collectively,
as a group, to own more than 55% of our common stock.
27
CAPITALIZATION
The following table describes capitalization as of March 31, 2008, on an actual basis and on a
pro forma, as adjusted basis to give effect to the sale of all 15,934,706 shares offered in the
rights offering (including application of net proceeds as described above) at a price of $ per
share.
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At March 31, 2008
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(In thousands, except share amounts)
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Historical
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Pro Forma
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Current liabilities:
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Accounts payable
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$
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58,829
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$
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Premiums payable to insurance companies
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7,646
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Deposits
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121,911
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Policy and contract liabilities
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26,635
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Payable under participation agreements
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54,263
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Accrued commission refunds
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516
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IBNR loss reserve
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6,877
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Unearned insurance premiums
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3,629
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Deferred income tax payable
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1,911
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Warrant Liability
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900
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Short-term debt
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8,237
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Current maturities of long-term debt
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127,066
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Total current liabilities
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418,420
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$
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Non-current Liabilities:
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Long-term debt less current maturities
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47,747
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Servicing liability
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14
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Warrant liability
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2,354
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Total liabilities
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468,535
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$
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Minority Interest in subsidiary
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35,090
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$
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Shareholders Equity:
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Common stock, $0.01 par value, 99,500,000 shares authorized, 14,224,021 and
14,224,021 shares issued and outstanding
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142
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Preferred stock series 2002 and 2002A, $25 par value, 110,000 shares
authorized, 49,667 shares issued outstanding
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1,242
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Preferred stock series 2002B, $32 par value, 34,375 authorized, 24,331 shares
issued and outstanding
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779
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Preferred stock series 2006, $1 par value, 20,000 authorized, 20,000 shares
issued and outstanding
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20
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Additional paid-in-capital on preferred stock Series 2006
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18,576
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Discount on preferred stock series 2006
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(1,350
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Additional paid-in capital
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55,424
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Accumulated other comprehensive income (loss)
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(371
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Accumulated deficit
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(28,707
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Total Shareholders Equity
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45,755
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$
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Total Liabilities and Shareholders Equity
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$
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549,380
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$
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Following the closing of the rights offering, we intend to effect a reverse stock split of our
outstanding shares of common stock in order to increase the market price per share. At this time,
we have not determined the ratio of the reverse stock split nor have we determined any other
details of such transaction. See PROSPECTUS SUMMARYProposed DevelopmentReverse Stock Split.
28
DILUTION
Purchasers of our common stock in the rights offering will experience an immediate and
substantial dilution of the net tangible book value of their common stock. At March 31, 2008, we
had a net tangible book value of approximately $5.0 million, or $0.35 per share of our common stock
held by continuing stockholders. After giving effect to and assuming the sale of 15,934,706 shares
of our common stock in the rights offering and after deducting transaction and offering expenses,
the pro forma net tangible book value at March 31, 2008, attributable to common stockholders would
have been $
million, or $
per share of our common stock. This amount represents an
immediate dilution to purchasers in the rights offering of $
. The following table illustrates
this per share dilution.
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Subscription price
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$
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Net tangible book value per share at March 31, 2008, before the rights offering
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$
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0.35
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Net increase in pro forma net tangible book value per share attributable to the
rights offering
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$
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Pro forma net tangible book value per share after giving effect to the rights
offering
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$
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Dilution in pro forma net tangible book value per share to purchasers
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$
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In addition, due to the consummation of the rights offering, our shareholders could experience
further dilution of the net tangible book value of their common stock due to the immediate decrease
in the exercise and conversion price of outstanding securities described under RISK FACTORS.
PRINCIPAL STOCKHOLDERS
The following table sets forth the name, address and share ownership of each person, group or
organization known to us to be the beneficial owner of more than 5% of our outstanding common
stock. The number of shares reported as beneficially owned in such table is determined under rules
of the Securities and Exchange Commission applicable to disclosure in this prospectus and is not
necessarily indicative of beneficial ownership for other purposes. Under these rules, beneficial
ownership includes any shares as to which a person has either sole or shared voting power or
investment power and also any shares that a person has the right to acquire within 60 days of May
28, 2008.
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Percent of
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Shares
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Common
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Beneficially
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Stock
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Name and Address of Beneficial Owner
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Owned
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Outstanding
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Brooke Holdings, Inc., Robert D. Orr, Leland G. Orr
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6,423,419
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44.2
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210 West State Street
Phillipsburg, Kansas 67661
1
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Jayhawk Capital Management, L.L.C.; Jayhawk
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1,671,918
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11.5
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%
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Institutional Partners, L.P.; Kent C. McCarthy
5410 West 61st Place, Suite 100
Mission, Kansas 66205
2
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HBK Master Fund L.P.
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1,711,765
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11.8
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%
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c/o HBK Investments L.P.
300 Crescent Court, Suite 700
Dallas, Texas 75201
3
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29
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1
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Robert D. Orr and Leland G. Orr, the principal shareholders of Brooke Holdings, are considered to
beneficially own in excess of 5% of the outstanding shares of our common stock as of May 28, 2008.
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2
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Information as to the number of shares beneficially owned is furnished solely in reliance on the
Schedule 13G filed on December 31, 2007 by Jayhawk Capital Management, L.L.C., Jayhawk
Institutional Partners, L.P. and Kent C. McCarthy. The Schedule 13G indicates that Mr. McCarthy
controls Jayhawk Capital Management, and Jayhawk Capital Management is the general partner of
Jayhawk Institutional Partners. Of the 1,671,918 shares beneficially owned, 300,000 are exercisable
pursuant to outstanding warrants. However, some of the shares indicated are not currently owned and
may not ever be owned by the selling stockholder as a result of restrictive provisions in the
outstanding warrant that restricts the exercise of securities by Jayhawk to the extent that such
exercise would result in the ownership of greater than 9.99% of our common stock.
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3
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Of the 1,711,765 shares beneficially owned, 1,176,471 shares are issuable upon conversion of the
2006 preferred stock and 235,294 shares are issuable upon exercise of the series 2006 warrants.
Also, includes 200,000 shares held by Steelhead Investments Ltd. over which HBK Investments LP, an
affiliate of HBK Master Fund L.P., has shared voting and dispositive power and 100,000 shares
issuable upon exercise of an outstanding warrant held by Steelhead Investments Ltd. over which HBK
Investments LP, an affiliate of HBK Master Fund L.P., has shared voting and dispositive power.
However, some of the shares indicated are not currently owned and may not ever be owned by HBK as a
result of restrictive provisions in the outstanding warrants that restrict the exercise of
securities by HBK to the extent that such exercise would result in the ownership of greater than
9.99% of our common stock.
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THE RIGHTS OFFERING
Before exercising any subscription rights, you should read carefully the information set forth
under RISK FACTORS.
Subscription Privileges
Your subscription rights entitle you to a basic subscription privilege and an
over-subscription privilege.
Basic Subscription Privilege
. The basic subscription privilege of each whole right entitles
you to purchase one share of our common stock at the subscription price of $ per share. You
will receive one subscription right for each share of our common stock you owned at the close of
business on the record date, or, in the case of the holders of series 2006 securities, for each
share of common stock on an as converted or as exercised basis as of the close of business on the
record date. You are not required to exercise all of your subscription rights unless you wish to
purchase shares under your over-subscription privilege. We will deliver to the holders of record
who purchase shares in the rights offering certificates representing the shares purchased with a
holders basic subscription privilege promptly after the rights offering has expired.
Over-Subscription Privilege
. In addition to your basic subscription privilege, you may
subscribe for additional shares of our common stock up to the number of shares for which you
subscribed under your basic subscription privilege, upon delivery of the required documents and
payment of the subscription price of $ per share, before the expiration of the rights
offering. You may only exercise your over-subscription privilege if you exercised your basic
subscription privilege in full and other holders of subscription rights do not exercise their basic
subscription privileges in full.
Pro Rata Allocation
. If there are not enough shares of our common stock to satisfy all
subscriptions made under the over-subscription privilege, we will allocate the remaining shares of
our common stock pro rata among those over-subscribing rights holders. Pro rata means in
proportion to the number of shares of our common stock that you and the other subscription rights
holders have subscribed for under the over-subscription privilege.
Full Exercise of Basic Subscription Privilege
. You may exercise your over-subscription
privilege only if you exercise your basic subscription privilege in full. To determine if you have
fully exercised your basic subscription privilege, we will consider only the basic subscription
privilege held by you in the same capacity. For example, suppose that you were granted subscription
rights for shares of our common stock that you own individually and shares of our common stock that
you own collectively with your spouse. If you wish to exercise your over-subscription privilege
with respect to the subscription rights you own individually, but not with respect to the
subscription rights you own collectively with your spouse, you only need to fully exercise your
basic
30
subscription privilege with respect to your individually owned subscription rights. You do not
have to subscribe for any shares under the basic subscription privilege owned collectively with
your spouse to exercise your individual over-subscription privilege. When you complete the portion
of your subscription rights certificate to exercise your over-subscription privilege, you will be
representing and certifying that you have fully exercised your subscription privileges as to shares
of our common stock that you hold in that capacity. You must exercise your over-subscription
privilege at the same time you exercise your basic subscription privilege in full.
Return of Excess Payment
. If you exercised your over-subscription privilege and are allocated
less than all of the shares of our common stock for which you wished to subscribe, your excess
payment for shares that were not allocated to you will be returned to you by mail, without interest
or deduction, promptly after the expiration date of the rights offering. We will deliver to the
holders of record who purchase shares in the rights offering certificates representing the shares
of our common stock that you purchased promptly after the expiration date of the rights offering
and after all pro rata allocations and adjustments have been completed.
Commitments of Executive Officers and Brooke Holdings, Inc.
All of our executive officers have agreed to fully exercise the 6,523,537 basic subscription
rights that they will be receiving with respect to common stock beneficially owned by them, subject
to the limitation described below.
Robert D. Orr and Brooke Holdings, Inc., our largest shareholder who owned approximately 44.5%
of our common stock as of May 28, 2008, intend to fully exercise the 6,458,913 basic subscription
rights that they will be receiving with respect to common stock beneficially owned by them, subject
to the limitation discussed below. Brooke Holdings, Inc. intends to retire a portion of our
outstanding debt in exchange for the exercise of its basic subscription rights. In addition, Brooke
Holdings, Inc. intends to fully exercise its over-subscription privilege and may retire additional
outstanding debt in exchange for the exercise of its over-subscription privilege. However, at no
time will Brooke Holdings, Robert D. Orr or Leland G. Orr and any other of our executive officers
or directors exercise their basic and over-subscription privileges if such exercise would cause
Brooke Holdings, Robert D. Orr or Leland G. Orr and any other of our executive officers or
directors collectively, as a group, to own more than 55% of our common stock.
Subscription Price
The subscription price for an exercised subscription right is $ per share.
Determination of Subscription Price
Our board of directors set all of the terms and conditions of the rights offering. The board
of directors makes no recommendation to you about whether you should exercise any of your
subscription rights. The board of directors considered the following factors in establishing the
subscription price:
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strategic alternatives for capital raising;
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the anticipated financial effect of the rights offering;
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the recent market price of our common stock;
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the pricing of similar transactions;
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shareholder incentive to participate in the rights offering;
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our business prospects; and
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general conditions in the securities markets.
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31
The $___ per share subscription price does not necessarily bear any relationship to our past
or expected future results of operations, cash flows, current financial condition, the future
market value of our common stock, or any other established criteria for value. There can be no
assurance that you will be able to sell shares purchased in this offering at a price equal to or
greater than the $___ per share subscription price.
On ___ __, 2008, the closing price of a
common share on the NASDAQ Global Market was $___. No change will be made to the cash subscription
price by reason of changes in the trading price of our common stock prior to the closing of the
rights offering.
We did not seek or obtain any opinion of financial advisors or investment bankers in
establishing the subscription price for the offering. You should not consider the subscription
price as an indication of the value of us or our common stock. See RISK FACTORS.
Expiration Date, Extensions and Termination
We
will keep the rights offering open until ___ __, 2008. You may exercise your subscription
right at any time at or before 5:00 p.m., Eastern Daylight Time, on
___ __, 2008, the expiration
date for the rights offering. However, we may extend the offering period for exercising your
subscription rights from time to time in our sole discretion, with such extension not to exceed 30
business days. If you do not exercise your subscription rights before the expiration of the rights
offering, your unexercised subscription rights will be null and void. We will not be obligated to
honor your exercise of subscription rights if the subscription agent receives the documents
relating to your exercise after the rights offering expires, regardless of when you transmitted the
documents.
We may, as mentioned above, extend the expiration of the rights offering from time to time by
giving oral or written notice to the subscription agent on or before the scheduled expiration of
the rights offering, for a period not to exceed 30 business days. If we elect to extend the
completion of the rights offering, we will issue a press release announcing the extension no later
than 9:00 a.m., Eastern Daylight Time, on the next business day after the most recently announced
expiration of the rights offering.
We may unilaterally terminate or withdraw the rights offering until the expiration of the
rights offering. See Withdrawal and Amendment below.
Reasons for the Rights Offering
In approving the rights offering, our board of directors carefully evaluated our need for
financial flexibility and additional capital. The board also considered alternative capital raising
methods that are available to us, some of which have also recently been employed by us, including,
among other things, the costs and expenses associated with such methods. In conducting its
analysis, the board of directors also considered the effect on the ownership percentage of the
current holders of our common stock caused by the rights offering, the pro-rata nature of a rights
offering to our shareholders, the market price of our common stock and general conditions of the
securities markets.
After weighing the factors discussed above and the effect of the rights offering of
potentially generating cash proceeds of approximately $ million, before expenses, in additional
capital for us, we determined to initiate this rights offering. As described in USE OF PROCEEDS
,
the proceeds of the rights offering are intended to be used for general corporate purposes and to
retire debt.
Non-transferability of the Subscription Rights
Except in the limited circumstances described below, only you may exercise your subscription
rights. You may not sell, give away or otherwise transfer your subscription rights.
Notwithstanding the foregoing, your subscription rights may be transferred by operation of
law; for example, a transfer of subscription rights to the estate of the recipient upon the death
of the recipient would be permitted. If the subscription rights are transferred as permitted,
evidence satisfactory to us that the transfer was proper must be received by us prior to the
expiration of the rights offering.
32
Withdrawal and Amendment
We reserve the right to withdraw or terminate this rights offering at any time for any reason
until the expiration of the rights offering. In the event that this offering is withdrawn or
terminated, all funds received from subscriptions by shareholders will be returned. Interest will
not be payable on any returned funds.
We reserve the right to amend the terms of this rights offering. If we make an amendment that
we consider significant, we will:
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mail notice of the amendment to all shareholders of record as of the record date; and
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if necessary, extend the expiration of the rights offering at least 10 days
following the date of such amendment.
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The extension of the expiration of the rights offering will not, in and of itself, be treated
as a significant amendment for these purposes.
You may exercise your subscription rights by delivering the following to the Subscription
Agent, at or prior to 5:00 p.m., Eastern Daylight Time,
on ___ __, 2008, the date on which the
subscription rights expire:
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your properly completed and executed rights certificate with any required
supplemental documentation; and
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your full subscription price payment for each share subscribed for under your
basic subscription rights and for your over-subscription rights.
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Certificates for Common Stock
As soon as practicable after the expiration of the rights offering, the subscription agent
will mail to each exercising subscription rights holder of record that has validly exercised the
basic subscription rights a certificate representing common stock purchased pursuant to the basic
subscription rights. The subscription agent also will arrange for issuance through DTC of shares
subscribed for by or through DTC participants. Certificates representing the over-subscription
shares will be delivered as soon as practicable after the expiration of the subscription period so
that we may make such pro-rations as may be necessary in the event the over-subscription requests
exceed the number of remaining available shares in the rights offering.
How to Exercise Your Rights
Rights holders may subscribe to purchase shares by:
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completing and signing the rights certificate which accompanies this prospectus;
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mailing or delivering the rights certificate to American Stock Transfer & Trust
Company, the subscription agent, at the appropriate address in the table below; and
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sending with your rights certificate the required payment for the exercise of
your basic subscription rights and over-subscription rights.
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For your convenience, a self-addressed envelope is enclosed with this prospectus, which you
may use if you return the rights certificate and payment by mail.
You should carefully read and follow those instructions. In order for a subscription to be
accepted, the subscription agent must receive the rights certificate and payment for the before the
expiration of the subscription period.
33
You should make payment in full for the exercise of your basic subscription rights and
over-subscription rights by cashiers or certified check drawn upon a United States bank payable to
American Stock Transfer & Trust Company, as Subscription Agent or by wire transfer of immediately
available funds, to the subscription account maintained by the subscription agent at JP Morgan
Chase Bank, ABA #021000021, Account No. 957-341-237. You should mail or deliver checks and
completed rights subscription certificates to the subscription agent at:
If by mail:
American Stock Transfer & Trust Company
Operations Center
Attn: Reorganization Department
P.O. Box 2042
New York, New York 10272-2042
If by registered, certified, or express mail, overnight delivery or in person:
American Stock Transfer & Trust Company
Operations Center
Attn: Reorganization Department
6201 15
th
Avenue
Brooklyn, New York 11219
The subscription agents facsimile number for eligible institutions only is (718) 234-5001.
The telephone number for confirmation of receipt of facsimiles is (718) 921-8317.
Any rights holder who has not submitted a properly completed rights certificate along with
payment of the subscription price to the subscription agent by 5:00 p.m., Eastern Daylight Time, on
___, 2008, unless such subscription period is extended by us, shall forfeit all rights to
subscribe in the rights offering.
Acceptance of Subscriptions
We are entitled to resolve all questions concerning the timeliness, validity, form and
eligibility of any exercise of basic or over-subscription rights. Our determination of these
questions will be final and binding. In our sole discretion, we may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such time as we may
determine, or reject the purported exercise of any right because of any defect or irregularity.
Rights certificates will not be considered received or accepted until all irregularities have
been waived or cured within such time as we determine in our sole discretion. Neither we nor the
subscription agent has any duty to give notification of any defect or irregularity in connection
with the submission of rights certificates or any other required document. Neither we nor the
subscription agent will incur any liability for failure to give such notification.
We reserve the right to reject any exercise of basic or over-subscription rights if the
exercise does not fully comply with the terms of the rights offering or is not in proper form or if
the exercise of rights would be unlawful.
Revocation
Unless our board of directors withdraws or terminates the rights offering, all exercises of
rights are irrevocable, even if you later learn information that you consider to be unfavorable to
the exercise of your rights. You should not exercise your rights unless you are certain that you
wish to purchase additional shares of our common stock at a price of $___ per share.
Incomplete Forms; Insufficient Payment
If you do not indicate the number of rights being exercised, or do not forward sufficient
payment for the number of basic and over-subscription rights that you indicate are being
exercised, then we will accept the
34
subscription forms and payment only for the maximum number of subscription rights that may be
exercised based on the actual payment delivered. We will return any payment not applied to the
purchase of shares under the rights offering procedures to those who made these payments as soon as
practicable by mail. Interest will not be payable on amounts refunded.
Notice to Beneficial Holders
If you are a broker, a trustee or a depositary for securities who holds shares of our common
stock for the account of others on
___, 2008, the record date, you should notify the
respective beneficial owners of such shares of the rights offering as soon as possible to find out
their intentions with respect to exercising their subscription rights. You should obtain
instructions from the beneficial owner with respect to their subscription rights, as set forth in
the instructions we have provided to you for your distribution to beneficial owners. If the
beneficial owner so instructs, you should complete the appropriate subscription rights certificates
and submit them to the subscription agent with the proper payment. If you hold shares of our common
stock for the account(s) of more than one beneficial owner, you may exercise the number of
subscription rights to which all such beneficial owners in the aggregate otherwise would have been
entitled had they been direct record holders of our common stock on the record date, provided that
you, as a nominee record holder, make a proper showing to the subscription agent by submitting the
form entitled Nominee Holder Certification that was provided to you with your rights offering
materials. If you did not receive this form, you should contact the subscription agent to request a
copy.
Beneficial Owners
If you are a beneficial owner of shares of our common stock or will receive your subscription
rights through a broker, custodian bank or other nominee, we will ask your broker, custodian bank
or other nominee to notify you of the rights offering. If you wish to exercise your subscription
rights, you will need to have your broker, custodian bank or other nominee act for you. If you hold
certificates of our common stock directly and would prefer to have your broker, custodian bank or
other nominee act for you, you should contact your nominee and request it to effect the
transactions for you. To indicate your decision with respect to your subscription rights, you
should complete and return to your broker, custodian bank or other nominee the form entitled
Beneficial Owners Election Form. You should receive this form from your broker, custodian bank or
other nominee with the other rights offering materials. If you wish to obtain a separate
subscription rights certificate, you should contact the nominee as soon as possible and request
that a separate subscription rights certificate be issued to you. You should contact your broker,
custodian bank or other nominee if you do not receive this form, but you believe you are entitled
to participate in the rights offering. We are not responsible if you do not receive the form from
your broker, custodian bank or nominee or if you receive it without sufficient time to respond.
Instructions for Completing your Rights Certificate(s)
You should read and follow the instructions accompanying the rights certificate(s) carefully.
If you want to exercise your subscription rights, you should send your rights certificate(s)
with your subscription price payment to the subscription agent at the addresses indicated above. A
self-addressed envelope is provided with this prospectus, which you may use if you send the rights
certificate and payment by mail. Do not send your rights certificate(s) or subscription price
payment to us.
YOU ARE RESPONSIBLE FOR THE METHOD OF DELIVERY OF YOUR RIGHTS CERTIFICATE(S) WITH YOUR
SUBSCRIPTION PRICE PAYMENT TO THE SUBSCRIPTION AGENT. If you send your rights certificate(s) and
subscription price payment by mail, we recommend that you send them by registered mail, properly
insured, with return receipt requested. You should allow a sufficient number of days to ensure
delivery to the subscription agent prior to the time the rights offering expires.
35
Regulatory Limitation
We will not be required to issue common stock to you pursuant to the rights offering if, in
our opinion, you would be required to obtain prior clearance or approval from any state or federal
regulatory authorities to own or control such shares if, at the time the subscription rights
expire, you have not obtained such clearance or approval.
Procedures for DTC Participants
If you are a participant in The Depository Trust Company, or DTC, and the shares you own are
held through DTC, we expect that your exercise of your basic subscription rights and
oversubscription rights may be made through the facilities of DTC. Payment for each share
subscribed for under the basic subscription right must be made at the time the rights are
exercised. You will be obligated to pay for over-subscription shares within five business days
after receiving notice from us as to how many (if any) shares have been allocated to you under the
over-subscription rights.
No Board Recommendation
An investment in our common stock must be made according to each investors evaluation of its
own best interests. Accordingly, our board of directors is not making any recommendation as to
whether you should exercise your subscription rights. In making the decision to exercise or not
exercise your subscription rights, you must consider your own best interests. You are urged to make
your decision based on your own assessment of our business and the rights offering. Among other
things, you should carefully consider the risks that are described under the heading RISK
FACTORS.
Common Stock Outstanding after the Rights Offering
Upon the issuance of the common stock offered in the rights offering, up to 30,458,647 shares
of common stock will be issued and outstanding if all rights are exercised. This would represent an
approximate 110.3% increase in the number of common stock on the record date for the rights
offering and an approximate 117.8% increase assuming the deemed conversion or exercise of all
series 2006 securities.
Other Matters
We are not making this rights offering in any state or other jurisdiction in which it is
unlawful to do so, nor are we selling or accepting any offers to purchase any of our common stock
from rights holders who are residents of those states or other jurisdictions. We may delay the
commencement of the rights offering in those states or other jurisdictions, or change the terms of
the rights offering, in order to comply with the securities law requirements of those states or
other jurisdictions. We may decline to make modifications to the terms of the rights offering
requested by those states or other jurisdictions, in which case, if you are a resident in those
states or jurisdictions you will not be eligible to participate in the rights offering.
Fees and Expenses
We will pay all fees charged by the information agent and the subscription agent. In addition,
we will pay all fees payable pursuant to tail rights existing in underwriting agreements entered
into as part of the private placement of the Companys securities in 2006 and 2007 should the
investors from those transactions elect to exercise their basic or over-subscription privileges.
You are responsible for paying any other commissions, fees, taxes or other expenses incurred in
connection with the exercise of the subscription rights. Neither we, the information agent nor the
subscription agent will pay such expenses.
Issuance of Common Stock Certificates
Common stock certificates for shares purchased in this rights offering through the exercise of
basic subscription rights will be issued as soon as practicable after the expiration of the rights
offering. Certificates representing the over-subscription shares will be delivered as soon as
practicable after the expiration of the
36
subscription period and after we have (1) made such pro-rations as may be necessary in the
event the over-subscription requests exceed the number of remaining available shares in the rights
offering and (2) notified over-subscribing rights holders as to how many (if any) shares
over-subscribed have been allocated to them. Our subscription agent, American Stock Transfer &
Trust Company, will deliver subscription payments to us only after consummation of this rights
offering and the issuance of share certificates to our shareholders that exercised rights and the
issuance through DTC of shares subscribed for through DTC.
Information Agent
We have appointed The Altman Group, Inc. as Information Agent for the rights offering. Under
certain circumstances, we may indemnify the information agent from certain liabilities that may
arise in connection with the rights offering.
Subscription Agent
We have appointed American Stock Transfer & Trust Company as subscription agent for the rights
offering. Under certain circumstances, we may indemnify the subscription agent from certain
liabilities that may arise in connection with the rights offering.
IMPORTANT
PLEASE CAREFULLY READ THE INSTRUCTIONS ACCOMPANYING THE SUBSCRIPTION CERTIFICATE AND FOLLOW
THOSE INSTRUCTIONS IN DETAIL. DO NOT SEND SUBSCRIPTION CERTIFICATES DIRECTLY TO US. YOU ARE
RESPONSIBLE FOR CHOOSING THE PAYMENT AND DELIVERY METHOD FOR YOUR SUBSCRIPTION CERTIFICATE, AND YOU
BEAR THE RISKS ASSOCIATED WITH SUCH DELIVERY. IF YOU CHOOSE TO DELIVER YOUR SUBSCRIPTION
CERTIFICATE AND PAYMENT BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED. WE ALSO RECOMMEND THAT YOU ALLOW A SUFFICIENT NUMBER OF DAYS TO ENSURE
DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO
___, 2008.
If You Have Questions
If you have questions or need assistance concerning the procedure for exercising subscription
rights, or if you would like additional copies of this prospectus or the Instructions for Use of
Brooke Corporation Subscription Rights Certificates, you should contact the information agent at
the following address and telephone number:
37
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
A holder should be aware that: (a) this discussion with respect to certain United States
federal income tax consequences of owning the subscription rights is not intended or written to be
used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed
on the taxpayer; (b) such discussion was written in connection with the promotion or marketing
(within the meaning of Internal Revenue Service (the Service) Circular 230) of the transactions
or matters addressed by such discussion; and (c) each taxpayer should seek advice based on its
particular circumstances from an independent tax advisor.
The following discussion is a summary of certain U.S. federal income tax consequences of the
rights offering to holders of common stock and series 2006 securities who hold such shares as a
capital asset for federal income tax purposes. This discussion is based on laws, regulations,
rulings and decisions in effect on the date of this prospectus, all of which are subject to change
(possibly with retroactive effect) and to differing interpretations. This discussion applies only
to holders who are U.S. persons, which is defined as a citizen or resident of the United States, a
domestic corporation, any estate the income of which is subject to U.S. federal income taxation
regardless of source, and any trust so long as a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust, or if it has a valid election in place
to be treated as a U.S. person.
This discussion does not address all aspects of federal income taxation that may be relevant
to holders in light of their particular circumstances or to holders who may be subject to special
tax treatment under the Internal Revenue Code of 1986, as amended, including holders of options or
warrants, holders who are dealers in securities or foreign currency, foreign persons (defined as
all persons other than U.S. persons), insurance companies, tax-exempt organizations, banks,
financial institutions, broker-dealers, holders who hold stock as part of a hedge, straddle,
conversion or other risk reduction transaction, or who acquired stock pursuant to the exercise of
compensatory stock options or warrants or otherwise as compensation. In the case of a holder that
is an entity treated as a partnership for U.S. federal income tax purposes, the treatment of its
partners generally will depend upon the status of the partner and the activities of the
partnership.
We have not sought, and will not seek, an opinion of counsel or a ruling from the Internal
Revenue Service regarding the federal income tax consequences of the rights offering or the related
share issuance. The following summary does not address the tax consequences of the rights offering
or the related share issuance under foreign, state, or local tax laws. Accordingly, we urge each
holder of our common stock and series 2006 preferred stock to consult his or its own tax advisor
with respect to the particular tax consequences to such holder of the rights offering and the
exercise of the subscription rights, including state and local tax consequences.
Holders of Common Stock
The federal income tax consequences to a holder of common stock on the receipt of subscription
rights under the rights offering should be as follows:
A holder should not recognize taxable income for federal income tax purposes in connection
with the receipt of subscription rights in the rights offering.
Except as provided in the following sentence, the tax basis of the subscription rights
received by a holder in the rights offering should be zero. If either (a) the fair market value of
the subscription rights on the date such subscription rights are distributed is equal to 15% or
greater of the fair market value on such date of the common stock with respect to which the
subscription rights are received or (b) the holder irrevocably elects, by attaching a statement to
his or its federal income tax return for the taxable year in which the subscription rights are
received, to allocate part of the tax basis of the holders common stock to the subscription
rights, then upon exercise of the subscription rights, the holders tax basis in the common stock
should be allocated between the common stock and the subscription rights in proportion to their
respective fair market values on the date the subscription rights are distributed.
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A holder who allows the subscription rights received in the rights offering to
expire should not recognize a tax loss, and the tax basis of the common stock owned by
such holder with respect to which such subscription rights were distributed should be
equal to the tax basis of such common stock immediately before the receipt of the
subscription rights in the rights offering.
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A holder should not recognize any gain or loss upon the exercise of the
subscription rights received in the rights offering.
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The tax basis of the common stock acquired through exercise of the subscription
rights should equal the sum of the subscription price for the common stock and the
holders tax basis, if any, in the subscription rights as described above.
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The holding period for the common stock acquired through exercise of the
subscription rights should begin on the date the subscription rights are exercised.
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Holders of Series 2006 Securities
The federal income tax consequences to a holder of series 2006 securities on the receipt of
subscription rights under the rights offering should be as follows:
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A holder should be treated as receiving a distribution in an amount equal to
the fair market value of the subscription rights that it receives.
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To the extent that the distribution is made out of our earnings and profits, it
will be a taxable dividend to the holder. If the amount of the distribution received by
the holder exceeds the holders proportionate share of our earnings and profits, the
excess will reduce the holders tax basis in the series 2006 preferred stock that it
holds, and to the extent that the excess is greater than the
holders tax basis in its shares, it will be treated as gain from the sale of the series 2006 preferred stock. If
the holder has held the applicable series 2006 preferred stock for more than one (1)
year, the gain should be treated as long-term capital gain.
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A holders tax basis in the subscription rights that it receives should equal
the fair market value of the subscription rights on the date of the distribution.
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A holder who allows the subscription rights received in the rights offering to
expire generally should recognize a capital loss, the deductibility of which would be
subject to applicable tax law limitations.
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A holder should not recognize any gain or loss upon the exercise of the
subscription rights received in the rights offering.
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The tax basis of the common stock acquired through exercise of the subscription
rights should equal the sum of the subscription price for the common stock and the
holders tax basis in the subscription rights as described above.
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The holding period for the common stock acquired through exercise of the
subscription rights should begin on the date the subscription rights are exercised.
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39
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock, $.01 par value, has traded under the symbol BXXX on the NASDAQ Global
Market since June 20, 2005. Our common stock was traded on the American Stock Exchange from May 29,
2003 until June 17, 2005 under the symbol BXX. From November 1, 2002 until May 28, 2003, the
common stock was traded on the OTC Bulletin Board. Prior to November 2002, there was no public
trading market for our common stock.
During the two most recently completed fiscal years, the high and low prices for our common
stock for each quarter have been as follows:
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Quarter
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Ending
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Market
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High Bid/Sale
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Low Bid/Sale
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First
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March 31, 2006
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NASDAQ
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$
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14.00
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$
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9.77
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Second
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June 30, 2006
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NASDAQ
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$
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13.13
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$
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10.14
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Third
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September 30, 2006
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NASDAQ
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$
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13.00
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$
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11.00
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Fourth
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December 31, 2006
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NASDAQ
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$
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13.00
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$
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9.10
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First
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March 31, 2007
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NASDAQ
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$
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13.74
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$
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11.32
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Second
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June 30, 2007
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NASDAQ
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$
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15.74
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$
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11.60
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Third
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September 30, 2007
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NASDAQ
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$
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14.60
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$
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9.19
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Fourth
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December 31, 2007
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NASDAQ
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$
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10.26
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$
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5.60
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First
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March 31, 2008
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NASDAQ
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$
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7.59
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$
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2.12
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On
, 2008, the closing price for our common stock on the NASDAQ Global Market was $___
per share.
Dividends.
Our board of directors has declared regular cash dividends since the second quarter of 2000.
However, we currently intend to carefully consider recent market conditions and intend to cease
paying regular cash dividends on our common stock in the future until these market conditions
stabilize and the board determines to resume the payment of dividends. Any decision to pay future
dividends to holders of our common stock will be at the discretion of our board of directors and
such decision will depend on many factors, including our financial condition, earnings, legal
requirements and other factors as our board of directors deems relevant. The certificate of
designations, preferences and rights of our series 2006 preferred stock restricts our ability to
pay dividends on our common stock in excess of amounts set forth therein, but allows us, subject to
certain exceptions, to continue to pay dividends at our current rate. We are required to receive
the approval of the holders of our series 2006 preferred stock for the payment of dividends on our
common stock if the aggregate amount of dividends paid on all securities over the previous
twelve-month period exceeds our current or accumulated earnings and profits (as defined in the
certificate of designations for the series 2006 preferred stock), or if, beginning in October 2008,
as a result of the payment of the proposed dividend to the holders of the common stock, the
dividend yield (as defined in the certificate of designations for the series 2006 preferred stock)
on our common stock calculated over the previous twelve-month period exceeds the dividend yield
calculated over the previous twelve-month period on the series 2006 preferred stock.
During our last two fiscal years and the first quarter of 2008, we paid dividends per share as
follows:
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2008
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2007
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2006
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Quarter
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Dividend
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Quarter
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Dividend
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Quarter
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Dividend
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First
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$
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0.18
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First
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$
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0.18
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First
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$
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0.16
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Second
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0.18
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Second
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0.18
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Third
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0.18
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Third
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0.18
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Fourth
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0.18
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Fourth
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0.18
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40
DESCRIPTION OF COMMON STOCK
As of May 28, 2008, we had outstanding 14,523,941 shares of common stock held by 452
stockholders of record. As of May 28, 2008, we had outstanding options (including vested and
unvested options) to purchase 53,802 shares of our common stock.
Our common stock is listed on the NASDAQ Global Market under the trading symbol BXXX and has
the following rights, preferences and privileges. The following description of the terms of our
capital stock is a summary and is qualified in its entirety by the provisions of our Amendment and
Restatement to the Articles of Incorporation and Bylaws and by provisions of Kansas corporate and
other applicable state law.
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Voting rights
. Each outstanding share of common stock entitles its holder to
one vote on all matters submitted to a vote of our stockholders, including the election
of directors. There are no cumulative voting rights. Generally, all matters to be voted
on by stockholders must be approved by a majority of the votes entitled to be cast by
all shares of common stock present or represented by proxy.
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Dividends
. Holders of common stock are entitled to receive dividends as, when
and if dividends are declared by our board of directors out of assets legally available
for the payment of dividends.
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Liquidation
. In the event of a liquidation, dissolution or winding up of our
affairs, whether voluntary or involuntary, after payment of our liabilities and
obligations to creditors, our remaining assets will be distributed ratably among the
holders of shares of common stock on a per share basis. If we have any preferred stock
outstanding at such time, holders of the preferred stock may be entitled to
distribution and/or liquidation preferences. In either such case, we will need to pay
the applicable distribution to the holders of our preferred stock before distributions
are paid to the holders of our common stock.
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Rights and preferences
. Our common stock has no preemptive, redemption,
conversion or subscription rights. The rights, powers, preferences and privileges of
holders of our common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock that we may designate
and issue in the future.
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PLAN OF DISTRIBUTION
We are offering shares of our common stock pursuant to this rights offering directly to
holders of our common stock and holders of our series 2006 securities on the record date. We have
not employed any brokers, dealers or underwriters in connection with the solicitation or exercise
of subscription privileges in this offering and no commissions, fees or discounts will be paid in
connection with it. Certain of our officers and other employees may solicit responses from you but
such officers and other employees will not receive any commissions or compensation for such
services other than their normal employment compensation.
We will pay the fees and expenses of American Stock Transfer & Trust Company and The Altman
Group, Inc., as subscription agent and information agent, respectively, and have agreed to
indemnify the subscription agent and the information agent from any liability it may incur in
connection with this offering.
On or about
, 2008, we will distribute the rights and copies of this prospectus to
the holders of record of our common stock and series 2006 securities as of the record date. If you
wish to exercise your rights and subscribe for new common stock, you should follow the procedures
described under THE RIGHTS OFFERINGHow to Exercise Your Rights. The rights generally are
non-transferable; please see THE RIGHTS OFFERINGNon-transferability of the Subscription Rights.
Brooke Holdings, Inc. intends to retire debt in payment for the exercise of its basic
subscription privilege and may retire additional outstanding debt to the extent it exercises its
over-subscription privilege as described above under USE OF PROCEEDS.
41
We entered into two separate underwriting agreements pursuant to the private offering of
securities in September 2006 and June 2007. Both agreements provide for the payment of a tail
commission should the investors involved in such offerings participate in a subsequent offering of
common stock within a two-year and one-year time frame, respectively. Thus, should the investors
from the prior private offerings elect to subscribe for common stock pursuant to the rights
offering, we will be required to pay certain compensation to those underwriters pursuant to such
tail right.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This prospectus incorporates information and documents by reference that are not presented in
or delivered with it. This means that we have disclosed important business, financial, and other
information by referring you to the publicly filed documents containing this information. All
information incorporated by reference is part of this prospectus.
This prospectus incorporates by reference the documents listed below, which we have filed with
the SEC:
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Annual Report on Form 10-K for the year ended December 31, 2007, filed March
17, 2008, including our audited financial statements as of December 31, 2007 and 2006,
and our results of operations and cash flows for each of the years in the three year
period ended December 31, 2007;
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Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed May
14, 2008;
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Current Report on Form 8-K filed March 6, 2008;
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Current Report on Form 8-K filed March 13, 2008;
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Definitive Proxy Statement filed April 28, 2008 and amended on May 1, 2008;
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The description of our common stock contained in our Registration Statement on
Form 8-A filed on June 13, 2005, including any other amendment or report filed for the
purpose of updating such information.
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All documents filed by us pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934, as amended (excluding any information furnished pursuant to Item 2.02, Item
7.01 or, if applicable, Item 8.01 in any Current Report on Form 8-K) after the date of this
registration statement and prior to the effectiveness of the registration statement and after the
date of this prospectus and prior to the termination of this offering, shall be deemed to be
incorporated into this prospectus by reference and to be a part hereof from the date of filing of
any such documents. Any statement contained herein, or in a document incorporated or deemed to be
incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained herein or in any subsequently filed document
that also is or is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus.
We will provide to any person, including a beneficial owner, to whom a prospectus is
delivered, a copy of any or all of the reports or documents that have been incorporated by
reference in this prospectus. These filings are readily available on our website at
http://www.brookecorp.com or you may request a copy of these filings at no cost by making written
or oral request for copies to:
Brooke Corporation
8500 College Boulevard
Overland Park, Kansas 66210
Attention: Carl Baranowski
Telephone: (913) 661-0123
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 with respect to the
subscription rights and the shares of common stock to be sold in this offering. This prospectus
does not contain all the information included
42
in the registration statement. For further information about us and the shares of our common
stock to be sold in this offering, please refer to this registration statement.
We file periodic reports, proxy statements and other information with the SEC. Copies of the
reports, proxy statements and other information may be examined without charge at the Public
Reference Section of the SEC, 100 F. St. N.E., Washington, D.C. 20549 or on the Internet at
http://www.sec.gov. Copies of all or a portion of such materials can be obtained from the Public
Reference Section of the SEC upon payment of prescribed fees. Please call the SEC at (800) SEC-0330
for further information about the Public Reference Room.
EXPERTS
The consolidated financial statements as of December 31, 2007 and 2006 and for each of the
three years in the period ended December 31, 2007, included in our Annual Report on Form 10-K for
the year ended December 31, 2007, incorporated herein by reference, have been audited by Summers,
Spencer & Callison, CPAs, Chartered, an independent registered public accounting firm, as indicated
in their report with respect thereto. Such financial statements have been so incorporated herein by
reference in reliance upon the authority of said firm as experts in auditing and accounting in
giving said report.
LEGAL MATTERS
Kutak Rock LLP, Denver, Colorado will pass upon certain matters regarding the validity of the
shares of common stock being offered in this prospectus.
DISCLOSURE OF SEC POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our articles of incorporation contain provisions that limit the liability of our directors as
permitted by the Kansas General Corporate Code. Our articles of incorporation provide that, subject
to certain conditions, the Company shall indemnify its directors, officers, employees or agents
against liabilities incurred by them in connection with a suit or proceeding if they acted in good
faith and in a manner they reasonably believed to be in, or not opposed to, the best interests of
the corporation, and in connection with any criminal suit or proceeding, if they had no reasonable
cause to believe their conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons as provided in the foregoing provisions,
or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act of 1933 and is
unenforceable.
43
The only sources of
information given to you
by us about your
investment decision are
this prospectus and any
documents referred to in
this prospectus. We did
not authorize anyone to
give you any other
information about your
investment decision.
This prospectus is not an
offer to sell securities
and is not meant to induce
the sale of securities if
it would violate state
law. If the persons who
are trying to offer the
securities for sale, or
the persons who receive
those offers for sale are
prohibited from doing so
under state law, this
prospectus is not meant to
induce sale of the
securities described in
this prospectus.
15,934,706 Shares of Common Stock
Rights to purchase up to 15,934,706 Shares of
Common Stock at $
per Share
COMMON STOCK
PROSPECTUS
, 2008
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following are the initial costs and expenses, other than underwriting discounts and
commissions, in connection with the registration and sale of the shares of our common stock:
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Securities and Exchange Commission Registration Fee
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$
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604.32
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Printing and Engraving Expenses
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50,000
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Legal Fees and Expenses
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100,000
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NASDAQ Listing Fee
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65,000
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Subscription Agent and Information Agent Fees and Expenses
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36,500
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Accounting Fees and Expenses
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5,000
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Total
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$
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257,104.32
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All expenses are estimated, except for the Securities and Exchange Commission registration
fee. All the expenses have been or will be incurred by us and not by the selling shareholders.
Item 15. Indemnification of Directors and Officers.
Section 17-6305 of the Kansas General Corporation Code provides generally and in pertinent
part that a Kansas corporation may indemnify its directors, officers, employees or agents against
expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by them in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, except actions by or in the right of the corporation,
if, in connection with the matters in issue, they acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the corporation, and in
connection with any criminal suit or proceeding, if in connection with the matters in issue, they
had no reasonable cause to believe their conduct was unlawful. Section 17-6305 further provides
that in connection with the defense or settlement of any action by or in the right of the
corporation to procure a judgment in its favor, a Kansas corporation may indemnify its directors,
officers, employees or agents against expenses actually and reasonably incurred by them in
connection with the defense or settlement of the action or suit if they acted in good faith and in
a manner they reasonably believed to be in, or not opposed to, the best interests of the
corporation; provided, however, that no indemnification shall be made in any action as to which
they have been adjudged to be liable to the corporation unless, and only to the extent that, a
court deciding such action determines that, despite the adjudication of liability but in view of
all of the circumstances of the case, they are fairly and reasonably entitled to indemnification
for such expenses as the court deems proper.
Article VIII of the Companys Amendment and Restatement to the Articles of Incorporation (the
Articles) provides as follows:
1. The corporation will indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal,
administrative or investigative, other than an action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, against expenses,
including attorneys fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interest of the corporation and
with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a
presumption that the person did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interest of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his conduct was unlawful.
II-1
2. The corporation will indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including attorneys fees, actually and
reasonably incurred by him in connection with the defense or settlement of the action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not opposed to the best
interest of the corporation; except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless and only to the extent that the
court in which the action or suit was brought determines upon application that, despite the
adjudication of liability and in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for such expenses which the court shall deem proper.
3. To the extent that a director, officer, employee or agent of the corporation has been
successful on the merits or otherwise in defense of any action, suit or proceedings referred to in
subsections 1 and 2 above, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses, including attorneys fees, actually and reasonably incurred by him in
connection with the action, suit or proceeding.
4. Any indemnification under subsections 1 and 2 above, unless ordered by a court, shall be
made by the corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the circumstances because
he has made the applicable standard of conduct set forth in this section. The determination shall
be made by the board of directors of the corporation by a majority vote of a quorum consisting of
directors who were not parties to the action, suit or proceeding, or, if such a quorum is not
obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by legal
counsel in a written opinion, or by the shareholders of the corporation.
5. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid
by the corporation in advance of the final disposition of the action, suit or proceeding as
authorized by the board of directors in the specific case upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately
be determined that he is entitled to be indemnified by the corporation as authorized in this
section.
6. The indemnification provided in this section shall not be deemed exclusive of any other
rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors or otherwise; both as to action in his official capacity
and as to action in another capacity while holding such office; and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person.
7. The corporation may purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the corporation would
have the power to indemnify him against such liability under the provisions of this section.
8. In no event shall, the corporation indemnify any person against expenses, penalties, or
other payments incurred in an administrative proceeding or action that results in a final order
assessing civil money penalties or requiring affirmative action by such individual or individuals
in the form of payments to the corporation.
Section 17-6002(b)(8) of the Kansas General Corporation Code provides that Article VIII of our
Articles does not limit or eliminate liability (i) for any breach of the directors duty of loyalty
to the corporation or its shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for paying a dividend or
approving a stock repurchase in violation of the Kansas General Corporation Code or (iv) for any
transaction from which the director derived an improper personal benefit.
II-2
Item 16. Exhibits and Financial Statement Schedules.
(a) The exhibits filed as a part of this registration statement are listed below:
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Exhibit
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Number
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Description
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4.01#
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Form of Subscription Rights Certificate
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5.01#
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Opinion of Kutak Rock LLP
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23.01#
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Consent of Summers, Spencer & Callison, CPAs
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24.01#
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Power of Attorney (page II-5)
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99.1#
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Form of Instruction for Use of Brooke Corporation Subscription Rights Certificates
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99.2#
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Form of Letter to Stockholders who are Record Holders
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99.3#
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Form of Letter to Nominee Holders Whose Clients are Beneficial Holders
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99.4#
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Form of Letter to Clients of Nominee Holders
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99.5#
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Form of Nominee Holder Certification
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99.6#
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Form of Beneficial Owner Election
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(b) Financial Statement Schedules:
The financial statement schedules are omitted because they are not required or are not
applicable, or the required information is provided in the consolidated financial statements or
notes thereto incorporated by reference in the prospectus.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrants annual report pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that time will be deemed
to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to trustees, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses incurred or paid by
a trustee, officer or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it
has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and
has duly caused this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Overland Park, State of Kansas on May 28, 2008.
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Brooke Corporation
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(Registrant)
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Date: May 28, 2008
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By:
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/s/ Leland G. Orr
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Leland G. Orr
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Chief Executive Officer, President and Vice Chairman of
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the Board
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II-4
POWER OF ATTORNEY
Each of the undersigned, whose signatures appear below, hereby constitute and appoint Robert
D. Orr, Leland G. Orr, or either of them, as their true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for them and in their name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective amendments) to this
registration statement, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as full and to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration
Statement on Form S-3 is signed by the following persons in the capacities and on the dates
indicated.
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Date: May 28, 2008
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/s/ Robert D. Orr
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Robert D. Orr, Chairman of the Board of Directors
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Date: May 28, 2008
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/s/ Leland G. Orr
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Leland G. Orr, Chief Executive Officer (Principal
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Executive Officer), President and Vice Chairman of the
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Board of Directors
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Date: May 28, 2008
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/s/ Travis Vrbas
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Travis Vrbas, Chief Financial Officer (Principal
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Accounting and Financial Officer), Treasurer and Assistant
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Secretary
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Date: May 28, 2008
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/s/ John L. Allen
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John L. Allen, Director
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Date: May 28, 2008
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/s/ Joe L. Barnes
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Joe L. Barnes, Director
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Date: May 28, 2008
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/s/ Mitchell G. Holthus
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Mitchell G. Holthus, Director
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II-5
Exhibit Index
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Exhibit
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Number
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Description
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4.01#
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Form of Subscription Rights Certificate
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5.01#
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Opinion of Kutak Rock LLP
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23.01#
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Consent of Summers, Spencer & Callison, CPAs
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24.01#
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Power of Attorney (page II-5)
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99.1#
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Form of Instruction for Use of Brooke Corporation Subscription Rights Certificates
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99.2#
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Form of Letter to Stockholders who are Record Holders
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99.3#
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Form of Letter to Nominee Holders Whose Clients are Beneficial Holders
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99.4#
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Form of Letter to Clients of Nominee Holders
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99.5#
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Form of Nominee Holder Certification
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99.6#
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Form of Beneficial Owner Election
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