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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 333-61433
EPIC RESORTS, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 23-2888968
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1150 FIRST AVENUE, SUITE 900
KING OF PRUSSIA, PA 19406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 992-0100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes No X
As of September 30, 1998, 1,118,000 Membership Interests of the Registrant were
outstanding.
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<TABLE>
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INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 2 - Changes in Securities. 14
Item 6 - Exhibits and Reports on Form 8-K 14
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EPIC RESORTS, LLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
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<S> <C> <C>
(unaudited)
ASSETS
Cash and cash equivalents $ 6,558,419 $ 248,079
Cash in escrow 17,703,239 53,142
Mortgages receivable, net of allowance of $1,332,305 and $750,061 as of
September 30, 1998 and December 31, 1997, respectively (Note 5) 51,984,075 37,147,850
Inventory 72,892,964 7,962,552
Property and equipment, net 10,330,070 9,971,388
Deferred financing costs, net 6,465,018 677,159
Other assets 1,004,933 228,004
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Total assets $ 166,938,718 $ 56,288,174
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LIABILITIES AND MEMBER'S EQUITY
Accounts payable $ 603,175 $ 983,704
Accrued expenses 699,759 577,143
Accrued interest payable 3,881,598 --
Advance deposits 67,038 53,142
Notes payable (Notes 2 and 5) 21,247,664 42,890,714
Senior secured notes payable 127,332,994 --
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Total liabilities 153,832,228 44,504,703
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Minority Interest -- 1,205,769
Commitments and contingencies -- --
Warrants 2,757,000 --
Member's equity 10,349,490 10,577,702
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Total liabilities and member's equity $ 166,938,718 $ 56,288,174
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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EPIC RESORTS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
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1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Sales of vacation ownership interests $ 10,678,012 $ 9,358,319 $ 27,343,596 $ 22,944,558
Resort operations 2,096,363 1,666,008 5,512,542 5,526,166
Interest income 1,558,470 932,719 4,069,740 2,449,843
---------------- --------------- ---------------- ---------------
14,332,845 11,957,046 36,925,878 30,920,567
---------------- --------------- ---------------- ---------------
Costs and expenses:
Cost of sales of vacation ownership interests 2,435,187 2,323,527 6,296,029 5,411,987
Resort operations 1,346,525 1,379,938 3,366,650 4,053,413
Selling and marketing costs 4,037,883 3,836,655 10,486,504 8,901,153
General and administrative 1,662,944 941,116 3,428,116 2,349,245
Provision for doubtful accounts 418,222 465,041 1,116,165 1,041,130
Depreciation 154,015 175,812 529,680 584,024
Financing and closing costs 289,630 149,521 868,548 445,843
Interest expense 4,829,937 884,805 6,900,277 2,663,873
---------------- --------------- ---------------- ---------------
15,174,343 10,156,415 32,991,969 25,450,668
---------------- --------------- ---------------- ---------------
(Loss) income before minority interest and
extraordinary item (841,498) 1,800,631 3,933,909 5,469,899
Minority interest -- 206,137 1,189,677 1,207,840
---------------- --------------- ---------------- ---------------
(Loss) income before extraordinary item (841,498) 1,594,494 2,744,232 4,262,059
Extraordinary loss on extinguishment of debt (2,722,027) -- (2,722,027) --
----------------- --------------- ----------------- --------------
Net (loss) income $ (3,563,525) $ 1,594,494 $ 22,205 $ 4,262,059
----------------- --------------- ----------------- --------------
----------------- --------------- ----------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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EPIC RESORT, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
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1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,205 $ 4,262,059
Adjustments to reconcile net income to net cash used in operating
activities-
Depreciation 529,680 584,024
Amortization 1,030,742 27,967
Provision for doubtful accounts 1,116,165 1,041,130
Minority interest 1,189,677 1,207,840
Change in assets and liabilities--
Mortgages receivable (15,952,390) (13,546,580)
Inventory of vacation ownership intervals (64,025,858) 2,314,804
Other assets (776,929) (83,878)
Accounts payable (380,529) 232,885
Accrued expenses 122,616 (50,017)
Accrued interest payable 3,881,598 --
Advance deposits 13,896 (8,749)
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Net cash used in operating activities (73,229,127) (4,018,515)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (888,362) (476,895)
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Net cash used in investing activities (888,362) (476,895)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 11,916,421 17,186,646
Proceeds from bridge loan 55,414,252 --
Proceeds from senior secured notes payable 130,000,000 --
Payments on notes payable and bridge loan (88,973,723) (10,447,830)
Placement of cash in escrow (17,650,097) (106,934)
Payment of deferred financing costs (6,728,607) (237,000)
Purchase of minority interest (3,300,000) --
Contributions from sole member 163,223 400,746
Distributions to sole member (413,640) (2,222,408)
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Net cash provided by financing activities 80,427,829 4,573,220
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NET INCREASE IN CASH AND CASH EQUIVALENTS 6,310,340 77,810
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 248,079 27,135
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,558,419 $ 104,945
---------------- ---------------
---------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,810,047 $ 2,765,678
---------------- ---------------
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</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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EPIC RESORTS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1. BACKGROUND:
Epic Resorts, LLC and its wholly-owned subsidiaries (the "Company") generate
revenue from the sale and financing of vacation ownership interests in its
resorts, 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 income from the transient rental of
resort accommodations.
The Company was formed in June 1998 to merge with Epic Resorts, Inc., which had
been formed to combine the ownership of London Bridge Resort, Inc. and the 55%
limited partnership interest and 1% general partnership interest in Daytona
Beach Regency, Ltd., each owned by Thomas F. Flatley, the Company's President,
and their vacation ownership acquisition and development businesses.
On June 30, 1998, the Company used the proceeds from a $55.4 million bridge
loan to purchase the following resorts: Scottsdale Links Resort (a 228-suite
complex in Scottsdale, Arizona), Palm Springs Marquis Villas (a 101-suite
complex in Palm Springs, California) and Westpark Resort (a 152-suite complex
in Las Vegas, Nevada). The Company also purchased the remaining 44% limited
partnership interest in Daytona Beach Regency, Ltd.
On July 8, 1998, the Company issued 130,000 Units, representing $130 million
principal amount of 13% Senior Secured Redeemable Notes due 2005 (the
"Original Notes") and warrants to purchase membership interests in the
Company or warrants to purchase common stock in Epic Warrant Co., in a private
placement offering (the "Offering") pursuant to Rule 144A of the Securities
Act of 1933. Proceeds of the Offering were used by the Company (i) to repay
the $55.4 million bridge loan; (ii) to repay $23.8 million of certain
indebtedness of the Company; (iii) to fund an escrow of the first two
interest payments under the Notes of $16.9 million; (iv) for working capital
and general corporate purposes and (v) to pay fees and expenses related to
the Offering and resort acquisitions. Proceeds of the Offering were also used
by the Company to acquire the Planter's Quarters Resort on the island of
Hilton Head in South Carolina on July 8, 1998 for a cash purchase of $3.8
million and assumption of approximately $4.0 million of debt, which was
immediately repaid. This resort contains 36 two and three bedroom suites.
On August 13, 1998 the Company filed a registration statement with the
Securities and Exchange Commission relating to its offer to exchange (the
"Exchange Offer") its 13% Senior Secured Redeemable Notes due 2005, Series B
(the "Exchange Notes") for all outstanding Original Notes. The Exchange Notes
contain substantially the same terms as the Original Notes. The Original
Notes and the Exchange Notes are fully, unconditionally, jointly and
severally, guaranteed by all of the Company's subsidiaries, except Epic
Master Funding Corporation ("Epic Funding"). As a result, separate financial
statements of the Guarantor subsidiaries will not be presented. As of
September 30, 1998, Epic Funding had inconsequential assets, liabilities and
equity.
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The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations under the Securities and
Exchange Act of 1934, and accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, including normal recurring accruals, considered necessary for a
fair presentation of financial condition and results of operations have been
made. Operating results for the three-month and nine month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. NEW RECEIVABLES FACILITY:
In September 1998, the Company entered into a $75 million non-recourse
vacation ownership loan participation facility (the "New Receivables
Facility") with a financial institution. Under the facility, the Company will
sell its Vacation Ownership Interest Receivables on a non-recourse basis. The
commitment provides for advance rates of 88% of the lesser of (i) the unpaid
principal balance of the receivables sold or (ii) the market value of such
receivables as determined by the financial institution. Borrowings under the
facility will bear interest at LIBOR plus 1.50%, reset daily.
3. RELATED PARTY TRANSACTIONS:
In the normal course of operations, an affiliate of Mr. Flatley provides the
Company with administrative services including payroll and insurance
processing. The Company recorded expenses of $363,177 for the nine months
ended September 30, 1998 related to these services. All of the expenses
recorded related to the first six months of the nine-month period ended
September 30, 1998. No expenses were recorded during the three months ended
September 30, 1998. During 1998, Mr. Flatley advanced the Company $385,484
for down payment deposits in regard to the additional resort purchases which
was reimbursed in July 1998.
4. EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT:
In connection with the Offering, the Company incurred prepayment penalties
totaling approximately $2.1 million and expenses associated with unamortized
deferred financing costs of approximately $0.6 million. These expenses have been
reflected as an extraordinary loss in the accompanying statements of operations
for the three and nine months ended September 30, 1998.
5. SUBSEQUENT EVENTS:
In October 1998, the Company consummated its first funding under the New
Receivables Facility and used a portion of the proceeds to pay off the remaining
outstanding notes payable balance of $21.3 million. In December 1998, the
Company consummated its Exchange Offer.
7
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EPIC RESORTS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Epic Resorts, LLC, a Delaware limited liability company (the "Company"), was
formed in June 1998 to merge with Epic Resorts, Inc., which had been 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 Thomas F. Flatley, the Company's President. 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 private placement of the Company's $130
million Senior Secured Redeemable Notes due 2005 (the "Notes") in July 1998 (the
"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.
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, green 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 Interests 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
8
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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.
RESULTS OF OPERATIONS
The following analysis by the management of the Company summarizes the
significant changes in the results of operations presented in the statements of
operations for the three and nine months ended September 30, 1998 and 1997, and
presents an analysis of the financial condition of the Company as of September
30, 1998.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997
REVENUES. For the three months ended September 30, 1998, the Company generated
total revenues of $14.3 million compared to $12.0 million for the three months
ended September 30, 1997, an increase of $2.3 million, or 19.2%. This increase
is primarily the result of $1.3 million increase in sales of Vacation Ownership
Interests to $10.7 million in 1998 from $9.4 million in 1997, an increase of
13.8%. Sales of Vacation Ownership Interests include the new sales activities at
the Planter's Quarters Resort of $0.9 million for the three months ended
September 30, 1998.
Resort operations revenue increased 23.5% to $2.1 million for the three months
ended September 30, 1998 from $1.7 million for the comparable period in 1997, as
a result of additional resort revenues from the newly acquired resorts.
Interest income increased 66.7% to $1.5 million for the three months ended
September 30, 1998 from $0.9 million for the comparable period in 1997 due to an
increase in the principal amount of net customer mortgages receivable to $52.0
million from $33.5 million.
COST OF SALES. Cost of sales for Vacation Ownership Interests as a percentage of
sales of Vacation Ownership Interests decreased to 22.4% for the three months
ended September 30, 1998 from 24.5% for the comparable period in 1997. This
decrease was attributable to the increase in the average sales price of Vacation
Ownership Interests at London Bridge Resort and Daytona Beach Regency.
RESORT OPERATIONS EXPENSE. Resort operations expense decreased 7.1% to $1.3
million for the three months ended September 30, 1998 from $1.4 million for the
comparable period in 1997, reflecting increased reimbursements from the
Associations which more than offset increased operation expenses from the newly
acquired resorts.
SELLING AND MARKETING. Selling and marketing expenses (including commissions) as
a percentage of Sales of Vacation Ownership Interests decreased to 37.8% for the
three months ended September 30, 1998 from 41.0% for the comparable period in
1997. This decrease was
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primarily a result of increases in the average sales price of Vacation Ownership
Interests and the development of more efficient sales and marketing programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$1.7 million for the three months ended September 30, 1998 from $0.9 million for
the comparable period in 1997. As a percentage of Sales of Vacation Ownership
Interests and resort operations revenue, general and administrative expenses
increased to 13.3% for the three months ended September 30, 1998 from 9.0% for
the comparable period in 1997 primarily as a result of increased staffing and
start-up costs incurred prior to the commencement of sales operations at the
newly acquired resorts.
INTEREST EXPENSE. Interest expense increased to $4.9 million for the three
months ended September 30, 1998 from $0.8 million for the comparable period
in 1997 reflecting the interest on the $130 million Senior Secured Redeemable
Notes issued by the Company in July 1998 (the "Notes").
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts as a percentage
of sales of Vacation Ownership Interests declined to 3.9% for the three months
ended September 30, 1998 from 5.0% for the comparable period in 1997 which
reflects the Company's increased monitoring and collection procedures associated
with customer notes receivable.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. The Company generated total revenues of $27.3 million for the nine
months ended September 30, 1998 as compared to $22.9 million for the comparable
period in 1997, an increase of $4.4 million, or 19.2%. This increase primarily
reflects the $3.2 million increased sales growth at Daytona Beach Regency to
$14.1 million for the nine months ended September 30, 1998 from $10.9 million
for the comparable period in 1997 as well as the new sales activities of $0.9
million at the Planter's Quarters Resort.
Resort operations revenue remained constant at $5.5 million for the nine
months ended September 30, 1998 and 1997. Revenue decreases of $0.3 million
at both London Bridge Resort and Daytona Beach Regency resulted from
decreasing availability of suites for rent in 1998 due to the continued
conversion of suites to Vacation Ownership Interests. These decreases were
offset by increased activity at the newly acquired resorts of $0.6 million
for the nine months ended September 30, 1998.
Interest income increased 64.0% to $4.1 million for the nine months ended
September 30, 1998 from $2.5 million for the comparable period in 1997 due to an
$18.5 million increase in the principal amount of net customer mortgages
receivable to $52.0 million in 1998 from $33.5 million in 1997.
COST OF SALES. Cost of sales for Vacation Ownership Interests as a percentage of
sales of Vacation Ownership Interests decreased to 23.1% for the nine months
ended September 30, 1998 from 23.6% for the comparable period in 1997. This
decrease was attributable to the increase in average sales price of Vacation
Ownership Interests at London Bridge and Daytona Beach Regency.
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RESORT OPERATIONS EXPENSE. Resort operations expense decreased 17.1% to $3.4
million for the nine months ended September 30, 1998 from $4.1 million for the
comparable period in 1997, resulting from increased reimbursements from the
Associations for such period in 1998.
SELLING AND MARKETING. Selling and marketing expenses (including commissions) as
a percentage of Sales of Vacation Ownership Interests decreased to 38.5% for the
nine months ended September 30, 1998 from 38.9% for the comparable period in
1997. This decrease was primarily a result of increases in the average sales
price of Vacation Ownership Interests and the development of more efficient
sales and marketing programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$3.4 million for the nine months ended September 30, 1998 from $2.3 million for
the comparable period in 1997. As a percentage of Sales of Vacation Ownership
Interests and resorts operations revenue, general and administrative expenses
increased to 10.7% for the nine months ended September 30, 1998 from 8.1% for
the comparable period in 1997 which was attributable to the increased staffing
and start-up costs incurred prior to the commencement of sales operations at the
newly acquired resorts.
INTEREST EXPENSE. Interest expense increased to $6.9 million for the nine months
ended September 30, 1998 from $2.7 million for the comparable period in 1997
reflecting the additional interest on Notes issued in July 1998.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts as a percentage
of Sales of Vacation Ownership Interests decreased to 4.0% for the nine months
ended September 30, 1998 from 4.4% for the comparable period in 1997 which
reflects the Company's increased monitoring and collection procedures associated
with customer notes receivable.
CHANGES IN FINANCIAL CONDITION
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Cash and cash equivalents increased by $6.3 million and $0.1 million for the
nine months ended September 30, 1998 and 1997, respectively.
Net cash used in operating activities was $73.2 million and $4.0 million for the
nine months ended September 30, 1998 and 1997, respectively. The net change is
primarily attributable to the acquisition of the four additional resorts for a
cash purchase price of $64.0 million during the nine months ended September 30,
1998.
Net cash used in investing activities was $0.9 million and $0.5 million for the
nine months ended September 30, 1998 and 1997, respectively.
Net cash provided by financing activities was $80.4 million and $4.6 million
for the nine months ended September 30, 1998 and 1997, respectively. The net
change is primarily attributable to $130.0 million proceeds received on July
8, 1998 from the Offering, which was used to purchase the new resorts as
discussed above, as well as the payoff of a $55.4 million bridge loan, the
repayment of $23.8 million of outstanding debt and the payment of deferred
financing costs of $6.7 million (including prepayment penalties of
approximately $2.1 million).
11
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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 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 and the interest paid on the notes payable secured by the
Company's pledge of such customer mortgages receivable. 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 September 30, 1998, the
Company had $21.3 million of outstanding notes payable secured by its land,
Vacation Ownership Interests and customer mortgages receivable under its
existing receivables facility. In October 1998, this existing receivables
facility was repaid and terminated with the proceeds from the Company's New
Receivables Facility (discussed below).
In September 1998, the Company entered into a non-recourse $75 million
vacation ownership loan participation facility with a financial institution
(the "New Receivables Facility"). Under this facility, the Company will sell
its Vacation Ownership Interest Receivables to a limited purpose, bankruptcy
remote subsidiary of the Company, and the financial institution will purchase
from the subsidiary 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 the subsidiary. The New Receivables
Facility provides for advance rates of 88% of the lesser of (i) the unpaid
principal balance of the receivables sold to the subsidiary or (ii) the
market value of such receivables as determined by the financial institution.
Borrowings under the New Receivables Facility will bear interest at LIBOR
plus 1.50%, reset daily. The New Receivables 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.
The Company's capital resources are provided from the following sources: (i)
cash flows from operations, (ii) proceeds from the New Receivables Facility and
(iii) proceeds from the Offering designated for working capital and
general corporate purposes. In addition, $16.9 million of the net proceeds of
the Offering, representing an amount equal to the first two interest payments
under the Notes, was placed into an escrow account to be held by an 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.
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Thereafter, the Company must at all times maintain escrow funds in an escrow
account sufficient to make the next required interest payment on the Notes.
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.
The Company believes that the net proceeds to the Company from the Offering
designated for working capital and general corporate purposes, 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 future, require additional credit
facilities or issuances of other debt or equity securities 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.
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. The Company is actively working with its suppliers and third party
service providers, including its receivable servicing providers and the vacation
ownership exchange networks with which it is affiliated to assess their
compliance efforts, as well as the Company's potential exposure to the failure
of such suppliers and third party service providers to become Year 2000
compliant. 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.
13
<PAGE>
PART II
ITEM 2. CHANGES IN SECURITIES.
(a) Inapplicable
(b) Inapplicable
(c) Recent Issues of Unregistered Securities. The Company sold securities
that were not registered under the Securities Act in the following
transaction during the quarter ended September 30, 1998:
On July 8, 1998, the Company and a wholly owned, non-operating
subsidiary, Epic Capital Corp. offered and sold 130,000 units (the
"Units") representing $130,000,000 principal amount of 13% Senior
Secured Redeemable Notes due 2005 (the "Notes") and warrants to
purchase membership interests ("LLC Warrants") in the Company or
shares ("Corporate Warrants") of common stock of Epic Warrant Co.,
another wholly owned non-operating subsidiary of the Company (the
"Offering"). NatWest Capital Markets Limited acted as the initial
purchaser in the Offering and purchased the Notes at a discount of
3.5%. The transaction was effected pursuant to an exemption from
registration under Section 4(2) of the Securities Act in reliance
upon the representations of the purchaser of the Units and its
agreement to resell such securities only pursuant to a registration
statement or in a transaction exempt from the registration
requirements of the Securities Act.
The warrants are exercisable at any time prior to June 15, 2005 for
an exercise price of $0.01 per warrant. Each Corporate Warrant is
exercisable for one share of Common Stock of Epic Warrant Co., and
each LLC Warrant is exercisable for one membership interest in the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule.
(b) Reports. No reports on Form 8-K have been filed during the quarter
ended September 30, 1998.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPIC RESORTS, LLC
Date: December 29, 1998 By: /s/ Scott J. Egelkamp
----------------- -------------------------------------
Scott J. Egelkamp
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QTR.
FINANCIAL STATEMENTS FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001068052
<NAME> EPIC RESORTS LLC
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 24,261,658
<SECURITIES> 0
<RECEIVABLES> 53,316,380
<ALLOWANCES> 1,332,305
<INVENTORY> 72,892,964
<CURRENT-ASSETS> 0
<PP&E> 14,483,551
<DEPRECIATION> 4,153,481
<TOTAL-ASSETS> 166,938,718
<CURRENT-LIABILITIES> 5,251,570
<BONDS> 151,337,658
0
0
<COMMON> 0
<OTHER-SE> 10,349,490
<TOTAL-LIABILITY-AND-EQUITY> 166,938,718
<SALES> 27,343,596
<TOTAL-REVENUES> 36,925,878
<CGS> 6,296,029
<TOTAL-COSTS> 20,149,183
<OTHER-EXPENSES> 4,826,344
<LOSS-PROVISION> 1,116,165
<INTEREST-EXPENSE> 6,900,277
<INCOME-PRETAX> 3,933,909
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,933,909
<DISCONTINUED> 0
<EXTRAORDINARY> (2,722,027)
<CHANGES> 0
<NET-INCOME> 22,205
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
