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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2000
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.
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(Exact name of registrant as specified in its charter)
NEW YORK 13-5629885
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(State or other jurisdiction of (IRS Employer
incorporation or organization) identification no.)
4310 PARADISE ROAD, LAS VEGAS, NV 89109
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 702-737-3700
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of November 15, 2000, 3,500,557 shares of the registrant's common stock were
outstanding. The aggregate market value of common stock held by non-affiliates
of the registrant as of November 15, 2000 was approximately $8,323,840 based on
a closing price of $4.81 for the common stock as reported on the NASDAQ National
Market on such date. For purposes of the foregoing computation, all executive
officers, Directors and 5 percent beneficial owners of the registrant are deemed
to be affiliates. Such determination should not be deemed to be an admission
that such executive officers, Directors or 5 percent beneficial owners are, in
fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE> 2
MEGO FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
------ ----
<S> <C>
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings.............................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............................................ 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters.................. 12
Item 6. Selected Consolidated Financial Data........................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 25
Item 8. Financial Statements and Supplementary Data.................................................... 26
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................................................... 26
PART III
Item 10. Directors and Executive Officers of the Company................................................ 27
Item 11. Executive Compensation......................................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 33
Item 13. Certain Relationships and Related Transactions................................................. 34
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................. 35
Signatures.................................................................................... 47
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Mego Financial Corp. (Mego Financial) is a premier developer and
operator of timeshare properties and a provider of consumer financing to
purchasers of its timeshare intervals and land parcels through its wholly-owned
subsidiary, Preferred Equities Corporation (PEC) established in 1970. PEC also
manages timeshare properties and receives management fees as well as fees based
on sales of timeshare interests. By providing financing to virtually all of its
customers, PEC also originates consumer receivables that it hypothecates and
services. Unless the context requires otherwise, the "Company" refers to Mego
Financial and its consolidated subsidiaries. The terms "fiscal 2000", "fiscal
1999" and "fiscal 1998" refer to the fiscal years ended August 31, 2000, 1999
and 1998, respectively.
The Company was incorporated under the laws of the state of New York in
1954 under the name Mego Corp. and, in 1992, changed its name to Mego Financial
Corp. In January 1988, the Company sold a controlling interest in the Company
consisting of approximately 43% of the then outstanding common stock after the
sale, to affiliates of the Assignors (as hereinafter defined). See "Item 13.
Certain Relationships and Related Transactions" and Note 1 of Notes to
Consolidated Financial Statements. In February 1988, the Company acquired PEC,
pursuant to an assignment by the Assignors (Comay Corp., GRI, RRE Corp., and H&H
Financial Inc.) of their contract right to purchase PEC. The Company's executive
offices are located at 4310 Paradise Road, Las Vegas, Nevada, and its telephone
number is (702) 737-3700.
PREFERRED EQUITIES CORPORATION
GENERAL
PEC acquires, develops and converts rental and condominium apartment
buildings and hotels for sale as timeshare interests and engages in the retail
sale of land. PEC's strategy is to acquire properties in desirable destination
resort areas that offer a range of recreational activities and amenities. PEC
markets and sells timeshare interests in its resorts in Las Vegas and Reno,
Nevada; Honolulu, Hawaii; Brigantine, New Jersey; Steamboat Springs, Colorado;
Indian Shores and Orlando, Florida; and sells land in Nevada and Colorado. PEC
owns property in Biloxi, Mississippi, which it is considering for the possible
construction of a future timeshare resort. PEC is also affiliated with Hotel
Maison Pierre Lafitte Ltd. in New Orleans, Louisiana, and received management
fees as well as fees based on sales of timeshare interests. Major lodging,
hospitality and entertainment companies, including The Walt Disney Company,
Hilton Hotels Corporation, Marriott Ownership Resorts, Inc. and Hyatt
Corporation, among others, have commenced developing and marketing timeshare
interests in various resort properties. The Company believes that the entry into
the timeshare industry of certain of these large and well-known lodging,
hospitality and entertainment companies has contributed to the growth and
acceptance of the industry. To enhance its competitive position, in April 1995,
PEC entered into a strategic alliance with Ramada Franchise Systems, Inc.
(Ramada) and its parent, Hospitality Franchise Systems, Inc., now Cendant
Corporation (Cendant), pursuant to which PEC was granted a ten-year (including a
renewal option) exclusive license to operate both its existing and future
timeshare properties under the name "Ramada Vacation Suites." The American
Resort Development Association (ARDA) estimates that over 2 million families in
the United States own timeshare interests in resorts worldwide and that sales of
timeshare interests in the United States aggregated approximately $4 billion in
1999. Additionally, it is estimated by ARDA that sales volume is increasing at a
compounded annual rate of approximately 14% due to the entry of brand-name
hospitality firms and well-financed publicly held companies with lower costs of
capital and strong growth among seasoned timeshare companies.
TIMESHARE PROPERTIES AND SALES
The timeshare interests offered by PEC in its resorts other than in
Hawaii generally consist of undivided fee interests in the land and facilities
comprising the property or an undivided fee interest in a particular unit,
pursuant to which the owner acquires the perpetual right to weekly occupancy of
a residence unit each year. In its resort in Hawaii, PEC offers "right-to-use"
interests, pursuant to which the owner has occupancy rights for one week each
year until December 31, 2009, the last full year of the underlying land lease
for the resort property. During fiscal 2000, 1999 and 1998, PEC had net sales of
2,885, 2,841 and 2,237 timeshare interests, respectively, at prices ranging from
$4,250 to $30,990.
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The Company believes that PEC's alliance with Ramada has enabled it to
capitalize on the Ramada reputation, name recognition and customer profile,
which closely matches PEC's customer profile. The agreement with Ramada
("Agreement") required PEC to pay an initial access fee of $1 million and
monthly recurring fees equal to 1% of PEC's Gross Sales (as defined in the
Agreement) through January 1996 and 1.5% of PEC's Gross Sales each month
commencing in February 1996, with certain minimums that increase each year. The
initial term of the Agreement was 5 years and PEC had the option to renew the
Agreement for an additional term of 5 years. PEC exercised the option on April
27, 2000. The Agreement will expire on December 31, 2005. The Company believes
it has benefited from the use of the Ramada name, but is unable to quantify the
amount of such benefit.
PEC also offers a sales program whereby a customer pays a fixed fee on
an installment basis to use a timeshare interest during an initial one-year
period with an option to purchase the timeshare interest. If the customer
exercises the option to purchase the interest, the fixed fee is applied toward
the down payment of the timeshare interest purchased.
PEC's Ramada Vacation Suites at Las Vegas includes 37 buildings with a
total of 489 studio, one and two bedroom units that have been converted for sale
as 24,939 timeshare interests. As of August 31, 2000, 3,523 timeshare interests
remained available for sale. The resort is in close proximity to "the Strip" in
Las Vegas and features swimming pools and other amenities. PEC has completed the
expansion of the resort common areas to include an expanded lobby, convenience
store and expanded sales facilities.
The Ramada Vacation Suites at Reno consists of a 95-unit hotel that has
been converted for sale as 4,845 timeshare interests. As of August 31, 2000,
1,249 timeshare interests remained available for sale. The resort is undergoing
major renovations and features an indoor swimming pool, exercise facilities,
sauna, jacuzzi and sun deck.
The Ramada Vacation Suites at Honolulu is an 80-unit hotel consisting of
3 buildings that have been converted for sale as 4,160 timeshare interests. As
of August 31, 2000, 577 timeshare interests remained available for sale. The
resort is within walking distance of a public beach and features a swimming pool
and jacuzzi. PEC has a leasehold interest in the buildings, equipment and
furnishings which expires in December 2009. The annual rental payments total
approximately $192,000.
The Ramada Vacation Suites at Steamboat Springs consists of 60 one- and
two-bedroom units, which have been converted for sale as 3,060 timeshare
interests. As of August 31, 2000, 813 timeshare interests remained available for
sale. PEC acquired this condominium resort in 1994 and completed the conversion
in 1995. PEC has constructed a 5,500-square foot amenities building at this
resort that features a spa and sauna.
The Ramada Vacation Suites - Hilltop at Steamboat Springs is a hotel
building with indoor swimming pool, restaurant, cocktail lounge and meeting room
facilities. The complex contains 56 one- and two-bedroom units to be sold as
2,856 timeshare interests. 42 of the units, containing 2,142 timeshare
interests, are registered for sale. As of August 31, 2000, 1,340 timeshare
interests remained available for sale. 14 additional units containing 714
timeshare interests will be registered as demand dictates. The resort is located
in Steamboat Springs, Colorado, in close proximity to ski slopes and other
attractions.
The Ramada Vacation Suites at Orlando consists of a 7-building, 102 unit
complex that has been converted into 5,202 timeshare interests. As of August 31,
2000, 991 timeshare interests remained available for sale. An eighth building,
containing 18 units to be sold as 918 timeshare interests, became available in
November 2000. The resort features a pool and is located near the major tourist
attractions.
The Ramada Vacation Suites at Indian Shores consists of a 2-building
complex, which has been converted into a total of 32 one- and two-bedroom units
to be sold as 1,632 timeshare interests. As of August 31. 2000, 53 timeshare
interests remained available for sale. The resort is located on the intercoastal
waterway in close proximity to St. Petersburg and Clearwater, Florida.
The Ramada Vacation Suites on Brigantine Beach consists of a 91-unit
hotel and a 17-unit three-story building that have been either converted or
constructed for sale as 5,508 timeshare interests. As of August 31, 2000, 877
timeshare interests were available for sale. The resort, located on beach front
property in close proximity to Atlantic City, New Jersey, features an enclosed
swimming pool, cocktail lounge, bar and restaurant.
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The Ramada Vacation Suites at New Orleans is an existing 19-suite hotel
that consists of studios, as well as one-and two-bedroom suites. The resort is
located next to the Fairmont Hotel, adjacent to the historic French Quarter. The
location provides easy access to the City's key tourist attractions.
The following table sets forth certain information regarding the
timeshare interests at the Company's resort properties:
<TABLE>
<CAPTION>
STEAMBOAT INDIAN
LAS VEGAS RENO WAIKIKI SPRINGS HILLTOP ORLANDO SHORES BRIGANTINE TOTAL
--------- ---- ------- ---------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum number of
timeshare interests 24,939 4,845 4,160 3,060 2,142 5,202 1,632 5,508 (1) 51,488
Net number of timeshare
interests sold through
August 31, 2000 21,416 3,596 3,583 2,247 802 4,211 1,579 4,631 42,065
Number of timeshare
interests available for sale
at August 31, 2000 3,523 1,249 577 813 1,340 991 53 877 9,423
Percent sold through
August 31, 2000 86% 74% 86% 73% 37% 81% 97% 84% 82%
Number of timeshare
interests sold during the
year ended August 31, 2000 2,879 107 395 426 619 1,468 289 36 6,219
Number of timeshare
interests reacquired during
the year ended August 31,
2000 through:
Contract cancellations 444 57 119 106 23 203 68 28 1,048
Exchanges (2) 878 102 156 283 171 176 103 86 1,955
Acquired for unpaid
maintenance fees 90 75 166 -- -- -- -- -- 331
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total number of timeshare
interests reacquired during
the year 1,412 234 441 389 194 379 171 114 3,334
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net number of timeshare
interests sold (reacquired)
during the year ended
August 31, 2000 1,467 (127) (46) 37 425 1,089 118 (78) 2,885
Additional pending timeshare
interests as of August 31, 2000 -- -- -- -- 714 918 -- -- 1,632
Sales price range of timeshare
interests available at
August 31,2000
From $ 8,550 $ 4,490 $ 4,250 $ 7,490 $ 7,990 $ 8,550 $ 8,550 $ 4,250 $ 4,250
To $ 21,690 $ 8,490 $ 6,450 $ 25,690 $ 30,990 $ 13,830 $ 16,050 $ 22,550 $ 30,990
</TABLE>
(1) 4,823 timeshare interests were sold prior to the acquisition by the
Company.
(2) These exchanges are primarily related to customers exchanging and/or
upgrading their current property to larger, higher-priced units.
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PEC's revenue from net sales of timeshare interests was $49.1 million,
$41.3 million and $37.7 million, representing 54.2%, 55.4% and 55.0% of total
revenues for fiscal 2000, 1999 and 1998, respectively.
RCI EXCHANGE NETWORK
Timeshare interest ownership is significantly enhanced by the
availability of resort exchange networks. These networks allow owners to
exchange their occupancy right in their home resort for an occupancy right in
another resort. Several companies, including Resorts Condominiums International
(RCI), a wholly-owned subsidiary of Cendant, provide timeshare interest exchange
networks. PEC's resorts participate in the RCI network.
According to RCI, it has a total of more than 3,500 participating resort
facilities located worldwide. PEC and the Owner's Association (as defined
hereinafter) of each of PEC's timeshare resorts have entered into an agreement
with RCI pursuant to which purchasers of timeshare interests in PEC's resorts
may apply for membership in the RCI exchange network. The cost of the RCI
subscription fee, which is at the option and expense of the timeshare interest
owner, is approximately $63 for the first year and $74 for each annual renewal.
The initial five-year terms of the agreements are automatically renewable for
additional five-year terms, unless either party gives the other party not less
than 180 days written notice prior to the expiration of the then current term.
Either party may terminate the agreement upon a breach of the agreement by the
other party.
OWNERS' ASSOCIATIONS AND PROPERTY MANAGEMENT
PEC's resort properties require ongoing management services. Independent
not-for-profit corporations known as Owners' Associations have been established
to administer each of PEC's resorts other than the resort in Honolulu. PEC's
resort in Honolulu is administered by the White Sands Resort Club, a division of
PEC (together with the Owners' Associations, collectively the "Associations").
Owners of timeshare interests in each resort are responsible for the payment of
annual assessment fees, which are intended to fund all of the operating expenses
at the resort facilities and accumulate reserves for replacement of furnishings,
fixtures and equipment, and building maintenance, to their respective
Association. Annual assessment fees for 2000 ranged from $253 to $451. In prior
years, PEC has voluntarily advanced monies to cover deficits for non-Florida
located Associations. There is no certainty PEC will continue this practice. In
Florida, if Association expenses exceed annual assessment fees, PEC is obligated
to pay the deficit. In fiscal 2000, PEC financed a budget shortfall of $90,000
and $63,000, respectively, for the Owners' Associations at Indian Shores and
Orlando. During calendar year 1999, the Associations had an excess of $904,000
in Association fees received compared to expenses paid.
If the owner of a timeshare interest defaults in the payment of the
annual assessment fee, the Association may impose a lien on the related
timeshare interest. PEC, at its option, has agreed to pay to the Associations
the annual assessment fees of timeshare interest owners who are delinquent, but
have paid PEC in full for their timeshare interest. In exchange for the payment
by PEC of such fees, the Associations assign their liens for non-payment on the
respective timeshare interests to PEC. In the event the timeshare interest
holder does not satisfy the lien after having an opportunity to do so, PEC
typically acquires the timeshare interest for the amount of the lien and any
related foreclosure costs.
PEC has entered into management agreements with the Associations
pursuant to which PEC receives annual management and administrative fees in
exchange for providing or arranging for various property management services
including reservations, bookkeeping, staffing, budgeting, maintenance and
housekeeping services. During fiscal 2000, 1999 and 1998, PEC received fees of
$2.7 million, $2.5 million and $2.4 million, respectively. The management
agreements are typically for initial terms ranging from three to five years and
automatically renew for successive additional one-year terms unless canceled by
an Association.
PEC's intent and goal is to manage these properties until all timeshare
interests are sold and the receivables generated from such sales have been paid.
Due to cancellations, exchanges and upgrades, none of the resorts are likely to
realize a 100% sellout for an extended period of time. The Company believes that
continued management of these properties preserves the integrity and operating
efficiencies of the resorts.
LAND SALES
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PEC is engaged in the retail sale of land in Nevada and Colorado for
residential, commercial, industrial and recreational use. Residential lots
generally range in size from one-quarter acre to five acres with some larger,
while commercial and industrial lots vary in size. PEC's residential lots
generally range in price from $15,000 to $39,000 while commercial and industrial
lots generally range in price from $79,000 to $94,000. PEC sold 766, 613 and 530
residential lots, net, and 2, 14 and 12 commercial and industrial lots during
fiscal 2000, 1999 and 1998, respectively. PEC is required from time to time to
cancel the purchase of lots and parcels as a result of payment defaults or
customer cancellations following inspections of the property pursuant to
contractual provisions.
NEVADA
A substantial portion of PEC's land sales have occurred in subdivisions
in the Pahrump Valley, located approximately 60 miles west of Las Vegas.
The following table illustrates certain statistics regarding the Pahrump
valley subdivisions:
<TABLE>
<S> <C>
Number of acres acquired since 1969 18,777
Number of lots platted 29,849
Net number of lots sold through August 31, 2000 29,710
Percent of lots sold through August 31, 2000 (unsold less than .5%) 100%
Number of platted lots available for sale at August 31, 2000 139
For the Year Ended August 31, 2000:
Number of parcels and lots sold 867
Number of parcels and lots canceled (331)
Number of parcels and lots repurchased (110)
Number of parcels and lots exchanged (408)
-------
Number of parcels and lots sold, net of cancellations and exchanges 18
=======
</TABLE>
Central Nevada Utilities Company (CNUC), a wholly-owned subsidiary of
PEC, provides sewer and water service within CNUC's certificated service area.
As of August 31, 2000, CNUC had 3,150 customers. In the past 4 years,
connections have grown at an average rate of 14.4% and 16.3%, respectively, for
residential water and sewer.
COLORADO
PEC also sells larger unimproved tracts of land in Colorado. PEC owns
unimproved land in Huerfano County, Colorado, which is being sold for
recreational use in parcels of at least 35 acres, at prices ranging from $12,000
to $18,000, depending on location and size. These parcels are sold without any
planned improvements and without water rights, which rights have been reserved
by PEC, except for an owner's right to drill a domestic well. Substantially all
of the parcels have been sold, with 62 parcels remaining in inventory as of
August 31, 2000.
In September 1993, PEC acquired improved and unimproved land in Park
County, Colorado, known as South Park Ranch, which is being sold for
recreational use as 1,870 separate parcels typically ranging in size from 5 to 9
acres and a few larger parcels at prices beginning at $15,000. As of August 31,
2000, 1,842 parcels had been sold with 28 parcels remaining in inventory. These
parcels are sold without any planned improvements, except for roads which are
already in place and a recreational facility that includes a basketball court,
baseball field and picnic facilities.
In February 1998, PEC acquired a tract of land in Park County, Colorado
near the town of Hartsel. This property is being sold as 2,137 separate parcels
with an average price and size of $28,600 and five acres, respectively. As of
August 31, 2000, 357 parcels remained unsold, not including 333 parcels which
became available for sale in October 2000. These parcels are sold without any
planned improvements, except for roads which are already in place.
The following table illustrates certain statistics regarding the parcels
and lots in Huerfano and Park Counties, Colorado:
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<TABLE>
<S> <C>
Number of acres acquired since 1969 60,782
Number of lots platted 4,828
Net number of lots sold through August 31, 2000 4,381
Percent of lots sold through August 31, 2000 91%
Number of platted lots available for sale at August 31, 2000 447
FOR THE YEAR ENDED AUGUST 31, 2000:
Number of parcels and lots sold 1,829
Number of parcels and lots canceled (378)
Number of parcels and lots exchanged (701)
-------
Number of parcels and lots sold, net of cancellations and exchanges 750
=======
</TABLE>
For fiscal 2,000, 1999 and 1998, respectively, PEC's revenue from net
land sales was $19.6 million, $16.0 million and $13.8 million, representing
21.7%, 21.4% and 20.1% of total revenues.
SALES OF NON-CORE ASSETS
The Company owns and has listed for sale certain commercial parcels that
are not necessary for its normal business activities. 22 of these parcels are
located in the Pahrump Valley. The Company also owns water rights in Huerfano
County that are listed for sale and a 4.25 acre parcel in Biloxi, Mississippi,
which it may sell. The Company also has received interest in the acquisition of
CNUC.
Since the Company began listing its non-core assets for sale in the
second quarter of fiscal 1999, the Company has sold $4,864,000 in non-core
assets. Sales have included two golf courses, a sports complex and six other
parcels located in the Pahrump Valley. Subsequent to August 31, 2000, the
Company also sold its two office buildings located at 4310 Paradise Road and
1500 E. Tropicana in Las Vegas, for a total consideration of $8,300,000. The
Company has leased back the building at 1500 E. Tropicana for a period of ten
years with two 5-year renewal options, and the building at 4310 Paradise Road
for a period of 5-1/2 years with a 4-1/2 year renewal option. The majority of
sales proceeds have been used to reduce debt.
The Company will continue to actively market the non-core assets;
however, there is no certainty as to when additional sales will occur.
TRUST ARRANGEMENTS
Title to certain of PEC's resort properties and land parcels in Huerfano
County, Colorado is held in trust by trustees to meet regulatory requirements
that were applicable at the time of the commencement of sales. In connection
with sales of timeshare interests pursuant to "right-to-use" or installment
sales contracts, title to certain of PEC's resort properties in the states of
Nevada and Hawaii are held in trust by trustees to meet requirements of certain
state regulatory authorities. Prior to 1988, PEC sold timeshare interests in
certain of its resorts in the state of Nevada pursuant to "right-to-use"
contracts and continues in other resorts to sell under installment sales
contracts under which the purchaser does not receive a deed until the purchase
price is paid in full. In addition, PEC offers "right-to-use" interests in its
resort in Hawaii, since it is on leased property. In connection with the
registration of the sale of such "right to use" timeshare interests, the
Department of Real Estate of the state of Nevada and the Department of Commerce
and Consumer Affairs of the state of Hawaii require that title to the related
resorts be placed in trust.
CUSTOMER FINANCING
PEC provides financing to virtually all the purchasers of its timeshare
interests, retail lots and land parcels who make a down payment equal to at
least 10% of the purchase price. The financing is generally evidenced by
non-recourse installment sale contracts as well as notes secured by deeds of
trust. Currently, the term of the financing generally ranges from two to twelve
years, with principal and interest payable in equal monthly payments. Interest
rates are fixed and generally range from 12.5% to 15.5% per year based on
prevailing market rates and the amount of the down payment made relative to the
sales price. PEC has a sales program whereby a 5% interest rate is charged on
those sales where the aggregate down payment is at least 50% of the purchase
price and the balance is payable in 36 or fewer monthly
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<PAGE> 9
payments. At August 31, 2000, PEC serviced 18,130 customer receivables related
to sales of timeshare interests and land, which receivables had an aggregate
outstanding principal balance of $153.0 million, a weighted-average maturity of
approximately 7 years and a weighted-average interest rate of 12.9%.
PEC has arrangements with institutional lenders, which, provide for the
financing of customer receivables of up to an aggregate of $133.5 million. These
lines of credit bear interest at variable rates tied to the prime rate and
90-day London Interbank Offering Rate (LIBOR) and are secured by timeshare and
land receivables and inventory. At August 31, 2000, an aggregate of $107.2
million was outstanding under such lines of credit and $26.3 million was
available for borrowing. PEC periodically sells its timeshare and land
receivables to various third party purchasers and uses a portion of the sales
proceeds to reduce the outstanding balances of its lines of credit, thereby
increasing the borrowing availability under such lines by the amount of
prepayment. These sales have generally resulted in yields to the purchaser less
than the weighted-average yield on the receivables, with PEC entitled to retain
the difference, the estimated value of which is carried as interest only
receivables. Sales agreements generally provide for: (i) PEC to continue
servicing the sold receivables; (ii) PEC to repurchase or replace accounts that
have become more than 90 days contractually delinquent; (iii) the maintenance of
cash reserve accounts for losses; and, (iv) certain minimum net worth
requirements and other covenants. The sales agreements for timeshare receivables
contain covenants that generally require PEC to use its best efforts to remain
the manager of the related resorts and to cause the Associations to maintain
appropriate insurance and pay applicable real estate taxes. Performance by PEC
of such covenants generally is guaranteed by the Company. The principal balances
of receivables sold by PEC were $19.6 million, $0, and $9.4 million during
fiscal 2000, 1999 and 1998, respectively.
At August 31, 2000, PEC was contingently liable to replace or repurchase
delinquent receivables in the aggregate amount of $ 59.6 million. Delinquencies
greater than 60 days have decreased in fiscal 2000 to 6.9% from 7.8% in fiscal
1999. PEC charges off or fully reserves all receivables that are more than 90
days delinquent and charges off the receivable when the Company determines that
collection is no longer probable. The following table sets forth information
with respect to receivables owned and sold that were 60 or more days delinquent,
excluding accounts that have been fully reserved, as of the dates indicated
(thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
60-day delinquent $ 11,930 $ 11,857 $ 11,836
Total receivables $172,907 $151,709 $136,509
60-day delinquency percentage 6.90% 7.82% 8.67%
</TABLE>
The 60-day delinquent amounts include any account that is contractually
60 days delinquent, including those accounts whereby customers are still making
payments but have not cured their delinquency status.
PEC provides an allowance for cancellations at the time it recognizes
revenues from sales of timeshare interests. PEC believes, based on its
experience and its analysis of economic conditions, that the allowance is
adequate to absorb losses on receivables that become uncollectible. Upon the
sale of the receivables, the allowance related to those receivables is reduced
and the reserve for notes receivable sold with recourse is appropriately
increased.
MARKETING
PEC markets timeshare interests and land through on-site and off-site
sales offices. PEC's sales staff receives commissions based on net sales volume.
PEC maintains fully-staffed on-site sales offices at its timeshare properties in
Las Vegas and Reno, Nevada and Steamboat Springs, Colorado as well as the Las
Vegas headquarters, and at its land projects in Nevada and Colorado. Small
on-site sales offices staffed with one to two sales associates are maintained in
Hawaii; Indian Shores and Orlando, Florida; and Brigantine, New Jersey. PEC also
maintains off-site sales offices in West Covina, California; Dallas and Houston,
Texas; and Denver, Colorado. PEC's marketing efforts are targeted primarily at
tourists and potential tourists meeting its customer profile. Currently,
approximately 48.6% of sales is made through the Las Vegas sales offices.
As part of its marketing strategy, PEC maintains an internal timeshare
interest exchange program. This program enables owners of PEC's timeshare
interests to exchange their occupancy right in their home resort for an
occupancy right at the same or a different time in another of PEC's timeshare
resorts. In addition, PEC has a sales program pursuant to which purchasers of
its timeshare interests, retail lots and land may exchange their equity
interests in one property for an interest in another of PEC's properties.
7
<PAGE> 10
The agreement of sale for a timeshare interest or land may be rescinded
within various statutory rescission periods ranging from five to ten days. For
land sales made at a location other than the property, the customer may cancel
the contract within a specified period, usually five months from the date of
purchase, provided that the contract is not in default, and provided the
customer has completed a developer-guided inspection of the subject property,
and then requests the cancellation. At August 31, 2000, $1.4 million of
recognized sales remained subject to such cancellation. If a customer defaults
after all rescission and cancellation periods have expired, all payments are
generally retained by PEC.
SEASONALITY
The Company's sales are generally not subject to significant seasonality
factors. For fiscal 2000, 1999 and 1998, quarterly sales as a percentage of
annual sales, for each of the fiscal quarters averaged:
<TABLE>
<CAPTION>
QUARTER ENDED % OF ANNUAL SALES
-------------------------------- -------------------------
<S> <C>
November 22.7%
February 22.3
May 27.0
August 28.0
---------
100.0%
=========
</TABLE>
The quarterly numbers in the preceding table are slightly higher in the
third and fourth quarters of the fiscal year as the Company's major sales area
in Las Vegas, Nevada, experiences higher tourist activity in those seasons. The
Company is not dependent upon any large affinity group of customers whose loss
would have a material adverse effect on the Company.
COMPETITION
The timeshare and real estate industries are highly competitive.
Competitors in the timeshare and real estate business include hotels, other
timeshare properties and real estate properties. Certain of the Company's
competitors are substantially larger and have more capital and other resources
than the Company.
PEC's timeshare plans compete directly with many other timeshare plans,
some of which are in facilities located in Las Vegas, Reno, Honolulu, Atlantic
City, Orlando, St. Petersburg/Clearwater, Tampa and Steamboat Springs. In recent
years, several major lodging, hospitality and entertainment companies have begun
to develop and market timeshare properties. According to ARDA data, in 2000,
approximately 31.5% of timeshare resorts were located in the Mountain/Pacific
region of the United States, 23.6% in Florida, 12.0% in the Northeast region,
16.5% in the Southeast region and 16.4% in the Central region of the United
States. In addition, PEC competes with condominium projects and with traditional
hotel accommodations in these areas. Certain of these competing projects and
accommodations are larger and more luxurious than PEC's facilities.
GOVERNMENT REGULATION
The Company's timeshare and real estate operations are subject to
extensive regulation, and licensing requirements by federal, state and local
authorities. The following is a summary of the regulations applicable to the
Company.
ENVIRONMENTAL REGULATION
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or chemical
releases at such property, and may be held liable to a governmental entity or to
third parties for property damage, personal injury and investigation and cleanup
costs incurred by such parties in connection with the contamination. Such laws
typically impose cleanup responsibility and liability without regard to whether
the owner knew of or caused the presence of the contaminants, and the liability
under such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
be
8
<PAGE> 11
liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not the facility is owned or operated
by such person. In addition, the owner or former owners of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site.
TIMESHARE REGULATION
Nevada Revised Statutes Chapter 119A requires the Company to give each
customer a Public Offering Statement that discloses all aspects of the timeshare
program, including the terms and conditions of sale, the common facilities, the
costs to operate and maintain common facilities, the Company's history and all
services and facilities available to the purchasers. Section 514E of the Hawaii
Revised Statutes provides for similar information to be provided to all
prospective purchasers through the use of the Hawaii Disclosure Statement, just
as Chapter 721 of the Florida Statutes similarly provides through the use of a
Public Offering Statement. Section 11000, et seq., of the California Business
and Professions Code also provides for similar information to be provided to all
prospective purchasers through the use of an Out-of-State Timeshare Permit
issued by the California Department of Real Estate. Section 45 of the New Jersey
Statutes Annotated provides for similar information to be provided to all
prospective purchasers through the use of a Public Offering Statement. The Texas
Register at 22 Texas Administrative Code, Section 543 provides for similar
information to be provided to all prospective purchasers through the use of the
Texas Timeshare Disclosure Statement. Title 12, Article 61 of the Colorado
Revised Statutes provides for similar information to be provided to all
prospective purchasers in their contracts of sales or by separate written
documents. Nevada and Colorado require a five-day rescission period for all
timeshare purchasers. The rescission period required by Hawaii and New Jersey is
seven days. The rescission period required by Florida is ten days. The
rescission period in California and Texas for out-of-state sales is five days.
The Nevada, California, New Jersey, Hawaii, Colorado, Florida and Texas
timeshare statutes have stringent restrictions on sales and advertising
practices and require the Company to utilize licensed sales personnel.
LENDING REGULATION
PEC is subject to various federal lending regulations related to
marketing, financing and selling consumer receivables. These federal regulations
include: Fair Housing Act, Americans With Disabilities Act, Interstate Land
Sales Full Disclosure Act, Truth-In-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Federal Trade Commission
Telemarketing Rule, Federal Communications Commission Telephone Census
Protection Act, Federal Trade Commission Act (Unfair or Deceptive Act or
Practices) and Fair Debt Collections Practices Act.
The Company believes that it has made all required filings with state,
city and county authorities and is in material compliance with all federal,
state and local regulations governing timeshare interests. The Company believes
that such regulations have not had a material adverse effect on any phase of the
Company's operations, including the overall cost of acquiring property.
Compliance with or changes in official interpretations of regulations might
impose additional compliance costs on the Company that cannot be predicted.
REAL ESTATE REGULATION
The real estate industry is subject to extensive regulation. The Company
is subject to compliance with various federal, state and local environmental,
zoning and other statutes and regulations regarding the acquisition,
subdivision, development and sale of real estate and various aspects of its
financing operations. The Interstate Land Sales Full Disclosure Act establishes
strict guidelines with respect to the subdivision and sale of land in interstate
commerce. The U.S. Department of Housing and Urban Development (HUD) has
enforcement powers with respect to this statute. In some instances (e.g., land
sales in Huerfano County, Colorado), the Company has been exempt from HUD
registration requirements because of the size or number of the subdivided
parcels and the limited nature or type of its offerings. The Company must
disclose financial information concerning the property, evidence of title, a
description of the intended manner of offering, proposed advertising materials
and must bear the costs of such registration, which include legal and filing
fees.
The Company believes that it is in compliance, in all material respects,
with all applicable federal, state and local regulations. The Company believes
that such regulations have not had a material adverse effect on any phase of its
operations. Compliance with future changes in regulations might impose
additional compliance costs on the Company that cannot be predicted.
9
<PAGE> 12
ADVERTISING REGULATION
In addition to requirements imposed by the various state timeshare acts,
PEC's marketing and advertising procedures are subject to the Federal Trade
Commission Act (Unfair and Deceptive Practices), Federal Trade Commission
Telemarketing Rules, Federal Communication Commission Telephone Consumer
Protection Act, Fair Housing Act, Equal Credit Opportunity Act and various state
consumer protection laws regulating telephone solicitations, the sale of travel
and sweepstakes, both in states in which PEC timeshare resorts are located or
registered and in states in which it advertises.
EMPLOYEES
As of August 31, 2000, PEC had 1,334 employees, of whom 1,137 were
full-time employees and 197 were part-time employees. Full-time employees were
comprised of the following: 680 sales and marketing officers and personnel, 165
general and administrative personnel, 280 hotel personnel and 12 utility company
personnel. None of PEC's employees are represented by a collective bargaining
unit. The Company believes that its relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
At August 31, 2000, the Company had 139 residential, commercial and
industrial lots, 447 recreational land parcels, and 9,423 timeshare interests in
inventory. In addition, the Company maintains the following properties:
The Company's principal executive offices are located at 4310 Paradise
Road, Las Vegas, Nevada 89109, where it occupies approximately 31,000 square
feet of office space in a building of which it was the owner. In November 2000,
the Company entered into a Sale/Leaseback transaction for this building. The
Company signed a master lease for the entire building for an initial term of
5-1/2 years with one 4-1/2 year renewal option. The current monthly rent is
$30,000.
The Company was the owner of a second office building located in Las
Vegas, Nevada. This building has approximately 57,500 square feet of office
space, of which the Company occupies approximately 33,800 square feet. Of the
remaining space, approximately 7,300 square feet is leased to tenants on a
short-term basis, and approximately 16,400 square feet is unoccupied. In October
2000, the Company entered into a Sale/Leaseback transaction for this building.
The Company signed a master lease for the entire building for a ten-year term
with two five-year renewal options. The current monthly rent is $57,446.
The Company leases an executive office at 1125 N. E. 125th Street in
North Miami, Florida, comprised of approximately 1,600 square feet, on a
month-to-month basis.
The Company leases various other facilities on a long-term, short-term
or month-to-month basis for off-site marketing and sales offices. The Company
has sales offices in West Covina, California; Denver, Colorado and Dallas, Texas
and marketing locations in close proximity of those offices and the Las Vegas
sales' offices.
ITEM 3. LEGAL PROCEEDINGS
On August 27, 1998, an action was filed in Nevada District Court, County
of Clark, No. A392585, by Robert and Jocelyne Henry, husband and wife
individually and on behalf of all others similarly situated against PEC, PEC's
wholly-owned subsidiary, Central Nevada Utilities Company (CNUC), and certain
other defendants. The plaintiffs' complaint asked for class action relief
claiming that PEC and CNUC were guilty of collecting certain betterment fees and
not providing sewer and water lines to their property. The court determined that
plaintiffs had not properly pursued their administrative remedies with the
Nevada Public Utilities Commission (PUC) and dismissed plaintiffs' amended
complaint, without prejudice. Notwithstanding plaintiffs' appeal of the
dismissal, plaintiff filed for administrative relief with the PUC. On November
17, 1999, the PUC found that CNUC, the only defendant over which the PUC has
jurisdiction, was not in violation of any duties owed the plaintiffs or
otherwise in violation of CNUC's approved tariffs. Subsequent to the PUC's
decision, plaintiffs voluntarily dismissed their appeal of the trial court's
order dismissing their case without prejudice and directing plaintiffs to
exhaust their administrative remedies. On May 4, 2000, plaintiffs
10
<PAGE> 13
refiled their complaint in Nevada District Court, naming all of the above
parties with the exception of CNUC. The defendants have filed a motion to
dismiss.
As previously reported in the Company's Annual Report on Form 10-K for
fiscal 1999 ("1999 Form 10-K"), the Company was a named defendant in three
purported class actions filed by Christopher Dunleavy, Alan Peyser and Michael
Nadler. A Settlement Agreement was approved by the Court in 1997 that had no
material effect on the Company's Consolidated Financial Statements. On August
21, 2000, the Settlement Agreement became final, as no further appeal was taken
since the appeal filed by Mr. Nadler that was denied on May 22, 2000.
As previously reported in the 1999 Form 10-K, the Company was a named
defendant in a purported class action filed by Robert J. Feeney. The period for
appeal of the dismissal with prejudice of the action against the Company expired
without an appeal having been filed.
On August 9, 1999, an action was filed in Nevada District Court, County
of Clark, No. A407152, by a dissident Director and a former Director of the
Grand Flamingo Towers Owners Association purporting to act on behalf of the
Association against PEC. The complaint alleges, among other things, breach of a
fiduciary duty by the defendant with respect to the management agreement between
the plaintiff and defendant. In particular, plaintiff is seeking rescission of
the management agreement, an injunction requiring the defendant to turn over
plaintiff's property held as plaintiff's manager, imposition of a constructive
trust on plaintiffs funds and profits received and held by the defendant as
plaintiff's manager, and an accounting of profits and property obtained by the
defendant as plaintiff's manager. In August 2000, the Plaintiffs voluntarily
dismissed this action with prejudice.
In the general course of business the Company and PEC, at various times,
have each been named in other lawsuits. The Company believes that it has
meritorious defenses to these lawsuits and that resolution of these matters will
not have a material adverse affect on the business or financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 2000.
11
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market and
since April 1, 1994, prices have been quoted on the Nasdaq National Market under
the symbol MEGO. Prior to April 1, 1994, the common stock was quoted on the
Nasdaq Small Cap Market under the symbol MEGO and, prior to May 1, 1994, was
traded on the Boston Stock Exchange under the symbol MGO. The following table
sets forth the high and low sales prices of the common stock as reported on the
Nasdaq National Market for the periods presented (1):
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
FISCAL YEAR 1999:
First Quarter $ 13.50 $ 4.13
Second Quarter 7.88 4.50
Third Quarter 7.13 4.50
Fourth Quarter 6.38 3.75
FISCAL YEAR 2000:
First Quarter 4.88 3.56
Second Quarter 5.06 3.63
Third Quarter 4.22 3.63
Fourth Quarter 4.63 3.88
FISCAL YEAR 2001:
First Quarter (through November 15, 2000) 4.94 4.31
</TABLE>
(1) On September 2, 1999, the Company's shareholders approved a one for six
reverse stock split of its common stock. The reverse split was effective
on September 9, 1999, with respect to all of the Company's 21,009,506
shares of common stock outstanding. After payment of cash in lieu of
fractional shares totaling 1,027 shares, the Company now has 3,500,557
common shares outstanding. All amounts in the above table and elsewhere
in this Form 10-K have been restated to retroactively show the effect of
this reverse stock split.
As of November 15, 2000, there were 1,853 holders of record of the
3,500,557 outstanding shares of common stock. The closing sales price for the
common stock on November 15, 2000 was $4.81.
The Company did not pay any cash dividends on its common stock during
fiscal 2000 and 1999. The Company intends to retain future earnings for the
operation and expansion of its business and does not currently anticipate paying
cash dividends on its common stock. Any future determination as to the payment
of such cash dividends would depend on a number of factors including future
earnings, results of operations, capital requirements, the Company's financial
condition and any restrictions under credit agreements existing from time to
time, as well as such other factors as the Board of Directors might deem
relevant. No assurance can be given that the Company will pay any dividends in
the future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below have been derived from the
Consolidated Financial Statements of the Company and its subsidiaries. The
Consolidated Financial Statements as of August 31, 2000 and 1999 and for each of
the three years in the period ended August 31, 2000 have been audited by
Deloitte & Touche LLP, independent auditors, and are included elsewhere herein.
The Consolidated Financial Statements as of August 31, 1998, 1997 and 1996 and
for the years ended August 31, 1997 and 1996 have been audited by Deloitte &
Touche LLP, independent auditors, and are not included herein.
Certain reclassifications have been made to conform prior years with the
current year presentation. The selected financial information set forth below
should be read in conjunction with the Consolidated Financial Statements,
12
<PAGE> 15
the related notes thereto and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein
(thousands of dollars, except per share amounts):
CONSOLIDATED SELECTED FINANCIAL DATA(1)(2)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES OF CONTINUING OPERATIONS:
Timeshare interest sales, net $ 49,062 $ 41,262 $ 37,713 $ 32,253 $ 27,778
Land sales, net 19,624 15,979 13,812 16,626 17,968
Gain on sale of notes receivable 635 -- 656 2,013 1,116
Gain on sale of other investments and other assets 1,857 513 -- -- --
Interest income 12,430 9,310 7,161 7,168 6,594
Financial income 1,153 1,184 3,304 2,922 1,253
Other(3) 5,734 6,254 5,944 6,514 5,943
-------- -------- -------- -------- --------
Total revenues of continuing operations 90,495 74,502 68,590 67,496 60,652
-------- -------- -------- -------- --------
COSTS AND EXPENSES OF CONTINUING OPERATIONS:
Cost of sales(4) 15,266 13,510 11,789 10,477 8,099
Marketing and sales 39,769 35,291 34,167 34,078 30,351
Depreciation 1,827 1,878 2,245 1,964 1,526
Interest expense 12,468 9,270 7,850 8,458 7,314
General and administrative 17,746 14,333 17,736 17,175 15,849
-------- -------- -------- -------- --------
Total costs and expenses of continuing
operations 87,076 74,282 73,787 72,152 63,139
-------- -------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 3,419 220 (5,197) (4,656) (2,487)
INCOME TAXES (BENEFIT) (530) (830) (1,968) (12,662) (1,068)
-------- -------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS 3,949 1,050 (3,229) 8,006 (1,419)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES AND MINORITY INTEREST(5) -- -- -- 11,334 6,270
-------- -------- -------- -------- --------
NET INCOME (LOSS) 3,949 1,050 (3,229) 19,340 4,851
CUMULATIVE PREFERRED STOCK DIVIDENDS -- -- -- -- 240
-------- -------- -------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 3,949 $ 1,050 $ (3,229) $ 19,340 $ 4,611
======== ======== ======== ======== ========
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA(6)(7):
BASIC:
Income (loss) from continuing operations $ 1.13 $ 0.30 $ (0.92) $ 2.58 $ (0.47)
Income (loss) from discontinued operations -- -- -- 3.64 2.08
Cumulative preferred stock dividends -- -- -- -- (0.08)
----------- ----------- ----------- ----------- -------------
Net income (loss) applicable to common stock $ 1.13 $ 0.30 $ (0.92) $ 6.22 $ 1.53
=========== =========== =========== =========== =============
Weighted-average number of common shares 3,500,557 3,500,557 3,500,557 3,108,510 3,108,493
=========== =========== =========== =========== =============
DILUTED(8):
Income (loss) from continuing operations $ 1.13 $ 0.30 $ (0.92) $ 2.46 $ (0.45)
Income from discontinued operations -- -- -- 3.48 1.97
Cumulative preferred stock dividends -- -- -- -- (0.08)
----------- ----------- ----------- ----------- -------------
Net income applicable to common stock $ 1.13 $ 0.30 $ (0.92) $ 5.94 $ 1.44
=========== =========== =========== =========== =============
Weighted-average number of common shares and
common share equivalents outstanding 3,500,557 3,500,557 3,500,557 3,253,718 3,184,788
=========== =========== =========== =========== =============
BALANCE SHEET DATA:
Total assets $ 168,592 $ 158,961 $ 142,076 $ 178,303 $ 145,505
Net assets of discontinued operations -- -- -- 53,276 30,514
Total liabilities excluding subordinated debt 138,524 132,650 117,049 100,745 109,963
Subordinated debt(9) 4,286 4,478 4,348 4,321 9,691
Total stockholders' equity 25,782 21,833 20,679 73,237 25,851
</TABLE>
(1) On September 2, 1997, the Company distributed all of its 10 million
shares of common stock of its former subsidiary, Mego Mortgage
Corporation (MMC) to the Company's shareholders in a tax-free Spin-off.
The operations of MMC have been reclassified as discontinued operations
and prior years' Consolidated Financial Statements of the Company
included herein reflect the reclassification accordingly. See "Item 7.
MD&A--Discontinued Operations of MMC" and Note 1 of Notes to
Consolidated Financial Statements.
(2) The income statement data, per share data and balance sheet data herein
for the five fiscal years are not necessarily indicative of the results
to be expected in the future. Certain reclassifications have been made
to conform prior years with the current presentation.
(3) Other revenues include incidental operations' income, management fees
from owners' associations, amortization of negative goodwill and other
miscellaneous items.
(4) Cost of sales includes product costs of sales of timeshare interests and
land, and incidental operations' expenses.
(5) Income from discontinued operations, net of taxes of $9.1 million and
minority interest of $2.4 million, includes the net income from MMC,
after tax, reduced by the related minority interests and certain general
and administrative expense related to the discontinued operations.
(6) All share and per share references have been restated to reflect the one
for six reverse split of the Company's common stock, effective September
9, 1999.
(7) No cash dividends per common share were declared during the fiscal years
included herein.
(8) The incremental shares from assumed conversions are not included in
computing the diluted per share amounts for fiscal 1998 because the
Company incurred a net loss and the effect would be anti-dilutive. The
incremental shares from assumed conversions are not included in
computing the diluted per share amounts for fiscal 2000 and 1999 because
the exercise price of the options and warrants exceeded the average
market price of the common shares during these fiscal years.
14
<PAGE> 17
(9) In payment of the exercise price of $4,250,000 of warrants exercised for
166,666 shares of the Company's common stock by the Assignors, the
subordinated debt due to the Assignors was reduced by that amount in
August 1997. See Note 10 of Notes to Consolidated Financial Statements
and "Item 13. Certain Relationships and Related Transactions."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations and the foregoing Business sections contain
certain forward-looking statements and information relating to the Company that
are based on the beliefs of management as well as assumptions made by and
information currently available to management. Such forward-looking statements
include, without limitation, the Company's expectations and estimates as to the
Company's business operations, including the introduction of new timeshare and
land sales programs and future financial performance, including growth in
revenues and net income and cash flows. Such forward-looking statements also
include, without limitation, the Company's expectations and beliefs as to the
result of its Year 2000 compliance efforts and the impact on the Company's
operations of efforts of its lenders and other third parties in respect of such
compliance. In addition, included herein the words "anticipates," "believes,"
"estimates," "expects," "plans," "intends" and similar expressions, as they
relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company's management with respect to future events and are subject to certain
risks, uncertainties and assumptions. In addition, the Company specifically
advises readers that the factors listed under the caption "Liquidity and Capital
Resources" could cause actual results to differ materially from those expressed
in any forward-looking statement. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, including the notes thereto, contained
elsewhere herein.
GENERAL
The business of the Company is primarily the marketing, financing and
sale of timeshare interests, retail lots and land parcels, servicing the related
receivables, and operating and managing timeshare properties.
PEC
PEC recognizes revenue primarily from sales of timeshare interests and
land sales in resort areas, gain on sale of receivables and interest income. PEC
periodically sells its consumer receivables while generally retaining the
servicing rights. Revenue from sales of timeshare interests and land is
recognized after the requisite rescission period has expired and at such time as
the purchaser has paid at least 10% of the sales price for sales of timeshare
interests and 20% of the sales price for land sales. Land sales typically meet
these requirements within six to ten months of closing, and sales of timeshare
interests typically meet these requirements at the time of sale. The sales
price, less a provision for cancellation, is recorded as revenue and the
allocated cost related to such net revenue of the timeshare interest or land
parcel is recorded as expense in the year that revenue is recognized. When
revenue related to land sales is recognized, the portion of the sales price
attributable to uncompleted required improvements, if any, is deferred.
Notes receivable with payment delinquencies of 90 days or more have been
considered in determining the allowance for cancellations. Cancellations occur
when the note receivable is determined to be uncollectible and the related
collateral, if any, has been recovered. Cancellation of a note receivable in the
quarter the revenue is recognized is deemed to not represent a sale and is
accounted for as a reversal of the revenue with an adjustment to cost of sales.
Cancellation of a note receivable subsequent to the quarter the revenue was
recognized is charged to the allowance for cancellations.
Gain on sale of notes receivable includes the present value of the
differential between contractual interest rates charged to borrowers on notes
receivable sold by PEC and the interest rates to be received by the purchasers
of such notes receivable, after considering the effects of estimated prepayments
and a normal servicing fee. PEC retains certain
15
<PAGE> 18
participations in cash flows from the sold notes receivable and generally
retains the associated servicing rights. PEC generally sells its notes
receivable at par value.
The present values of expected net cash flows from the sale of notes
receivable are recorded at the time of sale as interest only receivables.
Interest only receivables are amortized as a charge to income, as payments are
received on the retained interest differential over the estimated life of the
underlying notes receivable. Interest only receivables are recorded at the lower
of unamortized cost or estimated fair value. The expected cash flows used to
determine the interest only receivables asset have been reduced for potential
losses under recourse provisions of the sales agreements, as discussed below.
In discounting cash flows related to notes receivable sales, PEC defers
servicing income at an annual rate of 1% and discounts cash flows on its sales
at the rate it believes a purchaser would require as a rate of return. Earned
servicing income is included under the caption of financial income. The cash
flows were discounted to present value using a discount rate of 15% in each of
fiscal years 2000, 1999 and 1998. PEC has developed its assumptions based on
experience with its own portfolio, available market data and consultation with
its financial advisors.
In determining expected cash flows, management considers economic
conditions at the date of sale. In subsequent periods, these estimates may be
revised as necessary using the original discount rate, and any losses arising
from prepayment and loss experience will be recognized as realized.
Provision for cancellations relating to notes receivable is recorded as
expense in amounts sufficient to maintain the allowance at a level considered
adequate to provide for anticipated losses resulting from customers' failure to
fulfill their obligations under the terms of their notes receivable. PEC records
provision for cancellations at the time revenue is recognized, based on
historical experience and current economic factors. The related allowance for
cancellations represents PEC's estimate of the amount of the future credit
losses to be incurred over the lives of the notes receivable. The allowance for
cancellations is reduced by actual cancellations experienced, including
cancellations related to previously sold notes receivable which were reacquired
pursuant to the recourse obligations discussed herein. Such allowance is also
reduced to establish the separate liability for reserve for notes receivable
sold with recourse. PEC's judgment in determining the adequacy of this allowance
is based upon a periodic review of its portfolio of notes receivable. These
reviews take into consideration changes in the nature and level of the
portfolio, historical cancellation experience, current economic conditions which
affect the purchasers' ability to pay, changes in collateral values, estimated
value of inventory that may be reacquired and overall portfolio quality. Changes
in the allowance as a result of such reviews are included in the provision for
cancellations.
Recourse to PEC on sales of notes receivable is governed by the
agreements between the purchasers and PEC. The reserve for notes receivable sold
with recourse represents PEC's estimate of the fair value of future credit
losses to be incurred over the lives of the notes receivable. A liability for
reserve for notes receivable sold with recourse is established at the time of
each sale based upon PEC's estimate of the fair value of the future recourse
obligation under each agreement of sale.
Fees for servicing notes receivable originated or acquired by PEC and
sold with servicing rights retained are generally based on a stipulated
percentage of the outstanding principal balance of such notes receivable and are
recognized when earned. Interest received on notes receivable sold, less amounts
paid to investors, is reported as financial income. Interest only receivables
are amortized systematically to reduce notes receivable servicing income to an
amount representing normal servicing income and the present value discount. Late
charges and other miscellaneous income are recognized when collected. Costs to
service notes receivable are recorded to expense as incurred. Interest income
represents the interest received on loans held in PEC's portfolio, the accretion
of the discount on the interest only receivables and interest on cash funds.
Total costs and expenses consist primarily of marketing and sales
expenses, general and administrative expenses, direct costs of sales of
timeshare interests and land, depreciation and amortization and interest
expense. Marketing and sales costs directly attributable to unrecognized sales
are accounted for as deferred selling costs until such time as the sale is
recognized. The Company incurs a portion of operating expenses of the timeshare
Associations based on ownership of unsold timeshare interests at each of the
respective timeshare properties. These costs are referred to as "association
assessments" or "maintenance payments", and are included in Costs and Expenses
in the Consolidated Income Statements under the caption of General and
administrative. Management fees received from the associations are included in
Revenues in the Consolidated Income Statements under the caption of Other. These
fees are deemed not to be the result of a
16
<PAGE> 19
separate revenue generating line of business since the management activities to
which they relate are part of the support of the timeshare business and the fees
are actually a reduction of the expense the Company incurs to fulfill
obligations regarding timeshares.
The following table sets forth certain data regarding notes receivable
additions and servicing through sales of timeshare interests and land:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED AUGUST 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Principal balance of notes receivable additions (in thousands) $ 82,388 $ 64,112
======== ========
Number of notes receivable additions 7,552 6,448
======== ========
Notes receivable serviced at end of period (in thousands) $153,000 $132,240
======== ========
</TABLE>
Land sales as of August 31, 2000 exclude $17.3 million of sales not yet
recognized under generally accepted accounting principles (GAAP) since the
requisite payment amounts have not yet been received or the respective recission
periods have not yet expired. Of the $17.3 million unrecognized land sales, the
Company estimates that it will ultimately recognize $14.2 million of revenues,
which would be reduced by a related provision for cancellations of $1.2 million,
estimated deferred selling costs of $4.0 million and cost of sales of $2.0
million, for an estimated net profit of $7.0 million.
REAL ESTATE RISK
Real estate development involves significant risks, including risks that
suitable properties will not be available at reasonable prices, that
acquisition, development and construction financing may not be available on
favorable terms or at all, that infrastructure and construction costs may exceed
original estimates, that construction may not be completed on schedule, and that
upon completion of construction and improvements, properties may not be sold on
favorable terms or at all. In addition, PEC's timeshare activities, as well as
its ownership, improvement, subdivision and sale of land, are subject to
comprehensive federal, state and local laws regulating environmental and health
matters, protection of endangered species, water supplies, zoning, land
development, land use, building design and construction and other matters. Such
laws and difficulties in obtaining, or the failure to obtain, the requisite
licenses, permits, allocations, authorizations and other entitlements pursuant
to such laws can adversely impact the development and completion of PEC's
projects. The enactment of "slow-growth" or "no-growth" initiatives in any area
where PEC sells land or timeshare interests could also delay or preclude
entirely the development of such properties.
RESULTS OF OPERATIONS
Year Ended August 31, 2000 Compared to Year Ended August 31, 1999
Total revenues for the Company increased 21.5% or $16.0 million to $90.5
million during fiscal 2000 from $74.5 million during fiscal 1999 primarily due
to: a net increase of $11.5 million in timeshare and land sales to $68.7 million
in fiscal 2000 from $57.2 million in fiscal 1999 (net timeshare sales increased
by $7.8 million and net land sales increased by $3.7 million); an increase in
interest income to $12.4 million in fiscal 2000 from $9.3 million in fiscal
1999; and, higher gains on sales of notes receivable and sales of investments
and other assets.
Gross sales of timeshare interests increased to $55.3 million in fiscal
2000 from $45.8 million in fiscal 1999, an increase of 20.7%. Net sales of
timeshare interests increased to $49.1 million from $41.2 million, an increase
of 18.9%. This increase is primarily attributable to a favorable mix as a
comparatively greater number of the high-priced units were sold during fiscal
2000, and also to certain price increases. The provision for cancellations
represented 11.3% and 10.0%, respectively, of gross sales of timeshare interests
for fiscal 2000 and 1999. The percentage increase in the provision for
cancellations for timeshare interests was primarily due to a downward adjustment
recorded during the prior fiscal year based on a review of the reserve adequacy
at that time and cancellation experience during fiscal 2000. The number of
cancellations during fiscal 2000 was 1,048 compared to 875 during fiscal 1999.
The number of exchanges, generally for timeshare interests, which are primarily
made for upgrades, was 1,955 during fiscal 2000 compared to 2,757 during fiscal
1999.
17
<PAGE> 20
Gross sales of land increased to $20.7 million in fiscal 2000 from $17.0
million in fiscal 1999, an increase of 21.6%. Net sales of land increased to
$19.6 million in fiscal 2000 from $16.0 million in fiscal 1999 an increase of
22.8%. The provision for cancellations decreased to 5.3% for the year ended
August 31, 2000 from 6.2% of gross sales of land for the year ended August 31,
1999, primarily due to a downward adjustment recorded during fiscal 2000 based
on a review of reserve adequacy.
Gain on sale of notes receivable and investments of $2.5 million was
recorded during the fiscal 2000 as the Company, in addition to notes receivable
sales in the normal course of business, sold its golf courses and several
commercial non-core land parcels in Pahrump Valley. This is compared to a gain
of $513,000 recorded during fiscal 1999 as the Company sold a parcel of land in
Pahrump Valley.
Interest income increased to $12.4 million in fiscal 2000 from $9.3
million in fiscal 1999, an increase of 33.5% primarily due to increased average
notes receivable balances for the current period.
Total costs and expenses for the Company increased to $87.1 million for
fiscal 2000 from $74.3 million for fiscal 1999, an increase of 17.2%. The
increase resulted primarily from: an increase in direct costs of timeshare
interest sales to $10.5 million from $8.5 million, an increase of 23.3%; an
increase in marketing and sales to $39.8 million from $35.3 million, an increase
of 12.7%; an increase in interest expense to $12.5 million from $9.3 million, an
increase of 34.5%; and, an increase of $3.4 million, or 23.8%, in general and
administrative expenses. The increase in direct costs of timeshare sales is
directly attributable to higher net timeshare sales in 2000 and to the higher
costs to develop new timeshare inventory. The increase in marketing and sales
expenses is due primarily to the higher gross sales; however, as noted below,
the increase in dollars was accompanied by a related lower percentage of
marketing and sales expenses. The increase in interest expense is due to the
increase in the average outstanding balance of notes and contracts payable. The
increase in general and administrative expenses is due primarily to: increased
sales volume; the increase in escrow costs related to the increased sales
volume; a net increase in maintenance fees paid to Homeowner Associations by
PEC; an increase in executive incentive plan compensation, which is directly
related to the pretax income increase; the full resumption of payment of
Directors' fees; and, reserves for the Company's guaranty of office and
equipment leases related to a previously affiliated company.
As a percentage of gross sales of timeshare interests and land,
marketing and sales expenses related thereto decreased to 52.3% in fiscal 2000
from 56.1% in fiscal 1999. Cost of sales was 17.8% in fiscal 2000 and 17.9% in
fiscal 1999. Sales prices of timeshare interests are typically lower than those
of land, while selling costs per sale, other than commissions, are approximately
the same in amount for timeshare interests and land; accordingly, the Company
generally realizes lower profit margins from sales of timeshare interests than
from sales of land. Subsequent to the first quarter of fiscal 1999, the Company
restructured its marketing and sales programs, which restructuring included the
closing of unprofitable sales locations, the elimination of certain marketing
programs and the layoff of related personnel.
Pretax income of $3.4 million was recorded in fiscal 2000 compared to a
pretax income of $220,000 in fiscal 1999.
The income tax benefit for fiscal 2000 was $530,000 compared to the
income tax benefit of $830,000 for fiscal 1999. The benefit for both fiscal 2000
and 1999 was primarily due to the application of net operating loss (NOL)
carryforwards and changes in certain income tax liability reserves as a result
of facts and circumstances determined in an ongoing review and analysis of the
Company's federal income tax liability. See Note 11 of Notes to Consolidated
Financial Statements.
Net income applicable to common stock amounted to $3.9 million during
fiscal 2000 compared to net income of $1.1 million during fiscal 1999, primarily
due to the foregoing reported results.
Year Ended August 31, 1999 Compared to Year Ended August 31, 1998
Total revenues for the Company increased 8.6% or $5.9 million to $74.5
million during fiscal 1999 from $68.6 million during fiscal 1998 primarily due
to a net increase of $5.7 million in timeshare and land sales to $57.2 million
in fiscal 1999 from $51.5 million in fiscal 1998 (net timeshare sales increased
by $3.5 million and net land sales increased by $2.2 million), an increase in
interest income to $9.3 million in fiscal 1999 from $7.2 million in fiscal 1998,
partially offset by an aggregate decrease of $2.1 million in financial income.
18
<PAGE> 21
Gross sales of timeshare interests increased to $45.8 million in fiscal
1999 from $41.4 million in fiscal 1998, an increase of 10.6%. Net sales of
timeshare interests increased to $41.2 million from $37.7 million, an increase
of 9.4%. The provision for cancellations represented 10.0% and 9.0%,
respectively, of gross sales of timeshare interests for fiscal 1999 and 1998.
The percentage increase in the provision for cancellations for timeshare
interests was primarily due to a larger downward adjustment recorded during the
prior fiscal year based on a review of the reserve adequacy at that time. The
number of cancellations during fiscal 1999 was 875 compared to 781 during fiscal
1998. The number of exchanges, generally for timeshares, which are primarily
made for upgrades, during fiscal 1999 was 2,757 compared to 4,019 during fiscal
1998.
Gross sales of land increased to $17.0 million in fiscal 1999 from $14.9
million in fiscal 1998, an increase of 14.3%. Net sales of land increased to
$16.0 million in fiscal 1999 from $13.8 million in fiscal 1998 an increase of
15.7%. The provision for cancellations decreased to 6.2% for the year ended
August 31, 1999 from 7.3% of gross sales of land for fiscal 1998, primarily due
to a decrease in cancellation experience during fiscal 1999.
Gain on sale of investments of $513,000 was recorded during the fiscal
1999 as the Company sold a parcel of land in Pahrump Valley.
Interest income increased to $9.3 million in fiscal 1999 from $7.2
million in fiscal 1998, an increase of 30.0% primarily due to increased average
notes receivable balances for the current period.
Financial income decreased to $1.2 million in fiscal 1999 from $3.3
million in fiscal 1998, a decrease of 64.2%. The decrease was primarily a result
of the termination by agreement of loan servicing for a previously affiliated
company and a decrease in loans serviced for others.
Total costs and expenses for the Company increased to $74.3 million for
fiscal 1999 from $73.8 million for fiscal 1998, an increase of .6%. The increase
resulted primarily from an increase in direct costs of land sales to $2.7
million from $1.8 million, an increase of 53.1%, an increase in direct costs of
timeshare interest sales to $8.5 million from $7.4 million, an increase of
15.6%, an increase in marketing and sales to $35.3 million from $34.1 million,
an increase of 3.3%, an increase in interest expense to $9.3 million from $7.9
million, an increase of 18.1%, partially offset by a decrease of $3.4 million,
or 19.2%, in general and administrative expenses. The increase in direct costs
of land is attributable to increased land sales, including higher cost lots sold
during fiscal 1999 compared to fiscal 1998. The increase in direct costs of
timeshare sales is directly attributable to higher net timeshare sales in 1999
and to the higher costs to develop new timeshare inventory. The increase in
marketing and sales expenses is due primarily to the higher gross sales;
however, as noted below, the increase in dollars was accompanied by a related
lower percentage of marketing and sales expenses. The increase in interest
expense is due to the increase in the average outstanding balance of notes and
contracts payable. The decrease in general and administrative expenses is due
primarily to the reduction in salaries and benefits.
As a percentage of gross sales of timeshare interests and land,
marketing and sales expenses related thereto decreased to 56.1% in fiscal 1999
from 60.6% in fiscal 1998, and cost of sales increased to 17.9% in fiscal 1999
from 16.2% in fiscal 1998.
Interest expense was $9.3 million in fiscal 1999 and $7.9 million in
fiscal 1998. The increase is a result of a higher average outstanding balance of
notes and contracts payable during fiscal 1999 compared to fiscal 1998 and is
related to the fact that there were no sale of receivables during fiscal 1999.
Pretax income of $220,000 was recorded in fiscal 1999 compared to a
pretax loss of $5.2 million in fiscal 1998. The improvement in fiscal 1999
resulted from the $5.9 million increase in revenues partially offset by the
$500,000 increase in expenses.
The income tax benefit for fiscal 1999 was $830,000 compared to the
larger income tax benefit of $2.0 million for fiscal 1998. The benefit for both
fiscal 1999 and 1998 was primarily due to the application of net operating loss
(NOL) carryforwards and changes in certain income tax liability reserves. The
income tax liability reserves are a result of facts and circumstances determined
in an ongoing review and analysis of the Company's federal income tax liability.
Net income applicable to common stock amounted to $1.1 million during
fiscal 1999 compared to a loss of $3.2 million during fiscal 1998, primarily due
to the foregoing reported results.
19
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents was $1.1 million at August 31, 2000 and $1.8
million at August 31, 1999. The Company's principal cash requirements relate to
PEC's acquisition of timeshare properties and land and the payment of marketing
and sales expenses in connection with timeshare and land sales and Mego
Financial's payment of principal and interest on subordinated debt. PEC requires
continued access to sources of debt financing and sales in the secondary market
for receivables.
PEC's cash requirements arise from the acquisition of timeshare
properties and land, payments of operating expenses, payment of taxes to Mego
Financial, payments of principal and interest on debt obligations, and payments
of marketing and sales expenses in connection with sales of timeshare interests
and land. Marketing and sales 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
advances under PEC's lines of credit in the aggregate amount of $133.5 million,
sales of receivables and cash flows from operations. At August 31, 2000, no
commitments existed for material capital expenditures.
At August 31, 2000, PEC had arrangements with 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 $133.5 million. Such lines of credit
are secured by timeshare and land receivables and mortgages. At August 31, 2000,
an aggregate of $107.2 million was outstanding under such lines of credit, and
$26.3 million was available for borrowing. Under the terms of these lines of
credit, PEC may borrow 65% to 90% of the balances of the pledged timeshare and
land receivables. PEC is required to comply with certain covenants under these
agreements, which, among other things, require PEC to meet certain minimum
tangible net worth requirements. The most stringent of such requirements
provides that PEC maintains a minimum tangible net worth of $25 million. At
August 31, 2000, PEC exceeded this net worth requirement by $5.9 million.
Summarized lines of credit information and accompanying notes relating to these
lines of credit outstanding at August 31, 2000, consist of the following
(thousands of dollars):
<TABLE>
<CAPTION>
OUTSTANDING
BORROWING MAXIMUM (a)
BALANCE AT BORROWING REVOLVING
AUGUST 31, 2000 AMOUNTS EXPIRATION DATE MATURITY DATE INTEREST RATE
----------------------- --------------- ----------------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
$ 64,757 $ 75,000 (b) April 30, 2001 Various Prime + 2.0 - 2.25%
----------------------- ---------------
15,733 15,000 (c) December 1, 2002 Various Prime + 2.0
4,960 11,500 (d) December 31, 2001 Various Prime + 2.0 - 3.00%
----------------------- ---------------
20,693 26,500 Considered one borrowing line for the maximum amount.
----------------------- ---------------
19,790 30,000 (e) June 30, 2001 Various Libor + 4.0 - 4.25%
1,972 1,972 (f) July 30, 2003 Prime + 2.25%
----------------------- ---------------
$ 107,212 $ 133,472
======================= ===============
</TABLE>
(a) When the revolver expires as shown, the loans convert to term loans with
maturities as stated. In addition, management expects to extend the
lines on similar terms.
(b) Restrictions include PEC's requirement to maintain a minimum tangible
net worth of $25 million. Other restrictions, commencing with the fiscal
quarter ended November 30, 1999, include: PEC's requirement to maintain
costs and expenses for marketing and sales and general and
administrative expenses relating to net processed sales for each fiscal
quarter; PEC's requirement to maintain a minimum net processed sales
requirement for each fiscal quarter; and PEC's requirement not to exceed
a ratio of 4:1 of consolidated total liabilities to consolidated
tangible net worth. At August 31, 2000, $52.2 million of loans secured
by receivables were outstanding related to financings at prime plus 2%,
of which $29.5 million of loans secured by land receivables mature May
15, 2010 and $22.7 million of loans secured by timeshare receivables
mature May 15, 2007. The outstanding borrowing amount includes $6.4
million in mortgage financing maturing October 1, 2005 for the corporate
office buildings, which amount was paid in full in November 2000, and a
real estate loan with an outstanding balance of $1.2 million maturing
December 31, 2000, all bearing interest at prime plus 2.25%. The
remaining Acquisition and Development (A&D) loans, receivables loans and
a resort lobby loan outstanding of $5.0 million are at prime plus 2% and
mature at various dates through February 18, 2001.
20
<PAGE> 23
In December 1998, Finova Capital Corporation (FINOVA), PEC and Mego
Financial entered into an Agreement under which FINOVA agreed to make a
loan in the amount of $5,662,000 to PEC with an original maturity date
of June 30, 1999, which date has been extended to December 31, 2000.
Mego Financial guaranteed the loan and issued warrants to FINOVA to
purchase a total of 83,333 shares of common stock of Mego Financial at
an exercise price of $6.00 per share, exercisable within a five-year
period commencing January 1, 1999. The balance outstanding under this
Agreement, which is included in the $64.8 million balance in the
preceding table, was $1.2 million as of August 31, 2000.
The fair market value of the warrants was estimated at $104,000 and is
being amortized over the term of the Agreement.
(c) Restrictions include PEC's requirement to maintain a minimum tangible
net worth of $25 million during the life of the loan. These credit lines
include available financing for A&D and receivables. At August 31, 2000,
$6.3 million was outstanding under the A&D loan, which matures on June
30, 2004, and $9.4 million was outstanding under the receivables loan,
which matures on May 31, 2004.
(d) Restrictions include PEC's requirement to maintain a minimum tangible
net worth of $15 million. This credit line consists of receivable
financing with a maturity date of May 31, 2004, under which $1.6 million
was outstanding at August 31, 2000, and a real estate loan of $3.3
million with a maturity date of December 31, 2001.
(e) Restrictions include PEC's requirement to maintain a minimum tangible
net worth of $17 million during the life of the loan. These credit lines
include available financings for A&D and receivables. At August 31,
2000, $2.4 million was outstanding under the A&D loans which have a
maturity date of June 30, 2001 and bear interest at the 90-day London
Interbank Offering Rate (LIBOR) plus 4.25%. The available receivable
financings, of which $17.4 million was outstanding at August 31, 2000,
are at 90-day LIBOR plus 4% and have a maturity date of June 5, 2005.
(f) Restrictions include PEC's requirement to maintain a minimum tangible
net worth of $25 million.
A schedule of the cash shortfall arising from recognized and
unrecognized sales for the periods indicated is set forth below (thousands of
dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Marketing and sales expenses attributable to recognized and
unrecognized sales $ 40,717 $ 35,856 $ 34,733
Less: Down payments (12,280) (12,452) (12,934)
-------- -------- --------
Cash shortfall $ 28,437 $ 23,404 $ 21,799
======== ======== ========
</TABLE>
During fiscal 2000, PEC sold notes receivable of $19.6 million from
which $17.1 million of the sales proceeds were used to pay down debt. The
receivables, which have interest rates ranging from 11.5% - 15.5% depending on
the transaction, were sold to yield returns of 9.8% fixed and 10.0% floating to
the respective purchasers, with any excess interest received from the obligors
being payable to PEC.
PEC sells notes receivable subject to recourse provisions as contained
in each agreement. PEC is obligated under these agreements to replace or
repurchase accounts that become over 90 days delinquent or are otherwise subject
to replacement or repurchase in either cash or receivables generally at the
option of the purchaser. At August 31, 2000, PEC was contingently liable to
replace or repurchase notes receivable sold with recourse totaling $59.6
million. The repurchase provisions provide for substitution of receivables as
recourse for $51.7 million of sold notes receivable and cash payments for
repurchase relating to $7.9 million of sold notes receivable. At August 31, 2000
and 1999, the undiscounted reserve amounts of the recourse obligations on such
sold notes receivable were $4.5 million and $4.6 million, respectively. PEC
continually 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,
changes in collateral values, estimated value of inventory that may be
reacquired and overall portfolio quality.
21
<PAGE> 24
Recourse to PEC on sales of notes receivable is governed by the
agreements between the purchasers and PEC. The reserve for notes receivable sold
with recourse is established at the time of each sale based upon PEC's analysis
and represents PEC's estimate of its probable future credit losses to be
incurred over the lives of the notes receivable. Proceeds from the sale of notes
receivable sold with recourse were $19.6 million and $0 million, respectively,
for fiscal 2000 and 1999.
To improve its financial position, the Company has sold its golf courses
and certain of its non-core assets, and is pursuing the sale of certain of its
remaining non-core commercial real estate assets located in Pahrump Valley and
elsewhere. See discussion in Item 1., "Land Sales - Non-Core Assets".
At January 31, 1995, when accrual of payments to assignors ceased, $13.3
million was payable to the Assignors. On March 2, 1995, the Assignors agreed to
defer payment of $10 million of the amounts due to them 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 (Subordinated Debt).
Warrants (Warrants) to purchase 166,666 shares of common stock, at an exercise
price of $25.50 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 balance of $3.3 million was paid to the Assignors as follows:
$809,000 including interest of $59,000 in June 1995, and the balance of $2.6
million including interest of $45,000 in January 1997. The Warrants were
exercised in August 1997 in a non-cash transaction, whereby the Subordinated
Debt was reduced by $4.25 million. Interest on the Subordinated Debt was to be
paid semiannually at the rate of 10% per year starting September 1, 1995, and
the Subordinated Debt was to be repaid in semiannual principal payments
commencing March 1, 1997. On March 1, 1997, the Assignors received the first
semiannual principal payment of $1.4 million plus interest related to the
repayment of the Subordinated Debt. In connection with exercise of the Warrants,
payments aggregating $4.25 million were deemed paid and the semiannual payments
were scheduled to resume in March 1999, with a partial payment made in September
1998. The final $4.29 million was scheduled to be paid in 3 equal installments
on March 1, 1999, September 1, 1999 and March 1, 2000. In accordance with the
Eleventh Amendment to Assignment and Assumption Agreement, the principal
payments totaling $4.29 million have been deferred until March 1, 2001.
Management anticipates that all or part of the principal payments may be
extended beyond the current March 1, 2001 maturity date. Interest of $429,000 on
Subordinated Debt was paid during each of fiscal year 2000 and 1999. The
Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. See
"Item 13. Certain Relationships and Related Transactions" and Note 10 of Notes
to Consolidated Financial Statements.
During fiscal 2000 and 1999, the Company used cash of $5.5 million and
$20.9 million, respectively, in operating activities. The most significant
reason for the net decrease in cash used was the $19.6 million generated from
the sales of notes receivable. During fiscal 2000 and 1999, the Company used
cash of $384,000 and $1.8 million in investing activities, respectively, as a
result of a decline in additions to other investments. During fiscal 2000 and
1999, the Company provided cash of $4.4 million and $22.7 million in financing
activities, respectively, as a result of a decrease in borrowings, net of
paydowns.
Capital expenditures during fiscal years 2000 and 1999 were $4.8 million
and $3.7 million, respectively, for the acquisition of timeshare and land
inventory and $2.2 million and $1.6 million, respectively, for the purchase of
property and equipment. No commitments existed at August 31, 2000 for material
capital expenditures. The Company believes that its capital requirements will be
met from cash balances, internally generated cash, existing lines of credit,
sales of receivable and the modification, replacement or addition to its lines
of credit and new financings.
The components of the Company's debt, including lines of credit consist
of the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Notes collateralized by receivables $ 80,593 $ 67,457
Mortgages collateralized by real estate properties 27,407 35,846
Installment contracts and other notes payable 1,131 1,252
-------- --------
Total $109,131 $104,555
======== ========
</TABLE>
FINANCIAL CONDITION
The Company provides allowance for cancellations in amounts which, in
the Company's judgment, will be adequate to absorb losses on notes receivable
that may become uncollectible. The Company's judgment in determining the
adequacy of this allowance is based on its continual review of its portfolio
which utilizes historical
22
<PAGE> 25
experience and current economic factors. These reviews take into consideration
changes in the nature and level of the portfolio, historical rates, collateral
values, and current and future economic conditions which may affect the
obligors' ability to pay, collateral values and overall portfolio quality.
Changes in the aggregate of the allowance for cancellations, excluding
discounts, and the reserve for notes receivable sold with recourse for fiscal
2000, 1999, and 1998, consisted of the following (thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 18,149 $ 18,488 $ 19,527
Provision for cancellations 7,354 5,626 4,827
Amounts charged to allowance for cancellations and
reserve for notes receivable sold with recourse (8,643) (5,965) (5,866)
-------- -------- --------
Balance at end of year $ 16,860 $ 18,149 $ 18,488
======== ======== ========
</TABLE>
The allowance for cancellations and the reserve for notes receivable
sold with recourse consisted of the following at these dates (thousands of
dollars):
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Allowance for cancellations, excluding discounts $12,827 $13,987 $11,868
Reserve for notes receivable sold with recourse 4,033 4,162 6,620
------- ------- -------
Total $16,860 $18,149 $18,488
======= ======= =======
</TABLE>
The allowance for cancellations as a percentage of total notes
receivable was 10.8% as of August 31, 2000 compared to 13.5% as of August 31,
1999. The reduction is primarily due to the cancellations during fiscal 2000
which were reserved as of August 31, 1999.
August 31, 2000 Compared to August 31, 1999
Cash and cash equivalents was $1.1 million at August 31, 2000 and $1.8
million at August 31, 1999.
Notes receivable, net, increased 20.0% to $83.2 million at August 31,
2000 from $69.3 million at August 31, 1999 as a result of the increased fiscal
2000 sales, net of notes receivable sold, during fiscal 2000.
Interest only receivables increased 5.3% to $2.7 million at August 31,
2000 from $2.6 million at August 31, 1999. See Note 4 of Notes to Consolidated
Financial Statements.
Land and improvements inventory and timeshare interests held for sale
decreased 24.2% to $27.4 million at August 31, 2000 from $36.2 million at August
31, 1999. This decrease is directly related to the increase in sales in fiscal
2000.
Notes and contracts payable increased 4.4% to $109.1 million at August
31, 2000 from $104.6 million at August 31, 1999. Net borrowings related to
financing customer receivables increased by $13.1 million, which was partially
offset by net paydowns on other debt of $8.5 million.
Reserve for notes receivable sold with recourse decreased 3.1% to $4.0
million at August 31, 2000 from $4.2 million at August 31, 1999. The majority of
notes receivable sold during the fiscal year were land notes, which typically
require a lower reserve. The loans previously sold prior to fiscal 2000 continue
to amortize, which correspondingly lowers the required reserve.
Accrued income taxes decreased 15.1% to $3.0 million at August 31, 2000
from $3.5 million, due to the changes in certain income tax liability reserves
as a result of facts and circumstances determined in an ongoing review and
analysis of the Company's federal income tax liability.
Stockholders' equity increased to $25.8 million at August 31, 2000 from
$21.8 million at August 31, 1999 as a result of net income of $3.9 million
during fiscal 2000.
Timeshare interest and land sales net, for fiscal 2000, 1999 and 1998,
and the comparative dollar and percentage changes, are set forth in the
following table (thousands of dollars):
23
<PAGE> 26
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------------------------------------------------------------
2000 CHANGE 1999 CHANGE
2000 1999 FROM 1999 1998 FROM 1998
------- ------- ------------------- ------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Timeshare interest sales, net $49,062 $41,262 $ 7,800 18.9% $37,713 $ 3,549 9.4%
Land sales, net 19,624 15,979 3,645 22.8% 13,812 2,167 15.7%
------- ------- ------- ------- -------
Total timeshare interest
and land sales, net $68,686 $57,241 $11,445 20.0% $51,525 $ 5,716 11.1%
======= ======= ======= ======= =======
</TABLE>
August 31, 1999 Compared to August 31, 1998
Cash and cash equivalents was $1.8 million at August 31, 1999 and 1998.
Notes receivable, net, increased 45.0% to $69.3 million at August 31,
1999 from $47.8 million at August 31, 1998 as a result of net new receivables
added, and no sales of receivables, during fiscal 1999.
Interest only receivables decreased 23.8% to $2.6 million at August 31,
1999 from $3.4 million at August 31, 1998. See Note 4 of Notes to Consolidated
Financial Statements.
Land and improvements inventory and timeshare interests held for sale
decreased 17.3% to $36.2 million at August 31, 1999 from $43.8 million at August
31, 1998.
Notes and contracts payable increased 27.5% to $104.6 million at August
31, 1999 from $82.0 million at August 31, 1998. There were increased borrowings
and no receivable sales, the proceeds of which are usually used to pay down
debt, during fiscal 1999.
Reserve for notes receivable sold with recourse decreased 37.1% to $4.2
million at August 31, 1999 from $6.7 million at August 31, 1998 due to the
reduced balance of the sold notes receivable.
Accrued income taxes decreased 21.6% to $3.5 million at August 31, 1999
from $4.5 million, due primarily to the fiscal 1999 tax benefit. The change in
certain income tax liability reserves was a result of utilization of net
operating losses and an ongoing review of the facts and circumstances.
Stockholders' equity increased to $21.8 million at August 31, 1999 from
$20.7 million at August 31, 1998 as a result of net income of $1.1 million
during fiscal 1999.
RECENTLY ISSUED/EFFECTIVE ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities",
which was amended by SFAS No. 137, issued in June 1999. SFAS 133 established
standards for accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. SFAS
133, as amended, is effective for fiscal years beginning after June 15, 2000.
The adoption will not have a material effect on the Company's financial
statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS 140). SFAS 140 replaces FASB Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" and
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001 and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 31, 2000.
Management does not believe that the adoption of SFAS 140 will have a material
effect on the financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides the SEC Staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company has adopted SAB 101 during fiscal year 2000 and the adoption has not had
a material effect on the financial statements.
24
<PAGE> 27
EFFECTS OF CHANGING PRICES AND INFLATION
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.
YEAR 2000 COMPLIANCE
The Company believes it is Year 2000 compliant. There have been no
significant problems experienced as a result of the occurrence of Year 2000
which have disrupted operations. The Company will continue to monitor its
operations for any Year 2000 problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's various business activities generate liquidity, market and credit
risk:
- liquidity risk is the possibility of being unable to meet all present
and future financial obligations in a timely manner.
- market risk is the possibility that changes in future market rates or
prices will make the Company's positions less valuable.
- credit risk is the possible loss from a customer's failure to perform
according to the terms of the transaction.
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates. Such information
includes fair values of the market risk sensitive instruments and contract terms
sufficient to determine future cash flows from those instruments, categorized by
expected maturity dates (thousands of dollars):
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-------------------------------------------------------------------------
THERE- FAIR
AUGUST 31, 2001 2002 2003 2004 2005 AFTER TOTAL VALUE
------------------------------- -------- -------- -------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest only receivables(a)
Fixed rate $ 308 $ 351 $ 399 $ 454 $ 517 $ 384 $ 2,413 $ 2,413
Average interest rate 13.01% 13.01% 13.01% 13.01% 13.01% 13.01%
Variable rate $ 32 $ 36 $ 41 $ 46 $ 52 $ 81 $ 288 $ 288
Average interest rate 12.11% 12.11% 12.11% 12.11% 12.11% 12.11%
LIABILITIES:
Notes and contracts payable(b)
Fixed rate $ 830 $ 251 $ 197 $ 1,278 $ 1,278
Average interest rate 10.67% 11.31% 8.68%
Variable rate $ 22,080 $ 3,086 $ 1,453 $ 11,654 $ 69,580 $107,853 $107,853
Average interest rate 11.50% 11.36% 11.46% 11.50% 11.30%
Subordinated debt(c)
Fixed rate $ 4,286 $ 4,286 $ 4,286
Average interest rate 10.00%
</TABLE>
(a) The fair value was estimated by discounting future cash flows of the
instruments using discount rates, default, loss and prepayment
assumptions based upon available market data, opinions from financial
advisors and portfolio experience.
(b) Notes payable generally are adjustable rate, indexed to the prime rate,
or to the 90-day London Interbank Offering Rate (LIBOR); therefore,
carrying value approximates fair value.
(c) Carrying value is approximately the same as fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
25
<PAGE> 28
The following Consolidated Financial Statements of the Company and its
subsidiaries are included herewith:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets at August 31, 2000 and 1999 F-3
Consolidated Income Statements - Years Ended August 31, 2000, 1999 and 1998 F-4 - F-5
Consolidated Statements of Stockholders' Equity - Years Ended August 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows - Years Ended August 31, 2000, 1999 and 1998 F-7 - F-8
Notes to Consolidated Financial Statements - Years Ended August 31, 2000, 1999 and 1998 F-9 - F-36
</TABLE>
All schedules are omitted because of the absence of conditions under
which they are required or because the required information is included in the
financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION (OF COMPANY UNLESS OTHERWISE NOTED)
--------------------------------------- --------- -----------------------------------------------------
<S> <C> <C>
Robert Nederlander 67 Chairman of the Board, Chief Executive Officer and
Director
Jerome J. Cohen 72 President and Director
Chairman of the Board, Chief Executive Officer and
President of PEC
Herbert B. Hirsch 64 Senior Vice President, Chief Financial Officer,
Treasurer and Director
Eugene I. Schuster 63 Vice President and Director
Wilbur L. Ross, Jr. 62 Director
John E. McConnaughy, Jr. 71 Director
Jon A. Joseph 53 Senior Vice President, General Counsel and Secretary
Charles G. Baltuskonis 50 Senior Vice President and Chief Accounting Officer
</TABLE>
Robert Nederlander has been the Chairman of the Board and Chief
Executive Officer of the Company since January 1988. Mr. Nederlander is the
Chairman of the Executive Committee and a member of the Audit Committee. Since
July 1995, Mr. Nederlander has served on the Board of Directors of Cendant
Corporation, formerly Hospitality Franchise Systems, Inc. (HFS). Mr. Nederlander
has been Chairman of the Board of Riddell Sports Inc. since April 1988 and was
Riddell Sports Inc.'s Chief Executive Officer from April 1988 through March
1993. From February 1992 until June 1992, Mr. Nederlander was also Riddell
Sports Inc.'s interim President and Chief Operating Officer. Since November
1981, Mr. Nederlander has been President and/or a director of the Nederlander
Organization, Inc., owner and operator of one the world's largest chains of
legitimate theaters. Since December 1998, Mr. Nederlander is co-managing member
of the Nederlander Co. LLC, operator of legitimate theaters in various cities
outside New York. Mr. Nederlander served as the Managing General Partner of the
New York Yankees Baseball Club from August 1990 until December 1991, and has
been a limited partner since 1973. Since October 1985, Mr. Nederlander has been
President of Nederlander Television and Film Productions, Inc.; and Chairman of
the Board of Allis-Chalmers Corp. from May 1989 to 1993, and from 1993 to 1996
as Vice Chairman. Mr. Nederlander remains a director of Allis-Chalmers Corp. Mr.
Nederlander was a director of MMC from September 1996 until June 1998. In
October 1996, Mr. Nederlander became a director of News Communications Inc., a
publisher of community oriented free circulation newspapers. Mr. Nederlander
does not currently serve on a full time basis in his capacities with the
Company.
Jerome J. Cohen has been the President and a Director of the Company
since 1988. Mr. Cohen serves as a member of the Executive Committee and is
Chairman of the Board, Chief Executive Officer and President of PEC. Mr. Cohen
served as Chairman of the Board of MMC from April 1995 to June 1998, as Chief
Executive Officer from June 1992 to September 1997 and as President from June
1992 to March 1995. From April 1992 to June 1997, Mr. Cohen was a director of
Atlantic Gulf Communities Inc., formerly known as General Development
Corporation, a publicly held company engaged in land development, land sales and
utility operations in Florida and Tennessee.
Herbert B. Hirsch has been the Senior Vice President, Chief Financial
Officer, Treasurer and a Director of the Company since 1988. Mr. Hirsch serves
as a member of the Executive Committee. Mr. Hirsch served as a director of MMC
from June 1992 to June 1998, and served as Vice President, Chief Financial
Officer and Treasurer of MMC from 1992 to September 1996.
Eugene I. Schuster has been a Vice President and a Director of the
Company since 1988. Mr. Schuster is a member of the Stock Option Committee. Mr.
Schuster has also been Chief Executive Officer and Chairman of the Board of
Directors of Venture Funding, Ltd., a business development corporation, since
its inception in May 1983. Since February 1986, Mr. Schuster has been the
President and Chief Executive Officer and a director of Quest BioTechnology,
Inc., a publicly held biotechnology research and development firm. Since
September 1985, Mr. Schuster has been a director of Wavemat, Inc., a publicly
held company engaged in the manufacture and sale of
27
<PAGE> 30
microwave equipment for advanced materials processing. Since January 1988, Mr.
Schuster has been the Chairman and from May 1988 through February 1995 was Chief
Executive Officer, of Cellex Biosciences, Inc., a publicly held manufacturer of
automated cell culture systems. Mr. Schuster is Chairman and Chief Executive
Officer of Art Renaissance, Inc., a privately held company which operates
several chains of retail art galleries. Mr. Schuster does not currently serve on
a full time basis in his capacities with the Company.
Wilbur L. Ross, Jr. has been a Director of the Company since 1984. Mr.
Ross serves as a member of the Audit, Stock Option and Executive Incentive
Compensation Committees. From August 1976 to April 2000, Mr. Ross was Executive
Managing Director of Rothschild Inc. and Chairman of Asia Recovery Fund. As of
April 1, 2000, he founded WL Ross & Co. LLC. He remains Chairman of Asia
Recovery Fund, as well as the former Rothschild Recovery Fund, now named WLR
Recovery Fund, and is Chairman of Asia Recovery Co-Investment Partners. Mr. Ross
is also a director of Casella Waste Systems Inc., Pacific Life Insurance Company
(Korea), Syms Corporation and News Communication Inc.
John E. McConnaughy, Jr. has been a Director of the Company since 1984.
Mr. McConnaughy serves as Chairman of the Audit Committee and a member of the
Stock Option and Executive Incentive Compensation Committees. Mr. McConnaughy
was Chairman and Chief Executive Officer of Peabody International Corp. from
1969 to 1986. He was Chairman and Chief Executive Officer of GEO International
Corp. (GEO), a nondestructive testing, screen printing and oil field services
company, from 1981 to 1992. GEO was spun off in 1981 and became publicly held.
Mr. McConnaughy has been a director of Oxigene, Inc., Texstar Corporation, MAI
Corporation, Akzona Corp., First Bank Corp. (New Haven), Beringer Co., Inc., the
Pullman Co., Moore McCormack Resources and Peabody International Corp. He is
currently on the Board of Directors of Transact International, Inc., DeVlieg
Bullard, Inc., Levcor International, Inc., Riddell Sports, Inc., Wave Systems,
Inc and Adrien Arpel, Inc. Mr. McConnaughy is on the Board of Trustees and
Executive Committee of the Strang Cancer Prevention Center and is Chairman of
the Board of the Harlem School of the Arts.
Jon A. Joseph, Senior Vice President, General Counsel and Secretary, has
been with the Company since June 1995. Mr. Joseph was Executive Vice President
of Valley Bank of Nevada from 1984 to 1991. In 1992, Valley Bank of Nevada was
acquired by Bank of America. Mr. Joseph remained with the legal department of
Bank of America until June 1, 1995, when he joined the Company.
Charles G. Baltuskonis, Senior Vice President and Chief Accounting
Officer, has been with the Company since March 1997. He is a certified public
accountant and served as Senior Vice President and Controller of Chase Federal
Bank from May 1995 to March 1997. Prior to that date, he was Chief Financial
Officer of F&C Bancshares and First Coastal Bank, a Senior Vice President -
Finance of Bank of New England, and was a Senior Manager with the public
accounting firm of Ernst & Young.
The following are other key employees of the Company:
Gregg A. McMurtrie was named Executive Vice President and Chief
Operating Officer of PEC in November 1998. Mr. McMurtrie joined the staff of PEC
in August 1982. From August 1982 to July 1987, Mr. McMurtrie served in various
capacities in the credit, internal auditing, marketing, customer relations,
sales and executive departments. He was General Manager, Colorado Land Sales,
from September 1987 to February 1989. Since September 1989, Mr. McMurtrie served
as Director of Sales Administration.
S. Duke Campbell, Senior Vice President, Marketing and Sales of PEC, has
been with the Company since July 1996. From 1995 to 1996, Mr. Campbell served as
a Principal at D.I.A.L. Pro Northwest, Inc., a value added reseller for several
customer management systems in the Northwest. Mr. Campbell served as Vice
President of Marketing and sales for Hostar International, Inc., a manufacturer
of innovative material management systems for hospitals, from 1991 to 1994. From
1989 to 1990, Mr. Campbell was the Senior Principal of Gulf American Financial
Services, Inc., a financial services company that specializes in receivables
management. Prior to 1990, Mr. Campbell served in various positions at Thousand
Trails, Inc., a Texas company that owns and operates member campground resorts.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's Directors and executive officers, and persons who own
more than ten percent of the Company's outstanding common stock, to file
28
<PAGE> 31
with the SEC initial reports of ownership and reports of changes in ownership of
common stock. Such persons are required by SEC regulation to furnish the Company
with copies of all such reports they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company all Section 16(a) filing requirements
applicable to its officers, Directors and greater than ten percent beneficial
owners have been satisfied.
ADDITIONAL INFORMATION CONCERNING OFFICERS AND DIRECTORS
The Company's officers are elected annually by the Board of Directors
and serve at the discretion of the Board of Directors. The Company's Directors
hold office until the next annual meeting of shareholders and until their
successors have been duly elected and qualified. The Company reimburses all
Directors for their expenses in connection with their activities as Directors of
the Company. Directors of the Company who are also employees of the Company do
not receive additional compensation for their services as Directors. Members of
the Board of Directors of the Company who are not employees of the Company
received an annual fee of $30,000 in calendar 1999 and were scheduled to receive
an annual fee of $40,000 for calendar 2000. Directors are reimbursed for their
expenses incurred in attending meetings of the Board of Directors and its
committees.
Effective as of September 23, 1998, the Company entered into
indemnification agreements with each of its Directors and a former officer,
which superseded indemnification agreements entered into by the Company and such
persons in April 1998. The new indemnification agreements provide certain
protections now afforded by the Company's Articles of Incorporation and By-laws
so that they cannot be changed without the consent of such Directors and
officer. In addition, such agreements clarify the procedures for obtaining
indemnification from the Company and require the Company to maintain directors
and officers insurance.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation earned by the Company's chief executive officer and each
of the four other most highly compensated executive officers (Named Executive
Officers), and the Chief Operating Officer of PEC, whose annual salary and bonus
during the fiscal years presented
29
<PAGE> 32
exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
-------------------------------------------- NUMBER OF
FISCAL OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(a) COMPENSATION GRANTED COMPENSATION(b)
--------------------------------------- ------ --------- ---------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert Nederlander,
Chairman of the Board, Chief 1998 $200,002 $ -- $ 6,373 2,083 $ 1,039
Executive Officer, MFC 1999 65,424(c) -- 5,901 833 --
Chairman of the Board, PEC 2000 30,769(c) -- -- -- --
Jerome J. Cohen,
President, MFC 1998 $300,002 $ -- $ 8,383 2,083 $ 2,644
Chairman of the Board, Chief Executive 1999 300,002 5,769 9,800 2,083 2,400
Officer and President, PEC 2000 300,002 92,667(a) -- -- --
Herbert B. Hirsch
Senior Vice President, Chief Financial 1998 $200,000 $ -- $ 2,005 833 $ 2,341
Officer and Treasurer, MFC 1999 200,000 3,486 2,335 1,666 2,809
Senior Vice President and Chief 2000 200,000 37,067(a) -- -- --
Financial Officer, PEC
Jon A. Joseph
General Counsel and Secretary, MFC 1999 $200,000 $ 1,923 $ 24,000 -- $ 2,838
Senior Vice President, PEC 2000 200,000 18,533(a) 24,000 -- --
Charles G. Baltuskonis
Senior Vice President and 1999 $117,500 $ 3,202 $ 12,000 833 $ 1,943
Chief Accounting Officer, MFC and PEC 2000 125,000 --(a) 5,860 -- --
Gregg A. McMurtrie
Executive Vice President 1999 $142,462 $ 5,885 $ 3,910 833 $ 2,172
and Chief Operating Officer, PEC 2000 150,000 --(a) 2,127 -- --
</TABLE>
(a) Incentive compensation is included in the fiscal year it is earned with
respect to contractual arrangements. Awards to other executives are
discretionary and have not as yet been determined by the Incentive
Compensation Committee for fiscal 2000.
(b) Represents the Company's discretionary matching contributions of 25% of
the employee's contribution to the Company's 401(k) Plan on behalf of
the employee.
(c) Prior to December 11, 1998, Mr. Nederlander earned an annual salary of
$200,000. On that date, his salary was suspended. In April 2000, Mr.
Nederlander's salary was reinstated at an annual rate of $100,000.
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options during fiscal 2000.
AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning
unexercised stock options held by the Named Executive Officers as of August 31,
2000. No stock options were exercised by the Named Executive Officers during
fiscal 2000. See "Stock Option Plan" below in this section.
30
<PAGE> 33
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT OPTIONS HELD AT
AUGUST 31, 2000 AUGUST 31, 2000(1)
------------------------ -------------------------------------------- --------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------ --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Robert Nederlander 999 1,917 $ -- $ --
Jerome J. Cohen 1,249 2,917 $ -- $ --
Herbert B. Hirsch 666 1,833 $ -- $ --
Jon A. Joseph 2,000 3,000 $ -- $ --
Charles G. Baltuskonis 832 1,667 $ -- $ --
Gregg A. McMurtrie 832 1,667 $ -- $ --
</TABLE>
(1) The closing sales price of the Company's Common Stock as reported on
the Nasdaq National Market on August 31, 2000 was $4.50. The exercise
price as of August 31, 2000 was $6.00 per share, therefore, the value
of the unexercised options at August 31, 2000 was zero.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Jerome J. Cohen, which
originally was to expire on January 31, 2002. The agreement provides for an
annual base salary of $300,000 plus a bonus of 2.5% of Incentive Income as
defined in the Company's Incentive Plan (See "Executive Incentive Compensation
Plan"). The Company's Board of Directors has authorized certain amendments to
the employment agreement which, among other things, extend its expiration date
to January 31, 2005. Under the agreement as amended, in the event (1) that the
Company determines to terminate Mr. Cohen's employment under the agreement, (2)
of a change in control of ownership of the Company or (3) of a sale of all or
substantially all of the Company's assets, the Company would be required to
enter into a termination agreement with Mr. Cohen under which he would receive a
termination payment of $750,000. The termination payment would be payable in 36
equal monthly installments except in the case of a further change in control of
ownership or sale of assets of the Company, in which case any unpaid balance of
the $750,000 would become payable in a lump sum.
The Company has entered into an employment agreement, which renews
annually unless either party gives notice of termination, with Jon A. Joseph.
The current expiration date of the employment agreement is December 31, 2001.
The employment agreement provides for an annual base salary of $200,000 plus .5%
of Incentive Income as defined in the Company's Incentive Plan. Further, in the
event of a change in control of ownership of the Company, as defined in the
employment agreement, Mr. Joseph would receive a separation payment of $200,000.
On September 2, 1997, the Board of Directors authorized agreements with
Mr. Herbert B. Hirsch and Mr. Don A. Mayerson, pursuant to which the Company
would pay them a separation payment of $150,000 and $250,000, respectively, at
such time as they no longer are employed by the Company. Payments of $10,000 per
month to Mr. Mayerson commenced, upon his retirement in December 1998, and the
final payment will be due in January 2001. Effective December 1998, Mr. Eugene
I. Schuster no longer receives a salary.
The Company has entered into a Compensation Agreement with S. Duke
Campbell dated August 26, 1999, which provides for an annual base salary of
$125,000. In addition, Mr. Campbell is to be paid, monthly, a sales commission
of one-quarter of one percent (0.25%) of net sales, occurring after September 1,
1999, and a Profit Contribution Bonus for reducing sales and marketing costs for
fiscal 2000. If Mr. Campbell's employment is terminated by the Company, other
than for cause, Mr. Campbell shall receive his base salary and sales commissions
to the date of termination, the portion of his Profit Contribution Bonus, if
any, earned through the immediately preceding quarter, and a severance payment
in an amount equal to his then current annual base salary. If Mr. Campbell
resigns or terminates his employment by the Company he will be entitled to his
base salary and sales commissions through the date of such termination. In
addition, after the end of fiscal 2000, a new arrangement relating to
profitability to take the place of the Profit Contribution Bonus will be agreed
upon and added to the agreement by amendment. If the Company and Mr. Campbell
have not agreed to such amendment to this agreement by November 30, 2000, and
Mr. Campbell has received or earned, a Profit Contribution Bonus for fiscal
2000, Mr. Campbell may elect to resign or terminate his employment by the
Company during the thirty-day period following November 30, 2000 and he then
shall be entitled to a severance payment in an amount equal to his then current
annual base salary in addition to his base salary and sales commissions through
the date of such termination.
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<PAGE> 34
STOCK OPTION PLAN
Under the Company's Stock Option Plan (Plan), as originally adopted,
87,500 shares of common stock were reserved for issuance upon exercise of
options. In calendar year 1997, the Company's Board of Directors and
shareholders approved an amendment to the Plan to increase by 83,333 shares the
number of shares of common stock reserved for issuance pursuant to the Plan. As
a result, an aggregate of 170,833 shares of common stock are reserved for
issuance pursuant to the Plan, including 76,833 shares which have been issued
upon exercise of options. During fiscal 1998, the Company's Board of Directors
unanimously approved, subject to approval by the Company's shareholders, the
amendment and restatement of the Plan. The amendments to the Plan approved by
the Company's Board of Directors consist of changes to permit the grant of
options to non-employee Directors of the Company and changes to conform the Plan
to changes to the federal securities laws. On September 16, 1998, the
shareholders approved the amendment and restatement of the Plan. The Plan is
designed to serve as an incentive for retaining qualified and competent
employees and Directors.
The Stock Option Committee of the Company's Board of Directors
administers and interprets the Plan and is authorized, in its discretion, to
grant options thereunder to all eligible employees of the Company, including
officers of the Company. The Plan provides for the granting of both "incentive
stock options" (as defined in Section 422A of the Internal Revenue Code) and
nonstatutory stock options. Options can be granted under the Plan on such terms
and at such prices as determined by the Board, or a committee thereof, except
that the per share exercise price of options may not be less than 80% of the
fair market value of the common stock on the date of grant, and, in the case of
an incentive stock option, the per share exercise price may not be less than
100% of such fair market value. In the case of incentive stock options granted
to a 10% shareholder, the per share exercise price may not be less than 110% of
the fair market value of the common stock on the date of grant and shall expire
five years from the date of grant. The aggregate fair market value of the shares
covered by incentive stock options granted under the Plan that become
exercisable by a grantee for the first time in any calendar year is subject to a
$100,000 limit.
Options granted under the Plan are exercisable after the period or
periods specified in the option agreement. Options granted under the Plan are
not exercisable after the expiration of ten years from the date of grant (except
five years in the case of options granted to 10% shareholders) and are not
transferable other than by will or by the laws of descent and distribution.
In September 1997, an additional 58,083 incentive stock options were
granted under the Plan to employees at fair market value. On September 23, 1998,
an additional 18,500 incentive stock options were granted under the Plan. In
addition, the exercise price of all options issued September 2, 1997 was revised
from $18.75 per share to $6.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has not designated a Compensation Committee, but
has delegated the responsibility and authority for setting and overseeing the
administration of policy which governs the compensation of all of the Company's
employees (with the exception of Messrs. Nederlander, Cohen, Hirsch and
Schuster) to its President, Mr. Cohen. The compensation paid to Messrs.
Nederlander, Cohen, Hirsch and Schuster is determined by the Board of Directors.
The Directors who are also executive officers of the Company do not participate
in deliberations of the Board of Directors of the Company concerning their own
compensation.
EXECUTIVE INCENTIVE COMPENSATION PLAN
On June 22, 1994, the Board of Directors of the Company approved and
adopted an Executive Incentive Compensation Plan (Incentive Plan) for executives
and other key employees of the Company and its subsidiaries who contribute to
the success of the Company. Under the terms of the Incentive Plan, awards of
incentive compensation are determined by the Incentive Compensation Committee of
the Board of Directors of the Company, which committee shall be composed of not
less than two members. The Incentive Plan provides that the Board of Directors
may amend, suspend or terminate the Incentive Plan at any time. Incentive
Compensation for any fiscal year is defined as an amount equal to 7.5% of
incentive income (Incentive Income) for such year. Incentive Income for any
fiscal year is defined as the amount reported as income before taxes in the
Consolidated Financial Statements of the Company for such year. The maximum
amount of all awards of Incentive Compensation for any fiscal year shall not
exceed (a) 7.5% of Incentive Income for such year, reduced by (b) the amount of
Incentive Income which must be paid by the Company to employees pursuant to any
contractual obligation of the Company, increased by (c) any unawarded Incentive
Compensation carried forward from a prior fiscal year.
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<PAGE> 35
The Board of Directors has also approved an employment agreement with
Mr. Cohen, President of the Company, and agreements with Mr. Hirsch and Mr.
Joseph, executive officers of the Company, pursuant to which Messrs. Cohen,
Hirsch and Joseph are entitled to receive 2.5%, 1% and .5%, respectively, of
Incentive Income of the Company, as defined in the Incentive Plan.
SPLIT-DOLLAR INSURANCE PLAN
On April 5, 1995, the Board of Directors of the Company established a
split-dollar life insurance plan (Split-Dollar Plan) pursuant to which the
Company was obligated to pay premiums for certain "second to die" life insurance
policies on the lives of Messrs. Nederlander, Cohen, and Hirsch, executive
officers and Directors of the Company, and their respective spouses, and for Don
A. Mayerson, former executive officer of the Company, originally for a period of
five years, at an annual aggregate premium outlay of $400,000. Each policy is in
the name of a trust established for family beneficiaries selected by each
executive. On August 3, 1995, the Company approved a life insurance policy for
Mr. Schuster at an annual cost of $100,000 per annum, originally for a period of
five years. Pursuant to the plan, and with respect to each policy, at the end of
ten years after issuance, or earlier upon the deaths of the respective insured
parties, or certain other events, the Company was to receive the amount of
premiums paid on the policy. Through December 31, 1998, $300,000 was paid on Mr.
Schuster's policy and $400,000 was paid on each of the others, leaving a balance
of premiums in the amount of $600,000 still owed by the Company on the policies.
Pursuant to an amendment to the original agreement, executed in April 1999,
future payments by the Company relating to the policies were waived by Messrs.
Nederlander, Cohen, Hirsch, Mayerson and Schuster. In consideration of the
waiver, the Company agreed to accept repayment of the lesser of the premiums
paid or the cash value of the policy, upon the deaths of the respective insured
parties.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 15, 2000, information
with respect to the beneficial ownership of the Company's common stock by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding shares of common stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers (as defined in "Item. 11 Executive
Compensation"), and (iv) all Directors and executive officers of the Company as
a group. Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares of
common stock beneficially owned by them.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF OUTSTANDING
BENEFICIAL OWNER OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) COMMON STOCK OWNED
----------------------------------------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Robert Nederlander(2) 356,556 10.2%
Eugene I. Schuster and Growth Realty Inc. (GRI)(3) 251,504 7.2%
Jerome J. Cohen(4) 185,242 5.3%
Herbert B. Hirsch(5) 271,575 7.7%
John E. McConnaughy, Jr.(6) 100,511 2.8%
Wilbur L. Ross, Jr.(7) 832 *
Jon A. Joseph(8) 3,083 *
Charles G. Baltuskonis(9) 1,332 --
Friedman Billings Ramsey Group, Inc. and affiliates(10) 611,718 17.5%
All Executive Officers and Directors as a Group 1,170,635 33.4%
(8 persons)(11)
</TABLE>
* Less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from November 15, 2000 upon the
exercise of options or warrants. Each beneficial owner's percentage
ownership is determined by assuming that options and warrants that are
held by such person (but not those held by any other person) and that
are exercisable within 60 days from the applicable date have been
exercised.
(2) 810 Seventh Avenue, 21st Floor, New York, New York 10019. Includes
41,666 shares held by an affiliate of Mr. Nederlander and 1,582 shares
issuable under an option granted pursuant to the Company's Stock Option
Plan. Does not include 16,666 shares of common stock owned by the Robert
E. Nederlander Foundation, an
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<PAGE> 36
entity organized and operated exclusively for charitable purposes (the
Foundation), of which Mr. Nederlander is President. Mr. Nederlander
disclaims beneficial ownership of the shares owned by the Foundation.
(3) 321 Fisher Building, Detroit, Michigan 48202. Consists of (i) 211,506
shares held of record by GRI, a wholly-owned subsidiary of Venture
Funding, Ltd. of which Mr. Schuster is a principal shareholder, Director
and Chief Executive Officer, (ii) 39,166 shares held of record by Growth
Realty Holdings L.L.C., a limited liability corporation owned by Mr.
Schuster, GRI and Mr. Schuster's three children, and (iii) 832 shares
issuable under an option granted pursuant to the Company's Stock Option
Plan.
(4) 1125 N. E. 125th Street, Suite 206, North Miami, Florida 33161. Includes
2,082 shares issuable under options granted pursuant to the Company's
Stock Option Plan. Excludes 15,583 shares owned by Mr. Cohen's spouse
and 83,333 shares owned by a trust for the benefit of his children over
which Mr. Cohen does not have any investment or voting power, as to
which he disclaims beneficial ownership. Also excludes 5,000 shares of
common stock owned by the Rita and Jerome J. Cohen Foundation, Inc., an
entity organized and operated exclusively for charitable purposes (the
Cohen Foundation), of which Mr. Cohen is President. Mr. Cohen disclaims
beneficial ownership of the shares owned by the Cohen Foundation.
(5) 230 East Flamingo Road, Las Vegas, Nevada 89109. Includes 1,165 shares
issuable under an option granted pursuant to the Company's Stock Option
Plan.
(6) 1011 High Ridge Road, Stamford, Connecticut 06905. Includes 1,499 shares
issuable under options granted pursuant to the Company's Stock Option
Plan. Excludes 500 shares owned by a member of Mr. McConnaughy's family,
as to which Mr. McConnaughy does not have any investment or voting
power, and as to which he disclaims beneficial ownership.
(7) 1251 Avenue of the Americas, 51st Floor, New York, New York 10020.
Consists of 832 shares issuable under an option granted pursuant to the
Company's Stock Option Plan. Excludes 2,500 shares owned by a member of
Mr. Ross' family and 41,666 shares owned by Rothschild, Inc., of which
Mr. Ross is a former Managing Director, over which Mr. Ross does not
have any investment or voting power and as to which he disclaims
beneficial ownership.
(8) 4310 Paradise Road, Las Vegas, Nevada 89109. Includes 3,000 shares
issuable under options granted pursuant to the Company's Stock Option
Plan.
(9) 4310 Paradise Road, Las Vegas, Nevada 89109. Consists of shares issuable
under options granted pursuant to the Company's Stock Option Plan.
(10) 1001 19th Street North, Arlington, VA. 22209. Based upon a Schedule 13G
dated July 13, 1998, as amended on February 15, 2000, filed jointly by
Friedman Billings Ramsey Group, Inc., Orkney Holdings, Inc., Eric F.
Billings, Emanuel J. Friedman and W. Russell Ramsey with the SEC.
Consists of 601,716 shares owned by Friedman Billings Ramsey Group, Inc.
and 10,002 shares owned personally by Emanuel J. Friedman. The Company
has been advised that Emanuel J. Friedman, Eric F. Billings and W.
Russell Ramsey are each control persons with respect to Friedman
Billings Ramsey Group, Inc. and are the sole voting trustees of the
Friedman Billings Ramsey Group, Inc. Voting Trust, which has sole
discretion to vote approximately 89.1%of the voting power of Friedman
Billings Ramsey Group, Inc.
(11) See Notes (2)-(9).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Purchase of Preferred Equities Corporation. Pursuant to a Stock Purchase
and Redemption Agreement dated October 6, 1987 and amended October 25, 1987,
Comay Corp., an affiliate of Mr. Cohen (Comay), GRI, an affiliate of Mr.
Schuster, RRE Corp., an affiliate of Mr. Nederlander (together with its
assignee, RER Corp., another affiliate of Mr. Nederlander, RER), and H&H
Financial Inc., an affiliate of Mr. Hirsch (H&H), obtained the rights (PEC
Purchase Rights) to acquire PEC, a privately-held Nevada corporation engaged in
retail land sales, resort time-sharing and other real estate related activities.
(Comay, GRI, RER and H&H are collectively referred to as the Assignors).
Certain Arrangements Between the Company and Affiliates of Certain
Officers and Directors. Pursuant to the Assignment and Assumption Agreement,
dated February 1, 1988 as subsequently amended, the Assignors assigned
(Assignment) their PEC Purchase Rights to the Company. As part of the
consideration for the Assignment to the Company, the Assignors were entitled to
receive from the Company, on a quarterly basis until January 31, 1995, amounts
equal in the aggregate to 63% of the "Unrestricted Cash Balances" of PEC. The
Assignment and Assumption Agreement defines Unrestricted Cash Balances of PEC as
the cash on hand and on deposit of PEC and its subsidiary as
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<PAGE> 37
of the end of a fiscal quarter that could be used to make a dividend or other
payment to the Company without violating the most restrictive loan agreement to
which PEC is a party or by which PEC is bound.
At January 31, 1995, when accrual of payments to assignors ceased, $13.3
million was payable to the Assignors. On March 2, 1995, the Assignors agreed to
defer payment of $10 million of the amounts due to them 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 (Subordinated Debt).
Warrants (Warrants) to purchase 166,666 shares of common stock, at an exercise
price of $25.50 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 balance of $3.3 million was paid to the assignors as follows:
$809,000 including interest of $59,000 in June 1995, and the balance of $2.6
million including interest of $45,000 in January 1997. The Warrants were
exercised in August 1997 in a non-cash transaction, whereby the Subordinated
Debt was reduced by $4.25 million. Interest on the Subordinated Debt was to be
paid semiannually at the rate of 10% per year starting September 1, 1995, and
the Subordinated Debt was to be repaid in semiannual principal payments
commencing March 1, 1997. On March 1, 1997, the Assignors received the first
semiannual principal payment of $1.4 million plus interest related to the
repayment of the Subordinated Debt. In connection with exercise of the Warrants,
payments aggregating $4.25 million were deemed paid and the semiannual payments
were scheduled to resume in March 1999, with a partial payment made in September
1998. The final $4.29 million was scheduled to be paid in 3 equal installments
on March 1, 1999, September 1, 1999 and March 1, 2000. In accordance with the
Eleventh Amendment to Assignment and Assumption Agreement, the principal
payments have been deferred until March 1, 2001. Interest of $429,000 on
Subordinated Debt was paid during fiscal 2000. The Subordinated Debt is
collateralized by a pledge of PEC's outstanding stock. Subsequent to August 31,
2000, an advance of $100,000 at the interest rate of 10% was made to Eugene I.
Schuster, an affiliate of one of the Assignors, against the amount owed to it.
In April 1995, PEC entered into an arrangement with Ramada, a subsidiary
of Cendant Corporation, of which Mr. Nederlander became a director in July 1995.
See "Business-Preferred Equities Corporation-Timeshare Properties and Sales."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Certain documents filed as part of Form 10-K. See Item 8 above for a
list of financial statements included as part of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K. The Company did not file any current report on Form
8-K during the quarter ended August 31, 2000.
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1(1) Disclosure Statement dated October 3, 1983, together with
Schedules A through G and Debtors' Plan, filed as Exhibit (2) to
Mego International (a predecessor of the Company) Form 10-K for
the year ended February 28, 1983, and incorporated herein by
reference.
2.2(8) Articles of Merger of Vacation Spa Resorts, Inc. with and into
Preferred Equities Corporation dated March 10, 1993, Agreement
and Plan of Merger dated as of July 24, 1992, among Preferred
Equities Corporation and Vacation Spa Resorts, Inc., Amendment to
Agreement and Plan of Merger dated July 14, 1992, and Amendment
to Agreement and Plan of Merger dated December 7, 1992.
3.1(a)(1) Certificate of Incorporation of the Company, as amended, filed as
Exhibit 3.1 to the Company's Form 10-K for the fiscal year ended
August 31, 1987 and incorporated herein by reference.
3.1(b)(5) Certificate of Amendment of the Certificate of Incorporation of
the Company, dated June 19, 1992.
3.1(c)(8) Certificate of Amendment of the Certificate of Incorporation of
the Company, dated August 26, 1993.
</TABLE>
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<PAGE> 38
<TABLE>
<S> <C>
3.2(1) By-laws of the Company, as amended.
10.4(a)(1) Stock Purchase Agreement dated October 25, 1987 by and among the
Company, and Robert Nederlander, Jerome J. Cohen, Don A.
Mayerson, Herbert Hirsch and Growth Realty Inc. (GRI)
(collectively, the Purchasers) filed as Exhibit A to a Schedule
13D dated October 25, 1987, filed by Jerome J. Cohen, et al., and
incorporated herein by reference.
10.4(b)(1) Letter dated January 7, 1988 from the Purchasers of the Company,
updating representations made by the Company, in the Stock
Purchase Agreement (Exhibit 10.5(a)) filed as Exhibit 10.2 to a
Current Report on Form 8-K of the Company, dated January 7, 1988,
and incorporated herein by reference.
10.5(a)(1) Assignment Agreement dated October 25, 1987 by and among Comay
Corp. (Comay), GRI, RER Corp. (RER) (as successor in interest to
RRE Corp.) and H&H Financial, Inc. (H&H) (collectively the
Assignors) and the Company, with respect to shares of Common
Stock of Preferred Equities Corporation (PEC), filed as Exhibit B
to a Schedule 13D dated October 25, 1987 filed by Jerome J.
Cohen, et al., and incorporated herein by reference.
10.5(b)(1) Assignment and Assumption Agreement dated February 1, 1988 by and
among the Assignors and the Company filed as Exhibit 10.2 to a
Current Report of Form 8-K of the Company, dated February 1, 1988
and incorporated herein by reference.
10.5(c)(1) Amendment to Exhibit 10.6(b) dated as of July 29, 1988 filed as
Exhibit 10.3 to a Current Report on Form 8-K of the Company,
dated August 1, 1988 and incorporated herein by reference.
10.6(a)(1) Stock Purchase and Redemption Agreement dated as of October 6,
1987 by and among PEC, Comay, GRI, RRE Corp., H&H, Linda Sterling
and the 1971 Rosen Family Stock Trust filed as Exhibit C to a
Schedule 13D dated October 25, 1987 filed by Jerome J. Cohen, et
al., and incorporated herein by reference.
10.6(b)(1) Amendment dated as of October 25, 1987 of Exhibit 10.7(a) filed
as Exhibit 10.3(b) to a Current Report on Form 8-K of the Company
dated February 1, 1988, and incorporated herein by reference.
10.7(1) Loan and Security Agreement dated February 1, 1988 by and between
the Company and Greyhound Real Estate Finance Company filed as
Exhibit 10.7 to a Current Report on Form 8-K of the Company dated
February 1, 1988 and incorporated herein by reference.
10.8(1) Pledge and Security Agreement dated February 1, 1988 by and among
the Company and Comay, GRI, REF, H&H and PEC regarding the pledge
of PEC stock pursuant to the Assignment Agreement and the
Assignment and Assumption Agreement (Exhibits 10.6(a) and (b))
filed as Exhibit 10.8 to the Form 8 Amendment dated April 18,
1988 to a Current Report on Form 8-K of the Company dated
February 1, 1988 and incorporated herein by reference.
10.9(1) Purchase Agreement dated June 30, 1988 by and among Preferred
Equities Corporation (PEC), Southern Colorado Properties, Inc.,
Colorado Land and Grazing Company and The Oxford Finance
Companies, Inc. filed as Exhibit 10.1 to a Quarterly Report of
the Company on Form 10-Q for the quarter ended May 31, 1988 and
incorporated herein by reference.
10.10(2) Amendment to Exhibit 10.5(b), dated July 29, 1988.
10.11(3) Amended and Restated Loan and Security Agreement between
Greyhound Real Estate Finance Company and Vacation Spa Resorts,
Inc., dated May 10, 1989 and Amended and Restated Promissory Note
and Guarantee and Subordination Agreement.
10.12(3) Amendment No. 2 to Loan and Security Agreement between Greyhound
Real Estate Finance Company and Vacation Spa Resorts, Inc., dated
April 16, 1990 and Amendment No. 2 to Promissory Note and
Guarantee and Subordination Agreement.
10.13(3) Purchase Agreement dated 24th day of September 1990 by and among
Brigantine Inn, Ltd., Brigantine Preferred Properties, Inc. and
Preferred Equities Corporation.
10.14(3) Purchase Agreement dated 24th day of September, 1990 by and among
Brigantine Villas, L.P., Brigantine Preferred Properties, Inc.,
and Preferred Equities Corporation.
10.15(4) Amendment No. 3 to Loan and Security Agreement between Greyhound
Real Estate Finance Company and Preferred Equities Corporation,
dated May 31, 1991 and Amendment No. 2 to Promissory Note.
10.16(4) Amendment No. 3 to Loan and Security Agreement between Greyhound
Real Estate Finance Company and Vacation Spa Resorts, Inc., dated
May 31, 1991 and Amendment No. 2 to Promissory Note.
</TABLE>
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<PAGE> 39
<TABLE>
<S> <C>
10.17(4) Loan and Security Agreement between Dorfinco Corporation and
Preferred Equities Corporation, dated July 31, 1991 and related
Promissory Note dated August 9, 1991.
10.18(4) Forbearance and Assumption Agreement, Guarantee and Second
Amendment to Loan and Security Agreement between Chemical Bank of
New Jersey, Brigantine Villas, L.P. and Brigantine Preferred
Properties, Inc., dated June 12, 1991, Amended and Restated
Promissory Note dated June 18, 1991, and Second Amendment to
Mortgage dated June 18, 1991.
10.19(5) Stock Purchase Agreement dated August 13, 1992 between the
Company and PEC.
10.20(5) Amendment No. 4 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated January 13, 1992, and
Amendment No. 3 to Amended and Restated Promissory Note.
10.21(5) Agreement to Wholesale Financing and related Promissory Note
between ITT Commercial Finance Corp. and Calvada Homes, Inc.,
dated January 17, 1992.
10.22(5) Purchase and Sale Agreement between Golden West Homes and Calvada
Homes, Inc., dated February 26, 1992.
10.23(5) Standard Form of Agreement between Owner and Contractor between
Calvada Homes, Inc. and Emfad Enterprises, Inc., dated March 23,
1992.
10.24(5) Loan Modification and Extension Agreement between Valley Bank of
Nevada and Preferred Equities Corporation dated January 30, 1992.
10.25(5) Amendment No. 2 to Amended and Restated Loan Agreement between
Valley Bank of Nevada and Vacation Spa Resorts, Inc., dated
February 20, 1992, and related Promissory Note dated February 20,
1992.
10.26(6) Purchase and Servicing Agreement dated as of October 15, 1992
among Vacation Spa Resorts, Inc. and Preferred Equities
Corporation as Sellers, Preferred Equities Corporation as
Servicer, and NBD Bank, N.A. as Purchaser.
10.27(6) Guaranty Agreement as of October 15, 1992 made by Vacation Spa
Resorts, Inc., Preferred Equities Corporation, and the Company in
favor of NBD Bank, N.A.
10.28(6) Letter from Greyhound Financial Corporation dated December 4,
1992 extending the borrowing term of the Amended and Restated
Loan and Security Agreement dated May 10, 1992, between Greyhound
Real Estate Finance Company and Preferred Equities Corporation
and Loan and Security Agreement dated March 30, 1989, between
Greyhound Real Estate Finance Company and Vacation Spa Resorts,
Inc., to December 31, 1992.
10.29(7) Asset Sale Agreement dated December 22, 1992, by and between
Brigantine Preferred Properties, Inc. as Seller, and The Oxford
Finance Companies as Buyer.
10.30(7) Amendment No. 5 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated February 23, 1993,
Amendment No. 4 to Loan and Security Agreement between Greyhound
Real Estate Finance Company and Vacation Spa Resorts, Inc., dated
February 23, 1993.
10.31(7) First Amendment to Stock Purchase Agreement dated March 10, 1993,
by and between the Company and Preferred Equities Corporation.
10.32(7) Amendment No. 6 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated June 28, 1993, and three
(3) related Promissory Notes, relating to the Grand Flamingo
Winnick, Grand Flamingo Fountains, and Preferred Equities
Corporation corporate offices.
10.33(7) Second Amendment to Loan and Security Agreement dated June 30,
1993, between Dorfinco Corp. and Preferred Equities Corporation,
and First Amendment to Promissory Note.
10.34(7) Agreement for Sale of Notes Receivable arising from Timeshares
sales dated August 3, 1993, by and between Brigantine Properties,
Inc. as Seller, and The Oxford Finance Companies as Buyer.
10.35(7) Purchase and Sale Agreement dated August 30, 1993, between
Preferred Equities Corporation as Developer, and Marine Midland
Bank, N.A., and Wellington Financial Corp.
10.36(7) Purchase Agreement dated August 31, 1993, between Mego Financial
Corp. as Seller, and Legg Mason Special Investment Trust as
Buyer, for the purchase of 300,000 shares of the Company's
Preferred Stock.
10.37(8) Amended and Restated Loan Agreement between Bank of America
Nevada and Preferred Equities Corporation dated September 10,
1993.
</TABLE>
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<TABLE>
<S> <C>
10.38(8) Agreement for Line of Credit and Commercial Promissory Note
between Mego Mortgage Corporation and First National Bank of
Boston, dated January 4, 1994.
10.39(8) Amendment No. 7 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated January 24, 1994.
10.42(8) Amendment No. 8 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated April 15, 1994.
10.43(8) Purchase and Servicing Agreement dated as of June 1, 1994,
between Preferred Equities Corporation as Seller and Servicer,
and NBD Bank, N.A. as Purchaser.
10.44(8) Purchase and Servicing Agreement dated as of July 6, 1994,
between Preferred Equities Corporation as Seller, and First
National Bank of Boston as Purchaser.
10.45(8) Amendment No. 9 to Amended and Restated Loan and Security
Agreement between Greyhound Real Estate Finance Company and
Preferred Equities Corporation, dated August 31, 1994, and
Amendment No. 4 to Amended and Restated Promissory Note dated
August 31, 1994, Amendment No. 6 to Loan and Security Agreement
between Greyhound Real Estate Finance Company and Preferred
Equities Corporation dated August 31, 1994, and Amendment No. 4
to Promissory Note dated August 31, 1994, between Preferred
Equities Corporation as successor-in-interest to Vacation Spa
Resorts, Inc., and Greyhound Financial Corporation.
10.47(9) Third Amendment to Loan and Security Agreement and Assumption
Agreement dated August 23, 1994, by and between Preferred
Equities Corporation, Colorado Land and Grazing Corp. and
Dorfinco Corporation.
10.48(9) General Loan and Security Agreement dated October 5, 1994,
between Steamboat Suites, Inc. and Textron Financial Corporation.
10.49(9) Purchase and Servicing Agreement, Second Closing, dated November
29, 1994, between Preferred Equities Corporation and NBD Bank,
N.A.
10.50(9) Form of Agreement with respect to the Company's "Split-Dollar"
Life Insurance Plan, including Form of Assignment of Limited
Interest in Life Insurance as Collateral Security.
10.51(9) Construction Loan Agreement dated January 20, 1995, by and
between Preferred Equities Corporation and NBD Bank.
10.52(9) Amendment No. 10 to Amended and Restated Loan and Security
Agreement dated January 26, 1995, by and between Greyhound
Financial Corporation and Preferred Equities Corporation.
10.53(9) Loan Agreement re: Calvada Golf Course dated January 31, 1995, by
and among The First National Bank of Boston and Preferred
Equities Corporation.
10.54(9) Second Amendment to Assignment and Assumption Agreement dated
March 2, 1995, by and between RER Corp., Comay Corp., Growth
Realty, Inc. and H&H Financial, Inc. and Mego Financial Corp.
10.55(9) First Amendment to General Loan and Security Agreement dated
February 27, 1995, between Steamboat Suites, Inc. and Textron
Financial Corporation.
10.56(9) Master Loan Purchase and Servicing Agreement dated April 1, 1995,
by and between Greenwich Capital Financial Products, Inc. and
Mego Mortgage Corporation.
10.57(9) Licensing Agreement dated April 18, 1995, by and among
Hospitality Franchise Systems, Inc., Ramada Franchise Systems,
Inc. and Preferred Equities Corporation.
10.58(9) Purchase and Servicing Agreement, Third Closing, dated May 24,
1995, between NBD Bank, N.A. and Preferred Equities Corporation.
10.60(9) Purchase and Servicing Agreement, dated as of August 31, 1995,
between Preferred Equities Corporation, Colorado Land and Grazing
Corp. and First National Bank of Boston.
10.63(10) Form of Tax Allocation and Indemnity Agreement entered into
between Mego Mortgage Corporation and the Company.
10.64(10) Loan Program Sub-Servicing Agreement between Mego Mortgage
Corporation and Preferred Equities Corporation dated as of
September 1, 1996.
10.74(10) Office Lease by and between MassMutual and Mego Mortgage
Corporation dated April 1996.
10.77(10) Services and Consulting Agreement between Mego Mortgage
Corporation and Preferred Equities Corporation dated as of
September 1, 1996.
10.83(10) Form of Agreement entered into between Mego Mortgage Corporation
and Mego Financial Corp.
</TABLE>
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<TABLE>
<S> <C>
10.85(12) Amendment No. 11 to Amended and Restated Loan and Security
Agreement dated September 22, 1995, by and between Finova Capital
Corporation and Preferred Equities Corporation and related
Promissory Note relating to Aloha Bay Phase II.
10.86(12) Amendment No. 12 to Amended and Restated Loan and Security
Agreement dated September 29, 1995, by and between Finova Capital
Corporation and Preferred Equities Corporation and Amended and
Restated Promissory Note relating to Corporate Office Building.
10.87(12) Fourth Amendment to Loan and Security Agreement and Assumption
Agreement dated September 30, 1995, by and between Preferred
Equities Corporation, Colorado Land and Grazing Corp., Mego
Financial Corp. and Dorfinco Corporation.
10.88(12) Request for Receivables Purchase dated November 16, 1995, by and
between Preferred Equities Corporation as Seller and NBD Bank as
Purchaser.
10.89(12) Second Amendment to General Loan and Security Agreement dated
November 30, 1995, by and between Steamboat Suites, Inc. and
Textron Financial Corporation and Restated and Amended
Receivables Promissory Note.
10.90(12) Amendment No. 13 to Amended and Restated Loan and Security
Agreement dated December 13, 1995, by and between Finova Capital
Corporation and Preferred Equities Corporation and three (3)
related Promissory Notes, relating to the Grand Flamingo Towers
Lobby, Ida and Winnick Building Additions.
10.91(12) Purchase and Sale Agreement dated December 29, 1995, by and
between Overlook Lodge Limited Liability Company as Seller and
Preferred Equities Corporation as Purchaser.
10.92(12) Second Amendment to Purchase and Sale Agreement dated February 8,
1996, as previously amended by an Amendment to Purchase and Sale
Agreement dated May 10, 1994, between Preferred Equities
Corporation, Marine Midland Bank, and Wellington Financial Corp.
10.93(12) Acquisition and Construction Loan Agreement dated March 27, 1996,
by and between Heller Financial, Inc. and Preferred Equities
Corporation and three (3) related Promissory Notes; Acquisition
Promissory Note, Revolving Renovation Promissory Note, and
Receivables Promissory Note.
10.94(12) Construction Loan Agreement dated April 30, 1996, by and between
Preferred Equities Corporation and NBD Bank and related
Promissory Note.
10.95(12) Amendment No. 14 to Amended and Restated Loan and Security
Agreement dated June 5, 1996, by and between Finova Capital
Corporation and Preferred Equities Corporation and Second Amended
and Restated Promissory Note, relating to Headquarters and FCFC
Property.
10.96(12) Amendment No. 15 to Amended and Restated Loan and Security
Agreement dated August 16, 1996, by and between Finova Capital
Corporation and Preferred Equities Corporation; Amendment No. 7
to Loan and Security Agreement; Amendment No. 5 to Amended and
Restated Promissory Note; Amendment No. 5 to Promissory Note;
Amendment No. 1 to Promissory Note [Towers Lobby].
10.97(12) Request for Receivables Purchase dated July 30, 1996, by and
between Preferred Equities Corporation as Seller and NBD Bank as
Purchaser.
10.98(12) Preferred Stock redemption agreement by and between Mego
Financial Corp. and Legg Mason Special Investment Trust, Inc.
10.99(12) Amendment to Common Stock Purchase Warrant issued by Mego
Financial Corp. to Legg Mason Special Investment Trust, Inc.
10.100(14) Third Amendment to General Loan and Security Agreement dated
November 29, 1996 between Steamboat Suites, Inc. as Debtor and
Textron Financial Corporation as Lender and the related Restated
and Amended Receivables Promissory Note dated November 30, 1996
effective October 6, 1994.
10.101(14) Fifth Amendment to Loan and Security Agreement dated November 29,
1996 by and among Preferred Equities Corporation and Colorado
Land and Grazing Corp. as Borrower; Mego Financial Corp. as
Guarantor; and Dorfinco Corporation as Lender and the related
Fourth Amendment to Promissory Note dated November 29, 1996.
10.102(14) Acquisition and Renovation Loan Agreement dated August 6, 1996
between Heller Financial, Inc. as Lender and Preferred Equities
Corporation as Borrower; and Interval Receivables Loan and
Security Agreement dated August 6, 1996 by and among Heller
Financial, Inc. as Lender and Preferred Equities Corporation as
Borrower and Mego Financial Corp. as Guarantor, and the three
related Promissory Notes.
</TABLE>
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<TABLE>
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10.103(15) Subdivision Improvement Agreement dated March 7, 1995 between
Preferred Equities Corporation and the Board of County
Commissioners of the County of Nye, State of Nevada
10.104(15) Subdivision Improvement Agreement dated February 20, 1996 between
Preferred Equities Corporation and the Board of County
Commissioners of the County of Nye, State of Nevada
10.105(15) Subdivision Improvement Agreement dated February 20, 1996 between
Preferred Equities Corporation and the Board of County
Commissioners of the County of Nye, State of Nevada
10.106(15) Subdivision Improvement Agreement dated December 17, 1996 between
Preferred Equities Corporation and the Board of County
Commissioners of the County of Nye, State of Nevada
10.107(15) Subdivision Improvement Agreement dated December 17, 1996 between
Preferred Equities Corporation and the Board of County
Commissioners of the County of Nye, State of Nevada
10.108(15) Subdivision Improvement Agreement dated December 17, 1996 between
Preferred Equities Corporation and the Board of County
Commissioners of the County of Nye, State of Nevada
10.109(15) Subdivision Improvement Agreement dated December 17, 1996 between
Preferred Equities Corporation and the Board of County
Commissioners of the County of Nye, State of Nevada
10.110(15) Subdivision Improvement Agreement dated December 17, 1996 between
Preferred Equities Corporation and the Board of County
Commissioners of the County of Nye, State of Nevada
10.112(15) Employment Agreement between Mego Financial Corp. and Irving J.
Steinberg dated August 1, 1996.
10.113(16) Employment Agreement between Jerome J. Cohen and Mego Financial
Corp. dated September 1, 1996.
10.114(16) Purchase and Servicing Agreement between Preferred Equities
Corporation as Seller and BankBoston, N.A. as Purchaser dated May
30, 1997.
10.115(16) Second Amended and Restated and Consolidated Loan and Security
Agreement between Preferred Equities Corporation as Borrower and
FINOVA Capital Corporation as lender, dated May 15, 1997.
10.116(16) Form of Owners Association Agreement between Resort Condominiums
International, Inc. and Homeowners Associations with schedule
listing the associations.
10.127(13) Agreement between Mego Financial Corp. and Mego Mortgage
Corporation dated August 29, 1997.
10.128(17) Sub-Servicing Agreement dated September 1, 1996, as amended
September 2, 1997, between Mego Financial Corp., Mego Mortgage
Corporation and Preferred Equities Corporation.
10.129(17) Third Amendment to Assignment and Assumption Agreement by and
between RER Corp., Comay Corp., Growth Realty, Inc. and H&H
Financial, Inc. and Mego Financial Corp. dated August 20, 1997.
10.130(17) Loan and Security Agreement between Litchfield Financial
Corporation and Preferred Equities Corporation dated July 30,
1997.
10.132(17) Employment Agreement between Jon A. Joseph and Mego Financial
Corp. dated August 31, 1997.
10.133(17) Agreement between the Company and Herbert B. Hirsch dated
September 2, 1997 relating to a severance payment.
10.134(17) Agreement between the Company and Don A. Mayerson dated September
2, 1997 relating to a severance payment.
10.135(17) Amendment to Services and Consulting Agreement between Mego
Mortgage Corporation and Preferred Equities Corporation dated
January 20, 1998.
10.136(17) Amendment to Loan Program Sub-Servicing Agreement between Mego
Mortgage Corporation and Preferred Equities Corporation dated
January 20, 1998.
10.137(17) Agreement between Mego Mortgage Corporation and Preferred
Equities Corporation, dated February 9, 1998, regarding
assignment of rights related to the Loan Program Sub-Servicing
Agreement to Greenwich Capital Markets, Inc.
10.138(17) Mortgage Loan Facility Agreement between FINOVA Capital
Corporation and Preferred Equities Corporation dated February 18,
1998.
10.139(18) Termination of Services and Consulting Agreement between Mego
Mortgage Corporation and Preferred Equities Corporation, dated
April 22, 1998.
10.140(18) Settlement letter from Mego Financial Corp. to Mego Mortgage
Corporation dated June 26, 1998.
</TABLE>
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<PAGE> 43
<TABLE>
<S> <C>
10.141(18) Settlement letter from Preferred Equities Corporation to Mego
Mortgage Corporation dated June 26, 1998.
10.142(23) Amended and Restated Real Estate Purchase and Sales Agreement by
and among Preferred Equities as borrower and Mercantile Equities
Corporation and Hartsel Springs Ranch of Colorado, Inc., as Note
holder dated as of November 25, 1997.
10.143(23) Letter Amendment to General Loan and Security Agreement dated
December 1, 1997, between Steamboat Suites, Inc. and Textron
Financial Corporation.
10.144(23) Mortgage Loan Facility Agreement between FINOVA Capital
Corporation and Preferred Equities Corporation dated March 20,
1998.
10.145(23) Loan and Security Agreement dated August 12, 1998 between
Preferred Equities Corporation as Borrower and Dorfinco
Corporation as Lender and the related Promissory Note.
10.146(23) Post-72 Lots Purchase Money Promissory Note by and among
Preferred Equities and Mercantile Equities Corporation and
Hartsel Springs Ranch of Colorado, Inc. dated as of February 20,
1998.
10.147(23) Purchase Money Promissory Note by and among Preferred Equities as
borrower and Mercantile Equities Corporation and Hartsel Springs
Ranch of Colorado, Inc., as Noteholder dated as of February 20,
1998.
10.148(23) Compensation Agreement between Frederick H. Conte and Preferred
Equities Corporation dated September 1, 1998.
10.149(23) Form of Indemnification Agreement, each dated as of September 23,
1998 between the Company and each of Robert Nederlander, Jerome
J. Cohen, Eugene I. Schuster, Herbert B. Hirsch, John E.
McConnaughy, Jr., Wilbur L. Ross, Jr. and Don A. Mayerson.
10.150(20) Amended and Restated and Consolidated Loan and Security Agreement
between Finova and PEC & Mego Financial dated December 23, 1998
10.151(20) Common Stock Purchase Warrant issued by Mego Financial to Finova
Capital Corporation dated December 23, 1998.
10.152(21) First Amended and Restated and Consolidated Promissory Note dated
as of November 5, 1998 between FINOVA Capital Corporation and
Preferred Equities Corporation relating to Aloha Bay Phase I.
10.153(21) Third Amended and Restated Promissory Note dated as of September
29, 1998 by and between FINOVA Capital Corporation and Preferred
Equities Corporation relating to the Headquarters and FCFC
Property.
10.154(21) Amendment No. 4 to Second Amended and Restated and Consolidated
Loan and Security Agreement dated as of November 6, 1998 between
Finova Capital Corporation and Preferred Equities Corporation.
10.155(21) Amendment No. 4 to Second Amended and Restated and Consolidated
Loan and Security Agreement dated as of November 6, 1998 between
Greyhound Real Estate Finance Company and Preferred Equities
Corporation.
10.156(21) Amended and Restated Guarantee and Subordination Agreement dated
as of September 29, 1998 between Greyhound Real Estate Finance
Company and Mego Financial Corporation relating to the
Headquarters Re-advance.
10.157(21) First Amended and Restated Promissory Note dated as of November
6, 1998 between FINOVA Capital Corporation and Preferred Equities
Corporation relating to the IDA Building Addition.
10.158(21) Letter Agreement dated as of September 29, 1998 between FINOVA
Capital Corporation and Preferred Equities Corporation relating
to the Headquarters Re-advance.
10.159(21) Additional Advance Note dated as of November 6, 1998 between
FINOVA Capital Corporation and Preferred Equities Corporation
relating to Aloha Bay Phase II.
10.160(21) Request for Advance and Disbursement Instructions dated as of
November 11, 1998 between FINOVA Capital Corporation and
Preferred Equities Corporation.
10.161(21) First Amended and Restated Promissory Note dated as of November
6, 1998 between FINOVA Capital Corp. and Preferred Equities
Corporation relating to the Winnick Building Addition.
10.162(21) Fourth Amendment to Assignment and Assumption Agreement dated as
of February 26, 1999 by and between RER Corp, COMAY Corp., Growth
Realty Inc. and H & H Financial, Inc. and Mego Financial
Corporation.
10.163(21) Amended and Restated Stock Option Plan dated September 16, 1998
for Mego Financial Corp.
</TABLE>
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<PAGE> 44
<TABLE>
<S> <C>
10.164(22) Amendment No.2 to Interval Receivables Loan and Security
Agreement dated as of March 28, 1999 between Heller Financial,
Inc. and Preferred Equities Corporation.
10.165(22) Sales Agreement dated as of March 8, 1999 between Great Escape
Marketing, Inc. and Preferred Equities Corporation relating to
6950 Villa de Costa Dr. Orlando, Florida.
10.166(22) Sales Agreement dated as of March 10, 1999 between D&D Marketing,
Inc. and Preferred Equities Corp and Brigantine Preferred
Properties.
10.167(22) Forbearance and Modification Agreement dated as of May 7, 1999 by
and between Preferred Equities Corporation and Heller Financial,
Inc.
10.168(22) Management Agreement dated May 20, 1999 by and between Hotel
Maison Pierre Lafitte, LTD. Owners Association, Inc. and
Preferred Equities Corporation.
10.169(22) Fifth Amendment to Assignment and Assumption Agreement dated May
28, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc.
and H&H Financial, Inc. and Mego Financial Corp.
10.170(22) Amendment No. 2 to Severance Agreement, and Consulting Agreement
dated June 18, 1999 between Don A. Mayerson and Mego Financial
Corp.
10.171(22) First Amendment to Forbearance Agreement and Amendment No. 6 to
Second Amended and Restated and Consolidated Loan and Security
Agreement dated May 7, 1999 by and among Finova Capital
Corporation, Preferred Equities Corporation and Mego Financial
Corp.
10.172(24) Sixth Amendment to Assignment and Assumption Agreement dated May
28, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc.
and H&H Financial, Inc. and Mego Financial Corp.
10.173(24) Forbearance Agreement dated August 6, 1999 among Preferred
Equities, and Mego Financial Corporation and Litchfield Financial
Corporation.
10.174(24) Purchase and Sale Agreement between The Villas at Monterey
Limited Partnership and Tango Bay of Orlando and Preferred
Equities Corporation regarding Ramada Suites at Tango Bay
Orlando.
10.175(24) Extension dated September 7, 1999 to the Second Amendment to
Forbearance Agreement and Amendment No. 7 to Second Amended and
Restated Consolidated Loan and Security Agreement dated December
23, 1998 between Preferred Equities Corporation and Finova
Capital Corporation.
10.176(24) Purchase and Security Agreement dated June 11, 1999 between
Preferred Equities Corporation and Preferred RV Resort Owners
Association regarding the Preferred RV Resort.
10.177(24) Forbearance Agreement and Amendment No. 5 to Second Amended and
Restated and Consolidated Loan and Security Agreement dated
December 23, 1998 between Finova Capital Corporation and
Preferred Equities Corp.
10.178(24) Letter Agreement dated February 8, 1999 between Preferred
Equities Corporation and Finova Capital Corporation regarding
additional agreements to the Forbearance Agreement and Amendment
No. 5 to Second Amended and Restated Consolidated Loan and
Security Agreement dated December 23, 1998.
10.179(24) Amendment No. 3 to Severance Agreement and Consulting Agreement
between Mego Financial Corp. and Don A. Mayerson dated September
28, 1999.
10.180(24) Compensation Agreement between S. Duke Campbell and Preferred
Equities Corporation dated July 27, 1998.
10.181(24) Amendment dated October 15, 1999 to the General Loan and Security
Agreement Inventory Advance between Preferred Equities
Corporation and Textron Financial Corporation dated October 5,
1994.
10.182(24) Amendment dated April 26, 1999 to the Agreement made January 1,
1995 between Mego Financial Corp. and Herbert A. Krasow, as
Trustee of the Herbert B. Hirsch Property Trust Insurance Trust
dated October 22, 1990 regarding the Agreement concerning
"Split-Dollar" Life Insurance Plan.
10.183(24) Amended Assignment of Limited Interest in Life Insurance as
Collateral Security dated April 26, 1999 to an Assignment made as
of January 1, 1995 by Herbert A. Krasow, as Trustee of the
Herbert B. Hirsch Property Trust Insurance Trust, dated October
22, 1990 to Mego Financial Corp.
</TABLE>
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<TABLE>
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10.184(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan
dated April 26, 1999 to the Agreement made January 1, 1995,
between Mego Financial Corp., Lawrence J. Cohen and Clifford A.
Schulman as Trustees of the Cohen 1994 Insurance Trust dated
December 2, 1994, Jerome J. Cohen and Rita Cohen.
10.185(24) Amended Assignment of Limited Interest in Life Insurance as
Collateral Security dated April 26, 1999 to an Assignment made as
of January 1, 1995, by Lawrence J. Cohen and Clifford A.
Schulman, as Trustees of the Cohen 1994 Insurance Trust dated
December 21, 1994 to Mego Financial Corp.
10.186(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan
dated April 23, 1999 to the Agreement made as of June 1, 1995
between Mego Financial Corp, Joseph A. Schuster, as Trustee of
the Eugene I Schuster Irrevocable Trust - dated May 30 1995, and
Eugene I. Schuster.
10.187(24) Amended Assignment of Limited Interest in Life Insurance as
Collateral Security dated April 23, 1999 to an Assignment made as
of June 1, 1995, by Joseph A. Schuster, as Trustee of the Eugene
I. Schuster Irrevocable Trust - Mego, dated May 30, 1995 to Mego
Financial Corp.
10.188(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan
dated April 26, 1999 to the Agreement made January 1, 1995
between Mego Financial Corp., Tracy Allen, and Jane Gerard, as
Trustees of the Nederlander 1994 Insurance Trust, dated December
19, 1994, Robert e. Nederlander and Gladys Nederlander.
10.189(24) Amended Assignment of Limited Interest in Life Insurance as
Collateral Security Amendment made April 26, 1999 to as
Assignment made January 1, 1995 by Tracy Allen and Jane Gerard,
as Trustees of the Nederlander 1994 Insurance Trust, dated
December 19, 1994 to Mego Financial Corp.
10.190(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan
Amendment made as of April 26, 1999 to the Agreement made as of
January 1, 1995, between Mego Financial Corp., Gary Steven
Mayerson and Robert Keith Mayerson, as Trustees of the Mayerson
1994 Insurance Trust, dated December 21, 1994, Don A. Mayerson
and Evelyn W. Mayerson.
10.191(24) Amended Assignment of Limited Interest in Life Insurance as
Collateral Security Amendment made April 26, 1999 to an
Assignment made January 1, 1995, by Gary Steven Mayerson and
Robert Keith Mayerson, as Trustees of the Mayerson 1994 Insurance
Trust, dated December 21, 1994 to Mego Financial Corp.
10.192(24) Seventh Amendment to Assignment and Assumption Agreement by and
between RER Corp., Comay Corp., Growth Realty Inc. and H&H
Financial, Inc. and Mego Financial Corp. dated November 20, 1999.
10.193(25) Purchase and Sale Agreement dated October 6, 1999 between
Preferred Equities Corporation and Covington Nevada Corp
regarding the Sale of Calvada Championship Golf Course and
Calvada Executive Golf Course.
10.194(25) Amendment No. One to Third Amended and Restated Promissory Note -
Headquarters and FCFC Property dated November 9, 1999 between
Preferred Equities Corporation and Finova Capital Corporation.
10.195(25) Amendment No. One to Promissory Note - Additional Advances dated
November 9, 1999 between Preferred Equities Corporation and
Finova Capital Corporation.
10.196(25) Third Amendment to Forbearance Agreement and Amendment No. 8 to
Second Amended and Restated and Consolidated Loan and Security
Agreement dated November 9, 1999, by and among Finova Capital
Corporation, Preferred Equities Corporation, and Mego Financial
Corp.
10.197(25) Fourth Amendment to Forbearance Agreement and Amendment No. 9 to
Second Amended and Restated and Consolidated Loan and Security
Agreement dated December 17, 1999 by and among Finova Capital
Corporation, Preferred Equities Corporation, and Mego Financial
Corp.
10.198(25) Second Amendment to Deed of Trust - Hartsel Springs Ranch dated
December 17, 1999 by and among Preferred Equities Corporation and
Finova Capital Corporation.
10.199(26) Fifth Amendment to Forbearance Agreement and Amendment Number 10
to Second Amended and Restated and Consolidated Loan and Security
Agreement dated as of February 25, 2000 by and among FINOVA
Capital Corporation, Preferred Equities Corporation, and Mego
Financial Corp.
10.200(26) Eighth Amendment to Assignment and Assumption Agreement by and
between RER Corp., COMAY Corp., Growth Realty Inc. and H&H
Financial Inc., and Mego Financial Corp., dated January 31, 2000.
</TABLE>
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<TABLE>
<S> <C>
10.201(26) Amended, Restated and Increased Receivables Promissory Note No. 1
by Preferred Equities Corp. to Heller Financial, Inc. dated
December 22, 1999.
10.202(26) Amended, Restated and Consolidated Acquisition Promissory Note
No. 1 by Preferred Equities Corp. to Heller Financial, Inc. dated
December 22, 1999.
10.203(26) Fourth Amendment to Interval Receivables Loan and Security
Agreement dated December 22, 1999 between Heller Financial, Inc.,
and Preferred Equities Corporation.
10.204(26) Third Amendment to Acquisition and Construction Loan Agreement
dated December 22, 1999 between Heller Financial, Inc., and
Preferred Equities Corporation.
10.205(26) General Loan and Security Agreement (Inventory Loan) executed
December 17, 1999 by and among Textron Financial Corp., Preferred
Equities Corp. and Steamboat Suites, Inc.
10.206(26) General Loan and Security Agreement (Receivable Loan Facility)
executed December 17, 1999 by and among Textron Financial Corp.,
Preferred Equities Corp. and Steamboat Suites, Inc.
10.207(26) Sixth Amendment to Forbearance Agreement and Amendment No. 11 to
Second Amended and Restated and Consolidated Loan and Security
Agreement dated March 31, 2000 by and among Finova Capital
Corporation, Preferred Equities Corporation and Mego Financial
Corp.
10.208(27) Amendment No. 4 to Severance Agreement and Consulting Agreement
dated December 30, 1999 by and between Mego Financial Corp. and
Don A. Mayerson.
10.209(27) Amendment No. 5 to Severance Agreement and Consulting Agreement
dated May 20, 2000 by and between Mego Financial Corp. and Don A.
Mayerson.
10.210 (27) Ninth Amendment to Assignment and Assumption Agreement by
and between RER Corp., COMAY Corp., Growth Realty Inc. and H&H
Financial, Inc. and Mego Financial Corp. dated April 30,2000.
10.211 Seventh Amendment to Forbearance Agreement and Amendment No. 12
to Second Amended and Restated and Consolidated Loan and Security
Agreement dated July 20, 2000 by and among FINOVA Capital
Corporation, Preferred Equities Corporation and Mego Financial
Corp.
10.212 Second Amendment to Loan and Security Agreement between
Litchfield Financial Corporation and Preferred Equities
Corporation dated July 15, 2000.
10.213 Tenth Amendment to Assignment and Assumption Agreement by and
between RER Corp., COMAY Corp., Growth Realty Inc. and H&H
Financial, Inc. and Mego Financial Corp. dated August 31, 2000.
10.214 Fourth Amendment to Acquisition and Construction Loan Agreement
dated September 7, 2000 between Heller Financial, Inc., and
Preferred Equities Corporation.
10.215 ISDA Master Swap Agreement between Sovereign Bank and Preferred
Equities Corporation dated August 31, 2000.
10.216 Five year extension of Licensing Agreement dated April 18, 1995,
by and among Hospitality Franchise Systems, Inc., Ramada
Franchise Systems, Inc. and Preferred Equities Corporation.
10.217 Extension of Loan and Security Agreement dated August 12, 1998
between Dorfinco Corporation and Preferred Equities Corporation
to December 31, 2001.
10.218 Master Lease Agreement and Guaranty of Lease among Jozac Business
Center, LLC, Landlord; Preferred Equities Corporation, Tenants;
and Mego Financial Corporation, Guarantor, for 4310 Paradise
Road, Las Vegas, NV dated October 2, 2000.
10.219 Master Lease Agreement and Guaranty of Lease among Jozac Business
Center, LLC, Landlord; Preferred Equities Corporation, Tenants;
and Mego Financial Corporation, Guarantor, for 1500 Tropicana,
Las, Vegas, NV dated November 9, 2000.
10.220 Eleventh Amendment to Assignment and Assumption Agreement by and
between RER Corp., COMAY Corp., Growth Realty Inc. and H&H
Financial, Inc. and Mego Financial Corp. dated November 15, 2000.
21.1(19) List of subsidiaries.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
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(1) Filed as part of the Company's Form 10-K for fiscal year ended August
31, 1988 and incorporated herein by reference.
44
<PAGE> 47
(2) Filed as part of the Company's Form 10-K for fiscal year ended August
31, 1989 and incorporated herein by reference.
(3) Filed as part of the Company's Form 10-K for fiscal year ended August
31, 1990 and incorporated herein by reference.
(4) Filed as part of the Company's Form 10-K for fiscal year ended August
31, 1991 and incorporated herein by reference.
(5) Filed as part of the Company's Registration Statement on Form S-4
originally filed August 31, 1992 and incorporated herein by reference.
(6) Filed as part of the Company's Form 10-K for fiscal year ended August
31, 1992 and incorporated herein by reference.
(7) Filed as part of the Company's Form 10-K for fiscal year ended August
31, 1993 and incorporated herein by reference.
(8) Filed as part of the Company's Form 10-K for fiscal year ended August
31, 1994 and incorporated herein by reference.
(9) Filed as part of the Company's Form 10-K for fiscal year ended August
31, 1995 and incorporated herein by reference.
(10) Filed as part of the Registration Statement on Form S-1 filed by Mego
Mortgage Corporation, as amended (File No. 333-12443), and incorporated
herein by reference.
(12) Filed as part of the Company's Form 10-K for fiscal year ended August
31, 1996 and incorporated herein by reference.
(13) Filed as part of Mego Mortgage Corporation's Form 10-K for fiscal year
ended August 31, 1997 and incorporated herein by reference.
(14) Filed as part of the Company's Form 10-Q for the quarter ended November
30, 1996 and incorporated herein by reference.
(15) Filed as part of the Company's Form 10-Q for the quarter ended February
28, 1997 and incorporated herein by reference.
(16) Filed as part of the Company's Form 10-Q for the quarter ended May 31,
1997 and incorporated herein by reference.
(17) Filed as part of the Company's Form 10-Q for the quarter ended February
28, 1998 and incorporated herein by reference.
(18) Filed as part of the Company's Form 10-Q for the quarter ended May 31,
1998 and incorporated herein by reference.
(19) Filed as part of the Company's Form 10-K for the fiscal year ended
August 31, 1997 and incorporated herein by reference.
(20) Filed as part of the Company's Form 10-Q for the quarter ended November
30, 1998 and incorporated herein by reference.
(21) Filed as part of the Company's Form 10-Q for the quarter ended February
28, 1999 and incorporated herein by reference.
(22) Filed as part of the Company's Form 10-Q for the quarter ended May 31,
1999 and incorporated herein by reference.
(23) Filed as part of the Company's Form 10-K for the fiscal year ended
August 31, 1998 and incorporated herein by reference.
(24) Filed as part of the Company's Form 10K for the fiscal year ended August
31, 1999 and incorporated herein by reference.
(25) Filed as part of the Company's Form 10-Q for quarter ended November 30,
1999 and incorporated herein by reference.
(26) Filed as part of the Company's Form 10-Q for the quarter ended February
29, 2000 and incorporated herein by reference
(27) Filed as part of the Company's Form 10-Q for the quarter ended May 31,
2000 and incorporated herein by reference.
45
<PAGE> 48
(d) Financial Statement schedules required by Regulation S-X. No financial
statement schedules are included because of the absence of the
conditions under which they are required or because the information is
included in the financial statements or the notes thereto.
46
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
MEGO FINANCIAL CORP.
Date: November 27, 2000 By: /S/ JEROME J. COHEN
----------------- --------------------------------
Jerome J. Cohen, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ ROBERT NEDERLANDER Chairman of the Board, Chief Executive November 27, 2000
------------------------------------- Officer and Director
Robert Nederlander
/S/ JEROME J. COHEN President and Director November 27, 2000
-------------------------------------
Jerome J. Cohen
/S/ HERBERT B. HIRSCH Senior Vice President, Chief Financial November 27, 2000
------------------------------------- Officer, Treasurer and Director
Herbert B. Hirsch
/S/ EUGENE I. SCHUSTER Vice President and Director November 27, 2000
-------------------------------------
Eugene I. Schuster
/S/ CHARLES G. BALTUSKONIS Senior Vice President and November 27, 2000
------------------------------------- Chief Accounting Officer
Charles G. Baltuskonis
/S/ WILBUR L. ROSS, JR. Director November 27, 2000
-------------------------------------
Wilbur L. Ross, Jr.
/S/ JOHN E. MCCONNAUGHY, JR. Director November 27, 2000
-------------------------------------
John E. McConnaughy, Jr.
</TABLE>
47
<PAGE> 50
MEGO FINANCIAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report .............................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at August 31, 2000 and 1999 ................ F-3
Consolidated Income Statements -- Years Ended
August 31, 2000, 1999 and 1998 ..................................... F-4
Consolidated Statements of Stockholders' Equity -- Years Ended
August 31, 2000, 1999 and 1998 ..................................... F-5
Consolidated Statements of Cash Flows -- Years Ended
August 31, 2000, 1999 and 1998 ..................................... F-6
Notes to Consolidated Financial Statements ................................ F-7
</TABLE>
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Mego Financial Corp. and Subsidiaries
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Mego Financial
Corp. and its subsidiaries (the Company) as of August 31, 2000 and 1999, and the
related consolidated income statements, statements of stockholders' equity, and
statements of cash flows for each of the three years in the period ended August
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mego Financial Corp. and its
subsidiaries at August 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended August 31, 2000,
in conformity with accounting principles generally accepted in the United States
of America.
DELOITTE & TOUCHE LLP
San Diego, California
November 22, 2000
F-2
<PAGE> 52
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,069 $ 1,821
Restricted cash 1,255 1,676
Notes receivable, net of allowance for cancellations and discounts of
$13,234 and $14,340 at August 31, 2000 and 1999, respectively 83,156 69,300
Interest only receivables, at fair value 2,701 2,566
Timeshare interests held for sale 23,307 29,529
Land and improvements inventory 4,113 6,649
Other investments 4,492 5,111
Property and equipment, net of accumulated depreciation of
$17,632 and $16,252 at August 31, 2000 and 1999, respectively 23,167 23,560
Deferred selling costs 5,231 4,285
Prepaid debt expenses 2,060 1,757
Other assets 18,041 12,707
-------- --------
TOTAL ASSETS $168,592 $158,961
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and contracts payable $109,131 $104,555
Accounts payable and accrued liabilities 19,544 18,141
Reserve for notes receivable sold with recourse 4,033 4,162
Deposits 2,841 2,287
Accrued income taxes 2,975 3,505
-------- --------
Total liabilities before subordinated debt 138,524 132,650
-------- --------
Subordinated debt 4,286 4,478
Stockholders' equity:
Preferred stock, $.01 par value (authorized--5,000,000 shares, none outstanding) -- --
Common stock, $.01 par value (authorized--50,000,000 shares; 3,500,557 shares
issued and outstanding at August 31, 2000 and 1999) 35 35
Additional paid-in capital 13,068 13,068
Retained earnings 12,679 8,730
-------- --------
Total stockholders' equity 25,782 21,833
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $168,592 $158,961
======== ========
</TABLE>
F-3
<PAGE> 53
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Timeshare interest sales, net $ 49,062 $ 41,262 $ 37,713
Land sales, net 19,624 15,979 13,812
Gain on sale of notes receivable 635 -- 656
Gain on sale of investments and other assets 1,857 513 --
Interest income 12,430 9,310 7,161
Financial income 1,153 1,184 3,304
Incidental operations 2,033 2,597 2,831
Other 3,701 3,657 3,113
----------- ----------- -----------
Total revenues 90,495 74,502 68,590
----------- ----------- -----------
COSTS AND EXPENSES
Direct cost of:
Timeshare interest sales 10,518 8,527 7,375
Land sales 3,050 2,709 1,770
Incidental operations 1,698 2,274 2,644
Marketing and sales 39,769 35,291 34,167
Depreciation 1,827 1,878 2,245
Interest expense 12,468 9,270 7,850
General and administrative 17,746 14,333 17,736
----------- ----------- -----------
Total costs and expenses of continuing operations 87,076 74,282 73,787
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 3,419 220 (5,197)
INCOME TAXES (BENEFIT) (530) (830) (1,968)
----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 3,949 $ 1,050 $ (3,229)
=========== =========== ===========
INCOME (LOSS) PER COMMON SHARE
Basic:
Net income (loss) applicable to common stock $ 1.13 $ 0.30 $ (0.92)
=========== =========== ===========
Weighted-average number of common shares and
common share equivalents outstanding 3,500,557 3,500,557 3,500,557
=========== =========== ===========
Diluted:
Net income(loss) applicable to common stock $ 1.13 $ 0.30 $ (0.92)
=========== =========== ===========
Weighted-average number of common shares and
common share equivalents outstanding 3,500,557 3,500,557 3,500,557
=========== =========== ===========
</TABLE>
F-4
<PAGE> 54
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(thousands of dollars, except share and per share amounts)
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE ADDITIONAL
------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances at September 1, 1997 3,500,557 $ 35 $ 34,699 $ 38,503 $ 73,237
Distribution of MMC common stock in
connection with spin-off and
adjustments of receivable from MMC (21,735) (27,594) (49,329)
Net loss fiscal 1998 (3,229) (3,229)
--------- --------- --------- --------- ---------
Balances at August 31, 1998 3,500,557 35 12,964 7,680 20,679
Warrants issued 104 104
Net income fiscal 1999 1,050 1,050
--------- --------- --------- --------- ---------
Balances at August 31, 1999 3,500,557 35 13,068 8,730 21,833
Net income fiscal 2000
3,949 3,949
--------- --------- --------- --------- ---------
Balances at August 31, 2000 3,500,557 $ 35 $ 13,068 $ 12,679 $ 25,782
========= ========= ========= ========= =========
</TABLE>
F-5
<PAGE> 55
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,949 $ 1,050 $ (3,229)
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Charges to allowance for cancellations (8,643) (5,987) (5,984)
Provision for cancellations 7,354 5,626 4,827
Gain on sale of notes receivable (635) -- (656)
Gain on sale of other investments (1,857) (513) --
Provision for uncollectible owner's association advances 200 -- (403)
Cost of sales 13,568 11,236 9,145
Depreciation 1,827 1,979 2,245
Amortization of negative goodwill -- -- (53)
Additions to interest only receivables (660) -- (523)
Amortization of interest only receivables 525 801 452
Repayments on notes receivable 50,733 42,962 36,669
Additions to notes receivable (82,388) (64,112) (57,789)
Proceeds from sales of notes receivable 19,594 -- 9,418
Purchase of land and timeshare interests (4,810) (3,651) (15,614)
Changes in operating assets and liabilities:
Decrease in restricted cash 421 18 355
Increase in other assets (5,179) (5,557) (1,103)
Increase in deferred selling costs (946) (566) (566)
Increase (decrease) in accounts payable and accrued liabilities 1,403 (632) 1,896
Increase (decrease) in deposits 554 (2,590) 1,894
Decrease in accrued income taxes (530) (963) (1,767)
-------- -------- --------
Total adjustments (9,469) (21,949) (17,557)
-------- -------- --------
Net cash used in operating activities (5,520) (20,899) (20,786)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,230) (1,589) (2,334)
Proceeds from sale of property and equipment 1,617 -- 359
Proceeds from the sale of other investments 1,031 747 --
Additions to other investments (34) (950) (2,246)
-------- -------- --------
Net cash provided by (used in) investing activities 384 (1,792) (4,221)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings $ 64,363 $ 59,047 $ 51,311
Reduction of debt (59,787) (36,478) (34,894)
Payments on subordinated debt (192) (465) (640)
Increase in subordinated debt -- 595 667
-------- -------- --------
Net cash provided by financing activities 4,384 22,699 16,444
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (752) 8 (8,563)
CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 1,821 1,813 10,376
-------- -------- --------
CASH AND CASH EQUIVALENTS-END OF YEAR $ 1,069 $ 1,821 $ 1,813
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest net of amounts capitalized $ 12,339 $ 9,000 $ 7,595
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Issuance of warrants $ -- $ 104 $ --
======== ======== ========
</TABLE>
F-6
<PAGE> 56
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998)
1. NATURE OF OPERATIONS
Mego Financial Corp. (Mego Financial) is a premier developer and
operator of timeshare properties and a provider of consumer financing to
purchasers of timeshare intervals and land parcels through its wholly-owned
subsidiary, Preferred Equities Corporation (PEC), established in 1970. PEC is
engaged in originating, selling, servicing and financing consumer receivables
generated through timeshare and land sales. Mego Financial and its subsidiaries
are herein individually or collectively referred to as the Company as the
context requires. PEC markets and finances timeshare interests and land in
select resort areas. By providing financing to virtually all of its customers,
PEC also originates consumer receivables that it hypothecates and services. Mego
Financial was incorporated under the laws of the state of New York in 1954 under
the name Mego Corp. and, in 1992, changed its name to Mego Financial Corp. In
February 1988, Mego Financial acquired PEC, pursuant to an assignment by the
Assignors, as defined below, of their contract right to purchase PEC.
To facilitate its sales of timeshare interests, the Company has entered
into several trust agreements. The trustees administer the collection of the
related notes receivable. The Company has assigned title to certain of its
resort properties in Nevada and its interest in certain related notes receivable
to the trustees.
In 1992, Mego Financial organized a subsidiary, Mego Mortgage
Corporation (MMC), which was a specialized consumer finance company that
originated, purchased, sold, securitized and serviced consumer loans consisting
primarily of conventional uninsured home improvement and debt consolidation
loans. After an initial public offering (the IPO) of MMC common stock in
November 1996, Mego Financial held 81.3% of the outstanding stock of MMC. On
September 2, 1997, Mego Financial distributed all of its remaining 10,000,000
shares of MMC's common stock to Mego Financial's shareholders in a tax-free
spin-off (the Spin-off). In April 1998, an agreement was made to adjust the
balance due on a $10,100,000 receivable at August 31, 1997 by a reduction of the
income tax portion in the amount of $5,283,000 previously deemed owed by MMC to
the Company under a Tax Allocation and Indemnity Agreement dated November 19,
1996 (Tax Agreement) since that amount was no longer payable under that
agreement. As of April 1998, MMC owed the Company approximately $6,153,000,
including the $5,283,000 due under the Tax Agreement at August 31, 1997. An
agreement was subsequently made to settle the remaining $870,000 balance due the
Company by MMC. In consideration of this settlement, MMC paid the entire amount
of $1,574,000, which was separately owed to PEC, in June 1998. Following this
transaction, MMC had no outstanding indebtedness to the Company. The net effect
of the Spin-off resulted in the Company recording a distribution in the amount
of $49,329,000 for financial statement purposes in fiscal 1998.
ACQUISITION OF PREFERRED EQUITIES CORPORATION
The acquisition of PEC on February 1, 1988, was effected pursuant to an
Assignment Agreement, dated October 25, 1987, between Mego Financial and several
corporations (Assignors) and a related Assignment and Assumption Agreement
(Assignment and Assumption Agreement), dated February 1, 1988, and amended on
July 29, 1988, between Mego Financial and the Assignors (collectively, such
agreements constitute the Assignment). The acquisition of PEC was accomplished
by PEC issuing 2 shares of its common stock to Mego Financial for a purchase
price of approximately $50,000. Simultaneously the previously outstanding shares
held by others were surrendered and redeemed by PEC at a cost to PEC of
approximately $10,463,000 plus fees and expenses, leaving Mego Financial with
all of the outstanding shares of PEC.
The right to purchase shares from PEC was obtained by Mego Financial
pursuant to the Assignment, which assigned to Mego Financial the right to
purchase shares from PEC pursuant to the Stock Purchase and Redemption
Agreement, dated October 6, 1987, between PEC and the Assignors, as amended on
October 25, 1987. Consideration for the Assignment consisted of promissory notes
(Purchase Notes) from Mego Financial to the Assignors in the aggregate amount of
$2,000,000 and additional payments to the Assignors as described below. The
Purchase Notes were paid in full prior to August 31, 1988. After the payment of
the Purchase Notes, the Assignors were entitled to receive from Mego Financial
on a quarterly basis, as determined as of the end of each quarter, additional
payments equal in the aggregate to 63% of PEC's consolidated unrestricted cash
balances, for a period ended on January 31,
F-7
<PAGE> 57
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
1995. The additional payments were collateralized by a pledge of PEC stock to
the Assignors. See Note 10 for further discussion.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--The accompanying
Consolidated Financial Statements include the accounts of Mego Financial and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. See Note 1.
Parent Company Only Basis--At August 31, 2000 and 1999, Mego Financial,
on a "parent company only" basis, reflected total assets of $34,398,000 and
$30,467,000, respectively, which were comprised principally of its equity
investment in subsidiaries of $32,962,000 and $29,127,000, respectively, and
liabilities of $4,187,000 and $4,156,000, respectively, excluding subordinated
debt. At August 31, 2000 and 1999, liabilities were comprised principally of
accrued income taxes of $2,975,000 and $3,505,000, respectively, excluding
subordinated debt. At August 31, 2000 and 1999, subordinated debt of $4,286,000
and $4,478,000, respectively, was outstanding. See Notes 1, 10 and 17.
Cash Equivalents--Cash equivalents consist primarily of certificates of
deposit, repurchase agreements and commercial paper with original maturities of
90 days or less.
Restricted Cash--Restricted cash represents cash on deposit which
relates to utility subsidiary customer deposits and betterment fees; cash on
deposit in accordance with notes receivable sale agreements; and untransmitted
funds received from collection of notes receivable which have not as yet been
disbursed to the purchasers of such notes receivable in accordance with the
related sale agreements.
Notes Receivable--The basis is the outstanding principal balance of the
notes reduced by the allowance for cancellations and discounts. Substantially
all of the notes receivable generated by PEC are carried at the lower of cost or
market on an aggregate basis by type of receivable.
Allowance for Cancellations--Provision for cancellations relating to
notes receivable is recorded as expense in amounts sufficient to maintain the
allowance at a level considered adequate to provide for anticipated losses
resulting from customers' failure to fulfill their obligations under the terms
of their notes receivable. The Company records provision for cancellations at
the time revenue is recognized, based upon periodic analysis of the portfolio,
collateral values, historical credit loss experience, borrowers' ability to
repay and current economic factors. The allowance for cancellations represents
the Company's estimate of the future credit losses to be incurred over the lives
of the notes receivable. The allowance for cancellations is reduced by actual
cancellations experienced, including cancellations related to previously sold
notes receivable which were reacquired pursuant to the recourse obligations
discussed herein. Such allowance is also reduced to establish the separate
liability for the reserve for notes receivable sold with recourse. Recourse to
the Company on sales of notes receivable is governed by the agreements between
the purchasers and the Company. The Company's judgment in determining the
adequacy of this allowance is based upon a periodic review of its portfolio of
notes receivable. These reviews take into consideration changes in the nature
and level of the portfolio, current economic conditions which may affect the
purchasers' ability to pay, the estimated value of inventory that may be
reacquired and overall portfolio quality. Changes in the allowance as a result
of such reviews are reflected in the provision for cancellations.
Timeshare Interests Held for Sale--Costs incurred in connection with
preparing timeshare interests for sale are capitalized and include all costs of
acquisition, renovation and furnishings. Timeshare interests held for sale are
valued at the lower of cost or net realizable value.
Land and Improvements Inventory--Land and improvements inventory include
carrying costs capitalized during the development period and costs of
improvements incurred to date and are stated at cost, not in excess of
F-8
<PAGE> 58
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
market value.
Property and Equipment--Property and equipment is stated at cost and is
depreciated over its estimated useful life (generally 3 - 40 years) using the
straight-line method. Costs of maintenance and repairs that do not improve or
extend the life of the respective assets are recorded as expense.
Utility Accounting Policies--The Company, through a wholly-owned
subsidiary, provides water and sewer services to customers in the Pahrump valley
of Nevada. This subsidiary is subject to regulation by the Public Utilities
Commission of Nevada and the Company's accounting policies conform to generally
accepted accounting principles as applied in the case of regulated public
utilities in accordance with the accounting requirements of the regulatory
authority having jurisdiction. Contributions in aid of construction (CIAC)
received by the Company from its customers are included as a separate liability
and amortized over the period of 9 - 25 years, which represents the estimated
remaining useful life of the corresponding improvements. Amortization of CIAC
reduces depreciation expense. CIAC is included in Accounts Payable and Accrued
Liabilities on the Balance Sheet in the amounts of $9,173,000 and $8,495,000 at
August 31, 2000 and 1999, respectively.
Reserve for Notes Receivable Sold with Recourse--Recourse to the Company
on sales of notes receivable is governed by the agreements between the
purchasers and the Company. The reserve for notes receivable sold with recourse
represents the Company's estimate of the fair value of future credit losses to
be incurred over the lives of the notes receivable. Proceeds from the sale of
notes receivable sold with recourse were $19,594,000, $0 and $9,418,000 for the
years ended August 31, 2000, 1999 and 1998, respectively. A liability for
reserve for notes receivable sold with recourse is established at the time of
each sale based upon the Company's estimate of the future fair value of the
recourse obligation under each agreement of sale and is reviewed on a quarterly
basis. At August 31, 2000 and 1999, the outstanding balance of notes receivable
sold with recourse was $59,600,000 and $53,000,000, respectively.
Income Taxes--The Company utilizes the provisions of SFAS No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the Company to
adhere to an asset/liability approach for financial accounting and reporting for
income taxes. Income tax expense is provided for the tax effects of transactions
reported in the financial statements and consists of taxes currently due plus
deferred taxes related primarily to differences between the bases of the balance
sheet for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when they are recovered or settled.
See Note 11.
Revenue and Profit Recognition--Timeshare Interests and Land
Sales--Sales of timeshare interests and land are recognized and included in
revenues after certain "down payment" and other "continuing investment" criteria
are met. Land sale revenues are recognized using the deposit method in
accordance with the provisions of SFAS No. 66, "Accounting for Sales of Real
Estate." The agreement for sale generally provides for a down payment and a note
secured by a deed of trust or mortgage payable to the Company in monthly
installments, including interest, over a period of up to 12 years. Revenue is
recognized after the requisite rescission period has expired and at such time as
the purchaser has paid at least 10% of the sales price for sales of timeshare
interests and 20% of the sales price for land sales. Land sales usually meet
these requirements within eight to ten months from closing, and sales of
timeshare interests usually meet these requirements at the time of sale. The
sales price, less a provision for cancellation, is recorded as revenue and the
allocated cost related to such net revenue of the timeshare interest or land is
recorded as expense in the year that revenue is recognized. When revenue related
to land sales is recognized, the portion of the sales price attributable to
uncompleted required improvements, if any, is deferred.
All payments received prior to the recognition of the sale as revenue
are accounted for as deposits. Selling costs directly attributable to
unrecognized sales are accounted for as deferred selling costs until the sale is
recognized.
For land sales made at a location other than at the property, the
purchaser may cancel the contract within a specified inspection period, usually
five months from the date of purchase, provided that the purchaser is not in
default under the terms of the contract. At August 31, 2000, $1,445,000 of
recognized sales remain subject to such
F-9
<PAGE> 59
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
cancellation. If a purchaser defaults under the terms of the contract, after all
rescission and inspection periods have expired, all payments are generally
retained by the Company.
If the underlying note receivable is at a "below market" interest rate,
a discount is applied to the note receivable balance and amortized over the
note's term so that the effective yield is 10%.
Notes receivable with payment delinquencies of 90 days or more have been
considered in determining the allowance for cancellations. Cancellations occur
when the note receivable is determined to be uncollectible and the related
collateral, if any, has been recovered. Cancellation of a sale in the quarter
the revenue is recognized is deemed to not represent a sale and is accounted for
as a reversal of the revenue with an adjustment to cost of sales. Cancellation
of a note receivable subsequent to the quarter the revenue was recognized is
charged to the allowance for cancellations.
Revenue Recognition--Gain on Sale of Notes Receivable--Gain on sale of
notes receivable includes the present value of the differential between
contractual interest rates charged to borrowers on notes receivable sold by the
Company and the interest rates to be received by the purchasers of such notes
receivable, after considering the effects of estimated prepayments and a normal
servicing fee. The Company retains certain participations in cash flows from the
sold notes receivable and generally retains the associated servicing rights. The
Company generally sells its notes receivable at par value.
The present values of expected net cash flows from the sale of notes
receivable are recorded at the time of sale as interest only receivables.
Interest only receivables are amortized as a charge to income, as payments are
received on the retained interest differential over the estimated life of the
underlying notes receivable. Interest only receivables are recorded at estimated
fair value. Reserve for notes receivable sold with recourse represents the
Company's estimate of losses to be incurred in connection with the recourse
provisions of the sales agreements and is shown separately as a liability in the
Company's Balance Sheet.
In discounting cash flows related to notes receivable sales, the Company
defers servicing income at an annual rate of 1% and discounts cash flows on its
sales at the rate it believes a purchaser would require as a rate of return.
Earned servicing income is included under the caption of financial income. The
cash flows were discounted to present value using a discount rate of 15% in each
of fiscal years 2000, 1999 and 1998. The Company has developed its assumptions
based on experience with its own portfolio, available market data and
consultation with its financial advisors.
In determining expected cash flows, management considers economic
conditions at the date of sale. In subsequent periods, these estimates may be
revised as necessary using the original discount rate, and any losses arising
from prepayment and loss experience will be recognized as realized.
Interest Income--Interest income is recorded as earned. Interest income
represents the interest earned on notes receivable and short term investments.
Financial Income--Fees for servicing notes receivable originated or
acquired by the Company and sold with servicing rights retained are generally
based on a stipulated percentage of the outstanding principal balance of such
notes receivable and are recognized when earned. Interest received on notes
receivable sold, less amounts paid to investors, is reported as financial
income. Capitalized interest only receivables are amortized systematically to
reduce income to an amount representing normal servicing income and the present
value discount. Late charges and other miscellaneous income are recognized when
collected. Costs to service notes receivable are recorded as expense when
incurred.
Timeshare Owners' Associations--The Company incurs a portion of
operating expenses of the timeshare Owners' Associations based on ownership of
the unsold timeshare interests at each of the respective timeshare properties.
These costs are referred to as Association Assessments and are included in the
Income Statement in General and Administrative Expenses. Management fees and
costs received from the Associations are included in Revenues under the caption
of Other.
F-10
<PAGE> 60
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
See Note 16.
Income (Loss) Per Common Share--Basic income (loss) per common share is
based on the net income (loss) applicable to common stock for each period
divided by the weighted-average number of common shares outstanding during the
period. Diluted income per common share is computed by dividing net income
applicable to common stock by the weighted-average number of common shares plus
common share equivalents. In loss periods, or periods whereby the option and
warrants' exercise price exceeds the average market price, anti-dilutive common
share equivalents are excluded.
Effective September 9, 1999, the Company consummated a one for six
reverse stock split for all of the Company's common shares outstanding. All
share and per share references have been restated to retroactively show the
effect of this reverse stock split.
Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from common stock equivalents, similar to fully
diluted EPS, but uses only the average stock price during the period as part of
the computation.
At August 31, 2000, options to purchase 51,652 shares of common stock at
$6.00 per share were outstanding and warrants to purchase 83,333 shares of
common stock at $6.00 per share were outstanding. The options and warrants were
not included in the computation of diluted EPS because the options' and
warrants' exercise price was greater than the average market price of the common
shares. The options, which expire on September 2, 2002 through September 22,
2008, and the warrants, which expire on January 1, 2004, were still outstanding
at August 31, 2000.
Interest Rate Swap--In August 2000, the Company entered into a $25
million, 5-year, interest rate swap transaction with a financial institution to
hedge potential exposure to its variable rate notes' payable portfolio. The
interest rate swap is considered and is documented as a highly effective cash
flow hedge. Therefore, beginning September 1, 2000, the unrealized gain or loss
mark to market will be recorded into a separate Stockholders' Equity caption
titled "Other Comprehensive Income". The unrealized depreciation as of August
31, 2000 was $255,000. The adoption of SFAS 133 (defined below) is not expected
to have any additional effects on the Company's financial statements.
Evaluation of Long-Lived Assets--Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and For
Long-Lived Assets to Be Disposed Of" required that impairment losses be
recognized when the carrying value of an asset will not be recognizable based
on future cash flows. The Company's policy is to evaluate, at each balance
sheet date, the appropriateness of the carrying values of the unamortized
balances of long-lived assets. If such evaluation were to indicate a material
impairment of these assets, such impairment would be recognized by a write down
of the applicable asset to its estimated fair value.
Segment Information--In accordance with SFAS No. 131, the Company
considers its business to consist of one reportable operating segment. The
Company does not allocate revenues and expenses, or assets and liabilities, in a
segmented format for internal use or decision-making processes.
Recently Issued/Effective Accounting Standards--In June 1998, the
Financial Accounting Standards Board (FASB) issued SFAS No. 133 (SFAS 133)
"Accounting for Derivative Instruments and Hedging Activities", which was
amended by SFAS No. 137, issued in June 1999. SFAS 133 established standards for
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. SFAS 133, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company has not
completed the process of evaluating the impact that will result from adopting
SFAS 133, with the exception of the Interest Rate Swap transaction. Therefore,
the Company is unable to disclose the impact that adopting SFAS 133, as
amended, will have on its financial position and results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS 140). SFAS 140 replaces FASB Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" and
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001 and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 31, 2000.
Management does not believe that the adoption of SFAS 140 will have a material
effect on the financial statements.
F-11
<PAGE> 61
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides the SEC Staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company has adopted SAB 101 during fiscal year 2000 and the adoption has not had
a material effect on the financial statements.
Reclassification--Certain reclassifications have been made to conform
prior years with the current year presentation.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. NOTES RECEIVABLE
Notes receivable consist of the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Related to timeshare sales $ 71,306 $ 52,174
Related to land sales 25,084 31,466
-------- --------
Total 96,390 83,640
-------- --------
Less: Allowance for cancellations (12,827) (13,987)
Discounts (407) (353)
-------- --------
(13,234) (14,340)
-------- --------
Total $ 83,156 $ 69,300
======== ========
</TABLE>
The Company provides financing to the purchasers of its timeshare
interests and land. This financing is generally evidenced by notes secured by
deeds of trust or mortgages. These notes receivable are generally payable over a
period of up to 12 years, bear interest at rates generally ranging from 12.5% to
15.5% and require equal monthly installments of principal and interest.
The Company has entered into financing arrangements with certain
purchasers of timeshare interests and land whereby a 5% interest rate is charged
if the aggregate down payment is at least 50% of the purchase price and the
balance is payable in 36 or fewer monthly payments. Notes receivable of
$6,421,000 and $5,953,000 at August 31, 2000 and 1999, respectively, made under
this arrangement are included in the table above. A discount is established to
provide for an effective interest rate (currently 10%) on notes receivable
bearing no stated interest rate at the time of sale, and is applied to the
principal balance and amortized over the terms of the notes receivable. The
effective interest rate is based upon the economic interest rate environment and
similar industry data.
The Company is obligated under certain agreements for the sale of notes
receivable and certain loan agreements to maintain various minimum tangible net
worth requirements. The most restrictive of these agreements requires PEC to
maintain a minimum tangible net worth of $25,000,000. PEC's tangible net worth
at August 31, 2000 was $30,902,000.
At August 31, 2000 and 1999, receivables aggregating $88,641,000 and
$77,582,000, respectively, were pledged to lenders to collateralize certain of
the Company's indebtedness. Receivables which qualify for the lenders' criteria
may be pledged as collateral whether or not such receivables have been
recognized for accounting purposes. See Note 9.
F-12
<PAGE> 62
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
Allowance for Cancellations--The Company provides an allowance for
cancellations, in an amount which in the Company's judgment will be adequate to
absorb losses on notes receivable that may become uncollectible. The Company's
judgment in determining the adequacy of this allowance is based on its continual
review of its portfolio which utilizes historical experience and current
economic factors. These reviews take into consideration changes in the nature
and level of the portfolio, historical rates, collateral values, current and
future economic conditions which may affect the obligors' ability to pay and
overall portfolio quality. Changes in both the allowance for cancellations and
the reserve for notes receivable sold with recourse consist of the following
(thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 18,149 $ 18,488 $ 19,527
Provision for cancellations 7,354 5,626 4,827
Amounts charged to allowance for cancellations and
reserve for notes receivable sold with recourse (8,643) (5,965) (5,866)
-------- -------- --------
Balance at end of year $ 16,860 $ 18,149 $ 18,488
======== ======== ========
Allowance for cancellations $ 12,827 $ 13,987 $ 11,868
Reserve for notes receivable sold with recourse 4,033 4,162 6,620
-------- -------- --------
Total $ 16,860 $ 18,149 $ 18,488
======== ======== ========
</TABLE>
Number of Notes Receivable Accounts Serviced--The number of notes
receivable accounts serviced at August 31, 2000 and 1999, was 19,296 and 17,359,
including 5,852 and 5,581, respectively, serviced for others. At August 31, 2000
and 1999, the amount of notes receivable with payment delinquencies of 90 days
or more was $9,925,000 and $9,743,000, including $0 and $38,000, respectively,
serviced for others.
Notes Receivable Serviced and Originated--At August 31, 2000 and 1999,
notes receivable serviced were $153,000,000 and $132,240,000, including
$39,671,000 and $33,679,000, respectively, serviced for others. Notes receivable
originated were $82,388,000 and $64,112,000 for the years ended August 31, 2000
and 1999, respectively. 4. INTEREST ONLY RECEIVABLES Activity in interest only
receivables is as follows (thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
Balance at beginning of year $ 2,566 $ 3,367
Additions 660 --
Amortization (525) (801)
------- -------
Balance at end of year $ 2,701 $ 2,566
======= =======
</TABLE>
As of August 31, 2000 and 1999, respectively, interest only receivables
consisted of excess cash flows on sold loans totaling $59,588,000 and
$53,797,000, yielding weighted-average interest rates of 12.6% and 12.5%, net of
normal servicing fees and had weighted-average pass-through yields to the
investor of 9.2% for both years. These loans were sold under recourse provisions
as described in Note 2.
5. INVENTORIES
Timeshare interests held for sale consist of the following (thousands of
dollars):
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Timeshare interests (including capitalized interest of $100 and $507 in fiscal
2000 and 1999, respectively) $18,755 $16,874
Timeshare interests not registered (including capitalized interest of $130
and $1,228 in fiscal 2000 and 1999, respectively) 4,552 12,655
------- -------
$23,307 $29,529
======= =======
</TABLE>
F-13
<PAGE> 63
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
At August 31, 2000 and 1999, 9,423 and 9,146 timeshare interests,
respectively, were available for sale. 918 additional timeshare interests became
available in November 2000. Timeshare units amounting to 14 and 62, representing
714 and 3,876 timeshare interests, at August 31, 2000 and 1999, respectively,
were awaiting registration.
6. OTHER INVESTMENTS
Other investments in the following locations, at lower of cost or
market, consist of the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
------------------
2000 1999
------ ------
<S> <C> <C>
Water rights:
Huerfano County, Colorado $ 548 $ 543
Nye County, Nevada 417 413
Land:
Nye County, Nevada 1,108 1,435
Biloxi, Mississippi 2,080 2,380
Other 339 340
------ ------
Total $4,492 $5,111
====== ======
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation, consist of
the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Water and sewer systems $ 19,391 $ 18,438
Furniture and equipment 6,745 5,915
Buildings 9,737 9,868
Vehicles 3,051 2,840
Recreational facilities and equipment -- 1,050
Land 1,342 1,344
Leasehold improvements 533 357
-------- --------
40,799 39,812
Less: Accumulated depreciation (17,632) (16,252)
-------- --------
Total $ 23,167 $ 23,560
======== ========
</TABLE>
Leases--The Company leases certain real estate for sales offices. The
Company also leases its Hawaii real estate for timeshare usage. Rental expense
for fiscal 2000, 1999 and 1998 was $2,327,000, $2,112,000, and $2,035,000,
respectively. Future minimum rental payments under operating leases are set
forth below (thousands of dollars):
F-14
<PAGE> 64
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
FOR THE YEARS ENDING AUGUST 31,
-------------------------------
<S> <C>
2001 $ 2,073
2002 1,269
2003 273
2004 248
2005 199
Thereafter 875
--------
Total $ 4,937
========
</TABLE>
8. OTHER ASSETS
Other assets consist of the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Trust deed's clearing account $ 4,450 $ 1,851
Sold receivables' reserves 2,922 2,198
Owners' association receivables 2,314 1,398
Prepaid expenses 1,527 901
Cash surrender value of split-dollar life insurance plan 1,411 1,330
Interest receivable 1,059 838
Deposits and impounds 973 696
Inventories 861 415
Ramada license 466 567
White Sands HOA maintenance fees receivable 424 448
Other 1,634 2,065
------- -------
Total $18,041 $12,707
======= =======
</TABLE>
9. NOTES AND CONTRACTS PAYABLE
The Company's debt consists of the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
BORROWINGS UNDER LINES OF CREDIT
Notes collateralized by receivables
Borrowings bearing interest at prime plus 2% $ 80,593 $ 67,457
Mortgages collateralized by real estate properties(1)
Mortgages collateralized by the respective underlying assets with various
repayment terms and variable rates
of prime plus 2% to 3% and 90-day LIBOR plus 4.25% 26,619 34,114
-------- --------
Subtotal 107,212 101,571
OTHER
Other mortgages collateralized by the respective underlying assets with
various repayment terms and fixed interest rates of 8% and variable
rates of prime plus 2% in 2000 and 2% to 3% in 1999 788 1,732
Installment contracts and other notes payable 1,131 1,252
-------- --------
Total $109,131 $104,555
======== ========
</TABLE>
The prime rate of interest was 9.50% and the 90-day LIBOR was 6.68% at
August 31, 2000.
F-15
<PAGE> 65
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
In the preceding table, mortgages collateralized by real estate properties
consists of the follows:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Acquisition and development loans $22,074 $24,930
Working capital loans 4,545 9,184
------- -------
$26,619 $34,114
======= =======
</TABLE>
Lines of Credit--At August 31, 2000, PEC had arrangements with
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 $133.5 million.
Such lines of credit are secured by timeshare and land receivables and
mortgages. At August 31, 2000, an aggregate of $107.2 million was outstanding
under such lines of credit, and $26.3 million was available for borrowing. Under
the terms of these lines of credit, PEC may borrow 65% to 90% of the balances of
the pledged timeshare and land receivables. PEC is required to comply with
certain covenants under these agreements, which, among other things, require PEC
to meet certain minimum tangible net worth requirements. The most stringent of
such requirements provides that PEC maintain a minimum tangible net worth of $25
million. At August 31, 2000, PEC exceeded this net worth requirement by $5.9
million. Summarized lines of credit information and accompanying notes relating
to these lines of credit outstanding at August 31, 2000, consist of the
following (thousands of dollars):
<TABLE>
<CAPTION>
OUTSTANDING
BORROWING MAXIMUM (a)
BALANCE AT BORROWING REVOLVING
AUGUST 31, 2000 AMOUNTS EXPIRATION DATE MATURITY DATE INTEREST RATE
------------------- ------------- ------------------- --------------- --------------------
<S> <C> <C> <C> <C>
$ 64,757 $ 75,000 (b) April 30, 2001 Various Prime + 2.0 - 2.25%
---------- ---------
15,733 15,000 (c) December 1, 2002 Various Prime + 2.0 %
4,960 11,500 (d) December 31, 2001 Various Prime + 2.0 - 3.00%
---------- ---------
20,693 26,500 Considered one borrowing line for the maximum amount.
---------- ---------
19,790 30,000 (e) June 30, 2001 Various Libor + 4.0 - 4.25%
1,972 1,972 (f) July 30, 2003 Prime + 2.25%
---------- ---------
$ 107,212 $ 133,472
========== =========
</TABLE>
(a) When the revolver expires as shown, the loans convert to term loans with
maturities as stated. In addition, management expects to extend the
lines on similar terms.
(b) Restrictions include PEC's requirement to maintain a minimum tangible
net worth of $25 million. Other restrictions, commencing with the fiscal
quarter ended November 30, 1999, include: PEC's requirement to maintain
costs and expenses for marketing and sales and general and
administrative expenses relating to net processed sales for each fiscal
quarter; PEC's requirement to maintain a minimum net processed sales
requirement for each fiscal quarter; and PEC's requirement not to exceed
a ratio of 4:1 of consolidated total liabilities to consolidated
tangible net worth. At August 31, 2000, $52.2 million of loans secured
by receivables were outstanding related to financings at prime plus 2%,
of which $29.5 million of loans secured by land receivables mature May
15, 2010 and $22.7 million of loans secured by timeshare receivables
mature May 15, 2007. The outstanding borrowing amount includes $6.4
million in mortgage financing maturing October 1, 2005 for the corporate
office buildings, which amount was paid in full in November 2000, and a
real estate loan with an outstanding balance of $1.2 million maturing
December 31, 2000, all bearing interest at prime plus 2.25%. The
remaining Acquisition and Development (A&D) loans, receivables loans and
a resort lobby loan outstanding of $5.0 million are at prime plus 2% and
mature at various dates through February 18, 2001.
In December 1998, Finova Capital Corporation (FINOVA), PEC and Mego
Financial entered into an Agreement under which FINOVA agreed to make a
loan in the amount of $5,662,000 to PEC with an original maturity date
of June 30, 1999, which date has been extended to December 31, 2000.
Mego Financial guaranteed the loan and
F-16
<PAGE> 66
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
issued warrants (outstanding as of August 31, 2000) to FINOVA to
purchase a total of 83,333 shares of common stock of Mego Financial at
an exercise price of $6.00 per share, exercisable within a five-year
period commencing January 1, 1999. The balance outstanding under this
Agreement, which is included in the $64.8 million balance in the
preceding table, was $1.2 million as of August 31, 2000.
The fair market value of the warrants was estimated at $104,000 and is
being amortized over the term of the Agreement.
(c) Restrictions include PEC's requirement to maintain a minimum tangible
net worth of $25 million during the life of the loan. These credit lines
include available financing for A&D and receivables. At August 31, 2000,
$6.3 million was outstanding under the A&D loan, which matures on June
30, 2004, and $9.4 million was outstanding under the receivables loan,
which matures on May 31, 2004.
(d) Restrictions include PEC's requirement to maintain a minimum tangible
net worth of $15 million. This credit line consists of receivable
financing with a maturity date of May 31, 2004, under which $1.6 million
was outstanding at August 31, 2000, and a real estate loan of $3.3
million with a maturity date of December 31, 2001.
(e) Restrictions include PEC's requirement to maintain a minimum tangible
net worth of $17 million during the life of the loan. These credit lines
include available financings for A&D and receivables. At August 31,
2000, $2.4 million was outstanding under the A&D loans which have a
maturity date of June 30, 2001 and bear interest at the 90-day London
Interbank Offering Rate (LIBOR) plus 4.25%. The available receivable
financings, of which $17.4 million was outstanding at August 31, 2000,
are at 90-day LIBOR plus 4% and have a maturity date of June 5, 2005.
(f) Restrictions include PEC's requirement to maintain a minimum tangible
net worth of $25 million.
Maturities--Scheduled maturities of the Company's notes and contracts
payable are as follows (thousands of dollars):
<TABLE>
<CAPTION>
YEARS ENDING AUGUST 31,
-----------------------
<S> <C>
2001.............................................. $ 17,958
2002.............................................. 2,633
2003.............................................. 5,937
2004.............................................. 12,382
2005.............................................. 17,388
Thereafter........................................ 52,833
-----------
$ 109,131
===========
</TABLE>
10. SUBORDINATED DEBT
On March 2, 1995, Mego Financial entered into the Amendment whereby the
Assignors agreed to defer payment of $10,000,000 of the amount payable to
Assignors and to subordinate such amount, constituting Subordinated Debt, in
right of payment to debt for money borrowed by Mego Financial or obligations of
subsidiaries guaranteed by Mego Financial. Warrants for 166,666 shares of Mego
Financial common stock, at an exercise price of $25.50 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 were
exercised in August 1997 in a non-cash transaction whereby the Subordinated Debt
was reduced by $4,250,000. The Amendment calls for interest to be paid
semi-annually at the rate of 10% per annum starting September 1, 1995, and
semi-annual payments of $1,429,000 plus interest, which commenced March 1, 1997.
In connection with the exercise of Warrants, payments aggregating $4,250,000
were deemed paid and the semiannual payments were scheduled to resume in March
1999 (subsequently deferred until February 1, 2000) with a partial payment in
September 1998. The final $4.29 million was scheduled to be paid in 3 equal
installments on March 1, 1999, September 1, 1999 and March 1, 2000. In
accordance with the Eleventh Amendment to Assignment and Assumption Agreement,
the principal payments totaling $4.29 million have been deferred until March 1,
2001. Interest of $429,000 on Subordinated Debt was paid during each fiscal year
2000 and 1999. The
F-17
<PAGE> 67
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. See
Notes 1 and 16. The following table represents Subordinated Debt activity
(thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Balance at beginning of year $ 4,478 $ 4,348
Accreted interest 237 595
Less: Interest payments (429) (429)
Principal paydowns -- (36)
------- -------
Balance at end of year $ 4,286 $ 4,478
======= =======
</TABLE>
11. INCOME TAXES
Mego Financial files a consolidated federal income tax return with its
subsidiaries for its tax year, which ends the last day of February.
The income tax benefits of $530,000, $830,000 and $1,968,000,
respectively, in fiscal 2000, 1999 and 1998 are primarily a result of the use of
net operating loss (NOL) carryforwards which were previously fully reserved and
currently are used to offset income on a consolidated basis. In addition, due to
changes in facts and circumstances, certain income tax liability reserves
recorded in prior periods were reversed, resulting in a deferred tax liability.
Deferred income taxes shown in Balance Sheets as Accrued Income Taxes,
reflect the net tax effects of (a) temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, (b) temporary differences between the
timing of revenue recognition for book purposes and for income tax purposes, and
(c) operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred income tax, shown on Balance Sheets
as Accrued Income Taxes, as of August 31, 2000 and 1999 are as follows
(thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Deferred tax liabilities
Timing of revenue recognition $21,612 $14,368
Deferred tax assets:
Difference between book and tax carrying value of assets $18,637 10,569
Other -- 294
------- -------
$18,637 10,863
------- -------
Net deferred income tax $ 2,975 $ 3,505
======= =======
</TABLE>
The provision for income taxes as reported is different from the tax
provision computed by applying the statutory federal rate of 34%. The
differences are as follows (thousands of dollars):
F-18
<PAGE> 68
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Income (loss) from continuing operations before
income taxes $ 3,419 $ 220 $(5,197)
======= ======= =======
Tax at the statutory federal rate $ 1,162 $ 75 $(1,767)
Decrease in income taxes resulting from
application of NOL carryforwards and changes in
certain income tax liability reserves (1,692) (905) (201)
------- ------- -------
Total $ (530) $ (830) $(1,968)
======= ======= =======
</TABLE>
12. STOCKHOLDERS' EQUITY
Mego Financial has a stock option plan (Stock Option Plan), adopted
November 1993, amended September 9, 1997, and amended and restated as of
September 16, 1998 by approval of shareholders, for officers, key employees and
directors which provides for non-qualified and qualified incentive options. The
Stock Option Committee of the Board of Directors determines the option price
(not to be less than fair market value for qualified incentive options) at the
date of grant. The options generally expire ten years from the date of grant and
are exercisable over the period stated in each option generally at the
cumulative rate of 20% per year for three years from the date of grant, and the
remaining 40% at the end of the fourth year. In August 1997, in connection with
the Spin-off of MMC, the Stock Option Committee vested all options previously
granted, excluding those granted subsequent to February 26, 1997. On September
23, 1998, an additional 18,500 incentive and non-incentive stock options were
granted under the Stock Option Plan. In addition, the exercise prices of 50,750
of options issued on September 2, 1997 were revised from $18.75 per share to
$6.00 per share (restated for the one for six reverse stock split effective
September 9, 1999), which represented the fair value at date of repricing.
The following table sets forth shares reserved and options exercised,
granted and forfeited for the following periods:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER
RESERVE SHARES OPTIONS SHARE
--------------- --------------- ---------------
<S> <C> <C> <C>
At September 1, 1997 94,000 7,500 $ 33.75
Exercised -- -- $ --
Forfeited -- (8,167) $ 18.75 / 33.75
Granted -- 58,073 $ 6.00
--------------- --------------- ---------------
At August 31, 1998 94,000 57,406 $ 18.75 / 33.75
Exercised -- -- $ --
Forfeited -- (17,000) $ 15.00 / 52.50
Granted -- 18,500 $ 6.00
--------------- --------------- ---------------
At August 31, 1999 94,000 58,906 $ 6.00 / 33.75
Exercised -- -- $ --
Forfeited -- (7,254) $ 6.00 / 33.75
Granted -- -- $ --
--------------- --------------- ---------------
At August 31, 2000 94,000 51,652 $ 6.00
=============== =============== ===============
</TABLE>
F-19
<PAGE> 69
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
SFAS 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods or services from non-employees.
Those transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. The Company elected to continue to apply
the provisions of APB Opinion No. 25 as permitted by SFAS 123 and, accordingly,
provides pro forma disclosure below.
Stock options granted under Mego Financial's Stock Option Plan are
qualified and unqualified stock options that: (1) are generally granted at
prices which are equal to the fair value of the stock on the date of grant; (2)
generally subject to a grantee's continued employment with the Company, vest at
various periods over a four-year period; and (3) generally expire ten years
subsequent to the award.
A summary of the status of Mego Financial's stock options granted under
the Stock Option Plan as of August 31, 2000, 1999 and 1998 and the changes
during the year is presented below:
<TABLE>
<CAPTION>
AUGUST 31, 2000 AUGUST 31, 1999 AUGUST 31, 1998
----------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 58,906 $ 9.14 57,406 $ 9.22 7,500 $ 33.75
Granted -- -- 18,500 6.00 58,073 6.00
Exercised -- -- -- -- -- --
Forfeited (7,254) 31.50 17,000 6.00 8,167 6.00
------- ------- -------
Outstanding at end of year 51,652 6.00 58,906 9.14 57,406 9.22
======= ======= =======
Options exercisable at end of year 17,532 6.00 9,783 13.56 -- --
======= ======= =======
</TABLE>
The fair value of each option granted during fiscal 1999 and 1998 (none
were granted during fiscal 2000) is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: (1) dividend yield of zero; (2) expected volatility of 35% and 65%,
respectively, for the years ended August 31, 1999 and 1998; (3) risk-free
interest rate of 6%; and, (4) expected life of 7 years. The weighted-average
fair value of options granted during fiscal 2000, 1999 and 1998 was $0, $1.63
and $4.09, respectively. As of August 31, 2000, there were 51,652 options
outstanding which have an exercise price of $6.00 per common share and a
weighted-average remaining contractual life of 8 years.
Had compensation cost for Mego Financial's fiscal 2000, 1999 and 1998
grants for stock options been determined consistent with SFAS 123, the Company's
pro forma net income and pro forma net income per common share for fiscal 2000,
1999 and 1998 would approximate the pro forma amounts below (thousand of
dollars, except per share amounts):
<TABLE>
<CAPTION>
AUGUST 31, 2000 AUGUST 31, 1999 AUGUST 31, 1998
-------------------------- ------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) applicable to
common stock $ 3,949 $ 3,929 $ 1,050 $ 850 $ (3,229) $ (3,333)
Net income (loss) per common
share:
Basic 1.13 1.12 0.30 0.24 (0.92) (0.95)
Diluted 1.13 1.12 0.30 0.24 (0.92) (0.95)
</TABLE>
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments"
(SFAS 107), requires disclosure of estimated fair value information for
financial instruments, whether or not recognized in the Balance Sheets. Fair
F-20
<PAGE> 70
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
values are based upon estimates using present value or other valuation
techniques in cases where quoted market prices are not available. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
Estimated fair values, carrying values and various methods and
assumptions used in valuing the Company's financial instruments at August 31,
2000 and 1999 are set forth below (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31, 2000 AUGUST 31, 1999
------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents(a) $ 1,069 $ 1,069 $ 1,821 $ 1,821
Notes receivable, net(b) 83,156 86,864 69,300 71,900
Interest only receivables(c) 2,701 2,701 2,566 2,566
Interest rate swap(d) -- (255) -- --
FINANCIAL LIABILITIES:
Notes and contracts payable(e) 109,131 109,131 104,555 104,555
Subordinated debt(a) 4,286 4,286 4,478 4,478
</TABLE>
(a) Carrying value is approximately the same as fair value.
(b) The fair value was estimated by using outstanding commitments from
investors adjusted for non-qualified receivables and the collateral
securing such receivables.
(c) The fair value was estimated by discounting future cash flows of the
instruments using discount rates, default, loss and prepayment
assumptions based upon available market data, opinions from financial
advisors and historical portfolio experience.
(d) Fair value was estimated by obtaining a third-party quote.
(e) Notes payable generally are adjustable rate, indexed to the prime rate,
or to the 90-day London Interbank Offering Rate (LIBOR); therefore,
carrying value approximates fair value.
The fair value estimates were based upon pertinent market data and
relevant information on the financial instruments at that time. Because no
market exists for a certain portion of the financial instruments, fair value
estimates may be based upon judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and historical and other factors. Changes in assumptions could
significantly affect the estimates and do not reflect any premium or discount
that could result from the bulk sale of the entire portion of the financial
instruments. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision.
Fair value estimates are based upon existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax implications related to the
realization of the unrealized gains and losses can have an effect on fair value
estimates and have not been considered in any of the estimates.
F-21
<PAGE> 71
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
14. CONCENTRATIONS OF RISK
Availability of Funding Sources--The Company funds substantially all of
the notes receivable, timeshare inventory and land inventory with borrowings
through its financing facilities and internally generated funds. These
borrowings are in turn repaid with the proceeds received by the Company from
such notes receivable through loan sales and payments. Any failure to renew or
obtain adequate financing under its financing facilities, or other borrowings,
or any substantial reduction in the size of or pricing in the markets for the
Company's notes receivable, could have a material adverse effect on the
Company's operations.
Geographic Concentrations--The Company services notes receivable in all
50 states, the District of Columbia and Canada. At August 31, 2000, 25.8%, 15.1%
and 14.0%, respectively, of the dollar value of notes receivable serviced had
been originated in California, Texas and Colorado. No other state accounted for
more than 10% of the servicing portfolio of the Company's receivables. The risk
inherent in such concentrations is dependent upon regional and general economic
stability which affects property values and the financial stability of the
borrowers. The Company's timeshare and land inventories are concentrated in
Nevada, New Jersey, Colorado, and Florida. The risk inherent in such
concentrations is in the continued popularity of these resort destinations,
which affects the marketability of the Company's products.
Credit Risk--The Company is exposed to on-balance sheet credit risk
related to its notes receivable. The Company is exposed to off-balance sheet
credit risk related to notes receivable sold under recourse provisions. The
outstanding balance of notes receivable sold with recourse provisions totaled
$59,588,000 and 53,797,000 at August 31, 2000 and 1999, respectively.
Interest Rate Risk--The Company's profitability is in part determined by
the difference, or "spread," between the effective rate of interest received on
the notes receivable originated by the Company and the interest rates payable
under its financing facilities to fund the Company's notes receivable and
inventory held for sale and the yield required by financial institutions on
notes receivable hypothecated or sold. The spread can be adversely affected
after a note is originated and while it is held, by increases in the interest
rate. Additionally, the fair value of interest only receivables owned by the
Company may be adversely affected by changes in the interest rate environment
which could affect the discount rate and prepayment assumptions used to value
the assets.
15. TIMESHARE INTEREST SALES AND LAND SALES
Timeshare interest sales, net--A summary of the components is as follows
(thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Timeshare interest sales $ 55,317 $ 45,830 $ 41,449
Less: Provision for cancellations (6,255) (4,568) (3,736)
-------- -------- --------
Total $ 49,062 $ 41,262 $ 37,713
======== ======== ========
</TABLE>
Land sales, net--A summary of the components is as follows (thousands of
dollars):
F-22
<PAGE> 72
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Land sales $ 20,723 $ 17,037 $ 14,903
Less: Provision for cancellations (1,099) (1,058) (1,091)
-------- -------- --------
Total $ 19,624 $ 15,979 $ 13,812
======== ======== ========
</TABLE>
The following table reflects the maturities of notes receivable from
land sales for each of the five years after August 31, 2000 (thousands of
dollars):
<TABLE>
<CAPTION>
2001 2002 2003 2004 2005
----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Land notes receivable
maturities $ 160 $ 918 $ 1,955 $ 365 $ 989
</TABLE>
The range of interest rates are from 0% to 15.0% and the
weighted-average interest rate at August 31, 2000 was 12.1%.
The delinquency information related to land loans at August 31, 2000 is
as follows (thousands of dollars):
<TABLE>
<CAPTION>
PRINCIPAL BALANCE % OF LOANS SERVICED
--------------------- ----------------------
<S> <C> <C>
30 - 59 days $ 1,194 .8%
60 - 90 days 578 .4
Over 90 days 2,870 1.9
</TABLE>
The estimated total costs and expenditures for improvements on these
loans for the next five years are deemed immaterial for disclosure purposes at
August 31, 2000. No material obligations for future improvements on land existed
at August 31, 2000.
16. RELATED PARTY TRANSACTIONS
Timeshare Owners' Associations--Owners' Associations have been
incorporated for the Grand Flamingo, Reno Spa, Brigantine, Steamboat Springs,
Aloha Bay and Orlando timesharing resorts. The respective Owners' Associations
are independent not-for-profit corporations. PEC acts as the managing agent for
these Owners' Associations and the White Sands Waikiki Resort Club, which is a
division of PEC, (Associations) and has received management fees for its
services of $2,692,000, $2,540,000 and $2,388,000 in 2000, 1999 and 1998,
respectively. Such fees were recorded in Revenues under the caption of Other.
The expenses of PEC for management of each timeshare resort are incurred to
preserve the integrity of the property and the portfolio performance on an
on-going basis beyond the end of the sales period. The owners of timeshare
interests in each Association are responsible for payment to the Associations of
assessments, which are intended to fund all of the operating expenses at each of
the resort facilities. The Company's share of the Association Assessments, based
on unsold inventory owned, net of room income, was $1,581,000, $968,000 and
$1,677,000 for 2000, 1999 and 1998, respectively, and have been recorded in
Costs and Expenses under the caption of General and administrative. The Company
has in the past financed budget deficits of the Associations as is reflected in
the receivable from such Associations, but is not obligated to do so in the
future, except in its Florida resorts. The Public Offering Statements for the
Indian Shores and Orlando resorts contain a provision whereby PEC guarantees
that the annual assessment fees will not exceed a specified amount, in which
case PEC agrees to pay any monetary deficiencies. These guarantees are effective
through the Associations' calendar year of December 31, 2000, and at the option
of PEC, may be extended by PEC annually thereafter. In fiscal 2000, PEC financed
a budget deficit of $90,000 and $63,000 for the Owners' Association at Indian
Shores and Orlando, respectively.
The Company has agreed to pay to the Associations the annual assessment
fees of timeshare interest owners who are delinquent with respect to such fees,
but have paid the Company in full for their timeshare interests. In
F-23
<PAGE> 73
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
exchange for the payment by the Company of such fees, the Associations assign
their liens for non-payment on the respective timeshare interests to the
Company. In the event the timeshare interest holder does not satisfy the lien
after having an opportunity to do so, the Company acquires a quitclaim deed or
forecloses on and acquires the timeshare interest for the amount of the lien and
any related foreclosure costs.
At August 31, 2000 and 1999, $2,314,000 and $1,398,000, respectively,
was due from Owners Associations, and is included under the caption of Other
assets.
Payments to Assignors--Certain transactions have been entered into with
the Assignors, who are affiliates of certain officers and directors of the
Company, and these transactions are more fully described in Notes 1 and 10.
During the years ended August 31, 2000 and 1999, respectively, approximately
$429,000 and $465,000, including principal of $0 and $36,000, was paid to the
Assignors. Subsequent to August 31, 2000, an advance of $100,000 at the interest
rate of 10% was made to an affiliate of one of the Assignors against the amount
owed to it.
Subordinated Debt--See Note 10.
Transactions with MMC--In November 1996, MMC consummated the IPO and as
a result, the Company's ownership of MMC was reduced to approximately 81.3% of
the outstanding common stock. On September 2, 1997, Mego Financial distributed
all of its 10,000,000 shares of MMC's common stock to Mego Financial's
shareholders in the Spin-off. To fund MMC's past operations and growth and in
conjunction with the consolidated income tax returns, MMC incurred debt to the
Company and its subsidiary, PEC. The amount of intercompany debt was $10,100,000
at August 31, 1997 of which $3,400,000 was paid by MMC in October 1997 together
with $500,000 advanced by the Company to MMC in September 1997. Subsequently,
separate agreements were made in April and June 1998 to adjust by reductions the
remaining $6,153,000 indebtedness, since the major portion was no longer payable
under the Tax Sharing and Indemnity Agreement between the Company and MMC. Under
these agreements, MMC paid $1,574,000, which was separately owed to PEC.
Following this transaction, MMC had no outstanding indebtedness to the Company.
Management Services Provided by PEC. MMC and PEC were parties to a
management services arrangement pursuant to which certain executive, accounting,
legal, management information, data processing, human resources, advertising and
promotional personnel of PEC provided services to MMC on an as needed basis. For
the year ended August 31, 1998, approximately $616,000 of the salaries and
expenses of certain employees of PEC were attributable to and paid by MMC in
connection with services rendered by such employees to MMC. This agreement was
terminated by agreement during fiscal 1998.
Servicing Agreement between PEC and MMC. For the year ended August 31,
1998, MMC paid servicing fees to PEC of approximately $2,008,000. For the year
ended August 31, 1998, MMC incurred interest expense in the amount of $29,000
related to fees payable to PEC for these services. The interest rate was based
on PEC's average cost of funds and equaled 10.46% in 1998. As of August 31,
1998, PEC no longer serviced loans for MMC.
17. COMMITMENTS AND CONTINGENCIES
Litigation--On August 27, 1998, an action was filed in Nevada District
Court, County of Clark, No. A392585, by Robert and Jocelyne Henry, husband and
wife individually and on behalf of all others similarly situated against PEC,
PEC's wholly-owned subsidiary, Central Nevada Utilities Company (CNUC), and
certain other defendants. The plaintiffs' complaint asked for class action
relief claiming that PEC and CNUC were guilty of collecting certain betterment
fees and not providing sewer and water lines to their property. The court
determined that plaintiffs had not properly pursued their administrative
remedies with the Nevada Public Utilities Commission (PUC) and dismissed
plaintiffs' amended complaint, without prejudice. Notwithstanding plaintiffs'
appeal of the dismissal, plaintiff filed for administrative relief with the PUC.
On November 17, 1999, the PUC found that CNUC, the only defendant over which the
PUC has jurisdiction, was not in violation of any duties owed the plaintiffs or
otherwise in violation of CNUC's approved tariffs. Subsequent to the PUC's
decision, plaintiffs voluntarily dismissed
F-24
<PAGE> 74
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
their appeal of the trial court's order dismissing their case without prejudice
and directing plaintiffs to exhaust their administrative remedies. On May 4,
2000, plaintiffs refiled their complaint in Nevada District Court, naming all of
the above parties with the exception of CNUC. The defendants have filed a motion
to dismiss.
As previously reported, the Company was named a defendant in three
purported class actions filed by Christopher Dunleavy, Alan Peyser and Michael
Nadler. A settlement agreement was approved by the Court in 1997, that had no
material effect on the Company's Consolidated Financial Statements. On
August 21, 2000, the Settlement Agreement became final, as no further appeal was
taken since an appeal filed by Mr. Nadler that was denied on May 22, 2000.
On August 9, 1999, an action was filed in Nevada District Court, County
of Clark, No. A407152, by a dissident director and a former director of the
Grand Flamingo Towers Owners Association purporting to act on behalf of the
Association against PEC. The complaint alleges, among other things, breach of a
fiduciary duty by the defendant with respect to the management agreement between
the plaintiff and defendant. In particular, plaintiff is seeking rescission of
the management agreement, an injunction requiring the defendant to turn over
plaintiff's property held as plaintiff's manager, imposition of a constructive
trust on plaintiffs funds and profits received and held by the defendant as
plaintiff's manager, and an accounting of profits and property obtained by the
defendant as plaintiff's manager. In August 2000, the Plaintiffs voluntarily
dismissed this action with prejudice.
In the general course of business the Company and PEC, at various times,
have each been named in other lawsuits. The Company believes that it has
meritorious defenses to these lawsuits and that resolution of these matters will
not have a material adverse affect on the business or financial condition of the
Company.
Future Improvements--Central Nevada Utilities Company (CNUC), a
subsidiary, has issued performance bonds of $2,907,000 outstanding at August 31,
2000, to ensure the completion of water, sewer and other improvements in
portions of the Calvada development areas. The cost of the improvements will be
offset by the future receipt of betterment fees and connection fees.
Contingencies--At August 31, 2000, irrevocable letters of credit in the
amount of $310,000 were issued and outstanding to secure certain obligations of
the Company. These letters are collateralized by notes receivable.
In 1994 and 1996 the Company issued guarantees of an equipment lease and
an office lease on behalf of MMC on which claims have been made by the lessors.
The Company believes that the entire amount of the claim will not be paid, but
it has reserved on its books an amount which management believes is probable to
be paid to satisfy the guarantees, and is included in the caption Accounts
Payable and Accrued Liabilities on the Balance Sheet.
License Agreement--In April 1995, PEC entered into a strategic alliance
pursuant to which PEC was granted a ten-year (including a renewal option)
exclusive license to operate both its existing and future timeshare properties
under the name "Ramada Vacation Suites." PEC has renamed its timeshare resorts.
The arrangement provides for the payment by PEC of an initial access fee of
$1,000,000, which has been paid, and monthly recurring fees equal to 1% of PEC's
Gross Sales (as defined) each month through January 1996 and 1.5% of PEC's Gross
Sales each month commencing in February 1996 with certain minimums increasing
each year. The initial term of the arrangement is five years and PEC has
exercised its option to renew the arrangement for an additional term of five
years, expiring December 31, 2005.
18. QUARTERLY FINANCIAL DATA (unaudited)
The following tables reflect consolidated quarterly financial data for
the Company for the fiscal years ended August 31, 2000 and 1999 (thousands of
dollars, except share and per share amounts):
F-25
<PAGE> 75
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------
AUGUST 31, MAY 31, FEBRUARY 29, NOVEMBER 30,
2000 2000 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Net timeshare interest and land sales $ 17,979 $ 19,228 $ 15,469 $ 16,010
Net gain on sale of investments and other assets 1,179 635 678 --
Interest income 3,132 3,255 3,172 2,871
Financial income and other 1,755 1,617 1,699 1,816
----------- ----------- ----------- -----------
Total revenues 24,045 24,735 21,018 20,697
----------- ----------- ----------- -----------
EXPENSES:
Direct costs of timeshare interest and
land sales 3,753 3,930 2,951 2,934
Operating expenses 16,634 16,216 13,948 14,242
Interest expense 3,295 3,194 3,113 2,866
----------- ----------- ----------- -----------
Total expenses 23,682 23,340 20,012 20,042
----------- ----------- ----------- -----------
Income before income taxes 363 1,395 1,006 655
Income taxes (530) -- -- --
----------- ----------- ----------- -----------
Net income applicable to common stock $ 893 $ 1,395 $ 1,006 $ 655
=========== =========== =========== ===========
INCOME PER COMMON SHARE:
Basic:
Net income applicable to common stock $ 0.26 $ 0.40 $ 0.29 $ 0.19
=========== =========== =========== ===========
Weighted-average number of common shares 3,500,557 3,500,557 3,500,557 3,500,557
=========== =========== =========== ===========
Diluted:
Net income applicable to common stock $ 0.26 $ 0.40 $ 0.29 $ 0.19
=========== =========== =========== ===========
Weighted-average number of common shares and
common share equivalents outstanding 3,500,557 3,500,557 3,500,557 3,500,557
=========== =========== =========== ===========
</TABLE>
F-26
<PAGE> 76
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------------------------------------
AUGUST 31, MAY 31, FEBRUARY 28, NOVEMBER 30,
1999 1999 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Net timeshare interest and land sales $ 16,869 $ 15,754 $ 12,077 $ 12,541
Net gain on sale of investments and other assets -- -- -- 513
Interest income 2,694 2,672 1,952 1,992
Financial income and other 1,861 1,901 1,857 1,819
----------- ----------- ----------- -----------
Total revenues 21,424 20,327 15,886 16,865
----------- ----------- ----------- -----------
EXPENSES:
Direct costs of timeshare interest and
land sales 3,280 3,260 2,362 2,334
Operating expenses 14,520 13,550 12,142 13,564
Interest expense 2,635 2,374 2,173 2,088
----------- ----------- ----------- -----------
Total expenses 20,435 19,184 16,677 17,986
----------- ----------- ----------- -----------
Income before income taxes 989 1,143 (791) (1,121)
Income taxes (benefit) (180) -- (269) (381)
----------- ----------- ----------- -----------
Net income (loss) applicable to common stock $ 1,169 $ 1,143 $ (522) $ (740)
=========== =========== =========== ===========
INCOME (LOSS) PER COMMON SHARE:
Basic:
Net income (loss) applicable to common stock $ 0.33 $ 0.33 $ (0.15) $ (0.21)
=========== =========== =========== ===========
Weighted-average number of common share 3,500,557 3,500,557 3,550,557 3,500,557
=========== =========== =========== ===========
Diluted:
Net income (loss) applicable to common stock $ 0.33 $ 0.33 $ (0.15) $ (0.21)
=========== =========== =========== ===========
Weighted-average number of common shares and
common share equivalents outstanding 3,500,557 3,500,557 3,550,557 3,500,557
=========== =========== =========== ===========
</TABLE>
F-27
