<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: February 29, 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 April 5, 1996, there were 18,087,556 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
February 29, 1996 and August 31, 1995(Unaudited) . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Operations
Three and six months ended February 28, 1995 (Unaudited and restated)
and February 29, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Cash Flows
Six months ended February 28, 1995 (Unaudited and restated)
and February 29, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 8-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
<PAGE> 3
<TABLE>
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
(Unaudited)
<CAPTION>
February 29, August 31,
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,062 $ 7,338
Restricted cash 7,171 6,467
Notes receivable, net of allowances for cancellation and credit losses of $17,630
and $16,866 at February 29, 1996 and August 31, 1995 34,357 31,054
Excess servicing rights 27,138 16,565
Mortgage servicing rights 1,607 1,076
Timeshare interests held for sale 23,241 19,820
Land and improvements inventory 5,022 5,542
Other investments 2,241 1,531
Property and equipment, at cost, net of accumulated depreciation of $12,645 and
$11,823 at February 29, 1996 and August 31, 1995 14,074 12,681
Deferred selling costs 2,355 3,332
Other assets 7,948 7,351
-------- --------
TOTAL ASSETS $130,216 $112,757
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes and contracts payable $ 55,752 $ 44,715
Accounts payable and accrued liabilities 16,014 13,998
Payable to assignors 2,579 2,579
Future estimated contingency for notes receivable sold with recourse 8,766 8,030
Deposits 2,020 3,619
Negative goodwill 96 131
Deferred income taxes 10,107 8,103
-------- --------
Total liabilities before Subordinated debt and Redeemable Preferred Stock 95,334 81,175
-------- --------
Subordinated debt 9,516 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
February 29, 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 -- 5,000,000 shares
Issued and outstanding -- 18,087,556 shares 180 180
Additional paid in capital 4,498 4,498
Retained earnings 18,688 14,552
-------- --------
Total shareholders' equity 23,366 19,230
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $130,216 $112,757
======== ========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
2
<PAGE> 4
<TABLE>
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars)
(Unaudited)
<CAPTION>
Three months ended Six months ended
------------------------------ -----------------------------
February 28, February 29, February 28, February 29,
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) $ 3,946 $ 5,482 $ 8,606 $12,194
Retail lot sales, net (Note 2) 4,127 5,677 10,515 10,758
Housing sales - - 205 -
Gain on sale of notes receivable 1,445 4,884 2,816 11,281
Interest income 1,748 1,759 3,667 3,582
Financial income 154 1,271 154 2,162
Amortization of negative goodwill 87 13 178 35
Incidental operations 725 488 1,349 1,232
Other 132 (66) 269 527
------ ------ ------ ------
Total revenues 12,364 19,508 27,759 41,771
------ ------ ------ ------
COSTS AND EXPENSES
Direct costs of:
Timeshare interest sales 576 836 1,254 1,851
Retail lot sales 433 551 1,103 1,045
Housing sales (1) - 265 -
Incidental operations 638 374 1,261 1,078
Commissions and selling 5,011 7,711 10,096 15,549
Depreciation and amortization 416 662 823 1,117
Provision for credit losses 139 200 246 497
Interest 1,466 1,484 2,677 3,315
General and administrative 2,756 5,681 6,011 10,840
Payments to assignors 4,716 - 7,252 -
------ ------ ------ ------
Total costs and expenses 16,150 17,499 30,988 35,292
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES (3,786) 2,009 (3,229) 6,479
INCOME TAXES 356 531 1,408 2,203
------ ------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS (4,142) 1,478 (4,637) 4,276
Gain on discontinued operations, net of income
taxes of $298 578 - 578 -
------ ------ ------ ------
NET INCOME (LOSS) (3,564) 1,478 (4,059) 4,276
CUMULATIVE PREFERRED STOCK DIVIDENDS 90 60 180 140
------ ------ ------ ------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $(3,654) $1,418 $(4,239) $4,136
======= ====== ======= ======
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 5
<TABLE>
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(in thousands of dollar)
(Unaudited)
<CAPTION>
Three months ended Six months ended
------------------------------ ------------------------------
February 28, February 29, February 28, February 29,
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 $(0.23) $0.08 $(0.26) $0.23
Income from discontinued operations 0.03 - 0.03 -
------ ----- ------ -----
Net income (loss) $(0.20) $0.08 $(0.23) $0.23
====== ===== ====== =====
Weighted average number of common shares and
common share equivalents outstanding 18,086,750 18,087,556 18,086,750 18,087,556
========== ========== ========== ==========
Fully diluted
Income from continuing operations N/A $0.07 N/A $0.21
Income from discontinued operations - -
----- -----
Net income $0.07 $0.21
===== =====
Weighted average number of common shares and
common share equivalents outstanding 19,463,556 19,463,556
========== ==========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 6
<TABLE>
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(Unaudited)
<CAPTION>
Six months ended
-----------------------------
February 28, February 29,
1995 1996
------------ ------------
(As restated -
see Note 5)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(4,059) $4,276
------- ------
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 (132) -
Provisions for cancellation and credit losses 4,815 5,468
Cost of sales 2,622 2,896
Depreciation and amortization 823 1,117
Gains on sales of receivables (2,816) (11,281)
Gain on discontinued operations (578) -
Increase in provision for future estimated contingency for notes receivable
sold with recourse 1,032 736
Changes in operating assets and liabilities:
Increase in restricted cash (747) (704)
Increase in notes receivable, net (34,783) (60,945)
Proceeds from sale of notes receivable 33,356 63,455
Increase in excess servicing rights (2,822) (10,573)
Increase in mortgage servicing rights (309) (531)
Purchase of land and timeshare interests (8,763) (5,797)
(Increase) decrease in other assets (1,605) (597)
(Increase) decrease in deferred selling costs (725) 977
Increase in accounts payable and accrued liabilities 665 2,015
Increase in payable to assignors 6,198 -
Increase (decrease) in deposits 781 (1,599)
Decrease in negative goodwill (46) (35)
Increase in deferred income taxes 1,368 2,004
------- ------
Total adjustments (1,666) (13,394)
------- ------
Net cash used in operating activities (5,725) (9,118)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in debt 9,551 11,037
Preferred stock dividends (180) (140)
Redemption of preferred stock - (1,000)
Increase in subordinated debt - 164
------- ------
Net cash provided by financing activities 9,371 10,061
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,617) (2,509)
Increase in other investments (4) (710)
------- ------
Net cash used in financing activities (1,621) (3,219)
------- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,025 (2,276)
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 10,982 7,338
------- ------
CASH AND CASH EQUIVALENTS -- END OF PERIOD $13,007 $5,062
======= ======
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
5
<PAGE> 7
<TABLE>
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands of dollars)
(Unaudited)
<CAPTION>
Six months ended
-------------------------------
February 29, February 29,
1995 1996
----------- -----------
(As restated -
see Note 5)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized $ 2,519 $ 3,371
======= =======
Federal income taxes $ - $ -
======= =======
</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
"Registrant") at February 29, 1996 and the results of its operations
and cash flows for the six months ended February 28, 1995 (unaudited
and restated - see Note 5 below) and February 29, 1996.
All significant intercompany accounts between Mego and its
subsidiaries have been eliminated.
2) The Registrant provides a provision for cancellation. A summary is as
follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------------- -------------------------------
February 28, February 29, February 28, February 29,
1995 1996 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Gross timeshare interest sales $ 5,083 $ 6,443 $ 11,082 $ 15,137
Less: provision for cancellation 1,137 961 2,476 2,943
-------------- -------------- -------------- --------------
Timeshare interest sales, net $ 3,946 $ 5,482 $ 8,606 $ 12,194
============== ============== ============== ==============
Gross retail lot sales $ 4,948 $ 6,551 $ 12,608 $ 12,786
Less: provision for cancellation 821 874 2,093 2,028
-------------- -------------- -------------- --------------
Retail lot sales, net $ 4,127 $ 5,677 $ 10,515 $ 10,758
============== ============== ============== ==============
</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 six month periods ended February 29,
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 six month
periods ended February 28, 1995, after provision for income taxes, was
to increase Net loss for the three months ended February 28, 1995, by
$2.29 million, from Net loss of $1.27 million to a Net loss of $3.56
million and for the six months ended February 28, 1995, by $4.10
million, from Net income of $.04 million to a Net loss of $4.06
million.
7
<PAGE> 9
The line items impacted by this restatement included in the Statement
of Operations for the three and six months ended February 28, 1995 are
as follows (in thousands of dollars except per share data):
<TABLE>
<CAPTION>
Three months ended Six months ended
February 28, 1995 February 28, 1995
------------------------------------- -------------------------------------
Restatement Restatement
As adjustments As As adjustments As
Filed (Note 5) Restated Filed (Note 5) Restated
----------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Timeshare interest sales 4,263 (317) 3,946 9,087 (481) 8,606
Retail lot sales 4,490 (363) 4,127 10,128 387 10,515
Housing sales - - - 205 - 205
Gain on sale of notes receivable 1,946 (501) 1,445 4,538 (1,722) 2,816
Interest income 1,956 (208) 1,748 3,984 (317) 3,667
Financial income - 154 154 - 154 154
Amortization of negative goodwill 98 (11) 87 212 (34) 178
Incidental operations 553 172 725 1,177 172 1,349
Other 306 (174) 132 399 (130) 269
Total revenues 13,612 12,364 29,730 27,759
COSTS AND EXPENSES
Direct costs of:
Timeshare interest sales 634 (58) 576 1,448 (194) 1,254
Retail lot sales 503 (70) 433 1,302 (199) 1,103
Housing sales - (1) (1) 265 - 265
Incidental operations 637 1 638 1,260 1 1,261
Commissions and selling 3,768 1,243 5,011 8,618 1,478 10,096
Depreciation and amortization 352 64 416 706 117 823
Provision for credit losses 272 (133) 139 490 (244) 246
Interest 1,466 - 1,466 2,658 19 2,677
General and administrative 3,414 (658) 2,756 6,567 456 6,011
Payments to assignors 4,716 - 4,716 7,252 - 7,252
Total costs and expenses 15,762 16,150 30,566 30,988
LOSS BEFORE INCOME TAXES (2,150) (3,786) (836) (3,229)
INCOME TAXES - 356 356 - 1,408 1,408
LOSS FROM CONTINUING OPERATIONS (2,150) (4,142) (836) (4,637)
Gain on discontinued operations, net
of income taxes 876 (298) 578 876 (298) 578
NET INCOME (LOSS) (1,274) (3,564) 40 (4,059)
CUMULATIVE PREFERRED STOCK DIVIDENDS 90 90 180 180
NET LOSS APPLICABLE TO COMMON STOCK (1,364) (3,654) (140) (4,239)
LOSS PER COMMON SHARE:
Primary
Loss from continuing operations (0.13) (0.10) (0.23) (0.06) (0.20) (0.26)
Income from discontinued
operations 0.05 (0.02) 0.03 0.05 (0.02) 0.03
Net loss (0.08) (0.20) (0.01) (0.23)
Weighted average number of common
shares and common share
equivalents outstanding 18,086,750 18,086,750 18,086,750 18,086,750
</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 FEBRUARY 28, 1995 (AS RESTATED - SEE NOTE 5) COMPARED TO THE
THREE MONTHS ENDED FEBRUARY 29, 1996.
GENERAL
MEGO MORTGAGE CORPORATION ("MMC")
MMC originated $13,734,000 of Title I Loans during the three months ended
February 28, 1995 compared to $22,378,000 of Title I Loans during the three
months ended February 29, 1996, an increase of 63%.
MMC sold $12,747,000 of Title I Loans during the three months ended February
28, 1995 recognizing a gain on sale of Loans of $1,359,000. MMC sold
$21,394,000 of Title I Loans during the three months ended February 29, 1996,
recognizing a gain on sale of loans of $4,845,000. A weighted average discount
rate of 12% per annum was used in the determination of the gain on sale for the
three months ended February 28, 1995 and February 29, 1996.
Interest income increased from $162,000 during the three months ended February
28, 1995 to $195,000 during the three months ended February 29, 1996, an
increase of 20%. 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 $97,000 during the three months ended
February 28, 1995 to $870,000 during the three months ended February 29, 1996,
an increase of 797%. The increase was primarily the result of the increased
cumulative amount of Title I Loans being serviced for others.
Total revenues increased from $1,618,000 for the three months ended February
28, 1995 to $5,910,000 for the three months ended February 29, 1996, an
increase of 265%. The increase was primarily the result of increased sales of
Loans.
Total costs and expenses increased from $1,636,000 for the three months ended
February 28, 1995 to $3,311,000 for the three months ended February 29, 1996,
an increase of 102%. This increase resulted primarily from an increase in
general and administrative expenses from $1,186,000 to $2,104,000, an increase
of 77%; an increase in provision for credit losses from $139,000 to $200,000,
an increase of 44%; an increase in interest expense from $126,000 to $229,000,
an increase of 82%; and an increase in depreciation and amortization expense
from $84,000 to $273,000, an increase of 225%. These increases are primarily
due to the larger volume of MMC's business.
As a result, Income (loss) before income taxes of MMC increased from a loss of
$18,000 for the three months ended February 28, 1995 to income of $2,599,000
for the three months ended February 29, 1996.
PREFERRED EQUITIES CORPORATION ("PEC")
Timeshare interest and land sales, net, increased from $8,073,000 for the three
months ended February 28, 1995 to $11,159,000 for the three months ended
February 29, 1996, an increase of 38%. Gross sales of timeshare interests
increased from $5,083,000 to $6,443,000, an increase of 27%. Net sales of
timeshare interests increased from $3,946,000 to $5,482,000, an increase of
39%. The Provision for cancellation represented 22% and 15% of gross sales of
timeshare interests for the three months ended February 28, 1995 and February
29, 1996, respectively. Gross sales of land increased from $4,948,000 to
$6,551,000, an increase of 32%. Net sales of land increased from $4,127,000 to
$5,677,000, an increase of 38%. The Provision for cancellation represented 17%
and 13% of gross sales of land for the three months ended February 28, 1995 and
February 29, 1996, respectively.
Gain on sale of PEC's receivables decreased from $86,000 for the three months
ended February 28, 1995 to $40,000 for the three months ended February 29,
1996, a decrease of 53%. This decrease resulted from sales of receivables
decreasing from $1,093,000 during the three months ended February 28, 1995 to
$411,000 during the three months ended February 29, 1996, a decrease of 62%.
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 $1,586,000 for the three months ended
February 28, 1995 to $1,543,000 for the three months ended February 29, 1996, a
decrease of 3%. This decrease resulted primarily from a reduction in the
average balance of PEC's portfolio of receivables.
Other revenues increased from $156,000 for the three months ended February 28,
1995 to $287,000 for the three months ended February 29, 1996, an increase of
84%.
9
<PAGE> 11
As a result of the foregoing, total revenues of PEC increased from $10,659,000
for the three months ended February 28, 1995 to $13,579,000 for the three
months ended February 29, 1996, an increase of 27%.
Total costs and expenses increased from $9,470,000 for the three months ended
February 28, 1995 to $13,287,000 for the three months ended February 29, 1996,
an increase of 40%. This increase resulted primarily from an increase in
Commissions and selling expenses from $4,715,000 to $7,206,000, an increase of
53%, and an increase in General and administrative costs from $1,611,000 to
$2,601,000, an increase of 61%. The increase in General and administrative
costs is primarily due to increases in payroll, 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 47% for the three months ended February 28, 1995
to 55% for the three months ended February 29, 1996, and Costs of sales relating
thereto increased from 10% for the three months ended February 28, 1995 to 11%
for the three months ended February 29, 1996.
As a result of the foregoing, PEC's Income before income taxes decreased from
$1,189,000 for the three months ended February 28, 1995 to $292,000 for the
three months ended February 29, 1996, a decrease of 75%. The decrease is
largely due to the increase of Commissions and selling expense as a result of
additional costs involved in establishing new marketing programs to increase
sales levels primarily for timeshare interests.
COMPANY
Income Statement Data. Operating income from subsidiaries increased from
$1,171,000 for the three months ended February 28, 1995 to $2,891,000 for the
three months ended February 29, 1996, an increase of 147%. The increase was
due to the increased income of MMC which was partially offset by the decrease
in income of PEC.
Payments to Assignors, which relate to the acquisition of PEC in 1988,
decreased from $4,716,000 for the three months ended February 28, 1995 to zero
for the three months ended February 29, 1996, since accrual of amounts payable
to the Assignors ended on January 31, 1995.
Total costs and expenses increased from $16,150,000 for the three months ended
February 28, 1995 to $17,499,000 for the three months ended February 29, 1996,
an increase of 8%. This increase is primarily the result of an increase in
General and administrative expenses from $2,756,000 to $5,681,000, an increase
of 106%, and an increase in Commission and selling expenses from $5,011,000 to
$7,711,000, an increase of 54%. The increase in General and administrative
expenses is primarily a result of the increased volume of the business of MMC,
while the increase in Commissions and selling expense occurs as a result of
establishing new programs to increase sales levels primarily for timeshare
interests.
Income (loss) before income taxes increased from a loss of $3,786,000 for the
three months ended February 28, 1995 to income of $2,009,000 for the three
months ended February 29, 1996.
Income taxes increased from $356,000 for the three months ended February 28,
1995 to $531,000 for the three months ended February 29, 1996.
The Gain on discontinued operations, net of income taxes was $578,000 for the
three months ended February 28, 1995, and zero for the three months ended
February 29, 1996.
As a result of the foregoing, Net income (loss) increased from a net loss of
$3,564,000 for the three months ended February 28, 1995 to net income of
$1,478,000 for the three months ended February 29, 1996.
SIX MONTHS ENDED FEBRUARY 28, 1995 (AS RESTATED - SEE NOTE 5) COMPARED TO THE
SIX MONTHS ENDED FEBRUARY 29, 1996.
GENERAL
MEGO MORTGAGE CORPORATION ("MMC")
MMC originated $24,598,000 of Title I Loans during the six months ended
February 28, 1995 compared to $56,092,000 of Title I Loans during the six
months ended February 29, 1996, an increase of 128%.
MMC sold $23,602,000 of Title I Loans during the six months ended February 28,
1995 recognizing a gain on sale of Loans of $2,385,000. MMC sold $56,421,000
of Title I Loans during the six months ended February 29, 1996, recognizing a
gain on sale of loans of $10,810,000. A weighted average discount rate of 12%
per annum was used in the determination of the gain on sale for the six months
ended February 28, 1995 and February 29, 1996.
10
<PAGE> 12
Interest income increased from $458,000 during the six months ended February
28, 1995 to $526,000 during the six months ended February 29, 1996, an increase
of 15%. 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 $97,000 during the six months ended
February 28, 1995 to $1,761,000 during the six months ended February 29, 1996,
an increase of 1,715%. The increase was primarily the result of the increased
cumulative amount of Title I Loans being serviced for others.
Total revenues increased from $2,940,000 for the six months ended February 28,
1995 to $13,097,000 for the six months ended February 29, 1996, an increase of
345%. The increase was primarily the result of increased sales of Loans.
Total costs and expenses increased from $3,080,000 for the six months ended
February 28, 1995 to $6,653,000 for the six months ended February 29, 1996, an
increase of 116%. This increase resulted primarily from an increase in general
and administrative expenses from $2,276,000 to $4,296,000, an increase of 89%;
an increase in provision for credit losses from $246,000 to $497,000, an
increase of 102%; an increase in interest expense from $241,000 to $469,000, an
increase of 95%; and an increase in depreciation and amortization expense from
$155,000 to $374,000, an increase of 141%. These increases are primarily due
to the larger volume of MMC's business.
As a result, Income (loss) before income taxes of MMC increased from a loss of
$140,000 for the six months ended February 28, 1995 to income of $6,444,000 for
the six months ended February 29, 1996.
PREFERRED EQUITIES CORPORATION ("PEC")
Timeshare interest and land sales, net, increased from $19,121,000 for the six
months ended February 28, 1995 to $22,952,000 for the six months ended February
29, 1996, an increase of 20%. Gross sales of timeshare interests increased
from $11,082,000 to $15,137,000, an increase of 37%. Net sales of timeshare
interests increased from $8,606,000 to $12,194,000, an increase of 42%. The
Provision for cancellation represented 22% and 19% of gross sales of timeshare
interests for the six months ended February 28, 1995 and February 29, 1996,
respectively. Gross sales of land increased from $12,608,000 to $12,786,000,
an increase of 1%. Net sales of land increased from $10,515,000 to
$10,758,000, an increase of 2%. The Provision for cancellation represented 17%
and 16% of gross sales of land for the six months ended February 28, 1995 and
February 29, 1996, respectively.
Gain on sale of PEC's receivables increased from $431,000 for the six months
ended February 28, 1995 to $471,000 for the six months ended February 29, 1996,
an increase of 9%. This increase resulted from sales of receivables increasing
from $9,754,000 during the six months ended February 28, 1995 to $10,157,000
during the six months ended February 29, 1996, an increase of 4%. 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 $3,209,000 for the six months ended
February 28, 1995 to $3,049,000 for the six months ended February 29, 1996, a
decrease of 5%. This decrease resulted primarily from a reduction in the
average balance of PEC's portfolio of receivables.
Other revenues increased from $269,000 for the six months ended February 28,
1995 to $527,000 for the six months ended February 29, 1996, an increase of
96%.
As a result of the foregoing, total revenues of PEC increased from $24,641,000
for the six months ended February 28, 1995 to $28,632,000 for the six months
ended February 29, 1996, an increase of 16%.
Total costs and expenses increased from $20,046,000 for the six months ended
February 28, 1995 to $26,828,000 for the six months ended February 29, 1996, an
increase of 34%. This increase resulted primarily from an increase in
Commissions and selling expenses from $9,742,000 to $14,532,000, an increase of
49%, and an increase in General and administrative costs from $3,639,000 to
$5,057,000, an increase of 39%. The increase in General and administrative
costs is primarily due to increases in payroll, 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 41% for the six months ended February 28, 1995
to 52% for the six months ended February 29, 1996, and Costs of sales relating
thereto remained constant at 10% for each six months ended February 28, 1995 and
February 29, 1996.
As a result of the foregoing, PEC's Income before income taxes decreased from
$4,595,000 for the six months ended February 28, 1995 to $1,804,000 for the six
months ended February 29, 1996, a decrease of 61%. The decrease is largely due
to the increase of Commissions and selling expense as a result of additional
costs involved in establishing new marketing programs to increase sales levels
primarily for timeshare interests.
11
<PAGE> 13
COMPANY
Income Statement Data. Operating income from subsidiaries increased from
$4,455,000 for the six months ended February 28, 1995 to $8,248,000 for the six
months ended February 29, 1996, an increase of 85%. The increase was due to
the increased income of MMC which was partially offset by the decrease in
income of PEC.
Payments to Assignors, which relate to the acquisition of PEC in 1988,
decreased from $7,252,000 for the six months ended February 28, 1995 to zero
for the six months ended February 29, 1996, since accrual of amounts payable to
the Assignors ended on January 31, 1995.
Total costs and expenses increased from $30,988,000 for the six months ended
February 28, 1995 to $35,292,000 for the six months ended February 29, 1996, an
increase of 14%. This increase is primarily the result of an increase in
General and administrative expenses from $6,011,000 to $10,840,000, an increase
of 80%, and an increase in Commission and selling expenses from $10,096,000 to
$15,549,000, an increase of 54%. The increase in General and administrative
expenses is primarily a result of the increased volume of the business of MMC.
Income (loss) before income taxes increased from a loss of $3,229,000 for the
six months ended February 28, 1995 to income of $6,479,000 for the six months
ended February 29, 1996.
The Gain on discontinued operations, net of income taxes was $578,000 for the
six months ended February 28, 1995, and zero for the six months ended February
29, 1996.
Income taxes increased from $1,408,000 for the six months ended February 28,
1995 to $2,203,000 for the six months ended February 29, 1996.
As a result of the foregoing, Net income (loss) increased from a loss of
$4,059,000 for the six months ended February 28, 1995 to Net income of
$4,276,000 for the six months ended February 29, 1996.
LIQUIDITY
The Company had cash and cash equivalents of $5.1 million at February 29, 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 with servicing rights retained. Net cash used
in MMC's operating activities for the quarters ended February 28, 1995 and
February 29, 1996 was approximately $2.3 million and $3.4 million,
respectively. This use was funded primarily from the reinvestment of proceeds
from the sale of loans in the secondary market totaling approximately $12.7
million and $21.4 million for the quarters ended February 28, 1995 and February
29, 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.
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
February 29, 1996, the amounts on deposit in such reserve accounts totaled $7.9
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 February 29, 1996, MMC
had a $20.0 million warehouse line of credit for the financing of loan
originations which expires in August 1996. At February 29, 1996, $2.2 million
was outstanding under such line of credit and $17.8 million was available.
Such line of credit bears interest at the prime rate plus 1% 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 six month period.
12
<PAGE> 14
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. At August 31, 1995, an aggregate of
approximately $56.9 million in principal amount of loans had been sold pursuant
to the agreement for an amount equal to 98.5% of their remaining principal
balances, and an additional $56.4 million in principal amount of loans were
sold to the Purchaser during the six months ended February 29, 1996. 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.
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 $65.0 million and cash flows
from operations.
At February 29, 1996, PEC had arrangements with three 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 $65.0 million. Such lines of
credit are secured by timeshare and land receivables and property. At February
29, 1996, an aggregate of $48.7 million was outstanding under such lines of
credit, and $16.3 million was available for borrowing. At February 29, 1996,
PEC had unpledged timeshare and land receivables in the amount of approximately
$8.4 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% 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
1/4% 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 expires 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 $7.5 million bears interest at the prime
rate plus 2.5% and expires in June 1996, at which time it converts to a term
loan maturing in June 2000.
Set forth below is a schedule of the cash shortfall arising from recognized and
unrecognized sales for the periods indicated (in thousands of dollars):
<TABLE>
<CAPTION>
Six months ended
------------------------------
February 28, February 29,
1995 1996
------------- -------------
<S> <C> <C>
Commissions and selling expenses attributable to recognized and
unrecognized sales $ 10,462 $ 13,556
Less: downpayments 5,848 6,172
-------------- --------------
Cash Shortfall $ 4,614 $ 7,384
============== ==============
</TABLE>
At February 28, 1995 and February 29, 1996, PEC was contingently liable to
replace or repurchase notes receivable sold with recourse totaling $54.1
million and $68.9 million, respectively, in the event they become delinquent.
PEC sells notes receivable subject to recourse provisions contained in each
agreement. These obligations are guaranteed by Mego Financial Corp. 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.
During the quarters ended February 28, 1995 and February 29, 1996, the Company
used cash of $5.5 million and of $2.5 million, respectively, in operating
activities.
13
<PAGE> 15
During the quarters ended February 28, 1995 and February 29, 1996, the Company
provided cash of $7.7 million and $6.2 million, respectively, in financing
activities.
During the quarters ended February 28, 1995 and February 29, 1996, the Company
used cash of $1.2 million and $2.0 million, respectively, in investing
activities, which was substantially expended for the purchase of property and
equipment.
Capital expenditures during the quarters ended February 28, 1995 and February
29, 1996 were $3.2 million and $1.3 million, respectively, for the acquisition
of inventory and $1.2 million and $1.6 million, respectively, for the purchase
of property and equipment. The Company 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.
PART II
ITEM 1. LEGAL PROCEEDINGS.
No reportable events occurred during the three month period ended February 29,
1996.
14
<PAGE> 16
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: April 19, 1996
15
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Exhibit 27 - Financial Data Schedule
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> FEB-29-1996
<EXCHANGE-RATE> 1
<CASH> 12,233
<SECURITIES> 0
<RECEIVABLES> 51,987
<ALLOWANCES> 17,630
<INVENTORY> 28,263
<CURRENT-ASSETS> 0
<PP&E> 26,719
<DEPRECIATION> 12,645
<TOTAL-ASSETS> 130,216
<CURRENT-LIABILITIES> 0
<BONDS> 55,752
2,000
0
<COMMON> 180
<OTHER-SE> 23,186
<TOTAL-LIABILITY-AND-EQUITY> 130,216
<SALES> 22,952
<TOTAL-REVENUES> 41,771
<CGS> 2,896
<TOTAL-COSTS> 19,523
<OTHER-EXPENSES> 15,769
<LOSS-PROVISION> 497
<INTEREST-EXPENSE> 3,315
<INCOME-PRETAX> 6,479
<INCOME-TAX> 2,203
<INCOME-CONTINUING> 4,276
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,276
<EPS-PRIMARY> 0.23<F1>
<EPS-DILUTED> 0.21<F1>
<FN>
<F1>CUMULATIVE PREFERRED STOCK DIVIDEND--$140
</FN>
</TABLE>
