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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: NOVEMBER 30, 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 January 12, 2001, 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
November 30, 2000 and August 31, 2000..........................................1
Condensed Consolidated Income Statements for the Three Months Ended
November 30, 2000 and 1999 ...................................................2
Condensed Consolidated Statements of Stockholders' Equity for the Three Months
Ended November 30, 2000 .......................................................3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
November 30, 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......................................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................14
PART II OTHER INFORMATION
Item 1. Legal Proceedings..............................................................14
Item 4. Submission of Matters to a Vote of Security Holders............................14
Item 6. Exhibits and Reports on Form 8-K...............................................15
SIGNATURE ................................................................................16
</TABLE>
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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>
NOVEMBER 30, AUGUST 31,
ASSETS 2000 2000
------------ ----------
<S> <C> <C>
Cash and cash equivalents $ 337 $ 1,069
Restricted cash 1,066 1,255
Notes receivable, net of allowance for cancellations and discounts of $13,262 at
November 30, 2000 and $13,234 at August 31, 2000 84,090 83,156
Interest only receivables, at fair value 2,812 2,701
Timeshare interests held for sale 20,992 23,307
Land and improvements inventory 3,593 4,113
Other investments 4,487 4,492
Property and equipment, net of accumulated depreciation of $15,807 at November 30,
2000 and $17,632 at August 31, 2000 16,988 23,167
Deferred selling costs 5,238 5,231
Prepaid debt expenses 2,103 2,060
Other assets 18,082 18,041
--------- ---------
TOTAL ASSETS $ 159,788 $ 168,592
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and contracts payable $ 97,903 $ 109,131
Accounts payable and accrued liabilities 20,478 19,544
Reserve for notes receivable sold with recourse 4,265 4,033
Deposits 3,029 2,841
Accrued income taxes 2,595 2,975
--------- ---------
Total liabilities before subordinated debt 128,270 138,524
--------- ---------
Subordinated debt 4,286 4,286
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 November 30, 2000 and August 31, 2000) 35 35
Additional paid-in capital 13,068 13,068
Retained earnings 14,602 12,679
Accumulated other comprehensive loss (473) --
--------- ---------
Total stockholders' equity 27,232 25,782
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 159,788 $ 168,592
========= =========
</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
NOVEMBER 30,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUES
Timeshare interest sales, net $ 14,018 $ 11,991
Land sales, net 4,742 4,019
Gain on sale of notes receivable 292 --
Gain on sale of investments and other assets 1,608 --
Interest income 3,209 2,871
Financial income 479 272
Incidental operations 490 624
Other 1,042 920
----------- -----------
Total revenues 25,880 20,697
----------- -----------
COSTS AND EXPENSES
Direct cost of:
Timeshare interest sales 3,157 2,378
Land sales 769 556
Interest expense 3,044 2,866
Marketing and sales 11,464 9,274
General and administrative 4,914 3,878
Incidental operations 354 600
Depreciation 392 490
----------- -----------
Total costs and expenses 24,094 20,042
----------- -----------
INCOME BEFORE INCOME TAXES 1,786 655
INCOME TAXES (BENEFIT) (137) --
----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK $ 1,923 $ 655
=========== ===========
INCOME PER COMMON SHARE
Basic:
Net income applicable to common stock $ 0.55 $ 0.19
=========== ===========
Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557
=========== ===========
Diluted:
Net income applicable to common stock $ 0.55 $ 0.19
=========== ===========
Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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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 ACCUMULATED
$.01 PAR VALUE ADDITIONAL OTHER
----------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS LOSS TOTAL
--------- --------- ----------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at August 31, 2000 3,500,557 $ 35 $ 13,068 $ 12,679 $ 25,782
Net income for the three months ended
November 30, 2000 1,923 1,923
Cumulative effect of change in accounting
principle as of September 1, 2000 for
unrealized loss on interest rate swaps,
net of related income tax of $87 $ (168) (168)
Unrealized loss on interest rate swaps, for
the three months ended November 30, 2000,
net of related income tax of $156 (305) (305)
--------- --------- --------- --------- --------- ---------
Total comprehensive income 1,450
---------
Balances at November 30, 2000 3,500,557 $ 35 $ 13,068 $ 14,602 $ (473) $ 27,232
========= ========= ========= ========= ========= =========
</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, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,923 $ 655
-------- --------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Charges to allowance for cancellations (1,705) (1,945)
Provision for cancellations 1,946 1,408
Gain on sale of notes receivable (292) --
Gain on sale of other investments and other assets (1,608) --
Cost of sales 3,926 2,934
Depreciation 392 490
Additions to interest only receivables (276) --
Amortization of interest only receivables 165 162
Repayments on notes receivable, net 10,484 13,260
Additions to notes receivable (21,024) (19,592)
Proceeds from sale of notes receivable 9,889 --
Purchase of land and timeshare interests (1,091) (789)
Changes in operating assets and liabilities:
Decrease in restricted cash 189 295
Increase in other assets (84) (1,870)
Increase in deferred selling costs (7) (523)
Increase (decrease) in accounts payable and accrued liabilities 461 (531)
Increase in deposits 188 16
Decrease in accrued income taxes (380) --
-------- --------
Total adjustments 1,173 (6,685)
-------- --------
Net cash provided by (used in) operating activities 3,096 (6,030)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (458) (275)
Proceeds from the sale of property and equipment 7,853 --
Additions to other investments -- (25)
Proceeds from the sale of other investments 5 --
-------- --------
Net cash provided by (used in) investing activities 7,400 (300)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 12,746 17,613
Reduction of debt (23,974) (11,287)
Payments on subordinated debt -- (214)
Increase in subordinated debt -- 122
-------- --------
Net cash provided by (used in) financing activities (11,228) 6,234
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (732) (96)
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD 1,069 1,821
-------- --------
CASH AND CASH EQUIVALENTS--END OF PERIOD $ 337 $ 1,725
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amounts capitalized $ 3,145 $ 2,760
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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MEGO FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2000
(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, 2000 and 1999,
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, 2000, 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 November 30, 2000, the results of its operations
for the three months ended November 30, 2000 and 1999, the change in
stockholders' equity for the three months ended November 30, 2000 and the cash
flows for the three months ended November 30, 2000 and 1999. All intercompany
accounts between the parent and its subsidiaries have been eliminated.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (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 necessary for
the fair presentation of these statements have been included herein which are
normal and recurring in nature. The results of operations for the three months
ended November 30, 2000 are not necessarily indicative of the results to be
expected for the full year.
2. NATURE OF OPERATIONS
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 interest and land sales. Mego Financial and its subsidiaries are
herein collectively referred to as the Company as the context requires. 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.
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. 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.
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. INTEREST RATE SWAP AND CUMULATIVE EFFECT ON CHANGE IN ACCOUNTING PRINCIPLE
Effective September 1, 2000, the Company adopted the requirements of
Financial Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative
Instruments and Hedging Activities", which was amended by SFAS No. 137. 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
was documented as a highly effective cash flow hedge. Beginning September 1,
2000, the unrealized gain or loss mark to market, net of related income tax
effect, is recorded into a separate Stockholders' Equity caption titled
"Accumulated Other Comprehensive Income (Loss)". The cumulative effect of change
in accounting principle as of September 1, 2000, net of related income tax, was
an other comprehensive loss of $168,000.
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4. STOCKHOLDERS' EQUITY
Mego Financial's stock option plan (Stock Option Plan), provides for
grants of non-qualified and qualified incentive stock options to officers, key
employees and directors. Options for 51,652 shares of Mego Financial common
stock were outstanding as of November 30, 2000.
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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 its subsidiaries are referred to herein collectively as the
Company as the context requires) 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. 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 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, 2000.
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/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 or mortgages. These notes
receivable are generally payable over a period up to twelve years, bear interest
at rates ranging from 12.5% 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.
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.
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<PAGE> 10
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
three months ended November 30, 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.
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.
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<PAGE> 11
Marketing and sales costs directly attributable to unrecognized sales are
accounted for as deferred selling costs until such time as the sale is
recognized.
PEC has entered into financing arrangements with certain purchasers of
timeshare interests and land 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 payments. Notes receivable of $6.5
million at November 30, 2000 and $6.4 million at August 31, 2000 were made under
this arrangement.
Land sales as of November 30, 2000 exclude $18.8 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 $18.8 million unrecognized land sales, the
Company estimates that it will ultimately recognize $15.4 million of revenues,
which would be reduced by a related provision for cancellations of $1.3 million,
estimated deferred selling costs of $4.3 million and cost of sales of $2.2
million, for an estimated net profit of $7.6 million.
RESULTS OF OPERATIONS
Three Months Ended November 30, 2000 Compared to Three Months Ended November 30,
1999
Total revenues for the Company increased 25.0% or $5.2 million to $25.9
million during the three months ended November 30, 2000 from $20.7 million
during the three months ended November 30, 1999. The increase was primarily due
to a net increase of $2.7 million in timeshare interest and land sales to $18.7
million during the three months ended November 30, 2000 from $16.0 million
during the three months ended November 30, 1999 (net timeshare interest sales
increased by $2.0 million and net land sales increased by $700,000), an increase
in interest income to $3.2 million during the three months ended November 30,
2000 from $2.9 million during the three months ended November 30, 1999, and
gains on sale of receivables and investments and other assets of $1.9 million
during the three months ended November 30, 2000, compared to no gain on sales
during the three months ended November 30, 1999.
Gross sales of timeshare interests increased to $15.8 million during the
three months ended November 30, 2000 from $13.3 million during the three months
ended November 30, 1999, an increase of 18.7%. Net sales of timeshare interests
increased to $14.0 million from $12.0 million, an increase of 16.9%. The
provision for cancellations represented 11.1% and 9.7%, respectively, of gross
sales of timeshare interests for the three months ended November 30, 2000 and
1999. The comparative increase in the provision was primarily due to a downward
adjustment for the three months ended November 30, 1999 based on the results of
the customary quarterly review of the reserve adequacy.
Gross sales of land increased to $4.9 million during the three months
ended November 30, 2000 from $4.1 million during the three months ended November
30, 1999, an increase of 19.4%. Net sales of land increased to $4.7 million
during the three months ended November 30, 2000 from $4.0 million during the
three months ended November 30, 1999, an increase of 18.0%. The provision for
cancellations represented 4.0% and 2.8%, respectively, of gross sales of land
for the three months ended November 30, 2000 and 1999. The comparative increase
in the provision was primarily due to a downward adjustment for the three months
ended November 30, 1999 based on the results of the customary quarterly review
of the reserve adequacy.
A gain on sale of receivables of $292,000 was recorded for the three
months ended November 30, 2000 compared to no gain on sale of receivables for
the three months ended November 30, 1999. Gains in the amount of $1.6 million
were recorded for the three months ended November 30, 2000 on the sales of the
Company's two office buildings, compared to no gains on the sale of investments
and other assets for the three months ended November 30, 1999.
Interest income increased to $3.2 million during the three months ended
November 30, 2000 from $2.9 million for the three months ended November 30,
1999, an increase of 11.8%, primarily due to increased average notes receivable
balances for the comparative quarters.
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<PAGE> 12
Total costs and expenses for the Company increased to $24.1 million for
the three months ended November 30, 2000 from $20.0 million for the three months
ended November 30, 1999, an increase of 20.2%. The increase resulted primarily
from an increase in direct costs of timeshare interest sales to $3.2 million
from $2.4 million, an increase of 32.8%; an increase to $11.5 million from $9.3
million in marketing and sales expense, an increase of 23.6%; and, an increase
to $4.9 million from $3.9 million in general and administrative expenses, an
increase of 26.7%. The increase in direct costs of timeshare interest sales is
attributable to higher net timeshare interest sales during the current fiscal
quarter compared to the same quarter last year. As a percentage of gross sales
of timeshare interests and land marketing and sales expenses related thereto
increased to 55.4% for the three months ended November 30, 2000 from 53.2% for
the three months ended November 30, 1999. The increase in marketing and sales
expenses is due primarily to higher gross sales, new sales offices and general
increases related to a competitive sales environment. The increase in general
and administrative expenses is primarily due to the increase in recording and
filing fees and escrow costs related to the increased sales volume, and reserves
for the Company's guaranty of office and equipment leases related to a
previously affiliated company. Also, after the sale/leaseback of the two office
buildings, the related rent expense, which commenced during the three months
ended November 30, 2000, is now included in General and administrative expenses
compared to Interest and Depreciation expense in the comparative period when the
buildings were owned by the Company.
Interest expense increased to $3.0 million during the three months ended
November 30, 2000 from $2.9 million during the three months ended November 30,
1999, an increase of 6.2%. The increase is a result of higher average
outstanding balance of notes and contracts payable during the three months ended
November 30, 2000 compared to the three months ended November 30, 1999,
partially offset by a decrease in interest expense as a result of the reduction
of debt related to the sale of the office buildings.
Pretax income of $1.8 million was earned during the three months ended
November 30, 2000 compared to pretax income of $655,000 during the three months
ended November 30, 1999.
An income tax benefit of $137,000 was recorded for the three months
ended November 30, 2000, compared to no income tax provision for the three
months ended November 30, 1999. The income tax calculations for the three months
ended November 30, 2000 and 1999 were reduced 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 amounted to $1.9 million during
the three months ended November 30, 2000 compared to a net income applicable to
common stock of $655,000 during the three months ended November 30, 1999,
primarily due to the foregoing.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents for the Company was $337,000 at November 30,
2000 compared to $1.1 million at August 31, 2000. This was due primarily to a
timing difference in certain of the Company's fundings, which occur in the
normal course of business. Such fundings were subsequently received in December
2000.
PEC's cash requirements arise from the acquisition of timeshare
properties and land, payments of operating expenses, payments of principal and
interest on debt obligations, payments of marketing and sales expenses in
connection with sales of timeshare interests and land, and payments of income
taxes to Mego Financial. 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 flow from operations. At
November 30, 2000, no commitments existed for material capital expenditures.
At November 30, 2000, PEC had arrangements with 5 institutional lenders
under 6 agreements 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 6 lines of credit of up to an aggregate of $133.5
million. Such lines of credit
10
<PAGE> 13
are secured by timeshare and land receivables and mortgages. At November 30,
2000, an aggregate of $96.1 million was outstanding under such lines of credit,
and $37.4 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
November 30, 2000, PEC's tangible net worth was $32.5 million. Summarized lines
of credit information and accompanying notes relating to these six lines of
credit outstanding at November 30, 2000, consist of the following (thousands of
dollars):
<TABLE>
<CAPTION>
BORROWING MAXIMUM
AMOUNT AT BORROWING REVOLVING
NOVEMBER 30, 2000 AMOUNTS EXPIRATION DATE (a) MATURITY DATE INTEREST RATE
------------------- ------------- -------------------- --------------- --------------------
<S> <C> <C> <C> <C>
$ 51,406 $ 75,000 (b) April 30, 2001 Various Prime + 2.0 - 2.25%
------------------- -------------
16,623 15,000 (c) December 1, 2002 Various Prime + 2.0
3,423 11,500 (d) December 31, 2001 Various Prime + 2.0 - 3.00%
------------------- -------------
20,046 26,500 Considered one borrowing line for the maximum amount.
------------------- -------------
22,701 30,000 (e) June 30, 2001 Various Libor + 4.0 - 4.25%
1,972 1,972 (f) July 30, 2003 Prime + 2.25%
------------------- -------------
$ 96,125 $ 133,472
=================== =============
</TABLE>
(a) When the revolver expires as shown, the loans convert to term loans with
maturities as stated below. 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 November 30, 2000,
$46.8 million of loans secured by receivables were outstanding related to
financings at prime plus 2%, of which $21.5 million of loans secured by land
receivables mature May 15, 2010 and $25.3 million of loans secured by
timeshare receivables mature May 15, 2007. The outstanding borrowing amount
includes a real estate loan with an outstanding balance of $1.1 million
maturing April 30, 2001, bearing interest at prime plus 2.25%. The remaining
Acquisition and Development (A&D) loans, receivables loans and a resort
lobby loan outstanding of $2.8 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 April 30, 2001. 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 was $700,000 as of
November 30, 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 November 30, 2000, $6.0
million was outstanding under the A&D loan, which matures on June 30, 2004,
and $10.6 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 $100,000 was outstanding at
November 30, 2000, and a real estate loan of $3.3 million with a maturity
date of December 31, 200l.
11
<PAGE> 14
(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 November 30, 2000, $2.5
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 $20.2
million was outstanding at November 30, 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
NOVEMBER 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Marketing and selling expenses attributable
to recognized and unrecognized sales $ 11,447 $ 9,797
Less: Down payments (3,459) (3,016)
-------- --------
Cash Shortfall $ 7,988 $ 6,781
======== ========
</TABLE>
During the three months ended November 30, 2000, PEC sold $9.6 million
in notes receivable compared to the three months ended November 30, 1999 when
PEC did not sell any notes receivable.
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 November 30, 2000, PEC was contingently liable to
replace or repurchase notes receivable sold with recourse totaling $65.4
million. The repurchase provisions provide for substitution of receivables as
recourse for $58.3 million of sold notes receivable and cash payments for
repurchase relating to $7.1 million of sold notes receivable. The undiscounted
amounts of the recourse obligations on such notes receivable were $4.8 million
and $4.5 million at November 30, 2000 and August 31, 2000, 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>
NOVEMBER 30, AUGUST 31,
2000 2000
------------ ----------
<S> <C> <C>
Notes collateralized by receivables $ 77,718 $ 80,593
Mortgages collateralized by real estate properties 19,292 27,407
Installment contracts and other notes payable 893 1,131
-------- --------
Total $ 97,903 $109,131
======== ========
</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 three
months ended November 30, 2000 consisted of the following (thousands of
dollars):
<TABLE>
<S> <C>
Balance at beginning of period $ 16,860
Provision for cancellations 1,946
Amounts charged to allowance for cancellations, net (1,705)
--------
Balance at end of period $ 17,101
========
</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>
NOVEMBER 30, AUGUST 31,
2000 2000
------------ ----------
<S> <C> <C>
Allowance for cancellations, excluding discounts $ 12,836 $ 12,827
Reserve for notes receivable sold with recourse 4,265 4,033
-------- --------
Total $ 17,101 $ 16,860
======== ========
</TABLE>
November 30, 2000 Compared to August 31, 2000
Cash and cash equivalents decreased to $337,000 at November 30, 2000
from $1.1 million at August 31, 2000. This was due to a timing difference in
certain of the Company's fundings, which occur in the normal course of business.
Such fundings were subsequently received in December 2000.
Notes receivable, net, increased 1.1% to $84.1 million at November 30,
2000 from $83.2 million at August 31, 2000, as a result of net new receivables
added, less sale of receivables, during the first quarter of fiscal 2001.
Timeshare interests held for sale decreased 9.9% to $21.0 million at
November 30, 2000 from $23.3 million at August 31, 2000.
Land and improvements inventory decreased 12.6% to $3.6 million at
November 30, 2000 from $4.1 million at August 31, 2000.
Notes and contracts payable decreased 10.3% to $97.9 million at November
30, 2000 from $109.1 million at August 31, 2000. The debt paydown in connection
with the sales of two office buildings and sale of notes receivables more than
offset new borrowings during the three months ended November 30, 2000.
Reserve for notes receivable sold with recourse increased 5.8% to $4.3
million at November 30, 2000 from $4.0 million at August 31, 2000 as the reserve
addition due to the sale of notes receivable more than offset paydowns on such
sold notes receivable. Such paydowns would serve to reduce the balance of 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.
13
<PAGE> 16
Stockholders' equity increased 5.6% to $27.2 million at November 30,
2000 from $25.8 million at August 31, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There was no material change for the quarter ended November 30, 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, 2000.
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. The defendants filed a motion to dismiss, which was denied.
The defendant is preparing to file a motion for summary judgment.
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, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders for fiscal 1999 (Meeting) of the
Company was held on November 9, 2000.
(b) Not applicable because:
(i) Proxies for the Meeting were solicited pursuant to Regulation 14
under the Securities Act of 1934.
(ii) There were no solicitations in opposition to management's
nominees as listed in the Company's proxy statement dated October
12, 2000.
(iii) All such nominees were elected.
(c) The matter voted on at the Meeting consisted of the following:
(i) The election of six members to the Company's Board of Directors.
The name of each nominee for election and the number of shares
voted for and against such nominee, as well as the number of
abstentions and broker non-votes with respect to such nominee,
are set forth below.
14
<PAGE> 17
<TABLE>
<CAPTION>
Name For Against Abstentions Non-Votes
-------------------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Robert Nederlander 3,205,035 15,699 0 0
Jerome J. Cohen 3,205,022 12,712 0 0
Herbert B. Hirsch 3,205,035 15,699 0 0
John E. McConnaughy, Jr. 3,205,022 15,712 0 0
Wilbur L. Ross, Jr. 3,204,991 15,743 0 0
Eugene I. Schuster 3,205,035 15,699 0 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.221 Amended and Restated Employment Agreement dated November 10,
2000 by and between MEGO Financial Corp and Jerome J. Cohen.
10.222 Seventh Amendment to loan and security agreement by Preferred
Equities Corporation and Colorado Land and Grazing Corp.,
dated December 15, 2000.
10.223 Fifth Amendment to Promissory Note made by Preferred Equities
Corporation and Colorado Land And Grazing Corp on December 15,
2000.
10.224 Compensation Agreement between Carol Sullivan and Preferred
Equities Corporation dated January 8, 2001.
</TABLE>
No reports on Form 8-K were filed during the period.
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
Senior Vice President and
Chief Accounting Officer
Date: January 12, 2001
16
