<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________to __________________
Commission file number: 1-8645
MEGO FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
New York 13-5629885
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
4310 Paradise Road, Las Vegas, Nevada 89109
(Address of principal executive offices)(Zip Code)
(702) 737-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 17, 1996, there were 18,089,774 shares of Common Stock, $.01 par
value per share, of the Registrant outstanding.
<PAGE> 2
MEGO FINANCIAL CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
May 31, 1996 and August 31, 1995 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Operations
Three and nine months ended May 31, 1995 (Unaudited and restated)
and May 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Cash Flows
Nine months ended May 31, 1995 (Unaudited and restated)
and May 31, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 9-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE> 3
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
May 31, August 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $5,860 $7,338
Restricted cash 4,295 6,467
Notes receivable, net of allowances for cancellations and credit
losses of $18,060 and $16,866 at May 31, 1996 and August 31, 1995 41,679 31,054
Excess servicing rights 14,886 16,565
Mortgage servicing rights 2,738 1,076
Timeshare interests held for sale 31,582 19,820
Land and improvements inventory 4,639 5,542
Other investments 17,374 1,531
Property and equipment, at cost, net of accumulated depreciation of
$13,087 and $11,823 at May 31, 1996 and August 31, 1995 15,343 12,681
Deferred selling costs 2,544 3,332
Other assets 7,588 7,351
------------ ------------
TOTAL ASSETS $148,528 $112,757
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes and contracts payable $72,730 $44,715
Accounts payable and accrued liabilities 16,844 13,998
Payable to assignors 2,579 2,579
Future estimated contingency for notes receivable sold with recourse 7,849 8,030
Deposits 1,941 3,619
Negative goodwill 89 131
Deferred income taxes 11,517 8,103
------------ ------------
Total liabilities before Subordinated debt and Redeemable
Preferred Stock 113,549 81,175
------------ ------------
Subordinated debt 9,347 9,352
------------ ------------
Redeemable Preferred Stock, Series A, 12% Cumulative Preferred Stock,
$.01 par value, $10 redemption value, 200,000 and 300,000 shares
issued and outstanding at May 31, 1996 and August 31, 1995 2,000 3,000
------------ ------------
Shareholders' equity:
Preferred Stock - $.01 par value
Authorized - 5,000,000 shares
Common Stock - $.01 par value
Authorized - 50,000,000 shares
Issued and outstanding - 18,087,556 shares 180 180
Additional paid in capital 4,498 4,498
Retained earnings 18,954 14,552
------------ ------------
Total shareholders' equity 23,632 19,230
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $148,528 $112,757
============ ============
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
2
<PAGE> 4
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended May 31, ended May 31,
---------------------------- ----------------------------
1995 1996 1995 1996
-------------- ------------ -------------- ------------
(As restated - (As restated -
see Note 5) see Note 5)
<S> <C> <C> <C> <C>
REVENUES
Timeshare interest sales, net (Note 2) $5,852 $7,965 $14,458 $20,159
Retail lot sales, net (Note 2) 8,024 4,484 18,539 15,242
Housing sales - - 205 -
Gain on sale of notes receivable 4,221 3,387 7,037 14,668
Interest income 2,350 2,045 6,017 5,627
Financial income 352 1,567 506 3,729
Amortization of negative goodwill 18 18 196 53
Incidental operations 1,143 1,115 2,492 2,347
Other 176 428 445 955
-------------- ------------ -------------- ------------
Total revenues 22,136 21,009 49,895 62,780
-------------- ------------ -------------- ------------
COSTS AND EXPENSES
Direct cost of:
Timeshare interest sales 823 1,000 2,077 2,851
Retail lot sales 717 445 1,820 1,490
Housing sales - - 265 -
Incidental operations 292 591 1,553 1,669
Commissions and selling 9,496 8,134 19,592 23,683
Depreciation and amortization 411 555 1,234 1,672
Provision for credit losses 312 318 558 815
Interest 1,755 2,697 4,432 6,012
General and administrative 4,269 6,806 10,280 17,646
Payments to assignors - - 7,252 -
-------------- ------------ -------------- ------------
Total costs and expenses 18,075 20,546 49,063 55,838
-------------- ------------ -------------- ------------
INCOME BEFORE INCOME TAXES 4,061 463 832 6,942
INCOME TAXES 1,189 157 2,597 2,360
-------------- ------------ -------------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 2,872 306 (1,765) 4,582
Gain on discontinued operations, net of income taxes of
$152 and $450 for the three and nine months ended
May 31, 1995, respectively 295 - 873 -
-------------- ------------ -------------- ------------
NET INCOME (LOSS) 3,167 306 (892) 4,582
CUMULATIVE PREFERRED STOCK DIVIDENDS 90 60 270 180
-------------- ------------ -------------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $3,077 $246 $(1,162) $4,402
============== ============ ============== ============
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 5
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended May 31, ended May 31,
-------------------------- --------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
(As restated - (As restated -
see Note 5) see Note 5)
<S> <C> <C> <C> <C>
EARNINGS (LOSS) PER COMMON SHARE:
Primary
Income (loss) from continuing operations $0.15 $0.01 $(0.11) $0.24
Income from discontinued operations 0.02 0.00 0.05 0.00
------------ ------------ ------------ ------------
Net income (loss) $0.17 $0.01 $(0.06) $0.24
============ ============ ============ ============
Weighted average number of common shares and
common share equivalents outstanding 17,631,169 18,087,556 18,086,750 18,087,556
============ ============ ============ ============
Fully Diluted
Income from continuing operations $0.15 $0.01 N/A $0.23
Income from discontinued operations 0.02 0.00 0.00
------------ ------------ ------------
Net income $0.17 $0.01 $0.23
============ ============ ============
Weighted average number of common shares and
common share equivalents outstanding 18,431,037 19,484,667 19,484,667
============ ============ ============
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 6
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended May 31,
----------------------------
1995 1996
-------------- ------------
(As restated -
see Note 5)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(892) $4,582
Adjustments to reconcile net income to net cash used -------------- ------------
in operating activities:
Amortization of excess of underlying book value over purchase
price of wholly-owned subsidiary (196) (53)
Provisions for cancellation and credit losses 7,940 8,197
Cost of sales 4,162 4,341
Deprecation and amortization 1,234 1,672
Gain on sale of receivables (7,037) (14,754)
Gain on discontinued operations (873) -
Increase (decrease) in provision for future estimated contingency
for notes receivable sold with recourse 2,586 (181)
Changes in operating assets and liabilities:
Increase (decrease) in restricted cash (3,190) 2,172
Increase in notes receivable, net (34,281) (113,380)
Proceeds from sale of notes receivable 33,319 109,312
Increase (decrease) in excess servicing rights (7,336) 1,679
Increase in mortgage servicing rights (651) (1,662)
Purchase of land and timeshare interests (12,129) (15,200)
(Increase) decrease in other assets (4,943) (237)
(Increase) decrease in deferred selling costs (564) 788
Increase in accounts payable and accrued liabilities 11,656 2,857
Increase in payable to assignors 6,517 -
Increase (decrease) in deposits 677 (1,678)
Decrease in excess of liabilities over assets of discontinued
operations (3,051) -
Increase in deferred income taxes 1,404 3,414
-------------- ------------
Total adjustments (4,756) (12,713)
-------------- ------------
Net cash used in operating activities (5,648) (8,131)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in debt 9,077 28,015
Preferred stock dividends (270) (180)
Decrease in Redeemable Preferred Stock (1,000)
Increase in subordinated debt (5)
-------------- ------------
Net cash provided by financing activities 8,807 26,830
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,880) (4,334)
Increase in other investments (4) (15,843)
-------------- ------------
Net cash used in investing activities (2,884) (20,177)
-------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 275 (1,478)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 10,982 7,338
-------------- ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $11,257 $5,860
============== ============
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
5
<PAGE> 7
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended May 31,
----------------------------
1995 1996
-------------- ------------
(As restated -
see Note 5)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Issuance of Subordinated Debt to assignors $ 10,000 $ --
-------------- ------------
In connection with the issuance of Subordinated Debt
the Company issued 1,000,000 common stock warrants to
the Assignors $ 1,300 $ --
-------------- ------------
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
6
<PAGE> 8
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) In the opinion of management, when read in conjunction with the
audited consolidated financial statements for the years ended August
31, 1994 (as restated - see Note 5 below) and 1995, the accompanying
unaudited condensed consolidated financial statements contain all the
information necessary to present fairly the financial position of Mego
Financial Corp. ("Mego") and Subsidiaries (collectively the
"Company") at May 31, 1996 and the results of its operations and
cash flows for the nine months ended May 31, 1995 (unaudited and
restated - see Note 5 below) and May 31, 1996.
All significant intercompany accounts between Mego and its
subsidiaries have been eliminated.
2) The Company provides a provision for cancellation. A summary is as
follows (in thousands):
<TABLE>
<CAPTION>
Three months ended May 31, Nine months ended May 31,
------------------------------- -------------------------------
1995 1996 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Gross timeshare interest sales $ 7,282 $ 8,753 $ 18,364 $ 23,890
Less: provision for cancellation 1,430 788 3,906 3,731
-------------- -------------- -------------- --------------
Timeshare interest sales, net $ 5,852 $ 7,965 $ 14,458 $ 20,159
============== ============== ============== ==============
Gross retail lot sales $ 9,407 $ 5,710 $ 22,015 $ 18,496
Less: provision for cancellation 1,383 1,226 3,476 3,254
-------------- -------------- -------------- --------------
Retail lot sales, net $ 8,024 $ 4,484 $ 18,539 $ 15,242
============== ============== ============== ==============
</TABLE>
3) Earnings (loss) per common share are based on the Net income (loss)
applicable to common stock for each period divided by the weighted
average number of common shares and common share equivalents
outstanding during the period. 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 and options. In loss
periods, dilutive common equivalent shares are excluded as the effect
would be antidilutive.
4) The results for the three and nine month periods ended May 31, 1996
are not necessarily indicative of the actual results for the year
ending August 31, 1996.
5) On November 10, 1995, the Company announced that it had determined, in
consultation with its independent auditors, that certain adjustments
were required to be made to the Company's previously issued financial
statements, including certain financial statements reported on by such
independent auditors. Adjustments related primarily to (i) the
Company's method of computing 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
recovered over the estimated life of notes receivable sold by the
Company, (iii) its method of computing 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 reinstatement of the carrying value of certain art inventory, and
(vii) its method of accounting for organization costs relating to its
subsidiary, Mego Mortgage Corporation. None of such adjustments
affected the cash position of the Company. As a result of such
adjustments, the Company has restated its previously issued financial
statements for its fiscal years 1994 and 1993. Such adjustments also
affect the Company's previously issued financial statements for the
first three quarters of fiscal 1995.
The aggregate effect of the adjustments for the three and nine month
periods ended May 31, 1995, was to decrease Net income for the three
months ended May 31, 1995, by $3.5 million, from Net income of $6.7
million to Net income of $3.1 million and for the nine months ended
May 31, 1995, to decrease Net income by $7.6 million, from Net income
of $6.7 million to a Net loss of $.9 million.
7
<PAGE> 9
The line items impacted by this restatement included in the Statement of
Operations for the three and nine months ended May 31, 1995 are as follows (in
thousands of dollars except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
May 31, 1995 May 31, 1995
------------------------------------ ------------------------------------
Restatement Restatement
As adjustments As As adjustments As
Filed (Note 5) Restated Filed (Note 5) Restated
REVENUES ----------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Timeshare interest sales, net 5,660 192 5,852 14,747 (289) 14,458
Retail lot sales, net 7,530 494 8,024 17,658 881 18,539
Housing sales - - - 205 - 205
Gain on sale of notes receivable 6,712 (2,491) 4,221 11,250 (4,213) 7,037
Interest income 2,676 (326) 2,350 6,660 (643) 6,017
Financial income - 352 352 - 506 506
Amortization of negative goodwill 23 (5) 18 235 (39) 196
Incidental operations 721 422 1,143 1,898 594 2,492
Other 73 103 176 472 (27) 445
Total revenues 23,395 22,136 53,125 49,895
COSTS AND EXPENSES
Direct cost of:
Timeshare interest sales 1,092 (269) 823 2,540 (463) 2,077
Retail lots sales 747 (30) 717 2,049 (229) 1,820
Housing sales - - - 265 - 265
Incidental operations 640 (348) 292 1,900 (347) 1,553
Commissions and selling 8,048 1,448 9,496 16,666 2,926 19,592
Depreciation and amortization 651 (240) 411 1,357 (123) 1,234
Provision for credit losses 555 (243) 312 1,045 (487) 558
Interest 1,896 (141) 1,755 4,554 (122) 4,432
General and administrative 3,508 761 4,269 10,075 205 10,280
Payments to assignors - - - 7,252 - 7,252
Total costs and expenses 17,137 18,075 47,703 49,063
INCOME BEFORE INCOME TAXES 6,258 4,061 5,422 832
INCOME TAXES - 1,189 1,189 - 2,597 2,597
INCOME (LOSS) FROM CONTINUING OPERATIONS 6,258 2,872 5,422 (1,765)
Gain on discontinued operations, net
of income taxes of $298 446 (151) 295 1,322 (449) 873
NET INCOME (LOSS) 6,704 3,167 6,744 (892)
CUMULATIVE PREFERRED STOCK DIVIDENDS 90 90 270 270
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK 6,614 3,077 6,474 (1,162)
EARNINGS (LOSS) PER COMMON SHARE:
Primary
Income (loss) from continuing operations 0.35 (0.20) 0.15 0.29 (0.40) (0.11)
Income from discontinued operations 0.02 (0.00) 0.02 0.07 (0.02) 0.05
Net income (loss) 0.37 0.17 0.36 (0.06)
Weighted average number of common shares and
common share equivalents outstanding 18,087,556 18,086,750 18,087,019 18,086,750
Fully Diluted
Income from continuing operations 0.32 (0.17) 0.15 0.28 N/A
Income from discontinued operations 0.02 (0.00) 0.02 0.07
Net income 0.34 0.17 0.35
Weighted average number of common shares and
common share equivalents outstanding 19,463,566 18,431,037 18,764,417
</TABLE>
8
<PAGE> 10
MEGO FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended May 31, 1995 (as restated-see Note 5) Compared to Three
Months Ended May 31, 1996
GENERAL
Mego Mortgage Corporation ("MMC")
MMC originated $27,937,000 of Title I Loans during the three months ended May
31, 1995 compared to $32,913,000 of Title I Loans and $385,000 of conventional
home improvement loans during the three months ended May 31, 1996, an increase
of 19.2%.
MMC sold $23,894,000 of Title I Loans during the three months ended May 31,
1995 recognizing a Gain on sale of loans of $3,713,000. MMC sold $31,671,000
of Title I Loans and $50,000 of conventional home improvement loans during the
three months ended May 31, 1996, recognizing a Gain on sale of loans of
$3,414,000. As a percentage of Title I Loans sold, Gain on sale of loans was
15.5% during the three months ended May 31, 1995 compared to 10.8% during the
three months ended May 31, 1996. A weighted average discount rate of
approximately 12% per annum was used in the determination of the Gain on sale
for the three months ended May 31, 1995 and 1996.
Interest income increased from $177,000 during the three months ended May 31,
1995 to $593,000 during the three months ended May 31, 1996, an increase of
235.0%. The increase was primarily the result of the increase in the size of
the portfolio of Loans held for sale.
Loan servicing revenue increased from $321,000 during the three months ended
May 31, 1995 to $867,000 during the three months ended May 31, 1996, an
increase of 170.1%. The increase was primarily the result of the increased
cumulative amount of Title I Loans being serviced for others.
Total revenues increased from $4,211,000 for the three months ended May 31,
1995 to $4,874,000 for the three months ended May 31, 1996, an increase of
15.7%. The increase was primarily the result of increased sales of Loans.
Total costs and expenses increased from $2,217,000 for the three months ended
May 31, 1995 to $3,855,000 for the three months ended May 31, 1996, an increase
of 73.9%. This increase resulted primarily from an increase in General and
administrative expenses from $1,484,000 to $2,495,000, an increase of 68.1%; an
increase in Provision for credit losses from $312,000 to $318,000, an increase
of 1.9%; an increase in Interest expense from $139,000 to $232,000, an increase
of 66.9%; and an increase in Depreciation and amortization expense from
$105,000 to $267,000, an increase of 154.3%. The increase in General and
administrative expenses is primarily due to increased payroll related to the
hiring of additional loan quality control and other personnel in contemplation
of the expansion of MMC's business and costs related to the opening of
additional offices needed to attain a higher volume of business. The increase
in Interest expense is primarily the result of higher borrowings to support
increased Loan production.
As a result, Income before income taxes of MMC decreased from $1,994,000 for
the three months ended May 31, 1995 to $1,019,000 for the three months ended
May 31, 1996.
Preferred Equities Corporation ("PEC")
Timeshare interest and land sales, net, decreased from $13,876,000 for the
three months ended May 31, 1995 to $12,449,000 for the three months ended May
31, 1996, a decrease of 10.3%. Gross sales of timeshare interests increased
from $7,282,000 to $8,753,000, an increase of 20.2%. Net sales of timeshare
interests increased from $5,852,000 to $7,965,000, an increase of 36.1%. The
Provision for cancellation represented 19.6% and 9.0% of gross sales of
timeshare interests for the three months ended May 31, 1995 and 1996,
respectively. Gross sales of land decreased from $9,407,000 to $5,710,000, a
decrease of 39.3%. Net sales of land decreased from $8,024,000 to $4,484,000,
a decrease of 44.1%. In 1995, PEC shifted its emphasis, as part of its
strategic plan, from sales of land to sales of timeshare interests due to its
diminishing inventory of land, which resulted in the lower volume of land
sales. The Provision for cancellation represented 14.7% and 21.5% of gross
sales of land for the three months ended May 31, 1995 and 1996, respectively.
Gain on sale of PEC's receivables decreased from $508,000 for the three months
ended May 31, 1995 to $58,000 for the three months ended May 31, 1996, a
decrease of 88.6%. This decrease resulted from sales of receivables decreasing
from $11,639,000 during the three months ended May 31, 1995 to $646,000 during
the three months ended May 31, 1996, a decrease of 94.4%. From time to time,
PEC sells receivables in order to reduce the outstanding balances under its
lines of credit.
9
<PAGE> 11
PEC's Interest income decreased from $2,173,000 for the three months ended May
31, 1995 to $1,789,000 for the three months ended May 31, 1996, a decrease of
17.7%. This decrease resulted primarily from a reduction in the average
balance of PEC's portfolio of receivables. Financial services income increased
from $31,000 for the three months ended May 31, 1995 to $270,000 for the three
months ended May 31, 1996, an increase of 771.0%, due to the increased volume
of Loans being serviced for MMC and others.
Revenues from incidental operations decreased slightly from $1,143,000 for the
three months ended May 31, 1995 to $1,115,000 for the three months ended May
31, 1996, a decrease of 2.5%.
Other revenues increased from $176,000 for the three months ended May 31, 1995
to $407,000 for the three months ended May 31, 1996, an increase of 131.3%.
As a result of the foregoing, Total revenues of PEC decreased from $17,907,000
for the three months ended May 31, 1995 to $16,088,000 for the three months
ended May 31, 1996, a decrease of 10.2%.
Total costs and expenses decreased slightly from $14,759,000 for the three
months ended May 31, 1995 to $14,244,000 for the three months ended May 31,
1996, a decrease of 3.5%. This decrease resulted primarily from a decrease in
Commissions and selling expenses from $9,018,000 to $7,601,000, a decrease of
15.7%, due to the lower volume of land sales; an increase in Interest expense
of $207,000, an increase of 16.0% due to an increase in Notes payable; and an
increase in General and administrative costs from $2,240,000 to $2,794,000, an
increase of 24.7%. The increase in General and administrative costs is
primarily due to increases in payroll related to the hiring of additional
administrative personnel, maintenance fees related to unsold timeshare
inventory and owners' association costs. As a percentage of gross sales of
timeshare interests and land, Commissions and selling expenses relating thereto
decreased from 54.0% for the three months ended May 31, 1995 to 52.6% for the
three months ended May 31, 1996, and Costs of sales as a percentage relating
thereto increased from 9.2% to 10.0%. Sales prices of timeshare interests are
typically lower than those of land while selling costs are generally the same
for timeshare interests and land; accordingly, PEC generally realizes lower
profit margins from sales of timeshare interests than sales of land.
As a result of the foregoing, PEC's Income before income taxes decreased from
$3,148,000 for the three months ended May 31, 1995 to $1,844,000 for the three
months ended May 31, 1996, a decrease of 41.4%. The decrease is largely due to
the decrease in volume of land sales not yet offset by the increase in sales of
timeshare interests.
COMPANY
Income Statement Data. Operating income from subsidiaries decreased from
$5,142,000 for the three months ended May 31, 1995 to $2,863,000 for the three
months ended May 31, 1996, a decrease of 44.3%.
Total Costs and expenses increased from $18,075,000 for the three months ended
May 31, 1995 to $20,546,000 for the three months ended May 31, 1996, an increase
of 13.7%. This increase was primarily the result of an increase in General and
administrative expenses from $4,269,000 to $6,806,000, an increase of 59.4%,
partially offset by a decrease in Commission and selling expenses from
$9,496,000 to $8,134,000, a decrease of 14.3%. The increase in General and
administrative expenses is primarily a result of certain non-recurring
accounting and legal expenses approximating $1,100,000 relating to the
restatement of certain of the Company's financial statements, as well as the
increase in such expenses of MMC and PEC discussed above.
Income before income taxes decreased from $4,061,000 for the three months ended
May 31, 1995 to $463,000 for the three months ended May 31, 1996.
The Gain on discontinued operations, net of income taxes, was $295,000 for the
three months ended May 31, 1995, and zero for the three months ended May 31,
1996.
Income taxes decreased from $1,189,000 for the three months ended May 31, 1995
to $157,000 for the three months ended May 31, 1996.
As a result of the foregoing, Net income decreased from $3,167,000 for the
three months ended May 31, 1995 to $306,000 for the three months ended May 31,
1996.
Nine Months Ended May 31, 1995 (as restated-see Note 5) Compared to Nine Months
Ended May 31, 1996
GENERAL
Mego Mortgage Corporation
MMC originated $52,496,000 of Title I Loans during the nine months ended May
31, 1995 compared to $89,006,000 of Title I Loans and $385,000 of conventional
home improvement loans during the nine months ended May 31, 1996, an increase
of 70.3%.
10
<PAGE> 12
MMC sold $47,496,000 of Title I Loans during the nine months ended May 31, 1995
recognizing a Gain on sale of loans of $6,098,000. MMC sold $88,023,000 of
Title I Loans and $50,000 of conventional home improvement loans during the
nine months ended May 31, 1996, recognizing a Gain on sale of loans of
$14,224,000. As a percentage of Title I Loans sold, Gain on sale of loans was
12.8% during the nine months ended May 31, 1995 compared to 16.2% during the
nine months ended May 31, 1996. A weighted average discount rate of
approximately 12% per annum was used in the determination of the Gain on sale
for the nine months ended May 31, 1995 and 1996.
Interest income increased from $635,000 during the nine months ended May 31,
1995 to $1,119,000 during the nine months ended May 31, 1996. The increase
was primarily the result of the increase in the size of the portfolio of loans
held for sale.
Loan servicing revenue increased from $418,000 during the nine months ended May
31, 1995 to $2,628,000 during the nine months ended May 31, 1996, an increase
of 528.7%. The increase was primarily the result of the increased cumulative
amount of Title I Loans being serviced for others.
Total revenues increased from $7,151,000 for the nine months ended May 31, 1995
to $17,971,000 for the nine months ended May 31, 1996, an increase of 151.3%.
The increase was primarily the result of the increased volume of Loans
originated and the sale of such Loans.
Total Costs and expenses increased from $5,297,000 for the nine months ended
May 31, 1995 to $10,508,000 for the nine months ended May 31, 1996, an increase
of 98.4%. This increase resulted primarily from an increase in General and
administrative expenses from $3,760,000 to $6,791,000, an increase of 80.6%; an
increase in Provision for credit losses from $558,000 to $815,000, an increase
of 46.1%; an increase in Interest expense from $380,000 to $701,000, an
increase of 84.5%; and an increase in Depreciation and amortization expense
from $260,000 to $641,000, an increase of 146.5%. The increase in General and
administrative expenses is primarily due to increased payroll related to the
hiring of additional loan quality control and other personnel in contemplation
of the expansion of MMC's business and costs related to the opening of
additional offices. The increase in Interest expense is primarily the result
of higher borrowings to support increased loan production.
As a result, Income before income taxes of MMC increased from $1,854,000 for
the nine months ended May 31, 1995 to $7,463,000 for the nine months ended May
31, 1996.
Preferred Equities Corporation
Timeshare interest and land sales, net, increased from $32,997,000 for the nine
months ended May 31, 1995 to $35,401,000 for the nine months ended May 31, 1996,
an increase of 7.3%. Gross sales of timeshare interests increased from
$18,364,000 to $23,890,000, an increase of 30.1%. Net sales of timeshare
interests increased from $14,458,000 to $20,159,000, an increase of 39.4%. The
Provision for cancellation represented 21.3% and 15.6% of gross sales of
timeshare interests for the nine months ended May 31, 1995 and 1996,
respectively. Gross sales of land decreased from $22,015,000 to $18,496,000, a
decrease of 16.0%. Net sales of land decreased from $18,539,000 to $15,242,000,
a decrease of 17.8%. In 1995, PEC shifted its emphasis, as part of its
strategic plan, from sales of land to sales of timeshare interests due to its
greater inventory of timeshare interests, which resulted in the lower volume of
land sales. The Provision for cancellation represented 15.8% and 17.6% of gross
sales of land for the nine months ended May 31, 1995 and 1996, respectively.
Gain on sale of PEC's receivables decreased from $939,000 for the nine months
ended May 31, 1995 to $529,000 for the nine months ended May 31, 1996, a
decrease of 43.7%. This increase resulted from sales of receivables decreasing
from $21,239,000 during the nine months ended May 31, 1995 to $7,312,000
during the nine months ended May 31, 1996, a decrease of 65.6%. From time to
time, PEC sells receivables in order to reduce the outstanding balances under
its lines of credit.
PEC's Interest income decreased from $5,382,000 for the nine months ended May
31, 1995 to $4,838,000 for the nine months ended May 31, 1996, a decrease of
10.1%. This decrease resulted primarily from a reduction in the average
balance of PEC's portfolio of receivables.
Financial services income increased from $88,000 for the nine months ended May
31, 1995 to $671,000 for the nine months ended May 31, 1996, an increase of
662.5%, due to the increased volume of Loans serviced for MMC and others.
Revenues from incidental operations decreased from $2,492,000 for the nine
months ended May 31, 1995 to $2,347,000 for the nine months ended May 31, 1996,
a decrease of 5.8%.
Other revenues increased from $445,000 for the nine months ended May 31, 1995
to $934,000 for the nine months ended May 31, 1996, an increase of 109.9%.
As a result of the foregoing, Total revenues of PEC increased from $42,548,000
for the nine months ended May 31, 1995 to $44,720,000 for the nine months ended
May 31, 1996, an increase of 5.1%.
Total Costs and expenses increased from $34,805,000 for the nine months ended
May 31, 1995 to $41,072,000 for the nine months ended May 31, 1996, an increase
of 18.0%. This increase resulted primarily from an increase in Commissions and
selling expenses from $18,760,000 to $22,133,000, an increase of 18.0%, and an
increase in General and administrative costs from $5,879,000 to $7,851,000, an
11
<PAGE> 13
increase of 33.5%. PEC's selling expenses increased primarily as a result of
costs relating to the establishment of new marketing programs and strategies,
market research costs, increased advertising costs, costs associated with the
renaming of PEC's timeshare resorts to Ramada Vacation Suites and additional
sales offices. The increase in General and administrative costs is primarily
due to increases in payroll related to the hiring of additional administrative
personnel, maintenance fees related to unsold timeshare inventory and owners'
association costs. As a percentage of gross sales of timeshare interests and
land, Commissions and selling expenses relating thereto increased from 46.5%
for the nine months ended May 31, 1995 to 52.2% for the nine months ended May
31, 1996, and Costs of sales as a percentage relating thereto increased from
9.7% to 10.2%. Sales prices of timeshare interests are typically lower than
those of land while selling costs are generally the same for timeshare
interests and land; accordingly, PEC generally realizes lower profit margins
from sales of timeshare interests than sales of land.
As a result of the foregoing, PEC's Income before income taxes decreased from
$7,743,000 for the nine months ended May 31, 1995 to $3,648,000 for the nine
months ended May 31, 1996, a decrease of 52.9%. The decrease is largely due to
the increase of Commissions and selling expense and in General and
administrative expenses, together with the decrease in land sales.
COMPANY
Income Statement Data. Operating income from subsidiaries increased from
$9,597,000 for the nine months ended May 31, 1995 to $11,111,000 for the nine
months ended May 31, 1996, an increase of 15.8%. The increase was due to the
increased income of MMC which was partially offset by the decrease in income of
PEC.
Total costs and expenses increased from $49,063,000 for the nine months ended
May 31, 1995 to $55,838,000 for the nine months ended May 31, 1996, an increase
of 13.8%. This increase was primarily the result of an increase in General and
administrative expenses from $10,280,000 to $17,646,000, an increase of 71.7%,
and an increase in Commission and selling expenses from $19,592,000 to
$23,683,000, an increase of 20.9%. The increase in General and administrative
expenses is primarily a result of certain non-recurring accounting and legal
expenses approximating $1,100,000 relating to the restatement of certain of the
Company's financial statements, and the increase in such expenses of MMC and
PEC discussed above.
Payments to Assignors decreased from $7,252,000 for the nine months ended May
31, 1995 to zero for the nine months ended May 31, 1996, as accrual of amounts
payable to Assignors ended on January 31, 1995.
Income before income taxes increased from $832,000 for the nine months ended
May 31, 1995 to $6,942,000 for the nine months ended May 31, 1996.
The Gain on discontinued operations, net of income taxes, was $873,000 for the
nine months ended May 31, 1995, and zero for the nine months ended February 29,
1996.
Income taxes decreased from $2,597,000 for the nine months ended May 31, 1995
to $2,360,000 for the nine months ended May 31, 1996.
As a result of the foregoing, Net income (loss) increased from a loss of
$892,000 for the nine months ended May 31, 1995 to net income of $4,582,000 for
the nine months ended May 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had Cash and cash equivalents of $5.9 million at May 31, 1996
compared to Cash and cash equivalents of $7.3 million at August 31, 1995.
The Company's principal cash requirements relate to loan originations, the
acquisition of timeshare properties and land and the payment of commissions and
selling expenses in connection with timeshare and land sales. MMC and PEC each
requires continued access to sources of debt financing and sales in the
secondary market of loans and receivables, respectively.
MMC's cash requirements arise from loan originations, payments of operating and
interest expenses and deposits to reserve accounts related to loan sale
transactions. Loan originations and acquisitions are initially funded
principally through MMC's $20.0 million warehouse line of credit with a bank
pending the sale of loans in the secondary market. Substantially all of the
loans originated by MMC are sold. Net cash used in MMC's operating activities
for nine months ended May 31, 1995 and the nine months ended May 31, 1996 was
approximately $10.0 million and $8.0 million, respectively. This use was
funded primarily from the reinvestment of proceeds from the sale of loans in
the secondary market totaling approximately $47.5 million and $88.0 million,
for the nine months ended May, 1995, and 1996, respectively. The loan sale
transactions required the subordination of certain cash flows payable to MMC to
the payment of scheduled principal and interest due to the loan purchasers. In
connection with certain of such sale transactions, a portion of amounts payable
to MMC from the excess interest spread is required to be maintained in a
reserve account to the extent of the subordination requirements. The
subordination requirements generally provide that the excess interest spread is
payable to the reserve account until a specified percentage of the principal
balances of the sold loans is accumulated therein.
12
<PAGE> 14
Excess interest spread payable to MMC is subject to being utilized first to
replenish cash paid from the reserve account to fund shortfalls in collections
of interest from borrowers who default on the payments on the loans until MMC's
deposits into the reserve account equal the specified percentage. The excess
interest required to be deposited and maintained in the respective reserve
accounts is not available to support the cash flow requirements of MMC. At May
31, 1996, the amounts on deposit in such reserve accounts totaled $1.5 million.
Adequate credit facilities and other sources of funding, including the ability
of MMC to sell loans in the secondary market, are essential for the
continuation of MMC's loan origination operations. At May 31, 1996, MMC had a
$20.0 million warehouse line of credit for the financing of loan originations
which expires in August 1996. At May 31, 1996, $3.0 million was outstanding
under such line of credit and $17.0 million was available. Such line of credit
bears interest at the prime rate plus 1.0% per annum and is secured by loans
prior to sale. The agreement with the lender requires MMC to maintain a
minimum tangible net worth of $7.5 million, and a minimum level of
profitability of at least $500,000 per rolling six month period. In addition
to the $20.0 million warehouse line of credit, at May 31, 1996, MMC had a $5.0
million demand note facility from the same lender, with respect to which $5.0
million was outstanding on that date. This facility was secured by a pledge
of MMC's Excess servicing rights (together with the certificates relating to
securitizations ("Certificates") carried in "Other investments" on the
Company's balance sheets, payable to MMC pursuant to its loan sale agreements.
As of June 28, 1996, this facility was replaced by a $10.0 million revolving
credit loan from the same lender, with the same security. The new facility has
an eighteen month revolving credit period followed by a thirty month payment
period, and requires MMC to maintain a minimum tangible net worth of $12.5
million and a minimum level of profitability of at least $500,000 per rolling
six month period. Borrowings under this facility cannot exceed the lesser of
(a) 40% of MMC's Excess servicing rights (and Certificates) or (b) six times
the aggregate of the Excess servicing rights (and Certificates) payments
actually received by MMC over the most recent three month period. The Company
believes that MMC will be able to maintain its existing credit facilities and
obtain replacement financing as its credit arrangements mature and additional
financing, if necessary, however there can be no assurance that such financing
will be available on favorable terms, or at all.
In April 1995, MMC entered into an agreement (the "Purchase Agreement") to sell
Title I Loans to a financial institution (the "Purchaser"), with MMC retaining
the right to service the loans. Through May 31, 1996, an aggregate of
approximately $138.5 million in principal amount of loans had been sold
pursuant to the Purchase Agreement for an amount equal to 100.0% of their
remaining principal balances. Pursuant to the Purchase Agreement, the Purchaser
is entitled to receive interest at a variable rate equal to the sum of 200
basis points (2.0%) and the one month LIBOR rate as in effect from time to
time. MMC retained the right to receive the Excess Interest. The Purchase
Agreement requires MMC to establish and maintain a reserve account equal to
2.5% of the proceeds received by MMC from the sale of loans pursuant to the
agreement plus the Excess Interest received by MMC less its servicing fee to
fund shortfalls in collections from borrowers who default in the payment of
principal or interest. In May and June 1995, MMC repurchased from the
Purchaser an aggregate of approximately $25.0 million of the Title I Loans for
an amount equal to their remaining principal balance, which were sold to a
financial institution and in March 1996 repurchased an additional $77.8 million
of the Title I Loans in connection with the securitization transaction
hereinafter described.
In furtherance of MMC's strategy to commence securitization of Title I Loans,
in March 1996, MMC entered into an agreement (the "Securitization Agreement")
pursuant to which it sold a pool of $84.2 million of Title I Loans to a
financial institution (the "Depositor") at par. MMC previously repurchased
$77.8 million of such Loans from the Purchaser at par. In connection with such
sale transaction, MMC entered into a pooling and servicing agreement (the
"Pooling and Servicing Agreement") with the Depositor and two banks, pursuant
to which the Depositor sold the loans to a trust that, in turn, sold
pass-through certificates evidencing interests in the pool of loans pursuant to
a public offering. Pursuant to the Pooling and Servicing Agreement, MMC
continues to subservice the sold loans and is entitled to receive from payments
in respect of interest in the sold loans a servicing fee equal to 1.25% of the
balance of each loan. MMC may be required to either repurchase or replace
loans that do not conform to the representations and warranties of MMC in the
Securitization Agreement.
PEC's cash requirements arise from the acquisition of timeshare properties and
land, payments of operating expenses, payments of principal and interest on
debt obligations, and payments of Commissions and selling expenses in
connection with the sale of timeshare interests and land. Commissions and
selling expenses payable by PEC in connection with sales of timeshare interests
and land typically exceed the down payments received at the time of sale, as a
result of which PEC generates a cash shortfall. This cash shortfall and PEC's
other cash requirements are funded primarily through sales of receivables,
PEC's lines of credit in the aggregate amount of $87.5 million and cash flows
from operations.
At May 31, 1996, PEC had arrangements with four institutional lenders for the
financing of receivables in connection with sales of timeshare interests and
land and the acquisition of timeshare properties and land, which provide for
lines of credit of up to an aggregate of $87.5 million. Such lines of credit
are secured by timeshare and land receivables and real property. At May 31,
1996, an aggregate of $60.0 million was outstanding under such lines of credit.
At May 31, 1996, PEC had unpledged timeshare and land receivables in the amount
of approximately $11.6 million, substantially all of which was available for
pledging under existing lines of credit, subject to certain loan agreement
criteria. Under the terms of such lines of credit, PEC may borrow up to 75.0%
of the balances of the timeshare and land receivables tendered for pledging. One
of such lines of credit in the amount of $50.0 million bears interest at the
prime rate plus 2.25% and expires in September 1996, at which time it converts
to a term loan maturing in September 2003. The second line of credit in the
amount of $7.5 million bears interest at the prime rate plus 2.5% and is
scheduled to expire in September 1996, at which time it converts to a term loan
maturing in June 1999. The third line of credit in the amount of $15 million
bears interest at the prime rate plus 2.5% and expires in August 1996, at which
time it converts to a term loan maturing in August 2000. The fourth line of
credit in the amount of $15 million bears interest ranging from 4.0% to 4.25%
over LIBOR with an eighteen month revolving period, at which time it converts to
a term loan maturing in June 2005. While the Company believes that it will be
able to maintain its existing financing arrangements and
13
<PAGE> 15
obtain additional and replacement financing as its lending arrangements mature,
there can be no assurance that such financing will be available on favorable
terms, or at all.
Set forth below is a schedule of the cash shortfall arising from recognized and
unrecognized sales for the periods indicated:
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
May 31, May 31,
1995 1996
---- ----
<S> <C> <C>
Commissions and selling expenses attributable to recognized and
unrecognized sales $ 16,743 $ 21,324
Less: downpayments 9,238 9,724
-------------- --------------
Cash Shortfall $ 7,505 $ 11,600
============== ==============
</TABLE>
During the nine months ended May 31, 1995, PEC sold timeshare interest and land
receivables of $68.7 million to five major financial institutions, using $55.2
million of the proceeds to repay debt. The interest rates on the sold
receivables were from 12.0% to 14.8% and were sold to yield returns of 7.7% to
11.3% to the purchaser, with any excess interest received from the obligors
retained by the Company. During the nine months ended May 31, 1996, PEC sold
timeshare and land receivables of $7.3 million to two major financial
institutions, using $3.6 million of the proceeds to repay debt. The average
interest rates on the sold receivables were 11.8% to 13.9%, depending on the
transaction. The receivables were sold to yield returns of 8.3% to 10.5% to
the purchasers, with excess interest received from the obligors of the
receivables retained by the Company.
At May 31, 1996, PEC was contingently liable to replace or repurchase notes
receivable sold with recourse totaling $65.2 million in the event they become
delinquent. PEC sells notes receivable subject to recourse provisions
contained in each agreement. These obligations are guaranteed by the Company.
PEC is obligated under these agreements to replace or repurchase accounts that
become over 90 days delinquent or otherwise subject to replacement or
repurchase. 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 PEC'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. PEC is obligated under certain of these agreements for the
sale of notes receivable to maintain minimum net worth requirements.
In August 1993, the Company sold 300,000 shares of its Series A 12% Convertible
Preferred Stock for an aggregate of $3.0 million. The Company redeemed 100,000
shares of such Preferred Stock on September 1, 1995 and is obligated to redeem
the remaining 200,000 shares of such Preferred Stock on August 31, 1996. In
connection with such sale, the Company issued warrants to the purchaser to
purchase up to 300,000 shares of Common Stock at an exercise price of $1.20 per
share, which expire on August 31, 1996.
At January 31, 1995, when accrual of payments ceased, $13.3 million was payable
to the Assignors of the Agreement pursuant to which the Company had acquired
PEC. On March 2, 1995, the Assignors agreed to defer payment of $10.0 million
of Subordinated Debt pursuant to an amendment to the Assignment and Assumption
Agreement providing for the subordination of such amounts to payment of debt
for money borrowed by the Company or obligations of the Company's subsidiaries
guaranteed by the Company. Warrants to purchase 1.0 million shares of Common
Stock, at an exercise price of $4.25 per share (the closing market price per
share on March 2, 1995), were granted to the Assignors in consideration of the
payment deferral and subordination. The warrants contain restrictions on
transfer and are exercisable after March 1, 1996 and until March 1, 2000.
Interest on the Subordinated Debt is to be paid semiannually at the rate of 10%
per year starting September 1, 1995, and the Subordinated Debt is to be repaid
in seven equal semiannual payments of $1.4 million plus interest commencing
March 1, 1997. On June 14, 1995, the Company paid an aggregate of $809,000 to
the Assignors, including interest in the amount of $59,000. At May 31, 1996,
$2.6 million, other than the Subordinated Debt, was payable to the Assignors,
which amount also bears interest at the rate of 10% per year; and during the
nine months ended May 31, 1996, interest payments totalling $196,000 were paid
to the Assignors on such debt. Payments to Assignors are secured by a pledge
of all of PEC's outstanding stock.
During the nine months ended May 31, 1995 and 1996, the Company used cash of
$5.6 million and $8.1 million, respectively, in Operating activities.
During the nine months ended May 31, 1995 and 1996, the Company provided cash
of $8.8 million and $26.8 million, respectively, in Financing activities.
During the nine months ended May 31, 1995 and 1996, the Company used cash of
$2.9 million and $20.2 million, respectively, in Investing activities, which
was substantially expended for the acquisition of securities and the purchase
of property and equipment.
Capital expenditures during the nine months ended May 31 1995 and 1996 were
$12.1 million and $15.2 million, respectively, for the acquisition of inventory
and $2.9 million and $4.3 million, respectively, for the purchase of Property
and equipment. The Company
14
<PAGE> 16
anticipates that it will make additional capital expenditures in 1996 for the
acquisition of inventory, renovation of future timeshare inventory,
refurbishment of present timeshare inventory, construction of certain road
improvements in Pahrump Valley, Nevada and the acquisition of replacement
equipment. The Company believes that its capital 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.
The Company's operations are sensitive to increases in interest rates and to
inflation. Increased borrowing costs resulting from increases in interest
rates may not be immediately recoverable from prospective purchasers.
Inflationary increases are difficult to pass on to customers since increases in
sales prices often result in lower sales closing rates and higher
cancellations. The Company's notes receivable consist primarily of fixed rate
long term installment contracts that do not increase or decrease as a result of
changes in interest rates charged to the Company. In addition, delinquency and
cancellation rates may be affected by changes in the national economy.
PART II
ITEM 1. LEGAL PROCEEDINGS.
No reportable events occurred during the three month period ended May 31, 1996.
15
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEGO FINANCIAL CORP.
By: /s/ Irving J. Steinberg
----------------------------
Irving J. Steinberg
Vice President and Chief
Accounting Officer
Date: July 22, 1996
--------------------------
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 10,155
<SECURITIES> 0
<RECEIVABLES> 59,739
<ALLOWANCES> 18,060
<INVENTORY> 36,221
<CURRENT-ASSETS> 0
<PP&E> 28,430
<DEPRECIATION> 13,087
<TOTAL-ASSETS> 148,528
<CURRENT-LIABILITIES> 0
<BONDS> 72,730
2,000
0
<COMMON> 180
<OTHER-SE> 23,452
<TOTAL-LIABILITY-AND-EQUITY> 148,528
<SALES> 35,401
<TOTAL-REVENUES> 62,780
<CGS> 4,341
<TOTAL-COSTS> 29,693
<OTHER-EXPENSES> 26,145
<LOSS-PROVISION> 815
<INTEREST-EXPENSE> 6,012
<INCOME-PRETAX> 6,942
<INCOME-TAX> 2,360
<INCOME-CONTINUING> 4,582
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,582
<EPS-PRIMARY> .24<F1>
<EPS-DILUTED> .23<F1>
<FN>
<F1>CUMULATIVE PREFERRED STOCK DIVIDEND- $180
</FN>
</TABLE>
