<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 0-26410
JAYHAWK ACCEPTANCE CORPORATION
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-2486444
- -------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
BRYAN TOWER
2001 BRYAN STREET, SUITE 600, DALLAS, TX 75201
- ----------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 754-1000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
At August 13, 1998, the latest practicable date, there were
27,785,326 shares of Common Stock, $.01 par value, outstanding.
Page 1 of 20
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets at June 30, 1998
(Unaudited) and December 31, 1997................................. 3
Consolidated Statements of Operations for the three and six months
ended June 30, 1998 and 1997 (Unaudited).......................... 4
Consolidated Statement of Shareholders' Equity for the six months
ended June 30, 1998 (Unaudited)................................... 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (Unaudited)................................ 6
Notes to Consolidated Financial Statements (Unaudited)............ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 17
ITEM 5. OTHER INFORMATION.............................................. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 18
SIGNATURES.............................................................. 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
-------------------- --------------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 1,195 $ 1,905
Restricted cash 21 1,426
Medical contracts receivable, net 13,543 13,085
Automotive contracts receivable, net 27,597 47,525
Furniture, fixtures and equipment, net 4,318 5,384
Other assets 1,339 1,361
-------------------- --------------------
Total assets $ 48,013 $ 70,686
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 4,999 $ 5,935
Dealer payable 8,189 8,436
Deferred provider fees, net 1,005 1,027
Unearned service contract fees - 39
Notes payable (including $21,240 and $20,840 to the principal
shareholder at June 30, 1998 and December 31, 1997, respectively) 29,599 51,072
-------------------- --------------------
Total liabilities 43,792 66,509
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value; 40,000,000 shares authorized;
27,785,326 shares issued and outstanding at June 30, 1998
and December 31, 1997 278 278
Additional paid-in capital 93,722 93,722
Accumulated deficit (89,779) (89,823)
-------------------- --------------------
Total shareholders' equity 4,221 4,177
-------------------- --------------------
Total liabilities and shareholders' equity $ 48,013 $ 70,686
==================== ====================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------- ------------------------------------
1998 1997 1998 1997
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Finance charges $ 3,361 $ 6,510 $ 7,739 $ 15,713
Dealer and provider fees 981 3,002 2,006 6,301
Service contracts - 1,240 42 2,789
---------------- ----------------- --------------- ----------------
4,342 10,752 9,787 24,803
Costs and expenses:
Sales and marketing 825 2,777 1,574 6,549
Operating 2,881 5,263 6,085 11,588
Provision for credit losses - 12,647 - 18,070
Provision for service contract claims - 371 - 1,013
Loss on impairment of fixed assets - 3,960 - 3,960
Interest 908 2,055 2,084 4,763
---------------- ----------------- --------------- ----------------
4,614 27,073 9,743 45,943
---------------- ----------------- --------------- ----------------
Income (loss) before reorganization expense (272) (16,321) 44 (21,140)
Reorganization expense - 862 - 1,862
---------------- ----------------- --------------- ----------------
Income (loss) before income taxes (272) (17,183) 44 (23,002)
Income taxes - - - -
---------------- ----------------- --------------- ----------------
Net income (loss) $ (272) $(17,183) $ 44 $(23,002)
================ ================= =============== ================
Basic net income (loss) per share $ (.01) $ (.72) $ .00 $ (.96)
================ ================= =============== ================
Diluted net income (loss) per share $ (.01) $ (.72) $ .00 $ (.96)
================ ================= =============== ================
Weighted average number of shares outstanding 27,785 23, 930 27,785 23, 927
================ ================= =============== ================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
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, 1997 $278 $93,722 $(89,823) $4,177
Net income - - 44 44
--------------- ---------------- ---------------- ----------------
Balance at June 30, 1998 $278 $93,722 $(89,779) $4,221
=============== ================ ================ ================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------------
1998 1997
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 44 $(23,002)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,014 1,718
Loss on sale/write down of fixed assets 52 3,960
Provision for credit losses - 18,070
Changes in operating assets and liabilities:
Installment contracts receivable (4,046) 2,863
Income taxes receivable - 1,122
Other assets 22 697
Dealer payable (247) -
Accounts payable and accrued liabilities (912) (2,163)
Deferred dealer and provider fees, net (22) (493)
------------------- ------------------
Net cash provided by (used in) operating activities (4,095) 2,772
Cash flows from investing activities:
Payments to dealers and providers (5,260) (32,352)
Collections of principal on installment contracts receivable 28,713 55,489
Capital expenditures - (2,116)
Decrease (increase) in restricted cash 1,405 (2,332)
------------------- ------------------
Net cash provided by investing activities 24,858 18,689
Cash flows from financing activities:
Net borrowings (principal payments) under revolving credit facility (18,000) (3,700)
Proceeds from issuance of notes payable to principal shareholder 400 7,320
Principal payments on secured notes payable (3,873) (26,292)
Proceeds from sales of preferred stock of subsidiary - 5,000
Proceeds from sales of common stock, net - 10
------------------- ------------------
Net cash provided by (used in) financing activities (21,473) (17,662)
------------------- ------------------
Net increase (decrease) in cash and cash equivalents (710) 3,779
Cash and cash equivalents at the beginning of the period 1,905 253
------------------- ------------------
Cash and cash equivalents at the end of period $ 1,195 $ 4,052
=================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,652 $ 1,559
=================== ==================
Cash paid for income taxes $ - $ -
=================== ==================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Jayhawk
Acceptance Corporation and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, Jayhawk Services, Inc., Jayhawk
Funding Trust I ("Funding Trust"), and Jayhawk Medical Acceptance Corporation
("JMAC"). All significant intercompany balances and transactions have been
eliminated upon consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. 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, 1997, filed with the Securities and
Exchange Commission on April 15, 1998 (the "1997 10-K").
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. ("SFAS") 130, "Reporting Comprehensive
Income", which is effective for fiscal years beginning after December 15, 1997.
The Company adopted SFAS 130 on January 1, 1998. For the three and six month
periods ended June 30, 1998 and 1997, there was no difference between net income
as reported by the Company and comprehensive income as required to be reported
by SFAS 130.
7
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------- -------------------------------------
1998 1997 1998 1997
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (272,000) $(17,183,000) $ 44,000 $(23,002,000)
================ ================= ================ =================
Denominator:
Denominator for basic earnings per
share - weighted average shares 27,785,326 23,929,771 27,785,326 23,926,771
Effect of dilutive securities:
Stock options - - - -
---------------- ----------------- ---------------- -----------------
Dilutive potential common shares - - - -
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversions 27,785,326 23,929,771 27,785,326 23,926,771
================ ================= ================ =================
Basic net income (loss) per share $ (0.01) $ (0.72) $ 0.00 $ (0.96)
================ ================= ================ =================
Diluted net income (loss) per share $ (0.01) $ (0.72) $ 0.00 $ (0.96)
================ ================= ================ =================
</TABLE>
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
TOTAL REVENUE. Total revenue decreased from $10.8 million for the three
months ended June 30, 1997 to $4.3 million for the same period in 1998, a
decrease of $6.5 million or 60.2%. The decrease was due to a $6.3 million, or
69.6%, decrease in revenues attributable to the Company's automobile finance
program and a $0.2 million, or 11.8%, decrease in revenues attributable to
Jayhawk Medical Acceptance Corporation's ("JMAC") elective health care program.
JMAC incurred losses of approximately $0.5 million in the three months ended
June 30, 1998, and the Company anticipates that JMAC will continue to incur
losses until JMAC obtains additional financing. The decrease in total revenue
reflects decreased finance charges, dealer and provider fees, and service
contract revenue.
The decrease in finance charges resulted primarily from the increased
number of non-accrual automotive installment sale contracts ("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 Automotive Contracts receivable, net of allowance for
credit losses, decreased from $183.5 million at June 30, 1997 to $27.6 million
at June 30, 1998, a decrease of $155.9 million or 85.0%. Finance charges from
Automotive Contracts decreased from $6.1 million for the three months ended June
30, 1997 to $2.7 million for the same period in 1998, a decrease of $3.4 million
or 55.7%. The Company's medical contracts receivable, net of allowance for
credit losses, increased from $12.4 million at June 30, 1997 to $13.5 million at
June 30, 1998, and finance charges from medical procedure installment sale
contracts ("Medical Contracts" and, together with Automotive Contracts,
"Contracts") increased from $0.4 million during the second quarter of 1997 to
$0.6 million for the same period in 1998.
The average annualized yield on the Company's automobile finance portfolio
increased from 8.5% to 12.4% for the three months ended June 30, 1997 and June
30, 1998, respectively. The Company has not purchased any new Automotive
Contracts during 1998. The yield on the Company's automobile finance portfolio
for the three months ended June 30, 1998 was impacted by the amount of actual
collections compared to the estimated future collections used by the Company in
establishing the carrying value of the portfolio at December 31, 1997. See "--
Credit Loss Policy" and the 1997 10-K. The Company recognizes cash basis income
on non-accrual Automotive Contracts provided the estimated net realizable value
of the portfolio continues to equal or exceed the carrying value. During the
three months ended June 30, 1998, actual collections were less than the
estimated future collections used in the December 31, 1997 valuation.
Non-accrual Automotive Contracts as a percentage of the total number of
active (consisting of contracts that have not been charged off for financial
statement purposes) Automotive Contracts in the Company's portfolio increased
from 28.8% at June 30, 1997 to 63.2% at June 30, 1998. Due to the
discontinuation of Automotive Contract purchases, the average age of the
Automotive Contracts included in the Company's portfolio will increase, which
the Company anticipates will result in an increase in non-accrual Automotive
Contracts as a percentage of the total number of Automotive Contracts included
in the Company's portfolio. At June 30, 1998, the non-accrual Medical Contracts
as a percentage of the total number of Medical Contracts included in the
Company's portfolio was 9.4% as compared to 16.2% at June 30, 1997. This
decrease is due primarily to the refinement of underwriting standards for
Medical Contracts purchased during the second half of 1997 and the charge-off in
1998 of non-accrual Medical Contracts originated during 1997. 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 also increase.
Dealer and provider fees decreased from $3.0 million for the three months
ended June 30, 1997 to $1.0 million for the three months ended June 30, 1998, a
decrease of $2.0 million or 66.7%. As no new automotive dealers ("Dealers") are
enrolling in the Company's automobile finance program, no dealer fees were
recognized during the three months ended June 30, 1998, resulting in a $1.7
million decrease in revenues as compared to the same period in 1997. Fees from
providers related to Medical Contracts purchased in JMAC's elective health care
program approximated $1.0 million for the three
9
<PAGE>
months ended June 30, 1998 compared to $1.3 million for the same period in 1997,
a decrease of $0.3 million or 23.1%. This decrease is the result of lower
volumes of new provider enrollments and new loan originations in the second
quarter of 1998 compared to the same period in 1997.
Since the Company has discontinued new Automotive Contract purchases and
because substantially all service contracts related to existing loans had
expired by March 31, 1998, the Company recognized no service contract revenue in
the second quarter of 1998. Service contract revenue was $1.2 million for the
same period in 1997.
SALES AND MARKETING. Sales and marketing expenses decreased from $2.8
million for the three months ended June 30, 1997 to $0.8 million for the same
period in 1998 and decreased as a percentage of total revenue from 25.8% for the
three months ended June 30, 1997 to 19.0% for the three months ended June 30,
1998. No sales and marketing expenses related to the Company's automobile
finance program were incurred during the three months ended June 30, 1998,
resulting in a $1.3 million decrease in expenses when compared to the same
period in 1997. Sales and marketing expenses related to JMAC's elective health
care program decreased from $1.5 million for the three months ended June 30,
1997 to $0.8 million for the same period in 1998, a decrease of $0.7 million or
46.7%, and decreased as a percentage of related revenues from 85.6% for the
second quarter of 1997 to 51.8% for the second quarter of 1998.
OPERATING EXPENSES. Operating expenses decreased from $5.3 million for the
three months ended June 30, 1997 to $2.9 million for the same period in 1998, a
decrease of $2.3 million or 43.4%, but increased as a percentage of total
revenue from 48.9% for the second quarter of 1997 to 66.4% for the second
quarter of 1998. The dollar decrease in operating expenses was due to a
decrease of $2.4 million, or 53.7%, 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 reduction of
revenue as a result of the overall reduction in the Company's portfolio of
Automotive Contracts.
PROVISION FOR CREDIT LOSSES. The amount provided for credit losses
decreased from $12.6 million for the three months ended June 30, 1997 to $0.0
million for the same period in 1998. The decrease in the provision for credit
losses 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. As substantially all service
contracts have expired and existing accruals for estimated claims are considered
adequate, no provision for service contract claims was included in the results
of operations for the three months ended June 30, 1998. The Company provided
$0.4 million for service contract claims for the same period in 1997.
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, the Company recognized a loss of $4.0 million
during the second quarter of 1997 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 decreased from $2.1 million during the
second quarter of 1997 to $0.9 million during the same period in 1998. The
decrease was due primarily to the retirement of debt secured by the Company's
portfolio of Automotive Contracts.
REORGANIZATION EXPENSES. Reorganization expenses relate to costs incurred
by the Company in connection with its filing of a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code on February 7,
1997. The Company incurred $0.9 million of reorganization expenses in the
second quarter of 1997. The Company's Plan of Reorganization ("Plan") was
confirmed effective October 21, 1997, and no further reorganization expenses
were incurred during 1998.
INCOME TAXES. Due to net operating losses in 1997 and the availability of
net operating loss carryforwards in 1998, the Company's effective income tax
rate was 0% for the three-month periods ended June 30, 1998 and June 30, 1997.
10
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
TOTAL REVENUE. Total revenue decreased from $24.8 million for the six
months ended June 30, 1997 to $9.8 million for the same period in 1998, a
decrease of $15.0 million or 60.5%. The decrease was due to a $15.1 million
decrease in revenues attributable to the Company's automobile finance program
offset by a $0.1 million increase in revenues attributable to JMAC's elective
health care program. The decrease in total revenues reflects decreased finance
charges, dealer and provider fees, and service contract revenue.
Finance charges decreased from $15.7 million for the six months ended June
30, 1997 to $7.7 million for the same period in 1998, a decrease of $8.0 million
or 51.0%. The decrease was due to an $8.6 million decrease in finance charges
from Automotive Contracts offset by a $0.6 million increase in 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.
Dealer and provider fees decreased from $6.3 million for the six months
ended June 30, 1997 to $2.0 million for the six months ended June 30, 1998, a
decrease of $4.3 million or 68.3%. As no new Dealers are enrolling in the
Company's automobile finance program, no dealer fees were recognized during the
six months ended June 30, 1998, resulting in a $3.7 million decrease in revenues
as compared to the same period in 1997. Fees from providers related to Medical
Contracts purchased in JMAC's elective health care program, approximated $2.0
million for the six months ended June 30, 1998 compared to $2.6 million for the
same period in 1997, a decrease of $0.6 million or 23.1%. This decrease is the
result of lower volumes of new provider enrollments and new loan originations in
the second quarter of 1998 compared to the same period in 1997.
Service contract revenue decreased from $2.8 million for the six months
ended June 30, 1997 to $42,000 for the same period in 1998 due to the
discontinuation of new Automotive Contract purchases and the expiration of
service contracts related to existing loans.
SALES AND MARKETING. Sales and marketing expenses decreased from $6.5
million for the six months ended June 30, 1997 to $1.6 million for the same
period in 1998 and decreased as a percentage of total revenue from 26.4% for the
six months ended June 30, 1997 to 16.1% for the six months ended June 30, 1998.
No sales and marketing expenses related to the Company's automobile finance
program were incurred during the six months ended June 30, 1998, resulting in a
$3.2 million decrease in expenses when compared to the same period in 1997.
Sales and marketing expenses related to JMAC's elective health care program
decreased from $3.4 million for the six months ended June 30, 1997 to $1.6
million for the same period in 1998, a decrease of $1.8 million or 52.9%, and
decreased as a percentage of related revenues from 107.4% for the first six
months of 1997 to 49.6% for the same period in 1998. This decrease is due
largely to the curtailment of marketing efforts to providers resulting from
decreased liquidity available to JMAC after the filing of the Company's Chapter
11 petition. See "--Liquidity and Capital Resources".
OPERATING EXPENSES. Operating expenses decreased from $11.6 million for
the six months ended June 30, 1997 to $6.1 million for the same period in 1998,
a decrease of $5.5 million, or 47.4%, but increased as a percentage of total
revenue from 46.7% for the first six months of 1997 to 62.2% for the first six
months of 1998. The dollar decrease in operating expenses was due to a $5.1
million, or 52.9%, decrease in operating expenses attributable to the Company's
automobile finance program and a $0.4 million, or 20.3%, decrease 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 overall reduction in the Company's
portfolio of Automotive Contracts.
PROVISION FOR CREDIT LOSSES. The amount provided for credit losses
decreased from $18.1 million for the six months ended June 30, 1997 to $0.0
million for the same period in 1998. The decrease in the provision for credit
losses 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".
11
<PAGE>
PROVISION FOR SERVICE CONTRACT CLAIMS. As substantially all service
contracts have expired and existing accruals for estimated claims are considered
adequate, no provision for service contract claims was included in the results
of operations for the six months ended June 30, 1998. The Company provided $1.0
million for service contract claims for the same period in 1997.
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 decreased from $4.8 million during the
first six months of 1997 to $2.1 million during the same period in 1998. The
decrease was due primarily to the retirement of debt secured by the Company's
portfolio of Automotive Contracts.
REORGANIZATION EXPENSES. Reorganization expenses relate to costs incurred
by the Company in connection with its filing of a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code on February 7,
1997. The Company incurred $1.9 million of reorganization expenses in the six
months ended June 30, 1997. The Plan was confirmed effective October 21, 1997,
and no further reorganization expenses were incurred during 1998.
INCOME TAXES. Due to net operating losses in 1997 and the availability of
net operating loss carryforwards in 1998, the Company's effective income tax
rate was 0% for the six-month periods ended June 30, 1998 and June 30, 1997.
MEDICAL CONTRACTS RECEIVABLE
Medical Contracts receivable, net consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------------------- ------------------------
(UNAUDITED)
<S> <C> <C>
Gross installment contracts receivable $18,300 $21,375
Unearned finance charges (1,414) (1,863)
Deferred loan origination fees (1,023) (945)
------------------------- ------------------------
Medical Contracts receivable 15,863 18,567
Allowance for credit losses (2,320) (5,482)
------------------------- ------------------------
Medical Contracts receivable, net $13,543 $13,085
========================= ========================
</TABLE>
AUTOMOTIVE CONTRACTS RECEIVABLE
Automotive Contracts receivable, net consist of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------------------- ------------------------
(UNAUDITED)
<S> <C> <C>
Gross installment contracts receivable $ 94,954 $156,473
Unearned finance charges (11,548) (17,600)
------------------------- ------------------------
Automotive Contracts receivable 83,406 138,873
Allowance for credit losses (55,809) (91,348)
------------------------- ------------------------
Automotive Contracts receivable, net $ 27,597 $ 47,525
========================= ========================
</TABLE>
12
<PAGE>
CREDIT LOSS POLICY
The level of unrecovered acquisition payments 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 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. See the 1997 10-K.
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.
Revenue on non-accrual Automotive Contracts is recognized as collected, provided
the estimated net realizable value equals or exceeds the net carrying value of
the remaining Automotive Contracts. Revenue on Medical Contracts is recognized
under the interest method of accounting until the underlying obligation is 60
days contractually past due.
The total dollar amount of non-accrual Automotive Contracts as a percentage
of Automotive Contracts receivable was approximately 75% and 33% at June 30,
1998 and June 30, 1997, respectively. The total dollar amount of non-accrual
Medical Contracts as a percentage of Medical Contracts receivable was
approximately 12% at June 30, 1998. Due to the discontinuation of Automotive
Contract purchases, the average age of the Automotive Contracts included in the
Company's portfolio will increase, which the Company anticipates will result in
an increase in non-accrual Automotive Contracts as a percentage of the total
number of Automotive Contracts included in the Company's portfolio. At the same
time, the Company anticipates that as the average age of the Medical Contracts
included in its portfolio increases, non-accrual contracts as a percentage of
total Medical Contracts in the portfolio will also rise. 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 allowance
for credit losses.
The following tables set forth certain information regarding charge-offs,
the provision for credit losses, the allowance for credit losses and dealer
holdbacks for the periods indicated (dollars in thousands):
13
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ------------------------------
1998 1997 1998 1997
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Gross installment contracts receivable charged off........ $3,594 $50,508 $40,182 $91,009
Charged against dealer holdbacks (1)..................... - 40,406 - 72,806
Charged against unearned finance charges................. 569 7,357 2,373 13,488
Charged against allowance for credit losses.............. 3,025 2,745 37,809 4,715
Provision for credit losses............................... - 12,647 - 18,070
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
As a % of gross installment contracts receivable:
Dealer holdbacks (1) - % 26.5%
Allowance for credit losses 51.3% 29.9%
As a % of installment contracts receivable:
Allowance for credit losses 58.6% 35.1%
Net charge-offs against allowance for credit losses 38.1% 1.7%
</TABLE>
- ---------------
(1) As a result of the Plan, the Company no longer splits collections 80%
to a dealer's pool and 20% to the Company. Due to this change in the
nature of the Company's obligations to Dealers, the Company no longer
reports a dealer holdback netted against advances to Dealers. See the
1997 10-K.
LIQUIDITY AND CAPITAL RESOURCES
The Plan was confirmed effective October 21, 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 levels 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 $10.3 million in the third quarter
of 1998, 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 the 1997 10-K.
The Plan allows the Company to defer some or all of the scheduled payments
to unsecured creditors (including Dealers and JMAC) until after repayment of the
Company's former revolving credit lender in order to ensure the adequacy of its
working capital after a scheduled payment. The Company deferred approximately
$1.1 million of the $2.6 million in payments to unsecured creditors originally
scheduled for the first quarter 1998, substantially all of the $2.4 million in
payments to unsecured creditors originally scheduled for the second quarter
1998, and expects to defer a portion of the $2.4 million in payments to
unsecured creditors scheduled for the third quarter 1998. The possibility of
such a deferral was anticipated by the Plan and does not cause the Company to be
in default under any provision of the Plan, nor does it require Bankruptcy Court
approval. Under the Plan, such deferred amounts are payable to the extent of
available cash commencing December 31, 1998 and on each quarterly payment
thereafter until paid in full.
While JMAC was not a party to the Company's Chapter 11 Petition, it was
adversely affected by the Chapter 11 Proceeding. JMAC had made a $7.1 million
loan 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
14
<PAGE>
activities, including any repayment of such loan, prior to confirmation of the
Plan. Under the Plan, the JMAC Loan (which is eliminated in consolidation for
financial statement purposes) is to be repaid in installments with three initial
quarterly installments of $750,000, including interest, commencing March 31,
1998, and the remaining balance payable in five equal installments, including
interest, through December 1999. In connection with the deferral of payments to
unsecured creditors discussed above, the Company deferred approximately $416,000
of the $750,000 originally scheduled for payment to JMAC at March 31, 1998, the
entire amount originally scheduled for payment in the second quarter 1998, and
expects to defer a portion of the payment scheduled for the third quarter 1998.
Additionally, after commencement of the Chapter 11 Petition, JMAC's
revolving credit lender refused to make any further advances under JMAC's
revolving credit facility. To fund JMAC's operations, Mr. Carl Westcott, the
Company's Chairman, Chief Executive Officer, and largest shareholder, provided
approximately $12.3 million of financing to JMAC between January 30, 1997 and
September 30, 1997 (including the $5 million of proceeds from Mr. Westcott's
purchase of 50,000 shares of JMAC preferred stock which was subsequently
exchanged for 3,855,555 shares of the Company's Common Stock). Furthermore, 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.
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 are secured by all of the
assets of JMAC, and JMAC continues to owe Mr. Westcott approximately $1.7
million of accrued interest. Mr. Westcott has advised the Company that he does
not intend to provide additional funds to JMAC.
As the Plan has been confirmed, the Company is seeking new sources of debt
and equity financing to support the growth of JMAC's operations. Without
obtaining this additional financing, the Company does not believe that JMAC can
achieve the level of contract purchases necessary to become profitable. There
can be no assurance that such additional financing will be available on terms
which are acceptable to the Company, if at all. The failure of the Company to
receive additional financing would adversely affect its ability to grow JMAC's
elective health care procedure financing business and JMAC's ability to attain
profitability.
SEASONALITY
The Company's operations are affected by higher delinquency rates during
certain holiday periods. Collections on Automotive Contracts tend to be higher
during the period at the beginning of the calendar year when many persons
receive 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. In addition, since the health care
procedures indirectly financed by JMAC's program are elective in nature,
increases in interest rates may deter prospective patients from purchasing such
procedures as a result of higher borrowing costs.
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
15
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 14, 1998, the Company held an annual meeting of Shareholders to elect
nine individuals to the Board of Directors. A description of the foregoing is
contained in the Company's proxy statement dated April 15, 1998 relating to the
1998 annual meeting of shareholders.
There were 27,785,326 shares of the Company's common stock entitled to vote at
the annual meeting based on the March 17, 1998 record date of which 93.7% were
present in person or by proxy. The Company solicited proxies pursuant to
Regulation 14 of the Securities Exchange Act of 1934, and there was no
solicitation in opposition to management's nominees for directors as listed in
the proxy statement.
With respect to election to the Board of Directors, the voting was as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
--------- --------------
<S> <C> <C>
Carl H. Westcott 26,030,888 29,532
Jack T. Smith 26,030,688 29,732
Joe J. Pollard, III 26,028,388 32,032
Paul M. Bass 26,030,888 29,532
John D. Curtis 26,029,388 31,032
C. Gregory Earls 26,029,388 31,032
Arthur W. Hollingsworth 26,028,388 32,032
Regina T. Montoya 26,028,388 32,032
Kern Wildenthal, MD, PhD 26,031,688 28,732
</TABLE>
ITEM 5. OTHER INFORMATION
NASDAQ has notified the Company that, since the Company has failed to maintain a
closing bid price on its common stock of $1.00 or more in accordance with
NASDAQ's listing requirements, NASDAQ intends to delist the Company's common
stock on August 24, 1998. The Company plans to request an extension of the time
permitted for the Company to take steps to ensure the continued listing of its
common stock on NASDAQ. There is no assurance that the Company will obtain such
extension or that it will be able to raise the closing bid price of its common
stock to comply with NASDAQ's listing requirements. Delisting may harm
investors' interests in the Company's common stock, including by materially
adversely affecting the trading market and prices for the Company's common
stock.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JAYHAWK ACCEPTANCE CORPORATION
Date: August 14, 1998 By: /s/ Philip E. Falcosky
---------------------------------------
Philip E. Falcosky
Controller and Chief Accounting Officer
19
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,216
<SECURITIES> 0
<RECEIVABLES> 99,269
<ALLOWANCES> 58,129
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,484
<DEPRECIATION> 7,166
<TOTAL-ASSETS> 48,013
<CURRENT-LIABILITIES> 42,787
<BONDS> 0
0
0
<COMMON> 278
<OTHER-SE> 3,943
<TOTAL-LIABILITY-AND-EQUITY> 48,013
<SALES> 0
<TOTAL-REVENUES> 9,787
<CGS> 0
<TOTAL-COSTS> 7,659
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,084
<INCOME-PRETAX> 44
<INCOME-TAX> 0
<INCOME-CONTINUING> 44
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
