<PAGE>
PROSPECTUS
EPIC RESORTS, LLC
[LOGO]
EPIC CAPITAL CORP.
OFFER TO EXCHANGE UP TO $130,000,000 13% SENIOR SECURED REDEEMABLE
NOTES DUE 2005, SERIES B OF EPIC RESORTS, LLC AND EPIC CAPITAL
CORP., WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR
ANY AND ALL OF THEIR OUTSTANDING 13% SENIOR SECURED REDEEMABLE
NOTES DUE 2005, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER 10, 1998, UNLESS EXTENDED.
------------------------
Epic Resorts, LLC, a Delaware limited liability company (the "Company" or
"Epic"), and Epic Capital Corp., a Delaware corporation ("Capital Corp.," and
together with the Company, the "Issuers") hereby offer (the "Exchange Offer"),
upon the terms and conditions set forth in this Prospectus (this "Prospectus")
and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to
exchange up to $130,000,000 principal amount of their 13% Senior Secured
Redeemable Notes due 2005, Series B (the "Exchange Notes"), registered under the
Securities Act of 1933, as amended (the "Securities Act") for any and all of its
outstanding 13% Senior Secured Redeemable Notes due 2005, Series A (the
"Original Notes" and collectively with the Exchange Notes, the "Notes"). The
form and terms of the Exchange Notes are the same as the form and terms of the
Original Notes, except that the Exchange Notes will be registered under the
Securities Act, will not bear legends restricting their transfer and will not
contain certain provisions relating to an increase in the interest rate under
certain circumstances relating to the timing of the Exchange Offer. The Exchange
Notes will evidence the same indebtedness as the Original Notes and will be
issued under and entitled to the benefits of the July 8, 1998 Indenture (the
"Indenture"), among the Issuers, the Subsidiary Guarantors listed on Table 1 to
the Registration Statement Cover Page and United States Trust Company of New
York as trustee (the "Trustee"). See "The Exchange Offer" and "Description of
Notes." For the definitions of certain terms used herein, see "Glossary of
Defined Terms."
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Original Notes being tendered for exchange. The Company will accept
for exchange any and all Original Notes validly tendered and not withdrawn prior
to 5:00 p.m., New York City time, on December 10, 1998 unless extended (for a
maximum of an additional 20 business days) by the Company in its sole discretion
(the "Expiration Date"). Tenders of the Original Notes may be withdrawn at any
time prior to the Expiration Date. The Exchange Offer is subject to certain
customary conditions.
(CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF MATERIAL RISKS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is November 12, 1998.
<PAGE>
(CONTINUED FROM COVER PAGE)
The Original Notes were sold on July 8, 1998 (the "Issue Date") to NatWest
Capital Markets Limited (the "Initial Purchaser") in a transaction not
registered under the Securities Act in reliance upon an exemption under the
Securities Act as part of a sale of 130,000 units (the "Units"), consisting of
the Original Notes and warrants (the "Warrants") to purchase, at the purchaser's
election, one membership interest in the Company or one share of common stock
(the "Common Stock") of Epic Warrant Co. ("Warrant Co."). These transactions are
collectively hereinafter referred to as the "Initial Offering." In connection
with the Initial Offering, the Company consummated the acquisitions of the
Westpark Resort, the Scottsdale Links Resort, the Planter's Quarters Resort and
the Palm Springs Marquis Villas and acquired the limited partnership interests
in Daytona Beach Regency, Ltd. that were not previously owned by the Company or
one of its subsidiaries (collectively, the "Acquisitions"). The Initial
Purchaser subsequently placed the Units in transactions exempt from registration
under the Securities Act. The Warrants immediately detached from the Original
Notes on the Issue Date. Accordingly, the Original Notes and Warrants may not be
reoffered, resold or otherwise transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder solely in exchange for the Original Notes in order
to satisfy the obligations of the Issuers under the Registration Rights
Agreement (as defined) entered into the by the Issuers in connection with the
Initial Offering. Neither the Company nor Capital Corp. has any obligation under
the Registration Rights Agreement or any other agreement to exchange the
Warrants or register the Warrants under the Securities Act. See "The Exchange
Offer."
Based upon no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Issuers believe
that the Exchange Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than (i) a
broker-dealer who purchased such Exchange Notes from the Issuers to resell
pursuant to Rule 144A or any other available exemption under the Securities Act,
or (ii) any such holder that is an "affiliate" of an Issuer within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes. However, the Issuers have not sought
and do not intend to seek their own no-action letter in connection with the
Exchange Offer and there can be no assurance that the Commission would make a
similar determination with respect to the Exchange Offer. Eligible holders of
Original Notes wishing to accept the Exchange Offer must represent to the
Issuers that such conditions have been met. Each broker-dealer (a "Participating
Broker-Dealer") that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer in connection with
resales of Exchange Notes received in exchange for Original Notes where such
Original Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities. The Issuers have agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
Holders of Original Notes not tendered and accepted in the Exchange Offer
will continue to hold such Original Notes and will be entitled to all the rights
and benefits, and will be subject to the limitations applicable thereto, under
the Indenture and with respect to transfer under the Securities Act. The Issuers
will pay all the expenses incurred by them incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Original Notes or
the Exchange Notes. The Company does not intend to list the Exchange Notes on
any securities exchange or to seek approval for
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quotation through any automated quotation system. There can be no assurance that
an active market for the Exchange Notes will develop. See "Risk Factors--Lack of
a Public Market for the Notes." Moreover, to the extent that Original Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Original Notes could be adversely affected.
The Exchange Notes will be available initially only in book-entry form and
the Issuers expect that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of a Global Note (as defined herein), which will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global Note representing the Exchange Notes will be shown on,
and transfers thereof will be effected through, records maintained by DTC and
its participants. After the initial issuance of the Global Note, Exchange Notes
in certificated form will be issued in exchange for the Global Note only under
the limited circumstances set forth in the Indenture. See "Description of
Notes--Book-Entry, Delivery and Form."
Interest on the Original Notes is payable, and interest on the Exchange
Notes will be payable, semi-annually on June 15 and December 15 of each year,
commencing December 15, 1998. The Notes will mature on June 15, 2005. Except as
described below, the Issuers may not redeem the Notes prior to June 15, 2003. On
or after such date, the Issuers may redeem the Notes, in whole or in part, at
any time, at the redemption prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption. In addition, at any time and
from time to time on or prior to June 15, 2001, the Issuers may, subject to
certain requirements, redeem up to 35% of the aggregate principal amount of the
Notes with the cash proceeds of one or more Equity Offerings (as defined) at a
redemption price equal to 113% of the principal amount to be redeemed, together
with accrued and unpaid interest, if any, to the date of redemption, provided,
that at least 65% of the original aggregate principal amount of the Notes
remains outstanding immediately after each such redemption. The Issuers will be
obligated to make an offer to purchase $65 million (subject to adjustment as
described under "Description of Notes") aggregate principal amount of the Notes
not earlier than June 15, 2000 nor later than June 15, 2002 at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. Upon the occurrence of a Change of Control (as
defined), the Issuers will be required to make an offer to purchase the Notes at
a price equal to 101% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase.
The Original Notes are, and the Exchange Notes will be, senior obligations
of the Issuers. The Original Notes rank, and the Exchange Notes will rank, PARI
PASSU (equally) in right of payment with all existing and future Senior
Indebtedness (as defined) of the Issuers. The Original Notes rank, and the
Exchange Notes will rank, senior in right of payment to all existing and future
Subordinated Obligations (as defined) of the Issuers. The Original Notes are,
and the Exchange Notes will be, secured by (a) a first Mortgage (as defined) on
all real property acquired by the Issuers after the Issue Date, which Mortgages
shall convert into, and be replaced by, Mortgages on completed but unsold
Vacation Ownership Interests as they are created on such real property,
PROVIDED, that real property acquired or to be developed with funds from an A&D
Facility (as defined) shall not be subject to a Mortgage until such A&D Facility
has been repaid in full, (b) a security interest in the Escrow Account, and (c)
a security interest in the Cash Collateral Account (as defined). The Original
Notes are, and the Exchange Notes will be, unconditionally guaranteed (the
"Subsidiary Guarantees"), jointly and severally, by all of the Company's
subsidiaries in existence on July 8, 1998 and by each subsidiary of an Issuer
acquired or created thereafter other than certain Receivables Subsidiaries (as
defined) (collectively, the "Subsidiary Guarantors"). The Subsidiary Guarantees
are, and will continue to be, senior obligations of the Subsidiary Guarantors
and rank, and will continue to rank, PARI PASSU (equally) in right of payment
with all other existing and future Senior Indebtedness of the respective
Subsidiary Guarantors and senior in right of payment to all existing and future
Subordinated Obligations of the respective Subsidiary Guarantors. The Subsidiary
Guarantees may be released upon the occurrence of certain events. Except as
provided below, the Subsidiary Guarantees are and will continue to be secured by
a first Mortgage on (a) any completed but unsold Vacation Ownership Interests
owned by a particular Subsidiary Guarantor, and (b) any real property owned by a
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particular Subsidiary Guarantor, which Mortgage will automatically convert into,
and be replaced by, a Mortgage on Vacation Ownership Interests created thereon,
PROVIDED, that real property acquired or to be developed with funds from an A&D
Facility shall not be subject to a Mortgage until such A&D Facility has been
repaid in full. In addition, the Subsidiary Guarantee of Epic Resorts - Palm
Springs Marquis Villas, LLC is and will continue to be secured by a leasehold
mortgage on the leasehold acquired by it in connection with the Acquisitions. As
Vacation Ownership Interests are sold, the Mortgages thereon will be released.
As of June 30, 1998, on a pro forma basis after giving effect to the Initial
Offering and the application of the net proceeds from the sale of the Original
Notes, the Issuers and the Subsidiary Guarantors would have had $21.3 million of
Secured Indebtedness (as defined) outstanding, excluding the Notes which
constitutes (along with the Notes) the only Senior Indebtedness of the Issuers
and the Subsidiary Guarantors. See "Description of Notes--Ranking",
"--Security", and "Description of Other Indebtedness."
Epic Capital Corp. and Epic Warrant Co. are each newly-formed Delaware
corporations wholly owned by the Company. Neither Epic Warrant Co. nor Epic
Capital Corp. has any assets or conducts any operations.
AVAILABLE INFORMATION
The Issuers and the Subsidiary Guarantors have filed with the Commission a
Registration Statement on Form S-4 (the "Exchange Offer Registration Statement,"
which definition shall encompass all amendments, exhibits, annexes and schedules
thereto) pursuant to the Securities Act and the rules and regulations
promulgated thereunder, covering the Exchange Notes being offered hereby. This
Prospectus does not contain all the information set forth in the Exchange Offer
Registration Statement. For further information with respect to the Issuers and
the Exchange Offer, reference is made to the Exchange Offer Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
Reference is made to the copy of contracts, agreements, or other documents filed
as an exhibit to the Exchange Offer Registration Statement for a more complete
description of the document or matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Regional Offices of
the Commission at 7 World Trade Center, 13th Floor, New York, New York 10048 and
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials can be obtained from the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Information regarding the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such site is http://www.sec.gov.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Issuers and the Subsidiary Guarantors will become subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith will be required to
file periodic reports and other information with the Commission. The Issuers
have agreed that, whether or not they are required to do so by the rules and
regulations of the Commission, for so long as any of the Notes remain
outstanding, they will furnish to the holders of the Notes and file with the
Commission (unless the Commission will not accept such a filing) (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Issuers
were required to file such forms, including for each a "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and, with respect
to the annual information only, a report thereon by the Company's independent
auditors and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Issuers were required to file such reports. In
addition, for so long as any of the Notes remain outstanding, the Issuers have
agreed to make available to
iii
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any prospective purchaser of the Notes or beneficial owner of the Notes, the
information required by Rule 144A(d)(4) of the Securities Act.
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Business" and elsewhere, constitute
forward-looking statements. Such forward-looking statements (including, without
limitation, information concerning planned development and the Acquisitions) are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control, that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements and no
assurances can be given that the plans, estimates and expectations reflected in
such statements will be achieved. Such risks, uncertainties and other important
factors include, among others, the following factors (as well as the other
factors referred to in "Risk Factors" and elsewhere herein): (a) changes in
national, international or regional economic conditions that can affect the
vacation ownership industry, which is highly sensitive to such changes,
including, among other factors, levels of employment and discretionary
disposable income, consumer confidence, available financing and interest rates;
(b) risks associated with a large investment in vacation ownership inventory at
any given time (including risks that inventories will decline in value due to
changing market and economic conditions and that the development and carrying
costs of inventories may exceed those anticipated); (c) risks associated with an
inability to locate suitable vacation ownership inventory for acquisition; (d)
risks associated with delays in bringing the Company's inventories to market due
to, among other things, adverse weather conditions, changes in regulations
governing the Company's operations or changes in the availability of development
financing on terms acceptable to the Company; (e) the inability of the Company
to find external sources of liquidity on favorable terms to support its
operations, acquire, carry and develop its inventories and satisfy its debt and
other obligations; (f) the inability of the Company to find sources of capital
on favorable terms for the pledge of Vacation Ownership Interests Receivable (as
defined); (g) costs to develop vacation ownership inventory for sale and/or
selling, general and administrative expenses in excess of those anticipated; (h)
an increase or decrease in the number of resort properties subject to percentage
of completion accounting which requires deferral of profit recognition on such
projects until development is substantially complete; (i) risks associated with
management's ability to effectively manage the substantial increase in the
number of vacation ownership resorts that the Company will operate after the
Acquisitions; and (j) risks associated with the Company's ability to obtain the
necessary regulatory approvals required to commence sales of Vacation Ownership
Interests at the resorts to be acquired by the Company in connection with the
Acquisitions. See "Risk Factors." All forward-looking statements contained in
this Prospectus speak only as of the date of this Prospectus.
INDUSTRY DATA
Market and industry data used throughout this Prospectus were obtained from
internal company surveys, industry publications, unpublished industry data and
estimates, discussions with industry sources and currently available
information. The source for industry data is the American Resort Development
Association ("ARDA"), a non-profit industry organization. Industry publications
generally state that the information contained therein has been obtained from
sources believed to be reliable, but there can be no assurance as to the
accuracy and completeness of such information. The Company has not independently
verified such market data. Similarly, internal surveys by the Company, while
believed by the Company to be reliable, have not been verified by any
independent sources. Data for 1997 with respect to the estimated number of
tourists who visited the cities and surrounding areas in which the Company's
resorts are located was provided by the respective local visitors and convention
bureaus, and in the case of Lake Havasu City, the local chamber of commerce.
iv
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GLOSSARY OF DEFINED TERMS
The following terms defined in this glossary are used throughout this
Prospectus. Other capitalized terms used in this Prospectus but not otherwise
defined shall have the meanings assigned to them in "Description of
Notes--Certain Definitions."
<TABLE>
<S> <C>
ACQUISITIONS........................ The acquisition by the Company of the Palm Springs
Marquis Villas, the Westpark Resort and the
Scottsdale Links Resort on June 30, 1998 and the
acquisition by the Company of the Planter's Quarters
Resort and certain of the limited partnership
interests in the Daytona Beach Regency, Ltd. on July
8, 1998.
COMPANY OR EPIC..................... Epic Resorts, LLC and its subsidiaries.
COMPLETED INVENTORY................. The number of existing unsold Vacation Ownership
Interests in properties owned by the Company plus the
Vacation Ownership Interests that can be created in
resort properties for which construction is complete.
DAYTONA BEACH REGENCY............... The Company's vacation ownership resort located in
Daytona Beach, Florida.
EBITDA.............................. Earnings before interest expense, capitalized
interest included in cost of sales, income taxes,
depreciation and amortization, and extraordinary
item. EBITDA is presented because the Company
believes that it is a widely accepted industry
financial indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA should not
be construed in isolation as a substitute for income
from operations, net income or cash flows from
operating activities or other income or cash flow
statement data prepared in accordance with GAAP as a
measure of profitability or liquidity in analyzing
the Company's operating performance, financial
position and cash flows. The EBITDA measure presented
herein may not be comparable to EBITDA as presented
by other companies.
LONDON BRIDGE RESORT................ The Company's vacation ownership resort located in
Lake Havasu City, Arizona.
PALM SPRINGS MARQUIS VILLAS......... The resort villas located in Palm Springs,
California, which the Company acquired on June 30,
1998, and which will be converted to a vacation
ownership resort by the Company.
PLANNED INVENTORY................... Vacation Ownership Interests not yet available for
sale relating to planned and zoned resort properties
that are not yet under construction.
PLANTER'S QUARTERS RESORT........... The vacation ownership resort located in Hilton Head,
South Carolina, which the Company acquired on July 8,
1998.
PLEDGED VACATION OWNERSHIP The Vacation Ownership Interests at the Westpark
INTERESTS......................... Resort, the Scottsdale Links Resort, the London
Bridge Resort, the Daytona Beach Regency and any
resorts subsequently acquired or developed by the
Company or any of its subsidiaries.
</TABLE>
v
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<TABLE>
<S> <C>
SCOTTSDALE LINKS RESORT............. The resort complex located in Scottsdale, Arizona,
which the Company acquired on June 30, 1998, and
which will be converted to a vacation ownership
resort by the Company.
UNDER DEVELOPMENT INVENTORY......... Vacation Ownership Interests available for sale
relating to resorts currently under construction.
VACATION OWNERSHIP INTEREST......... An interest typically entitling the purchaser to a
fully-furnished vacation residence for a one-week
period on an annual or biannual basis in perpetuity.
WESTPARK RESORT..................... The resort complex located in Las Vegas, Nevada,
which the Company acquired on June 30, 1998, and
which will be converted to a vacation ownership
resort by the Company.
</TABLE>
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PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, ALL INFORMATION CONTAINED HEREIN REFERS TO THE COMPANY
SUBSEQUENT TO THE ACQUISITIONS AND THE RESTRUCTURING. INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Epic Resorts, LLC is a nationwide developer and marketer of high quality
vacation ownership resorts located in proven, major tourist destinations.
Vacation Ownership Interests typically entitle the buyer to a fully furnished
vacation residence for an annual or biannual period in perpetuity, as well as
access to over 1,500 resorts worldwide through the Company's participation in
vacation ownership interest exchange networks. The Company owns six resorts
located in Las Vegas, Nevada; Scottsdale, Arizona; Palm Springs, California;
Daytona Beach, Florida; Lake Havasu City, Arizona; and Hilton Head, South
Carolina and has an option to acquire property suitable for a resort in Pismo
Beach on the coast of California. In 1997, over 60 million tourists visited
these locations. The Company strategically markets and sells its Vacation
Ownership Interests through both on-site and off-site sales centers. In
addition, the Company's Completed Inventory enables it to generate income
through the rental of available suites at its resorts. The Company has
historically provided financing to approximately 90% of the purchasers of its
Vacation Ownership Interests, which, at an average yield of 15.0% for the six
months ended June 30, 1998, generated significant interest income for the
Company.
THE RESORTS
The Company's six high quality resorts are located in the following warm
weather, high volume, major tourist destinations:
<TABLE>
<CAPTION>
MILLIONS OF
LOCATION TOURISTS PER YEAR SURROUNDING AMENITIES/ATTRACTIONS
- --------------------------------- ------------------- ------------------------------------------------------------
<S> <C> <C>
Las Vegas, Nevada................ 30.0 Located one and one-half miles west of the Las Vegas strip
Scottsdale, Arizona.............. 12.0 Located on the famous Tournament of Players ("TPC") golf
course; over 100 other world-class golf courses
Palm Springs, California......... 4.5 Located on seven acres in downtown Palm Springs; over 70
world-class golf courses
Daytona Beach, Florida........... 8.0 18 miles of sandy beach; home of NASCAR and Grand Prix
racing; 52 miles from Disney World
Lake Havasu City, Arizona........ 3.0 London Bridge and English Village tourist and shopping
attractions; boating and fishing on Lake Havasu and the
Colorado River; 150 miles from Las Vegas and 67 miles from
Laughlin, Nevada
Hilton Head, South Carolina...... 2.5 12 miles of sandy beach; over 20 world-class golf courses
</TABLE>
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As the table below demonstrates, the Company's Completed Inventory will
increase from 822 to 25,854 Vacation Ownership Interests. Sales and marketing
and general and administrative expenses are the only material cash costs
required to convert such Completed Inventory to Vacation Ownership Interest
sales and comprised 49.8% of such sales for the twelve months ended June 30,
1998.
<TABLE>
<CAPTION>
UNSOLD
VACATION OWNERSHIP
MONTH/YEAR INTERESTS AT RESORTS
SALES ------------------------
COMMENCED OR AVERAGE UNDER
EXPECTED TO SALES DEVELOP-
RESORT LOCATION COMMENCE PRICE (A) COMPLETED MENT
- --------------------------------- --------------------------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
London Bridge Resort Lake Havasu City, AZ 8/91 $ 13,323 400 612
Daytona Beach Regency Daytona Beach, FL 11/96 11,349 422 2,295
Westpark Resort Las Vegas, NV 11/98 11,400 7,752 0
Scottsdale Links Resort Scottsdale, AZ 11/98 15,500 11,628 0
Palm Springs Palm Springs, CA 11/98 13,300 5,252 0
Marquis Villas
Planter's Hilton Head, SC 12/96 12,900 400 0
Quarters Resort
----------- -----
TOTAL............................................................................................. 25,854 2,907
----------- -----
----------- -----
<CAPTION>
RESORT PLANNED
- --------------------------------- -----------
<S> <C>
London Bridge Resort 9,843
Daytona Beach Regency 0
Westpark Resort 0
Scottsdale Links Resort 0
Palm Springs 0
Marquis Villas
Planter's 6,324
Quarters Resort
-----------
TOTAL............................ 16,167
-----------
-----------
</TABLE>
- ------------------------
(a) Average sales price is the average retail sales price for London Bridge
Resort, Daytona Beach Regency and the Planter's Quarters Resort for the
second quarter of 1998 and the expected average retail sales price for the
remaining resorts over the sellout period of Vacation Ownership Interests at
each such resort.
SALES AND MARKETING
The Company focuses its sales and marketing activities on generating a
predictable flow of both off-site and on-site prospective purchasers of Vacation
Ownership Interests at minimal cost.
OFF-SITE SALES CENTERS: The Company currently operates off-site sales
centers in Fresno, California and Philadelphia, Pennsylvania. The Company
also plans to add an additional off-site sales center in 1998 and four
additional centers by the end of 1999. The Company currently intends to
locate its planned off-site sales centers in major metropolitan areas, which
can be conveniently toured during evenings and weekends. These centers,
which are leased by the Company, are generally more cost effective because
they reduce the need for on-site tours of the Company's resorts and are
easily accessible to the Company's target customers. The Company's Fresno
off-site sales center generated $4.5 million of revenue and had an operating
margin of 47.6% for the twelve months ended June 30, 1998.
ON-SITE SALES CENTERS: The Company utilizes a variety of marketing
techniques to generate on-site tours, including mini-vacations resulting
from telemarketing and targeted mailings, retail center kiosks, in-house
marketing to renters, marketing to current owners of Vacation Ownership
Interests and referrals. The Company's Completed Inventory also provides
both additional revenue as well as sales and marketing cost advantages,
through (i) rental income, (ii) access to a steady source of high quality,
low cost, on-site sales tours from rental customers, and (iii) lower
mini-vacation marketing costs. The Company believes that its ability to
effectively implement, manage and refine its marketing activities has
resulted in the generation of a predictable and increasing supply of sales
prospects.
The Company typically establishes the sales prices for its Vacation
Ownership Interests on a resort-by-resort basis after reviewing local market
conditions. When the Company enters into a new market, it typically prices
Vacation Ownership Interests to attract the maximum number of potential
customers and gain market share. As the Company becomes more established in a
market, the Company increases its sales prices to reflect the high quality of
its properties. For example, average sales prices for Vacation Ownership
Interests at the London Bridge Resort and the Daytona Beach Regency have
increased from $8,900 and $7,900, at the date of commencement of sales,
respectively, to $13,323 and $11,349, respectively
2
<PAGE>
as of June 30, 1998. The Company expects to implement this pricing strategy with
respect to the resorts purchased in connection with the Acquisitions.
To support its marketing and sales efforts, the Company has developed and
continues to enhance its database to track its vacation ownership marketing and
sales programs. Management believes that, as the Company's vacation ownership
operations grow, this database will become an increasingly significant asset,
enabling it to take advantage of less costly marketing and referral
opportunities.
CUSTOMER FINANCING
The Company has historically provided financing to approximately 90% of its
vacation ownership customers. These customers are required to make a downpayment
of at least 10% of the Vacation Ownership Interest sales price, and typically
finance the balance over a period of seven to ten years. At the closing of a
sale of a Vacation Ownership Interest, the Company currently delivers a deed to
the purchaser of such Vacation Ownership Interest and secures repayment of such
purchaser's obligation by obtaining a mortgage on the Vacation Ownership
Interest. The Company is considering converting its vacation ownership
operations to a vacation club arrangement, whereby the purchaser of a Vacation
Ownership Interest would receive a non-deeded membership interest in a vacation
club operated by the Company, which would entitle such purchaser to reserve
units at any of the Company's resorts at any time of the year. As of June 30,
1998, the Company had a vacation ownership receivables portfolio totaling
approximately $45.0 million in principal amount, with a weighted average
contractual yield of approximately 15.0% for the six months ended June 30, 1998.
The Company expects a significant increase in its vacation ownership receivables
portfolio as sales commence at its newly-acquired resorts, begining in the
fourth quarter of 1998. On September 28, 1998, the Company entered into a
non-recourse vacation ownership interest loan participation facility (the "New
Receivables Facility") with Prudential Securities Credit Corporation, which will
enable the Company to turn its Vacation Ownership Interests Receivable into cash
quickly. The Company believes that the New Receivables Facility will enable it
to fund a significant portion of the Company's future development without
further leveraging the Company. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and "Description of Other
Indebtedness."
VACATION OWNERSHIP EXCHANGE NETWORKS
According to ARDA, the primary reason cited by consumers for purchasing a
Vacation Ownership Interest is the ability to exchange such interest for
accommodations at other resorts through worldwide exchange networks. London
Bridge Resort and the Daytona Beach Regency are affiliated with Interval
International ("II"), one of the leading worldwide vacation ownership exchange
companies. In addition, the Planter's Quarters Resort is affiliated with Resorts
Condominium International ("RCI"), another leading worldwide vacation ownership
exchange company. Participation in II or RCI entitles owners to exchange their
annual Vacation Ownership Interests for occupancy at over 1,500 II or 3,200 RCI
resorts worldwide. Both the London Bridge Resort and the Daytona Beach Regency
have received Five-Star designations from II, the highest designation under II's
rating system. In addition, the London Bridge Resort was one of II's 30 largest
selling resorts based on 1997 sales volume. The Planter's Quarters Resort has
been designated as a Gold Crown Resort, the highest designation in RCI's rating
system. The Company intends to affiliate its newly-acquired resorts with either
II or RCI.
VACATION OWNERSHIP INDUSTRY
First introduced in Europe in the mid-1960's, vacation ownership has been
one of the fastest growing segments of the hospitality industry over the past
two decades. According to ARDA and other industry sources, vacation ownership
sales and the number of Vacation Ownership Interest owners grew at compound
annual rates of approximately 16% and 22%, respectively, from 1980 to 1997 (see
chart below). The Company expects the industry to continue to grow as consumer
awareness of the attractiveness of
3
<PAGE>
vacation ownership as an alternative to traditional vacation lodging
establishments increases. Set forth below is certain information relating to the
vacation ownership industry.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
($ IN VACATION OWNERSHIP INTEREST SALES
BILLIONS) VOLUME
<S> <C>
1980 0.25
1981 1
1982 1.2
1983 1.3
1984 1.5
1985 1.4
1986 1.4
1987 2
1988 2.25
1989 3
1990 3.15
1991 3.75
1992 4.25
1993 4.5
1994 4.75
1995 5.25
1996 5.5
1997 6
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
(IN MILLIONS) NUMBER OF VACATION OWNERSHIP INTEREST OWNERS
<S> <C>
1980 0.15
1981 0.25
1982 0.35
1983 0.5
1984 0.65
1985 0.75
1986 1
1987 1.1
1988 1.3
1989 1.5
1990 1.75
1991 2.1
1992 2.35
1993 2.65
1994 3.1
1995 3.5
1996 4
1997 4.5
</TABLE>
Source: ARDA (includes, with respect to 1995, 1996 and 1997, unpublished
estimates provided by ARDA)
BUSINESS STRATEGY
Epic's core business strategy is to generate significant cash flow from its
total inventory of Vacation Ownership Interests by (i) expanding and developing
off-site sales centers, (ii) capitalizing on its superior sales and marketing
techniques, (iii) renting available suites at its resorts, (iv) utilizing the
New Receivables Facility, and (v) cross-marketing additional vacation products
to its extensive customer base.
EXPANDING AND DEVELOPING OFF-SITE SALES CENTERS. The Company has a
proven ability to market Vacation Ownership Interests off-site. The Company
intends to capitalize on this ability through the development of several
off-site sales centers in targeted, high volume locations throughout the United
States. Off-site sales centers require minimal capital investment and produce
significant sales.
CAPITALIZING ON SUPERIOR SALES AND MARKETING TECHNIQUES. The Company
believes that its proven ability to generate qualified tours at lower costs
gives it a competitive advantage over other companies in the vacation ownership
industry. The Company plans to capitalize on and continually refine its highly
transferable marketing techniques at its newly acquired properties. Management
believes that as the Company matures, it will also be able to reduce sales and
marketing costs as lower cost marketing programs, such as in-house tours and
referrals, grow. In addition, as the Company's newly acquired resorts become
established, the Company intends to increase its prices based on demand for
Vacation Ownership Interests at such resorts and local market conditions.
RENTING AVAILABLE SUITES AT ITS RESORTS. The Company has historically
generated income from the rental of suites available at its resorts. The
Acquisitions have significantly increased the Company's Completed Inventory and
therefore the number of suites available for rent.
UTILIZING THE NEW RECEIVABLES FACILITY. The Company intends to utilize
the New Receivables Facility to convert its Vacation Ownership Interests
Receivable into cash quickly, thereby enabling the Company to finance a
significant portion of its future development without incurring substantial
additional indebtedness.
CROSS-MARKETING ADDITIONAL VACATION PRODUCTS TO ITS EXTENSIVE CUSTOMER
BASE. Through its marketing research, the Company has created, and will continue
to expand, its already extensive customer base. The Company's long-term strategy
includes increasing the number of vacation products available to its customers.
To develop this strategy and expand its customer base, the Company has recently
formed Epic Travel, LLC, a licensed travel agency, to market and sell vacation
packages to individuals.
4
<PAGE>
The Company also intends to continue to grow through acquisitions in proven,
high-volume, major tourist destinations. Because the vacation ownership industry
is highly fragmented, the Company believes that significant opportunities exist
to make complementary acquisitions at attractive valuations. Acquisitions the
Company may consider include vacation ownership operating companies, land for
resort development, additional inventory, or other vacation ownership-related
assets which may be integrated into the Company's existing operations. In
addition, the Company intends to make selective acquisitions outside the United
States, focusing on the Caribbean region.
THE ACQUISITIONS
On June 30, 1998, the Company consummated the acquisitions of the Scottsdale
Links Resort, the Westpark Resort and the Palm Springs Marquis Villas. On July
8, 1998, the Company consummated the acquisition of the Planter's Quarters
Resort. The following table sets forth the purchase price of each of these
resorts:
<TABLE>
<CAPTION>
RESORTS PURCHASE PRICE
- ------------------------------------------------------------ --------------
($ IN
MILLIONS)
<S> <C>
Scottsdale Links Resort..................................... $25.5
Westpark Resort............................................. 15.9
Palm Springs Marquis Villas................................. 14.0
Planter's Quarters Resort................................... 7.8(a)
-----
Total....................................................... $63.2
-----
-----
</TABLE>
- ------------------------------
(b) This amount includes approximately $4.0 million of indebtedness of the
Planter's Quarters Resort that was assumed by the Company and refinanced
from the net proceeds of the Initial Offering.
On July 8, 1998, the Company also acquired the remaining limited partnership
interests of Daytona Beach Regency, Ltd. which were not owned by the Company or
one of its subsidiaries for $3.3 million. The Company now owns through its
subsidiaries Resort Management, LLC ("RMI") and Resort Investment, LLC ("RII"),
100% of the general and limited partnership interests in Daytona Beach Regency,
Ltd.
THE RESTRUCTURING
Epic Resorts, LLC, a Delaware limited liability company, was formed in June
1998 to merge with Epic Resorts, Inc., which was formed to combine the ownership
of the London Bridge Resort and the Daytona Beach Regency and their vacation
ownership acquisition and development businesses. London Bridge Resort was
acquired in 1986 by London Bridge Resort, Inc., a Delaware corporation wholly
owned by Mr. Thomas F. Flatley, the President and Chief Executive Officer of the
Company. In 1991, the conversion of the London Bridge Resort into a vacation
ownership resort was completed and sales of Vacation Ownership Interests at such
resort commenced. In April 1996, the Daytona Beach Regency was acquired by
Daytona Beach Regency, Ltd., and sales of Vacation Ownership Interests commenced
at such resort in November 1996. In connection with the Initial Offering, Epic
Resorts, Inc. was merged into Epic Resorts, LLC and certain of its subsidiaries
were merged into limited liability companies. Mr. Flatley simultaneously
contributed his membership interests in certain of such subsidiaries to the
Company (the "Restructuring").
5
<PAGE>
The following chart describes the structure of the Company following the
Restructuring and the Acquisitions:
<TABLE>
<S> <C> <C> <C>
Epic Capital Corp.
Epic Warrant Co.
London Bridge Resort, LLC
Epic Resorts - Westpark Resort, LLC
Epic Resorts - Scottsdale Links Resort, LLC
Epic Resorts - Palm Springs Marquis Villas,
Epic Resorts, LLC........ LLC
EPIC Travel, LLC
Epic Resorts Hilton Head, LLC d/b/a Planters
Quarter's Resort
Resort Management, LLC 1% G.P.
Daytona Beach Regency, Ltd.
Resort Investment, LLC 99% L.P
</TABLE>
Subsequent to the Initial Offering and the Acquisitions, the Company formed
three additional subsidiaries, Epic Resorts--Vacation Showplace, LLC, Epic
Resorts Management, LLC and Epic Marketing, LLC. These subsidiaries were formed
as Delaware limited liability companies and will operate off site sales, resort
management and travel service businesses for the Company. Each of these
subsidiaries will become Subsidiary Guarantors of the Notes by entering into a
Supplemental Indenture. On August 27, 1998, the Company also formed Epic Master
Funding Corporation, a bankruptcy remote Delaware corporation ("Epic Funding"),
as a special purpose financing subsidiary to facilitate securitization of the
Vacation Ownership Interests financed by the Company. The Company has no outside
assets, liabilities or operations separate from its wholly-owned subsidiaries.
The Notes are fully, unconditionally, jointly and severally guaranteed by the
Subsidiary Guarantors, and therefore, separate financial statements of the
Subsidiary Guarantors will not be presented. Epic Funding, as of June 30, 1998,
had inconsequential assets, liabilities and equity, and is therefore not a
Subsidiary Guarantor.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange
Original Notes in a like principal amount, the terms of which are substantially
identical to the Exchange Notes. All Original Notes surrendered in exchange for
Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the indebtedness of the Company. See "Use of Proceeds."
------------------------
The Company's executive offices are located at 1150 First Avenue, Suite 900,
King of Prussia, Pennsylvania, 19406 and its telephone number is (610) 992-0110.
6
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
ISSUERS......................... Epic Resorts, LLC and Epic Capital Corp.
OUTSTANDING NOTES............... The Original Notes were sold by the Issuers on July 8,
1998 to NatWest Capital Markets Limited (the "Initial
Purchaser") pursuant to a Purchase Agreement, dated June
30, 1998 (the "Purchase Agreement"). The Initial Purchaser
subsequently resold the Original Notes in transactions
exempt from registration under the Securities Act.
REGISTRATION RIGHTS AGREEMENT... Pursuant to the Purchase Agreement, the Issuers and the
Initial Purchaser entered into the Registration Rights
Agreement, which grants the holders of the Original Notes
certain exchange and registration rights. The Exchange
Offer is intended to satisfy such exchange and
registration rights which terminate upon the consummation
of the Exchange Offer.
SECURITIES OFFERED.............. $130.0 million aggregate principal amount of 13% Senior
Secured Redeemable Notes due 2005, Series B (the "Exchange
Notes").
THE EXCHANGE OFFER.............. The Issuers are offering to exchange $1,000 principal
amount of Exchange Notes for each $1,000 principal amount
of Original Notes that are properly tendered and accepted.
The Issuers will issue Exchange Notes on or promptly after
the Expiration Date. $130.0 million aggregate principal
amount of Original Notes is currently outstanding. The
Original Notes and the Exchange Notes are collectively
referred to herein as the "Notes." The terms of the
Exchange Notes are substantially identical in all respects
(including principal amount, interest rate and maturity
date) to the terms of the Original Notes for which they
may be exchanged pursuant to the Exchange Offer, except
that (i) the Exchange Notes will bear a Series B
designation (ii) the Exchange Notes are freely
transferable by holders thereof (other than as provided
herein) and are not subject to any covenant restricting
transfer absent registration under the Securities Act, and
(iii) holders of the Exchange Notes will not be entitled
to certain rights of holders of the Original Notes under
the Registration Rights Agreement, which rights will
terminate upon the consummation of the Exchange Offer. See
"The Exchange Offer."
Based on an interpretation by the staff of the Commission
set forth in no-action letters issued to third parties,
the Issuers believe that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Original
Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) a broker-
dealer who purchases such Exchange Notes directly from the
Issuers to resell pursuant to Rule 144A under the
Securities Act or any other available exemption under the
Securities Act, or (ii) a person that is an "affiliate" of
an Issuer within the meaning of Rule 405 under the
Securities Act), without compliance with the registration
and prospectus delivery provisions of the Securities Act,
provided that the holder is acquiring the Exchange Notes
in the ordinary course of its business and is not
participating, and has
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes.
The Issuers have not sought, and do not currently intend
to seek a no-action letter. There can be no assurance that
the staff of the Commission would make a similar
determination with respect to the Exchange Offer. Each
broker-dealer that receives the Exchange Notes for its own
account in exchange for the Original Notes, where such
Original Notes were acquired by such broker-dealer as a
result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange
Notes.
MINIMUM CONDITION............... The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Original Notes being
tendered for exchange.
EXPIRATION DATE................. The Exchange Offer will expire at 5:00 p.m., New York City
time, on December 10, 1998, unless the Exchange Offer is
extended (for a maximum of an additional 20 business days)
by the Issuers in their reasonable discretion, in which
cases the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
ACCRUED INTEREST ON THE EXCHANGE
NOTES AND ORIGINAL NOTES........ Interest on the Exchange Notes will accrue from (A) the
last interest payment date on which interest was paid on
the Original Notes surrendered in exchange therefor, or
(B) if no interest has been paid on the Original Notes,
from July 8, 1998. Holders whose Original Notes are
accepted for exchange will be deemed to have waived the
right to receive any interest accrued on the Original
Notes.
CONDITIONS TO THE EXCHANGE
OFFER........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Issuers. See "The
Exchange Offer-- Certain Conditions to the Exchange
Offer." The Issuers reserve the right to terminate or
amend the Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any of such
conditions.
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES.................... The exchange of the Original Notes for Exchange Notes by
tendering holders should not be a taxable exchange for
U.S. federal income tax purposes, and such holders should
not recognize any taxable gain or loss for U.S. federal
income tax purposes as a result of such exchange. See
"Material United States Federal Tax Consequences."
EFFECT ON HOLDERS OF THE
ORIGINAL NOTES.................. As a result of the making of, and upon acceptance for
exchange of all validly tendered Original Notes pursuant
to the terms of this Exchange Offer, the Issuers will have
fulfilled one of the covenants contained in the
Registration Rights Agreement and, accordingly, no
liquidated damages will become payable in respect of the
Original Notes pursuant to the applicable terms of the
Registration
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Rights Agreement. Holders of the Original Notes who do not
tender their Original Notes will be entitled to all the
rights and subject to all of the limitations applicable
thereto under the Indenture relating to the Original Notes
and the Exchange Notes, except for any rights under the
Indenture or the Registration Rights Agreement, which by
their terms terminate or cease to have further
effectiveness as a result of the making of, and the
acceptance for exchange of all validly tendered Original
Notes pursuant to, the Exchange Offer. All untendered
Original Notes will continue to be subject to the
restrictions on transfer provided for in the Original
Notes and in the Indenture. To the extent that Original
Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered Original Notes could be
adversely affected.
USE OF PROCEEDS................. There will be no cash proceeds to the Issuers from the
exchange pursuant to the Exchange Offer.
PROCEDURES FOR TENDERING ORIGINAL NOTES
TENDERING ORIGINAL NOTES........ Each beneficial owner owning interests in Original Notes
("Beneficial Owner") through a DTC Participant (as
defined) must instruct such DTC Participant to cause their
Original Notes to be tendered in accordance with the
procedures set forth in this Prospectus and in the
applicable Letter of Transmittal. See "The Exchange
Offer--Procedures for Tendering--Original Notes held
through DTC."
Each participant (a "DTC Participant") in the Depository
Trust Company ("DTC") holding Original Notes through DTC
must (i) electronically transmit its acceptance to DTC
through the DTC Automated Tender Offer Program ("ATOP"),
for which the transaction will be eligible, and DTC will
then verify the acceptance, execute a book-entry delivery
to the Exchange Agent's (as defined) account at DTC and
send an Agent's Message (as defined) to the Exchange Agent
for its acceptance, or (ii) comply with the guaranteed
delivery procedures set forth in this Prospectus and in
the Letter of Transmittal. By tendering through ATOP, DTC
Participants will expressly acknowledge receipt of the
accompanying Letter of Transmittal and agree to be bound
by its terms and the Issuers will be able to enforce such
agreement against such DTC Participants. See "The Exchange
Offer-- Procedures for Tendering--Original Notes held
through DTC" and "--Guaranteed Delivery
Procedures--Original Notes held through DTC."
Each Holder must (i) complete and sign a Letter of
Transmittal, and mail or deliver such Letter of
Transmittal, and all other documents required by the
Letter of Transmittal, together with certificate(s), if
any, representing all tendered Original Notes, to the
Exchange Agent at its address set forth in this Prospectus
and in the Letter of Transmittal, or (ii) comply with the
guaranteed delivery procedures set forth in this
Prospectus. See "The Exchange Offer--Procedures for
Tendering," "--Exchange Agent"
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
and "--Guaranteed Delivery Procedures--Original Notes held
by Holders."
By tendering, each holder will represent to the Issuers
that, among other things, (i) the Exchange Notes are to be
acquired by the holder or the person receiving such
Exchange Notes, whether or not such person is the holder,
in the ordinary course of business, (ii) the holder or any
such other person (other than a broker-dealer referred to
in the next sentence) is not engaging and does not intend
to engage in the distribution of the Exchange Notes, (iii)
the holder or any such other person has no arrangement or
understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the
holder nor any such other person is an "affiliate" of an
Issuer within the meaning of Rule 405 under the Securities
Act, and (v) the holder or any such other person
acknowledges that if such holder or other person
participates in the Exchange Offer for the purpose of
distributing the Exchange Notes it must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the
Exchange Notes. Each broker-dealer participating in the
Exchange Offer that receives Exchange Notes for its own
account in exchange for Original Notes must acknowledge
that it will deliver a prospectus in connection with any
resale of such Exchange Notes. See "The Exchange Offer--
Procedures for Tendering."
GUARANTEED DELIVERY
PROCEDURES...................... DTC Participants holding Original Notes through DTC who
wish to cause their Original Notes to be tendered, but who
cannot transmit their acceptances through ATOP prior to
the Expiration Date, may effect a tender in accordance
with the procedures set forth in this Prospectus and in
the Letter of Transmittal. See "The Exchange
Offer--Guaranteed Delivery Procedures." Holders who wish
to tender their Original Notes but (i) whose Original
Notes are not immediately available and will not be
available for tendering prior to the Expiration Date, or
(ii) who cannot deliver their Original Notes, the Letter
of Transmittal or any other required documents to the
Exchange Agent prior to the Expiration Date, may effect a
tender in accordance with the procedures set forth in this
Prospectus. See "The Exchange Offer--Guaranteed Delivery
Procedures."
SHELF REGISTRATION STATEMENT.... Under certain circumstances described in the Registration
Rights Agreement, certain holders of Original Notes
(including holders who are not permitted to participate in
the Exchange Offer or who may not freely resell Exchange
Notes received in the Exchange Offer) may require the
Issuers to file and use its best efforts to cause to
become effective, a shelf registration statement under the
Securities Act, which would cover resales of Original
Notes by such holders. See "The Exchange Offer--Purposes
and Effect of the Exchange Offer."
WITHDRAWAL RIGHTS............... Tenders of Original Notes may be withdrawn at any time
prior to the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
EXCHANGE AGENT.................. United States Trust Company of New York is serving as the
Exchange Agent in connection with the Exchange Offer. See
"The Exchange Offer--Exchange Agent."
THE NOTES
THE EXCHANGE NOTES.............. The Exchange Offer applies to $130.0 million aggregate
principal amount of the Original Notes. The form and terms
of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the exchange will
have been registered under the Securities Act and,
therefore, the Exchange Notes will not bear legends
restricting their transfer pursuant to the Securities Act,
and (ii) holders of the Exchange Notes will not be
entitled to certain rights of holders of the Original
Notes under the Registration Rights Agreement, which
rights will terminate upon consummation of the Exchange
Offer. The Exchange Notes will evidence the same debt as
the Original Notes (which they replace) and will be issued
under, and be entitled to the benefits of, the Indenture.
See "Description of Notes" for further information and for
definitions of certain capitalized terms used below.
</TABLE>
<TABLE>
<S> <C>
MATURITY........................ June 15, 2005.
INTEREST PAYMENT DATES.......... June 15 and December 15 of each year, commencing on
December 15, 1998 (each, an "Interest Payment Date").
ORIGINAL ISSUE DISCOUNT......... The Original Notes are, and the Exchange Notes will be
considered to have been, issued with original issue
discount (the difference between the principal payable on
the Notes and the issue price of the Notes) for United
States federal income tax purposes. Original issue
discount, as defined in the Internal Revenue Code of 1986
as amended and the Treasury Regulations issued thereunder
("OID"), has accrued from the issue date of the Notes and
generally will be includable as interest income in the
U.S. Holder's (defined in "Material United States Federal
Tax Consequences") gross income for United States federal
income tax purposes in advance of the cash payments to
which the income is attributable. For a more detailed
discussion of the United States federal income tax
consequences to the holders of the Exchange Notes of the
purchase, ownership and disposition of the Exchange Notes,
see "Material United States Federal Tax Consequences."
RANKING......................... The Original Notes rank, and the Exchange Notes will rank,
PARI PASSU (equally) with all existing and future Senior
Indebtedness of the Issuers. The Original Notes rank, and
the Exchange Notes will rank, senior in right of payment
to all existing and future Subordinated Obligations of the
Issuers. As of June 30, 1998, on a pro forma basis after
giving effect to the Initial Offering and the application
of the net proceeds from the sale of the Original Notes,
the Issuers and the Subsidiary Guarantors would have had
approximately $21.3 million of Secured Indebtedness,
excluding the Notes, which constitutes (along with the
Notes) the only Senior Indebtedness of the Issuers and the
Subsidiary Guarantors. In connection with the initial
funding of the New Receivables Facility,
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
the Company repaid $21.3 million of such Secured
Indebtedness in full. See "Description of Notes--Ranking",
"--Security", and "Description of Other Indebtedness."
GUARANTEES...................... The Original Notes are, and the Exchange Notes will be,
unconditionally guaranteed, jointly and severally, by the
Subsidiary Guarantors. The Subsidiary Guarantees are and
will be senior obligations of the Subsidiary Guarantors
rank and will rank PARI PASSU in right of payment with all
other existing and future Senior Indebtedness of the
respective Subsidiary Guarantors and senior in right of
payment to all existing and future Subordinated
Obligations of the respective Subsidiary Guarantors and
may be released upon the occurrence of certain events. See
"Description of Notes--Subsidiary Guarantees."
SECURITY........................ The Original Notes are, and the Exchange Notes will be,
secured by (a) a first mortgage or other similar interest
(subject to customary exceptions)(each, a "Mortgage") on
all real property acquired by the Issuers after the Issue
Date, which Mortgages shall convert into, and be replaced
by, Mortgages on completed but unsold Vacation Ownership
Interests on such real property (together with the
completed but unsold Vacation Ownership Interests pledged
by the Subsidiary Guarantors, the "Pledged Vacation
Ownership Interests") as they are created; PROVIDED, that
real property acquired or developed with funds from an A&D
Facility shall not be subject to a Mortgage until such A&D
Facility has been repaid in full, (b) a security interest
in the Escrow Account, and (c) a security interest in a
cash collateral account (the "Cash Collateral Account")
into which the proceeds of all sales of Vacation Ownership
Interests and receivables (including in connection with
the New Receivables Facility), as well as any receivables
actually collected, shall be deposited; PROVIDED, that the
Company shall have unrestricted access to all cash in the
Cash Collateral Account so long as no Event of Default has
occurred and is continuing.
Except as provided below, the Subsidiary Guarantees of
London Bridge Resort, LLC and Daytona Beach Regency, Ltd.
are and will be secured by a first Mortgage on all
completed but unsold Vacation Ownership Interests on the
real property owned by each such subsidiary, and, to the
extent that Vacation Ownership Interests on such
properties have yet to be created, on the fee simple
interest of such subsidiaries in such real property. Upon
the creation of such Vacation Ownership Interests, the
Mortgages on such real property (together with any other
real property pledged by any of the Issuers or the
Subsidiary Guarantors, the "Pledged Real Property") will
automatically convert into, and be replaced by, Mortgages
on such Vacation Ownership Interests. In the case of
London Bridge Resort, LLC, its Subsidiary Guarantee is and
will be secured by its existing completed but unsold
Vacation Ownership Interests solely to the extent
permitted under its existing receivables credit facility.
In addition, London Bridge Resort, LLC's new resort
development may be financed through an
</TABLE>
12
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<TABLE>
<S> <C>
A&D Facility, in which case such property will not be
subject to a Mortgage until such A&D Facility is repaid in
full.
The Subsidiary Guarantees of Epic Resorts-Westpark Resort,
LLC, Epic Resorts-Hilton Head, LLC and Epic
Resorts-Scottsdale Links Resort, LLC are and will
initially be secured by a first Mortgage on the fee simple
interest in the Pledged Real Property acquired by such
subsidiary in connection with the Acquisitions and, upon
the creation of Vacation Ownership Interests at such
properties, such Mortgages on such Pledged Real Property
will automatically convert into Mortgages on the Pledged
Vacation Ownership Interests of such subsidiaries. In
addition, the Subsidiary Guarantee of Epic Resorts-Palm
Springs Marquis Villas, LLC is and will be secured by a
leasehold mortgage on the leasehold acquired by it in
connection with the Acquisitions, subject to approval of
such mortgage by the Bureau of Indian Affairs.
Absent the occurrence and the continuance of an Event of
Default, the Trustee will be required to release, or
refrain from imposing its lien on the Pledged Vacation
Ownership Interests as they are sold and the Trustee will
not have a lien on the proceeds of any such sale. In
addition, absent the occurrence and the continuance of an
Event of Default, the Trustee will be required to release
its lien on the Pledged Real Property in the event that
that a Permitted Lien securing an A&D Facility is sought
to be imposed thereon; PROVIDED, that when such A&D
Facility is repaid in full, such lien of the Trustee shall
be imposed or reimposed, as the case may be.
The Subsidiary Guarantees of Subsidiary Guarantors
acquired in the future, or that acquire property in the
future not in connection with the Acquisitions, shall be
secured by a first Mortgage on the fee simple interest in
any Pledged Real Property acquired or owned by such
subsidiaries and, upon the creation of Vacation Ownership
Interests at such properties, such Mortgages on such
Pledged Real Property will automatically convert into, and
be replaced by, Mortgages on the Pledged Vacation
Ownership Interests of such subsidiaries; PROVIDED, that
real property acquired or developed with funds from an A&D
Facility shall not be subject to a Mortgage until such A&D
Facility has been repaid in full.
Mortgages will not be required to be imposed on
newly-acquired real property of the Issuers or any
Subsidiary Guarantor until sixty days after acquisition
thereof. If the Company determines to finance the
development of such real property through an A&D Facility
prior to the expiration of such sixty-day period and the
lender thereunder will not permit any Mortgage on such
property, no Mortgage on such real property will be
imposed until such A&D Facility is repaid in full.
Except to the extent of the assets, if any, serving as
security for such Subsidiary Guarantees, the Subsidiary
Guarantee of each Subsidiary Guarantor is and will be
effectively subordinated to the Secured Indebtedness of
each such Subsidiary Guarantor to the
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
extent of the assets serving as security therefor. See
"Description of Notes--Security."
ESCROW ACCOUNT.................. The Company has placed $16.9 million of the net proceeds
realized from the sale of the Original Notes, representing
funds sufficient to pay the first two interest payments on
the Notes, into the Escrow Account to be held by United
States Trust Company of New York, as escrow agent (the
"Escrow Agent") for the benefit of the holders of the
Notes. Until disbursed in accordance with the Escrow and
Disbursement Agreement (as defined), the Escrow Account
will secure a portion of the Company's obligations under
the Notes. Funds will be disbursed from the Escrow Account
to fund the first interest payment on the Notes and, upon
certain repurchases or redemptions of the Notes, to pay
principal of and premium, if any, thereon. Pending such
disbursement all funds contained in the Escrow Account
will be invested in Cash Equivalents. Thereafter, the
Issuers must at all times maintain in the Escrow Account
funds sufficient to make the next required interest
payment on the Notes.
OPTIONAL REDEMPTION............. Except as described below and under "Change of Control"
the Issuers may not redeem the Notes prior to June 15,
2003. On or after such date, the Issuers may redeem the
Notes, in whole or in part, at any time at the redemption
prices set forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. In addition,
at any time and from time to time on or prior to June 15,
2001, the Issuers may, subject to certain requirements,
redeem up to 35% of the aggregate principal amount of the
Notes with the cash proceeds of one or more Equity
Offerings at a redemption price equal to 113% of the
principal amount to be redeemed, together with accrued and
unpaid interest, if any, to the date of redemption,
provided that at least 65% of the original aggregate
principal amount of the Notes remain outstanding
immediately after each such redemption. See "Description
of Notes--Optional Redemption."
CHANGE OF CONTROL............... Upon the occurrence of a Change of Control, the Issuers
will be required to make an offer to purchase the Notes at
a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the
date of purchase. See "Description of Notes--Optional
Redemption" and "--Change of Control."
MANDATORY PURCHASE OFFER........ The Issuers will be obligated to make one or more offers
to purchase (each, a "Mandatory Purchase Offer") a total
of $65 million (subject to adjustment as described herein)
aggregate principal amount of the Notes (such amount, as
adjusted if applicable, the "Mandatory Purchase Amount")
not earlier than June 15, 2000 nor later than June 15,
2002 (the "Mandatory Purchase Offer Period") at a price
equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of any
purchase. Each Mandatory Purchase Offer shall be made for
a minimum of $10.0 million aggregate principal amount of
the Notes or such lesser amount as shall result in the
Issuers' having offered to purchase during the Mandatory
Purchase Offer
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
Period, in the aggregate, at least the Mandatory Purchase
Amount of the Notes. Mandatory Purchase Offers may only be
made on an Interest Payment Date. If, prior to any
Mandatory Purchase Offer, Notes have been called for
redemption or purchased by the Issuers, the Mandatory
Purchase Amount shall be reduced by an amount equal to the
aggregate principal amount of the Notes so called for
redemption or purchased by the Issuers. If Notes with an
aggregate principal amount in excess of the amount that
the Issuers are seeking to purchase pursuant to a
Mandatory Purchase Offer are tendered in connection with
such Mandatory Purchase Offer, such Notes shall be
purchased on a pro rata basis.
RESTRICTIVE COVENANTS........... The Indenture contains certain covenants that, among other
things, will limit (i) the incurrence of additional
indebtedness by the Company and its Restricted
Subsidiaries, (ii) the payment of dividends or
distributions on, and redemption of, capital stock or
membership interests of the Company and the redemption of
certain subordinated obligations of the Company, (iii)
investments, (iv) sales of assets and subsidiary stock or
membership interests, (v) transactions with affiliates and
(vi) consolidations, mergers and transfers of all or
substantially all the assets of the Company. The Indenture
will also prohibit certain restrictions on distributions
from Restricted Subsidiaries. However, all of these
limitations and prohibitions are subject to a number of
important qualifications and exceptions. See "Description
of Notes--Certain Covenants."
</TABLE>
RISK FACTORS
Prospective participants in the Exchange Offer should carefully consider the
information set forth under the caption "Risk Factors" and all other information
set forth in this Prospectus before participating in the Exchange Offer.
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<PAGE>
SUMMARY COMBINED FINANCIAL INFORMATION
The following table sets forth summary combined financial information for
the Company. For all periods presented, the financial information of London
Bridge Resort, Inc. is included together with the financial data of Epic
Resorts, Inc. since its inception on March 10, 1997 and the financial data of
Daytona Beach Regency, Ltd. since its acquisition on April 8, 1996. The summary
combined financial information as of and for the three years ended December 31,
1997 have been derived from the audited financial statements of such entities.
The summary combined financial information presented below for the six-month
periods ended June 30, 1998 and 1997 have been derived from the unaudited
financial statements of such entities. The unaudited combined financial
statements include all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
its combined financial position and results of operations for these periods.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the entire year. The following financial
information should be read in conjunction with "Use of Proceeds", "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the combined financial statements of the Company and related notes thereto
appearing elsewhere herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE SIX
AS OF OR FOR THE YEAR ENDED, MONTHS ENDED,
------------------------------------------- ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICE DATA)
INCOME STATEMENT DATA:
Revenues:
Sales of vacation ownership interests................... $ 8,290 $ 10,584 $ 30,104 $ 13,586 $ 16,666
Resort operations....................................... 5,029 6,074 6,652 3,860 3,416
Interest income and other............................... 704 1,208 3,535 1,517 2,511
------------- ------------- ------------- ----------- -----------
Total revenues.................................... 14,023 17,866 40,291 18,963 22,593
Cost of sales--vacation ownership interests............. 3,154 3,544 7,337 3,088 3,861
Resort operations expense............................... 4,103 4,806 4,599 2,674 2,010
Selling and marketing expenses.......................... 3,452 4,307 11,574 5,064 6,449
General and administrative expenses..................... 1,322 2,014 3,188 1,408 1,775
Depreciation and amortization........................... 644 799 772 408 376
Provision for losses.................................... 474 492 1,391 576 698
Financing and closing costs............................. 460 323 868 296 579
Interest expense........................................ 894 2,143 3,748 1,779 2,070
------------- ------------- ------------- ----------- -----------
Income (loss) before minority interest and extraordinary
item.................................................. (480) (562) 6,814 3,670 4,775
Minority interest....................................... -- (473) 1,676 1,002 1,190
------------- ------------- ------------- ----------- -----------
Income (loss) before extraordinary item................. (480) (89) 5,138 2,668 3,585
Extraordinary gain on settlement of debt................ 5,077 -- -- -- --
------------- ------------- ------------- ----------- -----------
Net income (loss)....................................... $ 4,597 $ (89) $ 5,138 $ 2,668 $ 3,585
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
OTHER DATA AND CREDIT STATISTICS:
EBITDA (1).............................................. $ 1,058 $ 2,859 $ 9,844 $ 4,951 $ 6,181
Pro Forma EBITDA (1).................................... 1,058 2,386 11,520 5,953 7,371
Cash flows from operating activities.................... (2,642) (83) (3,388) (1,853) (1,649)
Cash flows from investing activities.................... (980) (1,489) (2,313) (512) (56,298)
Cash flows from financing activities.................... 3,528 1,550 5,923 2,349 57,739
Weighted average interest rate on notes receivable at
period end............................................ 14.2% 14.4% 14.9% 14.7% 15.0%
Number of resorts at period end......................... 1 2 2 2 5
Average sales price of vacation ownership interests
sold.................................................. $ 11,157 $ 12,466 $ 11,746 $ 11,692 $ 12,129
Number of vacation ownership interests sold............. 743 849 2,563 1162 1374
Ratio of earnings to fixed charges (2).................. 0.46 0.88 2.29 2.45 2.70
BALANCE SHEET DATA:
Mortgages receivable, net............................... $ 7,641 $ 20,996 $ 37,148 $ 27,949 $ 45,035
Inventory, net.......................................... 12,032 12,741 7,963 11,994 63,286
Total assets............................................ 28,269 43,034 56,288 49,624 120,886
Notes payable........................................... 18,780 34,009 42,891 36,841 101,571
Stockholder's equity.................................... 8,763 8,163 10,578 10,496 13,913
</TABLE>
- ------------------------
(1) EBITDA represents net income (loss) before interest expense, capitalized
interest included in cost of sales, income taxes, depreciation and
amortization, and extraordinary item. EBITDA is presented because it is a
widely accepted industry financial indicator of a Company's ability to
service and/or incur indebtedness. However, EBITDA should not be construed
in isolation as
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a substitute for income from operations, net income or cash flows from
operating activities and other income or cash flow statement data prepared
in accordance with generally accepted accounting principles as a measure of
profitability or liquidity in analyzing the Company's operating performance,
financial position and cash flows. The EBITDA measure presented herein may
not be comparable to EBITDA as presented by other companies. The following
table reconciles EBITDA to net income (loss):
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED SIX MONTHS ENDED
------------------------------------------ ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------ ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net income (loss)......................... $ 4,597 $ (89) $ 5,138 $ 2,668 $ 3,585
Interest expense.......................... 894 2,143 3,748 1,779 2,070
Capitalized interest expense included in
cost
of sales................................ -- 6 186 96 150
Income taxes (a).......................... -- -- -- -- --
Depreciation and amortization............. 644 799 772 408 376
Extraordinary item........................ (5,077) -- -- -- --
------------ ------------- ------------- ----------- -----------
EBITDA.................................... 1,058 2,859 9,844 4,951 6,181
Minority interest......................... -- (473) 1,676 1,002 1,190
------------ ------------- ------------- ----------- -----------
Pro Forma EBITDA (b)...................... $ 1,058 $ 2,386 $ 11,520 $ 5,953 $ 7,371
------------ ------------- ------------- ----------- -----------
------------ ------------- ------------- ----------- -----------
</TABLE>
- ------------------------
(a) The Company is a limited liability company and has been structured to
qualify as a partnership for United States federal income tax purposes.
Accordingly, the Company pays no taxes and its income and expenses flow
through to the Company's members.
(b) Pro forma EBITDA represents the pro forma effects of the Initial
Offering and the application of the net proceeds therefrom, assuming the
Initial Offering closed January 1, 1997 and reflects the elimination of
minority interest associated with the Company's acquisition of certain
limited partnership interests in Daytona Beach Regency, Ltd. on July 8,
1998.
(2) Earnings for the years ended December 31, 1996 and 1995 were insufficient to
cover fixed charges by $283 and $480, respectively.
17
<PAGE>
RISK FACTORS
PRIOR TO PARTICIPATING IN THE EXCHANGE OFFER, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER, TOGETHER WITH THE OTHER INFORMATION INCLUDED IN THIS
PROSPECTUS, THE FOLLOWING RISK FACTORS:
RISKS ASSOCIATED WITH THE ACQUISITIONS AND FUTURE ACQUISITIONS
A principal component of the Company's strategy is to continue to grow by
acquiring additional vacation ownership projects, existing resorts from third
party operators or the land on which to develop vacation ownership resorts. On
June 30, 1998, the Company consummated the acquisition of the Westpark Resort,
the Scottsdale Links Resort and the Palm Springs Marquis Villas, and on July 8,
1998, the Company consummated the acquisition of the Planter's Quarters Resort
and the remaining limited partnership interests of the Daytona Beach Regency,
Ltd. The Company's future growth and financial success will depend upon a number
of factors, including its ability to (i) identify future attractive resort
acquisition opportunities, (ii) consummate such acquisitions on favorable terms,
and (iii) develop and profitably sell Vacation Ownership Interests at the
resorts purchased pursuant to the Acquisitions and any future acquisitions.
There can be no assurance that the Company will be successful with respect to
these factors.
Currently, there are numerous potential buyers of resort real estate, many
of whom are better capitalized than the Company and are competing to acquire
resort properties which the Company may consider attractive acquisition
opportunities. There can be no assurance that the Company will be able to
compete successfully against such other buyers.
Moreover, to successfully implement its business strategy, the Company must
integrate its newly acquired resorts into its existing sales and marketing
programs. During the start-up phase of a new resort, the Company expects to
experience lower operating margins for that resort until such resort's
operations mature and average prices of Vacation Ownership Interests can be
increased from the initial sales prices, which are typically below market to
allow the Company to attract customers and establish market share. The lower
margins could be substantial and could negatively impact the Company's cash
flow. No assurances can be given that the Company's operating margins will be
maintained or improved as its resorts achieve maturity or that new resorts will
not reduce the Company's overall operating margins. In addition, the Company's
expenses as a percentage of revenues is expected to increase as the Company
absorbs certain fixed costs related to the resorts acquired in connection with
the Acquisitions.
Acquisitions involve certain inherent risks and uncertainties. Such risks
include undisclosed liabilities, potential claims against the seller for which
indemnification may not be available (by virtue of caps or otherwise),
uncertainty as to future financial results, integrating distinct business
operations and projects, increased demands on management resources and other
similar factors. The Company also anticipates making selective acquisitions
outside the United States, which are subject to additional risks, such as
political and economic instability, regulation by foreign governments, the
imposition of taxes and tariffs and other similar factors. No assurance can be
given that the Acquisitions or future acquisitions will be profitable. See
"Business--The Acquisitions."
LIMITED OPERATING HISTORY
The Company, through its predecessors, has been involved in the vacation
ownership industry since 1991 through the London Bridge Resort and the Daytona
Beach Regency. However, the Company has had limited experience in the concurrent
development and operation of multiple resorts. Accordingly, the Company has a
limited operating history upon which an evaluation of the Company, its current
business and its prospects can be based, each of which must be considered in
light of the risks, expenses and problems frequently encountered by all
companies in the early stages of development. To address these risks, the
Company must, among other things, maintain and expand its customer base and
attract a significant number of new customers, respond to competitive
developments, provide superior customer
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<PAGE>
service, develop and extend its brand name recognition in a number of new
markets, implement and execute its business and marketing strategy successfully,
and continue to attract, retain and motivate qualified personnel. There can be
no assurance that the Company will be successful with respect to these factors,
and any failure to do so could have a material adverse effect on the Company's
business, results of operations and financial condition.
MANAGEMENT OF GROWTH
With the consummation of the Acquisitions, the Company has undertaken the
development, marketing and sales of Vacation Ownership Interests at its four
newly-acquired resorts in addition to continued operation and new phase
development at its two existing resorts. This rapid expansion is expected to
place significant pressure on the Company's managerial, operational and
financial systems. To manage its growth, the Company must continue to strengthen
its management team, implement and improve its operational and financial systems
and expand, train and manage its employee base. The Company also will be
required to develop and manage multiple relationships with site operators,
advertisers, suppliers and other third parties. The Company's systems,
procedures or controls may not be adequate to support the Company's operations,
and management may not be able to achieve the rapid expansion necessary to
exploit potential market opportunities. The Company's future operating results
will also depend on its ability to expand its sales and marketing organization,
to penetrate markets and to expand its support organization. The failure to
manage growth effectively could create a negative image of the Company in the
vacation ownership industry and could have a material adverse effect on the
Company's business, financial condition and results of operations.
VACATION OWNERSHIP INDUSTRY AND GENERAL ECONOMIC CONDITIONS
The vacation ownership industry is highly sensitive to changes in national
and regional economic conditions, including, among other factors, levels of
employment and discretionary disposable income, consumer confidence, available
financing and interest rates. A downturn in the economy in general or in the
market for vacation ownership property could have a material adverse effect on
the Company's business, operating results and financial condition. Any adverse
changes affecting the vacation ownership industry such as an oversupply of
Vacation Ownership Interests, a reduction in demand for Vacation Ownership
Interests, changes in travel and vacation patterns, changes in governmental
regulations of the vacation ownership industry and increases in construction
costs or taxes, as well as negative publicity for the vacation ownership
industry, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
SUBSTANTIAL LEVERAGE; POTENTIAL INABILITY TO SERVICE DEBT
The Company has significant debt service obligations. As of June 30, 1998,
after giving effect to the Initial Offering and the application of the net
proceeds therefrom, the Company and its consolidated subsidiaries would have had
total indebtedness of approximately $152.2 million. As of June 30, 1998, $21.3
million of such indebtedness was outstanding under the Company's existing $23.0
million receivables facility (the "Exisiting Receivables Facility") which bears
interest at a variable rate. This variable rate repriced each business day in
which the commercial prime base rate was changed by Citibank, N.A. In connection
with the initial funding of the New Receivables Facility, the Company repaid in
full all amounts outstanding under the Existing Receivables Facility. The
Company currently has no outstanding variable rate indebtedness. After giving
pro forma effect to the Initial Offering and the Acquisitions, the Company's
earnings would have been insufficient to cover its fixed charges by
approximately $1.8 million for the six months ended June 30, 1998. Moreover, the
Company is required to seek external sources of liquidity to support its
operations, finance the acquisition and development of vacation ownership
inventory, finance a substantial percentage of its sales and satisfy its debt
and other obligations. The Company anticipates that
19
<PAGE>
it will continue to require external sources of liquidity to support its
operations in the future. The Indenture permits the Company to incur material
additional indebtedness, provided that certain conditions and a coverage ratio
of consolidated cash flow to consolidated interest expense, currently equal to
2.00 to 1.00, are met. The Company's ability to pay cash dividends, to repay
subordinated debt and to make certain investments exceeding 50% of the Company's
consolidated net income is also limited by certain restrictions. See
"Description of Notes--Certain Covenants."
The Company's ability to service or to refinance its indebtedness (including
the Notes) or to obtain additional financing (including its ability to
consummate future notes receivable securitizations) depends on its future
performance, which is subject to a number of factors, including the Company's
results of operations, leverage, financial condition and business prospects, the
performance of its receivables, prevailing interest rates, general economic
conditions and perceptions about the vacation ownership industry. The Company
entered into the New Receivables Facility in September 1998. However, no
assurance can be given that the Company will be able to obtain sufficient
additional external sources of liquidity on attractive terms, or at all. The New
Receivables Facility includes, among other things, various representations and
warranties, conditions to funding, eligibility requirements for collateral,
affirmative, negative and financial covenants and events of default.
Specifically, the Company must maintain a Tangible Net Worth (as defined in the
New Receivables Facility) of at least $10.0 million and must meet all financial
covenants contained in the Indenture. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Liquidity and Capital
Resources," "Business," and "Description of Notes."
The Company's level of debt and debt service requirements will have several
important effects on its future operations, including the following: (i) the
Company will have significant cash requirements to service debt, reducing funds
available for operations and future business opportunities as well as increasing
the Company's vulnerability to adverse economic and industry conditions; (ii)
the Company's leveraged position will increase its vulnerability to competitive
pressures; (iii) the financial covenants and other restrictions contained in the
Indenture and other agreements relating to the Company's indebtedness will
require the Company to meet certain financial tests and will restrict its
ability to, among other things, borrow additional funds, dispose of assets or
pay cash dividends on, or repurchase, preferred or common stock; and (iv) funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes may be limited. Certain of the Company's competitors operate
on a less leveraged basis and will have greater operating and financial
flexibility than the Company.
RISKS RELATED TO DEVELOPMENT ACTIVITIES
The Company's growth strategy involves certain inherent risks including the
following: (i) the Company will be required to make material capital
expenditures to develop its Planned Inventory and Under Development Inventory
(the Company estimates that the total cash required to complete preparation for
the sale of such inventory as of June 30, 1998 was approximately $53.3 million),
(ii) planned development may be delayed or abandoned and development and
carrying costs may exceed those anticipated, possibly making the project
uneconomical or unprofitable, (iii) the Company may experience a fluctuation in
quarterly results due to an increase or decrease in the number of vacation
ownership projects subject to percentage of completion accounting which requires
net profit on such projects to be recognized on a pro rata basis as development
is completed, (iv) the Company may experience delays in bringing inventories to
market due to delays in obtaining required regulatory approvals to sell Vacation
Ownership Interests or otherwise, resulting in decreased revenues and increased
interest expense and carrying charges and (v) inventories may decline in value
due to changing market and economic conditions. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Business." There
can be no assurance that the Company will complete planned development
activities or be able to acquire additional properties on attractive terms.
In addition, the Company's construction activities typically are performed
by third-party contractors, and, accordingly, the timing, quality and completion
of such activities cannot be controlled by the
20
<PAGE>
Company. Nevertheless, construction claims may be asserted against the Company
for construction defects and such claims may give rise to liabilities. New
development activities, regardless of whether or not they are ultimately
successful, typically require a substantial portion of management's time and
attention. Development activities are also subject to risks relating to the
inability to obtain, or delays in obtaining, all necessary zoning, land-use,
building, occupancy, sales and other required governmental permits and
authorizations, the ability of the Company to coordinate construction activities
with the process of obtaining such permits and authorizations, and the ability
of the Company to obtain the financing necessary to complete the necessary
acquisition, construction, and/or conversion work at its projects and resorts.
In particular, with respect to the Westpark Resort, the Company must obtain a
zoning variance to permit the creation and sale of Vacation Ownership Interests
at such resort. With respect to the Scottsdale Links Resort and the Palm Springs
Marquis Villas, the Company has obtained conditional use zoning permits, which
permit the creation and sale of Vacation Ownership Interests at such resorts,
subject to the satisfaction of the conditions thereto. No assurance can be given
that the Company will obtain a zoning variance with respect to the Westpark
Resort or that the Company will satisfy the conditions to its zoning permits at
the Scottsdale Links Resort and/or the Palm Springs Marquis Villas. The failure
to obtain or maintain such zoning permits would have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, certain state and local laws may impose liability on property
developers with respect to construction defects discovered or repairs made by
future owners of such property.
RISKS ASSOCIATED WITH CUSTOMER FINANCING AND RECEIVABLES
The Company generally offers financing of up to 90% of the purchase price to
all purchasers of its Vacation Ownership Interests. These loans are
collateralized by liens on such Vacation Ownership Interests. The Company has
historically required external sources of liquidity in order to offer financing
to its customers and may require external sources of liquidity in the future.
The receivables arising from sales of Vacation Ownership Interests have
generally been pledged to institutional lenders. Under its current pledged
receivables facilities (rather than the New Receivables Facility), the Company
is typically advanced 90% of the principal balance of eligible pledged
receivables. Under such facilities, the Company is required to replace
receivables that become delinquent or to pay down the loan secured by such
receivables to remain within required loan to value ratios. Because the
Company's receivables bear interest at a fixed rate and its borrowings bear
interest at a variable rate, the Company bears the risk of increases in interest
rates. The average maturity of these receivables is seven years.
Under the Existing Receivables Facility, the Company bears the risk of
delinquencies and defaults by buyers who finance the purchase of their Vacation
Ownership Interests through the Company. The Company's Vacation Ownership
Interest financing is generally not subject to extensive loan underwriting
criteria. Prior to providing such financing, the Company performs a commercial
credit check. The New Receivables Facility will permit the Company to sell its
Vacation Ownership Interest Receivables to a limited-purpose receivables
subsidiary on a non-recourse basis. Such Vacation Ownership Interest Receivables
may thereafter be sold in securitization transactions. As a result, the risk of
delinquencies or defaults on such receivables would shift to the securitizing
lender. The Company will be able to finance a substantial portion of its
customers' purchases of Vacation Ownership Interests from the funds provided by
the New Receivables Facility. No assurance can be given, however, as to whether
the Company will also require a traditional pledged receivables facility in
order to support its operations.
General economic conditions have an impact on the ability of borrowers to
repay loans. Loss of earnings, illness and other similar factors affecting
borrowers may lead to an increase in delinquencies. The Company ceases to carry
a receivable upon a foreclosure or when it receives a deed in lieu of
foreclosure, at which time the property goes back into inventory. If the
vacation ownership market should experience an overall decline in values such
that the outstanding balances of the Company's notes receivable are greater than
the value of the respective Vacation Ownership Interests, the actual rates of
delinquencies,
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foreclosures and losses could be materially higher than those now experienced.
An increase in delinquency rates or defaults on the Company's receivables could
have a material adverse effect on the Company's business, operating results and
financial condition as well as the Company's ability to obtain financing under
the New Receivables Facility or any other pledged receivables facility. In
addition, if a purchaser of a Vacation Ownership Interest defaults early in the
repayment schedule, the costs associated with marketing and sales commissions
may not be recouped, and similar costs and commissions will be incurred in
connection with the resale of such Vacation Ownership Interest after the Company
regains possession of such Vacation Ownership Interest. The Company may incur
substantial costs and delays in connection with its servicing of receivables,
including costs in foreclosing or realizing on its collateral and additional
marketing and sales costs with respect to reacquired property. No assurances can
be given that reacquired property will be sold at a profit. During the six-month
period ended June 30, 1998 and the year ended December 31, 1997, the Company
charged $.07 million and $1.4 million, respectively, to its provision for loan
losses to reflect the difference between the unpaid principal balance of the
non-performing receivables and the estimated net realizable value of the
reacquired property. See "Business--Customer Financing."
RISK OF INABILITY TO REALIZE UPON SECURITY; INSUFFICIENT COLLATERAL
The Original Notes are, and the Exchange Notes will be, secured by Mortgages
on certain real property and Vacation Ownership Interests. See "Description of
Notes--Security" for a description of such collateral. The ability of the
Trustee to foreclose on such collateral upon the occurrence of an Event of
Default under the Indenture will be subject to legal requirements, potential
delays and practical problems associated with realization upon mortgages and
security interests in real property generally. Foreclosures are regulated by law
and are subject to a court's equitable powers. In certain circumstances, the
liens of the Trustee could become junior to certain governmental or other liens,
including, without limitation, liens for unpaid taxes or assessments or certain
environmental remediation liabilities. See "Description of Notes-- Security." In
addition with respect to the proposed leasehold mortgage on the Palm Springs
Marquis Villas leasehold, no assurance can be given that the Company will be
able to obtain the approval of the Bureau of Indian Affairs to impose such a
mortgage. If such approval is not obtained, the Subsidiary Guarantee of Epic
Resorts-Palm Springs Marquis Villas, LLC will not be secured by any mortgage on
such leasehold.
The proceeds of any sale of Pledged Real Property or Pledged Vacation
Ownership Interests, as the case may be, following an Event of Default under the
Indenture may not be sufficient to repay the Notes in full. No appraisals were
obtained on the Pledged Real Property or the Pledged Vacation Ownership
Interests in connection with the Initial Offering. No assurances can be given as
to the value of the Pledged Real Property or the Pledged Vacation Ownership
Interests or as to the amounts that could be realized in the event of a
foreclosure or other comparable proceeding realizing on the Mortgages or that
the Pledged Real Property or the Pledged Vacation Ownership Interests will not
decline in value. Moreover, pursuant to the terms of the Indenture and the
Mortgages, the Trustee will be required to release the lien of the Mortgages
upon the sale of any Pledged Vacation Ownership Interest covered thereby unless
an Event of Default shall have occurred and be continuing. Absent such an Event
of Default, the Trustee will not have a lien on the proceeds from a sale of the
Pledged Vacation Ownership Interests. Consequently, as Pledged Vacation
Ownership Interests are sold, the value of the collateral covered by the
Mortgages will diminish. The Company expects to begin selling Vacation Ownership
Interests at the Scottsdale Links Resort, the Palm Springs Marquis Villas, the
Westpark Resort upon receipt of required government approvals, which the Company
expects to obtain by November 1998 for Scottsdale Links Resort and Westpark
Resort and by January 1999 for Palm Springs Marquis Villas. The Company
currently estimates, based on historical sales at the Daytona Beach Regency and
the London Bridge Resort, that the Pledged Vacation Ownership Interests will be
sold out over a four to seven year period. In addition, if a lender under an A&D
Facility requires a Mortgage to secure borrowings under such facility, the
Trustee will not be permitted to impose or maintain a Mortgage on the property
acquired or developed therewith until such A&D Facility is repaid in full.
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If a bankruptcy proceeding were to be commenced by or against the Company
and/or the Subsidiary Guarantors and the bankruptcy court concluded that the
applicable Subsidiary Guarantees were not adequately secured, the holders of the
Notes would have only an unsecured deficiency claim with respect to the
applicable Subsidiary Guarantee to the extent of such deficiency, and would not
be entitled to post-petition interest or reimbursement of costs of collection
(including attorney's fees). Any deficiency claim of the holder of the Notes
with respect to the Subsidiary Guarantors who executed Mortgages would rank PARI
PASSU with any deficiency claims of all other general unsecured creditors of the
Company and/or the Subsidiary Guarantors. In addition, the ability of the
holders of the Notes to effect a sale of the Pledged Real Property or the
Pledged Vacation Ownership Interests may be subject to certain bankruptcy
limitations in the event of a bankruptcy proceeding involving the Company and/or
the Subsidiary Guarantors, including, without limitation, the so called
"automatic stay" under Section 362 of the United States Bankruptcy Code, 11
U.S.C. Section 101 et. seq., as amended from time to time.
Except for the Mortgages on the Pledged Real Property and the Pledged
Vacation Ownership Interests, the Pledged Note and the security interests in the
Escrow Account and the Cash Collateral Account neither the Company nor any of
its subsidiaries, including the Subsidiary Guarantors, has provided or is
required to provide any security for its obligations under the Notes or the
Subsidiary Guarantees, as applicable.
RISKS ASSOCIATED WITH VACATION OWNERSHIP INTEREST EXCHANGE NETWORK
The attractiveness of Vacation Ownership Interests is enhanced significantly
by the availability of exchange networks that allow owners of Vacation Ownership
Interests to exchange their occupancy right during a particular year for an
occupancy right granted at another participating network resort. Several
companies, including II and RCI, provide broad-based Vacation Ownership
Interests exchange services. The London Bridge Resort and the Daytona Beach
Regency are currently qualified for participation in the II exchange network and
the Planter's Quarters Resort is qualified for participation in RCI. No
assurance can be given that these resorts will continue to qualify, or its
future resorts will qualify, for participation in the II or RCI networks or any
other exchange network, or that the Company's customers will continue to be
satisfied with II's or RCI's exchange network. If such exchange networks cease
to function effectively, if the Company's resorts are not accepted as exchanges
for other desirable resorts, or if II or RCI ceases to be a leading exchange
network, the Company's sales of Vacation Ownership Interests could be materially
adversely affected. The Company has entered into agreements with II regarding
the Daytona Beach Regency and the London Bridge Resort and will assume the
agreement with RCI relating to the Planter's Quarters Resort. The Company
expects to enter into agreements with II or RCI regarding each of the Palm
Springs Marquis Villas, the Scottsdale Links Resort and the Westpark Resort.
However, there can be no assurance that such agreements will be entered into for
all or any one of such resorts. See "Business-- Vacation Ownership Industry
Overview--Participation in Exchange Networks."
HOLDING COMPANY STRUCTURE
The Notes will be obligations exclusively of the Issuers. Because a
significant portion of the operations of the Company currently are conducted
through subsidiaries, the cash flow of the Company and its ability to service
its debt, including the Notes, is dependent upon the cash flows of such
subsidiaries and the distribution of those cash flows to the Company, or upon
loans or other payments of funds by such subsidiaries to the Company. The
Company's subsidiaries are separate and distinct legal entities and, except
pursuant to the Subsidiary Guarantees, have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Notes or to make any funds
available therefor, whether by distributions, loans or other payments. In
addition, distributions and certain loans and advances to the Company by such
subsidiaries may be subject to certain contractual restrictions, will be
contingent upon the earnings of such subsidiaries and will be subject to various
business considerations and legal restrictions. The Original Notes are, and the
Exchange Notes will be, effectively subordinated to all Indebtedness (as
defined) and other liabilities and commitments (including trade payable and
lease obligations) of the Company's
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subsidiaries that are not Subsidiary Guarantors and to all Secured Indebtedness
of the Company and its subsidiaries (except to the extent of any collateral
securing the Notes or the Subsidiary Guarantees). Any right of the Company to
receive assets of any such subsidiary upon the liquidation or reorganization of
such subsidiary (and the consequent right of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
those subsidiary's creditors, except to the extent that the Company or the
Trustee, on behalf of the holders of Notes, pursuant to the Subsidiary
Guarantees, is itself recognized as a creditor of such subsidiary, in which case
the claims of the Company or the Trustee, on behalf of the holders of Notes,
would still be subordinate to any security in the assets of such subsidiary and
any Indebtedness of such subsidiary senior to that held by the Company.
LIMITATION ON PURCHASE OF NOTES UPON A CHANGE OF CONTROL OR MANDATORY PURCHASE
OFFER
Upon a Change of Control (as defined in the Indenture) or a Mandatory
Purchase Offer, each holder of the Notes will have certain rights, at the
holder's option, to require the Company to purchase all or a portion of such
holder's Notes. In connection with a Mandatory Purchase Offer, or if a Change of
Control were to occur, there can be no assurances the Company would have
sufficient financial resources, or would be able to arrange financing, to
purchase all Notes tendered by the holders thereof. In addition, certain events
involving a Change of Control may constitute an event of default under the
Company's credit agreements and other debt instruments. Moreover, the exercise
by the holders of their right to require the Company to purchase the Notes as a
result of the occurrence of a Change of Control or in connection with a
Mandatory Purchase Offer may create an event of default under the Company's
credit agreements and other debt instruments, and could create an event of
default under other future credit agreements or other debt instruments. Any such
default could effectively block the purchase of the Notes. See "Description of
the Notes--Change of Control" and "--Mandatory Offer to Purchase."
FRAUDULENT CONVEYANCE CONSIDERATIONS
The issuance by the Subsidiary Guarantors of the Subsidiary Guarantees and
the granting of the Mortgages could be subject to review under applicable
federal and state fraudulent transfer or conveyance laws in a bankruptcy
proceeding or a lawsuit by or on behalf of unpaid creditors of a Subsidiary
Guarantor or a representative of such creditors, such as a trustee or a
Subsidiary Guarantor as debtor-in-possession. Under such laws, if a court were
to find that, at the time a Subsidiary Guarantor issued the Subsidiary Guarantee
or granted a Mortgage, either (i) the Subsidiary Guarantor issued such
Subsidiary Guarantee or granted such Mortgage with the intent of hindering,
delaying or defrauding creditors, or (ii) the Subsidiary Guarantor received less
than a reasonably equivalent value or fair consideration for issuing such
Subsidiary Guarantee or granting such Mortgage, and the Subsidiary Guarantor (a)
was insolvent or rendered insolvent by reason of the issuance of such Subsidiary
Guarantee or granting such Mortgage, (b) was engaged in a business or a
transaction, or was about to engage in a business or a transaction, for which
the assets remaining with the Subsidiary Guarantor after giving effect to the
issuance of such Subsidiary Guarantee or the granting of a Mortgage, constituted
an unreasonably small amount of capital, or (c) intended to incur, or believed
that it would incur, debts beyond its ability to pay as they matured, such court
could void the Subsidiary Guarantor's obligations under such Subsidiary
Guarantee or Mortgage and direct the repayment of any amounts paid thereunder to
the Subsidiary Guarantor or to a fund for the benefit of the Subsidiary
Guarantor's creditors, or take other action detrimental to the holders of the
Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. Generally, however, an
entity will be considered insolvent for purposes of the foregoing if the sum of
its debts is greater than all of its property at a fair valuation, or if the
present fair salable value of its assets is less than the amount that will be
required to pay its probable liabilities on its existing debts as they become
absolute and matured or if it could not pay its debts as they became due. Based
upon management's analysis of internal cash flow projections and other financial
information and estimated values of assets and liabilities of the Subsidiary
Guarantors, the Company believes that,
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immediately after issuance of the Original Notes, the Subsidiary Guarantors were
solvent, and had sufficient capital to carry on their businesses and that the
Subsidiary Guarantors were able to pay their debts as they mature. No assurance
can be given, however, as to what standard a court could apply in making such
determinations or that a court would reach the same conclusions with regard to
these issues.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the experience
and abilities of its President and Chief Executive Officer, Thomas F. Flatley.
The loss of the services of Mr. Flatley could have a material adverse effect on
the Company and its business prospects. Although the Company has entered into
employment agreements with certain members of senior management, no assurances
can be given the Company will be able to retain the services of such
individuals. The Company's continued success is also dependent upon its ability
to hire, train and retain qualified marketing, sales, development, acquisition,
finance, management and administrative personnel. Such personnel are in
substantial demand and the cost of attracting or retaining such key personnel
could escalate over time. There can be no assurance that the Company will be
successful in attracting or retaining such personnel. See "Management."
VARIABILITY OF CASH FLOWS
The Company's cash flows, and thus its ability to pay interest and principal
on the Notes, may be impacted by, among other things, the timing of the
completion of the acquisition and development of its vacation ownership resorts,
a shortage of ready-for-sale inventory in its key market areas, levels of loan
losses, and the potential impact of adverse weather and other natural disasters
at the Company's resorts. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition."
GOVERNMENT REGULATION
The Company is subject to extensive and complex federal, state and local
regulation, and is required to comply with various federal, state and local
environmental, zoning, land use, consumer protection, anti-fraud, labor, usury,
truth-in-lending, equal opportunity, vacation ownership registration, licensing
and other laws and regulations which govern its operations. Existing or future
regulations may have a material adverse impact on the Company's operations by,
among other things, imposing additional compliance costs, delaying the period in
which projects are brought to market and limiting the interest rate which the
Company may charge to customers who utilize its financing. The Company believes
that it is in material compliance with all applicable laws and regulations to
which it is currently subject. However, no assurances can be given that the
costs of future compliance will not be significant or that the Company is in
fact in compliance with all applicable laws and regulations. In addition, there
can be no assurance that laws and regulations applicable to the Company in any
specific jurisdiction will not be revised or that other laws or regulations
(including, without limitation, with respect to tax matters) will not be adopted
which could increase the Company's cost of compliance or prevent the Company
from marketing or selling its vacation ownership properties or conducting other
operations in such jurisdictions or otherwise have a material adverse impact on
the Company's operations. Any failure of the Company to comply with applicable
laws or regulations or any increase in the costs of compliance could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Government Regulation" and "--Legal
Proceedings."
COMPETITION
The vacation ownership industry is highly competitive. The Company competes
with various high profile and well-established resort operators. Many of the
world's most recognized lodging, hospitality and entertainment companies have
begun to develop and sell Vacation Ownership Interests in resort properties.
Major companies that now operate or are developing or planning to develop
vacation ownership resorts include Marriott Ownership Resorts ("Marriott"), The
Walt Disney Company ("Disney"), Hilton Hotels Corporation ("Hilton"), Hyatt
Corporation ("Hyatt"), Four Seasons Hotels & Resorts ("Four
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<PAGE>
Seasons") and Inter-Continental Hotels and Resorts ("Inter-Continental"). The
Company also competes with other publicly-traded vacation ownership companies,
including Signature Resorts, Inc. ("Signature"), Vistana, Inc. ("Vistana"),
Fairfield Communities, Inc. ("Fairfield"), Bluegreen Corporation ("Bluegreen"),
Silverleaf, Inc. ("Silverleaf"), Trendwest Resorts, Inc. ("Trendwest") and ILX
Resorts Incorporated ("ILX") as well as numerous other owners and operators of
vacation ownership resorts. Many of the Company's competitors are larger and
possess greater financial, marketing, personnel and other resources than the
Company. Although the Company believes it can effectively compete in its market
areas, no assurances can be given as to the Company's future ability to locate,
develop and sell attractive properties in the markets in which it wishes to
operate or that the entrance of high profile and well-established operators into
the Company's market areas will not have a material adverse effect on the
Company's operations. The development and operation of additional vacation
ownership resorts in the Company's markets could have a material adverse impact
on the demand for Vacation Ownership Interests at the Company's resorts as well
as the Company's results of operations. In addition, management believes that
competition will be increased as the Company's competitors become larger through
recent and possible future consolidation in the vacation ownership industry.
With respect to its finance operations, the Company competes with banks,
mortgage companies, other financial institutions and government agencies
offering financing of Vacation Ownership Interests. See "Business--Competition."
NATURAL DISASTERS; UNINSURED LOSS
Certain of the Company's resorts are located in areas that are susceptible
to wind storms, hurricanes, floods, mud slides, earthquakes, and other natural
disasters. The Company's resorts could suffer significant damage as a result of
storms or natural disasters. Any such damage could impair the Company's ability
to sell Vacation Ownership Interests at its resorts, and to collect on
outstanding notes receivable arising from such sales and adversely affect the
Company's business, operating results and financial condition.
There are certain types of losses that are not generally insured because
they are either uninsurable or not economically feasible to insure and for which
the Company does not have insurance coverages such as losses due to floods or
acts of war. Should an uninsured loss or a loss in excess of insured limits
occur, the Company could lose its investment in a resort as well as the
anticipated future revenues from such resort, but would continue to be obligated
on any indebtedness or other obligations related to such resort.
APPLICABILITY OF FEDERAL SECURITIES LAWS TO THE SALE OF VACATION OWNERSHIP
INTERESTS
It is possible that the Vacation Ownership Interests may be deemed to be a
security as defined in Section 2(1) of the Securities Act. If the Vacation
Ownership Interests were determined to be a security for such purpose, their
sale would require registration under the Securities Act. The Company has not
registered the sale of the Vacation Ownership Interests under the Securities Act
and does not intend to do so in the future. If the sale of the Vacation
Ownership Interests were found to have violated the registration provisions of
the Securities Act, purchasers of the Vacation Ownership Interests would have
the right to rescind their purchases of Vacation Ownership Interests. If a
substantial number of purchasers sought rescission and were successful, the
Company's business, results of operations and financial condition could be
materially adversely affected. Because of the nature of the Company's Vacation
Ownership Interest program and the sales practices utilized in such program, the
Company does not believe that its Vacation Ownership Interests constitute a
security within the meaning of Section 2(1) of the Securities Act.
LIMITED RESALE MARKET FOR VACATION OWNERSHIP INTERESTS
The Company sells Vacation Ownership Interests to buyers for leisure
purposes and not for investment. The Company believes that the market for resale
of Vacation Ownership Interests by such buyers is presently limited and that any
resales of Vacation Ownership Interests are typically at prices substantially
less than the original purchase price. These factors may make ownership of
Vacation Ownership Interests less attractive to prospective buyers. In addition,
attempts by buyers to resell their Vacation Ownership
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Interests may compete with sales of, and depress the market price of, Vacation
Ownership Interests at the Company's resorts.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws, ordinances and regulations, the
current or previous owner, manager or operator of real property may be liable
for the costs of removal or remediation of certain hazardous or toxic substances
located on or in, or emanating from, such property, as well as related costs of
investigation and property damage. Such laws often impose such liability without
regard to whether the owner, manager or operator knew of, or was responsible
for, the presence of such hazardous or toxic substances. Under the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), a lender may be liable either to the government or to
private parties for cleanup costs on property securing a loan, even if the
lender does not cause or contribute to the contamination. Certain states impose
a statutory lien for associated costs on property that is the subject of a
cleanup action by the state on account of hazardous wastes or hazardous
substances released or disposed of on the property. Such a lien will generally
have priority over all subsequent liens on the property and, in certain of these
states, will have priority over prior recorded liens including the lien of a
mortgage or deed of trust. In addition, under federal environmental legislation
and possibly under state law in a number of states, a secured party which takes
a deed in lieu of foreclosure or acquires a mortgaged property at a foreclosure
sale or otherwise is deemed an "owner" or "operator" of the property and may be
liable for the full costs of cleaning up a contaminated site. Such costs could
be substantial and are not limited to the value of the property. The Company
believes that it is in compliance in all material respects with all federal,
state and local laws, ordinances and regulations regarding hazardous or toxic
substances, as a result of internal monitoring efforts by the Company's risk
manager as well as Phase 1 environmental studies which have been performed at
each of the Company's properties. However, no assurance can be given that
hazardous or toxic substances will not be found on the Company's property in the
future.
COMPLIANCE WITH LAWS GOVERNING ACCESS
A number of state and federal laws, including the Fair Housing Act and the
Americans with Disabilities Act, impose requirements related to access and use
by disabled persons of a variety of public accommodations and facilities.
Although the Company believes that its resorts are in compliance with these laws
in all material respects, the Company may incur additional costs of complying
with such laws and no assurances can be given that the Company is in fact in
compliance with such laws. The ultimate amount of the cost of compliance with
such legislation is not currently ascertainable, and while such costs are not
expected to have a material effect on the Company, such costs could be
substantial.
ORIGINAL ISSUE DISCOUNT
The Original Notes are, and the Exchange Notes will be considered to have
been issued with original issue discount (the difference between the principal
payable on the Notes and the original issue price of the Notes) for United
States federal income tax purposes. Original issue discount as defined in the
Code and the Treasury Regulations issued thereunder ("OID") will accrue from the
issue date of the Notes and generally will be includable as interest income in
the U.S. Holder's (defined in "Material United States Federal Tax Consequences")
gross income for United States federal income tax purposes in advance of the
cash payments to which the income is attributable. For a more detailed
discussion of the United States federal income tax consequences to the holders
of the Exchange Notes of the purchase, ownership and disposition of the Exchange
Notes, see "Material United States Federal Tax Consequences."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Original Notes were issued to, and the Company believes are currently
owned by, a relatively small number of beneficial owners. The Original Notes
have not been registered under the Securities Act and will be subject to
restrictions on transferability to the extent that they are not exchanged for
Exchange
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Notes. See "--Consequences of Failure to Exchange Original Notes." Although the
Exchange Notes will generally be permitted to be resold or otherwise transferred
by the holders (who are not affiliates of the Company) without compliance with
the registration and prospectus delivery requirements under the Securities Act,
they will constitute a new issue of securities with no established trading
market. If the Exchange Notes are traded after their initial issuance, they may
trade at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities and other factors including
general economic conditions and the financial condition of the Company. The
Company does not intend to apply for a listing or quotation of the Exchange
Notes on any securities exchange or stock market. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Exchange
Notes. The liquidity of, and trading market for, the Notes also may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of, and prospects for, the Company.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. Subject to certain provisions set forth in the Registration
Rights Agreement, the Company has agreed that, for a period of up to 180 days
after the consummation of the Exchange Offer, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any such
resale. However, under certain circumstances, the Company has the right to
require that Participating Broker-Dealers suspend the resale of Exchange Notes
pursuant to this Prospectus. See "The Exchange Offer--Resale of the Exchange
Notes."
CONSEQUENCES OF FAILURE TO EXCHANGE ORIGINAL NOTES
The Original Notes were offered and sold pursuant to exemptions from the
Securities Act. Accordingly, holders of Original Notes who do not exchange their
Original Notes for Exchange Notes pursuant to the Exchange Offer will continue
to be subject to the restrictions on transfer of such Original Notes as set
forth in the legend thereon. In general, the Original Notes may not be offered
or sold, unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act or
applicable state securities laws. The Company does not currently expect that it
will register the Original Notes under the Securities Act. Based on
interpretations by the staff of the Commission issued in no-action letters to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Original Notes may be offered for resale,
resold or otherwise transferred by the Holder thereof (other than (i) a
broker-dealer who purchases Exchange Notes directly from the Issuers to resell
pursuant to Rule 144A or any other available exemption under the Securities Act,
or (ii) a person that is an "affiliate" of an Issuer within the meaning of Rule
405 under the Securities Act), provided that such Exchange Notes are acquired in
the ordinary course of such Holder's business and such Holder has no arrangement
with any person to participate in the distribution of such Exchange Notes. Such
no-action letters are not binding interpretations of the law. The Company has
not sought, and does not currently intend to seek a no-action letter. There can
be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer. Any Holder of Original Notes
who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes would not be acting consistently with such
interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Thus, any Exchange Notes acquired by
such Holder will not be freely transferable except in compliance with the
Securities Act. Each Restricted Holder that receives Exchange Notes for its own
account in exchange for the Original Notes, where such Original Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
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USE OF PROCEEDS
The Issuers will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Issuers will receive in exchange
Original Notes in like principal amount, the terms of which are substantially
identical to the Exchange Notes. All Original Notes surrendered in exchange for
Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the indebtedness of the Company.
The proceeds of the Initial Offering were used by the Company (i) to fund
the purchase price of the Acquisitions; (ii) to repay certain indebtedness of
the Company; (iii) to fund the escrow of first year interest on the Notes; (iv)
for working capital and general corporate purposes and (v) to pay fees and
expenses related to the Initial Offering and the Acquisitions.
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CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1998 (i) on an actual basis and (ii) after giving effect to the Acquisitions,
the Initial Offering and the application of the net proceeds of the Initial
Offering as described under "Use of Proceeds." This information should be read
in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and the combined financial statements of the
Company and related notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current maturities:
Lines of credit, notes payable and receivable-backed notes payable... $ 101,571 $ 22,206
13% Senior Secured Redeemable Notes due 2005......................... -- 127,243
--------- -----------
Total long-term debt............................................. 101,571 149,449
Warrants............................................................... -- 2,757
Total stockholder's equity............................................. 13,913 11,191
--------- -----------
Total capitalization............................................. $ 115,484 $ 163,397
--------- -----------
--------- -----------
</TABLE>
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SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. For
all periods presented, the financial data of London Bridge Resort, Inc. is
included together with the financial data of Epic Resorts, Inc. since its
inception on March 10, 1997 and the financial data of Daytona Beach Regency,
Ltd. since its acquisition on April 8, 1996. The selected combined financial
data as of and for the three years ended December 31, 1997 have been derived
from audited financial statements. The summary financial data presented below
for the six-month periods ended June 30, 1998 and 1997, and the two years ended
December 31, 1994 have been derived from unaudited financial statements. The
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, which the Company considers necessary for a fair
presentation of its financial position and results of operations for these
periods. Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the entire year. The
following financial data should be read in conjunction with "Use of Proceeds",
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the combined financial statements of the Company and related
notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX-MONTHS ENDED
AS OF OR FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICE DATA)
INCOME STATEMENT DATA:
Revenues:
Sales of vacation ownership interests........... $ 8,572 $ 8,110 $ 8,290 $ 10,584 $ 30,104 $ 13,586 $ 16,666
Resort operations............................... 5,565 5,592 5,029 6,074 6,652 3,860 3,416
Interest income and other....................... 56 51 704 1,208 3,535 1,517 2,511
--------- --------- --------- --------- --------- --------- ---------
Total revenues............................ 14,193 13,753 14,023 17,866 40,291 18,963 22,593
Cost of sales--vacation ownership interests..... 3,193 3,008 3,154 3,544 7,337 3,088 3,861
Resort operations expense....................... 4,350 4,217 4,103 4,806 4,599 2,674 2,010
Selling and marketing expenses.................. 3,047 3,104 3,452 4,307 11,574 5,064 6,449
General and administrative expenses............. 1,357 1,385 1,322 2,014 3,188 1,408 1,775
Depreciation and amortization................... 591 586 644 799 772 408 376
Provision for losses............................ 473 458 474 492 1,391 576 698
Financing and closing costs..................... 217 271 460 323 868 296 579
Interest expense................................ 700 502 894 2,143 3,748 1,779 2,070
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority interest and
extraordinary item............................ 265 222 (480) (562) 6,814 3,670 4,775
Minority interest............................... -- -- -- (473) 1,676 1,002 1,190
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item......... 265 222 (480) (89) 5,138 2,668 3,585
Extraordinary gain on settlement of debt........ -- -- 5,077 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)............................... $ 265 $ 222 $ 4,597 $ (89) $ 5,138 $ 2,668 $ 3,585
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA AND CREDIT STATISTICS:
Weighted average interest rate on notes
receivable at period end...................... 13.9% 13.8% 14.2% 14.4% 14.9% 14.5% 15.0%
Number of resorts at period end................. 1 1 1 2 2 2 5
Average sales price of vacation ownership
interests sold................................ $ 9,911 $ 10,657 $ 11,157 $ 12,466 $ 11,746 $ 11,649 $ 12,014
Number of vacation ownership interests sold..... 865 761 743 849 2,563 540 617
Ratio of earnings to fixed charges(1)........... 1.38 1.44 0.46 0.88 2.29 2.45 2.70
BALANCE SHEET DATA:
Mortgages receivable, net....................... $ 610 $ 801 $ 7,641 $ 20,996 $ 37,148 $ 27,949 $ 45,035
Inventory, net.................................. 16,350 14,620 12,032 12,741 7,963 11,994 63,286
Total assets.................................... 25,954 24,476 28,269 43,034 56,288 49,624 120,886
Notes payable................................... 20,117 18,399 18,780 34,009 42,891 36,841 101,571
Stockholder's equity............................ 5,051 5,316 8,763 8,163 10,578 10,496 13,913
</TABLE>
- ------------------------------
(1) Earnings for the years ended December 31, 1996 and 1995 were insufficient to
cover fixed charges by $283 and $480, respectively.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
COMBINED FINANCIAL STATEMENTS AND RELATED NOTES AND THE OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Epic Resorts, LLC, a Delaware limited liability company, was formed in June
1998 to merge with Epic Resorts, Inc., which was formed to combine the ownership
of the London Bridge Resort and the Daytona Beach Regency, and their vacation
ownership acquisition and development businesses. London Bridge Resort was
acquired in 1986 by London Bridge Resort, Inc., a Delaware corporation
wholly-owned by Mr. Flatley. In 1991, the conversion of the London Bridge Resort
into a vacation ownership resort was completed and sales of Vacation Ownership
Interests at such resort commenced. In April 1996, the Daytona Beach Regency was
acquired by Daytona Beach Regency, Ltd. and sales of Vacation Ownership
Interests commenced at such resort in November 1996. In connection with the
Initial Offering, Epic Resorts, Inc. was merged into Epic Resorts, LLC and
certain of its subsidiaries were merged into limited liability companies. Mr.
Flatley simultaneously contributed his membership interests in certain of such
subsidiaries to the Company (the "Restructuring"). Financial statements for
periods prior to the Restructuring have been restated to combine the assets,
liabilities, equity and results of operations of London Bridge Resort, Daytona
Beach Regency and the Company.
As a result of the Acquisitions, the following discussion of the Company's
historical financial condition and results of operations is not necessarily
indicative of future results.
The Company generates revenues from the sale and financing of Vacation
Ownership Interests at its resorts, as well as from resort operations which
include commercial rentals, food and beverage sales, greens fees, rentals of
suites available at the Company's resorts and from fees associated with managing
the vacation ownership resorts.
The Company recognizes revenue from Vacation Ownership Interest sales when a
minimum of 10% of the sales price has been received in cash, the refund or
rescission period has expired, collectibility of the receivable representing the
remainder of the sales price is reasonably assured and the Company has completed
substantially all of its obligations with respect to any development relating to
the Vacation Ownership Interest sold. In cases where all development has not
been completed, the Company will recognize revenue in accordance with the
percentage of completion method of accounting. Under this method of revenue
recognition, income is recognized as work progresses. Measures of progress are
based on the relationship of costs incurred to date to expected total costs.
The Company has been dedicating greater resources to the acquisition and
development of vacation ownership projects. Costs associated with the
acquisition and development of vacation ownership resorts, including carrying
costs, are capitalized as inventory and allocated to cost of sales as the
respective revenue is recognized.
At each of the Company's existing resort properties currently in operation,
a Homeowners Association (each an "Association") is established. Each
Association is a not-for-profit corporation and operates primarily to collect
the assessments from its members and remit to the developer of the property the
Association's pro-rata share of direct and allocated expenditures including real
estate taxes, property insurance, grounds maintenance, utility costs and
housekeeping services. Typically, the Association reimburses the developer or
property manager for the Association's pro-rata share of such expenditures. The
Company intends to establish an Association at each of its newly acquired
resorts.
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<PAGE>
Pursuant to the New Receivables Facility, a portion of the Company's
revenues may be comprised of gains on sales of loans. In that event, the gains
will be recorded in the Company's revenues and on its balance sheet (as retained
interests on loan sales) at the time of sale, and the amount of gains recorded
will be based in part on management's estimates of future prepayment and default
rates and other considerations in light of then-current conditions. If actual
prepayments with respect to loans occur more quickly than was projected at the
time such loans were sold, as can occur when interest rates decline, interest
would be less than expected and earnings would be charged in the current period.
If actual defaults with respect to loans sold are greater than estimated,
charge-offs would exceed previously estimated amounts and earnings would be
charged in the current period.
RESULT OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
combined financial statements and related notes and the other financial
information included elsewhere in this Prospectus.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX MONTHS ENDED JUNE
30, 1997
TOTAL REVENUES. The Company recognized total revenues of $22.6 million for
the six months ended June 30, 1998 as compared to $19.0 million for the
comparable period in 1997, an increase of $3.6 million, or 18.9%. The increase
primarily reflects the increased sales growth at Daytona Beach Regency of $2.4
million or 37.5%, to $8.8 million for the six months ended June 30, 1998 from
$6.4 million for the comparable period in 1997.
Interest income increased 66.7% to $2.5 million for the six months ended
June 30, 1998 from $1.5 million for the comparable period in 1997 due to an
increase in the principal amount of net customer mortgages receivable to $45.0
million in 1998 from $21.0 million in 1997. Resort operations revenue decreased
12.8%, to $3.4 million for the six months ended June 30, 1998 from $3.9 million
for the comparable period in 1997. This decrease in resort operations revenue
reflects the decreasing availability of suites for rent in 1998, due to the
continued conversion of suites to Vacation Ownership Interests at Daytona Beach
Regency.
COST OF SALES. Cost of sales for Vacation Ownership Interests as a
percentage of sales of Vacation Ownership Interests increased to 23.2% for the
six months ended June 30, 1998 from 22.7% for the comparable period in 1997 due
to increases in the cost of converting hotel rooms to vacation ownership units.
RESORT OPERATIONS EXPENSE. Resort operations expense decreased 25.9% to
$2.0 million for the six months ended June 30, 1998 from $2.7 million for the
comparable period in 1997, resulting from increased reimbursements from the
Associations in 1998.
SELLING AND MARKETING. Selling and marketing expenses (including
commissions) as a percentage of sales of Vacation Ownership Interests increased
to 38.7% for the six months ended June 30, 1998 from 37.3% for the comparable
period in 1997 resulting from an increase in the sales force commission rate
structure in 1998.
GENERAL AND ADMINISTRATIVE. As a percentage of total revenues, general and
administrative expenses increased to 7.9% for the six months ended June 30, 1998
from 7.4% for the comparable period in 1997 resulting from an increase in
overhead in preparation for the consummation of the Acquisitions.
INTEREST EXPENSE. Interest expense increased 16.7% to $2.1 million for the
six months ended June 30, 1998 from $1.8 million for the comparable period in
1997 reflecting the Company's higher level of borrowings in 1998. The average
outstanding balance of interest-bearing debt increased 24.6% to $44.5 million
for the six months ended June 30, 1998 from $35.7 million for the comparable
period in 1997.
33
<PAGE>
PROVISION FOR LOAN LOSSES. Provision for loan losses as a percentage of
sales of Vacation Ownership Interests remained constant at 4.2% for the six
months ended June 30, 1998. The Company periodically monitors its provision for
loan losses to provide for future losses associated with any defaults on
customer notes receivable.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
TOTAL REVENUES. For the year ended December 31, 1997, the Company
recognized total revenues of $40.3 million compared to $17.9 million for the
year ended December 31, 1996, an increase of $22.4 million, or 125.1%. This
increase was primarily the result of a $19.5 million increase in sales of
Vacation Ownership Interests to $30.1 million during 1997 from $10.6 million
during 1996, an increase of 184.0%. Of this increase, $14.0 million was
attributable to the acquisition of the Daytona Beach Regency and $5.5 million
was attributable to increased sales volume at the London Bridge Resort.
Sales of Vacation Ownership Interests increased primarily as a result of (i)
an increase in the number of Vacation Ownership Interests sold at London Bridge
Resort from 794 in 1996 to 1,204 in 1997 and (ii) a full year of operations at
the Daytona Beach Regency compared to only two months of operations in 1996.
Interest income and other increased 191.7% to $3.5 million in 1997 from $1.2
million in 1996 due to a 76.7% increase in the principal amount of net customer
mortgages receivable from $21.0 million to $37.1 million, and an increase in the
average yield on the Company's customer mortgages receivable portfolio to 14.9%
from 14.4%.
Resort operations revenue increased 9.8%, to $6.7 million in 1997 from $6.1
million in 1996, as a result of increased suite rentals and retail operations at
London Bridge Resort and the acquisition of the Daytona Beach Regency.
COST OF SALES. Cost of sales as a percentage of sales of Vacation Ownership
Interests decreased to 24.4% in 1997 from 33.5% in 1996, reflecting higher
average selling prices for Vacation Ownership Interests at the London Bridge
Resort and the lower cost inventory acquired at Daytona Beach Regency.
RESORT OPERATIONS EXPENSE. Resort operations expense as a percentage of
resort operations revenue decreased to 69.1% in 1997 from 79.1% in 1996
primarily as a result of increased reimbursements from the Associations.
SELLING AND MARKETING. Selling and marketing expenses (including
commissions) as a percentage of sales of Vacation Ownership Interests declined
to 38.4% in 1997 from 40.7% in 1996. This decrease was primarily a result of
increases in the average sales prices of Vacation Ownership Interests and the
development of more efficient sales and marketing programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
60.0% to $3.2 million in 1997 from $2.0 million in 1996, primarily as a result
of additional employee costs incurred in generating increased sales volumes,
offset by the effect of the leveraging of these costs over a larger revenue
base. However, as a percentage of total revenues, these costs decreased to 7.9%
in 1997 from 11.3% in 1996. The $1.2 million increase in general and
administrative expenses was primarily the result of additional employee expenses
incurred in generating increased sales volumes and the acquisition of the
Daytona Beach Regency, as previously discussed.
INTEREST EXPENSE. Interest expense increased to $3.7 million in 1997 from
$2.1 million in 1996. This 76.2% increase reflects higher levels of borrowings
to fund growth in the Company's operations. The average outstanding balance of
interest-bearing debt increased to $38.4 million in 1997 from $26.4 million in
1996. The weighted average interest rate for the Company's financing
arrangements secured by notes receivable was 10.7% and 10.8% in 1997 and 1996,
respectively.
34
<PAGE>
PROVISION FOR LOAN LOSSES. Provision for loan losses remained relatively
constant at 4.6% of sales of Vacation Ownership Interests in 1997 and 1996.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
TOTAL REVENUES. For the year ended December 31, 1996, the Company
recognized total revenues of $17.9 million compared to $14.0 million for the
year ended December 31, 1995, an increase of $3.9 million, or 27.9%. This
increase was primarily the result of a $2.3 million, or 27.7%, increase in sales
of Vacation Ownership Interests to $10.6 million during 1996 from $8.3 million
during 1995.
Sales of Vacation Ownership Interests increased primarily as a result of a
14.3% increase in the number of Vacation Ownership Interests sold to 849 in 1996
from 743 in 1995.
Interest income and other increased 71.4% to $1.2 million in 1996 from $0.7
million in 1995 due to a 176.3% increase in the principal amount of net customer
mortgages receivable from $7.6 million in 1996 to $21.0 million in 1995. The
average yield on the Company's customer mortgages receivable portfolio increased
to 14.4% in 1996 from 14.2% in 1995.
Resort operations revenue increased 22.0% to $6.1 million in 1996 from $5.0
million in 1995, as a result of increased suite rentals and retail operations at
London Bridge Resort.
COST OF SALES. Cost of sales of Vacation Ownership Interests as a
percentage of such sales decreased to 33.4% in 1996 from 38.0% in 1995,
reflecting higher average selling prices for Vacation Ownership Interests at the
London Bridge Resort.
RESORT OPERATIONS EXPENSE. Resort operations expense as a percentage of
resort operations revenue decreased to 79.1% in 1996 from 81.6% in 1995,
primarily as a result of increased reimbursements from the Association.
SELLING AND MARKETING. Selling and marketing expenses (including
commissions) as a percentage of sales of Vacation Ownership Interests declined
to 40.7% in 1996 from 41.6% in 1995. The decrease in selling and marketing
expenses, as a percentage of sales of Vacation Ownership Interests, was
primarily a result of increases in the average sales prices of Vacation
Ownership Interests and the development of more efficient selling and marketing
programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
53.8% to $2.0 million in 1996 from $1.3 million in 1995, primarily as a result
of additional employee costs incurred in generating increased sales volumes,
offset by the effect of the leveraging of these costs over a larger revenue
base. As a percentage of total revenues, these costs increased to 11.3% in 1996
from 9.4% in 1995. This $0.7 million increase in general and administrative
expenses was primarily the result of additional employee expenses incurred in
generating increased sales volumes.
INTEREST EXPENSE. Interest expense increased to $2.1 million in 1996 from
$0.9 million in 1995. This increase in 1996 reflected higher borrowings to fund
growth in the Company's operations. The average outstanding balance of
interest-bearing debt increased to $26.4 million in 1996 from $18.6 million in
1995. The weighted average interest rate for the Company's financing
arrangements secured by notes receivable was 10.8% and 11.5% in 1996 and 1995,
respectively.
PROVISION FOR LOAN LOSSES. Provision for loan losses as a percentage of
sales of Vacation Ownership Interests declined to 4.6% in 1996 from 5.7% in
1995.
35
<PAGE>
CHANGES IN FINANCIAL CONDITION
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Cash and cash equivalents increased by approximately $221,000 for the year
ended December 31, 1997 and decreased by approximately $22,000 and $94,000 for
the years ended December 31, 1996 and 1995, respectively.
Net cash used in operating activities was $3.4 million, $0.1 million and
$2.6 million in 1997, 1996 and 1995, respectively. The change in net cash used
in operating activities from 1996 to 1997 is primarily attributable to the
increase in net income as described above, and the net change in activity in
inventory, which included a net decrease of $4.7 million in 1997 (due primarily
to increased sales activity) and a net increase in 1996 of $0.7 million (due
primarily to conversion activity in excess of sales at Daytona Beach Regency).
The change in net cash used in operating activities from 1995 to 1996 is
primarily attributable to the net inventory activity which included a net
increase in 1996 of $0.7 million (due primarily to conversion activity in excess
of sales at Daytona Beach Regency) and a net decrease in 1995 of $2.6 million
associated with sales activity at the London Bridge Resort.
Net cash used in investing activities was $2.3 million, $1.5 million, and
$1.0 million in 1997, 1996 and 1995, respectively. The increase from 1996 to
1997 is primarily attributable to the refurbishing of the on-site restaurant at
the London Bridge Resort, and the construction of a pool, exercise facility and
lounge area at the Daytona Beach Regency during 1997. The increase from 1995 to
1996 is primarily attributable to the construction of the Company's on-site
sales center at the Daytona Beach Regency.
Net cash provided by financing activities was $5.9 million, $1.6 million,
and $3.5 million in 1997, 1996, and 1995, respectively. The net decrease in cash
provided by financing activities from 1997 to 1996 is primarily attributable to
additional distributions to the Company's sole stockholder in 1997 totalling
$1.8 million. The net increase in cash provided by financing activities from
1996 to 1995 is primarily attributable to additional equity contributions by the
partners of Daytona Beach Regency, Ltd. in 1996 totalling $0.9 million.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Cash and cash equivalents decreased by $200,000 and $16,000 for the six
months ended June 30, 1998 and 1997, respectively.
Net cash used in operating activities was $1.6 million and $1.9 million for
the six months ended June 30, 1998 and 1997, respectively. The net change is
primarily attributable to the $0.9 million increase in net income to $3.6
million for the six months ended June 30, 1998 from $2.7 million for the prior
period as well as the $1.1 million net change in mortgages receivable to $8.6
million for the six months ended June 30, 1998 from $7.5 million for the prior
period.
Net cash used in investing activities was $56.3 million and $0.5 million for
the six months ended June 30, 1998 and 1997, respectively. The net change is
attributable to the acquisition of the three resorts on June 30, 1998.
Net cash used in financing activities was $57.7 million and $2.3 million for
the six months ended June 30, 1998 and 1997, respectively. The net change is
primarily attributable to the $55.4 million proceeds from a bridge loan, which
was used to finance the purchase of three resorts on June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations through the sale and financing of
Vacation Ownership Interests, resort operations transient rental of resort
accommodations and management fees. With respect to the sale of Vacation
Ownership Interests, the Company generates cash from operations from customer
downpayments and third party financing of customer mortgages receivable in
amounts typically equal to
36
<PAGE>
90% of the related customer mortgages receivable. The Company generates
additional cash from the financing of Vacation Ownership Interests equal to the
difference between the interest charged on the customer mortgages receivable
(which averaged 14.9% at December 31, 1997) and the interest paid on the notes
payable secured by the Company's pledge of such customer mortgages receivable
(which averaged 10.7% at December 31, 1997). The Company will generate
additional cash flow from its Vacation Ownership Interests Receivable portfolio
through receipt of the spread between the yield on such portfolio and the cost
of the New Receivables Facility upon completion of securitizations of such
receivables.
The Company requires funds to finance the acquisition and development of
resorts and related inventory, and to finance customer purchases of Vacation
Ownership Interests. Historically, these funds have been provided by
indebtedness secured by a portion of the Company's inventory of unsold Vacation
Ownership Interests, customer mortgages receivable and other assets. As of June
30, 1998, the Company had $46.2 million of outstanding notes payable secured by
its land, Vacation Ownership Interests and customer mortgages receivable. In
connection with the Initial Offering, the Company repaid $24.3 million of these
outstanding notes payable. The Company anticipates that its Existing Receivables
Facility will be repaid and terminated once securitizations under the New
Receivables Facility begin. The Existing Receivables Facility bears interest at
prime plus 2.5% per annum (11% per annum at June 30, 1998) and is payable in
monthly installments of principal and interest equal to 100% of all proceeds of
the receivables collateral collected during the month. Any remaining principal
under the Existing Receivables Facility is due seven years after the date of the
last advance related to mortgage receivables and is collateralized by certain
assets, including the specific mortgage receivables. As of June 30, 1998 the
outstanding principal balance under the Existing Receivables Facility was
approximately $21.3 million.
In September 1998, the Company entered into the New Receivables Facility
with Prudential Securities Credit Corporation ("PSCC"), which is a non-recourse
$75 million vacation ownership loan participation facility. Under this facility,
the Company will sell its Vacation Ownership Interest Receivables to Epic
Funding a limited purpose, bankruptcy remote subsidiary of the Company, and PSCC
will purchase from Epic Funding participation interests in such receivables. The
proceeds from the sale of the participation interests will be paid to the
Company as consideration for the receivables sold to Epic Funding. The
commitment provides for advance rates of 88% of the lesser of (i) unpaid
principal balance of the receivables sold to Epic Funding or (ii) the market
value of such receivables as determined by Prudential Securities Incorporated.
Borrowings under the facility will bear interest at LIBOR plus 1.50%, reset
daily. The facility will provide non-recourse interim funding for the Vacation
Ownership Interests Receivable pending their permanent funding through
receivables securitization transactions. The Company expects to be able to fund
a significant portion of its future development from funds provided by the New
Receivables Facility. See "Description of Other Indebtedness."
The Company's capital resources are provided from the following sources: (i)
cash flows from operations, (ii) proceeds from the Existing Receivables Facility
and the New Receivables Facility, (iii) proceeds from additional borrowings
permitted under the Indenture, and (iv) proceeds from the Initial Offering
designated for working capital and general corporate purposes. In addition,
$16.9 million of the net proceeds of the Initial Offering, representing an
amount equal to the first two interest payments under the Notes, was placed into
the Escrow Account to be held by the Escrow Agent for the benefit of the holders
of the Notes to pay interest on the Notes. The Escrow Funds may be disbursed to
the extent necessary to make the first interest payment on the Notes.
Thereafter, the Company must at all times maintain Escrow Funds in the Escrow
Account sufficient to make the next required interest payment on the Notes. The
Indenture and the Company's other credit facilities will include certain
covenants restricting, among other things, the incurrence of debt, the payment
of dividends and other restricted payments, the incurrence of liens and
transactions with affiliates. Certain current and future credit facilities
include or will include financial covenants. No assurances can be given that
such covenants will not limit the Company's ability to satisfy or refinance its
obligations or otherwise adversely affect the Company's operations. See "Risk
Factors--Substantial Leverage; Potential Inability to Service Debt."
37
<PAGE>
The Company intends to pursue a growth-oriented strategy; accordingly, the
Company may, from time to time acquire, among other things, additional vacation
ownership resorts and additional land upon which vacation ownership resorts may
be developed, and companies operating quality resorts or having vacation
ownership assets, management, sales or marketing expertise commensurate with the
Company's operations in the vacation ownership industry. Over the next twelve
months, the Company anticipates spending approximately $55.0 million for
acquisition, expansion, conversion and development activities. In this regard,
the Company currently has an option to acquire property suitable for a resort in
Pismo Beach, located on the coast of California. The Company may also evaluate
asset and operating company acquisitions, but presently has no contracts,
understandings or capital commitments relating to any such potential
acquisition.
The Company believes that the net proceeds to the Company from the Initial
Offering, together with cash generated from operations and future borrowings,
will be sufficient to meet the Company's working capital and capital expenditure
needs through December 1999. The Company may, in the future, require additional
credit facilities or issuances of other corporate debt or equity securities to
meet the Company's working capital and expenditure needs and in connection with
acquisitions or otherwise. Any debt incurred or issued by the Company may be
secured or unsecured, at fixed or variable rates of interest and may be subject
to such terms as management deems prudent. There can be no assurance that the
proposed credit facilities will be consummated on the terms described herein, if
at all, or that sufficient funds will be available from operations or under
existing, proposed or future revolving credit facilities or other borrowing
arrangements to meet the Company's cash needs, including, without limitation,
its debt service obligations. As noted above, the Indenture and the Company's
other credit facilities include or will include customary conditions to funding,
eligibility requirements for collateral, certain financial and other affirmative
and negative covenants, including, among others, limits on the incurrence of
indebtedness, covenants concerning net worth and fixed charge coverage
requirements and debt to equity ratios and events of default. In addition, the
Company's future operating performance and ability to meet its financial
obligations will be subject to future economic conditions and to financial,
business and other factors, many of which will be beyond the Company's control.
INFLATION
Inflation and changing prices have not had a material impact on the
Company's revenues, operating income and net income during any of the Company's
three most recent fiscal years. Due to the current economic climate, the Company
does not expect that inflation and changing prices will have a material impact
on the Company's revenues, operating income or net income.
YEAR 2000
The Company has conducted tests of its existing computer hardware and
software and determined that they are Year 2000 compliant. Because most of its
computer hardware and software is less than two years old, the Company believes
that its exposure to Year 2000 problems with respect to this hardware and
software is minimal. In addition, Non-IT systems do not have a significant role
in the Company's operations. As a result, the Company does not believe that it
is exposed to any material Year 2000 risks relating to such systems. The Company
is actively working with its suppliers and third party service providers,
including its receivables servicing providers and the vacation ownership
exchange networks with which it is affiliated, to assess their compliance
efforts. The Company has received assurances of compliance from several of such
third parties. The Company is currently assessing its potential exposure to the
failure of any such suppliers and third party service providers to become Year
2000 compliant and will formulate any necessary contingency plans once this risk
assessment is complete. While the Company believes that such exposure is
minimal, there can be no assurance that the systems of suppliers or third party
service providers are Year 2000 compliant, or that the failure of such suppliers
or third party service providers to be Year 2000 compliant will not have a
material adverse effect on the Company.
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<PAGE>
BUSINESS
Epic Resorts, LLC is a nationwide developer and marketer of high quality
vacation ownership resorts located in proven, major tourist destinations.
Vacation Ownership Interests typically entitle the buyer to a fully furnished
vacation residence for an annual or biannual period in perpetuity, as well as
access to over 1,500 resorts worldwide through the Company's participation in
vacation ownership interest exchange networks. The Company owns six resorts
located in Las Vegas, Nevada; Scottsdale, Arizona; Palm Springs, California;
Daytona Beach, Florida; Lake Havasu City, Arizona; and Hilton Head, South
Carolina and has an option to acquire property suitable for a resort in Pismo
Beach on the coast of California. In 1997, over 60 million tourists visited
these locations. The Company strategically markets and sells its Vacation
Ownership Interests through both on-site and off-site sales centers. In
addition, the Company's Completed Inventory enables it to generate income
through the rental of available suites at its resorts. The Company has
historically provided financing to approximately 90% of the purchasers of its
Vacation Ownership Interests, which, at an average yield of 15.0% for the six
months ended June 30, 1998, generated significant interest income for the
Company.
THE RESORTS
The Company's six high quality resorts are located in the following warm
weather, high volume, major tourist destinations:
<TABLE>
<CAPTION>
MILLIONS OF
LOCATION TOURISTS PER YEAR SURROUNDING AMENITIES/ATTRACTIONS
- --------------------------------- ------------------- ------------------------------------------------------------
<S> <C> <C>
Las Vegas, Nevada................ 30.0 Located one and one-half miles west of the Las Vegas strip
Scottsdale, Arizona.............. 12.0 Located on the famous TPC golf course; over 100 other
world-class golf courses
Palm Springs, California......... 4.5 Located on seven acres in downtown Palm Springs; over 70
world-class golf courses
Daytona Beach, Florida........... 8.0 18 miles of sandy beach; home of NASCAR and Grand Prix
racing; 52 miles from Disney World
Lake Havasu City, Arizona........ 3.0 London Bridge and English Village tourist and shopping
attractions; boating and fishing on Lake Havasu and the
Colorado River; 150 miles from Las Vegas and 67 miles from
Laughlin, Nevada
Hilton Head, South Carolina...... 2.5 12 miles of sandy beach; over 20 world-class golf courses
</TABLE>
The Company believes that the Vacation Ownership Interests which it markets
and sells are high quality resorts because such resorts (i) are located in high
volume, popular tourist destinations, (ii) provide a wide variety of amenities
and services, such as swimming pools, spas, exercise facilities and access to
golf courses, restaurants, shopping and entertainment, and (iii) received, or
are comparable to resorts that have received, the highest designation under the
rating systems of RCI and II, the principal vacation ownership exchange
networks. See "--Vacation Ownership Exchange Networks" and "--Description of the
Resorts."
As the table below demonstrates, the Company's Completed Inventory will
increase from 822 to 25,854 Vacation Ownership Interests. Sales and marketing
and general and administrative expenses are the
39
<PAGE>
only material cash costs required to convert such Completed Inventory to
Vacation Ownership Interest sales and comprised 49.8% of such sales for the
twelve months ended June 30, 1998.
<TABLE>
<CAPTION>
UNSOLD
VACATION OWNERSHIP
INTERESTS AT RESORTS
MONTH/YEAR SALES -------------------------------------
COMMENCED OR AVERAGE UNDER
EXPECTED TO SALES DEVELOP-
RESORT LOCATION COMMENCE PRICE(A) COMPLETED MENT PLANNED
- ----------------------------- ----------------------------- ------------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
London Bridge Lake Havasu City, AZ 8/91 $ 13,323 400 612 9,843
Resort
Daytona Beach Daytona Beach, FL 11/96 11,349 422 2,295 0
Regency
Westpark Resort Las Vegas, NV 11/98 11,400 7,752 0 0
Scottsdale Links Scottsdale, AZ 11/98 15,500 11,628 0 0
Resort
Palm Springs Palm Springs, CA 11/98 13,300 5,252 0 0
Marquis Villas
Planter's Hilton Head, SC 12/96 12,900 400 0 6,324
Quarters Resort
----------- ----- -----------
TOTAL....................................................................................... 25,854 2,907 16,167
----------- ----- -----------
----------- ----- -----------
</TABLE>
- ------------------------------
(a) Average sales price is the average retail sales price for the London Bridge
Resort, Daytona Beach Regency and the Planter's Quarters Resort for the
second quarter of 1998 and the expected average retail sales price for the
remaining resorts on June 30, 1998 over the sellout period of Vacation
Ownership Interests at such resorts.
SALES AND MARKETING
The Company focuses its sales and marketing activities on generating a
predictable flow of both off-site and on-site prospective purchasers of Vacation
Ownership Interests at minimal cost.
OFF-SITE SALES CENTERS: The Company currently operates off-site sales
centers in Fresno, California and in Philadelphia, Pennsylvania. The Company
also plans to add one additional off-site sales center in 1998 and four
additional centers by the end of 1999. The Company currently intends to
locate its planned off-site sales centers in major metropolitan areas, which
can be conveniently toured during evenings and weekends. These centers,
which are leased by the Company, are generally more cost effective because
they reduce the need for on-site tours of the Company's resorts and are
easily accessible to the Company's target customers. The Company's Fresno
off-site sales center generated $4.5 million of revenue and had an operating
margin of 47.6% for the twelve months ended June 30, 1998.
ON-SITE SALES CENTERS: The Company utilizes a variety of marketing
techniques to generate on-site tours, including mini-vacations resulting
from telemarketing and targeted mailings, retail center kiosks, in-house
marketing to renters, marketing to current owners of Vacation Ownership
Interests and referrals. The Company's Completed Inventory also provides
both additional revenue as well as sales and marketing cost advantages
through (i) rental income, (ii) access to a steady source of high quality,
low cost, on-site sales tours from rental customers, and (iii) lower
mini-vacation marketing costs. The Company believes that its ability to
effectively implement, manage and refine its marketing activities has
resulted in the generation of a predictable and increasing supply of sales
prospects.
The Company typically establishes the sales prices for its Vacation
Ownership Interests on a resort-by-resort basis after reviewing local market
conditions. When the Company enters into a new market, it typically prices
Vacation Ownership Interests to attract the maximum number of potential
customers and gain market share. As the Company becomes more established in a
market, the Company increases its sales prices to reflect the high quality of
its properties. For example, average sales prices for Vacation
40
<PAGE>
Ownership Interests at the London Bridge Resort and the Daytona Beach Regency
have increased from $8,900 and $7,900, at the date of commencement of sales,
respectively, to $13,323 and $11,349, respectively as of June 30, 1998. The
Company expects to implement this pricing strategy with respect to the resorts
purchased in connection with the Acquisitions.
To support its marketing and sales efforts, the Company has developed and
continues to enhance its database to track its vacation ownership marketing and
sales programs. Management believes that, as the Company's vacation ownership
operations grow, this database will become an increasingly significant asset,
enabling it to take advantage of less costly marketing and referral
opportunities.
CUSTOMER FINANCING
The Company has historically provided financing to approximately 90% of its
vacation ownership customers. These customers are required to make a downpayment
of at least 10% of the Vacation Ownership Interest sales price, and typically
finance the balance over a period of seven to ten years. At the closing of a
sale of a Vacation Ownership Interest, the Company currently delivers a deed to
the purchaser of such Vacation Ownership interest and secures repayment of such
purchaser's obligation by obtaining a mortgage on the Vacation Ownership
Interest. The Company is considering converting its vacation ownership
operations to a vacation club arrangement, whereby the purchaser of a Vacation
Ownership Interest would receive a non-deeded membership interest in a vacation
club operated by the Company, which would entitle such purchaser to reserve
units at any of the Company's resorts, at any time of the year. As of June 30,
1998, the Company had a vacation ownership receivables portfolio totaling
approximately $45.0 million in principal amount, with a weighted average
contractual yield of approximately 15.0% and 14.9% for the six months ended June
30, 1998 and the year ended December 31, 1997, respectively. The Company expects
a significant increase in its vacation ownership receivables portfolio as sales
commence at its newly-acquired resorts beginning in the fourth quarter of 1998.
The Company believes that the New Receivables Facility will enable the Company
to turn such receivables into cash quickly and enable it to fund a significant
portion of the Company's future development without further leveraging the
Company. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and "Description of Other Indebtedness."
VACATION OWNERSHIP EXCHANGE NETWORKS
According to ARDA, the primary reason cited by consumers for purchasing a
Vacation Ownership Interest is the ability to exchange such interest for
accommodations at other resorts through worldwide exchange networks. London
Bridge Resort and the Daytona Beach Regency are affiliated with II, one of the
leading worldwide vacation ownership exchange companies. In addition, the
Planter's Quarters Resort is affiliated with RCI, another leading worldwide
vacation ownership exchange company. Participation in II or RCI entitles owners
to exchange their annual Vacation Ownership Interests for occupancy at over
1,500 II or 3,200 RCI resorts worldwide. Both the London Bridge Resort and the
Daytona Beach Regency have received Five-Star designations from II, the highest
designation under II's rating system. In addition, the London Bridge Resort was
one of II's 30 largest selling resorts based on 1997 sales volume. The Planter's
Quarters Resort has been designated as a Gold Crown Resort, the highest rating
designation in RCI's rating system. The Company intends to affiliate its
newly-acquired resorts with either II or RCI.
VACATION OWNERSHIP INDUSTRY
First introduced in Europe in the mid-1960's, vacation ownership has been
one of the fastest growing segments of the hospitality industry over the past
two decades. According to ARDA and other industry sources, vacation ownership
sales and the number of Vacation Ownership Interest owners grew at compound
annual rates of approximately 16% and 22%, respectively, from 1980 to 1997 (see
chart below). The Company expects the industry to continue to grow as consumer
awareness of the attractiveness of
41
<PAGE>
vacation ownership as an alternative to traditional vacation lodging
establishments increases. Set forth below is certain information relating to the
vacation ownership industry.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
($ IN VACATION OWNERSHIP INTEREST SALES
BILLIONS) VOLUME
<S> <C>
1980 0.25
1981 1
1982 1.2
1983 1.3
1984 1.5
1985 1.4
1986 1.4
1987 2
1988 2.25
1989 3
1990 3.15
1991 3.75
1992 4.25
1993 4.5
1994 4.75
1995 5.25
1996 5.5
1997 6
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
(IN MILLIONS) NUMBER OF VACATION OWNERSHIP INTEREST OWNERS
<S> <C>
1980 0.15
1981 0.25
1982 0.35
1983 0.5
1984 0.65
1985 0.75
1986 1
1987 1.1
1988 1.3
1989 1.5
1990 1.75
1991 2.1
1992 2.35
1993 2.65
1994 3.1
1995 3.5
1996 4
1997 4.5
</TABLE>
Source: ARDA (includes, with respect to 1995, 1996 and 1997, unpublished
estimates provided by ARDA)
BUSINESS STRATEGY
Epic's core business strategy is to generate significant cash flow from its
total inventory of Vacation Ownership Interests by (i) expanding and developing
off-site sales centers, (ii) capitalizing on its superior sales and marketing
techniques, (iii) renting available suites at its resorts, (iv) utilizing the
New Receivables Facility, and (v) cross-marketing additional vacation products
to its extensive customer base.
EXPANDING AND DEVELOPING OFF-SITE SALES CENTERS. The Company has a proven
ability to market Vacation Ownership Interests off-site. The Company intends
to capitalize on this ability through the development of several off-site
sales centers in targeted, high volume locations throughout the United
States. Off-site sales centers require minimal capital investment and
produce significant sales.
CAPITALIZING ON SUPERIOR SALES AND MARKETING TECHNIQUES. The Company
believes that its proven ability to generate qualified tours at lower costs
gives it a competitive advantage over other companies in the vacation
ownership industry. The Company plans to capitalize on and continually
refine its highly transferable marketing techniques at its newly acquired
properties. Management believes that as the Company matures, it will also be
able to reduce sales and marketing costs as lower cost marketing programs,
such as in-house tours and referrals, grow. In addition, as the Company's
newly acquired resorts become established, the Company intends to increase
its prices based on demand for Vacation Ownership Interests at such resorts
and local market conditions.
RENTING AVAILABLE SUITES AT ITS RESORTS. The Company has historically
generated income from the rental of suites available at its resorts. The
Acquisitions have significantly increased the Company's Completed Inventory
and therefore the number of suites available for rent.
UTILIZING THE NEW RECEIVABLES FACILITY. The Company intends to utilize the
New Receivables Facility to convert its Vacation Ownership Interests
Receivable into cash quickly, thereby enabling the Company to finance a
significant portion of its future development without incurring substantial
additional indebtedness.
CROSS-MARKETING ADDITIONAL VACATION PRODUCTS TO ITS EXTENSIVE CUSTOMER
BASE. Through its marketing research, the Company has created, and will
continue to expand, its significant customer base. The Company's long-term
strategy includes increasing the number of vacation products available to
its customers. To develop this strategy and expand its customer base, the
Company formed Epic Travel, LLC, a licensed travel agency, to market and
sell vacation packages to individuals.
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<PAGE>
The Company also intends to continue to grow through acquisitions in proven,
high-volume, major tourist destinations. Because the vacation ownership industry
is highly fragmented, the Company believes that significant opportunities exist
to make complementary acquisitions at attractive valuations. Acquisitions the
Company may consider include vacation ownership operating companies, land for
resort development, additional inventory, or other vacation ownership-related
assets which may be integrated into the Company's existing operations. In
addition, the Company intends to make selective acquisitions outside the United
States, focusing on the Caribbean region.
THE ACQUISITIONS
On June 30, 1998, the Company consummated the acquisitions of the Scottsdale
Links Resort, the Westpark Resort and the Palm Springs Marquis Villas. On July
8, 1998, concurrently with the consummation of the Initial Offering, the Company
acquired the Planter's Quarters Resort and the remaining limited partnership
interests of the Daytona Beach Regency, Ltd. not then owned by RII. The purchase
of these resorts is consistent with the Company's strategy to grow through
selected acquisitions. Prior to entering into agreements to acquire these resort
properties, the Company undertook a full property review, including an
environmental assessment. During the review process, the Company's acquisition
specialists analyzed market, tourism and demographic data as well as the quality
and diversity of the location's existing amenities and attractions to determine
the potential strength of the vacation ownership market in such area. Based on
this review, the Company estimated the potential sellout value of the property
and the extent of any additional required development costs to determine the
appropriate purchase price for such properties. The Company intends to conduct a
similar property review before consummating any future acquisitions.
Set forth below is a summary of the terms of the Acquisitions.
SCOTTSDALE LINKS RESORT. Epic Resorts, Inc. and Scottsdale Links Apartments
Limited Partnership entered into a Purchase and Sale Agreement, dated May 7,
1998 (the "Scottsdale Agreement"). Pursuant to this agreement, the Company
agreed to acquire the Scottsdale Links 228-suite complex and adjacent property,
including all furniture, fixtures and other personal property located at the
complex, all permits, licenses and easements held by the seller and all existing
leases and tenancy agreements for a purchase price of $25,541,233. With the
proceeds of the purchase price, the seller agreed to pay and satisfy all
obligations, liens and encumbrances against the property, including the existing
mortgage, current and outstanding real estate taxes and all outstanding state
and local taxes relating to the property. The Company assumed no liabilities,
mortgages, obligations or indebtedness relating to the property. The sellers
also agreed to indemnify the Company for any material inaccuracy in the
representations and warranties made by the sellers in the Scottsdale Agreement
and any personal injury or contract claims associated with the property for
events occurring prior to the closing. Epic Resorts, Inc. assigned the
Scottsdale Agreement to its wholly-owned subsidiary Epic Resorts--Scottsdale
Links Resort, Inc. prior to the closing of this acquisition on June 30, 1998.
The complex will be converted into a vacation ownership resort. The Company
does not anticipate that any construction or material renovation will be
necessary to effect this conversion. The Company will begin selling Vacation
Ownership Interests at this resort in selected states as the public reports of
condominium are filed and accepted by the respective states and the Company
satisfies the conditions to the conditional use permit relating to the resort.
See "Risk Factors--Risks Related to Development Activities."
WESTPARK RESORT. Epic Resorts, Inc. and Westpark II Partnership L.L.C.
entered into a Purchase and Sale Agreement, dated May 8, 1998 (the "Westpark
Agreement"). Pursuant to this agreement, the Company agreed to acquire the
Westpark Resort 152-suite complex and adjacent property, including all
furniture, fixtures and other personal property located at the complex, all
permits, licenses and easements held by the seller and all existing leases and
tenancy agreements for a purchase price of $15,857,519. With
43
<PAGE>
the proceeds of the purchase price, the seller agreed to pay and satisfy all
obligations, liens and encumbrances against the property, including current and
outstanding real estate taxes and all outstanding state and local taxes relating
to the property. The Company assumed no liabilities, mortgages, obligations or
indebtedness relating to the property. The seller agreed to indemnify the
Company for any material inaccuracy in the representations and warranties made
by the seller in the Westpark Agreement and any personal injury or contract
claims associated with the property for events occurring prior to the closing.
Epic Resorts, Inc. assigned the Westpark Agreement to its wholly-owned
subsidiary, Epic Resorts-Westpark Resort, Inc. prior to closing of this
acquisition on June 30, 1998.
The Company will convert the complex into a vacation ownership resort and
plans to operate under the name of Desert Paradise Resort. All Nevada state
filing will be amended accordingly. The Company does not anticipate that any
construction or material renovation will be necessary to effect this conversion.
The Company will begin selling Vacation Ownership Interests at this resort in
selected states as the public reports of condominium are filed and accepted by
the respective states and when the Company receives zoning authorization
permitting the conversion and sale of Vacation Ownership Interests. See "Risk
Factors--Risks Related to Development Activities."
PALM SPRINGS MARQUIS VILLAS. Epic Resorts, Inc., Palm Springs Marquis
Villas, Inc. and Mark A. Bragg entered into an Option to Purchase Real Property,
dated May 20, 1998 (the "Palm Springs Option Agreement"). Pursuant to this
agreement, the Company exercised its option to purchase the Palm Springs Marquis
Resort 101-suite complex and adjacent property, including all furniture,
fixtures and other personal property located at the complex, all permits,
licenses and easements held by the seller and all existing leases and tenancy
agreements, and purchased such assets. The option was exercised by delivering to
the seller the purchase price of $14,015,500 as well as an executed purchase
agreement (the "Palm Springs Purchase Agreement"). With the proceeds of the
purchase price, the seller agreed to pay and satisfy all obligations, liens and
encumbrances against the property, including current and outstanding
indebtedness, real estate taxes and all outstanding state and local taxes
relating to the property. The Company assumed no liabilities, mortgages,
obligations or indebtedness relating to the property. The sellers agreed to
indemnify the Company, for a period of two years following closing, for any
material inaccuracy in the representations and warranties made by the sellers in
the Palm Springs Purchase Agreement other than those representations and
warranties pertaining to federal, state and local taxes, which survive until the
applicable statute of limitations on claims, and any personal injury or contract
claims associated with the property for events occurring prior to the closing of
this acquisition. Epic Resorts, Inc. assigned the Palm Springs Purchase
Agreement to its wholly-owned subsidiary, Epic Resorts-Palm Springs Marquis
Villas, Inc. prior to closing of this acquisition on June 30, 1998.
The Company will convert the complex into a vacation ownership resort. The
Company does not anticipate that any construction or material renovation will be
necessary to effect this conversion. The Company will begin selling Vacation
Ownership Interests at this resort in selected states as the public reports of
condominium are filed and accepted by the respective states and the Company
satisfies the conditions to the conditional use permit relating to the resort.
See "Risk Factors--Risks Related to Development Activities."
PLANTER'S QUARTERS RESORT. Epic Resorts, Inc. and Planter's Preserve, LLC
entered into a Purchase and Sale Agreement, dated May 13, 1998 (the "Planter's
Quarters Agreement"). Pursuant to this agreement, the Company agreed to acquire
the 160-suite resort and adjacent land, all furniture, fixtures and other
personal property located at the resort, all permits, licenses and easements
held by the seller, and all existing leases and tenancy agreements for a
purchase price of $3,821,000, subject to certain adjustments. The seller and
each of its members have agreed to indemnify the Company, for a period of two
years following the closing of this acquisition, for any material inaccuracy in
the representations and warranties made in the Planter's Quarters Agreement by
the seller or any of its members, and for any personal injury or contract claims
associated with the property for events occurring prior to closing. Prior to the
closing of
44
<PAGE>
this acquisition on July 8, 1998, the Company assigned the Planter's Quarters
Agreement to Epic Resorts-Hilton Head, LLC, a limited liability company wholly
owned by the Company.
The Company began selling Vacation Ownership Interests at the developed
phases of the Planter's Quarters Resort in South Carolina after the closing of
this acquisition, and expects to begin selling such interests in other states as
the public reports of condominium are filed and accepted by such states. The
Company expects to commence construction on the remaining undeveloped phases of
the resort in the near future. The Company plans to change the operating name of
this resort to Island Links Resort and will will amend all South Carolina state
filings accordingly.
DAYTONA BEACH REGENCY RESORT. The Company agreed to acquire the limited
partnership interests of Daytona Beach Regency Ltd. that were not then owned by
limited partners affiliated with the Company for an aggregate purchase price of
$3.3 million, which was allocated to such limited partners on a pro rata basis.
Prior to the closing of the Initial Offering on July 8, 1998, Mr. Flatley
contributed to the Company all of his equity interests in RMI and RII, which had
owned a 1% general partnership interest and a 55% limited partnership interest,
respectively, of Daytona Beach Regency, Ltd. As a result, the Company now owns
100% of the general and limited partnership interests of Daytona Beach Regency,
Ltd.
VACATION OWNERSHIP INDUSTRY OVERVIEW
THE MARKET. The vacation ownership industry consists primarily of
commercial lodging operators and vacation ownership resorts. Commercial lodging
typically consists of (i) hotels and motels which rent individual rooms on a
nightly, weekly or monthly basis and (ii) rental of privately owned condominium
units or homes. These facilities often prove uneconomical for frequent or
long-term leisure travelers, particularly vacationing families. In addition,
rates and availability are often unpredictable and subject to change.
Vacation ownership resorts are gaining in popularity as a relatively
economical and convenient alternative to commercial lodging establishments.
Vacation ownership resorts allow buyers to essentially prepay for their
vacation, while securing vacation accommodations and controlling room cost.
Vacation ownership resorts often provide comparable locations and greater
amenities at a decreased cost as compared to commercial lodging. In addition,
such resorts generally offer superior accommodations in terms of unit size.
WORLDWIDE MARKET. The worldwide vacation ownership industry has experienced
rapid growth since its inception in Europe in the mid-1960s. According to ARDA,
vacation ownership industry sales and the number of Vacation Ownership Interest
owners have grown at compound annual rates of approximately 16% and 22%,
respectively, from 1980 to 1997.
UNITED STATES MARKET. The vacation ownership industry has experienced
significant growth since Vacation Ownership Interests were first marketed in the
United States in the 1970s, and the number of vacation ownership resorts has
increased to 1,204 in 1997 from 870 in 1993. Similarly, the number of households
owning Vacation Ownership Interests has increased to 1.8 million households in
1997 from 1.3 million households in 1993. During 1996, a total of 218,000
one-week Vacation Ownership Interests were sold in the United States at an
average price of $10,000 each for a total sales volume of $2.2 billion. This
represents a 69.2% increase from 1992, when a total of 168,840 of such interests
were sold in the United States at an average price of $7,000 each for a total
sales volume of $1.3 billion. Despite such growth, the current average market
penetration rate for vacation ownership is only 1.72% of all U.S. households.
THE CONSUMER. According to ARDA, the median age and annual income of a
Vacation Ownership Interest purchaser in the United States in 1997 was 50 years
and $71,000, respectively. While demographics differ by property, the typical
age and annual income of an owner of a Vacation Ownership Interest at the
Company's resorts has ranged from between 40 to 55 years and in excess of
$50,000, respectively.
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<PAGE>
According to the U.S. Census Bureau, the number of persons in the 40 to 54 age
group was 54.9 million, which represented 21% of the U.S. population at July 1,
1997, and is predicted to increase to approximately 59.5 million by 2000.
REASONS FOR GROWTH. The Company believes that this growth trend in the
industry is a result of certain shifts in customer satisfaction and changes in
consumer perceptions of Vacation Ownership Interests. Management believes, based
on industry publications, that these trends are attributable to the following
factors, among others:
- Increased flexibility and options associated with Vacation Ownership
Interests;
- Improved quality and management of vacation ownership resorts and related
amenities;
- Improved customer perception of the value and quality of Vacation
Ownership Interests, as compared to other vacation lodging alternatives;
- Demographic trends resulting in a greater base of customers meeting the
profile of a typical Vacation Ownership Interest purchaser;
- Growth of exchange networks;
- Increased customer protection regulation of the vacation ownership
industry;
- Increased participation of brand name lodging companies; and
- Greater access to financing for purchasers.
Historically, the vacation ownership industry has been highly fragmented and
dominated by a large number of local and regional resort developers and
operators, each with limited portfolios of differing quality. Recently, there
has been a trend toward consolidation among vacation ownership resort developers
and operators. In addition, many of the world's most widely-recognized lodging,
hospitality and entertainment companies have begun to develop and sell Vacation
Ownership Interests under their brand names, including Marriott, Disney, Hilton,
Hyatt, Four Seasons and Inter-Continental. The Company believes that the entry
of such participants is one of the most significant factors contributing to the
vacation ownership industry's current success. The Company believes that
national lodging and hospitality companies are attracted to the vacation
ownership industry because of its relatively low product cost and high profit
margins. In addition, sales of Vacation Ownership Interests allow traditional
hotel companies to leverage their brands into additional resort markets where
demand exists for accommodations beyond traditional hotels. See "--Competition"
and "Risk Factors--Competition."
According to a 1997 ARDA study, the three primary reasons cited by consumers
for purchasing a Vacation Ownership Interest are (i) the ability to exchange
their Vacation Ownership Interest for accommodations at other resorts through
exchange networks, (ii) the quality and appeal of the resort at which they
purchased a Vacation Ownership Interest, and (iii) the money savings over
traditional resort vacations. According to a 1994 ARDA study, Vacation Ownership
Interest purchasers have a high rate of repeat purchases: approximately 35% of
all Vacation Ownership Interest owners own more than one interval and
approximately 45% of all owners who bought their first Vacation Ownership
Interest before 1985 have since purchased an additional interest. Moreover,
customer satisfaction was found to increase with length of ownership, age,
income, multiple location ownership, and accessibility to exchange networks.
DESCRIPTION OF THE RESORTS
Set forth below is a description of the Company's vacation ownership
resorts. The Company will commence sales of Vacation Ownership Interests at the
resorts purchased in connection with the Acquisitions upon receipt of required
governmental approvals, which are expected to be received by November 1998,
except in the case of Palm Springs Marquis Villas, which the Company expects to
receive by January 1999.
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<PAGE>
LONDON BRIDGE RESORT. The London Bridge Resort is situated on twelve acres
in scenic Lake Havasu City, Arizona, surrounding the world famous London Bridge,
which was relocated from London in 1968. The resort, formerly a 180 room hotel,
currently consists of 122 studio, one- and two-bedroom suites for a total of
6,222 Vacation Ownership Interests. The Company commenced a new construction
phase of 193 additional one- and two-bedroom suites in the third quarter of
1998. London Bridge offers many amenities, including three swimming pools, a
fifty-seven slip marina and a tennis court, as well as a nine-hole executive
golf course and one mile of beachfront on Lake Havasu. Also located at the
resort is one of Arizona's major tourist attractions, the London Bridge English
Village and Shopping Mall, which includes over 50 shops, restaurants, bars and
entertainment outlets. The Lake Havasu City area is a popular vacation
destination, which attracts over 3 million visitors each year and offers fishing
on the Colorado River, hunting, boating and water sports, and is located 150
miles from Las Vegas and 67 miles from Laughlin, Nevada. The London Bridge
Resort has been designated as a Five Star Resort by II, which awards this
designation to less than 10% of its 1,500 member resorts.
DAYTONA BEACH REGENCY. The Daytona Beach Regency is located in Daytona
Beach, Florida and currently consists of 45 one- and two-bedroom suites, for a
total of 2,295 Vacation Ownership Interests. Formerly a 198 room hotel, the
Company has renovated 45 of the resort's 90 vacation ownership suites, and plans
to complete the conversion of the remaining 45 suites by the first quarter of
1999. Amenities include an outdoor swimming pool and deck, and an indoor leisure
center with indoor pool, spa and health club. In addition, the resort will be
further enhanced by the recent enactment of a city ordinance which will prohibit
cars from driving on the resort's beachfront property. Activities such as
boating, surfing, water sports and golfing are within short walking distance to
the resort. In addition to its famous beaches and boardwalk, the Daytona Beach
area is the "World Center of Racing" and is the home of NASCAR and Grand Prix
motorcycle racing, attracting over 8 million visitors each year. The resort is a
short 52-mile drive to Orlando, home to Disney World. II has designated the
Daytona Beach Regency as a Five Star resort.
SCOTTSDALE LINKS RESORT. Located on the world famous TPC golf courses in
Scottsdale, Arizona, Scottsdale Links Resort offers 228 luxury one-, two- and
three-bedroom suites, for a total of 11,628 Vacation Ownership Interests. The
resort's amenities include mountain views, pool and spa, massage therapy room,
state-of-the-art fitness center, gas-operated grills and oversized patios and
balconies. The Scottsdale area attracts more than 12 million visitors each year
to its over 100 golf courses, gourmet restaurants, art galleries and world class
shopping.
WESTPARK RESORT. Located one and one-half miles west of the world famous
Las Vegas Strip in Las Vegas, Nevada, the Westpark Resort is situated in a quiet
tropical setting while offering easy access to the excitement and nightlife of
Las Vegas. The resort consists of 152 one- and two-bedroom suites, for a total
of 7,752 Vacation Ownership Interests. Each suite is equipped with oversized
patios or balconies and private Jacuzzis, state of the art audio and visual
equipment and full kitchens with dishwashers, refrigerators with icemakers and
microwave ovens. The resort offers shuttle service to Las Vegas attractions, and
can arrange for golf tee times, show tickets and sightseeing tours. Known as
"The Entertainment Capital of the World," Las Vegas attracts over 30 million
visitors each year.
PALM SPRINGS MARQUIS VILLAS. Conveniently located on seven acres in
downtown Palm Springs, California, the Palm Springs Marquis Villas consists of
101 one- and two-bedroom suites for a total of 5,252 Vacation Ownership
Interests. The resort's suites include full kitchens, marble baths, state of the
art audio visual equipment, wet bars, fireplaces and private balconies. The
resort's amenities include several pools, a full service spa and exercise
facility, tennis courts, close proximity to golf courses, sightseeing and
shopping. The resort staff will arrange tee times and transportation to any of
the area's over 70 world-class golf courses. The Palm Springs area attracts over
4.5 million visitors each year.
PLANTER'S QUARTERS RESORT. Located on Hilton Head Island off the coast of
South Carolina, the Planter's Quarters Resort currently consists of 36 one-and
two-bedroom suites for a total of 1,856 Vacation
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Ownership Interests. The Company expects to commence development of a total of
124 additional one-and two-bedroom suites (totalling 6,324 Vacation Ownership
Interests) at the resort. Such construction commenced in the third quarter of
1998 and will be completed in phases of eight to nine suites each. Current and
proposed amenities include a swimming pool, an outdoor spa, picnic areas,
bicycle rental, on-site movie rentals and an exercise facility. In addition, the
resort has special golf privileges at Port Royal Resort and Shipyard Plantation
and exclusive tennis privileges at the Port Royal Racquet Club. The Planter's
Quarters Resort has been designated as a Gold Crown Resort by RCI, the highest
designation in RCI's rating system. Hilton Head Island is a popular vacation
destination which attracts over 2.5 million visitors each year to its over 20
world-class championship golf courses, 6 major tennis centers, 7 major shopping
and entertainment centers, 12 miles of beach and over 200 restaurants.
SALES AND MARKETING
The Company believes that it has acquired significant skill and expertise in
the development, management and operation of its resorts and in the marketing of
Vacation Ownership Interests. The Company's sales representatives are a critical
component of its sales and marketing effort, and the Company continually strives
to attract, train and retain a dedicated sales force. The Company provides
intensive sales instruction and training, which coupled with the sales
representative's valuable local knowledge of each resort, assists in acquainting
prospective customers with each resort's benefits. The Company's sales staff is
required to provide each customer with a written disclosure statement regarding
the Vacation Ownership Interest to be sold prior to the time the customer signs
a purchase agreement. This disclosure statement sets forth relevant information
regarding ownership of a Vacation Ownership Interest at the resort and must be
signed by every purchaser. The Company believes that this information statement
contains all material and relevant information a customer requires to make an
informed decision regarding the purchase of a Vacation Ownership Interest at one
of its resorts, and contributes to its low rates of rescission. The Company
sells Vacation Ownership Interests to purchasers for leisure purposes and not
for investment purposes.
CUSTOMER FINANCING
GENERAL
Approximately 90% of the Company's customers finance their purchase of a
Vacation Ownership Interest with the Company. The Company financed approximately
90% of the aggregate purchase price of these sales during each of 1996 and 1997
and the six months ended June 30, 1998, and received cash for the remaining
balance. The typical financing extended by the Company on a Vacation Ownership
Interest provides for a term of approximately seven years at a fixed interest
rate. At the closing of a sale of a Vacation Ownership Interest, the Company
delivers the deed to the purchaser and secures repayment of such purchaser's
obligation by obtaining a mortgage on such purchaser's Vacation Ownership
Interest.
The Company believes that its financing is attractive to purchasers who find
it convenient to handle all facets of the purchase of Vacation Ownership
Interests through a single source and because the downpayments required by the
Company are similar to those required by banks and mortgage companies which
offer this type of credit, when such credit is available. The weighted average
interest rate on the Company's notes receivable was 14.4%, 14.9% and 15.0% at
December 31, 1996, December 31, 1997 and June 30,
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1998, respectively. The table below sets forth additional information relating
to the Company's notes receivable (amounts in thousands).
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
---------------------------- JUNE 30,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Notes receivable, gross, secured by Vacation Ownership Interests.... $ 21,732,059 $ 37,897,911 $ 46,262,418
Reserve for loan losses............................................. (736,211) (750,061) (1,227,598)
------------- ------------- -------------
Notes receivable, net............................................... $ 20,995,848 $ 37,147,850 $ 45,034,820
------------- ------------- -------------
------------- ------------- -------------
Charge-offs......................................................... $ 448,359 $ 1,377,617 $ 220,406
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
LOAN UNDERWRITING
Consistent with industry practice, Vacation Ownership Interest financing is
not subject to extensive loan underwriting criteria. Prior to providing such
financing, the Company performs a commercial credit check. The Company requires
a minimum downpayment of 10% of the purchase price and the execution of certain
closing documents. The Company encourages purchasers to make increased
downpayments by offering a lower interest rate. In addition, purchasers who do
not elect to participate in the Company's pre-authorized payment plan are
charged interest at a rate which is one percent greater than the otherwise
prevailing rate.
COLLECTION POLICIES
The Company currently bears the risk of purchaser default under its
traditional receivable financial facilities. Under these facilities, the
Company's practice has been to continue to accrue interest on its loans to
purchasers of Vacation Ownership Interests until such loans are deemed to be
uncollectible, at which point it commences foreclosure proceedings and, upon
obtaining title, returns such Vacation Ownership Interests to the Company's
inventory for resale. The Company closely monitors its loan accounts and
determines whether to foreclose on a case-by-case basis. If a purchaser of a
Vacation Ownership Interest defaults on the mortgage during the early part of
the loan amortization period, the Company will not have recovered its marketing,
selling (other than certain sales commissions) and general and administrative
costs relating to such Vacation Ownership Interest. In addition, although in
certain jurisdictions the Company may seek recourse against a defaulting
customer for the sales price of a Vacation Ownership Interest, the Company has
not historically pursued such a remedy. See "Risk Factors--Risks Associated with
Customer Financing and Receivables."
LOAN LOSS RESERVES
Reserve for loan losses as a percentage of period-end notes receivable was
3.5%, 2.0% and 2.7% at December 31, 1996, December 31, 1997 and June 30, 1998,
respectively. The adequacy of the Company's reserve for loan losses is
determined by management and reviewed on a regular basis considering, among
other factors, historical frequency of default, loss experience, present and
expected economic conditions as well as the quality of receivables. See "Risk
Factors--Risks Associated with Customer Financing and Receivables."
SALES OF RECEIVABLES/PLEDGING OF RECEIVABLES
The Company has historically pledged substantially all of its receivables to
obtain financing, generally retaining the right and obligation to service such
receivables. In the case of receivables in securitization transactions pledged
to a financial institution, the Company generally must maintain a debt to
eligible collateral rate (based on outstanding principal balance of the pledged
loans) of 90%. The Company is
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obligated to pledge additional eligible receivables or make additional principal
payments in order to maintain this collateralization rate. Repurchases and
additional principal payments have not been material to date. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Liquidity and Capital Resources."
RECEIVABLES SERVICING
Receivables servicing includes collecting payments from borrowers and
remitting such funds to the owners, lenders or investors in such receivables,
accounting for receivables principal and interest, making advances when
required, contacting delinquent borrowers, foreclosing in the event that
defaults are not remedied and performing other administrative duties. The
Company outsources the servicing of its receivables to a third party vendor, and
paid aggregate fees of $228,119 and 76,211 in fiscal 1997 and the second quarter
of 1998, respectively. The Company expects that its receivables servicing will
not change substantially when advances under the New Receivables Facility
commence.
CUSTOMER SERVICE
The Company emphasizes customer satisfaction and maintains full-time
customer service representatives in its King of Prussia headquarters to respond
to customer inquiries. At closing, all purchasers are provided with a toll-free
customer service phone number to facilitate any additional information requests.
Customer service surveys are often sent to each purchaser to measure customer
satisfaction and to alert the Company to problems, if any.
PARTICIPATION IN EXCHANGE NETWORKS
The Company believes that consumers are more likely to purchase from its
inventory of Vacation Ownership Interests as a result of its participation in
exchange networks. In a 1997 study sponsored by ARDA, exchange opportunity was
cited by purchasers of Vacation Ownership Interests as one of the most
significant factors in their decision to purchase such an interest. Membership
in an exchange network allows the owner of a Vacation Ownership Interest at one
of the Company's resorts to exchange their occupancy right for a similar right
at another participating resort, based upon availability and the payment of a
variable exchange fee. A Vacation Ownership Interest can be exchanged by listing
the interest as available with the exchange network affiliated with the owner's
home resort and requesting occupancy at another participating resort, indicating
the preferred resort or geographic area, the size of the unit desired, and the
period during which occupancy is desired. The exchange network assigns a rating
to each listed Vacation Ownership Interest, which is based upon a number of
factors, including the location and size of the unit, the quality of the resort
and the time of year during which the exchanging owner's Vacation Ownership
Interest is available. The network then attempts to satisfy the exchange request
by providing an occupancy right in a participating resort with a similar rating.
COMPETITION
The Company competes with other vacation ownership resort providers as well
as hotels, motels, condominium developments and second homes. Competition is
based primarily upon the attractiveness and location of the resort property and
amenities. The Company considers the direct competitors of individual resorts to
also include alternative accommodations, including hotels, motels,
bed-and-breakfasts and small vacation ownership operators located within the
immediate geographic vicinity of each of its resorts.
The vacation ownership industry historically has been highly fragmented and
dominated by a very large number of local and regional resort developers and
operators, each with limited portfolios. More recently, many of the world's most
widely-recognized lodging, hospitality and entertainment companies have begun to
develop and sell timeshare and vacation ownership interests under their brand
names,
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including Marriott, Disney, Hilton, Hyatt, Four Seasons and Inter-Continental.
In addition, other publicly-traded companies such as Signature, Vistana,
Fairfield, Trendwest, ILX, Bluegreen and Silverleaf currently compete or may
compete in the future with the Company. Furthermore, significant competition
exists in other markets in which the Company currently operates or is developing
vacation ownership resorts. Many entities with which the Company competes have
significantly greater access to financial, sales and marketing and other
resources than those of the Company and may be able to grow at a more rapid rate
or more profitably as a result. Management anticipates that competition will
increase in the future as a result of consolidation in the vacation ownership
industry. There can be no assurance that the Company will be able to
successfully compete with such consolidated companies. See "Risk
Factors--Competition."
GOVERNMENT REGULATION
The Company's marketing and sales activities and other resort operations are
subject to extensive regulation by the federal government and the states in
which the Company's resorts are located and in which its Vacation Ownership
Interests are marketed and sold. Federal legislation to which the Company is or
may be subject includes the Federal Trade Commission Act, the Fair Housing Act,
the Truth-in-Lending Act, the Real Estate Settlement Procedures Act, the Equal
Credit Opportunity Act, the Interstate Land Sales Full Disclosure Act, the
Telemarketing and Consumer Fraud and Abuse Prevention Act, and the Civil Rights
Acts of 1964, 1968 and 1991. Many states have adopted legislation as well as
specific laws and regulations regarding the sale of vacation ownership
interests. The laws of most states require a designated state authority to
approve a public report of condominium, a detailed offering statement describing
the Company and all material aspects of the resort and the sale of Vacation
Ownership Interests at such resort. In addition, the laws of most states in
which the Company sells Vacation Ownership Interests grant the purchaser of such
an interest the right to rescind a contract of purchase at any time within a
statutory rescission period, which generally ranges from three to ten days.
Furthermore, most states have other laws which regulate the Company's
activities, such as real estate licensure laws, travel sales licensure laws,
anti-fraud laws, telemarketing laws, prize, gift and sweepstakes laws, labor
laws and various regulations governing access and use of the Company's resorts
by disabled persons. The Company believes that it is in material compliance with
all applicable federal, state, local and foreign laws and regulations to which
it is currently subject. See "Risk Factors--Government Regulation."
EMPLOYEES
As of June 30, 1998, the Company employed a total of 667 full time
employees, and plans to add employees to staff the resorts purchased in
connection with the Acquisitions. None of the Company's employees are
represented by a collective bargaining unit, and the Company believes that its
relations with its employees are good.
LEGAL PROCEEDINGS
The Company is not presently involved in any material legal proceedings.
However, from time to time during the ordinary course of business, the Company
is threatened with, or may become a party to legal actions and other proceedings
incidental to the Company's business. The Company believes that its potential
exposure to such legal actions is adequately covered by its general liability
insurance.
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<PAGE>
MANAGEMENT
MANAGING MEMBER
The Company's Managing Member is Epic Membership Corp., a Delaware
corporation wholly owned by Mr. Flatley. Pursuant to the Company's Operating
Agreement, the Managing Member has the sole power to conduct, manage, control
and make all decisions affecting the conduct of the business, assets and affairs
of the Company. The Company also maintains a Board of Managers which acts in an
advisory capacity to the Managing Member and performs such other functions as
delegated to it by the Managing Member. In addition, the Board of Managers
retains certain duties and powers pursuant to the terms of the Indenture
governing the Notes. See "Description of Notes."
MANAGERS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each person
named as a manager and/or executive officer of the Company. Managers serve until
their successors are elected, and Officers hold office until their successors
are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Thomas F. Flatley................ 46 President, Chief Executive Officer and Manager
Scott J. Egelkamp................ 39 Vice President, Chief Financial Officer and Manager
Gerald L. Clark.................. 66 Manager
James A. Ditanna................. 48 Manager
Robert M. Kramer................. 46 Manager
</TABLE>
THOMAS F. FLATLEY has been President, Chief Executive Officer and a Director
of predecessors of the Company since 1991. Mr. Flatley has also served as the
President and a Director of American Financial Mortgage Corporation, a national
mortgage banking company, since 1988. From 1974 to 1982, Mr. Flatley practiced
as a Certified Public Accountant with Price Waterhouse, LLP. Mr. Flatley was
recently awarded the 1998 ARDA Community Service Award.
SCOTT J. EGELKAMP has been Vice President and Chief Financial Officer of
predecessors of the Company since 1992. Mr. Egelkamp has also served, since
1988, as Vice President and Chief Financial Officer of American Financial
Mortgage Corporation. Mr. Egelkamp has over 15 years of experience as a
financial manager in service and manufacturing environments.
GERALD L. CLARK, NCARB, FAIA, has served as Director of Development of
predecessors of the Company since 1992. Mr. Clark, a registered architect, has
over 35 years of experience in all aspects of design, construction and
development and currently also serves as President of Clark & Associates
Architects, Inc. In addition, Mr. Clark is a partner and principal of Accent
Plus Interiors, an interior design company.
JAMES A. DITANNA has served as Chief Financial Officer and Financial
Consultant of Nexmed, Inc., a pharmaceutical manufacturing company, since 1996.
Mr. Ditanna has also been a joint venture partner in VAVCO, a vaccine
manufacturer since 1992. Prior to joining Nexmed, Inc., Mr. Ditanna worked as a
consultant in the field of international finance and business development. Mr.
Ditanna practiced as a tax specialist with Price Waterhouse in Teheran, Iran.
Mr. Ditanna has a dual Masters in Business and Governmental Administration from
the Wharton School of the University of Pennsylvania.
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<PAGE>
ROBERT M. KRAMER has served as General Counsel, Executive Vice President and
Secretary of the Eastern Environmental Services, Inc. since June 1996. Since
1989, Mr. Kramer has been the sole partner of Robert M. Kramer & Associates,
P.C., a law firm consisting of three lawyers. From December 1989 to December
1997, Mr. Kramer served on the Board of Directors of American Capital
Corporation, a registered securities broker-dealer. Mr. Kramer received a J.D.
degree from Temple University Law School.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth, for fiscal
1997, certain information about the compensation paid to the chief executive
officer and the other executive officer of the Company (the "Named Executives").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------------------------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Thomas F. Flatley--............................................... 1997 (a) -- --
President and Chief Executive
Officer
Scott J. Egelkamp--............................................... 1997 $ 125,000 -- --
Vice President and Chief Financial
Officer
</TABLE>
- ------------------------
(a) Mr. Flatley did not receive a salary in 1997. It is expected that Mr.
Flatley's salary after the Initial Offering will be $280,000 per year.
EMPLOYMENT AGREEMENTS. Each of Thomas F. Flatley and Scott J. Egelkamp (the
"Executive Officers") have entered into employment agreements with the Company
(the "Employment Agreements"). Each Employment Agreement provides for an
employment term of three years, commencing May 20, 1998 (the "Employment
Period") and an annual base salary of $280,000 and $125,000, for Mr. Flatley and
Mr. Egelkamp, respectively. The Executive Officers' annual base salary is
subject to increase at the discretion of the Board of Managers. Each of Mr.
Flatley and Mr. Egelkamp's Employment Agreements provide that if such Executive
Officer is terminated for any reason other than violation of such agreement,
such Executive Officer is entitled to 120 days, notice prior to termination, to
payment of all accrued and unpaid salary and benefits through the date of
termination, and a lump sum payment equal to one year of his salary. In
addition, if the Employment Agreement of either Executive Officer is terminated
without cause upon the occurrence of a merger, consolidation or other business
combination in which the Company is not the surviving entity, such Executive
Officer will be entitled to a lump sum payment equal to two years of his salary.
Pursuant to the Employment Agreements, each of the Executive Officers has
agreed (i) not to compete with the Company in the vacation ownership business
during the Employment Period and for a period of six months after the
termination of such period, and (ii) to keep all proprietary information of the
Company confidential for a period of two years following the termination of his
employment with the Company. Each Executive Officer has also agreed that he will
not solicit any employee to leave the employ of the Company during the
Employment Period or for two years following the termination of his employment
with the Company.
LIFE INSURANCE POLICY The Company purchased an annual renewable term life
insurance policy on Mr. Flatley from CNA Life Insurance Company. This policy has
a face value of $15 million. The Company is the sole beneficiary of such policy.
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<PAGE>
COMPENSATION OF MANAGERS. The Company pays each Manager an annual retainer
of $10,000 to be paid in four quarterly installments of $2,500 each. In
addition, each Manager receives reasonable out-of-pocket expenses for each
meeting attended.
PRINCIPAL MEMBERS
99% of the 1,118,000 outstanding Membership Interests in the Company are
held by its President and Chief Executive Officer, Mr. Flatley. The remaining 1%
of outstanding Membership Interests are owned by Epic Membership Corp., a
Delaware corporation wholly owned by Mr. Flatley, which acts as the Managing
Member of the Company. In connection with the Initial Offering and the
Acquisitions, the Company agreed to issue Epic Warrants exercisable, in the
aggregate, for approximately 14% of the total outstanding Membership Interests
on a fully diluted basis after giving effect to the Initial Offering.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1990, London Bridge Resort obtained a line of credit not to
exceed $3,412,545. This loan was collateralized by an assignment of a second
mortgage on London Bridge Resort's facilities and properties and was subordinate
to the claims of London Bridge Resort's construction and equipment loans and did
not become payable until such loans have been paid in full. American Realty
Group, Inc., a Pennsylvania corporation wholly-owned by Mr. Flatley ("ARG"), was
the holder of a promissory note evidencing such loan (the "American Realty
Debt"). Interest on the promissory note accrued at a rate of 8.5% per annum up
to a maximum amount of $500,000. In 1995, interest accrued to $500,000 and the
promissory note became non-interest bearing. As of December 31, 1997, the
balance of the promissory note was $3,912,545, and was repaid out of the
proceeds of the Initial Offering. Pursuant to an Agreement to Subordinate dated
October 30, 1995, between ARG and Queen's Bay Joint Venture ("QBJV")
(predecessor to London Bridge Resort, LLC.), ARG was entitled to receive a fee
of $1,087,455 upon the repayment of certain financing of QBJV as consideration
for ARG's agreement to subordinate the American Realty Debt to such financing.
Such fee was paid in connection with the Initial Offering.
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<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
The Existing Receivables Facility is a $23.0 million Receivables Loan and
Security Facility between London Bridge Resort, Inc. and a financial
institution, which bears interest at prime plus 2.5% (11.0% at June 30, 1998).
The Existing Receivables Facility is payable in monthly installments of
principal and interest equal to 100% of all proceeds of the receivables
collateral collected during the month. Any remaining principal under the
Existing Receivables Facility is due seven years after the date of the last
advance related to mortgages receivable and is collateralized by the specific
mortgages receivable. As of June 30, 1998, the outstanding balance under the
Existing Receivables Facility was approximately $21.3 million. Such outstanding
balance was repaid in full in connection with the initial funding of the New
Receivables Facility on October 27, 1998. The Company currently has no
outstanding variable rate indebtedness.
On September 28, 1998, the Company and PSCC entered into the New Receivables
Facility, whereby PSCC agreed to finance up to $75 million (outstanding at any
time) of Vacation Ownership Interest Receivables. Under the terms of the New
Receivables Facility, the Company will sell Vacation Ownership Interest
Receivables to Epic Funding, an unconsolidated special purpose subsidiary, and
PSCC will make advances to Epic Funding in an amount equal to 88% of the lesser
of (i) the unpaid principal balance of the Vacation Ownership Interest
Receivables sold to Epic Funding or (ii) the market value of such receivables as
determined by Prudential Securities Incorporated. Requests for advances under
the New Receivables Facility are limited to a maximum of one per week, with no
dollar limit. The New Receivables Facility will terminate on September 28, 1999,
unless terminated earlier due to the occurrence of an event of default, a
material adverse change in the business, operations or financial condition of
the Company or Epic Funding, or cumulative receivable defaults in excess of 9%.
Advances under this facility will bear interest at a per annum rate equal to one
month LIBOR plus 1.50%, reset daily. The New Receivables Facility is intended to
provide non-recourse interim funding for the Vacation Ownership Interests
Receivables pending their long-term funding through securitization transactions.
The commitment is subject to customary conditions, and the events of default
under the New Receivables Facility include failure to maintain the financial
covenants applicable to the Notes and failure to maintain a collateral value
based on PSCC's mark-to-market valuation. The Company retains a subordinated
interest in the pooled Vacation Ownership Interest Receivables. An event of
default could allow PSCC to liquidate the Vacation Ownership Interest
Receivables, thereby impairing the Company's retained interest in such
receivables. The Company repaid the outstanding balance of the Existing
Receivables Facility with the proceeds of the initial funding of the New
Receivables Facility. The Company expects to use future borrowings under the New
Receivables Facility to, among other things, fund new Vacation Ownership
Interest Receivables and provide working capital.
The Existing Receivables Facility and the New Receivables Facility include,
among other things, customary representations and warranties, provisions with
respect to the payment of certain fees and expenses, conditions to funding,
eligibility rates and advance requirements for collateral, events of default and
certain financial and other covenants, including limitations on the incurrence
of indebtedness, net worth and fixed charge coverage requirements and other
coverage ratios.
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<PAGE>
THE EXCHANGE OFFER
PURPOSES AND EFFECT OF THE EXCHANGE OFFER
The Original Notes were sold by the Issuers on July 8, 1998 to the Initial
Purchaser pursuant to the Purchase Agreement among the Issuers, the Subsidiary
Guarantors and the Initial Purchaser. The Initial Purchaser subsequently resold
the Original Notes in transactions exempt from registration under the Securities
Act. Pursuant to the Purchase Agreement, the Issuers entered into the
Registration Rights Agreement. According to the terms of the Registration Rights
Agreement, the Issuers have agreed, for the benefit of the holders of the
Original Notes, at the Issuers' cost, to (i) file a registration statement with
the Commission within 75 days after the Issue Date of the Original Notes with
respect to the Exchange Offer for the Original Notes, and (ii) cause the
registration statement to be declared effective under the Securities Act within
135 days after the Issue Date. Upon the registration statement being declared
effective, the Issuers will offer the Exchange Notes in exchange for the
Original Notes. The Issuers will keep the Exchange Offer open for no less than
20 days (or longer if required by applicable law) after the date on which notice
of the Exchange Offer is mailed to the holders of the Original Notes.
For each Original Note properly tendered and accepted pursuant to the
Exchange Offer, the holder of such Original Note will receive an Exchange Note
having a principal amount equal to that of the Original Note tendered. Interest
on each Exchange Note will accrue from the last respective interest date on
which interest was paid on the Original Note tendered in exchange therefor, or,
if no interest has been paid on such Original Note, from the Issue Date. Holders
whose Original Notes are accepted for exchange will be deemed to have waived the
right to receive any interest accrued on the Original Notes.
Each holder of the Original Notes who wishes to exchange the Original Notes
for Exchange Notes in the Exchange Offer will be required to represent in the
Letter of Transmittal that (i) it is not an affiliate of an Issuer or any of the
Subsidiary Guarantors, (ii) the Exchange Notes to be received by it were
acquired in the ordinary course of its business and (iii) at the time of
commencement of the Exchange Offer, it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes and that it is not acting on behalf of a person who could not
truthfully make the foregoing representations.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If the holder is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Original Notes that were acquired as a
result of market making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of the Exchange Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit the Issuers to effect the Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 165 days after the Issue
Date, or, under certain circumstances, if the Initial Purchasers or any holder
of Original Notes (other than the Initial Purchasers) who is not eligible to
participate in the Exchange Offer shall so request (each a "Shelf Request"), the
Issuers will at their cost, (a) as promptly as practicable, and within 75 days
of the Issue Date, file a shelf registration statement covering resales of the
Original Notes (a "Shelf Registration Statement"), (b) use their reasonable
efforts to cause such Shelf Registration Statement to be declared effective
under the Securities Act no later than 135 days following the Issue Date and (c)
use their reasonable efforts to keep effective such Shelf Registration Statement
until the earlier of (i) two years after the Issue Date, (ii) such time as all
of the applicable Registrable Notes (as defined in the Registration Rights
Agreement) have been sold thereunder or (iii) such time as the Notes become
eligible for registration without volume restrictions pursuant to Rule 144 under
the Securities Act. The Issuers will, in the event of the filing of a Shelf
Registration Statement, provide to each holder of Original Notes copies of the
prospectus which is a part of such Shelf Registration Statement, notify each
such holder when such Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of Original
Notes. A holder that sells its Original Notes pursuant to a Shelf
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Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
If the Issuers or the Subsidiary Guarantors fail to comply with the above
provisions or if such Shelf Registration Statement fails to become effective,
then, as liquidated damages, additional interest (the "Additional Interest")
shall become payable with respect to the Notes as follows:
(i) if the Registration Statement or Shelf Registration Statement is not
filed within 75 days following the Issue Date, Additional Interest shall
accrue on the Notes over and above the stated interest at a rate of 0.50%
per annum for the first 30 days commencing on the 76th day after the Issue
Date or the Shelf Notice, respectively, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each
subsequent 30-day period;
(ii) if the Registration Statement or Shelf Registration Statement is
not declared effective within 135 days following the Issue Date, Additional
Interest shall accrue on the Notes over and above the stated interest at a
rate of 0.50% per annum for the first 30 days commencing on the 136th day
after the Issue Date or the Shelf Notice, respectively, such Additional
Interest rate increasing by an additional 0.50% per annum at the beginning
of each subsequent 30-day period; or
(iii) if (A) the Issuers have not exchanged all Notes validly tendered
in accordance with the terms of the Exchange Offer on or prior to 165 days
after the Issue Date or (B) the Exchange Registration Statement ceases to be
effective at any time prior to the time that the Exchange Offer is
consummated or (C) if applicable, the Shelf Registration Statement has been
declared effective and such Shelf Registration Statement ceases to be
effective at any time prior to the second anniversary of the Issue Date
(unless all the Notes have been sold thereunder), then Additional Interest
shall accrue on the Notes over and above the stated interest at a rate of
0.50% per annum for the first 30 days commencing on (x) the 166th day after
the Issue Date with respect to the Notes validly tendered and not exchanged
by the Note Issuers, in the case of (A) above, or (y) the day the Exchange
Registration Statement ceases to be effective or usable for its intended
purpose in the case of (B) above, or (z) the day such Shelf Registration
Statement ceases to be effective in the case of (C) above, such additional
Interest rate increasing by an additional 0.50% per annum at the beginning
of each subsequent 30-day period;
PROVIDED, HOWEVER, that the Additional Interest rate on the Notes under clauses
(i), (ii) or (iii) above, may not exceed, in the aggregate, 1.50% per annum; and
PROVIDED FURTHER, that (1) upon the filing of the Registration Statement or
Shelf Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of the Registration Statement or Shelf Registration Statement (in
the case of (ii) above), or (3) upon the exchange of Exchange Notes for all
Notes tendered (in the case of clause (iii)(A) above), or upon the effectiveness
of the Registration Statement which had ceased to remain effective (in the case
of clause (iii)(B) above), or upon the effectiveness of the Shelf Registration
Statement which had ceased to remain effective (in the case of clause (iii)(C)
above), Additional Interest on the Notes as a result of such clause (or the
relevant subclause thereof), as the case may be, shall cease to accrue.
Notwithstanding anything to the contrary in Section 4(a) of the Registration
Rights Agreement, the Issuers and the Subsidiary Guarantors will not be required
to pay liquidated damages to the holder of Transfer Restricted Securities if
such holder failed to comply with its obligations to make the representations or
failed to provide the information required to be provided by it, if any,
pursuant to the Registration Rights Agreement.
The liquidated damages are intended to constitute the sole damages that will
be suffered by holders of Registrable Notes described above by reason of the
failure of (i) the Shelf Registration Statement or the
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Registration Statement to be filed, (ii) the Shelf Registration Statement to
remain effective or (iii) the Registration Statement to be declared effective
and the Exchange Offer to be consummated, in each case to the extent required by
the Registration Rights Agreement.
The summary herein of the material provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, which has been incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part, a copy of which will
be available upon request to Epic.
Following the consummation of the Exchange Offer, holders of the Original
Notes who were eligible to participate in the Exchange Offer but who did not
tender their Original Notes will not have any further exchange or registration
rights and such Original Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the market for such
Original Notes could be adversely affected. See "Risk Factors--Consequences of
Failure to Exchange Original Notes."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Issuers will accept any and all Original
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on the Expiration Date. The Issuers will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of Original Notes
accepted in the Exchange Offer. Holders may tender some or all of their Original
Notes pursuant to the Exchange Offer. However, Original Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will bear a Series B
designation and will have been registered under the Securities Act and,
therefore, will not bear legends restricting the transfer thereof and will not
contain certain provisions relating to an increase in the interest rate which
were included in the terms of the Original Notes in certain circumstances
relating to the timing of the Exchange Offer and (ii) holders of the Exchange
Notes will not be entitled to certain rights of the holders of the Original
Notes under the Registration Rights Agreement, which rights shall terminate upon
the consummation of the Exchange Offer. The Exchange Notes will evidence the
same debt as the Original Notes (which they replace) and will be issued under
and entitled to the benefits of the Indenture. The Original Notes and the
Exchange Notes will constitute a single class of debt securities under the
Indenture.
As of the date of this Prospectus, $130.0 million aggregate principal amount
of Original Notes are outstanding. The Issuers have fixed the close of business
November 9, 1998 as the record date for the Exchange Offer for purposes of
determining the person to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of the Original Notes do not have any appraisal or dissenters'
rights in connection with the Exchange Offer. The Issuers intend to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission thereunder.
The Issuers shall be deemed to have accepted validly tendered Original Notes
when, as and if the Issuers have given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Original Notes from the Issuers.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Original Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
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Holders who tender Original Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions of the
Letter of Transmittal, transfer taxes with respect to the exchange of Original
Notes pursuant to the Exchange Offer. The Issuers will pay all charges and
expenses, other than the transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
December 10, 1998, unless the Issuers, in their sole discretion, extend the
Exchange Offer (for a maximum of an additional 20 business days), in which case
the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Issuers will notify the Exchange
Agent of any extension by oral (confirmed in writing) or written notice, and
will make a public announcement thereof through an appropriate news agency,
prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date. The Issuers reserve the right, (i) to
delay accepting any Original Notes, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders.
PROCEDURES FOR TENDERING
The tender of Original Notes pursuant to any of the procedures set forth in
this Prospectus and in the Letter of Transmittal will constitute a binding
agreement between the tendering Holder and the Issuers in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal. The tender of Original Notes will constitute an agreement to
deliver good and marketable title to all tendered Original Notes prior to the
Expiration Date free and clear of all liens, charges, claims, encumbrances,
interests and restrictions of any kind. Holders must follow the procedures set
forth in this Prospectus in order to properly and effectively tender Original
Notes.
EXCEPT AS PROVIDED IN "--GUARANTEED DELIVERY PROCEDURES," UNLESS THE
ORIGINAL NOTES BEING TENDERED ARE DEPOSITED BY THE HOLDER WITH THE EXCHANGE
AGENT PRIOR TO THE EXPIRATION DATE (ACCOMPANIED BY A PROPERLY COMPLETED AND DULY
EXECUTED LETTER OF TRANSMITTAL), THE ISSUERS MAY, AT THEIR OPTION, REJECT SUCH
TENDER. ISSUANCE OF EXCHANGE NOTES WILL BE MADE ONLY AGAINST DEPOSIT OF TENDERED
ORIGINAL NOTES AND DELIVERY OF ALL OTHER REQUIRED DOCUMENTS. NOTWITHSTANDING THE
FOREGOING, DTC PARTICIPANTS TENDERING THROUGH ATOP WILL BE DEEMED TO HAVE MADE
VALID DELIVERY WHERE THE EXCHANGE AGENT RECEIVES AN AGENT'S MESSAGE (DEFINED
BELOW) PRIOR TO THE EXPIRATION DATE.
ORIGINAL NOTES HELD THROUGH DTC. Each Beneficial Owner holding Original
Notes through a DTC Participant must instruct such DTC Participant to cause its
Original Notes to be tendered in accordance with the procedures set forth in
this Prospectus.
Pursuant to an authorization given by DTC to the DTC Participants, each DTC
Participant holding Original Notes through DTC must (i) electronically transmit
its acceptance through ATOP, and DTC will then verify the acceptance, execute a
book-entry delivery to the Exchange Agent's account at DTC and send an Agent's
Message to the Exchange Agent for its acceptance, or (ii) comply with the
guaranteed delivery procedures set forth below and in the Notice of Guaranteed
Delivery. See "--Guaranteed Delivery Procedures."
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The Exchange Agent will (promptly after the date of this Prospectus)
establish accounts at DTC for purposes of the Exchange Offer with respect to
Original Notes held through DTC, and any financial institution that is a DTC
Participant may make book-entry delivery of interests in Original Notes into the
Exchange Agent's account through ATOP. However, although delivery of interests
in the Original Notes may be effected through book-entry transfer into the
Exchange Agent's account through ATOP, an Agent's Message in connection with
such book-entry transfer, and any other required documents, must be transmitted
to and received by the Exchange Agent at its address set forth under "Exchange
Agent," or the guaranteed delivery procedures set forth below must be complied
with, in each case, prior to the Expiration Date. Delivery of documents to DTC
does not constitute delivery to the Exchange Agent. The confirmation of a
book-entry transfer into the Exchange Agent's account at DTC as described above
is referred to herein as a "Book-Entry Confirmation." The term "Agent's Message"
means a message transmitted by DTC to, and received by, the Exchange Agent and
forming a part of the Book-Entry Confirmation, which states that DTC has
received an express acknowledgment from each DTC Participant tendering through
ATOP that such DTC Participants have received a Letter of Transmittal and agree
to be bound by the terms of the Letter of Transmittal and that the Issuers may
enforce such agreement against such DTC Participants.
Cede & Co., as the Holder of the global certificates representing the
Original Notes (a "Global Security"), will tender a portion of each Global
Security equal to the aggregate principal amount due at the stated maturity for
which instructions to tender are given by DTC Participants.
ORIGINAL NOTES HELD BY HOLDERS. Each Holder must (i) complete and sign and
mail or deliver the accompanying Letter of Transmittal, and any other documents
required by the Letter of Transmittal, together with certificate(s) representing
all tendered Original Notes, to the Exchange Agent at its address set forth
under "--Exchange Agent," or (ii) comply with the guaranteed delivery procedures
set forth below and in the Notice of Guaranteed Delivery. See "--Guaranteed
Delivery Procedures."
All signatures on a Letter of Transmittal must be guaranteed by any member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor" institution
within the meaning of the Rule 17Ad-15 under the Exchange Act (each an "Eligible
Institution"); provided, however, that signatures on a Letter of Transmittal
need not be guaranteed if such Original Notes are tendered for the account of an
Eligible Institution including (as such terms are defined in Rule 17Ad-15): (i)
a bank; (ii) a broker, dealer, municipal securities dealer, municipal securities
broker, government securities dealer or government securities broker; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings institution that is a
participant in a Securities Transfer Association recognized program.
If a Letter of Transmittal or any Original Note is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, agent, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person must so indicate when signing, and proper evidence satisfactory to
the Issuers of the authority of such person so to act must be submitted.
Holders should indicate in the applicable box in the Letter of Transmittal
the name and address to which substitute certificates evidencing Original Notes
for amounts not tendered are to be issued or sent, if different from the name
and address of the person signing the Letter of Transmittal. In the case of
issuance in a different name, the employer identification or social security
number of the person named must also be indicated. If no instructions are given,
such Original Notes not tendered, as the case may be, will be returned to the
person signing the Letter of Transmittal.
By tendering, each Holder and each DTC Participant will make to the Issuers
the representations set forth in the third paragraph under the heading
"--Purposes and Effect of the Exchange Offer."
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No alternative, conditional, irregular or contingent tenders will be
accepted (unless waived). By executing a Letter of Transmittal or transmitting
an acceptance through ATOP, as the case may be, each tendering Holder waives any
right to receive any notice of the acceptance for purchase of its Original
Notes.
All questions as to the validity, form, eligibility (including time of
receipt), and acceptance and withdrawal of tendered Original Notes will be
resolved by the Issuers in their discretion, whose determination will be final
and binding. The Issuers reserve the absolute right to reject any or all tenders
that are not in proper form or the acceptance of which may, in the opinion of
counsel for the Issuers, be unlawful. The Issuers also reserve the absolute
right to waive any condition to the Exchange Offer and any irregularities or
conditions of tender as to particular Original Notes. The Issuers'
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding. Unless
waived, any irregularities in connection with tenders must be cured within such
time as the Issuers shall determine. The Issuers and the Exchange Agent shall
not be under any duty to give notification of defects in such tenders and shall
not incur liabilities for failure to give such notification. Tenders of Original
Notes will not be deemed to have been made until such irregularities have been
cured or waived. Any Original Notes received by the Exchange Agent that are not
properly tendered and as to which the irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Holder, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
LETTERS OF TRANSMITTAL AND ORIGINAL NOTES MUST BE SENT ONLY TO THE EXCHANGE
AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR ORIGINAL NOTES TO THE ISSUERS OR
DTC.
The method of delivery of Original Notes and Letters of Transmittal, any
required signature guarantees and all other required documents, including
delivery through DTC and any acceptance through ATOP, is at the election and
risk of the persons tendering and delivering acceptances or Letters of
Transmittal and, except as otherwise provided in the applicable Letter of
Transmittal, delivery will be deemed made only when actually received by the
Exchange Agent. If delivery is by mail, it is suggested that the Holder use
properly insured, registered mail with return receipt requested, and that the
mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
ORIGINAL NOTES HELD THROUGH DTC. DTC Participants holding Original Notes
through DTC who wish to cause their Original Notes to be tendered, but who
cannot transmit their acceptances through ATOP prior to the Expiration Date, may
cause a tender to be effected if:
(a) guaranteed delivery is made by or through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by mail, hand delivery,
facsimile transmission or overnight courier) substantially in the form
provided by the Issuers herewith; and
(c) Book-Entry Confirmation and an Agent's Message in connection
therewith (as described above) are received by the Exchange Agent within
three New York Stock Exchange ("NYSE") trading days after the date of the
execution of the Notice of Guaranteed Delivery.
ORIGINAL NOTES HELD BY HOLDERS. Holders who wish to tender their Original
Notes and (i) whose Original Notes are not immediately available, (ii) who
cannot deliver their Original Notes, the Letter of Transmittal or any other
required documents to the Exchange Agent or (iii) who cannot complete the
procedures for book-entry transfer, prior to the Expiration Date, may effect a
tender if:
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(a) the tender is made through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the holder, the
certificate number(s) of such Original Notes and the principal amount of
Original Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three NYSE trading days after the Expiration Date,
the Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Original Notes (or a confirmation of
book-entry transfer of such Original Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility), and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Original Notes in proper form for transfer (or a confirmation or book-entry
transfer of such Original Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent upon three NYSE
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to 5:00 p.m, New York City time, on the Expiration
Date.
ORIGINAL NOTES HELD THROUGH DTC. DTC Participants holding Original Notes
who have transmitted their acceptances through ATOP may, prior to 5:00 p.m., New
York City time, on the Expiration Date, withdraw the instruction given thereby
by delivering to the Exchange Agent, at its address set forth under "Exchange
Agent," a written, telegraphic or facsimile notice of withdrawal of such
instruction. Such notice of withdrawal must contain the name and number of the
DTC Participant, the principal amount due at the Stated Maturity date of the
Original Notes to which such withdrawal related and the signature of the DTC
Participant. Withdrawal of such an instruction will be effective upon receipt of
such written notice of withdrawal by the Exchange Agent.
ORIGINAL NOTES HELD BY HOLDERS. Holders may withdraw a tender of Original
Notes in the Exchange Offer by a telegram, telex, letter or facsimile
transmission notice of withdrawal received by the Exchange Agent at its address
set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date.
Any such notice of withdrawal must (i) specify the name of the person having
deposited the Original Notes to be withdrawn (the "Depositor"), (ii) identify
the Original Notes to be withdrawn (including the certificate number(s) and
principal amount due at the Stated Maturity of such Original Notes, or, in the
case of Original Notes transferred by book-entry transfer, the name and number
of the account at the Book-Entry Transfer Facility to be credited), (iii) be
signed by the holder in the same manner as the original signature on the Letter
of Transmittal by which such Original Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Original Notes register the
transfer of such Original Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any such Original Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Issuers, whose determination shall be final and binding on
all parties. Original Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Original Notes so withdrawn are validly
retendered. Any Original Notes which have been tendered but which are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as
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practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Original Notes may be retendered by following one of
the procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
All signatures on a notice of withdrawal must be guaranteed by an Eligible
Institution; provided, however, that signatures on the notice of withdrawal need
not be guaranteed if the Original Notes being withdrawn are held for the account
of an Eligible Institution.
A withdrawal of an instruction or withdrawal of a tender must be executed by
a DTC Participant or a Holder, as the case may be, in the same manner as the
person's name appears on its transmission through ATOP or Letter of Transmittal,
as the case may be, to which such withdrawal relates. If a notice of withdrawal
is signed by a trustee, partner, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other person acting in a
fiduciary or representative capacity, such person must so indicate when signing
and must submit with the revocation appropriate evidence of authority to execute
the notice of withdrawal. A DTC Participant or a Holder may withdraw an
instruction or a tender, as the case may be, only if such withdrawal complies
with the provisions of this Prospectus.
A withdrawal of a tender of Original Notes by a DTC Participant or a Holder,
as the case may be, may be rescinded only by a new transmission of an acceptance
through ATOP or execution and delivery of a new Letter of Transmittal, as the
case may be, in accordance with the procedures described herein.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Issuers shall not
be required to accept for exchange, or exchange securities for, any Original
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Original Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the judgment of the Issuers upon written advice of counsel, could
reasonably be expected to materially impair the ability of the Issuers to
proceed with the Exchange Offer or any material adverse development has
occurred in any existing action or proceeding with respect to the Issuers or
any of Epic's subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the judgment of
the Issuers and based on written advice of counsel, could reasonably be
expected to materially impair the ability of the Issuers to proceed with the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Issuers; or
(c) any governmental approval has not been obtained, which approval the
Issuers shall, in their discretion and based on written advice of counsel,
deem necessary for the consummation of the Exchange Offer as contemplated
hereby.
If any of the conditions are not satisfied, the Issuers may (i) refuse to
accept any Original Notes and return all tendered Original Notes to the
tendering holders, (ii) extend the Exchange Offer and retain all Original Notes
tendered prior to the expiration of the Exchange Offer, subject, however, to the
rights of holders to withdraw such Original Notes (see "--Withdrawal of
Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Original Notes which have not
been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. All questions and requests for assistance as well as all
correspondence in connection with the
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Exchange Offer and the Letter of Transmittal should be directed to the Exchange
Agent by phone at 800-548-6565, by facsimile at 212-780-0592 or addressed to the
Exchange Agent as follows:
BY HAND DELIVERY BEFORE 4:30 P.M. ON THE EXPIRATION DATE:
United States Trust Company of New York
111 Broadway, Lower Level
Attn: Corporate Trust Window
New York, New York 10006
BY OVERNIGHT COURIER OR BY HAND DELIVERY AFTER 4:30 P.M. ON THE EXPIRATION DATE:
United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
BY REGISTERED OR CERTIFIED MAIL:
United States Trust Company of New York
P.O. Box 844, Cooper Station
Attn: Corporate Trust Services
New York, New York 10276-0844
Requests for additional copies of this Prospectus, the Letter of Transmittal
or the Notice of Guaranteed Delivery should be directed to the Exchange Agent.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Issuers. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Issuers and their affiliates.
The Issuers has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Issuers will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Issuers. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Original Notes, as reflected in the Issuers' accounting records on the date of
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Issuers.
CONSEQUENCES OF FAILURE TO EXCHANGE
Original Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Original
Notes may be resold only (i) to the Issuers (upon redemption thereof or
otherwise), (ii) so long as the Original Notes are eligible for resale pursuant
to Rule 144A, to a person inside the United States whom the seller reasonably
believes is a qualified
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institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, in accordance with Rule 144
under the Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to the Issuers), (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States. See "Risk Factors--Consequences of
Failure to Exchange Original Notes."
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the Issuers believe that a holder or other person who receives Exchange Notes in
the ordinary course of business, whether or not such person is the holder (other
than (i) a broker-dealer who purchases such Exchange Notes from the Issuers to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an "affiliate" of an Issuer within the
meaning of Rule 405 under the Securities Act) who receives Exchange Notes in
exchange for Original Notes, and who is not participating, does not intend to
participate, and has no arrangement or understanding with person to participate,
in the distribution of the Exchange Notes, will be allowed to resell the
Exchange Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the Exchange Notes a prospectus
that satisfies the requirements of Section 10 of the Securities Act. However, if
any holder acquires Exchange Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the Exchange Notes, such
holder cannot rely on the position of the staff of the Commission enunciated in
such no-action letters or any similar interpretive letters, and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Original Notes, where such
Original Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Issuers in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an affiliate of an Issuer within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives Exchange Notes
for its own account in exchange for Original Notes must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
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DESCRIPTION OF NOTES
GENERAL
The Original Notes were, and the Exchange Notes will be, issued under the
Indenture, dated as of the Issue Date, among the Issuers, the Subsidiary
Guarantors and United States Trust Company of New York, as Trustee (the
"Trustee"), a copy of which is available upon request to the Company. The
Original Notes and the Exchange Notes will constitute a single class of debt
securities under the Indenture and, accordingly will vote together as a single
class for purposes of determining whether holders of the requisite percentage of
outstanding principal amount of Notes have taken certain actions or exercised
certain rights under the Indenture. The following is a summary of certain
provisions of the Indenture and the Notes and does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Indenture (including the definitions of certain terms therein
and those terms made a part thereof by the Trust Indenture Act of 1939, as
amended) and the Notes.
Except as otherwise indicated, the following description relates both to the
Original Notes issued in the Initial Offering and the Exchange Notes to be
issued in the Exchange Offer. The form and terms of the Exchange Notes are the
same as the form and terms of the Original Notes in all material respects,
except that (i) the Exchange Notes will bear a Series B designation and have
been registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof and will not contain certain provisions
relating to an increase in the interest rate which were included in the terms of
the Original Notes in certain circumstances relating to the timing of the
Exchange Offer and (ii) the holders of the Exchange Notes will not be entitled
to certain rights of the holders of the Original Notes under the Registration
Rights Agreement, which rights shall terminate upon the consummation of the
Exchange Offer. The Exchange Notes will be obligations of the Company evidencing
the same indebtedness as the Original Notes.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee in New York, New York), except
that, at the option of the Company, payment of interest may be made by check
mailed to the address of a holder as such address appears in the Note Register.
Initially, the Trustee will act as Paying Agent and Registrar for the Notes. The
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar, which initially will be the Trustee's corporate trust office
in New York, New York. The Company may change any Paying Agent and Registrar
without notice to holders of the Notes.
For each Original Note accepted for exchange, the holder of such Original
Note will receive an Exchange Note having a principal amount equal to that of
the surrendered Original Note.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF NOTES
The Issuers sold $130.0 million aggregate principal amount of Original Notes
in the Initial Offering. The Notes will mature on June 15, 2005. Each Note will
bear interest at the rate of 13% per annum, payable semiannually on June 15 and
December 15 of each year (each an "Interest Payment Date"), commencing on
December 15, 1998, to holders of record at the close of business on the
fifteenth day of the month (whether or not a business day) immediately preceding
the relevant Interest Payment Date; provided, that interest payable at maturity
will be payable to the person to whom principal is payable. Interest on the
Exchange Notes will accrue from (i) the last interest payment date on which
interest was paid on the Original Notes surrendered in exchange therefor, or
(ii) if no interest has been paid on the
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Original Notes, from July 8, 1998. Holders whose Original Notes are accepted for
exchange will be deemed to have waived the right to receive any interest accrued
on the Original Notes. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. The Notes will not be entitled to the benefit
of any mandatory sinking fund.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the option of
the Company prior to June 15, 2003. On and after such date, the Notes will be
redeemable, at the Company's option, in whole or in part, at any time upon not
less than 30 nor more than 60 days' prior notice mailed by first-class mail to
each holder's registered address, at the following redemption prices (expressed
in percentages of principal amount), if redeemed during the 12-month period
commencing on June 15 of the years set forth below, plus accrued and unpaid
interest to the redemption date (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant Interest
Payment Date):
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ----------------------------------- -----------
<S> <C>
2003............................... 106.50%
2004 and thereafter................ 103.25%
</TABLE>
OPTIONAL REDEMPTION UPON EQUITY OFFERING. In addition, at any time prior to
June 15, 2001, the Company may, at its option, redeem up to 35% of the original
aggregate principal amount of the Notes, with Net Cash Proceeds of one or more
Equity Offerings, at a redemption price equal to 113% of the principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the date of
redemption; PROVIDED, HOWEVER, that at least 65% of the original aggregate
principal amount of the Notes remains outstanding after each such redemption. In
order to effect the foregoing redemption with the proceeds of any Equity
Offering, the Company shall make such redemption not more than 90 days after the
consummation of any such Equity Offering.
SELECTION. In the case of any partial redemption, selection of the Notes
for redemption will be made by the Trustee on a PRO RATA basis, by lot or by
such other method as the Trustee in its sole discretion shall deem to be fair
and appropriate; PROVIDED, HOWEVER, that if a partial redemption is made with
proceeds of an Equity Offering, selection of the Notes or portion thereof for
redemption shall be made by the Trustee only on a PRO RATA basis, unless such
method is otherwise prohibited. Notes may be redeemed in part in multiples of
$1,000 principal amount only. Notice of redemption will be sent, by first class
mail, postage prepaid, at least 45 days (unless a shorter period is acceptable
to the Trustee) prior to the date fixed for redemption to each holder whose
Notes are to be redeemed at the last address for such holder then shown on the
registry books. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after any redemption date, interest
will cease to accrue on the Notes or part thereof called for redemption as long
as the Company has deposited with the Paying Agent funds in satisfaction of the
redemption price pursuant to the Indenture.
RANKING
The Original Notes are and the Exchange Notes will be senior obligations of
the Issuers and the Original Notes rank and the Exchange Notes will rank PARI
PASSU (equally) in right of payment with all existing and future Senior
Indebtedness of the Issuers and the Original Notes rank and the Exchange Notes
will rank senior in right of payment to any existing and future Subordinated
Obligations of the
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Issuers. The Original Notes are and the Exchange Notes will be effectively
subordinated in right of payment to Secured Indebtedness of the Issuers to the
extent of the assets serving as security therefor. As of June 30, 1998, on a pro
forma basis after giving effect to the Initial Offering and the application of
the net proceeds therefrom as discussed under "Use of Proceeds", the Issuers and
the Subsidiary Guarantors would have had $21.3 million of Secured Indebtedness,
excluding the Notes, which (along with the Notes) is the only Senior
Indebtedness of the Note Issuers and the Subsidiary Guarantors. In connection
with the initial funding of the New Receivables Facility, the Company repaid
$21.3 million of such Secured Indebtedness in full. See "Description of Other
Indebtedness."
SECURITY
The Original Notes are and the Exchange Notes will be secured by (a) a
Mortgage on all real property acquired by the Issuers after the Issue Date,
which Mortgages shall convert into, and be replaced by, Mortgages on the Pledged
Vacation Ownership Interests of the Note Issuers as they are created; PROVIDED,
that real property acquired or developed with funds from an A&D Facility shall
not be subject to a Mortgage until such A&D Facility has been repaid in full,
(b) a security interest in the Escrow Account, and (c) a security interest in
the Cash Collateral Account; PROVIDED, that the Company shall have unrestricted
access to the funds in the Cash Collateral Account unless an Event of Default
has occurred and is continuing.
Except as provided below, the Subsidiary Guarantees of London Bridge Resort,
LLC and Daytona Beach Regency, Ltd. are secured by a Mortgage on the Vacation
Ownership Interests on the real property owned by such Subsidiary Guarantors
and, to the extent that Vacation Ownership Interests have yet to be created on
such properties, on the fee simple interest of such Subsidiary Guarantors in
such real property. Upon the creation of further Vacation Ownership Interests on
such Pledged Real Property, the Mortgages on such Pledged Real Property shall
convert into, and be replaced by, Mortgages on such Pledged Vacation Ownership
Interests. In the case of London Bridge Resort, LLC, its Subsidiary Guarantee is
secured by its existing completed but unsold Vacation Ownership Interests solely
to the extent permitted under its existing Receivables Credit Facility. In
addition, London Bridge Resort, LLC's new resort development may be financed
through an A&D Facility, in which case it will not be subject to a Mortgage
until such A&D Facility is repaid in full.
The Subsidiary Guarantees of Epic Resorts-Westpark Resort, LLC, Epic
Resorts-Hilton Head, LLC and Epic Resorts-Scottsdale Links Resort, LLC initially
are secured by a first Mortgage on their Pledged Real Property and, upon the
creation of Vacation Ownership Interests at such properties, such Mortgages will
automatically be converted into, and be replaced by, Mortgages on the Pledged
Vacation Ownership Interests of such subsidiaries. In addition, the Subsidiary
Guarantee of Epic Resorts-Palm Springs Marquis Villas, LLC is secured by a
leasehold mortgage on the leasehold acquired by it in connection with the
Acquisitions.
No assurances can be given as to the value of the Pledged Real Property or
the Pledged Vacation Ownership Interests or as to the amount that would be
realized in the event of a foreclosure or other comparable proceeding realizing
on the Mortgages or that the property will not decline in value. Pursuant to the
terms of the Indenture and the Mortgages, the Trustee shall be required to
release the lien of the Mortgages with respect to the sale of any property
covered thereby unless an Event of Default shall have occurred and be
continuing. Absent such an Event of Default, the Trustee shall not have a lien
on the proceeds from a sale of the Pledged Vacation Ownership Interests.
Consequently, the value of the collateral covered by the Mortgages will diminish
over time as Pledged Vacation Ownership Interests are sold. The Company
currently estimates, based on historical sales at London Bridge Resort and
Daytona Beach Regency, that the Pledged Vacation Ownership Interests and the
unsold Vacation Ownership Interests securing the indebtedness evidenced by the
Pledged Note will be sold out over a four to seven
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year period. In addition, if the lender under an A&D Facility requires as a
condition to making advances thereunder that such advances be secured by a
Mortgage on the real property to be acquired and/or developed with such
advances, then absent the occurrence and continuance of an Event of Default, the
Trustee shall, to the extent so required by such lender, remove any existing
Mortgage in its favor from the property and shall refrain from imposing any
Mortgages thereon until such A&D Facility has been repaid in full. Once such A&D
Facility has been repaid in full, the applicable Note Issuer or Subsidiary
Guarantor shall be obligated to cause the removal of such lender's Mortgage, and
the Trustee shall impose or reimpose, as the case may be, its Mortgage on such
property. See "Risk Factors--Risk of Inability to Realize Upon Security;
Insufficient Collateral."
If the recording tax applicable to the filing of a Mortgage is more then a
de minimis amount, the amount secured by such Mortgage shall equal two times the
aggregate purchase price and development cost of the property subject to such
Mortgage, not to exceed $130.0 million. In addition, in connection with the
acquisition of any real property, the Company shall have 60 days from the date
of such acquisition within which to grant, or cause to be granted, the Mortgage
on such property required by the Indenture unless, prior to the expiration of
such sixty-day period, the Company determines to utilize an A&D Facility to
finance development of such real property, in which case no Mortgage will be
granted until such A&D Facility is repaid in full.
SUBSIDIARY GUARANTEES
Each Subsidiary Guarantor has unconditionally guaranteed on a senior basis,
jointly and severally, to each holder and the Trustee, as primary obligor and
not as a surety, the full and prompt payment of principal of and interest on the
Notes, and of all other obligations of the Note Issuers under the Indenture.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture) result in the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. Each Subsidiary Guarantor that makes a
payment or distribution under a Subsidiary Guarantee shall be entitled to
contribution from each other Subsidiary Guarantor of a PRO RATA amount based on
the Adjusted Net Assets of each Subsidiary Guarantor.
Each Subsidiary Guarantor (other than Warrant Co.) may consolidate with or
merge into or sell its assets to the Company or another Subsidiary Guarantor
without limitation. Subject to certain conditions, each Subsidiary Guarantor
(other than Warrant Co.) may also consolidate with or merge into or sell all or
substantially all its assets to a corporation, partnership or trust other than
the Company or another Subsidiary Guarantor (whether or not affiliated with the
Subsidiary Guarantor). Upon the sale or disposition of a Subsidiary Guarantor
(or all or substantially all of its assets) to a Person (whether or not an
Affiliate of the Subsidiary Guarantor) which is not a Subsidiary of the Company,
which sale or disposition is otherwise in compliance with the Indenture
(including the covenant described under "--Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock"), such Subsidiary Guarantor shall be
deemed released from all its obligations under the Indenture and its Subsidiary
Guarantee, and such Subsidiary Guarantee shall terminate; PROVIDED, HOWEVER,
that any such termination shall occur only to the extent that all obligations of
such Subsidiary Guarantor under and all of its guarantees of, and under all of
its pledges of assets or other security interests which secure, any other
Indebtedness of the Company shall also terminate upon such release, sale or
transfer.
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Subsequent to the Issue Date, separate financial information for the
Subsidiary Guarantors will not be provided except to the extent required by
Regulation S-X under the Securities Act.
ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that if (i) the Company or any of its Restricted
Subsidiaries shall acquire or create another Restricted Subsidiary, other than a
Receivables Subsidiary, or (ii) an Unrestricted Subsidiary of the Company is
redesignated as a Restricted Subsidiary or otherwise ceases to be an
Unrestricted Subsidiary, then such newly, acquired, created or redesignated
Restricted Subsidiary shall execute a supplemental indenture and become a
Subsidiary Guarantor in accordance with the terms of the Indenture.
DISBURSEMENT OF FUNDS--INTEREST ESCROW ACCOUNT
Pursuant to the Indenture, the Issuers placed $16.9 million of the net
proceeds of the Initial Offering, representing funds sufficient to pay the first
two interest payments on the Notes, into the Escrow Account. The Issuers entered
into the Escrow and Disbursement Agreement, which provides, among other things,
that funds may be disbursed from the Escrow Account to fund the first interest
payment on the Notes and, upon certain repurchases or redemptions thereof, to
pay principal of and premium, if any, thereon. Pending such disbursement, the
Note Issuers will cause all funds contained in the Interest Escrow Account to be
invested in Cash Equivalents. Interest earned on these Cash Equivalents will be
added to the Interest Escrow Account. After the first Interest Payment Date, the
Note Issuers must at all times maintain funds in the Escrow Account sufficient
to fund the next required interest payment on the Notes.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each holder will have the right to require the Company to repurchase
all or any part of such holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant Interest Payment Date): (i)
any sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all of the assets of the Company
and its Subsidiaries; (ii) a majority of the Board of Directors of the Company
shall consist of Persons who are not Continuing Directors of the Company; (iii)
if no Equity Offering shall have occurred, the failure of Thomas F. Flatley to
continue to beneficially own more than 50% of the ordinary voting power for the
election of managers or directors of the Company; (iv) if an Equity Offering
shall have occurred, the failure of Mr. Flatley to beneficially own at least 25%
of the ordinary voting power for the election of managers or directors of the
Company or (v) if any Person or Group shall at any time beneficially own a
greater percentage of the ordinary voting power for the election of managers or
directors of the Company than is then beneficially owned by Mr. Flatley.
Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Notes in
connection with such Change of Control, the Company shall mail a notice to each
holder with a copy to the Trustee stating: (1) that a Change of Control has
occurred and that such holder has the right to require the Company to purchase
such holder's Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of holders of record on a record date to receive interest
on the relevant Interest Payment Date); (2) the purchase date (which shall be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed); and (3) the procedures determined by the Company, consistent with the
Indenture, that a holder must follow in order to have its Notes purchased.
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The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of the
Company and its Subsidiaries. With respect to the disposition of property or
assets, the phrase "all or substantially all" as used in the Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which is the law which governs
the Indenture) and is subject to judicial interpretation. Accordingly, in
certain circumstances there may be a degree of uncertainty in ascertaining
whether a particular transaction would involve a disposition of "all or
substantially all" of the property or assets of a Person, and therefore it may
be unclear as to whether a Change of Control has occurred and whether the
Company is required to make an offer to repurchase the Notes as described above.
Future Senior Indebtedness of the Company and its Subsidiaries may contain
prohibitions of certain events that would constitute a Change of Control or
require such Senior Indebtedness to be purchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such Senior Indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
holders upon a purchase may be limited the Company's then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required purchases.
MANDATORY OFFER TO PURCHASE
During the period beginning on and including June 15, 2000 and ending on and
including June 15, 2002, the Issuers are obligated to make one or more Mandatory
Purchase Offers to purchase a total of $65 million (the "Mandatory Purchase
Amount") aggregate principal amount of Notes (subject to adjustment as described
below) at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of payment. Any Mandatory Purchase
Offer must be made on an Interest Payment Date, and in connection with any
Mandatory Purchase Offer, the Issuers must offer to purchase at least $10
million aggregate principal amount of Notes (or such lesser amount as shall
result in the Issuers' having offered to purchase, in the aggregate, the
Mandatory Purchase Amount of Notes). If prior to any Mandatory Repurchase Offer,
Notes have been called for redemption or purchased by the Issuers, the Mandatory
Purchase Amount shall be reduced by an amount equal to the aggregate principal
amount of the Notes so called for redemption or purchased. If Notes with an
aggregate principal amount in excess of the amount that the Issuers are seeking
to purchase in connection with a Mandatory Purchase Offer are tendered in
connection with such Mandatory Purchase Offer, such Notes shall be purchased on
a PRO RATA basis.
On any Interest Payment Date on which the Issuers are making a Mandatory
Purchase Offer, the Issuers shall mail a notice to each holder with a copy to
the Trustee stating: (1) that a Mandatory Purchase Offer is being made and that
such holder has the right to require the Issuers to purchase such holder's Notes
at a purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase; (2) the aggregate
principal amount of Notes to be purchased in connection with such Mandatory
Purchase Offer and that if Notes in excess of such amount are tendered, that
such Notes will be purchased on a pro rata basis; (3) the purchase date (which
shall be no earlier than
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30 days nor later than 60 days from the date such notice is mailed); and (4) the
procedures determined by the Issuers, consistent with the Indenture, that a
holder must follow in order to have its Notes purchased.
The Issuers will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the purchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Issuers will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The Issuers' ability to pay cash to the holders in connection with a
Mandatory Purchase Offer may be limited by the Company's then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required purchases.
CERTAIN COVENANTS
The Indenture contains certain covenants, including, among others, the
following:
LIMITATION ON INDEBTEDNESS. (a) The Company shall not, and shall not permit
any of its Restricted Subsidiaries to, Incur any Indebtedness; PROVIDED,
HOWEVER, that the Company and its Restricted Subsidiaries may Incur Indebtedness
if (i) no Default or Event of Default shall have occurred and be continuing at
the time of such Incurrence or would occur as a consequence of such Incurrence
and (ii) the Consolidated Coverage Ratio would be equal to at least (x) 2.00 to
1.00 if such Indebtedness is incurred on or prior to June 1, 2000, (y) 2.25 to
1.00 if such Indebtedness is incurred after June 1, 2000 but on or prior to June
1, 2002 and (z) 2.50 to 1.00 if such Indebtedness is Incurred after June 1,
2002.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness represented by Capitalized Lease Obligations, mortgage
financing or purchase money obligations, in each case Incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in a Permitted Business or
Incurred to refinance any such purchase price or cost of construction or
improvement, in each case Incurred no later than 365 days after the date of
such acquisition or the date of completion of such construction or
improvement; PROVIDED, HOWEVER, that the principal amount of any
Indebtedness Incurred pursuant to this clause (i) shall not exceed $2.0
million at any time outstanding;
(ii) Indebtedness of the Company owing to and held by any Wholly-Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by
the Company or any Wholly-Owned Subsidiary; PROVIDED, HOWEVER, that any
subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Wholly-Owned Subsidiary ceasing to be a
Wholly-Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or any Wholly-Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof;
(iii) Indebtedness represented by (A) the Original Notes and the Exchange
Notes, (B) the Subsidiary Guarantees, (C) Existing Indebtedness and (D) any
Refinancing Indebtedness Incurred in respect of any Indebtedness described
in clause (i) or this clause (iii) or Incurred pursuant to paragraph (a)
above;
(iv) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred in
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anticipation of, or to provide all or any portion of the funds or credit
support utilized to consummate the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Subsidiary or was otherwise acquired by the Company); PROVIDED, HOWEVER,
that at the time such Restricted Subsidiary is acquired by the Company, the
Company would have been able to Incur $1.00 of additional Indebtedness
pursuant to paragraph (a) above after giving effect to the Incurrence of
such Indebtedness pursuant to this clause (iv) and (B) Refinancing
Indebtedness Incurred by a Restricted Subsidiary in respect of Indebtedness
Incurred by such Restricted Subsidiary pursuant to this clause (iv);
(v) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by the Company or any of its
Restricted Subsidiaries to their customers in the ordinary course of their
business, (B) in respect of performance bonds or similar obligations of the
Company or any of its Restricted Subsidiaries for or in connection with
pledges, deposits or payments made or given in the ordinary course of
business in connection with or to secure statutory, regulatory or similar
obligations, including obligations under health, safety or environmental
obligations and (C) arising from Guarantees to suppliers, lessors,
licensees, contractors, franchises or customers of obligations (other than
Indebtedness) incurred in the ordinary course of business;
(vi) Indebtedness under Currency Agreements and Interest Rate
Agreements; PROVIDED, HOWEVER, that in the case of Currency Agreements and
Interest Rate Agreements, such Currency Agreements and Interest Rate
Agreements are entered into for bona fide hedging purposes of the Company or
its Restricted Subsidiaries (as determined in good faith by the Board of
Directors of the Company) and correspond in terms of notional amount,
duration, currencies and interest rates as applicable, to Indebtedness of
the Company or its Restricted Subsidiaries Incurred without violation of the
Indenture or to business transactions of the Company or its Restricted
Subsidiaries on customary terms entered into in the ordinary course of
business;
(vii) Indebtedness arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees or
letters of credits, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in each case Incurred in connection with the disposition of
any business assets or Restricted Subsidiary of the Company (other than
Guarantees of Indebtedness or other obligations incurred by any Person
acquiring all or any portion of such business assets or Restricted
Subsidiary of the Company for the purpose of financing such acquisition) in
a principal amount not to exceed the gross proceeds actually received by the
Company or any of its Restricted Subsidiaries in connection with such
disposition; PROVIDED, HOWEVER, that the principal amount of any
Indebtedness Incurred pursuant to this clause (vii) when taken together with
all Indebtedness Incurred pursuant to this clause (vii) and then
outstanding, shall not exceed $2.0 million;
(viii) Indebtedness consisting of (A) Guarantees by the Company of
Indebtedness incurred by a Restricted Subsidiary without violation of the
Indenture (so long as the Company could have Incurred such Indebtedness
directly without violation of the Indenture) and (B) Guarantees by a
Restricted Subsidiary of Senior Indebtedness incurred by the Company without
violation of the Indenture (so long as such Restricted Subsidiary could have
Incurred such Indebtedness directly without violation of the Indenture);
(ix) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument issued by the Company or
its Subsidiaries drawn against insufficient funds in the ordinary course of
business in an amount not to exceed $250,000 in the aggregate at any time,
provided that such Indebtedness is extinguished within two business days of
its incurrence;
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(x) Indebtedness representing borrowings against Vacation Ownership
Interests Receivable relating to property as to which no certificate of
occupancy has been received; PROVIDED, that the aggregate amount of
Indebtedness permitted under this clause (x) shall at no time exceed $5
million;
(xi) Indebtedness Incurred pursuant to credit facilities (A) in an
amount not to exceed 85% of Vacation Ownership Interests Receivable
outstanding at the time of Incurrence or (B) by a Receivables Subsidiary in
an amount not to exceed 100% of the total amount of Vacation Ownership
Interests Receivable outstanding as of the time of Incurrence as long as all
such Indebtedness is not Guaranteed by the Company or any Subsidiary,
PROVIDED that in either case such Indebtedness is secured by a Lien on such
Vacation Ownership Interests Receivable; and
(xii) Indebtedness Incurred under A&D Facilities; PROVIDED, that if the
Consolidated Coverage Ratio at the time of such Incurrence is at least 2.00
to 1.00 but less than 3.00 to 1.00, the total amount of Indebtedness
Incurred pursuant to the clause (xii) shall not exceed $30.0 million at any
one time outstanding; PROVIDED, FURTHER, that if the Consolidated Coverage
Ratio at the time of such Incurrence is less than 2.00 to 1.00, the total
amount of Indebtedness Incurred pursuant to this clause (xii) shall not
exceed $15.0 million.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses at the time of incurrence, the Company shall, in its sole discretion,
classify such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in the applicable clause(s) so selected by the
Company. No fluctuation in currency exchange rates or interest rates following
the incurrence of any Indebtedness shall result in a Default hereunder if the
Indebtedness itself was incurred in compliance with the Indenture at the time of
the incurrence.
(c) Neither the Company nor any Restricted Subsidiary shall Incur any
Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Subordinated Obligations of the Company
unless such Indebtedness shall be subordinated to the Notes to at least the same
extent as such Subordinated Obligations. No Restricted Subsidiary shall Incur
any Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Guarantor Subordinated Obligation of
such Subsidiary Guarantor unless such Indebtedness shall be subordinated to the
obligations of such Subsidiary Guarantor under the Subsidiary Guarantee to at
least the same extent as such Guarantor Subordinated Obligation.
(d) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not, and shall not
permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving the Company or any of its Restricted Subsidiaries)
except (A) dividends or distributions payable in its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase such
Capital Stock and (B) dividends or distributions payable to the Company or a
Restricted Subsidiary of the Company which holds any equity interest in the
paying Restricted Subsidiary (and if the Restricted Subsidiary paying the
dividend or making the distribution is not a Wholly-Owned Subsidiary, to its
other holders of Capital Stock on a PRO RATA basis), (ii) purchase, redeem,
retire or otherwise acquire for value any Capital Stock of the Company held by
Persons other than a Wholly-Owned Subsidiary of the Company or any Capital Stock
of a Restricted Subsidiary of the Company held by any Affiliate of the Company,
other than a Wholly-Owned Subsidiary (in either case, other than in exchange for
its Capital Stock (other than Disqualified Stock)), (iii) purchase, repurchase,
redeem, defease or otherwise acquire or retire for
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value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment, any Subordinated Obligations or (iv) make any Investment (other
than a Permitted Investment) in any Person (any such dividend, distribution,
purchase, redemption, repurchase, defeasance, other acquisition, retirement or
Investment as described in preceding clauses (i) through (iv) being referred to
as a "Restricted Payment"); if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and
be continuing (or would result therefrom); or (2) the Company is not able to
incur an additional $1.00 of Indebtedness pursuant to paragraph (a) under
"Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments declared or made subsequent to the
Issue Date would exceed the sum of (A) 50% of the Consolidated Net Income
accrued during the period (treated as one accounting period) from the first day
of the fiscal quarter beginning on or after the Issue Date to the end of the
most recent fiscal quarter ending prior to the date of such Restricted Payment
as to which financial results are available (but in no event ending more than
135 days prior to the date of such Restricted Payment) (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the
aggregate net proceeds received by the Company from the issue or sale of its
Capital Stock (other than Disqualified Stock) or other capital contributions
subsequent to the Issue Date (other than net proceeds received from an issuance
or sale of such Capital Stock to (x) a Subsidiary of the Company, (y) an
employee stock ownership plan or similar trust or (z) management employees of
the Company or any Subsidiary of the Company (other than sales of Capital Stock
(other than Disqualified Stock) to management employees of the Company pursuant
to BONA FIDE employee stock option plans of the Company); PROVIDED, HOWEVER,
that the value of any non-cash net proceeds shall be as determined by the Board
of Directors in good faith, except that in the event the value of any non-cash
net proceeds shall be $2.0 million or more, the value shall be as determined in
writing by an independent investment banking firm of nationally recognized
standing); (C) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Restricted Subsidiary of the Company) subsequent to the Issue Date of any
Indebtedness of the Company convertible or exchangeable for Capital Stock of the
Company (less the amount of any cash, or other property, distributed by the
Company upon such conversion or exchange); and (D) the amount equal to the net
reduction in Investments (other than Permitted Investments) made after the Issue
Date by the Company or any of its Restricted Subsidiaries in any Person
resulting from (i) repurchases or redemptions of such Investments by such
Person, proceeds realized upon the sale of such Investment to an unaffiliated
purchaser, repayments of loans or advances or other transfers of assets by such
Person to the Company or any Restricted Subsidiary of the Company or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in
each case as provided in the definition of "Investment") not to exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously
included in the calculation of the amount of Restricted Payments; PROVIDED,
HOWEVER, that no amount shall be included under this Clause (D) to the extent it
is already included in Consolidated Net Income.
(b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of the Company made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary, an employee stock ownership plan
or similar trust or management employees of the Company or any Subsidiary of the
Company); PROVIDED, HOWEVER, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from clause (3)(B) of paragraph
(a); (ii) any purchase or redemption of Subordinated Obligations of the Company
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Subordinated Obligations of the Company in compliance with the
"Limitation on Indebtedness" covenant; PROVIDED, HOWEVER, that such purchase or
redemption shall be excluded in the calculation of the amount of Restricted
Payments; (iii) any purchase or redemption of Subordinated Obligations as a
result of a Change of Control (provided that the covenant described in
"Limitation on Repayments upon a Change of Control" is complied with); (iv) any
purchase or redemption of Subordinated Obligations from Net Available Cash to
the extent permitted under
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"Limitation on Sales of Assets and Subsidiary Stock" below; PROVIDED, HOWEVER,
that such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments; (v) dividends paid within 60 days after the date
of declaration if at such date of declaration such dividend would have complied
with this provision; PROVIDED, HOWEVER, that such dividend shall be included in
the calculation of the amount of Restricted Payments; and (vi) so long as the
Company is not treated for federal income tax purposes as a corporation or an
association taxable as a corporation or other entity that is subject to an
entity level tax for income tax purposes, distributions to any holder of
Membership Interests in the Company (each, a "Member"), as soon as practicable
after the end of each calendar quarter, of an amount (A) reasonably determined
to be sufficient to pay any federal and, if such an election is in effect for
state and local income tax purposes, state and local income taxes actually
imposed on such Member's allocable share of income from the Company, or (B) if
Thomas F. Flatley and his Affiliates cease to own beneficially 90% or more of
the ordinary voting power for the election of directors of the Company, equal to
such Member's Tax Allowance Amount in respect of such quarter, and the Company
shall cause the Accountants to deliver to the Trustee a certificate setting
forth the determination of each Member's Tax Allowance Amount within 60 days of
the end of each fiscal year; PROVIDED, HOWEVER, such Tax Allowance Amounts shall
be excluded in the calculation of the amount of Restricted Payments; PROVIDED,
FURTHER, that in the case of clauses (i), (ii), (iii) and (iv) no Default or
Event of Default shall have occurred or be continuing at the time of such
payment or as a result thereof.
(c) For purposes of determining compliance with the foregoing covenant,
Restricted Payments may be made with cash or non-cash assets, provided that any
Restricted Payment made other than in cash shall be valued at the fair market
value (determined, subject to the additional requirements of the immediately
succeeding proviso, in good faith by the Board of Directors) of the assets so
utilized in making such Restricted Payment; PROVIDED, HOWEVER, that (i) in the
case of any Restricted Payment made with Capital Stock or Indebtedness, such
Restricted Payment shall be deemed to be made in an amount equal to the greater
of the fair market value thereof and the liquidation preference (if any) or
principal amount of the Capital Stock or Indebtedness, as the case may be, so
utilized, and (ii) in the case of any Restricted Payment in an aggregate amount
in excess of $2.0 million, a written opinion as to the fairness of the valuation
thereof (as determined by the Company) for purposes of determining compliance
with the "Limitation on Restricted Payments" covenant in the Indenture shall be
issued by an independent investment banking firm of national standing.
(d) Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an officer's certificate stating that such
Restricted Payment complies with the Indenture and setting forth in reasonable
detail the basis upon which the required calculations were computed, which
calculations may be based upon the Company's latest available quarterly
financial statements, and a copy of any required investment banker's opinion.
LIMITATION ON LIENS. The Indenture provides that the Company will not and
will not permit any Restricted Subsidiary to, directly or indirectly, create or
permit to exist any Liens except for Permitted Liens.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, create or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any such Restricted Subsidiary to
(i) pay dividends or make any other distributions on its Capital Stock or pay
any Indebtedness or other obligation owed to the Company, (ii) make any loans or
advances to the Company or (iii) transfer any of its property or assets to the
Company or Guarantee the Notes, except: (a) any encumbrance or restriction
pursuant to an agreement in effect at or entered into on the Issue Date; (b) any
encumbrance or restriction with respect to such a Restricted Subsidiary pursuant
to an agreement relating to any Indebtedness issued by such Restricted
Subsidiary on or prior to the date on which such Restricted Subsidiary was
acquired by the
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Company and outstanding on such date (other than Indebtedness Incurred in
anticipation of, or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted Subsidiary of
the Company or was acquired by the Company); (c) any encumbrance or restriction
with respect to such a Restricted Subsidiary pursuant to an agreement evidencing
Indebtedness Incurred without violation of the Indenture or effecting a
refinancing of Indebtedness issued pursuant to an agreement referred to in
clauses (a) or (b) or this clause (c) or contained in any amendment to an
agreement referred to in clauses (a) or (b) or this clause (c); PROVIDED,
HOWEVER, that the encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any of such agreement, refinancing agreement or
amendment, taken as a whole, are no less favorable to the holders of the Notes
in any material respect, as determined in good faith by the Board of Directors
of the Company, than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in agreements in effect at, or entered into on,
the Issue Date; (d) in the case of clause (iii), any encumbrance or restriction
(A) that restricts in a customary manner the subletting, assignment or transfer
of any property or asset that is a lease, license, conveyance or contract or
similar property or asset, (B) by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets of
the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture, (C) that is included in a licensing agreement to the extent such
restrictions limit the transfer of the property subject to such licensing
agreement or (D) arising or agreed to in the ordinary course of business and
that does not, individually or in the aggregate, detract from the value of
property or assets of the Company or any of its Subsidiaries in any manner
material to the Company or any such Restricted Subsidiary; (e) in the case of
clause (iii) above, restrictions contained in security agreements, mortgages or
similar documents securing Indebtedness of a Restricted Subsidiary to the extent
such restrictions restrict the transfer of the property subject to such security
agreements; (f) in the case of clause (iii) above, any instrument governing or
evidencing Indebtedness of a Person acquired by the Company or any Restricted
Subsidiary of the Company at the time of such acquisition, which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person so acquired; PROVIDED, HOWEVER, that such
Indebtedness is not incurred in connection with or in contemplation of such
acquisition; (g) any restriction with respect to such a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; (h) encumbrances or
restrictions arising or existing by reason of applicable law; (i) any
encumbrance or restriction pursuant to Indebtedness of Restricted Subsidiaries
that is permitted to be incurred subsequent to the Issue Date pursuant to the
provisions of the covenant described under "--Limitation on Indebtedness"; and
(j) restrictions on cash or other deposits imposed by customers under contracts
incurred in the ordinary course of business consistent with past practices.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company shall
not, and shall not permit any of its Restricted Subsidiaries to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by the Company's Board of Directors
(including as to the value of all non-cash consideration), of the shares and
assets subject to such Asset Disposition, (ii) at least 75% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash or Cash Equivalents and (iii) an amount equal to 100% of the Net Available
Cash from such Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be) (A) FIRST, to the extent the Company or any
Restricted Subsidiary elects (or is required by the terms of any Secured
Indebtedness), (x) to prepay, repay or purchase Secured Indebtedness within 45
days from the later of the date of such Asset Disposition or the receipt of such
Net Available Cash or (y) to the investment in or acquisition of Additional
Assets within 360 days from the later of the date of such Asset Disposition or
the receipt of such Net Available Cash; (B) SECOND, within 360 days from the
receipt of such Net Available Cash, to the extent of the balance of such Net
Available Cash after application in accordance with clause (A), to make an offer
to purchase Notes at 100% of their principal amount plus accrued and unpaid
interest, if any,
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thereon; and (C) THIRD, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B) (w) to the investment
in or acquisition of Additional Assets, (x) the making of Temporary Cash
Investments or (y) and other purpose otherwise permitted under the Indenture, in
each case within the later of 45 days after the application of Net Available
Cash in accordance with clauses (A) and (B) or the date that is one year from
the receipt of such Net Available Cash; PROVIDED, HOWEVER, that, in connection
with any prepayment, repayment or purchase of Indebtedness pursuant to clause
(A) or (B) above, the Company or such Restricted Subsidiary shall retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions, the Company and
its Restricted Subsidiaries shall not be required to apply any Net Available
Cash in accordance herewith except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this covenant at any time exceed $10.0 million. The Company shall not be
required to make an offer for Notes pursuant to this covenant if the Net
Available Cash available therefor (after application of the proceeds as provided
in clause (A)) is less than $10.0 million for any particular Asset Disposition
(which lesser amounts shall be carried forward for purposes of determining
whether an offer is required with respect to the Net Available Cash from any
subsequent Asset Disposition).
For the purposes of this covenant, the following will be deemed to be cash:
(x) the assumption by the transferee of Senior Indebtedness of the Company or
Senior Indebtedness of any Restricted Subsidiary of the Company and the release
of the Company or such Restricted Subsidiary from all liability on such Senior
Indebtedness in connection with such Asset Disposition (in which case the
Company shall, without further action, be deemed to have applied such assumed
Indebtedness in accordance with clause (A) of the preceding paragraph) and (y)
securities received by the Company or any Restricted Subsidiary of the Company
from the transferee that are promptly (and in any event within 90 days)
converted by the Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(B), the Company will be required to purchase Notes
tendered pursuant to an offer by the Company for the Notes at a purchase price
of 100% of their principal amount plus accrued and unpaid interest, if any, to
the purchase date in accordance with the procedures (including prorating in the
event of oversubscription) set forth in the Indenture. If the aggregate purchase
price of the Notes tendered pursuant to the offer is less than the Net Available
Cash allotted to the purchase of the Notes, the Company will apply the remaining
Net Available Cash in accordance with clause (a)(iii)(C) above.
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under the Indenture by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or conduct any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with or for the benefit of any Affiliate of the Company, other than a
Wholly-Owned Subsidiary (an "Affiliate Transaction") unless: (i) the terms of
such Affiliate Transaction are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could be obtained at
the time of such transaction in arm's-length dealings with a Person who is not
such an Affiliate; (ii) in the event such Affiliate Transaction involves an
aggregate amount in excess of $1.0 million, the terms of such transaction have
been approved by a majority of the members of the Board of Directors of the
Company and by a majority of the disinterested members of such Board, if any
(and such majorities each determine that such Affiliate Transaction satisfies
the criteria in (i) above); and (iii) in the event such Affiliate Transaction
involves an aggregate amount in excess of $2.0 million, the Company has received
a written opinion from
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an independent investment banking firm of nationally recognized standing that
such Affiliate Transaction is fair to the Company or such Restricted Subsidiary,
as the case may be, from a financial point of view.
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under
"Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, or any stock options and stock ownership
plans for the benefit of employees, officers and directors, consultants and
advisors approved by the Board of Directors of the Company, (iii) loans or
advances to employees in the ordinary course of business of the Company or any
of its Restricted Subsidiaries in aggregate amount outstanding not to exceed
$250,000 to any employee or $500,000 in the aggregate at any time, (iv) any
transaction between Wholly-Owned Subsidiaries, (v) indemnification agreements
with, and the payment of fees and indemnities to, directors, officers and
employees of the Company and its Restricted Subsidiaries, in each case in the
ordinary course of business, (vi) transactions pursuant to agreements in
existence on the Issue Date which are (x) described in the Prospectus or (y)
otherwise, in the aggregate, immaterial to the Company and its Restricted
Subsidiaries taken as a whole, (vii) any employment, non-competition or
confidentiality agreements entered into by the Company or any of its Restricted
Subsidiaries with its employees in the ordinary course of business, (viii) the
issuance of Capital Stock of the Company (other than Disqualified Stock), (ix)
the payment of reasonable and customary fees to directors of the Company who are
not employees of the Company (including, without limitation, the grant of stock
options), and (x) Affiliate Transactions between either the Company or a
Restricted Subsidiary and a Receivables Subsidiary involving the transfer or
sale of Vacation Ownership Interests Receivable.
LIMITATION ON ISSUANCES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The
Company will not permit any of its Restricted Subsidiaries to issue any Capital
Stock to any Person (other than to the Company or a Wholly-Owned Subsidiary of
the Company) or permit any Person (other than the Company or a Wholly-Owned
Subsidiary of the Company) to own any Capital Stock of a Restricted Subsidiary
of the Company, if in either case as a result thereof such Restricted Subsidiary
would no longer be a Restricted Subsidiary of the Company; PROVIDED, HOWEVER,
that this provision shall not prohibit (x) the Company or any of its Restricted
Subsidiaries from selling, leasing or otherwise disposing of all of the Capital
Stock of any Restricted Subsidiary or (y) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary in compliance with the Indenture.
LIMITATION ON REPAYMENT UPON A CHANGE OF CONTROL. The Company will not make
an offer to repurchase any Subordinated Obligations if required to do so
pursuant to a Change of Control until at least 60 days after the occurrence of
such Change of Control and shall not purchase any Subordinated Obligations for
30 days following the time the Company is required to make purchases of the
Notes under the Indenture following such Change of Control.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into,
Guarantee or otherwise become liable with respect to any Sale/Leaseback
Transaction with respect to any property or assets unless (i) the Company or
such Restricted Subsidiary, as the case may be, would be entitled pursuant to
the Indenture to Incur Indebtedness secured by a Permitted Lien on such property
or assets in an amount equal to the Attributable Indebtedness with respect to
such Sale/Leaseback Transaction, (ii) the Net Cash Proceeds from such Sale/
Leaseback Transaction are at least equal to the fair market value of the
property or assets subject to such Sale/Leaseback Transaction (such fair market
value determined, in the event such property or assets have a fair market value
in excess of $1.0 million, no more than 30 days prior to the effective date of
such Sale/ Leaseback Transaction, by the Board of Directors of the Company as
evidenced by a resolution of such Board) and (iii) the Net Cash Proceeds of such
Sale/Leaseback Transaction are applied in accordance with the provisions
described under "--Limitation on Sales of Assets and Subsidiary Stock."
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SEC REPORTS. The Company will provide to the Trustee and the holders of the
Notes, within 15 days after it files them with the Commission, copies of the
annual reports and of the information, documents and other reports (or copies of
such portions of any of the foregoing as the Commission may by rules and
regulations prescribe) which the Company files with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act. In the event that the Company is not
required to file such reports with the Commission pursuant to the Exchange Act,
the Company will nevertheless deliver such Exchange Act information to the
Trustee and the holders of the Notes within 15 days after it would have been
required to file it with the Commission.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of (i)
fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of other Investments of the Company and the Restricted Subsidiaries
in such Subsidiary on such date; and
(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "--Limitation on Additional Indebtedness" at the time of
Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"--Limitation on Restricted Payments."
The Indenture further provides that the Company may revoke any Designation
of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"), whereupon such
Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at such
time, have been permitted to be Incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
TAXES. The Company will, and will cause its Restricted Subsidiaries to, pay
and discharge when due and payable all taxes, levies, imposts, duties or other
governmental charges ("Taxes") imposed on it or on
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its income or profits or on any of its properties except such Taxes which are
being contested in good faith in appropriate proceedings and for which adequate
reserves have been established in accordance with GAAP.
MERGER AND CONSOLIDATION. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all of its
assets to, any Person, unless: (i) the resulting, surviving or transferee Person
(the "Successor Company") shall be a corporation, partnership, trust or limited
liability company organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) shall expressly assume, by supplemental indenture, executed
and delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture; (ii) immediately
after giving effect to such transaction (and treating any Indebtedness that
becomes an obligation of the Successor Company or any Subsidiary of the
Successor Company as a result of such transaction as having been Incurred by the
Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, the
Successor Company (A) shall have a Consolidated Net Worth equal or greater to
the Consolidated Net Worth of the Company immediately prior to such transaction
and (B) shall be able to incur at least an additional $1.00 of Indebtedness
pursuant to paragraph (a) of "--Limitation on Indebtedness"; (iv) the Company
shall have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture; and (v) there has
been delivered to the Trustee an Opinion of Counsel to the effect that holders
of the Notes will not recognize income, gain or loss for United States federal
income tax purposes as a result of such consolidation, merger, conveyance,
transfer or lease and will be subject to United States federal income tax with
respect to the Notes in the same amount and in the same manner and at the same
times as would have been the case if such consolidation, merger, conveyance,
transfer or lease had not occurred.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in the
case of a lease of all or substantially all its assets, the Company will not be
released from the obligation to pay the principal of and interest on the Notes.
Notwithstanding the foregoing clauses (ii) and (iii), any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company or any other Wholly-Owned
Subsidiary. Notwithstanding the foregoing, neither Capital Corp. nor Warrant Co.
may merge with or into any other entity.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Indenture:
(i) a default in any payment of interest on any Note when due, continued for 30
days, (ii) a default in the payment of principal of any Note when due at its
Stated Maturity, upon required redemption or repurchase, upon declaration or
otherwise, (iii) the failure by any Note Issuer to comply with its obligations
under the "Merger and Consolidation" covenant described under "Certain
Covenants" above, (iv) the failure by the Company to comply for 30 days after
notice with any of its obligations under the covenants described under "Change
of Control" above or under covenants described under "Certain Covenants" above
(in each case, other than a failure to purchase Notes which shall constitute an
Event of Default under clause (ii) above), other than "Merger and
Consolidation," (v) the failure by any Note Issuer or any Subsidiary Guarantor
to comply for 60 days after notice with its other agreements contained in the
Indenture, (vi) Indebtedness of the Company or any Restricted Subsidiary is not
paid within any applicable grace period after final maturity or is accelerated
by the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $2.0 million and such default shall
not have been cured or such acceleration rescinded after a 20-day period, (vii)
certain events of bankruptcy, insolvency or reorganization of any Note Issuer or
a Significant Subsidiary (the "bankruptcy provisions"), (viii) any judgment or
decree for the payment of money in excess of $2.0 million (to the extent not
covered by insurance) is rendered against any
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Note Issuer or a Significant Subsidiary and such judgment or decree shall remain
undischarged or unstayed for a period of 60 days after such judgment becomes
final and non-appealable (the "judgment default provision"), or (ix) any
Subsidiary Guarantee by a Restricted Subsidiary ceases to be in full force and
effect (except as contemplated by the terms of the Indenture) or any Subsidiary
Guarantor denies or disaffirms its obligations under the Indenture or its
Subsidiary Guarantee and such Default continues for 10 days. However, a default
under clause (iv) or (v) will not constitute an Event of Default until the
Trustee or the holders of 25% in principal amount of the outstanding Notes
notify the Company of the default and the Note Issuers do not cure such default
within the time specified in clause (iv) or (v), as applicable, after receipt of
such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes by notice to the
Note Issuers may declare the principal of and accrued and unpaid interest, if
any, on all the Notes to be due and payable. Upon such a declaration, such
principal and accrued and unpaid interest shall be due and payable immediately.
If an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of any Note Issuer occurs, the principal of and accrued and
unpaid interest on all the Notes will become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holders.
Under certain circumstances, the holders of a majority in principal amount of
the outstanding Notes may rescind any such acceleration with respect to the
Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction that, in the opinion of the Trustee, is
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or
power conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other holder or that would
involve the Trustee in personal liability. Prior to taking any action under the
Indenture, the Trustee shall be entitled to indemnification satisfactory to it
in its sole discretion against all losses and expenses caused by taking or not
taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium (if any) or interest on any Note, the Trustee may
withhold notice if and so long as its board of directors, a committee of its
board of directors or a committee of its Trust officers in good faith determines
that withholding notice is in the interests of the holders of the Notes. In
addition, the Note Issuers are required to deliver to the Trustee, within 90
days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year. The
Note Issuers also are required to deliver to the Trustee, within 30 days after
the occurrence thereof, written notice of any events which would constitute
certain Defaults.
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
and any past Default or compliance with any
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provisions may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. However, without the consent of
each holder of the outstanding Notes affected, no amendment may, among other
things, (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the stated rate of or extend the stated time for payment
of interest on any Note, (iii) reduce the principal of or extend the Stated
Maturity of any Note, (iv) reduce the premium payable upon the redemption or
repurchase of any Note or change the time at which any Note may be redeemed as
described under "Optional Redemption" above, (v) make any Note payable in money
other than that stated in the Note, (vi) impair the right of any holder to
receive payment of principal of and interest on such holder's Notes on or after
the due dates therefor or to institute suit for the enforcement of any payment
on or with respect to such holder's Notes or (vii) make any change in the
amendment provisions which require each holder's consent or in the waiver
provisions.
Without the consent of any holder, the Issuers and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation, partnership, trust or limited
liability company of the obligations of the Company under the Indenture
(provided that there has been delivered to the Trustee an Opinion of Counsel to
the effect that holders of Notes will not recognize income, gain or loss for
United States federal income tax purposes as a result of such assumption and
will be subject to United States federal income tax on the same amount and in
the same manner and at the same time as would have been the case if such
assumption had not occurred), to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code), to add further Guarantees with respect to the Notes, to add
further security for the Notes, to add to the covenants of the Company for the
benefit of the holders or to surrender any right or power conferred upon the
Note Issuers, to make any change that does not adversely affect the rights of
any holder or to comply with any requirement of the Commission in connection
with the qualification of the Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Issuers are
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders, or any defect
therein, will not impair or affect the validity of the amendment.
NO PERSONAL LIABILITY OF DIRECTORS, MANAGERS, OFFICERS, EMPLOYEES AND MEMBERS
No manager, officer or employee of the Company or any Subsidiary or member
of the Company, as such, shall have any personal liability for any obligations
of the Company or any Subsidiary under the Notes, the Indenture, the Subsidiary
Guarantees, the Mortgages or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes and the Subsidiary Guarantees and the
grant of the Mortgages. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that such
a waiver is against public policy.
DEFEASANCE
The Issuers at any time may terminate all their obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Issuers at any time may terminate their obligations under covenants
described under "--Certain Covenants" (other than "Merger and Consolidation"),
the operation of the cross acceleration provision, the bankruptcy provisions
with respect
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to Significant Subsidiaries, the judgment default provision and the Subsidiary
Guarantee provision described under "Events of Default" above and the
limitations contained in clauses (iii) and (iv) under "--Certain
Covenants--Merger and Consolidation" above as well as the obligation to provide
security for the Notes and the Subsidiary Guarantees described under
"Description of Notes--Security" ("covenant defeasance").
The Issuers may exercise the legal defeasance option notwithstanding their
prior exercise of the covenant defeasance option. If the Issuers exercise the
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Issuers exercise the covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries), (viii) or (ix) under "Events of Default" above or
because of the failure of the Company to comply with clause (iii) or (iv) under
"--Certain Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Issuers must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to federal income tax with respect to the
Notes in the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred (and, in the
case of legal defeasance only, such Opinion of Counsel must be based on a ruling
of the Internal Revenue Service or other change in applicable Federal income tax
law).
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect (except as otherwise
expressly provided for in the Indenture) when either (i) all outstanding Notes
have been delivered (other than lost, stolen or destroyed Notes which have been
replaced) to the Trustee for cancellation or (ii) all outstanding Notes have
become due and payable, whether at maturity or as a result of the mailing of a
notice of redemption pursuant to the terms of the Indenture and the Issuers have
irrevocably deposited with the Trustee funds sufficient to pay at maturity or
upon redemption all outstanding Notes, including interest thereon (other than
lost, stolen, mutilated or destroyed Notes which have been replaced), and, in
either case, the Issuers have paid all other sums payable under the Indenture.
The Trustee is required to acknowledge satisfaction and discharge of the
Indenture on demand of the Issuers accompanied by an Officer's Certificate and
an Opinion of Counsel at the cost and expense of the Issuers.
TRANSFER AND EXCHANGE
Upon any transfer of a Note, the registrar may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indenture. The registrar
is not required to transfer or exchange any Notes selected for redemption nor is
the registrar required to transfer or exchange any Notes for a period of 15 days
before a selection of Notes to be redeemed. The registered holder of a Note may
be treated as the owner of it for all purposes.
CONCERNING THE TRUSTEE
United States Trust Company of New York is the Trustee under the Indenture
and has been appointed by the Company as registrar and paying agent with regard
to the Notes. The Trustee's current address is 114 West 47th Street, New York,
New York 10036.
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The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of any Note Issuer, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim a security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined) it
must eliminate such conflict or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes issued under the Indenture will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured) the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any of the holders of the Notes issued thereunder unless they
shall have offered to the Trustee security and indemnity satisfactory to it.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Accountants" means Arthur Andersen LLP or such other nationally recognized
firm of independent certified public accountants as is reasonably acceptable to
the Trustee.
"A&D Facilities" means, with respect to the Company and its Restricted
Subsidiaries, one or more debt facilities with banks or other institutional
lenders providing for borrowings, the proceeds of which are required to be used
for the acquisition and/or development of real property owned by the Company or
such Restricted Subsidiary, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Permitted Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or a Restricted Subsidiary of the Company;
(iii) Capital Stock constituting a minority interest in any Person that at such
time is a Restricted Subsidiary of the Company; or (iv) Permitted Investments of
the type and in the amounts described in clause (viii) of the definition
thereof; PROVIDED, HOWEVER, that, in the case of clauses (ii) and (iii), such
Restricted Subsidiary is primarily engaged in a Permitted Business.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
lesser of the amount by which (x) the fair value of the property of such
Subsidiary Guarantor exceeds the total amount of liabilities, including, without
limitation, the probable liability of such Subsidiary Guarantor with respect to
its contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under the Subsidiary Guarantees, of such Subsidiary Guarantor at
such date and (y) the present fair salable value of the assets of such
Subsidiary Guarantor at such date exceeds the amount that will be required to
pay the probable liability of such Subsidiary Guarantor on its debts (after
giving effect to all other fixed and contingent liabilities incurred or assumed
on such date and after giving effect to any collection from any Subsidiary by
such Subsidiary Guarantor in respect of the obligations of such Subsidiary under
the Subsidiary Guarantees), excluding debt in respect of the Subsidiary
Guarantees, as they become absolute and matured.
"Affiliate" of any specified person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management
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and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of (or
any other equity interests in) a Restricted Subsidiary (other than directors'
qualifying shares) or of any other property or other assets (each referred to
for the purposes of this definition as a "disposition") by the Company or any of
its Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly-Owned Subsidiary, (ii) a sale, transfer or disposition in
the ordinary course of business of Vacation Ownership Interests or Vacation
Ownership Interests Receivables (including, without limitation, direct sales to
financial institutions and sales or transfers in connection with securitization
transactions in the ordinary course of business), (iii) a disposition of
obsolete or worn out equipment or equipment that is no longer useful in the
conduct of the business of the Company and its Restricted Subsidiaries and that
is disposed of in each case in the ordinary course of business, (iv)
dispositions of property for net proceeds which, when taken collectively with
the net proceeds of any other such dispositions under this clause (iv) that were
consummated since the beginning of the calendar year in which such disposition
is consummated, do not exceed $1.0 million, (v) transactions permitted under
"--Certain Covenants--Merger and Consolidation" above; and (vi) Permitted
Investments. Notwithstanding anything to the contrary contained above, a
Restricted Payment made in compliance with the "Limitation on Restricted
Payments" covenant shall not constitute an Asset Disposition except for purposes
of determinations of the Consolidated Coverage Ratio.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate per annum equal to the discount rate which would be applicable to
a Capitalized Lease Obligation with a like term in accordance with GAAP) of the
total obligations of the lessee for rental payments during the remaining term of
the lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
indebtedness, the quotient obtained by dividing (i) the sum of the product of
the numbers of years (rounded upwards to the nearest month) from the date of
determination to the dates of each successive scheduled principal payment of
such Indebtedness or redemption multiplied by the amount of such payment by (ii)
the sum of all such payments.
"Board of Directors" means, with respect to any Person, the board of
directors, board of managers or other analogous controlling body of such Person
or any committee thereof duly authorized, with respect to any particular matter,
to exercise the power of such body, or so long as the Company is a limited
liability company, the managing member of the Company.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less
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from the date of acquisition, bankers' acceptances with maturities not exceeding
one year and overnight bank deposits, in each case with any commercial bank
having capital and surplus in excess of $500 million, (iv) repurchase
obligations for underlying securities of the types described in clauses (ii) and
(iii) entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper rated A-l or the
equivalent thereof by Moody's Investors Service, Inc. ("Moody's") or Standard
and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.
("S&P") and in each case maturing within one year after the date of acquisition,
(vi) investment funds investing 95% of their assets in securities of the types
described in clauses (i)-(v) above, (vii) readily marketable direct obligations
issued by any state of the United States of America or any political subdivision
thereof having one of the two highest rating categories obtainable from either
Moody's or S&P and (viii) Indebtedness or preferred stock issued by Persons with
a rating of "A" or higher from S&P or "A2" or higher from Moody's.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense, and (v) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
item to the extent it represents an accrual of or reserve for cash disbursements
for any subsequent period prior to the Stated Maturity of the Notes) and less,
(x) the aggregate amount of contingent and "earnout" payments in respect of any
Permitted Business acquired by the Company or any Restricted Subsidiary that are
paid in cash during such period and (y) to the extent added in calculating
Consolidated Net Income, non-cash items (excluding such non-cash items to the
extent they represent an accrual for cash receipts reasonably expected to be
received prior to the Stated Maturity of the Notes), in each case for such
period. Notwithstanding the foregoing, the income tax expense, depreciation
expense and amortization expense of a Subsidiary of the Company shall be
included in Consolidated Cash Flow only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the date of
such determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such four fiscal quarters; PROVIDED, HOWEVER,
that (A) if the Company or any of its Restricted Subsidiaries has incurred any
Indebtedness since the beginning of such period and through the date of
determination of the Consolidated Coverage Ratio that remains outstanding or if
the transaction giving rise to the need to calculate Consolidated Coverage Ratio
is an Incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (1) such Indebtedness as if such Indebtedness had
been Incurred on the first day of such period (provided that if such
Indebtedness is Incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar arrangement)
only that portion of such Indebtedness that constitutes the one year projected
average balance of such Indebtedness (as determined in good faith by the Board
of Directors of the Company) shall be deemed outstanding for purposes of this
calculation), and (2) the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such period,
(B) if since the beginning of such period any Indebtedness of the Company or any
of its Restricted Subsidiaries has been repaid, repurchased, defeased or
otherwise discharged (other than Indebtedness under a revolving credit or
similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and the underlying commitment terminated and has not been
replaced), Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Indebtedness had been repaid,
repurchased, defeased or otherwise discharged on the first day of such period
and as if the Company or any Restricted Subsidiary has not earned the interest
income actually earned during such period in respect of cash or Cash Equivalents
used to repay, repurchase, defease or otherwise discharge such Indebtedness, (C)
if since the beginning of such period the Company or any of its Restricted
Subsidiaries shall have made
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any Asset Disposition or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Asset Disposition, Consolidated Cash Flow
for such period shall be reduced by an amount equal to the Consolidated Cash
Flow (if positive) attributable to the assets which are the subject of such
Asset Disposition for such period or increased by an amount equal to the
Consolidated Cash Flow (if negative) attributable thereto for such period, and
Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense attributable to any Indebtedness of
the Company or any of its Restricted Subsidiaries repaid, repurchased, defeased
or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary of the Company is
sold, the Consolidated Interest Expense for such period directly attributable to
the Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (D) if since the beginning of such period the Company or any
of its Restricted Subsidiaries (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary of the Company (or any Person which
becomes a Restricted Subsidiary of the Company as a result thereof) or an
acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder which constitutes all or substantially all of
an operating unit of a business, Consolidated Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period and (E) if
since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary of the Company or was merged with or into the Company or
any Restricted Subsidiary of the Company since the beginning of such period)
shall have made any Asset Disposition, Investment or acquisition of assets that
would have required an adjustment pursuant to clause (C) or (D) above if made by
the Company or a Restricted Subsidiary of the Company during such period,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries determined in accordance
with GAAP, PLUS, to the extent not included in such interest expense (i)
interest expense attributable to Capitalized Lease Obligations and the interest
expense attributable to leases constituting part of a Sale/Leaseback
Transaction, (ii) capitalized interest, (iii) amortization of debt discount and
debt issuance costs, (iv) non-cash interest expense, (v) commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing, (vi) interest actually paid by the Company or any such
Restricted Subsidiary under any Guarantee of Indebtedness or other obligation of
any other Person, (vii) net costs pursuant to Interest Rate Agreements and
Currency Agreements (including amortization of fees), (viii) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company) in connection with Indebtedness Incurred
by such plan or trust and (ix) cash and Disqualified Stock dividends in respect
of all Preferred Stock of Subsidiaries and Disqualified Stock of the Company
held by Persons other than the Company or a Wholly-Owned Subsidiary and less
interest income. Notwithstanding the foregoing, the Consolidated Interest
Expense with respect to any Restricted Subsidiary of the Company, that was not a
Wholly-Owned Subsidiary, shall be included only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary was included in
calculating Consolidated Net Income.
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"Consolidated Net Income" means, for any period, the consolidated net income
(loss) of the Company and its consolidated Subsidiaries determined in accordance
with GAAP; PROVIDED, HOWEVER, that there shall not be included in such
Consolidated Net Income: (i) any net income (loss) of any person acquired by the
Company or any of its Restricted Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (ii) any net
income of any Restricted Subsidiary of the Company if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company (other than restrictions in effect on the Issue Date
with respect to a Restricted Subsidiary of the Company and other than
restrictions that are created or exist in compliance with the "Limitation on
Restrictions on Distributions from Restricted Subsidiaries" covenant), (iii) any
gain or loss realized upon the sale or other disposition of any assets of the
Company or its consolidated Restricted Subsidiaries (including pursuant to any
Sale/Leaseback Transaction) which are not sold or otherwise disposed of in the
ordinary course of business (it being understood that direct sales of Vacation
Ownership Interests Receivables to a financial institution or sales of Vacation
Ownership Interests Receivables in connection with securitization transactions
shall be deemed to be in the ordinary course of business) and any gain or loss
realized upon the sale or other disposition of any Capital Stock of any Person,
(iv) any extraordinary gain or loss, (v) the cumulative effect of a change in
accounting principles, (vi) the net income of any Person, other than a
Restricted Subsidiary, except to the extent of the lesser of (A) cash dividends
or distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person and (B) the net income of such Person (but in no
event less than zero), and the net loss of such Person (other than an
Unrestricted Subsidiary) shall be included only to the extent of the aggregate
Investment of the Company or any of its Restricted Subsidiaries in such Person
and (vii) any non-cash expenses attributable to grants or exercises of employee
stock options. Notwithstanding the foregoing, for the purpose of the covenant
described under "--Certain Covenants--Limitation on Restricted Payments" only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted Subsidiaries
to the Company or a Restricted Subsidiary to the extent such dividends,
repayments or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Restricted Subsidiaries, determined on
a consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending prior to the taking of any action for the
purpose of which the determination is being made and for which financial
statements are available (but in no event ending more than 135 days prior to the
taking of such action), as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid in capital or capital surplus
relating to such Capital Stock plus (iii) any retained earnings or earned
surplus less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Continuing Director" of any Person means, as of the date of determination,
any Person who (i) was a member of the Board of Directors of such Person on the
date of the Indenture or (ii) was nominated for election or elected to the Board
of Directors of such Person with the affirmative vote of a majority of the
Continuing Directors of such Person who were members of such Board of Directors
at the time of such nomination or election.
"Currency Agreement" means, in respect of a Person, any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than an event which
would constitute a Change of Control), (i) matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the
option of the holder thereof, in whole or in
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part, on or prior to the final Stated Maturity of the Notes, or (ii) is
convertible into or exchangeable (unless at the sole option of the issuer
thereof) for (a) debt securities or (b) any Capital Stock referred to in (i)
above, in each case at any time prior to the final Stated Maturity of the Notes.
"Equity Offering" means a primary public offering for cash by the Company of
its common stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"Existing Indebtedness" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issue Date, plus interest accrued, thereon,
after application of the net proceeds of the Notes as described in the
Prospectus.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Group" shall mean any "group" of related persons within the meaning of
Section 13(d) of the Exchange Act.
"Guarantee" means any obligation, contingent or otherwise, of any Person,
directly or indirectly, guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person (i)
to purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter incurred) which is expressly subordinate or junior
in right of payment to the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee pursuant to a written agreement.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses
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(i), (ii) and (v)) entered into in the ordinary course of business of such
Person to the extent that such letters of credit are not drawn upon or, if and
to the extent drawn upon, such drawing is reimbursed no later than the third
business day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit), (iv) all obligations of such Person
to pay the deferred and unpaid purchase price of property or services (except
(x) trade payables and accrued expenses incurred in the ordinary course of
business and (y) contingent or "earnout" payment obligations in respect of any
Permitted Business acquired by the Company or any Restricted Subsidiary), which
purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, (v) all Capitalized Lease Obligations and all Attributable
Indebtedness of such Person, (vi) all Indebtedness of other Persons secured by a
Lien on any asset of such Person, whether or not such Indebtedness is assumed by
such Person, (vii) all Indebtedness of other Persons to the extent Guaranteed by
such Person, (viii) the amount of all obligations of such Person with respect to
the redemption, repayment or other repurchase of any Disqualified Stock or, with
respect to any Restricted Subsidiary of the Company, any Preferred Stock of such
Restricted Subsidiary to the extent such obligation arises on or before the
Stated Maturity of the Notes (but excluding, in each case, accrued dividends)
with the amount of Indebtedness represented by such Disqualified Stock or
Preferred Stock, as the case may be, being equal to the greater of its voluntary
or involuntary liquidation preference and its maximum fixed repurchase price;
PROVIDED that, for purposes hereof the "maximum fixed repurchase price" of any
Disqualified Stock or Preferred Stock, as the case may be, which does not have a
fixed repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock or Preferred Stock, as the case may be, as if such
Disqualified Stock or Preferred Stock, as the case may be, were purchased on any
date on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based on the fair market value of such
Disqualified Stock or Preferred Stock, as the case may be, such fair market
value shall be determined in good faith by the Board of Directors of the Company
and (ix) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. Unless specifically set
forth above, the amount of Indebtedness of any Person at any date shall be the
outstanding principal amount of all unconditional obligations as described
above, as such amount would be reflected on a balance sheet prepared in
accordance with GAAP, and the maximum liability of such Person, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations described above at such date.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts payable on the balance sheet of such Person) or other extension of
credit (including by way of Guarantee or similar arrangement, but excluding any
debt or extension of credit represented by a bank deposit other than a time
deposit) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase or acquisition of Capital Stock, Indebtedness or
other similar instruments issued by such Person. For purposes of the definition
of "Unrestricted Subsidiary" and the covenant described under "Certain
Covenants--Limitation on Restricted Payments", (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in a Restricted
Subsidiary to be designated as an Unrestricted Subsidiary) of the fair market
value of the net assets of such Restricted Subsidiary of the Company at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary;
PROVIDED, HOWEVER, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of the original
designation less (y) the portion (proportionate to the Company's equity interest
in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time
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that such Subsidiary is so redesignated a Restricted Subsidiary; and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
in good faith by the Board of Directors and evidenced by a resolution of such
Board of Directors certified in an Officers' Certificate to the Trustee.
"Issue Date" means the date of issuance of the Original Notes.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets subject to such Asset Disposition) therefrom in each
case net of (i) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all distributions and other payments required to
be made to any Person owning a beneficial interest in assets subject to sale or
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition, (iii) the deduction of appropriate amounts to be provided by
the seller as a reserve, in accordance with GAAP, against any liabilities
associated with the assets disposed of in such Asset Disposition, provided
however, that upon any reduction in such reserves (other than to the extent
resulting from payments of the respective reserved liabilities), Net Available
Cash shall be increased by the amount of such reduction to reserves, and
retained by the Company or any Restricted Subsidiary of the Company after such
Asset Disposition and (iv) any portion of the purchase price from an Asset
Disposition placed in escrow (whether as a reserve for adjustment of the
purchase price, for satisfaction of indemnities in respect of such Asset
Disposition or otherwise in connection with such Asset Disposition); PROVIDED,
HOWEVER, that upon the termination of such escrow, Net Available Cash shall be
increased by any portion of funds therein released to the Company or any
Restricted Subsidiary.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any guarantee or credit support of
any kind (including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor, general partner or otherwise) and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"Officer" means the Chairman of the Board, the Vice-Chairman of the Board,
the Chief Executive Officer, the Chief Financial Officer, the President, any
Vice-President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" shall mean a certificate signed by two Officers of
the Company, at least one of whom shall be the principal executive, financial or
accounting officer of the Company.
"Opinion of Counsel" means a written opinion, in form and substance
acceptable to the Trustee, from legal counsel who is acceptable to the Trustee.
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"Permitted Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of the Company and its
Restricted Subsidiaries on the date of the Indenture, as reasonably determined
by the Company's Board of Directors.
"Permitted Investment" means an Investment by the Company or any of its
Restricted Subsidiaries in (i) a Wholly-Owned Subsidiary of the Company;
PROVIDED, HOWEVER, that the primary business of such Wholly-Owned Subsidiary is
a Permitted Business and upon the making of such Investment, such Person becomes
a Restricted Subsidiary; (ii) another Person if as a result of such Investment
such other Person becomes a Wholly-Owned Subsidiary of the Company or is merged
or consolidated with or into, or transfers or conveys all or substantially all
its assets to, the Company or a Wholly-Owned Subsidiary of the Company and upon
the making of such Investment, such Person becomes a Restricted Subsidiary;
PROVIDED, HOWEVER, that in each case such Person's primary business is a
Permitted Business; (iii) Temporary Cash Investments; (iv) a Receivables
Subsidiary; (v) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business; (vi)
loans and advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted Subsidiary in
an aggregate amount outstanding at any one time not to exceed $250,000 to any
one employee or $1.0 million in the aggregate; (vii) stock, obligations or
securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any of its Restricted Subsidiaries or in
satisfaction of judgments or claims; (viii) Persons to the extent such
Investment is received by the Company or any Restricted Subsidiary as
consideration for asset dispositions effected in compliance with the covenant
described under "Limitations on Sales of Assets and Subsidiary Stock"; (ix)
prepayments and other credits to suppliers made in the ordinary course of
business consistent with the past practices of the Company and its Restricted
Subsidiaries; (x) Investments in connection with pledges, deposits, payments or
performance bonds made or given in the ordinary course of business in connection
with or to secure statutory, regulatory or similar obligations, including
obligations under health, safety or environmental obligations, (xi) loans by the
Company to Epic Resorts-Hilton Head, LLC for the purpose of constructing
vacation ownership suites at the Planter's Quarters Resort in an aggregate
principal amount not to exceed $4.0 million at any one time outstanding which
loans shall be on terms substantially similar (including with respect to
security) to the terms of the indebtedness described in clause (xii) below (with
the note evidencing such loan or loans pledged by the Company to the Trustee for
the benefit of the holders of the Notes as security for the Company's
obligations under the Notes), provided, that the aggregate principal amount of
such loans shall not be limited if Epic Resorts-Hilton Head, LLC is a Subsidiary
Guarantor, and (xii) loans by the Company to Epic Resorts-Hilton Head, LLC made
simultaneously with the consummation of the Initial Offering to be used to repay
indebtedness of Epic Resorts-Hilton Head, LLC then outstanding in an amount not
to exceed $4.0 million at any one time outstanding which loans shall be on terms
(including with respect to security) substantially similar to the terms of such
indebtedness.
"Permitted Liens" means: (i)(A) Liens granted by the Company and the
Subsidiary Guarantors which secure Indebtedness to the extent the Indebtedness
is permitted to be Incurred pursuant to clause (xii) of paragraph (b) under the
"Limitation on Indebtedness" covenant, PROVIDED that the only assets covered by
such Liens are assets that are acquired or developed with the proceeds of the
Indebtedness secured thereby, and (B) Liens granted to the Trustee on the
Pledged Real Property and the Pledged Vacation Ownership Interests securing the
obligations of certain Subsidiary Guarantors under their respective Subsidiary
Guarantees; (ii) Liens in favor of the Company or any Subsidiary Guarantor or
the Trustee for the benefit of the holders of the Notes; (iii) Liens on property
of a Person existing at the time such Person is acquired by or merged into or
consolidated with the Company or any Restricted Subsidiary thereof; provided
that such Liens were in existence prior to the contemplation of such acquisition
and do not extend to any assets of the Company or its Restricted Subsidiaries
other than those acquired in connection with such merger or consolidation; (iv)
Liens to secure the performance of obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the ordinary
course of business;
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(v) Liens existing on the Issue Date; (vi) Liens in respect of extensions,
renewals, refundings or refinancings of any Indebtedness secured by the Liens
referred to in clauses (i), (ii), and (iv) above and (vii) below; provided that
the Liens in connection with such renewal, extensions, renewals, refundings or
refinancing shall be limited to all or part of the specific property which was
subject to the original Lien; (vii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded; provided that any reserve or other appropriate provisions as shall be
required in conformity with GAAP shall have been made therefor; (vii) any Lien
securing purchase money obligations Incurred in compliance with paragraph (b)(i)
of "--Certain Covenants--Limitation or Indebtedness" PROVIDED that such Liens do
not extend to any property (other than the property so purchased) owned by the
Company or its Restricted Subsidiaries and is not incurred more than 30 days
after the incurrence of such Indebtedness secured by such Lien; (ix) Liens to
secure Capitalized Lease Obligations (except in respect of Sale/Leaseback
Transactions) on real or personal property of the Company to the extent
consummated in compliance with paragraph (b)(i) of "--Certain
Covenants--Limitation or Indebtedness" provided that such Liens do not extend to
or cover any property of the Company of any of its Subsidiaries other than the
property subject to such Capitalized Lease Obligation; (x) any Lien securing
Indebtedness Incurred in compliance with clauses (x) or (xi) of paragraph (b) of
"--Certain Covenants--Limitation or Indebtedness" PROVIDED, that such Liens
cover only Vacation Ownership Interests Receivable; and (xi) Liens incurred in
the ordinary course of business of the Company or any Restricted Subsidiary
thereof with respect to obligations that do not exceed $1 million at any one
time outstanding and that (A) are not Incurred in connection with the borrowing
of money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (B) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of the business by the Company or such Restricted Subsidiary.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision hereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Receivables and Related Assets" means Vacation Ownership Interests
Receivable and instruments, chattel paper, obligations, general intangibles,
mortgages, deeds, records and other similar assets, in each case relating to
such Vacation Ownership Interests Receivable.
"Receivables Subsidiary" means a Restricted Subsidiary which is established
and continues to operate for the limited purpose of acquiring, selling and
financing Receivables and Related Assets in connection with receivables
securitization or financing transactions.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of
any Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances Refinancing Indebtedness;
PROVIDED, HOWEVER, that (i) the Refinancing Indebtedness has a Stated Maturity
no earlier than the earlier of (A) the first anniversary of the Stated Maturity
of the Notes and (B) Stated Maturity of the Indebtedness being refinanced, (ii)
the Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the lesser of (A) the
Average Life of the Notes and (B) the Average Life of the Indebtedness being
refinanced and (iii) the Refinancing Indebtedness is in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue price)
that is equal to (or 101% of, in the case of a refinancing of the Notes in
connection with a
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Change of Control) or less than the sum of the aggregate principal amount (or if
issued with original issue discount, the aggregate accreted value) then
outstanding of the Indebtedness being refinanced (plus the amount of any premium
required to be paid in connection therewith and reasonable fees and expenses
therewith); PROVIDED, FURTHER, that Refinancing Indebtedness shall not include
Indebtedness of a Subsidiary which refinances Indebtedness of the Company.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Subsidiary leases it
from such Person.
"Secured Indebtedness" means any Senior Indebtedness of the Company or a
Subsidiary Guarantor secured by a Lien.
"Senior Indebtedness" in the case of the Notes means Indebtedness that is
not by its terms expressly subordinate or junior in right of payment to any
other Indebtedness of the Company or the Subsidiary Guarantee of a Restricted
Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the Commission.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligations" means Indebtedness that is expressly subordinate
or junior in right of payment to any other Indebtedness of the Company or the
Subsidiary Guarantee of a Restricted Subsidiary.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary shall
refer to a Subsidiary of the Company.
"Subsidiary Guarantor" means each Subsidiary of the Company in existence on
the Issue Date and each Subsidiary (other than an Unrestricted Subsidiary)
created or acquired by the Company after the Issue Date, and any Receivables
Subsidiary.
"Tax Allowance Amount" means, with respect to any Member (including a holder
of Epic Warrants if such holder is treated as holding an equity interest in the
Company for federal, state or local income tax purposes), for any calendar
quarter, (i) forty percent (40%) of the excess of (a) the estimated taxable
income allocable to such Member arising from its ownership of an interest in the
Company for the fiscal year through such calendar quarter over (b) any losses of
the Company for prior fiscal years and such fiscal year that are allocable to
such Member (or the predecessor in interest to such Member) that were not
previously utilized in the calculation of Tax Allowance Amounts for any period
minus (ii) prior distributions of Tax Allowance Amounts for such fiscal year,
all as determined by the Accountants in good faith. The amount so determined by
the Accountants shall be the Tax Allowance Amount for each period and shall be
final and binding on all Members.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust
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company which is organized under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America
having capital surplus and undivided profits aggregating in excess of $250
million (or the foreign currency equivalent thereof) and whose long-term debt,
or whose parent holding company's long-term debt, is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act), (iii)
repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) above entered into with a bank
meeting the qualifications described in clause (ii) above, (iv) Investments in
commercial paper, maturing not more than 180 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time as
of which any investment therein is made of "P-l" (or higher) according to
Moody's or "A-1" (or higher) according to S&P, (v) Investments in securities
with maturities of six months or less from the date of acquisition issued or
fully guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by S&P or "A" by Moody's and (vi) Investments in mutual funds whose
investment guidelines restrict such funds' investments to those satisfying the
provisions of clauses (i) through (v) above.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any Restricted Subsidiary of the Company
that is not a Subsidiary of the Subsidiary to be so designated; PROVIDED,
HOWEVER, that each Subsidiary to be so designated and each of its Subsidiaries
has not at the time of such designation, and does not thereafter create, Incur,
issue, assume, guarantee or otherwise become liable with respect to any
Indebtedness other than Non-Recourse Debt and either (A) the Subsidiary to be so
designated has total consolidated assets of $10,000 or less or (B) if such
Subsidiary has consolidated assets greater than $10,000, then such designation
would be permitted under "Limitation on Restricted Payments." The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary subject to the limitations contained in "Limitation on Designations
of Unrestricted Subsidiaries."
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Vacation Ownership Interests" means the right to use (whether arising by
virtue of a deeded interest in real property or otherwise) a fully-furnished
vacation residence for a specified period each year or otherwise, sold by the
Company and its Restricted Subsidiaries in the ordinary course of their resorts
business.
"Vacation Ownership Interests Receivable" means the receivables of the
Company and its Restricted Subsidiaries arising from sales by the Company and
its Restricted Subsidiaries of Vacation Ownership Interests or otherwise
acquired by the Company or a Restricted Subsidiary (but excluding any fees for
service or other fees in respect of such Vacation Ownership Interests)
determined on a consolidated basis in accordance with GAAP.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly-Owned Subsidiary.
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
In the opinion of Jones, Day, Reavis & Pogue, special tax counsel to the
Company, the discussion of the United States tax matters set forth below states
the material United States federal income and estate tax consequences of the
acquisition, ownership and disposition of a Note by a holder thereof. This
discussion is based upon the Code, Treasury Regulations, administrative
pronouncements, and judicial decisions, all of which are subject to change,
possibly retroactively. This discussion only applies to Notes held as capital
assets that were purchased by an initial holder at the initial issue price and
does not address aspects of United States federal income taxation that may be
applicable to certain other holders (including insurance companies, tax exempt
organizations, financial institutions, brokers or traders in securities or
currencies, holders that will hold a Note as part of a position in a "straddle"
or as part of a "hedging," "conversion" or "integrated" transaction for United
States federal income tax purposes or that have a "functional currency" other
than the United States dollar) that may be subject to special rules not
discussed below. Prospective investors are urged to consult their tax advisors
regarding the United States federal tax consequences of acquiring, holding and
disposing of Notes as well as any tax consequences that may arise under the laws
of any foreign, state, local or other taxing jurisdiction.
For purposes of this discussion, a "U.S. Holder" is a beneficial owner of
Notes who for United States federal income tax purposes is (i) a citizen or
resident of the United States; (ii) a corporation created under the laws of the
United States or any State thereof (including the District of Columbia); (iii)
an estate the income of which is subject to United States federal income
taxation regardless of its source; (iv) a trust (a) the administration over
which a United States court can exercise primary supervision and (b) all of the
substantial decisions of which one or more United States persons have the
authority to control or (v) a partnership or other entity that is created or
organized in or under the laws of the United States or any State thereof
(including the District of Columbia) and that is properly classified as a U.S.
entity. Notwithstanding the preceding sentence, to the extent provided in
Treasury Regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to such date, that elect to continue to
be treated as United States persons also will be U.S. Holders. A "Non-U.S.
Holder" is a beneficial owner of Notes other than a U.S. Holder.
ALLOCATION OF THE ISSUE PRICE BETWEEN AN ORIGINAL NOTE AND A WARRANT
The Original Notes were issued as part of a Unit, comprised of Original
Notes and Warrants. The "issue price" of a Unit for United States federal income
tax purposes will be the initial offering price of a substantial amount of the
Units to investors (other than persons acting in their capacity as underwriters,
placement agents or wholesalers). The issue price of a Unit was allocated
between the Original Note and the Warrant based on their respective fair market
values at the time of issuance, and a holder's initial tax basis in each will be
equal to the amount so allocated. Based upon its estimate of the relative fair
market values of an Original Note and a Warrant, the Company and Capital Corp.
treated $978.79 of the issue price of a Unit as allocable to the Original Notes
(which amount the Company will therefore treat as its "issue price" for United
States federal income tax purposes) and $21.21 as allocable to the Warrant. The
Company and Capital Corp. intend to file information returns with the Internal
Revenue Service (the "IRS") based on such allocation.
THE NOTES
U.S. HOLDERS
INTEREST AND ORIGINAL ISSUE DISCOUNT. The Original Notes are, and the
Exchange Notes will be, considered to have been issued with original issue
discount ("OID"). As a result, a U.S. Holder of a Note generally will be
required to include in gross income (as interest) the sum of the "daily
portions" of OID on such Note calculated under a constant yield method for all
days during the taxable year that the U.S. Holder owns such Note. In addition, a
U.S. Holder will be required to include "qualified stated interest"
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(defined below) on such Note in gross income (as interest) under such U.S.
Holder's regular method of tax accounting.
The amount of OID on a Note allocable to an accrual period generally is
determined by multiplying the "adjusted issue price" (as defined below) of such
Note at the beginning of the accrual period by the yield to maturity of such
Note (adjusting the yield to take into account the length of the particular
accrual period) and subtracting from that product the amount payable as
qualified stated interest (as defined below) during such accrual period.
Generally, an accrual period is any period elected by a U.S. Holder, provided
that each accrual period is no longer than one year and that each interest
payment date is the first or last day of the accrual period. The "adjusted issue
price" of a Note at the beginning of any accrual period will be the sum of its
issue price and the amount of OID allocable to all prior accrual periods,
reduced by the amount of all payments other than qualified stated interest
payments made with respect to such Note in all prior accrual periods. "Qualified
stated interest" ("QSI") generally is stated interest that is unconditionally
payable in cash or property (other than debt instruments of the issuer) at least
annually at a single fixed rate during the entire term of the debt instrument.
The "stated redemption price at maturity" of a Note will be the sum of all
payments provided for under such Note other than QSI payments.
Accordingly, a U.S. Holder will be required to include in gross income (as
interest), in the manner set forth above: (i) qualified stated interest payments
on the Note and (ii) OID accruing on such Note. Stated interest on the Notes
will be treated as QSI for United States federal income tax purposes. The total
amount of OID on the Notes will equal the amount by which the issue price of the
Notes is less than the principal amount thereof.
A U.S. Holder's tax basis in a note will be increased by the amount of any
OID included in the U.S. Holder's gross income with respect to such Note under
the rules discussed above and decreased by the amount of any payment other than
QSI with respect to such Note.
It is possible that the IRS could assert that the Additional Interest which
the Company and Capital Corp. would be obligated to pay if the Exchange Offer
Registration Statement is not declared effective within the time periods set
forth herein (or if certain other actions described under "The Exchange Offer"
are not taken) are "contingent payments" for United States federal income tax
purposes. If so treated, the Notes would be treated as contingent payment debt
instruments and certain adverse United States federal income tax consequences
could result. However, the Treasury Regulations issued by the IRS regarding debt
instruments that provide for one or more contingent payments provide that, for
purposes of determining whether a debt instrument is a contingent debt
instrument, remote or incidental contingencies are ignored. The Company and
Capital Corp. believe that the possibility of the payment of Additional Interest
is remote and, accordingly, do not intend to treat the Notes as contingent
payment debt instruments.
The Company and Capital Corp. do not intend to treat the possibility of an
optional or provisional redemption or repurchase of the Notes as giving rise to
accrual of OID or recognition of ordinary income upon retirement, sale or
exchange.
SALE, EXCHANGE OR RETIREMENT. Subject to the discussion of the Exchange
Offer below, upon the sale, exchange or retirement of a Note, it is the opinion
of the Company's special tax counsel that a U.S. Holder will recognize taxable
gain or loss equal to the difference, if any, between the amount realized on the
sale, exchange or retirement (other than unpaid interest which will be taxable
as such) and the U.S. Holder's adjusted tax basis in such Note. As stated above,
a U.S. Holder's adjusted tax basis in a Note generally will equal the cost of
such Note to the holder increased by the amount of OID previously included in
income by such U.S. Holder and decreased by payments other than QSI made with
respect to such Note. Any such gain or loss will be capital gain or loss. In the
case of a noncorporate U.S. Holder, the maximum marginal United States federal
income tax rate applicable to such gain will be lower than the maximum marginal
United States federal income tax rate applicable to ordinary income if such U.S.
Holder's holding period for such Notes exceeds one year.
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NON-U.S. HOLDERS
Subject to the discussion of backup withholding below, under United States
federal tax law: (i) payments of principal of, premium, if any, and interest
(including OID) on the Notes by an Issuer or any paying agent thereof to a
Non-U.S. Holder (other than, (a) a controlled foreign corporation related to the
Company or Capital Corp. by stock ownership, (b) a member owning actually or
constructively 10% or more of the capital interests or profits interests of the
Company or 10% or more of the total combined voting power of all classes of
stock of Capital Corp. entitled to vote or (c) a bank which acquired such Notes
in consideration of an extension of credit made pursuant to a loan agreement
entered into in the ordinary course of business) will not be subject to United
States federal income or withholding tax if such interest or other amount is not
effectively connected with the conduct of a trade or business in the United
States and, provided that valid certifications meeting the requirement of
Section 871(h)(2)(B)(ii) or 881(c)(2)(B)(ii) of the Code (as discussed below
under "United States Backup Withholding Tax and Information Reporting"), are
received or an exemption is otherwise established; (ii) any gain or income
recognized by a Non-U.S. Holder upon the sale or redemption of Notes will not be
subject to United States income or withholding tax unless (x) such gain is
effectively connected with the conduct by such Non-U.S. Holder of a trade or
business in the United States or (y) in the case of any gain realized by an
individual Non-U.S. Holder, such holder is present in the United States for 183
days or more in the taxable year of such sale, exchange or retirement and
certain other conditions are met and (iii) a Note that is held by an individual
who at the time of death is not a citizen or resident of the United States will
not be subject to United States federal estate tax as a result of such
individual's death, provided that, at the time of such individual's death, such
individual does not own (actually or constructively) (x) 10% or more of the
capital interests or profits interests of the Company or (y) 10% or more of the
total combined voting power of all classes of stock of Capital Corp. entitled to
vote, and provided that payments of interest with respect to such Notes would
not have been effectively connected with the conduct by such individual of a
trade or business in the United States.
EXCHANGE OFFER
In the opinion of the Company's special tax counsel, the exchange of an
Original Note for an Exchange Note by a holder pursuant to the Exchange Offer
will not constitute a taxable exchange for United States federal income tax
purposes. A holder will not recognize any gain or loss upon the receipt of an
Exchange Note pursuant to the Exchange Offer and a holder will be required to
continue to include interest on the Exchange Note in gross income for United
States federal income tax purposes in the manner and to the extent described
herein. A holder's holding period for an Exchange Note will include the holding
period for the Original Note exchanged pursuant to the Exchange Offer and such
holder's adjusted basis in an Exchange Note will be the same as such holder's
adjusted basis in such Original Note.
CLASSIFICATION AS APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
Corporations that issue debt obligations that are classified as applicable
high yield discount obligations (as defined in the Code) and holders thereof are
subject to special rules (the "AHYDO Rules") regarding the deductibility of
interest and reclassification of certain interest as dividends. If a debt
obligation's yield to maturity exceeds the "applicable federal rate" in effect
at the time of their issuance (the "AFR") plus five percentage points and
certain other requirements are met, such debt obligation will be classified as
an applicable high yield discount obligation. In that event, no portion of the
OID would be deductible by the issuer until paid. In addition, a portion of the
OID thereon may not be deductible by the issuer at any time; such portion would
be an amount that bears the same ratio to such OID as (i) the excess of the
yield to maturity of such debt obligation over the AFR plus six percentage
points bears to (ii) the yield to maturity. Since Capital Corp. is a co-issuer
of the Notes and certain members of the Company (a co-issuer of the Notes) may
be corporations, the AHYDO Rules will apply to such corporate members even
though the Company is not taxed as a corporation for United States federal
income tax purposes. For
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purposes of determining the yield to maturity of a Note, the issue price of a
Note will be determined as described above under "--The Notes." The Issuers do
not believe that the Notes will be subject to the AHYDO Rules because at the
time of issuance the Original Notes did not have "significant original issue
discount."
UNITED STATES BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
A 31% backup withholding tax and information reporting requirements apply to
certain payments of principal of, and premium, if any, and interest (including
OID) on a security and to the proceeds of the sale or redemption of a security
to certain non-corporate beneficial owners of a security that are United States
persons. A payor will be required to withhold 31% of any such payment on a Note
to beneficial owners of Notes that are United States persons (other than an
"exempt recipient," such as a corporation, a foreign person that provides
appropriate certification and certain other persons) if such holder fails to
furnish its correct taxpayer identification number or otherwise fails to comply
with, or establish an exemption from, such backup withholding requirements.
Under current Treasury Regulations, payments of principal and interest made
to a Non-U.S. Holder of a Note will not be subject to United States federal
income tax withholding, backup withholding or information reporting if an
appropriate certification is provided by the beneficial owner or by a financial
institution holding the Note on behalf of the beneficial owner in the ordinary
course of its trade or business to the paying agent and the paying agent does
not have actual knowledge that the certificate is false. If provided by a
beneficial owner, the certification must give the name and address of such
owner, state that such owner is not a United States person, or, in the case of
an individual, that such person is neither a citizen nor a resident of the
United States, and be signed by the owner under penalties of perjury. If
provided by a financial institution, the certification must state that the
financial institution has received from the beneficial owner the certificate set
forth in the preceding sentence, set forth the information contained in such
certificate (and include a copy of such certificate), and be signed by an
authorized representative of the financial institution under penalties of
perjury. In addition, if such principal or interest is paid to the beneficial
owner of a Note by a foreign office of a foreign custodian, foreign nominee or
other foreign agent of such beneficial owner, or if a foreign office of a
foreign "broker" (as defined in the applicable Treasury Regulations) pays the
proceeds of the sale of a Note to the seller thereof, backup withholding and
information reporting will not apply to such payment (provided that such
nominee, custodian, agent or broker derives less than 50% of its gross income
for certain periods from the conduct of a trade or business in the United States
and is not a "controlled foreign corporation" as to the United States).
Principal and interest so paid by a foreign office of other custodians, nominees
or agents, or the payment by a foreign office of other brokers of the proceeds
of the sale of a Note will not be subject to backup withholding, but will be
subject to information reporting unless the custodian, nominee, agent or broker
has documentary evidence in its records that the beneficial owner is not a
United States person for purposes of such backup withholding and information
reporting requirements and certain conditions are met, or the beneficial owner
otherwise establishes an exemption. Principal and interest so paid by the United
States office of a custodian, nominee or agent, or the payment of the proceeds
of a sale of a Note by the United States office of a broker, is subject to both
backup withholding and information reporting unless the beneficial owner
certifies its non-United States status under penalties of perjury or otherwise
establishes an exemption.
Treasury Regulations issued on October 6, 1997, and an IRS notice amending
such regulations, would modify certain of the rules discussed above generally
with respect to payments on the Notes made after December 31, 1999 and provide
alternative methods for establishing an exemption from United States withholding
tax. In general, the new regulations do not significantly alter the substantive
withholding and information reporting requirements but rather unify current
certification procedures and forms and clarify reliance standards. Further, the
new regulations alter the procedures for claiming the benefits of an income tax
treaty and may change certain procedures relating to intermediaries receiving
payments on behalf of
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beneficial owners. Prospective investors should consult their tax advisors
concerning the effect, if any, of such new regulations on an investment in the
Notes.
THE ABOVE DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF
ALL TAX CONSEQUENCES RELATING TO THE OWNERSHIP OF THE NOTES. PROSPECTIVE
PURCHASERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX
CONSEQUENCES OF THEIR PARTICULAR SITUATIONS.
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PLAN OF DISTRIBUTION
Based on interpretations of the staff of the Commission set forth in
no-action letters issued to third parties, the Issuers believe that, except as
described below, Exchange Notes issued pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by the respective holders
thereof without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that (i) such Exchange Notes are
acquired in the ordinary course of such holder's business and (ii) such holder
is not participating, and has no arrangement or understanding with any person to
participate, in a distribution of the Exchange Notes. A holder of Original Notes
that is an "affiliate" of an Issuer within the meaning of Rule 405 under the
Securities Act or that is a broker-dealer that purchased Original Notes from the
Issuers to resell pursuant to an exemption from registration under the
Securities Act (a) cannot rely on such interpretations by the staff of the
Commission, (b) will not be permitted or entitled to tender such Original Notes
in the Exchange Offer and (c) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or other
transfer of such Original Notes unless such sale or transfer is made pursuant to
an exemption from such requirements. In addition, any holder who tenders
Original Notes in the Exchange Offer with the intention or for the purpose of
participating in a distribution of the Exchange Notes cannot rely on such
interpretations by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with the secondary resale transaction. Unless an exemption from
registration is otherwise available, any such resale transaction should be
covered by an effective registration statement containing selling
securityholders information required by Item 507 of the Regulation S-K under the
Securities Act. To date, the staff of the Commission has taken the position that
a broker-dealer that has acquired securities in exchange for securities that
were acquired by such broker-dealer as a result of market-making activities or
other trading activities may fulfill the prospectus delivery requirements with
the prospectus contained in an exchange offer registration statement.
Each holder of Original Notes who wishes to exchange its Original Notes for
Exchange Notes in the Exchange Offer will be required to make certain
representations to the Issuers set forth in "The Exchange Offer--Purpose and
Effect of the Exchange Offer."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Original
Notes where such Original Notes were acquired as a result of market-making
activities or other trading activities. The Issuers have agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until February 10, 1998, all dealers
effecting transactions in the Exchange Notes may be required to deliver a
prospectus.
The Issuers will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer or the purchasers of any such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such Exchange Notes may be deemed to be an "underwriter" within the meaning
of the Securities Act and any profit on any such resale of Exchange Notes and
any commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering
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a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Issuers by Jones, Day, Reavis & Pogue, Cleveland, Ohio.
EXPERTS
The financial statements included in this Prospectus to the extent, and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
I. UNAUDITED PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
Pro Forma Consolidating Balance Sheet as of December 31, 1997....................................... F-3
Pro Forma Consolidating Statement of Operations for the year ended December 31, 1997................ F-4
Pro Forma Consolidating Statement of Operations for the six months ended June 30, 1998 . F-5
Notes and Management's Assumptions to Unaudited Pro Forma Consolidating Financial Statements........ F-6
II. EPIC RESORTS, INC.
Report of Independent Public Accountants............................................................ F-8
Combined Balance Sheets as of December 31, 1997, 1996 and June 30, 1998 (Unaudited)................. F-9
Combined Statements of Income for the Years Ended December 31, 1997, 1996 and 1995, and the Six
Months Ended June 30, 1998 and 1997 (Unaudited)................................................... F-10
Combined Statements of Changes in Stockholder's Equity for the Years Ended December 31, 1997, 1996
and 1995, and the Six Months Ended June 30, 1998 (Unaudited)...................................... F-11
Combined Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995, and the Six
Months Ended June 30, 1998 and 1997 (Unaudited)................................................... F-12
Notes to Combined Financial Statements.............................................................. F-13
III. LONDON BRIDGE RESORT, INC.
Report of Independent Public Accountants............................................................ F-22
Balance Sheets as of December 31, 1997 and 1996..................................................... F-23
Statements of Income for the Years Ended December 31, 1997, 1996 and 1995........................... F-24
Statements of Changes in Stockholder's Equity for the Years Ended December 31, 1997, 1996 and
1995.............................................................................................. F-25
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995....................... F-26
Notes to Financial Statements....................................................................... F-27
IV. DAYTONA BEACH REGENCY, LTD.
Report of Independent Public Accountants............................................................ F-34
Balance Sheets as of December 31, 1997 and 1996..................................................... F-35
Statements of Income for the Year Ended December 31, 1997 and for the period from inception (April
8, 1996) through December 31, 1996................................................................ F-36
Statements of Changes in Partners' Equity (Deficit) for the Year Ended December 31, 1997 and for the
period from inception (April 8, 1996) through December 31, 1996................................... F-37
Statements of Cash Flows for the Year Ended December 31, 1997 and for the period from inception
(April 8, 1996) through December 31, 1996......................................................... F-38
Notes to Financial Statements....................................................................... F-39
</TABLE>
F-1
<PAGE>
EPIC RESORTS, LLC
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
The following unaudited pro forma financial information has been derived by
the application of pro forma adjustments to the Company's historical financial
data included elsewhere herein. The accompanying unaudited pro forma
consolidating financial information is presented as if the transactions
described below had been consummated on June 30, 1998 for balance sheet
purposes, and January 1, 1997 for purposes of the statements of operations:
- The Company completed the issuance of the original notes and warrants.
- The Company completed the acquisitions of the Westpark Resort, the
Scottsdale Links Resort, the Planter's Quarters Resort and the Palm
Springs Marquis Villas.
- The Company completed the acquisition of the minority interests in Daytona
Beach Regency, Ltd.
- The Company completed the exchange offer.
The unaudited pro forma consolidating financial information should be read
in conjunction with "Use of Proceeds," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of the Company and the related notes thereto
included elsewhere herein. In management's opinion, all adjustments necessary to
reflect the effects of the transactions have been made.
F-2
<PAGE>
EPIC RESORTS, LLC
PRO FORMA CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
THE COMPANY PRO FORMA, AS
HISTORICAL THE OFFERING ADJUSTED
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 41 $ 11,992(A) $ 12,033
Cash in escrow........................................................ 23 16,900(A) 16,923
Mortgages receivable.................................................. 45,035 -- 45,035
Inventory............................................................. 63,286 9,902(A) 73,188
Property and equipment, net........................................... 10,102 -- 10,102
Deferred financing costs, net......................................... 1,403 6,723(B) 8,126
Other assets.......................................................... 996 -- 996
------------- ------------ -------------
Total assets........................................................ $ 120,886 $ 45,517 $ 166,403
------------- ------------ -------------
------------- ------------ -------------
LIABILITIES AND MEMBER'S EQUITY
Accounts payable...................................................... $ 1,761 -- $ 1,761
Accrued expenses...................................................... 437 -- 437
Advance deposits...................................................... 223 -- 223
Bridge loan........................................................... 55,414 (55,414)(A) --
Notes payable......................................................... 46,157 (23,951)(A) 22,206
Senior secured notes payable.......................................... -- 127,243(C) 127,243
Due to member......................................................... 585 -- 585
------------- ------------ -------------
Total liabilities................................................... 104,577 47,878 152,455
------------- ------------ -------------
Minority interest..................................................... 2,396 (2,396)(A) --
Warrants.............................................................. -- 2,757(C) 2,757
Member's equity....................................................... 13,913 (2,722)(D) 11,191
------------- ------------ -------------
Total liabilities and member's equity............................... $ 120,686 $ 45,517 $ 166,403
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
The accompanying notes and management's assumptions are an integral part of this
statement.
F-3
<PAGE>
EPIC RESORTS, LLC
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PRO FORMA THE COMPANY
HISTORICAL ADJUSTMENTS(A) PRO FORMA
----------- -------------- -----------
<S> <C> <C> <C>
Revenue:
Sales of vacation ownership interests.................................. $ 30,104 $ -- $ 30,104
Resort operations...................................................... 6,651 -- 6,651
Interest income........................................................ 3,536 -- 3,536
----------- -------------- -----------
Total revenue........................................................ 40,291 -- 40,291
----------- -------------- -----------
Costs and Expenses:
Cost of sales of vacation ownership interests.......................... 7,337 -- 7,337
Resort operations...................................................... 4,599 -- --
Selling and marketing.................................................. 11,574 -- 11,574
General and administrative............................................. 3,188 -- 3,188
Provision for doubtful accounts........................................ 1,392 -- 1,392
Depreciation and amortization.......................................... 771 -- 771
Financing and closing costs............................................ 868 -- 868
Interest expense....................................................... 3,748 16,546(b) 20,294
----------- -------------- -----------
Total expenses....................................................... 33,477 16,546 50,023
----------- -------------- -----------
Income (loss) before minority interest................................. 6,814 (16,546) (9,732)
Minority interest...................................................... 1,676 (1,676)(c) --
----------- -------------- -----------
Net income (loss)...................................................... $ 5,138 $ (14,899) $ (9,732)
----------- -------------- -----------
----------- -------------- -----------
</TABLE>
The accompanying notes and management's assumptions are an integral part of this
statement.
F-4
<PAGE>
EPIC RESORTS, LLC
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PRO FORMA THE COMPANY
HISTORICAL ADJUSTMENTS(A) PRO FORMA
----------- -------------- -----------
<S> <C> <C> <C>
Revenue:
Sales of vacation ownership interests..................................... $ 16,666 $ -- $ 16,666
Resort operations......................................................... 3,416 -- 3,416
Interest income........................................................... 2,511 -- 2,511
----------- ------- -----------
Total revenue........................................................... 22,593 -- 22,593
----------- ------- -----------
Costs and Expenses:
Cost of sales of vacation ownership interests............................. 3,861 -- 3,861
Resort operations......................................................... 2,011 -- 2,011
Selling and marketing..................................................... 6,448 -- 6,448
General and administrative................................................ 1,775 -- 1,775
Provision for doubtful accounts........................................... 698 -- 698
Depreciation and amortization............................................. 376 -- 376
Financing and closing costs............................................... 579 -- 579
Interest expense.......................................................... 2,070 8,261(b) 10,331
----------- ------- -----------
Total expenses.......................................................... 17,818 8,261 26,079
----------- ------- -----------
Income (loss) before minority interest.................................... 4,775 (8,261) (3,486)
Minority interest......................................................... 1,189 (1,189)(c) --
----------- ------- -----------
Net income (loss)......................................................... $ 3,586 $ (7,072) $ (3,486)
----------- ------- -----------
----------- ------- -----------
</TABLE>
The accompanying notes and management's assumptions are an integral part of this
statement.
F-5
<PAGE>
EPIC RESORTS, LLC
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS)
1. ADJUSTMENTS TO PRO FORMA CONSOLIDATING BALANCE SHEET:
<TABLE>
<CAPTION>
<S> <C> <C>
(A) To record the cash use of proceeds as follows:
Escrow deposit on first year of interest on the Notes....................... $ 16,900
Purchase price of inventory at Planter's Quarters Resort and buyout of
remaining minority interest obligations................................... 9,902
Payment of fees and expenses relating to the Offering and the
Acquisitions.............................................................. 7,353
Repayment of the Bridge Loan (utilized to acquire Scottsdale Links Resort,
Westpark Resort, and Palm Springs Marquis Villas on June 30, 1998)........ 55,414
Repayment of existing company indebtedness, including a portion of the
London Bridge Debt and all of the Daytona Debt............................ 23,951
Acquisition of all of the interests in Daytona Beach Regency, Ltd........... 2,396
Prepayment penalties incurred on early repayment of portion of London Bridge
Debt and all of Daytona Debt.............................................. 2,092
---------
Total cash use of proceeds.................................................. 118,008
Remaining proceeds for working capital and general corporate purposes....... 11,992
---------
Total principal amount of notes............................................. $ 130,000
---------
---------
(B) Payment of fees and expenses relating to the Offering and the
Acquisitions.............................................................. $ 7,353
Less write-off of unamortized deferred financing costs associated with the
repayment of a portion of London Bridge Debt and all of Daytona Debt...... (630)
---------
Net increase in deferred financing costs.................................... $ 6,723
---------
---------
(C) To record the issuance of senior secured redeemable notes and warrants as
follows:
Principal amount of notes................................................... $ 130,000
Less amount allocated to warrants (calculated value of $21.21 using the
Black-Scholes model, multiplied by 130,000 warrants)...................... 2,757
---------
$ 127,243
---------
---------
(D) To record the extraordinary loss on the early repayment of existing company
indebtedness, including prepayment penalties of approximately $2.1
million, and the write-off of unamortized deferred financing costs of
approximately $0.6 million................................................ $ 2,722
---------
</TABLE>
F-6
<PAGE>
EPIC RESORTS, LLC
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS)
2. ADJUSTMENTS TO PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Since the Company acquired inventory, there are no pro forma or historical
results of operations to be presented for these assets.
(b) To record additional interest expense as follows:
Interest on $130 million Senior Secured Redeemable Notes at 13%.............. $ 16,900
Interest on remaining hypothecation notes outstanding........................ 1,807
Amortization of $7.3 million of deferred issuance costs on Senior Secured
Redeemable Notes over 7 years.............................................. 1,050
Amortization of warrants over 7 years........................................ 394
Amortization of deferred financing costs on remaining hypothecation
facility................................................................... 143
---------
Total pro forma interest expense............................................. 20,294
Less: historical interest expense............................................ (3,748)
---------
Pro forma adjustment to interest expense..................................... $ 16,546
---------
---------
(c) To record the elimination of minority interest upon the acquisition of all of
the interests in Daytona Beach Regency, Ltd.
</TABLE>
3. ADJUSTMENTS TO PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Since the Company acquired inventory, there are no pro forma or historical
results of operations to be presented for these assets.
(b) To record additional interest expense as follows:
Interest on $130 million Senior Secured Redeemable Notes at 13%............... $ 8,450
Interest on remaining hypothecation notes outstanding......................... 1,082
Amortization of $7.3 million of deferred issuance costs of Senior Secured
Redeemable Notes over 7 years............................................... 525
Amortization of warrants over 7 years......................................... 197
Amortization of deferred financing costs on remaining hypothecation
facility.................................................................... 77
---------
Total pro forma interest expense.............................................. 10,331
Less: historical interest expense............................................. (2,070)
---------
Pro forma adjustment to interest expense...................................... $ 8,261
---------
---------
(c) To record the elimination of minority interest upon the acquisition of all of
the interests in Daytona Beach Regency, Ltd.
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Epic Resorts, Inc.
We have audited the accompanying combined balance sheets of Epic Resorts,
Inc. and affiliates, as discussed in Note 1, (a Delaware S-corporation) as of
December 31, 1997 and 1996, and the related combined statements of income, cash
flows and changes in stockholder's equity for each of the three years in the
period ended December 31, 1997. 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Epic Resorts, Inc.
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania,
May 22, 1998
F-8
<PAGE>
EPIC RESORTS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................... $ 40,871 $ 248,079 $ 27,135
Cash in escrow.................................... 23,160 53,142 139,103
Mortgages receivable, net of allowance of
$1,227,598 (unaudited), $750,061 and $736,211 as
of June 30, 1998, December 31, 1997 and 1996,
respectively.................................... 45,034,820 37,147,850 20,995,848
Inventory......................................... 63,285,731 7,962,552 12,741,087
Property and equipment, net....................... 10,102,127 9,971,388 8,429,264
Deferred financing costs, net..................... 1,402,659 677,159 613,764
Other assets...................................... 996,336 228,004 87,669
----------- ------------ ------------
Total assets................................ $120,885,704 $ 56,288,174 $ 43,033,870
----------- ------------ ------------
----------- ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable.................................. $ 1,760,887 $ 983,704 $ 719,926
Accrued expenses.................................. 437,339 520,735 414,722
Due to Homeowners' Association.................... -- 56,408 59,288
Advance deposits.................................. 222,871 53,142 139,103
Bridge loan....................................... 55,414,252 -- --
Notes payable..................................... 46,156,455 42,890,714 34,008,682
Due Member........................................ 585,438 -- --
----------- ------------ ------------
Total liabilities........................... 104,577,242 44,504,703 35,341,721
Minority Interest................................. 2,395,446 1,205,769 (470,602)
Commitments and contingencies (Note 9)............ -- -- --
Stockholder's Equity.............................. 13,913,016 10,577,702 8,162,751
----------- ------------ ------------
Total liabilities and stockholder's
equity.................................... $120,885,704 $ 56,288,174 $ 43,033,870
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
EPIC RESORTS, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED, FOR THE YEAR ENDED
---------------------------- -------------------------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Sales of vacation ownership
interests........................ $ 16,665,584 $ 13,586,239 $ 30,103,561 $ 10,583,527 $ 8,289,785
Resort operations.................. 3,416,179 3,860,158 6,651,552 6,074,429 5,029,222
Interest income.................... 2,511,270 1,517,124 3,535,575 1,207,977 703,813
------------- ------------- ------------- ------------- -------------
22,593,033 18,963,521 40,290,688 17,865,933 14,022,820
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales of vacation ownership
interests........................ 3,860,842 3,088,460 7,336,861 3,543,853 3,153,516
Resort operations.................. 2,010,669 2,673,475 4,599,059 4,805,702 4,103,109
Selling and marketing costs........ 6,448,621 5,064,498 11,573,747 4,306,702 3,451,965
General and administrative......... 1,774,627 1,408,129 3,188,269 2,014,015 1,322,263
Provision for doubtful accounts.... 697,943 576,089 1,391,467 492,056 473,539
Depreciation and amortization...... 375,665 408,212 771,330 798,904 643,941
Financing and closing costs........ 578,918 296,322 868,273 322,934 460,242
Interest expense................... 2,070,340 1,779,068 3,748,063 2,142,911 894,464
------------- ------------- ------------- ------------- -------------
17,817,625 15,294,253 33,477,069 18,427,077 14,503,039
------------- ------------- ------------- ------------- -------------
Income (loss) before minority interest
and extraordinary item............... 4,775,408 3,669,268 6,813,619 (561,144) (480,219)
Minority interest...................... 1,189,677 1,001,704 1,676,371 (472,995) --
------------- ------------- ------------- ------------- -------------
Income (loss) before extraordinary
item................................. 3,585,731 2,667,564 5,137,248 (88,149) (480,219)
Extraordinary gain on settlement of
debt (Note 7)........................ -- -- -- -- 5,077,456
------------- ------------- ------------- ------------- -------------
Net income (loss)...................... $ 3,585,731 $ 2,667,564 $ 5,137,248 $ (88,149) $ 4,597,237
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
EPIC RESORTS, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND
THE THREE MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1995.......................... $ 5,315,998
Distributions................................... (1,150,664)
Net income...................................... 4,597,237
-------------
BALANCE, DECEMBER 31, 1995........................ 8,762,571
Contributions................................... 947,730
Distributions................................... (1,459,404)
Net loss........................................ (88,149)
-------------
BALANCE, DECEMBER 31, 1996........................ 8,162,748
Contributions................................... 602,865
Distributions................................... (3,325,159)
Net income...................................... 5,137,248
-------------
BALANCE, DECEMBER 31, 1997........................ 10,577,702
Contributions (unaudited)....................... 163,223
Distributions (unaudited)....................... (413,640)
Net income (unaudited).......................... 3,585,731
-------------
BALANCE, JUNE 30, 1998 (unaudited)................ $ 13,913,016
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
EPIC RESORTS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED
------------------------ ----------------------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996 1995
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 3,585,731 $ 2,667,564 $5,137,248 $ (88,149) $4,597,237
Adjustments to reconcile net income (loss) to
net cash used in operating activities--
Depreciation and amortization................. 375,665 408,212 771,330 798,904 643,941
Amortization of financing fees................ 94,261 16,572 173,605 75,201 72,881
Provision for doubtful accounts............... 697,943 576,089 1,391,467 492,056 473,539
Minority Interest............................. 1,189,677 1,001,704 1,676,371 (470,602) --
Extraordinary gain on early
settlement of debt.......................... -- -- -- -- (5,077,456)
Change in assets and liabilities--
Cash in escrow.............................. 29,982 127,836 85,961 (88,509) (20,812)
Mortgages receivable........................ (8,584,913) (7,529,097) (17,543,469) (712,110) (6,323,252)
Inventory................................... 897,789 747,467 4,778,535 (709,259) 2,588,253
Other assets................................ (748,446) (292,104) (140,335) 12,960 54,667
Accounts payable............................ 227,183 241,751 263,775 237,219 114,513
Accrued expenses............................ (83,396) 13,068 106,013 221,872 244,015
Due to Association.......................... (56,408) (59,288) (2,880) 59,288 --
Advance deposits............................ 140,789 227,452 (85,961) 88,509 (9,585)
Due to Member............................... 585,438 -- -- -- --
----------- ----------- ------------ ------------ ------------
Net cash used in operating activities..... (1,648,705) (1,852,774) (3,388,340) (82,620) (2,642,059)
----------- ----------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. (506,404) (512,269) (2,313,454) (1,489,094) (980,326)
Resort acquisitions............................. (55,791,533) -- -- -- --
----------- ----------- ------------ ------------ ------------
Net cash used in investing activities..... (56,297,937) (512,269) (2,313,454) (1,489,094) (980,326)
----------- ----------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable..................... 11,916,421 9,797,213 24,846,989 7,566,143 15,845,186
Payments on notes payable....................... (8,650,680) (6,965,220) (15,964,957) (5,472,540) (10,769,873)
Proceeds from bridge loan....................... 55,414,252 -- -- -- --
Payment of deferred financing costs............. (690,142) (149,500) (237,000) (31,793) (396,250)
Contributions................................... 163,223 267,164 602,865 947,730 --
Distributions................................... (413,640) (601,014) (3,325,159) (1,459,404) (1,150,664)
----------- ----------- ------------ ------------ ------------
Net cash provided by financing
activities.............................. 57,739,434 2,348,643 5,922,738 1,550,136 3,528,399
----------- ----------- ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................... (207,208) (16,400) 220,944 (21,578) (93,986)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...... 248,079 27,135 27,135 48,713 142,699
----------- ----------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR............ $ 40,871 $ 10,735 $ 248,079 $ 27,135 $ 48,713
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid................................... $ 2,172,145 $ 1,880,873 $3,835,997 $2,054,106 $ 942,567
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
During the year ended December 31, 1996, the Company acquired the beneficial interests in certain installment
contracts and mortgages receivable previously sold in exchange for the assumption of certain hypothecation notes
payable, in the amount of $13,134,847.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
EPIC RESORTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(INFORMATION AS OF JUNE 30, 1998 AND 1997 IS UNAUDITED)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION:
Epic Resorts, Inc. (the Company) is a Delaware Subchapter S-corporation
which, together with its affiliates, was formed for the purpose of acquiring,
developing, marketing, selling and financing vacation ownership interests. The
Company has resorts located in Lake Havasu City, Arizona and Daytona Beach,
Florida, which entitle the buyer to use a fully-furnished vacation residence,
generally for a one-week period each year, in perpetuity (Vacation Ownership
Interests). The Company's principal operations consist of (i) acquiring,
developing and operating vacation ownership resort locations, (ii) marketing and
selling Vacation Ownership Interests in its resorts, and (iii) providing
customer financing to individual purchasers of Vacation Ownership Interests at
its resorts. The Company also generates revenue from the transient rentals of
resort accommodations.
The Company was incorporated in March 1997. Previously, all administrative
costs and expenses were charged directly to the resort properties or funded by
the sole stockholder. Upon formation, the sole stockholder was issued 100 shares
of common stock at a total cash cost of $10.00. Upon completion of the Offering
(see Note 13), the Company will own additional vacation ownership resort
properties and will incur additional administrative costs of operating the
business.
In October 1996, London Bridge Resort, Inc. (LBR), a Delaware S-corporation,
was formed to acquire, develop, market and sell vacation ownership interests at
Lake Havasu City, Arizona. LBR is a 122-unit vacation ownership mixed-use
development with a total of 6,222 Vacation Ownership Interests. In addition to
vacation ownership units, the resort contains several common area amenities and
retail and conference center facilities. LBR succeeded to a joint venture which
had commenced selling Vacation Ownership Interests at this resort during 1991.
The sole stockholder has maintained full ownership control of LBR since its
inception in 1990.
In March 1996, Daytona Beach Regency, Ltd. (DBR) was formed as a limited
partnership to acquire, develop, market and sell Vacation Ownership Interests at
a resort located in Daytona Beach, Florida. DBR is a 90-unit resort with a total
of 4,590 Vacation Ownership Interests as well as common area amenities. The
partnership began selling Vacation Ownership Interests in November 1996. The
partnership is owned 56% by the Company's sole stockholder as the sole 1%
general partner (through a corporate entity known as Resort Management, Inc.)
and through a 55% limited partnership interest (through a corporate entity known
as Resort Investments, Inc.). The remaining 44% limited partnership interests
are owned by two unrelated third parties. These limited partnership interests
will be purchased by the Company in connection with the anticipated acquisitions
(see Note 13). The general partner has personally guaranteed DBR's acquisition
and construction loans and receives a fee for acting as the general partner of
DBR.
The accompanying financial statements include the combined accounts of Epic
Resorts, Inc., London Bridge Resort, Inc. and Daytona Beach Regency, Ltd., which
together are doing business as Epic Resorts, Inc. All of the entities operate
under the common control of a sole stockholder. Epic Resorts, Inc. was formed in
March 1997 to facilitate future acquisitions and financing of additional
vacation ownership resorts. Accordingly, all of the net assets of the entities
under common control have been recorded at their historical cost and their
results of operations have been included in the combined results since the dates
of acquisition. Minority interest reflects the historical results of operations
pertaining to the 44% partnership interest in Daytona Beach Regency, Ltd. for
all periods presented. The Company expects to record the acquisition of this
minority interest under purchase accounting upon completion of the anticipated
transactions (see Note 13).
F-13
<PAGE>
EPIC RESORTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(INFORMATION AS OF JUNE 30, 1998 AND 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS AND CASH IN ESCROW
Cash and cash equivalents consist of cash, money market and all highly
liquid investments purchased with an original maturity of three months or less.
Funds received from purchasers which are held during the statutory rescission
period, or until all conditions are met for the sales transaction to be
recognized and title conveyed, are maintained in escrow accounts and are
reflected as restricted cash.
MORTGAGES RECEIVABLE
Mortgages receivable reflect the amounts due from Vacation Ownership
Interest purchasers who have accepted purchase money mortgage financing. The
obligations are evidenced by promissory notes and mortgages which are then
recorded in the state where the resort is located. The majority of these
installment contracts and mortgages receivable collateralize certain debt
obligations of the Company. The purchase money mortgages generally mature over
terms which approximate 84 months, with interest rates ranging from 9.9 percent
to 16.9 percent, per annum. The mortgages may be prepaid at any time, without
penalty.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides for estimated future losses related to uncollectible
receivables currently included in its installment contracts and mortgages
receivable portfolio. The provision is based upon management's estimate of
losses which may result because of cancellation of the related purchase money
mortgage contract.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful life of 5 to 7 years. Buildings
are amortized over their estimated useful life of 39 years.
DEFERRED FINANCING COSTS
Financing and loan origination fees incurred in connection with obtaining
certain acquisition and development funding have been capitalized and are being
amortized over the life of the indebtedness.
INCOME TAXES
No federal or state income taxes are payable by the Company, and none have
been provided for in the accompanying financial statements. The sole stockholder
is to include the Company's profits and losses in his tax returns.
STOCKHOLDER'S EQUITY
Stockholder's equity includes the capital stock, partners capital and
retained earnings of the Company, and its combined affiliates.
F-14
<PAGE>
EPIC RESORTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(INFORMATION AS OF JUNE 30, 1998 AND 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SALES RECOGNITION AND SELLING POLICIES
The Vacation Ownership Interest purchaser has the right to rescind or cancel
their purchase contract within a set period of time following contract execution
(generally seven to ten calendar days depending on the state in which the resort
is located), and is entitled to a full refund of their deposit. All funds
received by the Company are held in escrow, by an independent agent, until the
expiration of the rescission period and title is conveyed to the purchaser.
Sales, which are principally made through installment contracts, are not
recognized until the Company has received at least 10 percent of the total
purchase price, the statutory rescission period has elapsed, and certificates of
occupancy in the underlying units have been issued. Prior to sales recognition,
all payments received are accounted for as advance deposits. Closing costs
collected from the purchaser are used to offset a portion of the closing costs
incurred by the Company.
COST OF SALES AND INVENTORY
Cost of sales is computed by dividing the total project acquisition and
conversion costs associated with the Vacation Ownership Interests by the number
of interests to be sold, based upon fifty-one weeks of availability per
individual unit. Inventory, including all development costs, contents and
improvements, and capitalized interest is stated at cost, which is not more than
net realizable value. Interests transferred back to the Company attributable to
forfeiture, legal foreclosure, or reconveyance of a deed-in-lieu of legal
foreclosure, is returned to inventory at the original amount expensed as the
cost of sale. Marketing, advertising, commissions, and other selling costs are
expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure 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. MORTGAGES RECEIVABLE:
The Company provides financing to its customers, which is collateralized by
such purchaser's Vacation Ownership Interest. The mortgages receivable generally
bear interest at a rate between 9.9% and 16.9%, which remains fixed over the
term of the loan, which typically approximates seven years. The mortgages
receivable may be prepaid at any time without penalty. The weighted average rate
of interest on outstanding mortgages receivable is 14.9%, 14.4% and 14.2% as of
December 31, 1997, 1996 and 1995, respectively.
As of December 31, 1997, approximately 4.1% of the Company's consumer loans
were considered by the Company to be delinquent (scheduled payment past due 60
or more days).
F-15
<PAGE>
EPIC RESORTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(INFORMATION AS OF JUNE 30, 1998 AND 1997 IS UNAUDITED)
3. MORTGAGES RECEIVABLE: (CONTINUED)
The following schedule reflects the scheduled principal maturities of
mortgages receivable:
<TABLE>
<S> <C>
1998........................................................... $5,460,618
1999........................................................... 5,261,564
2000........................................................... 5,545,867
2001........................................................... 5,624,519
2002........................................................... 5,347,487
Thereafter..................................................... 10,657,856
----------
Total principal maturities of mortgages receivable............. 37,897,911
Less allowance for doubtful accounts........................... (750,061)
----------
Net principal maturities of mortgages receivable $37,147,850
----------
----------
</TABLE>
The activity in the mortgages receivable allowance for doubtful accounts is
as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED
MONTHS ENDED ---------------------------
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning of period...................... $ 750,061 $ 736,211 $ 692,514
Provision for doubtful accounts................... 697,943 1,391,467 492,057
Charge-offs....................................... (220,406) (1,377,617) (448,360)
------------- ------------ ------------
Balance, end of period............................ $1,227,598 $ 750,061 $ 736,211
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
4. INVENTORY:
Inventory and accumulated cost of vacation ownership interests consist of
the following as of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................................. $ 2,479,430 $ 2,479,430 $ 2,479,430
Development costs................................. 88,911,844 30,492,374 27,880,128
------------ ------------ ------------
91,391,274 32,971,804 30,359,558
Less: accumulated vacation ownership interest cost
of sales........................................ (25,364,926) (22,415,969) (15,332,303)
Less: resort property valuation allowance......... (2,740,617) (2,593,283) (2,286,168)
------------ ------------ ------------
$ 63,285,731 $ 7,962,552 $ 12,741,087
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-16
<PAGE>
EPIC RESORTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(INFORMATION AS OF JUNE 30, 1998 AND 1997 IS UNAUDITED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of:
<TABLE>
<CAPTION>
DECEMBER DECEMBER
JUNE 30, 31, 31,
1998 1997 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Land.................................................. $2,913,029 $2,913,029 $2,909,304
Building and improvements............................. 9,246,043 8,806,349 7,880,795
Furniture, fixtures and equipment..................... 1,974,434 1,804,389 772,187
---------- ---------- ----------
14,133,506 13,523,767 11,562,286
Less- Accumulated depreciation........................ 4,031,379 3,552,379 3,133,022
---------- ---------- ----------
$10,102,127 $9,971,388 $8,429,264
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
6. DEFERRED FINANCING COSTS:
Deferred financing costs and accumulated amortization consist of the
following as of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred financing costs.......................... $ 1,902,285 $1,082,524 $ 845,524
Less- Accumulated amortization.................... 499,626 405,365 231,760
----------- ------------ ------------
$ 1,402,659 $ 677,159 $ 613,764
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
F-17
<PAGE>
EPIC RESORTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(INFORMATION AS OF JUNE 30, 1998 AND 1997 IS UNAUDITED)
7. NOTES PAYABLE:
Notes payable consist of the following as of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Revolving line of credit not to exceed $23 million in the aggregate
(limited by eligible collateral), with interest payable monthly at
prime plus 2.5% (11.0% at June 30, 1998 and December 31, 1997 and
10.75% at December 31, 1996), payable in monthly installments of
principal and interest equal to 100% of all proceeds of the
receivables collateral collected during the month but not less
than the accrued interest, with any remaining principal due seven
years after the date of the last advance related to mortgages
receivable, collateralized by specific mortgages receivable....... $ 21,312,684 $ 19,445,949 $ 13,828,009
Revolving line of credit not to exceed $15 million in the aggregate
(limited by eligible collateral), with interest payable monthly at
LIBOR plus 5.5% (11.16%, 11.22% and 11.0% at June 30, 1998,
December 31, 1997, and 1996, respectively), payable in monthly
installments of principal and interest equal to 100% of all
proceeds of the receivables collateral collected during the month
but not less than the accrued interest, with any remaining
principal due October 2004, collateralized by specific mortgages
receivable........................................................ 11,290,278 8,360,703 422,659
Revolving line of credit not to exceed $7.5 million in the aggregate
(limited by eligible collateral), with interest payable monthly at
prime plus 2.5% (11.0% at June 30, 1998 and December 31, 1997 and
10.75% at December 31, 1996), payable in monthly installments of
principal and interest equal to 100% of all proceeds of the
receivables collateral collected during the month but not less
than the accrued interest, with any remaining principal due
September 2000, collateralized by specific mortgages receivable... 1,756,800 2,433,333 4,230,333
Construction loan payable not to exceed $9.5 million, with interest
payable at prime plus 2.75% (11.25% at June 30, 1998 and December
31, 1997 and 11.0% at December 31, 1996), principal payable with a
portion (24%) of the proceeds received on the sale of Vacation
Ownership Interests, collateralized by assets and unsold Vacation
Ownership Interests, due October 1999............................. 2,274,867 3,593,197 7,071,365
</TABLE>
F-18
<PAGE>
EPIC RESORTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(INFORMATION AS OF JUNE 30, 1998 AND 1997 IS UNAUDITED)
7. NOTES PAYABLE: (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Construction loan payable not to exceed $3.9 million, with interest
payable at LIBOR plus 6% (11.66%, 11.72% and 11.5% at June 30,
1998, December 31, 1997 and 1996, respectively), principal payable
with a portion (24%) of the proceeds received on the sale of
Vacation Ownership Interests, collateralized by assets and unsold
Vacation Ownership Interests, due April, 2000..................... 3,223,190 2,605,453 1,175,822
Acquisition loan payable not to exceed $3.15 million, with interest
payable at LIBOR plus 6% (11.66%, 11.72% and 11.5% at June 30,
1998, December 31, 1997 and 1996, respectively), principal payable
with a portion of received on the sale of Vacation Ownership
Interests, collateralized by assets and unsold vacation ownership
interests, due April, 2000........................................ 1,493,202 2,042,751 3,101,952
Equipment loan payable not to exceed $336,297, with interest payable
at a fixed rate of 12.75%, payable in 48 equal monthly
installments of principal and interest, collateralized by
furniture and equipment, due December 1999........................ 139,999 182,380 265,997
Equipment loan payable with interest payable at a fixed rate of
13.05%, payable in 48 equal monthly installments of principal and
interest, collateralized by furniture and equipment, due April
2001.............................................................. 752,890 314,403 --
Other note payable.................................................. 3,912,545 3,912,545 3,912,545
------------- ------------- -------------
Total notes payable................................................. $ 46,156,455 $ 42,890,714 $ 34,008,682
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Company anticipates paying off all outstanding indebtedness upon
completion of the Offering, as described in Note 13.
In 1995, the Company refinanced a mortgage notes payable with an outstanding
balance of $12,675,995 with a lender. The Company accounted for this debt
restructuring in accordance with Statement of Financial Accounting Standards No.
15, "Accounting for Debtors and Creditors for Troubled Debt Restructurings." As
a result, an extraordinary gain on debt forgiveness of $5,077,456 for the year
ended December 31, 1996 was recorded in the accompanying combined financial
statements.
8. RELATED PARTY TRANSACTIONS:
In October 1990, the Company obtained a nonrecourse line of credit not to
exceed $3,412,545 from American Realty Group, Inc. an affiliate of the sole
stockholder, all of which remains outstanding as of
F-19
<PAGE>
EPIC RESORTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(INFORMATION AS OF JUNE 30, 1998 AND 1997 IS UNAUDITED)
8. RELATED PARTY TRANSACTIONS: (CONTINUED)
June 30, 1998 and December 31, 1997. The loan is collateralized by an assignment
of a second mortgage on the Company's property. This loan is subordinate to the
claims of the Company's construction and equipment loans and shall not become
payable until these notes have been paid in full. Interest accrued at a rate of
8.5% per annum up to a maximum amount of $500,000. Upon reaching $500,000 in
1995, the note became noninterest bearing and the accrued liability was
capitalized into the loan's principal. During 1997, no interest was accrued
under the terms of this note. The balance on this note was $3,912,545 as of
December 31, 1997 and 1996.
In the normal course of operations, an affiliate of the sole stockholder
provides the Company with administrative services including payroll and
insurance processing. No fee was paid in 1997 related to these services.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases commercial real estate to various retail operators, for
the operation of a shopping mall, under various lease agreements that expire
through September 2002. Future minimum rental income expected to be recognized
from noncancelable operating leases on a straight-line basis as of December 31,
1997, is as follows:
Year ending December 31
<TABLE>
<S> <C>
1998.............................................. $ 424,607
1999.............................................. 350,316
2000.............................................. 200,448
2001.............................................. 65,164
2002.............................................. 24,600
----------
Total future minimum rentals...................... $1,065,135
----------
----------
</TABLE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments",
requires that the Company disclose estimated fair value for its financial
instruments. The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance
sheets for cash and cash equivalents approximate their fair value because of the
short term nature of these instruments.
MORTGAGES RECEIVABLE: The carrying amounts reported in the balance sheets
for mortgages receivable approximate their fair value because the weighted
average interest rate on the portfolio of mortgages receivable approximates
current interest rates to be received on similar current mortgages receivable.
NOTES PAYABLE: The carrying amounts reported in the balance sheets for
notes payable approximate their fair value because the interest rates on these
instruments approximate current interest rates charged on similar current
borrowings.
F-20
<PAGE>
EPIC RESORTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(INFORMATION AS OF JUNE 30, 1998 AND 1997 IS UNAUDITED)
11. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in one industry segment, which includes the
development, acquisition, marketing, selling, financing and management of
vacation ownership resorts. The Company does not operate outside of the United
States. The Company's customers are not concentrated in any specific geographic
region and no single customer accounts for a significant amount of the Company's
sales.
12. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED:
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company is in the process of
reassessing current business segment reporting to determine if changes in
reporting will be required upon adoption of this new standard. Any required
disclosures prescribed by SFAS 131 will first be adopted in the Company's 1998
annual financial statements.
In March 1998, the Emerging Issues Task Force ("EITF") issued 97-11,
"Accounting for Internal Costs Relating to Real Estate Property Acquisition".
The EITF concluded that internal costs related to the acquisition of operating
properties should be expensed as incurred. This EITF issue will not impact the
Company as they have not previously capitalized internal costs associated with
acquisitions.
13. SUBSEQUENT EVENTS:
In May 1998, the Company entered into agreements to purchase four resorts
located in Palm Springs, California; Hilton Head, South Carolina; Scottsdale,
Arizona; and Las Vegas, Nevada, all of which will be converted into vacation
ownership resorts. The purchase agreements are subject to normal contingencies
including the Company's ability to obtain financing.
On June 26, 1998, Epic Resorts, LLC, a Delaware limited liability company,
was formed to merge with the Company. This merger was completed on July 1, 1998.
On July 8, 1998, the Company issued $130 million aggregate principal amount
of Senior Secured Notes due June, 2005 (the "Notes") in a private placement
pursuant to Rule 144A of the Securities Act of 1933 (the "Offering"). The
Company used the net proceeds of the Offering as follows: (i) $66.5 million to
finance the acquisition of the four new vacation ownership resort properties
discussed above; (ii) $25.9 million to repay the Company's existing notes
payable, including prepayment penalties of $1.6 million; (iii) $16.9 million of
required escrow of first year interest on the Notes; (iv) $7.2 million of fees
and expenses relating to the Offering and the acquisitions; and (v) $13.5
million for working capital and general corporate purposes, including future
acquisitions the Company may pursue.
The Company has agreed to file a registration statement relating to an
exchange offer pursuant to which another series of notes of the Company,
containing substantially the same terms as the Notes, would be offered in
exchange for the Notes.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of London Bridge Resort, Inc.:
We have audited the accompanying balance sheets of London Bridge Resort,
Inc. (a Delaware S-corporation) as of December 31, 1997 and 1996, and the
related statements of income, stockholder's equity and cash flows for each of
the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of London Bridge Resort, Inc.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania,
May 22, 1998
F-22
<PAGE>
LONDON BRIDGE RESORT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 31,
1997 1996
----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.............................. $ 211,672 $ 540
Cash in escrow......................................... 25,713 55,615
Mortgages receivable, net of allowance of $374,863 and
$711,754 as of December 31, 1997 and 1996
respectively......................................... 26,182,690 20,531,163
Inventory.............................................. 5,494,335 9,259,476
Property and equipment, net............................ 7,833,116 7,676,233
Deferred financing costs, net.......................... 521,374 561,978
Other assets........................................... 126,031 82,023
-
----------- -----------
Total assets..................................... $40,394,931 $38,167,028
-
-
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable....................................... $ 763,272 $ 636,569
Accrued expenses....................................... 276,661 293,337
Due to Homeowners Association.......................... 56,408 59,288
Advance deposits....................................... 25,713 55,615
Notes payable.......................................... 29,881,807 29,308,249
-
----------- -----------
Total liabilities................................ 31,003,861 30,353,058
-
----------- -----------
Commitments and contingencies (Note 9)
Stockholder's Equity:
Common Stock ($100 par value, 1,000 shares
authorized, 100 shares outstanding)................ 10,000 10,000
Additional paid-in capital........................... 10,211,860 10,211,860
Accumulated deficit.................................. (830,790) (2,407,890)
-
----------- -----------
Total stockholder's equity....................... 9,391,070 7,813,970
-
----------- -----------
Total liabilities and stockholder's equity....... $40,394,931 $38,167,028
-
-
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
LONDON BRIDGE RESORT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Sales of vacation ownership interests.............. $15,540,895 $10,032,151 $ 8,289,785
Resort operations.................................. 5,650,046 5,532,699 5,029,222
Interest income.................................... 3,007,348 1,207,977 703,813
----------- ----------- -----------
24,198,289 16,772,827 14,022,820
----------- ----------- -----------
Costs and expenses:
Cost of sales of vacation ownership interests...... 4,535,563 3,429,831 3,153,516
Resort operations.................................. 3,648,887 4,028,285 4,103,109
Selling and marketing costs........................ 6,081,677 4,029,674 3,451,965
General and administrative......................... 1,681,332 1,493,036 1,322,263
Provision for doubtful accounts.................... 721,685 467,599 473,539
Depreciation and amortization...................... 504,379 618,114 643,941
Financing and closing costs........................ 454,594 324,780 460,242
Interest expense................................... 2,963,633 1,873,101 894,464
----------- ----------- -----------
20,591,750 16,264,420 14,503,039
----------- ----------- -----------
Income (loss) before extraordinary item................ 3,606,539 508,407 (480,219)
Extraordinary gain on settlement of debt (Note 7)...... -- -- 5,077,456
----------- ----------- -----------
Net income............................................. $ 3,606,539 $ 508,407 $ 4,597,237
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
LONDON BRIDGE RESORT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDER'S
STOCK CAPITAL (DEFICIT) EQUITY
--------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995................................ $ -- $ -- $ 5,315,998 $ 5,315,998
Distributions......................................... -- -- (1,150,664) (1,150,664)
Net income............................................ -- -- 4,597,237 4,597,237
--------- ------------- -------------- -------------
BALANCE, DECEMBER 31, 1995.............................. -- -- 8,762,571 8,762,571
Corporate formation of London Bridge Resort, Inc. and
liquidation of Queens Bay Joint Venture............. 10,000 10,211,860 (10,221,860) --
Distributions......................................... -- -- (1,457,008) (1,457,008)
Net income............................................ -- -- 508,407 508,407
--------- ------------- -------------- -------------
BALANCE, DECEMBER 31, 1996.............................. 10,000 10,211,860 (2,407,890) 7,813,970
Distributions......................................... -- -- (2,029,439) (2,029,439)
Net income............................................ -- -- 3,606,539 3,606,539
--------- ------------- -------------- -------------
BALANCE, DECEMBER 31, 1997.............................. $ 10,000 $ 10,211,860 $ (830,790) $ 9,391,070
--------- ------------- -------------- -------------
--------- ------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
LONDON BRIDGE RESORT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 3,606,539 $ 508,407 $ 4,597,237
Adjustments to reconcile net income to net cash provided by
(used in) operating activities--
Depreciation and amortization................................. 504,379 618,114 643,941
Amortization of financing fees................................ 138,604 126,988 72,881
Provision for doubtful accounts............................... 721,685 467,599 473,539
Extraordinary gain on settlement of debt...................... -- -- (5,077,456)
Change in assets and liabilities--
Mortgages receivable........................................ (6,373,212) (222,968) (6,323,252)
Inventory................................................... 3,765,141 2,772,352 2,588,253
Cash in escrow.............................................. 29,902 (5,021) (20,812)
Other assets................................................ (44,008) 18,606 54,667
Accounts payable............................................ 126,700 153,859 114,513
Accrued expenses............................................ (16,676) 100,487 244,015
Due to Association.......................................... (2,880) 8,694 --
Advance deposits............................................ (29,902) 55,615 (9,585)
-------------- ------------- --------------
Net cash provided by (used in) operating activities....... 2,426,272 4,602,732 (2,642,059)
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............................. (661,262) (555,273) (980,326)
-------------- ------------- --------------
Net cash used in investing activities..................... (661,262) (555,273) (980,326)
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable..................................... 12,442,169 2,745,497 15,845,186
Payments on notes payable....................................... (11,868,608) (5,352,327) (10,769,873)
Payment of deferred financing costs............................. (98,000) (31,794) (396,250)
Distributions................................................... (2,029,439) (1,457,008) (1,150,664)
-------------- ------------- --------------
Net cash provided by (used in) financing activities....... (1,553,878) (4,095,632) 3,528,399
-------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 211,132 (48,173) (93,986)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................... 540 48,713 142,699
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR............................ $ 211,672 $ 540 $ 48,713
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
LONDON BRIDGE RESORT, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid was $2,856,003, $1,815,292 and $942,567 for the years ended
December 31, 1997, 1996 and 1995, respectively.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1996, the Company adopted a corporate
structure and liquidated its previous joint venture form. Common stock of
$10,000 and additional paid-in capital of $10,211,860 was issued in exchange for
the net assets of the joint venture.
During the year ended December 31, 1996, the Company acquired the beneficial
interests in certain installment contracts and mortgages receivable previously
sold by the former joint venture, in exchange for the assumption of certain
hypothecation notes payable, in the amount of $13,134,847.
F-27
<PAGE>
LONDON BRIDGE RESORT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. NATURE OF BUSINESS:
London Bridge Resort, Inc. (the Company) is a Delaware S-corporation formed
for the purpose of acquiring, developing, marketing and selling vacation
ownership interests in certain units of the London Bridge Resort, located in
Lake Havasu City, Arizona. The Company generates revenues from the sale and
financing of vacation ownership interests in its resort, which entitle the buyer
to use a fully-furnished vacation residence, generally for a one-week period
each year, in perpetuity (Vacation Ownership Interests). The Company also
generates revenue from the transient rentals of resort accommodations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS AND CASH IN ESCROW
Cash and cash equivalents consist of cash and all highly liquid investments
purchased with an original maturity of three months or less. Funds received from
purchasers which are held during the statutory rescission period, or until all
conditions are met for the sales transaction to be recognized and title
conveyed, are maintained in escrow accounts and are reflected as restricted
cash.
MORTGAGES RECEIVABLE
Mortgages receivable reflect the amounts due from Vacation Ownership
Interest purchasers who have accepted purchase money mortgage financing. The
obligations are evidenced by promissory notes and mortgages which are then
recorded in the State of Arizona. The majority of these installment contracts
and mortgages receivable collateralize certain debt obligations of the Company.
The purchase money mortgages generally mature over terms which approximate 84
months, with interest rates ranging from 9.9 percent to 16.9 percent, per annum.
The mortgages may be prepaid at any time, without penalty.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides for estimated future losses related to uncollectible
receivables currently included in its installment contracts and mortgages
receivable portfolio. The provision is based upon management's estimate of
losses which may result because of cancellation of the related purchase money
mortgage contract.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful life of 5 to 7 years. Buildings
are amortized over an estimated useful life of 39 years.
DEFERRED FINANCING COSTS
Financing and loan origination fees incurred in connection with obtaining
certain acquisition and development funding have been capitalized and are being
amortized over the life of the respective loans.
INCOME TAXES
No federal or state income taxes are payable by the Company, and none have
been provided for in the accompanying financial statements. The sole stockholder
is to include the Company's profits and losses in his tax returns.
F-28
<PAGE>
LONDON BRIDGE RESORT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SALES RECOGNITION AND SELLING POLICIES
The Vacation Ownership Interest purchaser has the right to rescind or cancel
their purchase contract within seven calendar days from contract execution, and
is entitled to a full refund of deposit. All funds received by the Company are
held in escrow, by an independent agent, until the expiration of the rescission
period and title is conveyed to the purchaser. Sales, which are principally made
through installment contracts, are not recognized until the Company has received
at least 10 percent of the total purchase price, the statutory rescission period
has elapsed, and certificates of occupancy in the underlying units have been
issued. Prior to sales recognition, all payments received are accounted for as
advance deposits. Closing costs collected from the purchaser are used to offset
a portion of the closing costs incurred by the Company.
COST OF SALES AND INVENTORY
Cost of sales is computed by dividing the total project acquisition and
conversion costs associated with the Vacation Ownership Interests by the number
of interests to be sold, based upon fifty-one weeks of availability per
individual unit. Inventory, including all development costs, contents and
improvements, and capitalized interest is stated at cost, which is not more than
net realizable value. Interests transferred back to the Company attributable to
forfeiture, legal foreclosure, or reconveyance of a deed-in-lieu of legal
foreclosure, is returned to inventory at the original amount expensed as the
cost of sale. Marketing, advertising, commissions, and other selling costs are
expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure 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. MORTGAGES RECEIVABLE:
The Company provides financing to its customers, which is collateralized by
their Vacation Ownership Interest. The mortgages receivable generally bear
interest at a rate between 9.9% and 16.9%, which remain fixed over the term of
the loan, which typically approximates seven years. The mortgages receivable may
be prepaid at any time without penalty. The weighted average rate of interest on
outstanding mortgages receivable is 14.5%, 14.3%, and 14.2% as of December 31,
1997, 1996, and 1995.
As of December 31, 1997, approximately 3.8% of the Company's consumer loans
were considered by the Company to be delinquent (scheduled payment past due 60
or more days).
F-29
<PAGE>
LONDON BRIDGE RESORT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
3. MORTGAGES RECEIVABLE: (CONTINUED)
The following schedule reflects the scheduled principal maturities of
mortgages receivables:
<TABLE>
<S> <C>
1998.............................................. $ 4,194,079
1999.............................................. 4,099,806
2000.............................................. 4,195,450
2001.............................................. 4,089,514
2002.............................................. 3,584,562
Thereafter........................................ 6,394,142
-----------
Total principal maturities of mortgages
receivable........................................ 26,557,553
Less allowance for doubtful accounts.............. 374,863
-----------
Net principal maturities of mortgages
receivable........................................ $26,182,690
-----------
-----------
</TABLE>
The activity in the mortgages receivable allowance for doubtful accounts for
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Balance, beginning of period...................................... $ 711,754 $ 692,514
Provision for doubtful accounts................................... 721,685 467,600
Charge-offs....................................................... (1,058,576) (448,360)
------------- -----------
Balance, end of period............................................ $ 374,863 $ 711,754
------------- -----------
------------- -----------
</TABLE>
4. INVENTORY:
Inventory and accumulated cost of Vacation Ownership Interests consist of
the following as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Land.......................................................... $ 2,479,430 $ 2,479,430
Development costs............................................. 24,946,160 24,226,747
-------------- --------------
27,425,590 26,706,177
Less: accumulated Vacation Ownership Interest cost of sales... (19,666,789) (15,224,077)
Less: resort property valuation allowance..................... (2,264,466) (2,222,624)
-------------- --------------
$ 5,494,335 $ 9,259,476
-------------- --------------
-------------- --------------
</TABLE>
F-30
<PAGE>
LONDON BRIDGE RESORT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Land............................................................. $ 2,913,029 $ 2,909,304
Building and improvements........................................ 7,085,148 7,004,721
Furniture, fixtures and equipment................................ 1,131,919 772,187
------------- ------------
11,130,096 10,686,212
Less--Accumulated depreciation................................... 3,296,980 3,009,979
------------- ------------
$ 7,833,116 $ 7,676,233
------------- ------------
------------- ------------
</TABLE>
6. DEFERRED FINANCING COSTS:
Deferred financing costs consist of the following as of December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred financing costs.............................................. $ 885,524 $ 787,524
Less-Accumulated amortization......................................... 364,150 225,546
---------- ----------
$ 521,374 $ 561,978
---------- ----------
---------- ----------
</TABLE>
F-31
<PAGE>
LONDON BRIDGE RESORT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
7. NOTES PAYABLE:
Notes payable consist of the following as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Revolving line of credit not to exceed $23 million in the
aggregate (limited by eligible collateral), with interest
payable monthly at prime plus 2.5% (11.0% and 10.75% at
December 31, 1997 and 1996, respectively), payable in monthly
installments of principal and interest equal to 100% of all
proceeds of the receivables collateral collected during the
month but not less than the accrued interest, with any
remaining principal due seven years after the date of the
last advance related to mortgages receivable, collateralized
by specific mortgages receivable............................. $ 19,445,949 $ 13,828,009
Revolving line of credit not to exceed $7.5 million in the
aggregate (limited by eligible collateral), with interest
payable monthly at prime plus 2.5% (11.0% and 10.75% at
December 31, 1997 and 1996, respectively), payable in monthly
installments of principal and interest equal to 100% of all
proceeds of the receivables collateral collected during the
month but not less than the accrued interest, with any
remaining principal due September 2000, collateralized by
specific mortgages receivable................................ 2,433,333 4,230,333
Construction loan payable not to exceed $9.5 million, with
interest payable at prime plus 2.75% (11.25% and 11.0% at
December 31, 1997 and 1996, respectively), principal payable
with a portion (24%) of the proceeds received on the sale of
Vacation Ownership Interests, collateralized by assets and
unsold Vacation Ownership Interests due October 1999......... 3,593,197 7,071,365
Equipment loan payable not to exceed $336,297, with interest
payable at a fixed rate of 12.75%, payable in 48 equal
monthly installments of principal and interest,
collateralized by furniture and equipment, due December
1999......................................................... 182,380 265,997
Equipment loan payable with interest payable at a fixed rate of
13.05%, payable in 48 equal monthly installments of principal
and interest, collateralized by furniture and equipment, due
April 2000................................................... 314,403 --
Other note payable............................................. 3,912,545 3,912,545
------------- -------------
Total notes payable............................................ $ 29,881,807 $ 29,308,249
------------- -------------
------------- -------------
</TABLE>
F-32
<PAGE>
LONDON BRIDGE RESORT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
7. NOTES PAYABLE: (CONTINUED)
In 1995, the Company refinanced a mortgage notes payable with an outstanding
balance of $12,675,995 with a lender. The Company accounted for this debt
restructuring in accordance with Statement of Financial Accounting Standards No.
15, "Accounting for Debtors and Creditors for Troubled Debt Restructurings." As
a result, an extraordinary gain on debt forgiveness of $5,077,456 for the year
ended December 31, 1996 was recorded in the accompanying financial statements.
8. RELATED PARTY TRANSACTIONS:
In October 1990, the Company obtained a nonrecourse line of credit not to
exceed $3,412,545 from American Realty Group Inc., an affliate of the sole
stockholder, all of which remains outstanding as of December 31, 1997. The loan
is collateralized by an assignment of a second mortgage on the Company's
property. This loan is subordinate to the claims of the Company's construction
and equipment loans and shall not become payable until these notes have been
paid in full. Interest accrued at a rate of 8.5% per annum up to a maximum
amount of $500,000. Upon reaching $500,000 in 1995, the note became noninterest
bearing and the accrued liability was capitalized into the loan's principal.
During 1997, no interest was accrued under the terms of this note. The balance
on this note was $3,912,545 as of December 31, 1997 and 1996.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases commercial real estate to various retail operators, for
the operation of a shopping mall, under various lease agreements that expire
through September 2002. Future minimum rental income expected to be recognized
from noncancelable operating leases on a straight-line basis as of December 31,
1997, is as follows:
Year ending December 31
<TABLE>
<S> <C>
1998........................................................... $ 424,607
1999........................................................... 350,316
2000........................................................... 200,448
2001........................................................... 65,164
2002........................................................... 24,600
----------
Total future minimum rentals................................... $1,065,135
----------
----------
</TABLE>
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Daytona Beach Regency, Ltd.:
We have audited the accompanying balance sheets of Daytona Beach Regency,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996, and the
related statements of income, partners' equity (deficit) and cash flows for the
year ended December 31, 1997 and for the period from inception (April 8, 1996)
to December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Daytona Beach Regency, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and for the period from inception
(April 8, 1996) to December 31, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania,
May 22, 1998
F-34
<PAGE>
DAYTONA BEACH REGENCY, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 1997 31, 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents......................... $ 36,397 $ 26,595
Cash in escrow.................................... 27,429 83,488
Mortgages receivable, net of allowance of $375,198
and $24,457 at December 31, 1997 and 1996,
respectively.................................... 10,965,160 464,685
Inventory......................................... 2,468,217 3,481,611
Property and equipment, net....................... 2,138,272 753,031
Deferred financing costs, net..................... 155,785 51,786
Other assets...................................... 101,973 5,646
----------- -----------
Total assets................................ $15,893,233 $4,866,842
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Accounts payable.................................. $ 220,432 $ 83,357
Accrued expenses.................................. 244,074 121,385
Advance deposits.................................. 27,429 83,488
Notes payable..................................... 13,008,907 4,700,433
----------- -----------
Total liabilities........................... 13,500,842 4,988,663
----------- -----------
Commitments and contingencies -- --
Partners' equity (deficit)........................ 2,392,391 (121,821 )
----------- -----------
Total liabilities and partners' equity
(deficit)................................. $15,893,233 $4,866,842
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
DAYTONA BEACH REGENCY, LTD.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE INCEPTION
YEAR ENDED (APRIL 8,
DECEMBER 1996) TO
31, DECEMBER
1997 31, 1996
----------- -----------
<S> <C> <C>
Revenue:
Sales of vacation ownership interests......... $14,562,666 $ 551,376
Resort operations............................. 1,001,506 541,730
Interest income............................... 528,227 --
----------- -----------
16,092,399 1,093,106
----------- -----------
Costs and expenses:
Cost of sales of vacation ownership
interests................................... 2,801,298 114,022
Resort operations............................. 950,172 775,571
Selling and marketing costs................... 5,492,070 277,028
General and administrative.................... 904,082 520,979
Provision for doubtful accounts............... 669,782 24,457
Depreciation and amortization................. 266,951 180,790
Financing and closing costs................... 413,679 --
Interest expense.............................. 784,430 269,810
----------- -----------
12,282,464 2,162,657
----------- -----------
Net income (loss)................................. $ 3,809,935 $(1,069,551)
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
DAYTONA BEACH REGENCY, LTD.
STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD
FROM INCEPTION (APRIL 8, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
LIMITED PARTNERS
GENERAL ---------------------------------------
PARTNER CLASS B
------------ CLASS A --------------------------
RESORTS ----------- RESORTS REGENCY
MANAGEMENT, DONALD F. INVESTMENT, RESORTS,
INC. LEWIS INC. INC. TOTAL
------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE,
APRIL 8, 1996............................ $ 9,478 $ 132,682 $ 521,251 $ 284,319 $ 947,730
Net loss................................. (10,696) (149,737) (588,253) (320,865) (1,069,551)
------------ ----------- ------------ ------------ -------------
BALANCE,
DECEMBER 31, 1996........................ $ (1,218) $ (17,055) $ (67,002) $ (36,546) $ (121,821)
Distributions............................ (12,269) (222,183) (693,198) (368,073) (1,295,723)
Net income............................... 38,099 533,391 2,095,464 1,142,981 3,809,935
------------ ----------- ------------ ------------ -------------
BALANCE,
DECEMBER 31, 1997........................ $ 24,612 $ 294,153 $ 1,335,264 $ 738,362 $ 2,392,391
------------ ----------- ------------ ------------ -------------
------------ ----------- ------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
DAYTONA BEACH REGENCY, LTD.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED FROM INCEPTION
DECEMBER 31, (APRIL 8, 1996) TO
1997 DECEMBER 31, 1996
------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 3,809,935 $(1,069,551)
Adjustments to reconcile net income (loss) to
net cash used in operating activities-
Depreciation and amortization................. 266,951 180,790
Amortization of financing fees................ 35,001 6,214
Provision for doubtful accounts............... 669,782 24,457
Change in assets and liabilities--
Cash in escrow.............................. 56,059 (83,488)
Mortgages receivable........................ (11,170,257) (489,142)
Inventory................................... 1,013,394 (3,481,611)
Other assets................................ (96,327) (5,646)
Accounts payable............................ 137,075 83,357
Accrued expenses............................ 122,689 121,385
Advance deposits............................ (56,059) 83,488
------------ ------------------
Net cash used in operating activities..... (5,211,757) (4,629,747)
------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. (1,652,192) (933,821)
------------ ------------------
Net cash used in investing activities..... (1,652,192) (933,821)
------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable..................... 12,404,823 4,820,646
Payments on notes payable....................... (4,096,349) (120,213)
Payment of deferred financing costs............. (139,000) (58,000)
Distributions................................... (1,295,723) --
Contributions................................... -- 947,730
------------ ------------------
Net cash provided by financing
activities.............................. 6,873,751 5,590,163
------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 9,802 26,595
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...... 26,595 --
------------ ------------------
CASH AND CASH EQUIVALENTS, END OF YEAR............ $ 36,397 $ 26,595
------------ ------------------
------------ ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid................................... $ 979,994 $ 238,814
------------ ------------------
------------ ------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
DAYTONA BEACH REGENCY, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. NATURE OF BUSINESS:
Daytona Beach Regency, Ltd. (the Partnership) is a Florida limited
partnership formed for the purpose of acquiring, developing, marketing and
selling vacation ownership interests in certain units of the Daytona Beach
Regency, located in Daytona Beach, Florida. The Partnership generates revenues
from the sale and financing of vacation ownership interests in its resort, which
entitle the buyer to use a fully-furnished vacation residence, generally for a
one-week period each year, in perpetuity (Vacation Ownership Interests). The
Partnership also generates revenue from the transient rentals of resort
accommodations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS CASH IN ESCROW
Cash and cash equivalents consist of cash and all highly liquid investments
purchased with an original maturity of three months or less. Funds received from
purchasers which are held during the statutory rescission period, or until all
conditions are met for the sales transaction to be recognized and title
conveyed, are maintained in escrow accounts and are reflected as restricted
cash.
MORTGAGES RECEIVABLE
Mortgages receivable reflect the amounts due from Vacation Ownership
Interest purchasers who have accepted purchase money mortgage financing. The
obligations are evidenced by promissory notes and mortgages which are then
recorded in the State of Florida. The majority of these installment contracts
and mortgages receivable collateralize certain debt obligations of the
Partnership. The purchase money mortgages generally mature over terms which
approximate 84 months, with interest rates ranging from 9.9 percent to 16.9
percent, per annum. The mortgages may be prepaid at any time, without penalty.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Partnership provides for estimated future losses related to
uncollectible receivables currently included in its installment contracts and
mortgages receivable portfolio. The provision is estimated based upon
management's estimate of losses which may result because of cancellation of the
related purchase money mortgage contract.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful life of 5 to 7 years. Buildings
are amortized over the estimated useful life of 39 years.
DEFERRED FINANCING COSTS
Financing and loan origination fees incurred in connection with obtaining
certain acquisition and development funding have been capitalized and are being
amortized over the life of the of the respective loans.
F-39
<PAGE>
DAYTONA BEACH REGENCY, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
No federal or state income taxes are payable by the Partnership, and none
have been provided for in the accompanying financial statements. The partners
are to include their respective share of the Partnership's profits or losses in
their tax returns. The Partnership's tax returns and the amount of allocable
Partnership profits and losses are subject to examination by federal and state
taxing authorities. If such examinations result in changes to Partnership
profits or losses, the tax liability of the partners would be changed
accordingly.
SALES RECOGNITION AND SELLING POLICIES
The Vacation Ownership Interest purchaser has the right to rescind or cancel
their purchase contract within 10 calendar days from contract execution, and is
entitled to a full refund of deposit. All funds received by the Partnership are
held in escrow, by an independent agent, until the expiration of the rescission
period and title is conveyed to the purchaser. Sales, which are principally made
through installment contracts, are not recognized until the Partnership has
received at least 10 percent of the total purchase price, the statutory
rescission period has elapsed, and certificates of occupancy in the underlying
units have been issued. Prior to sales recognition, all payments received are
accounted for as advance deposits. Closing costs collected from the purchaser
are used to offset a portion of the closing costs incurred by the Partnership.
COST OF SALES AND INVENTORY
Cost of sales is computed by dividing the total project acquisition and
conversion costs associated with the Vacation Ownership Interests by the number
of interests to be sold, based upon fifty-one weeks of availability per
individual unit. Inventory, including all development costs, contents and
improvements, and capitalized interest is stated at cost, which is not more than
net realizable value. Interests transferred back to the Partnership attributable
to forfeiture, legal foreclosure, or reconveyance of a deed-in-lieu of legal
foreclosure, is returned to inventory at the original amount expensed as the
cost of sale. Marketing, advertising, commissions, and other selling costs are
expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure 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. MORTGAGES RECEIVABLE:
The Partnership provides financing to its customers which is collateralized
by their Vacation Ownership Interest. The mortgages receivable generally bear
interest at a rate between 9.9% and 16.9% which remain fixed over the term of
the loan, which typically approximates seven years. The mortgages receivable may
be prepaid at any time without penalty. The weighted average rate of interest on
outstanding mortgages receivable is 16.1% and 16.3% as of December 31, 1997 and
1996, respectively.
F-40
<PAGE>
DAYTONA BEACH REGENCY, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
3. MORTGAGES RECEIVABLE: (CONTINUED)
As of December 31, 1997, approximately 4.7% of the Partnership's consumer
loans were considered by the Partnership to be delinquent (scheduled payment
past due 60 or more days).
The following schedule reflects the scheduled principal maturities of
mortgages receivables:
<TABLE>
<S> <C>
1998.............................................. $ 1,266,539
1999.............................................. 1,161,758
2000.............................................. 1,350,417
2001.............................................. 1,535,005
2002.............................................. 1,762,925
Thereafter........................................ 4,263,714
-----------
Total principal maturities of mortgages
receivable...................................... 11,340,358
Less allowance for doubtful accounts.............. 375,198
-----------
Net principal maturities of mortgages
receivable...................................... $10,965,160
-----------
-----------
</TABLE>
The activity in the mortgages receivable allowance for doubtful accounts for
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ----------
<S> <C> <C>
Balance, beginning of period........................................ $ 24,457 $ --
Provision for doubtful accounts..................................... 669,782 24,457
Charge-offs......................................................... (319,041) --
------------- ----------
Balance, end of period.............................................. $ 375,198 $ 24,457
------------- ----------
------------- ----------
</TABLE>
4. INVENTORY:
Inventory and accumulated cost of Vacation Ownership Interests consist of
the following as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Development costs................................. $5,546,214 $3,653,381
Less: accumulated Vacation Ownership Interests
cost of sales................................... (2,749,180) (108,226)
Less: resort property valuation allowance......... (328,817) (63,544)
---------- ----------
$2,468,217 $3,481,611
---------- ----------
---------- ----------
</TABLE>
F-41
<PAGE>
DAYTONA BEACH REGENCY, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Building and improvements......................... $1,721,201 $ 876,074
Furniture, fixtures and equipment................. 672,470 --
---------- ----------
2,393,671 876,074
Less- Accumulated depreciation.................... 255,399 123,043
---------- ----------
$2,138,272 $ 753,031
---------- ----------
---------- ----------
</TABLE>
6. DEFERRED FINANCING COSTS:
Deferred financing costs consist of the following as of December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Deferred financing costs............................................... $ 197,000 $ 58,000
Less- Accumulated amortization......................................... 41,215 6,214
---------- ---------
$ 155,785 $ 51,786
---------- ---------
---------- ---------
</TABLE>
7. NOTES PAYABLE:
Notes payable consist of the following as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revolving line of credit not to exceed $15 million in
the aggregate (limited by eligible collateral), with
interest payable monthly at LIBOR plus 5.5% (11.22%
and 11.0% at December 31, 1997 and 1996,
respectively), payable in monthly installments of
principal and interest equal to 100% of all proceeds
of the receivables collateral collected during the
month but not less than the accrued interest, with
any remaining principal due October 2004,
collateralized by specific mortgages receivable...... $8,360,703 $422,659
Construction loan payable not to exceed $3.9 million,
with interest payable at LIBOR plus 6% (11.72 % and
11.5% at December 31, 1997 and 1996, respectively),
principal payable with a portion (24%) of the
proceeds received on the sale of Vacation Ownership
Interests, collateralized by assets and unsold
Vacation Ownership Interests, due April 2000......... 2,605,453 1,175,822
Acquisition loan payable not to exceed $3.15 million,
with interest payable at LIBOR plus 6% (11.72% and
11.5% at December 31, 1997 and 1996, respectively),
principal payable with a portion of received on the
sale of Vacation Ownership Interests, collateralized
by assets and unsold Vacation Ownership Interests,
due April 2000....................................... 2,042,751 3,101,952
----------- -----------
Total notes payable.................................... $13,008,907 $4,700,433
----------- -----------
----------- -----------
</TABLE>
F-42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE ISSUERS
OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUERS SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information................. iii
Prospectus Summary.................... 1
Risk Factors.......................... 18
Use of Proceeds....................... 29
Capitalization........................ 30
Selected Financial Data............... 31
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. 32
Business.............................. 39
Management............................ 52
Principal Members..................... 54
Certain Relationships and Related
Transactions........................ 54
Description of Other Indebtedness..... 55
The Exchange Offer.................... 56
Description of Notes.................. 66
Material United States Federal Tax
Consequences........................ 97
Plan of Distribution.................. 102
Legal Matters......................... 103
Experts............................... 103
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL FEBRUARY 10, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN SELLING
EXCHANGE NOTES RECEIVED IN EXCHANGE FOR ORIGINAL NOTES HELD FOR THEIR OWN
ACCOUNT.
[LOGO]
EPIC RESORTS, LLC
EPIC CAPITAL CORP.
OFFER TO EXCHANGE UP TO $130,000,000 13% SENIOR SECURED REDEEMABLE NOTES DUE
2005, SERIES B OF EPIC RESORTS, LLC AND EPIC CAPITAL CORP., WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT, FOR ANY AND ALL OF THEIR OUTSTANDING 13%
SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES A
---------------
PROSPECTUS
---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LETTER OF TRANSMITTAL
EPIC RESORTS, LLC
EPIC CAPITAL CORP.
OFFER TO EXCHANGE
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES B
FOR ANY AND ALL OUTSTANDING
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES A
PURSUANT TO THE PROSPECTUS, DATED NOVEMBER 12, 1998.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON DECEMBER 10, 1998 UNLESS EXTENDED (THE "EXPIRATION DATE").
- --------------------------------------------------------------------------------
MAIL DELIVERY TO: United States Trust Company of New York, EXCHANGE AGENT
BY MAIL:
United States Trust Company of New York
P.O. Box 844, Cooper Station
New York, NY 10276-0844
Attention: Corporate Trust Services
<TABLE>
<S> <C>
BY HAND: BY OVERNIGHT DELIVERY:
United States Trust Company of New York United States Trust Company of New York
111 Broadway, Lower Level 770 Broadway, 13th Floor
New York, NY 10006 New York, NY 10003
Attention: Corporate Trust Services Attention: Corporate Trust Services
</TABLE>
BY FACSIMILE TRANSMISSION
(For Eligible Institutions Only)
(212) 420-6152
Confirm By Telephone
1-800-548-6565
- --------------------------------------------------------------------------------
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
- --------------------------------------------------------------------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING
INSTRUCTIONS CAREFULLY
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated November 12, 1998 (the "Prospectus"), of Epic Resorts, LLC, a
Delaware limited liability company and Epic Capital Corp., a Delaware
corporation (collectively referred to as the "Issuers"), and this Letter of
Transmittal (the "Letter"), which together constitute the Issuers' offer (the
"Exchange Offer") to exchange an aggregate principal amount of up to $130.0
million of their 13% Senior Secured Redeemable Notes due 2005, Series B (the
"New Notes") for a like principal amount of their issued and outstanding 13%
Senior Secured Redeemable Notes due 2005, Series A (the "Old Notes") from the
holders (the "Holders") thereof. Capitalized terms used but not defined herein
have the meanings given to them in the Exchange Offer.
<PAGE>
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. No interest will be payable on the Old Notes on the date of the
exchange for the New Notes and Old Notes accepted for exchange will cease to
accrue interest from and after the consummation of the Exchange Offer, therefore
no interest will be paid thereon to the Holders at such time. Each New Note will
bear interest at 13% per annum and will be payable in cash semiannually in
arrears on each December 15 and June 15, commencing on December 15, 1998.
Holders of Old Notes accepted for exchange will be deemed to have waived the
right to receive any other payment of interest on the Old Notes. The Issuers
reserve the right, at any time or from time to time, to extend the Exchange
Offer at its discretion, in which event the term "Expiration Date" shall mean
the latest time and date to which the Exchange Offer is extended. The Issuers
shall notify the Holders of the Old Notes of any extension by means of a press
release or other public announcement prior to 9:00 A.M., New York City time, on
the next business day after the previously scheduled Expiration Date.
This Letter is to be completed by a Holder of Old Notes either if
certificates are to be forwarded herewith or if a tender of certificates for Old
Notes, if available, is to be made by book-entry transfer to the account
maintained by the Exchange Agent at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in "The
Exchange Offer--Procedures for Tendering" section of the Prospectus. Holders of
Old Notes whose certificates are not immediately available, or who are unable to
deliver their certificates or confirmation of the book-entry tender of their Old
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility (a
"Book-Entry Confirmation") and all other documents required by this Letter to
the Exchange Agent on or prior to the Expiration Date, may tender their Old
Notes according to the guaranteed delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures" section of the Prospectus. See
Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does
not constitute delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
List below the Old Notes to which this Letter relates. If the space provided
below is inadequate, the certificate numbers and principal amount of Old Notes
should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
------------------------------------------------------------------------------------------
NAME AND ADDRESS OF REGISTERED HOLDER AS IT
APPEARS ON THE CERTIFICATE NUMBER(S) PRINCIPAL AMOUNT OF OLD
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, OF OLD NOTES
SERIES A NOTES TRANSMITTED* TRANSMITTED**
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed if Old Notes are being tendered by book-entry
transfer.
** Unless otherwise indicated in this column, a Holder will be deemed to have
tendered ALL of the Old Notes represented by the Old Notes indicated in
column 2. See Instruction 2. Old Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple
thereof. See Instruction 1.
2
<PAGE>
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
Account Number ______________ Transaction Code Number____________________
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s) ____________________________________________
Window Ticket Number (if any) ______________________________________________
Date of Execution of Notice of Guaranteed Delivery _________________________
Name of Institution which guaranteed delivery ______________________________
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number ______________ Transaction Code Number _____________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
NAME: ______________________________________________________________________
ADDRESS: ___________________________________________________________________
______________________________________
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
3
<PAGE>
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Issuers the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Issuers all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Issuers will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim when the same are accepted by the Issuers. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent as
its agent and attorney-in-fact with full power of substitution, for purposes of
delivering this Letter and the Old Notes to the Issuers. The Power of Attorney
granted in this paragraph shall be deemed irrevocable from and after the
Expiration Date and coupled with an interest. The undersigned hereby further
represents that any New Notes acquired in exchange for Old Notes tendered hereby
will have been acquired in the ordinary course of business of the person
receiving such New Notes, whether or not such person is the undersigned, that
neither the Holder of such Old Notes nor any such other person is participating,
intends to participate or has an arrangement or understanding with any person to
participate in the distribution of such New Notes and that neither the Holder of
such Old Notes nor any such other person is an "affiliate," of the Issuers, as
defined in Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act").
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on an interpretation by the staff of the Securities and Exchange
Commission (the "SEC") set forth in no-action letters to third parties, based on
which the Issuers believe that the New Notes issued in exchange for the Old
Notes pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by any Holder thereof (other than any such Holder that is
an "affiliate" of the Issuers within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such Holder's business and such Holder has no
arrangement with any person to participate in the distribution of such New
Notes. If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a distribution of
New Notes. If the undersigned is a broker-dealer that will receive New Notes for
its own account in exchange for Old Notes, it represents that the Old Notes to
be exchanged for New Notes were acquired by it as a result of market-making
activities or other trading activities, and acknowledges that it will deliver a
prospectus in connection with any resale of such New Notes; however, by so
acknowledging and by delivering a prospectus, the undersigned will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The undersigned acknowledges that in reliance on an interpretation by the staff
of the SEC, a broker-dealer may fulfill his prospectus delivery requirements
with respect to the New Notes (other than a resale of an unsold allotment from
the original sale of the Old Notes) with the Prospectus which constitutes part
of this Exchange Offer.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Issuers to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in "The Exchange Offer--Withdrawal of Tenders"
section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at the Book-Entry
Transfer Facility. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send the New Notes (and, if
applicable, substitute certificates representing Old Notes for any Old Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of Old Notes."
4
<PAGE>
- --------------------------------------------------------------------------------
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD
NOTES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE
OLD NOTES AS SET FORTH IN SUCH BOX ABOVE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or
New Notes are to be issued in the name of and sent to someone other than the
person of persons whose signature(s) appear(s) on this Letter above, or if
Old Notes delivered by book-entry transfer which are not accepted for
exchange are to be returned by credit to an account maintained at the
Book-Entry Transfer Facility other than the account indicated above.
Issue: New Notes and/or Old Notes to:
Name(s): ___________________________________________________________________
(PLEASE TYPE OR PRINT)
__________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address: ___________________________________________________________________
____________________________________________________________________________
Employer Identification # or Social Security Number: _______________________
/ / Credit unexchanged Old Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility account set forth below.
____________________________________________________________________________
(BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER, IF APPLICABLE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or
New Notes are to be sent to someone other than the person of persons whose
signature(s) appear(s) on this Letter above or to such person or persons at
an address other than shown in the box entitled "Description of Old Notes"
on this Letter above.
Mail: New Notes and/or Old Notes to:
Name(s): ___________________________________________________________________
(PLEASE TYPE OR PRINT)
____________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address: ___________________________________________________________________
____________________________________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT; THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE
CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER
REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY
THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
- --------------------------------------------------------------------------------
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
ANY BOX ABOVE.
5
<PAGE>
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
<TABLE>
<S> <C>
Dated:
SIGNATURE(S) OF OWNER DATE
</TABLE>
Area code and Telephone Number _____________________________________________
If a Holder is tendering any Old Notes, this Letter must be signed by
the registered Holder(s) as the name(s) appear(s) on the certificate(s) for
the Old Notes or by any person(s) authorized to become registered Holder(s)
by endorsements and documents transmitted herewith. If signature is by a
trustee, executor, administrator, guardian, officer or other person acting
in a fiduciary or representative capacity, please set forth full title. See
Instruction 3.
Name(s): ___________________________________________________________________
____________________________________________________________________________
(PLEASE TYPE OR PRINT)
Capacity: __________________________________________________________________
Address: ___________________________________________________________________
____________________________________________________________________________
(INCLUDING ZIP CODE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
SIGNATURE(S) GUARANTEED BY AN ELIGIBLE INSTITUTION:
<TABLE>
<S> <C>
(AUTHORIZED SIGNATURE)
(TITLE)
(NAME AND FIRM)
Dated:
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER OF 13% SENIOR
SECURED REDEEMABLE NOTES DUE 2005, SERIES B FOR ANY AND ALL OUTSTANDING 13%
SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES A OF EPIC RESORTS, LLC AND EPIC
CAPITAL CORP.
1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES: This
letter is to be completed by noteholders either if certificates are to be
forwarded herewith or if tenders are to be made pursuant to the procedures for
delivery by book-entry transfer set forth in "The Exchange Offer--Procedures for
Tendering" section of the Prospectus. Certificates for all physically tendered
Old Notes, or Book-Entry Confirmation, as the case may be, as well as a properly
completed and duly executed letter (or manually signed facsimile hereof) and any
other documents required by this Letter, must be received by the Exchange Agent
at the address set forth herein on or prior to the Expiration Date, or the
tendering Holder must comply with the guaranteed delivery procedures set forth
below. Old Notes tendered hereby must be in denominations of principal amount of
$1,000 and any integral multiple thereof.
Noteholders whose certificates for Old Notes are not immediately available
or who cannot deliver their certificates and all other required documents to the
Exchange Agent on or prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis, may tender their Old Notes
pursuant to the guaranteed delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to
such procedures, (i) such tender must be made by or through an Eligible
Institution and a Notice of Guaranteed Delivery must be signed by such Holder,
(ii) on or prior to the Expiration Date, the Exchange Agent must receive from
the Holder and the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery), substantially in the form provided by the Issuers, setting forth the
name and address of the Holder of Old Notes, the certificate number or numbers
of the tendered Old Notes, and the principal amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that within four
(4) business days after the date of delivery of the Notice of Guaranteed
Delivery, the tendered Old Notes, a duly executed Letter of Transmittal and any
other required documents will be deposited by the Eligible Institution with the
Exchange Agent and (iii) the certificates for all physically tendered Old Notes,
in proper form for transfer, or Book-Entry Confirmation, as the case may be, and
all other documents required by this Letter, must be received by the Exchange
Agent within four (4) business days after the Expiration Date.
The method of delivery of this Letter, the Old Notes and all other required
documents is at the election and risk of the tendering Holders, but the delivery
will be deemed made only when actually received or confirmed by the Exchange
Agent. If such delivery is by mail, it is recommended that registered mail,
properly insured, with return receipt requested, be used. Instead of delivery by
mail, it is recommended that the Holder use an overnight or hand delivery
service. In all cases, it is suggested that the mailing be made sufficiently in
advance of the Expiration Date to permit delivery to the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer"
section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO NOTEHOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER): If less than all of the Old Notes evidenced by a submitted
certificate are to be tendered, the tendering Holder(s) should fill in the
aggregate principal amount of Old Notes to be tendered in the box above entitled
"Description of Old Notes--Principal Amount of Old Notes Transmitted." Holders
whose Old Notes are not tendered or are tendered but not accepted in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and preferences and subject to the limitations applicable thereto
under the Indenture. Following consummation of the Exchange Offer, the Holders
will continue to be subject to the existing restrictions upon transfer thereof
and the Issuers will have no further obligation to such Holders to provide for
the registration under the Securities Act of the Old Notes held by them. ALL OF
7
<PAGE>
THE OLD NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN
TENDERED UNLESS OTHERWISE INDICATED.
3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES: If this Letter is signed by the registered Holder of the Old Notes
tendered hereby, the signature must correspond exactly with the name as written
on the face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of certificates.
When this Letter is signed by the registered Holder or Holders of the Old
Notes specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required. If, however, the New Notes are to be issued,
or any untendered Old Notes are to be reissued, to a person other than the
registered Holder, then endorsements of any certificates transmitted hereby or
separate bond powers are required. Signatures on such certificate(s) must be
guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered Holder or
Holders of any certificate(s) specified herein, such certificate(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered Holder or Holder appear(s) on the
certificate(s) and signatures on such certificate(s) must be guaranteed by an
Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Issuers,
proper evidence satisfactory to the Issuers of their authority to so act must be
submitted.
ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS
REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF
A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY
HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN "ELIGIBLE
INSTITUTION").
SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE INSTITUTION,
PROVIDED THE OLD NOTES ARE TENDERED: (I) BY A REGISTERED HOLDER OF OLD NOTES
(WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY PARTICIPANT IN THE
BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION
LISTING AS THE HOLDER OF SUCH OLD NOTES) WHO HAS NOT COMPLETED THE BOX ENTITLED
"SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS," ON THIS
LETTER, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS: Tendering Holders of Old
Notes should indicate in the applicable box the name and address to which New
Notes issued pursuant to the Exchange Offer and/or Old Notes not exchanged are
to be sent, if different from the name or address of the person signing this
Letter. In the case of issuance in a different name, the employer identification
or social security number of the person named must also be indicated.
Noteholders tendering Old Notes by book-entry transfer may request that Old
Notes not exchanged be credited to such account maintained at the Book-Entry
Transfer Facility as such noteholder may designate hereon. If no such
instructions are given, such Old Notes not exchanged will be returned to the
name or address of the person signing this Letter.
8
<PAGE>
5. TRANSFER TAXES: The Issuers will pay all transfer taxes, if any,
applicable to the transfer of Old Notes to it or its order pursuant to the
Exchange Offer. If, however, certificates representing New Notes and/or Old
Notes for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be registered or issued in the name of, any person other
than the registered Holder of the Old Notes tendered hereby, or if tendered Old
Notes are registered in the name of any person other than the person signing
this Letter, or if a transfer tax is imposed for any reason other than the
transfer of Old Notes to the Company or its order pursuant to the Exchange
Offer, the amount of any such transfer taxes (whether imposed on the registered
Holder or any other persons) will be payable by the tendering Holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering Holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 5, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
6. WAIVER OF CONDITIONS: The Issuers reserve the absolute right to waive
satisfaction of any or all conditions enumerated in the Prospectus.
7. NO CONDITIONAL TENDERS: No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering Holders of Old Notes, by
execution of this Letter, shall waive any right to receive notice of the
acceptance of their Old Notes for exchange.
Neither the Issuers, the Exchange Agent nor any other person is obligated to
give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
8. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES: Any Holder whose Old
Notes have been mutilated, lost, stolen or destroyed should contact the Exchange
Agent at the address indicated above for further instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES: Questions relating to the
procedure for tendering, as well as requests for additional copies of the
Prospectus and this Letter, may be directed to the Exchange Agent, at the
address indicated above.
IMPORTANT TAX INFORMATION
Under current Federal income tax law, any Holder whose tendered Old Notes
are accepted for payment generally is required to provide the Exchange Agent (as
agent for the payer) with his or her correct taxpayer identification number
("TIN") on Substitute Form W-9 below. If such Holder of Old Notes is an
individual, the TIN is his or her social security number. If the Exchange Agent
is not provided with the correct TIN, the Holder of Old Notes may be subject to
a $50 penalty imposed by the Internal Revenue Service. In addition, payments
that are made to such Holders of Old Notes with respect to New Notes may be
subject to backup withholding.
Certain Holders of Old Notes (including, among others, all corporations and
certain foreign individuals) may not be subject to these backup withholding and
reporting requirements. Exempt Holders of Old Notes should indicate their exempt
status on Substitute Form W-9. In order for a foreign individual to qualify as
an exempt recipient, that Holder of Old Notes must submit a properly completed
Internal Revenue Service Form W-8, signed under penalties of perjury, attesting
to his or her exempt status. Such statements can be obtained from the Exchange
Agent. See the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute W-9 for additional instructions.
If backup withholding applies, the Exchange Agent is required to withhold 31
percent of any such payments made to the Holder of Old Notes, Backup withholding
is not an additional tax. Rather, the federal income tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained.
9
<PAGE>
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments that are made to a Holder of Old
Notes with respect to Old Notes exchanged pursuant to the Exchange Offer, each
Holder of Old Notes is required to notify the Exchange Agent of his, her or its
correct TIN by completing the Substitute Form W-9 below certifying the TIN
provided on such form is correct (or that such Holder of Old Notes is awaiting a
TIN) and that (1) such Holder of Old Notes has not been notified by the Internal
Revenue Service that he, she or it is subject to backup withholding as a result
of failure to report all interest or dividends or (2) the Internal Revenue
Service has notified such Holder of Old Notes that he, she or it is no longer
subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder of Old Notes is required to give the Exchange Agent the social
security number or employer identification number of the record owner of the Old
Notes. If the Old Notes are in more than one name or are not in the name of the
actual owner, consult the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 for additional guidelines on which
number to report.
10
<PAGE>
PAYER'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK AS EXCHANGE AGENT
<TABLE>
<C> <S> <C>
- -----------------------------------------------------------------------------------------
SUBSTITUTE Part 1: PLEASE Social Security Number
FORM W-9 PROVIDE YOUR TIN IN OR --------------------------
Department of the Treasury THE BOX AT RIGHT AND Employer Identification Number
Internal Revenue Service CERTIFY BY SIGNING
AND DATING BELOW
-------------------------------------------------------
Part 2: Certification--Under penalties of perjury, I
certify that:
(1) The number shown on this form is my current
taxpayer identification number (or I am waiting for a
number to be issued to me) and
(2) I am not subject to backup withholding because (a)
I am exempt from backup withholding, (b) I have not
Payer's Request for Taxpayer been notified by the Internal Revenue Service (the
Identification Number (TIN)
"IRS") that I am subject to backup withholding as a
result of a failure to report all interest or dividends
or (c) the IRS has notified me that I am no longer
subject to backup withholding.
-------------------------------------------------------
Part 3: Awaiting TIN / /
- -----------------------------------------------------------------------------------------
CERTIFICATE INSTRUCTIONS--You must cross out Item (2) above if you have been notified by
the IRS that you are currently subject to backup withholding because of under-reporting
interest or dividends on your tax return. However, if after being notified by the IRS
that you were subject to backup withholding you received another notification from the
IRS that you are no longer subject to backup withholding, do not cross out such Item
(2).
SIGNATURE: ------------------------------------------------- DATE:--------------------
- -----------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31 PERCENT OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER.
PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE W-9" FOR ADDITIONAL DETAILS
NOTE: YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Officer or
(b) I intend to mail or deliver such an application in the near future. I
understand that if I do not provide a taxpayer identification number within
sixty (60) days, 31 percent of all reportable payments made to me thereafter
will be withheld until I provide a number.
SIGNATURE: ------------------------------------------- DATE: ------------------
- --------------------------------------------------------------------------------
11
<PAGE>
NOTICE OF GUARANTEED DELIVERY
OFFER FOR OUTSTANDING
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES B
IN EXCHANGE FOR
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES A
OF
EPIC RESORTS, LLC
AND
EPIC CAPITAL CORP.
This form or one substantially equivalent to it must be used to exchange the
13% Senior Secured Redeemable Notes Due 2005, Series A of Epic Resorts, LLC and
Epic Capital Corp. (collectively referred to as the "Issuers") (the "Old Notes")
if certificates for the Old Notes are not immediately available or if time will
not permit the Letter of Transmittal or other required documents to reach the
United States Trust Company of New York (the "Exchange Agent") prior to 5:00
p.m. New York City time on December 10, 1998 (the "Expiration Date"), at which
time the right to exchange the Old Notes terminates. This form must be delivered
by hand, mail, telegram or facsimile transmission to the Exchange Agent as
follows:
MAIL DELIVERY TO: United States Trust Company of New York, EXCHANGE AGENT
By Mail:
United States Trust Company of New York
P.O. Box 844, Cooper Station
New York, NY 10276-0844
Attention: Corporate Trust Services
<TABLE>
<CAPTION>
<S> <C>
By Hand: By Overnight Delivery:
United States Trust Company of New York United States Trust Company of New York
111 Broadway, Lower Level 770 Broadway, 13th Floor
New York, NY 10006 New York, NY 10003
Attention: Corporate Trust Services Attention: Corporate Trust Services
</TABLE>
By Facsimile Transmission
(For Eligible Institutions Only):
(212) 420-6152
Confirm By Telephone
1-800-548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN THOSE SHOWN ABOVE DOES
NOT CONSTITUTE VALID DELIVERY.
UNDER THE TERMS OF THIS DOCUMENT, THE OLD NOTES, A PROPERLY COMPLETED AND
DULY EXECUTED LETTER OF TRANSMITTAL, AND OTHER DOCUMENTS REQUIRED BY THE LETTER
OF TRANSMITTAL MUST BE DELIVERED TO THE EXCHANGE AGENT WITHIN FOUR BUSINESS DAYS
AFTER THE DATE OF DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders the principal amount of Old Notes indicated
below, upon the terms and subject to the conditions contained in the
Registration Statement on Form S-4 filed by Epic Resorts, LLC, a Delaware
limited liability company and Epic Capital Corp., a Delaware corporation, with
the Securities and Exchange Commission (the "Registration Statement") and the
accompanying Prospectus dated November 12, 1998 included therein (the
"Prospectus"), receipt of which is hereby acknowledged:
DESCRIPTION OF SECURITIES TENDERED
<TABLE>
<CAPTION>
<S> <C> <C>
Please fill in your name(s) exactly
as it appears on your Note(s) PLEASE FILL IN
and your present address NUMBERS AND AMOUNTS
Name(s): Note Principal
Number(s) Amount
Address(es):
TOTALS
</TABLE>
<TABLE>
<S> <C>
Signatures (all registered holders must sign): Address:
- ------------------------------------------------------- -------------------------------------------------------
- ------------------------------------------------------- -------------------------------------------------------
(Please Type or Print) Area Code and Daytime Telephone Number:
( ) -
-------------------------------------------------------
</TABLE>
2
<PAGE>
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE
The undersigned, a member firm of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office, branch or agency in the
United States, hereby guarantees to deliver to the Exchange Agent at the address
set forth above, Old Note certificates surrendered for exchange hereby in proper
form for transfer, together with a properly completed and duly executed Letter
of Transmittal and any other documents required by the Letter of Transmittal,
within four (4) business days after the date of delivery of this Notice of
Guaranteed Delivery.
<TABLE>
<S> <C>
Dated: , 1998 Name of Firm:
Sign Here:
(Authorized Signature)
Name:
(Please type or print)
(Area code and Telephone Number)
Address:
(Zip Code)
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. OLD
NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
3
<PAGE>
EPIC RESORTS, LLC
EPIC CAPITAL CORP.
OFFER TO EXCHANGE
ALL OF THEIR OUTSTANDING
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES A
FOR THEIR
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES B
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON DECEMBER 10, 1998,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
To Our Clients:
Enclosed for your consideration is a Prospectus dated November 12, 1998
("Prospectus") and the related Letter of Transmittal (which, together with any
amendments or supplements thereto, collectively constitute the "Exchange Offer")
relating to an offer by Epic Resorts, LLC, a Delaware limited liability company,
and Epic Capital Corp., a Delaware corporation (collectively referred to as the
"Issuers"), to exchange all of their outstanding 13% Senior Secured Redeemable
Notes due 2005, Series A ("Old Notes") for their 13% Senior Secured Redeemable
Notes due 2005, Series B upon the terms and subject to the conditions set forth
in the Exchange Offer.
We are the holder of record of Old Notes held by us for your account. A
tender for exchange of such Old Notes can be made only by us as the holder of
record and pursuant to your instructions. The Letter of Transmittal is furnished
to you for your information only and cannot be used by you to tender for
exchange Old Notes held by us for your account.
We request instructions as to whether you wish to have us tender for
exchange on your behalf any or all of such Old Notes held by us for your
account, pursuant to the terms and subject to the conditions set forth in the
Exchange Offer.
Your attention is directed to the following:
1. The Exchange Offer and withdrawal rights will expire at 5:00 P.M.,
New York City time, on December 10, 1998, unless the Exchange Offer is
extended. Your instructions to us should be forwarded to us in ample time to
permit us to submit a tender on your behalf.
2. The Exchange Offer is made for all Old Notes outstanding
constituting $130,000,000 aggregate principal amount as of the date of the
Prospectus.
3. The minimum permitted tender is $1,000 principal amount of Old
Notes, and all tenders must be in integral multiples of $1,000.
4. The Offer is conditioned upon the satisfaction of certain conditions
set forth in the Prospectus under the caption "The Exchange
Offer--Conditions of the Exchange Offer." The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered
for exchange.
5. Tendering Holders will not be obligated to pay brokerage fees or
commissions or, except as set forth in Instruction 5 of the Letter of
Transmittal, transfer taxes applicable to the exchange of Old Notes pursuant
to the Exchange Offer.
6. In all cases, exchange of Old Notes tendered and accepted for
exchange pursuant to the Exchange Offer will be made only after timely
receipt by the United States Trust Company of New
<PAGE>
York ("Exchange Agent") of (i) certificates representing such Old Notes or
timely confirmation of a book-entry transfer of such Old Notes into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedures set forth in the Prospectus
under the caption "The Exchange Offer--Procedures for Tendering Old Notes,"
(ii) the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, with any required signature guarantees, or confirmation
in connection with a book-entry transfer, and (iii) any other documents
required by the Letter of Transmittal. Accordingly, payment may be made to
tendering Holders at different times if delivery of the Old Notes and other
required documents occurs at different times.
The Exchange Offer is being made solely by the Prospectus and the related
Letter of Transmittal and is being made to all Holders of Old Notes. The Issuers
are not aware of any state where the making of the Exchange Offer is prohibited
by administrative or judicial action pursuant to any valid state statute. If the
Issuers become aware of any valid state statute prohibiting the making of the
Exchange Offer or the acceptance of Old Notes tendered for exchange pursuant
thereto, the Issuers will make a good faith effort to comply with any such state
statute or seek to have such statute declared inapplicable to the Exchange
Offer. If, after such good faith effort, the Issuers cannot comply with such
state statute, the Exchange Offer will not be made to, nor will tenders be
accepted from or on behalf of, the holders of Old Notes in such state. In any
jurisdiction where the securities, blue sky or other laws require the Exchange
Offer to be made by a licensed broker or dealer, the Exchange Offer shall be
deemed to be made on behalf of the Issuers by one or more registered brokers or
dealers that are licensed under the laws of such jurisdiction.
If you wish to have us tender any or all of the Old Notes held by us for
your account, please instruct us by completing, executing and returning to us
the instruction form contained in this letter. If you authorize a tender for
exchange of your Old Notes, the entire aggregate principal amount of such Old
Notes will be tendered for exchange unless otherwise specified in such
instruction form. Your instructions should be forwarded to us in ample time to
permit us to submit a tender on your behalf prior to the expiration of the
Exchange Offer.
2
<PAGE>
INSTRUCTIONS WITH RESPECT TO THE
EPIC RESORTS, LLC
EPIC CAPITAL CORP.
OFFER TO EXCHANGE
ALL OF THEIR
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES A
FOR THEIR
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES B
The undersigned acknowledge(s) receipt of your letter enclosing the
Prospectus dated November 12, 1998 and the related Letter of Transmittal (which,
together with any amendments or supplements thereto, collectively constitute the
"Exchange Offer") pursuant to an offer by Epic Resorts, LLC, a Delaware limited
liability company and Epic Capital Corp., a Delaware corporation, to exchange
all of their outstanding 13% Senior Secured Redeemable Notes due 2005, Series A
("Old Notes") for their 13% Senior Secured Redeemable Notes due 2005, Series B.
This will instruct you to tender the principal amount of Old Notes indicated
below (or, if no number is indicated below, the entire aggregate principal
amount) which are held by you for the account of the undersigned, upon the terms
and subject to the conditions set forth in the Exchange Offer.
-------------------------------------------------------------------------------
Aggregate Principal Amount of Old Notes to be Tendered:* $ ___________________
Dated: ___________________________________________________________________, 199
---
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SIGN HERE
Signature(s): _________________________________________________________________
Please print name(s): _________________________________________________________
Address: ______________________________________________________________________
Area Code and Telephone Number: _______________________________________________
Tax Identification or Social Security Number: _________________________________
-------------------------------------------------------------------------------
- ------------------------
* Unless otherwise indicated, it will be assumed that the entire principal
amount of the Old Notes held by us for your account are to be tendered for
exchange. The minimum permitted tender is $1,000 principal amount of Old
Notes, and all tenders must be in integral multiples of $1,000.
3
<PAGE>
EPIC RESORTS, LLC
EPIC CAPITAL CORP.
OFFER TO EXCHANGE
ALL OF THEIR OUTSTANDING
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES A
FOR THEIR
13% SENIOR SECURED REDEEMABLE NOTES DUE 2005, SERIES B
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON THURSDAY, DECEMBER 10, 1998,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
NOVEMBER 12, 1998
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Epic Resorts, LLC, a Delaware limited liability company and Epic Capital
Corp., a Delaware corporation (collectively, the "Issuers"), are offering to
exchange all of their outstanding 13% Senior Secured Redeemable Notes due 2005,
Series A ("Old Notes") for their 13% Senior Secured Redeemable Notes due 2005,
Series B upon the terms and subject to the conditions set forth in the
Prospectus dated November 12, 1998 ("Prospectus") and in the related Letter of
Transmittal (which, together with any amendments or supplements thereto,
collectively constitute the "Exchange Offer") enclosed herewith.
The Exchange Offer is conditioned upon satisfaction of certain conditions
set forth in the Prospectus under the caption "The Exchange Offer--Conditions of
the Exchange Offer." The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange.
Enclosed herewith for your information and forwarding to your clients for
whose accounts you hold Old Notes registered in your name or in the name of your
nominee are copies of the following documents:
1. The Prospectus dated November 12, 1998.
2. The green Letter of Transmittal to tender Old Notes for exchange
(for your use and for the information of your clients). Facsimile copies of
the Letter of Transmittal may be used to tender Old Notes for exchange.
3. The pink Notice of Guaranteed Delivery (to be used to tender Old
Notes for exchange if certificates for Old Notes are not immediately
available or if such certificates for Old Notes and all other required
documents cannot be delivered to United States Trust Company of New York
("Exchange Agent") on or prior to the Expiration Date or if the procedures
for book-entry transfer cannot be completed on a timely basis.)
4. A yellow printed form of letter which may be sent to your clients
for whose accounts you hold Old Notes registered in your name or in the name
of your nominee, with space provided for obtaining such clients'
instructions with regard to the Exchange Offer.
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS
PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 10, 1998, UNLESS THE
EXCHANGE OFFER IS EXTENDED.
<PAGE>
In order for Old Notes to be validly tendered pursuant to the Exchange
Offer, (i) a duly executed and properly completed Letter of Transmittal (or
facsimile thereof) together with any required signature guarantees, or
confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account maintained at The Depository Trust Company (the "Book-Entry
Transfer Facility"), must be received by the Exchange Agent on or prior to the
Expiration Date, and (ii) either certificates representing tendered Old Notes
must be received by the Exchange Agent or such Old Notes must be tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility, and confirmation of book-entry transfer must be received by the
Exchange Agent, all in accordance with the instructions set forth in the
Prospectus.
If a Holder (as defined in the Prospectus) desires to tender Old Notes for
exchange pursuant to the Exchange Offer and such Holder's Old Note certificates
are not immediately available or such Holder cannot deliver the Old Note
certificates and all other required documents to the Exchange Agent on or prior
to the Expiration Date, or such Holder cannot complete the procedure for
delivery by book-entry transfer on a timely basis, such Old Notes may
nevertheless be tendered for exchange by following the guaranteed delivery
procedures specified in the Prospectus under the caption "The Exchange Offer--
Guaranteed Delivery Procedures."
The Issuers will not pay any fees or commissions to any broker or dealer or
any other person for soliciting tenders of Old Notes pursuant to the Exchange
Offer. The Issuers will, however, upon request, reimburse you for customary
mailing and handling expenses, incurred by you in forwarding any of the enclosed
materials to your clients. The Issuers will pay or cause to be paid any transfer
taxes applicable to the exchange of Old Notes pursuant to the Exchange Offer,
except as otherwise provided in Instruction 5 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer should be
addressed to the Exchange Agent, at its address and telephone numbers set forth
in the Prospectus under the caption "The Exchange Offer--Exchange Agent."
Additional copies of the enclosed material may be obtained from the Exchange
Agent.
Very truly yours,
Epic Resorts, LLC
Epic Capital Corp.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE ISSUERS OR THE EXCHANGE AGENT, OR ANY
AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY
STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE
EXCHANGE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS THEREIN.
2
