-----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, TYRIuJCkCws038vkxxi1RcMm9CMsWTY26eYa+zRTQtLBViDjD4n2jr4u3+jZcajf iisiYl7Bfh8XaxPnu13pdQ== 0000950150-98-001192.txt : 19980716 0000950150-98-001192.hdr.sgml : 19980716 ACCESSION NUMBER: 0000950150-98-001192 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980715 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGO FINANCIAL CORP CENTRAL INDEX KEY: 0000736035 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] IRS NUMBER: 135629885 STATE OF INCORPORATION: NY FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08645 FILM NUMBER: 98666647 BUSINESS ADDRESS: STREET 1: 4310 PARADISE RD CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027373700 MAIL ADDRESS: STREET 1: 4310 PARADISE RD CITY: LAS VEGAS STATE: NV ZIP: 89109 FORMER COMPANY: FORMER CONFORMED NAME: MEGO CORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FOR PERIOD ENDED MAY 31, 1998 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MAY 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________________ TO ________________________ COMMISSION FILE NUMBER: 1-8645 MEGO FINANCIAL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-5629885 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 4310 PARADISE ROAD, LAS VEGAS, NEVADA 89109 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (702) 737-3700 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: As of July 10, 1998, there were 21,009,506 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. Condensed Financial Statements (unaudited) Condensed Consolidated Statements of Financial Condition at May 31, 1998 and August 31, 1997.............................................................. 1 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended May 31, 1998 and 1997.................................................. 2 Condensed Consolidated Statements of Stockholders' Equity for the Nine Months Ended May 31, 1998........................................................... 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 1998 and 1997........................................................ 4 Notes to Condensed Consolidated Financial Statements........................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 12 PART II OTHER INFORMATION Item 1. Legal Proceedings.............................................................. 22 Item 5. Other Events................................................................... 23 Item 6. Exhibits and Reports on Form 8-K............................................... 23 SIGNATURE ................................................................................ 24
i 3 PART I FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (thousands of dollars, except per share amounts) (unaudited)
MAY 31, AUGUST 31, ASSETS 1998 1997 ------------ ------------ Cash and cash equivalents $ 2,417 $ 10,376 Restricted cash 2,015 2,049 Notes receivable, net of allowance for cancellations and discounts of $13,425 at May 31, 1998 and $11,341 at August 31, 1997 48,214 34,274 Interest only receivables, at fair value 2,955 3,296 Timeshare interests held for sale 36,719 35,088 Land and improvements inventory 8,367 2,206 Other investments 4,164 2,149 Property and equipment, net of accumulated depreciation of $13,713 at May 31, 1998 and $15,292 at August 31, 1997 23,996 24,220 Deferred selling costs 3,226 3,153 Prepaid debt expenses 1,355 1,286 Other receivables 1,371 -- Other assets 8,391 6,930 Net assets of discontinued operations -- 53,276 ------------ ------------ TOTAL ASSETS $ 143,190 $ 178,303 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes and contracts payable $ 83,257 $ 65,569 Accounts payable and accrued liabilities 19,763 17,202 Reserve for notes receivable sold with recourse 5,577 8,703 Deposits 4,547 2,983 Negative goodwill 17 53 Accrued income taxes 4,708 6,235 ------------ ------------ Total liabilities before subordinated debt 117,869 100,745 ------------ ------------ Subordinated debt 4,174 4,321 ------------ ------------ Stockholders' equity: Preferred stock, $.01 par value (authorized--5,000,000 shares, none outstanding) -- -- Common stock, $.01 par value (authorized--50,000,000 shares; issued and outstanding--21,009,506 shares at May 31, 1998 and August 31, 1997) 210 210 Additional paid-in capital 12,789 34,524 Retained earnings 8,148 38,503 ------------ ------------ Total stockholders' equity 21,147 73,237 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 143,190 $ 178,303 ============ ============
See notes to condensed consolidated financial statements. 1 4 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (thousands of dollars, except per share amounts) (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, ---------------------------- ---------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ REVENUES OF CONTINUING OPERATIONS Timeshare interest sales, net $ 9,579 $ 8,466 $ 26,872 $ 23,595 Land sales, net 3,530 4,736 10,114 12,510 Gain on sale of notes receivable -- 503 -- 1,393 Interest income 1,931 1,941 5,248 5,340 Financial income 769 726 2,773 2,055 Incidental operations 821 881 2,242 2,324 Other 881 1,002 2,277 2,596 ------------ ------------ ------------ ------------ Total revenues of continuing operations 17,511 18,255 49,526 49,813 ------------ ------------ ------------ ------------ COSTS AND EXPENSES OF CONTINUING OPERATIONS Direct cost of: Timeshare interest sales 1,755 1,354 5,206 3,866 Land sales 421 392 1,234 1,126 Incidental operations 652 719 1,949 2,127 Commissions and selling 9,143 8,901 24,739 24,952 General and administrative 4,675 4,237 13,561 12,511 Interest expense 2,157 2,084 5,635 6,351 Depreciation 549 469 1,691 1,402 ------------ ------------ ------------ ------------ Total costs and expenses of continuing operations 19,352 18,156 54,015 52,335 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,841) 99 (4,489) (2,522) INCOME TAXES (BENEFIT) (1,728) (2,084) (1,728) (5,009) ------------ ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS (113) 2,183 (2,761) 2,487 INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES OF $2,619 AND $6,230 FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997, RESPECTIVELY, AND NET OF $799 AND $1,493 OF MINORITY INTEREST FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997, RESPECTIVELY -- 2,944 -- 7,587 ------------ ------------ ------------ ------------ NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (113) $ 5,127 $ (2,761) $ 10,074 ============ ============ ============ ============ EARNINGS (LOSS) PER COMMON SHARE Basic: Income (loss) from continuing operations $ (0.01) $ 0.11 $ (0.13) $ 0.13 Income from discontinued operations -- 0.16 -- 0.41 ------------ ------------ ------------ ------------ Net income (loss) applicable to common stock $ (0.01) $ 0.27 $ (0.13) $ 0.54 ============ ============ ============ ============ Weighted-average number of common shares outstanding 21,009,506 18,733,121 21,009,506 18,582,572 ============ ============ ============ ============ Diluted: Income (loss) from continuing operations $ (0.01) $ 0.11 $ (0.13) $ 0.13 Income from discontinued operations -- 0.16 -- 0.39 ------------ ------------ ------------ ------------ Net income (loss) applicable to common stock $ (0.01) $ 0.27 $ (0.13) $ 0.52 ============ ============ ============ ============ Weighted-average number of common shares and common share equivalents outstanding 21,009,506 19,299,365 21,009,506 19,497,659 ============ ============ ============ ============
See notes to condensed consolidated financial statements. 2 5 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (thousands of dollars, except per share amounts) (unaudited)
COMMON STOCK $.01 PAR VALUE ADDITIONAL ------------ ------------ PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------------ ------------ ------------ ------------ ------------ Balance at August 31, 1997 21,009,506 $ 210 $ 34,524 $ 38,503 $ 73,237 Distribution of Mego Mortgage Corporation common stock in connection with the Spin-off (see Note 6 of Notes to Condensed Consolidated Financial Statements) -- -- (21,735) (21,441) (43,176) Adjustment of receivable from Mego Mortgage Corporation (See Note 5 of Notes to Condensed Consolidated Financial Statements) -- -- -- (6,153) (6,153) Net loss for the nine months ended May 31, 1998 -- -- -- (2,761) (2,761) ------------ ------------ ------------ ------------ ------------ Balance at May 31, 1998 21,009,506 $ 210 $ 12,789 $ 8,148 $ 21,147 ============ ============ ============ ============ ============
See notes to condensed consolidated financial statements. 3 6 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands of dollars) (unaudited)
NINE MONTHS ENDED MAY 31, -------------------------- 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (2,761) $ 10,074 ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of negative goodwill (36) (21) Charges to allowance for cancellations (5,152) (7,677) Provision for cancellations 3,760 8,806 Gain on sale of notes receivable -- -- Provision for uncollectible Owners' Association advances (403) (275) Cost of sales 6,440 4,992 Depreciation 1,691 1,402 Gain on sale of stock of subsidiary -- 8,113 Additions to interest only receivables -- (1,082) Amortization of interest only receivables 341 221 Repayments on notes receivable 27,548 22,506 Additions to notes receivable (40,096) (40,260) Proceeds from sale of notes receivable -- 20,099 Purchase of land and timeshare interests (14,232) (5,938) Additions to other receivables (4,193) -- Decreases in other receivables 6,769 -- Changes in operating assets and liabilities: Decrease in restricted cash 34 413 Increase in other assets (4,253) (1,090) Increase in deferred selling costs (73) (45) Increase in accounts payable and accrued liabilities 2,561 910 Decrease in payable to assignors -- (2,579) Increase (decrease) in deposits 1,564 (497) Increase (decrease) in accrued income taxes (1,527) 6,405 ------------ ------------ Total adjustments (19,257) 14,403 ------------ ------------ Net cash provided by (used in) operating activities (22,018) 24,477 ------------ ------------ NET CASH USED IN DISCONTINUED OPERATIONS -- (12,472) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (1,826) (5,259) Proceeds from the sale of property and equipment 359 24 Additions to other investments (2,015) (785) Payments on other investments -- 826 ------------ ------------ Net cash used in investing activities (3,482) (5,194) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 35,745 32,010 Reduction of debt (18,057) (36,072) Increase in common stock due to exercise of warrants -- 3 Increase in additional paid-in capital due to exercise of warrants -- 357 Payments on subordinated debt (639) (1,422) Increase in subordinated debt 492 -- ------------ ------------ Net cash provided by (used in) financing activities 17,541 (5,124) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,959) 1,687 CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 10,376 2,742 ------------ ------------ CASH AND CASH EQUIVALENTS -- END OF PERIOD $ 2,417 $ 4,429 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest, net of amounts capitalized $ 5,656 $ 5,652 ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Issuance of 1,000,000 common stock warrants in connection with commitment received $ -- $ 3,000 Reduction of additional paid-in capital due to Spin-off of Mego Mortgage Corporation (21,735) -- Reduction of retained earnings due to Spin-off of Mego Mortgage Corporation (21,441) -- Adjustments of receivable from Mego Mortgage Corporation (6,153) --
See notes to condensed consolidated financial statements. 4 7 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997 (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, 1997 and 1996 contained in the Annual Report on Form 10-K ("Form 10-K") of Mego Financial Corp. (Mego Financial) filed with the Securities and Exchange Commission for the year ended August 31, 1997, the accompanying unaudited Condensed Consolidated Financial Statements contain all of the information necessary to present fairly the financial position of Mego Financial and Subsidiaries at May 31, 1998, the results of its operations for the three and nine months ended May 31, 1998 and 1997, the change in stockholders' equity for the nine months ended May 31, 1998 and the cash flows for the nine months ended May 31, 1998 and 1997. All intercompany accounts between Mego Financial and its subsidiaries have been eliminated. Certain reclassifications have been made to conform prior periods with the current period presentation. The accompanying Condensed Consolidated Statements of Operations reflect the operating results of Mego Mortgage Corporation (MMC) for prior periods as discontinued operations in accordance with Accounting Principles Board (APB) Opinion No. 30. Prior period financial results and cash flows have been restated to reflect continuing operations. The footnote information presented herein applies only to the continuing operations of Mego Financial unless otherwise stated. See Note 6 for further discussion. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all material adjustments 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 and nine months ended May 31, 1998 are not necessarily indicative of the results to be expected for the full year. 2. NATURE OF OPERATIONS Mego Financial is a specialty financial services company that, through its subsidiary, Preferred Equities Corporation (PEC), is engaged primarily in originating, selling, servicing and financing consumer receivables generated through timeshare and land sales. Mego Financial and its subsidiaries are also 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. In 1992, Mego Financial organized a subsidiary, MMC, a specialized consumer finance company that originates, purchases, sells, securitizes and services consumer loans consisting primarily of debt consolidation loans and to a lesser extent conventional uninsured home improvement loans. After an initial public offering (the IPO) of MMC common stock in November 1996, Mego Financial held 81.3% of the outstanding stock of MMC. On September 2, 1997, Mego Financial distributed all of its remaining 10,000,000 shares of MMC's common stock to Mego Financial's shareholders in a tax-free spin-off (the Spin-off). See Note 6. 3. PREFERRED EQUITIES CORPORATION 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 sells and generally 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. 5 8 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997 (unaudited) 4. MERGER AGREEMENT WITH SYCAMORE PARTNERS On March 27, 1998, the Company announced that it had entered into a definitive merger agreement (the "Merger Agreement") under which it was to be acquired by Sycamore Partners, LLC ("Sycamore"). Sycamore was to be financed by Blackacre Capital Group, L.P., a real estate investment fund. Under the terms of the Merger Agreement, the Company shareholders were to receive $6.00 per share of Common Stock, in cash, less an adjustment related to a receivable from MMC on the Company's financial statements. The adjustment was expected to be at least $0.25 per share but not more than $0.29 per share so that the per share price which was to be received by shareholders would have been a minimum of $5.71 per share up to an estimated maximum of $5.75 per share. See Note 5. On May 19, 1998, Sycamore announced that it was prepared to go forward with the previously announced merger only if certain terms of the Merger Agreement were modified, including a reduction of the purchase price to $4.50 per share of outstanding Common Stock. The Company has notified Sycamore that Sycamore is in default under the Merger Agreement. Nevertheless, the Company intends to maintain communications with Sycamore and to continue to negotiate so long as it deems such negotiations to be in the best interest of the Company's shareholders. 5. ADJUSTMENT OF RECEIVABLE FROM MEGO MORTGAGE CORPORATION In April 1998, an agreement was made to adjust by reductions (recorded in the three months ended February 28, 1998) the income tax portion of a receivable in the amount of $5,283,000 owed by MMC to the Company under a Tax Allocation and Indemnity Agreement dated November 19, 1996. As of the date of the April 1998 agreement, MMC owed the Company an estimated total of $6,153,000, of which $5,283,000 was a result of filing a consolidated federal income tax return with the Company's affiliated group prior to the Spin-off. An agreement was subsequently made to settle (recorded in the three months ended May 31, 1998) the remaining $870,000 balance due the Company by MMC. In consideration of this settlement, MMC paid the entire amount of $1,574,000, which was separately owed to PEC, in June 1998. Following this transaction, MMC had no outstanding indebtedness to the Company. 6. DISCONTINUED OPERATIONS OF MEGO MORTGAGE CORPORATION On September 2, 1997, Mego Financial distributed all of its 81.3% interest in MMC, comprised of 10,000,000 shares of MMC's common stock, to Mego Financial's shareholders in the Spin-off. MMC's financial results have been accounted for as discontinued operations and, accordingly, the Company reclassified its Condensed Consolidated Financial Statements for all periods presented prior to that date. The net effect of the Spin-off resulted in the Company recording an equity distribution in the amount of $43,176,000 in fiscal 1998, comprised of $21,735,000 of additional paid-in capital and $21,441,000 of retained earnings. 7. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed Of," (SFAS 121) was issued by the Financial Accounting Standards Board (FASB) in March 1995, and effective for fiscal years beginning after December 15, 1995. SFAS 121 requires that long-lived assets be reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Under the provisions of SFAS 121, impairment losses are recognized when expected future cash flows are less than the assets' carrying value. The Company has not recorded any expense related to impairment losses since adoption of SFAS 121. The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125) in June 1996. SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement also provides 6 9 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997 (unaudited) consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value. SFAS 125 also requires that servicing assets be measured by allocating the carrying amount between the assets sold and retained interests based on their relative fair values at the date of transfer. Additionally, this statement requires that the servicing assets and liabilities be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income or loss and (b) assessment for asset impairment or increased obligation based on their fair values. SFAS 125 requires the Company's excess servicing rights be measured at fair market value and reclassified as interest only receivables and accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As required by SFAS 125, the Company adopted the new requirements effective January 1, 1997. Implementation of SFAS 125 did not have any material impact on the financial statements of the Company, as the book value of the Company's interest only receivables approximated fair value. SFAS No. 128, "Earnings per Share," (SFAS 128) was issued by the FASB in March 1997, effective for financial statements issued after December 15, 1997. SFAS 128 provides simplified standards for the computation and presentation of earnings per share (EPS), making EPS comparable to international standards. SFAS 128 requires dual presentation of "Basic" and "Diluted" EPS by entities with complex capital structures, replacing "Primary" and "Fully-diluted" EPS under APB Opinion No. 15. Basic EPS excludes dilution from common stock equivalents and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from common stock equivalents, similar to fully-diluted EPS, but uses only the average stock price during the period as part of the computation. An entity that reports discontinued operations is required to present Basic and Diluted EPS for each of the income related line items. Data utilized in calculating earnings per share under SFAS 128 are as follows (thousands of dollars, except share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------ ------------ ------------ ------------ BASIC EPS Income (loss) from continuing operations $ (113) $ 2,183 $ (2,761) $ 2,487 Income from discontinued operations -- 2,944 -- 7,587 ------------ ------------ ------------ ------------ Net income (loss) $ (113) $ 5,127 $ (2,761) $ 10,074 ============ ============ ============ ============ Weighted-average number of common shares outstanding 21,009,506 18,733,121 21,009,506 18,582,572 ============ ============ ============ ============ DILUTED EPS Income (loss) from continuing operations $ (113) $ 2,183 $ (2,761) $ 2,487 Income from discontinued operations -- 2,944 -- 7,587 ------------ ------------ ------------ ------------ Net income (loss) $ (113) $ 5,127 $ (2,761) $ 10,074 ============ ============ ============ ============ Weighted-average number of common shares and common share equivalents outstanding 21,009,506 19,299,365 21,009,506 19,497,659 ============ ============ ============ ============
7 10 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997 (unaudited) The following tables reconcile income (loss)from continuing operations, basic and diluted shares and EPS for the following periods (thousands of dollars, except per share amounts):
THREE MONTHS ENDED MAY 31, 1998 THREE MONTHS ENDED MAY 31, 1997 ----------------------------------- ----------------------------------- PER SHARE PER SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT ----------- ------------ ---------- ----------- ------------ ---------- Income (loss) from continuing $ (113) $ 2,183 operations BASIC EPS Income (loss) from continuing operations (113) 21,009,506 $ (0.01) 2,183 18,733,121 $ 0.11 ---------- ----------- ========= ---------- ----------- ========= Effect of dilutive securities: Warrants - - - 337,662 Stock options - - - 228,582 ---------- ----------- ---------- ----------- DILUTED EPS Income (loss) from continuing operations and assumed conversions $ (113) 21,009,506 $ (0.01) $ 2,183 19,299,365 $ 0.11 ========== =========== ========= ========== =========== =========
NINE MONTHS ENDED MAY 31, 1998 NINE MONTHS ENDED MAY 31, 1997 ----------------------------------- ----------------------------------- PER SHARE PER SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT ----------- ------------ ---------- ----------- ------------ ---------- Income (loss) from continuing $ (2,761) $ 2,487 operations BASIC EPS Income (loss) from continuing (2,761) 21,009,506 $ (0.13) 2,487 18,582,572 $ 0.13 ---------- ----------- ========= ---------- ----------- ========= operations Effect of dilutive securities: Warrants - - - 658,160 Stock options - - - 256,927 ---------- ----------- ---------- ----------- DILUTED EPS Income (loss) from continuing operations and assumed conversions $ (2,761) 21,009,506 $ (0.13) $ 2,487 19,497,659 $ 0.13 ========== =========== ========= ========== =========== =========
8 11 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997 (unaudited) The following tables reconcile income from discontinued operations, net of taxes and minority interest, basic and diluted shares, and EPS for the following periods (thousands of dollars, except per share amounts):
THREE MONTHS ENDED MAY 31, 1997 ---------------------------------------------- PER SHARE INCOME SHARES AMOUNT --------------- ------------- -------------- Income from discontinued operations $ 3,743 Less: Minority interest in discontinued 799 operations -------------- BASIC EPS Income from discontinued operations 2,944 18,733,121 $ 0.16 ------------- ------------- ============== Effect of dilutive securities: Warrants - 337,662 Stock options - 228,582 ------------- ------------- DILUTED EPS Income from discontinued operations and assumed conversions $ 2,944 19,299,365 $ 0.16 ============= ============= ==============
THREE MONTHS ENDED MAY 31, 1997 ---------------------------------------------- PER SHARE INCOME SHARES AMOUNT --------------- --------------- -------------- Income from discontinued operations $ 9,080 Less: Minority interest in discontinued 1,493 operations -------------- BASIC EPS Income from discontinued operations 7,587 18,582,572 $ 0.41 ------------- ------------- ============== Effect of dilutive securities: Warrants - 658,160 Stock options - 256,927 ------------- ------------- DILUTED EPS Income from discontinued operations and assumed conversions $ 7,587 19,497,659 $ 0.39 ============= ============= ==============
9 12 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997 (unaudited) The following tables reconcile the net income (loss) applicable to common shareholders, basic and diluted shares and EPS for the following periods (thousands of dollars, except per share amounts):
THREE MONTHS ENDED MAY 31, 1998 THREE MONTHS ENDED MAY 31, 1997 ------------------------------------- ------------------------------------ PER SHARE PER SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT ------------ ----------- ---------- ----------- ----------- ---------- Net income (loss) $ (113) $ 5,127 BASIC EPS Income (loss) applicable to common stockholders (113) 21,009,506 $ (0.01) 5,127 18,733,121 $ 0.27 ---------- ----------- ========= ---------- ---------- ========= Effect of dilutive securities: Warrants - - - 337,662 Stock Options - - - 228,582 ---------- ---------- ---------- ---------- DILUTED EPS Income (loss) applicable to common stockholders and assumed conversions $ (113) 21,009,506 $ (0.01) $ 5,127 19,299,365 $ 0.27 ========== =========== ========= ========== =========== =========
NINE MONTHS ENDED MAY 31, 1998 NINE MONTHS ENDED MAY 31, 1997 ------------------------------------- ------------------------------------ PER SHARE PER SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT ------------ ----------- ---------- ----------- ----------- ---------- Net income (loss) $ (2,761) $ 10,074 ---------- BASIC EPS Income (loss) applicable to common stockholders (2,761) 21,009,506 $ (0.13) 10,074 18,582,572 $ 0.54 ---------- ----------- ========= ---------- ---------- ========= Effect of dilutive securities: Warrants - - - 658,160 Stock Options - - - 256,927 ---------- ---------- ---------- ---------- DILUTED EPS Income (loss) applicable to common stockholders and assumed conversions $ (2,761) 21,009,506 $ (0.13) $ 10,074 19,497,659 $ 0.52 ========== =========== ========= ========== =========== =========
10 13 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1998 AND 1997 (unaudited) As a result of Mego Financial's loss from continuing operations for the three and nine months ended May 31, 1998, incentive stock options outstanding to purchase 351,500 shares of Mego Financial's common stock were considered antidilutive under SFAS 128 requirements and therefore were not included in the weighted-average number of common shares. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130) and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS 131 establishes standards of reporting by publicly-held business enterprises and disclosure of information about operating segments in annual financial statements and, to a lesser extent, in interim financial reports issued to shareholders. SFAS 130 and 131 are effective for fiscal years beginning after December 15, 1997. As both SFAS 130 and 131 deal with financial statement disclosure, the Company does not anticipate the adoption of these new standards will have a material impact on its financial position, results of operations or cash flows. The Company has not yet determined what its reporting segments will be under SFAS 131. 8. STOCKHOLDERS' EQUITY Mego Financial's stock option plan (Stock Option Plan) was increased by 500,000 shares upon shareholder approval which was obtained on September 9, 1997. On September 3, 1997, an additional 348,500 incentive stock options were granted under the Stock Option Plan to employees at fair market value, which was authorized by the Stock Option Committee, of which 15,000 are subject to future shareholder approval of certain amendments to the Stock Option Plan in accordance with applicable law. The total number of options outstanding is 351,500 which includes 40,000 options which were previously outstanding. The Spin-off resulted in a distribution by the Company of $21,735,000 of additional paid-in capital and $21,441,000 of retained earnings. These equity amounts related to MMC which, as a result of the Spin-off, is no longer owned by the Company. See Note 6. 11 14 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) that are based on the beliefs of management as well as assumptions made by and information currently available to management. Such forward-looking statements include, without limitation, the Company's expectation and estimates as to the Company's business operations, including the introduction of new timeshare and land sales programs and future financial performance, including growth in revenues and net income and cash flows. 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. Also, 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 Consolidated Financial Statements, including the notes thereto, in the Company's Form 10-K for the fiscal year ended August 31, 1997. GENERAL The business of the Company following the Spin-off is primarily the marketing, financing and sale of timeshare interests, retail lots and land parcels, and servicing the related notes receivable. The Company, through its subsidiary Preferred Equities Corporation (PEC), provides financing to purchasers of its timeshare interests and land. This financing is generally evidenced by notes secured by deeds of trust and mortgages as well as non-recourse installment sale contracts. These notes receivable are generally payable over a period ranging from two to twelve years, bear interest at rates ranging from 0% to 16% and generally require equal monthly payments of principal and interest. Discontinued Operations of Mego Mortgage Corporation (MMC) The Company formed MMC in June 1992 as a wholly-owned subsidiary and operated MMC as such until November 1996. MMC is a specialized consumer finance company that originates, purchases, sells, securitizes and services consumer loans consisting primarily of debt consolidation loans and, to a lesser extent, conventional uninsured home improvement loans. In November 1996, MMC consummated an initial public offering (the IPO) and as a result, the Company's ownership of MMC was reduced to approximately 81.3% of the outstanding common stock. On September 2, 1997, the Company distributed all of its 10 million shares of MMC's common stock to the Company's shareholders in the tax-free Spin-off. To fund MMC's past operations and growth and in conjunction with filing consolidated tax returns, MMC incurred debt and other obligations due to the Company and its subsidiary, PEC. There was no outstanding indebtedness due to the Company at May 31, 1998 after the adjustment of a receivable of $6.2 million described in Note 5 of Notes to Condensed Consolidated Financial Statements and $10.1 million at August 31, 1997, other than $1.4 million due PEC which was paid in June 1998. It is not anticipated that the Company will provide funds to MMC or guarantee MMC's indebtedness in the future, although it may do so. MMC had an agreement with PEC for providing management services. This agreement was cancelled on April 22, 1998, effective 90 days thereafter. In June 1998, MMC paid $585,000 to PEC, which was the amount owed for these management services for the nine months ended May 31, 1998. MMC still has an agreement with PEC for loan servicing, which is expected to be terminated. Effective January 1, 1998, the servicing fees paid to PEC by MMC were reduced from 40 basis points to 35 basis points per year by written agreement. In January 12 15 1998, the loan servicing agreement between PEC and MMC was amended to permit the assignment by MMC of its servicing rights and obligations with respect to certain Conventional loans sold to a financial institution, and subsequent thereto, the agreement to service those loans was terminated. The servicing fees for the nine months ended May 31, 1998 and 1997 aggregated $1.8 million and $1.2 million, respectively. The accompanying Consolidated Statements of Operations reflect the operating results of MMC as discontinued operations in accordance with Accounting Principles Board (APB) Opinion No. 30. For additional information see Note 6 of Notes to Condensed Consolidated Financial Statements. PEC PEC recognizes revenue primarily from sales of timeshare interests and land sales in resort areas, gain on sale of receivables and interest income. Periodically, PEC may sell its consumer receivables, 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 eight to ten months of closing, and sales of timeshare interests typically meet these requirements at the time of sale. The sales price, less a provision for cancellation, is recorded as revenue and the allocated cost related to such net revenue of the timeshare interest or land parcel is recorded as expense in the year that revenue is recognized. When revenue related to land sales is recognized, the portion of the sales price attributable to uncompleted required improvements, if any, is deferred. Notes receivable with payment delinquencies of 90 days or more have been considered in determining the allowance for cancellations. Cancellations occur when the note receivable is determined to be uncollectible and the related collateral, if any, has been recovered. Cancellation of a note receivable in the quarter the revenue is recognized is not deemed to represent a sale and is accounted for as a reversal of the revenue with an adjustment to cost of sales. Cancellation of a note receivable subsequent to the quarter the revenue was recognized is charged to the allowance for cancellations. Gain on sale of notes receivable includes the present value of the differential between contractual interest rates charged to borrowers on notes receivable sold by PEC and the interest rates to be received by the purchasers of such notes receivable, after considering the effects of estimated prepayments and a normal servicing fee. PEC retains certain participations in cash flows from the sold notes receivable and generally retains the associated servicing rights. PEC generally sells its notes receivable at par. 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 Statements of Financial Condition. In discounting cash flows related to notes receivable sales, PEC defers servicing income at an annual rate of 1% and discounts cash flows on its sales at the rate it believes a purchaser would require as a rate of return. Earned servicing income is included under the caption of financial income. The cash flows were discounted to present value using a discount rate of 15% for the nine months ended May 31, 1998 and 1997. PEC has developed its assumptions based on experience with its own portfolio, available market data and consultations with its investment bankers. 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. 13 16 Provision for cancellations relating to notes receivable is recorded as expense in amounts sufficient to maintain the allowance at a level considered adequate to provide for anticipated losses resulting from customers' failure to fulfill their obligations under the terms of their notes receivable. PEC records provision for cancellations at the time revenue is recognized, based on historical experience and current economic factors. The related allowance for cancellations represents PEC's estimate of the amount of the future credit losses to be incurred over the lives of the notes receivable. The allowance for cancellations is reduced by actual cancellations experienced, including cancellations related to previously sold notes receivable which were reacquired pursuant to the recourse obligations discussed herein. Such allowance is also reduced to establish the separate liability for reserve for notes receivable sold with recourse. PEC's judgment in determining the adequacy of this allowance is based upon a periodic review of its portfolio of notes receivable. These reviews take into consideration changes in the nature and level of the portfolio, historical cancellation experience, current economic conditions which 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. Recourse to PEC on sales of notes receivable is governed by the agreements between the purchasers and PEC. The reserve for notes receivable sold with recourse represents PEC's estimate of the fair value of future credit losses to be incurred over the lives of the notes receivable. Fees for servicing notes receivable originated or acquired by PEC and sold with servicing rights retained are generally based on a stipulated percentage of the outstanding principal balance of such notes receivable and are recognized when earned. Total costs and expenses consist primarily of commissions and selling expenses, general and administrative expenses, direct costs of sales of timeshare interests and land, interest expense and depreciation. Commissions and selling 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 no stated interest rate is charged if the aggregate down payment is at least 50% of the purchase price and the balance is payable in 24 or fewer monthly payments. Notes receivable of $7.2 million and $7.0 million at May 31, 1998 and August 31, 1997, respectively, were made under this arrangement. Land sales as of May 31, 1998 exclude $11.6 million of sales not yet recognized under generally accepted accounting principles (GAAP) since the requisite payment amounts have not yet been received. If ultimately recognized, revenues from these sales would be reduced by a related provision for cancellations of $1.7 million, deferred selling costs of $3.2 million and cost of sales of $1.1 million. RESULTS OF OPERATIONS Three Months Ended May 31, 1998 Compared to Three Months Ended May 31, 1997 PEC Total revenues for PEC decreased 4.3%, or $783,000, to $17.5 million during the three months ended May 31, 1998 from $18.3 million during the three months ended May 31, 1997. The decrease was primarily due to a decrease in land sales, net, to $3.5 million during the three months ended May 31, 1998 from $4.7 million during the three months ended May 31, 1997 and no gain on sale of receivables during the three months ended May 31, 1998 compared to a gain on sale of receivables of $503,000 during the three months ended May 31, 1997. These decreases were partially offset by an increase of $1.1 million in timeshare interest sales, net. Timeshare interest and land sales, net, decreased to $13.1 million during the three months ended May 31, 1998 from $13.2 million during the three months ended May 31, 1997, a decrease of $93,000. Gross sales of timeshare interests decreased to $10.4 million during the three months ended May 31, 1998 from $11.1 million during the three months ended May 31, 1997, a decrease of 5.9%. Net sales of timeshare interests increased to $9.6 million from $8.5 million, an increase of 13.1%. The provision for cancellations represented 8.3% and 23.7% of gross sales of timeshare interests for the three months ended May 31, 1998 and 1997, respectively. The decrease in the provision for cancellations for timeshare interests was primarily due to lower cancellation experience during the 14 17 third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 and to an analysis of the required allowances, including the reserve for notes receivable sold with recourse, as of May 31, 1998. Gross sales of land decreased to $3.8 million during the three months ended May 31, 1998 from $5.6 million during the three months ended May 31, 1997, a decrease of 31.2%. Net sales of land decreased to $3.5 million during the three months ended May 31, 1998 from $4.7 million during the three months ended May 31, 1997, a decrease of 25.5%. The provision for cancellations decreased to 8.2% of gross sales of land for the three months ended May 31, 1998 from 15.3% for the three months ended May 31, 1997, primarily due to lower cancellation experience during the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 and to an analysis of the required allowances, including the reserve for notes receivable sold with recourse, as of May 31, 1998. The decrease in gross land sales was the result of PEC's diminishing inventory of land available for sale and its increasing inventory of timeshare interests from the opening of new timeshare resorts. During the third quarter of fiscal 1998, PEC acquired developed lots in Colorado to add to its land inventory. PEC began selling these lots in the last month of the third quarter of fiscal 1998. No gain on sale of receivables was recorded for the three months ended May 31, 1998 compared to $503,000 for the three months ended May 31, 1997. There were no receivable sales during the three months ended May 31, 1998 while there were $9.8 million in receivable sales during the three months ended May 31, 1997. PEC periodically sells receivables to reduce the outstanding balances under its lines of credit. Financial income increased to $769,000 during the three months ended May 31, 1998 from $726,000 during the three months ended May 31, 1997, an increase of 5.9%. The increase was a result of the increased number of loans serviced by PEC for an unrelated party, generating increased servicing fees. As a result of the foregoing, total PEC revenues decreased to $17.5 million during the three months ended May 31, 1998 from $18.3 million during the three months ended May 31, 1997. Total costs and expenses for PEC increased to $18.8 million for the three months ended May 31, 1998 from $17.5 million for the three months ended May 31, 1997. The increase resulted primarily from an increase in direct costs of timeshare interest sales to $1.8 million from $1.4 million, an increase of 29.6%, and an increase in general and administrative expense to $4.3 million from $3.9 million, an increase of 12.8%. In September 1997, 1,122 new upscale, luxury timeshare interests in PEC's Las Vegas, Nevada resort became available for sale. The increase in direct costs of timeshare sales is generally attributable to the sale of this higher cost timeshare inventory. The increase in general and administrative expenses is primarily due to increases in payroll, group medical insurance and association costs related to a higher level of unsold timeshare inventory. As a percentage of gross sales of timeshare interests and land, commissions and selling expenses relating thereto increased to 64.0% during the three months ended May 31, 1998 from 53.3% during the three months ended May 31, 1997, and cost of sales increased to 15.2% during the three months ended May 31, 1998 from 10.5% during the three months ended May 31, 1997. Sales prices of timeshare interests are typically lower than those of land, while selling costs per sale, other than commissions, are approximately the same in amount for timeshare interests and land; accordingly, PEC generally realizes lower profit margins from sales of timeshare interests than from sales of land. Interest expense of PEC increased to $2.0 million during the three months ended May 31, 1998 from $1.8 million during the three months ended May 31, 1997, an increase of 9.7%. The increase is a result of a higher average outstanding balance of notes payable, partially offset by lower interest rates, during the three months ended May 31, 1998 compared to the three months ended May 31, 1997. A pre-tax loss of $1.3 million was recorded by PEC during the three months ended May 31, 1998 compared to pre-tax income of $797,000 during the three months ended May 31, 1997. The pre-tax loss is primarily due to the decrease in land sales and the absence of gain on sale of receivables during the three months ended May 31, 1998, together with an increase in general and administrative expenses and direct cost of timeshare interest sales. 15 18 No income tax provision or benefit for PEC was recorded for the three months ended May 31, 1998 and 1997. As part of an arrangement between PEC and the Company regarding payment of taxes PEC generally does not recognize a tax benefit for periods in which it records a loss. As a result of the foregoing, PEC reported a net loss of $1.3 million during the three months ended May 31, 1998 compared to net income of $797,000 during the three months ended May 31, 1997. COMPANY (consolidated) Loss from continuing operations was $113,000 during the three months ended May 31, 1998 compared to income of $2.2 million during the three months ended May 31, 1997, due primarily to a decrease in total revenues of $744,000 while total costs and expenses increased by $1.2 million because of higher costs of timeshare sales and increased general and administrative expenses.. See prior discussion for PEC. Total costs and expenses during the three months ended May 31, 1998 were $19.4 million, an increase of 6.6% from $18.2 million during the three months ended May 31, 1997. Combined commissions and selling expenses and general and administrative expenses increased 5.2% for the three months ended May 31, 1998 compared to the three months ended May 31, 1997 due to the expansion of timeshare marketing efforts by PEC. Total general and administrative expenses for Mego Financial (parent only) were primarily comprised of professional services, including those related to the Merger Agreement, external financial reporting expenses and regulatory and other public company corporate expenses. The income tax benefit for the three months ended May 31, 1998 was $1.7 million compared to an income tax benefit of $2.1 million for the three months ended May 31, 1997. The change in accrued income taxes for the three months ended May 31, 1998 resulted from a review of the Company's tax position and was based on what the expected net operating loss will be for the entire year ending August 31, 1998; therefore, it was deemed appropriate to recognize that benefit on an interim basis. The change in accrued income taxes for the three months ended May 31, 1997 was a result of facts and circumstances determined in an extensive review and analysis of the Company's federal income tax liability completed during fiscal 1997. Net loss applicable to common stock was $113,000 during the three months ended May 31, 1998 compared to net income applicable to common stock of $5.1 million during the three months ended May 31, 1997, primarily due to the foregoing and due to income from discontinued operations of $2.9 million during the three months ended May 31, 1997 while no income from discontinued operations was recorded during the three months ended May 31, 1998 because of the Spin-off of MMC. Nine months Ended May 31, 1998 Compared to Nine months Ended May 31, 1997 PEC Total revenues for PEC decreased 0.7%, or $339,000, to $49.4 million during the nine months ended May 31, 1998 from $49.7 million during the nine months ended May 31, 1997. The decrease was primarily due to a decrease in land sales, net, to $10.1 million during the nine months ended May 31, 1998 from $12.5 million during the nine months ended May 31, 1997 and no gain on sale of receivables during the nine months ended May 31, 1998 compared to a gain on sale of receivables of $1.4 million during the nine months ended May 31, 1997. These decreases were partially offset by an increase of $1.1 million in timeshare interest sales, net. Timeshare interest and land sales, net, increased to $37.0 million during the nine months ended May 31, 1998 from $36.1 million during the nine months ended May 31, 1997, an increase of 2.4%. Gross sales of timeshare interests decreased 2.2% to $29.7 million during the nine months ended May 31, 1998 from $30.4 million during the nine months ended May 31, 1997. Net sales of timeshare interests increased for the nine months ended May 31, 1998 to $26.9 million from $23.6 million for the nine months ended May 31, 1997, an increase of 13.9%. The provision for cancellations represented 9.6% and 22.3% of gross sales of timeshare interests for the nine months ended May 31, 1998 and 1997, respectively. The decrease in the provision for cancellations for timeshare interests was primarily due to lower cancellation experience during the first 16 19 nine months of fiscal 1998 compared to the first nine months of fiscal 1997 and to an analysis of the required allowances, including the reserve for notes receivable sold with recourse as of May 31, 1998. Gross sales of land decreased to $11.0 million during the nine months ended May 31, 1998 from $14.5 million during the nine months ended May 31, 1997, a decrease of 24.1%. Net sales of land decreased to $10.1 million during the nine months ended May 31, 1998 from $12.5 million during the nine months ended May 31, 1997, a decrease of 19.2%. The provision for cancellations decreased to 8.2% of gross sales of land for the nine months ended May 31, 1998 from 13.9% for the nine months ended May 31, 1997, primarily due to lower cancellation experience during the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997 and to an analysis of the required allowances, including the reserve for notes receivable sold with recourse as of May 31, 1998. The decrease in gross land sales was the result of PEC's diminishing inventory of land available for sale and its increasing inventory of timeshare interests from the opening of new timeshare resorts. During the third quarter of fiscal 1998, PEC acquired developed lots in Colorado to add to its land inventory. PEC began selling these lots in the last month of the third quarter of fiscal 1998. No gain on sale of receivables was recorded for the nine months ended May 31, 1998 compared to $1.4 million for the nine months ended May 31, 1997. There were no receivable sales during the nine months ended May 31, 1998 while there were $19.9 million in receivable sales during the nine months ended May 31, 1997. PEC periodically sells receivables to reduce the outstanding balances under its lines of credit. Financial income increased to $2.8 million during the nine months ended May 31, 1998 from $2.1 million during the nine months ended May 31, 1997, an increase of 34.9%. The increase was a result of the increased number of loans serviced by PEC for an unrelated third party, generating increased servicing fees. As a result of the foregoing, total PEC revenues decreased to $49.4 million during the nine months ended May 31, 1998 from $49.7 million during the nine months ended May 31, 1997. Total costs and expenses for PEC increased to $52.3 million for the nine months ended May 31, 1998 from $50.2 million for the nine months ended May 31, 1997, an increase of 4.2%. The increase resulted primarily from an increase in direct costs of timeshare interest sales to $5.2 million from $3.9 million, an increase of 34.7%; an increase in general and administrative expense to $12.4 million from $11.5 million, an increase of 7.6%; and, an increase in depreciation expense to $1.7 million from $1.4, an increase of 20.6%. In September 1997, 1,122 new upscale, luxury timeshare interests in PEC's Las Vegas, Nevada resort became available for sale. The increase in direct costs of timeshare sales is generally attributable to the sale of this higher cost timeshare inventory. The increase in direct costs of land is attributable to increased sales of higher cost lots sold during the current fiscal period compared to the same period in fiscal 1997. The increase in general and administrative expense is due to increased payroll, professional services and group medical insurance. The increase in depreciation expense is due to the increase in property and equipment, net of accumulated depreciation, to $24.0 million at May 31, 1998 from $23.2 million at May 31, 1997. As a percentage of gross sales of timeshare interests and land, commissions and selling expenses relating thereto increased to 60.7% during the nine months ended May 31, 1998 from 55.6% during the nine months ended May 31, 1997, and cost of sales increased to 15.8% during the nine months ended May 31, 1998 from 11.1% during the nine months ended May 31, 1997. Sales prices of timeshare interests are typically lower than those of land, while selling costs per sale, other than commissions, are approximately the same in amount for timeshare interests and land; accordingly, PEC generally realizes lower profit margins from sales of timeshare interests than from sales of land. Interest expense of PEC decreased to $5.1 million during the nine months ended May 31, 1998 from $5.3 million during the nine months ended May 31, 1997, a decrease of 2.2%. The decrease is a result of the refinancing of certain notes and contracts payable to lower interest rates, which more than offset the average balance increase, during the nine months ended May 31, 1998 compared to the nine months ended May 31, 1997. A pre-tax loss of $2.9 million was recorded by PEC during the nine months ended May 31, 1998 compared to a pre-tax loss of $500,000 during the nine months ended May 31, 1997. The increase in the pre-tax loss is largely 17 20 due to the decrease in land sales and the absence of gain on sale of receivables during the current period, together with an increase in general and administrative expenses and direct costs of timeshare interest sales. No income tax provision or benefit for PEC was recorded for the nine months ended May 31, 1998 or 1997. As part of an arrangement between PEC and the Company regarding payment of taxes PEC generally does not recognize a tax benefit for periods in which it records a loss. As a result of the foregoing, PEC reported a net loss of $2.9 million during the nine months ended May 31, 1998 compared to a net loss of $500,000 during the nine months ended May 31, 1997. COMPANY (consolidated) Loss from continuing operations was $2.8 million during the nine months ended May 31, 1998 compared to income of $2.5 during the nine months ended May 31, 1997, due primarily to an income tax benefit of $1.7 million during the nine months ended May 31, 1998 compared to $5.0 million recognized during the nine months ended May 31, 1997 and a decrease in total revenues of $287,000 while total costs and expenses increased by $1.7 million because of higher costs of timeshare sales and increased general and administrative expenses. Total costs and expenses during the nine months ended May 31, 1998 were $54.0 million, an increase of 3.2% compared to $52.3 million during the nine months ended May 31, 1997. Combined commissions and selling expenses and general and administrative expenses increased 2.2% for the nine months ended May 31, 1998 compared to the nine months ended May 31, 1997 due to the expansion of timeshare marketing efforts by PEC. Total general and administrative expenses for Mego Financial (parent only) were primarily comprised of professional services, including those related to the Merger Agreement, external financial reporting expenses and regulatory and other public company corporate expenses. The income tax benefit for the nine months ended May 31, 1998 was $1.7 million compared to an income tax benefit of $5.0 million for the nine months ended May 31, 1997. The change in accrued income taxes for the nine months ended May 31, 1998 resulted from a review of the Company's tax position and was based on what the expected net operating loss will be for the entire year ending August 31, 1998; therefore, it was deemed appropriate to recognize that benefit on an interim basis. The change in accrued income taxes for the nine months ended May 31, 1997 was a result of facts and circumstances determined in an extensive review and analysis of the Company's federal income tax liability completed during fiscal 1997. Net loss applicable to common stock was $2.8 million during the nine months ended May 31, 1998 compared to net income applicable to common stock of $10.1 million during the nine months ended May 31, 1997, primarily due to the foregoing and due to income from discontinued operations of $7.6 million during the nine months ended May 31, 1997 while no income from discontinued operations was recorded during the nine months ended May 31, 1998 because of the Spin-off of MMC. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents for the Company were $2.4 million at May 31, 1998 compared to $10.4 million at August 31, 1997. The decrease was primarily due to PEC's acquisition and improvement of timeshare properties, no sale of notes receivable occurring during the first three quarters of fiscal 1998, the payment of commissions and selling expenses in connection with timeshare and land sales and Mego Financial's payment of interest on subordinated debt. PEC requires continued access to sources of debt financing and sales in the secondary market for receivables. PEC PEC's cash requirements arise from the acquisition of timeshare properties and land, payments of operating expenses, payments of taxes and dividends to Mego Financial, payments of principal and interest on debt obligations and payments of commissions and selling expenses in connection with sales 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. 18 21 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 $137.5 million and cash flows from operations. At May 31, 1998, no commitments existed for material capital expenditures. At May 31, 1998, 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 with an aggregate availability of up to $137.5 million. Such lines of credit are secured by timeshare and land receivables and mortgages. At May 31, 1998, an aggregate of $78.2 million was outstanding under such lines of credit, and $59.3 million was available for borrowing. Under the terms of these lines of credit, PEC may borrow 70% to 85% of the balances of the pledged timeshare and land receivables. PEC is required to comply with certain covenants under these agreements, which, among other things, require PEC to meet certain minimum tangible net worth requirements. The most stringent of such requirements provides that PEC maintain a minimum tangible net worth of $25.0 million. At May 31, 1998, PEC's tangible net worth was $25.3 million. Necessary waivers of compliance with certain covenants related to these and other agreements have been received. Summarized lines of credit information and accompanying notes relating to these six lines of credit outstanding at May 31, 1998, consist of the following (thousands of dollars):
BORROWING MAXIMUM AMOUNT AT BORROWING REVOLVING MAY 31, 1998 AMOUNT EXPIRATION DATE (f) MATURITY DATE INTEREST RATE - ----------------- ------------- ------------------- ---------------- ------------------- $ 50,200 $ 75,000 (a) May 15, 2000 Various Prime + 2.0 - 2.25% 6,232 15,000 (b) June 30, 1998 Various Prime + 2.0% 8,985 15,000 (c) February 28, 1999 Various LIBOR + 4.0 - 4.25% 5,539 15,000 (c) July 31, 1998 December 31, 2000 LIBOR + 4.25% 4,437 10,000 (d) August 1, 2000 August 1, 2003 Prime + 2.0 - 2.25% 2,809 7,500 (e) June 30, 1998 May 31, 2002 Prime + 2.0%
- --------------- (a) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $20.0 million with such amount increasing each fiscal quarter after August 31, 1997 by an amount equal to 50% of PEC's consolidated net income for each quarter up to a maximum requirement of $25 million. At May 31, 1998, $33.7 million of loans secured by receivables were outstanding related to financings at prime +2%, of which $21.3 million of loans secured by land receivables mature May 15, 2010 and $12.4 million of loans secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes $2.1 million in acquisition and development (A&D) financing which mature March 20, 1999 and May 20, 1999 and $5.3 million maturing July 1, 2003 for the financing of corporate office buildings, both of which are amortizing loans and bear interest at prime +2.25%. The remaining A&D and receivables loans, land acquisition loan and a resort lobby loan outstanding of $9.1 million are at prime +2% and mature between November 30, 1998 and February 20, 2001. (b) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25.0 million during the life of the loan. These credit lines include available financing for A&D and receivables. At May 31, 1998, $1.5 was outstanding under the A&D loan which matures in September 1999, and $4.8 million maturing June 1, 2002 was outstanding under the receivables loan. (c) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $17.0 million during the life of the loan. These credit lines include available financings for A&D and receivables. At May 31, 1998, $6.6 million was outstanding under the A&D loans, bearing interest at the 90-day London Interbank Offering Rate (LIBOR) +4.25% and maturing between March 1999 and August 1999. At May 31, 1998, $2.4 million was outstanding under the receivables loan, bearing interest at the 90-day LIBOR +4% and maturing in June 2005. (d) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. This credit line is for the purpose of financing receivables and costs of remodeling. (e) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $15 million. This credit line is for the purpose of financing receivables. (f) Revolving expiration dates represent the expiration of the revolving features of the lines of credit, at which time the credit lines become loans with fixed maturities. 19 22 A schedule of the cash shortfall arising from recognized and unrecognized sales for the periods indicated is set forth below (thousands of dollars):
THREE MONTHS ENDED MAY 31, NINE MONTHS ENDED MAY 31, ---------------------------- --------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------ Commissions and selling expenses attributable to recognized and unrecognized sales $ 9,085 $ 8,643 $ 24,811 $ 25,055 Less: Down payments (3,004) (3,606) (9,267) (10,348) ------------ ------------ ------------ ----------- Cash Shortfall $ 6,081 $ 5,037 $ 15,544 $ 14,707 ============ ============ ============ ===========
During the nine months ended May 31, 1998, PEC did not sell any notes receivable. During the nine months ended May 31, 1997, PEC sold notes receivable of $19.9 million from which $16.8 million of the sales proceeds were used to pay down debt during the nine months ended May 31, 1997. The receivables sold during the nine months ended May 31, 1997 had a weighted-average interest rate of 12.7% and were sold to yield a return of 9.0% with any excess interest received from the obligors being payable to PEC. At May 31, 1998, PEC was contingently liable to replace or repurchase notes receivable sold with recourse totaling $70.9 million. 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. The repurchase provisions provide for substitution of receivables as recourse for $70.0 million of sold notes receivable and cash payments for repurchase relating to $883,000 of sold notes receivable. At May 31, 1998 and 1997, the undiscounted amounts of the recourse obligations on such notes receivable were $6.1 million and $12.0 million, respectively. PEC 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, 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):
MAY 31, AUGUST 31, 1998 1997 -------------- -------------- Notes collateralized by receivables $ 44,055 $ 31,489 Mortgages collateralized by real estate properties 37,403 32,311 Installment contracts and other notes payable 1,799 1,769 ------------- ------------- Total $ 83,257 $ 65,569 ============= =============
FINANCIAL CONDITION May 31, 1998 Compared to August 31, 1997 Cash and cash equivalents decreased 76.7% to $2.4 million at May 31, 1998 from $10.4 million at August 31, 1997, primarily as a result of PEC's acquisition and improvement of timeshare properties, no sale of notes receivable during the first nine months of fiscal 1998, the payment of commissions and selling expenses in connection with timeshare and land sales and Mego Financial's payment of interest on subordinated debt. Notes receivable, net, increased 40.7% to $48.2 million at May 31, 1998 from $34.3 million at August 31, 1997 primarily as a result of new receivables added exceeding reductions while no receivable sales occurred during the nine months ended May 31, 1998. 20 23 Changes in the aggregate of the allowance for cancellations, excluding discounts, and the reserve for notes receivable sold with recourse for the nine months ended May 31, 1998 consists of the following (thousands of dollars): Balance at beginning of period $ 19,527 Provision for cancellations 3,760 Amounts charged to allowance for cancellations and reserve for notes receivable sold with recourse (4,808) ------------ Balance at end of period $ 18,479 ============
The allowance for cancellations and the reserve for notes receivable sold with recourse consisted of the following at these dates (thousands of dollars):
MAY 31, AUGUST 31, 1998 1997 ------------- -------------- Allowance for cancellations, excluding discounts $ 12,902 $ 10,824 Reserve for notes receivable sold with recourse 5,577 8,703 ------------- ------------- Total $ 18,479 $ 19,527 ============= =============
Statement of Financial Accounting Standard (SFAS) No. 125 (SFAS 125) requires the reclassification of excess servicing rights as interest only receivables which are carried at fair market value. Interest only receivables decreased 10.3% to $3.0 million at May 31, 1998 from $3.3 million at August 31, 1997 due to normal amortization. Timeshare interests held for sale and land and improvements inventory increased 20.9% to $45.1 million at May 31, 1998 from $37.3 million at August 31, 1997 primarily as a result of the completion of construction of additional timeshare interests and the addition of land inventory in Colorado during the nine months ended May 31, 1998. Other investments increased $2.0 million to $4.2 million at May 31, 1998 from $2.1 million at August 31, 1997 due to the recent acquisition of property in Biloxi, Mississippi. Other receivables increased to $1.4 million at May 31, 1998 from $0 at August 31, 1997, due to a receivable from MMC to PEC (subsequently paid in June 1998). Net assets of discontinued operations decreased to $0 at May 31, 1998 from $53.3 million at August 31, 1997 due to the completion of the Spin-off on September 2, 1997. The $53.3 million at August 31, 1997 represented the net assets of MMC of $53.1 million and the Company's receivable of $10.1 million from MMC less the minority interest of $9.9 million. Of the $10.1 million, $9.7 million was due from MMC to the Company and $446,000 was due from MMC to PEC. After the Spin-off, MMC was obligated to pay the debt due to the Company, $3.9 million of which was paid in October 1997 under the terms of an agreement and $6.2 million of which was eliminated through adjustments in April and June 1998. Notes and contracts payable increased 27.0% to $83.3 million at May 31, 1998 from $65.6 million at August 31, 1997, due to increased borrowings and no receivable sales occurring during the nine months ended May 31, 1998; the proceeds of which are usually used to pay down debt. Reserve for notes receivable sold with recourse decreased 35.9% to $5.6 million at May 31, 1998 from $8.7 million at August 31, 1997 primarily due to no receivable sales occurring during the nine months ended May 31, 1998 and the reduced balance of the sold notes receivable. Recourse to PEC on sales of notes receivable is governed by the agreements between the purchasers and PEC. Accrued income taxes decreased 24.5% to $4.7 million at May 31, 1998 from $6.2 million at August 31, 1997. The change in certain income tax liability reserves was a result of facts and circumstances determined in an extensive review and analysis of the Company's federal income tax liability completed during fiscal 1997. 21 24 Stockholders' equity decreased 71.1% to $21.1 million at May 31, 1998 from $73.2 million at August 31, 1997 primarily as a result of the distribution by Mego Financial of all of its remaining shares of MMC common stock to shareholders of Mego Financial pursuant to the Spin-off which resulted in a distribution of $43.2 million in equity and the settlement of the $6.2 million receivable MMC owed the Company. See Note 5 of Notes to Condensed Consolidated Financial Statements. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," (SFAS 125) was issued by the Financial Accounting Standards Board (FASB) in June 1996. SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value. SFAS 125 also requires that servicing assets be measured by allocating the carrying amount between the assets sold and retained interests based on their relative fair values at the date of transfer. Additionally, this statement requires that the servicing assets and liabilities be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income or loss and (b) assessment for asset impairment or increased obligation based on their fair values. SFAS 125 requires that the Company's excess servicing rights be measured at fair market value and be reclassified as interest only receivables and accounted for in accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." As required by SFAS 125, the Company adopted the new requirements effective January 1, 1997. Implementation of SFAS 125 did not have any material impact on the financial statements of the Company, as the book value of the Company's interest only receivables approximated fair value. SFAS No. 128, "Earnings per Share," (SFAS 128) was issued by the FASB in March 1997, effective for financial statements issued after December 15, 1997. SFAS 128 provides simplified standards for the computation and presentation of earnings per share (EPS), making EPS comparable to international standards. SFAS 128 requires dual presentation of "Basic" and "Diluted" EPS, by entities with complex capital structures, replacing "Primary" and "Fully-diluted" EPS under APB Opinion No. 15. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 23, 1998, an action was filed in the United States District Court for the Northern District of Georgia, Civil Action No.1:98CV0593-CAM, by Robert J. Feeney, plaintiff, as a purported class action against Mego Mortgage Corporation and Jeffrey S. Moore, the former President and Chief Executive Officer of Mego Mortgage Corporation. The complaint alleges, among other things, that the defendants violated the federal securities laws in connection with the preparation and issuance of certain of Mego Mortgage Corporation's financial statements. The named plaintiff seeks to represent a class consisting of purchasers of the common stock of Mego Mortgage Corporation between April 11, 1997 and December 18, 1997, and seeks such other relief as the Court may deem just and proper. Although the Company has not been served in the above matter, the Company has learned that an amended complaint was filed in such matter on or about June 29, 1998, which amended complaint, among other things, adds Mego Financial Corp. as a defendant, adds John Cole, Trent Hildebrand, Burt W. Price and Frank J. Murphy as Plaintiffs and alleges an expansion of the purported class to certain purchasers of Mego Mortgage Corporation's common stock from April 11, 1997 through May 20, 1998. The Company's counsel have not completed their review of the above matter. As reported in the Corporations' Form 10-K for the year ended August 31, 1997, and in prior reports, following the Company's restatement of certain of its previously issued financial statements, including for the year ended August 31, 1994, upon which its auditors had rendered unqualified opinions, the Securities and Exchange Commission (SEC) commenced a formal investigation to determine, among other things, whether the Company, and/or its officers and directors, violated applicable federal securities laws in connection with the preparation and filing of the Company's previously issued financial statements or certain trading in its common stock. 22 25 In a letter from the SEC dated June 1, 1998, the Company was advised that the staff inquiry had been terminated and that no enforcement action had been recommended to the Commission. In addition, the letter referred to Securities Act Release 5310 which provides that such letter should not be construed to mean that any party has been exonerated or that no action may ultimately result from the staff's investigation. ITEM 5. OTHER EVENTS On March 27, 1998, the Company announced that it had entered into the Merger Agreement under which it was to be acquired by Sycamore. Sycamore was to be financed by Blackacre Capital Group, L.P., a real estate investment fund. Under the terms of the Merger Agreement, the Company shareholders are to receive $6.00 per share of Common stock, in cash, less an adjustment related to a receivable from MMC on the Company's financial statements. The adjustment was expected to be at least $0.25 per share but not more than $0.29 per share so that the per share price which was to be received by shareholders would have been a minimum of $5.71 per share up to an estimated maximum of $5.75 per share. See Note 5. On May 19, 1998, Sycamore announced that it was prepared to go forward with the previously announced merger only if certain terms of the merger agreement were modified, including a reduction of the purchase price to $4.50 per share of outstanding Common Stock. The Company has notified Sycamore that Sycamore is in default under the Merger Agreement. Nevertheless, the Company intends to maintain communications with Sycamore and to continue to negotiate so long as it deems such negotiations to be in the best interest of the Company's shareholders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.139 Termination of Services and Consulting Agreement between Mego Mortgage Corporation and Preferred Equities Corporation, dated April 22, 1998. 10.140 Settlement letter from Mego Financial Corp. to Mego Mortgage Corporation dated June 26, 1998. 10.141 Settlement letter from Preferred Equities Corporation to Mego Mortgage Corporation dated June 26, 1998. 27.1 Financial Data Schedule (for SEC use only).
No reports on Form 8-K were filed during the period except as reported in the Company's Form 10-K for the year ended August 31, 1997. 23 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEGO FINANCIAL CORP. By:/s/ Charles G. Baltuskonis ------------------------------------- Charles G. Baltuskonis Vice President and Chief Accounting Officer Date: July 15, 1998 ------------------------------- 24 EX-10.139 2 TERMINATION OF SERVICES AND CONSULTING AGREEMENT 1 EXHIBIT 10.139 [MEGO MORTGAGE CORPORATION LETTERHEAD] [PEC LOGO] PREFERRED EQUITIES CORPORATION 4310 Paradise Road, Las Vegas, NV 89109-6597 o 702.737.3700 o Toll Free 1.800.634.6431 o Fax 702.369.4398 April 22, 1998 Mr. Jeff S. Moore, President Mego Mortgage Corporation 1000 Parkwood Circle - 5th Floor Atlanta, GA 30339 Dear Mr. Moore: Reference is made to the Services and Consulting Agreement, between Mego Mortgage Corporation ("Mego Mortgage") and Preferred Equities Corporation ("PEC") dated as of September 1, 1996 (the "Agreement"). This is to advise that Mego Financial Corp., the corporate parent of PEC, has entered into an Agreement and Plan of Merger dated as of March 25, 1998, with Sycamore Partners, LLC. The merger is expected to be effective within the next two months and the merger agreement requires Mego Financial Corp. to cause PEC to terminate the Agreement on or prior to the merger date. this letter shall constitute notice of termination of the Agreement. Such termination shall be effective on the date of the completion of the merger or in 90 days from the date hereof, whichever is sooner. At the time of the termination all amounts due from Mego Mortgage to PEC for services performed under the terms of the Agreement shall be paid in full. Please indicate your agreement with the foregoing by executing a copy of this letter in the space provided below and returning it to the undersigned at your earliest convenience. Sincerely, PREFERRED EQUITIES CORPORATION /s/ FREDERICK H. CONTE Frederick H. Conte Executive Vice President Accepted and Approved: MEGO MORTGAGE CORPORATION By: /s/ JEFF S. MOORE ------------------------- Jeff S. Moore, President Date: 4-28-98 ------------- EX-10.140 3 SETTLEMENT FROM MEGO FINANCIAL TO MEGO MORTGAGE 1 EXHIBIT 10.140 MEGO FINANCIAL CORP. 1125 N.E. 125th Street, Suite 206 N. Miami, Florida 33161 June 26, 1998 Mego Mortgage Corporation 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339 Gentlemen: In consideration of the payment by Mego Mortgage Corporation ("Mego Mortgage") to Preferred Equities Corporation ("PEC", the wholly owned subsidiary of Mego Financial Corp. ("Mego Financial"), of $1,574,009.50, which amount represents fees for services rendered by PEC and costs and expenses billed through June 30, 1998 under (i) the Loan Program Subservicing Agreement, dated as of September 1, 1996, as amended, between PEC and Mego Mortgage and (ii) the Services and Consulting Agreement, dated as of September 1, 1996, as amended, between PEC and Mego Mortgage, Mego Financial Corp. ("Mego Financial") hereby agrees that no further amounts are owed to it by Mego Mortgage under the (i) the Tax Allocation and Indemnity Agreement, dated November 19, 1996, between Mego Financial and Mego Mortgage (the "Tax Agreement"), (ii) the Payment Agreement, dated as of August 29, 1997, between Mego Mortgage and Mego Financial (the "Payment Agreement") and (iii) the Agreement dated April 9, 1998, between Mego Mortgage and Mego Financial (the "April Agreement," and together with the Tax Agreement and the Payment Agreement, the "Mego Agreements") and hereby releases Mego Mortgage from any right, claim or action Mego Financial now has or may have in the future arising out of or in connection with the Mego Agreements. Similarly, in consideration of the release granted herein by Mego Financial, by Mego Mortgage's execution of this letter, Mego Mortgage hereby releases Mego Financial from any right, claim or action Mego Mortgage now has or may have in the future arising out of or in connection with the Mego Agreements. Very truly yours, MEGO FINANCIAL CORP. By: /s/ JEROME J. COHEN -------------------------- Jerome J. Cohen, President Agreed to and accepted this __ day of June 1998 MEGO MORTGAGE CORPORATION By: ------------------------ Name: Title: EX-10.141 4 SETTLEMENT LETTER FROM PEC TO MEGO MORTGAGE 1 EXHIBIT 10.141 PREFERRED EQUITIES CORPORATION June 26, 1998 Mego Mortgage Corporation 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339 Gentlemen: In consideration of the payment by Mego Mortgage Corporation ("Mego Mortgage") to Preferred Equities Corporation ("PEC") of $1,574,009.50, which amount represents fees for services rendered by PEC and costs and expenses billed through June 30, 1998 under (i) the Loan Program Subservicing Agreement, dated as of September 1, 1996, as amended, between PEC and Mego Mortgage (the "Subservicing Agreement") and (ii) the Services and Consulting Agreement, dated as of September 1, 1996, as amended, between PEC and Mego Mortgage (the "Services Agreement," and together with the Subservicing Agreement, the "Agreements"), and for other good and valuable consideration the sufficiency of which is hereby acknowledged, PEC hereby agrees that no further amounts are owed to it by Mego Mortgage under the Agreements for services rendered or costs and expenses billed through June 30, 1998 and hereby releases Mego Mortgage from any right, claim or action PEC now has or may have in the future under the Agreements for services rendered and expenses billed through June 30, 1998. Similarly, in consideration of the release granted herein by PEC, by Mego Mortgage's execution of this letter, Mego Mortgage hereby releases PEC from any right, claim or action Mego Mortgage now has or may have in the future with respect to services rendered by PEC to Mego Mortgage through June 30, 1998 under the Agreements and agrees to promptly pay when due all amounts owed to PEC with respect to services rendered and costs and expenses incurred after June 30, 1998. Very truly yours, PREFERRED EQUITIES CORPORATION By: /s/ JEROME J. COHEN -------------------------- Jerome J. Cohen, President Agreed to and accepted this __ day of June 1998 MEGO MORTGAGE CORPORATION By: ------------------------ Name: Title: EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS AUG-31-1998 SEP-01-1997 MAY-31-1998 4,432 0 61,639 13,425 45,086 0 37,709 13,713 143,190 0 83,257 0 0 210 20,937 143,190 36,986 49,526 6,440 33,128 20,887 0 5,635 (4,489) (1,728) (2,761) 0 0 0 (2,761) (0.13) (0.13)
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