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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MAY 31, 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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-5629885
(STATE OR OTHER JURISDICTION OF (I. R. S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4310 PARADISE ROAD, LAS VEGAS, NEVADA 89109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(702) 737-3700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 12, 2000, there were 3,500,557 shares of Common Stock, $.01
par value per share, of the Registrant outstanding.
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MEGO FINANCIAL CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at May 31, 2000 and August 31, 1999...........1
Condensed Consolidated Income Statements for the Three and Nine Months Ended
May 31, 2000 and 1999.............................................................2
Condensed Consolidated Statements of Stockholders' Equity for the Nine Months
Ended May 31, 2000................................................................3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
May 31, 2000 and 1999.............................................................4
Notes to Condensed Consolidated Financial Statements................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................................6
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................14
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................................15
Item 6. Exhibits and Reports on Form 8-K...................................................15
SIGNATURE.....................................................................................16
</TABLE>
I
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PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands of dollars, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,766 $ 1,821
Restricted cash 1,523 1,676
Notes receivable, net of allowance for cancellations and discounts of $12,845 at
May 31, 2000 and $14,340 at August 31, 1999 74,132 69,300
Interest only receivables, at fair value 2,866 2,566
Timeshare interests held for sale 25,218 29,529
Land and improvements inventory 4,747 6,649
Other investments 4,492 5,111
Property and equipment, net of accumulated depreciation of $17,161 at May 31,
2000 and $16,252 at August 31, 1999 23,452 23,560
Deferred selling costs 5,100 4,285
Prepaid debt expenses 2,078 1,757
Other assets 15,970 12,707
---------- ----------
TOTAL ASSETS $ 161,344 $ 158,961
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and contracts payable $ 103,458 $ 104,555
Accounts payable and accrued liabilities 18,008 18,141
Reserve for notes receivable sold with recourse 4,447 4,162
Deposits 2,751 2,287
Accrued income taxes 3,505 3,505
---------- ----------
Total liabilities before subordinated debt 132,169 132,650
---------- ----------
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 May 31, 2000 and August 31, 1999) 35 35
Additional paid-in capital 13,068 13,068
Retained earnings 11,786 8,730
---------- ----------
Total stockholders' equity 24,889 21,833
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 161,344 $ 158,961
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(thousands of dollars, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Timeshare interest sales, net $ 13,377 $ 10,885 $ 36,274 $ 28,494
Land sales, net 5,851 4,869 14,433 11,878
Gain on sale of receivables 635 -- 635 --
Net gain on sale of investments and other assets 31 -- 709 513
Interest income 3,255 2,672 9,298 6,616
Financial income 241 321 782 1,030
Incidental operations 421 694 1,556 1,970
Other 924 886 2,763 2,577
----------- ----------- ----------- -----------
Total revenues 24,735 20,327 66,450 53,078
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Direct cost of:
Timeshare interest sales 2,987 2,483 7,575 5,917
Land sales 943 777 2,240 2,039
Marketing and sales 10,857 9,014 28,724 25,629
General and administrative 4,632 3,502 12,905 10,473
Interest expense 3,194 2,374 9,173 6,635
Incidental operations 278 549 1,377 1,661
Depreciation 449 485 1,400 1,493
----------- ----------- ----------- -----------
Total costs and expenses 23,340 19,184 63,394 53,847
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 1,395 1,143 3,056 (769)
INCOME TAXES (BENEFIT) -- -- -- (650)
----------- ----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 1,395 $ 1,143 $ 3,056 $ (119)
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
Basic:
Net income (loss) applicable to common stock $ 0.40 $ 0.33 $ 0.87 $ (0.03)
=========== =========== =========== ===========
Weighted-average number of common shares 3,500,557 3,500,557 3,500,557 3,500,557
=========== =========== =========== ===========
Diluted:
Net income (loss) applicable to common stock $ 0.40 $ 0.33 $ 0.87 $ (0.03)
=========== =========== =========== ===========
Weighted-average number of common shares and
common share equivalents outstanding 3,500,557 3,500,557 3,500,557 3,500,557
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
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MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(thousands of dollars, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE ADDITIONAL
-------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1999 3,500,557 $ 35 $ 13,068 $ 8,730 $ 21,833
Net income for the nine months ended
May 31, 2000 -- -- -- 3,056 3,056
---------- ---------- ---------- ---------- ----------
Balance at May 31, 2000 3,500,557 $ 35 $ 13,068 $ 11,786 $ 24,889
========== ========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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MEGO FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,056 $ (119)
-------- --------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Charges to allowance for cancellations (6,339) (4,662)
Provision for cancellations 5,077 4,186
Net gain on sale of receivables and investments and other assets (1,344) (513)
Cost of sales 9,815 7,956
Depreciation 1,400 1,493
Amortization of interest only receivables 360 579
Additions to interest only receivables (660) --
Repayments on notes receivable 37,412 29,849
Additions to notes receivable (59,656) (43,634)
Proceeds from sales of notes receivable 19,594 --
Purchase of land and timeshare interests (3,602) (2,994)
Changes in operating assets and liabilities:
Decrease in restricted cash 153 142
Increase in other assets (3,253) (4,928)
Increase in deferred selling costs (815) (157)
Increase (decrease) in accounts payable and accrued liabilities (133) 1,810
Increase (decrease) in deposits 464 (2,421)
Decrease in accrued income taxes -- (783)
-------- --------
Total adjustments (1,527) (14,077)
-------- --------
Net cash provided by (used in) operating activities 1,529 (14,196)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,292) (1,368)
Proceeds from the sale of other investments 1,001 747
Additions to other investments (34) (821)
Decrease in other investments 30 --
-------- --------
Net cash used in investing activities (295) (1,442)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 49,643 40,906
Reduction of debt (50,740) (25,124)
Payments on subordinated debt (429) (466)
Increase in subordinated debt 237 453
-------- --------
Net cash provided by (used in) financing activities (1,289) 15,769
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (55) 131
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 1,821 1,813
-------- --------
CASH AND CASH EQUIVALENTS -- END OF PERIOD $ 1,766 $ 1,944
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, net of amounts capitalized $ 9,101 $ 6,342
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Issuance of warrants related to debt $ -- $ 109
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 7
MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2000 AND 1999
(unaudited)
1. FINANCIAL STATEMENTS
In the opinion of management, when read in conjunction with the audited
Consolidated Financial Statements for the years ended August 31, 1999 and 1998,
contained in the Form 10-K of Mego Financial Corp. (Mego Financial) filed with
the Securities and Exchange Commission for the year ended August 31, 1999, the
accompanying unaudited Condensed Consolidated Financial Statements contain all
of the information necessary to present fairly the financial position of Mego
Financial and subsidiaries at May 31, 2000, the results of its operations for
the three and nine months ended May 31, 2000 and 1999, the changes in
stockholders' equity for the nine months ended May 31, 2000 and the cash flows
for the nine months ended May 31, 2000 and 1999. All intercompany accounts
between the parent and its subsidiaries have been eliminated.
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. In the
opinion of management, all material adjustments, which are normal and recurring
in nature, necessary for the fair presentation of these statements have been
included herein. The results of operations for the three and nine months ended
May 31, 2000 are not necessarily indicative of the results to be expected for
the full year.
Effective September 9, 1999, the Company consummated a one for six
reverse stock split for all of the Company's common shares outstanding. Except
as otherwise indicated, all share and per share references have been restated to
retroactively show the effect of this reverse stock split.
2. NATURE OF OPERATIONS
Mego Financial, through its wholly-owned subsidiary, Preferred Equities
Corporation (PEC), established in 1970, is a premier developer of timeshare
properties and a provider of consumer financing to purchasers of its timeshare
intervals and land parcels, in select resort areas. 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. In
February 1988, Mego Financial acquired PEC, pursuant to an assignment by the
Assignors (Comay Corp., Growth Realty Inc., RER Corp., and H&H Financial, Inc.)
of their contract right to purchase PEC. Mego Financial and its subsidiaries are
herein collectively referred to as the Company. 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.
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.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", which summarizes the SEC's interpretation of applying generally
accepted accounting principles to revenue recognition in the financial
statements. SAB No. 101 was subsequently amended in June 2000 and becomes
effective for the fourth fiscal quarter of fiscal years beginning after December
15, 1999. Based on Mego Financial's current revenue recognition policies, Mego
Financial does not expect the adoption of SAB No. 101, as amended, to have a
material impact on its consolidated financial position or results of operations.
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4. STOCKHOLDERS' EQUITY
Mego Financial's stock option plan (Stock Option Plan), which was
amended and restated as of September 16, 1998 upon the approval of Mego
Financial's shareholders, provides for grants of non-qualified and qualified
incentive options to officers, key employees and directors. Options for 58,906
shares were outstanding as of May 31, 2000.
ITEM 2. 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 section contains certain forward-looking
statements and information relating to Mego Financial Corp. (Mego Financial)
(Mego Financial and it subsidiaries are referred to herein collectively as 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 expectation 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 results of its year 2000 compliance efforts and the impact on
the Company's operations of efforts its lenders and other third parties in
respect of such compliance. In addition, as used 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 Condensed Consolidated Financial Statements, including the notes thereto,
contained elsewhere herein and in the Company's Form 10-K for the fiscal year
ended August 31, 1999.
GENERAL
The business of the Company is primarily the marketing, financing and
sale of timeshare interests, retail lots and land parcels, and servicing the
related receivables, and operating and/or managing timeshare properties. The
Company, through its subsidiary, Preferred Equities Corporation (PEC), provides
financing to purchasers of its timeshare interests and land. This financing is
generally evidenced by notes secured by deeds of trust and mortgages. These
notes receivable are generally payable over a period up to twelve years, bear
interest at rates ranging from 10.0% to 15.5%, and require equal monthly
installments of principal and interest.
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 period 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.
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<PAGE> 9
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 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. Reserve for notes
receivable sold with recourse represents PEC's estimate of the fair value of its
future credit losses to be incurred over the lives of the notes receivable in
connection with the recourse provisions of the sales agreements and is shown
separately as a liability in the Company's Condensed Consolidated Balance
Sheets.
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% for the nine
months ended May 31, 2000 and 1999. 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 adjusted for 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
may 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.
Fees for servicing notes receivable originated 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.
7
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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 or cancelled prior to recognition.
Land sales as of May 31, 2000 exclude $18.3 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 $18.3 million unrecognized land sales, the
Company estimates that it will ultimately recognize $15.0 million of revenues,
which would be reduced by a provision for cancellations of $1.3 million,
deferred selling costs of $4.2 million and cost of sales of $2.1 million.
PEC has entered into financing arrangements with certain purchasers of
timeshare interests and land whereby a lower interest rate, currently 5% per
annum, 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
payments. Notes receivable of $6.3 million and $6.0 million at May 31, 2000 and
August 31, 1999, respectively, were made under this arrangement.
RESULTS OF OPERATIONS
Three Months Ended May 31, 2000 Compared to Three Months Ended May 31, 1999
Total revenues for the Company increased 21.7% or $4.4 million to $24.7
million during the three months ended May 31, 2000 from $20.3 million during the
three months ended May 31, 1999. The increase was primarily due to a net
increase of $3.5 million in timeshare and land sales to $19.2 million during the
three months ended May 31, 2000 from $15.7 million during the three months ended
May 31, 1999 (net timeshare sales increased by $2.5 million and net land sales
increased by $1.0), an increase in interest income to $3.3 million during the
three months ended May 31, 2000 from $2.7 million during the three months ended
May 31, 1999 and total net gains of $666,000 on sale of receivables and
investments and other assets during the three months ended May 31, 2000.
Gross sales of timeshare interests increased to $15.3 million during the
three months ended May 31, 2000 from $12.5 million during the three months ended
May 31, 1999, an increase of 22.7%. Net sales of timeshare interests increased
to $13.4 million from $10.9 million, an increase of 22.9%. The provision for
cancellations represented 12.5% and 12.7%, respectively, of gross sales of
timeshare interests for the three months ended May 31, 2000 and 1999.
Gross sales of land increased to $6.3 million during the three months
ended May 31, 2000 from $5.2 million during the three months ended May 31, 1999,
an increase of 21.0%. Net sales of land increased to $5.9 million during the
three months ended May 31, 2000 from $4.9 million during the three months ended
May 31, 1999, an increase of 20.2%. The provision for cancellations represented
7.0% and 6.4%, respectively, of gross sales of land for the three months ended
May 31, 2000 and 1999.
Interest income increased 21.8% to $3.3 million for the three months
ended May 31, 2000 from $2.7 million for the three months ended May 31, 1999,
primarily due to increased notes receivable for the current quarter.
During the three months ended May 31, 2000, there were $666,000 net
gains on sale of receivables and land parcels.
Total costs and expenses for the Company increased to $23.3 million for
the three months ended May 31, 2000 from $19.1 million for the three months
ended May 31, 1999, an increase of 21.7%. The increase resulted primarily from
an increase in direct costs of timeshare sales to $3.0 million from $2.5
million, an increase of 20.3%; an increase of $1.8 million in marketing and
sales expense, an increase of 20.4%; an increase of $820,000 in interest
expense, an increase of 34.5%; and, an increase of $1.1 million in general and
administrative expenses, an increase of 32.3%. The increase in direct costs of
timeshare sales is attributable to higher net timeshare sales during the current
fiscal quarter compared to the same quarter last year. The increase in marketing
and sales expenses is due primarily to higher gross sales. As discussed below,
marketing and sales expenses decreased as a percentage of gross sales. The
increase in interest expense is due to
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<PAGE> 11
increased notes and contracts payable and borrowing costs. The increase in
general and administrative expenses is due primarily to the increase in escrow
collection costs related to the increased sales volume, an increase in
maintenance fees paid to Homeowner Associations by PEC, other resort operations'
expenses and a lease payment 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 50.3% during the three
months ended May 31, 2000 from 51.0% during the three months ended May 31, 1999,
and cost of sales decreased to 18.2% during the three months ended May 31, 2000
from 18.5% during the three months ended May 31, 1999. 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. 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.
Interest expense increased to $3.2 million during the three months ended
May 31, 2000 from $2.4 million during the three months ended May 31, 1999, an
increase of 34.5%. The increase was a result of increased notes and contracts
payable during the three months ended May 31, 2000 compared to the three months
ended May 31, 1999, and the increased borrowing costs in the comparative
periods. This increase related to interest carrying costs for maintaining the
notes in the Company's owned portfolio. Historically, PEC has from time to time
sold notes receivable and applied the net proceeds to reduce its outstanding
debt. Until the current quarter, there had been no such sales since August 1998.
There were loan package sales to two institutional buyers aggregating $19.0
million during the three months ended May 31, 2000.
Pre-tax income of $1.4 million was earned during the three months ended
May 31, 2000 compared to pre-tax income of $1.1 million during the three months
ended May 31, 1999. The improvement in the three months ended May 31, 2000
resulted from the $4.4 million increase in revenues partially offset by the $4.1
million increase in expenses.
No income taxes were recorded for the three months ended May 31, 2000
and 1999, due to the use of net operating loss carryforwards which were
previously fully reserved and are used to offset income on a consolidated basis.
Income taxes are recorded, and the liability is adjusted, based on an ongoing
review of related facts and circumstances.
Net income applicable to common stock amounted to $1.4 million during
the three months ended May 31, 2000 compared to net income applicable to common
stock of $1.1 million during the three months ended May 31, 1999, primarily due
to the foregoing.
Nine Months Ended May 31, 2000 Compared to Nine Months Ended May 31, 1999
Total revenues for the Company increased 25.2%, or $13.4 million, to
$66.5 million during the nine months ended May 31, 2000 from $53.1 million
during the nine months ended May 31, 1999. The increase was primarily due to an
increase in timeshare and land sales to $50.7 million during the nine months
ended May 31, 2000 from $40.4 million during the nine months ended May 31, 1999
(net timeshare sales increased by $7.8 million and net land sales increased by
$2.5 million), an increase in interest income to $9.3 million during the nine
months ended May 31, 2000 from $6.6 million during the nine months ended May 31,
1999, and total net gains on sale of receivables and investments and other
assets of $1.3 million during the nine months ended May 31, 2000 compared to
$513,000 during the nine months ended May 31, 1999.
Gross sales of timeshare interests increased to $40.6 million during the
nine months ended May 31, 2000 compared to $31.9 million during the nine months
ended May 31, 1999, an increase of 27.3%. Net sales of timeshare interests
increased to $36.3 million from $28.5 million, an increase of 27.3%. The
provision for cancellations represented 10.6% of gross sales of timeshare
interests for the nine months ended May 31, 2000 and 1999.
Gross sales of land increased to $15.2 million during the nine months
ended May 31, 2000 from $12.7 million during the nine months ended May 31, 1999,
an increase of 19.8%. Net sales of land increased to $14.4 million during the
nine months ended May 31, 2000 from $11.9 million during the nine months ended
May 31, 1999, an increase of 21.5%. The provision for cancellations decreased to
5.0% of gross sales of land for the nine months ended May 31, 2000 from 6.3% for
the nine months ended May 31, 1999, primarily due to a decrease in cancellation
experience during the nine months
9
<PAGE> 12
ended May 31, 2000 and downward adjustments based on the results of the
customary quarterly reviews of the allowance adequacy.
Interest income increased to $9.3 million for the nine months ended May
31, 2000 from $6.6 million for the nine months ended May 31, 1999, an increase
of 40.5%, primarily due to increased notes receivable for the current period.
During the nine months ended May 31, 2000, there were $1.3 million net
gains on sale of receivables, the golf courses and land parcels, compared to a
$513,000 gain on a sale of a land parcel for the nine months ended May 31, 1999.
Total costs and expenses for the Company increased to $63.4 million for
the nine months ended May 31, 2000 from $53.8 million for the nine months ended
May 31, 1999, an increase of 17.7%. The increase resulted primarily from an
increase in direct costs of timeshare sales to $7.6 million from $5.9 million,
an increase of 28.0%; an increase in marketing and sales expenses to $28.7
million from $25.6 million, an increase of 12.1%; an increase in interest
expense to $9.2 million from $6.6 million, an increase of 38.3%; and, an
increase in general and administrative expenses to $12.9 million from $10.5
million, an increase of 23.2%. The increase in direct costs of timeshare sales
is attributable to higher net timeshare sales during the current fiscal period
compared to the same period last fiscal year. The increase in marketing and
sales expenses is due primarily to higher gross sales. As discussed below, the
increase in these expenses on a dollar basis was accompanied by a decrease in
marketing and sales expenses as a percentage of gross sales. The increase in
interest expense is due to increased notes and contracts payable and borrowing
costs. The increase in general and administrative expenses is primarily due to
the increase in escrow collection costs related to sales volume, an increase in
maintenance fees paid to Homeowner Associations by PEC, other resort operations'
expenses and a lease payment related to a previously affiliated company.
As a percentage of gross sales of timeshare interests and land,
marketing and sales expenses relating thereto decreased to 51.5% during the nine
months ended May 31, 2000 from 57.5% during the nine months ended May 31, 1999,
and cost of sales decreased to 17.6% during the nine months ended May 31, 2000
from 17.9% during the nine months ended May 31, 1999.
Interest expense increased to $9.2 million during the nine months ended
May 31, 2000 from $6.6 million during the nine months ended May 31, 1999, an
increase of 38.3%. The increase is a result of increased notes and contracts
payable and borrowing costs during the nine months ended May 31, 2000 compared
to the nine months ended May 31, 1999.
Pre-tax income of $3.1 million was earned during the nine months ended
May 31, 2000 compared to a pre-tax loss of $769,000 during the nine months ended
May 31, 1999. The improvement in the first nine months of fiscal 2000 resulted
from the $13.4 million increase in revenues partially offset by the $9.5 million
increase in expenses.
No income tax provision or benefit was recorded for the nine months
ended May 31, 2000 compared to an income tax benefit of $650,000 during the nine
months ended May 31, 1999, due to the use of net operating loss carryforwards
which were previously fully reserved and currently are used to offset income on
a consolidated basis. Income taxes are recorded, and the liability is adjusted,
based on an ongoing review of related facts and circumstances.
Net income applicable to common stock was $3.1 million during the nine
months ended May 31, 2000 compared to a net loss applicable to common stock of
$119,000 during the nine months ended May 31, 1999, primarily due to the
foregoing.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents for the Company were $1.8 million at May 31,
2000 and August 31, 1999.
PEC's cash requirements arise from the acquisition of timeshare
properties and land, payments of operating expenses, payments of income 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
10
<PAGE> 13
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 May 31, 2000, no commitments existed for material capital
expenditures.
At May 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 May 31, 2000, an
aggregate of $101.5 million was outstanding under such lines of credit, and
$32.0 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 May
31, 2000, PEC exceeded this net worth requirement by $5.0 million. Summarized
lines of credit information and accompanying notes relating to these lines of
credit outstanding at May 31, 2000, consist of the following (thousands of
dollars):
<TABLE>
<CAPTION>
BORROWING MAXIMUM
Amount at Borrowing Revolving
May 31, 2000 Amounts Expiration Date (a) Maturity Date Interest Rate
------------------- ------------- ------------------- --------------- --------------------
<S> <C> <C> <C> <C>
$ 60,312 $ 75,000 (b) December 31, 2000 Various Prime + 2.0 - 2.25%
------------------ ------------
15,538 15,000 (c) December 1, 2002 Various Prime + 2.0
5,387 11,500 (d) August 1, 2000 Various Prime + 2.0 - 3.00%
------------------ ------------
20,925 26,500 Considered one borrowing line for the maximum amount.
------------------ ------------
18,260 30,000 (e) June 30, 2001 Various Libor + 4.0 - 4.25%
1,972 1,972 (f) July 31, 2000 Prime + 2.25%
------------------ ------------
$ 101,469 $ 133,472
================== ============
</TABLE>
(a) Revolving expiration dates represent the expiration of the revolving
features of the lines of credit, at which time the credit lines become
loans with fixed maturities. As is customary, the Company is negotiating
for extensions of certain of the revolving periods.
(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 May 31, 2000, $45.9 million of loans secured by
receivables were outstanding related to financings at prime plus 2%, of
which $26.8 million of loans secured by land receivables mature May 15,
2010 and $19.1 million of loans secured by timeshare receivables mature
May 15, 2007. The outstanding borrowing amount includes $6.4 million in
acquisition and development (A&D) financing maturing October 1, 2005 for
the corporate office buildings, which is an amortizing loan with
principal payments waived through December 31, 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 A&D loans,
receivables loans and a resort lobby loan outstanding of $4.3 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 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
11
<PAGE> 14
outstanding under this Agreement, which is included in the $60.3 million
balance in the preceding table, was $2.5 million as of May 31, 2000.
(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 May 31, 2000,
$6.8 million was outstanding under the A&D loan, which matures on June
30, 2004, and $8.7 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 $1.7 million
was outstanding at May 31, 2000, and a real estate loan of $3.7 million
with a maturity date of August 30, 2000.
(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 May 31, 2000,
$2.8 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 $15.5 million was outstanding at May 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>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Marketing and selling expenses attributable
to recognized and unrecognized sales $ 10,772 $ 8,837 $ 29,539 $ 26,168
Less: Down payments (2,831) (3,475) (8,175) (8,868)
-------- -------- -------- --------
Cash Shortfall $ 7,941 $ 5,362 $ 21,364 $ 17,300
======== ======== ======== ========
</TABLE>
During the three months ended May 31, 2000, an aggregate of $19.0
million of notes receivable was sold to two institutional buyers. There had been
no other notes receivable sales since August 1998.
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 May 31, 2000, PEC was contingently liable to replace
or repurchase notes receivable sold with recourse totaling $63.5 million. The
repurchase provisions provide for substitution of receivables as recourse for
$54.7 million of sold notes receivable and cash payments for repurchase relating
to $8.8 million of sold notes receivable. The undiscounted amounts of the
recourse obligations on such notes receivable were $5.0 million and $6.0 million
at May 31, 2000 and 1999, 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.
The components of the Company's debt, including lines of credit consist
of the following (thousands of dollars):
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
2000 1999
-------- ----------
<S> <C> <C>
Notes collateralized by receivables $ 71,824 $ 67,457
Mortgages collateralized by real estate properties 30,440 35,846
Installment contracts and other notes payable 1,194 1,252
-------- --------
Total $103,458 $104,555
======== ========
</TABLE>
12
<PAGE> 15
FINANCIAL CONDITION
Changes in the aggregate of the allowance for cancellations, excluding
discounts, and the reserve for notes receivable sold with recourse for the nine
months ended May 31, 2000, consisted of the following (thousands of dollars):
<TABLE>
<S> <C>
Balance at beginning of period $ 18,149
Provision for cancellations 5,077
Amounts charged to allowance for cancellations, net (6,339)
--------
Balance at end of period $ 16,887
========
</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>
MAY 31, AUGUST 31,
2000 1999
-------- ----------
<S> <C> <C>
Allowance for cancellations, excluding discounts $ 12,440 $ 13,987
Reserve for notes receivable sold with recourse 4,447 4,162
-------- --------
Total $ 16,887 $ 18,149
======== ========
</TABLE>
May 31, 2000 Compared to August 31, 1999
Cash and cash equivalents was $1.8 million at May 31, 2000 and August
31, 1999.
Notes receivable, net, increased 7.0% to $74.1 million at May 31, 2000
from $69.3 million at August 31, 1999 primarily as a result of net new
receivables added. During the three months ended May 31, 2000, $19.0 million in
notes receivable were sold to various lenders.
Timeshare interests held for sale decreased 14.6% to $25.2 million at
May 31, 2000 from $29.5 million at August 31, 1999.
Land and improvements inventory decreased 28.6% to $4.7 million at May
31, 2000 from $6.6 million at August 31, 1999.
Notes and contracts payable decreased 1.0% to $103.5 million at May 31,
2000 from $104.6 million at August 31, 1999. There was a net increase of $4.3
million in notes collateralized by receivables, as the new business more than
offset the notes receivable sales previously mentioned. Mortgages collateralized
by real estate properties decreased by $5.4 million. Other than release payments
in the normal course of business, such debt was reduced by the proceeds from the
sale of the golf courses and land parcels.
Reserve for notes receivable sold with recourse increased 6.9% to $4.4
million at May 31, 2000 from $4.2 million at August 31, 1999. This reserve is
increased as notes receivable are sold to lenders, and reduced as loan balances
decrease. Recourse to the Company on sales of notes receivable is governed by
the agreements between the purchasers and the Company.
Stockholders' equity increased 14.0% to $24.9 million at May 31, 2000
from $21.8 million at August 31, 1999. The change for the period was due to net
income.
13
<PAGE> 16
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 Year 2000 problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There was no material change for the three months ended May 31, 2000 in
the information about the Company's "Quantitative and Qualitative Disclosures
About Market Risk" as disclosed in its Annual Report on Form 10-K for the fiscal
year ended August 31, 1999.
14
<PAGE> 17
PART II OTHER INFORMATION
ITEM 1. 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 refiled their
complaint in Nevada District Court, naming all of the above parties with the
exception of CNUC.
On October 19, 1998, the United States District Court, District of
Nevada (Court) issued a Final Judgment and Order of Dismissal with Prejudice,
approving the Settlement Agreement, regarding the actions against the Company
known as the Dunleavy and Peyser Actions filed in 1995 and 1996; and the Michael
Nadler action filed in 1996. The Final Judgment and Order of Dismissal would not
become final until the Effective Date, which is the date following either the
expiration of any appeal period without appeal; or, the date following the
affirmation of the Final Judgment on appeal, and on which such Final Judgment is
no longer subject to further judicial review. On November 13, 1998, Michael
Nadler, who had filed objections to the settlement, filed a Notice of Appeal
from the Final Judgment and Order of Dismissal with Prejudice and certain other
orders of the Court. On May 22, 2000, the 9th Circuit Court of Appeals denied
Mr. Nadler's appeal of the Settlement Agreement and sustained the final
judgment. Provided no further appeal is taken, the Effective Date will be
August 21, 2000.
There has been no material change in the status of other litigation
reported in the Company's Annual Report on Form 10-K for the year ended August
31, 1999, other than that reported herein and in the Form 10-Q's for the
quarters ended November 30, 1999 and February 29, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.208 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 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 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.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
(b) No reports on Form 8-K were filed during the quarter.
15
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEGO FINANCIAL CORP.
By: /s/ Charles G. Baltuskonis
-------------------------------------------
Charles G. Baltuskonis
Vice President and Chief Accounting Officer
Date: July 12, 2000
16
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.208 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 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 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.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
