<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
-------------------------
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, TEXAS 75201
(Address of Principal Executive Offices)(Zip Code)
(214) 754-1000
(Registrant's Telephone Number, Including Area Code)
------------------------------
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 [ ]
------------------------------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES [X] NO [ ]
------------------------------
At May 16, 1997, the latest practicable date, there were 23,929,771 shares
of Common Stock, $.01 par value, outstanding.
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION
(DEBTOR-IN-POSSESSION)
INDEX TO FORM 10-Q
------------------
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets at March 31, 1997 (Unaudited) and
December 31, 1996......................................................3
Consolidated Statements of Operations for the three months ended
March 31, 1997 and 1996 (Unaudited)....................................4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 (Unaudited)....................................5
Consolidated Statement of Shareholders' Equity for the three
months ended March 31, 1997 (Unaudited)...............................6
Notes to Consolidated Financial Statements.............................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.................................15
SIGNATURES.................................................................16
- ----------
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
JAYHAWK ACCEPTANCE CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Cash and cash equivalents $ 3,759 $ 253
Restricted cash 4,334 6,352
Installment contracts receivable 333,312 373,740
Allowance for credit losses (77,654) (73,635)
--------- ---------
Installment contracts receivable, net 255,658 300,105
Furniture, fixtures and equipment, net 11,482 10,545
Income taxes receivable 22 1,122
Other assets 4,161 4,190
--------- ---------
Total assets $ 279,416 $ 322,567
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 6,690 $ 8,878
Deferred dealer and provider fees, net 2,652 2,841
Dealer and provider holdbacks, net 129,594 159,075
Unearned service contract fees 1,799 2,942
Notes payable 104,306 108,647
--------- ---------
Total liabilities 245,041 282,383
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 March 31, 1997 and December 31, 1996,
respectively 240 239
Additional paid-in capital 88,779 88,770
Accumulated deficit (54,644) (48,825)
--------- ---------
Total shareholders' equity 34,375 40,184
--------- ---------
Total liabilities and shareholders' equity $ 279,416 $ 322,567
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Finance charges $ 9,203 $ 8,161
Dealer and provider fees 3,299 1,715
Service contracts 1,549 263
-------- --------
14,051 10,139
Costs and expenses:
Sales and marketing 3,772 1,778
Operating 6,325 2,991
Provision for credit losses 5,423 814
Provision for service contract claims 642 197
Interest 2,708 1,217
-------- --------
18,870 6,997
-------- --------
Income (loss) before reorganization expense (4,819) 3,142
Reorganization expense 1,000 -
-------- --------
Income (loss) before income taxes (5,819) 3,142
Income tax expense - 1,098
-------- --------
Net income (loss) $ (5,819) $ 2,044
======== ========
Net income (loss) per share $ (0.24) $ 0.10
======== ========
Weighted average number of shares outstanding 23,924 20,785
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION
(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 (5,819) (5,819)
-------- -------- -------- --------
Balance at March 31, 1997 $ 240 $ 88,779 $(54,644) $ 34,375
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,819) $ 2,044
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 863 438
Loss on sale/write down of fixed assets 47 -
Provision for credit losses 5,423 814
Deferred income taxes - 600
Changes in operating assets and liabilities:
Installment contracts receivable 832 (2,566)
Income taxes receivable 1,100 -
Other assets 28 50
Accounts payable and accrued liabilities (3,332) (164)
Income taxes payable - (352)
Deferred dealer fees, net (188) (301)
-------- --------
Net cash provided by (used in) operating activities (1,046) 563
Cash flows from investing activities
Payments to dealers (15,925) (52,525)
Collections of installment contracts receivable 24,637 18,423
Capital expenditures (1,848) (1,355)
Decrease (increase) in restricted cash 2,019 (11,826)
-------- --------
Net cash provided by (used in) investing activities 8,883 (47,283)
Cash flows from financing activities;
Net borrowings under revolving credit facilities 4,300 10,819
Proceeds from issuance of notes payable to principal
shareholder 6,020 -
Net proceeds from the issuance of secured notes payable - 36,352
Principal payments on secured notes payable (14,661) -
Proceeds from sales of common stock, net 10 (188)
-------- --------
Net cash provided by (used in) financing activities (4,331) 46,983
Net increase in cash and cash equivalents 3,506 263
Cash and cash equivalents at the beginning of the period 253 120
-------- --------
Cash and cash equivalents at the end of the period $ 3,759 $ 383
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,777 $ 909
======== ========
Cash paid for income taxes $ - $ 850
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Jayhawk
Acceptance Corporation (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 wholly-owned 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 month period ended March 31, 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 20,798,334 for the three months ended March 31, 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 lenders' cash collateral through July 31, 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.
NOTE 4 - NOTES PAYABLE
After the Company's filing of its Bankruptcy 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 Jan. 30, 1997 and
March 31, 1997, the Company's principal shareholder made loans to JMAC in the
aggregate principal amount of $6.0 million. Additionally, at the request of
JMAC's revolving credit lender, on Feb. 28, 1997, Mr. Westcott purchased the
Revolving Credit Promissory Note evidencing the $13.5 million principal amount
of indebtedness outstanding under the credit facility.
NOTE 5 - SUBSEQUENT EVENTS
From April 14 through May 16, 1997, the principal shareholder purchased
from JMAC 37,500 shares of JMAC Preferred Stock in exchange for $2.0 million of
the indebtedness to the principal shareholder and $1.75 million of cash and,
subject to certain limitations, committed to purchase up to an additional 12,500
shares of JMAC Preferred Stock for $100 per share. Each 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
Page 7
<PAGE>
any time prior to conversion at a redemption price equal to the Liquidation
Value, provided that at the time of such redemption all such indebtedness owing
by JMAC to the principal shareholder and certain affiliated parties has been
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
Revolving 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
sucessful, 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 if
and when declared by the Board of Directors of JMAC.
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 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 July 31, 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) changed the focus of its
sales and marketing efforts from enrolling new Dealers into the Company's
program to purchasing Automotive Contracts from existing Dealers whose pools are
among the better performing pools owned by the Company, (iii) received
significantly fewer Automotive Contracts from its participating Dealers for
purchase consideration, (iv) purchased a materially lower volume of Automotive
Contracts from its Dealers (326 and 127 Automotive Contracts during the months
of March and April 1997, respectively, as compared with 8,405 and 6,471
Automotive Contracts during the months of March and April 1996, respectively),
and (v) reduced its workforce by approximately 200 employees. See "--Liquidity
and Capital Resources" and the 1996 10-K.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Total Revenue. Total revenue increased from $10.1 million for the three
months ended March 31, 1996 to $14.1 million for the same period in 1997, an
increase of $4.0 million or 39.6%. The increase was due to a $2.6 million, or
25.7%, increase in revenues attributable to the Company's automobile finance
program and to $1.4 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 May 16, 1997, had enrolled 1,559 health care
providers ("Providers") into its elective health care program, purchased 4,756
installment contracts from Providers ("Medical Contracts", and together with
Automotive Contracts, "Contracts") and financed $15.6 million of elective health
care procedures. JMAC incurred losses of approximately $2.2 million in the first
quarter of 1997 and the Company anticipates that JMAC will continue to incur
losses at least through the second quarter of 1997. The increase in total
revenues reflects increased Dealer and Provider fees, increased service contract
revenue and increased finance charges.
Dealer and Provider fees increased from $1.7 million for the three months
ended March 31, 1996 to $3.3 for the three months ended March 31, 1997, an
increase of $1.6 million or 94.1%. The increase was the result of a $.3 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, and $1.3 million in fees
from Providers primarily relating to Medical Contracts purchased in JMAC's
elective health care program.
Service contract revenue was $.3 million for the three months ended March
31, 1996 as compared with $1.5 million for the same period in 1997, an increase
of $1.2 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 related Automotive Contract. As a result of the decreased
number of Automotive Contracts being
9
<PAGE>
submitted to and purchased by the Company and changes in the way Dealers
are compensated for selling service contracts, the Company expects service
contract revenue to decrease significantly in the future.
The increase in finance charges resulted from the increased number of
Automotive Contracts and Medical Contracts held in the Company's portfolio.
Finance charges from both Automotive Contracts and Medical Contracts increased
from $8.2 million for the three months ended March 31, 1996 to $9.2 million for
the same period in 1997, an increase of $1.0 million or 12.2%. Finance charges
from Medical Contracts were $161,000 for the three months ended March 31, 1997.
The Company's installment contracts receivable, net of allowance for credit
losses, increased from $230.3 million as of March 31, 1996, to $333.3 million as
of March 31, 1997, an increase of $103.0 million or 44.7%. The increase was due
to an increase in automobile receivables of $90.3 million and to $12.7 million
of medical receivables.
The average annualized yield on the Company's automobile finance portfolio
decreased from 16% to 10% for the three months ended March 31, 1996 and March
31, 1997, respectively. The decrease in the average annualized yield is
attributable to the longer average original term of Automotive Contracts
included in the Company's portfolio during the first quarter of 1997 when
compared with the first quarter of 1996 and 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 first quarter of 1997 when
compared with the same period in 1996. Non-accrual Automotive Contracts as a
percentage of the total number of Automotive Contracts included within the
Company's portfolio increased from 22% at March 31, 1996 to 42% at March 31,
1997. 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 within its portfolio will increase, which will
result in a significant increase in non-accrual Automotive Contracts as a
percentage of the total number of Automotive Contracts included within the
Company's portfolio. As of March 31, 1997, non-accrual Medical Contracts as a
percentage of the total number of Medical Contracts included within the
Company's portfolio was 3.3%. The Company anticipates that as the average age of
the Medical Contracts included within its portfolio increases, non-accrual
Medical Contracts as a percentage of the total number of Medical Contracts
included within the Company's portfolio will rise significantly.
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 the Company, the Company anticipates reporting materially lower volumes of
Automotive Contract purchases in the foreseeable future, which will result in
decreased finance charges, dealer fees and service contract revenue. See "--
Recent Developments; Chapter 11 Proceeding."
Sales and Marketing. Sales and marketing expenses increased from $1.8
million for the three months ended March 31, 1996 to $3.8 million for the same
period in 1997, and increased as a percentage of total revenue from 17.5% for
the three months ended March 31, 1996 to 26.8% for the three months ended March
31, 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 $2.0 million of sales and marketing expenses for the
three months ended March 31, 1997. Sales and marketing expenses for the
Company's automobile finance program decreased as a percentage of revenues
attributable to the Company's automobile finance program from 17.5% to 14.7% for
the periods ended March 31, 1996 and March 31, 1997, respectively. The decrease
was primarily the result of economies of scale associated with greater revenues
and, to a lesser extent, the Company's reduced efforts in enrolling new Dealers
into the Company's automobile finance program. Sales and marketing expenses of
JMAC's elective health care program were 133.6% of revenues attributable to the
elective health care program for the quarter ending March 31, 1997. See "--
Recent Developments; Chapter 11 Proceeding."
Operating Expenses. Operating expenses increased from $3.0 million for the
three months ending March 31, 1996 to $6.3 million for the corresponding period
in 1997, an increase of $3.3 million, or 110.0%, and increased as a percentage
of total revenues from 29.5% to 45.0% over the same periods. The dollar increase
in operating expenses is primarily attributable to expenses incurred in
servicing the larger automobile finance portfolio and, to a lesser extent,
expenses incurred in connection with JMAC's elective health care program. The
increase in operating expenses as a percentage of total revenues is primarily
attributable to the higher percentage of non-accrual Contracts included within
the Company's portfolio during the first quarter of 1997 when compared with the
first quarter of 1996,
10
<PAGE>
and the higher level of operating expenses of JMAC's elective health care
program as a percentage of revenues attributable to the 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 $.8 million for the three months ended March 31, 1996 to $5.4
million for the same period in 1997, an increase of $4.6 million or 575.0%. See
"--Credit Loss Policy" and the 1996 10-K. The increase in the provision for
credit losses is primarily due to the increased number of non-accrual Automotive
Contracts included in the Company's portfolio on March 31, 1997 when compared
with March 31, 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, along with a provision for possible losses on
acquisition payments paid to Dealers with respect to Automotive Contracts
purchased in the first quarter of 1997.
Provision for Service Contract Claims. The Company provided $642,000 for
service contract claims for the three months ended March 31, 1997 as compared
with $197,000 in the first quarter of 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 quarter of
1997 when compared with the first quarter of 1996.
Interest Expense. Interest expense increased from $1.2 million during the
three months ended March 31, 1996 to $2.7 million during the same period in
1997. This increase was primarily 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 $1 million of reorganization expenses in the first quarter of 1997,
primarily consisting of professional fees.
Income Taxes. The Company's effective income tax rate was 0% for the three
months ended March 31, 1997, as compared with an effective income tax rate of
35% for the same period in 1996.
INSTALLMENT CONTRACTS RECEIVABLE
Installment contracts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- -------------
<S> <C> <C>
Gross installment contracts receivable........... $ 387,699 $ 438,998
Unearned finance charges......................... (54,387) (65,258)
--------- ---------
Installment contracts receivable................. $ 333,312 $ 373,740
========= =========
</TABLE>
Changes in gross installment contracts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Balance, beginning of period..................... $ 438,998 $ 198,397
Gross amount of installment contracts accepted... 34,399 108,588
Cash collections on installment contracts
receivable....................................... (40,782) (25,180)
Charge offs...................................... (44,916) (8,054)
--------- ---------
Balance, end of period........................... $ 387,699 $ 273,751
========= =========
</TABLE>
11
<PAGE>
DEALER AND PROVIDER HOLDBACKS
Dealer and Provider holdbacks, net, consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ---------
<S> <C> <C>
Dealer and Provider holdbacks.............. $ 311,852 $ 351,549
Less: Acquisition payments................ (182,258) (192,474)
--------- ---------
Dealer and Provider holdbacks, net......... $ 129,594 $ 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
receivable portfolio and management's judgment are other factors used in
assessing the overall adequacy of the allowance and 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
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
gross installment contracts receivable were approximately 41% and 22% as of
March 31, 1997 and March 31, 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 included within its portfolio will
increase, which will result in a significant increase in non-accrual contracts
as a percentage of the total number of Contracts included within the Company's
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 and provider 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% for Automotive Contracts (averaging 55% for
Automotive Contracts purchased in 1996 and 58% for Automotive Contracts
purchased in the first quarter of 1997) and 60% for Medical Contracts of the
principal amount of the Contract, 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
Providers' 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.
12
<PAGE>
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.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------------------
1997 1996
--------------------------------------
$ %/(1)/ $ %/(1)/
------- -------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Gross installment contracts receivable
charged-off....................................... 44,916 100.0% 8,054 100.0%
Charged against dealer/provider holdbacks.......... 35,933 80.0% 6,443 80.0%
Charged against unearned finance charges........... 7,013 15.6% 1,206 15.0%
Charged against allowance for credit losses........ 1,970 4.4% 405 5.0%
Provision for credit losses........................ 5,423 ---/(2)/ 814 ---/(2)/
MARCH 31,
-----------------
1997 1996
------- -------
As a % of gross installment contracts receivable:
Dealer and provider holdbacks..................................... 80.4% 80.0%
Allowance for credit losses....................................... 20.0% 1.3%
As a % of installment contracts receivable:
Allowance for credit losses....................................... 23.3% 1.6%
Net charge-offs against allowance for credit losses.................. .6% .2%
</TABLE>
- --------------------------------------------
(1) As a percent of gross installment contracts receivable charged-off.
(2) Not meaningful.
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 July 31, 1997, such authorization
has been limited to the payment of expenses and purchases of Contracts in
accordance with a court approved budget.
Although Jayhawk Medical Acceptance Corporation ("JMAC") was not a party
to the Company's Chapter 11 Petition, the Company's 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. Westcott, the Company's Chairman of the Board, Chief
Executive Officer and largest shareholder, provided approximately $8.7 million
of financing to JMAC between January 30, 1997 and May 16, 1997 (including the
proceeds from Mr. Westcott's purchase of 37,500 shares of JMAC's Series A
Redeemable, Convertible Preferred Stock) and, subject to certain limitations,
committed to provide JMAC with up to $1.25 million of additional financing.
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.
13
<PAGE>
Additionally, the majority of the financing provided by Mr. Westcott to JMAC has
been in the form of 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 JMAC's Series A Redeemable, Convertible Preferred Stock and the terms of the
financing provided by Mr. Westcott.
The Company has reached an agreement with its revolving lender and Mr.
Westcott on the terms on which they would support the Company's proposed plan of
reorganization. See the 1996 10-K for further information concerning the
Chapter 11 Proceeding. Under the Company's proposed plan of reorganization, the
Company's liquidity would largely be a function of collections on its existing
Contracts, and at projected levels of collections, the funds available for the
purchase of Contracts would restrict such purchases to a materially lower level
than that which prevailed before the filing of the Chapter 11 Petition.
Additionally, although the Company believes the projected levels of collections
on its Contracts are obtainable, there can be no assurance that such projections
will ultimately be realized. The failure of the Company to realize such
projected levels of collections on its Contracts could have a material adverse
effect on the Company. Furthermore, depending on the quality of the Automotive
Contracts available for purchase by the Company versus the quality of the
Medical Contracts available for purchase by JMAC as well as the Company's
overall assessment of the opportunities in such markets, some or all of such
funds may be used to purchase Medical Contracts.
Upon confirmation of the proposed 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 the such additional financing will be available on terms which
are acceptable to the Company, nor can there be any assurance that the proposed
plan of reorganization will be confirmed. Among other things, neither the
Bankruptcy Court nor the creditors' committee appointed by the Bankruptcy Court
has approved the terms of the proposed plan of reorganization.
SEASONALITY
The Company's operations are affected by higher delinquency rates during
certain holiday periods, as well as higher sales of used vehicles during the
annual period at the beginning of the calendar year when many persons are
receiving state and federal tax refunds.
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 the proposed 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 the
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.
14
<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 February 7, 1997
with respect to (i) the filing by the Company of the Chapter 11 Petition (Item 3
of Form 8-K) and (ii) the election of Carl H. Westcott to the positions of
Chairman of the Board and Chief Executive Officer of the Company (Item 5 of Form
8-K).
15
<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: May 19, 1997 By: /s/ C. Fred Jackson
-------------------------
C. Fred Jackson
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
COMPUTATION OF EARNINGS PER SHARE
Exhibit 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
PRIMARY:
Net Income (loss) $ (5,819,000) $ 2,044,000
============ ============
Shares as adjusted:
Weighted average common shares outstanding 23,923,771 20,497,233
Incremental shares from outstanding stock
options as determined under the treasury
stock method - 287,764
------------ ------------
Shares as adjusted 23,923,771 20,784,997
============ ============
Net income (loss) per share $ (0.24) $ 0.10
============ ============
FULLY DILUTED:
Net Income (loss) $ (5,819,000) $ 2,044,000
============ ============
Shares as adjusted:
Weighted average common shares outstanding 23,923,771 20,497,233
Incremental shares from outstanding stock
options as determined under the treasury
stock method - 301,101
------------ ------------
Shares as adjusted 23,923,771 20,798,334
============ ============
Net income (loss) per share $ (0.24) $ 0.10
============ ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 8,093<F1> 12,209
<SECURITIES> 0 0
<RECEIVABLES> 333,312 230,306
<ALLOWANCES> 77,654 3,594
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 15,703 7,705
<DEPRECIATION> 4,221 1,782
<TOTAL-ASSETS> 279,416 248,273
<CURRENT-LIABILITIES> 31,032 43,813
<BONDS> 81,460 43,205
0 0
0 0
<COMMON> 89,019 47,478
<OTHER-SE> (54,644) 2,958
<TOTAL-LIABILITY-AND-EQUITY> 279,416<F2> 248,273
<SALES> 0 0
<TOTAL-REVENUES> 14,051 10,139
<CGS> 0 0
<TOTAL-COSTS> 10,097 4,769
<OTHER-EXPENSES> 1,642 197
<LOSS-PROVISION> 5,423 814
<INTEREST-EXPENSE> 2,708 1,217
<INCOME-PRETAX> (5,819) 3,142
<INCOME-TAX> 0 1,098
<INCOME-CONTINUING> (5,819) 2,044
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,819) 2,044
<EPS-PRIMARY> .24 .10
<EPS-DILUTED> .24 .10
<FN>
<F1>INCLUDES RESTRICTED CASH OF $ 3,759.
<F2>INCLUDES DEALER AND PROVIDER HOLDBACKS OF $ 129,594.
</FN>
</TABLE>
