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The following is an excerpt from a 10-K SEC Filing, filed by MEGO FINANCIAL CORP on 11/29/2000.
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MEGO FINANCIAL CORP - 10-K - 20001129 - PART_I

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.

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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.

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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.

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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

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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:

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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

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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.

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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

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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.

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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

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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.

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BROKERAGE PARTNERS