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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 ACT OF 1934
For quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ---------------------
Commission File Number: 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
incorporation or organization) identification no.)
1150 FIRST AVENUE, SUITE 900 19407
KING OF PRUSSIA, PA (Zip Code)
(Address of principal executive offices)
(610) 992-0100
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of September 30, 1999, 1,118,000 membership interests of the
registrant were outstanding.
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- -------------------------------------------------------------------------------
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EPIC RESORTS, LLC
INDEX
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<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
ITEM 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998...............................................................................3
Consolidated Statements of Operations - Nine Months Ended
September 30, 1999 and 1998......................................................................4
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998......................................................................5
Notes to Consolidated Financial Statements.......................................................6
ITEM 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations........................................................................7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......................................11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K..................................................................
SIGNATURES
EXHIBIT INDEX...................................................................................................
</TABLE>
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PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EPIC RESORTS, LLC
CONSOLIDATED BALANCE SHEETS
(unaudited)
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<CAPTION>
September 30, December 31,
1999 1998
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ASSETS
Cash and cash equivalents $ 6,326,000 $ 16,095,000
Cash in escrow 8,886,000 8,586,000
Investment in residual interests 28,849,000 15,223,000
Mortgages receivable, net of allowance of $1,234,000 and $991,000 as
of September 30, 1999 and December 31, 1998, respectively 19,168,000 11,771,000
Inventory 66,190,000 73,042,000
Property and equipment, net 15,186,000 11,909,000
Deferred financing costs, net 5,663,000 6,823,000
Other assets 7,258,000 3,479,000
-------------------------------------
Total assets $157,526,000 $146,928,000
-------------------------------------
-------------------------------------
LIABILITIES AND MEMBERS' EQUITY
Accounts payable $ 2,043,000 $ 1,154,000
Accrued expenses 1,006,000 1,743,000
Accrued interest payable 4,961,000 736,000
Advance deposits 43,000 76,000
Deferred revenue 1,621,000 423,000
Notes payable 418,000 621,000
Senior secured notes payable 127,727,000 127,432,000
-------------------------------------
Total liabilities 137,819,000 132,185,000
-------------------------------------
Commitments and contingencies - -
Warrants 2,757,000 2,757,000
Members' equity 16,950,000 11,986,000
-------------------------------------
Total liabilities and members' equity $157,526,000 $146,928,000
-------------------------------------
-------------------------------------
</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,
-------------------------- ---------------------------
1999 1998 1999 1998
------- ------- ------ -------
<S> <C> <C> <C> <C>
Revenue:
Sales of vacation ownership interests $ 24,542,000 $ 10,678,000 $ 63,417,000 $ 27,344,000
Resort operations 5,771,000 2,096,000 15,402,000 5,512,000
Gains on sales of receivables 4,749,000 - 10,068,000 -
Other income 823,000 1,558,000 2,447,000 4,070,000
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35,885,000 14,332,000 91,334,000 36,926,000
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Costs and expenses:
Cost of sales of vacation ownership interests 4,788,000 2,435,000 12,490,000 6,296,000
Resort operations 6,480,000 1,346,000 17,022,000 3,367,000
Selling and marketing costs 11,041,000 4,038,000 27,696,000 10,487,000
General and administrative 4,068,000 1,663,000 10,790,000 3,428,000
Provision for doubtful accounts 802,000 418,000 2,210,000 1,116,000
Depreciation 373,000 154,000 755,000 530,000
Financing and closing costs 226,000 290,000 741,000 868,000
Interest expense 4,855,000 4,830,000 14,457,000 6,900,000
---------------------------------------------------------------------------
32,633,000 15,174,000 86,161,000 32,992,000
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Income (loss) before minority interest 3,252,000 (842,000) 5,173,000 3,934,000
Minority interest - - - 1,190,000
Income (loss) before extraordinary item - (842,000) - 2,744,000
Extraordinary loss on early extinguishment of debt - (2,722,000) - (2,722,000)
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Net income (loss) $ 3,252,000 $ (3,564,000) $ 5,173,000 $ 22,000
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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 CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,173,000 $ 22,000
Adjustments to reconcile net income to net cash used in operating activities-
Depreciation 755,000 530,000
Amortization of deferred financing costs 1,438,000 1,031,000
Provision for doubtful accounts 2,210,000 1,116,000
Gains on sales of receivables (10,068,000) -
Minority interest - 1,190,000
Changes in assets and liabilities--
Mortgages receivable (26,572,000) (15,952,000)
Inventory 6,852,000 (64,026,000)
Other assets (3,779,000) (777,000)
Accounts payable 889,000 (381,000)
Accrued expenses (737,000) 4,004,000
Advance deposits (33,000) 14,000
Deferred revenue 1,198,000 -
-----------------------------------------
Net cash used in operating activities (22,674,000) (73,229,000)
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,032,000) (888,000)
Investment in residual interests (13,626,000) -
-----------------------------------------
Net cash used in investing activities (17,658,000) (888,000)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 11,916,000
Proceeds from bridge loan - 55,414,000
Proceeds from bond offering - 130,000,000
Payments on notes payable (203,000) (88,974,000)
Interest escrows (300,000) (17,650,000)
Proceeds from sales of receivables 31,555,000 -
Payment of deferred financing costs (278,000) (6,728,000)
Purchase of minority interest - (3,300,000)
Contributions from members - 163,000
Distributions to members (211,000) (414,000)
-----------------------------------------
30,563,000 80,427,000
-----------------------------------------
Net cash provided by financing activities
-----------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,769,000) 6,310,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,095,000 248,000
-----------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,326,000 $ 6,558,000
-----------------------------------------
-----------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 8,794,000 $ 2,810,000
-----------------------------------------
-----------------------------------------
</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
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1. BASIS OF PRESENTATION:
The consolidated financial statements have been prepared by the
Registrant, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Registrant believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the audited
financial statements and the notes thereto included in the Registrant's latest
annual report on Form 10-K. In the opinion of the Registrant, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
consolidated financial position and the consolidated results of its operations
and its cash flows, have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the full year.
The Company has reclassified certain prior period amounts to conform to the
current year presentation.
2. NATURE OF BUSINESS:
Epic Resorts, LLC (a Delaware limited liability company) and its wholly
owned subsidiaries (collectively the "Company") generate revenue from the sale
and financing of vacation ownership interests in its resorts. Customers acquire
the right 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.
Beginning in the first quarter of 1999, Epic began selling
membership interests of Epic Vacation Club (the "Club"), a Delaware nonprofit
mutual benefit corporation formed in 1998, at all of its resorts. The Club was
formed for the specific purpose of owning and managing the real property
conveyed to it by Epic. The Club provides purchasers significant
flexibility in their vacation planning, a wider variety of vacation options and
easier access to Epic's network of resorts. The Club sells points, which
entitle the customer to reserve units at any of Epic's six resorts and in
increments as short as one day. The number of points required to stay one day at
one of Epic's resorts varies depending upon the particular resort, the
size of the unit, the season and the day of the week.
3. SALES OF MORTGAGES RECEIVABLE:
During the three and nine months ended September 30, 1999, Epic
sold $20,462,000 and $42,515,000, respectively of mortgages receivables as part
of its $75 million Vacation Ownership Loan Participation Facility ("Receivables
Facility"). Under this Receivables Facility, Epic sells its Vacation
Ownership Interest Receivables on a non-recourse basis to Epic Master Funding
Corporation ("Epic Funding"), a wholly-owned subsidiary which is a qualifying
special purpose entity as defined in SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and (i) unpaid principal balance of the
receivables sold or (ii) the market value of such receivables as determined by
the financial institution. The Receivable Facility contains a customary
provision requiring the substitution of collateral in an equal amount if
receivables become 60 days past due.
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4. RELATED PARTY TRANSACTIONS:
The Company has accrued $1,274,000 and $829,000 as of September 30,
1999 and December 31,1998, respectively, as a receivable from various
homeowners' associations at its resorts. The Company generally accrues
receivables from homeowners' associations for management fees and certain other
expenses paid on behalf of the homeowners' associations. This receivable is
included in other assets in the accompanying consolidated balance sheets.
5. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in one industry segment, which includes the
development, acquisition, marketing, financing, and management of vacation
ownership resorts. The Company does not operate outside 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 Epic's revenue.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS QUARTERLY REPORT, AND OTHER WRITTEN REPORTS AND ORAL STATEMENTS
MADE FROM TIME TO TIME BY EPIC, MAY CONTAIN "FORWARD-LOOKING STATEMENTS."
ALL STATEMENTS THAT ADDRESS OPERATING PERFORMANCE, EVENTS OR DEVELOPMENTS THAT
MANAGEMENT ANTICIPATES WILL OCCUR IN THE FUTURE, INCLUDING STATEMENTS RELATED TO
FUTURE SALES, PROFITS, EXPENSES, AND INCOME, OR STATEMENTS EXPRESSING GENERAL
OPTIMISM ABOUT FUTURE RESULTS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION,
WORDS SUCH AS "EXPECTS," "ANTICIPATES," "INTENDS," "PLANS," "BELIEVES," AND
"ESTIMATES," AND VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY FORWARD-LOOKING STATEMENTS.
BECAUSE FORWARD-LOOKING STATEMENTS ARE BASED ON A NUMBER OF BELIEFS,
ESTIMATES AND ASSUMPTIONS BY MANAGEMENT THAT COULD ULTIMATELY PROVE INACCURATE,
THERE IS NO ASSURANCE THAT FORWARD-LOOKING STATEMENTS WILL PROVE TO BE CORRECT.
ANY NUMBER OF FACTORS COULD AFFECT FUTURE OPERATIONS AND RESULTS, INCLUDING THE
FOLLOWING: INCREASING COMPETITION; FLUCTUATIONS IN CONSUMER DEMAND AND
CONFIDENCE; FLUCTUATIONS IN COSTS AND EXPENSES; THE EFFECTIVENESS OF
ADVERTISING, MARKETING AND PROMOTIONAL PROGRAMS; WEATHER CONDITIONS THAT AFFECT
THE GEOGRAPHIC AREAS WHERE THE COMPANY'S RESORTS ARE LOCATED; THE EFFECTIVENESS
OF THE INTEGRATION OF THE COMPANY'S RECENTLY ACQUIRED RESORTS; THE TIMING,
QUALITY AND COMPLETION OF CONSTRUCTION AND DEVELOPMENT ACTIVITIES AT THE
COMPANY'S RESORTS; THE TIMING AND AVAILABILITY OF GOVERNMENTAL PERMITS AND
AUTHORIZATIONS REGARDING THE COMPANY'S RESORTS; THE CONTINUED AVAILABILITY AND
TERMS OF FINANCING; AND OTHER GENERAL ECONOMIC CONDITIONS, SUCH AS THE RATE OF
EMPLOYMENT, INFLATION AND INTEREST RATES. THIS LIST OF FACTORS IS NOT EXCLUSIVE.
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO THE SAFE HARBORS CREATED IN
THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
HISTORY AND OWNERSHIP
Epic Resorts, LLC, a Delaware limited liability company ("EPIC"), was
formed in June 1998 to merge with Epic Resorts, Inc. Epic Resorts, Inc. 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, Epic's
President. In April 1996, the Daytona Beach Regency Resort was acquired by
Daytona Beach Regency, Ltd., a limited partnership controlled by Mr. Flatley.
In connection with the private placement of $130 million aggregate
principal amount of Epic's Senior Secured Redeemable Notes due 2005 (the
"SECURED NOTES") in July 1998, 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 those subsidiaries to Epic. In connection with the issuance of the
Secured Notes, Epic acquired four new resorts (Desert Paradise Resort,
Scottsdale Links Resort, Palm Springs Marquis Villas and Island Links Resort)
and purchased the limited partnership interests in Daytona Beach Regency, Ltd.
not owned by Mr. Flatley.
BUSINESS
Epic is a nationwide developer and marketer of vacation ownership
resorts located in major tourist destinations. Vacation ownership interests
typically entitle the buyer to a fully furnished vacation residence in any
one of Epic's six resorts based on the number of points purchased in Epic
Vacation Club, a Delaware nonprofit non-stock corporation developed by Epic
(the "VACATION CLUB"). The Vacation Club is managed by a board of directors
elected by its members. The Vacation Club holds units of each of Epic's
resorts which are transferred into the Vacation Club by each of Epic's
operating subsidiaries when the units are developed or purchased by the
applicable subsidiary. Epic converted its operations to this vacation club
system in January 1999. Prior to this time, a customer would purchase a
one-week timeshare interval at one particular resort, and would receive a
deed evidencing their purchase. Epic now sells points ("VACATION POINTS") in
the Vacation Club, which entitle the purchaser to reserve units at any of
Epic's six resorts and in increments as short as one day, depending on how
far in advance
8
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reservations are made. A customer now has access to all of Epic's resorts, as
well as over 1,500 other resorts worldwide through Epic's participation in
vacation ownership interest exchange networks. The vacation club system offers
Epic's customers greater flexibility in their vacation planning, a wider variety
of vacation options, and easier access to Epic's network of resorts.
Epic's six resorts are located in Las Vegas, Nevada; Scottsdale,
Arizona; Palm Springs, California; Daytona Beach, Florida; Lake Havasu City,
Arizona; and Hilton Head, South Carolina.
Epic marketed and sold its Timeshare Intervals and markets and sells
its Vacation Points (collectively, "VACATION OWNERSHIP INTERESTS") through both
on-site and off-site sales centers. In addition, Epic generates income through
the rental of available suites at its resorts. Epic sells Vacation Ownership
Interests to purchasers for leisure purposes and not for investment purposes.
EPIC VACATION CLUB
The Vacation Club is a Delaware nonprofit, non stock corporation formed
by Epic in 1998. The Vacation Club's certificate of incorporation provides that
it was formed for the specific purpose of owning and managing the real property
conveyed to it by Epic and its resort subsidiaries. Purchasers of Vacation
Points ("PURCHASERS") receive the right to reserve time at any of the resort
units conveyed to the Vacation Club as well as the right to vote to elect the
Vacation Club's board members and to vote on major Club matters. Epic currently
owns a majority of the Vacation Points allocated in respect of the Resorts in
the Vacation Club and expects to own a majority of all Vacation Points in the
near future.
The Vacation Club maintains a reserve, funded from the annual
assessments collected from Purchasers, which is used to maintain and upgrade the
interiors and furnishings of the resort units, and the exteriors and common
areas of the resorts in which the Vacation Club owns all of the units. The
Vacation Club collects maintenance dues from Purchasers based on the number of
Vacation Points owned. Currently, the annual dues are 4.5 cents per Vacation
Point. These dues are intended to cover the Vacation Club's operating costs,
including condominium association dues at each resort. Epic will pay association
dues for all unsold Vacation Points.
The vacation club system provides Purchasers with significant
flexibility in planning their vacations. Under this system, Purchasers can
select vacations according to their schedules, space needs and available
Vacation Points. The number of Vacation Points that are required to stay one day
at one of Epic's resorts varies depending upon the particular resort, the size
of the unit, the season and the day of the week. For example, a Friday or
Saturday night stay at a one-bedroom unit may require 1,000 Vacation Points per
night off-season and 1,500 Vacation Points per night in peak season. A midweek
stay at the same one-bedroom unit would require less Vacation Points. Vacation
Points are reissued on an anniversary date basis and any unused Vacation Points
may be carried over for one year. A Purchaser may also borrow Vacation Points
from their allotment for the next year, subject to certain restrictions
prescribed by the Vacation Club.
In addition, Purchasers may also buy bonus time from the Vacation Club
for use when space is available. Bonus time can only be reserved within two
weeks of use. Bonus time gives customers the opportunity to use available units
on short notice at a reduced rate (generally from $20 to $50 per night for a two
bedroom unit, mid-week in the off-season) and to obtain vacation opportunities
beyond their Vacation Point allotment.
The Vacation Club has a board of directors, elected by its members,
that manages its business and affairs. Each of the directors and principal
executive officers of the Vacation Club are also officers of Epic. The Board
must obtain the approval of a majority of the voting power represented to take
certain actions, including (i) any incurrence of a capital expenditure exceeding
5% of the Vacation Club's budgeted gross expenses during any fiscal year and
(ii) the sale of any of the Vacation Club's property during any fiscal year, if
the aggregate fair market value is in excess of 5% of the Vacation Club's
budgeted expenses for that year.
9
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SALES AND MARKETING
Epic 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. Epic currently operates an off-site sales
center in Philadelphia, Pennsylvania. Epic also plans to add four additional
sales centers by the end of 1999, two of which have already been constructed in
Schaumburg, Illinois and Torrence, California. Epic currently intends to locate
these planned sales centers in major metropolitan areas, which can be
conveniently toured during evenings and weekends. These centers, which are
leased by Epic, are generally more cost effective because they reduce the need
for on-site tours of Epic's Resorts and are more easily accessible to Epic's
target customers.
ON-SITE SALES CENTERS. Epic 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.
Epic's completed but unsold inventory of resort units also provides 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.
Epic typically establishes the sales prices for its Vacation Ownership
Interests on a resort-by-resort basis after reviewing competitive local market
conditions. When Epic enters into a new market, it typically prices Vacation
Ownership Interests to attract the maximum number of potential customers and
gain market share. As Epic becomes more established in a market, sales prices
are increased to reflect the high quality of its resorts. For example, average
sales prices for Vacation Ownership Interests at Epic's London Bridge Resort and
Daytona Beach Regency have increased from $8,900 and $7,900, at commencement of
sales, respectively, to $13,323 and $11,349, respectively, as of December 31,
1998.
Epic's sales representatives are a critical component of its sales and
marketing effort, and Epic continually strives to attract, train and retain a
dedicated sales force. Epic provides sales instruction and training, which
coupled with the sales representative's valuable knowledge of each resort,
assists in acquainting prospective customers with the benefits of each resort.
Epic'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. Epic 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. At closing, customers are
also provided with a toll free customer service phone number to facilitate any
additional information requests.
To support its marketing and sales efforts, Epic has also developed a
computer database to track its vacation ownership marketing and sales programs.
Management believes that as Epic's vacation ownership operations grow, this
database will become an increasingly significant asset and will enable it to
take advantage of less costly marketing and referral opportunities.
CUSTOMER FINANCING
Approximately 90% of Epic's customers (each, an "OBLIGOR") finance
their purchase of a Vacation Ownership Interest with Epic. Obligors are
generally required to make a down payment of at least 10% of the purchase price.
The balance is typically financed for a period of seven to ten years at a fixed
interest rate. Epic financed approximately 90% of the aggregate purchase price
of these sales during each of 1996, 1997 and 1998, and received cash for the
remaining balance.
The adequacy of Epic'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.
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Epic 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. In addition, the down payments required by
Epic are similar to those required by banks and mortgage companies which offer
this type of credit, when such credit is available.
VACATION OWNERSHIP EXCHANGE NETWORKS
According to the American Resort Developers Association, 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. Membership in an exchange network allows the owner
of a Vacation Ownership Interest at one of Epic's Resorts or in the Vacation
Club 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.
Each Resort is affiliated with Interval International ("II"), one of
the leading worldwide vacation ownership exchange companies. Participation in II
entitles owners to exchange their annual occupancy rights for occupancy at over
1,700 II resorts worldwide. By contract, II also manages the day-to-day master
reservation system for the Epic resort system at a cost effective level. Epic
regards the use of the reservation system as a significant customer service to
its members and a competitive advantage over other resort developers. All of the
Resorts have received Five-Star designations from II, the highest designation
under II's rating system. II awards this designation to less than 10% of its
1,700 member resorts.
RESULTS OF OPERATIONS
The following analysis by the management of Epic summarizes the
significant changes in the results of operations presented in the statements of
operations for the three and nine months ended September 30, 1999 and 1998, and
presents an analysis of the financial condition of Epic as of September
30, 1999.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1998
REVENUES. For the three months ended September 30, 1999, Epic
generated total revenues of $35.9 million compared to $14.3 million for the
three months ended September 30, 1998, an increase of $21.6 million, or 151%.
This increase is primarily the result of a $13.8 million increase in sales of
Vacation Ownership Interests to $24.5 million for the three months ended
September 30,1999 from $10.7 million for the comparable period in 1998, an
increase of 129%. Sales of Vacation Ownership Interests include the new sales
activities at Scottsdale Links, Desert Paradise, Palm Springs Marquis and
Island Links resorts of $12.7 million for the three months ended September 30,
1999.
Resort operations revenue increased 176% to $5.8 million for the three months
ended September 30, 1999 from $2.1 million for the comparable period in 1998, as
a result of $2.7 million of additional resort revenues from the recently
acquired resorts, as well as increased revenues of $3.2 million from the sale of
vacation packages. Revenue from vacation package sales is deferred until the
Company fulfills the client vacation.
Gains on sales of receivables increased to $4.7 million for the three months
ended September 30, 1999 for the comparable prior period. This increase is
attributable to continued fundings under Epic's Receivables Facility
entered into in October 1998.
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Other income decreased 200% to $823,000 for the three months ended September 30,
1999 from $1.6 million for the comparable period in 1998, this decrease reflects
a reduction in interest income, due to the sale of the notes receivable under
Epic's receivables facility.
COST OF SALES. Cost of sales for Vacation Ownership Interests as a
percentage of sales of Vacation Ownership Interests decreased to 19.5% for
the three months ended September 30, 1999 from 22.8% for the comparable
period in 1998. This decrease was attributable to the increase in the average
sales price of Vacation Ownership Interests at the resorts, as well as the
lower cost of sales from the newer resorts.
RESORT OPERATIONS EXPENSE. Resort operations expense increased 400% to $6.5
million for the three months ended September 30, 1999 from $1.3 million for
the comparable period in 1998, reflecting increased expenses to operate
Scottsdale Links, Desert Paradise and Palms Springs Marquis resorts, as well
as increased expenses of $2.6 million relating to the sale of vacation
packages.
SELLING AND MARKETING. Selling and marketing expenses (including
commissions) as a percentage of sales of Vacation Ownership Interests
increased to 45.0% for the three months ended September 30, 1999 from 37.8%
for the comparable period in 1998. This increase was primarily a result of
the marketing costs incurred to generate tours as sales commenced at the
Scottsdale Links, Desert Paradise, Island Links and Palm Springs Marquis
resorts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$4.1 million for the three months ended September 30, 1999 from $1.7 million
for the comparable period in 1998. As a percentage of sales of Vacation
Ownership Interests and resort operations revenue, general and administrative
expenses increased to 13.5% for the three months ended September 30, 1999
from 13.3% for the comparable period in 1998 primarily as a result of
increased staffing and costs incurred to properly support the new resorts.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts as a
percentage of sales of Vacation Ownership Interests decreased to 3.3% for the
three months ended September 30, 1999 from 3.9% for the comparable period in
1998 which reflects the increased number of financed sales at Epic's
resorts.
INTEREST EXPENSE. Interest expense increased to $4.9 million for the three
months ended September 30, 1999 from $4.8 million for the comparable period
in 1998, reflecting a full three months of interest on the Secured Notes, as
compared to less than eleven weeks in the prior period.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES. For the nine months ended September 30, 1999, Epic
generated total revenues of $91.3 million compared to $36.9 million for the
nine months ended September 30, 1998, an increase of $54.4 million, or
147.4%. This increase is primarily the result of a $36.1 million increase in
sales of Vacation Ownership Interests to $63.4 million for the nine months
ended September 30, 1999 from $27.3 million for the comparable period in
1998, an increase of 132.2%. Sales of Vacation Ownership Interests include
the new sales activities at Scottsdale Links, Desert Paradise, Island Links
and Palm Springs Marquis resorts of $31.4 million for the nine months ended
September 30, 1999.
Resort operations revenue increased 180.0% to $15.4 million for the nine months
ended September 30, 1999 from $5.5 million for the comparable period in 1998, as
a result of $3.0 million of additional resort revenues from the recently
acquired resorts, as well as increased revenues of $3.9 million from the sale of
vacation packages.
Gains on sales of receivables increased to $10.1 million for the nine months
ended September 30, 1999 from the comparable prior period. This increase is
attributable to Epic's receivables facility entered into in October 1998.
Other income decreased 41.5% to $2.4 million for the nine months ended September
30, 1999 from $4.1 million for the comparable period in 1998 due to the sale of
the notes receivable under Epic's receivables facility.
12
<PAGE>
COST OF SALES. Cost of sales for Vacation Ownership Interests as a
percentage of sales of Vacation Ownership Interests decreased to 19.7% for
the nine months ended September 30, 1999 from 23.0% for the comparable period
in 1998. This decrease was attributable to the increase in the average sales
price of Vacation Ownership Interests at the resorts and the lower cost of
sales from the newer resorts.
RESORT OPERATIONS EXPENSE. Resort operations expense increased 425% to $17.0
million for the nine months ended September 30, 1999 from $3.4 million for
the comparable period in 1998, reflecting increased expenses to operate
Scottsdale Links, Desert Paradise, Island Links and Palms Springs Marquis
resorts, as well as increased expenses of $5.4 million relating to the sale
of vacation packages.
SELLING AND MARKETING. Selling and marketing expenses (including
commissions) as a percentage of sales of Vacation Ownership Interests
increased to 43.7% for the nine months ended September 30, 1999 from 38.4%
for the comparable period in 1998. This increase was primarily a result of
the marketing costs incurred to generate tours as sales commenced at the
Scottsdale Links, Desert Paradise, Island Links and Palm Springs Marquis
resorts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$10.8 million for the nine months ended September 30, 1999 from $3.5 million
for the comparable period in 1998. As a percentage of sales of Vacation
Ownership Interests and resort operations revenue, general and administrative
expenses increased to 13.7% for the nine months ended September 30, 1999 from
10.6% for the comparable period in 1998 primarily as a result of increased
staffing and costs incurred to properly support the new resorts.
INTEREST EXPENSE. Interest expense increased to $14.5 million for the nine
months ended September 30, 1999 from $6.9 million for the comparable period
in 1998 reflecting a full nine months of interest on Epic's senior
secured notes payable for the nine months ended September 30, 1999, as
compared to only three months from the July 1998 issuance date in the
comparable period.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts as a
percentage of sales of Vacation Ownership Interests decreased to 3.5% for the
nine months ended September 30, 1999 from 4.1% for the comparable period in
1998 which reflects the increased number of financed sales at Epic's
resorts.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations through the sale and financing of
membership interests in Epic Vacation Club, Vacation Ownership Interests, resort
operations, transient rental of resort accommodations and management fees. With
respect to the sale of Vacation Ownership Interests, Epic 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 Epic's pledge of such customer mortgages receivable.
The Company expects to 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 its 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. These funds are provided by Epic's non-recourse $75 million
vacation ownership loan participation facility. Under this receivables facility,
Epic sells Vacation Ownership Interest receivables to a limited purpose,
bankruptcy remote subsidiary of Epic, and a financial institution
purchases from the subsidiary participation interests in such receivables. The
proceeds from the sale of the participation interests are paid to Epic as
consideration for the receivables sold to the subsidiary. The receivables
facility provides for advance rates of 88% of the lesser of (i) unpaid principal
balance of the receivables sold to the subsidiary or (ii) the market value of
such receivables as determined by the financial institution. The receivables
facility provides non-recourse interim funding for the Vacation Ownership
Interests receivables 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 its
receivables facility.
13
<PAGE>
The Company's capital resources are provided from the following sources: (i)
cash flows from operations, (ii) proceeds from the receivables facility and
(iii) working capital. In addition, $8.5 million representing an amount equal
to one interest payment under the Secured Notes, is held in an escrow account
for the benefit of the holders of the Secured Notes to pay interest on the
Secured Notes. The escrow funds may be disbursed to the extent necessary to
make the interest payment on the Secured Notes. The Company must at all times
maintain escrow funds in an escrow account sufficient to make the next
required semi-annual interest payment on the Secured 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 its available working capital, together with cash
generated from operations and future borrowings, will be sufficient to meet the
Company's working capital and capital expenditure needs for future business
operations. The Company may obtain additional credit facilities or issue other
corporate debt or equity securities in connection with future acquisitions. Any
debt incurred or issued by Epic 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 Year 2000 issue is a flaw in many electronic data processing
systems, which prevents them from processing year-date data accurately beyond
the year 1999. This is the result of using a two-digit representation for the
year, for example "99" for "1999." This approach assumed that the first two
digits of the abbreviated date are "19." However, when the computer reaches 2000
it may interpret "00" as the year 1900 possibly causing inaccurate data
processing or processing to stop altogether.
The Company is addressing the Year 2000 issue with a corporate wide
initiative led by the Director of Information Systems and involving the
Company's Risk Manager. The initiative includes ascertaining that each of the
software packages in use has been certified as Year 2000 compliant.
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, and the fact that
each of the software packages have already been certified as compliant, the
Company believes that its exposure to Year 2000 problems with respect to this
hardware and software is minimal.
At each of Epic's resort locations, the general manager has been
advised that the resort's suppliers are Year 2000 compliant or that such
suppliers have taken the necessary steps to become compliant before the end of
1999.
While Epic believes that its exposure to risks involving the
Year 2000 problem 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 providers to be Year 2000 compliant
will not have an effect on Epic. The Company believes that its reasonably
likely worst case scenario regarding Year 2000 noncompliance is that certain
functions currently performed by its computer systems will have to be performed
manually. This could result in increased administrative burden and expense. The
Company has not made any material expenditures regarding the Year 2000 issue and
has utilized its internal staff to make all required Year 2000 upgrades and
conversions. These costs are not separately tracked.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is not exposed to interest rate risk in the near term, as
substantially all of Epic's indebtedness is at fixed rates (principally
the $130 million of senior secured redeemable notes which bear interest at a
fixed rate of 13.0%). The Company does not maintain a trading account for any
class of financial instrument, has never purchased any derivative instruments,
and is not directly subject to any foreign currency exchange or commodity price
risk.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are included in this Quarterly Report on
Form 10-Q:
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
15
<PAGE>
SIGNATURES
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
Dated: November 15, 1999 By: /s/ Scott J. Egelkamp
--------------------- -------------------------------------------
Scott J. Egelkamp
Vice President and Chief Financial Officer
Duly Authorized Principal Financial Officer
16
<PAGE>
EXHIBIT INDEX
Exhibit 27. Financial Data Schedule
17
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<CIK> 0001068052
<NAME> EPIC RESORTS LLC
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,212,000
<SECURITIES> 28,844,000
<RECEIVABLES> 20,402,000
<ALLOWANCES> 1,234,000
<INVENTORY> 66,190,000
<CURRENT-ASSETS> 12,921,000
<PP&E> 20,243,000
<DEPRECIATION> 5,057,000
<TOTAL-ASSETS> 157,526,000
<CURRENT-LIABILITIES> 10,092,000
<BONDS> 130,484,000
0
0
<COMMON> 0
<OTHER-SE> 16,950,000
<TOTAL-LIABILITY-AND-EQUITY> 157,526,000
<SALES> 24,542,000
<TOTAL-REVENUES> 35,885,000
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<TOTAL-COSTS> 22,309,000
<OTHER-EXPENSES> 4,667,000
<LOSS-PROVISION> 802,000
<INTEREST-EXPENSE> 4,865,000
<INCOME-PRETAX> 3,252,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,252,000
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<NET-INCOME> 3,252,000
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