<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission File Number 0-26410
JAYHAWK ACCEPTANCE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-2486444
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
BRYAN TOWER
2001 BRYAN STREET, SUITE 600, DALLAS, TX 75201
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 754-1000
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- _____
At August 12, 1997, the latest practicable date, there were
23,929,771 shares of Common Stock, $.01 par value, outstanding.
Page 1
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INDEX TO FORM 10-Q
------------------
PART I. FINANCIAL INFORMATION
- ------------------------------
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
<S> <C>
Consolidated Balance Sheets at June 30, 1997 (Unaudited) and December 31, 1996....................... 3
Consolidated Statements of Operations for the three and six months ended
June 30, 1997 and 1996 (Unaudited).................................................................. 4
Consolidated Statement of Shareholders' Equity for the six months ended
June 30, 1997 (Unaudited)........................................................................... 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 (Unaudited).................................................................. 6
Notes to Consolidated Financial Statements (Unaudited)............................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................................. 9
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 16
SIGNATURES.................................................................................................. 17
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</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- --------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 4,052 $ 253
Restricted cash 8,684 6,352
Installment contracts receivable 271,097 373,740
Allowance for credit losses (87,582) (73,635)
-------- --------
Installment contracts receivable, net 183,515 300,105
Furniture, fixtures and equipment, net 6,983 10,545
Income taxes receivable -- 1,122
Other assets 3,493 4,190
-------- --------
Total assets $206,727 $322,567
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 6,795 $ 8,878
Deferred dealer and provider fees, net 2,348 2,841
Dealer and provider holdbacks, net 88,107 159,075
Unearned service contract fees 1,310 2,942
Notes payable 85,975 108,647
-------- --------
Total liabilities 184,535 282,383
Preferred stock of subsidiary 5,000 --
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value;
40,000,000 shares authorized;
23,929,771 and 23,917,771 shares
issued and outstanding at
June 30, 1997 and December 31, 240 239
1996, respectively
Additional paid-in capital 88,779 88,770
Accumulated deficit (71,827) (48,825)
-------- --------
Total shareholders' equity 17,192 40,184
-------- --------
Total liabilities and shareholders'
equity $206,727 $322,567
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Finance charges $ 6,510 $10,077 $ 15,713 $18,238
Dealer and provider fees 3,002 1,822 6,301 3,537
Service contracts 1,240 606 2,789 869
-------- ------- -------- -------
10,752 12,505 24,803 22,644
Costs and expenses:
Sales and marketing 2,777 1,946 6,549 3,724
Operating 5,263 3,813 11,588 6,804
Provision for credit losses 12,647 998 18,070 1,812
Provision for service contract claims 371 235 1,013 432
Loss on impairment of fixed assets 3,960 -- 3,960 --
Interest 2,055 1,200 4,763 2,417
-------- ------- -------- -------
27,073 8,192 45,943 15,189
-------- ------- -------- -------
Income (loss) before reorganization
expense (16,321) 4,313 (21,140) 7,455
Reorganization expense 862 -- 1,862 --
-------- ------- -------- -------
Income (loss) before income taxes (17,183) 4,313 (23,002) 7,455
Income taxes -- 1,451 -- 2,549
-------- ------- -------- -------
Net income (loss) $(17,183) $ 2,862 $(23,002) $ 4,906
======== ======= ======== =======
Net income (loss) per share $(.72) $.12 $(.96) $.22
======== ======= ======== =======
Weighted average number of shares
outstanding 23,930 23,765 23,927 22,298
======== ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $239 $88,770 $(48,825) $ 40,184
Issuance of 12,000 shares of common
stock upon exercise of stock options 1 9 -- 10
Net loss -- -- (23,002) (23,002)
------ --------- --------- ---------
Balance at June 30, 1997 $240 $88,779 $(71,827) $ 17,192
====== ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (23,002) $ 4,906
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,718 989
Loss on impairment of fixed assets 3,960 --
Provision for credit losses 18,070 1,812
Deferred income taxes -- 2,088
Changes in operating assets and
liabilities:
Installment contracts receivable 2,863 (6,091)
Income taxes receivable 1,122 --
Other assets 697 423
Accounts payable and accrued
liabilities (2,163) (735)
Income taxes payable -- (1,675)
Deferred dealer and provider fees,
net (493) 24
------------ -----------
Net cash provided by operating
activities 2,772 1,741
Cash flows from investing activities:
Payments to dealers (32,352) (98,084)
Collections of principal on
installment contracts receivable 55,489 40,023
Capital expenditures (2,116) (3,114)
Increase in restricted cash (2,332) (4,120)
------------ -----------
Net cash provided by (used in)
investing activities 18,689 (65,295)
Cash flows from financing activities:
Net borrowings (principal payments)
under revolving credit facility (3,700) (1,609)
Proceeds from issuance of notes
payable to principal shareholders 7,320 --
Proceeds from the issuance of secured
notes payable -- 36,352
Principal payments on secured notes
payable (26,292) (11,884)
Proceeds from sales of preferred
stock of subsidiary 5,000 --
Proceeds from sales of common stock,
net 10 40,916
------------- -----------
Net cash provided by (used in)
financing activities (17,662) 63,775
------------- -----------
Net increase in cash and cash
equivalents 3,799 221
Cash and cash equivalents at the
beginning of the period 253 120
------------- -----------
Cash and cash equivalents at the end of
period $ 4,052 $ 341
============= ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 1,559 $ 1,905
============= ===========
Cash paid for income taxes $ -- $ 1,950
============= ===========
</TABLE>
See notes to consolidated financial statements.
Page 6
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Jayhawk
Acceptance Corporation and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, Jayhawk Services, Inc., Jayhawk
Funding Trust I ("Funding Trust") and Jayhawk Medical Acceptance Corporation
("JMAC"). All significant intercompany balances and transactions have been
eliminated upon consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996, filed with the Securities and
Exchange Commission on April 18, 1997.
NOTE 2 - NET INCOME PER SHARE
The weighted average number of common and common equivalent shares
outstanding for the purposes of computing net income per share were 23,929,771
and 23,765,234 for the three months ended June 30, 1997 and 1996, and 23,926,771
and 22,297,668 for the six months ended June 30, 1997 and 1996, respectively.
NOTE 3 - BANKRUPTCY PROCEEDINGS
On February 7, 1997, the Company (excluding the subsidiaries) filed a
voluntary petition for reorganization (the "Chapter 11 Petition") under Chapter
11 of the Federal Bankruptcy Code (the "Chapter 11 Proceeding"). The Company is
managing its business as a debtor-in-possession subject to the supervision and
control of the Federal Bankruptcy Court for the Northern District of Texas (the
"Bankruptcy Court"). As substantially all of the Company's assets are pledged to
secure its lenders, the Company is required to obtain Bankruptcy Court
authorization for its use of such lenders' collateral, including cash
collateral. Although the Company has received authorization to use a portion of
its revolving lender's cash collateral through September 30, 1997, such
authorization has been limited to the payment of expenses and purchase of
automobile installment sales contracts in accordance with a court approved
budget.
NOTE 4 - NOTES PAYABLE
After the Company's filing of the Chapter 11 Petition in February 1997,
JMAC's revolving credit lender refused to make any further advances under JMAC's
revolving credit facility. To fund JMAC's operations between January 30, 1997
and June 30, 1997, the Company's principal shareholder made loans to JMAC in
the aggregate principal amount of $7.3 million. Additionally, at the request of
JMAC's revolving credit lender, on February 28, 1997, the Company's principal
shareholder purchased the revolving credit promissory note evidencing the $13.6
million principal amount of indebtedness outstanding under the credit facility.
NOTE 5 - PREFERRED STOCK OF SUBSIDIARY
From April 14 through June 11, 1997, the principal shareholder
purchased from JMAC 50,000 shares of JMAC Preferred Stock in exchange for $2.0
million of the indebtedness to the principal shareholder and $3.0 million of
cash. Each
Page 7
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - PREFERRED STOCK OF SUBSIDIARY (CONTINUED)
outstanding share of JMAC Preferred Stock (i) has a liquidation value equal to
the sum of $100 plus $1.50 for each calendar month or portion thereof that then
has elapsed from and including April 1997 (the sum of such amounts being
referred to as the "Liquidation Value"), (ii) except as required by law,
entitles the holder thereof to one vote per share voting with the holders of
JMAC's common stock (which results in the principal shareholder having voting
control of JMAC as long as he owns the JMAC Preferred Stock), and (iii) is
redeemable at any time prior to conversion at a redemption price equal to the
Liquidation Value, provided that at the time of such redemption all indebtedness
owing by JMAC to the principal shareholder and certain affiliated parties is
paid in full. Each share of JMAC Preferred Stock, unless previously redeemed, is
convertible at the option of the principal shareholder into that number of
shares of JMAC Common Stock as shall be equal to the quotient of that number of
shares of JMAC Common Stock, which after issuance would be equal to 95% of all
shares of JMAC Common Stock outstanding on the date the first share of JMAC
Preferred Stock is converted divided by the number of shares of JMAC Preferred
Stock authorized for issuance (currently 50,000) at any time after the earlier
of (i) April 15, 1998, (ii) thirty days after any person, entity or group (other
than the principal shareholder or certain of his affiliates) becomes the
beneficial owner of 25% or more of the combined voting power of the Company with
the intention of changing or influencing control of the Company, (iii) the date
of appointment of a trustee or receiver of the Company in the Chapter 11
Proceeding or the conversion of the Chapter 11 Proceeding to a Chapter 7
proceeding, (iv) the first date following termination or suspension of the
Company's right to use cash collateral in the Chapter 11 Proceeding for a period
of more than 15 calendar days, (v) the date that the stay is lifted enabling the
Company's revolving credit lender (or another debtor-in-possession lender that
the Company owes in excess of $5.0 million) to foreclose on its respective lien
on the Company's assets, (vi) the date that any of the security agreements
securing any of the indebtedness to the principal shareholder shall cease to be
legal, valid, binding and enforceable agreements or shall in any way be
terminated or become or be declared ineffective or inoperative or cease to
provide the first priority liens intended to be created thereby or if JMAC or
any of its shareholders or creditors or any other person shall institute any
legal action that, if successful, would have such effect, or (vii) the date,
after confirmation of the Plan, that the Company defaults on any other material
indebtedness or the maturity of such indebtedness is accelerated. No dividends
shall accrue on the JMAC Preferred Stock prior to April 15, 1998, after which
dividends shall be accrued if and when declared by the Board of Directors of
JMAC.
NOTE 6 - IMPAIRMENT OF FIXED ASSETS
As a result of the Chapter 11 Proceeding and the absence of available financing,
the Company has substantially reduced its purchases of installment sale
contracts from automobile dealers ("Automotive Contracts") and substantially
eliminated its marketing efforts to such dealers. Related furniture, fixtures
and equipment, consisting primarily of development costs of computer software
used in the solicitation of dealers and origination of Automotive Contracts, are
believed to have negligible fair market value. Accordingly, the carrying values
of such assets have been reduced at June 30, 1997 and the related loss of
$3,960,000 was included in the results of operations for the three months then
ended.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
RECENT DEVELOPMENTS; CHAPTER 11 PROCEEDING
As described in the Company's annual report on Form 10-K for the year ended
December 31, 1996 (the "1996 10-K"), on February 7, 1997, the Company filed a
voluntary petition for reorganization (the "Chapter 11 Petition") under Chapter
11 of the Federal Bankruptcy Code (the "Chapter 11 Proceeding"). The Company is
managing its business as debtor-in-possession subject to the supervision and
control of the Federal Bankruptcy Court for the Northern District of Texas (the
"Bankruptcy Court"). As substantially all of the Company's assets are pledged to
secure its lenders, the Company is required to obtain Bankruptcy Court
authorization for its use of such lenders' collateral, including cash
collateral. Although the Company has received authorization to use a portion of
its revolving lender's cash collateral through September 30, 1997, such
authorization has been limited to the payment of expenses and purchase of
automobile installment sale contracts ("Automotive Contracts") in accordance
with a court approved budget. As a result of these limitations and the lack of
available borrowings, the Company has implemented a number of cost-saving
measures. Among other things, since the filing of the Chapter 11 Petition, the
Company has (i) tightened the criteria under which it is willing to purchase
Automotive Contracts from automobile dealers ("Dealers"), (ii) received
significantly fewer Automotive Contracts from its participating Dealers for
purchase consideration, (iii) substantially discontinued its sales and marketing
efforts to Dealers, (iv) purchased a materially lower volume of Automotive
Contracts from its Dealers (127, 50, 11 and 2 Automotive Contracts in April,
May, June and July 1997, respectively), and (iv) reduced its workforce by
approximately 200 employees. See "--Liquidity and Capital Resources."
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
TOTAL REVENUE. Total revenue decreased from $12.5 million for the three
months ended June 30, 1996 to $10.8 million for the same period in 1997, a
decrease of $1.7 million or 13.6%. The decrease was due to a $3.5 million, or
27.6%, decrease in revenues attributable to the Company's automobile finance
program, offset by $1.7 million of revenues attributable to Jayhawk Medical
Acceptance Corporation's ("JMAC") elective health care program. JMAC was formed
in August 1996 to provide an indirect source of financing for elective health
care procedures and, as of June 30, 1997, had enrolled 1,652 health care
providers ("Providers") into its elective health care program, purchased 5,608
installment contracts from Providers ("Medical Contracts," and together with
Automotive Contracts, "Contracts") and financed $20.5 million of elective health
care procedures. JMAC incurred losses of approximately $1.0 million in the three
months ended June 30, 1997, and the Company anticipates that JMAC will continue
to incur losses at least through the third quarter of 1997. The decrease in
total revenue reflects decreased finance charges, offset by increased dealer and
provider fees and increased service contract revenue.
The decrease in finance charges resulted primarily from the increased
number of non-accrual Automotive Contracts held in the Company's portfolio and
from the overall reduction of the Company's Automotive Contract portfolio as
existing Automotive Contracts are repaid. The Company's installment contracts
receivable, net of allowance for credit losses, decreased from $278.8 million at
June 30, 1996 to $183.5 million at June 30, 1997, a decrease of $95.3 million or
34.2%. The decrease was attributable to a decrease in automobile receivables of
$113.3 million, offset by $18.0 million of medical receivables. Finance charges
from Automotive Contracts decreased from $10.1 million for the three months
ended June 30, 1996 to $6.1 million for the same period in 1997, a decrease of
$4.0 million or 39.6%. Finance charges from Medical Contracts were $416,000 for
the three months ended June 30, 1997.
The average annualized yield on the Company's automobile finance
portfolio decreased from 15.7% to 8.5% for the three months ended June 30, 1996
and June 30, 1997, respectively. The decrease in the average annualized yield is
attributable to the higher percentage of non-accrual Automotive Contracts as a
percentage of the total number of Automotive Contracts included within the
Company's portfolio during the second quarter of 1997 when compared to the same
period in 1996 and the longer average original term of Automotive Contracts
included in the Company's portfolio during the second quarter of 1997 when
compared to the second quarter of 1996. Non-accrual Automotive Contracts as a
percentage of the total number of Automotive Contracts in the Company's
portfolio increased from 34% at June 30, 1996 to 49% at June 30, 1997.
Page 9
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Due to the current and expected future reduced level of Automotive Contract
purchases, the Company anticipates that the average age of the Automotive
Contracts included in its portfolio will increase, resulting in a significant
increase in non-accrual Automotive Contracts as a percentage of the total number
of Automotive Contracts included in the Company's portfolio. At June 30, 1997,
the non-accrual Medical Contracts as a percentage of the total number of Medical
Contracts included in the Company's portfolio was 16.2%. The Company anticipates
that as the average age of the Medical Contracts included in its portfolio
increases, non-accrual Medical Contracts as a percentage of total Medical
Contracts in the portfolio will rise significantly.
Dealer and provider fees increased from $1.8 million for the three
months ended June 30, 1996 to $3.0 million for the three months ended June 30,
1997, an increase of $1.2 million or 18.1%. The increase was the result of $1.3
million in fees from Providers related to Medical Contracts purchased in JMAC's
elective health care program, offset by a $.1 million decrease in fees from
Dealers. The fees from Dealers are primarily attributable to the recognition of
enrollment fees of Dealers that enrolled in the Company's automobile finance
program prior to the filing of the Chapter 11 Petition. As essentially no new
Dealers are enrolling in the Company's automobile finance program, the Company
expects Dealer fees to decrease significantly in the future.
Service contract revenue was $.6 million for the three months ended
June 30, 1996 as compared with $1.2 million for the same period in 1997, an
increase of $.6 million. The increase in service contract revenue is primarily
attributable to the fact that the Company first began offering its service
contract program to Dealers in the first quarter of 1996 and primarily relates
to service contracts sold prior to 1997. Service contract revenue is recognized
over the term of the service contract. As a result of the decreased number of
Automotive Contracts being purchased by the Company, the Company expects service
contract revenue to decrease significantly in the future.
As a result of measures taken by the Company in connection with the
Chapter 11 Proceeding and the decreased number of Automotive Contracts being
submitted to and purchased by the Company, the Company anticipates reporting
significantly decreased finance charges, dealer fees and service contract
revenue in the foreseeable future. See "- Recent Developments; Chapter 11
Proceeding."
SALES AND MARKETING. Sales and marketing expenses increased from $1.9
million for the three months ended June 30, 1996 to $2.8 million for the same
period in 1997, and increased as a percentage of total revenue from 15.6% for
the three months ended June 30, 1996 to 25.8% for the three months ended June
30, 1997. The increase in sales and marketing expenses is primarily a result of
the Company's effort to expand JMAC's elective health care program which
incurred approximately $1.5 million of sales and marketing expenses for the
three months ended June 30, 1997. Sales and marketing expenses of JMAC's
elective health care program were 85.6% of revenues attributable to the elective
health care program for the quarter ended June 30, 1997. Due primarily to the
substantial discontinuation of sales and marketing efforts to Dealers, sales and
marketing expenses for the Company's automobile finance program for the three
months ended June 30, 1997 primarily represent previously paid sales commissions
which are amortized for financial statement purposes over the period of the
related enrollment fee revenues. Such expenses decreased as a percentage of
revenues attributable to the Company's automobile finance program from 16% to
15% for the periods ended June 30, 1996 and June 30, 1997, respectively. See " -
Recent Developments; Chapter 11 Proceeding."
OPERATING EXPENSES. Operating expenses increased from $3.8 million for
the three months ended June 30, 1996 to $5.3 million for the same period in
1997, an increase of $1.5 million or 38%, and increased as a percentage of total
revenue from 30% for the second quarter of 1996 to 49% for the second quarter of
1997. The dollar increase in operating expenses was due to an increase of $.7
million in operating expenses attributable to the Company's automobile finance
program and $.8 million of operating expenses attributable to JMAC's elective
health care program. The increase in operating expenses as a percentage of total
revenue is primarily attributable to the higher percentage of non-accrual
Contracts included within the Company's portfolio during the second quarter of
1997 when compared with the second quarter of 1996.
PROVISION FOR CREDIT LOSSES. The amount provided for credit losses
increased from $998,000 for the three months ended June 30, 1996 to $12.6
million for the same period in 1997. The increase in the provision for credit
losses is primarily due to the increased number of non-accrual Automotive
Contracts in the Company's portfolio at June 30, 1997 when compared to June 30,
1996 and the Company's policy of providing for possible losses in uncollected
finance charges previously reported in earnings upon a contract reaching non-
accrual status. See "--Credit Loss Policy" and the 1996 10-K.
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<PAGE>
PROVISION FOR SERVICE CONTRACT CLAIMS. The Company provided $371,000
for service contract claims for the three months ended June 30, 1997 as compared
to $235,000 for the same period in 1996. The increase in the provision for
service contract claims is primarily attributable to the increased number of
service contracts included in the Company's portfolio in the second quarter of
1997 when compared to the second quarter of 1996.
LOSS ON IMPAIRMENT OF FIXED ASSETS. As a result of the substantial
elimination of marketing efforts to Dealers and the substantial reduction of
purchases of Automotive Contracts during the second quarter of 1997, the Company
recognized a loss of $3.9 million for the impairment of fixed assets, primarily
costs of computer software, used in the solicitation of Dealers and origination
of Automotive Contracts.
INTEREST EXPENSE. Interest expense increased from $1.2 million during
the second quarter of 1996 to $2.1 million during the same period in 1997. The
increase was due to higher average borrowings under the Company's credit
facilities.
REORGANIZATION EXPENSES. Reorganization expenses relate to costs
incurred by the Company in connection with the Chapter 11 Proceeding. The
Company incurred $862,000 of reorganization expenses in the second quarter of
1997, consisting primarily of professional fees.
INCOME TAXES. The Company's effective income tax rate was 0% for the
three-month period ended June 30, 1997, as compared with an effective income tax
rate of 34% for the same period in 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
TOTAL REVENUE. Total revenue increased from $22.6 million for the six
months ended June 30, 1996 to $24.8 million for the same period in 1997, an
increase of $2.2 million or 9.7%. The increase was due to $3.1 million of
revenues attributable to JMAC's elective health care program, offset by a $.9
million decrease in revenues attributable to the Company's automobile finance
program. The increase in total revenues reflects increased dealer and provider
fees and increased service contract revenue, offset by decreased finance
charges.
Dealer and provider fees increased from $3.5 million for the six months
ended June 30, 1996 to $6.3 million for the six months ended June 30, 1997, an
increase of $2.8 million or 80.0%. The increase was the result of $2.6 million
in fees from Providers related to Medical Contracts purchased in JMAC's elective
health care program and a $.2 million increase in fees from Dealers primarily
attributable to the recognition of enrollment fees of Dealers that enrolled in
the Company's automobile finance program prior to the filing of the Chapter 11
Petition.
Service contract revenue was $.9 million for the six months ended June
30, 1996 as compared with $2.8 million for the same period in 1997, an increase
of $1.9 million. The increase in service contract revenue is primarily
attributable to the fact that the Company first began offering its service
contract program to Dealers in the first quarter of 1996 and primarily relates
to service contracts sold prior to 1997.
Finance charges decreased from $18.2 million for the six months ended
June 30, 1996 to $15.7 million for the same period in 1997, a decrease of $2.5
million or 13.8%. The decrease was due to a $3.1 million decrease in finance
charges from Automotive Contracts, offset by $.6 million of finance charges from
Medical Contracts. The decrease in finance charges from Automotive Contracts
resulted primarily from the increased number of non-accrual Automotive Contracts
held in the Company's portfolio and from the overall reduction of the Automotive
Contract portfolio as existing Contracts are repaid.
SALES AND MARKETING. Sales and marketing expenses increased from $3.7
million for the six months ended June 30, 1996 to $6.5 million for the same
period in 1997, and increased as a percentage of total revenue from 16.4% for
the six months ended June 30, 1996 to 26.4% for the six months ended June 30,
1997. The increase in sales and marketing expenses is a result of the Company's
effort to expand JMAC's elective health care program which incurred
approximately $3.3 million of sales and marketing expenses for the six months
ended June 30, 1997. Sales and marketing expenses of JMAC's elective health care
program were 107.4% of revenues attributable to the elective health care program
for the six months ended June 30, 1997. Due primarily to the substantial
discontinuation of sales and marketing efforts to Dealers, sales and marketing
Page 11
<PAGE>
expenses for the Company's automobile finance program for the six months ended
June 30, 1997 primarily represent previously paid sales commissions which are
amortized for financial statement purposes over the period of the related
enrollment fee revenues. Such expenses approximated 14.7% and 17.5% of revenues
attributable to the Company's automobile finance program for the six months
ended June 30, 1997 and June 30, 1996, respectively. See " -Recent Developments;
Chapter 11 Proceeding."
OPERATING EXPENSES. Operating expenses increased from $6.8 million
for the six months ended June 30, 1996 to $11.6 million for the same period in
1997, an increase of $4.8 million, or 70.3%, and increased as a percentage of
total revenue from 30.0% for the first six months of 1996 to 46.7% for the first
six months of 1997. The dollar increase in operating expenses was due to $1.9
million of operating expenses attributable to JMAC's elective health care
program and a $2.9 million increase in operating expenses attributable to the
Company's automobile finance program. The increase in operating expenses as a
percentage of total revenue is primarily attributable to the higher percentage
of non-accrual Contracts included within the Company's portfolio during the
first six months of 1997 when compared with the first six months of 1996 and the
higher level of operating expenses as a percentage of revenue of JMAC's elective
health care program when compared with the Company's automobile finance program.
PROVISION FOR CREDIT LOSSES. The amount provided for credit losses
increased from $1.8 million for the six months ended June 30, 1996 to $18.1
million for the same period in 1997. The increase in the provision for credit
losses is primarily due to the increased number of non-accrual Automotive
Contracts in the Company's portfolio at June 30, 1997 when compared to June 30,
1996 and the Company's policy of providing for possible losses in uncollected
finance charges previously reported in earnings upon a contract reaching non-
accrual status. See "--Credit Loss Policy" and the 1996 10-K."
PROVISION FOR SERVICE CONTRACT CLAIMS. The Company provided $1.0
million for service contract claims for the six months ended June 30, 1997 as
compared to $.4 million for the six months ended June 30, 1996. The increase in
the provision for service contract claims is primarily attributable to the
increased number of service contracts included in the Company's portfolio in the
first six months of 1997 when compared to the same period of 1996.
LOSS ON IMPAIRMENT OF FIXED ASSETS. As a result of the substantial
elimination of marketing efforts to Dealers and the substantial reduction of
purchases of Automotive Contracts during the second quarter of 1997, the Company
recognized a loss of $3.9 million for the impairment of fixed assets, primarily
costs of computer software, used in the solicitation of Dealers and origination
of Automotive Contracts.
INTEREST EXPENSE. Interest expense increased from $2.4 million
during the first six months of 1996 to $4.8 million during the same period in
1997. The increase was due primarily to higher average borrowings under the
Company's credit facilities.
INCOME TAXES. The Company's effective income tax rate was 0% for
the six month period ended June 30, 1997, as compared with an effective income
tax rate of 34% for the same period in 1996.
INSTALLMENT CONTRACTS RECEIVABLE
Installment contracts receivable consist of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Gross installment contracts receivable $311,653 $438,998
Unearned finance charges (40,556) (65,258)
------------- ------------
Installment contracts receivable $271,097 $373,740
============= ============
</TABLE>
Page 12
<PAGE>
Changes in gross installment contracts receivable are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------
1997 1996 1997 1996
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, beginning of period $387,699 $273,751 $438,998 $198,397
Gross amount of installment contracts accepted 8,219 105,417 38,203 214,005
Cash collections on installment contracts receivable (33,757) (30,824) (74,539) (56,004)
Charge offs (50,508) (12,467) (91,009) (20,521)
----------- ---------- ---------- ---------
Balance, end of period $311,653 $335,877 $311,653 $335,877
=========== ========== ========== =========
</TABLE>
The increase in charge-offs between the three and six months ended
June 30, 1997 and the three and six months ended June 30, 1996, respectively,
is primarily attributable to the increase in the average age of such Contracts,
the growth in gross installment contracts receivable and the Company's charge-
off policy. See "--Credit Loss Policy."
DEALER AND PROVIDER HOLDBACKS
Dealer and provider holdbacks, net, consist of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Dealer and provider holdbacks $ 251,624 $ 351,549
Less: Acquisition payments (163,517) (192,474)
------------- ------------
Dealer and provider holdbacks, net $ 88,107 $ 159,075
============= ============
</TABLE>
CREDIT LOSS POLICY
The level of related Dealer and Provider holdbacks and the possible
impact of economic conditions on the creditworthiness of obligors are given
major consideration in determining the adequacy of the allowance for credit
losses. Credit loss experience, changes in the character, size and age of
particular Dealer and Provider pools and the Company's overall installment
contracts portfolio, and management's judgment are other factors used in
assessing the overall adequacy of the resulting provision for credit losses.
Ultimate losses may vary from current estimates, and the amount of the
provision, which is a current expense, may be either greater or less than the
actual charge-offs.
Revenue on Automotive Contracts is recognized under the interest
method of accounting until the underlying obligation is 120 days contractually
past due or the collateral securing the Contract is repossessed, whichever
occurs first, and revenue on Medical Contracts is recognized under the interest
method of accounting until the underlying obligation is 60 days contractually
past due. At such time, the Company suspends the accrual of revenue and provides
for possible losses in uncollected finance charges previously reported in
earnings.
The dollar amount of contracts in non-accrual status as a percentage
of installment contracts receivable was approximately 53% and 32% as of June 30,
1997 and June 30, 1996, respectively. Due to the current and expected future
reduced level of Automotive Contract purchases, the Company anticipates that the
average age of the Contracts in its portfolio will increase, which will result
in a significant increase in non-accrual contracts as a percentage of both the
total number and dollar amount of Contracts in the portfolio.
Contract balances on which no material payment has been received for
a significant period of time (in no event greater than one year) are charged-off
against the related dealer holdback and, if insufficient, the allowance for
credit losses. Because any remaining outstanding contracts in the applicable
pool are available to recover acquisition payments paid upon the Company's
purchase of contracts included within such pool and as the acquisition payment
generally approximates 50%
Page 13
<PAGE>
of principal for Automotive Contracts (averaging 55% for Automotive Contracts
purchased in 1996 and 58% for Automotive Contracts purchased in the first six
months of 1997) and 60% of principal for Medical Contracts, the risk of loss to
the Company is mitigated. However, risk does exist that acquisition payments
made to a Dealer or Provider may not be fully recouped from the collections
related to that Dealer's or Provider's pool(s) since the default rate on any
individual pool could be, and in cases has been, so extreme that collections are
not sufficient to recover all acquisition payments paid by the Company for such
contracts. See "-Recent Developments; Chapter 11 Proceeding" and the 1996 10-K.
The following tables set forth certain information regarding charge-
offs, the provision for credit losses, the allowance for credit losses and
dealer and provider holdbacks for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1997 1996 1997 1996
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Gross installment contracts receivable charged off.......... $50,508 $12,467 $91,009 $20,521
Charged against dealer holdbacks........................ 40,406 9,974 72,806 16,417
Charged against unearned finance charges................ 7,357 1,887 13,488 3,093
Charged against allowance for credit losses............. 2,745 606 4,715 1,011
Provision for credit losses.................................. 12,647 998 18,070 1,812
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
--------- ----------
<S> <C> <C>
As a % of gross installment contracts receivable:
Dealer and provider holdbacks 28.3% 39.7%
Allowance for credit losses 28.1% 1.4%
As a % of installment contracts receivable:
Allowance for credit losses 32.3% 1.7%
Net charge-offs against allowance for credit losses 1.7% 0.4%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since the filing of the Chapter 11 Petition, the Company has been
managing its business as a debtor-in-possession subject to the control and
supervision of the Bankruptcy Court. As substantially all of the Company's
assets are pledged to secure its lenders, the Company is required to obtain
Bankruptcy Court authorization for its use of such lenders' collateral,
including cash collateral. Although the Company has received authorization to
use a portion of its revolving lender's cash collateral through September 30,
1997, such authorization has been limited to the payment of expenses and
purchases of Contracts in accordance with a court approved budget.
Although JMAC was not a party to the Company's Chapter 11 Petition,
the filing of the Chapter 11 Petition has affected JMAC. JMAC had loaned
approximately $7.1 million to the Company prior to the Company's filing of the
Chapter 11 Petition, and the Bankruptcy Court has prohibited the Company from
providing JMAC with any cash to finance its activities, including any repayment
of such loan. Additionally, after the Company filed its Chapter 11 Petition,
JMAC's revolving credit lender refused to make any further advances under JMAC's
revolving credit facility. To fund JMAC's operations, Mr. Carl Westcott, the
Company's Chairman, Chief Executive Officer, and largest shareholder provided
approximately $12.3 million of financing to JMAC between January 30, 1997 and
August 12, 1997 (including the proceeds from Mr. Westcott's purchase of 50,000
shares of JMAC's Series A Redeemable, Convertible Preferred Stock (the "JMAC
Preferred Stock")). However, Mr. Westcott is not obligated to provide JMAC with
any additional financing and the failure of JMAC to receive additional financing
from the Company or Mr. Westcott or otherwise would have a material adverse
effect on JMAC. Additionally, the majority of the financing provided by Mr.
Westcott to JMAC has been in the form of
Page 14
<PAGE>
demand notes secured by all of the assets of JMAC. Neither JMAC nor the Company
currently has the financial resources with which to repay such notes. See the
1996 10-K for further information regarding JMAC, the terms of the JMAC
Preferred Stock and the terms of the financing provided by Mr. Westcott.
Discussions with the Company's secured lender and the unsecured
creditors' committee regarding the terms of an amended plan of reorganization
that could be supported jointly are continuing. Such amended plan of
reorganization would continue to provide for full payment of the Company's
indebtedness and contractual obligations. The Company believes it has reached
substantial agreement with the unsecured creditors' committee for such a plan
and anticipates it will be able to reach a similar agreement with its secured
lender and Mr. Westcott. However, there can be no assurance that agreement can
be reached for a jointly agreed plan or that, if agreement for such a plan is
reached, such plan will be confirmed.
Upon confirmation of a plan of reorganization, the Company intends
to seek new sources of financing to supplement the cash available from
collections of its Contracts to fund its and JMAC's operations. There can be no
assurance that such additional financing will be available on terms which are
acceptable to the Company. The failure of the Company to receive additional
financing would adversely affect its ability to grow JMAC's medical finance
business.
SEASONALITY
The Company's operations are affected by higher delinquency rates
during certain holiday periods.
IMPACT OF INFLATION
Increases in the inflation rate generally result in increased
interest rates. Because a significant portion of the Company's outstanding
indebtedness bears interest at variable interest rates, any increase in interest
rates will increase the borrowing costs of the Company.
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the matters
discussed in Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations or elsewhere herein, including the matters relating to
an amended plan of reorganization and any beliefs with respect thereto and
financial projections, are forward looking statements that are dependent upon a
number of risks and uncertainties that could cause actual results to differ
materially from those in the forward looking statements. These risks and
uncertainties include the recoverability of amounts paid for Contracts, the
delinquency and default rates with respect to the Contracts included in the
Company's portfolio, the impact of competitive services and products, changes in
market conditions, JMAC's limited operating history, the impact of changes in
regulation or litigation, the management of growth and other risks described
herein. The Company does not intend to provide updated information about the
matters referred to in these forward looking statements, other than in the
context of management's discussion and analysis in the Company's quarterly and
annual reports on Form 10-Q and 10-K.
Page 15
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
Exhibit Number Description
-------------- -----------
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated June 30,
1997 in accordance with Item 5. Other Information of Form 8-K.
Page 16
<PAGE>
SIGNATURES
-----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JAYHAWK ACCEPTANCE CORPORATION
Date: August 14, 1997 By: /s/ Philip E. Falcosky
----------------------
Philip E. Falcosky
Controller and Chief Accounting Officer
Page 17
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description
-------------- -----------
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE>
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
1997 1996 1997 1996
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
PRIMARY:
Net income (loss) $(17,183,000) $ 2,862,000 $(23,002,000) $ 4,906,000
=============== ============ ============ ===========
Shares as adjusted:
Weighted average common shares outstanding 23,929,771 23,384,472 23,926,771 21,931,074
Incremental shares from outstanding stock
options as determined under the treasury
stock method -- 380,762 -- 366,594
--------------- ------------ ------------ -----------
Shares as adjusted 23,929,771 23,765,234 23,926,771 22,297,668
=============== ============ ============ ===========
Net income (loss) per share $ (.72) $ .12 $ (.96) $ .22
=============== ============ ============ ===========
FULLY DILUTED:
Net income (loss) $(17,183,000) $ 2,862,000 $(23,002,000) $ 4,906,000
=============== ============ ============ ===========
Shares as adjusted:
Weighted average common shares outstanding 23,929,771 23,384,472 23,926,771 21,931,074
Incremental shares from outstanding stock
options as determined under the treasury
stock method -- 393,442 -- 410,619
--------------- ------------ ------------ -----------
Shares as adjusted 23,929,771 23,777,914 23,926,771 22,341,693
=============== ============ ============ ===========
Net income (loss) per share $ (.72) $ .12 $ (.96) $ .22
=============== ============ ============ ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1996
<CASH> 12,736
<SECURITIES> 0
<RECEIVABLES> 271,097
<ALLOWANCES> 87,582
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,012
<DEPRECIATION> 5,029
<TOTAL-ASSETS> 206,727
<CURRENT-LIABILITIES> 92,770
<BONDS> 5,000
0
0
<COMMON> 240
<OTHER-SE> 16,952
<TOTAL-LIABILITY-AND-EQUITY> 206,727
<SALES> 0
<TOTAL-REVENUES> 24,803
<CGS> 0
<TOTAL-COSTS> 23,110
<OTHER-EXPENSES> 1,862
<LOSS-PROVISION> 18,070
<INTEREST-EXPENSE> 4,763
<INCOME-PRETAX> (23,002)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,002)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
