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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended August 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 1-8645
MEGO FINANCIAL CORP.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
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<S> <C>
NEW YORK 13-5629885
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(State or other jurisdiction of (IRS Employer
incorporation or organization) identification no.)
</TABLE>
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<S> <C>
4310 PARADISE ROAD, LAS VEGAS, NEVADA 89109
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(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code 702-737-3700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
________________________________________________________________________________
(Title of Class)
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 NO X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
As of November 11, 1994, 18,086,750 shares of the registrant's Common Stock
were outstanding. The aggregate market value of Common Stock held by
non-affiliates of the registrant as of November 11, 1994 was approximately
$44,167,658, based on a closing price of $4.25 for the Common Stock as reported
on the NASDAQ National Market on such date. For purposes of the foregoing
computation, all executive officers, directors and 5 percent beneficial owners
of the registrant are deemed to be affiliates. Such determination should not
be deemed to be an admission that such executive officers, directors or 5
percent beneficial owners are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III, Items 10-13 is incorporated by reference
from the registrant's definitive proxy statement (filed pursuant to Regulation
14A).
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PART I
Item 1. Business.
This Amendment No. 1 to the Form 10-K for the year ended August 31,
1994 of Mego Financial Corp. is being filed as a result of the restatement of
the financial statements included therein as described below in "Recent
Developments."
(a) GENERAL DEVELOPMENT OF BUSINESS.
Background.
Mego Financial Corp., previously named Mego Corp. ("Mego"), a New York
corporation organized in 1954 (hereinafter together with subsidiaries referred
to as the "Company"), is a successor by merger to Mego International, Inc.,
which was incorporated in Delaware in 1969.
The Company during the period of inception to fiscal 1983, was in the
business of manufacturing and selling toys through its own facilities. During
fiscal 1983, the Company sought the protection of Chapter 11 of the United
States Bankruptcy Code. In December 1983, the Company emerged from Chapter 11
proceedings.
Change of Control.
On October 25, 1987, Mego entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") which closed on January 7, 1988, for the sale of an
aggregate of 6,684,767 shares of its Class A Common stock (subsequently
designated Common Stock) in a privately negotiated transaction to the
following: Robert Nederlander (1,671,192 shares), Jerome J. Cohen (1,336,953
shares), Growth Realty Inc., an affiliate of Eugene Schuster, ("GRI")
(1,671,192 shares), Herbert B. Hirsch (1,336,953 shares) and Don A. Mayerson
(668,477 shares) (collectively, the "Purchasers"). The shares acquired
represented approximately 43% of the Class A Shares outstanding after the
consummation of the transaction. Consideration for the purchase consisted of
cash of approximately $195,000, or approximately $.03 per share. At August 31,
1994, the Purchasers owned in the aggregate 6,845,918 shares (approximately 38%
of Common stock). On November 1, 1994, GRI sold 179,061 shares reducing the
aggregate ownership percentage to approximately 37%.
Purchase of Preferred Equities Corporation.
Pursuant to a Stock Purchase and Redemption Agreement, dated October
6, 1987 (as amended as of October 25, 1987), Comay Corp. ("Comay"), GRI, RRE
Corp. ("RRE") and H&H Financial Inc. ("H&H") (affiliates of Messrs. Cohen and
Mayerson, Mr. Schuster, Mr. Nederlander and Mr. Hirsch, respectively),
obtained the right (hereinafter "PEC Purchase Rights") to acquire Preferred
Equities Corporation ("PEC"), a privately-held Nevada corporation engaged in
retail land sales, resort timesharing and other real estate related activities.
(Comay, GRI, RRE and H&H are collectively referred to as the "Assignors".)
The Company acquired the PEC Purchase Rights from the Assignors
pursuant to an Assignment Agreement, dated October 25, 1987, between Mego and
the Assignors and a related Assignment and Assumption Agreement, dated February
1, 1988 and amended on July 29, 1988, between Mego and the Assignors
(collectively such agreements constitute the "Assignment"). The acquisition of
PEC closed on February 1, 1988, and PEC became a wholly-owned subsidiary of
Mego.
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Recent Developments.
Subsequent to the issuance of the Company's financial statements for
the year ended August 31, 1994, the Company determined that certain adjustments
were required to be made to the amounts previously reported in the Company's
financial statements, including certain financial statements reported on by
such independent auditors. Adjustments relate primarily to (i) the Company's
method of accounting for deferred selling costs for retail lots, (ii) certain
estimates and assumptions previously utilized by the Company to compute the
present value of the income stream to be received over the estimated life of
notes receivable sold by the Company, (iii) its method of determining the
Provisions for cancellation, (iv) the restatement of certain Accounts relating
to assets acquired by the Company in 1991, (v) its method of accounting for
contributions in aid of construction received from customers of Central Nevada
Utilities Company, its wholly-owned subsidiary, (vi) the revaluation of the
carrying value of certain art inventory, (vii) its method of accounting for
organizational costs relating to MMC, and (viii) certain other adjustments.
None of such adjustments affect the cash position of the Company. The
aggregate effect of such adjustments after provision for income taxes was to
decrease Net income by $8.6 million for the year ended August 31, 1994 from Net
income of $2.8 million to a Net loss of $5.7 million, to decrease Net income by
$4.7 million for the year ended August 31, 1993 from $3.7 million to a Net loss
of $1.0 million, and to decrease Net income by $4.7 million for the year ended
August 31, 1992 from Net income of $3.6 million to a Net loss of $1.1 million.
As a result of such adjustments, the Company has restated its previously
reported amounts for its fiscal years ended August 31, 1994, 1993 and 1992 to
reflect such adjustments. Following the issuance of the Company's November 10,
1995 press release, two purported class actions were commenced against the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Notes 20 and 21 to Notes to Consolidated Financial
Statements.
(b) INDUSTRY SEGMENT INFORMATION.
Not applicable.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
General
Present Activities.
Mego operates PEC as its wholly-owned subsidiary and has no present
plans to change PEC's line of business. The executive offices of Mego and PEC
are located at 4310 Paradise Road, Las Vegas, Nevada 89109. Mego, through its
wholly-owned subsidiary Mego Mortgage Corporation ("MMC"), is primarily engaged
in the business of originating, purchasing, selling and servicing loans for
property improvement ("Loans"), that qualify under the provisions of Title I of
the National Housing Act which is administered by the U.S. Department of
Housing and Urban Development ("HUD"). Pursuant to this program 90% of the
principal balances of each of the Loans are U.S. government insured ("FHA
Insured Loans"). The executive offices of MMC are located at 210 Interstate
North Parkway, Suite 250, Atlanta, Georgia 30339.
Business of PEC.
PEC is in the business of generating consumer receivables by marketing
timeshare interests located in Las Vegas and Reno, Nevada; Honolulu, Hawaii;
and Brigantine, New Jersey (see "Business - Timesharing Activities"), and
marketing unimproved real estate parcels and lots in Nevada and Colorado on a
retail basis for residential, commercial, industrial and recreational use (see
"Business - Land Sales").
During the fiscal year ended August 31, 1994, PEC ceased the business
of constructing and selling single family residential homes in its Calvada
subdivisions in the Pahrump Valley, Nye County, Nevada. This business was not
a material component of PEC's operations.
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PEC through certain of its subsidiaries also sells larger unimproved
land parcels. In addition, PEC operates a recreational vehicle facility at a
Calvada subdivision in the Pahrump Valley where it has sold timeshare interests
in vehicle pads and hookups and also runs a recreational facility. The RV Park
is not a material component of PEC's operations.
Sales by PEC and its subsidiaries often produce negative cash flow due
to selling expenses and other costs exceeding down payments from purchasers,
and which negative cash flow is generally financed either by corporate
borrowings or internally generated cash balances (see "Business - Customer
Financing"). The future level of sales of timeshare interests and land by PEC
and its subsidiaries could be limited by the availability of funds to finance
the negative cash flow that results from sales.
Land Sales.
PEC is engaged in the sale of land at the retail level for
residential, commercial, industrial and recreational use.
The retail land sales business involves the acquisition of lots and
large tracts of unimproved land followed by tract subdivision and retail sale.
PEC has made a substantial portion of its retail land sales for residential,
commercial and industrial use in the Pahrump Valley, Nye County, Nevada.
The following table illustrates certain statistics regarding the
Pahrump Valley subdivisions:
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Number of acres acquired since 1969 18,572
Number of lots platted 29,144
Net number of lots sold through August 31, 1994 28,144
Percent sold through August 31, 1994 97%
For the twelve months ended August 31, 1994
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Number of lots sold 1,771
Number of lots canceled and/or exchanged 1,668
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Number of lots sold, net of cancellations and exchanges 103
=====
</TABLE>
Residential lots range in price from $9,550 to $46,500. Commercial
lots range in price from $17,000 to $76,500 and industrial lots range in price
from $16,750 to $45,750. Some lots sold are unimproved at the time of sale,
but various improvements such as roads and utilities and, in certain
circumstances, amenities, are part of the development program. At August 31,
1994, all roads obligated to be constructed by PEC had been completed.
Central Nevada Utilities Company, a wholly-owned subsidiary of PEC,
operates a public sewer and water utility for portions of PEC's Nevada
subdivisions and certain other properties located within that subsidiary's
certificated service area (which is subject to the regulation of the Nevada
Public Service Commission).
PEC and its subsidiaries acquired unimproved land in Huerfano County,
Colorado, which is being sold for recreational use in parcels with a minimum
size of 35 acres and with prices ranging from $11,000 to $42,750 depending on
location and size. These parcels are sold without any planned improvements and
without water rights, which have been reserved by PEC.
In November 1993, PEC, through a wholly-owned subsidiary, purchased
1,668 parcels, improved with roads, containing a minimum of five acres each,
located in Park County, Colorado. The purchase price was
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$2,504,000, payable $500,000 down and the balance payable in ten equal
semi-annual installments of principal with interest at the rate of 7% per
annum. These parcels were offered for sale commencing in January 1994, and
range in price from $12,995 to $29,995 depending on location and size.
The following table illustrates certain statistics regarding these
parcels in Huerfano and Park Counties, Colorado:
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Number of acres acquired since 1981 50,609
Total number of parcels 2,772
Net number of parcels sold through August 31, 1994 1,775
Percent sold through August 31, 1994 64%
For the twelve months ended August 31, 1994
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Number of parcels sold 1,352
Number of parcels canceled and/or exchanged 590
---
Number of parcels sold, net of cancellations and exchanges 762
===
</TABLE>
For the fiscal years ended August 31, 1994, 1993 and 1992, PEC's
consolidated net revenue from land sales were approximately $13,356,000,
$13,199,800 and $13,818,000, respectively, representing approximately 28.86%,
29.87% and 33.43% of total revenues, respectively.
Timesharing Activities.
PEC engages in the sale of timeshare interests. These interests
include fee interests, in which the right to weekly occupancy each year is
perpetual in duration, and, alternatively, "right-to-use" interests which
confer occupancy rights for one week each year during a stated time period.
PEC's timeshare properties consist of the Grand Flamingo Resort, a resort
facility in Las Vegas, Nevada (consisting of the Grand Flamingo Towers, Grand
Flamingo Villas, Grand Flamingo Terraces, Grand Flamingo Suites, Grand Flamingo
Fountains and Grand Flamingo Winnick), the Reno Spa Resort, a resort hotel in
Reno, Nevada, the Brigantine Resort consisting of the Brigantine Inn and
Villas, in Brigantine, New Jersey, adjoining Atlantic City, New Jersey, in
which fee interests are sold, and the White Sands Waikiki Resort, a resort
hotel in Honolulu, Hawaii, in which right-to-use privileges expiring shortly
before the land lease expires in the year 2010 are sold. During fiscal 1994
sales prices ranged from $3,950 to $15,450. Annual Association assessments for
operating costs ("Association Assessments") ranged from $203.00 to $419.97
during calendar year 1994.
The following table illustrates certain statistics regarding
timesharing activities:
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<CAPTION>
Grand Flamingo Reno Brigantine
Resort Spa White Sands Resort Total
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<S> <C> <C> <C> <C> <C>
Maximum number of timeshare interests
available 15,351 4,845 4,160 5,508 29,864
Net number of timeshare interests
sold through August 31, 1994 15,045 4,468 3,584 5,004(1) 28,101
Percent sold through August 31, 1994 98% 92% 86% 91% 94%
</TABLE>
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<TABLE>
<CAPTION>
Grand Flamingo Reno Brigantine
Resort Spa White Sands Resort Total
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<S> <C> <C> <C> <C> <C>
Net number of timeshare interests
sold (reacquired) during the 12
months ended August 31, 1994 1,483 (166) 24 (58) 1,283
Sales price of timeshare interests as
of August 31, 1994 range
From/ $ 6,150/ $ 5,750/ $ 3,950/ $ 5,150/ --
To $15,000 $ 9,350 $ 5,950 $15,450 --
Calendar year 1994 association
assessments per timeshare interest $203.00(2) $230.47 $367.09 $247.18/ --
$226.82(3) $419.97 --
$237.90(4) --
$238.00(5) --
and
$269.00(6)
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</TABLE>
(1) 4,823 timeshare interests were sold by the prior developer
(2) Grand Flamingo Winnick
(3) Grand Flamingo Suites
(4) Grand Flamingo Terraces
(5) Grand Flamingo Fountains
(6) Grand Flamingo Towers and Grand Flamingo Villas
In July 1990, the Company purchased 102 apartment units at a total
cost of $4,355,000. This property is in close proximity to the Grand Flamingo
Towers. Forty of the apartment units have been remodeled, renovated and
converted to timeshare interests and have been included in timeshare interests
available for sale in fiscal 1994. The remaining 62 apartment units, included
in Timeshare interests under construction at August 31, 1994, representing an
additional 3,162 timeshare interests which were completed and became available
for sale in mid September 1994.
The Company maintains sales offices in Nevada, California, Colorado,
Hawaii and New Jersey.
PEC participates in an exchange program sponsored by Resort
Condominiums International ("RCI") which has a total of more than 2,600
participating resort facilities located worldwide. Approximately 53% of the
participating facilities are located in the United States and Canada. The cost
of the annual subscription renewal fee in RCI, which is at the option and
expense of the Company's customers, is approximately $65 per year. Membership
in RCI entitles the Company's customers, based upon availability and the
payment of a variable exchange fee to RCI, to obtain an occupancy right in
another participating resort.
For the fiscal years ended August 31, 1994, 1993 and 1992, PEC's
consolidated net revenue from sales of timeshare interests was $19,254,000,
$21,734,000 and $14,621,000, respectively, representing approximately 59.04%,
62.22% and 51.41% of total net revenues, respectively.
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Recent Purchases of Timeshare Interests.
During September 1994, the Company purchased 48 apartment units
(representing 2,448 timeshare interests) at a total cost of $1,810,000. These
units are in close proximity to the Grand Flamingo Resort in Las Vegas, Nevada.
Anticipated costs to remodel, renovate and convert these units are expected to
total approximately $1,400,000. These units are expected to become available
for sale May 1995.
During October 1994, the Company purchased 60 apartment units
(representing 3,060 timeshare interests) at a total cost of $3,033,000. These
units are located in Steamboat Springs, Colorado. Anticipated costs to
remodel, renovate and convert these units and to construct an amenity building
are expected to total approximately $2,750,000. A portion of these units is
expected to become available for sale early in calendar year 1995.
Condominium Conversions and Apartment Sale.
PEC had been engaged through certain subsidiaries (the "PEC Apartment
Subsidiaries") in the sale of apartments in the Boroughs of Queens and the
Bronx, New York City, that had been converted from rental units into
condominiums, some of which remain occupied by lessees. During fiscal 1990,
the Company decided to discontinue this line of business activity. These
properties are presently the subject of litigation (see "Legal Proceedings").
Customer Financing.
The Company provides financing to the purchasers of its timeshare
interests and land parcels. This financing is generally evidenced by
non-recourse installment sales contracts as well as notes secured by deeds of
trust ("Notes"), having a term of up to 10 years with principal and interest
payable monthly in level payments over the term, bearing interest at rates
(generally ranging from 0% to 16% per annum and averaging approximately 11.0%
per annum at August 31, 1994) based on market rates in effect at the time of
signing the contract and the amount of the down payment made in proportion to
the sales price. The down payment received by the Company for such sales is at
least 10% of the sales price. The down payment is often less than the direct
expense of Commissions and selling and the difference is financed either by
borrowings by the Company or by the Company's internally generated funds.
Thus, the future sales levels of the Company could be limited by the
availability of funds to finance the initial negative cash flow that results
from sales.
The Company has a sales program whereby no stated interest is charged
on those sales where the aggregate down payment is at least 50% of the purchase
price and the balance is payable in 24 or fewer monthly payments. Sales of land
and timeshare interests for the fiscal years ended August 31, 1994, 1993 and
1992 under this arrangement were approximately $13,854,000, $13,263,000, and
$9,702,000, respectively, representing approximately 34.55%, 30.90% and 25.03%,
of gross sales, respectively.
Marketing.
The Company sells timeshare interests and real estate lots and land
parcels ("Land") through on-site and off-site sales offices at certain of its
locations and at times through brokers located in various states. The Company
also attracts potential customers through booths located in unaffiliated resort
hotels, hospitality centers, by direct communication and through independent
contractors who are retained on a commission basis.
The agreement of sale for a timeshare interest or Land may be
rescinded within various statutory rescission periods (see "Business -
Timesharing Regulation"). For Land sales made at a location other than the
property, generally the purchaser may cancel the contract within a specified
period, usually 5 months from the date of purchase, provided that the contract
is not in default, and provided the purchaser has completed a developer guided
inspection and tour of the subject property first, and then requests the
cancellation. At
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August 31, 1994, $260,000 of recognized sales remain subject to such
cancellation. If a purchaser defaults after all rescission and cancellation
periods have expired, all payments are generally retained by the Company.
Seasonality.
Sales of timeshare interests and Land are seasonal. For the last
three fiscal years, quarterly sales as a percentage of annual sales, for each
of the fiscal quarters averaged: quarters ended November 30 - 25%, quarters
ended February 28 - 22%, quarters ended May 31 - 24%, and quarters ended August
31 - 29%. The majority of the Company's customers are tourists. The Company's
major marketing area, Las Vegas, Nevada, reaches peaks of tourist activity at
periods different from the Company's other major marketing areas, Reno, Nevada,
Southern California, Atlantic City, New Jersey, Denver and Park and Huerfano
Counties, Colorado, which are more active in summer than in winter. The
Company's other major marketing area, Honolulu, Hawaii, is not subject to
seasonality. The Company is not dependent upon a limited number of customers
whose loss would have a materially adverse effect on the Company.
Governmental Regulation of Land and Timeshare Interests.
General. The real estate industry is subject to extensive regulation.
The Company is subject to compliance with various Federal, state and local
environmental, zoning and other statutes and regulations regarding the
acquisition, subdivision, development and sale of real estate and various
aspects of its financing operations. The Interstate Land Sales Full Disclosure
Act establishes strict guidelines with respect to the subdivision and sale of
land in interstate commerce. HUD has enforcement powers with respect to this
statute. In many instances, (e.g., Huerfano County, Colorado land sales) the
Company has been exempt from HUD registration requirements because of the size
or number of the subdivided parcels and the limited nature or type of its
offerings. The Company registers its timeshare properties with various state
agencies (see "Business - Timesharing Regulation"). The Company must disclose
financial information concerning the property, evidence of title, a description
of the intended manner of offering, proposed advertising materials, and must
bear the costs of such registration, which include legal and filing fees.
Although the regulations governing the Company's business are subject to
changing interpretations by various governmental agencies and authorities, the
Company believes that it is in compliance in all material respects with
existing regulations.
The Company's customer financing activities are also subject to
extensive regulation. The interest rates which the Company may charge on its
customer notes are subject to state usury laws, which specify the maximum rate
which may be charged to consumers. In addition, both Federal and state
truth-in-lending regulations require that the Company disclose to its customers
prior to execution of the Notes, all material terms and conditions of the
financing, including the payment schedule and total obligation under the Notes.
The Company believes that it is in compliance in all material respects with
such regulations.
Timesharing Regulation. Nevada Revised Statutes Chapter 119A requires
the Company to give each customer a Public Offering Statement that discloses
all aspects of the timeshare program, including the terms and conditions of
sale, the common facilities, the costs to operate and maintain common
facilities, the Company's history and all services and facilities available to
the purchasers. Section 514E of Hawaii Revised Statutes provides for similar
information to be provided to all prospective purchasers through the use of the
Hawaii Disclosure Statement. Section 11000, et seq., of the California
Business and Professions Code also provides for similar information to be
provided to all prospective purchasers through the use of an Out-of-State Time
Share Permit issued by the California Department of Real Estate. Section 45 of
the New Jersey Statutes Annotated provides for similar information to be
provided to all prospective purchasers through the use of a Public Offering
Statement. Title 12, Article 61 of the Colorado Revised Statutes provides for
similar information to be provided to all prospective purchasers, in their
contracts of sale or by separate written documents. Nevada and Colorado
require a five day rescission period for all timeshare purchasers. The
rescission period required by Hawaii and New Jersey is seven days. The
rescission period in California for out-of-state sales is five days. The
Nevada,
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California, New Jersey, Hawaii, and Colorado timeshare statutes have stringent
restrictions on sales and advertising practices and require the Company to
utilize licensed sales personnel.
The city and county governments in areas where the Company operates
have enacted licensing and other ordinances that affect timeshare projects.
To the best of its knowledge, the Company has made all required
filings with state, city and county authorities and is in compliance with all
state and local regulations governing sales of timeshare interests in all
material respects. The Company believes that such regulations have not had a
material adverse effect on any phase of the Company's operations, including the
over-all cost of acquiring property. Compliance with or changes in official
interpretations of regulations might, however, impose additional compliance
costs on the Company that cannot be predicted.
Trust Arrangements.
Title to certain of the Company's resort properties and land parcels
in Huerfano County, Colorado, is held in trust by trustees. Trustees administer
the collection of certain of the Company's Notes receivable, collect the
proceeds generated by the sale of timeshare interests and the Association
Assessments from timeshare interest owners and retain funds for the payment of
insurance, taxes and capital improvements. Bank of America Nevada ("BofA"), is
the sole trustee under the trust agreements governing the Reno facility and
certain of the Grand Flamingo Resort facilities. The trustee for the Honolulu
facility is First Hawaiian Bank. The Company anticipates replacing BofA as
trustee since BofA is withdrawing from the business of acting as trustee for
timeshare projects.
BofA pays the balance of the collections over to the Company on a
regular basis, after deducting certain impounds, provided that Association
Assessments have been disbursed by the Company according to a budget submitted
by the Company. Under the trust and management agreements, the Company has the
exclusive rights to the control and management of the facilities held in trust.
Timeshare Owners' Associations.
Timeshare Owners' Associations have been incorporated for the Grand
Flamingo, Reno Spa, and Brigantine timesharing resorts. The respective
Timeshare Owners' Associations are independent not-for-profit corporations.
PEC acts as the managing agent for these Timeshare Owners' Associations and the
White Sands Resort Club (a division of PEC) ("Associations") and receives a
management fee for its services. The owners of timeshare interests in each
Association are responsible for payment to the Associations for Association
Assessments, which are intended to fund all of the operating expenses at each
of the resort facilities. The Company has in the past financed budget deficits
of the Associations, but is not obligated to do so in the future.
The Company has agreed to pay to the Associations the Association
Assessments of timeshare interest owners who are delinquent with respect to
their Association Assessments, but have paid the Company in full for their
timeshare interest. In exchange for these payments, the Associations assign
their liens for non-payment of Association Assessments on the respective
timeshare interests to the Company. In the event the timeshare interest holder
does not satisfy the lien after having an opportunity to do so, the Company
acquires the timeshare interest for the amount of the lien and any foreclosure
costs.
Competition.
The real estate and timeshare industries are highly competitive. The
Company competes against numerous developers, hotels and others in the real
estate and timeshare businesses, many of which are larger and have greater
financial and other resources than the Company.
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The Company's timeshare plans compete directly with many other
timeshare plans, some of which are in facilities located in Las Vegas, Reno,
Honolulu and Atlantic City. In addition, the Company competes with condominium
projects and with traditional hotel accommodations in these areas. Certain of
these competing projects and accommodations are larger and more luxurious than
the Company's facilities. There are currently available approximately 79,000
hotel and motel rooms in Las Vegas, 37,000 in Honolulu, 19,000 in Washoe
County, Nevada which includes the Reno and Lake Tahoe, Nevada area, and 14,000
in Atlantic City.
Business of MMC.
MMC is engaged in the business, of originating, purchasing, selling
and servicing FHA Insured Loans that qualify under the provisions of Title I of
the National Housing Act which is administered by the U.S. Department of
Housing and Urban Development. Pursuant to this program 90% of the principal
balances of the Loans are U.S. government insured.
MMC commenced active operations in March 1994, and by August 31, 1994,
it had generated 497 individual Loans. These Loans are fixed rate and are
generally secured by a mortgage or deed of trust on the single family residence
to which the improvements relate. Loan amounts ranged from $3,000 to $25,000
and Loan terms ranged from 6 months to 240 months. The Loans are generated
through two operating divisions. The Dealer Division operates by means of
developing and underwriting a network of independent home improvement
contractors. Upon approval by MMC the dealer is then eligible to sell the
qualified Loans it generates to MMC. The Correspondent Division operates by
means of contacting and underwriting other mortgage lenders who are in the
business of direct origination of Loans with consumers. These correspondents
are sponsored by MMC and as such are approved by HUD under the correspondent
program.
All Loans that MMC generates from dealers or correspondents are
approved by MMC on an individual basis. The customer credit application is
submitted to the Company's headquarters where MMC's personnel promptly conduct
an analysis of the applicant's credit worthiness. This analysis includes a
review of prior credit history, length and likelihood of continued employment,
substantiation of income and certain other factors. If the application meets
MMC's guidelines and the credit is approved, MMC agrees to purchase the Loan
upon receipt of a fully completed Loan package.
The volume of Loans generated by MMC from commencement of operations
in March 1994 is as follows:
<TABLE>
<S> <C>
Year ended August 31, 1994:
Number of Loans 497
Average amount of Loans 13,535
Weighted average interest rate 14.18%
Weighted average term (months) 175
Total funding $6,727,040
</TABLE>
In addition to the Loans shown above, MMC purchased a portfolio of FHA
Insured Loans aggregating $1,420,000, originated by another financial
institution, consisting of 212 contracts with an average balance of $6,699, a
weighted average interest rate of 15.46%, and a weighted average remaining term
of 101 months. MMC will continue to consider acquisitions of portfolios of
Loans originated by others in the future.
Sales of Loans. During August 1994, MMC entered into an agreement to
sell up to $25 million of principal balance of Loans to a third party
purchaser. The sales can be consummated on a monthly basis with
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<PAGE> 11
a minimum sale of $2 million. The sale price is at par with the purchaser to
receive interest at a rate indexed to the yield paid on four year Federal
Government Treasury obligations in effect at the time of sale (the "Pass thru
Rate"). On an ongoing basis MMC will receive the excess yield which represents
the difference between the contracted interest rate on the sold receivables and
the Pass thru Rate. At the end of August 1994, the initial sale under this
agreement was consummated whereby Loans with a principal balance of $6.56
million and a weighted average remaining term of 172 months were sold. During
October 1994, another sale of Loans with a principal balance of $4.61 million
and weighted average remaining life of 178 months were sold. It is MMC's
intent to continue to sell the Loans it generates on an ongoing basis.
Servicing. MMC, through an affiliated corporation, PEC, services all
of the Loans it purchases whether or not the Loans are subsequently sold. In
servicing Loans, MMC collects payments from the customer and remits the
appropriate principal and interest payments to the owner of the Loan. PEC
charges MMC a fee equal to .5% per annum on the principal balance of the Loans
for providing this service. At August 31, 1994, the unpaid principal amount of
the Loans being serviced totalled $8,026,000 representing 707 Loans with an
average unpaid balance of $11,352.
Regulation. MMC is a HUD approved Title I mortgage lender and as such
is subject to its supervision. In addition, MMC's operations are subject to
supervision by state authorities (typically state banking or consumer credit
authorities) many of which generally require that MMC be licensed to conduct
its business. This normally requires state examinations and reporting
requirements on an annual basis.
MMC is also subject to state usury laws which in certain instances may
be pre-empted by Federal laws. Compliance with such usury limits, however, has
not impeded MMC in doing business in any state where it currently operates.
The Federal Consumer Credit Protection Act ("FCCPA") requires a
written statement showing an annual percentage rate ("APR") of finance charges
and requires that other information be presented to debtors when consumer
credit contracts are executed. The Fair Credit Reporting Act requires certain
disclosures to applicants concerning information that is used as a basis for
denial of credit. The Federal Equal Credit Opportunity Act prohibits
discrimination against applicants with respect to any aspect of a credit
transaction on the basis of sex, marital status, race, color, religion,
national origin, age, derivation of income from public assistance program, or
the good faith exercise of a right under the FCCPA.
The Company believes that it is in compliance in all material respects
with all applicable Federal, state and local regulations. The Company believes
that such regulations have not had a material adverse effect on any phase of
MMC's operations. Compliance with future changes in regulations might,
however, impose additional compliance costs on the Company that cannot be
predicted.
Competition and Other Factors. MMC competes with banks, saving and
loan associations, and finance companies, all of which may be larger than MMC.
Prevailing interest rates are typically affected by economic conditions.
Changes in rates generally do not inhibit MMC's ability to compete, although
from time to time, in particular geographic areas, local competition may choose
to offer more favorable rates. It is MMC's intent to continuously provide
expeditious professional service to its Dealers and Correspondents rather than
compete solely on an interest rate basis.
Employees.
As of August 31, 1994, the Company had 868 full and part-time
employees, including 11 executive officers (2 of whom do not serve on a full
time basis), 79 managerial and professional personnel, 365 marketing and sales
specialists, and 413 general administrative, support, hotel personnel and loan
processors. 672 employees are based in Nevada (498 in Las Vegas, 109 in
Pahrump, and 65 in Reno), 27 in California, 37 in Colorado, 6 in Florida, 39 in
Georgia, 27 in Hawaii, 58 in New Jersey and 2 in Oklahoma. None of the
Company's
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<PAGE> 12
employees are represented by a collective bargaining unit. The Company believes
that its relations with its employees are satisfactory.
Future Acquisitions.
There are no ongoing arrangements or understandings with potential
sellers with respect to any corporate acquisition or any material real estate
purchase except as set forth in "Recent Purchases of Timeshare Interests".
Federal Income Tax Matters.
The Company files a consolidated Federal income tax return with its
subsidiaries for its tax year which ends the last day of February. As of
August 31, 1994, the Company had Federal net operating loss carryforwards
available for utilization against future taxable income approximately
$25,000,000, which expire through 2009.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES.
Not applicable.
Item 2. Properties.
The Company's principal executive offices are located at 4310 Paradise
Road, Las Vegas, Nevada 89109, where it occupies approximately 31,000 square
feet of office space in a modern building. Title to the property is held by
PEC. The Company has allocated approximately 2,500 square feet to executive
offices, 7,000 square feet to accounting and finance operations, 10,600 square
feet to marketing/sales, 3,000 square feet to data processing and 7,900 square
feet to general administrative operations.
Grand Flamingo Towers (part of the Grand Flamingo Resort) is a 93-unit
apartment complex constructed in 1976.
Grand Flamingo Villas (also part of the Grand Flamingo Resort),
constructed in 1964, is a 94-unit apartment complex adjacent to the Grand
Flamingo Towers.
The Grand Flamingo Terraces (also part of the Grand Flamingo Resort),
constructed in 1960 and acquired by the Company during fiscal 1991, consists of
two 25-unit apartment complexes adjacent to the Grand Flamingo Towers.
The Grand Flamingo Suites (also part of the Grand Flamingo Resort),
constructed in 1969, is a 102-unit apartment complex in close proximity to the
Grand Flamingo Towers.
The Grand Flamingo Winnick (also part of the Grand Flamingo Resort),
constructed in 1974, is a 15-unit apartment complex in close proximity to the
Grand Flamingo Towers.
The Grand Flamingo Fountains (also part of the Grand Flamingo Resort),
constructed in 1963, is a 12-unit apartment complex in close proximity to the
Grand Flamingo Towers.
The Reno Spa Resort is a 95-unit hotel constructed in 1962.
The White Sands Waikiki Resort is an 80-unit hotel consisting of three
buildings constructed between 1959 and 1964. The Company holds the buildings,
equipment and furnishings under a land lease expiring on
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<PAGE> 13
March 31, 2010. The Company makes rental payments of approximately $192,000
per year and passes on to the White Sands Resort Club such costs as an
operating expense.
The Brigantine Inn (part of the Brigantine Resort) is a 91-unit hotel,
originally constructed in 1926, located on the Atlantic Ocean in Brigantine,
New Jersey. It also contains a restaurant, bar and indoor swimming pool.
The Brigantine Villas (also part of the Brigantine Resort) is a
17-unit three story building, completed in 1990, over covered parking located
on the Atlantic Ocean in Brigantine, New Jersey and is adjacent to the
Brigantine Inn.
The Company believes that substantially all of its offices, rooms and
apartments are well maintained and adequate for their present uses.
At August 31, 1994, the Company had approximately 614 residential,
commercial and industrial lots, 997 recreational land parcels, 126 recreational
vehicle pads and 1,763 timeshare interests in its inventory.
Item 3. Legal Proceedings.
On February 8, 1989, Intercontinental Financial, Inc. and others (the
"Plaintiffs") filed an action in the Clark County, Nevada, District Court
against PEC, its subsidiary, First Corporation of Nevada, and others (the
"Defendants"). The lawsuit alleged fraud, breach of a prior settlement
agreement, breach of agreements to pay compensation and conspiracy. The suit
demanded compensatory damages of approximately $3,125,000 plus punitive
damages. In March 1991, the Court granted the Defendants' Motion for Judgment
on the Pleadings and dismissed one of the Plaintiffs' claims for fraud, the
claim for breach of a prior settlement agreement, and the claim of conspiracy.
The Company believed that it had meritorious defenses to the lawsuit and filed
substantial counterclaims against the Plaintiffs. Following a trial held in
February and March 1994, the court found against the Plaintiffs on all counts
except as to two small amounts, aggregating $25,000, to which the Company had
stipulated was due to Plaintiffs at the beginning of the case. The court held
that there was no fraud or breach of contract by the Defendants and that the
Company was not obligated to pay an additional $250,000 or other damages under
the prior settlement agreement. The court did not find sufficient breach by
the Plaintiffs to require repayment of other funds paid under the settlement
agreement as requested in the Defendants' counterclaim. The court at a
separate hearing, determined that the Company should be awarded $105,000 to be
paid by the Plaintiffs as compensation for the Company's costs and attorneys'
fees. Certain of the Plaintiffs have filed a notice of appeal. In February,
1995, the Company accepted $55,000 in full settlement of the amount due.
In June 1989, PEC and certain of its subsidiaries (the "PEC Apartment
Subsidiaries") commenced an action in the Supreme Court in the State of New
York, County of Queens, against the original owners, mortgagees and manager of
the New York apartments owned by such subsidiaries. The suit requested an
accounting and alleged 1) breach of contract, 2) breach of the covenant of good
faith and fair dealing, 3) breach of fiduciary duty, 4) conversion of funds and
property, and 5) unjust enrichment. Defendants counterclaimed, alleging that
the PEC Apartment Subsidiaries were in default of their mortgage obligations,
and sought to enforce a March 1984 limited guaranty executed by PEC. In
connection with this action, PEC posted a bond for $1,200,000, secured by PEC's
letter of credit, which related to a claim by the defendants for damages
arising out of a preliminary injunction, later dissolved. Pursuant to a Court
order in June 1993, finding that defendants had failed to establish their claim
for lost opportunities for profit, the injunction bond was ordered to be
reduced to $135,000. By order dated December 15, 1992, the Appellate Division
sanctioned defendants and their prior counsel for engaging in a pattern of
frivolous conduct in connection with pretrial discovery. In connection with
the sanction, PEC was awarded $10,000 to be paid by the defendants' prior
counsel. As a result of various motions and interlocutory appeals, PEC's
pleaded affirmative defenses to enforcement of the March 1984 limited and
sought to enforce a March 1984 limited
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<PAGE> 14
guaranty were dismissed as having been expressly waived in the limited
guaranty. The trial Court, after holding in July 1992 that defendant Ziegelman
had lost most of his standing to assert counterclaims under the limited
guaranty, reversed itself and held in September 1993 that Ziegelman has
standing to sue under the limited guaranty, and PEC has not been allowed to
raise the defense of usury as requested by PEC. In the summer of 1994, PEC
filed appeals from the trial Court's determinations that the defendants had
retained the right of standing to sue under the guaranty and that the defense
of usury would not be considered. During July and August of 1994, the Court
conducted an evidentiary hearing in order to afford defendants the opportunity
to establish the date of any alleged default on the part of the PEC
subsidiaries and the amounts to which defendants claim entitlement under the
limited guaranty. In May 1995, an order for judgment of $3,346,000 was
rendered against PEC on its limited guaranty in connection with the defendants'
counterclaim. In June 1995, pursuant to a stipulation between the parties
dated as of May 15, 1995, PEC paid $2.9 million in full settlement of the
litigation. Because the reserve recorded in the financial statements of the
Company exceeded the amount of the settlement, the Company recognized a gain on
discontinued operations of $1,322,000 (see Notes 14 and 21 to Notes to
Consolidated Financial Statements).
In the general course of business the Company, at various times, has
been named in other lawsuits. The Company believes that it has meritorious
defenses to these lawsuits and that resolution of these matters will not have a
material adverse affect on the business or financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
On February 9, 1994, an Annual Meeting of Shareholders was held at
which time all of the directors were elected. At the same meeting the
appointment of Deloitte & Touche LLP as the Company's independent public
accountants was approved as was the approval of the 1993 Stock Option Plan for
525,000 Common Shares for key employees of the Company.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters.
(a) Market Information.
The Common Shares are traded in the over the counter market on NASDAQ
and prior to May 1, 1994, was traded on the Boston Stock Exchange ("BSE").
NASDAQ Small Cap Market Transactions and Boston Stock Exchange
Transaction. The Class A Shares, subsequently redesignated Common Shares in
June 1992, began trading in the over the counter market under the trading
symbol MEGO, and on the BSE under the trading symbol MGO, and was reported on
the NASDAQ Small Cap Market through March 1994. The high and low bid prices
for Common Shares for the quarterly periods while trading in the Small Cap
Market on NASDAQ and BSE, are as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
----------------- ---------- ---------
<S> <C> <C>
November 30, 1991 1 5/16 1/2
February 29, 1992 1 5/8 3/4
May 31, 1992 1 9/16 3/4
August 31, 1992 1 5/16 7/8
November 30, 1992 1 11/16
February 28, 1993 1 7/16 7/8
May 31, 1993 1 1/2 1 1/2
</TABLE>
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<PAGE> 15
<TABLE>
<S> <C> <C>
August 31, 1993 1 1/8 13/16
November 30, 1993 3 1 3/8
February 28, 1994 3 3/8 2 1/8
Month of March 1994 4 1/2 3 3/8
</TABLE>
NASDAQ National Market Transactions. In April 1994, the Common Shares
of the Company began trading on the NASDAQ National Market under the trading
symbol MEGO. The high and low security prices for Common Shares for the
quarterly periods since trading began on the NASDAQ National Market are as
follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- -------- -------
<S> <C> <C>
May 31, 1994 4 1/2 2 3/4
August 31, 1994 4 1/4 3
</TABLE>
The prices quoted reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
On November 11, 1994, the closing price of the Common Shares was $4.25 (4 1/4)
as reported by NASDAQ.
(b) Holders.
The approximate number of record holders of Common stock of the
Company as of August 31, 1994 was 2,764, without inclusion of 2,133 prior
shareholders of Vacation Spa Resorts, Inc. ("VSR") a former 80%-owned
subsidiary of the Company, who have not as yet exchanged their shares pursuant
to the Plan of Merger with PEC. There is one holder of Preferred Stock.
(c) Dividends.
Since 1983, Mego has not paid dividend on any of its outstanding
Common Shares.
Mego's ability to declare dividends depends in large part on PEC's
ability to pay dividends or make other payments to Mego. The most restrictive
provision that affects the ability of PEC to pay dividends is contained in
certain loan and receivable sale agreements which require PEC to maintain a
tangible net worth of at least $25,000,000. At August 31, 1994, PEC's net worth
was $31,936,000 and according to this restriction, approximately $6,936,000 was
available to make dividend payments to Mego.
It is the current policy of the Board of Directors of Mego to retain
cash for use as working capital and not to pay dividends.
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<PAGE> 16
Item 6. Selected Financial Data (in thousands of dollars except per share
data).
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------------------------------
Income statement data: 1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
$46,718 $48,295 $41,334 $42,883 $35,163
------- ------- ------- ------- -------
Operating revenues
Income (loss) from continuing
operations before income taxes (5,013) 1,365 1,339 3,235 4,357
Income taxes 761 2,218 2,382 3,025 1,928
------- ------- ------- ------- -------
Income (loss) from continuing
operations (5,774) (853) (1,043) 210 2,429
Income (loss) from discontinued
operations -- -- -- -- 81
------- ------- ------- ------- -------
Income (loss) before minority
interest (5,774) (853) (1,043) 210 2,510
Minority interest in income of
80%-owned subsidiary -- 126 63 330 128
------- ------- ------- ------- -------
Income (loss) before extraordinary
items (5,774) (979) (1,106) (120) 2,382
Extraordinary items:
Tax benefit resulting from
utilization of net operating and
credit loss carryforwards -- -- -- 2,972 1,901
------- ------- ------- ------- -------
-- -- -- 2,972 4,283
------- ------- ------- ------- -------
Net income (loss) $(5,774) $(979) $(1,106) $2,852 $4,283
======= ======= ======= ======= =======
Earnings (loss) per share:
Primary -
Income (loss) from continuing
operations, net of minority
interest $(.34) $(.06) $(.07) $(.01) $.15
Extraordinary items .00 .00 .00 .18 .11
------- ------- ------- ------- -------
Net income (loss) $(.34) $(.06) $(.07) $.17 $.26
======= ======= ======= ======= =======
Cash dividends per common share None None None None None
Weighted average number of shares
outstanding (in thousands) 17,820 17,145 16,701 16,711 16,717
</TABLE>
<TABLE>
<CAPTION>
Years Ended August 31,
-----------------------------------------------------------------
Balance sheet data: 1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total assets $88,302 $91,153 $88,937 $85,770 $75,296
Total liabilities 68,779 66,144 65,412 61,202 53,910
Minority interest -- -- 1,619 1,556 1,226
Redeemable preferred stock 3,000 3,000 -- -- --
Common stock and other
shareholders' equity $16,523 $22,009 $21,906 $23,012 $20,160
</TABLE>
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following analysis should be read in conjunction with the
consolidated financial statements and accompanying notes for the years ended
August 31, 1994, 1993 and 1992, beginning on pages F-1 and following.
The financial statements for the fiscal years 1994, 1993 1992 and
certain prior years have been restated (see Note 20 to Notes to consolidated
financial statements and "Business-Recent Events").
GENERAL
The business of the Company, after the acquisition of PEC (see
"Business--Purchase of Preferred Equities Corporation") and the commencement of
operations of MMC (see "Business of MMC"), is primarily the business of
generating consumer receivables by marketing timeshare interests, retail lots
and land parcels and generating home improvement loans; and collecting the
related Notes receivable and Loans.
MMC commenced operations on March 1, 1994 and, accordingly, the
Company's results of operations for the year ended August 31, 1994 include only
the initial six months of operations of MMC. MMC recognizes revenue from the
gain on sale of loans, interest income and servicing income. Gain on sale of
loans represents the present value of the difference between stated interest
rates charged to borrowers on loans sold by the Company and the interest rates
passed on to the purchaser of such loans, after considering the effects of
estimated prepayments and losses, unreimbursed FHA insurance costs and normal
servicing fees. Interest income represents the interest received on loans in
MMC's portfolio prior to their sale and the accretion of the discount on the
excess servicing rights. MMC continues to service all loans sold to date,
recognizing servicing income over the life of the loans.
Total costs and expenses consist primarily of general and
administrative expenses, depreciation and amortization, and interest expense on
borrowings to finance loan originations.
PEC
PEC recognizes revenue primarily from sales of timeshare interests and
land, gain on sale of receivables and interest income. Revenue from sales of
timeshare interests and land is recognized after the statutory rescission
period has expired and at such time as the purchaser has paid at least 10% of
the sales price for sales of timeshare interests and 20% of the sales price for
land sales. Land sales typically meet these requirements within eight to ten
months from closing, and sales of timeshare interests typically meet these
requirements at the time of sale. The sales price, is recorded as revenue.
When revenue related to land sales is recognized, the portion of the sales
price attributable to uncompleted required improvements, if any, is deferred.
Notes receivable with payment delinquencies of 90 days or more have
been considered in determining the Allowance for cancellation. Cancellations
occur when the note receivable is determined to be uncollectible and related
collateral, if any, has been recovered. Cancellation of a note receivable in
the year the Revenue is recognized is accounted for as a reversal of the
Revenue. Cancellation of a note receivable subsequent to the year the Revenue
was recognized is charged to the Allowance for cancellation.
Gain on sale of notes receivable includes the present value of the
differential between contracted interest rates charged to borrowers on notes
receivable sold by the Company and the interest rates to be received by the
purchasers of such notes receivable, after considering the effects of estimated
prepayments and a normal servicing fee. The Company retains the servicing
rights and participation in certain cash flows from the sold notes receivable.
The Company generally sells its notes receivable at par value.
Interest income represents the interest received on loans held in
PEC's portfolio, the accretion of the discount on the excess servicing rights
and interest on cash funds.
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<PAGE> 18
Other revenues are derived primarily from PEC's golf courses, utility
company and housing sales.
Total costs and expenses consist primarily of commissions and selling
expenses, general and administrative expenses, direct costs of sales of
timeshare interests and land, depreciation and amortization and interest
expense. Commissions and selling costs directly attributable to unrecognized
sales are accounted for as deferred selling costs until such time as the sale
is recognized.
CERTAIN PAYMENTS AND AMORTIZATION OF NEGATIVE GOODWILL
In connection with the assignment to the Company in 1988 by affiliates
of certain officers and directors of the Company (the "Assignors") of the right
to acquire PEC, the Company became obligated to make quarterly payments to the
Assignors equal to 63% of the cash balances of PEC, during the seven year
period ending January 31, 1995, that could be used to pay a dividend without
violating PEC's loan agreements. Accrual of amounts owed under such assignment
agreement to the Assignors will end on January 31, 1995, when their right to
the accrual expires. At the time of the acquisition of PEC, the underlying
book value of the net assets acquired exceeded the purchase price paid by the
Company by $42.3 million resulting in the creation of negative goodwill in that
amount (the "Revaluation Adjustment"). Of this amount $20.0 million was not
amortized but was instead reduced as additional payments were accrued to the
Assigners. Amounts accrued to the Assignors in excess of $20.0 million were
expensed as such accruals were made. The amortization of the remaining $22.3
million of the Revaluation Adjustment was directly affected by the level of
collections of the receivables of PEC included in the acquired assets. As
proceeds of these receivables were collected, through installment payments or
sale, a portion of the Revaluation Adjustment included as a contra account in
notes receivable was recorded to income as amortization of negative good will.
The Company also amortizes over a five-year period ending February 1998,
negative goodwill related to the excess of the underlying book value over the
purchase price paid in 1993 for the acquisition of the minority interest of
Vacation Spa Resorts, Inc. ("VSR"), formerly an 80%-owned subsidiary. The
financial statements of the Company accordingly reflect amortization of a
portion of the Revaluation Adjustment ("Revaluation Amortization"),
amortization of the negative goodwill associated with the acquisition of the
VSR minority interest and accrual of payments to Assignors ("Payments to
Assignors").
RESULTS OF OPERATIONS
Year Ended August 31, 1994 Compared to Year Ended August 31, 1993
MMC
MMC originated or purchased $8.13 million of Title I Loans during
fiscal 1994, its first year of operations. MMC sold $6.56 million of Title I
Loans during fiscal 1994, recognizing a gain on sales of loans of $0.58
million.
Interest income was $0.28 million for fiscal 1994.
Total revenues were $0.86 million for fiscal 1994.
Total costs and expenses, consisting primarily of general and
administrative expenses, were $2.37 million for fiscal 1994.
As a result of the foregoing, MMC incurred an operating loss of $1.5
million for fiscal 1994.
PEC
Timeshare interests and land sales, net, decreased from $34.93 million
for fiscal 1993 to $32.61 million for fiscal 1994, a decrease of 6.64%.
18
<PAGE> 19
Gross sales of timeshare interests decreased from $26.92 million to
$24.67 million, a decrease of 8.36%. Net sales of timeshare interests
decreased from $21.73 million to $19.52 million, a decrease of 10.17%. The
provision for cancellation represented 19.26% and 20.87% of gross sales of
timeshare interests for fiscal 1993 and 1994, respectively.
Gross sales of land decreased from $16.00 million to $15.43 million, a
decrease of 3.56%. Net sales of land increased from $13.20 million to $13.36
million, an increase of 1.21%. The provision for cancellation represented
17.53% and 12.31% of gross sales of land for fiscal 1993 and 1994,
respectively. The decrease in the provision for cancellation relating to land
sales was primarily the result of a decrease in PEC's delinquency and
cancellation rates related to land receivables.
PEC's Gain on sale of receivables increased from $.63 million for
fiscal 1993 to $.875 million for fiscal 1994, an increase of 38.89%. This
increase resulted from increased sales of receivables from $16.34 million
during fiscal 1993 to $23.99 million during fiscal 1994, an increase of 46.82%.
PEC's revenues from Incidental operations increased from $1.67 million
for fiscal 1993 to $2.01 million for fiscal 1994, an increase of 20.36%. This
increase is primarily the result of increased golf course and utility revenues.
As a result of the foregoing, total PEC revenues decreased from $47.43
million for fiscal 1993 to $44.86 million for fiscal 1994, a decrease of 4.47%.
Total PEC costs and expenses decreased from $41.84 million for fiscal
1993 to $39.70 million for fiscal 1994, a decrease of 4.97%. This decrease
resulted primarily from a decrease in cost of sales from $6.37 million to $4.59
million, a decrease of 27.00%, a decrease in commissions and selling expenses
from $20.08 million to $18.95 million, a decrease of 5.63%, and an increase in
General and administrative from $8.24 million to $8.46 million, an increase of
2.62%. As a percentage of gross sales of timeshare interests and land, costs
of sales relating thereto decreased from 12.87% for fiscal 1993 to 10.27% for
fiscal 1994, and commissions and selling expenses relating thereto increased
from 46.06% for fiscal 1993 to 47.13% for fiscal 1994.
As a result of the foregoing, PEC's operating income increased from
$3.62 million for fiscal 1993 to $3.45 million for fiscal 1994, an increase of
4.11%.
COMPANY
Operating income from subsidiaries decreased from $3.62 million for
fiscal 1993 to $2.20 million for fiscal 1994, a decrease of 39.23%. The
decrease was attributable primarily to MMC's operating loss for fiscal 1994.
Interest income increased slightly from $8.24 million for fiscal 1993
to $8.26 million for fiscal 1994, an increase of 0.24%. This increase was
offset by an increase in Interest expense from $4.19 million for fiscal 1993 to
$4.73 million for fiscal 1994, an increase of 12.89%, due to a higher level of
Notes and contracts payable during fiscal 1994.
Amortization of negative goodwill decreased from $.88 million for
fiscal 1993 to $.47 million for fiscal 1994, a decrease of 46.59%. Included in
such amortization was $.83 million and $.42 million in fiscal 1993 and 1994,
respectively, relating to the purchase of PEC in 1988, with $.05 million in
each of fiscal 1993 and 1994, relating to the acquisition of the minority
interest in VSR.
Other income increased from $.88 million for fiscal 1993 to $.95
million for fiscal 1994.
19
<PAGE> 20
As a result of the various matters described above, total revenues
decreased from $48.30 million for fiscal 1993 to $46.72 million for fiscal
1994, a decrease of 3.27%.
Payments to Assignors increased from $4.63 million for fiscal 1993 to
$8.53 million for fiscal 1994, an increase of 84.23%.
Total costs and expenses increased from $46.93 million for fiscal 1993
to $51.73 million for fiscal 1994, an increase of 10.23%. This increase
resulted primarily from a decrease in cost of sales from $6.37 million to $4.65
million, a decrease of 27.00%, and a decrease in commissions and selling
expenses from $20.08 million to $18.96 million, a decrease of 5.58%, which were
offset by an increase in General and administrative from $8.50 million to
$11.22 million, an increase of 32.00%, and the above described increase in
Payments to assignors. The increase in general and administrative expenses was
primarily a result of the operations of MMC in fiscal 1994.
Income (loss) before income taxes decreased from income of $1.37
million for fiscal 1993 to a Loss before income taxes of $5.01 million for
fiscal 1994. Income taxes of $2.22 million and $.76 million were provided in
1993 and 1994, respectively.
Minority interest in 80%-owned subsidiary decreased from $.13 million
for fiscal 1993 to zero for fiscal 1994 as a result of the merger of VSR into
the Company in fiscal 1993.
As a result of the foregoing the Net loss in 1993 of $.98 million
increased to a Net loss in 1994 of $5.77 million.
Year Ended August 31, 1993 Compared to Year Ended August 31, 1992
MMC
MMC had no operations in fiscal 1993 or 1992.
PEC
Timeshare interests and land sales, net, increased from $28.44 million
for fiscal 1992 to $34.93 million for fiscal 1993, an increase of 22.82%.
Gross sales of timeshare interests increased from $20.57 million to
$26.92 million, an increase of 30.87%. Net sales of timeshare interests
increased from $14.62 million to $21.73 million, an increase of 48.63%. The
provision for cancellation represented 28.92% and 19.26% of gross sales of
timeshare interests for fiscal 1992 and 1993, respectively.
Gross sales of land decreased from $18.20 million to $16.00 million, a
decrease of 12.09%. Net sales of land decreased from $13.82 million to $13.20
million, a decrease of 4.49%. The provision for cancellation represented
24.07% and 17.53% of gross sales of land for fiscal 1992 and 1993,
respectively.
PEC sold $16.34 million of receivables during fiscal 1993, recognizing
a gain on sale of receivables of $.63 million. PEC did not sell any
receivables during fiscal 1992.
Interest income remained relatively constant at $8.18 million for
fiscal 1992 and $8.24 million for fiscal 1993.
Housing sales were $1.06 million for fiscal 1993 and zero for fiscal
1992.
20
<PAGE> 21
As a result of the foregoing, total PEC revenues increased from $39.34
million for fiscal 1992 to $47.43 million for fiscal 1993, an increase of
20.56%.
Total PEC costs and expenses increased from $36.19 million for fiscal
1992 to $41.84 million for fiscal 1993, an increase of 15.63%. This increase
resulted primarily from an increase in commissions and selling expenses from
$16.43 million to $20.08 million, an increase of 22.19%, and an increase in
cost of sales from $4.55 million to $6.37 million, an increase of 40.12 %. As
a percentage of gross sales of timeshare interests and land, commissions and
selling expenses relating thereto increased from 41.90% for fiscal 1992 to
46.06% for fiscal 1993 and costs of sales relating thereto increased from
11.73% for fiscal 1992 to 12.87% for fiscal 1993. Included in total costs and
expenses for 1993 is $.84 million for costs of sales related to housing sales.
As a result of the foregoing, PEC's operating income increased from
$2.07 million for fiscal 1992 to $3.62 million for fiscal 1993, an increase of
74.94%.
COMPANY
Operating income from subsidiaries increased from $2.07 million for
fiscal 1992 to $3.62 million for fiscal 1993, an increase of 74.94%, all of
which is attributable to PEC.
Amortization of negative goodwill decreased from $1.98 million for
fiscal 1992 to $.88 million for fiscal 1993, a decrease of 55.87%. Included in
such amortization was $1.98 million and $.83 million in fiscal 1992 and 1993,
respectively relating to the purchase of PEC in 1988, with $.05 million in
fiscal 1993 relating to the acquisition of the minority interest in VSR.
Incidental operations and Other income, decreased from an aggregate of
$2.73 million for fiscal 1992 to $2.56 million for fiscal 1993, a decrease of
6.44%.
Payments to Assignors increased from $3.33 million for fiscal 1992 to
$4.63 million for fiscal 1993, an increase of 39.31%.
Income before income taxes increased from $1.34 million for fiscal
1992 to $1.37 for fiscal 1993. This increase is primarily the result of the
increase of timeshare interest sales from $14.62 million to $21.73 million
offset by a decrease in the amortization of negative goodwill relating to the
acquisition of PEC from $1.98 million to $.83 million, the increase in Payments
to Assignors from $3.33 million to $4.63 million, and the increase in
Commissions and Selling from $16.43 million to $20.08 million caused by the
higher level of timeshare interest sales.
Income taxes decreased from $2.38 million for fiscal 1992 to $2.22
million for fiscal 1993.
Minority interest in 80%-owned subsidiary increased from $.06 million
for fiscal 1992 to $.13 million for fiscal 1993, an increase of 100%.
As result of the foregoing, Loss decreased from $1.11 million for
fiscal 1992 to $.98 million for fiscal 1993.
Liquidity and Capital Resources.
Cash and cash equivalents increased $2.71 million (32.75%) to $10.98
million at August 31, 1994, from $8.27 million at August 31, 1993. The
increase was caused primarily by proceeds of a higher level of sales of
receivables in fiscal 1994.
21
<PAGE> 22
During fiscal 1994, the Company provided $10.18 million of cash by
operating activities compared with providing $7.51 million of cash by operating
activities in fiscal 1993. The Company anticipates that it will continue to
require cash in its operating activities for as long as it maintains the
present or increased levels of Revenues from sales of timeshare interests and
Land. In fiscal 1994, the Company provided $30.38 million of cash from the
sales of receivables, compared to $16.33 million of cash from such source in
fiscal 1993, an increase of 86.05%. The Company, as shown below, generates a
cash shortfall from sales as a result of its Commissions and selling expenses
generally exceeding the cash down payments received at the time of sale. The
cash shortfall is generally funded through financing activities. The Company's
potential Revenues are therefore limited by its cash resources and lines of
credit available to fund the cash shortfall and other Company cash
requirements.
The Company must obtain sources of funds, whether from the Company's
existing assets or from external sources to cover the cash shortfall that is
created when commissions and selling expenses exceed down payments received by
the Company from its customers. In addition to the cash shortfall, the Company
must recover its product costs, pay its General and administrative expenses,
purchase and replace equipment and make principal and interest payments toward
its debt. During fiscal 1994, the cash shortfall and other cash needs were
financed from sales of receivables, borrowings on lines of credit, collections,
including interest, on receivables produced by sales made in current and prior
periods, down payments made on new sales, and cash balances.
For fiscal 1994 the Company used net cash from financing activities of
$5.28 million, which included in this calculation $41.04 million of proceeds
from borrowings offset by $45.96 million used to reduce debt. Sales of
receivables is an ongoing program from which proceeds are used to reduce debt
outstanding under lines of credit thereby increasing availability under such
lines of credit.
At August 31, 1994, PEC had two lines of credit not to exceed $57.50
million in the aggregate, secured by timeshare and Land receivables. As of
August 31, 1994 the Company's outstanding liabilities under these lines of
credit were approximately $36.59 million. At August 31, 1994, the Company had
unpledged timeshare and Land receivables, both recognized and unrecognized, in
the amount of approximately $18.48 million, of which $18.1 million are
available for pledging under existing lines of credit, subject to certain loan
agreement criteria. Under the terms of these lines of credit, the Company may
borrow up to 75% of the balances of the timeshare and Land receivables tendered
for pledging. The Company believes that it has adequate lines of credit.
However, the Company continues to seek additional lines of credit and increases
or more favorable terms in its existing lines of credit. The need for
available lines of credit is to support future sales and the related cash
shortfall. Set forth below is a schedule of the cash shortfall arising from
recognized and unrecognized sales for (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended August 31,
------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Commissions and selling expenses $19,924 $19,890 $16,329
attributable to recognized and
unrecognized sales
Less: down payments 10,792 10,140 8,993
------- ------- -------
Cash Shortfall $ 9,132 $ 9,750 $ 7,336
</TABLE>
MMC had a $10 million unsecured revolving line of credit expiring on
December 31, 1994, bearing interest at prime plus 1%, against which $.37
million had been advanced at August 31, 1994. The highest amount advanced under
this line of credit during the year was $6.28 million. This line of credit was
renewed and later replaced in August 1995 by a secured warehouse line of credit
from the same lender in the amount of $20 million which will expire in August,
1996.
22
<PAGE> 23
Liquidity demands may be met through new borrowings, increased down
payments, the sale of receivables, the offer to customers of cash discounts or
other incentives for prepayments of their receivable balances, voluntary
reduction in sales volume, or by a combination of these five strategies.
During the fiscal year ended August 31, 1994, the Company sold
receivables of $30.55 million to four major financial institutions from which
$20.7 million of the proceeds were used to pay debt. The receivables, which
have average interest rates of 11.27% to 14.154% depending on the transaction,
were sold to yield returns of 8.5% to 9.75% to the purchasers, with any excess
interest received from the obligors of the receivables being payable to the
Company.
During the fiscal year ended August 31, 1993, the Company sold
receivables of $16.3 million to three major financial institutions from which
$10.92 million of the proceeds were used to pay debt. The receivables, which
have average interest rates of 11.78% to 13.2% depending on the transaction,
were sold to yield returns of 9.25% to 12% to the purchasers, with any excess
interest received from the obligors of the receivables being payable to the
Company.
The Company sells Notes receivable subject to recourse provisions as
contained in each agreement. The Company is obligated under these agreements
to replace or repurchase accounts that become over ninety days delinquent or
otherwise subject to replacement or repurchase. The recourse provisions
provide for substitution for or repurchase of receivables with respect to
$51.19 million of sold Notes receivable. A liability for Future estimated
contingency for notes receivable sold with recourse was established at the time
of each sale based upon the Company's analysis of all probable losses resulting
from the Company's recourse obligations under each agreement of sale. The
Company periodically reviews the adequacy of this liability. These reviews
take into consideration changes in the nature and level of the portfolio,
current and future economic conditions which may affect the obligors' ability
to pay, collateral values and overall portfolio quality.
The Company is obligated under certain agreements for the sale of
Notes receivable and certain loan agreements to maintain minimum net worth
requirements. The most restrictive of these agreements requires PEC to
maintain a minimum net worth of $25.0 million.
The Assignors of the agreement which enabled the Company to acquire
all of the stock of PEC were entitled to receive from the Company on a
quarterly basis, for a period ending on January 31, 1995, additional payments
as determined as of the end of each quarter, equal in the aggregate to 63% of
PEC's unrestricted cash balances. At August 31, 1993, the liability Payable to
assignors was $3.20 million. During fiscal 1994 payments of $4.9 million
including interest of $304,000 were paid to the Assignors. At August 31, 1994,
$7.13 million remained payable to the Assignors on the Payable to assignors
liability, an increase of $ 3.93 million from August 31, 1993.
During fiscal 1994 and 1993, the Company used cash of $2.20 million
and $1.45 million, respectively, in investing activities, which was
substantially expended for the purchase of Property and equipment.
Capital expenditures during fiscal 1994 were $5.35 million for the
acquisition of inventory and $2.55 million for the purchase of Property and
equipment. For fiscal 1995 it is anticipated that capital expenditures will
approximate $9.7 million for the acquisition of inventory, renovation of future
timeshare inventory, refurbishment of present timeshare inventory, construction
of certain road improvements in Pahrump Valley and the acquisition of
replacement equipment. The Company believes that its current and long-term
requirements will be met from cash balances, internally generated cash,
existing lines of credit, sales of receivables, and the modification,
replacement or addition to its lines of credit.
23
<PAGE> 24
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data
required by Item 8 of Mego Financial Corp. and its subsidiaries are included
herewith:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets - August 31, 1994 and August 31, 1993 F-2
Consolidated Statements of Operations for the years ended
August 31, 1994, 1993 and 1992 F-3 - F-4
Consolidated Statements of Cash Flows for the years ended
August 31, 1994, 1993 and 1992 F-5 - F-6
Consolidated Statements of Shareholders' Equity for the years ended
August 31, 1994, 1993 and 1992 F-7
Notes to Consolidated Financial Statements for
the years ended August 31, 1994, 1993 and 1992 F-8 - F-22
Independent Auditors' Report on Financial Statement Schedules S-1
Valuation and Qualifying Accounts for the year ended August 31, 1994 S-2
Valuation and Qualifying Accounts for the year ended August 31, 1993 S-3
Valuation and Qualifying Accounts for the year ended August 31, 1992 S-4
</TABLE>
All other schedules are omitted because of the absence of conditions
under which they are required or because the required information is included
in the financial statements.
Item 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Incorporated by reference from the Company's definitive proxy
statement as filed.
Item 11. Executive Compensation.
Incorporated by reference from the Company's definitive proxy
statement as filed.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference from the Company's definitive proxy
statement as filed.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference from the Company's definitive proxy
statement as filed.
24
<PAGE> 25
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K.
(a) (1) (2) Financial Statements. See Item 8 above for a list of
financial statements included as part of this Annual Report on Form 10-K.
(3) Exhibits.
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
2.1(1) Disclosure Statement dated October 3, 1983, together with Schedules A through G and Debtors' Plan, filed as
Exhibit (2) to Mego International (a predecessor of Mego) Form 10-K for the year ended February 28, 1983,
and incorporated herein by reference.
2.2 Articles of Merger of Vacation Spa Resorts, Inc. with and into Preferred Equities Corporation dated March
10, 1993, Agreement and Plan of Merger dated as of July 24, 1992, among Preferred Equities Corporation and
Vacation Spa Resorts, Inc., Amendment to Agreement and Plan of Merger dated July 24, 1992, and Amendment to
Agreement and Plan of Merger dated December 7, 1992.
3.1 (a) (1) Certificate of Incorporation of Mego, as amended, filed as Exhibit 3.1 to Mego's Form 10-K for the fiscal
year ended August 31, 1987 and incorporated herein by reference.
3.1 (b) (5) Certificate of Amendment of the Certificate of Incorporation of Mego Financial Corp., dated June 19, 1992.
3.1 (c) Certificate of Amendment of the Certificate of Incorporation of Mego Financial Corp., dated August 26,
1993.
3.2 (1) By-laws of Mego, as amended.
10.4 (a) (1) Stock Purchase Agreement dated October 25, 1987 by and among Mego("Mego"), and Robert Nederlander, Jerome
J. Cohen, Don A. Mayerson, Herbert Hirsch, and Growth Realty Inc. ("GRI") (collectively the "Purchasers")
filed as Exhibit A to a Schedule 13D dated October 25, 1987, filed by Jerome J. Cohen, et al., and
incorporated herein by reference.
10.4 (b) (1) Letter dated January 7, 1988 from the Purchasers to Mego updating representations made by Mego in the Stock
Purchase Agreement (Exhibit 10.5(a)) filed as Exhibit 10.2 to a Current Report on Form 8-K of Mego, dated
January 7, 1988, and incorporated herein by reference.
10.5 (a) (1) Assignment Agreement dated October 25, 1987 by and among Comay Corp. ("Comay"), GRI, RER Corp. ("RER") (as
successor in interest to RRE Corp.) and H&H Financial, Inc. ("H&H") (collectively the "Assignors") and Mego
with respect to shares of Common Stock of Preferred Equities Corporation ("PEC"), filed as Exhibit B to a
Schedule 13D dated October 25, 1987 filed by Jerome J. Cohen, et al., and incorporated herein by reference.
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
10.5 (b) (1) Assignment and Assumption Agreement dated February 1, 1988 by and among the Assignors and Mego filed as
Exhibit 10.2 to a Current Report on Form 8-K of Mego dated February 1, 1988 and incorporated herein by
reference.
10.5 (c) (1) Amendment to Exhibit 10.6(b) dated as of July 29, 1988 filed as Exhibit 10.3 to a Current Report on Form 8-
K of Mego dated August 1, 1988 and incorporated herein by reference.
10.6 (a) (1) Stock Purchase and Redemption Agreement dated as of October 6, 1987 by and among PEC, Comay, GRI, RRE
Corp., H&H, Linda Sterling and the 1971 Rosen Family Stock Trust filed as Exhibit C to a Schedule 13D dated
October 25, 1987 filed by Jerome J. Cohen, et al., and incorporated herein by reference.
10.6 (b) (1) Amendment dated as of October 25, 1987 of Exhibit 10.7(a) filed as Exhibit 10.3(b) to a Current Report on
Form 8-K of Mego dated February 1, 1988, and incorporated herein by reference.
10.7 (1) Loan and Security Agreement dated February 1, 1988 by and between Mego and Greyhound Real Estate Finance
Company filed as Exhibit 10.7 to a Current Report on Form 8-K of Mego dated February 1, 1988 and
incorporated herein by reference.
10.8 (1) Pledge and Security Agreement dated February 1, 1988 by and among Mego and Comay, GRI, RER, H&H and PEC
regarding the pledge of PEC stock pursuant to the Assignment Agreement and the Assignment and Assumption
Agreement (Exhibits 10.6(a) and (b)) filed as exhibit 10.8 to the Form 8 Amendment dated April 18, 1988 to
a Current Report on Form 8-K of Mego dated February 1, 1988 and incorporated herein by reference.
10.9 (1) Purchase Agreement dated June 30, 1988 by and among Preferred Equities Corporation ("PEC"), Southern
Colorado Properties, Inc., Colorado Land and Grazing Company and The Oxford Finance Companies, Inc. filed
as Exhibit 10.1 to a Quarterly Report of Mego on Form 10-Q for the quarter ended May 31, 1988 and
incorporated herein by reference.
10.10 (2) Amendment to Exhibit 10.5(b), dated July 29, 1988.
10.11 (3) Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation
Spa Resorts, Inc., dated May 10, 1989 and Amended and Restated Promissory Note and Guarantee and
Subordination Agreement.
10.12 (3) Amendment No. 2 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation
Spa Resorts, Inc., dated April 16, 1990 and Amendment No. 2 to Promissory Note and Guarantee and
Subordination Agreement.
10.13 (3) Purchase Agreement dated 24th day of September, 1990 by and among Brigantine Inn, Ltd., Brigantine
Preferred Properties, Inc. and Preferred Equities Corporation.
10.14 (3) Purchase Agreement dated 24th day of September, 1990 by and among Brigantine Villas, L.P., Brigantine
Preferred Properties, Inc. and Preferred Equities Corporation.
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
10.15 (4) Amendment No. 3 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred
Equities Corporation, dated May 31, 1991 and Amendment No. 2 to Promissory Note.
10.16 (4) Amendment No. 3 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation
Spa Resorts, Inc., dated May 31, 1991 and Amendment No. 3 to Promissory Note.
10.17 (4) Loan and Security Agreement between Dorfinco Corporation and Preferred Equities Corporation, dated July 31,
1991 and related Promissory Note dated August 9, 1991.
10.18 (4) Forbearance and Assumption Agreement, Guarantee and Second Amendment to Loan and Security Agreement between
Chemical Bank of New Jersey, Brigantine Villas, L.P., and Brigantine Preferred Properties, Inc., dated June
12, 1991, Amended and Restated Promissory Note dated June 18, 1991, and Second Amendment to Mortgage dated
June 18, 1991.
10.19 (5) Stock Purchase Agreement dated August 13, 1992 between Mego and PEC.
10.20 (5) Amendment No. 4 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance
Company and Preferred Equities Corporation, dated January 13, 1992, and Amendment No. 3 to Amended and
Restated Promissory Note.
10.21 (5) Agreement for Wholesale Financing and related Promissory Note between ITT Commercial Finance Corp. and
Calvada Homes, Inc., dated January 17, 1992.
10.22 (5) Purchase and Sale Agreement between Golden West Homes and Calvada Homes, Inc., dated February 26, 1992.
10.23 (5) Standard Form of Agreement Between Owner and Contractor between Calvada Homes, Inc. and Emfad Enterprises,
Inc., dated March 23, 1992.
10.24 (5) Loan Modification and Extension Agreement between Valley Bank of Nevada and Preferred Equities Corporation,
dated January 30, 1992.
10.25 (5) Amendment No. 2 to Amended and Restated Loan Agreement between Valley Bank of Nevada and Vacation Spa
Resorts, Inc., dated February 20, 1992, and related Promissory Note dated February 20, 1992.
10.26 (6) Purchase and Servicing Agreement dated as of October 15, 1992 among Vacation Spa Resorts, Inc. and
Preferred Equities Corporation as Sellers, Preferred Equities Corporation as Servicer, and NBD Bank, N.A.
as Purchaser.
10.27 (6) Guaranty Agreement as of October 15, 1992 made by Vacation Spa Resorts, Inc., Preferred Equities
Corporation, and Mego Financial Corp. in favor of NBD Bank, N.A.
10.28 (6) Letter from Greyhound Financial Corporation dated December 4, 1992 extending the borrowing term of the
Amended and Restated Loan and Security Agreement dated May 10, 1992, between Greyhound Real Estate Finance
Company and Preferred Equities Corporation and Loan and Security Agreement dated March 30, 1989, between
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., to December 31, 1992.
10.29 (7) Asset Sale Agreement dated December 22, 1992, by and between Brigantine Preferred Properties, Inc. as
Seller, and The Oxford Finance Companies as Buyer.
10.30 (7) Amendment No. 5 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance
Company and Preferred Equities Corporation, dated February 23, 1993, Amendment No. 4 to Loan and Security
Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated February 23,
1993.
10.31 (7) First Amendment to Stock Purchase Agreement dated March 10, 1993, by and between Mego Financial Corp. and
Preferred Equities Corporation.
10.32 (7) Amendment No. 6 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance
Company and Preferred Equities Corporation, dated June 28, 1993, and three (3) related Promissory Notes,
relating to the Grand Flamingo Winnick, Grand Flamingo Fountains, and Preferred Equities Corporation
corporate offices.
10.33 (7) Second Amendment to Loan and Security Agreement dated June 30, 1993, between Dorfinco Corp. and Preferred
Equities Corporation, and First Amendment to Promissory Note.
10.34 (7) Agreement for Sale of Notes Receivable arising from Timeshare sales dated August 3, 1993, by and between
Brigantine Preferred Properties, Inc. as Seller, and The Oxford Finance Companies as Buyer.
10.35 (7) Purchase and Sale Agreement dated August 30, 1993, between Preferred Equities Corporation as Developer, and
Marine Midland Bank, N.A., and Wellington Financial Corp.
10.36 (7) Purchase Agreement dated August 31, 1993, between Mego Financial Corp. as Seller, and Legg Mason Special
Investment Trust as Buyer, for the purchase of 300,000 shares of the Company's Preferred Stock.
10.37 (8) Amended and Restated Loan Agreement between Bank of America Nevada and Preferred Equities Corporation,
dated September 10, 1993.
10.38 (8) Agreement for Line of Credit and Commercial Promissory Note between Mego Mortgage Corporation and First
National Bank of Boston, dated January 4, 1994
10.39 (8) Amendment No. 7 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance
Company and Preferred Equities Corporation, dated January 24, 1994.
10.40 (8) Agreement between Mego Mortgage Corporation and Hamilton Consulting, Inc., dated January 31, 1994.
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
10.41 (8) Loan Purchase and Sale Agreement dated March 22, 1994, between Mego Mortgage Corporation as Buyer, and
Southwest Beneficial Finance, Inc. as Seller.
10.42 (8) Amendment No. 8 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance
Company and Preferred Equities Corporation, dated April 15, 1994.
10.43 (8) Purchase and Servicing Agreement dated as of June 1, 1994, between Preferred Equities Corporation as Seller
and Servicer, and NBD Bank, N.A. as Purchaser.
10.44 (8) Purchase and Servicing Agreement dated as of July 6, 1994, between Preferred Equities Corporation as
Seller, and First National Bank of Boston as Purchaser.
10.45 (8) Amendment No. 9 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance
Company and Preferred Equities Corporation, dated August 31, 1994, and Amendment No. 4 to Amended and
Restated Promissory Note dated August 31, 1994, Amendment No. 6 to Loan and Security Agreement between
Greyhound Real Estate Finance Company and Preferred Equities Corporation dated August 31, 1994, and
Amendment No. 4 to Promissory Note dated August 31, 1994, between Preferred Equities Corporation as
successor-in-interest to Vacation Spa Resorts, Inc., and Greyhound Financial Corporation.
10.46 (8) Master Loan Purchase and Servicing Agreement dated as of August 26, 1994, between Mego Mortgage Corporation
as Seller, and First National Bank of Boston, as Purchaser.
22.1 (8) Subsidiaries of the Registrant.
(1) Filed as part of Mego's Form 10-K for fiscal year ended August 31, 1988 and incorporated herein by
reference.
(2) Filed as part of Mego's Form 10-K for fiscal year ended August 31, 1989 and incorporated herein by
reference.
(3) Filed as part of Mego's Form 10-K for fiscal year ended August 31, 1990 and incorporated herein by
reference.
(4) Filed as part of Mego's Form 10-K for fiscal year ended August 31, 1991 and incorporated herein by
reference.
(5) Filed as part of Mego's Registration Statement on Form S-4 originally filed August 13, 1992 and
incorporated herein by reference.
(6) Filed as part of Mego's Form 10-K for fiscal year ended August 13, 1992 and incorporated herein by
reference.
(7) Filed as part of Mego's Form 10-K for fiscal year ended August 13, 1993 and incorporated herein by
reference.
(8) Filed as part of Mego's Form 10-K for fiscal year ended August 31, 1994 and incorporated herein by
reference.
</TABLE>
(b) Reports on Form 8-K. None.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
MEGO FINANCIAL CORP.
Date: February 28, 1996 By: /s/ JEROME J. COHEN
--------------------------
Jerome J. Cohen, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT NEDERLANDER Chairman of the Board, Chief Executive February 28, 1996
-------------------------------------------- Officer and Director
Robert Nederlander
/s/ JEROME J. COHEN President and Director February 28, 1996
--------------------------------------------
Jerome J. Cohen
/s/ HERBERT B. HIRSCH Senior Vice President, Treasurer, February 28, 1996
-------------------------------------------- Chief Financial Officer and Director
Herbert B. Hirsch
/s/ EUGENE I. SCHUSTER Vice President and Director February 28, 1996
--------------------------------------------
Eugene I. Schuster
/s/ IRVING J. STEINBERG Vice President and Chief February 28, 1996
-------------------------------------------- Accounting Officer
Irving J. Steinberg
/s/ WILBUR L. ROSS, JR. Director February 28, 1996
--------------------------------------------
Wilbur L. Ross, Jr.
/s/ JOHN E. MCCONNAUGHY Director February 28, 1996
--------------------------------------------
John E. McConnaughy
</TABLE>
30
<PAGE> 31
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED AUGUST 31, 1994, 1993 AND 1992
AND INDEPENDENT AUDITORS' REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report F - 1
Consolidated Balance Sheets F - 2
Consolidated Statements of Operations F - 3
Consolidated Statements of Cash Flows F - 4
Consolidated Statements of Shareholders' Equity F - 6
Notes to Consolidated Financial Statements F - 7
</TABLE>
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Mego Financial Corp. and Subsidiaries
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Mego Financial
Corp. and its subsidiaries (the "Company") as of August 31, 1994 and 1993, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended August 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mego Financial Corp. and
subsidiaries at August 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1994 in conformity with generally accepted accounting principles.
As discussed in Note 20, the accompanying 1994, 1993 and 1992 consolidated
financial statements have been restated.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
November 16, 1994 (February 29, 1996 as to notes 20 and 21)
F-1
<PAGE> 33
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
August 31,
<TABLE>
<CAPTION>
1994 1993
------------- ------------
ASSETS (As Restated - See Note 20)
<S> <C> <C>
Cash and cash equivalents (Note 4) $ 10,982 $ 8,273
Restricted cash (Note 4) 752 500
Notes receivable, net (Notes 4, 5, 11, 13 and 14) 36,514 46,307
Excess servicing rights (Notes 4 and 6) 2,146 902
Timeshare interests held for sale (Notes 4, 7 and 11) 9,622 10,041
Land and improvements inventory (Notes 4 and 7) 7,195 6,087
Other investments (Note 8) 1,619 1,827
Property and equipment, at cost, net (Notes 4, 9 and 11) 10,100 8,795
Deferred selling costs (Note 4) 3,055 2,052
Other assets (Notes 4, 10 and 13) 6,317 6,128
------------- ------------
TOTAL ASSETS $ 88,302 $ 90,912
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes and contracts payable (Note 11) $ 39,810 $ 44,728
Accounts payable and accrued liabilities (Note 13) 6,111 4,464
Payable to assignors (Notes 2, 3 and 13) 7,131 3,204
Future estimated contingency for notes receivable sold
with recourse (Notes 4 and 5) 3,690 2,980
Excess of liabilities over assets of discontinued
operations (Note 17) 4,222 4,222
Deposits (Note 4) 2,220 1,418
Negative goodwill (Note 19) 181 234
Deferred income taxes (Notes 4 and 12) 5,414 4,653
------------- ------------
Total liabilities 68,779 65,903
------------- ------------
Redeemable Preferred Stock, Series A, 12%
Cumulative Preferred Stock, $.01 par value,
$10 redemption value, 300,000 shares issued and outstanding (Note 16) 3,000 3,000
------------- ------------
Commitments, contingencies and subsequent events (Notes 14 and 21)
Shareholders' equity (Notes 2, 5, 16, 18 and 19)
Preferred stock -- $.01 par value
Authorized -- 5,000,000 shares
Common stock, $.01 par value
Authorized -- 50,000,000 shares;
Issued and outstanding -- 18,086,750 shares at
August 31, 1994, and 17,631,169 shares at August 31, 1993 180 178
Additional paid in capital 3,198 2,612
Retained earnings 13,145 19,219
------------- ------------
Total shareholders' equity 16,523 22,009
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 88,302 $ 90,912
============= ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 34
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars except per share data)
For the years ended August 31,
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- --------------
REVENUES (As Restated -See Note 20)
<S> <C> <C> <C>
Timeshare interest sales, net (Notes 4 and 15) $ 19,521 $ 21,734 $ 14,621
Retail lot sales, net (Notes 4 and 15) 13,534 13,199 13,818
Housing sales 515 1,057 -
Gain on sales of notes receivable (Note 4) 1,454 631 -
Interest income (Notes 5 and 10) 8,261 8,244 8,181
Amortization of negative goodwill (Notes 3 and 19) 472 875 1,983
Incidental operations 2,007 1,672 1,590
Other 954 883 1,141
------------- ------------ ------------
Total revenues 46,718 48,295 41,334
------------- ------------ ------------
COSTS AND EXPENSES
Direct costs of:
Timeshare interest sales 2,684 3,472 2,433
Retail lot sales 1,435 2,054 2,113
Housing sales 531 843 -
Incidental operations 2,342 2,178 1,903
Commissions and selling 18,962 20,079 16,432
Depreciation and amortization (Note 4) 1,208 980 938
Interest (Note 11) 4,729 4,193 4,401
General and administrative (Note 4) 11,218 8,499 8,450
Provision for credit losses 96 - -
Payments to assignors (Notes 2, 3 and 13) 8,526 4,632 3,325
------------- ------------ ------------
Total costs and expenses 51,731 46,930 39,995
------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (5,013) 1,365 1,339
INCOME TAXES (Notes 4 and 12) 761 2,218 2,382
------------- ------------ ------------
LOSS BEFORE MINORITY INTEREST (5,774) (853) (1,043)
MINORITY INTEREST IN 80%-
OWNED SUBSIDIARY (Note 19) - 126 63
------------- ------------ ------------
NET LOSS (5,774) (979) (1,106)
CUMULATIVE PREFERRED STOCK DIVIDENDS 360 - -
------------- ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (6,134) $ (979) $ (1,106)
============= ============ ============
LOSS PER COMMON SHARE $ (.34) $ (.06) $ (.07)
============= ============ ============
Weighted average number of common shares
and common share equivalents outstanding 17,820,170 17,145,101 16,700,919
============= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 35
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the years ended August 31,
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (As Restated -See Note 20)
<S> <C> <C> <C>
Net loss $ (5,774) $ (979) $ (1,106)
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of excess of underlying book value
over purchase price of wholly-owned subsidiary (472) (875) (1,983)
Provisions for cancellation and credit losses 7,775 7,991 10,328
Cost of sales 4,650 6,369 4,546
Depreciation and amortization 1,208 980 938
Gains on sales of receivables and other assets (1,454) (631) (81)
Increase (decrease) in provision for future estimated
contingency for notes receivable sold with recourse 710 1,169 (579)
Minority interest in 80%-owned subsidiary - 126 63
Changes in operating assets and liabilities:
Increase in restricted cash (252) (500) -
Increase in notes receivable, net (26,489) (20,698) (13,452)
Proceeds from sale of notes receivable 30,380 16,329 -
Increase in excess servicing rights (1,244) (902) -
Additions to land and timeshare interests (5,339) (3,486) (3,968)
Decrease (increase) in other assets 592 (914) (24)
(Increase) decrease in deferred selling costs (1,003) 133 103
Increase (decrease) in accounts payable and
accrued liabilities 1,406 511 (740)
Increase in payable to assignors 3,927 733 76
Increase (decrease) in deposits 802 (112) 38
(Decrease) increase in deferred income taxes 761 2,263 2,337
-------- -------- --------
Total adjustments 15,958 8,486 (2,398)
-------- -------- --------
Net cash provided by (used in) operating activities 10,184 7,507 (3,504)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 41,040 29,015 21,673
Reduction of debt (45,958) (33,081) (18,595)
Acquisition of minority interest - (287) -
Sale of preferred stock - 3,000 -
Preferred stock dividends (300) - -
Redemption of common stock (62) - -
-------- -------- --------
Net cash (used in) provided by financing activities (5,280) (1,353) 3,078
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment
and investments 150 218 259
Purchase of property and equipment (2,553) (1,601) (870)
Decrease (increase) in other investments 208 (70) 575
-------- -------- --------
Net cash used in investing activities (2,195) (1,453) (36)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,709 4,701 (462)
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR 8,273 3,572 4,034
-------- -------- --------
CASH AND CASH EQUIVALENTS -- END OF YEAR $ 10,982 $ 8,273 $ 3,572
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 36
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands of dollars)
For the years ended August 31,
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: (As Restated -See Note 20)
<S> <C> <C> <C>
Cash paid during the year for:
Interest, net of amounts capitalized $ 4,646 $ 3,970 $ 4,103
======= ======= =======
Federal income taxes $ - $ - $ -
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES:
The Company issued 475,000 shares of its
common stock to an unrelated entity for
services rendered to Mego Mortgage
Corporation (Note 18) $ 650 $ - $ -
======= ======= =======
The Company acquired the minority interest in its
80%-owned subsidiary as follows:
Minority interest acquired $ - $ 1,745 $ -
Issuance of common stock - (1,082) -
Allocation of carrying value of subsidiary's
property and equipment, net - (132) -
Negative goodwill acquired - (244) -
------- ------- -------
Cash expended for acquisition of minority
interest $ - $ 287 $ -
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 37
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(NOTES 3, 5, 16, 18, 19 AND 20)
(in thousands of dollars except share data)
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------------------------------------
Class A Class B Common stock
$.01 par value $.01 par value $.01 par value
------------------------ ---------------------- ------------------------
Shares Amount Shares Amount Shares Amount
---------- ------ --------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 1, 1991, as
previously reported 15,548,289 $ 155 1,152,630 $ 12 - $ -
Prior period adjustment - - - - - -
---------- ----- --------- ----- ---------- ----
Balance at September 1, 1991 as
restated (see Note 20) 15,548,289 155 1,152,630 12 - -
Conversion of Class B to common
stock and redesignation of
Class A to common stock (15,548,289) (155) (1,152,630) (12) 16,700,919 167
Net loss (as restated - see Note 20) - - - - - -
---------- ----- --------- ----- ---------- ----
Balance at August 31, 1992 (as
restated - see Note 20) - - - - 16,700,919 167
Issuance of common stock -
Exchange for minority interest
in subsidiary common stock - - - - 930,250 11
Net loss (as restated - see Note 20) - - - - - -
---------- ----- --------- ----- ---------- ----
Balance at August 31, 1993 (as
restated - see Note 20) - - - - 17,631,169 178
Issuance of common stock
(Note 18) - - - - 475,000 3
Redemption of common stock
(Note 18) - - - - (19,419) (1)
Dividends paid on preferred
stock - - - - - -
Net loss (as restated - see Note 20)
- - - - - -
---------- ----- --------- ----- ---------- ----
Balance at August 31, 1994 (as
restated - see Note 20) - $ - - $ - 18,086,750 $180
========== ===== ========= ===== ========== ====
</TABLE>
<TABLE>
<CAPTION>
Additional
paid in Retained
capital earnings Total
---------- -------- --------
<S> <C> <C> <C>
Balance at September 1, 1991, as
previously reported $1,541 $22,409 $24,117
Prior period adjustment - (1,105) (1,105)
------ ------ ------
Balance at September 1, 1991 as
restated (see Note 20) 1,541 21,304 23,012
Conversion of Class B to common
stock and redesignation of
Class A to common stock - - -
Net loss (as restated - see Note 20) - (1,106) (1,106)
------ ------ ------
Balance at August 31, 1992 (as
restated - see Note 20) 1,541 20,198 21,906
Issuance of common stock -
Exchange for minority interest
in subsidiary common stock 1,071 - 1,082
Net loss (as restated - see Note 20) - (979) (979)
------ ------ ------
Balance at August 31, 1993 (as
restated - see Note 20) 2,612 19,219 22,009
Issuance of common stock
(Note 18) 647 - 650
Redemption of common stock
(Note 18) (61) - (62)
Dividends paid on preferred
stock - (300) (300)
Net loss (as restated - see Note 20)
- (5,774) (5,774)
------ ------ ------
Balance at August 31, 1994 (as
restated - see Note 20) $3,198 $13,145 $16,523
====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 38
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1994, 1993 AND 1992
1. Nature of Operations
The shareholders of Mego Corp., during fiscal 1992, voted to amend its
Certificate of Incorporation changing its name to Mego Financial Corp.
("Mego"), and changing its authorized Preferred and Common stock (see
Note 18). Prior to February 1, 1988, and subsequent to 1983, the
operations of Mego were primarily limited to licensing trademarks and
patents owned by Mego. On February 1, 1988, Preferred Equities
Corporation ("PEC") was acquired as a wholly-owned subsidiary of Mego
(see Note 2). PEC is primarily engaged in the business of generating
consumer receivables through marketing timeshare interests in its
resort properties and marketing developed and undeveloped real estate
lots on a retail basis. Mego Mortgage Corporation, a wholly-owned
subsidiary ("MMC"), is primarily engaged in the business of
originating, purchasing, selling and servicing loans for property
improvement that qualify under the provisions of Title I of the
National Housing Act which is administered by the U.S. Department of
Housing and Urban Development ("HUD"). Pursuant to that program 90%
of the principal balances of the loans are U.S. government insured
("Title I Loans") with a cumulative maximum of 10% of all Title I
loans originated by MMC. Mego and its subsidiaries are herein
collectively referred to as the "Company".
To facilitate its sales of timeshare interests, the Company has
entered into several trust agreements. The trustees administer the
collection of the related notes receivable (see Note 5). To achieve
this end, the Company has assigned title to certain of its resort
properties and its interest in certain notes receivable to the
trustees.
2. Acquisition of Preferred Equities Corporation
The acquisition of PEC on February 1, 1988, was effected pursuant to
an Assignment Agreement, dated October 25, 1987, between Mego and
several corporations ("Assignors") (see Note 13) and a related
Assignment and Assumption Agreement, dated February 1, 1988, and
amended on July 29, 1988 (the "Assignment and Assumption Agreement"),
between Mego and the Assignors (collectively, such agreements
constitute the "Assignment"). The acquisition of PEC was accomplished
by PEC's issuing two shares of its Common stock to the Company for a
purchase price of approximately $50,000. Immediately prior to that
time the previously outstanding shares held by others were surrendered
and redeemed by PEC at a cost to PEC of approximately $10,463,000 plus
fees and expenses, leaving Mego with all of the outstanding shares of
PEC.
The right to purchase shares from PEC was obtained by Mego pursuant to
the Assignment, which assigned to the Company the right to purchase
shares from PEC pursuant to the Stock Purchase and Redemption
Agreement, dated October 6, 1987 (the "Stock Purchase Agreement"),
between PEC and the Assignors, as amended on October 25, 1987.
Consideration for the Assignment consisted of promissory notes
(hereinafter "Purchase Notes") from Mego to the Assignors in the
aggregate amount of $2,000,000 and additional payments to the
Assignors as described below. The Purchase Notes were paid in full
prior to August 31, 1988. After the payment of the Purchase Notes the
Assignors are entitled to receive from the Company on a quarterly
basis, as determined as of the end of each quarter, additional
payments equal in the aggregate to 63% of PEC's consolidated
unrestricted cash balances, for a period ending on January 31, 1995.
The additional payments are collateralized by a pledge of the PEC
Stock to the Assignors. (See Note 13).
3. Excess of Book Value of Net Assets Acquired over Acquisition Cost
On February 1, 1988, the underlying book value of the net assets of
PEC exceeded Mego's acquisition cost by the amount of $42,315,000.
Management allocated the excess book value to assets existing at the
acquisition date (primarily notes receivable which mature over
approximately seven to ten years), as a Revaluation adjustment. As
collections are made on the receivables (either through installment
payments or upon sale of receivables) a portion of the Revaluation
adjustment is recorded in income as amortization. For the years ended
August 31, 1994, 1993 and 1992, such amortization amounted to
$422,000, $828,000 and $1,983,000, respectively. The Company
determined that $20,000,000 of the Revaluation adjustment should not
be amortized but should be reduced for Payments to assignors which
have aggregated $40,149,000 through August 31, 1994. Amounts in
excess of $20,000,000 are expensed and $8,526,000, $4,632,000 and
$3,325,000 have been included in Costs and Expenses in the years ended
August 31, 1994, 1993 and 1992, respectively (see Notes 2 and 13).
4. Summary of Significant Accounting Policies
Principles of Consolidation -- The accompanying financial statements
include the accounts of Mego and its subsidiaries (see Note 1). All
significant intercompany accounts and transactions have been
eliminated in consolidation. The financial statements have been
restated as described in Note 20.
Parent company only basis -- At August 31, 1994 and 1993, Mego, on a
Parent company only basis, reflected total assets of $31,898,000 and
$32,461,000 respectively, which are comprised principally of its net
investment in subsidiaries of $31,610,000 and $29,204,000,
respectively; and total liabilities of $7,489,000 and $3,604,000,
respectively. At August 31, 1994 and 1993, liabilities were comprised
principally of amounts payable to Assignors of $7,131,000 and
$3,204,000, respectively. At August 31, 1994 and 1993, Mego had
outstanding Redeemable Preferred Stock with an aggregate redemption
price of $3,000,000. (See Note 16.)
F-7
<PAGE> 39
Cash Equivalents -- Cash equivalents consist primarily of certificates
of deposit, repurchase agreements and commercial paper with original
maturities of ninety days or less.
Restricted Cash -- Restricted cash represents cash on deposit which is
restricted in accordance with the notes receivable sale agreements and
untransmitted funds received from collection of notes receivable which
have not as yet been disbursed to the purchasers of such notes
receivable in accordance with the notes receivable sale agreements.
Timeshare Interests Held for Sale -- Costs incurred in connection with
preparing timeshare interests for sale are capitalized and include all
costs of acquisition, renovation and furnishings. Timeshare interests
held for sale are valued at the lower of cost or net realizable value.
Timeshare inventory that is to be recovered from future cancellations
of sales is provided for as estimated inventory to be recovered from
future cancellations and is recorded at its estimated cost.
Land and Improvements Inventory -- Land and improvements inventory
include carrying costs capitalized during the development period and
costs of improvements incurred to date and are stated at cost not in
excess of market value. Land and improvements inventory that is to be
recovered from future cancellations of sales is provided for as
estimated inventory to be recovered from future cancellations and is
recorded at its estimated cost.
Revenue and Profit Recognition -- Timeshare Interests and Retail Lot
Sales -- Sales of timeshare interests and retail lots are recognized
and included in Revenues after certain "down payment" and other
"continuing investment" criteria are met. Retail lot revenues are
recognized on the percentage-of-completion method. Revenue recognition
is in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 66 "Accounting for Sales of Real
Estate". The agreement for sale generally provides for a down payment
and a note secured by a deed of trust or mortgage payable to the
Company in monthly installments, including interest, over a period of
up to 10 years. Revenue is recognized after the requisite rescission
period has expired and at such time as the purchaser has paid at least
10% of the sales price for sales of timeshare interests and 20% of the
sales price for retail lot sales. Retail lot sales usually meet these
requirements within 8 to 10 months from closing, and sales of
timeshare interests usually meet these requirements at the time of
sale. The sales price, less a provision for cancellation, is recorded
as Revenue and the cost related to such net Revenue of the timeshare
interest or land parcel is charged against income in the year that
Revenue is recognized. When Revenue related to retail lot sales is
recognized, the portion of the sales price attributable to uncompleted
required improvements, if any, is deferred.
All payments received prior to the recognition of the sale as Revenue
are accounted for as Deposits. Selling costs directly attributable to
unrecognized sales are accounted for as Deferred selling costs until
the sale is recognized.
For retail lot sales made at a location other than at the property the
purchaser may cancel the contract within a specified inspection
period, usually 5 months from the date of purchase, provided that the
purchaser is not in default under the terms of the contract. At
August 31, 1994, $260,000 of recognized sales remain subject to such
cancellation. If a purchaser defaults under the terms of the contract,
after all rescission and inspection periods have expired, payments are
generally retained by the Company.
If the underlying note receivable is at a "below market" interest
rate, a valuation discount is applied to the note receivable balance
and amortized over its term so that the effective yield is 8% to 16%
dependent upon the year of sale.
Notes receivable with payment delinquencies of 90 days or more have
been considered in determining the Allowance for cancellation.
Cancellations occur when the note receivable is determined to be
uncollectible and related collateral, if any, has been recovered.
Cancellation of a note receivable in the year the Revenue is
recognized is accounted for as a reversal of the Revenue.
Cancellation of a note receivable subsequent to the year the Revenue
was recognized is charged to the Allowance for cancellation.
Revenue Recognition -- Gain on Sales of Notes Receivable -- Gain on
sale of notes receivable includes the present value of the
differential between contracted interest rates charged to borrowers on
notes receivable sold by the Company and the interest rates to be
received by the purchasers of such notes receivable, after considering
the effects of estimated prepayments and a normal servicing fee. The
Company retains participation in certain cash flows from the sold
notes receivable and often retains the associated servicing rights.
The Company generally sells its notes receivable at par value.
The present value of expected net cash flows from these participations
are recorded at the time of sale as Excess servicing rights. Excess
servicing rights are amortized as a charge to income, as payments are
received on the retained interest differential over the estimated life
of the underlying notes receivable. Excess servicing rights are
carried at the lower of unamortized cost or estimated fair value. The
expected cash flows used to determine the Excess servicing rights
asset have been reduced for potential losses under recourse provisions
of the sales agreements. The Future estimated contingency for notes
receivable sold with recourse represents the Company's estimate of
losses to be incurred in connection with the recourse provisions of
the sales agreements and is shown separately as a liability on the
Company's balance sheet.
In discounting cash flows related to notes receivable sales the
Company defers servicing income at an annual rate of 1% and discounts
cash flows on its sales at the rate it believes a purchaser would
require as a rate of return. The cash flows were discounted to
present value using discount rates which averaged 14.4% in 1994. The
Company has developed its assumptions based on experience with its own
portfolio, available market data and ongoing consultation with its
investment bankers.
F-8
<PAGE> 40
In determining expected cash flows, management considers economic
conditions at the date of sale. In subsequent periods, these
estimates may be revised as necessary using the original discount
rate, and any losses arising from prepayment and loss experience will
be recognized as realized.
Allowances for Cancellation and Credit Losses -- Provision for
cancellation relating to notes receivable is charged to income in
amounts sufficient to maintain the allowance at a level considered
adequate to provide for anticipated losses resulting from customers
failure to fulfill their obligations under the terms of their notes.
The allowances for cancellation and credit losses are based upon
periodic analysis of the cancellation rates and other factors. (See
Note 5.)
Property and Equipment -- Property and equipment is stated at cost and
is depreciated over its estimated service life (3 to 40 years) using
the straight-line method. Costs of maintenance and repairs that do
not improve or extend the life of the respective assets are charged to
expense. The cost and related accumulated depreciation of property
sold or retired are removed from the accounts and any gains or losses
realized are included in the determination of income.
Timeshare Owners' Associations -- The Company incurs a share of
operating expenses of the Timeshare Owners' Associations based on its
ownership of the unsold timeshare interests at each of the respective
timeshare properties. These costs are referred to as Association
Assessments and are included in the financial statements in General
and administrative (see Note 13).
Amortization of Organizational Costs of MMC -- Organizational costs
associated with the commencement of originating, purchasing, selling
and servicing of Title I Loans by MMC are being amortized over five
years by MMC and such amortization is included in Depreciation and
amortization expense.
Future Estimated Contingency for Notes Receivable Sold with Recourse
-- Recourse to the Company on sales of notes receivable is governed by
the agreements between the purchasers and the Company. The Future
estimated contingency for notes receivable sold with recourse
represents the Company's best estimate of its probable future credit
losses to be incurred over the life of the notes receivable, giving
effect to estimated FHA Insurance recoveries on Title I Loans.
Income Taxes -- At August 31, 1993, effective September 1, 1992, the
Company adopted the provisions of SFAS No. 109, "Accounting for Income
Taxes". SFAS No. 109 requires the Company to adopt an asset/liability
approach for financial accounting and reporting for income taxes.
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the bases of
the balance sheet for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when they are recovered or settled. Deferred taxes also
are recognized for operating losses that are available to offset
future taxable income and tax credits that are available to offset
future Federal income taxes. (See Note 12.)
Earnings (loss) per common share -- Earnings (loss) per common share
are based on the Net income (loss) applicable to common stock for each
year divided by the weighted average number of common shares and
common share equivalents outstanding during the year. Earnings per
common share assuming full dilution are computed by dividing Net
income applicable to common stock by the weighted average number of
common shares plus shares issuable on the exercise of outstanding
warrants. In loss periods, dilutive common equivalent shares are
excluded as the effect would be antidilutive.
5. Notes Receivable
Notes receivable (in thousands of dollars) consisted of the following
at:
<TABLE>
<CAPTION>
August 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Related to timeshare sales $ 29,019 $ 32,641
Related to Land sales 24,456 34,462
Related to Title I Loans 1,493 -
------------ ------------
Total 54,968 67,103
------------ ------------
Less: Allowances for cancellation and credit losses 18,007 19,933
Valuation discount 281 275
------------ ------------
18,288 20,208
------------ ------------
Total before Revaluation adjustment 36,680 46,895
Less: Revaluation adjustment (see Note 3) 166 588
------------ ------------
Total $ 36,514 $ 46,307
============ ============
</TABLE>
The Company provides financing to the purchasers of its timeshare interests
and retail lots. This financing is generally evidenced by notes secured by
deeds of trust as well as non-recourse installment sales contracts. These
notes receivable are generally payable over a period of up to 10 years,
bear interest at rates ranging from 0% to 16% and require equal monthly
installments of principal and interest.
F-9
<PAGE> 41
The Company has entered into financing arrangements with certain purchasers
of timeshare interests and retail lots whereby no stated interest rate is
charged if the aggregate down payment is at least 50% of the purchase price
and the balance is payable in 24 or fewer monthly payments. Notes
receivable of $3,611,000 and $4,241,000 at August 31, 1994 and 1993,
respectively, made under this arrangement are included above. A Valuation
discount is established to provide for an effective interest rate
(presently 10%) on notes receivable bearing no stated interest rate, and is
applied to the principal balance and amortized over the term of payment.
Scheduled five year collections of principal on recognized notes receivable
existing at August 31, 1994, are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ending August 31,
-------------------------------
<S> <C>
1995 $ 9,901
1996 7,417
1997 6,438
1998 6,682
1999 6,641
</TABLE>
During the fiscal year ended August 31, 1994, PEC sold notes receivable of
$23,993,000 to three major financial institutions from which $14,838,000
of the proceeds were used to pay debt. The receivables, which have
average interest rates of 11.27% to 13.14% depending on the transaction,
were sold to yield returns of 8.5% to 9.75% to the purchasers, with any
excess interest received from the obligors of the receivables being
payable to the Company.
During the fiscal year ended August 31, 1994, MMC sold $6,555,000 of Title
I Loans to a financial institution, which has agreed to purchase up to
$25,000,000 of such Loans by November 1995. From the proceeds $5,902,000
was used to pay debt. The Loans have an average interest rate of 14.154%
and were sold to yield a return of 8.535% to the purchaser, with any
excess interest received from the obligors of the receivables being
payable to the Company.
During the fiscal year ended August 31, 1993, PEC sold receivables of
$16,344,000 to three major financial institutions from which $10,917,000
of the proceeds were used to pay debt. The receivables, which have
average interest rates of 11.78% to 13.2% depending on the transaction,
were sold to yield returns of 9.25% to 12% to the purchasers, with any
excess interest received from the obligors of the receivables being
payable to the Company.
At August 31, 1994, the Company was contingently liable to replace or
repurchase notes receivable sold with recourse totalling $51,193,000. The
Company sells notes receivable subject to recourse provisions as contained
in each agreement. The Company is obligated under these agreements to
replace or repurchase accounts that become over ninety days delinquent or
otherwise subject to replacement or repurchase. The repurchase provisions
provide for substitution of receivables as recourse for $46,506,000 of
sold notes receivable and cash payments for repurchase relating to
$4,687,000 of sold notes receivable. A liability for Future estimated
contingency for notes receivable sold with recourse was established at the
time of each sale based upon the Company's analysis of probable losses
resulting from the Company's recourse obligations under each agreement of
sale. During fiscal 1994 the Company changed its method of determining
the amount to be recorded for the Future estimated contingency for notes
receivable sold with recourse. For notes receivable sold after September
30, 1992, the liability is to be determined based on the guidance issued
by the Financial Accounting Standards Board Emerging Issues Task Force
("EITF") in EITF Issue 92-2, on a discounted to present value basis using
an interest rate equivalent to the risk-free market rate for securities
with a duration similar to that estimated for the underlying notes
receivable. For notes receivable sold prior to September 30, 1992, the
liability remains on a non-discounted basis. At August 31, 1994, the
undiscounted amount of the $3,690,000 recourse obligation on such notes
receivable was $4,069,000. The effect of this change together with the
related amortization was to increase income for 1994 by approximately
$445,000. The Company periodically reviews the adequacy of this
liability. These reviews take into consideration changes in the nature and
level of the portfolio, current and future economic conditions which may
affect the obligors' ability to pay, collateral values and overall
portfolio quality.
The Company is obligated under certain agreements for the sale of notes
receivable and certain loan agreements to maintain minimum net worth
requirements. The most restrictive of these agreements requires PEC to
maintain a minimum net worth of $25,000,000.
At August 31, 1994 and 1993, notes receivable aggregating $47,148,000 and
$55,725,000, respectively, were pledged to lenders to collateralize
certain of the Company's indebtedness (see Note 11). Receivables which
qualify for the lenders' criteria may be pledged as collateral whether or
not such receivables have been recognized for accounting purposes (see
Note 11).
The Company records a Provision for cancellation and credit losses at the
time Revenue is recognized or upon completion of a Title I Loan
transaction, based on historical experience and current economic factors.
The related Allowances for cancellation and credit losses represent an
amount which, in the Company's judgment, will be adequate to absorb losses
on the recognized notes receivable which may become uncollectible. The
Allowance for cancellation is reduced by actual cancellations experienced,
including cancellations related to previously sold notes receivable which
were reacquired pursuant to the recourse obligations discussed above.
Such Allowance is also reduced to establish the liability for future
estimated cancellations as notes receivable are sold. The Company's
judgment in determining the adequacy of these allowances is based on its
periodic review of its portfolio of notes receivable. These reviews take
into consideration changes in the nature and level of the portfolio,
current and future economic conditions which may affect the purchaser's
ability to pay, collateral values, overall
F-10
<PAGE> 42
portfolio quality and giving effect to the FHA Insurance recoveries in the
case of Title I loans. Revisions of the Allowances as a result of such
reviews are included in the Provision for cancellation and credit losses.
Changes in the Allowances for cancellation and credit losses for notes
receivable (in thousands of dollars) consisted of the following:
<TABLE>
<CAPTION>
For the years ended August 31,
----------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 19,933 $ 20,477 $ 17,973
Provisions for cancellation and credit losses 7,145 7,991 10,328
Reduction in allowances caused
by sales of receivables (2,916) (874) -
Amounts charged to allowances for
cancellation and credit losses (6,155) (7,661) (7,824)
----------- ----------- -----------
Balance at end of year $ 18,007 $ 19,933 $ 20,477
=========== =========== ===========
</TABLE>
At August 31, 1994 and 1993, there were outstanding approximately 11,800
and 13,400 notes receivable, respectively. At August 31, 1994 and 1993,
notes receivable with payment delinquencies of 90 days or more were
$3,849,000 and $3,638,000, respectively.
6. Excess Servicing Rights
Excess servicing rights (in thousands of dollars) consisted of the
following at:
<TABLE>
<CAPTION>
August 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C> <C>
Estimated cash flows from receivables sold $ 3,711 $ 989
Less: Estimated Deferred servicing revenue 810 87
Estimated FHA Insurance premiums 90 -
Discount to present value 665 -
------------ ------------
Total $ 2,146 $ 902
============ ============
</TABLE>
The Company discounts the cash flows on the underlying notes receivable
sold at a rate the Company believes a purchaser would require as a rate of
return. The Company sold $30,548,000 of Land and timeshare notes and Title
I Loans in the fiscal year ended August 31, 1994, at an average yield to
the purchasers of 9.1%. The average rate used to discount the cash flows
for the year ended August 31, 1994, was 14.4%.
Deferred servicing revenues arise from the sales of receivables for which
the Company becomes the servicing agent for the purchasers. At August 31,
1994 and 1993, the Company was servicing for these entities and for its
own account approximately 19,200 and 19,800 accounts, respectively.
During the year ended August 31, 1994, amortization of the excess
servicing rights was $310,000.
7. Inventories
Timeshare interests held for sale (in thousands of dollars) consisted of
the following at:
<TABLE>
<CAPTION>
August 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Timeshare interests (including capitalized
interest of $0 and $25 in 1994 and 1993,
respectively) $ 2,363 $ 3,448
Timeshare interests under construction
(including capitalized interest of $405
and $197 in 1994 and 1993, respectively) 4,813 4,213
Inventory of Timeshare interests estimated to
be recovered from future cancellations 2,446 2,380
------------ ------------
Total $ 9,622 $ 10,041
============ ============
</TABLE>
At August 31, 1994 and 1993, there were unsold timeshare interests of
1,763 and 2,434, respectively. Sixty-two apartment units, included in
Timeshare interests under construction at August 31, 1994,
representing an additional 3,162 timeshare interests became available
for sale in September 1994, when the remodeling, renovation,
conversion and registration of those timeshare interests were
completed.
F-11
<PAGE> 43
Land and improvements inventory (in thousands of dollars) consisted of
the following at:
<TABLE>
<CAPTION>
August 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Land and improvements $ 4,915 $ 3,298
Inventory of Land and improvements estimated to
be recovered from future cancellations 2,280 2,789
------------ ------------
Total $ 7,195 $ 6,087
============ ============
</TABLE>
8. Other Investments
Other investments (in thousands of dollars), at lower of cost or
market, consisted of the following at:
<TABLE>
<CAPTION>
August 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Water rights:
Huerfano County, Colorado $ 581 $ 565
Nye County, Nevada 95 95
Land:
Nye County, Nevada 624 624
Sevier County, Tennessee - 150
Clark County, Nevada 51 51
Other 268 342
------------ ------------
Total $ 1,619 $ 1,827
============ ============
</TABLE>
9. Property and Equipment
Property and equipment and amounts of related accumulated depreciation
(in thousands of dollars), consisted of the following at:
<TABLE>
<CAPTION>
August 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Water and sewer systems $ 7,902 $ 6,863
Furniture and equipment 4,371 4,562
Buildings 4,745 3,743
Vehicles 1,717 1,391
Recreational facilities and equipment 969 875
Land 689 689
Leasehold improvements 254 158
------------ ------------
20,647 18,281
Less: Accumulated depreciation 10,547 9,486
------------ ------------
Total $ 10,100 $ 8,795
============ ============
</TABLE>
10. Other Assets
Other assets (in thousands of dollars) consisted of the following at:
<TABLE>
<CAPTION>
August 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Other receivables $ 1,423 $ 1,611
Miscellaneous assets 1,285 1,143
Deposits and impounds 700 535
Prepaid expenses 784 911
Notes receivable collateralized by trust deeds (a) 255 870
Receivable from Owners' Associations (see Notes 4 and 13) 1,003 681
Organizational costs of MMC 867 377
------------ ------------
Total $ 6,317 $ 6,128
============ ============
</TABLE>
(a) The Company has first and second mortgage notes
receivable resulting from the sale of rental
properties. These notes carry interest rates ranging
from 8% to 13%. Payment terms vary, with principal
due dates ranging until August 2016.
F-12
<PAGE> 44
11. Notes and Contracts Payable
The Company's debt including lines of credit (in thousands of dollars)
consisted of the following at:
<TABLE>
<CAPTION>
August 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Notes collateralized by receivables $ 31,342 $ 41,904
Mortgages collateralized by real estate properties 7,207 2,173
Installment contracts and other notes payable 1,261 560
Notes and contracts payable to related parties (Note 13) - 91
------------ ------------
Total notes and contracts payable $ 39,810 $ 44,728
============ ============
</TABLE>
The details of the notes payable are summarized as follows:
<TABLE>
<CAPTION>
August 31,
-----------------------------
Notes collateralized by receivables 1994 1993
---------------------------------------------------- ------------ ------------
<S> <C>
Borrowings bearing interest at prime plus 2.5% in
1994 and 1993 including "Lines of Credit"
(see below). $ 30,974 $ 37,713
Several promissory notes, the largest of which
was $247,000 in 1994 and $2,437,000 in 1993.
Borrowings bear interest at fixed rates of 10.0%
in 1994 and 1993, and variable rates of prime
plus 2.0% to 2.5% in 1993. Repayment terms
vary, however aggregate monthly payments,
including interest and principal amortization,
amount to approximately $34,000 in 1994 and
1993. In addition, in 1993, variable payments
were required on two obligations for which
principal and interest payments in the amount
of $377,000 were paid. 368 4,191
------------ ------------
Total notes collateralized by receivables $ 31,342 $ 41,904
============ ============
August 31,
----------------------------
Mortgages collateralized by real estate properties 1994 1993
-------------------------------------------------- ------------ ------------
Various mortgages collateralized by the respective
underlying assets with various repayment terms
and with various fixed interest rates ranging from
7.0% to 12.5% in 1994, and from 7.0% to 10.0% in
1993, and variable rates of prime plus: 2.5% in
1994, and 2.0% to 2.5% in 1993. $ 7,207 $ 2,173
============ ============
</TABLE>
The prime rate of interest was 7.75% at August 31, 1994.
Maturities -- Scheduled maturities of the Company's debt, excluding
lines of credit of $36,966,000 (in thousands of dollars) are as
follows:
<TABLE>
<CAPTION>
For the years ending August 31,
-----------------------------------------------------------------
Balance 1995 1996 1997 1998 1999 Thereafter
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2,844 $ 2,042 $ 452 $ 221 $ 129 $ 0 $ 0
======== ======== ========= ======= ========= ======== =======
</TABLE>
Lines of Credit -- PEC has entered into two agreements for lines of
credit not to exceed $57,500,000 which are collateralized by security
interests in timeshare and Land receivables and which are guaranteed
by Mego. At August 31, 1994 and 1993, $36,593,000 and $37,713,000,
respectively, had been borrowed under these lines. The first line
provides for aggregate borrowings of $50,000,000 of which $33,473,000
had been borrowed at August 31, 1994. This line of credit provides
for a borrowing term which terminates on September 22, 1996, and then
converts to a term loan maturing September 22, 2003, payable from the
proceeds of notes receivable which have been used as collateral for
the loan. Interest is now paid at the rate of prime plus 2.25%. This
line requires that PEC maintain a tangible net worth of at least
$25,000,000 during the borrowing
F-13
<PAGE> 45
term, and thereafter this requirement is permitted to decrease to
$15,000,000 depending on the loan balance. The second line is in the
amount of $7,500,000 of which $3,120,000 had been borrowed at August
31, 1994. This line of credit provides for a borrowing term which
terminates September 30, 1995, and then converts to a term loan
maturing June 30, 1999, payable from the proceeds of notes receivable
which have been used as collateral for the loan. Interest is paid at
the rate of prime plus 2.50%. This line requires that PEC maintain a
minimum tangible net worth of $15,000,000 during the term of the loan.
Under the terms of these lines of credit, the Company may borrow up to
75% of the balances of the pledged timeshare and Land receivables.
MMC has a $10,000,000 unsecured revolving line of credit due December
31, 1994, bearing interest at prime plus 1%, against which $373,000
had been advanced at August 31, 1994. The highest amount advanced
under this line of credit during the year was $6,275,000. The Company
expects that this credit facility will be renewed. The terms of the
$10,000,000 credit facility contain among other provisions, financial
covenants requiring the maintenance by MMC of a net worth of at least
$3,500,000.
12. Income Taxes
The Company files a consolidated Federal income tax return with its
subsidiaries for its tax year which ends the last day of February.
The Company adopted SFAS No. 109 effective September 1, 1992. There
was no cumulative effect of adopting SFAS No. 109 on the Company's
financial statements.
As of August 31, 1994, the Company had Federal net operating loss
carryforwards available for utilization against future taxable income
approximating $25,000,000, which expire through 2009.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, (b) temporary differences between the timing of revenue
recognition for book purposes and for income tax purposes, and (c)
operating loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's net deferred tax liability
as of August 31, 1994 and 1993 (in thousands of dollars), are as
follows:
<TABLE>
<CAPTION>
August 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Difference between book and tax carrying value
of assets $ 4,553 $ 3,072
Timing of revenue recognition 8,758 11,101
Other 631 428
------------ ------------
13,942 14,601
------------ ------------
Deferred tax assets:
Operating loss carryforward 7,415 8,835
Tax credit carryforward 1,113 1,113
Valuation allowance - -
------------ ------------
8,528 9,948
------------ ------------
Net deferred tax liability $ 5,414 $ 4,653
============ ============
</TABLE>
The provision for taxes as reported is different from the tax
provision computed by applying the statutory Federal rate of 34%. The
differences (in thousands of dollars) are as follows:
<TABLE>
<CAPTION>
For the years ended August 31,
----------------------------------------------
1994 1993 1992
----------- ------------ ------------
<S> <C> <C> <C>
Income (loss) before income taxes $ (5,013) $ 1,365 $ 1,339
=========== ============ ============
Tax at the statutory Federal rate $ (1,704) $ 464 $ 455
Increase (decrease) in taxes resulting from:
Payments to assignors 2,218 1,059 780
Realization of purchase price adjustment 217 366 838
Amortization of goodwill 17 208 208
Contributions in aid of construction 114 88 40
Other (101) 33 61
----------- ------------ ------------
Total $ 761 $ 2,218 $ 2,382
=========== ============ ============
</TABLE>
F-14
<PAGE> 46
13. Related Party Transactions
Timeshare Owners' Associations -- Owners' Associations have been
incorporated for the Grand Flamingo, Reno Spa, and Brigantine
timesharing resorts. The respective Owners' Associations are
independent not-for-profit corporations. PEC acts as the managing
agent for these Owners' Associations and the White Sands Resort Club
(a division of PEC) ("Associations") and received management fees for
its services of $2,051,000, $1,756,000 and $1,695,000 in 1994, 1993
and 1992, respectively. Such fees were recorded as a reduction of
General and administrative expense. The owners of timeshare interests
in each Association are responsible for payment to the Associations of
Association Assessments, which are intended to fund all of the
operating expenses at each of the resort facilities. The Company's
share of the Association assessments (net of room income) of $220,000,
$107,000 and $219,000 for 1994, 1993 and 1992, respectively, have been
charged to General and administrative expense. The Company has in the
past financed budget deficits of the Associations as is reflected in
the receivable from such Associations, but is not obligated to do so
in the future.
Since January 1988, the Company has agreed to pay to the Associations
the Association Assessments of timeshare interest owners who are
delinquent with respect to their Association Assessments, but have
paid the Company in full for their timeshare interests. In exchange
for these payments, the Associations assign their liens for
non-payment of Association Assessments on the respective timeshare
interests to the Company. In the event the timeshare interest holder
does not satisfy the lien after having an opportunity to do so, the
Company acquires the timeshare interest for the amount of the lien and
any foreclosure costs.
At August 31, 1994 and 1993, $1,003,000 and $681,000, respectively,
was receivable from Owners' Associations. These amounts are included
in Other assets at August 31, 1994 and 1993, respectively.
Payments to Assignors -- Certain transactions have been entered into
with the Assignors, who are affiliates of certain officers and
directors of the Company, and these transactions are more fully
described in Note 2. During the years ended August 31, 1994, 1993 and
1992, approximately $4,904,000, $4,109,000 and $3,612,000, including
interest of $304,000, $109,000 and $362,000, respectively, were paid
to the Assignors.
Transactions with Management -- On September 24, 1990, Brigantine
Preferred Properties, Inc. ("Properties"), a Nevada Corporation that
is a wholly-owned subsidiary of PEC, entered into agreements with
Brigantine Inn, Ltd., a New Jersey Limited Partnership ("Inn"), and
Brigantine Villas, L.P., a New Jersey Limited Partnership ("Villas"),
(the "Inn Agreement" and the "Villas Agreement", respectively) for the
acquisition of certain assets (primarily inventory of timeshare
interests and related assets) and the assumption of certain
liabilities of Inn and Villas. Inn and Villas were in the business of
selling timeshare interests in two adjacent facilities located near
Atlantic City, New Jersey.
(a) The Inn Agreement provided for the sale of all of the unsold
inventory of timeshare interests (approximately 600 timeshare
interests) owned by Inn as well as certain other income
producing assets but excluded certain bank accounts, a claim
against a third party for damages and the major portion of
timeshare receivables (approximately $9,772,000) owned by Inn
and which were retained by Inn. Properties assumed most of the
liabilities of Inn with the exception of approximately
$9,600,000 due on a receivable loan secured by the retained
receivables. Properties acquired approximately 20% of the
total book assets of Inn. Jerome J. Cohen, President of PEC
and Don A. Mayerson, Senior Vice President and General Counsel
of PEC, who are also officers of Mego, at that time were
limited partners of Inn owning approximately 18% and 9% of
Inn, respectively. At the time of closing, no funds were
transferred from Properties to Inn.
The consideration to be paid by Properties under the Inn
Agreement for assets with an estimated value of $2,600,000 was
the assumption of certain liabilities of Inn aggregating
approximately that amount. Included in such liabilities was
approximately $948,000 due to a corporation ("Manager") in
which Messrs. Cohen and Mayerson collectively own 100% of the
stock. From the $948,000, release prices aggregating $800,000
were to be paid by Properties to a lender of the partnership
upon the sale of certain timeshare interests and the balance
of $148,000 was to be paid to the Manager. The $948,000 was to
be paid at the rate of 25% of the gross sales of the timeshare
interests acquired, until paid in full. In order to obtain the
consent of a lender to Inn, PEC and Properties entered into an
assumption agreement which related to certain obligations of
Inn but did not include assumption of the receivable loan debt
to that lender.
(b) The Villas Agreement provided for the sale of all the unsold
inventory of timeshare interests (approximately 85 timeshare
interests) owned by Villas as well as certain other assets but
excluded certain bank accounts and a claim against certain
third parties for damages. Properties assumed certain of the
liabilities of Villas. The assets acquired represent
substantially all of the assets of Villas. Messrs. Cohen and
Mayerson at that time were limited partners of Villas, owning
51% and 34% of that partnership, respectively.
At the time of closing, no funds were transferred from
Properties to Villas. The consideration being paid by
Properties under the Villas Agreement for assets with an
estimated value of $5,700,000 is $100,000 plus the assumption
of certain liabilities of Villas aggregating approximately
$5,600,000, including $489,000 due to Manager. The $100,000
and the $489,000 were paid at the rate of 25% of gross sales
of the timeshare interests acquired.
F-15
<PAGE> 47
Inn and Villas, prior to the Properties acquisition, sold certain
receivables which were subject to recourse provisions. As part of the
purchase agreements, Properties assumed such recourse obligations for
approximately $8,200,000 of then outstanding receivables. No
estimated liability for such obligations was accrued in the Company's
original acquisition accounting. The financial statements have been
restated to reflect the $1,437,000 acquisition liability and related
subsequent activity. At August 31, 1994, $2,172,000 of such
receivables remain outstanding and the related estimated liability of
$664,000 has been accrued. PEC guaranteed $6,300,000 of recourse
obligations and certain other obligations of Properties.
A management contract for services to be provided to the related
Homeowner's Associations was acquired as part of the transaction. The
contract was initially valued at $600,000 based on an annual 15%
management fee related to the operating costs of the Homeowner's
Associations. This value has been restated to $200,000. The restated
value reflects deducting certain costs which are incurred and paid by
the Manager on behalf of the Homeowner's Associations.
The liability for the recourse obligations assumed by Properties and
the restatement of the value of the management contract resulted in
$1,837,000 of Goodwill associated with this transaction, which has
been amortized over a three year period ending September 30, 1993. At
August 31, 1994, all of the Company's obligations owed to the Inn and
Villas had been paid in full.
During the years ended August 31, 1991, 1992 and 1993, Properties
acquired approximately $227,000, $738,000 and $78,000, respectively,
of timeshare inventory from a creditor of the Inn.
During December 1992, Properties purchased approximately $6,025,000 of
timeshare receivables from Inn for a purchase price of approximately
$3,524,000. The purchase price was financed through the sale by
Properties of approximately $3,720,000 of the acquired receivables to
a financial institution. In connection with the sale, PEC guaranteed
the repurchase and other obligations of Properties and agreed to
maintain a net worth of at least $22,500,000. As collateral for its
obligations under the sale agreement, Properties also pledged
approximately $750,000 of the acquired timeshare receivables to the
purchaser. The amount of the collateral required under the sale
agreement reduces by approximately 20% per year. In connection with
this transaction, Properties recorded an Allowance for cancellation
and a Future estimated contingency for notes receivable sold with
recourse aggregating approximately $2,000,000.
14. Commitments and Contingencies
Future Improvements -- The Company was obligated by agreements with
Nye County, Nevada to complete road and surveying improvements
specified in subdivision maps recorded with the County. PEC pledged
certain receivables obtained from the sale of lots to County
authorities as security for road improvements. At August 31, 1993,
all roads obligated to be constructed by PEC under these agreements
had been completed and prior to August 31, 1994, the County returned
all of the security.
Central Nevada Utilities Company (a wholly-owned subsidiary) has
issued performance bonds to ensure the completion of certain central
water and sewer system improvements in portions of Calvada North and
the Calvada Meadows subdivisions in the amounts of $4,611,000 and
$7,405,000, respectively. The cost of the improvements will be offset
by the future receipt of betterment fees and connection fees.
Leases -- The Company leases certain real estate for sales and general
and administrative usage. The Company also leases its Hawaii real
estate for timeshare usage. Rental expense for 1994 was $1,865,000.
Future minimum rental payments (in thousands of dollars) under these
leases are as follows:
<TABLE>
<CAPTION>
For the years ending August 31,
-------------------------------
<S> <C> <C>
1995 $ 1,766
1996 1,441
1997 991
1998 685
1999 243
Thereafter 2,042
--------------
Total $ 7,168
=============
</TABLE>
Litigation -- On February 8, 1989, Intercontinental Financial, Inc.
and others (the "Plaintiffs") filed an action in the Clark County,
Nevada, District Court against PEC, its subsidiary, First Corporation
of Nevada, and others (the "Defendants"). The lawsuit alleged fraud,
breach of a prior settlement agreement, breach of agreements to pay
compensation and conspiracy. The suit demanded compensatory damages
of approximately $3,125,000 plus punitive damages. In March 1991, the
Court granted the Defendants' Motion for Judgment on the Pleadings and
dismissed one of the Plaintiffs' claims for fraud, the claim for
breach of a prior settlement agreement, and the claim of conspiracy.
The Company believed that it had meritorious defenses to the lawsuit
and filed substantial counterclaims against the Plaintiffs. Following
a trial held in February and March 1994, the Court found against the
Plaintiffs on all counts except as to two small amounts, aggregating
$25,000, to which the Company had stipulated was due to Plaintiffs at
the beginning of the case. The Court held that there was no fraud or
breach of contract by the Defendants and that the Company was not
obligated to pay an additional $250,000 or other damages under the
prior settlement agreement. The Court did not find sufficient breach
by the Plaintiffs to require repayment of other funds paid under the
settlement agreement as requested in the Defendants' counterclaim. The
Court at a separate hearing, determined that the
F-16
<PAGE> 48
Company should be awarded $105,000 to be paid by the Plaintiffs as
compensation for the Company's costs and attorneys' fees. Certain of
the Plaintiffs have filed a notice of appeal. (See Note 21.)
In June 1989, PEC and certain of its subsidiaries (the "PEC Apartment
Subsidiaries") commenced an action in the Supreme Court in the State
of New York, County of Queens, against the original owners, mortgagees
and manager of the New York apartments owned by such subsidiaries.
The suit requested an accounting and alleged 1) breach of contract, 2)
breach of the covenant of good faith and fair dealing, 3) breach of
fiduciary duty, 4) conversion of funds and property, and 5) unjust
enrichment. Defendants counterclaimed, alleging that the PEC
Apartment Subsidiaries were in default of their mortgage obligations,
and sought to enforce a March 1984 limited guaranty executed by PEC.
Based upon information previously supplied by the defendants, the
maximum amount of PEC's limited guaranty is currently calculated at
approximately $1,250,000 plus interest, which may be accruing at the
rate of two percent (2%) per month since the date of the alleged
default, and certain legal costs, to the extent that such costs and
interest are approved by the Court. In connection with this action,
PEC has posted a bond for $1,200,000, secured by PEC's letter of
credit, which related to a claim by the defendants for damages arising
out of a preliminary injunction, later dissolved. Pursuant to a Court
order in June 1993, finding that defendants had failed to establish
their claim for lost opportunities for profit, the injunction bond was
ordered to be reduced to $135,000. By order dated December 15, 1992,
the Appellate Division sanctioned defendants and their prior counsel
for engaging in a pattern of frivolous conduct in connection with
pretrial discovery. In connection with the sanction, PEC was awarded
$10,000 to be paid by the defendants' prior counsel. As a result of
various motions and interlocutory appeals, PEC's pleaded affirmative
defenses to enforcement of the March 1984 limited guaranty were
dismissed as having been expressly waived in the limited guaranty. The
trial Court, after holding in July 1992 that defendant Ziegelman had
lost most of his standing to assert counterclaims under the limited
guaranty, reversed itself and held in September 1993 that Ziegelman
has standing to sue under the limited guaranty, and PEC has not been
allowed to raise the defense of usury as requested by PEC. In the
summer of 1994, PEC filed appeals from the trial Court's
determinations that the defendants had retained the right of standing
to sue under the guaranty and that the defense of usury would not be
considered. If permitted to assert these and other defenses after
appeal, the Company believes that it has meritorious defenses to any
enforcement of the limited guaranty. During July and August of 1994,
the Court conducted an evidentiary hearing in order to afford
defendants the opportunity to establish the date of any alleged
default on the part of the PEC subsidiaries and the amounts to which
defendants claim entitlement under the limited guaranty. The Court
has not yet rendered a decision. Should the matter, after appeals,
ultimately be decided against PEC, the Company believes there would be
no material adverse effect on the business or financial condition of
the Company (see Notes 17 and 21).
In the general course of business the Company, at various times, has
been named in other lawsuits. The Company believes that it has
meritorious defenses to these lawsuits and that resolution of these
matters will not have a material adverse affect on the business or
financial condition of the Company.
Contingencies -- At August 31, 1994, irrevocable letters of credit in
the amount of $2,180,000 were issued and outstanding to secure certain
obligations of the Company. These letters are collateralized by notes
receivable in the amount of $2,127,000.
15. Timeshare Interest Sales and Retail Lot Sales
Timeshare interest sales, net -- A summary of the components of
Timeshare interest sales, net (in thousands of dollars) is as follows:
<TABLE>
<CAPTION>
For the years ended August 31,
----------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Timeshare interest sales $ 24,670 $ 26,920 $ 20,569
Less: Provision for cancellation 5,149 5,186 5,948
------------ ------------ ------------
Timeshare interest sales, net $ 19,521 $ 21,734 $ 14,621
============ ============ ============
</TABLE>
Retail lot sales, net -- A summary of the components of Retail lot sales,
net (in thousands of dollars) is as follows:
<TABLE>
<CAPTION>
For the years ended August 31,
----------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Retail lot sales $ 15,434 $ 16,004 $ 18,198
Less: Provision for cancellation 1,900 2,805 4,380
------------ ------------ ------------
Retail lot sales, net $ 13,534 $ 13,199 $ 13,818
============ ============ ============
</TABLE>
16. Redeemable Preferred Stock
The Company has designated 300,000 shares of its 5,000,000 authorized
preferred shares as Series A, 12% Cumulative Preferred Stock, par
value, $.01 per share. The remaining 4,700,000 authorized preferred
shares have not been designated. As of August 31, 1993, the Company
sold 300,000 shares of its Series A, 12% Cumulative Preferred Stock
("Preferred Stock"), at a price of $10 per share. The Preferred Stock
is stated at its par value of $.01 per share, and redemption value of
$10 per share. The Company is obligated to redeem 100,000 shares of
Preferred Stock at the end of two years following August 31, 1993, at
$10 per share plus any accrued and unpaid dividends; and the Company
is obligated to redeem 200,000 shares of Preferred
F-17
<PAGE> 49
Stock at the end of three years following August 31, 1993, at $10 per
share plus any accrued and unpaid dividends. The holders of the
Preferred Stock are entitled to one vote per share of Preferred Stock.
As part of the transaction to purchase the Preferred Stock, the
Company issued warrants to the buyer of the Preferred Stock to
purchase 300,000 shares of the Company's Common Stock, $.01 par value
per share ("Common Stock") at an exercise price of $1.20 per share and
exercisable through August 31, 1996.
If dividends payable on any outstanding shares of Preferred Stock
shall be in arrears for four full consecutive quarters, then, until
such time as all accrued and unpaid dividends on all outstanding
shares of Preferred Stock shall have been declared and paid, the
holders of record of all shares of Preferred Stock then outstanding,
voting separately as one class, and with one vote for each share held,
shall be entitled to elect one member of the Board of Directors of the
Company. At August 31, 1994, no Preferred Stock dividends were in
arrears.
17. Excess of Liabilities Over Assets of Discontinued Operations
The Company is engaged in litigation (see Notes 14 and 21) over the
ownership of the PEC Apartment Subsidiaries. A defendant acquired
operational control of the PEC Apartment Subsidiaries as of December
1, 1989, and has elected new officers. In 1990 the Company made a
decision that it no longer wished to pursue this line of business.
Accordingly, the line of business was reclassified to Discontinued
operations in fiscal 1990.
A condensed balance sheet of the Discontinued operations (in thousands
of dollars) is as follows:
<TABLE>
<S> <C>
Assets
Real estate rental properties $ 12,107
Other assets 135
------------
Total assets $ 12,242
============
Liabilities
Notes payable $ 12,589
Accrued interest 3,875
------------
Total liabilities 16,464
------------
Excess of liabilities over assets of discontinued operations $ (4,222)
===========
</TABLE>
18. Shareholders' Equity
At the 1992 Annual Meeting of Shareholders, Mego adopted amendments to
its Certificate of Incorporation changing its name from Mego Corp. to
Mego Financial Corp. and increased the authorized number of shares of
Class A Common Stock to 50,000,000 shares from 25,200,000 shares,
changed the designation of Class A Common Stock to Common Stock,
converted the outstanding Class B Common Stock to Common Stock,
eliminated all previously existing classes of Preferred Stock and
authorized the issuance of 5,000,000 shares of new Preferred Stock,
$.01 par value.
The Company has issued 475,000 shares of its Common Stock to an
unrelated company for its services to MMC in obtaining the necessary
HUD approval, state licensing and other matters in connection with the
organization of MMC.
During fiscal 1994, the Company offered to purchase shares of its
Common Stock from holders of less than 100 shares at a price of $3.20
per share. The Company acquired 19,419 shares for an aggregate
expenditure of approximately $62,000.
The Company has a stock option plan, adopted November 1993, for
officers and key employees which provides for non-qualified and
qualified incentive options. The Stock Option Committee of the Board
of Directors determines the option price (not to be less than fair
market value for qualified incentive options) at the date of grant.
The options generally expire ten years from the date of grant and are
exercisable over the period stated in each option at the cumulative
rate of 20% per year commencing December 22, 1994, for three years and
the remaining 40% after December 22, 1997.
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------
Reserved Price
Shares Number Per Share
------------ ------------ ------------
<S> <C> <C> <C>
At November 17, 1993 525,000 - -
Granted to more than 10% shareholder - 35,000 $ 2.75
Granted to others - 355,000 $ 2.50
------------ ------------
At August 31, 1994 525,000 390,000
============ ============
</TABLE>
F-18
<PAGE> 50
19. Merger with 80%-Owned Subsidiary
In July 1992, the Boards of Directors of PEC, Vacation Spa Resorts,
Inc. ("VSR"), a then 80%-owned subsidiary of PEC, and Mego, approved a
proposed Agreement and Plan of Merger, which was executed as of July
24, 1992 (the "Plan"), and pursuant to which VSR was merged with and
into PEC on March 11, 1993. Under the Plan, PEC is the surviving
corporation, VSR ceased to exist and each share of VSR Common Stock,
other than shares held by PEC and dissenting shareholders, was
converted into one-quarter of a share of the Common Stock of Mego,
which owns all of the outstanding stock of PEC. As a result, Negative
goodwill of $244,000 was established, which is being amortized over a
five year period, and the Minority interest in 80%-owned subsidiary
has been eliminated.
20. Restatement
Subsequent to the issuance of its financial statements for the year
ended August 31, 1995, the Company determined that certain adjustments
were required to be made to previously reported amounts.
The Company reassessed its method of accounting for Deferred selling
costs for Retail lot sales under SFAS No. 66, SFAS No. 67,
"Accounting for Costs and Initial Retail Operations of Real Estate
Projects" and SFAS No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases". The net effect of the reassessment for the
years ended August 31, 1994, 1993 and 1992, was decreases in income
before income taxes of $1,701,000, $170,000 and $164,000,
respectively. The effect of this restatement on the balance sheets was
a reduction of Deferred selling costs.
The Company accounts for its sales of notes receivable under SFAS No.
65, "Accounting for Certain Mortgage Banking Activities" and SFAS No.
91 which require that certain estimates and assumptions (such as the
impact of prepayments, cancellations and the discount period and rate)
be made in order to compute the present value of the income stream to
be received over the estimated lives of the notes receivable sold by
the Company. The Company determined that the estimates and
assumptions it used previously required revision. The net effect of
the restatement for the year ended August 31, 1994 was a decrease in
income before income taxes of $3,194,000. The effects of the
restatement on the balance sheet were adjustments to the Allowance for
cancellations, Excess servicing rights, Other assets and the Future
estimated contingency for notes receivable sold with recourse.
In 1994 the Company, based on an appraisal, revalued its art inventory
and increased the carrying value to approximately $279,000. The
Company has determined that such revaluation was not in accordance
with generally accepted accounting principles and has reduced the
carrying value of that asset to the original $25,000 carrying value.
The effect of this restatement on income before income taxes for the
year ended August 31, 1994, was a decrease of $254,000. The effect on
the balance sheet for 1994, was a reduction in Other investments.
Pursuant to historical practice, Contributions in aid of construction
("CIAC") were erroneously included in Revenues for years 1994 and
prior. CIAC received by the Company from its customers should have
been included as a separate liability and amortized over the period of
9 - 25 years, which represents the estimated remaining useful life of
the corresponding property. Amortization of CIAC reduces depreciation
expense. CIAC, is included in Accounts payable and accrued liabilities
in the amounts of $1,015,000 and $677,000 at August 31, 1994 and 1993,
respectively. The Company excludes from the CIAC liability a sum equal
to the income tax cost related to the receipt of CIAC funds. For the
years ended August 31, 1994, 1993 and 1992, the effect of this
restatement was a decrease in income before income taxes of $412,000,
$305,000 and $149,000, respectively. The effect of this restatement on
the balance sheets of the Company for those years was an increase in
the CIAC liability, which is included in Accounts payable and accrued
liabilities in each of the years.
The Company's Provision and related Allowance for cancellations were
understated in 1994 and prior years as a result of the misapplication
of then available information relating to the Company's cancellation
experience and determination of the inventory estimated to be
recovered from future cancellations. Had appropriate information been
used and inventory estimated to be recovered from future cancellations
been properly recorded greater Provisions for cancellations would have
been recorded and the Allowance for cancellations would have been
substantially greater. Additionally, the inventory to be recovered
from future cancellations would have been separately recorded as
Inventory rather than being recorded as a reduction of the Provision
and related Allowance for cancellations. The effect of this
restatement was to reduce income before income taxes as reported in
the years ended August 31, 1994, 1993 and 1992 by $1,110,000, $144,000
and $2,302,000, respectively. The effect of this restatement on the
balance sheets for such years was to decrease notes receivable by
$10,404,000, $7,974,000 and $8,246,000, respectively, and to increase
inventory by $4,782,000, $5,169,000 and $5,477,000, respectively.
The Company has restated its Statements of Operations for each of the
three years ended August 31, 1994, to properly record as Other
revenues forfeitures of deposits relating to transactions which did
not meet the accounting criteria for revenue recognition. Such
restatement reduced Timeshare interest sales, net, Retail lot sales,
net and the related costs of sales resulting in forfeiture income of
$82,000, $106,000 and $158,000 in the years ended August 31, 1994,
1993 and 1992, respectively, with no effect on income before income
taxes.
F-19
<PAGE> 51
During the fiscal year ended August 31, 1991, the Company acquired
certain assets as described as "Transactions with Management" in Note
13, "Related Party Transactions". Certain accounts relating to the
acquisition of those assets were incorrectly stated at the time of the
transaction and accordingly, 1991 has been restated. The result of
the restatement as it applies to the years 1994, 1993 and 1992, was to
reduce income before income taxes by $90,000, $651,000 and $651,000,
respectively. The effect of the restatement on the balance sheets of
the Company for those years was to change the Allowance for
cancellation and Other assets in each of the years.
The Company has determined that it erroneously included $955,000 of
expenses in deferred Organizational costs related to MMC in the fiscal
year ended August 31, 1994. Accordingly, Costs and expenses were
understated by $725,000 and amortization of the Organizational costs
was overstated by $3,000. The effect of this restatement on the
Statement of Operations was to reduce income before income taxes in
1994 by $722,000. The effect of this restatement on the balance sheet
of the Company at August 31, 1994, was to reduce Other assets by
$722,000.
A summary of the effect of the restatement on the Balance Sheets at
August 31, is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
As As
Previously As Previously As
Reported Restated Reported Restated
1994 1994 1993 1993
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Notes receivable, net $ 46,473 $ 36,514 $ 54,281 $ 46,307
Excess servicing rights 2,456 2,146 - 902
Timeshare interests held for sale 7,176 9,622 7,661 10,041
Land and improvements inventory 4,915 7,195 3,298 6,087
Other investments 1,873 1,619 - -
Property and equipment, at cost, net 10,291 10,100 8,937 8,795
Deferred selling costs 6,461 3,055 3,758 2,052
Other assets 9,229 6,317 8,304 6,128
Accounts payable and accrued liabilities $ 4,187 $ 6,111 $ 3,492 $ 4,464
Future estimated contingency for notes
receivable sold with recourse 3,075 3,690 - -
Negative goodwill 322 181 416 234
Income taxes payable 283 5,414 344 4,653
Retained earnings 32,228 13,145 29,743 19,219
</TABLE>
A summary of the effect of the restatement on the Statements of Operations
for the years ended August 31, is as follows (in thousands of dollars
except per share amounts):
<TABLE>
<CAPTION>
As As As
Previously As Previously As Previously As
Reported Restated Reported Restated Reported Restated
1994 1994 1993 1993 1992 1992
--------- -------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Timeshare interest sales, net $ 20,862 $ 19,521 $ 22,722 $ 21,734 $ 17,101 $ 14,621
Retail lot sales, net 14,163 13,534 13,939 13,199 15,621 13,818
Gain on sales of notes receivable 4,648 1,454 - 631 - -
Interest income 8,303 8,261 8,248 8,244 - -
Amortization of negative goodwill 513 472 866 875 - -
Incidental operations 2,389 2,007 1,966 1,672 1,765 1,590
Other 1,113 954 1,410 883 981 1,141
Direct costs of:
Timeshare interest sales 3,473 2,684 4,351 3,472 3,461 2,433
Retail lot sales 1,813 1,435 2,760 2,054 3,066 2,113
Incidental operations 2,349 2,342 2,064 2,178 1,823 1,903
Commissions and selling 17,210 18,962 19,852 20,079 16,268 16,432
Depreciation and amortization 1,105 1,208 812 980 734 938
Interest 4,678 4,729 4,194 4,193 4,353 4,401
General and administrative 10,036 11,218 7,846 8,499 7,903 8,450
Income taxes - 761 690 2,218 744 2,382
Minority interest in 80%-owned subsidiary
- - - - 321 63
Cumulative effect of change in accounting
principle - - 1,661 - - -
Net income (loss) 2,785 (5,774) 3,699 (979) 3,635 (1,106)
Earnings (loss) per common share .14 (.34) .22 (.06) .22 (.07)
</TABLE>
F-20
<PAGE> 52
21. Subsequent Events
In the matter of the Intercontinental Financial, Inc. litigation
described in Note 14, the Company has accepted $55,000 in full
settlement of the amount due. Its judgment against Intercontinental
Financial, Inc. et. al., was satisfied and the matter closed.
In the matter of the PEC Apartment Subsidiaries litigation described
in Note 14, an order for judgment of $3,346,000 was rendered against
PEC on its limited guaranty, in connection with the Defendants'
counterclaim. Pursuant to a stipulation between the parties dated as
of May 15, 1995, PEC paid the amount of $2,900,000 on June 15, 1995 in
full settlement of this matter. Because the reserve recorded in the
financial statements of the Company exceeded the amount of the
settlement, the Company recognized a Gain on discontinued operations
in fiscal 1995 of $1,322,000.
On July 5, 1995, Pahrump Valley Vineyards, Inc. filed a complaint in
the 5th Judicial District Court, Nye County, Nevada, (Case No.
CV13394) against Central Nevada Utilities Company ("CNUC"), a
subsidiary of PEC. The plaintiff claimed compensatory damages in
excess of $25,000 in each of four counts alleging trespass, nuisance,
negligence and breach of contract for the alleged supplying of
contaminated water by CNUC to the plaintiff, and also prayed for
punitive damages in excess of $25,000. CNUC has liability insurance
covering the claims for compensatory damages, and Company believes
that CNUC has not committed any act which would entitle the plaintiff
to punitive damages. CNUC intends to vigorously defend against the
claims, and Company does not believe that this matter will have a
material adverse effect on the business or financial condition of CNUC
or the Company.
Following the Company's November 10, 1995 announcement disclosing
certain accounting adjustments, an action was filed on November 13,
1995, in the United States District Court, District of Nevada by
Christopher Dunleavy, as a purported class action against the Company,
certain of the Company's officers and directors and the Company's
independent auditors. The complaint alleges, among other things, that
the defendants violated Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 thereunder in connection with the preparation
and issuance of certain of the Company's financial reports issued in
1994 and 1995, including certain financial statements reported on by
the Company's independent auditors. The complaint also alleges that
one of the director defendants violated the federal securities laws by
engaging in "insider trading." The named plaintiff seeks to represent
a class consisting of purchasers of the Company's Common Stock between
January 14, 1994 and November 9, 1995, and seeks damages in an
unspecified amount, costs, attorney's fees, and such other relief as
the court may deem just and proper. The Company believes that it has
substantial defenses to the action, however, the Company presently
cannot predict the outcome of this matter.
On November 16, 1995, a second action was filed in the United States
District Court for the District of Nevada by Alan Peyser as a
purported class action against the Company and certain of its officers
and directors, which was served on the Company on December 20, 1995.
The complaint alleges, among other things, that the defendants
violated the federal securities laws by making statements and issuing
certain financial reports in 1994 and 1995 that overstated the
Company's earnings and business prospects. The named plaintiff seeks
to represent a class consisting of purchasers of the Company's common
stock between November 28, 1994 and November 9, 1995. The complaint
seeks damages in an unspecified amount, costs, attorney's fees and
such other relief as the Court may deem just and proper. The Company
believes that it has substantial defenses to the action, however, the
Company presently cannot predict the outcome of this matter.
F-21
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Mego Financial Corp. and Subsidiaries
Las Vegas, Nevada
We have audited the consolidated financial statements of Mego Financial Corp.
and its subsidiaries (the "Company") as of August 31, 1994 and 1993, and for
each of the three years in the period ended August 31, 1994, and have issued
our report thereon dated November 16, 1994 (February 29, 1996 as to notes 20
and 21), included elsewhere in this Form 10-K/A. Our audits also included the
consolidated financial statement schedules of the Company, listed in Item 8 of
this Form 10-K/A. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
November 16, 1994 (February 29, 1996 as to Note A to financial statement
schedules)
S-1
<PAGE> 54
Schedule VIII
MEGO FINANCIAL CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
For the year ended August 31, 1994
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at End
Description of Period Expenses Accounts Deductions of Period
- ----------- --------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Allowances for cancellations and credit
losses $19,933 $7,145 $ -- $ (9,071) $18,007
Unamortized valuation discount 275 292 -- (286) 281
Revaluation adjustment 588(a) -- -- (422)(b) 166
------- ------ -------- ------- -------
$20,796 $7,437 $ -- $(9,779) $18,454
======= ====== ======== ======= =======
</TABLE>
(a) Excess of book value over cost at September 1, 1989.
(b) Amortization of excess of book value over cost.
NOTE A - As discussed in Note 20 of the notes to the Company's consolidated
financial statements, certain amounts included herein have been
restated.
S-2
<PAGE> 55
Schedule VIII
MEGO FINANCIAL CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
For the year ended August 31, 1993
<TABLE>
<CAPTION>
Additions
---------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at End
Description of Period Expenses Accounts Deductions of Period
- ----------- --------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for cancellations $20,477 $7,991 $ -- $(8,535) $19,933
Unamortized valuation discount 316 -- -- (41) 275
Revaluation adjustment 1,416(a) -- -- (828)(b) 588
------- ------ -------- ------- -------
$22,209 $7,991 $ -- $(9,404) $20,796
======= ====== ======== ======= =======
</TABLE>
(a) Excess of book value over cost at September 1, 1989.
(b) Amortization of excess of book value over cost.
NOTE A - As discussed in Note 20 of the notes to the Company's consolidated
financial statements, certain amounts included herein have been
restated.
S-3
<PAGE> 56
Schedule VIII
MEGO FINANCIAL CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
For the year ended August 31, 1992
<TABLE>
<CAPTION>
Additions
-------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at End
Description of Period Expenses Accounts Deductions of Period
- ----------- ---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for cancellations $17,973(c) $10,328 $ -- $ (7,824) $20,477
Unamortized valuation discount 333 -- -- (17) 316
Revaluation adjustment 3,399(a) -- -- (1,983)(b) 1,416
------- ------- -------- ------- -------
$21,705 $10,328 $ -- $(9,824) $22,209
======= ======= ======== ======= =======
</TABLE>
(a) Excess of book value over cost at September 1, 1989.
(b) Amortization of excess of book value over cost.
(c) As restated.
NOTE A - As discussed in Note 20 of the notes to the Company's consolidated
financial statements, certain amounts included herein have been
restated.
S-4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-START> SEP-01-1993
<PERIOD-END> AUG-31-1994
<EXCHANGE-RATE> 1
<CASH> 11,734
<SECURITIES> 0
<RECEIVABLES> 54,968
<ALLOWANCES> 18,288
<INVENTORY> 16,817
<CURRENT-ASSETS> 0
<PP&E> 20,647
<DEPRECIATION> 10,547
<TOTAL-ASSETS> 88,302
<CURRENT-LIABILITIES> 0
<BONDS> 39,810
<COMMON> 180
3,000
0
<OTHER-SE> 16,343
<TOTAL-LIABILITY-AND-EQUITY> 88,302
<SALES> 33,570
<TOTAL-REVENUES> 46,718
<CGS> 4,650
<TOTAL-COSTS> 25,954
<OTHER-EXPENSES> 25,777<F2>
<LOSS-PROVISION> 96
<INTEREST-EXPENSE> 4,729
<INCOME-PRETAX> (5,013)
<INCOME-TAX> 761
<INCOME-CONTINUING> (5,774)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,774)
<EPS-PRIMARY> (.34)<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>CUMULATIVE PREFERRED STOCK DIVIDEND -- $360
<F2>PAYMENTS TO ASSIGNORS -- $8,526
</FN>
</TABLE>
