-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FlockyBUGjqyR4n7+9MjYlTO9J6Mtrd2mx0FHjT+XDHAd9AI1slYvmsAdUqIbr3T pAW1CzIGJwf369S2eQKrtA== 0000950150-96-000241.txt : 19960422 0000950150-96-000241.hdr.sgml : 19960422 ACCESSION NUMBER: 0000950150-96-000241 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960419 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGO FINANCIAL CORP CENTRAL INDEX KEY: 0000736035 STANDARD INDUSTRIAL CLASSIFICATION: LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES) [6552] IRS NUMBER: 135629885 STATE OF INCORPORATION: NY FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08645 FILM NUMBER: 96548635 BUSINESS ADDRESS: STREET 1: 4310 PARADISE RD CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027373700 FORMER COMPANY: FORMER CONFORMED NAME: MEGO CORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: February 29, 1996 - ------------------------------------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________to __________________ Commission file number: 1-8645 - ------------------------------------------------------------------------------- MEGO FINANCIAL CORP. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) 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 April 5, 1996, there were 18,087,556 shares of Common Stock, $.01 par value per share, of the Registrant outstanding. 2 MEGO FINANCIAL CORP. AND SUBSIDIARIES INDEX
Page PART I FINANCIAL INFORMATION: Item 1. Financial Statements Condensed Consolidated Balance Sheets February 29, 1996 and August 31, 1995(Unaudited) . . . . . . . . . . . . . . . . . . . . . 2 Condensed Consolidated Statements of Operations Three and six months ended February 28, 1995 (Unaudited and restated) and February 29, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4 Condensed Consolidated Statements of Cash Flows Six months ended February 28, 1995 (Unaudited and restated) and February 29, 1996 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 8-14 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of dollars) (Unaudited)
February 29, August 31, 1996 1995 ----------- ---------- ASSETS Cash and cash equivalents $ 5,062 $ 7,338 Restricted cash 7,171 6,467 Notes receivable, net of allowances for cancellation and credit losses of $17,630 and $16,866 at February 29, 1996 and August 31, 1995 34,357 31,054 Excess servicing rights 27,138 16,565 Mortgage servicing rights 1,607 1,076 Timeshare interests held for sale 23,241 19,820 Land and improvements inventory 5,022 5,542 Other investments 2,241 1,531 Property and equipment, at cost, net of accumulated depreciation of $12,645 and $11,823 at February 29, 1996 and August 31, 1995 14,074 12,681 Deferred selling costs 2,355 3,332 Other assets 7,948 7,351 -------- -------- TOTAL ASSETS $130,216 $112,757 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes and contracts payable $ 55,752 $ 44,715 Accounts payable and accrued liabilities 16,014 13,998 Payable to assignors 2,579 2,579 Future estimated contingency for notes receivable sold with recourse 8,766 8,030 Deposits 2,020 3,619 Negative goodwill 96 131 Deferred income taxes 10,107 8,103 -------- -------- Total liabilities before Subordinated debt and Redeemable Preferred Stock 95,334 81,175 -------- -------- Subordinated debt 9,516 9,352 -------- -------- Redeemable Preferred Stock, Series A, 12% Cumulative Preferred Stock, $.01 par value, $10 redemption value, 200,000 and 300,000 shares issued and outstanding at February 29, 1996 and August 31, 1995 2,000 3,000 -------- -------- Shareholders' equity Preferred Stock -- $.01 par value Authorized -- 5,000,000 shares Common Stock -- $.01 par value Authorized -- 5,000,000 shares Issued and outstanding -- 18,087,556 shares 180 180 Additional paid in capital 4,498 4,498 Retained earnings 18,688 14,552 -------- -------- Total shareholders' equity 23,366 19,230 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $130,216 $112,757 ======== ========
See the accompanying notes to the condensed consolidated financial statements. 2 4 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of dollars) (Unaudited)
Three months ended Six months ended ------------------------------ ----------------------------- February 28, February 29, February 28, February 29, 1995 1996 1995 1996 ---------- ---------- ---------- ----------- (As restated - (As restated - see Note 5) see Note 5) REVENUES Timeshare interest sales, net (Note 2) $ 3,946 $ 5,482 $ 8,606 $12,194 Retail lot sales, net (Note 2) 4,127 5,677 10,515 10,758 Housing sales - - 205 - Gain on sale of notes receivable 1,445 4,884 2,816 11,281 Interest income 1,748 1,759 3,667 3,582 Financial income 154 1,271 154 2,162 Amortization of negative goodwill 87 13 178 35 Incidental operations 725 488 1,349 1,232 Other 132 (66) 269 527 ------ ------ ------ ------ Total revenues 12,364 19,508 27,759 41,771 ------ ------ ------ ------ COSTS AND EXPENSES Direct costs of: Timeshare interest sales 576 836 1,254 1,851 Retail lot sales 433 551 1,103 1,045 Housing sales (1) - 265 - Incidental operations 638 374 1,261 1,078 Commissions and selling 5,011 7,711 10,096 15,549 Depreciation and amortization 416 662 823 1,117 Provision for credit losses 139 200 246 497 Interest 1,466 1,484 2,677 3,315 General and administrative 2,756 5,681 6,011 10,840 Payments to assignors 4,716 - 7,252 - ------ ------ ------ ------ Total costs and expenses 16,150 17,499 30,988 35,292 ------ ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAXES (3,786) 2,009 (3,229) 6,479 INCOME TAXES 356 531 1,408 2,203 ------ ------ ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS (4,142) 1,478 (4,637) 4,276 Gain on discontinued operations, net of income taxes of $298 578 - 578 - ------ ------ ------ ------ NET INCOME (LOSS) (3,564) 1,478 (4,059) 4,276 CUMULATIVE PREFERRED STOCK DIVIDENDS 90 60 180 140 ------ ------ ------ ------ NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $(3,654) $1,418 $(4,239) $4,136 ======= ====== ======= ======
See the accompanying notes to the condensed consolidated financial statements. 3 5 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (in thousands of dollar) (Unaudited)
Three months ended Six months ended ------------------------------ ------------------------------ February 28, February 29, February 28, February 29, 1995 1996 1995 1996 ----------- ----------- ----------- ---------- (As restated - (As restated - see Note 5) see Note 5) EARNINGS (LOSS) PER COMMON SHARE: Primary Income (loss) from continuing operations $(0.23) $0.08 $(0.26) $0.23 Income from discontinued operations 0.03 - 0.03 - ------ ----- ------ ----- Net income (loss) $(0.20) $0.08 $(0.23) $0.23 ====== ===== ====== ===== Weighted average number of common shares and common share equivalents outstanding 18,086,750 18,087,556 18,086,750 18,087,556 ========== ========== ========== ========== Fully diluted Income from continuing operations N/A $0.07 N/A $0.21 Income from discontinued operations - - ----- ----- Net income $0.07 $0.21 ===== ===== Weighted average number of common shares and common share equivalents outstanding 19,463,556 19,463,556 ========== ==========
See the accompanying notes to the condensed consolidated financial statements. 4 6 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (Unaudited)
Six months ended ----------------------------- February 28, February 29, 1995 1996 ------------ ------------ (As restated - see Note 5) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(4,059) $4,276 ------- ------ Adjustments to reconcile net income to net cash used in operating activities: Amortization of excess of underlying book value over purchase price of wholly- owned subsidiary (132) - Provisions for cancellation and credit losses 4,815 5,468 Cost of sales 2,622 2,896 Depreciation and amortization 823 1,117 Gains on sales of receivables (2,816) (11,281) Gain on discontinued operations (578) - Increase in provision for future estimated contingency for notes receivable sold with recourse 1,032 736 Changes in operating assets and liabilities: Increase in restricted cash (747) (704) Increase in notes receivable, net (34,783) (60,945) Proceeds from sale of notes receivable 33,356 63,455 Increase in excess servicing rights (2,822) (10,573) Increase in mortgage servicing rights (309) (531) Purchase of land and timeshare interests (8,763) (5,797) (Increase) decrease in other assets (1,605) (597) (Increase) decrease in deferred selling costs (725) 977 Increase in accounts payable and accrued liabilities 665 2,015 Increase in payable to assignors 6,198 - Increase (decrease) in deposits 781 (1,599) Decrease in negative goodwill (46) (35) Increase in deferred income taxes 1,368 2,004 ------- ------ Total adjustments (1,666) (13,394) ------- ------ Net cash used in operating activities (5,725) (9,118) ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Increase in debt 9,551 11,037 Preferred stock dividends (180) (140) Redemption of preferred stock - (1,000) Increase in subordinated debt - 164 ------- ------ Net cash provided by financing activities 9,371 10,061 ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,617) (2,509) Increase in other investments (4) (710) ------- ------ Net cash used in financing activities (1,621) (3,219) ------- ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,025 (2,276) CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 10,982 7,338 ------- ------ CASH AND CASH EQUIVALENTS -- END OF PERIOD $13,007 $5,062 ======= ======
See the accompanying notes to the condensed consolidated financial statements. 5 7 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (in thousands of dollars) (Unaudited)
Six months ended ------------------------------- February 29, February 29, 1995 1996 ----------- ----------- (As restated - see Note 5) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest, net of amounts capitalized $ 2,519 $ 3,371 ======= ======= Federal income taxes $ - $ - ======= =======
See the accompanying notes to the condensed consolidated financial statements. 6 8 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1) In the opinion of management, when read in conjunction with the audited consolidated financial statements for the years ended August 31, 1994 (as restated - see Note 5 below) and 1995, the accompanying unaudited condensed consolidated financial statements contain all the information necessary to present fairly the financial position of Mego Financial Corp. ("Mego") and Subsidiaries (collectively the "Registrant") at February 29, 1996 and the results of its operations and cash flows for the six months ended February 28, 1995 (unaudited and restated - see Note 5 below) and February 29, 1996. All significant intercompany accounts between Mego and its subsidiaries have been eliminated. 2) The Registrant provides a provision for cancellation. A summary is as follows (in thousands):
Three months ended Six months ended ------------------------------- ------------------------------- February 28, February 29, February 28, February 29, 1995 1996 1995 1996 -------------- -------------- -------------- -------------- Gross timeshare interest sales $ 5,083 $ 6,443 $ 11,082 $ 15,137 Less: provision for cancellation 1,137 961 2,476 2,943 -------------- -------------- -------------- -------------- Timeshare interest sales, net $ 3,946 $ 5,482 $ 8,606 $ 12,194 ============== ============== ============== ============== Gross retail lot sales $ 4,948 $ 6,551 $ 12,608 $ 12,786 Less: provision for cancellation 821 874 2,093 2,028 -------------- -------------- -------------- -------------- Retail lot sales, net $ 4,127 $ 5,677 $ 10,515 $ 10,758 ============== ============== ============== ==============
3) Earnings (loss) per common share are based on the Net income (loss) applicable to common stock for each period divided by the weighted average number of common shares and common share equivalents outstanding during the period. Earnings per common share assuming full dilution are computed by dividing Net income applicable to common stock by the weighted average number of common shares plus shares issuable on the exercise of outstanding warrants and options. In loss periods, dilutive common equivalent shares are excluded as the effect would be antidilutive. 4) The results for the three and six month periods ended February 29, 1996 are not necessarily indicative of the actual results for the year ending August 31, 1996. 5) On November 10, 1995, the Company announced that it had determined, in consultation with its independent auditors, that certain adjustments were required to be made to the Company's previously issued financial statements, including certain financial statements reported on by such independent auditors. Adjustments related primarily to (i) the Company's method of computing deferred selling costs for retail lots, (ii) certain estimates and assumptions previously utilized by the Company to compute the present value of the income stream to be recovered over the estimated life of notes receivable sold by the Company, (iii) its method of computing the Provisions for cancellation, (iv) the restatement of certain Accounts relating to assets acquired by the Company in 1991, (v) its method of accounting for contributions in aid of construction received from customers of Central Nevada Utilities Company, its wholly-owned subsidiary, (vi) the reinstatement of the carrying value of certain art inventory, and (vii) its method of accounting for organization costs relating to its subsidiary, Mego Mortgage Corporation. None of such adjustments affected the cash position of the Company. As a result of such adjustments, the Company has restated its previously issued financial statements for its fiscal years 1994 and 1993. Such adjustments also affect the Company's previously issued financial statements for the first three quarters of fiscal 1995. The aggregate effect of the adjustments for the three and six month periods ended February 28, 1995, after provision for income taxes, was to increase Net loss for the three months ended February 28, 1995, by $2.29 million, from Net loss of $1.27 million to a Net loss of $3.56 million and for the six months ended February 28, 1995, by $4.10 million, from Net income of $.04 million to a Net loss of $4.06 million. 7 9 The line items impacted by this restatement included in the Statement of Operations for the three and six months ended February 28, 1995 are as follows (in thousands of dollars except per share data):
Three months ended Six months ended February 28, 1995 February 28, 1995 ------------------------------------- ------------------------------------- Restatement Restatement As adjustments As As adjustments As Filed (Note 5) Restated Filed (Note 5) Restated ----------- ------------ ------------ ------------ ----------- ------------ REVENUES Timeshare interest sales 4,263 (317) 3,946 9,087 (481) 8,606 Retail lot sales 4,490 (363) 4,127 10,128 387 10,515 Housing sales - - - 205 - 205 Gain on sale of notes receivable 1,946 (501) 1,445 4,538 (1,722) 2,816 Interest income 1,956 (208) 1,748 3,984 (317) 3,667 Financial income - 154 154 - 154 154 Amortization of negative goodwill 98 (11) 87 212 (34) 178 Incidental operations 553 172 725 1,177 172 1,349 Other 306 (174) 132 399 (130) 269 Total revenues 13,612 12,364 29,730 27,759 COSTS AND EXPENSES Direct costs of: Timeshare interest sales 634 (58) 576 1,448 (194) 1,254 Retail lot sales 503 (70) 433 1,302 (199) 1,103 Housing sales - (1) (1) 265 - 265 Incidental operations 637 1 638 1,260 1 1,261 Commissions and selling 3,768 1,243 5,011 8,618 1,478 10,096 Depreciation and amortization 352 64 416 706 117 823 Provision for credit losses 272 (133) 139 490 (244) 246 Interest 1,466 - 1,466 2,658 19 2,677 General and administrative 3,414 (658) 2,756 6,567 456 6,011 Payments to assignors 4,716 - 4,716 7,252 - 7,252 Total costs and expenses 15,762 16,150 30,566 30,988 LOSS BEFORE INCOME TAXES (2,150) (3,786) (836) (3,229) INCOME TAXES - 356 356 - 1,408 1,408 LOSS FROM CONTINUING OPERATIONS (2,150) (4,142) (836) (4,637) Gain on discontinued operations, net of income taxes 876 (298) 578 876 (298) 578 NET INCOME (LOSS) (1,274) (3,564) 40 (4,059) CUMULATIVE PREFERRED STOCK DIVIDENDS 90 90 180 180 NET LOSS APPLICABLE TO COMMON STOCK (1,364) (3,654) (140) (4,239) LOSS PER COMMON SHARE: Primary Loss from continuing operations (0.13) (0.10) (0.23) (0.06) (0.20) (0.26) Income from discontinued operations 0.05 (0.02) 0.03 0.05 (0.02) 0.03 Net loss (0.08) (0.20) (0.01) (0.23) Weighted average number of common shares and common share equivalents outstanding 18,086,750 18,086,750 18,086,750 18,086,750
8 10 MEGO FINANCIAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1995 (AS RESTATED - SEE NOTE 5) COMPARED TO THE THREE MONTHS ENDED FEBRUARY 29, 1996. GENERAL MEGO MORTGAGE CORPORATION ("MMC") MMC originated $13,734,000 of Title I Loans during the three months ended February 28, 1995 compared to $22,378,000 of Title I Loans during the three months ended February 29, 1996, an increase of 63%. MMC sold $12,747,000 of Title I Loans during the three months ended February 28, 1995 recognizing a gain on sale of Loans of $1,359,000. MMC sold $21,394,000 of Title I Loans during the three months ended February 29, 1996, recognizing a gain on sale of loans of $4,845,000. A weighted average discount rate of 12% per annum was used in the determination of the gain on sale for the three months ended February 28, 1995 and February 29, 1996. Interest income increased from $162,000 during the three months ended February 28, 1995 to $195,000 during the three months ended February 29, 1996, an increase of 20%. The increase was primarily the result of the increase in the size of the portfolio of loans held for sale. Loan servicing revenue increased from $97,000 during the three months ended February 28, 1995 to $870,000 during the three months ended February 29, 1996, an increase of 797%. The increase was primarily the result of the increased cumulative amount of Title I Loans being serviced for others. Total revenues increased from $1,618,000 for the three months ended February 28, 1995 to $5,910,000 for the three months ended February 29, 1996, an increase of 265%. The increase was primarily the result of increased sales of Loans. Total costs and expenses increased from $1,636,000 for the three months ended February 28, 1995 to $3,311,000 for the three months ended February 29, 1996, an increase of 102%. This increase resulted primarily from an increase in general and administrative expenses from $1,186,000 to $2,104,000, an increase of 77%; an increase in provision for credit losses from $139,000 to $200,000, an increase of 44%; an increase in interest expense from $126,000 to $229,000, an increase of 82%; and an increase in depreciation and amortization expense from $84,000 to $273,000, an increase of 225%. These increases are primarily due to the larger volume of MMC's business. As a result, Income (loss) before income taxes of MMC increased from a loss of $18,000 for the three months ended February 28, 1995 to income of $2,599,000 for the three months ended February 29, 1996. PREFERRED EQUITIES CORPORATION ("PEC") Timeshare interest and land sales, net, increased from $8,073,000 for the three months ended February 28, 1995 to $11,159,000 for the three months ended February 29, 1996, an increase of 38%. Gross sales of timeshare interests increased from $5,083,000 to $6,443,000, an increase of 27%. Net sales of timeshare interests increased from $3,946,000 to $5,482,000, an increase of 39%. The Provision for cancellation represented 22% and 15% of gross sales of timeshare interests for the three months ended February 28, 1995 and February 29, 1996, respectively. Gross sales of land increased from $4,948,000 to $6,551,000, an increase of 32%. Net sales of land increased from $4,127,000 to $5,677,000, an increase of 38%. The Provision for cancellation represented 17% and 13% of gross sales of land for the three months ended February 28, 1995 and February 29, 1996, respectively. Gain on sale of PEC's receivables decreased from $86,000 for the three months ended February 28, 1995 to $40,000 for the three months ended February 29, 1996, a decrease of 53%. This decrease resulted from sales of receivables decreasing from $1,093,000 during the three months ended February 28, 1995 to $411,000 during the three months ended February 29, 1996, a decrease of 62%. From time to time, PEC sells receivables in order to reduce the outstanding balances under its lines of credit. PEC's Interest income decreased from $1,586,000 for the three months ended February 28, 1995 to $1,543,000 for the three months ended February 29, 1996, a decrease of 3%. This decrease resulted primarily from a reduction in the average balance of PEC's portfolio of receivables. Other revenues increased from $156,000 for the three months ended February 28, 1995 to $287,000 for the three months ended February 29, 1996, an increase of 84%. 9 11 As a result of the foregoing, total revenues of PEC increased from $10,659,000 for the three months ended February 28, 1995 to $13,579,000 for the three months ended February 29, 1996, an increase of 27%. Total costs and expenses increased from $9,470,000 for the three months ended February 28, 1995 to $13,287,000 for the three months ended February 29, 1996, an increase of 40%. This increase resulted primarily from an increase in Commissions and selling expenses from $4,715,000 to $7,206,000, an increase of 53%, and an increase in General and administrative costs from $1,611,000 to $2,601,000, an increase of 61%. The increase in General and administrative costs is primarily due to increases in payroll, maintenance fees related to unsold timeshare inventory and owners' association costs. As a percentage of gross sales of timeshare interests and land Commissions and selling expenses relating thereto increased from 47% for the three months ended February 28, 1995 to 55% for the three months ended February 29, 1996, and Costs of sales relating thereto increased from 10% for the three months ended February 28, 1995 to 11% for the three months ended February 29, 1996. As a result of the foregoing, PEC's Income before income taxes decreased from $1,189,000 for the three months ended February 28, 1995 to $292,000 for the three months ended February 29, 1996, a decrease of 75%. The decrease is largely due to the increase of Commissions and selling expense as a result of additional costs involved in establishing new marketing programs to increase sales levels primarily for timeshare interests. COMPANY Income Statement Data. Operating income from subsidiaries increased from $1,171,000 for the three months ended February 28, 1995 to $2,891,000 for the three months ended February 29, 1996, an increase of 147%. The increase was due to the increased income of MMC which was partially offset by the decrease in income of PEC. Payments to Assignors, which relate to the acquisition of PEC in 1988, decreased from $4,716,000 for the three months ended February 28, 1995 to zero for the three months ended February 29, 1996, since accrual of amounts payable to the Assignors ended on January 31, 1995. Total costs and expenses increased from $16,150,000 for the three months ended February 28, 1995 to $17,499,000 for the three months ended February 29, 1996, an increase of 8%. This increase is primarily the result of an increase in General and administrative expenses from $2,756,000 to $5,681,000, an increase of 106%, and an increase in Commission and selling expenses from $5,011,000 to $7,711,000, an increase of 54%. The increase in General and administrative expenses is primarily a result of the increased volume of the business of MMC, while the increase in Commissions and selling expense occurs as a result of establishing new programs to increase sales levels primarily for timeshare interests. Income (loss) before income taxes increased from a loss of $3,786,000 for the three months ended February 28, 1995 to income of $2,009,000 for the three months ended February 29, 1996. Income taxes increased from $356,000 for the three months ended February 28, 1995 to $531,000 for the three months ended February 29, 1996. The Gain on discontinued operations, net of income taxes was $578,000 for the three months ended February 28, 1995, and zero for the three months ended February 29, 1996. As a result of the foregoing, Net income (loss) increased from a net loss of $3,564,000 for the three months ended February 28, 1995 to net income of $1,478,000 for the three months ended February 29, 1996. SIX MONTHS ENDED FEBRUARY 28, 1995 (AS RESTATED - SEE NOTE 5) COMPARED TO THE SIX MONTHS ENDED FEBRUARY 29, 1996. GENERAL MEGO MORTGAGE CORPORATION ("MMC") MMC originated $24,598,000 of Title I Loans during the six months ended February 28, 1995 compared to $56,092,000 of Title I Loans during the six months ended February 29, 1996, an increase of 128%. MMC sold $23,602,000 of Title I Loans during the six months ended February 28, 1995 recognizing a gain on sale of Loans of $2,385,000. MMC sold $56,421,000 of Title I Loans during the six months ended February 29, 1996, recognizing a gain on sale of loans of $10,810,000. A weighted average discount rate of 12% per annum was used in the determination of the gain on sale for the six months ended February 28, 1995 and February 29, 1996. 10 12 Interest income increased from $458,000 during the six months ended February 28, 1995 to $526,000 during the six months ended February 29, 1996, an increase of 15%. The increase was primarily the result of the increase in the size of the portfolio of loans held for sale. Loan servicing revenue increased from $97,000 during the six months ended February 28, 1995 to $1,761,000 during the six months ended February 29, 1996, an increase of 1,715%. The increase was primarily the result of the increased cumulative amount of Title I Loans being serviced for others. Total revenues increased from $2,940,000 for the six months ended February 28, 1995 to $13,097,000 for the six months ended February 29, 1996, an increase of 345%. The increase was primarily the result of increased sales of Loans. Total costs and expenses increased from $3,080,000 for the six months ended February 28, 1995 to $6,653,000 for the six months ended February 29, 1996, an increase of 116%. This increase resulted primarily from an increase in general and administrative expenses from $2,276,000 to $4,296,000, an increase of 89%; an increase in provision for credit losses from $246,000 to $497,000, an increase of 102%; an increase in interest expense from $241,000 to $469,000, an increase of 95%; and an increase in depreciation and amortization expense from $155,000 to $374,000, an increase of 141%. These increases are primarily due to the larger volume of MMC's business. As a result, Income (loss) before income taxes of MMC increased from a loss of $140,000 for the six months ended February 28, 1995 to income of $6,444,000 for the six months ended February 29, 1996. PREFERRED EQUITIES CORPORATION ("PEC") Timeshare interest and land sales, net, increased from $19,121,000 for the six months ended February 28, 1995 to $22,952,000 for the six months ended February 29, 1996, an increase of 20%. Gross sales of timeshare interests increased from $11,082,000 to $15,137,000, an increase of 37%. Net sales of timeshare interests increased from $8,606,000 to $12,194,000, an increase of 42%. The Provision for cancellation represented 22% and 19% of gross sales of timeshare interests for the six months ended February 28, 1995 and February 29, 1996, respectively. Gross sales of land increased from $12,608,000 to $12,786,000, an increase of 1%. Net sales of land increased from $10,515,000 to $10,758,000, an increase of 2%. The Provision for cancellation represented 17% and 16% of gross sales of land for the six months ended February 28, 1995 and February 29, 1996, respectively. Gain on sale of PEC's receivables increased from $431,000 for the six months ended February 28, 1995 to $471,000 for the six months ended February 29, 1996, an increase of 9%. This increase resulted from sales of receivables increasing from $9,754,000 during the six months ended February 28, 1995 to $10,157,000 during the six months ended February 29, 1996, an increase of 4%. From time to time, PEC sells receivables in order to reduce the outstanding balances under its lines of credit. PEC's Interest income decreased from $3,209,000 for the six months ended February 28, 1995 to $3,049,000 for the six months ended February 29, 1996, a decrease of 5%. This decrease resulted primarily from a reduction in the average balance of PEC's portfolio of receivables. Other revenues increased from $269,000 for the six months ended February 28, 1995 to $527,000 for the six months ended February 29, 1996, an increase of 96%. As a result of the foregoing, total revenues of PEC increased from $24,641,000 for the six months ended February 28, 1995 to $28,632,000 for the six months ended February 29, 1996, an increase of 16%. Total costs and expenses increased from $20,046,000 for the six months ended February 28, 1995 to $26,828,000 for the six months ended February 29, 1996, an increase of 34%. This increase resulted primarily from an increase in Commissions and selling expenses from $9,742,000 to $14,532,000, an increase of 49%, and an increase in General and administrative costs from $3,639,000 to $5,057,000, an increase of 39%. The increase in General and administrative costs is primarily due to increases in payroll, maintenance fees related to unsold timeshare inventory and owners' association costs. As a percentage of gross sales of timeshare interests and land Commissions and selling expenses relating thereto increased from 41% for the six months ended February 28, 1995 to 52% for the six months ended February 29, 1996, and Costs of sales relating thereto remained constant at 10% for each six months ended February 28, 1995 and February 29, 1996. As a result of the foregoing, PEC's Income before income taxes decreased from $4,595,000 for the six months ended February 28, 1995 to $1,804,000 for the six months ended February 29, 1996, a decrease of 61%. The decrease is largely due to the increase of Commissions and selling expense as a result of additional costs involved in establishing new marketing programs to increase sales levels primarily for timeshare interests. 11 13 COMPANY Income Statement Data. Operating income from subsidiaries increased from $4,455,000 for the six months ended February 28, 1995 to $8,248,000 for the six months ended February 29, 1996, an increase of 85%. The increase was due to the increased income of MMC which was partially offset by the decrease in income of PEC. Payments to Assignors, which relate to the acquisition of PEC in 1988, decreased from $7,252,000 for the six months ended February 28, 1995 to zero for the six months ended February 29, 1996, since accrual of amounts payable to the Assignors ended on January 31, 1995. Total costs and expenses increased from $30,988,000 for the six months ended February 28, 1995 to $35,292,000 for the six months ended February 29, 1996, an increase of 14%. This increase is primarily the result of an increase in General and administrative expenses from $6,011,000 to $10,840,000, an increase of 80%, and an increase in Commission and selling expenses from $10,096,000 to $15,549,000, an increase of 54%. The increase in General and administrative expenses is primarily a result of the increased volume of the business of MMC. Income (loss) before income taxes increased from a loss of $3,229,000 for the six months ended February 28, 1995 to income of $6,479,000 for the six months ended February 29, 1996. The Gain on discontinued operations, net of income taxes was $578,000 for the six months ended February 28, 1995, and zero for the six months ended February 29, 1996. Income taxes increased from $1,408,000 for the six months ended February 28, 1995 to $2,203,000 for the six months ended February 29, 1996. As a result of the foregoing, Net income (loss) increased from a loss of $4,059,000 for the six months ended February 28, 1995 to Net income of $4,276,000 for the six months ended February 29, 1996. LIQUIDITY The Company had cash and cash equivalents of $5.1 million at February 29, 1996 compared to cash and cash equivalents of $7.3 million at August 31, 1995. The Company's principal cash requirements relate to loan originations, the acquisition of timeshare properties and land and the payment of commissions and selling expenses in connection with timeshare and land sales. MMC and PEC each requires continued access to sources of debt financing and sales in the secondary market of loans and receivables, respectively. MMC's cash requirements arise from loan originations, payments of operating and interest expenses and deposits to reserve accounts related to loan sale transactions. Loan originations and acquisitions are initially funded principally through MMC's $20.0 million warehouse line of credit with a bank pending the sale of loans in the secondary market. Substantially all of the loans originated by MMC are sold with servicing rights retained. Net cash used in MMC's operating activities for the quarters ended February 28, 1995 and February 29, 1996 was approximately $2.3 million and $3.4 million, respectively. This use was funded primarily from the reinvestment of proceeds from the sale of loans in the secondary market totaling approximately $12.7 million and $21.4 million for the quarters ended February 28, 1995 and February 29, 1996, respectively. The loan sale transactions required the subordination of certain cash flows payable to MMC to the payment of scheduled principal and interest due to the loan purchasers. In connection with certain of such sale transactions, a portion of amounts payable to MMC from the excess interest spread is required to be maintained in a reserve account to the extent of the subordination requirements. The subordination requirements generally provide that the excess interest spread is payable to the reserve account until a specified percentage of the principal balances of the sold loans is accumulated therein. Excess interest spread payable to MMC is subject to being utilized first to replenish cash paid from the reserve account to fund shortfalls in collections of interest from borrowers who default on the payments on the loans until MMC's deposits into the reserve account equal the specified percentage. The excess interest required to be deposited and maintained in the respective reserve accounts is not available to support the cash flow requirements of MMC. At February 29, 1996, the amounts on deposit in such reserve accounts totaled $7.9 million. Adequate credit facilities and other sources of funding, including the ability of MMC to sell loans in the secondary market, are essential for the continuation of MMC's loan origination operations. At February 29, 1996, MMC had a $20.0 million warehouse line of credit for the financing of loan originations which expires in August 1996. At February 29, 1996, $2.2 million was outstanding under such line of credit and $17.8 million was available. Such line of credit bears interest at the prime rate plus 1% per annum and is secured by loans prior to sale. The agreement with the lender requires MMC to maintain a minimum tangible net worth of $7.5 million, and a minimum level of profitability of at least $500,000 per six month period. 12 14 In April 1995, MMC entered into an agreement (the "Purchase Agreement") to sell Title I Loans to a financial institution (the "Purchaser") with MMC retaining the right to service the loans. At August 31, 1995, an aggregate of approximately $56.9 million in principal amount of loans had been sold pursuant to the agreement for an amount equal to 98.5% of their remaining principal balances, and an additional $56.4 million in principal amount of loans were sold to the Purchaser during the six months ended February 29, 1996. Pursuant to the Purchase Agreement, the Purchaser is entitled to receive interest at a variable rate equal to the sum of 200 basis points (2.0%) and the one-month LIBOR rate as in effect from time to time. MMC retained the right to receive the Excess Interest. The Purchase Agreement requires MMC to establish and maintain a reserve account equal to 2.5% of the proceeds received by MMC from the sale of loans pursuant to the Agreement plus the Excess Interest received by MMC less its servicing fee to fund shortfalls in collections from borrowers who default in the payment of principal or interest. PEC's cash requirements arise from the acquisition of timeshare properties and land, payments of operating expenses, payments of principal and interest on debt obligations, and payments of commissions and selling expenses in connection with the sale of timeshare interests and land. Commissions and selling expenses payable by PEC in connection with sales of timeshare interests and land typically exceed the down payments received at the time of sale, as a result of which PEC generates a cash shortfall. This cash shortfall and PEC's other cash requirements are funded primarily through sales of receivables, PEC's lines of credit in the aggregate amount of $65.0 million and cash flows from operations. At February 29, 1996, PEC had arrangements with three institutional lenders for the financing of receivables in connection with sales of timeshare interests and land and the acquisition of timeshare properties and land, which provide for lines of credit of up to an aggregate of $65.0 million. Such lines of credit are secured by timeshare and land receivables and property. At February 29, 1996, an aggregate of $48.7 million was outstanding under such lines of credit, and $16.3 million was available for borrowing. At February 29, 1996, PEC had unpledged timeshare and land receivables in the amount of approximately $8.4 million, substantially all of which was available for pledging under existing lines of credit, subject to certain loan agreement criteria. Under the terms of such lines of credit, PEC may borrow up to 75% of the balances of the timeshare and land receivables tendered for pledging. One of such lines of credit in the amount of $50.0 million bears interest at the prime rate plus 2 1/4% and expires in September 1996, at which time it converts to a term loan maturing in September 2003. The second line of credit in the amount of $7.5 million bears interest at the prime rate plus 2.5% and expires in September 1996, at which time it converts to a term loan maturing in June 1999. The third line of credit in the amount of $7.5 million bears interest at the prime rate plus 2.5% and expires in June 1996, at which time it converts to a term loan maturing in June 2000. Set forth below is a schedule of the cash shortfall arising from recognized and unrecognized sales for the periods indicated (in thousands of dollars):
Six months ended ------------------------------ February 28, February 29, 1995 1996 ------------- ------------- Commissions and selling expenses attributable to recognized and unrecognized sales $ 10,462 $ 13,556 Less: downpayments 5,848 6,172 -------------- -------------- Cash Shortfall $ 4,614 $ 7,384 ============== ==============
At February 28, 1995 and February 29, 1996, PEC was contingently liable to replace or repurchase notes receivable sold with recourse totaling $54.1 million and $68.9 million, respectively, in the event they become delinquent. PEC sells notes receivable subject to recourse provisions contained in each agreement. These obligations are guaranteed by Mego Financial Corp. PEC is obligated under these agreements to replace or repurchase accounts that become over 90 days delinquent or otherwise subject to replacement or repurchase. A liability for future estimated contingency for notes receivable sold with recourse was established at the time of each sale based upon the Company's analysis of all probable losses resulting from PEC's recourse obligations under each agreement of sale. The Company periodically reviews the adequacy of this liability. These reviews take into consideration changes in the nature and level of the portfolio, current and future economic conditions which may affect the obligors' ability to pay, collateral values and overall portfolio quality. PEC is obligated under certain of these agreements for the sale of notes receivable to maintain minimum net worth requirements. In August 1993, the Company sold 300,000 shares of its Series A 12% Convertible Preferred Stock for an aggregate of $3.0 million. The Company redeemed 100,000 shares of such Preferred Stock on September 1, 1995 and is obligated to redeem the remaining 200,000 shares of such Preferred Stock on August 31, 1996. During the quarters ended February 28, 1995 and February 29, 1996, the Company used cash of $5.5 million and of $2.5 million, respectively, in operating activities. 13 15 During the quarters ended February 28, 1995 and February 29, 1996, the Company provided cash of $7.7 million and $6.2 million, respectively, in financing activities. During the quarters ended February 28, 1995 and February 29, 1996, the Company used cash of $1.2 million and $2.0 million, respectively, in investing activities, which was substantially expended for the purchase of property and equipment. Capital expenditures during the quarters ended February 28, 1995 and February 29, 1996 were $3.2 million and $1.3 million, respectively, for the acquisition of inventory and $1.2 million and $1.6 million, respectively, for the purchase of property and equipment. The Company anticipates that it will make additional capital expenditures in 1996 for the acquisition of inventory, renovation of future timeshare inventory, refurbishment of present timeshare inventory, construction of certain road improvements in Pahrump Valley, Nevada and the acquisition of replacement equipment. The Company believes that its capital requirements will be met from cash balances, internally generated cash, existing lines of credit, sales of receivables, and the modification, replacement or addition to its lines of credit. PART II ITEM 1. LEGAL PROCEEDINGS. No reportable events occurred during the three month period ended February 29, 1996. 14 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEGO FINANCIAL CORP. By: /s/ Irving J. Steinberg --------------------------------- Irving J. Steinberg Vice President and Chief Accounting Officer Date: April 19, 1996 15 17 INDEX TO EXHIBITS Exhibit 27 - Financial Data Schedule
16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 6-MOS AUG-31-1996 SEP-01-1995 FEB-29-1996 1 12,233 0 51,987 17,630 28,263 0 26,719 12,645 130,216 0 55,752 2,000 0 180 23,186 130,216 22,952 41,771 2,896 19,523 15,769 497 3,315 6,479 2,203 4,276 0 0 0 4,276 0.23 0.21 CUMULATIVE PREFERRED STOCK DIVIDEND--$140
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