<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 March 31, 1999
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 May 13, 1999, the latest practicable date, there were
27,785,326 shares of Common Stock, $.01 par value, outstanding.
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
------------------
PART I. FINANCIAL INFORMATION
- ------------------------------
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
<S> <C>
Consolidated Balance Sheets at March 31, 1999 (Unaudited) and
December 31, 1998............................................................. 3
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998 (Unaudited)........................................... 4
Consolidated Statement of Shareholders' Equity (Deficit) for the three
months ended March 31, 1999 (Unaudited)....................................... 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 (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......................................... 15
SIGNATURES......................................................................... 16
- ----------
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- -------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 430 $ 816
Medical contracts receivable, net 12,225 12,074
Automotive contracts receivable, net 13,595 16,695
Furniture, fixtures and equipment, net 3,016 3,452
Other assets 791 996
-------- --------
Total assets $ 30,057 $ 34,033
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued liabilities $ 2,375 $ 3,754
Dealer payable 6,926 7,960
Deferred provider fees, net 885 858
Notes payable to principal shareholder 20,336 21,240
-------- --------
Total liabilities 30,522 33,812
======== ========
Commitments and contingencies
Shareholders' Equity (Deficit):
Common stock, $.01 par value; 40,000,000 shares authorized
27,785,326 shares issued and outstanding at March 31, 199
and December 31, 1998 278 278
Additional paid-in capital 93,722 93,722
Accumulated deficit (94,465) (93,779)
-------- --------
Total shareholders' equity (deficit) (465) 221
-------- --------
Total liabilities and shareholders' equity (deficit) $ 30,057 $ 34,033
======== ========
</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
MARCH 31,
------------------------
1999 1998
-------- -------
<S> <C> <C>
Revenues:
Finance charges $ 1,650 $ 4,378
Provider fees 607 874
Service contracts -- 42
-------- -------
2,257 5,294
Costs and expenses:
Sales and marketing 282 749
Operating 1,995 3,204
Provision for credit losses 150 --
Interest 516 1,025
-------- -------
2,943 4,978
-------- -------
Income (loss) before income taxes (686) 316
Income taxes -- --
-------- -------
Net income (loss) $ (686) $ 316
======== =======
Basic and diluted net income (loss) per share $ (.02) $ .01
======== =======
Weighted average number of shares outstanding 27,785 27,785
======== =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(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, 1998 $ 278 $ 93,722 $ (93,779) $ 221
Net loss -- -- (686) (686)
------ -------- --------- ------
Balance at March 31, 1999 $ 278 $ 93,722 $ (94,465) $ (465)
====== ======== ========= ======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (686) $ $ 316
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 436 564
Provision for credit losses 150 --
Changes in operating assets and liabilities:
Installment contracts receivable (1,578) (2,255)
Other assets 205 (173)
Dealer Payable (1,034) 30
Accounts payable and accrued liabilities (1,379) (912)
Deferred provider fees, net 27 (29)
-------- --------
Net cash used in operating activities (3,859) (2,459)
Cash flows from investing activities:
Payments to dealers and providers (3,054) (2,304)
Collections of principal on installment contracts receivable 7,431 16,335
Capital expenditures -- --
Decrease (increase) in restricted cash -- 978
-------- --------
Net cash provided by investing activities 4,377 15,009
Cash flows from financing activities:
Net borrowings (principal payments) under revolving credit facility -- (9,000)
Proceeds (principal payments) of notes payable to principal shareholder (904) --
Principal payments on secured notes payable -- (3,873)
Net cash used in financing activities (904) (12,873)
-------- --------
Net decrease in cash and cash equivalents (386) (323)
Cash and cash equivalents at the beginning of the period 816 1,905
-------- --------
Cash and cash equivalents at the end of period $ 430 $ 1,582
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 967 $ 1,149
======== ========
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., and
Jayhawk Medical Acceptance Corporation ("JMAC"). All significant intercompany
balances and transactions have been eliminated upon consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have been
included. Operating results for the three month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. 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, 1998, filed with the Securities and
Exchange Commission on April 15, 1999 (the "1998 10-K").
NOTE 2 - COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and March 31, 1998, there was
no difference between net income as reported by the Company and comprehensive
income as required to be reported by SFAS 130.
NOTE 3 - SEGMENT INFORMATION
The Company identifies business segments based on the type of loan
serviced: the Automotive segment includes all activities, revenues, and costs
associated with the Company's portfolio of Automotive Contracts receivable, and
the Medical segment includes all activities, revenues, and costs associated with
JMAC's portfolio of Medical Contracts receivable. The Company measures segment
profit (loss) as net income (loss) before income taxes.
The following tables provide financial data by segment for the three
months ended March 31, 1999 and March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
AUTOMOTIVE MEDICAL TOTAL
---------- ------- --------
THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------
<S> <C> <C> <C>
Finance charges ............................... $1,033 $ 617 $1,650
Other revenue ................................. -- 745 745
Less: intersegment income .................... -- (138) (138)
---------- -------- ---------
Revenue from external customers ............... $1,033 $1,224 $2,257
========== ======== =========
Interest expense .............................. $ 243 $ 411 $ 654
Less: intersegment expense ................... (138) -- (138)
---------- -------- ---------
Reported interest expense ..................... $ 105 $ 411 $ 516
========== ======== =========
Provision for credit losses ................... $ -- $ 150 $ 150
Depreciation and amortization ................. $ 378 $ 58 $ 436
Loss before income taxes ...................... $ (468) $ (218) $ (686)
</TABLE>
7
<PAGE>
JAYHAWK ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
AUTOMOTIVE MEDICAL TOTAL
--------- ------- ------
THREE MONTHS ENDED MARCH 31, 1998
----------------------------------
<S> <C> <C> <C>
Finance charges ............................... $3,823 $ 555 $4,378
Other revenue ................................. 42 1,025 1,067
Less: intersegment income .................... -- (151) (151)
------- ------ ------
Revenue from external customers ............... $3,865 $1,429 $5,294
======= ====== ======
Interest expense .............................. $ 798 $ 378 $1,176
Less: intersegment expense ................... (151) -- (151)
------ ------ ------
Reported interest expense ..................... $ 647 $ 378 $1,025
====== ====== ======
Provision for credit losses ................... $ -- $ -- $ --
Depreciation and amortization ................. $ 480 $ 84 $ 564
Income (loss) before income taxes.............. $ 573 $ (257) $ 316
</TABLE>
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Numerator:
Net income (loss) ..................................... $ (686,000) $ 316,000
================== ===================
Denominator:
Denominator for basic earnings per
share - weighted average shares ...................... 27,785,326 27,785,326
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 27,785,326
================== ===================
Basic and diluted net income (loss) per share ............ $ (0.02) $ 0.01
================== ===================
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
TOTAL REVENUE. Total revenue decreased from $5.3 million for the three
months ended March 31, 1998 to $2.3 million for the same period in 1999, a
decrease of $3.0 million or 56.6%. The decrease was due to a $2.8 million, or
73.3%, decrease in revenues attributable to the Company's automobile finance
program coupled with a $0.2 million, or 14.3%, decrease in revenues attributable
to JMAC's elective health care program. JMAC incurred losses of approximately
$218,000 in the three months ended March 31, 1999, and the Company anticipates
that, at its current level of operations, JMAC will continue to incur losses
until JMAC obtains additional financing. The Company is currently reviewing
possible expense reductions in an attempt to reduce these losses. However, there
can be no assurance that any such expense reductions can be implemented or, if
implemented, will have the effect of materially improving JMAC's results of
operations. See "--Liquidity and Capital Resources". The decrease in total
revenue reflects decreased finance charges and provider fees.
The decrease in finance charges resulted primarily from the overall
reduction of the Company's portfolio of automotive installment sale contracts
("Automotive Contracts") as existing Automotive Contracts are repaid. The
Company's Automotive Contracts receivable, net of allowance for credit losses,
decreased from $35.8 million at March 31, 1998 to $13.6 million at March 31,
1999, a decrease of $22.2 million or 62.0%. Finance charges from Automotive
Contracts decreased from $3.8 million for the three months ended March 31, 1998
to $1.0 million for the same period in 1999, a decrease of $2.8 million or
73.7%. The total dollar amount of non-accrual Automotive Contracts as a
percentage of Automotive Contracts receivable increased from 65.4% at March 31,
1998 to 86.5% at March 31, 1999. 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 an
increase in non-accrual Automotive Contracts as a percentage of Automotive
Contracts receivable.
Finance charges from medical procedure installment sale contracts ("Medical
Contracts" and, together with Automotive Contracts, "Contracts") increased from
$556,000 for the three months ended March 31, 1998 to $617,000 for the same
period in 1999. Although the Company's Medical Contracts receivable, net of
allowance for credit losses, decreased from $12.9 million at March 31, 1998 to
$12.2 million at March 31, 1999, the average annualized yield on the portfolio
of Medical Contracts increased from 12.2% for the first quarter of 1998 to 16.1%
for the first quarter of 1999. This increase results primarily from a decrease
in the relative amount of non-accrual Medical Contracts included in the
Company's portfolio of Medical Contracts during the first quarter of 1999
compared to the same period in 1998. The total dollar amount of non-accrual
Medical Contracts as a percentage of Medical Contracts receivable decreased from
24.0% at March 31, 1998 to 19.4% at March 31, 1999. This decrease is due to the
refinement of underwriting standards beginning the second half of 1997 and the
write-off in 1998 of non-accrual Medical Contracts originated during 1997.
Provider fees decreased from $0.9 million for the three months ended March
31, 1998 to $0.6 million for the three months ended March 31, 1998, a decrease
of $0.3 million or 33.3%. This decrease is the result of lower volumes of new
Provider enrollments and new loan originations in the second half of 1998 and
the first quarter of 1999 as JMAC continued its search for additional financing
and evaluated strategic alternatives. See "--Liquidity and Capital Resources".
SALES AND MARKETING. Sales and marketing expenses decreased from $0.7
million for the three months ended March 31, 1998 to $0.3 million for the same
period in 1999 and decreased as a percentage of total revenue from 14.1% for the
three months ended March 31, 1998 to 12.5% for the three months ended March 31,
1999. All sales and marketing expenses incurred relate to JMAC's elective health
care program. The decrease in sales and marketing expenses results primarily
from the curtailment of television and print advertising in favor of banner
advertising on internet websites.
OPERATING EXPENSES. Operating expenses decreased from $3.2 million for the
three months ended March 31, 1998 to $2.0 million for the same period in 1999, a
decrease of $1.2 million or 37.5%, but increased as a percentage of total
revenue from 60.5% for the first quarter of 1998 to 88.4% for the first quarter
of 1999. The dollar decrease in operating expenses was due to a decrease of $1.2
million, or 49.5%, 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
9
<PAGE>
reduction of revenue as a result of the overall reduction of the Company's
Automotive Contract portfolio as existing Automotive Contracts are repaid.
PROVISION FOR CREDIT LOSSES. The Company provided $150,000 for credit
losses for the three months ended March 31, 1999 related to its portfolio of
Medical Contracts. See "--Credit Loss Policy".
INTEREST EXPENSE. Interest expense decreased from $1.0 million during the
first quarter of 1998 to $0.5 million during the same period in 1999. The
decrease was due primarily to the retirement of debt secured by the Company's
portfolio of Automotive Contracts.
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 March 31, 1999 and March 31, 1998.
MEDICAL CONTRACTS RECEIVABLE
Medical Contracts receivable, net consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------------- --------------
(UNAUDITED)
<S> <C> <C>
Gross installment contracts receivable $16,870 $16,636
Unearned finance charges (1,344) (1,220)
Deferred loan origination fees (956) (841)
--------------- --------------
Medical Contracts receivable 14,570 14,575
Allowance for credit losses (2,345) (2,501)
--------------- --------------
Medical Contracts receivable, net $12,225 $12,074
=============== ==============
</TABLE>
AUTOMOTIVE CONTRACTS RECEIVABLE
Automotive Contracts receivable, net consist of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Gross installment contracts receivable $ 30,742 $ 35,079
Unearned finance charges (3,461) (3,894)
-------------- -------------
Automotive Contracts receivable 27,281 31,185
Allowance for credit losses (13,686) (14,490)
-------------- -------------
Automotive Contracts receivable, net $ 13,595 $ 16,695
============== =============
</TABLE>
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 1998 10-K.
10
<PAGE>
Revenue on Automotive Contracts is recognized under a method which
approximates 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 86.5% and 65.4% at March
31, 1999 and March 31, 1998, respectively. The total dollar amount of non-
accrual Medical Contracts as a percentage of Medical Contracts receivable was
approximately 19.4% and 24.0% at March 31, 1999 and March 31, 1998,
respectively. 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 an increase in non-accrual contracts
as a percentage of the total number and amount of Automotive Contracts included
in the Company's portfolio. Contract balances on which no material payment has
been received for a significant period of time (in no event greater than one
year) are charged-off against the related allowance for credit losses.
The following tables set forth certain information regarding charge-offs,
the provision for credit losses, and the allowance for credit losses for the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Gross installment contracts receivable charged-off $1,187 $36,588
Charged against unearned finance charges 127 1,804
Charged against allowance for credit losses 1,060 34,784
Provision for credit losses 150 --
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------
1998 1997
------------------- -------------
<S> <C> <C>
As a % of gross installment contracts receivable:
Allowance for credit losses 33.7% 48.6%
As a % of installment contracts receivable:
Allowance for credit losses 38.3% 55.7%
Net charge-offs against allowance for credit losses 6.6% 31.6%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
On February 7, 1997, the Company (excluding subsidiaries) filed a voluntary
petition for reorganization under Chapter 11 of the Federal Bankruptcy Code (the
"Chapter 11 Petition") in the Northern District of Texas (the "Chapter 11
Proceeding"). The Company's Plan of Reorganization ("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 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.
While JMAC was not a party to the Company's Chapter 11 Petition, it was
adversely affected by the Chapter 11 Proceeding. JMAC had loaned approximately
$7.1 million to the Company ("JMAC Loan") prior to the Company's filing of
11
<PAGE>
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, prior to confirmation of the Plan.
Obligations to the Company's revolving lender, other secured creditors, and
unsecured trade creditors aggregating approximately $41.6 million on October 21,
1997, plus interest as required, have been paid in full in accordance with the
terms of the Plan. The Plan allows the Company to defer some or all of the
scheduled payments to unsecured creditors, including automotive dealers
("Dealers") and JMAC in order to ensure the adequacy of its working capital
after a scheduled payment. As collections on its Automotive Contracts since
October 1997 have been lower than contemplated by the Plan, the Company deferred
approximately $3.9 million of the $4.6 million originally scheduled for payment
to JMAC and settling Dealers through September 30, 1998. At March 31, 1999, the
Company continues to owe approximately $6.9 million to Dealers (including an
estimated $2.4 million to nonsettling Dealers) and approximately $6.2 million to
JMAC, which amounts are generally due in quarterly installments through December
1999. The Plan also allows the Company to defer some or all of future scheduled
payments. Based on current projected levels of collections on its Automotive
Contracts, the Company expects to defer some of the future scheduled payments to
the Dealers and JMAC into the year 2000. See the 1998 10-K.
Additionally, after commencement of the Chapter 11 Proceeding, 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 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 original principal
amount of $7.1 million ($6.2 million principal balance at March 31, 1999), 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. Additionally, in 1998, Mr. Westcott loaned an additional
$400,000 to JMAC, which loan bears interest at the prime rate and is payable on
demand. All of these notes are secured by all of the assets of JMAC. Mr.
Westcott has advised the Company that he does not intend to provide additional
funds to JMAC.
Since confirmation of the Plan, the Company has sought new sources of debt
and equity financing to support the growth of JMAC's operations. JMAC incurred
losses of approximately $218,000 in the three months ended March 31, 1999, and
the Company anticipates that, at its current level of operations, JMAC will
continue to incur losses until JMAC obtains additional financing. The Company is
currently reviewing possible expense reductions in an attempt to reduce these
losses. However, there can be no assurance that any such expense reductions can
be implemented or, if implemented, will have the effect of materially improving
JMAC's results of operations. Additionally, as described above, approximately
$20.3 million of loans payable by JMAC to Mr. Westcott are due on demand or in
November 1999. The failure to refinance this indebtedness would have a material
adverse effect on the Company. There can be no assurance that any such financing
will be available on terms which are acceptable to the Company, if at all. The
Board of Directors appointed a special committee consisting of Paul Bass,
Committee Chairman, Arthur Hollingsworth and Dr. Kern Wildenthal to assist it in
developing, reviewing and structuring a range of strategic alternatives intended
to maximize the value of JMAC to the Company, including the possible sale of all
or part of JMAC. The special committee has engaged the investment banking firm
of Hoak Breedlove Wesneski & Co. to assist in connection with the strategic
review. There can be no assurances, however, of the outcome of the strategic
review.
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.
12
<PAGE>
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. Such plan is expected to be completed by the end of May
1999. 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. The Company
expects to complete these tests by the end of the third quarter of 1999. 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 noncompliant systems commenced in July
1998, and the Company expects to complete this process during the second quarter
of 1999.
In addition to its critical 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. The Company expects to complete such
review and assessment by the end of the second quarter of 1999.
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 the assessment by August 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 of assigned Contracts, and delays
in the ability to pay certain suppliers. Such effects, if significant, would
likely result in lost revenues or increased operating costs.
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. Should the third parties with whom the Company has banking and
credit investigation relationships fail to comply with Year 2000 requirements,
the Company will consider changing its suppliers of such services to suppliers
who are Year 2000 compliant. 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.
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.
13
<PAGE>
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, financial projections and the
Year 2000, 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, risks associated with technology 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.
14
<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
The Company filed a Current Report on Form 8-K dated
February 16, 1999 in accordance with Item 4. Changes in
Registrant's Certifying Accountant of Form 8-K.
15
<PAGE>
SIGNATURES
-----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JAYHAWK ACCEPTANCE CORPORATION
Date: May 14, 1998 By: /s/ Philip E. Falcosky
---------------------------------------
Philip E. Falcosky
Controller and Chief Accounting Officer
16
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
17
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