10-K 1 a66375e10-k.txt FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 -------------------------------------------------------------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ COMMISSION FILE NUMBER 1-8645 MEGO FINANCIAL CORP. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NEW YORK 13-5629885 ------------------------------- --------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) identification no.) 4310 PARADISE ROAD, LAS VEGAS, NV 89109 ---------------------------------------- ---------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 702-737-3700 ------------------------------ Securities registered pursuant to Section 12(b) of the Act: NONE --------------------- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of November 15, 2000, 3,500,557 shares of the registrant's common stock were outstanding. The aggregate market value of common stock held by non-affiliates of the registrant as of November 15, 2000 was approximately $8,323,840 based on a closing price of $4.81 for the common stock as reported on the NASDAQ National Market on such date. For purposes of the foregoing computation, all executive officers, Directors and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers, Directors or 5 percent beneficial owners are, in fact, affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ 2 MEGO FINANCIAL CORP. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I PAGE ------ ---- Item 1. Business....................................................................................... 1 Item 2. Properties..................................................................................... 10 Item 3. Legal Proceedings.............................................................................. 10 Item 4. Submission of Matters to a Vote of Security Holders............................................ 11 PART II Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters.................. 12 Item 6. Selected Consolidated Financial Data........................................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 25 Item 8. Financial Statements and Supplementary Data.................................................... 26 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................................................... 26 PART III Item 10. Directors and Executive Officers of the Company................................................ 27 Item 11. Executive Compensation......................................................................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 33 Item 13. Certain Relationships and Related Transactions................................................. 34 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................. 35 Signatures.................................................................................... 47
i 3 PART I ITEM 1. BUSINESS GENERAL Mego Financial Corp. (Mego Financial) is a premier developer and operator of timeshare properties and a provider of consumer financing to purchasers of its timeshare intervals and land parcels through its wholly-owned subsidiary, Preferred Equities Corporation (PEC) established in 1970. PEC also manages timeshare properties and receives management fees as well as fees based on sales of timeshare interests. By providing financing to virtually all of its customers, PEC also originates consumer receivables that it hypothecates and services. Unless the context requires otherwise, the "Company" refers to Mego Financial and its consolidated subsidiaries. The terms "fiscal 2000", "fiscal 1999" and "fiscal 1998" refer to the fiscal years ended August 31, 2000, 1999 and 1998, respectively. The Company was incorporated under the laws of the state of New York in 1954 under the name Mego Corp. and, in 1992, changed its name to Mego Financial Corp. In January 1988, the Company sold a controlling interest in the Company consisting of approximately 43% of the then outstanding common stock after the sale, to affiliates of the Assignors (as hereinafter defined). See "Item 13. Certain Relationships and Related Transactions" and Note 1 of Notes to Consolidated Financial Statements. In February 1988, the Company acquired PEC, pursuant to an assignment by the Assignors (Comay Corp., GRI, RRE Corp., and H&H Financial Inc.) of their contract right to purchase PEC. The Company's executive offices are located at 4310 Paradise Road, Las Vegas, Nevada, and its telephone number is (702) 737-3700. PREFERRED EQUITIES CORPORATION GENERAL PEC acquires, develops and converts rental and condominium apartment buildings and hotels for sale as timeshare interests and engages in the retail sale of land. PEC's strategy is to acquire properties in desirable destination resort areas that offer a range of recreational activities and amenities. PEC markets and sells timeshare interests in its resorts in Las Vegas and Reno, Nevada; Honolulu, Hawaii; Brigantine, New Jersey; Steamboat Springs, Colorado; Indian Shores and Orlando, Florida; and sells land in Nevada and Colorado. PEC owns property in Biloxi, Mississippi, which it is considering for the possible construction of a future timeshare resort. PEC is also affiliated with Hotel Maison Pierre Lafitte Ltd. in New Orleans, Louisiana, and received management fees as well as fees based on sales of timeshare interests. Major lodging, hospitality and entertainment companies, including The Walt Disney Company, Hilton Hotels Corporation, Marriott Ownership Resorts, Inc. and Hyatt Corporation, among others, have commenced developing and marketing timeshare interests in various resort properties. The Company believes that the entry into the timeshare industry of certain of these large and well-known lodging, hospitality and entertainment companies has contributed to the growth and acceptance of the industry. To enhance its competitive position, in April 1995, PEC entered into a strategic alliance with Ramada Franchise Systems, Inc. (Ramada) and its parent, Hospitality Franchise Systems, Inc., now Cendant Corporation (Cendant), pursuant to which PEC was granted a ten-year (including a renewal option) exclusive license to operate both its existing and future timeshare properties under the name "Ramada Vacation Suites." The American Resort Development Association (ARDA) estimates that over 2 million families in the United States own timeshare interests in resorts worldwide and that sales of timeshare interests in the United States aggregated approximately $4 billion in 1999. Additionally, it is estimated by ARDA that sales volume is increasing at a compounded annual rate of approximately 14% due to the entry of brand-name hospitality firms and well-financed publicly held companies with lower costs of capital and strong growth among seasoned timeshare companies. TIMESHARE PROPERTIES AND SALES The timeshare interests offered by PEC in its resorts other than in Hawaii generally consist of undivided fee interests in the land and facilities comprising the property or an undivided fee interest in a particular unit, pursuant to which the owner acquires the perpetual right to weekly occupancy of a residence unit each year. In its resort in Hawaii, PEC offers "right-to-use" interests, pursuant to which the owner has occupancy rights for one week each year until December 31, 2009, the last full year of the underlying land lease for the resort property. During fiscal 2000, 1999 and 1998, PEC had net sales of 2,885, 2,841 and 2,237 timeshare interests, respectively, at prices ranging from $4,250 to $30,990. 1 4 The Company believes that PEC's alliance with Ramada has enabled it to capitalize on the Ramada reputation, name recognition and customer profile, which closely matches PEC's customer profile. The agreement with Ramada ("Agreement") required PEC to pay an initial access fee of $1 million and monthly recurring fees equal to 1% of PEC's Gross Sales (as defined in the Agreement) through January 1996 and 1.5% of PEC's Gross Sales each month commencing in February 1996, with certain minimums that increase each year. The initial term of the Agreement was 5 years and PEC had the option to renew the Agreement for an additional term of 5 years. PEC exercised the option on April 27, 2000. The Agreement will expire on December 31, 2005. The Company believes it has benefited from the use of the Ramada name, but is unable to quantify the amount of such benefit. PEC also offers a sales program whereby a customer pays a fixed fee on an installment basis to use a timeshare interest during an initial one-year period with an option to purchase the timeshare interest. If the customer exercises the option to purchase the interest, the fixed fee is applied toward the down payment of the timeshare interest purchased. PEC's Ramada Vacation Suites at Las Vegas includes 37 buildings with a total of 489 studio, one and two bedroom units that have been converted for sale as 24,939 timeshare interests. As of August 31, 2000, 3,523 timeshare interests remained available for sale. The resort is in close proximity to "the Strip" in Las Vegas and features swimming pools and other amenities. PEC has completed the expansion of the resort common areas to include an expanded lobby, convenience store and expanded sales facilities. The Ramada Vacation Suites at Reno consists of a 95-unit hotel that has been converted for sale as 4,845 timeshare interests. As of August 31, 2000, 1,249 timeshare interests remained available for sale. The resort is undergoing major renovations and features an indoor swimming pool, exercise facilities, sauna, jacuzzi and sun deck. The Ramada Vacation Suites at Honolulu is an 80-unit hotel consisting of 3 buildings that have been converted for sale as 4,160 timeshare interests. As of August 31, 2000, 577 timeshare interests remained available for sale. The resort is within walking distance of a public beach and features a swimming pool and jacuzzi. PEC has a leasehold interest in the buildings, equipment and furnishings which expires in December 2009. The annual rental payments total approximately $192,000. The Ramada Vacation Suites at Steamboat Springs consists of 60 one- and two-bedroom units, which have been converted for sale as 3,060 timeshare interests. As of August 31, 2000, 813 timeshare interests remained available for sale. PEC acquired this condominium resort in 1994 and completed the conversion in 1995. PEC has constructed a 5,500-square foot amenities building at this resort that features a spa and sauna. The Ramada Vacation Suites - Hilltop at Steamboat Springs is a hotel building with indoor swimming pool, restaurant, cocktail lounge and meeting room facilities. The complex contains 56 one- and two-bedroom units to be sold as 2,856 timeshare interests. 42 of the units, containing 2,142 timeshare interests, are registered for sale. As of August 31, 2000, 1,340 timeshare interests remained available for sale. 14 additional units containing 714 timeshare interests will be registered as demand dictates. The resort is located in Steamboat Springs, Colorado, in close proximity to ski slopes and other attractions. The Ramada Vacation Suites at Orlando consists of a 7-building, 102 unit complex that has been converted into 5,202 timeshare interests. As of August 31, 2000, 991 timeshare interests remained available for sale. An eighth building, containing 18 units to be sold as 918 timeshare interests, became available in November 2000. The resort features a pool and is located near the major tourist attractions. The Ramada Vacation Suites at Indian Shores consists of a 2-building complex, which has been converted into a total of 32 one- and two-bedroom units to be sold as 1,632 timeshare interests. As of August 31. 2000, 53 timeshare interests remained available for sale. The resort is located on the intercoastal waterway in close proximity to St. Petersburg and Clearwater, Florida. The Ramada Vacation Suites on Brigantine Beach consists of a 91-unit hotel and a 17-unit three-story building that have been either converted or constructed for sale as 5,508 timeshare interests. As of August 31, 2000, 877 timeshare interests were available for sale. The resort, located on beach front property in close proximity to Atlantic City, New Jersey, features an enclosed swimming pool, cocktail lounge, bar and restaurant. 2 5 The Ramada Vacation Suites at New Orleans is an existing 19-suite hotel that consists of studios, as well as one-and two-bedroom suites. The resort is located next to the Fairmont Hotel, adjacent to the historic French Quarter. The location provides easy access to the City's key tourist attractions. The following table sets forth certain information regarding the timeshare interests at the Company's resort properties:
STEAMBOAT INDIAN LAS VEGAS RENO WAIKIKI SPRINGS HILLTOP ORLANDO SHORES BRIGANTINE TOTAL --------- ---- ------- ---------- ------- ------- ------- ---------- ------- Maximum number of timeshare interests 24,939 4,845 4,160 3,060 2,142 5,202 1,632 5,508 (1) 51,488 Net number of timeshare interests sold through August 31, 2000 21,416 3,596 3,583 2,247 802 4,211 1,579 4,631 42,065 Number of timeshare interests available for sale at August 31, 2000 3,523 1,249 577 813 1,340 991 53 877 9,423 Percent sold through August 31, 2000 86% 74% 86% 73% 37% 81% 97% 84% 82% Number of timeshare interests sold during the year ended August 31, 2000 2,879 107 395 426 619 1,468 289 36 6,219 Number of timeshare interests reacquired during the year ended August 31, 2000 through: Contract cancellations 444 57 119 106 23 203 68 28 1,048 Exchanges (2) 878 102 156 283 171 176 103 86 1,955 Acquired for unpaid maintenance fees 90 75 166 -- -- -- -- -- 331 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total number of timeshare interests reacquired during the year 1,412 234 441 389 194 379 171 114 3,334 -------- -------- -------- -------- -------- -------- -------- -------- -------- Net number of timeshare interests sold (reacquired) during the year ended August 31, 2000 1,467 (127) (46) 37 425 1,089 118 (78) 2,885 Additional pending timeshare interests as of August 31, 2000 -- -- -- -- 714 918 -- -- 1,632 Sales price range of timeshare interests available at August 31,2000 From $ 8,550 $ 4,490 $ 4,250 $ 7,490 $ 7,990 $ 8,550 $ 8,550 $ 4,250 $ 4,250 To $ 21,690 $ 8,490 $ 6,450 $ 25,690 $ 30,990 $ 13,830 $ 16,050 $ 22,550 $ 30,990
(1) 4,823 timeshare interests were sold prior to the acquisition by the Company. (2) These exchanges are primarily related to customers exchanging and/or upgrading their current property to larger, higher-priced units. 3 6 PEC's revenue from net sales of timeshare interests was $49.1 million, $41.3 million and $37.7 million, representing 54.2%, 55.4% and 55.0% of total revenues for fiscal 2000, 1999 and 1998, respectively. RCI EXCHANGE NETWORK Timeshare interest ownership is significantly enhanced by the availability of resort exchange networks. These networks allow owners to exchange their occupancy right in their home resort for an occupancy right in another resort. Several companies, including Resorts Condominiums International (RCI), a wholly-owned subsidiary of Cendant, provide timeshare interest exchange networks. PEC's resorts participate in the RCI network. According to RCI, it has a total of more than 3,500 participating resort facilities located worldwide. PEC and the Owner's Association (as defined hereinafter) of each of PEC's timeshare resorts have entered into an agreement with RCI pursuant to which purchasers of timeshare interests in PEC's resorts may apply for membership in the RCI exchange network. The cost of the RCI subscription fee, which is at the option and expense of the timeshare interest owner, is approximately $63 for the first year and $74 for each annual renewal. The initial five-year terms of the agreements are automatically renewable for additional five-year terms, unless either party gives the other party not less than 180 days written notice prior to the expiration of the then current term. Either party may terminate the agreement upon a breach of the agreement by the other party. OWNERS' ASSOCIATIONS AND PROPERTY MANAGEMENT PEC's resort properties require ongoing management services. Independent not-for-profit corporations known as Owners' Associations have been established to administer each of PEC's resorts other than the resort in Honolulu. PEC's resort in Honolulu is administered by the White Sands Resort Club, a division of PEC (together with the Owners' Associations, collectively the "Associations"). Owners of timeshare interests in each resort are responsible for the payment of annual assessment fees, which are intended to fund all of the operating expenses at the resort facilities and accumulate reserves for replacement of furnishings, fixtures and equipment, and building maintenance, to their respective Association. Annual assessment fees for 2000 ranged from $253 to $451. In prior years, PEC has voluntarily advanced monies to cover deficits for non-Florida located Associations. There is no certainty PEC will continue this practice. In Florida, if Association expenses exceed annual assessment fees, PEC is obligated to pay the deficit. In fiscal 2000, PEC financed a budget shortfall of $90,000 and $63,000, respectively, for the Owners' Associations at Indian Shores and Orlando. During calendar year 1999, the Associations had an excess of $904,000 in Association fees received compared to expenses paid. If the owner of a timeshare interest defaults in the payment of the annual assessment fee, the Association may impose a lien on the related timeshare interest. PEC, at its option, has agreed to pay to the Associations the annual assessment fees of timeshare interest owners who are delinquent, but have paid PEC in full for their timeshare interest. In exchange for the payment by PEC of such fees, the Associations assign their liens for non-payment on the respective timeshare interests to PEC. In the event the timeshare interest holder does not satisfy the lien after having an opportunity to do so, PEC typically acquires the timeshare interest for the amount of the lien and any related foreclosure costs. PEC has entered into management agreements with the Associations pursuant to which PEC receives annual management and administrative fees in exchange for providing or arranging for various property management services including reservations, bookkeeping, staffing, budgeting, maintenance and housekeeping services. During fiscal 2000, 1999 and 1998, PEC received fees of $2.7 million, $2.5 million and $2.4 million, respectively. The management agreements are typically for initial terms ranging from three to five years and automatically renew for successive additional one-year terms unless canceled by an Association. PEC's intent and goal is to manage these properties until all timeshare interests are sold and the receivables generated from such sales have been paid. Due to cancellations, exchanges and upgrades, none of the resorts are likely to realize a 100% sellout for an extended period of time. The Company believes that continued management of these properties preserves the integrity and operating efficiencies of the resorts. LAND SALES 4 7 PEC is engaged in the retail sale of land in Nevada and Colorado for residential, commercial, industrial and recreational use. Residential lots generally range in size from one-quarter acre to five acres with some larger, while commercial and industrial lots vary in size. PEC's residential lots generally range in price from $15,000 to $39,000 while commercial and industrial lots generally range in price from $79,000 to $94,000. PEC sold 766, 613 and 530 residential lots, net, and 2, 14 and 12 commercial and industrial lots during fiscal 2000, 1999 and 1998, respectively. PEC is required from time to time to cancel the purchase of lots and parcels as a result of payment defaults or customer cancellations following inspections of the property pursuant to contractual provisions. NEVADA A substantial portion of PEC's land sales have occurred in subdivisions in the Pahrump Valley, located approximately 60 miles west of Las Vegas. The following table illustrates certain statistics regarding the Pahrump valley subdivisions: Number of acres acquired since 1969 18,777 Number of lots platted 29,849 Net number of lots sold through August 31, 2000 29,710 Percent of lots sold through August 31, 2000 (unsold less than .5%) 100% Number of platted lots available for sale at August 31, 2000 139 For the Year Ended August 31, 2000: Number of parcels and lots sold 867 Number of parcels and lots canceled (331) Number of parcels and lots repurchased (110) Number of parcels and lots exchanged (408) ------- Number of parcels and lots sold, net of cancellations and exchanges 18 =======
Central Nevada Utilities Company (CNUC), a wholly-owned subsidiary of PEC, provides sewer and water service within CNUC's certificated service area. As of August 31, 2000, CNUC had 3,150 customers. In the past 4 years, connections have grown at an average rate of 14.4% and 16.3%, respectively, for residential water and sewer. COLORADO PEC also sells larger unimproved tracts of land in Colorado. PEC owns unimproved land in Huerfano County, Colorado, which is being sold for recreational use in parcels of at least 35 acres, at prices ranging from $12,000 to $18,000, depending on location and size. These parcels are sold without any planned improvements and without water rights, which rights have been reserved by PEC, except for an owner's right to drill a domestic well. Substantially all of the parcels have been sold, with 62 parcels remaining in inventory as of August 31, 2000. In September 1993, PEC acquired improved and unimproved land in Park County, Colorado, known as South Park Ranch, which is being sold for recreational use as 1,870 separate parcels typically ranging in size from 5 to 9 acres and a few larger parcels at prices beginning at $15,000. As of August 31, 2000, 1,842 parcels had been sold with 28 parcels remaining in inventory. These parcels are sold without any planned improvements, except for roads which are already in place and a recreational facility that includes a basketball court, baseball field and picnic facilities. In February 1998, PEC acquired a tract of land in Park County, Colorado near the town of Hartsel. This property is being sold as 2,137 separate parcels with an average price and size of $28,600 and five acres, respectively. As of August 31, 2000, 357 parcels remained unsold, not including 333 parcels which became available for sale in October 2000. These parcels are sold without any planned improvements, except for roads which are already in place. The following table illustrates certain statistics regarding the parcels and lots in Huerfano and Park Counties, Colorado: 5 8 Number of acres acquired since 1969 60,782 Number of lots platted 4,828 Net number of lots sold through August 31, 2000 4,381 Percent of lots sold through August 31, 2000 91% Number of platted lots available for sale at August 31, 2000 447 FOR THE YEAR ENDED AUGUST 31, 2000: Number of parcels and lots sold 1,829 Number of parcels and lots canceled (378) Number of parcels and lots exchanged (701) ------- Number of parcels and lots sold, net of cancellations and exchanges 750 =======
For fiscal 2,000, 1999 and 1998, respectively, PEC's revenue from net land sales was $19.6 million, $16.0 million and $13.8 million, representing 21.7%, 21.4% and 20.1% of total revenues. SALES OF NON-CORE ASSETS The Company owns and has listed for sale certain commercial parcels that are not necessary for its normal business activities. 22 of these parcels are located in the Pahrump Valley. The Company also owns water rights in Huerfano County that are listed for sale and a 4.25 acre parcel in Biloxi, Mississippi, which it may sell. The Company also has received interest in the acquisition of CNUC. Since the Company began listing its non-core assets for sale in the second quarter of fiscal 1999, the Company has sold $4,864,000 in non-core assets. Sales have included two golf courses, a sports complex and six other parcels located in the Pahrump Valley. Subsequent to August 31, 2000, the Company also sold its two office buildings located at 4310 Paradise Road and 1500 E. Tropicana in Las Vegas, for a total consideration of $8,300,000. The Company has leased back the building at 1500 E. Tropicana for a period of ten years with two 5-year renewal options, and the building at 4310 Paradise Road for a period of 5-1/2 years with a 4-1/2 year renewal option. The majority of sales proceeds have been used to reduce debt. The Company will continue to actively market the non-core assets; however, there is no certainty as to when additional sales will occur. TRUST ARRANGEMENTS Title to certain of PEC's resort properties and land parcels in Huerfano County, Colorado is held in trust by trustees to meet regulatory requirements that were applicable at the time of the commencement of sales. In connection with sales of timeshare interests pursuant to "right-to-use" or installment sales contracts, title to certain of PEC's resort properties in the states of Nevada and Hawaii are held in trust by trustees to meet requirements of certain state regulatory authorities. Prior to 1988, PEC sold timeshare interests in certain of its resorts in the state of Nevada pursuant to "right-to-use" contracts and continues in other resorts to sell under installment sales contracts under which the purchaser does not receive a deed until the purchase price is paid in full. In addition, PEC offers "right-to-use" interests in its resort in Hawaii, since it is on leased property. In connection with the registration of the sale of such "right to use" timeshare interests, the Department of Real Estate of the state of Nevada and the Department of Commerce and Consumer Affairs of the state of Hawaii require that title to the related resorts be placed in trust. CUSTOMER FINANCING PEC provides financing to virtually all the purchasers of its timeshare interests, retail lots and land parcels who make a down payment equal to at least 10% of the purchase price. The financing is generally evidenced by non-recourse installment sale contracts as well as notes secured by deeds of trust. Currently, the term of the financing generally ranges from two to twelve years, with principal and interest payable in equal monthly payments. Interest rates are fixed and generally range from 12.5% to 15.5% per year based on prevailing market rates and the amount of the down payment made relative to the sales price. PEC has a sales program whereby a 5% interest rate is charged on those sales where the aggregate down payment is at least 50% of the purchase price and the balance is payable in 36 or fewer monthly 6 9 payments. At August 31, 2000, PEC serviced 18,130 customer receivables related to sales of timeshare interests and land, which receivables had an aggregate outstanding principal balance of $153.0 million, a weighted-average maturity of approximately 7 years and a weighted-average interest rate of 12.9%. PEC has arrangements with institutional lenders, which, provide for the financing of customer receivables of up to an aggregate of $133.5 million. These lines of credit bear interest at variable rates tied to the prime rate and 90-day London Interbank Offering Rate (LIBOR) and are secured by timeshare and land receivables and inventory. At August 31, 2000, an aggregate of $107.2 million was outstanding under such lines of credit and $26.3 million was available for borrowing. PEC periodically sells its timeshare and land receivables to various third party purchasers and uses a portion of the sales proceeds to reduce the outstanding balances of its lines of credit, thereby increasing the borrowing availability under such lines by the amount of prepayment. These sales have generally resulted in yields to the purchaser less than the weighted-average yield on the receivables, with PEC entitled to retain the difference, the estimated value of which is carried as interest only receivables. Sales agreements generally provide for: (i) PEC to continue servicing the sold receivables; (ii) PEC to repurchase or replace accounts that have become more than 90 days contractually delinquent; (iii) the maintenance of cash reserve accounts for losses; and, (iv) certain minimum net worth requirements and other covenants. The sales agreements for timeshare receivables contain covenants that generally require PEC to use its best efforts to remain the manager of the related resorts and to cause the Associations to maintain appropriate insurance and pay applicable real estate taxes. Performance by PEC of such covenants generally is guaranteed by the Company. The principal balances of receivables sold by PEC were $19.6 million, $0, and $9.4 million during fiscal 2000, 1999 and 1998, respectively. At August 31, 2000, PEC was contingently liable to replace or repurchase delinquent receivables in the aggregate amount of $ 59.6 million. Delinquencies greater than 60 days have decreased in fiscal 2000 to 6.9% from 7.8% in fiscal 1999. PEC charges off or fully reserves all receivables that are more than 90 days delinquent and charges off the receivable when the Company determines that collection is no longer probable. The following table sets forth information with respect to receivables owned and sold that were 60 or more days delinquent, excluding accounts that have been fully reserved, as of the dates indicated (thousands of dollars):
AUGUST 31, --------------------------------------- 2000 1999 1998 --------- --------- --------- 60-day delinquent $ 11,930 $ 11,857 $ 11,836 Total receivables $172,907 $151,709 $136,509 60-day delinquency percentage 6.90% 7.82% 8.67%
The 60-day delinquent amounts include any account that is contractually 60 days delinquent, including those accounts whereby customers are still making payments but have not cured their delinquency status. PEC provides an allowance for cancellations at the time it recognizes revenues from sales of timeshare interests. PEC believes, based on its experience and its analysis of economic conditions, that the allowance is adequate to absorb losses on receivables that become uncollectible. Upon the sale of the receivables, the allowance related to those receivables is reduced and the reserve for notes receivable sold with recourse is appropriately increased. MARKETING PEC markets timeshare interests and land through on-site and off-site sales offices. PEC's sales staff receives commissions based on net sales volume. PEC maintains fully-staffed on-site sales offices at its timeshare properties in Las Vegas and Reno, Nevada and Steamboat Springs, Colorado as well as the Las Vegas headquarters, and at its land projects in Nevada and Colorado. Small on-site sales offices staffed with one to two sales associates are maintained in Hawaii; Indian Shores and Orlando, Florida; and Brigantine, New Jersey. PEC also maintains off-site sales offices in West Covina, California; Dallas and Houston, Texas; and Denver, Colorado. PEC's marketing efforts are targeted primarily at tourists and potential tourists meeting its customer profile. Currently, approximately 48.6% of sales is made through the Las Vegas sales offices. As part of its marketing strategy, PEC maintains an internal timeshare interest exchange program. This program enables owners of PEC's timeshare interests to exchange their occupancy right in their home resort for an occupancy right at the same or a different time in another of PEC's timeshare resorts. In addition, PEC has a sales program pursuant to which purchasers of its timeshare interests, retail lots and land may exchange their equity interests in one property for an interest in another of PEC's properties. 7 10 The agreement of sale for a timeshare interest or land may be rescinded within various statutory rescission periods ranging from five to ten days. For land sales made at a location other than the property, the customer may cancel the contract within a specified period, usually five months from the date of purchase, provided that the contract is not in default, and provided the customer has completed a developer-guided inspection of the subject property, and then requests the cancellation. At August 31, 2000, $1.4 million of recognized sales remained subject to such cancellation. If a customer defaults after all rescission and cancellation periods have expired, all payments are generally retained by PEC. SEASONALITY The Company's sales are generally not subject to significant seasonality factors. For fiscal 2000, 1999 and 1998, quarterly sales as a percentage of annual sales, for each of the fiscal quarters averaged:
QUARTER ENDED % OF ANNUAL SALES -------------------------------- ------------------------- November 22.7% February 22.3 May 27.0 August 28.0 --------- 100.0% =========
The quarterly numbers in the preceding table are slightly higher in the third and fourth quarters of the fiscal year as the Company's major sales area in Las Vegas, Nevada, experiences higher tourist activity in those seasons. The Company is not dependent upon any large affinity group of customers whose loss would have a material adverse effect on the Company. COMPETITION The timeshare and real estate industries are highly competitive. Competitors in the timeshare and real estate business include hotels, other timeshare properties and real estate properties. Certain of the Company's competitors are substantially larger and have more capital and other resources than the Company. PEC's timeshare plans compete directly with many other timeshare plans, some of which are in facilities located in Las Vegas, Reno, Honolulu, Atlantic City, Orlando, St. Petersburg/Clearwater, Tampa and Steamboat Springs. In recent years, several major lodging, hospitality and entertainment companies have begun to develop and market timeshare properties. According to ARDA data, in 2000, approximately 31.5% of timeshare resorts were located in the Mountain/Pacific region of the United States, 23.6% in Florida, 12.0% in the Northeast region, 16.5% in the Southeast region and 16.4% in the Central region of the United States. In addition, PEC competes with condominium projects and with traditional hotel accommodations in these areas. Certain of these competing projects and accommodations are larger and more luxurious than PEC's facilities. GOVERNMENT REGULATION The Company's timeshare and real estate operations are subject to extensive regulation, and licensing requirements by federal, state and local authorities. The following is a summary of the regulations applicable to the Company. ENVIRONMENTAL REGULATION Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or chemical releases at such property, and may be held liable to a governmental entity or to third parties for property damage, personal injury and investigation and cleanup costs incurred by such parties in connection with the contamination. Such laws typically impose cleanup responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such property, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be 8 11 liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not the facility is owned or operated by such person. In addition, the owner or former owners of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. TIMESHARE REGULATION Nevada Revised Statutes Chapter 119A requires the Company to give each customer a Public Offering Statement that discloses all aspects of the timeshare program, including the terms and conditions of sale, the common facilities, the costs to operate and maintain common facilities, the Company's history and all services and facilities available to the purchasers. Section 514E of the Hawaii Revised Statutes provides for similar information to be provided to all prospective purchasers through the use of the Hawaii Disclosure Statement, just as Chapter 721 of the Florida Statutes similarly provides through the use of a Public Offering Statement. Section 11000, et seq., of the California Business and Professions Code also provides for similar information to be provided to all prospective purchasers through the use of an Out-of-State Timeshare Permit issued by the California Department of Real Estate. Section 45 of the New Jersey Statutes Annotated provides for similar information to be provided to all prospective purchasers through the use of a Public Offering Statement. The Texas Register at 22 Texas Administrative Code, Section 543 provides for similar information to be provided to all prospective purchasers through the use of the Texas Timeshare Disclosure Statement. Title 12, Article 61 of the Colorado Revised Statutes provides for similar information to be provided to all prospective purchasers in their contracts of sales or by separate written documents. Nevada and Colorado require a five-day rescission period for all timeshare purchasers. The rescission period required by Hawaii and New Jersey is seven days. The rescission period required by Florida is ten days. The rescission period in California and Texas for out-of-state sales is five days. The Nevada, California, New Jersey, Hawaii, Colorado, Florida and Texas timeshare statutes have stringent restrictions on sales and advertising practices and require the Company to utilize licensed sales personnel. LENDING REGULATION PEC is subject to various federal lending regulations related to marketing, financing and selling consumer receivables. These federal regulations include: Fair Housing Act, Americans With Disabilities Act, Interstate Land Sales Full Disclosure Act, Truth-In-Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Federal Trade Commission Telemarketing Rule, Federal Communications Commission Telephone Census Protection Act, Federal Trade Commission Act (Unfair or Deceptive Act or Practices) and Fair Debt Collections Practices Act. The Company believes that it has made all required filings with state, city and county authorities and is in material compliance with all federal, state and local regulations governing timeshare interests. The Company believes that such regulations have not had a material adverse effect on any phase of the Company's operations, including the overall cost of acquiring property. Compliance with or changes in official interpretations of regulations might impose additional compliance costs on the Company that cannot be predicted. REAL ESTATE REGULATION The real estate industry is subject to extensive regulation. The Company is subject to compliance with various federal, state and local environmental, zoning and other statutes and regulations regarding the acquisition, subdivision, development and sale of real estate and various aspects of its financing operations. The Interstate Land Sales Full Disclosure Act establishes strict guidelines with respect to the subdivision and sale of land in interstate commerce. The U.S. Department of Housing and Urban Development (HUD) has enforcement powers with respect to this statute. In some instances (e.g., land sales in Huerfano County, Colorado), the Company has been exempt from HUD registration requirements because of the size or number of the subdivided parcels and the limited nature or type of its offerings. The Company must disclose financial information concerning the property, evidence of title, a description of the intended manner of offering, proposed advertising materials and must bear the costs of such registration, which include legal and filing fees. The Company believes that it is in compliance, in all material respects, with all applicable federal, state and local regulations. The Company believes that such regulations have not had a material adverse effect on any phase of its operations. Compliance with future changes in regulations might impose additional compliance costs on the Company that cannot be predicted. 9 12 ADVERTISING REGULATION In addition to requirements imposed by the various state timeshare acts, PEC's marketing and advertising procedures are subject to the Federal Trade Commission Act (Unfair and Deceptive Practices), Federal Trade Commission Telemarketing Rules, Federal Communication Commission Telephone Consumer Protection Act, Fair Housing Act, Equal Credit Opportunity Act and various state consumer protection laws regulating telephone solicitations, the sale of travel and sweepstakes, both in states in which PEC timeshare resorts are located or registered and in states in which it advertises. EMPLOYEES As of August 31, 2000, PEC had 1,334 employees, of whom 1,137 were full-time employees and 197 were part-time employees. Full-time employees were comprised of the following: 680 sales and marketing officers and personnel, 165 general and administrative personnel, 280 hotel personnel and 12 utility company personnel. None of PEC's employees are represented by a collective bargaining unit. The Company believes that its relations with its employees are satisfactory. ITEM 2. PROPERTIES At August 31, 2000, the Company had 139 residential, commercial and industrial lots, 447 recreational land parcels, and 9,423 timeshare interests in inventory. In addition, the Company maintains the following properties: The Company's principal executive offices are located at 4310 Paradise Road, Las Vegas, Nevada 89109, where it occupies approximately 31,000 square feet of office space in a building of which it was the owner. In November 2000, the Company entered into a Sale/Leaseback transaction for this building. The Company signed a master lease for the entire building for an initial term of 5-1/2 years with one 4-1/2 year renewal option. The current monthly rent is $30,000. The Company was the owner of a second office building located in Las Vegas, Nevada. This building has approximately 57,500 square feet of office space, of which the Company occupies approximately 33,800 square feet. Of the remaining space, approximately 7,300 square feet is leased to tenants on a short-term basis, and approximately 16,400 square feet is unoccupied. In October 2000, the Company entered into a Sale/Leaseback transaction for this building. The Company signed a master lease for the entire building for a ten-year term with two five-year renewal options. The current monthly rent is $57,446. The Company leases an executive office at 1125 N. E. 125th Street in North Miami, Florida, comprised of approximately 1,600 square feet, on a month-to-month basis. The Company leases various other facilities on a long-term, short-term or month-to-month basis for off-site marketing and sales offices. The Company has sales offices in West Covina, California; Denver, Colorado and Dallas, Texas and marketing locations in close proximity of those offices and the Las Vegas sales' offices. ITEM 3. LEGAL PROCEEDINGS On August 27, 1998, an action was filed in Nevada District Court, County of Clark, No. A392585, by Robert and Jocelyne Henry, husband and wife individually and on behalf of all others similarly situated against PEC, PEC's wholly-owned subsidiary, Central Nevada Utilities Company (CNUC), and certain other defendants. The plaintiffs' complaint asked for class action relief claiming that PEC and CNUC were guilty of collecting certain betterment fees and not providing sewer and water lines to their property. The court determined that plaintiffs had not properly pursued their administrative remedies with the Nevada Public Utilities Commission (PUC) and dismissed plaintiffs' amended complaint, without prejudice. Notwithstanding plaintiffs' appeal of the dismissal, plaintiff filed for administrative relief with the PUC. On November 17, 1999, the PUC found that CNUC, the only defendant over which the PUC has jurisdiction, was not in violation of any duties owed the plaintiffs or otherwise in violation of CNUC's approved tariffs. Subsequent to the PUC's decision, plaintiffs voluntarily dismissed their appeal of the trial court's order dismissing their case without prejudice and directing plaintiffs to exhaust their administrative remedies. On May 4, 2000, plaintiffs 10 13 refiled their complaint in Nevada District Court, naming all of the above parties with the exception of CNUC. The defendants have filed a motion to dismiss. As previously reported in the Company's Annual Report on Form 10-K for fiscal 1999 ("1999 Form 10-K"), the Company was a named defendant in three purported class actions filed by Christopher Dunleavy, Alan Peyser and Michael Nadler. A Settlement Agreement was approved by the Court in 1997 that had no material effect on the Company's Consolidated Financial Statements. On August 21, 2000, the Settlement Agreement became final, as no further appeal was taken since the appeal filed by Mr. Nadler that was denied on May 22, 2000. As previously reported in the 1999 Form 10-K, the Company was a named defendant in a purported class action filed by Robert J. Feeney. The period for appeal of the dismissal with prejudice of the action against the Company expired without an appeal having been filed. On August 9, 1999, an action was filed in Nevada District Court, County of Clark, No. A407152, by a dissident Director and a former Director of the Grand Flamingo Towers Owners Association purporting to act on behalf of the Association against PEC. The complaint alleges, among other things, breach of a fiduciary duty by the defendant with respect to the management agreement between the plaintiff and defendant. In particular, plaintiff is seeking rescission of the management agreement, an injunction requiring the defendant to turn over plaintiff's property held as plaintiff's manager, imposition of a constructive trust on plaintiffs funds and profits received and held by the defendant as plaintiff's manager, and an accounting of profits and property obtained by the defendant as plaintiff's manager. In August 2000, the Plaintiffs voluntarily dismissed this action with prejudice. In the general course of business the Company and PEC, at various times, have each been named in other lawsuits. The Company believes that it has meritorious defenses to these lawsuits and that resolution of these matters will not have a material adverse affect on the business or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of fiscal 2000. 11 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS MARKET INFORMATION The Company's common stock is traded in the over-the-counter market and since April 1, 1994, prices have been quoted on the Nasdaq National Market under the symbol MEGO. Prior to April 1, 1994, the common stock was quoted on the Nasdaq Small Cap Market under the symbol MEGO and, prior to May 1, 1994, was traded on the Boston Stock Exchange under the symbol MGO. The following table sets forth the high and low sales prices of the common stock as reported on the Nasdaq National Market for the periods presented (1):
HIGH LOW -------- ------- FISCAL YEAR 1999: First Quarter $ 13.50 $ 4.13 Second Quarter 7.88 4.50 Third Quarter 7.13 4.50 Fourth Quarter 6.38 3.75 FISCAL YEAR 2000: First Quarter 4.88 3.56 Second Quarter 5.06 3.63 Third Quarter 4.22 3.63 Fourth Quarter 4.63 3.88 FISCAL YEAR 2001: First Quarter (through November 15, 2000) 4.94 4.31
(1) On September 2, 1999, the Company's shareholders approved a one for six reverse stock split of its common stock. The reverse split was effective on September 9, 1999, with respect to all of the Company's 21,009,506 shares of common stock outstanding. After payment of cash in lieu of fractional shares totaling 1,027 shares, the Company now has 3,500,557 common shares outstanding. All amounts in the above table and elsewhere in this Form 10-K have been restated to retroactively show the effect of this reverse stock split. As of November 15, 2000, there were 1,853 holders of record of the 3,500,557 outstanding shares of common stock. The closing sales price for the common stock on November 15, 2000 was $4.81. The Company did not pay any cash dividends on its common stock during fiscal 2000 and 1999. The Company intends to retain future earnings for the operation and expansion of its business and does not currently anticipate paying cash dividends on its common stock. Any future determination as to the payment of such cash dividends would depend on a number of factors including future earnings, results of operations, capital requirements, the Company's financial condition and any restrictions under credit agreements existing from time to time, as well as such other factors as the Board of Directors might deem relevant. No assurance can be given that the Company will pay any dividends in the future. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected financial data set forth below have been derived from the Consolidated Financial Statements of the Company and its subsidiaries. The Consolidated Financial Statements as of August 31, 2000 and 1999 and for each of the three years in the period ended August 31, 2000 have been audited by Deloitte & Touche LLP, independent auditors, and are included elsewhere herein. The Consolidated Financial Statements as of August 31, 1998, 1997 and 1996 and for the years ended August 31, 1997 and 1996 have been audited by Deloitte & Touche LLP, independent auditors, and are not included herein. Certain reclassifications have been made to conform prior years with the current year presentation. The selected financial information set forth below should be read in conjunction with the Consolidated Financial Statements, 12 15 the related notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein (thousands of dollars, except per share amounts): CONSOLIDATED SELECTED FINANCIAL DATA(1)(2)
FOR THE YEARS ENDED AUGUST 31, -------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- INCOME STATEMENT DATA: REVENUES OF CONTINUING OPERATIONS: Timeshare interest sales, net $ 49,062 $ 41,262 $ 37,713 $ 32,253 $ 27,778 Land sales, net 19,624 15,979 13,812 16,626 17,968 Gain on sale of notes receivable 635 -- 656 2,013 1,116 Gain on sale of other investments and other assets 1,857 513 -- -- -- Interest income 12,430 9,310 7,161 7,168 6,594 Financial income 1,153 1,184 3,304 2,922 1,253 Other(3) 5,734 6,254 5,944 6,514 5,943 -------- -------- -------- -------- -------- Total revenues of continuing operations 90,495 74,502 68,590 67,496 60,652 -------- -------- -------- -------- -------- COSTS AND EXPENSES OF CONTINUING OPERATIONS: Cost of sales(4) 15,266 13,510 11,789 10,477 8,099 Marketing and sales 39,769 35,291 34,167 34,078 30,351 Depreciation 1,827 1,878 2,245 1,964 1,526 Interest expense 12,468 9,270 7,850 8,458 7,314 General and administrative 17,746 14,333 17,736 17,175 15,849 -------- -------- -------- -------- -------- Total costs and expenses of continuing operations 87,076 74,282 73,787 72,152 63,139 -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 3,419 220 (5,197) (4,656) (2,487) INCOME TAXES (BENEFIT) (530) (830) (1,968) (12,662) (1,068) -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS 3,949 1,050 (3,229) 8,006 (1,419) INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES AND MINORITY INTEREST(5) -- -- -- 11,334 6,270 -------- -------- -------- -------- -------- NET INCOME (LOSS) 3,949 1,050 (3,229) 19,340 4,851 CUMULATIVE PREFERRED STOCK DIVIDENDS -- -- -- -- 240 -------- -------- -------- -------- -------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 3,949 $ 1,050 $ (3,229) $ 19,340 $ 4,611 ======== ======== ======== ======== ========
13 16
FOR THE YEARS ENDED AUGUST 31, ---------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ------------- PER SHARE DATA(6)(7): BASIC: Income (loss) from continuing operations $ 1.13 $ 0.30 $ (0.92) $ 2.58 $ (0.47) Income (loss) from discontinued operations -- -- -- 3.64 2.08 Cumulative preferred stock dividends -- -- -- -- (0.08) ----------- ----------- ----------- ----------- ------------- Net income (loss) applicable to common stock $ 1.13 $ 0.30 $ (0.92) $ 6.22 $ 1.53 =========== =========== =========== =========== ============= Weighted-average number of common shares 3,500,557 3,500,557 3,500,557 3,108,510 3,108,493 =========== =========== =========== =========== ============= DILUTED(8): Income (loss) from continuing operations $ 1.13 $ 0.30 $ (0.92) $ 2.46 $ (0.45) Income from discontinued operations -- -- -- 3.48 1.97 Cumulative preferred stock dividends -- -- -- -- (0.08) ----------- ----------- ----------- ----------- ------------- Net income applicable to common stock $ 1.13 $ 0.30 $ (0.92) $ 5.94 $ 1.44 =========== =========== =========== =========== ============= Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,500,557 3,253,718 3,184,788 =========== =========== =========== =========== ============= BALANCE SHEET DATA: Total assets $ 168,592 $ 158,961 $ 142,076 $ 178,303 $ 145,505 Net assets of discontinued operations -- -- -- 53,276 30,514 Total liabilities excluding subordinated debt 138,524 132,650 117,049 100,745 109,963 Subordinated debt(9) 4,286 4,478 4,348 4,321 9,691 Total stockholders' equity 25,782 21,833 20,679 73,237 25,851
(1) On September 2, 1997, the Company distributed all of its 10 million shares of common stock of its former subsidiary, Mego Mortgage Corporation (MMC) to the Company's shareholders in a tax-free Spin-off. The operations of MMC have been reclassified as discontinued operations and prior years' Consolidated Financial Statements of the Company included herein reflect the reclassification accordingly. See "Item 7. MD&A--Discontinued Operations of MMC" and Note 1 of Notes to Consolidated Financial Statements. (2) The income statement data, per share data and balance sheet data herein for the five fiscal years are not necessarily indicative of the results to be expected in the future. Certain reclassifications have been made to conform prior years with the current presentation. (3) Other revenues include incidental operations' income, management fees from owners' associations, amortization of negative goodwill and other miscellaneous items. (4) Cost of sales includes product costs of sales of timeshare interests and land, and incidental operations' expenses. (5) Income from discontinued operations, net of taxes of $9.1 million and minority interest of $2.4 million, includes the net income from MMC, after tax, reduced by the related minority interests and certain general and administrative expense related to the discontinued operations. (6) All share and per share references have been restated to reflect the one for six reverse split of the Company's common stock, effective September 9, 1999. (7) No cash dividends per common share were declared during the fiscal years included herein. (8) The incremental shares from assumed conversions are not included in computing the diluted per share amounts for fiscal 1998 because the Company incurred a net loss and the effect would be anti-dilutive. The incremental shares from assumed conversions are not included in computing the diluted per share amounts for fiscal 2000 and 1999 because the exercise price of the options and warrants exceeded the average market price of the common shares during these fiscal years. 14 17 (9) In payment of the exercise price of $4,250,000 of warrants exercised for 166,666 shares of the Company's common stock by the Assignors, the subordinated debt due to the Assignors was reduced by that amount in August 1997. See Note 10 of Notes to Consolidated Financial Statements and "Item 13. Certain Relationships and Related Transactions." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS The following Management's Discussion and Analysis of Financial Condition and Results of Operations and the foregoing Business sections contain certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. Such forward-looking statements include, without limitation, the Company's expectations and estimates as to the Company's business operations, including the introduction of new timeshare and land sales programs and future financial performance, including growth in revenues and net income and cash flows. Such forward-looking statements also include, without limitation, the Company's expectations and beliefs as to the result of its Year 2000 compliance efforts and the impact on the Company's operations of efforts of its lenders and other third parties in respect of such compliance. In addition, included herein the words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company's management with respect to future events and are subject to certain risks, uncertainties and assumptions. In addition, the Company specifically advises readers that the factors listed under the caption "Liquidity and Capital Resources" could cause actual results to differ materially from those expressed in any forward-looking statement. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, contained elsewhere herein. GENERAL The business of the Company is primarily the marketing, financing and sale of timeshare interests, retail lots and land parcels, servicing the related receivables, and operating and managing timeshare properties. PEC PEC recognizes revenue primarily from sales of timeshare interests and land sales in resort areas, gain on sale of receivables and interest income. PEC periodically sells its consumer receivables while generally retaining the servicing rights. Revenue from sales of timeshare interests and land is recognized after the requisite rescission period has expired and at such time as the purchaser has paid at least 10% of the sales price for sales of timeshare interests and 20% of the sales price for land sales. Land sales typically meet these requirements within six to ten months of closing, and sales of timeshare interests typically meet these requirements at the time of sale. The sales price, less a provision for cancellation, is recorded as revenue and the allocated cost related to such net revenue of the timeshare interest or land parcel is recorded as expense in the year that revenue is recognized. When revenue related to land sales is recognized, the portion of the sales price attributable to uncompleted required improvements, if any, is deferred. Notes receivable with payment delinquencies of 90 days or more have been considered in determining the allowance for cancellations. Cancellations occur when the note receivable is determined to be uncollectible and the related collateral, if any, has been recovered. Cancellation of a note receivable in the quarter the revenue is recognized is deemed to not represent a sale and is accounted for as a reversal of the revenue with an adjustment to cost of sales. Cancellation of a note receivable subsequent to the quarter the revenue was recognized is charged to the allowance for cancellations. Gain on sale of notes receivable includes the present value of the differential between contractual interest rates charged to borrowers on notes receivable sold by PEC and the interest rates to be received by the purchasers of such notes receivable, after considering the effects of estimated prepayments and a normal servicing fee. PEC retains certain 15 18 participations in cash flows from the sold notes receivable and generally retains the associated servicing rights. PEC generally sells its notes receivable at par value. The present values of expected net cash flows from the sale of notes receivable are recorded at the time of sale as interest only receivables. Interest only receivables are amortized as a charge to income, as payments are received on the retained interest differential over the estimated life of the underlying notes receivable. Interest only receivables are recorded at the lower of unamortized cost or estimated fair value. The expected cash flows used to determine the interest only receivables asset have been reduced for potential losses under recourse provisions of the sales agreements, as discussed below. In discounting cash flows related to notes receivable sales, PEC defers servicing income at an annual rate of 1% and discounts cash flows on its sales at the rate it believes a purchaser would require as a rate of return. Earned servicing income is included under the caption of financial income. The cash flows were discounted to present value using a discount rate of 15% in each of fiscal years 2000, 1999 and 1998. PEC has developed its assumptions based on experience with its own portfolio, available market data and consultation with its financial advisors. In determining expected cash flows, management considers economic conditions at the date of sale. In subsequent periods, these estimates may be revised as necessary using the original discount rate, and any losses arising from prepayment and loss experience will be recognized as realized. Provision for cancellations relating to notes receivable is recorded as expense in amounts sufficient to maintain the allowance at a level considered adequate to provide for anticipated losses resulting from customers' failure to fulfill their obligations under the terms of their notes receivable. PEC records provision for cancellations at the time revenue is recognized, based on historical experience and current economic factors. The related allowance for cancellations represents PEC's estimate of the amount of the future credit losses to be incurred over the lives of the notes receivable. The allowance for cancellations is reduced by actual cancellations experienced, including cancellations related to previously sold notes receivable which were reacquired pursuant to the recourse obligations discussed herein. Such allowance is also reduced to establish the separate liability for reserve for notes receivable sold with recourse. PEC's judgment in determining the adequacy of this allowance is based upon a periodic review of its portfolio of notes receivable. These reviews take into consideration changes in the nature and level of the portfolio, historical cancellation experience, current economic conditions which affect the purchasers' ability to pay, changes in collateral values, estimated value of inventory that may be reacquired and overall portfolio quality. Changes in the allowance as a result of such reviews are included in the provision for cancellations. Recourse to PEC on sales of notes receivable is governed by the agreements between the purchasers and PEC. The reserve for notes receivable sold with recourse represents PEC's estimate of the fair value of future credit losses to be incurred over the lives of the notes receivable. A liability for reserve for notes receivable sold with recourse is established at the time of each sale based upon PEC's estimate of the fair value of the future recourse obligation under each agreement of sale. Fees for servicing notes receivable originated or acquired by PEC and sold with servicing rights retained are generally based on a stipulated percentage of the outstanding principal balance of such notes receivable and are recognized when earned. Interest received on notes receivable sold, less amounts paid to investors, is reported as financial income. Interest only receivables are amortized systematically to reduce notes receivable servicing income to an amount representing normal servicing income and the present value discount. Late charges and other miscellaneous income are recognized when collected. Costs to service notes receivable are recorded to expense as incurred. Interest income represents the interest received on loans held in PEC's portfolio, the accretion of the discount on the interest only receivables and interest on cash funds. Total costs and expenses consist primarily of marketing and sales expenses, general and administrative expenses, direct costs of sales of timeshare interests and land, depreciation and amortization and interest expense. Marketing and sales costs directly attributable to unrecognized sales are accounted for as deferred selling costs until such time as the sale is recognized. The Company incurs a portion of operating expenses of the timeshare Associations based on ownership of unsold timeshare interests at each of the respective timeshare properties. These costs are referred to as "association assessments" or "maintenance payments", and are included in Costs and Expenses in the Consolidated Income Statements under the caption of General and administrative. Management fees received from the associations are included in Revenues in the Consolidated Income Statements under the caption of Other. These fees are deemed not to be the result of a 16 19 separate revenue generating line of business since the management activities to which they relate are part of the support of the timeshare business and the fees are actually a reduction of the expense the Company incurs to fulfill obligations regarding timeshares. The following table sets forth certain data regarding notes receivable additions and servicing through sales of timeshare interests and land:
FOR THE YEARS ENDED AUGUST 31, ---------------------- 2000 1999 -------- -------- Principal balance of notes receivable additions (in thousands) $ 82,388 $ 64,112 ======== ======== Number of notes receivable additions 7,552 6,448 ======== ======== Notes receivable serviced at end of period (in thousands) $153,000 $132,240 ======== ========
Land sales as of August 31, 2000 exclude $17.3 million of sales not yet recognized under generally accepted accounting principles (GAAP) since the requisite payment amounts have not yet been received or the respective recission periods have not yet expired. Of the $17.3 million unrecognized land sales, the Company estimates that it will ultimately recognize $14.2 million of revenues, which would be reduced by a related provision for cancellations of $1.2 million, estimated deferred selling costs of $4.0 million and cost of sales of $2.0 million, for an estimated net profit of $7.0 million. REAL ESTATE RISK Real estate development involves significant risks, including risks that suitable properties will not be available at reasonable prices, that acquisition, development and construction financing may not be available on favorable terms or at all, that infrastructure and construction costs may exceed original estimates, that construction may not be completed on schedule, and that upon completion of construction and improvements, properties may not be sold on favorable terms or at all. In addition, PEC's timeshare activities, as well as its ownership, improvement, subdivision and sale of land, are subject to comprehensive federal, state and local laws regulating environmental and health matters, protection of endangered species, water supplies, zoning, land development, land use, building design and construction and other matters. Such laws and difficulties in obtaining, or the failure to obtain, the requisite licenses, permits, allocations, authorizations and other entitlements pursuant to such laws can adversely impact the development and completion of PEC's projects. The enactment of "slow-growth" or "no-growth" initiatives in any area where PEC sells land or timeshare interests could also delay or preclude entirely the development of such properties. RESULTS OF OPERATIONS Year Ended August 31, 2000 Compared to Year Ended August 31, 1999 Total revenues for the Company increased 21.5% or $16.0 million to $90.5 million during fiscal 2000 from $74.5 million during fiscal 1999 primarily due to: a net increase of $11.5 million in timeshare and land sales to $68.7 million in fiscal 2000 from $57.2 million in fiscal 1999 (net timeshare sales increased by $7.8 million and net land sales increased by $3.7 million); an increase in interest income to $12.4 million in fiscal 2000 from $9.3 million in fiscal 1999; and, higher gains on sales of notes receivable and sales of investments and other assets. Gross sales of timeshare interests increased to $55.3 million in fiscal 2000 from $45.8 million in fiscal 1999, an increase of 20.7%. Net sales of timeshare interests increased to $49.1 million from $41.2 million, an increase of 18.9%. This increase is primarily attributable to a favorable mix as a comparatively greater number of the high-priced units were sold during fiscal 2000, and also to certain price increases. The provision for cancellations represented 11.3% and 10.0%, respectively, of gross sales of timeshare interests for fiscal 2000 and 1999. The percentage increase in the provision for cancellations for timeshare interests was primarily due to a downward adjustment recorded during the prior fiscal year based on a review of the reserve adequacy at that time and cancellation experience during fiscal 2000. The number of cancellations during fiscal 2000 was 1,048 compared to 875 during fiscal 1999. The number of exchanges, generally for timeshare interests, which are primarily made for upgrades, was 1,955 during fiscal 2000 compared to 2,757 during fiscal 1999. 17 20 Gross sales of land increased to $20.7 million in fiscal 2000 from $17.0 million in fiscal 1999, an increase of 21.6%. Net sales of land increased to $19.6 million in fiscal 2000 from $16.0 million in fiscal 1999 an increase of 22.8%. The provision for cancellations decreased to 5.3% for the year ended August 31, 2000 from 6.2% of gross sales of land for the year ended August 31, 1999, primarily due to a downward adjustment recorded during fiscal 2000 based on a review of reserve adequacy. Gain on sale of notes receivable and investments of $2.5 million was recorded during the fiscal 2000 as the Company, in addition to notes receivable sales in the normal course of business, sold its golf courses and several commercial non-core land parcels in Pahrump Valley. This is compared to a gain of $513,000 recorded during fiscal 1999 as the Company sold a parcel of land in Pahrump Valley. Interest income increased to $12.4 million in fiscal 2000 from $9.3 million in fiscal 1999, an increase of 33.5% primarily due to increased average notes receivable balances for the current period. Total costs and expenses for the Company increased to $87.1 million for fiscal 2000 from $74.3 million for fiscal 1999, an increase of 17.2%. The increase resulted primarily from: an increase in direct costs of timeshare interest sales to $10.5 million from $8.5 million, an increase of 23.3%; an increase in marketing and sales to $39.8 million from $35.3 million, an increase of 12.7%; an increase in interest expense to $12.5 million from $9.3 million, an increase of 34.5%; and, an increase of $3.4 million, or 23.8%, in general and administrative expenses. The increase in direct costs of timeshare sales is directly attributable to higher net timeshare sales in 2000 and to the higher costs to develop new timeshare inventory. The increase in marketing and sales expenses is due primarily to the higher gross sales; however, as noted below, the increase in dollars was accompanied by a related lower percentage of marketing and sales expenses. The increase in interest expense is due to the increase in the average outstanding balance of notes and contracts payable. The increase in general and administrative expenses is due primarily to: increased sales volume; the increase in escrow costs related to the increased sales volume; a net increase in maintenance fees paid to Homeowner Associations by PEC; an increase in executive incentive plan compensation, which is directly related to the pretax income increase; the full resumption of payment of Directors' fees; and, reserves for the Company's guaranty of office and equipment leases related to a previously affiliated company. As a percentage of gross sales of timeshare interests and land, marketing and sales expenses related thereto decreased to 52.3% in fiscal 2000 from 56.1% in fiscal 1999. Cost of sales was 17.8% in fiscal 2000 and 17.9% in fiscal 1999. Sales prices of timeshare interests are typically lower than those of land, while selling costs per sale, other than commissions, are approximately the same in amount for timeshare interests and land; accordingly, the Company generally realizes lower profit margins from sales of timeshare interests than from sales of land. Subsequent to the first quarter of fiscal 1999, the Company restructured its marketing and sales programs, which restructuring included the closing of unprofitable sales locations, the elimination of certain marketing programs and the layoff of related personnel. Pretax income of $3.4 million was recorded in fiscal 2000 compared to a pretax income of $220,000 in fiscal 1999. The income tax benefit for fiscal 2000 was $530,000 compared to the income tax benefit of $830,000 for fiscal 1999. The benefit for both fiscal 2000 and 1999 was primarily due to the application of net operating loss (NOL) carryforwards and changes in certain income tax liability reserves as a result of facts and circumstances determined in an ongoing review and analysis of the Company's federal income tax liability. See Note 11 of Notes to Consolidated Financial Statements. Net income applicable to common stock amounted to $3.9 million during fiscal 2000 compared to net income of $1.1 million during fiscal 1999, primarily due to the foregoing reported results. Year Ended August 31, 1999 Compared to Year Ended August 31, 1998 Total revenues for the Company increased 8.6% or $5.9 million to $74.5 million during fiscal 1999 from $68.6 million during fiscal 1998 primarily due to a net increase of $5.7 million in timeshare and land sales to $57.2 million in fiscal 1999 from $51.5 million in fiscal 1998 (net timeshare sales increased by $3.5 million and net land sales increased by $2.2 million), an increase in interest income to $9.3 million in fiscal 1999 from $7.2 million in fiscal 1998, partially offset by an aggregate decrease of $2.1 million in financial income. 18 21 Gross sales of timeshare interests increased to $45.8 million in fiscal 1999 from $41.4 million in fiscal 1998, an increase of 10.6%. Net sales of timeshare interests increased to $41.2 million from $37.7 million, an increase of 9.4%. The provision for cancellations represented 10.0% and 9.0%, respectively, of gross sales of timeshare interests for fiscal 1999 and 1998. The percentage increase in the provision for cancellations for timeshare interests was primarily due to a larger downward adjustment recorded during the prior fiscal year based on a review of the reserve adequacy at that time. The number of cancellations during fiscal 1999 was 875 compared to 781 during fiscal 1998. The number of exchanges, generally for timeshares, which are primarily made for upgrades, during fiscal 1999 was 2,757 compared to 4,019 during fiscal 1998. Gross sales of land increased to $17.0 million in fiscal 1999 from $14.9 million in fiscal 1998, an increase of 14.3%. Net sales of land increased to $16.0 million in fiscal 1999 from $13.8 million in fiscal 1998 an increase of 15.7%. The provision for cancellations decreased to 6.2% for the year ended August 31, 1999 from 7.3% of gross sales of land for fiscal 1998, primarily due to a decrease in cancellation experience during fiscal 1999. Gain on sale of investments of $513,000 was recorded during the fiscal 1999 as the Company sold a parcel of land in Pahrump Valley. Interest income increased to $9.3 million in fiscal 1999 from $7.2 million in fiscal 1998, an increase of 30.0% primarily due to increased average notes receivable balances for the current period. Financial income decreased to $1.2 million in fiscal 1999 from $3.3 million in fiscal 1998, a decrease of 64.2%. The decrease was primarily a result of the termination by agreement of loan servicing for a previously affiliated company and a decrease in loans serviced for others. Total costs and expenses for the Company increased to $74.3 million for fiscal 1999 from $73.8 million for fiscal 1998, an increase of .6%. The increase resulted primarily from an increase in direct costs of land sales to $2.7 million from $1.8 million, an increase of 53.1%, an increase in direct costs of timeshare interest sales to $8.5 million from $7.4 million, an increase of 15.6%, an increase in marketing and sales to $35.3 million from $34.1 million, an increase of 3.3%, an increase in interest expense to $9.3 million from $7.9 million, an increase of 18.1%, partially offset by a decrease of $3.4 million, or 19.2%, in general and administrative expenses. The increase in direct costs of land is attributable to increased land sales, including higher cost lots sold during fiscal 1999 compared to fiscal 1998. The increase in direct costs of timeshare sales is directly attributable to higher net timeshare sales in 1999 and to the higher costs to develop new timeshare inventory. The increase in marketing and sales expenses is due primarily to the higher gross sales; however, as noted below, the increase in dollars was accompanied by a related lower percentage of marketing and sales expenses. The increase in interest expense is due to the increase in the average outstanding balance of notes and contracts payable. The decrease in general and administrative expenses is due primarily to the reduction in salaries and benefits. As a percentage of gross sales of timeshare interests and land, marketing and sales expenses related thereto decreased to 56.1% in fiscal 1999 from 60.6% in fiscal 1998, and cost of sales increased to 17.9% in fiscal 1999 from 16.2% in fiscal 1998. Interest expense was $9.3 million in fiscal 1999 and $7.9 million in fiscal 1998. The increase is a result of a higher average outstanding balance of notes and contracts payable during fiscal 1999 compared to fiscal 1998 and is related to the fact that there were no sale of receivables during fiscal 1999. Pretax income of $220,000 was recorded in fiscal 1999 compared to a pretax loss of $5.2 million in fiscal 1998. The improvement in fiscal 1999 resulted from the $5.9 million increase in revenues partially offset by the $500,000 increase in expenses. The income tax benefit for fiscal 1999 was $830,000 compared to the larger income tax benefit of $2.0 million for fiscal 1998. The benefit for both fiscal 1999 and 1998 was primarily due to the application of net operating loss (NOL) carryforwards and changes in certain income tax liability reserves. The income tax liability reserves are a result of facts and circumstances determined in an ongoing review and analysis of the Company's federal income tax liability. Net income applicable to common stock amounted to $1.1 million during fiscal 1999 compared to a loss of $3.2 million during fiscal 1998, primarily due to the foregoing reported results. 19 22 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents was $1.1 million at August 31, 2000 and $1.8 million at August 31, 1999. The Company's principal cash requirements relate to PEC's acquisition of timeshare properties and land and the payment of marketing and sales expenses in connection with timeshare and land sales and Mego Financial's payment of principal and interest on subordinated debt. PEC requires continued access to sources of debt financing and sales in the secondary market for receivables. PEC's cash requirements arise from the acquisition of timeshare properties and land, payments of operating expenses, payment of taxes to Mego Financial, payments of principal and interest on debt obligations, and payments of marketing and sales expenses in connection with sales of timeshare interests and land. Marketing and sales expenses payable by PEC in connection with sales of timeshare interests and land typically exceed the down payments received at the time of sale, as a result of which PEC generates a cash shortfall. This cash shortfall and PEC's other cash requirements are funded primarily through advances under PEC's lines of credit in the aggregate amount of $133.5 million, sales of receivables and cash flows from operations. At August 31, 2000, no commitments existed for material capital expenditures. At August 31, 2000, PEC had arrangements with institutional lenders for the financing of receivables in connection with sales of timeshare interests and land and the acquisition of timeshare properties and land, which provide for lines of credit of up to an aggregate of $133.5 million. Such lines of credit are secured by timeshare and land receivables and mortgages. At August 31, 2000, an aggregate of $107.2 million was outstanding under such lines of credit, and $26.3 million was available for borrowing. Under the terms of these lines of credit, PEC may borrow 65% to 90% of the balances of the pledged timeshare and land receivables. PEC is required to comply with certain covenants under these agreements, which, among other things, require PEC to meet certain minimum tangible net worth requirements. The most stringent of such requirements provides that PEC maintains a minimum tangible net worth of $25 million. At August 31, 2000, PEC exceeded this net worth requirement by $5.9 million. Summarized lines of credit information and accompanying notes relating to these lines of credit outstanding at August 31, 2000, consist of the following (thousands of dollars):
OUTSTANDING BORROWING MAXIMUM (a) BALANCE AT BORROWING REVOLVING AUGUST 31, 2000 AMOUNTS EXPIRATION DATE MATURITY DATE INTEREST RATE ----------------------- --------------- ----------------------- ------------------- ------------------------ $ 64,757 $ 75,000 (b) April 30, 2001 Various Prime + 2.0 - 2.25% ----------------------- --------------- 15,733 15,000 (c) December 1, 2002 Various Prime + 2.0 4,960 11,500 (d) December 31, 2001 Various Prime + 2.0 - 3.00% ----------------------- --------------- 20,693 26,500 Considered one borrowing line for the maximum amount. ----------------------- --------------- 19,790 30,000 (e) June 30, 2001 Various Libor + 4.0 - 4.25% 1,972 1,972 (f) July 30, 2003 Prime + 2.25% ----------------------- --------------- $ 107,212 $ 133,472 ======================= ===============
(a) When the revolver expires as shown, the loans convert to term loans with maturities as stated. In addition, management expects to extend the lines on similar terms. (b) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. Other restrictions, commencing with the fiscal quarter ended November 30, 1999, include: PEC's requirement to maintain costs and expenses for marketing and sales and general and administrative expenses relating to net processed sales for each fiscal quarter; PEC's requirement to maintain a minimum net processed sales requirement for each fiscal quarter; and PEC's requirement not to exceed a ratio of 4:1 of consolidated total liabilities to consolidated tangible net worth. At August 31, 2000, $52.2 million of loans secured by receivables were outstanding related to financings at prime plus 2%, of which $29.5 million of loans secured by land receivables mature May 15, 2010 and $22.7 million of loans secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes $6.4 million in mortgage financing maturing October 1, 2005 for the corporate office buildings, which amount was paid in full in November 2000, and a real estate loan with an outstanding balance of $1.2 million maturing December 31, 2000, all bearing interest at prime plus 2.25%. The remaining Acquisition and Development (A&D) loans, receivables loans and a resort lobby loan outstanding of $5.0 million are at prime plus 2% and mature at various dates through February 18, 2001. 20 23 In December 1998, Finova Capital Corporation (FINOVA), PEC and Mego Financial entered into an Agreement under which FINOVA agreed to make a loan in the amount of $5,662,000 to PEC with an original maturity date of June 30, 1999, which date has been extended to December 31, 2000. Mego Financial guaranteed the loan and issued warrants to FINOVA to purchase a total of 83,333 shares of common stock of Mego Financial at an exercise price of $6.00 per share, exercisable within a five-year period commencing January 1, 1999. The balance outstanding under this Agreement, which is included in the $64.8 million balance in the preceding table, was $1.2 million as of August 31, 2000. The fair market value of the warrants was estimated at $104,000 and is being amortized over the term of the Agreement. (c) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million during the life of the loan. These credit lines include available financing for A&D and receivables. At August 31, 2000, $6.3 million was outstanding under the A&D loan, which matures on June 30, 2004, and $9.4 million was outstanding under the receivables loan, which matures on May 31, 2004. (d) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $15 million. This credit line consists of receivable financing with a maturity date of May 31, 2004, under which $1.6 million was outstanding at August 31, 2000, and a real estate loan of $3.3 million with a maturity date of December 31, 2001. (e) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $17 million during the life of the loan. These credit lines include available financings for A&D and receivables. At August 31, 2000, $2.4 million was outstanding under the A&D loans which have a maturity date of June 30, 2001 and bear interest at the 90-day London Interbank Offering Rate (LIBOR) plus 4.25%. The available receivable financings, of which $17.4 million was outstanding at August 31, 2000, are at 90-day LIBOR plus 4% and have a maturity date of June 5, 2005. (f) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. A schedule of the cash shortfall arising from recognized and unrecognized sales for the periods indicated is set forth below (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Marketing and sales expenses attributable to recognized and unrecognized sales $ 40,717 $ 35,856 $ 34,733 Less: Down payments (12,280) (12,452) (12,934) -------- -------- -------- Cash shortfall $ 28,437 $ 23,404 $ 21,799 ======== ======== ========
During fiscal 2000, PEC sold notes receivable of $19.6 million from which $17.1 million of the sales proceeds were used to pay down debt. The receivables, which have interest rates ranging from 11.5% - 15.5% depending on the transaction, were sold to yield returns of 9.8% fixed and 10.0% floating to the respective purchasers, with any excess interest received from the obligors being payable to PEC. PEC sells notes receivable subject to recourse provisions as contained in each agreement. PEC is obligated under these agreements to replace or repurchase accounts that become over 90 days delinquent or are otherwise subject to replacement or repurchase in either cash or receivables generally at the option of the purchaser. At August 31, 2000, PEC was contingently liable to replace or repurchase notes receivable sold with recourse totaling $59.6 million. The repurchase provisions provide for substitution of receivables as recourse for $51.7 million of sold notes receivable and cash payments for repurchase relating to $7.9 million of sold notes receivable. At August 31, 2000 and 1999, the undiscounted reserve amounts of the recourse obligations on such sold notes receivable were $4.5 million and $4.6 million, respectively. PEC continually reviews the adequacy of this liability. These reviews take into consideration changes in the nature and level of the portfolio, current and future economic conditions which may affect the obligors' ability to pay, changes in collateral values, estimated value of inventory that may be reacquired and overall portfolio quality. 21 24 Recourse to PEC on sales of notes receivable is governed by the agreements between the purchasers and PEC. The reserve for notes receivable sold with recourse is established at the time of each sale based upon PEC's analysis and represents PEC's estimate of its probable future credit losses to be incurred over the lives of the notes receivable. Proceeds from the sale of notes receivable sold with recourse were $19.6 million and $0 million, respectively, for fiscal 2000 and 1999. To improve its financial position, the Company has sold its golf courses and certain of its non-core assets, and is pursuing the sale of certain of its remaining non-core commercial real estate assets located in Pahrump Valley and elsewhere. See discussion in Item 1., "Land Sales - Non-Core Assets". At January 31, 1995, when accrual of payments to assignors ceased, $13.3 million was payable to the Assignors. On March 2, 1995, the Assignors agreed to defer payment of $10 million of the amounts due to them pursuant to an amendment to the Assignment and Assumption Agreement providing for the subordination of such amounts to payment of debt for money borrowed by the Company or obligations of the Company's subsidiaries guaranteed by the Company (Subordinated Debt). Warrants (Warrants) to purchase 166,666 shares of common stock, at an exercise price of $25.50 per share (the closing market price per share on March 2, 1995), were granted to the Assignors in consideration of the payment deferral and subordination. The balance of $3.3 million was paid to the Assignors as follows: $809,000 including interest of $59,000 in June 1995, and the balance of $2.6 million including interest of $45,000 in January 1997. The Warrants were exercised in August 1997 in a non-cash transaction, whereby the Subordinated Debt was reduced by $4.25 million. Interest on the Subordinated Debt was to be paid semiannually at the rate of 10% per year starting September 1, 1995, and the Subordinated Debt was to be repaid in semiannual principal payments commencing March 1, 1997. On March 1, 1997, the Assignors received the first semiannual principal payment of $1.4 million plus interest related to the repayment of the Subordinated Debt. In connection with exercise of the Warrants, payments aggregating $4.25 million were deemed paid and the semiannual payments were scheduled to resume in March 1999, with a partial payment made in September 1998. The final $4.29 million was scheduled to be paid in 3 equal installments on March 1, 1999, September 1, 1999 and March 1, 2000. In accordance with the Eleventh Amendment to Assignment and Assumption Agreement, the principal payments totaling $4.29 million have been deferred until March 1, 2001. Management anticipates that all or part of the principal payments may be extended beyond the current March 1, 2001 maturity date. Interest of $429,000 on Subordinated Debt was paid during each of fiscal year 2000 and 1999. The Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. See "Item 13. Certain Relationships and Related Transactions" and Note 10 of Notes to Consolidated Financial Statements. During fiscal 2000 and 1999, the Company used cash of $5.5 million and $20.9 million, respectively, in operating activities. The most significant reason for the net decrease in cash used was the $19.6 million generated from the sales of notes receivable. During fiscal 2000 and 1999, the Company used cash of $384,000 and $1.8 million in investing activities, respectively, as a result of a decline in additions to other investments. During fiscal 2000 and 1999, the Company provided cash of $4.4 million and $22.7 million in financing activities, respectively, as a result of a decrease in borrowings, net of paydowns. Capital expenditures during fiscal years 2000 and 1999 were $4.8 million and $3.7 million, respectively, for the acquisition of timeshare and land inventory and $2.2 million and $1.6 million, respectively, for the purchase of property and equipment. No commitments existed at August 31, 2000 for material capital expenditures. The Company believes that its capital requirements will be met from cash balances, internally generated cash, existing lines of credit, sales of receivable and the modification, replacement or addition to its lines of credit and new financings. The components of the Company's debt, including lines of credit consist of the following (thousands of dollars):
AUGUST 31, ---------------------- 2000 1999 -------- -------- Notes collateralized by receivables $ 80,593 $ 67,457 Mortgages collateralized by real estate properties 27,407 35,846 Installment contracts and other notes payable 1,131 1,252 -------- -------- Total $109,131 $104,555 ======== ========
FINANCIAL CONDITION The Company provides allowance for cancellations in amounts which, in the Company's judgment, will be adequate to absorb losses on notes receivable that may become uncollectible. The Company's judgment in determining the adequacy of this allowance is based on its continual review of its portfolio which utilizes historical 22 25 experience and current economic factors. These reviews take into consideration changes in the nature and level of the portfolio, historical rates, collateral values, and current and future economic conditions which may affect the obligors' ability to pay, collateral values and overall portfolio quality. Changes in the aggregate of the allowance for cancellations, excluding discounts, and the reserve for notes receivable sold with recourse for fiscal 2000, 1999, and 1998, consisted of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Balance at beginning of year $ 18,149 $ 18,488 $ 19,527 Provision for cancellations 7,354 5,626 4,827 Amounts charged to allowance for cancellations and reserve for notes receivable sold with recourse (8,643) (5,965) (5,866) -------- -------- -------- Balance at end of year $ 16,860 $ 18,149 $ 18,488 ======== ======== ========
The allowance for cancellations and the reserve for notes receivable sold with recourse consisted of the following at these dates (thousands of dollars):
AUGUST 31, --------------------------------- 2000 1999 1998 ------- ------- ------- Allowance for cancellations, excluding discounts $12,827 $13,987 $11,868 Reserve for notes receivable sold with recourse 4,033 4,162 6,620 ------- ------- ------- Total $16,860 $18,149 $18,488 ======= ======= =======
The allowance for cancellations as a percentage of total notes receivable was 10.8% as of August 31, 2000 compared to 13.5% as of August 31, 1999. The reduction is primarily due to the cancellations during fiscal 2000 which were reserved as of August 31, 1999. August 31, 2000 Compared to August 31, 1999 Cash and cash equivalents was $1.1 million at August 31, 2000 and $1.8 million at August 31, 1999. Notes receivable, net, increased 20.0% to $83.2 million at August 31, 2000 from $69.3 million at August 31, 1999 as a result of the increased fiscal 2000 sales, net of notes receivable sold, during fiscal 2000. Interest only receivables increased 5.3% to $2.7 million at August 31, 2000 from $2.6 million at August 31, 1999. See Note 4 of Notes to Consolidated Financial Statements. Land and improvements inventory and timeshare interests held for sale decreased 24.2% to $27.4 million at August 31, 2000 from $36.2 million at August 31, 1999. This decrease is directly related to the increase in sales in fiscal 2000. Notes and contracts payable increased 4.4% to $109.1 million at August 31, 2000 from $104.6 million at August 31, 1999. Net borrowings related to financing customer receivables increased by $13.1 million, which was partially offset by net paydowns on other debt of $8.5 million. Reserve for notes receivable sold with recourse decreased 3.1% to $4.0 million at August 31, 2000 from $4.2 million at August 31, 1999. The majority of notes receivable sold during the fiscal year were land notes, which typically require a lower reserve. The loans previously sold prior to fiscal 2000 continue to amortize, which correspondingly lowers the required reserve. Accrued income taxes decreased 15.1% to $3.0 million at August 31, 2000 from $3.5 million, due to the changes in certain income tax liability reserves as a result of facts and circumstances determined in an ongoing review and analysis of the Company's federal income tax liability. Stockholders' equity increased to $25.8 million at August 31, 2000 from $21.8 million at August 31, 1999 as a result of net income of $3.9 million during fiscal 2000. Timeshare interest and land sales net, for fiscal 2000, 1999 and 1998, and the comparative dollar and percentage changes, are set forth in the following table (thousands of dollars): 23 26
FOR THE YEARS ENDED AUGUST 31, ------------------------------------------------------------------------------------ 2000 CHANGE 1999 CHANGE 2000 1999 FROM 1999 1998 FROM 1998 ------- ------- ------------------- ------- ------------------- Timeshare interest sales, net $49,062 $41,262 $ 7,800 18.9% $37,713 $ 3,549 9.4% Land sales, net 19,624 15,979 3,645 22.8% 13,812 2,167 15.7% ------- ------- ------- ------- ------- Total timeshare interest and land sales, net $68,686 $57,241 $11,445 20.0% $51,525 $ 5,716 11.1% ======= ======= ======= ======= =======
August 31, 1999 Compared to August 31, 1998 Cash and cash equivalents was $1.8 million at August 31, 1999 and 1998. Notes receivable, net, increased 45.0% to $69.3 million at August 31, 1999 from $47.8 million at August 31, 1998 as a result of net new receivables added, and no sales of receivables, during fiscal 1999. Interest only receivables decreased 23.8% to $2.6 million at August 31, 1999 from $3.4 million at August 31, 1998. See Note 4 of Notes to Consolidated Financial Statements. Land and improvements inventory and timeshare interests held for sale decreased 17.3% to $36.2 million at August 31, 1999 from $43.8 million at August 31, 1998. Notes and contracts payable increased 27.5% to $104.6 million at August 31, 1999 from $82.0 million at August 31, 1998. There were increased borrowings and no receivable sales, the proceeds of which are usually used to pay down debt, during fiscal 1999. Reserve for notes receivable sold with recourse decreased 37.1% to $4.2 million at August 31, 1999 from $6.7 million at August 31, 1998 due to the reduced balance of the sold notes receivable. Accrued income taxes decreased 21.6% to $3.5 million at August 31, 1999 from $4.5 million, due primarily to the fiscal 1999 tax benefit. The change in certain income tax liability reserves was a result of utilization of net operating losses and an ongoing review of the facts and circumstances. Stockholders' equity increased to $21.8 million at August 31, 1999 from $20.7 million at August 31, 1998 as a result of net income of $1.1 million during fiscal 1999. RECENTLY ISSUED/EFFECTIVE ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities", which was amended by SFAS No. 137, issued in June 1999. SFAS 133 established standards for accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133, as amended, is effective for fiscal years beginning after June 15, 2000. The adoption will not have a material effect on the Company's financial statements. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). SFAS 140 replaces FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 31, 2000. Management does not believe that the adoption of SFAS 140 will have a material effect on the financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides the SEC Staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company has adopted SAB 101 during fiscal year 2000 and the adoption has not had a material effect on the financial statements. 24 27 EFFECTS OF CHANGING PRICES AND INFLATION The Company's operations are sensitive to increases in interest rates and to inflation. Increased borrowing costs resulting from increases in interest rates may not be immediately recoverable from prospective purchasers. Inflationary increases are difficult to pass on to customers since increases in sales prices often result in lower sales closing rates and higher cancellations. The Company's notes receivable consist primarily of fixed-rate long term installment contracts that do not increase or decrease as a result of changes in interest rates charged to the Company. In addition, delinquency and cancellation rates may be affected by changes in the national economy. YEAR 2000 COMPLIANCE The Company believes it is Year 2000 compliant. There have been no significant problems experienced as a result of the occurrence of Year 2000 which have disrupted operations. The Company will continue to monitor its operations for any Year 2000 problems. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's various business activities generate liquidity, market and credit risk: - liquidity risk is the possibility of being unable to meet all present and future financial obligations in a timely manner. - market risk is the possibility that changes in future market rates or prices will make the Company's positions less valuable. - credit risk is the possible loss from a customer's failure to perform according to the terms of the transaction. The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. Such information includes fair values of the market risk sensitive instruments and contract terms sufficient to determine future cash flows from those instruments, categorized by expected maturity dates (thousands of dollars):
EXPECTED MATURITY DATE ------------------------------------------------------------------------- THERE- FAIR AUGUST 31, 2001 2002 2003 2004 2005 AFTER TOTAL VALUE ------------------------------- -------- -------- -------- --------- --------- --------- --------- ---------- ASSETS: Interest only receivables(a) Fixed rate $ 308 $ 351 $ 399 $ 454 $ 517 $ 384 $ 2,413 $ 2,413 Average interest rate 13.01% 13.01% 13.01% 13.01% 13.01% 13.01% Variable rate $ 32 $ 36 $ 41 $ 46 $ 52 $ 81 $ 288 $ 288 Average interest rate 12.11% 12.11% 12.11% 12.11% 12.11% 12.11% LIABILITIES: Notes and contracts payable(b) Fixed rate $ 830 $ 251 $ 197 $ 1,278 $ 1,278 Average interest rate 10.67% 11.31% 8.68% Variable rate $ 22,080 $ 3,086 $ 1,453 $ 11,654 $ 69,580 $107,853 $107,853 Average interest rate 11.50% 11.36% 11.46% 11.50% 11.30% Subordinated debt(c) Fixed rate $ 4,286 $ 4,286 $ 4,286 Average interest rate 10.00%
(a) The fair value was estimated by discounting future cash flows of the instruments using discount rates, default, loss and prepayment assumptions based upon available market data, opinions from financial advisors and portfolio experience. (b) Notes payable generally are adjustable rate, indexed to the prime rate, or to the 90-day London Interbank Offering Rate (LIBOR); therefore, carrying value approximates fair value. (c) Carrying value is approximately the same as fair value. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25 28 The following Consolidated Financial Statements of the Company and its subsidiaries are included herewith:
PAGE ---- Independent Auditors' Report F-2 Consolidated Balance Sheets at August 31, 2000 and 1999 F-3 Consolidated Income Statements - Years Ended August 31, 2000, 1999 and 1998 F-4 - F-5 Consolidated Statements of Stockholders' Equity - Years Ended August 31, 2000, 1999 and 1998 F-6 Consolidated Statements of Cash Flows - Years Ended August 31, 2000, 1999 and 1998 F-7 - F-8 Notes to Consolidated Financial Statements - Years Ended August 31, 2000, 1999 and 1998 F-9 - F-36
All schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 26 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information with respect to the directors and executive officers of the Company.
NAME AGE POSITION (OF COMPANY UNLESS OTHERWISE NOTED) --------------------------------------- --------- ----------------------------------------------------- Robert Nederlander 67 Chairman of the Board, Chief Executive Officer and Director Jerome J. Cohen 72 President and Director Chairman of the Board, Chief Executive Officer and President of PEC Herbert B. Hirsch 64 Senior Vice President, Chief Financial Officer, Treasurer and Director Eugene I. Schuster 63 Vice President and Director Wilbur L. Ross, Jr. 62 Director John E. McConnaughy, Jr. 71 Director Jon A. Joseph 53 Senior Vice President, General Counsel and Secretary Charles G. Baltuskonis 50 Senior Vice President and Chief Accounting Officer
Robert Nederlander has been the Chairman of the Board and Chief Executive Officer of the Company since January 1988. Mr. Nederlander is the Chairman of the Executive Committee and a member of the Audit Committee. Since July 1995, Mr. Nederlander has served on the Board of Directors of Cendant Corporation, formerly Hospitality Franchise Systems, Inc. (HFS). Mr. Nederlander has been Chairman of the Board of Riddell Sports Inc. since April 1988 and was Riddell Sports Inc.'s Chief Executive Officer from April 1988 through March 1993. From February 1992 until June 1992, Mr. Nederlander was also Riddell Sports Inc.'s interim President and Chief Operating Officer. Since November 1981, Mr. Nederlander has been President and/or a director of the Nederlander Organization, Inc., owner and operator of one the world's largest chains of legitimate theaters. Since December 1998, Mr. Nederlander is co-managing member of the Nederlander Co. LLC, operator of legitimate theaters in various cities outside New York. Mr. Nederlander served as the Managing General Partner of the New York Yankees Baseball Club from August 1990 until December 1991, and has been a limited partner since 1973. Since October 1985, Mr. Nederlander has been President of Nederlander Television and Film Productions, Inc.; and Chairman of the Board of Allis-Chalmers Corp. from May 1989 to 1993, and from 1993 to 1996 as Vice Chairman. Mr. Nederlander remains a director of Allis-Chalmers Corp. Mr. Nederlander was a director of MMC from September 1996 until June 1998. In October 1996, Mr. Nederlander became a director of News Communications Inc., a publisher of community oriented free circulation newspapers. Mr. Nederlander does not currently serve on a full time basis in his capacities with the Company. Jerome J. Cohen has been the President and a Director of the Company since 1988. Mr. Cohen serves as a member of the Executive Committee and is Chairman of the Board, Chief Executive Officer and President of PEC. Mr. Cohen served as Chairman of the Board of MMC from April 1995 to June 1998, as Chief Executive Officer from June 1992 to September 1997 and as President from June 1992 to March 1995. From April 1992 to June 1997, Mr. Cohen was a director of Atlantic Gulf Communities Inc., formerly known as General Development Corporation, a publicly held company engaged in land development, land sales and utility operations in Florida and Tennessee. Herbert B. Hirsch has been the Senior Vice President, Chief Financial Officer, Treasurer and a Director of the Company since 1988. Mr. Hirsch serves as a member of the Executive Committee. Mr. Hirsch served as a director of MMC from June 1992 to June 1998, and served as Vice President, Chief Financial Officer and Treasurer of MMC from 1992 to September 1996. Eugene I. Schuster has been a Vice President and a Director of the Company since 1988. Mr. Schuster is a member of the Stock Option Committee. Mr. Schuster has also been Chief Executive Officer and Chairman of the Board of Directors of Venture Funding, Ltd., a business development corporation, since its inception in May 1983. Since February 1986, Mr. Schuster has been the President and Chief Executive Officer and a director of Quest BioTechnology, Inc., a publicly held biotechnology research and development firm. Since September 1985, Mr. Schuster has been a director of Wavemat, Inc., a publicly held company engaged in the manufacture and sale of 27 30 microwave equipment for advanced materials processing. Since January 1988, Mr. Schuster has been the Chairman and from May 1988 through February 1995 was Chief Executive Officer, of Cellex Biosciences, Inc., a publicly held manufacturer of automated cell culture systems. Mr. Schuster is Chairman and Chief Executive Officer of Art Renaissance, Inc., a privately held company which operates several chains of retail art galleries. Mr. Schuster does not currently serve on a full time basis in his capacities with the Company. Wilbur L. Ross, Jr. has been a Director of the Company since 1984. Mr. Ross serves as a member of the Audit, Stock Option and Executive Incentive Compensation Committees. From August 1976 to April 2000, Mr. Ross was Executive Managing Director of Rothschild Inc. and Chairman of Asia Recovery Fund. As of April 1, 2000, he founded WL Ross & Co. LLC. He remains Chairman of Asia Recovery Fund, as well as the former Rothschild Recovery Fund, now named WLR Recovery Fund, and is Chairman of Asia Recovery Co-Investment Partners. Mr. Ross is also a director of Casella Waste Systems Inc., Pacific Life Insurance Company (Korea), Syms Corporation and News Communication Inc. John E. McConnaughy, Jr. has been a Director of the Company since 1984. Mr. McConnaughy serves as Chairman of the Audit Committee and a member of the Stock Option and Executive Incentive Compensation Committees. Mr. McConnaughy was Chairman and Chief Executive Officer of Peabody International Corp. from 1969 to 1986. He was Chairman and Chief Executive Officer of GEO International Corp. (GEO), a nondestructive testing, screen printing and oil field services company, from 1981 to 1992. GEO was spun off in 1981 and became publicly held. Mr. McConnaughy has been a director of Oxigene, Inc., Texstar Corporation, MAI Corporation, Akzona Corp., First Bank Corp. (New Haven), Beringer Co., Inc., the Pullman Co., Moore McCormack Resources and Peabody International Corp. He is currently on the Board of Directors of Transact International, Inc., DeVlieg Bullard, Inc., Levcor International, Inc., Riddell Sports, Inc., Wave Systems, Inc and Adrien Arpel, Inc. Mr. McConnaughy is on the Board of Trustees and Executive Committee of the Strang Cancer Prevention Center and is Chairman of the Board of the Harlem School of the Arts. Jon A. Joseph, Senior Vice President, General Counsel and Secretary, has been with the Company since June 1995. Mr. Joseph was Executive Vice President of Valley Bank of Nevada from 1984 to 1991. In 1992, Valley Bank of Nevada was acquired by Bank of America. Mr. Joseph remained with the legal department of Bank of America until June 1, 1995, when he joined the Company. Charles G. Baltuskonis, Senior Vice President and Chief Accounting Officer, has been with the Company since March 1997. He is a certified public accountant and served as Senior Vice President and Controller of Chase Federal Bank from May 1995 to March 1997. Prior to that date, he was Chief Financial Officer of F&C Bancshares and First Coastal Bank, a Senior Vice President - Finance of Bank of New England, and was a Senior Manager with the public accounting firm of Ernst & Young. The following are other key employees of the Company: Gregg A. McMurtrie was named Executive Vice President and Chief Operating Officer of PEC in November 1998. Mr. McMurtrie joined the staff of PEC in August 1982. From August 1982 to July 1987, Mr. McMurtrie served in various capacities in the credit, internal auditing, marketing, customer relations, sales and executive departments. He was General Manager, Colorado Land Sales, from September 1987 to February 1989. Since September 1989, Mr. McMurtrie served as Director of Sales Administration. S. Duke Campbell, Senior Vice President, Marketing and Sales of PEC, has been with the Company since July 1996. From 1995 to 1996, Mr. Campbell served as a Principal at D.I.A.L. Pro Northwest, Inc., a value added reseller for several customer management systems in the Northwest. Mr. Campbell served as Vice President of Marketing and sales for Hostar International, Inc., a manufacturer of innovative material management systems for hospitals, from 1991 to 1994. From 1989 to 1990, Mr. Campbell was the Senior Principal of Gulf American Financial Services, Inc., a financial services company that specializes in receivables management. Prior to 1990, Mr. Campbell served in various positions at Thousand Trails, Inc., a Texas company that owns and operates member campground resorts. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's Directors and executive officers, and persons who own more than ten percent of the Company's outstanding common stock, to file 28 31 with the SEC initial reports of ownership and reports of changes in ownership of common stock. Such persons are required by SEC regulation to furnish the Company with copies of all such reports they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company all Section 16(a) filing requirements applicable to its officers, Directors and greater than ten percent beneficial owners have been satisfied. ADDITIONAL INFORMATION CONCERNING OFFICERS AND DIRECTORS The Company's officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. The Company's Directors hold office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. The Company reimburses all Directors for their expenses in connection with their activities as Directors of the Company. Directors of the Company who are also employees of the Company do not receive additional compensation for their services as Directors. Members of the Board of Directors of the Company who are not employees of the Company received an annual fee of $30,000 in calendar 1999 and were scheduled to receive an annual fee of $40,000 for calendar 2000. Directors are reimbursed for their expenses incurred in attending meetings of the Board of Directors and its committees. Effective as of September 23, 1998, the Company entered into indemnification agreements with each of its Directors and a former officer, which superseded indemnification agreements entered into by the Company and such persons in April 1998. The new indemnification agreements provide certain protections now afforded by the Company's Articles of Incorporation and By-laws so that they cannot be changed without the consent of such Directors and officer. In addition, such agreements clarify the procedures for obtaining indemnification from the Company and require the Company to maintain directors and officers insurance. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information concerning the annual and long-term compensation earned by the Company's chief executive officer and each of the four other most highly compensated executive officers (Named Executive Officers), and the Chief Operating Officer of PEC, whose annual salary and bonus during the fiscal years presented 29 32 exceeded $100,000.
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ----------------------- -------------------------------------------- NUMBER OF FISCAL OTHER ANNUAL OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(a) COMPENSATION GRANTED COMPENSATION(b) --------------------------------------- ------ --------- ---------- ------------ ------- --------------- Robert Nederlander, Chairman of the Board, Chief 1998 $200,002 $ -- $ 6,373 2,083 $ 1,039 Executive Officer, MFC 1999 65,424(c) -- 5,901 833 -- Chairman of the Board, PEC 2000 30,769(c) -- -- -- -- Jerome J. Cohen, President, MFC 1998 $300,002 $ -- $ 8,383 2,083 $ 2,644 Chairman of the Board, Chief Executive 1999 300,002 5,769 9,800 2,083 2,400 Officer and President, PEC 2000 300,002 92,667(a) -- -- -- Herbert B. Hirsch Senior Vice President, Chief Financial 1998 $200,000 $ -- $ 2,005 833 $ 2,341 Officer and Treasurer, MFC 1999 200,000 3,486 2,335 1,666 2,809 Senior Vice President and Chief 2000 200,000 37,067(a) -- -- -- Financial Officer, PEC Jon A. Joseph General Counsel and Secretary, MFC 1999 $200,000 $ 1,923 $ 24,000 -- $ 2,838 Senior Vice President, PEC 2000 200,000 18,533(a) 24,000 -- -- Charles G. Baltuskonis Senior Vice President and 1999 $117,500 $ 3,202 $ 12,000 833 $ 1,943 Chief Accounting Officer, MFC and PEC 2000 125,000 --(a) 5,860 -- -- Gregg A. McMurtrie Executive Vice President 1999 $142,462 $ 5,885 $ 3,910 833 $ 2,172 and Chief Operating Officer, PEC 2000 150,000 --(a) 2,127 -- --
(a) Incentive compensation is included in the fiscal year it is earned with respect to contractual arrangements. Awards to other executives are discretionary and have not as yet been determined by the Incentive Compensation Committee for fiscal 2000. (b) Represents the Company's discretionary matching contributions of 25% of the employee's contribution to the Company's 401(k) Plan on behalf of the employee. (c) Prior to December 11, 1998, Mr. Nederlander earned an annual salary of $200,000. On that date, his salary was suspended. In April 2000, Mr. Nederlander's salary was reinstated at an annual rate of $100,000. OPTION GRANTS IN LAST FISCAL YEAR There were no grants of stock options during fiscal 2000. AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE The following table sets forth certain information concerning unexercised stock options held by the Named Executive Officers as of August 31, 2000. No stock options were exercised by the Named Executive Officers during fiscal 2000. See "Stock Option Plan" below in this section. 30 33
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS HELD AT OPTIONS HELD AT AUGUST 31, 2000 AUGUST 31, 2000(1) ------------------------ -------------------------------------------- -------------------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------------------------ --------------------- --------------------- --------------------- --------------------- Robert Nederlander 999 1,917 $ -- $ -- Jerome J. Cohen 1,249 2,917 $ -- $ -- Herbert B. Hirsch 666 1,833 $ -- $ -- Jon A. Joseph 2,000 3,000 $ -- $ -- Charles G. Baltuskonis 832 1,667 $ -- $ -- Gregg A. McMurtrie 832 1,667 $ -- $ --
(1) The closing sales price of the Company's Common Stock as reported on the Nasdaq National Market on August 31, 2000 was $4.50. The exercise price as of August 31, 2000 was $6.00 per share, therefore, the value of the unexercised options at August 31, 2000 was zero. EMPLOYMENT AGREEMENTS The Company entered into an employment agreement with Jerome J. Cohen, which originally was to expire on January 31, 2002. The agreement provides for an annual base salary of $300,000 plus a bonus of 2.5% of Incentive Income as defined in the Company's Incentive Plan (See "Executive Incentive Compensation Plan"). The Company's Board of Directors has authorized certain amendments to the employment agreement which, among other things, extend its expiration date to January 31, 2005. Under the agreement as amended, in the event (1) that the Company determines to terminate Mr. Cohen's employment under the agreement, (2) of a change in control of ownership of the Company or (3) of a sale of all or substantially all of the Company's assets, the Company would be required to enter into a termination agreement with Mr. Cohen under which he would receive a termination payment of $750,000. The termination payment would be payable in 36 equal monthly installments except in the case of a further change in control of ownership or sale of assets of the Company, in which case any unpaid balance of the $750,000 would become payable in a lump sum. The Company has entered into an employment agreement, which renews annually unless either party gives notice of termination, with Jon A. Joseph. The current expiration date of the employment agreement is December 31, 2001. The employment agreement provides for an annual base salary of $200,000 plus .5% of Incentive Income as defined in the Company's Incentive Plan. Further, in the event of a change in control of ownership of the Company, as defined in the employment agreement, Mr. Joseph would receive a separation payment of $200,000. On September 2, 1997, the Board of Directors authorized agreements with Mr. Herbert B. Hirsch and Mr. Don A. Mayerson, pursuant to which the Company would pay them a separation payment of $150,000 and $250,000, respectively, at such time as they no longer are employed by the Company. Payments of $10,000 per month to Mr. Mayerson commenced, upon his retirement in December 1998, and the final payment will be due in January 2001. Effective December 1998, Mr. Eugene I. Schuster no longer receives a salary. The Company has entered into a Compensation Agreement with S. Duke Campbell dated August 26, 1999, which provides for an annual base salary of $125,000. In addition, Mr. Campbell is to be paid, monthly, a sales commission of one-quarter of one percent (0.25%) of net sales, occurring after September 1, 1999, and a Profit Contribution Bonus for reducing sales and marketing costs for fiscal 2000. If Mr. Campbell's employment is terminated by the Company, other than for cause, Mr. Campbell shall receive his base salary and sales commissions to the date of termination, the portion of his Profit Contribution Bonus, if any, earned through the immediately preceding quarter, and a severance payment in an amount equal to his then current annual base salary. If Mr. Campbell resigns or terminates his employment by the Company he will be entitled to his base salary and sales commissions through the date of such termination. In addition, after the end of fiscal 2000, a new arrangement relating to profitability to take the place of the Profit Contribution Bonus will be agreed upon and added to the agreement by amendment. If the Company and Mr. Campbell have not agreed to such amendment to this agreement by November 30, 2000, and Mr. Campbell has received or earned, a Profit Contribution Bonus for fiscal 2000, Mr. Campbell may elect to resign or terminate his employment by the Company during the thirty-day period following November 30, 2000 and he then shall be entitled to a severance payment in an amount equal to his then current annual base salary in addition to his base salary and sales commissions through the date of such termination. 31 34 STOCK OPTION PLAN Under the Company's Stock Option Plan (Plan), as originally adopted, 87,500 shares of common stock were reserved for issuance upon exercise of options. In calendar year 1997, the Company's Board of Directors and shareholders approved an amendment to the Plan to increase by 83,333 shares the number of shares of common stock reserved for issuance pursuant to the Plan. As a result, an aggregate of 170,833 shares of common stock are reserved for issuance pursuant to the Plan, including 76,833 shares which have been issued upon exercise of options. During fiscal 1998, the Company's Board of Directors unanimously approved, subject to approval by the Company's shareholders, the amendment and restatement of the Plan. The amendments to the Plan approved by the Company's Board of Directors consist of changes to permit the grant of options to non-employee Directors of the Company and changes to conform the Plan to changes to the federal securities laws. On September 16, 1998, the shareholders approved the amendment and restatement of the Plan. The Plan is designed to serve as an incentive for retaining qualified and competent employees and Directors. The Stock Option Committee of the Company's Board of Directors administers and interprets the Plan and is authorized, in its discretion, to grant options thereunder to all eligible employees of the Company, including officers of the Company. The Plan provides for the granting of both "incentive stock options" (as defined in Section 422A of the Internal Revenue Code) and nonstatutory stock options. Options can be granted under the Plan on such terms and at such prices as determined by the Board, or a committee thereof, except that the per share exercise price of options may not be less than 80% of the fair market value of the common stock on the date of grant, and, in the case of an incentive stock option, the per share exercise price may not be less than 100% of such fair market value. In the case of incentive stock options granted to a 10% shareholder, the per share exercise price may not be less than 110% of the fair market value of the common stock on the date of grant and shall expire five years from the date of grant. The aggregate fair market value of the shares covered by incentive stock options granted under the Plan that become exercisable by a grantee for the first time in any calendar year is subject to a $100,000 limit. Options granted under the Plan are exercisable after the period or periods specified in the option agreement. Options granted under the Plan are not exercisable after the expiration of ten years from the date of grant (except five years in the case of options granted to 10% shareholders) and are not transferable other than by will or by the laws of descent and distribution. In September 1997, an additional 58,083 incentive stock options were granted under the Plan to employees at fair market value. On September 23, 1998, an additional 18,500 incentive stock options were granted under the Plan. In addition, the exercise price of all options issued September 2, 1997 was revised from $18.75 per share to $6.00 per share. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors has not designated a Compensation Committee, but has delegated the responsibility and authority for setting and overseeing the administration of policy which governs the compensation of all of the Company's employees (with the exception of Messrs. Nederlander, Cohen, Hirsch and Schuster) to its President, Mr. Cohen. The compensation paid to Messrs. Nederlander, Cohen, Hirsch and Schuster is determined by the Board of Directors. The Directors who are also executive officers of the Company do not participate in deliberations of the Board of Directors of the Company concerning their own compensation. EXECUTIVE INCENTIVE COMPENSATION PLAN On June 22, 1994, the Board of Directors of the Company approved and adopted an Executive Incentive Compensation Plan (Incentive Plan) for executives and other key employees of the Company and its subsidiaries who contribute to the success of the Company. Under the terms of the Incentive Plan, awards of incentive compensation are determined by the Incentive Compensation Committee of the Board of Directors of the Company, which committee shall be composed of not less than two members. The Incentive Plan provides that the Board of Directors may amend, suspend or terminate the Incentive Plan at any time. Incentive Compensation for any fiscal year is defined as an amount equal to 7.5% of incentive income (Incentive Income) for such year. Incentive Income for any fiscal year is defined as the amount reported as income before taxes in the Consolidated Financial Statements of the Company for such year. The maximum amount of all awards of Incentive Compensation for any fiscal year shall not exceed (a) 7.5% of Incentive Income for such year, reduced by (b) the amount of Incentive Income which must be paid by the Company to employees pursuant to any contractual obligation of the Company, increased by (c) any unawarded Incentive Compensation carried forward from a prior fiscal year. 32 35 The Board of Directors has also approved an employment agreement with Mr. Cohen, President of the Company, and agreements with Mr. Hirsch and Mr. Joseph, executive officers of the Company, pursuant to which Messrs. Cohen, Hirsch and Joseph are entitled to receive 2.5%, 1% and .5%, respectively, of Incentive Income of the Company, as defined in the Incentive Plan. SPLIT-DOLLAR INSURANCE PLAN On April 5, 1995, the Board of Directors of the Company established a split-dollar life insurance plan (Split-Dollar Plan) pursuant to which the Company was obligated to pay premiums for certain "second to die" life insurance policies on the lives of Messrs. Nederlander, Cohen, and Hirsch, executive officers and Directors of the Company, and their respective spouses, and for Don A. Mayerson, former executive officer of the Company, originally for a period of five years, at an annual aggregate premium outlay of $400,000. Each policy is in the name of a trust established for family beneficiaries selected by each executive. On August 3, 1995, the Company approved a life insurance policy for Mr. Schuster at an annual cost of $100,000 per annum, originally for a period of five years. Pursuant to the plan, and with respect to each policy, at the end of ten years after issuance, or earlier upon the deaths of the respective insured parties, or certain other events, the Company was to receive the amount of premiums paid on the policy. Through December 31, 1998, $300,000 was paid on Mr. Schuster's policy and $400,000 was paid on each of the others, leaving a balance of premiums in the amount of $600,000 still owed by the Company on the policies. Pursuant to an amendment to the original agreement, executed in April 1999, future payments by the Company relating to the policies were waived by Messrs. Nederlander, Cohen, Hirsch, Mayerson and Schuster. In consideration of the waiver, the Company agreed to accept repayment of the lesser of the premiums paid or the cash value of the policy, upon the deaths of the respective insured parties. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of November 15, 2000, information with respect to the beneficial ownership of the Company's common stock by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each director of the Company, (iii) each of the Named Executive Officers (as defined in "Item. 11 Executive Compensation"), and (iv) all Directors and executive officers of the Company as a group. Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF OUTSTANDING BENEFICIAL OWNER OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) COMMON STOCK OWNED ----------------------------------------------------------- ---------------------------- ---------------------------- Robert Nederlander(2) 356,556 10.2% Eugene I. Schuster and Growth Realty Inc. (GRI)(3) 251,504 7.2% Jerome J. Cohen(4) 185,242 5.3% Herbert B. Hirsch(5) 271,575 7.7% John E. McConnaughy, Jr.(6) 100,511 2.8% Wilbur L. Ross, Jr.(7) 832 * Jon A. Joseph(8) 3,083 * Charles G. Baltuskonis(9) 1,332 -- Friedman Billings Ramsey Group, Inc. and affiliates(10) 611,718 17.5% All Executive Officers and Directors as a Group 1,170,635 33.4% (8 persons)(11)
* Less than 1%. (1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from November 15, 2000 upon the exercise of options or warrants. Each beneficial owner's percentage ownership is determined by assuming that options and warrants that are held by such person (but not those held by any other person) and that are exercisable within 60 days from the applicable date have been exercised. (2) 810 Seventh Avenue, 21st Floor, New York, New York 10019. Includes 41,666 shares held by an affiliate of Mr. Nederlander and 1,582 shares issuable under an option granted pursuant to the Company's Stock Option Plan. Does not include 16,666 shares of common stock owned by the Robert E. Nederlander Foundation, an 33 36 entity organized and operated exclusively for charitable purposes (the Foundation), of which Mr. Nederlander is President. Mr. Nederlander disclaims beneficial ownership of the shares owned by the Foundation. (3) 321 Fisher Building, Detroit, Michigan 48202. Consists of (i) 211,506 shares held of record by GRI, a wholly-owned subsidiary of Venture Funding, Ltd. of which Mr. Schuster is a principal shareholder, Director and Chief Executive Officer, (ii) 39,166 shares held of record by Growth Realty Holdings L.L.C., a limited liability corporation owned by Mr. Schuster, GRI and Mr. Schuster's three children, and (iii) 832 shares issuable under an option granted pursuant to the Company's Stock Option Plan. (4) 1125 N. E. 125th Street, Suite 206, North Miami, Florida 33161. Includes 2,082 shares issuable under options granted pursuant to the Company's Stock Option Plan. Excludes 15,583 shares owned by Mr. Cohen's spouse and 83,333 shares owned by a trust for the benefit of his children over which Mr. Cohen does not have any investment or voting power, as to which he disclaims beneficial ownership. Also excludes 5,000 shares of common stock owned by the Rita and Jerome J. Cohen Foundation, Inc., an entity organized and operated exclusively for charitable purposes (the Cohen Foundation), of which Mr. Cohen is President. Mr. Cohen disclaims beneficial ownership of the shares owned by the Cohen Foundation. (5) 230 East Flamingo Road, Las Vegas, Nevada 89109. Includes 1,165 shares issuable under an option granted pursuant to the Company's Stock Option Plan. (6) 1011 High Ridge Road, Stamford, Connecticut 06905. Includes 1,499 shares issuable under options granted pursuant to the Company's Stock Option Plan. Excludes 500 shares owned by a member of Mr. McConnaughy's family, as to which Mr. McConnaughy does not have any investment or voting power, and as to which he disclaims beneficial ownership. (7) 1251 Avenue of the Americas, 51st Floor, New York, New York 10020. Consists of 832 shares issuable under an option granted pursuant to the Company's Stock Option Plan. Excludes 2,500 shares owned by a member of Mr. Ross' family and 41,666 shares owned by Rothschild, Inc., of which Mr. Ross is a former Managing Director, over which Mr. Ross does not have any investment or voting power and as to which he disclaims beneficial ownership. (8) 4310 Paradise Road, Las Vegas, Nevada 89109. Includes 3,000 shares issuable under options granted pursuant to the Company's Stock Option Plan. (9) 4310 Paradise Road, Las Vegas, Nevada 89109. Consists of shares issuable under options granted pursuant to the Company's Stock Option Plan. (10) 1001 19th Street North, Arlington, VA. 22209. Based upon a Schedule 13G dated July 13, 1998, as amended on February 15, 2000, filed jointly by Friedman Billings Ramsey Group, Inc., Orkney Holdings, Inc., Eric F. Billings, Emanuel J. Friedman and W. Russell Ramsey with the SEC. Consists of 601,716 shares owned by Friedman Billings Ramsey Group, Inc. and 10,002 shares owned personally by Emanuel J. Friedman. The Company has been advised that Emanuel J. Friedman, Eric F. Billings and W. Russell Ramsey are each control persons with respect to Friedman Billings Ramsey Group, Inc. and are the sole voting trustees of the Friedman Billings Ramsey Group, Inc. Voting Trust, which has sole discretion to vote approximately 89.1%of the voting power of Friedman Billings Ramsey Group, Inc. (11) See Notes (2)-(9). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Purchase of Preferred Equities Corporation. Pursuant to a Stock Purchase and Redemption Agreement dated October 6, 1987 and amended October 25, 1987, Comay Corp., an affiliate of Mr. Cohen (Comay), GRI, an affiliate of Mr. Schuster, RRE Corp., an affiliate of Mr. Nederlander (together with its assignee, RER Corp., another affiliate of Mr. Nederlander, RER), and H&H Financial Inc., an affiliate of Mr. Hirsch (H&H), obtained the rights (PEC Purchase Rights) to acquire PEC, a privately-held Nevada corporation engaged in retail land sales, resort time-sharing and other real estate related activities. (Comay, GRI, RER and H&H are collectively referred to as the Assignors). Certain Arrangements Between the Company and Affiliates of Certain Officers and Directors. Pursuant to the Assignment and Assumption Agreement, dated February 1, 1988 as subsequently amended, the Assignors assigned (Assignment) their PEC Purchase Rights to the Company. As part of the consideration for the Assignment to the Company, the Assignors were entitled to receive from the Company, on a quarterly basis until January 31, 1995, amounts equal in the aggregate to 63% of the "Unrestricted Cash Balances" of PEC. The Assignment and Assumption Agreement defines Unrestricted Cash Balances of PEC as the cash on hand and on deposit of PEC and its subsidiary as 34 37 of the end of a fiscal quarter that could be used to make a dividend or other payment to the Company without violating the most restrictive loan agreement to which PEC is a party or by which PEC is bound. At January 31, 1995, when accrual of payments to assignors ceased, $13.3 million was payable to the Assignors. On March 2, 1995, the Assignors agreed to defer payment of $10 million of the amounts due to them pursuant to an amendment to the Assignment and Assumption Agreement providing for the subordination of such amounts to payment of debt for money borrowed by the Company or obligations of the Company's subsidiaries guaranteed by the Company (Subordinated Debt). Warrants (Warrants) to purchase 166,666 shares of common stock, at an exercise price of $25.50 per share (the closing market price per share on March 2, 1995), were granted to the Assignors in consideration of the payment deferral and subordination. The balance of $3.3 million was paid to the assignors as follows: $809,000 including interest of $59,000 in June 1995, and the balance of $2.6 million including interest of $45,000 in January 1997. The Warrants were exercised in August 1997 in a non-cash transaction, whereby the Subordinated Debt was reduced by $4.25 million. Interest on the Subordinated Debt was to be paid semiannually at the rate of 10% per year starting September 1, 1995, and the Subordinated Debt was to be repaid in semiannual principal payments commencing March 1, 1997. On March 1, 1997, the Assignors received the first semiannual principal payment of $1.4 million plus interest related to the repayment of the Subordinated Debt. In connection with exercise of the Warrants, payments aggregating $4.25 million were deemed paid and the semiannual payments were scheduled to resume in March 1999, with a partial payment made in September 1998. The final $4.29 million was scheduled to be paid in 3 equal installments on March 1, 1999, September 1, 1999 and March 1, 2000. In accordance with the Eleventh Amendment to Assignment and Assumption Agreement, the principal payments have been deferred until March 1, 2001. Interest of $429,000 on Subordinated Debt was paid during fiscal 2000. The Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. Subsequent to August 31, 2000, an advance of $100,000 at the interest rate of 10% was made to Eugene I. Schuster, an affiliate of one of the Assignors, against the amount owed to it. In April 1995, PEC entered into an arrangement with Ramada, a subsidiary of Cendant Corporation, of which Mr. Nederlander became a director in July 1995. See "Business-Preferred Equities Corporation-Timeshare Properties and Sales." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) Certain documents filed as part of Form 10-K. See Item 8 above for a list of financial statements included as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K. The Company did not file any current report on Form 8-K during the quarter ended August 31, 2000. (c) Exhibits.
EXHIBIT NUMBER DESCRIPTION ------ ----------- 2.1(1) Disclosure Statement dated October 3, 1983, together with Schedules A through G and Debtors' Plan, filed as Exhibit (2) to Mego International (a predecessor of the Company) Form 10-K for the year ended February 28, 1983, and incorporated herein by reference. 2.2(8) Articles of Merger of Vacation Spa Resorts, Inc. with and into Preferred Equities Corporation dated March 10, 1993, Agreement and Plan of Merger dated as of July 24, 1992, among Preferred Equities Corporation and Vacation Spa Resorts, Inc., Amendment to Agreement and Plan of Merger dated July 14, 1992, and Amendment to Agreement and Plan of Merger dated December 7, 1992. 3.1(a)(1) Certificate of Incorporation of the Company, as amended, filed as Exhibit 3.1 to the Company's Form 10-K for the fiscal year ended August 31, 1987 and incorporated herein by reference. 3.1(b)(5) Certificate of Amendment of the Certificate of Incorporation of the Company, dated June 19, 1992. 3.1(c)(8) Certificate of Amendment of the Certificate of Incorporation of the Company, dated August 26, 1993.
35 38 3.2(1) By-laws of the Company, as amended. 10.4(a)(1) Stock Purchase Agreement dated October 25, 1987 by and among the Company, and Robert Nederlander, Jerome J. Cohen, Don A. Mayerson, Herbert Hirsch and Growth Realty Inc. (GRI) (collectively, the Purchasers) filed as Exhibit A to a Schedule 13D dated October 25, 1987, filed by Jerome J. Cohen, et al., and incorporated herein by reference. 10.4(b)(1) Letter dated January 7, 1988 from the Purchasers of the Company, updating representations made by the Company, in the Stock Purchase Agreement (Exhibit 10.5(a)) filed as Exhibit 10.2 to a Current Report on Form 8-K of the Company, dated January 7, 1988, and incorporated herein by reference. 10.5(a)(1) Assignment Agreement dated October 25, 1987 by and among Comay Corp. (Comay), GRI, RER Corp. (RER) (as successor in interest to RRE Corp.) and H&H Financial, Inc. (H&H) (collectively the Assignors) and the Company, with respect to shares of Common Stock of Preferred Equities Corporation (PEC), filed as Exhibit B to a Schedule 13D dated October 25, 1987 filed by Jerome J. Cohen, et al., and incorporated herein by reference. 10.5(b)(1) Assignment and Assumption Agreement dated February 1, 1988 by and among the Assignors and the Company filed as Exhibit 10.2 to a Current Report of Form 8-K of the Company, dated February 1, 1988 and incorporated herein by reference. 10.5(c)(1) Amendment to Exhibit 10.6(b) dated as of July 29, 1988 filed as Exhibit 10.3 to a Current Report on Form 8-K of the Company, dated August 1, 1988 and incorporated herein by reference. 10.6(a)(1) Stock Purchase and Redemption Agreement dated as of October 6, 1987 by and among PEC, Comay, GRI, RRE Corp., H&H, Linda Sterling and the 1971 Rosen Family Stock Trust filed as Exhibit C to a Schedule 13D dated October 25, 1987 filed by Jerome J. Cohen, et al., and incorporated herein by reference. 10.6(b)(1) Amendment dated as of October 25, 1987 of Exhibit 10.7(a) filed as Exhibit 10.3(b) to a Current Report on Form 8-K of the Company dated February 1, 1988, and incorporated herein by reference. 10.7(1) Loan and Security Agreement dated February 1, 1988 by and between the Company and Greyhound Real Estate Finance Company filed as Exhibit 10.7 to a Current Report on Form 8-K of the Company dated February 1, 1988 and incorporated herein by reference. 10.8(1) Pledge and Security Agreement dated February 1, 1988 by and among the Company and Comay, GRI, REF, H&H and PEC regarding the pledge of PEC stock pursuant to the Assignment Agreement and the Assignment and Assumption Agreement (Exhibits 10.6(a) and (b)) filed as Exhibit 10.8 to the Form 8 Amendment dated April 18, 1988 to a Current Report on Form 8-K of the Company dated February 1, 1988 and incorporated herein by reference. 10.9(1) Purchase Agreement dated June 30, 1988 by and among Preferred Equities Corporation (PEC), Southern Colorado Properties, Inc., Colorado Land and Grazing Company and The Oxford Finance Companies, Inc. filed as Exhibit 10.1 to a Quarterly Report of the Company on Form 10-Q for the quarter ended May 31, 1988 and incorporated herein by reference. 10.10(2) Amendment to Exhibit 10.5(b), dated July 29, 1988. 10.11(3) Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated May 10, 1989 and Amended and Restated Promissory Note and Guarantee and Subordination Agreement. 10.12(3) Amendment No. 2 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated April 16, 1990 and Amendment No. 2 to Promissory Note and Guarantee and Subordination Agreement. 10.13(3) Purchase Agreement dated 24th day of September 1990 by and among Brigantine Inn, Ltd., Brigantine Preferred Properties, Inc. and Preferred Equities Corporation. 10.14(3) Purchase Agreement dated 24th day of September, 1990 by and among Brigantine Villas, L.P., Brigantine Preferred Properties, Inc., and Preferred Equities Corporation. 10.15(4) Amendment No. 3 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated May 31, 1991 and Amendment No. 2 to Promissory Note. 10.16(4) Amendment No. 3 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated May 31, 1991 and Amendment No. 2 to Promissory Note.
36 39 10.17(4) Loan and Security Agreement between Dorfinco Corporation and Preferred Equities Corporation, dated July 31, 1991 and related Promissory Note dated August 9, 1991. 10.18(4) Forbearance and Assumption Agreement, Guarantee and Second Amendment to Loan and Security Agreement between Chemical Bank of New Jersey, Brigantine Villas, L.P. and Brigantine Preferred Properties, Inc., dated June 12, 1991, Amended and Restated Promissory Note dated June 18, 1991, and Second Amendment to Mortgage dated June 18, 1991. 10.19(5) Stock Purchase Agreement dated August 13, 1992 between the Company and PEC. 10.20(5) Amendment No. 4 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated January 13, 1992, and Amendment No. 3 to Amended and Restated Promissory Note. 10.21(5) Agreement to Wholesale Financing and related Promissory Note between ITT Commercial Finance Corp. and Calvada Homes, Inc., dated January 17, 1992. 10.22(5) Purchase and Sale Agreement between Golden West Homes and Calvada Homes, Inc., dated February 26, 1992. 10.23(5) Standard Form of Agreement between Owner and Contractor between Calvada Homes, Inc. and Emfad Enterprises, Inc., dated March 23, 1992. 10.24(5) Loan Modification and Extension Agreement between Valley Bank of Nevada and Preferred Equities Corporation dated January 30, 1992. 10.25(5) Amendment No. 2 to Amended and Restated Loan Agreement between Valley Bank of Nevada and Vacation Spa Resorts, Inc., dated February 20, 1992, and related Promissory Note dated February 20, 1992. 10.26(6) Purchase and Servicing Agreement dated as of October 15, 1992 among Vacation Spa Resorts, Inc. and Preferred Equities Corporation as Sellers, Preferred Equities Corporation as Servicer, and NBD Bank, N.A. as Purchaser. 10.27(6) Guaranty Agreement as of October 15, 1992 made by Vacation Spa Resorts, Inc., Preferred Equities Corporation, and the Company in favor of NBD Bank, N.A. 10.28(6) Letter from Greyhound Financial Corporation dated December 4, 1992 extending the borrowing term of the Amended and Restated Loan and Security Agreement dated May 10, 1992, between Greyhound Real Estate Finance Company and Preferred Equities Corporation and Loan and Security Agreement dated March 30, 1989, between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., to December 31, 1992. 10.29(7) Asset Sale Agreement dated December 22, 1992, by and between Brigantine Preferred Properties, Inc. as Seller, and The Oxford Finance Companies as Buyer. 10.30(7) Amendment No. 5 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated February 23, 1993, Amendment No. 4 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Vacation Spa Resorts, Inc., dated February 23, 1993. 10.31(7) First Amendment to Stock Purchase Agreement dated March 10, 1993, by and between the Company and Preferred Equities Corporation. 10.32(7) Amendment No. 6 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated June 28, 1993, and three (3) related Promissory Notes, relating to the Grand Flamingo Winnick, Grand Flamingo Fountains, and Preferred Equities Corporation corporate offices. 10.33(7) Second Amendment to Loan and Security Agreement dated June 30, 1993, between Dorfinco Corp. and Preferred Equities Corporation, and First Amendment to Promissory Note. 10.34(7) Agreement for Sale of Notes Receivable arising from Timeshares sales dated August 3, 1993, by and between Brigantine Properties, Inc. as Seller, and The Oxford Finance Companies as Buyer. 10.35(7) Purchase and Sale Agreement dated August 30, 1993, between Preferred Equities Corporation as Developer, and Marine Midland Bank, N.A., and Wellington Financial Corp. 10.36(7) Purchase Agreement dated August 31, 1993, between Mego Financial Corp. as Seller, and Legg Mason Special Investment Trust as Buyer, for the purchase of 300,000 shares of the Company's Preferred Stock. 10.37(8) Amended and Restated Loan Agreement between Bank of America Nevada and Preferred Equities Corporation dated September 10, 1993.
37 40 10.38(8) Agreement for Line of Credit and Commercial Promissory Note between Mego Mortgage Corporation and First National Bank of Boston, dated January 4, 1994. 10.39(8) Amendment No. 7 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated January 24, 1994. 10.42(8) Amendment No. 8 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated April 15, 1994. 10.43(8) Purchase and Servicing Agreement dated as of June 1, 1994, between Preferred Equities Corporation as Seller and Servicer, and NBD Bank, N.A. as Purchaser. 10.44(8) Purchase and Servicing Agreement dated as of July 6, 1994, between Preferred Equities Corporation as Seller, and First National Bank of Boston as Purchaser. 10.45(8) Amendment No. 9 to Amended and Restated Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation, dated August 31, 1994, and Amendment No. 4 to Amended and Restated Promissory Note dated August 31, 1994, Amendment No. 6 to Loan and Security Agreement between Greyhound Real Estate Finance Company and Preferred Equities Corporation dated August 31, 1994, and Amendment No. 4 to Promissory Note dated August 31, 1994, between Preferred Equities Corporation as successor-in-interest to Vacation Spa Resorts, Inc., and Greyhound Financial Corporation. 10.47(9) Third Amendment to Loan and Security Agreement and Assumption Agreement dated August 23, 1994, by and between Preferred Equities Corporation, Colorado Land and Grazing Corp. and Dorfinco Corporation. 10.48(9) General Loan and Security Agreement dated October 5, 1994, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.49(9) Purchase and Servicing Agreement, Second Closing, dated November 29, 1994, between Preferred Equities Corporation and NBD Bank, N.A. 10.50(9) Form of Agreement with respect to the Company's "Split-Dollar" Life Insurance Plan, including Form of Assignment of Limited Interest in Life Insurance as Collateral Security. 10.51(9) Construction Loan Agreement dated January 20, 1995, by and between Preferred Equities Corporation and NBD Bank. 10.52(9) Amendment No. 10 to Amended and Restated Loan and Security Agreement dated January 26, 1995, by and between Greyhound Financial Corporation and Preferred Equities Corporation. 10.53(9) Loan Agreement re: Calvada Golf Course dated January 31, 1995, by and among The First National Bank of Boston and Preferred Equities Corporation. 10.54(9) Second Amendment to Assignment and Assumption Agreement dated March 2, 1995, by and between RER Corp., Comay Corp., Growth Realty, Inc. and H&H Financial, Inc. and Mego Financial Corp. 10.55(9) First Amendment to General Loan and Security Agreement dated February 27, 1995, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.56(9) Master Loan Purchase and Servicing Agreement dated April 1, 1995, by and between Greenwich Capital Financial Products, Inc. and Mego Mortgage Corporation. 10.57(9) Licensing Agreement dated April 18, 1995, by and among Hospitality Franchise Systems, Inc., Ramada Franchise Systems, Inc. and Preferred Equities Corporation. 10.58(9) Purchase and Servicing Agreement, Third Closing, dated May 24, 1995, between NBD Bank, N.A. and Preferred Equities Corporation. 10.60(9) Purchase and Servicing Agreement, dated as of August 31, 1995, between Preferred Equities Corporation, Colorado Land and Grazing Corp. and First National Bank of Boston. 10.63(10) Form of Tax Allocation and Indemnity Agreement entered into between Mego Mortgage Corporation and the Company. 10.64(10) Loan Program Sub-Servicing Agreement between Mego Mortgage Corporation and Preferred Equities Corporation dated as of September 1, 1996. 10.74(10) Office Lease by and between MassMutual and Mego Mortgage Corporation dated April 1996. 10.77(10) Services and Consulting Agreement between Mego Mortgage Corporation and Preferred Equities Corporation dated as of September 1, 1996. 10.83(10) Form of Agreement entered into between Mego Mortgage Corporation and Mego Financial Corp.
38 41 10.85(12) Amendment No. 11 to Amended and Restated Loan and Security Agreement dated September 22, 1995, by and between Finova Capital Corporation and Preferred Equities Corporation and related Promissory Note relating to Aloha Bay Phase II. 10.86(12) Amendment No. 12 to Amended and Restated Loan and Security Agreement dated September 29, 1995, by and between Finova Capital Corporation and Preferred Equities Corporation and Amended and Restated Promissory Note relating to Corporate Office Building. 10.87(12) Fourth Amendment to Loan and Security Agreement and Assumption Agreement dated September 30, 1995, by and between Preferred Equities Corporation, Colorado Land and Grazing Corp., Mego Financial Corp. and Dorfinco Corporation. 10.88(12) Request for Receivables Purchase dated November 16, 1995, by and between Preferred Equities Corporation as Seller and NBD Bank as Purchaser. 10.89(12) Second Amendment to General Loan and Security Agreement dated November 30, 1995, by and between Steamboat Suites, Inc. and Textron Financial Corporation and Restated and Amended Receivables Promissory Note. 10.90(12) Amendment No. 13 to Amended and Restated Loan and Security Agreement dated December 13, 1995, by and between Finova Capital Corporation and Preferred Equities Corporation and three (3) related Promissory Notes, relating to the Grand Flamingo Towers Lobby, Ida and Winnick Building Additions. 10.91(12) Purchase and Sale Agreement dated December 29, 1995, by and between Overlook Lodge Limited Liability Company as Seller and Preferred Equities Corporation as Purchaser. 10.92(12) Second Amendment to Purchase and Sale Agreement dated February 8, 1996, as previously amended by an Amendment to Purchase and Sale Agreement dated May 10, 1994, between Preferred Equities Corporation, Marine Midland Bank, and Wellington Financial Corp. 10.93(12) Acquisition and Construction Loan Agreement dated March 27, 1996, by and between Heller Financial, Inc. and Preferred Equities Corporation and three (3) related Promissory Notes; Acquisition Promissory Note, Revolving Renovation Promissory Note, and Receivables Promissory Note. 10.94(12) Construction Loan Agreement dated April 30, 1996, by and between Preferred Equities Corporation and NBD Bank and related Promissory Note. 10.95(12) Amendment No. 14 to Amended and Restated Loan and Security Agreement dated June 5, 1996, by and between Finova Capital Corporation and Preferred Equities Corporation and Second Amended and Restated Promissory Note, relating to Headquarters and FCFC Property. 10.96(12) Amendment No. 15 to Amended and Restated Loan and Security Agreement dated August 16, 1996, by and between Finova Capital Corporation and Preferred Equities Corporation; Amendment No. 7 to Loan and Security Agreement; Amendment No. 5 to Amended and Restated Promissory Note; Amendment No. 5 to Promissory Note; Amendment No. 1 to Promissory Note [Towers Lobby]. 10.97(12) Request for Receivables Purchase dated July 30, 1996, by and between Preferred Equities Corporation as Seller and NBD Bank as Purchaser. 10.98(12) Preferred Stock redemption agreement by and between Mego Financial Corp. and Legg Mason Special Investment Trust, Inc. 10.99(12) Amendment to Common Stock Purchase Warrant issued by Mego Financial Corp. to Legg Mason Special Investment Trust, Inc. 10.100(14) Third Amendment to General Loan and Security Agreement dated November 29, 1996 between Steamboat Suites, Inc. as Debtor and Textron Financial Corporation as Lender and the related Restated and Amended Receivables Promissory Note dated November 30, 1996 effective October 6, 1994. 10.101(14) Fifth Amendment to Loan and Security Agreement dated November 29, 1996 by and among Preferred Equities Corporation and Colorado Land and Grazing Corp. as Borrower; Mego Financial Corp. as Guarantor; and Dorfinco Corporation as Lender and the related Fourth Amendment to Promissory Note dated November 29, 1996. 10.102(14) Acquisition and Renovation Loan Agreement dated August 6, 1996 between Heller Financial, Inc. as Lender and Preferred Equities Corporation as Borrower; and Interval Receivables Loan and Security Agreement dated August 6, 1996 by and among Heller Financial, Inc. as Lender and Preferred Equities Corporation as Borrower and Mego Financial Corp. as Guarantor, and the three related Promissory Notes.
39 42 10.103(15) Subdivision Improvement Agreement dated March 7, 1995 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada 10.104(15) Subdivision Improvement Agreement dated February 20, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada 10.105(15) Subdivision Improvement Agreement dated February 20, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada 10.106(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada 10.107(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada 10.108(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada 10.109(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada 10.110(15) Subdivision Improvement Agreement dated December 17, 1996 between Preferred Equities Corporation and the Board of County Commissioners of the County of Nye, State of Nevada 10.112(15) Employment Agreement between Mego Financial Corp. and Irving J. Steinberg dated August 1, 1996. 10.113(16) Employment Agreement between Jerome J. Cohen and Mego Financial Corp. dated September 1, 1996. 10.114(16) Purchase and Servicing Agreement between Preferred Equities Corporation as Seller and BankBoston, N.A. as Purchaser dated May 30, 1997. 10.115(16) Second Amended and Restated and Consolidated Loan and Security Agreement between Preferred Equities Corporation as Borrower and FINOVA Capital Corporation as lender, dated May 15, 1997. 10.116(16) Form of Owners Association Agreement between Resort Condominiums International, Inc. and Homeowners Associations with schedule listing the associations. 10.127(13) Agreement between Mego Financial Corp. and Mego Mortgage Corporation dated August 29, 1997. 10.128(17) Sub-Servicing Agreement dated September 1, 1996, as amended September 2, 1997, between Mego Financial Corp., Mego Mortgage Corporation and Preferred Equities Corporation. 10.129(17) Third Amendment to Assignment and Assumption Agreement by and between RER Corp., Comay Corp., Growth Realty, Inc. and H&H Financial, Inc. and Mego Financial Corp. dated August 20, 1997. 10.130(17) Loan and Security Agreement between Litchfield Financial Corporation and Preferred Equities Corporation dated July 30, 1997. 10.132(17) Employment Agreement between Jon A. Joseph and Mego Financial Corp. dated August 31, 1997. 10.133(17) Agreement between the Company and Herbert B. Hirsch dated September 2, 1997 relating to a severance payment. 10.134(17) Agreement between the Company and Don A. Mayerson dated September 2, 1997 relating to a severance payment. 10.135(17) Amendment to Services and Consulting Agreement between Mego Mortgage Corporation and Preferred Equities Corporation dated January 20, 1998. 10.136(17) Amendment to Loan Program Sub-Servicing Agreement between Mego Mortgage Corporation and Preferred Equities Corporation dated January 20, 1998. 10.137(17) Agreement between Mego Mortgage Corporation and Preferred Equities Corporation, dated February 9, 1998, regarding assignment of rights related to the Loan Program Sub-Servicing Agreement to Greenwich Capital Markets, Inc. 10.138(17) Mortgage Loan Facility Agreement between FINOVA Capital Corporation and Preferred Equities Corporation dated February 18, 1998. 10.139(18) Termination of Services and Consulting Agreement between Mego Mortgage Corporation and Preferred Equities Corporation, dated April 22, 1998. 10.140(18) Settlement letter from Mego Financial Corp. to Mego Mortgage Corporation dated June 26, 1998.
40 43 10.141(18) Settlement letter from Preferred Equities Corporation to Mego Mortgage Corporation dated June 26, 1998. 10.142(23) Amended and Restated Real Estate Purchase and Sales Agreement by and among Preferred Equities as borrower and Mercantile Equities Corporation and Hartsel Springs Ranch of Colorado, Inc., as Note holder dated as of November 25, 1997. 10.143(23) Letter Amendment to General Loan and Security Agreement dated December 1, 1997, between Steamboat Suites, Inc. and Textron Financial Corporation. 10.144(23) Mortgage Loan Facility Agreement between FINOVA Capital Corporation and Preferred Equities Corporation dated March 20, 1998. 10.145(23) Loan and Security Agreement dated August 12, 1998 between Preferred Equities Corporation as Borrower and Dorfinco Corporation as Lender and the related Promissory Note. 10.146(23) Post-72 Lots Purchase Money Promissory Note by and among Preferred Equities and Mercantile Equities Corporation and Hartsel Springs Ranch of Colorado, Inc. dated as of February 20, 1998. 10.147(23) Purchase Money Promissory Note by and among Preferred Equities as borrower and Mercantile Equities Corporation and Hartsel Springs Ranch of Colorado, Inc., as Noteholder dated as of February 20, 1998. 10.148(23) Compensation Agreement between Frederick H. Conte and Preferred Equities Corporation dated September 1, 1998. 10.149(23) Form of Indemnification Agreement, each dated as of September 23, 1998 between the Company and each of Robert Nederlander, Jerome J. Cohen, Eugene I. Schuster, Herbert B. Hirsch, John E. McConnaughy, Jr., Wilbur L. Ross, Jr. and Don A. Mayerson. 10.150(20) Amended and Restated and Consolidated Loan and Security Agreement between Finova and PEC & Mego Financial dated December 23, 1998 10.151(20) Common Stock Purchase Warrant issued by Mego Financial to Finova Capital Corporation dated December 23, 1998. 10.152(21) First Amended and Restated and Consolidated Promissory Note dated as of November 5, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to Aloha Bay Phase I. 10.153(21) Third Amended and Restated Promissory Note dated as of September 29, 1998 by and between FINOVA Capital Corporation and Preferred Equities Corporation relating to the Headquarters and FCFC Property. 10.154(21) Amendment No. 4 to Second Amended and Restated and Consolidated Loan and Security Agreement dated as of November 6, 1998 between Finova Capital Corporation and Preferred Equities Corporation. 10.155(21) Amendment No. 4 to Second Amended and Restated and Consolidated Loan and Security Agreement dated as of November 6, 1998 between Greyhound Real Estate Finance Company and Preferred Equities Corporation. 10.156(21) Amended and Restated Guarantee and Subordination Agreement dated as of September 29, 1998 between Greyhound Real Estate Finance Company and Mego Financial Corporation relating to the Headquarters Re-advance. 10.157(21) First Amended and Restated Promissory Note dated as of November 6, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to the IDA Building Addition. 10.158(21) Letter Agreement dated as of September 29, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to the Headquarters Re-advance. 10.159(21) Additional Advance Note dated as of November 6, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation relating to Aloha Bay Phase II. 10.160(21) Request for Advance and Disbursement Instructions dated as of November 11, 1998 between FINOVA Capital Corporation and Preferred Equities Corporation. 10.161(21) First Amended and Restated Promissory Note dated as of November 6, 1998 between FINOVA Capital Corp. and Preferred Equities Corporation relating to the Winnick Building Addition. 10.162(21) Fourth Amendment to Assignment and Assumption Agreement dated as of February 26, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc. and H & H Financial, Inc. and Mego Financial Corporation. 10.163(21) Amended and Restated Stock Option Plan dated September 16, 1998 for Mego Financial Corp.
41 44 10.164(22) Amendment No.2 to Interval Receivables Loan and Security Agreement dated as of March 28, 1999 between Heller Financial, Inc. and Preferred Equities Corporation. 10.165(22) Sales Agreement dated as of March 8, 1999 between Great Escape Marketing, Inc. and Preferred Equities Corporation relating to 6950 Villa de Costa Dr. Orlando, Florida. 10.166(22) Sales Agreement dated as of March 10, 1999 between D&D Marketing, Inc. and Preferred Equities Corp and Brigantine Preferred Properties. 10.167(22) Forbearance and Modification Agreement dated as of May 7, 1999 by and between Preferred Equities Corporation and Heller Financial, Inc. 10.168(22) Management Agreement dated May 20, 1999 by and between Hotel Maison Pierre Lafitte, LTD. Owners Association, Inc. and Preferred Equities Corporation. 10.169(22) Fifth Amendment to Assignment and Assumption Agreement dated May 28, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. 10.170(22) Amendment No. 2 to Severance Agreement, and Consulting Agreement dated June 18, 1999 between Don A. Mayerson and Mego Financial Corp. 10.171(22) First Amendment to Forbearance Agreement and Amendment No. 6 to Second Amended and Restated and Consolidated Loan and Security Agreement dated May 7, 1999 by and among Finova Capital Corporation, Preferred Equities Corporation and Mego Financial Corp. 10.172(24) Sixth Amendment to Assignment and Assumption Agreement dated May 28, 1999 by and between RER Corp, COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. 10.173(24) Forbearance Agreement dated August 6, 1999 among Preferred Equities, and Mego Financial Corporation and Litchfield Financial Corporation. 10.174(24) Purchase and Sale Agreement between The Villas at Monterey Limited Partnership and Tango Bay of Orlando and Preferred Equities Corporation regarding Ramada Suites at Tango Bay Orlando. 10.175(24) Extension dated September 7, 1999 to the Second Amendment to Forbearance Agreement and Amendment No. 7 to Second Amended and Restated Consolidated Loan and Security Agreement dated December 23, 1998 between Preferred Equities Corporation and Finova Capital Corporation. 10.176(24) Purchase and Security Agreement dated June 11, 1999 between Preferred Equities Corporation and Preferred RV Resort Owners Association regarding the Preferred RV Resort. 10.177(24) Forbearance Agreement and Amendment No. 5 to Second Amended and Restated and Consolidated Loan and Security Agreement dated December 23, 1998 between Finova Capital Corporation and Preferred Equities Corp. 10.178(24) Letter Agreement dated February 8, 1999 between Preferred Equities Corporation and Finova Capital Corporation regarding additional agreements to the Forbearance Agreement and Amendment No. 5 to Second Amended and Restated Consolidated Loan and Security Agreement dated December 23, 1998. 10.179(24) Amendment No. 3 to Severance Agreement and Consulting Agreement between Mego Financial Corp. and Don A. Mayerson dated September 28, 1999. 10.180(24) Compensation Agreement between S. Duke Campbell and Preferred Equities Corporation dated July 27, 1998. 10.181(24) Amendment dated October 15, 1999 to the General Loan and Security Agreement Inventory Advance between Preferred Equities Corporation and Textron Financial Corporation dated October 5, 1994. 10.182(24) Amendment dated April 26, 1999 to the Agreement made January 1, 1995 between Mego Financial Corp. and Herbert A. Krasow, as Trustee of the Herbert B. Hirsch Property Trust Insurance Trust dated October 22, 1990 regarding the Agreement concerning "Split-Dollar" Life Insurance Plan. 10.183(24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security dated April 26, 1999 to an Assignment made as of January 1, 1995 by Herbert A. Krasow, as Trustee of the Herbert B. Hirsch Property Trust Insurance Trust, dated October 22, 1990 to Mego Financial Corp.
42 45 10.184(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan dated April 26, 1999 to the Agreement made January 1, 1995, between Mego Financial Corp., Lawrence J. Cohen and Clifford A. Schulman as Trustees of the Cohen 1994 Insurance Trust dated December 2, 1994, Jerome J. Cohen and Rita Cohen. 10.185(24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security dated April 26, 1999 to an Assignment made as of January 1, 1995, by Lawrence J. Cohen and Clifford A. Schulman, as Trustees of the Cohen 1994 Insurance Trust dated December 21, 1994 to Mego Financial Corp. 10.186(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan dated April 23, 1999 to the Agreement made as of June 1, 1995 between Mego Financial Corp, Joseph A. Schuster, as Trustee of the Eugene I Schuster Irrevocable Trust - dated May 30 1995, and Eugene I. Schuster. 10.187(24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security dated April 23, 1999 to an Assignment made as of June 1, 1995, by Joseph A. Schuster, as Trustee of the Eugene I. Schuster Irrevocable Trust - Mego, dated May 30, 1995 to Mego Financial Corp. 10.188(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan dated April 26, 1999 to the Agreement made January 1, 1995 between Mego Financial Corp., Tracy Allen, and Jane Gerard, as Trustees of the Nederlander 1994 Insurance Trust, dated December 19, 1994, Robert e. Nederlander and Gladys Nederlander. 10.189(24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security Amendment made April 26, 1999 to as Assignment made January 1, 1995 by Tracy Allen and Jane Gerard, as Trustees of the Nederlander 1994 Insurance Trust, dated December 19, 1994 to Mego Financial Corp. 10.190(24) Amended Agreement Concerning "Split-Dollar" Life Insurance Plan Amendment made as of April 26, 1999 to the Agreement made as of January 1, 1995, between Mego Financial Corp., Gary Steven Mayerson and Robert Keith Mayerson, as Trustees of the Mayerson 1994 Insurance Trust, dated December 21, 1994, Don A. Mayerson and Evelyn W. Mayerson. 10.191(24) Amended Assignment of Limited Interest in Life Insurance as Collateral Security Amendment made April 26, 1999 to an Assignment made January 1, 1995, by Gary Steven Mayerson and Robert Keith Mayerson, as Trustees of the Mayerson 1994 Insurance Trust, dated December 21, 1994 to Mego Financial Corp. 10.192(24) Seventh Amendment to Assignment and Assumption Agreement by and between RER Corp., Comay Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. dated November 20, 1999. 10.193(25) Purchase and Sale Agreement dated October 6, 1999 between Preferred Equities Corporation and Covington Nevada Corp regarding the Sale of Calvada Championship Golf Course and Calvada Executive Golf Course. 10.194(25) Amendment No. One to Third Amended and Restated Promissory Note - Headquarters and FCFC Property dated November 9, 1999 between Preferred Equities Corporation and Finova Capital Corporation. 10.195(25) Amendment No. One to Promissory Note - Additional Advances dated November 9, 1999 between Preferred Equities Corporation and Finova Capital Corporation. 10.196(25) Third Amendment to Forbearance Agreement and Amendment No. 8 to Second Amended and Restated and Consolidated Loan and Security Agreement dated November 9, 1999, by and among Finova Capital Corporation, Preferred Equities Corporation, and Mego Financial Corp. 10.197(25) Fourth Amendment to Forbearance Agreement and Amendment No. 9 to Second Amended and Restated and Consolidated Loan and Security Agreement dated December 17, 1999 by and among Finova Capital Corporation, Preferred Equities Corporation, and Mego Financial Corp. 10.198(25) Second Amendment to Deed of Trust - Hartsel Springs Ranch dated December 17, 1999 by and among Preferred Equities Corporation and Finova Capital Corporation. 10.199(26) Fifth Amendment to Forbearance Agreement and Amendment Number 10 to Second Amended and Restated and Consolidated Loan and Security Agreement dated as of February 25, 2000 by and among FINOVA Capital Corporation, Preferred Equities Corporation, and Mego Financial Corp. 10.200(26) Eighth Amendment to Assignment and Assumption Agreement by and between RER Corp., COMAY Corp., Growth Realty Inc. and H&H Financial Inc., and Mego Financial Corp., dated January 31, 2000.
43 46 10.201(26) Amended, Restated and Increased Receivables Promissory Note No. 1 by Preferred Equities Corp. to Heller Financial, Inc. dated December 22, 1999. 10.202(26) Amended, Restated and Consolidated Acquisition Promissory Note No. 1 by Preferred Equities Corp. to Heller Financial, Inc. dated December 22, 1999. 10.203(26) Fourth Amendment to Interval Receivables Loan and Security Agreement dated December 22, 1999 between Heller Financial, Inc., and Preferred Equities Corporation. 10.204(26) Third Amendment to Acquisition and Construction Loan Agreement dated December 22, 1999 between Heller Financial, Inc., and Preferred Equities Corporation. 10.205(26) General Loan and Security Agreement (Inventory Loan) executed December 17, 1999 by and among Textron Financial Corp., Preferred Equities Corp. and Steamboat Suites, Inc. 10.206(26) General Loan and Security Agreement (Receivable Loan Facility) executed December 17, 1999 by and among Textron Financial Corp., Preferred Equities Corp. and Steamboat Suites, Inc. 10.207(26) Sixth Amendment to Forbearance Agreement and Amendment No. 11 to Second Amended and Restated and Consolidated Loan and Security Agreement dated March 31, 2000 by and among Finova Capital Corporation, Preferred Equities Corporation and Mego Financial Corp. 10.208(27) Amendment No. 4 to Severance Agreement and Consulting Agreement dated December 30, 1999 by and between Mego Financial Corp. and Don A. Mayerson. 10.209(27) Amendment No. 5 to Severance Agreement and Consulting Agreement dated May 20, 2000 by and between Mego Financial Corp. and Don A. Mayerson. 10.210 (27) Ninth Amendment to Assignment and Assumption Agreement by and between RER Corp., COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. dated April 30,2000. 10.211 Seventh Amendment to Forbearance Agreement and Amendment No. 12 to Second Amended and Restated and Consolidated Loan and Security Agreement dated July 20, 2000 by and among FINOVA Capital Corporation, Preferred Equities Corporation and Mego Financial Corp. 10.212 Second Amendment to Loan and Security Agreement between Litchfield Financial Corporation and Preferred Equities Corporation dated July 15, 2000. 10.213 Tenth Amendment to Assignment and Assumption Agreement by and between RER Corp., COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. dated August 31, 2000. 10.214 Fourth Amendment to Acquisition and Construction Loan Agreement dated September 7, 2000 between Heller Financial, Inc., and Preferred Equities Corporation. 10.215 ISDA Master Swap Agreement between Sovereign Bank and Preferred Equities Corporation dated August 31, 2000. 10.216 Five year extension of Licensing Agreement dated April 18, 1995, by and among Hospitality Franchise Systems, Inc., Ramada Franchise Systems, Inc. and Preferred Equities Corporation. 10.217 Extension of Loan and Security Agreement dated August 12, 1998 between Dorfinco Corporation and Preferred Equities Corporation to December 31, 2001. 10.218 Master Lease Agreement and Guaranty of Lease among Jozac Business Center, LLC, Landlord; Preferred Equities Corporation, Tenants; and Mego Financial Corporation, Guarantor, for 4310 Paradise Road, Las Vegas, NV dated October 2, 2000. 10.219 Master Lease Agreement and Guaranty of Lease among Jozac Business Center, LLC, Landlord; Preferred Equities Corporation, Tenants; and Mego Financial Corporation, Guarantor, for 1500 Tropicana, Las, Vegas, NV dated November 9, 2000. 10.220 Eleventh Amendment to Assignment and Assumption Agreement by and between RER Corp., COMAY Corp., Growth Realty Inc. and H&H Financial, Inc. and Mego Financial Corp. dated November 15, 2000. 21.1(19) List of subsidiaries. 27.1 Financial Data Schedule (for SEC use only).
------------------ (1) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1988 and incorporated herein by reference. 44 47 (2) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1989 and incorporated herein by reference. (3) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1990 and incorporated herein by reference. (4) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1991 and incorporated herein by reference. (5) Filed as part of the Company's Registration Statement on Form S-4 originally filed August 31, 1992 and incorporated herein by reference. (6) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1992 and incorporated herein by reference. (7) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1993 and incorporated herein by reference. (8) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1994 and incorporated herein by reference. (9) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1995 and incorporated herein by reference. (10) Filed as part of the Registration Statement on Form S-1 filed by Mego Mortgage Corporation, as amended (File No. 333-12443), and incorporated herein by reference. (12) Filed as part of the Company's Form 10-K for fiscal year ended August 31, 1996 and incorporated herein by reference. (13) Filed as part of Mego Mortgage Corporation's Form 10-K for fiscal year ended August 31, 1997 and incorporated herein by reference. (14) Filed as part of the Company's Form 10-Q for the quarter ended November 30, 1996 and incorporated herein by reference. (15) Filed as part of the Company's Form 10-Q for the quarter ended February 28, 1997 and incorporated herein by reference. (16) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1997 and incorporated herein by reference. (17) Filed as part of the Company's Form 10-Q for the quarter ended February 28, 1998 and incorporated herein by reference. (18) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1998 and incorporated herein by reference. (19) Filed as part of the Company's Form 10-K for the fiscal year ended August 31, 1997 and incorporated herein by reference. (20) Filed as part of the Company's Form 10-Q for the quarter ended November 30, 1998 and incorporated herein by reference. (21) Filed as part of the Company's Form 10-Q for the quarter ended February 28, 1999 and incorporated herein by reference. (22) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 1999 and incorporated herein by reference. (23) Filed as part of the Company's Form 10-K for the fiscal year ended August 31, 1998 and incorporated herein by reference. (24) Filed as part of the Company's Form 10K for the fiscal year ended August 31, 1999 and incorporated herein by reference. (25) Filed as part of the Company's Form 10-Q for quarter ended November 30, 1999 and incorporated herein by reference. (26) Filed as part of the Company's Form 10-Q for the quarter ended February 29, 2000 and incorporated herein by reference (27) Filed as part of the Company's Form 10-Q for the quarter ended May 31, 2000 and incorporated herein by reference. 45 48 (d) Financial Statement schedules required by Regulation S-X. No financial statement schedules are included because of the absence of the conditions under which they are required or because the information is included in the financial statements or the notes thereto. 46 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MEGO FINANCIAL CORP. Date: November 27, 2000 By: /S/ JEROME J. COHEN ----------------- -------------------------------- Jerome J. Cohen, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date(s) indicated.
SIGNATURE TITLE DATE --------- ----- ---- /S/ ROBERT NEDERLANDER Chairman of the Board, Chief Executive November 27, 2000 ------------------------------------- Officer and Director Robert Nederlander /S/ JEROME J. COHEN President and Director November 27, 2000 ------------------------------------- Jerome J. Cohen /S/ HERBERT B. HIRSCH Senior Vice President, Chief Financial November 27, 2000 ------------------------------------- Officer, Treasurer and Director Herbert B. Hirsch /S/ EUGENE I. SCHUSTER Vice President and Director November 27, 2000 ------------------------------------- Eugene I. Schuster /S/ CHARLES G. BALTUSKONIS Senior Vice President and November 27, 2000 ------------------------------------- Chief Accounting Officer Charles G. Baltuskonis /S/ WILBUR L. ROSS, JR. Director November 27, 2000 ------------------------------------- Wilbur L. Ross, Jr. /S/ JOHN E. MCCONNAUGHY, JR. Director November 27, 2000 ------------------------------------- John E. McConnaughy, Jr.
47 50 MEGO FINANCIAL CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No. -------- Independent Auditors' Report .............................................. F-2 Consolidated Financial Statements: Consolidated Balance Sheets at August 31, 2000 and 1999 ................ F-3 Consolidated Income Statements -- Years Ended August 31, 2000, 1999 and 1998 ..................................... F-4 Consolidated Statements of Stockholders' Equity -- Years Ended August 31, 2000, 1999 and 1998 ..................................... F-5 Consolidated Statements of Cash Flows -- Years Ended August 31, 2000, 1999 and 1998 ..................................... F-6 Notes to Consolidated Financial Statements ................................ F-7
F-1 51 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Mego Financial Corp. and Subsidiaries Las Vegas, Nevada We have audited the accompanying consolidated balance sheets of Mego Financial Corp. and its subsidiaries (the Company) as of August 31, 2000 and 1999, and the related consolidated income statements, statements of stockholders' equity, and statements of cash flows for each of the three years in the period ended August 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Mego Financial Corp. and its subsidiaries at August 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2000, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP San Diego, California November 22, 2000 F-2 52 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (thousands of dollars, except per share amounts)
AUGUST 31, ---------------------- 2000 1999 -------- -------- ASSETS Cash and cash equivalents $ 1,069 $ 1,821 Restricted cash 1,255 1,676 Notes receivable, net of allowance for cancellations and discounts of $13,234 and $14,340 at August 31, 2000 and 1999, respectively 83,156 69,300 Interest only receivables, at fair value 2,701 2,566 Timeshare interests held for sale 23,307 29,529 Land and improvements inventory 4,113 6,649 Other investments 4,492 5,111 Property and equipment, net of accumulated depreciation of $17,632 and $16,252 at August 31, 2000 and 1999, respectively 23,167 23,560 Deferred selling costs 5,231 4,285 Prepaid debt expenses 2,060 1,757 Other assets 18,041 12,707 -------- -------- TOTAL ASSETS $168,592 $158,961 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes and contracts payable $109,131 $104,555 Accounts payable and accrued liabilities 19,544 18,141 Reserve for notes receivable sold with recourse 4,033 4,162 Deposits 2,841 2,287 Accrued income taxes 2,975 3,505 -------- -------- Total liabilities before subordinated debt 138,524 132,650 -------- -------- Subordinated debt 4,286 4,478 Stockholders' equity: Preferred stock, $.01 par value (authorized--5,000,000 shares, none outstanding) -- -- Common stock, $.01 par value (authorized--50,000,000 shares; 3,500,557 shares issued and outstanding at August 31, 2000 and 1999) 35 35 Additional paid-in capital 13,068 13,068 Retained earnings 12,679 8,730 -------- -------- Total stockholders' equity 25,782 21,833 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $168,592 $158,961 ======== ========
F-3 53 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (thousands of dollars, except per share amounts)
FOR THE YEARS ENDED AUGUST 31, ----------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- REVENUES Timeshare interest sales, net $ 49,062 $ 41,262 $ 37,713 Land sales, net 19,624 15,979 13,812 Gain on sale of notes receivable 635 -- 656 Gain on sale of investments and other assets 1,857 513 -- Interest income 12,430 9,310 7,161 Financial income 1,153 1,184 3,304 Incidental operations 2,033 2,597 2,831 Other 3,701 3,657 3,113 ----------- ----------- ----------- Total revenues 90,495 74,502 68,590 ----------- ----------- ----------- COSTS AND EXPENSES Direct cost of: Timeshare interest sales 10,518 8,527 7,375 Land sales 3,050 2,709 1,770 Incidental operations 1,698 2,274 2,644 Marketing and sales 39,769 35,291 34,167 Depreciation 1,827 1,878 2,245 Interest expense 12,468 9,270 7,850 General and administrative 17,746 14,333 17,736 ----------- ----------- ----------- Total costs and expenses of continuing operations 87,076 74,282 73,787 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 3,419 220 (5,197) INCOME TAXES (BENEFIT) (530) (830) (1,968) ----------- ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 3,949 $ 1,050 $ (3,229) =========== =========== =========== INCOME (LOSS) PER COMMON SHARE Basic: Net income (loss) applicable to common stock $ 1.13 $ 0.30 $ (0.92) =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,500,557 =========== =========== =========== Diluted: Net income(loss) applicable to common stock $ 1.13 $ 0.30 $ (0.92) =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,500,557 =========== =========== ===========
F-4 54 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (thousands of dollars, except share and per share amounts)
COMMON STOCK $.01 PAR VALUE ADDITIONAL ------------------------ PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL --------- --------- --------- --------- --------- Balances at September 1, 1997 3,500,557 $ 35 $ 34,699 $ 38,503 $ 73,237 Distribution of MMC common stock in connection with spin-off and adjustments of receivable from MMC (21,735) (27,594) (49,329) Net loss fiscal 1998 (3,229) (3,229) --------- --------- --------- --------- --------- Balances at August 31, 1998 3,500,557 35 12,964 7,680 20,679 Warrants issued 104 104 Net income fiscal 1999 1,050 1,050 --------- --------- --------- --------- --------- Balances at August 31, 1999 3,500,557 35 13,068 8,730 21,833 Net income fiscal 2000 3,949 3,949 --------- --------- --------- --------- --------- Balances at August 31, 2000 3,500,557 $ 35 $ 13,068 $ 12,679 $ 25,782 ========= ========= ========= ========= =========
F-5 55 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands of dollars)
FOR THE YEARS ENDED AUGUST 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 3,949 $ 1,050 $ (3,229) -------- -------- -------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Charges to allowance for cancellations (8,643) (5,987) (5,984) Provision for cancellations 7,354 5,626 4,827 Gain on sale of notes receivable (635) -- (656) Gain on sale of other investments (1,857) (513) -- Provision for uncollectible owner's association advances 200 -- (403) Cost of sales 13,568 11,236 9,145 Depreciation 1,827 1,979 2,245 Amortization of negative goodwill -- -- (53) Additions to interest only receivables (660) -- (523) Amortization of interest only receivables 525 801 452 Repayments on notes receivable 50,733 42,962 36,669 Additions to notes receivable (82,388) (64,112) (57,789) Proceeds from sales of notes receivable 19,594 -- 9,418 Purchase of land and timeshare interests (4,810) (3,651) (15,614) Changes in operating assets and liabilities: Decrease in restricted cash 421 18 355 Increase in other assets (5,179) (5,557) (1,103) Increase in deferred selling costs (946) (566) (566) Increase (decrease) in accounts payable and accrued liabilities 1,403 (632) 1,896 Increase (decrease) in deposits 554 (2,590) 1,894 Decrease in accrued income taxes (530) (963) (1,767) -------- -------- -------- Total adjustments (9,469) (21,949) (17,557) -------- -------- -------- Net cash used in operating activities (5,520) (20,899) (20,786) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (2,230) (1,589) (2,334) Proceeds from sale of property and equipment 1,617 -- 359 Proceeds from the sale of other investments 1,031 747 -- Additions to other investments (34) (950) (2,246) -------- -------- -------- Net cash provided by (used in) investing activities 384 (1,792) (4,221) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings $ 64,363 $ 59,047 $ 51,311 Reduction of debt (59,787) (36,478) (34,894) Payments on subordinated debt (192) (465) (640) Increase in subordinated debt -- 595 667 -------- -------- -------- Net cash provided by financing activities 4,384 22,699 16,444 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (752) 8 (8,563) CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 1,821 1,813 10,376 -------- -------- -------- CASH AND CASH EQUIVALENTS-END OF YEAR $ 1,069 $ 1,821 $ 1,813 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest net of amounts capitalized $ 12,339 $ 9,000 $ 7,595 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Issuance of warrants $ -- $ 104 $ -- ======== ======== ========
F-6 56 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998) 1. NATURE OF OPERATIONS Mego Financial Corp. (Mego Financial) is a premier developer and operator of timeshare properties and a provider of consumer financing to purchasers of timeshare intervals and land parcels through its wholly-owned subsidiary, Preferred Equities Corporation (PEC), established in 1970. PEC is engaged in originating, selling, servicing and financing consumer receivables generated through timeshare and land sales. Mego Financial and its subsidiaries are herein individually or collectively referred to as the Company as the context requires. PEC markets and finances timeshare interests and land in select resort areas. By providing financing to virtually all of its customers, PEC also originates consumer receivables that it hypothecates and services. Mego Financial was incorporated under the laws of the state of New York in 1954 under the name Mego Corp. and, in 1992, changed its name to Mego Financial Corp. In February 1988, Mego Financial acquired PEC, pursuant to an assignment by the Assignors, as defined below, of their contract right to purchase PEC. To facilitate its sales of timeshare interests, the Company has entered into several trust agreements. The trustees administer the collection of the related notes receivable. The Company has assigned title to certain of its resort properties in Nevada and its interest in certain related notes receivable to the trustees. In 1992, Mego Financial organized a subsidiary, Mego Mortgage Corporation (MMC), which was a specialized consumer finance company that originated, purchased, sold, securitized and serviced consumer loans consisting primarily of conventional uninsured home improvement and debt consolidation loans. After an initial public offering (the IPO) of MMC common stock in November 1996, Mego Financial held 81.3% of the outstanding stock of MMC. On September 2, 1997, Mego Financial distributed all of its remaining 10,000,000 shares of MMC's common stock to Mego Financial's shareholders in a tax-free spin-off (the Spin-off). In April 1998, an agreement was made to adjust the balance due on a $10,100,000 receivable at August 31, 1997 by a reduction of the income tax portion in the amount of $5,283,000 previously deemed owed by MMC to the Company under a Tax Allocation and Indemnity Agreement dated November 19, 1996 (Tax Agreement) since that amount was no longer payable under that agreement. As of April 1998, MMC owed the Company approximately $6,153,000, including the $5,283,000 due under the Tax Agreement at August 31, 1997. An agreement was subsequently made to settle the remaining $870,000 balance due the Company by MMC. In consideration of this settlement, MMC paid the entire amount of $1,574,000, which was separately owed to PEC, in June 1998. Following this transaction, MMC had no outstanding indebtedness to the Company. The net effect of the Spin-off resulted in the Company recording a distribution in the amount of $49,329,000 for financial statement purposes in fiscal 1998. ACQUISITION OF PREFERRED EQUITIES CORPORATION The acquisition of PEC on February 1, 1988, was effected pursuant to an Assignment Agreement, dated October 25, 1987, between Mego Financial and several corporations (Assignors) and a related Assignment and Assumption Agreement (Assignment and Assumption Agreement), dated February 1, 1988, and amended on July 29, 1988, between Mego Financial and the Assignors (collectively, such agreements constitute the Assignment). The acquisition of PEC was accomplished by PEC issuing 2 shares of its common stock to Mego Financial for a purchase price of approximately $50,000. Simultaneously the previously outstanding shares held by others were surrendered and redeemed by PEC at a cost to PEC of approximately $10,463,000 plus fees and expenses, leaving Mego Financial with all of the outstanding shares of PEC. The right to purchase shares from PEC was obtained by Mego Financial pursuant to the Assignment, which assigned to Mego Financial the right to purchase shares from PEC pursuant to the Stock Purchase and Redemption Agreement, dated October 6, 1987, between PEC and the Assignors, as amended on October 25, 1987. Consideration for the Assignment consisted of promissory notes (Purchase Notes) from Mego Financial to the Assignors in the aggregate amount of $2,000,000 and additional payments to the Assignors as described below. The Purchase Notes were paid in full prior to August 31, 1988. After the payment of the Purchase Notes, the Assignors were entitled to receive from Mego Financial on a quarterly basis, as determined as of the end of each quarter, additional payments equal in the aggregate to 63% of PEC's consolidated unrestricted cash balances, for a period ended on January 31, F-7 57 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 1995. The additional payments were collateralized by a pledge of PEC stock to the Assignors. See Note 10 for further discussion. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Basis of Presentation--The accompanying Consolidated Financial Statements include the accounts of Mego Financial and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. See Note 1. Parent Company Only Basis--At August 31, 2000 and 1999, Mego Financial, on a "parent company only" basis, reflected total assets of $34,398,000 and $30,467,000, respectively, which were comprised principally of its equity investment in subsidiaries of $32,962,000 and $29,127,000, respectively, and liabilities of $4,187,000 and $4,156,000, respectively, excluding subordinated debt. At August 31, 2000 and 1999, liabilities were comprised principally of accrued income taxes of $2,975,000 and $3,505,000, respectively, excluding subordinated debt. At August 31, 2000 and 1999, subordinated debt of $4,286,000 and $4,478,000, respectively, was outstanding. See Notes 1, 10 and 17. Cash Equivalents--Cash equivalents consist primarily of certificates of deposit, repurchase agreements and commercial paper with original maturities of 90 days or less. Restricted Cash--Restricted cash represents cash on deposit which relates to utility subsidiary customer deposits and betterment fees; cash on deposit in accordance with notes receivable sale agreements; and untransmitted funds received from collection of notes receivable which have not as yet been disbursed to the purchasers of such notes receivable in accordance with the related sale agreements. Notes Receivable--The basis is the outstanding principal balance of the notes reduced by the allowance for cancellations and discounts. Substantially all of the notes receivable generated by PEC are carried at the lower of cost or market on an aggregate basis by type of receivable. Allowance for Cancellations--Provision for cancellations relating to notes receivable is recorded as expense in amounts sufficient to maintain the allowance at a level considered adequate to provide for anticipated losses resulting from customers' failure to fulfill their obligations under the terms of their notes receivable. The Company records provision for cancellations at the time revenue is recognized, based upon periodic analysis of the portfolio, collateral values, historical credit loss experience, borrowers' ability to repay and current economic factors. The allowance for cancellations represents the Company's estimate of the future credit losses to be incurred over the lives of the notes receivable. The allowance for cancellations is reduced by actual cancellations experienced, including cancellations related to previously sold notes receivable which were reacquired pursuant to the recourse obligations discussed herein. Such allowance is also reduced to establish the separate liability for the reserve for notes receivable sold with recourse. Recourse to the Company on sales of notes receivable is governed by the agreements between the purchasers and the Company. The Company's judgment in determining the adequacy of this allowance is based upon a periodic review of its portfolio of notes receivable. These reviews take into consideration changes in the nature and level of the portfolio, current economic conditions which may affect the purchasers' ability to pay, the estimated value of inventory that may be reacquired and overall portfolio quality. Changes in the allowance as a result of such reviews are reflected in the provision for cancellations. Timeshare Interests Held for Sale--Costs incurred in connection with preparing timeshare interests for sale are capitalized and include all costs of acquisition, renovation and furnishings. Timeshare interests held for sale are valued at the lower of cost or net realizable value. Land and Improvements Inventory--Land and improvements inventory include carrying costs capitalized during the development period and costs of improvements incurred to date and are stated at cost, not in excess of F-8 58 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 market value. Property and Equipment--Property and equipment is stated at cost and is depreciated over its estimated useful life (generally 3 - 40 years) using the straight-line method. Costs of maintenance and repairs that do not improve or extend the life of the respective assets are recorded as expense. Utility Accounting Policies--The Company, through a wholly-owned subsidiary, provides water and sewer services to customers in the Pahrump valley of Nevada. This subsidiary is subject to regulation by the Public Utilities Commission of Nevada and the Company's accounting policies conform to generally accepted accounting principles as applied in the case of regulated public utilities in accordance with the accounting requirements of the regulatory authority having jurisdiction. Contributions in aid of construction (CIAC) received by the Company from its customers are included as a separate liability and amortized over the period of 9 - 25 years, which represents the estimated remaining useful life of the corresponding improvements. Amortization of CIAC reduces depreciation expense. CIAC is included in Accounts Payable and Accrued Liabilities on the Balance Sheet in the amounts of $9,173,000 and $8,495,000 at August 31, 2000 and 1999, respectively. Reserve for Notes Receivable Sold with Recourse--Recourse to the Company on sales of notes receivable is governed by the agreements between the purchasers and the Company. The reserve for notes receivable sold with recourse represents the Company's estimate of the fair value of future credit losses to be incurred over the lives of the notes receivable. Proceeds from the sale of notes receivable sold with recourse were $19,594,000, $0 and $9,418,000 for the years ended August 31, 2000, 1999 and 1998, respectively. A liability for reserve for notes receivable sold with recourse is established at the time of each sale based upon the Company's estimate of the future fair value of the recourse obligation under each agreement of sale and is reviewed on a quarterly basis. At August 31, 2000 and 1999, the outstanding balance of notes receivable sold with recourse was $59,600,000 and $53,000,000, respectively. Income Taxes--The Company utilizes the provisions of SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the Company to adhere to an asset/liability approach for financial accounting and reporting for income taxes. Income tax expense is provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the bases of the balance sheet for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when they are recovered or settled. See Note 11. Revenue and Profit Recognition--Timeshare Interests and Land Sales--Sales of timeshare interests and land are recognized and included in revenues after certain "down payment" and other "continuing investment" criteria are met. Land sale revenues are recognized using the deposit method in accordance with the provisions of SFAS No. 66, "Accounting for Sales of Real Estate." The agreement for sale generally provides for a down payment and a note secured by a deed of trust or mortgage payable to the Company in monthly installments, including interest, over a period of up to 12 years. Revenue is recognized after the requisite rescission period has expired and at such time as the purchaser has paid at least 10% of the sales price for sales of timeshare interests and 20% of the sales price for land sales. Land sales usually meet these requirements within eight to ten months from closing, and sales of timeshare interests usually meet these requirements at the time of sale. The sales price, less a provision for cancellation, is recorded as revenue and the allocated cost related to such net revenue of the timeshare interest or land is recorded as expense in the year that revenue is recognized. When revenue related to land sales is recognized, the portion of the sales price attributable to uncompleted required improvements, if any, is deferred. All payments received prior to the recognition of the sale as revenue are accounted for as deposits. Selling costs directly attributable to unrecognized sales are accounted for as deferred selling costs until the sale is recognized. For land sales made at a location other than at the property, the purchaser may cancel the contract within a specified inspection period, usually five months from the date of purchase, provided that the purchaser is not in default under the terms of the contract. At August 31, 2000, $1,445,000 of recognized sales remain subject to such F-9 59 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 cancellation. If a purchaser defaults under the terms of the contract, after all rescission and inspection periods have expired, all payments are generally retained by the Company. If the underlying note receivable is at a "below market" interest rate, a discount is applied to the note receivable balance and amortized over the note's term so that the effective yield is 10%. Notes receivable with payment delinquencies of 90 days or more have been considered in determining the allowance for cancellations. Cancellations occur when the note receivable is determined to be uncollectible and the related collateral, if any, has been recovered. Cancellation of a sale in the quarter the revenue is recognized is deemed to not represent a sale and is accounted for as a reversal of the revenue with an adjustment to cost of sales. Cancellation of a note receivable subsequent to the quarter the revenue was recognized is charged to the allowance for cancellations. Revenue Recognition--Gain on Sale of Notes Receivable--Gain on sale of notes receivable includes the present value of the differential between contractual interest rates charged to borrowers on notes receivable sold by the Company and the interest rates to be received by the purchasers of such notes receivable, after considering the effects of estimated prepayments and a normal servicing fee. The Company retains certain participations in cash flows from the sold notes receivable and generally retains the associated servicing rights. The Company generally sells its notes receivable at par value. The present values of expected net cash flows from the sale of notes receivable are recorded at the time of sale as interest only receivables. Interest only receivables are amortized as a charge to income, as payments are received on the retained interest differential over the estimated life of the underlying notes receivable. Interest only receivables are recorded at estimated fair value. Reserve for notes receivable sold with recourse represents the Company's estimate of losses to be incurred in connection with the recourse provisions of the sales agreements and is shown separately as a liability in the Company's Balance Sheet. In discounting cash flows related to notes receivable sales, the Company defers servicing income at an annual rate of 1% and discounts cash flows on its sales at the rate it believes a purchaser would require as a rate of return. Earned servicing income is included under the caption of financial income. The cash flows were discounted to present value using a discount rate of 15% in each of fiscal years 2000, 1999 and 1998. The Company has developed its assumptions based on experience with its own portfolio, available market data and consultation with its financial advisors. In determining expected cash flows, management considers economic conditions at the date of sale. In subsequent periods, these estimates may be revised as necessary using the original discount rate, and any losses arising from prepayment and loss experience will be recognized as realized. Interest Income--Interest income is recorded as earned. Interest income represents the interest earned on notes receivable and short term investments. Financial Income--Fees for servicing notes receivable originated or acquired by the Company and sold with servicing rights retained are generally based on a stipulated percentage of the outstanding principal balance of such notes receivable and are recognized when earned. Interest received on notes receivable sold, less amounts paid to investors, is reported as financial income. Capitalized interest only receivables are amortized systematically to reduce income to an amount representing normal servicing income and the present value discount. Late charges and other miscellaneous income are recognized when collected. Costs to service notes receivable are recorded as expense when incurred. Timeshare Owners' Associations--The Company incurs a portion of operating expenses of the timeshare Owners' Associations based on ownership of the unsold timeshare interests at each of the respective timeshare properties. These costs are referred to as Association Assessments and are included in the Income Statement in General and Administrative Expenses. Management fees and costs received from the Associations are included in Revenues under the caption of Other. F-10 60 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 See Note 16. Income (Loss) Per Common Share--Basic income (loss) per common share is based on the net income (loss) applicable to common stock for each period divided by the weighted-average number of common shares outstanding during the period. Diluted income per common share is computed by dividing net income applicable to common stock by the weighted-average number of common shares plus common share equivalents. In loss periods, or periods whereby the option and warrants' exercise price exceeds the average market price, anti-dilutive common share equivalents are excluded. Effective September 9, 1999, the Company consummated a one for six reverse stock split for all of the Company's common shares outstanding. All share and per share references have been restated to retroactively show the effect of this reverse stock split. Basic EPS excludes dilution from common stock equivalents and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from common stock equivalents, similar to fully diluted EPS, but uses only the average stock price during the period as part of the computation. At August 31, 2000, options to purchase 51,652 shares of common stock at $6.00 per share were outstanding and warrants to purchase 83,333 shares of common stock at $6.00 per share were outstanding. The options and warrants were not included in the computation of diluted EPS because the options' and warrants' exercise price was greater than the average market price of the common shares. The options, which expire on September 2, 2002 through September 22, 2008, and the warrants, which expire on January 1, 2004, were still outstanding at August 31, 2000. Interest Rate Swap--In August 2000, the Company entered into a $25 million, 5-year, interest rate swap transaction with a financial institution to hedge potential exposure to its variable rate notes' payable portfolio. The interest rate swap is considered and is documented as a highly effective cash flow hedge. Therefore, beginning September 1, 2000, the unrealized gain or loss mark to market will be recorded into a separate Stockholders' Equity caption titled "Other Comprehensive Income". The unrealized depreciation as of August 31, 2000 was $255,000. The adoption of SFAS 133 (defined below) is not expected to have any additional effects on the Company's financial statements. Evaluation of Long-Lived Assets--Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of" required that impairment losses be recognized when the carrying value of an asset will not be recognizable based on future cash flows. The Company's policy is to evaluate, at each balance sheet date, the appropriateness of the carrying values of the unamortized balances of long-lived assets. If such evaluation were to indicate a material impairment of these assets, such impairment would be recognized by a write down of the applicable asset to its estimated fair value. Segment Information--In accordance with SFAS No. 131, the Company considers its business to consist of one reportable operating segment. The Company does not allocate revenues and expenses, or assets and liabilities, in a segmented format for internal use or decision-making processes. Recently Issued/Effective Accounting Standards--In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities", which was amended by SFAS No. 137, issued in June 1999. SFAS 133 established standards for accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133, as amended, is effective for fiscal years beginning after June 15, 2000. The Company has not completed the process of evaluating the impact that will result from adopting SFAS 133, with the exception of the Interest Rate Swap transaction. Therefore, the Company is unable to disclose the impact that adopting SFAS 133, as amended, will have on its financial position and results of operations. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). SFAS 140 replaces FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 31, 2000. Management does not believe that the adoption of SFAS 140 will have a material effect on the financial statements. F-11 61 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides the SEC Staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company has adopted SAB 101 during fiscal year 2000 and the adoption has not had a material effect on the financial statements. Reclassification--Certain reclassifications have been made to conform prior years with the current year presentation. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. NOTES RECEIVABLE Notes receivable consist of the following (thousands of dollars):
AUGUST 31, ----------------------- 2000 1999 -------- -------- Related to timeshare sales $ 71,306 $ 52,174 Related to land sales 25,084 31,466 -------- -------- Total 96,390 83,640 -------- -------- Less: Allowance for cancellations (12,827) (13,987) Discounts (407) (353) -------- -------- (13,234) (14,340) -------- -------- Total $ 83,156 $ 69,300 ======== ========
The Company provides financing to the purchasers of its timeshare interests and land. This financing is generally evidenced by notes secured by deeds of trust or mortgages. These notes receivable are generally payable over a period of up to 12 years, bear interest at rates generally ranging from 12.5% to 15.5% and require equal monthly installments of principal and interest. The Company has entered into financing arrangements with certain purchasers of timeshare interests and land whereby a 5% interest rate is charged if the aggregate down payment is at least 50% of the purchase price and the balance is payable in 36 or fewer monthly payments. Notes receivable of $6,421,000 and $5,953,000 at August 31, 2000 and 1999, respectively, made under this arrangement are included in the table above. A discount is established to provide for an effective interest rate (currently 10%) on notes receivable bearing no stated interest rate at the time of sale, and is applied to the principal balance and amortized over the terms of the notes receivable. The effective interest rate is based upon the economic interest rate environment and similar industry data. The Company is obligated under certain agreements for the sale of notes receivable and certain loan agreements to maintain various minimum tangible net worth requirements. The most restrictive of these agreements requires PEC to maintain a minimum tangible net worth of $25,000,000. PEC's tangible net worth at August 31, 2000 was $30,902,000. At August 31, 2000 and 1999, receivables aggregating $88,641,000 and $77,582,000, respectively, were pledged to lenders to collateralize certain of the Company's indebtedness. Receivables which qualify for the lenders' criteria may be pledged as collateral whether or not such receivables have been recognized for accounting purposes. See Note 9. F-12 62 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 Allowance for Cancellations--The Company provides an allowance for cancellations, in an amount which in the Company's judgment will be adequate to absorb losses on notes receivable that may become uncollectible. The Company's judgment in determining the adequacy of this allowance is based on its continual review of its portfolio which utilizes historical experience and current economic factors. These reviews take into consideration changes in the nature and level of the portfolio, historical rates, collateral values, current and future economic conditions which may affect the obligors' ability to pay and overall portfolio quality. Changes in both the allowance for cancellations and the reserve for notes receivable sold with recourse consist of the following (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Balance at beginning of year $ 18,149 $ 18,488 $ 19,527 Provision for cancellations 7,354 5,626 4,827 Amounts charged to allowance for cancellations and reserve for notes receivable sold with recourse (8,643) (5,965) (5,866) -------- -------- -------- Balance at end of year $ 16,860 $ 18,149 $ 18,488 ======== ======== ======== Allowance for cancellations $ 12,827 $ 13,987 $ 11,868 Reserve for notes receivable sold with recourse 4,033 4,162 6,620 -------- -------- -------- Total $ 16,860 $ 18,149 $ 18,488 ======== ======== ========
Number of Notes Receivable Accounts Serviced--The number of notes receivable accounts serviced at August 31, 2000 and 1999, was 19,296 and 17,359, including 5,852 and 5,581, respectively, serviced for others. At August 31, 2000 and 1999, the amount of notes receivable with payment delinquencies of 90 days or more was $9,925,000 and $9,743,000, including $0 and $38,000, respectively, serviced for others. Notes Receivable Serviced and Originated--At August 31, 2000 and 1999, notes receivable serviced were $153,000,000 and $132,240,000, including $39,671,000 and $33,679,000, respectively, serviced for others. Notes receivable originated were $82,388,000 and $64,112,000 for the years ended August 31, 2000 and 1999, respectively. 4. INTEREST ONLY RECEIVABLES Activity in interest only receivables is as follows (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ----------------------------- 2000 1999 -------- -------- Balance at beginning of year $ 2,566 $ 3,367 Additions 660 -- Amortization (525) (801) ------- ------- Balance at end of year $ 2,701 $ 2,566 ======= =======
As of August 31, 2000 and 1999, respectively, interest only receivables consisted of excess cash flows on sold loans totaling $59,588,000 and $53,797,000, yielding weighted-average interest rates of 12.6% and 12.5%, net of normal servicing fees and had weighted-average pass-through yields to the investor of 9.2% for both years. These loans were sold under recourse provisions as described in Note 2. 5. INVENTORIES Timeshare interests held for sale consist of the following (thousands of dollars):
AUGUST 31, -------------------- 2000 1999 ------- ------- Timeshare interests (including capitalized interest of $100 and $507 in fiscal 2000 and 1999, respectively) $18,755 $16,874 Timeshare interests not registered (including capitalized interest of $130 and $1,228 in fiscal 2000 and 1999, respectively) 4,552 12,655 ------- ------- $23,307 $29,529 ======= =======
F-13 63 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 At August 31, 2000 and 1999, 9,423 and 9,146 timeshare interests, respectively, were available for sale. 918 additional timeshare interests became available in November 2000. Timeshare units amounting to 14 and 62, representing 714 and 3,876 timeshare interests, at August 31, 2000 and 1999, respectively, were awaiting registration. 6. OTHER INVESTMENTS Other investments in the following locations, at lower of cost or market, consist of the following (thousands of dollars):
AUGUST 31, ------------------ 2000 1999 ------ ------ Water rights: Huerfano County, Colorado $ 548 $ 543 Nye County, Nevada 417 413 Land: Nye County, Nevada 1,108 1,435 Biloxi, Mississippi 2,080 2,380 Other 339 340 ------ ------ Total $4,492 $5,111 ====== ======
7. PROPERTY AND EQUIPMENT Property and equipment and related accumulated depreciation, consist of the following (thousands of dollars):
AUGUST 31, ----------------------- 2000 1999 -------- -------- Water and sewer systems $ 19,391 $ 18,438 Furniture and equipment 6,745 5,915 Buildings 9,737 9,868 Vehicles 3,051 2,840 Recreational facilities and equipment -- 1,050 Land 1,342 1,344 Leasehold improvements 533 357 -------- -------- 40,799 39,812 Less: Accumulated depreciation (17,632) (16,252) -------- -------- Total $ 23,167 $ 23,560 ======== ========
Leases--The Company leases certain real estate for sales offices. The Company also leases its Hawaii real estate for timeshare usage. Rental expense for fiscal 2000, 1999 and 1998 was $2,327,000, $2,112,000, and $2,035,000, respectively. Future minimum rental payments under operating leases are set forth below (thousands of dollars): F-14 64 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
FOR THE YEARS ENDING AUGUST 31, ------------------------------- 2001 $ 2,073 2002 1,269 2003 273 2004 248 2005 199 Thereafter 875 -------- Total $ 4,937 ========
8. OTHER ASSETS Other assets consist of the following (thousands of dollars):
AUGUST 31, -------------------- 2000 1999 ------- ------- Trust deed's clearing account $ 4,450 $ 1,851 Sold receivables' reserves 2,922 2,198 Owners' association receivables 2,314 1,398 Prepaid expenses 1,527 901 Cash surrender value of split-dollar life insurance plan 1,411 1,330 Interest receivable 1,059 838 Deposits and impounds 973 696 Inventories 861 415 Ramada license 466 567 White Sands HOA maintenance fees receivable 424 448 Other 1,634 2,065 ------- ------- Total $18,041 $12,707 ======= =======
9. NOTES AND CONTRACTS PAYABLE The Company's debt consists of the following (thousands of dollars):
AUGUST 31, ---------------------- 2000 1999 -------- -------- BORROWINGS UNDER LINES OF CREDIT Notes collateralized by receivables Borrowings bearing interest at prime plus 2% $ 80,593 $ 67,457 Mortgages collateralized by real estate properties(1) Mortgages collateralized by the respective underlying assets with various repayment terms and variable rates of prime plus 2% to 3% and 90-day LIBOR plus 4.25% 26,619 34,114 -------- -------- Subtotal 107,212 101,571 OTHER Other mortgages collateralized by the respective underlying assets with various repayment terms and fixed interest rates of 8% and variable rates of prime plus 2% in 2000 and 2% to 3% in 1999 788 1,732 Installment contracts and other notes payable 1,131 1,252 -------- -------- Total $109,131 $104,555 ======== ========
The prime rate of interest was 9.50% and the 90-day LIBOR was 6.68% at August 31, 2000. F-15 65 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 In the preceding table, mortgages collateralized by real estate properties consists of the follows:
AUGUST 31, -------------------- 2000 1999 ------- ------- Acquisition and development loans $22,074 $24,930 Working capital loans 4,545 9,184 ------- ------- $26,619 $34,114 ======= =======
Lines of Credit--At August 31, 2000, PEC had arrangements with institutional lenders for the financing of receivables in connection with sales of timeshare interests and land and the acquisition of timeshare properties and land, which provide for lines of credit of up to an aggregate of $133.5 million. Such lines of credit are secured by timeshare and land receivables and mortgages. At August 31, 2000, an aggregate of $107.2 million was outstanding under such lines of credit, and $26.3 million was available for borrowing. Under the terms of these lines of credit, PEC may borrow 65% to 90% of the balances of the pledged timeshare and land receivables. PEC is required to comply with certain covenants under these agreements, which, among other things, require PEC to meet certain minimum tangible net worth requirements. The most stringent of such requirements provides that PEC maintain a minimum tangible net worth of $25 million. At August 31, 2000, PEC exceeded this net worth requirement by $5.9 million. Summarized lines of credit information and accompanying notes relating to these lines of credit outstanding at August 31, 2000, consist of the following (thousands of dollars):
OUTSTANDING BORROWING MAXIMUM (a) BALANCE AT BORROWING REVOLVING AUGUST 31, 2000 AMOUNTS EXPIRATION DATE MATURITY DATE INTEREST RATE ------------------- ------------- ------------------- --------------- -------------------- $ 64,757 $ 75,000 (b) April 30, 2001 Various Prime + 2.0 - 2.25% ---------- --------- 15,733 15,000 (c) December 1, 2002 Various Prime + 2.0 % 4,960 11,500 (d) December 31, 2001 Various Prime + 2.0 - 3.00% ---------- --------- 20,693 26,500 Considered one borrowing line for the maximum amount. ---------- --------- 19,790 30,000 (e) June 30, 2001 Various Libor + 4.0 - 4.25% 1,972 1,972 (f) July 30, 2003 Prime + 2.25% ---------- --------- $ 107,212 $ 133,472 ========== =========
(a) When the revolver expires as shown, the loans convert to term loans with maturities as stated. In addition, management expects to extend the lines on similar terms. (b) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. Other restrictions, commencing with the fiscal quarter ended November 30, 1999, include: PEC's requirement to maintain costs and expenses for marketing and sales and general and administrative expenses relating to net processed sales for each fiscal quarter; PEC's requirement to maintain a minimum net processed sales requirement for each fiscal quarter; and PEC's requirement not to exceed a ratio of 4:1 of consolidated total liabilities to consolidated tangible net worth. At August 31, 2000, $52.2 million of loans secured by receivables were outstanding related to financings at prime plus 2%, of which $29.5 million of loans secured by land receivables mature May 15, 2010 and $22.7 million of loans secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes $6.4 million in mortgage financing maturing October 1, 2005 for the corporate office buildings, which amount was paid in full in November 2000, and a real estate loan with an outstanding balance of $1.2 million maturing December 31, 2000, all bearing interest at prime plus 2.25%. The remaining Acquisition and Development (A&D) loans, receivables loans and a resort lobby loan outstanding of $5.0 million are at prime plus 2% and mature at various dates through February 18, 2001. In December 1998, Finova Capital Corporation (FINOVA), PEC and Mego Financial entered into an Agreement under which FINOVA agreed to make a loan in the amount of $5,662,000 to PEC with an original maturity date of June 30, 1999, which date has been extended to December 31, 2000. Mego Financial guaranteed the loan and F-16 66 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 issued warrants (outstanding as of August 31, 2000) to FINOVA to purchase a total of 83,333 shares of common stock of Mego Financial at an exercise price of $6.00 per share, exercisable within a five-year period commencing January 1, 1999. The balance outstanding under this Agreement, which is included in the $64.8 million balance in the preceding table, was $1.2 million as of August 31, 2000. The fair market value of the warrants was estimated at $104,000 and is being amortized over the term of the Agreement. (c) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million during the life of the loan. These credit lines include available financing for A&D and receivables. At August 31, 2000, $6.3 million was outstanding under the A&D loan, which matures on June 30, 2004, and $9.4 million was outstanding under the receivables loan, which matures on May 31, 2004. (d) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $15 million. This credit line consists of receivable financing with a maturity date of May 31, 2004, under which $1.6 million was outstanding at August 31, 2000, and a real estate loan of $3.3 million with a maturity date of December 31, 2001. (e) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $17 million during the life of the loan. These credit lines include available financings for A&D and receivables. At August 31, 2000, $2.4 million was outstanding under the A&D loans which have a maturity date of June 30, 2001 and bear interest at the 90-day London Interbank Offering Rate (LIBOR) plus 4.25%. The available receivable financings, of which $17.4 million was outstanding at August 31, 2000, are at 90-day LIBOR plus 4% and have a maturity date of June 5, 2005. (f) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. Maturities--Scheduled maturities of the Company's notes and contracts payable are as follows (thousands of dollars):
YEARS ENDING AUGUST 31, ----------------------- 2001.............................................. $ 17,958 2002.............................................. 2,633 2003.............................................. 5,937 2004.............................................. 12,382 2005.............................................. 17,388 Thereafter........................................ 52,833 ----------- $ 109,131 ===========
10. SUBORDINATED DEBT On March 2, 1995, Mego Financial entered into the Amendment whereby the Assignors agreed to defer payment of $10,000,000 of the amount payable to Assignors and to subordinate such amount, constituting Subordinated Debt, in right of payment to debt for money borrowed by Mego Financial or obligations of subsidiaries guaranteed by Mego Financial. Warrants for 166,666 shares of Mego Financial common stock, at an exercise price of $25.50 per share (the closing market price per share on March 2, 1995) were granted to the Assignors in consideration of the payment deferral and subordination. The Warrants were exercised in August 1997 in a non-cash transaction whereby the Subordinated Debt was reduced by $4,250,000. The Amendment calls for interest to be paid semi-annually at the rate of 10% per annum starting September 1, 1995, and semi-annual payments of $1,429,000 plus interest, which commenced March 1, 1997. In connection with the exercise of Warrants, payments aggregating $4,250,000 were deemed paid and the semiannual payments were scheduled to resume in March 1999 (subsequently deferred until February 1, 2000) with a partial payment in September 1998. The final $4.29 million was scheduled to be paid in 3 equal installments on March 1, 1999, September 1, 1999 and March 1, 2000. In accordance with the Eleventh Amendment to Assignment and Assumption Agreement, the principal payments totaling $4.29 million have been deferred until March 1, 2001. Interest of $429,000 on Subordinated Debt was paid during each fiscal year 2000 and 1999. The F-17 67 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 Subordinated Debt is collateralized by a pledge of PEC's outstanding stock. See Notes 1 and 16. The following table represents Subordinated Debt activity (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, ------------------------------ 2000 1999 ----------- ---------- Balance at beginning of year $ 4,478 $ 4,348 Accreted interest 237 595 Less: Interest payments (429) (429) Principal paydowns -- (36) ------- ------- Balance at end of year $ 4,286 $ 4,478 ======= =======
11. INCOME TAXES Mego Financial files a consolidated federal income tax return with its subsidiaries for its tax year, which ends the last day of February. The income tax benefits of $530,000, $830,000 and $1,968,000, respectively, in fiscal 2000, 1999 and 1998 are primarily a result of the use of net operating loss (NOL) carryforwards which were previously fully reserved and currently are used to offset income on a consolidated basis. In addition, due to changes in facts and circumstances, certain income tax liability reserves recorded in prior periods were reversed, resulting in a deferred tax liability. Deferred income taxes shown in Balance Sheets as Accrued Income Taxes, reflect the net tax effects of (a) temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, (b) temporary differences between the timing of revenue recognition for book purposes and for income tax purposes, and (c) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred income tax, shown on Balance Sheets as Accrued Income Taxes, as of August 31, 2000 and 1999 are as follows (thousands of dollars):
AUGUST 31, -------------------- 2000 1999 ------- ------- Deferred tax liabilities Timing of revenue recognition $21,612 $14,368 Deferred tax assets: Difference between book and tax carrying value of assets $18,637 10,569 Other -- 294 ------- ------- $18,637 10,863 ------- ------- Net deferred income tax $ 2,975 $ 3,505 ======= =======
The provision for income taxes as reported is different from the tax provision computed by applying the statutory federal rate of 34%. The differences are as follows (thousands of dollars): F-18 68 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
FOR THE YEARS ENDED AUGUST 31, ----------------------------------- 2000 1999 1998 ------- ------- ------- Income (loss) from continuing operations before income taxes $ 3,419 $ 220 $(5,197) ======= ======= ======= Tax at the statutory federal rate $ 1,162 $ 75 $(1,767) Decrease in income taxes resulting from application of NOL carryforwards and changes in certain income tax liability reserves (1,692) (905) (201) ------- ------- ------- Total $ (530) $ (830) $(1,968) ======= ======= =======
12. STOCKHOLDERS' EQUITY Mego Financial has a stock option plan (Stock Option Plan), adopted November 1993, amended September 9, 1997, and amended and restated as of September 16, 1998 by approval of shareholders, for officers, key employees and directors which provides for non-qualified and qualified incentive options. The Stock Option Committee of the Board of Directors determines the option price (not to be less than fair market value for qualified incentive options) at the date of grant. The options generally expire ten years from the date of grant and are exercisable over the period stated in each option generally at the cumulative rate of 20% per year for three years from the date of grant, and the remaining 40% at the end of the fourth year. In August 1997, in connection with the Spin-off of MMC, the Stock Option Committee vested all options previously granted, excluding those granted subsequent to February 26, 1997. On September 23, 1998, an additional 18,500 incentive and non-incentive stock options were granted under the Stock Option Plan. In addition, the exercise prices of 50,750 of options issued on September 2, 1997 were revised from $18.75 per share to $6.00 per share (restated for the one for six reverse stock split effective September 9, 1999), which represented the fair value at date of repricing. The following table sets forth shares reserved and options exercised, granted and forfeited for the following periods:
EXERCISE NUMBER OF PRICE PER RESERVE SHARES OPTIONS SHARE --------------- --------------- --------------- At September 1, 1997 94,000 7,500 $ 33.75 Exercised -- -- $ -- Forfeited -- (8,167) $ 18.75 / 33.75 Granted -- 58,073 $ 6.00 --------------- --------------- --------------- At August 31, 1998 94,000 57,406 $ 18.75 / 33.75 Exercised -- -- $ -- Forfeited -- (17,000) $ 15.00 / 52.50 Granted -- 18,500 $ 6.00 --------------- --------------- --------------- At August 31, 1999 94,000 58,906 $ 6.00 / 33.75 Exercised -- -- $ -- Forfeited -- (7,254) $ 6.00 / 33.75 Granted -- -- $ -- --------------- --------------- --------------- At August 31, 2000 94,000 51,652 $ 6.00 =============== =============== ===============
F-19 69 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The Company elected to continue to apply the provisions of APB Opinion No. 25 as permitted by SFAS 123 and, accordingly, provides pro forma disclosure below. Stock options granted under Mego Financial's Stock Option Plan are qualified and unqualified stock options that: (1) are generally granted at prices which are equal to the fair value of the stock on the date of grant; (2) generally subject to a grantee's continued employment with the Company, vest at various periods over a four-year period; and (3) generally expire ten years subsequent to the award. A summary of the status of Mego Financial's stock options granted under the Stock Option Plan as of August 31, 2000, 1999 and 1998 and the changes during the year is presented below:
AUGUST 31, 2000 AUGUST 31, 1999 AUGUST 31, 1998 ----------------------- ---------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- ------- --------- ------- --------- Outstanding at beginning of year 58,906 $ 9.14 57,406 $ 9.22 7,500 $ 33.75 Granted -- -- 18,500 6.00 58,073 6.00 Exercised -- -- -- -- -- -- Forfeited (7,254) 31.50 17,000 6.00 8,167 6.00 ------- ------- ------- Outstanding at end of year 51,652 6.00 58,906 9.14 57,406 9.22 ======= ======= ======= Options exercisable at end of year 17,532 6.00 9,783 13.56 -- -- ======= ======= =======
The fair value of each option granted during fiscal 1999 and 1998 (none were granted during fiscal 2000) is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: (1) dividend yield of zero; (2) expected volatility of 35% and 65%, respectively, for the years ended August 31, 1999 and 1998; (3) risk-free interest rate of 6%; and, (4) expected life of 7 years. The weighted-average fair value of options granted during fiscal 2000, 1999 and 1998 was $0, $1.63 and $4.09, respectively. As of August 31, 2000, there were 51,652 options outstanding which have an exercise price of $6.00 per common share and a weighted-average remaining contractual life of 8 years. Had compensation cost for Mego Financial's fiscal 2000, 1999 and 1998 grants for stock options been determined consistent with SFAS 123, the Company's pro forma net income and pro forma net income per common share for fiscal 2000, 1999 and 1998 would approximate the pro forma amounts below (thousand of dollars, except per share amounts):
AUGUST 31, 2000 AUGUST 31, 1999 AUGUST 31, 1998 -------------------------- ------------------------- -------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- ----------- --------- Net income (loss) applicable to common stock $ 3,949 $ 3,929 $ 1,050 $ 850 $ (3,229) $ (3,333) Net income (loss) per common share: Basic 1.13 1.12 0.30 0.24 (0.92) (0.95) Diluted 1.13 1.12 0.30 0.24 (0.92) (0.95)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" (SFAS 107), requires disclosure of estimated fair value information for financial instruments, whether or not recognized in the Balance Sheets. Fair F-20 70 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 values are based upon estimates using present value or other valuation techniques in cases where quoted market prices are not available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Estimated fair values, carrying values and various methods and assumptions used in valuing the Company's financial instruments at August 31, 2000 and 1999 are set forth below (thousands of dollars):
AUGUST 31, 2000 AUGUST 31, 1999 ------------------------- ------------------------ CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE --------- ---------- --------- ---------- FINANCIAL ASSETS: Cash and cash equivalents(a) $ 1,069 $ 1,069 $ 1,821 $ 1,821 Notes receivable, net(b) 83,156 86,864 69,300 71,900 Interest only receivables(c) 2,701 2,701 2,566 2,566 Interest rate swap(d) -- (255) -- -- FINANCIAL LIABILITIES: Notes and contracts payable(e) 109,131 109,131 104,555 104,555 Subordinated debt(a) 4,286 4,286 4,478 4,478
(a) Carrying value is approximately the same as fair value. (b) The fair value was estimated by using outstanding commitments from investors adjusted for non-qualified receivables and the collateral securing such receivables. (c) The fair value was estimated by discounting future cash flows of the instruments using discount rates, default, loss and prepayment assumptions based upon available market data, opinions from financial advisors and historical portfolio experience. (d) Fair value was estimated by obtaining a third-party quote. (e) Notes payable generally are adjustable rate, indexed to the prime rate, or to the 90-day London Interbank Offering Rate (LIBOR); therefore, carrying value approximates fair value. The fair value estimates were based upon pertinent market data and relevant information on the financial instruments at that time. Because no market exists for a certain portion of the financial instruments, fair value estimates may be based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and historical and other factors. Changes in assumptions could significantly affect the estimates and do not reflect any premium or discount that could result from the bulk sale of the entire portion of the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Fair value estimates are based upon existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have an effect on fair value estimates and have not been considered in any of the estimates. F-21 71 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 14. CONCENTRATIONS OF RISK Availability of Funding Sources--The Company funds substantially all of the notes receivable, timeshare inventory and land inventory with borrowings through its financing facilities and internally generated funds. These borrowings are in turn repaid with the proceeds received by the Company from such notes receivable through loan sales and payments. Any failure to renew or obtain adequate financing under its financing facilities, or other borrowings, or any substantial reduction in the size of or pricing in the markets for the Company's notes receivable, could have a material adverse effect on the Company's operations. Geographic Concentrations--The Company services notes receivable in all 50 states, the District of Columbia and Canada. At August 31, 2000, 25.8%, 15.1% and 14.0%, respectively, of the dollar value of notes receivable serviced had been originated in California, Texas and Colorado. No other state accounted for more than 10% of the servicing portfolio of the Company's receivables. The risk inherent in such concentrations is dependent upon regional and general economic stability which affects property values and the financial stability of the borrowers. The Company's timeshare and land inventories are concentrated in Nevada, New Jersey, Colorado, and Florida. The risk inherent in such concentrations is in the continued popularity of these resort destinations, which affects the marketability of the Company's products. Credit Risk--The Company is exposed to on-balance sheet credit risk related to its notes receivable. The Company is exposed to off-balance sheet credit risk related to notes receivable sold under recourse provisions. The outstanding balance of notes receivable sold with recourse provisions totaled $59,588,000 and 53,797,000 at August 31, 2000 and 1999, respectively. Interest Rate Risk--The Company's profitability is in part determined by the difference, or "spread," between the effective rate of interest received on the notes receivable originated by the Company and the interest rates payable under its financing facilities to fund the Company's notes receivable and inventory held for sale and the yield required by financial institutions on notes receivable hypothecated or sold. The spread can be adversely affected after a note is originated and while it is held, by increases in the interest rate. Additionally, the fair value of interest only receivables owned by the Company may be adversely affected by changes in the interest rate environment which could affect the discount rate and prepayment assumptions used to value the assets. 15. TIMESHARE INTEREST SALES AND LAND SALES Timeshare interest sales, net--A summary of the components is as follows (thousands of dollars):
FOR THE YEARS ENDED AUGUST 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Timeshare interest sales $ 55,317 $ 45,830 $ 41,449 Less: Provision for cancellations (6,255) (4,568) (3,736) -------- -------- -------- Total $ 49,062 $ 41,262 $ 37,713 ======== ======== ========
Land sales, net--A summary of the components is as follows (thousands of dollars): F-22 72 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
FOR THE YEARS ENDED AUGUST 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Land sales $ 20,723 $ 17,037 $ 14,903 Less: Provision for cancellations (1,099) (1,058) (1,091) -------- -------- -------- Total $ 19,624 $ 15,979 $ 13,812 ======== ======== ========
The following table reflects the maturities of notes receivable from land sales for each of the five years after August 31, 2000 (thousands of dollars):
2001 2002 2003 2004 2005 ----------- ------------ ----------- ------------ ----------- Land notes receivable maturities $ 160 $ 918 $ 1,955 $ 365 $ 989
The range of interest rates are from 0% to 15.0% and the weighted-average interest rate at August 31, 2000 was 12.1%. The delinquency information related to land loans at August 31, 2000 is as follows (thousands of dollars):
PRINCIPAL BALANCE % OF LOANS SERVICED --------------------- ---------------------- 30 - 59 days $ 1,194 .8% 60 - 90 days 578 .4 Over 90 days 2,870 1.9
The estimated total costs and expenditures for improvements on these loans for the next five years are deemed immaterial for disclosure purposes at August 31, 2000. No material obligations for future improvements on land existed at August 31, 2000. 16. RELATED PARTY TRANSACTIONS Timeshare Owners' Associations--Owners' Associations have been incorporated for the Grand Flamingo, Reno Spa, Brigantine, Steamboat Springs, Aloha Bay and Orlando timesharing resorts. The respective Owners' Associations are independent not-for-profit corporations. PEC acts as the managing agent for these Owners' Associations and the White Sands Waikiki Resort Club, which is a division of PEC, (Associations) and has received management fees for its services of $2,692,000, $2,540,000 and $2,388,000 in 2000, 1999 and 1998, respectively. Such fees were recorded in Revenues under the caption of Other. The expenses of PEC for management of each timeshare resort are incurred to preserve the integrity of the property and the portfolio performance on an on-going basis beyond the end of the sales period. The owners of timeshare interests in each Association are responsible for payment to the Associations of assessments, which are intended to fund all of the operating expenses at each of the resort facilities. The Company's share of the Association Assessments, based on unsold inventory owned, net of room income, was $1,581,000, $968,000 and $1,677,000 for 2000, 1999 and 1998, respectively, and have been recorded in Costs and Expenses under the caption of General and administrative. The Company has in the past financed budget deficits of the Associations as is reflected in the receivable from such Associations, but is not obligated to do so in the future, except in its Florida resorts. The Public Offering Statements for the Indian Shores and Orlando resorts contain a provision whereby PEC guarantees that the annual assessment fees will not exceed a specified amount, in which case PEC agrees to pay any monetary deficiencies. These guarantees are effective through the Associations' calendar year of December 31, 2000, and at the option of PEC, may be extended by PEC annually thereafter. In fiscal 2000, PEC financed a budget deficit of $90,000 and $63,000 for the Owners' Association at Indian Shores and Orlando, respectively. The Company has agreed to pay to the Associations the annual assessment fees of timeshare interest owners who are delinquent with respect to such fees, but have paid the Company in full for their timeshare interests. In F-23 73 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 exchange for the payment by the Company of such fees, the Associations assign their liens for non-payment on the respective timeshare interests to the Company. In the event the timeshare interest holder does not satisfy the lien after having an opportunity to do so, the Company acquires a quitclaim deed or forecloses on and acquires the timeshare interest for the amount of the lien and any related foreclosure costs. At August 31, 2000 and 1999, $2,314,000 and $1,398,000, respectively, was due from Owners Associations, and is included under the caption of Other assets. Payments to Assignors--Certain transactions have been entered into with the Assignors, who are affiliates of certain officers and directors of the Company, and these transactions are more fully described in Notes 1 and 10. During the years ended August 31, 2000 and 1999, respectively, approximately $429,000 and $465,000, including principal of $0 and $36,000, was paid to the Assignors. Subsequent to August 31, 2000, an advance of $100,000 at the interest rate of 10% was made to an affiliate of one of the Assignors against the amount owed to it. Subordinated Debt--See Note 10. Transactions with MMC--In November 1996, MMC consummated the IPO and as a result, the Company's ownership of MMC was reduced to approximately 81.3% of the outstanding common stock. On September 2, 1997, Mego Financial distributed all of its 10,000,000 shares of MMC's common stock to Mego Financial's shareholders in the Spin-off. To fund MMC's past operations and growth and in conjunction with the consolidated income tax returns, MMC incurred debt to the Company and its subsidiary, PEC. The amount of intercompany debt was $10,100,000 at August 31, 1997 of which $3,400,000 was paid by MMC in October 1997 together with $500,000 advanced by the Company to MMC in September 1997. Subsequently, separate agreements were made in April and June 1998 to adjust by reductions the remaining $6,153,000 indebtedness, since the major portion was no longer payable under the Tax Sharing and Indemnity Agreement between the Company and MMC. Under these agreements, MMC paid $1,574,000, which was separately owed to PEC. Following this transaction, MMC had no outstanding indebtedness to the Company. Management Services Provided by PEC. MMC and PEC were parties to a management services arrangement pursuant to which certain executive, accounting, legal, management information, data processing, human resources, advertising and promotional personnel of PEC provided services to MMC on an as needed basis. For the year ended August 31, 1998, approximately $616,000 of the salaries and expenses of certain employees of PEC were attributable to and paid by MMC in connection with services rendered by such employees to MMC. This agreement was terminated by agreement during fiscal 1998. Servicing Agreement between PEC and MMC. For the year ended August 31, 1998, MMC paid servicing fees to PEC of approximately $2,008,000. For the year ended August 31, 1998, MMC incurred interest expense in the amount of $29,000 related to fees payable to PEC for these services. The interest rate was based on PEC's average cost of funds and equaled 10.46% in 1998. As of August 31, 1998, PEC no longer serviced loans for MMC. 17. COMMITMENTS AND CONTINGENCIES Litigation--On August 27, 1998, an action was filed in Nevada District Court, County of Clark, No. A392585, by Robert and Jocelyne Henry, husband and wife individually and on behalf of all others similarly situated against PEC, PEC's wholly-owned subsidiary, Central Nevada Utilities Company (CNUC), and certain other defendants. The plaintiffs' complaint asked for class action relief claiming that PEC and CNUC were guilty of collecting certain betterment fees and not providing sewer and water lines to their property. The court determined that plaintiffs had not properly pursued their administrative remedies with the Nevada Public Utilities Commission (PUC) and dismissed plaintiffs' amended complaint, without prejudice. Notwithstanding plaintiffs' appeal of the dismissal, plaintiff filed for administrative relief with the PUC. On November 17, 1999, the PUC found that CNUC, the only defendant over which the PUC has jurisdiction, was not in violation of any duties owed the plaintiffs or otherwise in violation of CNUC's approved tariffs. Subsequent to the PUC's decision, plaintiffs voluntarily dismissed F-24 74 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998 their appeal of the trial court's order dismissing their case without prejudice and directing plaintiffs to exhaust their administrative remedies. On May 4, 2000, plaintiffs refiled their complaint in Nevada District Court, naming all of the above parties with the exception of CNUC. The defendants have filed a motion to dismiss. As previously reported, the Company was named a defendant in three purported class actions filed by Christopher Dunleavy, Alan Peyser and Michael Nadler. A settlement agreement was approved by the Court in 1997, that had no material effect on the Company's Consolidated Financial Statements. On August 21, 2000, the Settlement Agreement became final, as no further appeal was taken since an appeal filed by Mr. Nadler that was denied on May 22, 2000. On August 9, 1999, an action was filed in Nevada District Court, County of Clark, No. A407152, by a dissident director and a former director of the Grand Flamingo Towers Owners Association purporting to act on behalf of the Association against PEC. The complaint alleges, among other things, breach of a fiduciary duty by the defendant with respect to the management agreement between the plaintiff and defendant. In particular, plaintiff is seeking rescission of the management agreement, an injunction requiring the defendant to turn over plaintiff's property held as plaintiff's manager, imposition of a constructive trust on plaintiffs funds and profits received and held by the defendant as plaintiff's manager, and an accounting of profits and property obtained by the defendant as plaintiff's manager. In August 2000, the Plaintiffs voluntarily dismissed this action with prejudice. In the general course of business the Company and PEC, at various times, have each been named in other lawsuits. The Company believes that it has meritorious defenses to these lawsuits and that resolution of these matters will not have a material adverse affect on the business or financial condition of the Company. Future Improvements--Central Nevada Utilities Company (CNUC), a subsidiary, has issued performance bonds of $2,907,000 outstanding at August 31, 2000, to ensure the completion of water, sewer and other improvements in portions of the Calvada development areas. The cost of the improvements will be offset by the future receipt of betterment fees and connection fees. Contingencies--At August 31, 2000, irrevocable letters of credit in the amount of $310,000 were issued and outstanding to secure certain obligations of the Company. These letters are collateralized by notes receivable. In 1994 and 1996 the Company issued guarantees of an equipment lease and an office lease on behalf of MMC on which claims have been made by the lessors. The Company believes that the entire amount of the claim will not be paid, but it has reserved on its books an amount which management believes is probable to be paid to satisfy the guarantees, and is included in the caption Accounts Payable and Accrued Liabilities on the Balance Sheet. License Agreement--In April 1995, PEC entered into a strategic alliance pursuant to which PEC was granted a ten-year (including a renewal option) exclusive license to operate both its existing and future timeshare properties under the name "Ramada Vacation Suites." PEC has renamed its timeshare resorts. The arrangement provides for the payment by PEC of an initial access fee of $1,000,000, which has been paid, and monthly recurring fees equal to 1% of PEC's Gross Sales (as defined) each month through January 1996 and 1.5% of PEC's Gross Sales each month commencing in February 1996 with certain minimums increasing each year. The initial term of the arrangement is five years and PEC has exercised its option to renew the arrangement for an additional term of five years, expiring December 31, 2005. 18. QUARTERLY FINANCIAL DATA (unaudited) The following tables reflect consolidated quarterly financial data for the Company for the fiscal years ended August 31, 2000 and 1999 (thousands of dollars, except share and per share amounts): F-25 75 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
FOR THE THREE MONTHS ENDED --------------------------------------------------------------- AUGUST 31, MAY 31, FEBRUARY 29, NOVEMBER 30, 2000 2000 2000 1999 ----------- ----------- ----------- ----------- REVENUES: Net timeshare interest and land sales $ 17,979 $ 19,228 $ 15,469 $ 16,010 Net gain on sale of investments and other assets 1,179 635 678 -- Interest income 3,132 3,255 3,172 2,871 Financial income and other 1,755 1,617 1,699 1,816 ----------- ----------- ----------- ----------- Total revenues 24,045 24,735 21,018 20,697 ----------- ----------- ----------- ----------- EXPENSES: Direct costs of timeshare interest and land sales 3,753 3,930 2,951 2,934 Operating expenses 16,634 16,216 13,948 14,242 Interest expense 3,295 3,194 3,113 2,866 ----------- ----------- ----------- ----------- Total expenses 23,682 23,340 20,012 20,042 ----------- ----------- ----------- ----------- Income before income taxes 363 1,395 1,006 655 Income taxes (530) -- -- -- ----------- ----------- ----------- ----------- Net income applicable to common stock $ 893 $ 1,395 $ 1,006 $ 655 =========== =========== =========== =========== INCOME PER COMMON SHARE: Basic: Net income applicable to common stock $ 0.26 $ 0.40 $ 0.29 $ 0.19 =========== =========== =========== =========== Weighted-average number of common shares 3,500,557 3,500,557 3,500,557 3,500,557 =========== =========== =========== =========== Diluted: Net income applicable to common stock $ 0.26 $ 0.40 $ 0.29 $ 0.19 =========== =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,500,557 3,500,557 =========== =========== =========== ===========
F-26 76 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
FOR THE THREE MONTHS ENDED ---------------------------------------------------------------- AUGUST 31, MAY 31, FEBRUARY 28, NOVEMBER 30, 1999 1999 1999 1998 ----------- ----------- ----------- ----------- REVENUES: Net timeshare interest and land sales $ 16,869 $ 15,754 $ 12,077 $ 12,541 Net gain on sale of investments and other assets -- -- -- 513 Interest income 2,694 2,672 1,952 1,992 Financial income and other 1,861 1,901 1,857 1,819 ----------- ----------- ----------- ----------- Total revenues 21,424 20,327 15,886 16,865 ----------- ----------- ----------- ----------- EXPENSES: Direct costs of timeshare interest and land sales 3,280 3,260 2,362 2,334 Operating expenses 14,520 13,550 12,142 13,564 Interest expense 2,635 2,374 2,173 2,088 ----------- ----------- ----------- ----------- Total expenses 20,435 19,184 16,677 17,986 ----------- ----------- ----------- ----------- Income before income taxes 989 1,143 (791) (1,121) Income taxes (benefit) (180) -- (269) (381) ----------- ----------- ----------- ----------- Net income (loss) applicable to common stock $ 1,169 $ 1,143 $ (522) $ (740) =========== =========== =========== =========== INCOME (LOSS) PER COMMON SHARE: Basic: Net income (loss) applicable to common stock $ 0.33 $ 0.33 $ (0.15) $ (0.21) =========== =========== =========== =========== Weighted-average number of common share 3,500,557 3,500,557 3,550,557 3,500,557 =========== =========== =========== =========== Diluted: Net income (loss) applicable to common stock $ 0.33 $ 0.33 $ (0.15) $ (0.21) =========== =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding 3,500,557 3,500,557 3,550,557 3,500,557 =========== =========== =========== ===========
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