July 14, 2000
The following Management's Discussion and Analysis of Financial Condition and Results of Operations section contains
certain forward-looking statements and information relating to Mego Financial Corp. (Mego Financial) (Mego Financial
and it subsidiaries are referred to herein collectively as the Company) that are based on the beliefs of management
as well as assumptions made by and information currently available to management. Such forward-looking statements
include, without limitation, the Company's expectation and estimates as to the Company's business operations, including
the introduction of new timeshare and land sales programs and future financial performance, including growth in
revenues and net income and cash flows. Such forward-looking statements also include, without limitation, the Company's
expectations and beliefs as to the results of its year 2000 compliance efforts and the impact on the Company's
operations of efforts its lenders and other third parties in respect of such compliance. In addition, as used herein,
the words "anticipates," "believes," "estimates," "expects," "plans,"
"intends" and similar expressions, as they relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current views of the Company's management with respect
to future events and are subject to certain risks, uncertainties and assumptions. In addition, the Company specifically
advises readers that the factors listed under the caption "Liquidity and Capital Resources" could cause
actual results to differ materially from those expressed in any forward-looking statement. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated or expected.
The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements,
including the notes thereto, contained elsewhere herein and in the Company's Form 10-K for the fiscal year ended
August 31, 1999.
GENERAL
The business of the Company is primarily the marketing, financing and sale of timeshare interests, retail lots
and land parcels, and servicing the related receivables, and operating and/or managing timeshare properties. The
Company, through its subsidiary, Preferred Equities Corporation (PEC), provides financing to purchasers of its
timeshare interests and land. This financing is generally evidenced by notes secured by deeds of trust and mortgages.
These notes receivable are generally payable over a period up to twelve years, bear interest at rates ranging from
10.0% to 15.5%, and require equal monthly installments of principal and interest.
PEC
PEC recognizes revenue primarily from sales of timeshare interests and land sales in resort areas, gain on sale
of receivables and interest income. PEC periodically sells its consumer receivables while generally retaining the
servicing rights. Revenue from sales of timeshare interests and land is recognized after the requisite rescission
period has expired and at such time as the purchaser has paid at least 10% of the sales price for sales of timeshare
interests and 20% of the sales price for land sales. Land sales typically meet these requirements within six to
ten months of closing, and sales of timeshare interests typically meet these requirements at the time of sale.
The sales price, less a provision for cancellation, is recorded as revenue and the allocated cost related to such
net revenue of the timeshare interest or land parcel is recorded as expense in the period that revenue is recognized.
When revenue related to land sales is recognized, the portion of the sales price attributable to uncompleted required
improvements, if any, is deferred.
Notes receivable with payment delinquencies of 90 days or more have been considered in determining the allowance
for cancellations. Cancellations occur when the note receivable is determined to be uncollectible and the related
collateral, if any, has been recovered. Cancellation of a note receivable in the quarter the revenue is recognized
is deemed to not represent a sale and is accounted for as a reversal of the revenue with an adjustment to cost
of sales. Cancellation of a note receivable subsequent to the quarter the revenue was recognized is charged to
the allowance for cancellations.
Gain on sale of notes receivable includes the present value of the differential between contractual interest rates
charged to borrowers on notes receivable sold by PEC and the interest rates to be received by the purchasers of
such notes receivable, after considering the effects of estimated prepayments and a normal servicing fee. PEC retains
certain participations in cash flows from the sold notes receivable and generally retains the associated servicing
rights. PEC generally sells its notes receivable at par value.
The present values of expected net cash flows from the sale of notes receivable are recorded at the time of sale
as interest only receivables. Interest only receivables are amortized as a charge to income, as payments are received
on the retained interest differential over the estimated life of the underlying notes receivable. Interest only
receivables are recorded at the lower of unamortized cost or estimated fair value. The expected cash flows used
to determine the interest only receivables asset have been reduced for potential losses under recourse provisions
of the sales agreements. Reserve for notes receivable sold with recourse represents PEC's estimate of the fair
value of its future credit losses to be incurred over the lives of the notes receivable in connection with the
recourse provisions of the sales agreements and is shown separately as a liability in the Company's Condensed Consolidated
Balance Sheets.
In discounting cash flows related to notes receivable sales, PEC defers servicing income at an annual rate of 1%
and discounts cash flows on its sales at the rate it believes a purchaser would require as a rate of return. Earned
servicing income is included under the caption of financial income. The cash flows were discounted to present value
using a discount rate of 15% for the nine months ended May 31, 2000 and 1999. PEC has developed its assumptions
based on experience with its own portfolio, available market data and consultation with its financial advisors.
In determining expected cash flows, management considers economic conditions at the date of sale. In subsequent
periods, these estimates may be revised as necessary using the original discount rate, and any losses arising from
prepayment and loss experience will be recognized as realized.
Provision for cancellations relating to notes receivable is recorded as expense in amounts sufficient to maintain
the allowance at a level considered adequate to provide for anticipated losses resulting from customers' failure
to fulfill their obligations under the terms of their notes receivable. PEC records provision for cancellations
at the time revenue is recognized, based on historical experience and current economic factors. The related allowance
for cancellations represents PEC's estimate of the amount of the future credit losses to be incurred over the lives
of the notes receivable. The allowance for cancellations is adjusted for actual cancellations experienced, including
cancellations related to previously sold notes receivable which were reacquired pursuant to the recourse obligations
discussed herein. Such allowance is also reduced to establish the separate liability for reserve for notes receivable
sold with recourse. PEC's judgment in determining the adequacy of this allowance is based upon a periodic review
of its portfolio of notes receivable. These reviews take into consideration changes in the nature and level of
the portfolio, historical cancellation experience, current economic conditions which may affect the purchasers'
ability to pay, changes in collateral values, estimated value of inventory that may be reacquired and overall portfolio
quality. Changes in the allowance as a result of such reviews are included in the provision for cancellations.
Fees for servicing notes receivable originated by PEC and sold with servicing rights retained are generally based
on a stipulated percentage of the outstanding principal balance of such notes receivable and are recognized when
earned. Interest received on notes receivable sold, less amounts paid to investors, is reported as financial income.
Interest only receivables are amortized systematically to reduce notes receivable servicing income to an amount
representing normal servicing income and the present value discount. Late charges and other miscellaneous income
are recognized when collected. Costs to service notes receivable are recorded to expense as incurred. Interest
income represents the interest received on loans held in PEC's portfolio, the accretion of the discount on the
interest only receivables and interest on cash funds.
Total costs and expenses consist primarily of marketing and sales expenses, general and administrative expenses,
direct costs of sales of timeshare interests and land, depreciation and amortization and interest expense. Marketing
and sales costs directly attributable to unrecognized sales are accounted for as deferred selling costs until such
time as the sale is recognized or cancelled prior to recognition.
Land sales as of May 31, 2000 exclude $18.3 million of sales not yet recognized under generally accepted accounting
principles (GAAP) since the requisite payment amounts have not yet been received or the respective recission periods
have not yet expired. Of the $18.3 million unrecognized land sales, the Company estimates that it will ultimately
recognize $15.0 million of revenues, which would be reduced by a provision for cancellations of $1.3 million, deferred
selling costs of $4.2 million and cost of sales of $2.1 million.
PEC has entered into financing arrangements with certain purchasers of timeshare interests and land whereby a lower
interest rate, currently 5% per annum, is charged on those sales where the aggregate down payment is at least 50%
of the purchase price and the balance is payable in 36 or fewer monthly payments. Notes receivable of $6.3 million
and $6.0 million at May 31, 2000 and August 31, 1999, respectively, were made under this arrangement.
RESULTS OF OPERATIONS
Three Months Ended May 31, 2000 Compared to Three Months Ended May 31, 1999
Total revenues for the Company increased 21.7% or $4.4 million to $24.7 million during the three months ended May
31, 2000 from $20.3 million during the three months ended May 31, 1999. The increase was primarily due to a net
increase of $3.5 million in timeshare and land sales to $19.2 million during the three months ended May 31, 2000
from $15.7 million during the three months ended May 31, 1999 (net timeshare sales increased by $2.5 million and
net land sales increased by $1.0), an increase in interest income to $3.3 million during the three months ended
May 31, 2000 from $2.7 million during the three months ended May 31, 1999 and total net gains of $666,000 on sale
of receivables and investments and other assets during the three months ended May 31, 2000.
Gross sales of timeshare interests increased to $15.3 million during the three months ended May 31, 2000 from $12.5
million during the three months ended May 31, 1999, an increase of 22.7%. Net sales of timeshare interests increased
to $13.4 million from $10.9 million, an increase of 22.9%. The provision for cancellations represented 12.5% and
12.7%, respectively, of gross sales of timeshare interests for the three months ended May 31, 2000 and 1999.
Gross sales of land increased to $6.3 million during the three months ended May 31, 2000 from $5.2 million during
the three months ended May 31, 1999, an increase of 21.0%. Net sales of land increased to $5.9 million during the
three months ended May 31, 2000 from $4.9 million during the three months ended May 31, 1999, an increase of 20.2%.
The provision for cancellations represented 7.0% and 6.4%, respectively, of gross sales of land for the three months
ended May 31, 2000 and 1999.
Interest income increased 21.8% to $3.3 million for the three months ended May 31, 2000 from $2.7 million for the
three months ended May 31, 1999, primarily due to increased notes receivable for the current quarter.
During the three months ended May 31, 2000, there were $666,000 net gains on sale of receivables and land parcels.
Total costs and expenses for the Company increased to $23.3 million for the three months ended May 31, 2000 from
$19.1 million for the three months ended May 31, 1999, an increase of 21.7%. The increase resulted primarily from
an increase in direct costs of timeshare sales to $3.0 million from $2.5 million, an increase of 20.3%; an increase
of $1.8 million in marketing and sales expense, an increase of 20.4%; an increase of $820,000 in interest expense,
an increase of 34.5%; and, an increase of $1.1 million in general and administrative expenses, an increase of 32.3%.
The increase in direct costs of timeshare sales is attributable to higher net timeshare sales during the current
fiscal quarter compared to the same quarter last year. The increase in marketing and sales expenses is due primarily
to higher gross sales. As discussed below, marketing and sales expenses decreased as a percentage of gross sales.
The increase in interest expense is due to
increased notes and contracts payable and borrowing costs. The increase in general and administrative expenses
is due primarily to the increase in escrow collection costs related to the increased sales volume, an increase
in maintenance fees paid to Homeowner Associations by PEC, other resort operations' expenses and a lease payment
related to a previously affiliated company.
As a percentage of gross sales of timeshare interests and land, marketing and sales expenses related thereto decreased
to 50.3% during the three months ended May 31, 2000 from 51.0% during the three months ended May 31, 1999, and
cost of sales decreased to 18.2% during the three months ended May 31, 2000 from 18.5% during the three months
ended May 31, 1999. Subsequent to the first quarter of fiscal 1999, the Company restructured its marketing and
sales programs, which restructuring included the closing of unprofitable sales locations, the elimination of certain
marketing programs and the layoff of related personnel. Sales prices of timeshare interests are typically lower
than those of land, while selling costs per sale, other than commissions, are approximately the same in amount
for timeshare interests and land; accordingly, the Company generally realizes lower profit margins from sales of
timeshare interests than from sales of land.
Interest expense increased to $3.2 million during the three months ended May 31, 2000 from $2.4 million during
the three months ended May 31, 1999, an increase of 34.5%. The increase was a result of increased notes and contracts
payable during the three months ended May 31, 2000 compared to the three months ended May 31, 1999, and the increased
borrowing costs in the comparative periods. This increase related to interest carrying costs for maintaining the
notes in the Company's owned portfolio. Historically, PEC has from time to time sold notes receivable and applied
the net proceeds to reduce its outstanding debt. Until the current quarter, there had been no such sales since
August 1998. There were loan package sales to two institutional buyers aggregating $19.0 million during the three
months ended May 31, 2000.
Pre-tax income of $1.4 million was earned during the three months ended May 31, 2000 compared to pre-tax income
of $1.1 million during the three months ended May 31, 1999. The improvement in the three months ended May 31, 2000
resulted from the $4.4 million increase in revenues partially offset by the $4.1 million increase in expenses.
No income taxes were recorded for the three months ended May 31, 2000 and 1999, due to the use of net operating
loss carryforwards which were previously fully reserved and are used to offset income on a consolidated basis.
Income taxes are recorded, and the liability is adjusted, based on an ongoing review of related facts and circumstances.
Net income applicable to common stock amounted to $1.4 million during the three months ended May 31, 2000 compared
to net income applicable to common stock of $1.1 million during the three months ended May 31, 1999, primarily
due to the foregoing.
Nine Months Ended May 31, 2000 Compared to Nine Months Ended May 31, 1999
Total revenues for the Company increased 25.2%, or $13.4 million, to $66.5 million during the nine months ended
May 31, 2000 from $53.1 million during the nine months ended May 31, 1999. The increase was primarily due to an
increase in timeshare and land sales to $50.7 million during the nine months ended May 31, 2000 from $40.4 million
during the nine months ended May 31, 1999 (net timeshare sales increased by $7.8 million and net land sales increased
by $2.5 million), an increase in interest income to $9.3 million during the nine months ended May 31, 2000 from
$6.6 million during the nine months ended May 31, 1999, and total net gains on sale of receivables and investments
and other assets of $1.3 million during the nine months ended May 31, 2000 compared to $513,000 during the nine
months ended May 31, 1999.
Gross sales of timeshare interests increased to $40.6 million during the nine months ended May 31, 2000 compared
to $31.9 million during the nine months ended May 31, 1999, an increase of 27.3%. Net sales of timeshare interests
increased to $36.3 million from $28.5 million, an increase of 27.3%. The provision for cancellations represented
10.6% of gross sales of timeshare interests for the nine months ended May 31, 2000 and 1999.
Gross sales of land increased to $15.2 million during the nine months ended May 31, 2000 from $12.7 million during
the nine months ended May 31, 1999, an increase of 19.8%. Net sales of land increased to $14.4 million during the
nine months ended May 31, 2000 from $11.9 million during the nine months ended May 31, 1999, an increase of 21.5%.
The provision for cancellations decreased to 5.0% of gross sales of land for the nine months ended May 31, 2000
from 6.3% for the nine months ended May 31, 1999, primarily due to a decrease in cancellation experience during
the nine months
ended May 31, 2000 and downward adjustments based on the results of the customary quarterly reviews of the allowance
adequacy.
Interest income increased to $9.3 million for the nine months ended May 31, 2000 from $6.6 million for the nine
months ended May 31, 1999, an increase of 40.5%, primarily due to increased notes receivable for the current period.
During the nine months ended May 31, 2000, there were $1.3 million net gains on sale of receivables, the golf courses
and land parcels, compared to a $513,000 gain on a sale of a land parcel for the nine months ended May 31, 1999.
Total costs and expenses for the Company increased to $63.4 million for the nine months ended May 31, 2000 from
$53.8 million for the nine months ended May 31, 1999, an increase of 17.7%. The increase resulted primarily from
an increase in direct costs of timeshare sales to $7.6 million from $5.9 million, an increase of 28.0%; an increase
in marketing and sales expenses to $28.7 million from $25.6 million, an increase of 12.1%; an increase in interest
expense to $9.2 million from $6.6 million, an increase of 38.3%; and, an increase in general and administrative
expenses to $12.9 million from $10.5 million, an increase of 23.2%. The increase in direct costs of timeshare sales
is attributable to higher net timeshare sales during the current fiscal period compared to the same period last
fiscal year. The increase in marketing and sales expenses is due primarily to higher gross sales. As discussed
below, the increase in these expenses on a dollar basis was accompanied by a decrease in marketing and sales expenses
as a percentage of gross sales. The increase in interest expense is due to increased notes and contracts payable
and borrowing costs. The increase in general and administrative expenses is primarily due to the increase in escrow
collection costs related to sales volume, an increase in maintenance fees paid to Homeowner Associations by PEC,
other resort operations' expenses and a lease payment related to a previously affiliated company.
As a percentage of gross sales of timeshare interests and land, marketing and sales expenses relating thereto decreased
to 51.5% during the nine months ended May 31, 2000 from 57.5% during the nine months ended May 31, 1999, and cost
of sales decreased to 17.6% during the nine months ended May 31, 2000 from 17.9% during the nine months ended May
31, 1999.
Interest expense increased to $9.2 million during the nine months ended May 31, 2000 from $6.6 million during the
nine months ended May 31, 1999, an increase of 38.3%. The increase is a result of increased notes and contracts
payable and borrowing costs during the nine months ended May 31, 2000 compared to the nine months ended May 31,
1999.
Pre-tax income of $3.1 million was earned during the nine months ended May 31, 2000 compared to a pre-tax loss
of $769,000 during the nine months ended May 31, 1999. The improvement in the first nine months of fiscal 2000
resulted from the $13.4 million increase in revenues partially offset by the $9.5 million increase in expenses.
No income tax provision or benefit was recorded for the nine months ended May 31, 2000 compared to an income tax
benefit of $650,000 during the nine months ended May 31, 1999, due to the use of net operating loss carryforwards
which were previously fully reserved and currently are used to offset income on a consolidated basis. Income taxes
are recorded, and the liability is adjusted, based on an ongoing review of related facts and circumstances.
Net income applicable to common stock was $3.1 million during the nine months ended May 31, 2000 compared to a
net loss applicable to common stock of $119,000 during the nine months ended May 31, 1999, primarily due to the
foregoing.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents for the Company were $1.8 million at May 31, 2000 and August 31, 1999.
PEC's cash requirements arise from the acquisition of timeshare properties and land, payments of operating expenses,
payments of income taxes to Mego Financial, payments of principal and interest on debt obligations, and payments
of marketing and sales expenses in connection with sales of timeshare interests and land. Marketing and sales expenses
payable by PEC in connection with sales of timeshare interests and land typically exceed the down payments received
at the time of sale, as a result of which PEC generates a cash shortfall. This cash shortfall and PEC's other cash
requirements are funded primarily through advances under PEC's lines of credit in the aggregate amount of $133.5
million, sales of receivables and cash flows from operations. At May 31, 2000, no commitments existed for material
capital expenditures.
At May 31, 2000, PEC had arrangements with institutional lenders for the financing of receivables in connection
with sales of timeshare interests and land and the acquisition of timeshare properties and land, which provide
for lines of credit of up to an aggregate of $133.5 million. Such lines of credit are secured by timeshare and
land receivables and mortgages. At May 31, 2000, an aggregate of $101.5 million was outstanding under such lines
of credit, and $32.0 million was available for borrowing. Under the terms of these lines of credit, PEC may borrow
65% to 90% of the balances of the pledged timeshare and land receivables. PEC is required to comply with certain
covenants under these agreements, which, among other things, require PEC to meet certain minimum tangible net worth
requirements. The most stringent of such requirements provides that PEC maintain a minimum tangible net worth of
$25 million. At May 31, 2000, PEC exceeded this net worth requirement by $5.0 million. Summarized lines of credit
information and accompanying notes relating to these lines of credit outstanding at May 31, 2000, consist of the
following (thousands of dollars):
BORROWING MAXIMUM
Amount at Borrowing Revolving
May 31, 2000 Amounts Expiration Date (a) Maturity Date Interest Rate
------------------- ------------- ------------------- --------------- --------------------
$ 60,312 $ 75,000 (b) December 31, 2000 Various Prime + 2.0 - 2.25%
------------------ ------------
15,538 15,000 (c) December 1, 2002 Various Prime + 2.0
5,387 11,500 (d) August 1, 2000 Various Prime + 2.0 - 3.00%
------------------ ------------
20,925 26,500 Considered one borrowing line for the maximum amount.
------------------ ------------
18,260 30,000 (e) June 30, 2001 Various Libor + 4.0 - 4.25%
1,972 1,972 (f) July 31, 2000 Prime + 2.25%
------------------ ------------
$ 101,469 $ 133,472
================== ============
(a) Revolving expiration dates represent the expiration of the revolving features of the lines of credit, at which
time the credit lines become loans with fixed maturities. As is customary, the Company is negotiating for extensions
of certain of the revolving periods.
(b) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million. Other restrictions,
commencing with the fiscal quarter ended November 30, 1999, include: PEC's requirement to maintain costs and expenses
for marketing and sales and general and administrative expenses relating to net processed sales for each fiscal
quarter; PEC's requirement to maintain a minimum net processed sales requirement for each fiscal quarter; and PEC's
requirement not to exceed a ratio of 4:1 of consolidated total liabilities to consolidated tangible net worth.
At May 31, 2000, $45.9 million of loans secured by receivables were outstanding related to financings at prime
plus 2%, of which $26.8 million of loans secured by land receivables mature May 15, 2010 and $19.1 million of loans
secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes $6.4 million in
acquisition and development (A&D) financing maturing October 1, 2005 for the corporate office buildings, which
is an amortizing loan with principal payments waived through December 31, 2000, and a real estate loan with an
outstanding balance of $1.2 million maturing December 31, 2000, all bearing interest at prime plus 2.25%. The remaining
A&D loans, receivables loans and a resort lobby loan outstanding of $4.3 million are at prime plus 2% and mature
at various dates through February 18, 2001.
In December 1998, Finova Capital Corporation (FINOVA), PEC and Mego Financial entered into an Agreement under which
FINOVA agreed to make a loan in the amount of $5,662,000 to PEC with an original maturity date of June 30, 1999,
which date has been extended to December 31, 2000. Mego Financial guaranteed the loan and issued warrants to FINOVA
to purchase a total of 83,333 shares of common stock of Mego Financial at an exercise price of $6.00 per share,
exercisable within a five-year period commencing January 1, 1999. The balance
outstanding under this Agreement, which is included in the $60.3 million balance in the preceding table, was $2.5
million as of May 31, 2000.
(c) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million during the life
of the loan. These credit lines include available financing for A&D and receivables. At May 31, 2000, $6.8
million was outstanding under the A&D loan, which matures on June 30, 2004, and $8.7 million was outstanding
under the receivables loan, which matures on May 31, 2004.
(d) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $15 million. This credit
line consists of receivable financing with a maturity date of May 31, 2004, under which $1.7 million was outstanding
at May 31, 2000, and a real estate loan of $3.7 million with a maturity date of August 30, 2000.
(e) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $17 million during the life
of the loan. These credit lines include available financings for A&D and receivables. At May 31, 2000, $2.8
million was outstanding under the A&D loans which have a maturity date of June 30, 2001 and bear interest at
the 90-day London Interbank Offering Rate (LIBOR) plus 4.25%. The available receivable financings, of which $15.5
million was outstanding at May 31, 2000, are at 90-day LIBOR plus 4% and have a maturity date of June 5, 2005.
(f) Restrictions include PEC's requirement to maintain a minimum tangible net worth of $25 million.
A schedule of the cash shortfall arising from recognized and unrecognized sales for the periods indicated is set
forth below (thousands of dollars):
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Marketing and selling expenses attributable
to recognized and unrecognized sales $ 10,772 $ 8,837 $ 29,539 $ 26,168
Less: Down payments (2,831) (3,475) (8,175) (8,868)
-------- -------- -------- --------
Cash Shortfall $ 7,941 $ 5,362 $ 21,364 $ 17,300
======== ======== ======== ========
During the three months ended May 31, 2000, an aggregate of $19.0 million of notes receivable was sold to two institutional
buyers. There had been no other notes receivable sales since August 1998.
PEC sells notes receivable subject to recourse provisions as contained in each agreement. PEC is obligated under
these agreements to replace or repurchase accounts that become over 90 days delinquent or are otherwise subject
to replacement or repurchase in either cash or receivables generally at the option of the purchaser. At May 31,
2000, PEC was contingently liable to replace or repurchase notes receivable sold with recourse totaling $63.5 million.
The repurchase provisions provide for substitution of receivables as recourse for $54.7 million of sold notes receivable
and cash payments for repurchase relating to $8.8 million of sold notes receivable. The undiscounted amounts of
the recourse obligations on such notes receivable were $5.0 million and $6.0 million at May 31, 2000 and 1999,
respectively. PEC continually reviews the adequacy of this liability. These reviews take into consideration changes
in the nature and level of the portfolio, current and future economic conditions which may affect the obligors'
ability to pay, changes in collateral values, estimated value of inventory that may be reacquired and overall portfolio
quality.
The components of the Company's debt, including lines of credit consist of the following (thousands of dollars):
MAY 31, AUGUST 31,
2000 1999
-------- ----------
Notes collateralized by receivables $ 71,824 $ 67,457
Mortgages collateralized by real estate properties 30,440 35,846
Installment contracts and other notes payable 1,194 1,252
-------- --------
Total $103,458 $104,555
======== ========
FINANCIAL CONDITION
Changes in the aggregate of the allowance for cancellations, excluding discounts, and the reserve for notes receivable
sold with recourse for the nine months ended May 31, 2000, consisted of the following (thousands of dollars):
Balance at beginning of period $ 18,149
Provision for cancellations 5,077
Amounts charged to allowance for cancellations, net (6,339)
--------
Balance at end of period $ 16,887
========
The allowance for cancellations and the reserve for notes receivable sold with recourse consisted of the following
at these dates (thousands of dollars):
MAY 31, AUGUST 31,
2000 1999
-------- ----------
Allowance for cancellations, excluding discounts $ 12,440 $ 13,987
Reserve for notes receivable sold with recourse 4,447 4,162
-------- --------
Total $ 16,887 $ 18,149
======== ========
May 31, 2000 Compared to August 31, 1999
Cash and cash equivalents was $1.8 million at May 31, 2000 and August 31, 1999.
Notes receivable, net, increased 7.0% to $74.1 million at May 31, 2000 from $69.3 million at August 31, 1999 primarily
as a result of net new receivables added. During the three months ended May 31, 2000, $19.0 million in notes receivable
were sold to various lenders.
Timeshare interests held for sale decreased 14.6% to $25.2 million at May 31, 2000 from $29.5 million at August
31, 1999.
Land and improvements inventory decreased 28.6% to $4.7 million at May 31, 2000 from $6.6 million at August 31,
1999.
Notes and contracts payable decreased 1.0% to $103.5 million at May 31, 2000 from $104.6 million at August 31,
1999. There was a net increase of $4.3 million in notes collateralized by receivables, as the new business more
than offset the notes receivable sales previously mentioned. Mortgages collateralized by real estate properties
decreased by $5.4 million. Other than release payments in the normal course of business, such debt was reduced
by the proceeds from the sale of the golf courses and land parcels.
Reserve for notes receivable sold with recourse increased 6.9% to $4.4 million at May 31, 2000 from $4.2 million
at August 31, 1999. This reserve is increased as notes receivable are sold to lenders, and reduced as loan balances
decrease. Recourse to the Company on sales of notes receivable is governed by the agreements between the purchasers
and the Company.
Stockholders' equity increased 14.0% to $24.9 million at May 31, 2000 from $21.8 million at August 31, 1999. The
change for the period was due to net income.
YEAR 2000 COMPLIANCE
The Company believes it is Year 2000 compliant. There have been no significant problems experienced as a result
of the occurrence of Year 2000 which have disrupted operations. The Company will continue to monitor its operations
for Year 2000 problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There was no material change for the three months ended May 31, 2000 in the information about the Company's "Quantitative
and Qualitative Disclosures About Market Risk" as disclosed in its Annual Report on Form 10-K for the fiscal
year ended August 31, 1999.