<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 September 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 November 12, 1997, the latest practicable date, there were
27,785,326 shares of Common Stock, $.01 par value, outstanding.
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INDEX TO FORM 10-Q
------------------
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets at September 30, 1997 (Unaudited)
and December 31, 1996........................................... 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and 1996 (Unaudited)............ 4
Consolidated Statement of Shareholders' Equity for the nine
months ended September 30, 1997 (Unaudited)..................... 5
Consolidated Statements of Cash Flows for the nine months ended
September 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........................ 10
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 17
SIGNATURES............................................................ 18
- ----------
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)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 2,801 $ 253
Restricted cash 3,746 6,352
Installment contracts receivable 206,469 373,740
Allowance for credit losses (84,870) (73,635)
--------------- ---------------
Installment contracts receivable, net 121,599 300,105
Furniture, fixtures and equipment, net 6,501 10,545
Income taxes receivable -- 1,122
Other assets 3,179 4,190
--------------- ---------------
Total assets $ 137,826 $ 322,567
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 7,863 $ 8,878
Deferred dealer and provider fees, net 1,956 2,841
Dealer and provider holdbacks, net 43,839 159,075
Unearned service contract fees 389 2,942
Notes payable 64,716 108,647
--------------- ---------------
Total liabilities 118,763 282,383
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
September 30, 1997 and December 31, 1996, respectively 240 239
Additional paid-in capital 88,779 88,770
Accumulated deficit (74,956) (48,825)
Total shareholders' equity 14,063 40,184
--------------- ---------------
Total liabilities and shareholders' equity $ 137,826 $ 322,567
=============== ===============
</TABLE>
See notes to consolidated financial statements.
3
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ----------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Finance charges $ 4,093 $ 11,586 $ 19,806 $ 29,824
Dealer and provider fees 2,253 2,227 8,554 5,764
Service contracts 877 935 3,666 1,804
--------------- --------------- --------------- ---------------
7,223 14,748 32,026 37,392
Costs and expenses:
Sales and marketing 1,683 2,402 8,232 6,126
Operating 4,221 4,304 15,809 11,108
Provision for credit losses 68 1,363 18,138 3,175
Provision for service contract claims 175 373 1,188 805
Loss on impairment of fixed assets -- -- 3,960 --
Interest 1,871 1,598 6,634 4,015
--------------- --------------- --------------- ---------------
8,018 10,040 53,961 25,229
--------------- --------------- --------------- ---------------
Income (loss) before reorganization expense (795) 4,708 (21,9355) 12,163
Reorganization expense 2,334 -- 4,196 --
--------------- --------------- --------------- ---------------
Income (loss) before income taxes (3,129) 4,708 (26,131) 12,163
Income taxes -- 1,583 -- 4,132
--------------- --------------- --------------- ---------------
Net income (loss) $ (3,129) $ 3,125 $ (26,131) $ 8,031
=============== =============== =============== ===============
Net income (loss) per share $ (.13) $ .13 $ (1.09) $ .35
=============== =============== =============== ===============
Weighted average number of shares outstanding 23,930 24,191 23,928 22,939
=============== =============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
4
<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 ACCUMULATED
STOCK CAPITAL DEFICIT 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 -- -- (26,131) (26,131)
----------- ----------- ----------- -----------
Balance at September 30, 1997 $ 240 $ 88,779 $ (74,956) $ 14,063
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (26,131) $ 8,031
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,297 1,626
Loss on impairment of fixed assets 3,960 --
Provision for credit losses 18,138 3,175
Deferred income taxes -- 6,255
Changes in operating assets and liabilities:
Installment contracts receivable 7,011 (10,739)
Income taxes receivable 1,122 (4,073)
Other assets 1,011 (1,470)
Accounts payable and accrued liabilities (1,133) (581)
Deferred dealer and provider fees, net (885) 800
----------- -----------
Net cash provided by operating activities 5,390 3,024
Cash flows from investing activities:
Payments to dealers and providers (31,843) (144,140)
Collections of principal on installment contracts receivable 67,529 62,891
Capital expenditures (2,213) (5,285)
Decrease (increase) in restricted cash 2,606 (19,665)
----------- -----------
Net cash provided by (used in) investing activities 36,079 (106,199)
Cash flows from financing activities:
Net borrowings (principal payments) under revolving credit facility (3,700) 6,944
Proceeds from issuance of notes payable to principal shareholder 7,320 --
Proceeds from the issuance of secured notes payable -- 84,231
Principal payments on secured notes payable (47,551) (28,809)
Proceeds from sales of preferred stock of subsidiary 5,000 --
Proceeds from sales of common stock, net 10 41,120
----------- -----------
Net cash provided by (used in) financing activities (38,921) 103,486
----------- -----------
Net increase in cash and cash equivalents 2,548 311
Cash and cash equivalents at the beginning of the period 253 120
----------- -----------
Cash and cash equivalents at the end of period $ 2,801 $ 431
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 4,663 $ 3,408
=========== ===========
Cash paid for income taxes $ -- $ 1,950
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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 nine month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending 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 24,190,946 for the three months ended September 30, 1997 and 1996, and
23,927,771 and 22,938,956 for the nine months ended September 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
managed 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 was required to obtain Bankruptcy Court
authorization for its use of such lenders' collateral, including cash
collateral. Although the Company received authorization to use a portion of its
revolving lender's cash collateral, such authorization was limited to the
payment of expenses and purchase of automobile installment sales contracts in
accordance with a court approved budget.
On October 10, 1997, the Bankruptcy Court entered an order, effective
October 21, 1997, confirming the Company's plan of reorganization (the "Plan").
Under the terms of the Plan, all current and future obligations to automobile
dealers are to be fixed at either a settlement offer contained in the plan or an
amount to be subsequently adjudicated by the Bankruptcy Court. The Company will
make payments to settling dealers aggregating approximately $5.6 million in
quarterly installments over two years commencing March 1998. In addition, non-
accrual installment contracts receivable with principal balances totaling
approximately $100 million, which contracts have previously been charged off for
financial statement purposes, are to be transferred to a trust benefiting the
settling dealers. Dealers to which the Company made settlement offers totaling
approximately $2.7 million may reject such settlements, and the value, if any,
of related claims will be determined by the Bankruptcy Court. Obligations to
unsecured trade creditors totaling approximately $4.1 million at September 30,
1997 are to be paid in full, plus interest, in eight quarterly installments
commencing December 1997.
As provided in the Plan, the Company also entered into a new agreement with
its revolving lender. The agreement grants the revolving lender a security
interest in substantially all of the Company's assets but removes restrictions
on the use
7
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - BANKRUPTCY PROCEEDINGS (CONTINUED)
of such collateral provided no default under the agreement exists. The
agreement provides for monthly principal payments of $1 million to $3.5 million,
plus interest, through September 1998. All other secured lenders are to be
repaid in accordance with the terms of existing agreements.
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 September 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 $13.5
million principal amount of indebtedness outstanding under the credit facility.
Notes payable to shareholders at September 30, 1997 totaled $20.8 million.
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
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.
The Plan provides for the exchange of the JMAC preferred stock for the
number of shares of the Company's common stock equal to the amount derived by
dividing (i) the Liquidation Value by (ii) an amount equal to 75% of the
8
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - PREFERRED STOCK OF SUBSIDIARY (CONTINUED)
average of the last reported daily sale price of the common stock beginning with
the twentieth trading day preceding the date the Plan was confirmed and
continuing for a period ending on the twentieth trading date following the date
the Plan was confirmed. On November 12, 1997, the Company issued 3,855,555
shares of common stock in exchange for the JMAC preferred stock.
NOTE 6 - IMPAIRMENT OF FIXED ASSETS
As a result of the Chapter 11 Proceeding and the absence of available financing,
the Company has discontinued its purchases of installment sale contracts from
automobile dealers ("Automotive Contracts") and 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 were reduced, and
the related loss of $3,960,000 was included in the results of operations for the
second quarter.
NOTE 7 - REORGANIZATION EXPENSE
Reorganization expense consists primarily of professional fees incurred in
connection with the Chapter 11 Proceeding.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RECENT DEVELOPMENTS
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"). Prior to
confirmation of its plan of reorganization in October 1997, the Company managed
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 was required to obtain Bankruptcy Court authorization for
its use of such lenders' collateral, including cash collateral. Although the
Company received authorization to use a portion of its revolving lender's cash
collateral, such authorization was 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. On October 10, 1997, the Bankruptcy Court entered an order
confirming the Company's plan of reorganization (the "Plan"). Since that date,
the Company has operated its business in accordance with the Plan. The Plan and
the related disclosure statement are filed as exhibits to the Company's Current
Report on Form 8-K, dated October 23, 1997.
The Company does not presently intend to resume the purchase of Automotive
Contracts. The Company currently intends to focus on increasing Jayhawk Medical
Acceptance Corporation's ("JMAC") elective health care procedure financing
business, which the Company believes is currently less competitive than vehicle
contract purchasing and will generate installment contracts for purchase from
borrowers with substantially better credit than it has purchased with respect to
vehicles. The Company may also examine other specialty finance areas that it
believes would generate contracts for purchase meeting generally the criteria of
the elective medical procedure contracts JMAC is currently purchasing.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
TOTAL REVENUE. Total revenue decreased from $14.7 million for the three
months ended September 30, 1996 to $7.2 million for the same period in 1997, a
decrease of $7.5 million or 51.0%. The decrease was due to an $8.9 million, or
60.3%, decrease in revenues attributable to the Company's automobile finance
program, offset by $1.4 million of revenues attributable to JMAC's 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 September 30,
1997, had enrolled 1,741 health care providers ("Providers") into its elective
health care program, purchased 6,917 installment contracts from Providers
("Medical Contracts," and together with Automotive Contracts, "Contracts") and
financed $27.7 million of elective health care procedures. Revenues recognized
by JMAC during the third quarter of 1996 were immaterial ($39,000). JMAC
incurred losses of approximately $614,000 in the three months ended September
30, 1997, and the Company anticipates that JMAC will continue to incur losses at
least through the fourth quarter of 1997. The decrease in total revenue
reflects decreased finance charges and service contract revenue, offset by
increased dealer and provider fees.
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 $331.8 million at
September 30, 1996 to $121.6 million at September 30, 1997, a decrease of $210.2
million or 63.4%. The decrease was attributable to a decrease in automobile
receivables of $230.4 million, offset by $20.2 million of medical receivables.
Finance charges from Automotive Contracts decreased from $11.6 million for the
three months ended September 30, 1996 to $4.1 million for the same period in
1997, a decrease of $7.5 million or 64.7%. Finance charges from Medical
Contracts were $496,000 for the three months ended September 30, 1997.
The average annualized yield on the Company's automobile finance portfolio
decreased from 15% to 6% for the three months ended September 30, 1996 and
September 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
10
<PAGE>
Automotive Contracts included within the Company's portfolio during the third
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 third quarter of 1997 when compared to the third quarter of 1996. Non-
accrual Automotive Contracts as a percentage of the total number of Automotive
Contracts in the Company's portfolio increased from 29% at September 30, 1996 to
58% at September 30, 1997. Due to the discontinuation 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 September 30,
1997, the non-accrual Medical Contracts as a percentage of the total number of
Medical Contracts included in the Company's portfolio was 22.8%. 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 $2,227,000 for the three months
ended September 30, 1996 to $2,253,000 for the three months ended September 30,
1997, an increase of $26,000 or 1.2%. The increase was the result of $873,000
in fees from Providers related to Medical Contracts purchased in JMAC's elective
health care program, offset by an $847,000 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 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 $935,000 for the three months ended September
30, 1996 as compared with $877,000 for the same period in 1997, a decrease of
$58,000 or 6.2%. The decrease in service contract revenue is primarily due to
the reduced volume of Automotive Contract purchases. Service contract revenue
is recognized over the term of the service contract and primarily relates to
service contracts sold prior to 1997. As a result of the discontinuation of
Automotive Contract purchases, 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 discontinuation of Automotive Contract purchases by the
Company, the Company anticipates reporting significantly decreased finance
charges, dealer fees and service contract revenue in the foreseeable future.
See "- Recent Developments."
SALES AND MARKETING. Sales and marketing expenses decreased from $2.4
million for the three months ended September 30, 1996 to $1.7 million for the
same period in 1997, but increased as a percentage of total revenue from 16.3%
for the three months ended September 30, 1996 to 23.3% for the three months
ended September 30, 1997. The dollar decrease in sales and marketing expenses
was due to a $1.4 million, or 60.9%, decrease in expenses related to the
Company's automobile finance program, offset by a $.7 million increase in
expenses attributable to JMAC's elective health care program. The increase in
sales and marketing expenses as a percentage of total revenue is primarily
related to the Company's efforts to expand JMAC's elective health care network.
Sales and marketing expenses of JMAC's elective health care program were 55.3%
of related revenues for the quarter ended September 30, 1997. Sales and
marketing expenses for the Company's automobile finance program for the three
months ended September 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 15% of
revenues attributable to the Company's automobile finance program for both the
periods ended September 30, 1996 and September 30, 1997. See "- Recent
Developments."
OPERATING EXPENSES. Operating expenses decreased from $4.3 million for the
three months ended September 30, 1996 to $4.2 million for the same period in
1997, a decrease of $.1 million or 1.9%, but increased as a percentage of total
revenue from 29% for the third quarter of 1996 to 58% for the third quarter of
1997. The dollar decrease in operating expenses was due to a decrease of $.5
million, or 12.5%, in operating expenses attributable to the Company's
automobile finance program offset by a $.4 million increase in 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 reduction of revenue as a result of the higher percentage of non-accrual
Contracts included within the Company's portfolio during the third quarter of
1997 when compared with the third quarter of 1996.
PROVISION FOR CREDIT LOSSES. The amount provided for credit losses
decreased from $1.4 million for the three months ended September 30, 1996 to $.1
million for the same period in 1997. The decrease in the provision for credit
losses
11
<PAGE>
is primarily due to the substantial elimination of new Automotive Contract
purchases in 1997, the maturity of the Company's portfolio of Automotive
Contracts, and the level of allowances for credit losses established in prior
periods. See "--Credit Loss Policy".
PROVISION FOR SERVICE CONTRACT CLAIMS. The Company provided $175,000 for
service contract claims for the three months ended September 30, 1997 as
compared to $373,000 for the same period in 1996. The decrease in the provision
for service contract claims is primarily due to the substantial elimination of
new Automotive Contract purchases and the contractual expiration of service
contracts on existing loans.
INTEREST EXPENSE. Interest expense increased from $1.6 million during the
third quarter of 1996 to $1.9 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 $2.3 million of reorganization expenses in the third 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 September 30, 1997, as compared with an effective
income tax rate of 34% for the same period in 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
TOTAL REVENUE. Total revenue decreased from $37.4 million for the nine
months ended September 30, 1996 to $32.0 million for the same period in 1997, a
decrease of $5.4 million or 14.4%. The decrease was due to a $9.9 million
decrease in revenues attributable to the Company's automobile finance program,
offset by $4.5 million of revenues attributable to JMAC's elective health care
program. The decrease in total revenue reflects decreased finance charges,
offset by increased dealer and provider fees and increased service contract
revenue.
Dealer and provider fees increased from $5.8 million for the nine months
ended September 30, 1996 to $8.5 million for the nine months ended September 30,
1997, an increase of $2.8 million or 48.4%. The increase was the result of $3.4
million in fees from Providers related to Medical Contracts purchased in JMAC's
elective health care program and a $.6 million decrease in fees from Dealers.
Service contract revenue was $1.8 million for the nine months ended
September 30, 1996 as compared with $3.7 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 $29.8 million for the nine months ended
September 30, 1996 to $19.8 million for the same period in 1997, a decrease of
$10.0 million or 33.6%. The decrease was due to a $11.1 million decrease in
finance charges from Automotive Contracts, offset by $1.1 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 $6.1
million for the nine months ended September 30, 1996 to $8.2 million for the
same period in 1997 and increased as a percentage of total revenue from 16.4%
for the nine months ended September 30, 1996 to 25.7% for the nine months ended
September 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 $4.1 million of sales and marketing expenses for the nine
months ended September 30, 1997 (compared to $388,000 for the same period in
1996). Sales and marketing expenses of JMAC's elective health care program were
91.6% of revenues attributable to the elective health care program for the nine
months ended September 30, 1997. Sales and marketing expenses for the Company's
automobile finance program for the nine months ended September 30, 1997
primarily represent previously paid sales commissions which are amortized for
financial statement purposes over the period
12
<PAGE>
of the related enrollment fee revenues. Such expenses approximated 14.9% and
15.3% of revenues attributable to the Company's automobile finance program for
the nine months ended September 30, 1997 and September 30, 1996, respectively.
See "- Recent Developments."
OPERATING EXPENSES. Operating expenses increased from $11.1 million for
the nine months ended September 30, 1996 to $15.8 million for the same period in
1997, an increase of $4.7 million, or 42.3%, and increased as a percentage of
total revenue from 29.7% for the first nine months of 1996 to 49.4% for the
first nine months of 1997. The dollar increase in operating expenses was due to
$2.6 million of operating expenses attributable to JMAC's elective health care
program and a $2.1 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 nine months of 1997 when compared with the first nine 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 $3.2 million for the nine months ended September 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 during the first nine months of 1997
compared to the same period in 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."
PROVISION FOR SERVICE CONTRACT CLAIMS. The Company provided $1.2 million
for service contract claims for the nine months ended September 30, 1997 as
compared to $.8 million for the nine months ended September 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 nine 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 $4.0 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 $4.0 million during the
first nine months of 1996 to $6.6 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 nine
months ended September 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>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Gross installment contracts receivable $ 234,748 $ 438,998
Unearned finance charges (28,279) (65,258)
------------- -------------
Installment contracts receivable $ 206,469 $ 373,740
============= =============
</TABLE>
13
<PAGE>
Changes in gross installment contracts receivable are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 311,653 $ 335,877 $ 438,998 $ 198,397
Gross amount of installment contracts accepted 4,123 109,158 42,326 323,163
Cash collections on installment contracts receivable (27,871) (32,214) (102,410) (88,218)
Charge offs (53,157) (22,505) (144,166) (43,026)
------------ ------------ ------------ ------------
Balance, end of period $ 234,748 $ 390,316 $ 234,748 $ 390,316
============ ============ ============ ============
</TABLE>
The increase in charge-offs between the three and nine months ended
September 30, 1997 and the three and nine months ended September 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>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Dealer and provider holdbacks, net $ 190,712 $ 351,549
Less: Acquisition payments (146,873) (192,474)
------------ ------------
Dealer and provider holdbacks, net $ 43,839 $ 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 total dollar amount of non-accrual contracts as a percentage of installment
contracts receivable was approximately 63% and 29% as of September 30, 1997 and
September 30, 1996, respectively. Due to the discontinuation 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%
14
<PAGE>
of principal for Automotive Contracts (averaging 55% for Automotive Contracts
purchased in 1996 and 58% for Automotive Contracts purchased in the first nine
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" 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross installment contracts receivable charged off........... $ 53,157 $ 22,505 $144,166 $ 43,026
Charged against dealer holdbacks............................ 42,526 18,004 115,332 34,421
Charged against unearned finance charges.................... 7,852 3,771 21,340 6,864
Charged against allowance for credit losses................. 2,779 730 7,494 1,741
Provision for credit losses.................................. 68 1,363 18,138 3,175
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
As a % of gross installment contracts receivable:
Dealer and provider holdbacks, net 18.7% 38.0%
Allowance for credit losses 36.2% 1.6%
As a % of installment contracts receivable:
Allowance for credit losses 41.1% 1.9%
Net charge-offs against allowance for credit losses 3.6% 0.5%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Plan was confirmed on October 10, 1997. The Company will rely upon
collections on its existing Automotive Contracts for liquidity to meet Plan
obligations. At projected levels of collections, the funds available for
purposes other than meeting Plan obligations would be very limited.
Additionally, although the Company believes the projected levels of collections
on its Automotive Contracts are attainable, there can be no assurance that such
projections will ultimately be realized, and any failure to realize the
projected level of collections could have a material adverse effect on the
Company. The Plan generally requires the Company to make monthly payments to
various creditors aggregating approximately $13.4 million in the fourth quarter
of 1997 and $11.9 million, $11.7 million, and $10.8 million in the first,
second, and third quarters of 1998, respectively, at which time the Company's
former revolving credit lender will be paid in full. Thereafter, the Plan
provides for quarterly payments to creditors of approximately $2.5 million
through December 1999. See Note 3 of the Notes to Consolidated Financial
Statements of the Company included herein.
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 (the "JMAC Loan") prior to the
Company's filing of the Chapter 11 Petition, and the Bankruptcy Court 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
15
<PAGE>
approximately $12.3 million of financing to JMAC between January 30, 1997 and
August 12, 1997 (including the $5 million proceeds from Mr. Westcott's purchase
of 50,000 shares of JMAC's Series A Redeemable, Convertible Preferred Stock (the
"JMAC Preferred Stock")). Additionally, at the request of JMAC's revolving
credit lender, Mr. Westcott purchased the revolving credit promissory note
evidencing the $13.5 million principal amount of indebtedness outstanding under
the facility. 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.
As provided in the Plan, on November 12, 1997 Mr. Westcott exchanged the
JMAC Preferred Stock for 3,855,555 shares of the Company's Common Stock.
Additionally, on November 12, 1997, Mr. Westcott agreed to consolidate and
extend the maturities of the notes evidencing his loans to JMAC. Accordingly,
these loans are now evidenced by two notes. The first note is in the principal
amount of $7.1 million, bears interest at the prime rate and is payable when,
and to the extent, any proceeds are received by JMAC with respect to the JMAC
Loan; provided that any unpaid principal and interest is due in November 1999.
The second note is in the principal amount of $13.7 million, bears interest at
the prime rate and is due in November 1999. Both notes continue to be secured
by all of the assets of JMAC, and JMAC continues to owe Mr. Westcott
approximately $1.0 million of accrued interest that is payable upon demand.
As the Plan has been confirmed, the Company intends to seek new sources of
debt and equity financing to support the growth of 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 elective health care
procedure financing 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 the Plan 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.
16
<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 August
22, 1997 in accordance with Item 5. Other Information of
Form 8-K.
The Company filed a Current Report on Form 8-K dated October
23, 1997 in accordance with Item 3. Bankruptcy or
Receivership of Form 8-K.
17
<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: November 14, 1997 By: /s/ Philip E. Falcosky
------------------------------------------
Philip E. Falcosky
Controller and Chief Accounting Officer
18
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
19
<PAGE>
COMPUTATION OF EARNINGS PER SHARE
Exhibit 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ----------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
PRIMARY:
Net income (loss) $ (3,129,000) $ 3,125,000 $ (26,131,000) $ 8,031,000
=============== =============== =============== ===============
Shares as adjusted:
Weighted average common shares outstanding 23,929,771 23,871,409 23,927,771 22,577,376
Incremental shares from outstanding stock
options as determined under the treasury
stock method -- 319,537 -- 361,580
--------------- --------------- --------------- ---------------
Shares as adjusted 23,929,771 24,190,946 23,927,771 22,938,956
=============== =============== =============== ===============
Net income (loss) per share $ (.13) $ .13 $ (1.09) $ .35
=============== =============== =============== ===============
FULLY DILUTED:
Net income (loss) $ (3,129,000) $ 3,125,000 $ (26,131,000) $ 8,031,000
=============== =============== =============== ===============
Shares as adjusted:
Weighted average common shares outstanding 23,929,771 23,871,409 23,927,771 22,577,376
Incremental shares from outstanding stock
options as determined under the treasury
stock method -- 393,088 -- 420,860
--------------- --------------- --------------- ---------------
Shares as adjusted 23,929,771 24,264,497 23,927,771 22,998,236
=============== =============== =============== ===============
Net income (loss) per share $ (.13) $ .13 $ (1.09) $ .35
=============== =============== =============== ===============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,547
<SECURITIES> 0
<RECEIVABLES> 206,469
<ALLOWANCES> 84,870
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,110
<DEPRECIATION> 5,609
<TOTAL-ASSETS> 137,826
<CURRENT-LIABILITIES> 54,047
<BONDS> 5,000
0
0
<COMMON> 240
<OTHER-SE> 13,823
<TOTAL-LIABILITY-AND-EQUITY> 137,826
<SALES> 0
<TOTAL-REVENUES> 32,026
<CGS> 0
<TOTAL-COSTS> 29,189
<OTHER-EXPENSES> 4,196
<LOSS-PROVISION> 18,138
<INTEREST-EXPENSE> 6,634
<INCOME-PRETAX> (26,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,131)
<EPS-PRIMARY> (1.09)
<EPS-DILUTED> (1.09)
</TABLE>
