<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, 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 November 12, 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 September 30, 1998
(Unaudited) and December 31, 1997......................................3
Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 and 1997 (Unaudited)..............4
Consolidated Statement of Shareholders' Equity for the
nine months ended September 30, 1998 (Unaudited).......................5
Consolidated Statements of Cash Flows for the nine months ended
September 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 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
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------------- --------------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 485 $ 1,905
Restricted cash 1,426
Medical contracts receivable, net 13,296 13,085
Automotive contracts receivable, net 21,784 47,525
Furniture, fixtures and equipment, net 3,865 5,384
Other assets 1,239 1,361
-------------------- --------------------
Total assets $ 40,669 $ 70,686
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 5,302 $ 5,935
Dealer payable 8,190 8,436
Deferred provider fees, net 898 1,027
Unearned service contract fees -- 39
Notes payable (including $21,240 and $20,840 to the principal shareholder
at September 30, 1998 and December 31, 1997, respectively) 22,599 51,072
-------------------- --------------------
Total liabilities 36,989 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 September 30, 1998
and December 31, 1997 278 278
Additional paid-in capital 93,722 93,722
Accumulated deficit (90,320) (89,823)
-------------------- --------------------
Total shareholders' equity 3,680 4,177
-------------------- --------------------
Total liabilities and shareholders' equity $ 40,669 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Finance charges $ 2,488 $ 4,093 $ 10,227 $ 19,806
Dealer and provider fees 797 2,253 2,499 8,554
Service contracts -- 877 42 3,666
--------- --------- --------- ---------
3,285 7,223 12,768 32,026
Costs and expenses:
Sales and marketing 385 1,683 1,959 8,232
Operating 2,760 4,221 8,844 15,809
Provision for credit losses -- 68 -- 18,138
Provision for service contract claims -- 175 -- 1,188
Loss on impairment of fixed assets -- -- -- 3,960
Interest 681 1,871 2,462 6,634
--------- --------- --------- ---------
3,826 8,018 13,265 53,961
--------- --------- --------- ---------
Loss before reorganization expense (541) (795) (497) (21,935)
Reorganization expense -- 2,334 -- 4,196
--------- --------- --------- ---------
Loss before income taxes (541) (3,129) (497) (26,131)
Income taxes -- -- -- --
--------- --------- --------- ---------
Net Loss $ (541) $ (3,129) $ (497) $ (26,131)
========= ========= ========= =========
Basic net loss per share $ (.02) $ (.13) $ (.02) $ (1.09)
========= ========= ========= =========
Diluted net loss per share $ (.02) $ (.13) $ (.02) $ (1.09)
========= ========= ========= =========
Weighted average number of shares outstanding 27,785 23,930 27,785 23, 928
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
(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 loss -- -- (497) (497)
------------ ------------ ------------- -------------
Balance at September 30, 1998 $ 278 $ 93,722 $ (90,320) $ 3,680
============ ============ ============= =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30,
------------------------------------------
1998 1997
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (497) $ (26,131)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,463 2,297
Loss on sale/write down of fixed assets 56 3,960
Provision for credit losses -- 18,138
Changes in operating assets and liabilities:
Installment contracts receivable (5,752) 7,011
Income taxes receivable -- 1,122
Other assets 122 1,011
Dealer payable (246) --
Accounts payable and accrued liabilities (609) (1,133)
Deferred dealer and provider fees, net (129) (885)
------------------- ------------------
Net cash provided by (used in) operating activities (5,592) 5,390
Cash flows from investing activities:
Payments to dealers and providers (7,462) (31,843)
Collections of principal on installment contracts receivable 38,681 67,529
Capital expenditures -- (2,213)
Decrease (increase) in restricted cash 1,426 2,606
------------------- ------------------
Net cash provided by investing activities 32,645 36,079
Cash flows from financing activities:
Net borrowings (principal payments) under revolving credit facility (25,000) (3,700)
Proceeds from issuance of notes payable to principal shareholder 400 7,320
Principal payments on secured notes payable (3,873) (47,551)
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 (28,473) (38,291)
------------------- ------------------
Net increase (decrease) in cash and cash equivalents (1,420) 2,548
Cash and cash equivalents at the beginning of the period 1,905 253
------------------- ------------------
Cash and cash equivalents at the end of period $ 485 $ 2,801
=================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,081 $ 4,663
=================== ==================
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 nine month periods ended
September 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 nine month
periods ended September 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 NINE MONTHS ENDED
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (541,000) $(3,129,000) $ (497,000) $(26,131,000)
=========== =========== =========== ============
Denominator:
Denominator for basic earnings per
share - weighted average shares 27,785,326 23,929,771 27,785,326 23,927,771
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 23,927,771
=========== =========== =========== ============
Basic net loss per share $ (0.02) $ (0.13) $ (0.02) $ (1.09)
=========== =========== =========== ============
Diluted net loss per share $ (0.02) $ (0.13) $ (0.02) $ (1.09)
=========== =========== =========== ============
</TABLE>
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
TOTAL REVENUE. Total revenue decreased from $7.2 million for the three
months ended September 30, 1997 to $3.3 million for the same period in 1998, a
decrease of $3.9 million or 54.2%. The decrease was due to a $3.9 million, or
67.6%, decrease in revenues attributable to the Company's automobile finance
program. Revenues attributable to Jayhawk Medical Acceptance Corporation's
("JMAC") elective health care program remained relatively constant in the third
quarter of 1998 compared to the same period in 1997. JMAC incurred losses of
approximately $0.1 million in the three months ended September 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 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 $101.4 million at September 30, 1997 to $21.8 million at
September 30, 1998, a decrease of $79.6 million or 78.5%. Finance charges from
Automotive Contracts decreased from $3.6 million for the three months ended
September 30, 1997 to $1.9 million for the same period in 1998, a decrease of
$1.7 million or 47.2%. The Company's medical contracts receivable, net of
allowance for credit losses, decreased from $14.0 million at September 30, 1997
to $13.3 million at September 30, 1998, and finance charges from medical
procedure installment sale contracts ("Medical Contracts" and, together with
Automotive Contracts, "Contracts") increased from $0.5 million during the third
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 6.0% to 7.9% for the three months ended September 30, 1997 and
September 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 September 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 September 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 40.3% at September 30, 1997 to 73.2% at September 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 September 30, 1998, the non-accrual Medical
Contracts as a percentage of the total number of Medical Contracts included in
the Company's portfolio was 11.1% as compared to 22.8% at September 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 $2.3 million for the three months
ended September 30, 1997 to $0.8 million for the three months ended September
30, 1998, a decrease of $1.5 million or 65.2%. 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 September 30, 1998, resulting
in a $1.4 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 $0.8
9
<PAGE>
million for the three months ended September 30, 1998 compared to $0.9 million
for the same period in 1997, a decrease of $0.1 million or 11.1%. This decrease
is the result of lower volumes of new provider enrollments and new loan
originations in the third 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 third quarter of 1998. Service contract revenue was $0.9 million for the
same period in 1997.
SALES AND MARKETING. Sales and marketing expenses decreased from $1.7
million for the three months ended September 30, 1997 to $0.4 million for the
same period in 1998 and decreased as a percentage of total revenue from 23.3%
for the three months ended September 30, 1997 to 11.7% for the three months
ended September 30, 1998. No sales and marketing expenses related to the
Company's automobile finance program were incurred during the three months ended
September 30, 1998, resulting in a $0.9 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 $0.8 million for the three
months ended September 30, 1997 to $0.4 million for the same period in 1998, a
decrease of $0.4 million or 50.0%, and decreased as a percentage of related
revenues from 55.3% for the third quarter of 1997 to 15.8% for the third quarter
of 1998. These decreases are primarily attributable to the formation of an
advertising fund to which JMAC pays, on behalf of the health care providers, 8%
of the amount financed on certain Medical Contracts for use by the fund to
inform the public of programs available from JMAC to finance elective health
care procedures and to promote the use of such programs.
OPERATING EXPENSES. Operating expenses decreased from $4.2 million for the
three months ended September 30, 1997 to $2.8 million for the same period in
1998, a decrease of $1.4 million or 33.3%, but increased as a percentage of
total revenue from 58.4% for the third quarter of 1997 to 84.0% for the third
quarter of 1998. The dollar decrease in operating expenses was due to a
decrease of $1.6 million, or 45.5%, 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 $0.1 million for the three months ended September 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 September 30, 1998. The Company
provided $0.2 million for service contract claims for the same period in 1997.
INTEREST EXPENSE. Interest expense decreased from $1.9 million during the
third quarter of 1997 to $0.8 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 $2.3 million of reorganization expenses in the third
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 and the availability of net
operating loss carryforwards, the Company's effective income tax rate was 0% for
the three-month periods ended September 30, 1998 and September 30, 1997.
10
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
TOTAL REVENUE. Total revenue decreased from $32.0 million for the nine
months ended September 30, 1997 to $12.8 million for the same period in 1998, a
decrease of $19.2 million or 60.0%. The decrease was due to a $19.0 million
decrease in revenues attributable to the Company's automobile finance program
and a $0.2 million decrease 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 $19.8 million for the nine months ended
September 30, 1997 to $10.2 million for the same period in 1998, a decrease of
$9.6 million or 48.5 %. The decrease was due to a $10.3 million decrease in
finance charges from Automotive Contracts offset by a $0.7 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 $8.5 million for the nine months
ended September 30, 1997 to $3.0 million for the nine months ended September 30,
1998, a decrease of $5.5 million or 64.7%. As no new Dealers are enrolling in
the Company's automobile finance program, no dealer fees were recognized during
the nine months ended September 30, 1998, resulting in a $5.1 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 $3.0 million for the nine months ended September 30, 1998 compared
to $3.4 million for the same period in 1997, a decrease of $0.4 million or
11.8%. This decrease is the result of lower volumes of new provider enrollments
and new loan originations in the second and third quarters of 1998 compared to
the same period in 1997.
Service contract revenue decreased from $3.7 million for the nine months
ended September 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 $8.2
million for the nine months ended September 30, 1997 to $2.0 million for the
same period in 1998 and decreased as a percentage of total revenue from 25.7%
for the nine months ended September 30, 1997 to 15.3% for the nine months ended
September 30, 1998. No sales and marketing expenses related to the Company's
automobile finance program were incurred during the nine months ended September
30, 1998, resulting in a $4.1 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 $4.1 million for the nine months ended
September 30, 1997 to $2.0 million for the same period in 1998, a decrease of
$2.1 million or 51.2%, and decreased as a percentage of related revenues from
91.6% for the first nine months of 1997 to 41.5% for the same period in 1998.
This decrease is due primarily 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 and the operations of the advertising fund
referred to above. See "--Liquidity and Capital Resources".
OPERATING EXPENSES. Operating expenses decreased from $15.8 million for
the nine months ended September 30, 1997 to $8.8 million for the same period in
1998, a decrease of $7.0 million, or 44.3%, but increased as a percentage of
total revenue from 49.4% for the first nine months of 1997 to 69.3% for the
first nine months of 1998. The dollar decrease in operating expenses was due to
a $6.7 million, or 50.9%, decrease in operating expenses attributable to the
Company's automobile finance program and a $0.3 million, or 9.5%, 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 nine months ended September 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 nine months ended September 30, 1998. The Company
provided $1.2 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 $6.6 million during the
first nine months of 1997 to $2.5 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 $2.3 million of reorganization expenses in the nine
months ended September 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 and the availability of net
operating loss carryforwards, the Company's effective income tax rate was 0% for
the nine-month periods ended September 30, 1998 and September 30, 1997.
MEDICAL CONTRACTS RECEIVABLE
Medical Contracts receivable, net consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------- ------------------------
(UNAUDITED)
<S> <C> <C>
Gross installment contracts receivable $ 17,079 $ 21,375
Unearned finance charges (1,253) (1,863)
Deferred loan origination fees (887) (945)
------------------------- ------------------------
Medical Contracts receivable 14,939 18,567
Allowance for credit losses (1,643) (5,482)
------------------------- ------------------------
Medical Contracts receivable, net $ 13,296 $ 13,085
========================= ========================
</TABLE>
AUTOMOTIVE CONTRACTS RECEIVABLE
Automotive Contracts receivable, net consist of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------- ------------------------
<S> <C> <C>
(UNAUDITED)
Gross installment contracts receivable $ 85,726 $ 156,473
Unearned finance charges (10,325) (17,600)
------------------------- ------------------------
Automotive Contracts receivable 75,401 138,873
Allowance for credit losses (53,617) (91,348)
------------------------- ------------------------
Automotive Contracts receivable, net $ 21,784 $ 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 83.6% and 47.8% at
September 30, 1998 and September 30, 1997, respectively. The total dollar
amount of non-accrual Medical Contracts as a percentage of Medical Contracts
receivable was approximately 10.4% at September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Gross installment contracts receivable charged off........ $ 2,863 $ 53,157 $ 43,045 $ 144,166
Charged against dealer holdbacks (1)..................... -- 42,526 -- 115,332
Charged against unearned finance charges................. 275 7,852 2,648 21,340
Charged against allowance for credit losses.............. 2,588 2,779 40,397 7,494
Provision for credit losses............................... -- 68 -- 18,138
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
As a % of gross installment contracts receivable:
Dealer holdbacks (1) -- % 18.7%
Allowance for credit losses 53.8% 36.2%
As a % of installment contracts receivable:
Allowance for credit losses 61.2% 41.1%
Net charge-offs against allowance for credit losses 44.7% 3.6%
</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 to meet Plan obligations,
and any funds available for purposes other than meeting Plan obligations will be
very limited. There can be no assurance that collections ultimately realized
from Automotive Contracts will be sufficient to meet Plan obligations, and any
failure to meet Plan obligations could have a material adverse effect on the
Company.
Under the Plan, the Company's debt to its former revolving credit lender
was scheduled to be paid in full at the end of the third quarter. However, a
balance of approximately $1.4 million remained as of September 30, 1998. An
extension was obtained and such remaining balance was paid in October 1998.
The Plan allowed 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
$4.6 million of the $7.7 million (net of an estimated $.7 million attributable
to Dealers who are contesting their claims) in payments to unsecured creditors
originally scheduled for the first three quarters of 1998. Under the Plan, such
deferred balances are payable, together with other scheduled payments, in
quarterly installments aggregating approximately $4.8 million in the fourth
quarter of 1998 and approximately $3.3 million thereafter through the fourth
quarter of 1999. The Plan also allows the Company to defer a portion of these
future payments, with any deferred amounts payable to the extent of cash
available on each subsequent scheduled payment date. The Company expects to
defer a portion of payments to Dealers and JMAC scheduled for the fourth quarter
of 1998. The possibility of such deferrals was anticipated by the Plan and does
not cause the Company to be in default under the Plan, nor does it require
Bankruptcy Court approval.
14
<PAGE>
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 (which loan is eliminated in consolidation for financial
statement purposes), and the Bankruptcy Court prohibited the Company from
providing JMAC with any cash to finance its activities, including any repayment
of such loan, prior to confirmation of the Plan. In connection with the
deferral of payments to unsecured creditors discussed above, the Company
deferred approximately $1.9 million of the $2.3 million originally scheduled for
payment to JMAC during the first three quarters of 1998. The remaining
principal balance of $7.1 million, plus accrued interest at September 30, 1998
of approximately $0.7 million, is payable in five equal installments, including
interest, through December 1999. The Company expects to defer a portion of the
payment to JMAC scheduled for the fourth quarter of 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 $1.8
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.
15
<PAGE>
Year 2000
Until recently, most computer software and hardware, as well as chips and
processors imbedded in various products (collectively referred to as "computer
applications"), used two digits, rather than four, to define the applicable
year. Such computer applications may recognize a date using "00" as the year
1900 rather than the year 2000. Consequently, many business and governmental
entities face the risk of some degree of interruption in their operations when
using computer applications to process dates of January 1, 2000 and beyond.
This is known as the Year 2000 issue.
The Company's loan servicing, loan application, general ledger and accounts
payable systems comprise its critical information technology ("IT") systems.
The Company has conducted a review of its critical IT systems to identify
components that are not Year 2000 compliant and is developing an implementation
plan to resolve this issue. Additionally, letters of compliance are being
obtained from all vendors of standard systems, and the Company plans to conduct
tests of all systems to provide an enhanced degree of confidence for Year 2000
compliance. All of the Company's critical operating systems accommodate four
digit entry and processing of year data. However, these systems also permit
two-digit entry of such data, which could result in errors in the processing of
such data. The Company believes the risk of such errors can be mitigated
through enhancements of operating procedures without material cost to the
Company. In addition, the Company uses various ancillary programs to extract
and/or manipulate data from the operating systems for reporting and other
purposes. A preliminary assessment indicates these programs will require some
modifications to properly process data pertaining to dates after the year 2000.
Management believes these modifications can be accomplished in conjunction with
the routine ongoing maintenance of its computer systems without material cost to
the Company. Replacement or modification of known non-compliant systems has
commenced, and the Company expects to complete this process during the second
quarter of 1999.
In addition to its internal systems, the Company also relies, directly and
indirectly, on the systems of third parties, such as banks and credit bureaus,
for the accurate exchange of data and for financial processing capabilities.
The Company is contacting these third parties to determine what actions, if any,
may be needed to mitigate its risks relating to the failure of such third
parties to be Year 2000 compliant in a timely fashion.
Software and hardware, such as security, power management, and telephone
systems, that facilitate the operations of the Company's corporate offices
comprise the Company's primary non-IT systems. The Company is in the process of
assessing the Year 2000 compliance of the non-IT systems that operate at its
facilities and expects to conclude this assessment by March 31, 1999.
The Company has not incurred, nor does it expect to incur, material costs
in readying its computer applications for the year 2000. The IT and non-IT
systems currently in place or expected to be in place were not purchased
specifically, nor was their installation accelerated, because of the Year 2000
issue.
The Company's failure to fully or timely implement its Year 2000 compliance
plan or the occurrence of an unexpected Year 2000 problem could result in the
disruption of normal business activities or operations and have a material
adverse effect on the Company's results of operations, liquidity, or financial
condition. Additionally, with respect to third parties, there can be no
assurance that their systems will be rendered Year 2000 compliant on a timely
basis or that any resulting Year 2000 issues would not have an adverse effect on
the results of operations of the Company. The Company believes that the most
likely negative effects, if any, could include delays in underwriting Medical
Contracts, delays in the Company's servicing assigned Contracts, and delays in
the ability to pay certain suppliers.
The Company believes that the Year 2000 compliance of its IT and non-IT
systems as well as its efforts to assess the Year 2000 compliance of third
parties should minimize the business difficulties encountered as a result of the
Year 2000 issue. Consequently, the Company does not anticipate the need to
formulate contingency plans to deal with the Year 2000 issues and has not
formulated such plans. If this assessment changes the Company will develop
contingency plans as deemed necessary.
16
<PAGE>
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.
17
<PAGE>
PART II - OTHER INFORMATION
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: November 16, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 485
<SECURITIES> 0
<RECEIVABLES> 90,340
<ALLOWANCES> 55,260
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,413
<DEPRECIATION> 7,548
<TOTAL-ASSETS> 40,669
<CURRENT-LIABILITIES> 36,091
<BONDS> 0
0
0
<COMMON> 278
<OTHER-SE> 3,402
<TOTAL-LIABILITY-AND-EQUITY> 40,669
<SALES> 0
<TOTAL-REVENUES> 12,768
<CGS> 0
<TOTAL-COSTS> 10,803
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,462
<INCOME-PRETAX> (497)
<INCOME-TAX> 0
<INCOME-CONTINUING> (497)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (497)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
