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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 Identification
incorporation or organization) No.)
1150 FIRST AVENUE, SUITE 900 19406
KING OF PRUSSIA, PA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 992-0100
Securities registered pursuant to Section 12(b) of The Act: NONE
Securities registered pursuant to Section 12(g) of The Act: NONE
------------------------
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Form 10-K. Yes /X/ No / /
As of March 30, 1999, 1,118,000 Membership Interests of the Registrant were
outstanding.
Documents incorporated by reference: NONE
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<PAGE>
PART I
ITEM 1. BUSINESS
HISTORY AND OWNERSHIP
Epic Resorts, LLC, a Delaware limited liability company (the "Company"), 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, the Company's
President. In April 1996, the Daytona Beach Regency Resort was acquired by
Daytona Beach Regency, Ltd., a limited partnership of which Mr. Flatley is the
general partner.
In connection with the private placement of $130 million aggregate principal
amount of the Company's Senior Secured Redeemable Notes due 2005 (the "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 the Company. In connection with the issuance of the Notes, the
Company 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.
EPIC'S VACATION OWNERSHIP BUSINESS
The Company 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 the Company's six resorts based on the number of points purchased in Epic
Vacation Club, a nonprofit corporation operated by the Company (the "Club"). The
Club holds units of each of the Company's resorts which are transferred into the
Club by each of the Company's operating subsidiaries when the units are
developed or purchased by the applicable subsidiary. The Company converted its
operations to this vacation club system in January 1999. Prior to this time, a
customer would purchase a one-week interest at one particular resort, and would
receive a deed evidencing their purchase. The Company now sells points ("Club
Points") in the Club, which entitle the purchaser to reserve units at any of the
Company's six resorts and in increments as short as [one day]. A customer now
has access to all of the Company's resorts, as well as over 1,500 other resorts
worldwide through the Company's participation in vacation ownership interest
exchange networks. The vacation club system offers the Company's customers
greater flexibility in their vacation planning, a wider variety of vacation
options, and easier access to the Company's network of resorts.
The Company'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.
The Company markets and sells its deeded vacation ownership interests and
Club Points (collectively, "Vacation Ownership Interests") through both on-site
and off-site sales centers. In addition, the Company generates income through
the rental of available suites at its resorts. The Company sells Vacation
Ownership Interests to purchasers for leisure purposes and not for investment
purposes.
EPIC VACATION CLUB
The Club is a Delaware nonprofit, non stock corporation formed by the
Company in 1998. The Club's articles of incorporation provide that it was formed
for the specific purpose of owning and managing the real property conveyed to it
by the Company and its resort subsidiaries. Purchasers of Club Points
("Purchasers") receive the right to reserve time at any of the resort units
conveyed to the Club as well as the right to vote to elect the Club's board
members and to vote on major Club matters. The number of votes that each
Purchaser has is based on the number of Club Points the Purchaser owns.
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The 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 Club owns all of the units. The Club collects maintenance
dues from Purchasers based on the number of Club Points owned. Currently, the
annual dues are $237 for the first 5,000 Club Points owned, plus $72 for each
additional increment of 2,500 Club Points owned. These dues are intended to
cover the Club's operating costs, including condominium association dues at each
resort. The Company will pay association dues for all unsold Club 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 Club Points. The number
of Club Points that are required to stay one day at one of the Company'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 825 Club Points per night off-season and 1,450 Club
Points per night in peak season. A midweek stay at the same one-bedroom unit
would require less Club Points. Club Points are reissued on an anniversary date
basis and any unused Club Points may be carried over for one year. A Purchaser
may also borrow Club Points from their allotment for the next year.
In addition, Purchasers may also buy bonus time from the 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 Club Point allotment.
The Club has a board of directors that manages its business and affairs.
Each of the directors and principal executive officers of the Club are also
officers of the Company. 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 Club's budgeted gross expenses
during any fiscal year and (ii) the sale of any of the Club's property during
any fiscal year, if the aggregate fair market value is in excess of 5% of the
Club's budgeted expenses for that year.
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 four additional sales centers by the end of 1999. The
Company 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 the Company, are generally more
cost effective because they reduce the need for on-site tours of the
Company's resorts and are more easily accessible to the Company's target
customers.
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 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.
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, sales prices are increased to
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reflect the high quality of its resorts. For example, average sales prices for
Vacation Ownership Interests at the Company'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.
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 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. 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. 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, the Company has also developed a
computer 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 and will enable it
to take advantage of less costly marketing and referral opportunities.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The Company currently has no operations or sales outside the United States.
100% of the Company's revenues were generated from domestic sales of Vacation
Ownership Interests and resort operations during each of the fiscal years ended
December 31, 1996, 1997 and 1998. All of the Company's long-lived assets are
currently located in the United States. However, in the future, the Company may
expand its operations to include the acquisition or development of resorts
outside the United States. See Note 10 to the Notes to Consolidated Financial
Statements included herein for additional segment and geographical information
regarding the Company.
CUSTOMER FINANCING
Approximately 90% of the Company's customers finance their purchase of a
Vacation Ownership Interest with the Company. These customers are required to
make a down payment of at least 10% of the Vacation Ownership Interest sales
price. The balance is typically financed for a period of seven to ten years at a
fixed interest rate. The Company 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.
As of December 31, 1998, the Company had a vacation ownership receivables
portfolio totaling approximately $12.8 million in principal amount, with a
weighted average contractual yield of approximately 15.5%, 14.9%, and 14.4% for
the years ended December 31, 1998, 1997 and 1996, 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.
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. In addition, the downpayments required by the
Company are similar to those required by banks and mortgage companies which
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offer this type of credit, when such credit is available. The table below sets
forth additional information relating to the Company's notes receivable (amounts
in thousands).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Notes receivable, gross, secured by Vacation Ownership Interests.... $ 21,732,000 $ 37,898,000 $ 12,762,000
Reserve for loan losses............................................. (736,000) (750,000) (991,000)
------------- ------------- -------------
Notes receivable, net............................................... $ 20,996,000 $ 37,148,000 $ 11,771,000
------------- ------------- -------------
------------- ------------- -------------
Charge-offs......................................................... $ 448,000 $ 1,378,000 $ 875,000
------------- ------------- -------------
------------- ------------- -------------
</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. While the Company
requires a minimum downpayment of 10% of the purchase price, 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 bears the risk of purchaser default under its receivables
financing facility. 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. Upon obtaining title, the Company returns the Vacation Ownership
Interests to 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.
SALES OF RECEIVABLES
In September 1998, the Company entered into a $75 million vacation ownership
loan participation facility with a financial institution. Under this facility,
the Company sells its Vacation Ownership Interest Receivables to a limited
purpose, bankruptcy remote subsidiary of the Company, which are then pledged to
the financial institution as security for the funding used by the subsidiary to
acquire the receivables. This facility provides the Company with non-recourse
interim funding for 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 this receivables facility.
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
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receivables to a third party vendor, and paid aggregate fees of $221,000 and
$228,000 in fiscal 1998 and 1997, respectively. For fiscal 1999, the Company
intends to perform certain collection services through its own personnel.
CUSTOMER SERVICE
The Company emphasizes customer satisfaction and maintains full-time
customer service representatives in its King of Prussia, Pennsylvania
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.
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. In addition to the direct competition of individual resorts, other
competitors also include alternative accommodations such as hotels, motels,
bed-and-breakfasts and small vacation ownership operators located within the
immediate geographic vicinity of each of the Company's 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. 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.
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 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.
London Bridge Resort and the Daytona Beach Regency are affiliated with
Interval International ("II"), one of the leading worldwide vacation ownership
exchange companies. Participation in II entitles owners to exchange their annual
Vacation Ownership Interests for occupancy at over 1,500 II 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. II awards this designation to less than 10% of its 1500 member resorts.
The Company's other four newly acquired resorts, the Desert
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Paradise Resort, the Palm Springs Marquis Villas, Island Links Resort and the
Scottsdale Links Resort recently became affiliated with II, and have not yet
been rated.
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.
EMPLOYEES
As of December 31, 1998, the Company employed a total of 1,222 full time
employees. None of the Company's employees are represented by a collective
bargaining unit. The Company believes that its relations with its employees are
good.
ITEM 2. PROPERTIES
The Company owns and operates six resorts. Set forth below is a description
of each resort property.
LONDON BRIDGE RESORT. The London Bridge Resort is situated on twelve acres
in Lake Havasu City, Arizona. The resort, formerly a 180 room hotel, currently
consists of 122 studio, one- and two-bedroom suites. The Company commenced a new
construction phase of 193 additional one- and two-bedroom suites in the third
quarter of 1998.
DAYTONA BEACH REGENCY. The Daytona Beach Regency is located in Daytona
Beach, Florida and currently consists of 72 one- and two-bedroom suites.
Formerly a 198 room hotel, the Company has renovated 72 of the resort's 90
vacation ownership suites, and has or will complete the conversion of the
remaining 18 suites during the first and second quarters of 1999.
SCOTTSDALE LINKS RESORT. The Scottsdale Links Resort is located on the TPC
golf courses in Scottsdale, Arizona, and Scottsdale Links Resort offers 228
one-, two- and three-bedroom suites.
DESERT PARADISE RESORT. The Desert Paradise Resort is located one and
one-half miles west of the Las Vegas Strip in Las Vegas, Nevada. The resort
consists of 152 one- and two-bedroom suites.
PALM SPRINGS MARQUIS VILLAS. Located on seven acres in downtown Palm
Springs, California, the Palm Springs Marquis Villas consists of 101 one- and
two-bedroom suites.
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ISLAND LINKS RESORT. Located on Hilton Head Island off the coast of South
Carolina, the Island Links Resort currently consists of 36 one-and two-bedroom
suites. The Company expects to complete development of a total of 124 additional
one- and two-bedroom suites at the resort. Such construction commenced in the
third quarter of 1998 and will be completed in phases of eight to nine suites
each.
The Company also leases two off-site sales centers located in Philadelphia,
Pennsylvania and Fresno, California.
ITEM 3. 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 its business. The Company believes that its potential exposure to
such legal actions is adequately covered by its general liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of the Company's security holders. During the first
quarter of 1999 certain amendments to the Indenture and Security Agreement were
agreed to in order to reflect the vacation club structure.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a limited liability company and has no equity securities that
trade.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. The
selected consolidated financial data as of and for the four years ended December
31, 1998 have been derived from audited financial statements. The selected
financial data presented below for the year ended December 31, 1994 has 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 this period. The following selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and the consolidated
financial statements of the Company and related notes thereto appearing
elsewhere herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICE
DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Sales of vacation ownership interests......... $ 8,110 $ 8,290 $ 10,584 $ 29,967 $ 36,344
Resort operations............................. 5,592 5,029 6,074 6,652 7,772
Gains on sales of receivables................. -- -- -- -- 10,232
Interest income and other..................... 51 704 1,208 3,672 5,926
--------- --------- --------- --------- ---------
Total revenues.......................... 13,753 14,023 17,866 40,291 60,274
Cost of sales--vacation ownership interests... 3,008 3,154 3,544 7,337 8,075
Resort operations expense..................... 4,217 4,103 4,806 4,599 7,067
Selling and marketing expenses................ 3,104 3,452 4,307 11,574 15,146
General and administrative expenses........... 1,385 1,322 2,014 3,188 6,591
Depreciation.................................. 586 644 799 772 652
Provision for losses.......................... 458 474 492 1,391 1,116
Financing and closing costs................... 271 460 323 868 1,055
Interest expense.............................. 502 894 2,143 3,748 12,107
--------- --------- --------- --------- ---------
Income (loss) before minority interest and
extraordinary item.......................... 222 (480) (562) 6,814 8,465
Minority interest............................. -- -- (473) 1,676 1,190
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item....... 222 (480) (89) 5,138 7,275
Extraordinary gain (loss) on settlement of
debt........................................ -- 5,077 -- -- (5,364)
--------- --------- --------- --------- ---------
Net income (loss)............................. $ 222 $ 4,597 $ (89) $ 5,138 $ 1,911
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA AND CREDIT STATISTICS:
Number of resorts at period end............... 1 1 2 2 6
Average sales price of vacation ownership
interests sold.............................. $ 10,657 $ 11,157 $ 12,466 $ 11,692 $ 12,430
Number of vacation ownership interests sold... 761 743 849 2,563 2,924
BALANCE SHEET DATA:
Mortgages receivable, net..................... $ 801 $ 7,641 $ 20,996 $ 37,148 $ 11,771
Inventory, net................................ 14,620 12,032 12,741 7,963 73,042
Total assets.................................. 24,476 28,269 43,034 56,288 146,773
Senior secured notes payable.................. -- -- -- -- 127,432
Notes payable................................. 18,399 18,780 34,009 42,891 621
Warrants...................................... -- -- -- -- 2,757
Member's equity............................... 5,316 8,763 8,163 10,578 11,986
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following represents a discussion of Epic Resorts, LLC, as successor to
Epic Resorts, Inc. The information presents all of the operations of the
Company's resorts as of their respective dates of acquisition, including:
<TABLE>
<CAPTION>
RESORT PROPERTY DATE ACQUIRED
- - - - - - - - - - - ----------------------------------------------------------------------------- ---------------
<S> <C>
London Bridge Resort......................................................... 1989
Daytona Beach Regency........................................................ 1991/1998*
Scottsdale Links Resort...................................................... June 30, 1998
Desert Paradise Resort....................................................... June 30, 1998
Palm Springs Marquis Villas.................................................. June 30, 1998
Island Links Resort.......................................................... July 8, 1998
</TABLE>
- - - - - - - - - - - ------------------------
* On July 8, 1998 the Company acquired the remaining minority partners'
interests in Daytona Beach Regency and now owns 100% of this resort.
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.
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 resorts, a Homeowners Association (each an
"Association") has been 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.
RESULTS OF OPERATIONS
The following analysis summarizes the significant changes in the results of
operations and financial condition of the Company and should be read in
conjunction with the Company's consolidated financial statements and related
notes.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
REVENUES. For the year ended December 31, 1998, the Company recognized
total revenues of $60.3 million compared to $40.3 million for the year ended
December 31, 1997, an increase of $20.0 million, or 49.6%. This increase was
primarily the result of $10.2 of gains recognized in 1998 from the sales of
mortgages receivable and a $6.3 million increase in sales of Vacation Ownership
Interests to $36.3 million during 1998 from $30.0 million during 1997, an
increase of 21.0%.
9
<PAGE>
Sales of Vacation Ownership Interests increased primarily as a result of (i)
increased sales growth at the Daytona Beach Regency Resort to $17.4 million
during 1998 from $14.6 million during 1997, an increase of $2.8 million or 19.2%
and (ii) $3.3 million of sales generated from the new sales activities at the
Island Links Resort and the Philadelphia offsite sales center.
Resort operations revenue increased 16.4%, to $7.8 million in 1998 from $6.7
million in 1997, primarily as a result of additional resort revenues of $1.6
million during 1998 from the newly acquired resorts and the sale of vacation
packages of $0.2 million by Epic Marketing, a new venture started in the fourth
quarter of 1998. This increase was offset by a $0.6 million decrease in resort
operations revenue at London Bridge Resort and the Daytona Beach Regency Resort
which reflects the decreasing availability of suites for rent in 1998 as the
Company continues to convert suites at these resorts to Vacation Ownership
Interests.
Gains on sales of receivables of $10.2 million relate to the Company's
initial fundings in October, November and December 1998 under its Receivables
Facility as discussed in Note 3 to the Company's consolidated financial
statements.
Interest income increased $2.0 million to $5.5 million in 1998 from $3.5
million in 1997, an increase of 57.1%, primarily from investing a portion of the
proceeds from the sale of the Notes into short-term investments.
Other income increased $0.3 million to $0.4 million in 1998 from $0.1
million in 1997 primarily attributable to the $0.2 million of Ambassador Club
activity. Ambassador Club sales provide a limited package of visits for a
moderate price to customers who cannot commit to a full purchase obligation.
COST OF SALES. Cost of sales as a percentage of sales of Vacation Ownership
Interests decreased to 22.3% in 1998 from 24.3% in 1997, reflecting higher
average selling prices for Vacation Ownership Interests at London Bridge Resort
and Daytona Beach Regency.
RESORT OPERATIONS EXPENSE. Resort operations expense increased
approximately $2.5 million to $7.1 million in 1998 from $4.6 million in 1997. As
a percentage of resort operations revenue, resort operations expense increased
to 91.0% in 1998 from 68.7% in 1997 primarily as a result of increased
operational expenses of $2.1 million from the newly acquired resorts.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses (including
commissions) as a percentage of sales of Vacation Ownership Interests increased
to 41.6% in 1998 from 38.7% in 1997. In 1998, the Company incurred $476,000 in
start-up selling and marketing expenses as it prepared for the (i) commencement
of selling efforts at the three new western locations in the first quarter of
1999 and (ii) opening of its offsite sales center in Philadelphia in the middle
of the fourth quarter of 1999. As part of the Company's development of its
marketing strategy, the Company also incurred approximately $400,000 to
implement a comprehensive marketing effort on the East Coast.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 106.3% to $6.6 million in 1998 from $3.2 million in 1997 reflecting
the Company's growth and the newly acquired resorts in 1998. As a percentage of
total revenues, general and administrative expenses increased to 10.9% in 1998
from 7.9% 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. As part of the Company's growth plan, the Company increased
general and administrative expenses at its headquarters by $1.3 million to have
in place the infrastructure required to support the addition of its four new
resorts and its additional offsite sales center. The Company continues to
evaluate its administrative support and expects to continue to increase its
investment in resources to support its anticipated growth.
INTEREST EXPENSE. Interest expense increased to $12.1 million in 1998 from
$3.7 million in 1997, an increase of $8.4 million, which reflects the increased
indebtedness from the Notes issued in July 1998.
10
<PAGE>
PROVISION FOR LOAN LOSSES. Provision for loan losses as a percentage of
sales of Vacation Ownership Interest decreased to 3.0% in 1998 from 4.6% in
1997. This decrease was attributable to the lower receivables base resulting
from the sales of mortgages receivable through the Receivables Facility.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
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 $19.4 million increase in sales of Vacation Ownership
Interests to $30.0 million during 1997 from $10.6 million during 1996, an
increase of 183.0%. 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 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 EXPENSES. Selling and marketing expenses (including
commissions) as a percentage of sales of Vacation Ownership Interests declined
to 38.7% in 1997 from 40.7% in 1996. This decrease was primarily the 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 EXPENSES. 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 11.2% 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 volume 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.
PROVISION FOR LOAN LOSSES. Provision for loan losses remained relatively
constant at 4.7% of sales of Vacation Ownership Interests in 1997 and 1996.
11
<PAGE>
CHANGES IN FINANCIAL CONDITION
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Cash and cash equivalents increased by $15.8 million and $0.2 million for
the years ended December 31, 1998 and 1997, respectively, and decreased $0.1
million for the year ended December 31, 1996.
Net cash used in operating activities was $74.2 million and $3.5 million in
1998 and 1997, respectively. Net cash provided by operating activities was $0.1
million in 1996. The change in net cash used in operating activities from 1997
to 1998 is primarily attributable to the acquisition of the four additional
resorts for a cash purchase price of $64.0 million during 1998. The change in
net cash used in operating activities from 1996 to 1997 is primarily
attributable to the increase in net income and the net change 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).
Net cash used in investing activities was $17.8 million, $2.3 million and
$1.5 million in 1998, 1997 and 1996, respectively. The increase from 1997 to
1998 is primarily attributable to the $15.2 million investment in residual
interests associated with the sales of receivables through the Receivables
Facility. The increase from 1996 to 1997 is primarily attributable to the
refurbishing of the onsite restaurant at the London Bridge Resort, and the
construction of a pool, exercise facility and lounge area at the Daytona Beach
Regency during 1997.
Net cash provided by financing activities was $107.9 million, $6.0 million
and $1.5 million in 1998, 1997 and 1996, respectively. The net increase in cash
provided by financing activities from 1997 to 1998 is primarily attributable to
the $130.0 million proceeds received on July 8, 1998 from the sale of the Notes,
which was used to purchase the new resorts as discussed above, and the payoff of
$23.8 million of outstanding debt and the payment of $6.7 million of deferred
financing costs. The net increase in cash provided by financing activities from
1996 to 1997 is primarily attributable to the increased borrowings through
mortgage indebtedness. 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.
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 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. In October
1998, this existing receivables facility was repaid and terminated with the
proceeds from the Receivables Facility.
In September 1998, the Company entered into a non-recourse $75 million
vacation ownership loan participation facility with a financial institution (the
"Receivables Facility"). Under this facility, the Company sells its Vacation
Ownership Interest receivables to a limited purpose, bankruptcy remote
subsidiary of the Company, which are then pledged to the financial institution
as security for the funding
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<PAGE>
used by the subsidiary to acquire the receivables. 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. Borrowings under the
Receivables Facility bear interest at one month LIBOR plus 1.50%, reset daily.
The Receivables Facility provides the Company with 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
the Receivables Facility.
The Company's capital resources are provided from the following sources: (i)
cash flows from operations, (ii) proceeds from the Receivables Facility and
(iii) remaining proceeds from the sale of the Notes 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 were disbursed to make the first interest payment of
$7.4 million due December 15, 1998. Thereafter, the Company must at all times
maintain escrow funds in this escrow account sufficient to make the next
required interest payment of $8.5 million 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 remaining net proceeds from the sale of the
Notes 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 the end
of the fiscal year. The Company may, in the future, require additional credit
facilities or issuances of other corporate 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. The Company's credit
facilities and the indenture for the Notes 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.
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 have been certified Year 2000 compliant.
The Company has conducted tests of its existing computer hardware and
determined that is 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. 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
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<PAGE>
party service providers to become Year 2000 compliant. In the case of its
receivables servicing providers, the Company has received representations that
they have completed their remediation program and will be providing a
certificate that they are Year 2000 compliant.
At each of the 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 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.
FORWARD LOOKING STATEMENTS
From time to time, information the Company provides, statements by the
Company's employees or information included in its filings with the Securities
and Exchange Commission (including those portions of the Management's Discussion
and Analysis that refer to the future) may contain forward-looking statements
that are not historical facts. Those statements are "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, and the Company's future performance, operating
results, financial position and liquidity, are subject to a variety of factors
that could materially affect results, including:
- THE COMPANY'S OPERATING MARGINS WILL BE LOWER AS ITS NEWLY ACQUIRED
RESORTS ARE INTEGRATED
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.
To successfully implement this business strategy, the Company must first
integrate its newly acquired resorts into its existing sales and marketing
programs. Initial sales prices are typically below market to allow the Company
to attract customers and establish market share. As a result, the Company's
operating margins are likely to be lower until prices increase. 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.
- THE COMPANY HAS HAD LIMITED EXPERIENCE IN THE CONCURRENT DEVELOPMENT AND
OPERATION OF MULTIPLE RESORTS
The Company has undertaken the development, marketing and sales of Vacation
Ownership Interests at its four newly-acquired resorts in addition to the
continued operation and new phase development at its two existing resorts. This
rapid expansion has placed, and will continue 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 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. Failure to effectively manage growth could
have a material adverse effect on the Company's business, operating results and
financial condition.
- THE VACATION OWNERSHIP INDUSTRY IS HIGHLY SENSITIVE TO CHANGES IN NATIONAL
AND REGIONAL ECONOMIC CONDITIONS
Changes in economic conditions such as reductions in levels of employment,
discretionary disposable income, consumer confidence, available financing as
well as any increase in interest rates will affect the
14
<PAGE>
Company's sales of Vacation Ownership Interests. 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.
- CUSTOMERS MAY NOT BE ABLE TO REPAY LOANS MADE BY THE COMPANY FOR THE
PURCHASE OF VACATION OWNERSHIP INTERESTS
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. 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,
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 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 that Vacation Ownership Interest. The Company may also incur
substantial costs and delays in connection with the servicing of its
receivables, including costs in foreclosing or realizing on its collateral and
additional marketing and sales costs with respect to reacquired property.
- THE COMPANY HAS SUBSTANTIAL LEVERAGE AND MAY NOT BE ABLE TO SERVICE ITS
DEBT
The Company has significant debt service obligations. The Company
anticipates that it will continue to require external sources of liquidity to
support its operations in the future. 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.
The Company's ability to service or to refinance its indebtedness 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 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 Receivables Facility) of at least $10.0
million and must meet all financial covenants contained in the indenture under
which the Notes were issued.
The Company's level of debt and debt service requirements will have several
important effects on its future operations, including the following:
- 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;
- the Company's leveraged position will increase its vulnerability to
competitive pressures;
- the financial covenants and other restrictions contained in the indenture
governing the Notes 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
15
<PAGE>
- funds available for working capital, capital expenditures, acquisitions
and general corporate purposes may be limited.
- 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
The percentage of completion method of accounting requires net profit on
such projects to be recognized on a pro rata basis as development is completed.
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.
- THE TIMING, QUALITY AND COMPLETION OF CONSTRUCTION AND DEVELOPMENT
ACTIVITIES AT THE COMPANY'S RESORTS ARE CONTROLLED BY THIRD PARTY CONTRACTORS
AND THE AVAILABILITY OF GOVERNMENTAL PERMITS AND AUTHORIZATIONS
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. 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.
- NATURAL DISASTERS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY
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 significantly adversely
affect the Company's business, operating results and financial condition.
- 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 of 1933. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to interest rate risk in the near term, as
substantially all of the Company's indebtedness is at fixed rates (principally
the $130 million of senior secured 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Member of Epic Resorts, LLC:
We have audited the accompanying consolidated balance sheets of Epic
Resorts, LLC (a Delaware limited liability company) as of December 31, 1998 and
1997, and the related consolidated statements of operations, cash flows and
changes in member's equity for each of the three years in the period ended
December 31, 1998. 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 consolidated financial position of Epic Resorts,
LLC as of December 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
March 25, 1999
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EPIC RESORTS, LLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents......................................................... $ 16,095,000 $ 248,000
Cash in escrow (Notes 2 and 6).................................................... 8,586,000 53,000
Investment in residual interests (Note 3)......................................... 15,223,000 --
Mortgages receivable, net of allowance of $991,000 and $750,000 as of December 31,
1998 and 1997, respectively (Note 3)............................................ 11,771,000 37,148,000
Inventory (Note 4)................................................................ 73,042,000 7,963,000
Property and equipment, net of accumulated depreciation of $4,303,000 and
$3,553,000 as of December 31, 1998 and 1997, respectively (Note 5).............. 11,909,000 9,971,000
Deferred financing costs, net of accumulated amortization of $692,000 and $405,000
as of December 31, 1998 and 1997, respectively.................................. 6,823,000 677,000
Other assets (Note 7)............................................................. 3,324,000 228,000
-------------- -------------
Total assets................................................................ $ 146,773,000 $ 56,288,000
-------------- -------------
-------------- -------------
LIABILITIES AND MEMBER'S EQUITY
Accounts payable.................................................................. $ 1,154,000 $ 984,000
Accrued expenses.................................................................. 1,743,000 496,000
Accrued interest payable.......................................................... 736,000 81,000
Advance deposits.................................................................. 76,000 53,000
Deferred revenue.................................................................. 268,000 --
Notes payable (Notes 6 and 7)..................................................... 621,000 42,891,000
Senior secured notes payable (Note 6)............................................. 127,432,000 --
-------------- -------------
Total liabilities........................................................... 132,030,000 44,505,000
-------------- -------------
Minority interest (Note 1)........................................................ -- 1,205,000
Commitments and contingencies (Note 8)
Warrants (Note 6)................................................................. 2,757,000 --
Member's equity................................................................... 11,986,000 10,578,000
-------------- -------------
Total liabilities and member's equity....................................... $ 146,773,000 $ 56,288,000
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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EPIC RESORTS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Sales of vacation ownership interests............................. $ 36,344,000 $ 29,967,000 $ 10,584,000
Resort operations................................................. 7,772,000 6,652,000 6,074,000
Gains on sales of receivables (Note 3)............................ 10,232,000 -- --
Interest income................................................... 5,499,000 3,535,000 1,208,000
Other income...................................................... 427,000 137,000 --
------------- ------------- -------------
60,274,000 40,291,000 17,866,000
------------- ------------- -------------
Costs and expenses:
Cost of sales of vacation ownership interests (Note 4)............ 8,075,000 7,337,000 3,544,000
Resort operations................................................. 7,067,000 4,599,000 4,806,000
Selling and marketing costs....................................... 15,146,000 11,574,000 4,307,000
General and administrative........................................ 6,591,000 3,188,000 2,014,000
Provision for doubtful accounts................................... 1,116,000 1,392,000 492,000
Depreciation (Note 5)............................................. 652,000 771,000 799,000
Financing and closing costs....................................... 1,055,000 868,000 323,000
Interest expense (Note 6)......................................... 12,107,000 3,748,000 2,143,000
------------- ------------- -------------
51,809,000 33,477,000 18,428,000
------------- ------------- -------------
Income (loss) before minority interest and extraordinary item....... 8,465,000 6,814,000 (562,000)
Minority interest................................................... 1,190,000 1,676,000 (473,000)
------------- ------------- -------------
Income (loss) before extraordinary item............................. 7,275,000 5,138,000 (89,000)
Extraordinary losses on extinguishment of debt (Note 6)............. 5,364,000 -- --
------------- ------------- -------------
Net income (loss)................................................... $ 1,911,000 $ 5,138,000 $ (89,000)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
EPIC RESORTS, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1996..................... $ 8,763,000
Contributions.............................. 948,000
Distributions.............................. (1,460,000)
Net loss................................... (89,000)
----------------
BALANCE, DECEMBER 31, 1996................... 8,162,000
Contributions.............................. 603,000
Distributions.............................. (3,325,000)
Net income................................. 5,138,000
----------------
BALANCE, DECEMBER 31, 1997................... 10,578,000
Contributions.............................. 263,000
Distributions.............................. (766,000)
Net income................................. 1,911,000
----------------
BALANCE, DECEMBER 31, 1998................... $ 11,986,000
----------------
----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
EPIC RESORT, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------------- -------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................... $ 1,911,000 $ 5,138,000 $ (89,000)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities--
Depreciation.................................................. 652,000 771,000 799,000
Amortization of financing costs............................... 1,557,000 173,000 75,000
Provision for doubtful accounts............................... 1,116,000 1,392,000 492,000
Gains on sales of receivables................................. (10,232,000) -- --
Minority interest............................................. 1,190,000 1,676,000 (473,000)
Changes in assets and liabilities--
Mortgages receivable........................................ (5,529,000) (17,543,000) (710,000)
Inventory................................................... (64,174,000) 4,779,000 (709,000)
Other assets................................................ (3,096,000) (141,000) 14,000
Accounts payable............................................ 170,000 264,000 237,000
Accrued expenses............................................ 1,247,000 90,000 223,000
Accrued interest payable.................................... 655,000 13,000 58,000
Deferred revenue............................................ 268,000 -- --
Advance deposits............................................ 23,000 (86,000) 89,000
--------------- -------------- ------------
Net cash (used in) provided by operating activities....... (74,242,000) (3,474,000) 6,000
--------------- -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............................. (2,590,000) (2,314,000) (1,489,000)
Investment in residual interests................................ (15,223,000) -- --
--------------- -------------- ------------
Net cash used in investing activities..................... (17,813,000) (2,314,000) (1,489,000)
--------------- -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable..................................... 11,916,000 24,847,000 7,566,000
Proceeds from bridge loan....................................... 55,414,000 -- --
Proceeds from senior secured notes payable...................... 130,000,000 -- --
Payments on notes payable and bridge loan....................... (109,600,000) (15,965,000) (5,472,000)
Proceeds from sales of receivables.............................. 40,022,000 -- --
Interest escrows, net........................................... (8,533,000) 86,000 (89,000)
Payment of deferred financing costs............................. (7,514,000) (237,000) (32,000)
Purchase of minority interest................................... (3,300,000) -- --
Contributions from sole member.................................. 263,000 603,000 948,000
Distributions to sole member.................................... (766,000) (3,325,000) (1,459,000)
--------------- -------------- ------------
Net cash provided by financing activities................. 107,902,000 6,009,000 1,462,000
--------------- -------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 15,847,000 221,000 (21,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 248,000 27,000 48,000
--------------- -------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 16,095,000 $ 248,000 $ 27,000
--------------- -------------- ------------
--------------- -------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid................................................... $ 9,894,000 $ 3,836,000 $ 2,054,000
--------------- -------------- ------------
--------------- -------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
EPIC RESORTS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION:
Epic Resorts, LLC (a sole-member Delaware Limited Liability Company) and its
wholly-owned subsidiaries (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.
The Company was formed in June 1998 to merge and succeed to the business of
Epic Resorts, Inc. (the "Predecessor") which had a sole stockholder who is the
sole member of the Company. The Predecessor business was responsible for
operating the wholly-owned resort at Lake Havasu City, Arizona known as London
Bridge Resort, Inc. (LBR), and a majority-owned resort at Daytona Beach, Florida
known as Dayton Beach Regency, Ltd. (DBR).
The accompanying financial statements include the combined accounts of the
Company, London Bridge Resort, Inc. and Daytona Beach Regency, Ltd., which
together are doing business now as Epic Resorts, LLC. All of the entities
operated under the common control of the sole stockholder. 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 their dates of acquisition. Minority interest reflects
the historical results of operations pertaining to the 44% partnership interest
in DBR for all periods up until the Company's acquisition of this minority
interest in June 1998.
On June 30, 1998, the Company used $55.4 million of proceeds from a 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 total purchase price was allocated to the cost basis of
inventory at these resorts in accordance with the purchase method of accounting.
The Company also purchased the remaining 44% limited partnership interest in DBR
at a cost of $3.3 million which has been capitalized as a component of inventory
at this resort, net of the $2.4 million of minority interest acquired.
On July 8, 1998, the Company issued 130,000 Units, representing $130 million
principal amount of 13% Senior Secured Redeemable Notes due 2005 (the "Notes")
and warrants to purchase membership interests or warrants to purchase common
stock 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 described above; (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. The
resort contains 36 two and three bedroom suites and was accounted for by the
purchase method of accounting.
On August 13, 1998, the Company filed a registration statement with the
Securities and Exchange Commission relating to an exchange offer for another
series of notes of the Company, containing substantially the same terms as the
Notes. These notes are now available to be publicly traded and are held by
institutional investors.
22
<PAGE>
EPIC RESORTS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
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.
Mortgages receivable are sold by the Company on a non-recourse basis in
connection with a loan participation facility with a financial institution (see
Note 3).
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides for estimated future losses related to uncollectible
receivables currently included in its installment contracts and mortgage
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 their estimated useful life of 40 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 term of the indebtedness.
INCOME TAXES
The Company is a Delaware limited liability company, accordingly no federal
or state income taxes are payable by the Company, and none have been provided
for in the accompanying financial statements. The sole member is to include his
respective share of the Company's profits or losses in his tax return. The
Company's tax returns and the amount of allocable profits and losses are subject
to examination by federal and state taxing authorities. If such examinations
result in changes to Company profits or losses, the tax liability of the sole
member 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 a set period of time following contract execution
(generally three to ten calendar days depending on the state in which the sale
is consummated), 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
23
<PAGE>
EPIC RESORTS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 allocating the total project acquisition and
conversion costs associated with the Vacation Ownership Interests over 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 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, are
returned to inventory at the original amount expensed as the cost of sale.
Marketing, advertising, commissions, and other selling costs are expensed as
incurred.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". The standard establishes additional disclosure
for the elements of comprehensive income and a total comprehensive income
calculation. Net income as reported by the Company reflects total comprehensive
income for each of the three years in the period ended December 31, 1998.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. MORTGAGES RECEIVABLE:
The Company provides financing to its customers, which is collateralized by
such purchaser's Vacation Ownership Interest. The Company offers certain
customers, who make deposits of 33%, one-year financing on a non-interest
bearing basis. The purchase money mortgages generally mature over terms which
approximate 84 months, with fixed interest rates ranging from 13.9 percent to
16.9 percent, per annum. The mortgages may be prepaid at any time, without
penalty. The weighted average rate of interest on outstanding mortgages
receivable is 15.5%, 14.9% and 14.4% for the years ended December 31, 1998, 1997
and 1996, respectively.
24
<PAGE>
EPIC RESORTS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. MORTGAGES RECEIVABLE: (CONTINUED)
The following schedule reflects the scheduled principal maturities of
mortgages receivable:
<TABLE>
<S> <C>
1999.............................................. $ 1,219,000
2000.............................................. 1,367,000
2001.............................................. 1,517,000
2002.............................................. 1,727,000
2003.............................................. 1,954,000
Thereafter........................................ 4,978,000
--------------
Total principal maturities of mortgages
receivable...................................... 12,762,000
Less allowance for doubtful accounts.............. (991,000)
--------------
Net principal maturities of mortgages
receivable...................................... $ 11,771,000
--------------
--------------
</TABLE>
The activity in the mortgages receivable allowance for doubtful accounts is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------- -----------
<S> <C> <C> <C>
Balance, beginning of period........................ $ 750,000 $ 736,000 $ 692,000
Provision for doubtful accounts................... 1,116,000 1,392,000 492,000
Charge-offs....................................... (875,000) (1,378,000) (448,000)
------------ ------------- -----------
Balance, end of period.............................. $ 991,000 $ 750,000 $ 736,000
------------ ------------- -----------
------------ ------------- -----------
</TABLE>
During 1998, the Company sold $45,479,000 of mortgages receivables as part
of its $75 million Vacation Ownership Loan Participation Facility ("Receivables
Facility"). Under this Receivables Facility, the Company 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 Extinguishments of Liabilities". The
commitment provides for advance rates of 88% of the lesser of (i) unpaid
principal balance of the receivables sold or (ii) the market value of such
receivables as determined by the financial institution. The Receivables Facility
contains a customary provision requiring the substitution of collateral in an
equal amount if receivables become 60 days past due.
The Company accounts for the transfers of receivables to Epic Funding as
sales in accordance with SFAS No. 125. The Company recognized gains on the sales
of mortgages receivable of $10,232,000 as a result of $45,479,000 of sales and
has an investment in residual interests associated with these mortgages
receivable of $15,223,000. The retained interests were valued by the Company
assuming a 10% discount rate for estimated defaults and prepayments and a 6.5%
annual interest rate on the monthly balance of the financing. The Company
accounts for this investment as a held-to-maturity security in accordance with
SFAS No. 115, "Accounting for Certain Investments and Debt Securities".
25
<PAGE>
EPIC RESORTS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
4. INVENTORY:
Inventory and accumulated cost of sales consist of the following as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Acquisition and development costs............................ $ 105,964,000 $ 32,972,000
Less: accumulated cost of sales.............................. (30,244,000) (22,416,000)
Less: resort property valuation allowance.................... (2,678,000) (2,593,000)
-------------- --------------
$ 73,042,000 $ 7,963,000
-------------- --------------
-------------- --------------
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------- ------------
<S> <C> <C>
Land............................................................. $ 2,913,000 $ 2,913,000
Building and improvements........................................ 11,177,000 8,806,000
Furniture, fixtures and equipment................................ 2,122,000 1,805,000
------------- ------------
16,212,000 13,524,000
Less: Accumulated depreciation................................... 4,303,000 3,553,000
------------- ------------
$ 11,909,000 $ 9,971,000
------------- ------------
------------- ------------
</TABLE>
6. NOTES PAYABLE:
On July 8, 1998, the Company issued 130,000 units, representing $130,000,000
principal amount of Senior Secured Redeemable Notes (the "Notes"). The Notes
bear interest at the rate of 13% per annum, payable semiannually on June 15 and
December 15 of each year and are scheduled to mature on June 15, 2005. The notes
were recorded at their fair value less the initial value of the warrants of
$2,757,000 and will be accreted to their redeemable value through maturity. The
Company maintains $8,450,000 at all times in escrow to cover the next required
interest payment.
All of the Company's operating subsidiaries (the Subsidiary Guarantors) have
fully and unconditionally guaranteed the Notes. Epic Resorts, LLC's activities
are limited to owning and operating the Company's six resort properties. In
addition, their activities include the owning and collecting of the Company's
investment in the residual interests. Accordingly, the combined financial
information of the Subsidiary Guarantors is equivalent to the consolidated
financial statements of the Company, except for the Company's investment in the
residual interests of $15,223,000 as described in Note 3. The holders of the
Notes would have a direct claim to the residual interest in the event of a
default, as defined, under the Notes. The separate financial statements and
other disclosures concerning the Subsidiary Guarantors are not presented because
management has determined that they are not material to investors.
Concurrent with the issuance of the Notes, the Company issued 130,000 of
warrants with a par value of $.01 per warrant. These warrants have been valued
using the Black-Scholes pricing model and are being amortized as a component of
additional interest expense over the seven year term of the Notes. The
amortization increases the redemption value of the notes through maturity.
26
<PAGE>
EPIC RESORTS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
6. NOTES PAYABLE: (CONTINUED)
In connection with the Offering, the Company incurred $2,055,000 of
prepayment penalties. The Company wrote off $667,000 of unamortized deferred
financing costs related to the extinguished debt. During the fourth quarter of
1998, the Company used the proceeds from the initial funding of the Receivables
to pay off $20.0 million of outstanding notes payable. The Company incurred
$2,029,000 of prepayment penalties and wrote off $613,000 of unamortized
deferred financing costs. These expenses have been reflected as an extraordinary
losses in the accompanying statement of operations for the year ended December
31, 1998.
Notes payable at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
---------- -------------
<S> <C> <C>
Revolving lines of credit, with interest payable monthly at rates
of 11.0% to 11.22%............................................... $ -- $ 30,240,000
Construction loans payable with interest payable at rates of 11.25%
to 11.72%........................................................ -- 6,199,000
Acquisition loan payable with interest payable at LIBOR plus 6%
(11.72% at December 31, 1997).................................... -- 2,043,000
Equipment loans payable with interest payable at fixed rates of
12.75% to 13.05%, payable in 48 equal monthly installments of
principal and interest, collateralized by furniture and
equipment, due 1999 to 2001...................................... 621,000 496,000
Other note payable................................................. -- 3,913,000
---------- -------------
Total notes payable................................................ $ 621,000 $ 42,891,000
---------- -------------
---------- -------------
</TABLE>
7. RELATED PARTY TRANSACTIONS:
At December 31, 1998, the Company has accrued $829,000 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 sheet. At
December 31, 1997, the Company had accrued $56,000 as a payable to the
homeowners' associations at its resorts. Payables to the homeowners'
associations consist primarily of maintenance fees for units owned by the
Company. This payable is included in accrued expenses in the accompanying
consolidated balance sheet.
In 1998, the Company paid $1,601,000 of construction and inventory-related
items to certain companies which are affiliated with a manager and member of the
Company's Advisory Board. The Company believes that these transactions have been
made on substantially the same terms as those prevailing in the current
marketplace.
In October 1990, the Company obtained a nonrecourse line of credit not to
exceed $3,413,000 from an affiliate of the sole member, all of which remained
outstanding as of December 31, 1997. The loan was 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
was not payable until these notes
27
<PAGE>
EPIC RESORTS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
7. RELATED PARTY TRANSACTIONS: (CONTINUED)
were 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 1998, 1997 and 1996, no interest was accrued under the terms of this
note. This note, together with a fee paid to a related party of $1,087,000, was
paid in full with the proceeds of the Offering.
Through June 30, 1998, in the normal course of operations, an affiliate of
the sole member provided the Company with administrative services including
payroll and insurance processing.
8. 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,
1998, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- - - - - - - - - - - ----------------------------------------------------------------------------------
<S> <C>
1999.............................................................................. $ 435,000
2000.............................................................................. 282,000
2001.............................................................................. 134,000
2002.............................................................................. 23,000
----------
Total future minimum rentals...................................................... $ 874,000
----------
----------
</TABLE>
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments",
requires that the Company disclose estimated fair values 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 amount reported in the balance
sheet for cash and cash equivalents approximates their fair value because of the
short-term maturity of these instruments.
MORTGAGES RECEIVABLE: The carrying amount reported in the balance sheet for
mortgages receivable approximates its 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.
SENIOR SECURED NOTES PAYABLE AND NOTES PAYABLE: The carrying amounts
reported in the balance sheet for notes payable approximates its fair value
because the interest rates on these instruments approximate current interest
rates charged on similar current borrowings.
10. 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.
28
<PAGE>
EPIC RESORTS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
11. SUMMARY OF QUARTERLY RESULTS (UNAUDITED):
The following presents a summary of the unaudited quarterly financial
information for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 10,109,000 $ 12,484,000 $ 14,333,000 $ 23,348,000 $ 60,274,000
Total expenses (1).................. 8,194,000 9,623,000 15,174,000 18,818,000 51,809,000
------------- ------------- -------------- ------------- -------------
Income (loss) before minority
interest and extraordinary loss... 1,915,000 2,861,000 (841,000) 4,530,000 8,465,000
Minority Interest (2)............... 543,000 647,000 -- -- 1,190,000
Extraordinary loss (3).............. -- -- 2,722,000 2,642,000 5,364,000
------------- ------------- -------------- ------------- -------------
Net income (loss)................... $ 1,372,000 $ 2,214,000 $ (3,563,000) $ 1,888,000 $ 1,911,000
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 8,588,000 $ 10,375,000 $ 11,957,000 $ 9,371,000 $ 40,291,000
Total expenses...................... 7,313,000 7,981,000 10,156,000 8,027,000 33,477,000
------------- ------------- -------------- ------------- -------------
Income before minority interest..... 1,275,000 2,394,000 1,801,000 1,344,000 6,814,000
Minority Interest................... 446,000 555,000 206,000 469,000 1,676,000
------------- ------------- -------------- ------------- -------------
Net income.......................... $ 829,000 $ 1,839,000 $ 1,595,000 $ 875,000 $ 5,138,000
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
</TABLE>
- - - - - - - - - - - ------------------------
(1) Expenses during the 3rd quarter of 1998 include start-up and staffing costs
incurred prior to the commencement of sales operations at the newly acquired
resorts.
(2) On June 30, 1998, the Company completed the buyout of minority interest upon
the acquisition of all of the minority partner's interests in Daytona Beach
Regency, Ltd.
(3) Represents the extraordinary losses on the early repayments of existing
company indebtedness, including prepayment penalties and write-off of
unamortized deferred financing costs (see Note 6 to the consolidated
financial statements).
12. SUBSEQUENT EVENT:
Subsequent to year end, the Company began selling membership interests into
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 the Company
and its resort subsidiaries. The Club provides purchasers significant
flexibility in their vacation planning, a wider variety of vacation options and
easier access to the Company's network of resorts. The Club sells points, which
entitle the customer to reserve units at any of the Company's six resorts and in
increments as short as one day. The number of points required to stay one day at
one of the Company's resorts varies depending upon the particular resort, the
size of the unit, the season and the day of the week.
29
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers of the Company. Officers hold office until their successors are elected
and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - - - - - - - - - - --------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Thomas F. Flatley................ 47 President and Chief Executive Officer
Scott J. Egelkamp................ 40 Vice President and Chief Financial Officer
</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.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth, for the fiscal
years 1997 and 1998, certain information about the compensation paid to the
chief executive officer and the other executive officers of the Company.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- - - - - - - - - - - ------------------------------------------------------------------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C>
Thomas F. Flatley.................................................. 1998 $ 280,000 -- --
President and Chief Executive 1997 (a) -- --
Officer
Scott J. Egelkamp.................................................. 1998 $ 125,000 -- --
Vice President and Chief Financial 1997 $ 125,000 -- --
Officer
</TABLE>
- - - - - - - - - - - ------------------------
(a) Mr. Flatley did not receive a salary in 1997.
30
<PAGE>
EMPLOYMENT AGREEMENTS. Each of Thomas F. Flatley and Scott J. Egelkamp have
entered into employment agreements with the Company. Each 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 annual base salary is subject to increase at the
discretion of the Chief Executive Officer of the Company. Each of Mr. Flatley
and Mr. Egelkamp's employment agreements provide that if he is terminated for
any reason other than violation of the agreement, he 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 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 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:
- 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,
- to keep all proprietary information of the Company confidential for a
period of two years following the termination of his employment with the
Company, and
- 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 this policy.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
99% of the 1,118,000 outstanding membership interests in the Company are
held by Mr. Flatley, its President and Chief Executive Officer. The remaining 1%
of outstanding membership interests are owned by the Managing Member of the
Company, Epic Membership Corp., which is wholly owned by Mr. Flatley. In
connection with the offering of the Notes, the Company issued warrants
exercisable in the aggregate for approximately 14% of the total outstanding
membership interests on a fully diluted basis after giving effect to the
offering of the Notes.
ITEM 13. 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. The loan was
subordinate to the claims of London Bridge Resort's construction and equipment
loans and would become payable when those construction and equipment loans were
paid in full. American Realty Group, Inc., a Pennsylvania corporation wholly
owned by Mr. Flatley ("American Realty"), 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 in July 1998 out of the proceeds of the offering of
the Notes. Pursuant to an Agreement to Subordinate dated October 30, 1995,
between American Realty and Queen's Bay Joint Venture (the predecessor to London
Bridge Resort, LLC.), American Realty was entitled to receive a fee of
$1,087,455 upon the repayment of certain financing of Queen's Bay Joint Venture
as consideration for American Realty's agreement to subordinate the American
Realty Debt to such financing. Such fee was paid in July 1998 in connection with
the offering of the Notes.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS
Exhibit 27--Financial Data Schedule.
(b) REPORTS. No reports on Form 8-K have been filed during the last quarter of
the fiscal year ended December 31, 1998.
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- - - - - - - - - - - ----------- ----------------------------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Formation of Epic Resorts, LLC. (incorporated by reference to Exhibit 3.1 to
the Company's registration statement on Form S-4, File No. 333-61433)
3.2 Operating Agreement of Epic Resorts, LLC. (incorporated by reference to Exhibit 3.2 to the
Company's registration statement on Form S-4, File No. 333-61433)
3.3 By-Laws of Epic Resorts, LLC. (incorporated by reference to Exhibit 3.3 to the Company's
registration statement on Form S-4, File No. 333-61433)
3.4 Certificate of Incorporation of Epic Vacation Club.
3.5 By-Laws of Epic Vacation Club (to be filed on a Current Report on Form 8-K)
4.1 Indenture, dated July 8, 1998 between Epic Resorts, LLC, Epic Capital Corp., the Subsidiary
Guarantors signatory thereto and United States Trust Company of New York, as Trustee relating
to the 13% Senior Secured Redeemable Notes due 2005 (the form of which is included in such
indenture). (incorporated by reference to Exhibit 4.1 to the Company's registration statement
on Form S-4, File No. 333-61433)
4.2 Form of Global Exchange Note (included in Exhibit 4.1). (incorporated by reference to Exhibit
4.2 to the Company's registration statement on Form S-4, File No. 333-61433)
4.4 First Supplemental Indenture, dated January 7, 1999 between Epic Resorts, LLC, Epic Capital
Corp., the Subsidiary Guarantors signatory thereto, Epic Marketing, LLC, Epic
Resorts--Vacation Showplace LLC, Epic Resorts Management, LLC and United States Trust Company
of New York as trustee.
4.5 Second Supplemental Indenture, dated February 3, 1999 between Epic Resorts, LLC, Epic Capital
Corp., the Subsidiary Guarantors signatory thereto and United States Trust Company of New
York, as trustee.
10.1* Employment Agreement between Epic Resorts, Inc. and Thomas F. Flatley, dated May 20, 1998.
(incorporated by reference to Exhibit 10.1 to the Company's registration statement on Form
S-4, File No. 333-61433)
10.2* Employment Agreement between Epic Resorts, Inc. and Scott J. Egelkamp, dated May 20, 1998.
(incorporated by reference to Exhibit 10.2 to the Company's registration statement on Form
S-4, File No. 333-61433)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- - - - - - - - - - - ----------- ----------------------------------------------------------------------------------------------
<C> <S>
10.3 Escrow and Disbursement Agreement, dated July 8, 1998 between United States Trust Company of
New York, as Trustee under the Indenture and as Escrow Agent, Epic Resorts, LLC and Epic
Capital Corp. (incorporated by reference to Exhibit 10.3 to the Company's registration
statement on Form S-4, File No. 333-61433)
10.4 Security Agreement, dated July 8, 1998 made by the Grantors named therein in favor of United
States Trust Company of New York, as trustee under the Indenture, Collateral Agent and
Depository for the benefit of the Noteholders of the 13% Senior Secured Notes due 2005 issued
by Epic Resorts, LLC and Epic Capital Corp. (incorporated by reference to Exhibit 10.4 to the
Company's registration statement on Form S-4, File No. 333-61433)
10.5 Registration Rights and Members' Agreement, dated July 8, 1998 between Epic Resorts, LLC, Epic
Membership Corp., Members of Epic Resorts LLC, Epic Capital Corp., Epic Warrant Co. and
NatWest Capital Markets Limited, as Initial Purchaser. (incorporated by reference to Exhibit
10.5 to the Company's registration statement on Form S-4, File No. 333-61433)
10.6 Warrant Agreement, dated July 8, 1998 between Epic Warrant Co., as Issuer and United States
Trust Company of New York, as Warrant Agent. (incorporated by reference to Exhibit 10.6 to the
Company's registration statement on Form S-4, File No. 333-61433)
10.7 Warrant Agreement, dated July 8, 1998 between Epic Resorts, LLC, as Issuer and United States
Trust Company of New York, as Warrant Agent. (incorporated by reference to Exhibit 10.7 to the
Company's registration statement on Form S-4, File No. 333-61433)
10.8 Form of Epic Warrant Co. Warrant Certificate (included in and incorporated by reference to
Exhibit 10.6 to the Company's registration statement on Form S-4, File No. 333-61433)
10.9 Form of Epic Resorts, LLC Warrant Certificate (included in and incorporated by reference to
Exhibit 10.7 to the Company's registration statement on Form S-4, File No. 333-61433)
10.10 Mortgage and Security Agreement, granted July 8, 1998 by Epic Resorts--Hilton Head, LLC, as
mortgagor to United States Trust Company of New York, as trustee under the Indenture and
mortgagee. (incorporated by reference to Exhibit 10.10 to the Company's registration statement
on Form S-4, File No. 333-61433)
10.11 Deed of Trust, granted July 8, 1998 by Epic Resorts--Westpark Resort, LLC, as trustor to
United Title of Nevada, as trustee for the benefit of United States Trust Company of New York,
as trustee under the Indenture. (incorporated by reference to Exhibit 10.11 to the Company's
registration statement on Form S-4, File No. 333-61433)
10.12 Form of Leasehold Deed of Trust, Assignment of Leases and Rents Security Agreement and Fixture
Filing, granted July , 1998 by Epic Resorts--Palm Springs Marquis Villas, LLC, as trustor to
Barbara J. Goodman, Esq., as trustee for the benefit of United States Trust Company of New
York, as trustee under the Indenture. (incorporated by reference to Exhibit 10.12 to the
Company's registration statement on Form S-4, File No. 333-61433)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- - - - - - - - - - - ----------- ----------------------------------------------------------------------------------------------
<C> <S>
10.13 Mortgage, granted July 8, 1998 by Daytona Beach Regency, Ltd., as mortgagor to United States
Trust Company of New York, as trustee under the Indenture and mortgagee. (incorporated by
reference to Exhibit 10.13 to the Company's registration statement on Form S-4, File No.
333-61433)
10.14 Deed of Trust, granted July 8, 1998 by Epic Resorts--Scottsdale Links Resort, LLC, as trustor
to Jones Osborn, II, Esq., as trustee for the benefit of United States Trust Company of New
York, as trustee under the Indenture. (incorporated by reference to Exhibit 10.14 to the
Company's registration statement on Form S-4, File No. 333-61433)
10.15 Receivables Loan and Security Agreement, dated October 11, 1996 between London Bridge Resort,
Inc. and Finova Capital Corporation. (incorporated by reference to Exhibit 10.15 to the
Company's registration statement on Form S-4, File No. 333-61433)
10.16 Trust Indenture, dated September 28, 1998 between Epic Master Funding Corporation, Epic
Resorts, LLC as administrator and Marine Midland Bank, as trustee. (incorporated by reference
to Exhibit 10.16 to the Company's registration statement on Form S-4, File No. 333-61433)
10.17 Credit Agreement, dated September 28, 1998 between Epic Master Funding Corporation, Epic
Resorts, LLC and Prudential Securities Credit Corporation. (incorporated by reference to
Exhibit 10.17 to the Company's registration statement on Form S-4, File No. 333-61433)
10.18 Form of Security Agreement for vacation club property, between United States Trust Company of
New York, as trustee under the Indenture and the resort subsidiary transferring vacation
ownership units to Epic Vacation Club.
21 Subsidiaries of Epic Resorts, LLC.
27 Financial Data Schedule.
</TABLE>
(d) FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not applicable or are not required or
because the information is reported in the consolidated financial statements or
notes thereto.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
NO ANNUAL REPORT OR PROXY STATEMENT COVERING THE COMPANY'S LAST FISCAL YEAR
HAS BEEN OR WILL BE CIRCULATED TO SECURITY HOLDERS.
34
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this annual report on Form 10-K to be
signed on its behalf by the undersigned thereunto duly authorized.
EPIC RESORTS, LLC
By: /s/ SCOTT J. EGELKAMP
-----------------------------------------
Scott J. Egelkamp
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - - - - - - - - - - ------------------------------ -------------------------- -------------------
<C> <S> <C>
President and Chief
/s/ THOMAS F. FLATLEY Executive Officer
- - - - - - - - - - - ------------------------------ (Principal Executive March 31, 1999
Thomas F. Flatley Officer)
Vice President and Chief
/s/ SCOTT J. EGELKAMP Financial Officer
- - - - - - - - - - - ------------------------------ (Principal Financial and March 31, 1999
Scott J. Egelkamp Accounting Officer)
Managing Member March 31, 1999
/s/ THOMAS F. FLATLEY
- - - - - - - - - - - ------------------------------
Epic Membership Corp.
By: Thomas F. Flatley,
President
</TABLE>
35
<PAGE>
CERTIFICATE OF INCORPORATION
OF
EPIC VACATION CLUB
A NON-STOCK NONPROFIT CORPORATION
1. NAME. The name of this corporation is EPIC VACATION CLUB.
2. AGENT FOR SERVICE OF PROCESS. The address of the corporation's
registered office in the State of Delaware is 1209 Orange Street, City of
Wilmington, County of New Castle, Delaware 19801. The name of the
corporation's registered agent at such address is The Corporation Trust
Company.
3. PURPOSE.
3.1 GENERAL. This corporation is a non-stock nonprofit corporation
organized under the Delaware General Corporation Law. The purpose of this
corporation is to engage in any lawful act or activity for which a
corporation may be organized under such law.
3.2 SPECIFIC. The specific and primary purpose for which the
corporation is formed is to care for, own, lease, maintain, operate and
manage the real property and improvements thereon and personal property
therein or which it owns, wherever located, which has been dedicated to the
Epic Vacation Club Vacation Ownership Plan by a Declaration recorded or filed
in various states and counties.
3.3 LIMITATION. Notwithstanding any of the above statements of
purposes and powers, this corporation shall not, except to an insubstantial
degree, engage in any activities or exercise any powers that are not in
furtherance of the specific purpose of this corporation. No part of the net
earnings of the corporation shall benefit any private member or individual
(other than by acquiring, constructing, or providing management, maintenance,
and care of property held by the corporation, or by a rebate of excess
membership dues, fees, or assessments).
4. NO AUTHORITY TO ISSUE STOCK. The corporation is a nonprofit corporation
and has no authority to issue capital stock.
5. MEMBERSHIP. The conditions of membership in this corporation are stated
in the bylaws of the corporation.
6. EXISTENCE. This corporation shall have perpetual existence.
7. AMENDMENT. Except as provided in Section 7.1, amendment of this
Certificate of Incorporation requires the affirmative vote or written assent
of a majority of the corporation's Board of Directors; and (i) a majority of
the Voting Power of each Class of Members (as defined in the bylaws of the
corporation), if there is more than one class, or (ii) if there is only one
Class
<PAGE>
of Members, a majority of the Voting Power of Members other than Declarant,
or its successor, plus the approval of a majority of the total Voting Power.
The votes required for such an amendment shall not be less than the
affirmative votes required for action to be taken under the clause being
affected.
7.1 BOARD ONLY. The Board of Directors alone may amend the Certificate
of Incorporation to make technical corrections or additions required by
7.1(a) COURT. A court of competent jurisdiction, or
7.1(b) AGENCY. A Federal or state agency, to comply with
consumer protection, sales regulation and/or tax exemption laws.
7.2 "VOTING POWER" is the aggregate votes of Members, including, if
applicable, all Classes, unless otherwise specified.
7.3 MEETINGS. Meetings of members may be held within or without the
State of Delaware, as the bylaws of the corporation provide.
8. BYLAWS. In furtherance, and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter or
repeal the bylaws of the corporation.
9. INDEMNIFICATION. To the full extent permitted by the Delaware General
Corporation Law or any other applicable laws presently or hereafter in
effect, no director of the corporation is to be personally liable to the
corporation or its members for or with respect to any acts or omissions in
the performance of his or her duties as a director of the corporation. Any
repeal or modification of this Section 9 will not adversely affect any right
or protection of a director of the corporation existing immediately prior to
such repeal or modification. Each person who is or was or had agreed to
become a director or officer of the corporation, or each such person who is
or was serving or who had agreed to serve at the request of the Board of
Directors or an officer of the corporation as an employee or agent of the
corporation or as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise (including
the heirs, executors, administrators or estate of such person), is to be
indemnified by the corporation to the full extent permitted by the Delaware
General Corporation Law or any other applicable laws as presently or
hereafter in effect. Without limiting the generality or the effect of the
foregoing, the corporation may enter into one or more agreements with any
person which provide for indemnification greater or different than that
provided herein. Any repeal or modification of this section 9 will not
adversely affect any right or protection existing hereunder immediately prior
to such repeal or modification.
10. INCORPORATOR. The name and mailing address of the incorporator is
Thomas F. Flatley, Epic Resorts, LLC, 1150 First Avenue, Suite 900, King of
Prussia, PA 19406.
2
<PAGE>
11. DIRECTOR.
11.1 The powers of the incorporator are to cease upon the issuance of
the Certificate of Incorporation, and the following person is to serve as
director of the corporation until his successor(s) are elected and qualified:
Thomas F. Flatley, Epic Resorts, LLC, 1150 First Avenue, Suite 900, King of
Prussia, PA 19406.
11.2 Election of directors need not be by written ballot except to the
extent provided for in the bylaws of the corporation.
/S/ THOMAS F. FLATLEY
-------------------------------------------
Incorporator
3
<PAGE>
- - - - - - - - - - - ------------------------------------------------------------------------------
EPIC RESORTS, LLC
EPIC CAPITAL CORP.
as Issuers,
The Subsidiary Guarantors Named Herein or
which become a party pursuant to Article 10 hereof
and
UNITED STATES TRUST COMPANY OF NEW YORK
as Trustee
$130,000,000
13% Senior Secured Redeemable Notes Due 2005, Series A
13% Senior Secured Redeemable Notes Due 2005, Series B
FIRST SUPPLEMENTAL INDENTURE
Dated as of January 7, 1999
- - - - - - - - - - - ------------------------------------------------------------------------------
<PAGE>
THIS FIRST SUPPLEMENTAL INDENTURE (the "FIRST SUPPLEMENTAL
INDENTURE"), dated as of January 7, 1999, between EPIC RESORTS, LLC, a
Delaware limited liability company ("EPIC"), EPIC CAPITAL CORP., a Delaware
corporation ("CAPITAL CORP.", and together with Epic, the "ISSUERS"), the
Subsidiary Guarantors named on the Signature Page hereto (the "SUBSIDIARY
GUARANTORS"), Epic Resorts - Vacation Showplace, a Delaware limited liability
company ("SHOWPLACE"), Epic Resorts Management, LLC, a Delaware limited
liability company ("MANAGEMENT"), Epic Marketing, LLC, a Delaware limited
liability company ("MARKETING") and UNITED STATES TRUST COMPANY OF NEW YORK,
a banking corporation organized and existing under the laws of the State of
New York, in its capacity as trustee (the "TRUSTEE").
RECITALS:
A. The Issuers, the Subsidiary Guarantors and Trustee entered into
that certain Indenture, dated as of July 8, 1998 (the "INDENTURE").
B. On September 3, 1998, Epic formed two new subsidiaries, Showplace
and Management, and on October 5, 1998, Epic formed another new subsidiary,
Marketing. Each subsidiary was formed as a limited liability company under
the laws of the State of Delaware. Showplace, Management and Marketing are
sometimes collectively referred to herein as the "New Subsidiary Guarantors."
C. The amendments to the Indenture as hereinafter set forth are
permitted under Section 9.01(a)(iv) of the Indenture without the consent of
any Securityholder. The Issuers have delivered, or caused to be delivered to
the Trustee, an opinion of counsel to that effect.
D. This First Supplemental Indenture has been duly authorized by all
necessary corporate action on the part of the Issuers, the Subsidiary
Guarantors and each New Subsidiary Guarantor.
E. The Issuers have delivered, or caused to be delivered to the
Trustee, an Officer's Certificate and an Opinion of Counsel stating that all
conditions precedent and covenants, if any, provided for in the Indenture
relating to this First Supplemental Indenture have been satisfied.
AGREEMENT:
The Issuers, the Subsidiary Guarantors, the New Subsidiary Guarantors
and the Trustee mutually covenant and agree for the equal and proportionate
benefit of the respective Holders from time to time of the Securities as
follows:
SECTION 1. DEFINITIONS. Capitalized terms used in this First
Supplemental Indenture and not otherwise defined herein have the meanings
given them in the Indenture.
SECTION 2. ADDITIONAL SUBSIDIARY GUARANTORS.
2.1. RESTRICTED SUBSIDIARIES. None of the New Subsidiary Guarantors has
been designated as an Unrestricted Subsidiary pursuant to Section 4.19 of the
Indenture, and therefore
<PAGE>
each New Subsidiary Guarantor constitutes a Restricted Subsidiary as defined
in Section 1.01 of the Indenture.
2.2. DELIVERY OF ADDITIONAL SUBSIDIARY GUARANTEES. Pursuant to Section
4.20 of the Indenture, the Issuers have, through the execution of this First
Supplemental Indenture in accordance with Sections 10.02 and 10.07 of the
Indenture, caused each of the New Subsidiary Guarantors to execute and
deliver a Subsidiary Guarantee of the Securities, and each of the New
Subsidiary Guarantors hereafter constitutes, subject to and in accordance
with the terms of the Indenture, and for all purposes of the Indenture shall
be a Subsidiary Guarantor under the Indenture.
2.3 ASSUMPTION OF OBLIGATIONS OF INDENTURE. By executing this First
Supplemental Indenture, each of the New Subsidiary Guarantors agree to be
bound by all of the terms, conditions and obligations of the Indenture
applicable to the Subsidiary Guarantors, specifically including Section 10.01
of Article 10 thereof.
SECTION 3. MISCELLANEOUS.
3.1. EFFECT AND OPERATION OF FIRST SUPPLEMENTAL INDENTURE. This First
Supplemental Indenture shall be effective upon the execution and delivery
hereof by the Issuers, the Subsidiary Guarantors, the New Subsidiary
Guarantors and the Trustee. The Indenture shall be supplemented and amended
in accordance therewith, and this First Supplemental Indenture shall form a
part of the Indenture for all purposes, and every Security heretofore or
hereafter authenticated and delivered under the Indenture shall be bound
thereby. Except as supplemented hereby, all provisions of the Indenture
shall remain in full force and effect.
3.2. INDENTURE AND FIRST SUPPLEMENTAL INDENTURE CONSTRUED TOGETHER.
This First Supplemental Indenture is an indenture supplemental to and in
implementation of the Indenture, and the Indenture and this First
Supplemental Indenture shall from the date hereof be read and construed
together.
3.3. CONFIRMATION AND PRESERVATION OF THE INDENTURE. The Indenture, as
supplemented by this First Supplemental Indenture, is in all respects
confirmed and preserved.
3.4. CONFLICT WITH TRUST INDENTURE ACT. If any provision of this First
Supplemental Indenture limits, qualifies or conflicts with any provision of
the Trust Indenture Act of 1939, as amended (the "ACT"), that is required
under such Act to be part of and govern any provision of this First
Supplemental Indenture, the provisions of such Act shall control. If any
provision of this First Supplemental Indenture modifies or excludes any
provision of the Act that may be so modified or excluded, the provisions of
the Act shall be deemed to apply to the Indenture as so modified or to be
excluded by this First Supplemental Indenture, as the case may be.
3.5. SEPARABILITY. In case any provision of this First Supplemental
Indenture shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
3.6. EFFECT OF HEADINGS. The Section headings herein are for
convenience only and shall not affect the construction hereof.
2
<PAGE>
3.7. BENEFITS OF FIRST SUPPLEMENTAL INDENTURE. Nothing in the
Indenture, this First Supplemental Indenture or the Securities, express or
implied, shall give to any Person, other than the parties hereto and thereto
and their successors hereunder and thereunder, and the Securityholders, any
benefit of any legal or equitable right, remedy or claim under the Indenture
as supplemented and amended hereby or the Securities.
3.8. SUCCESSORS AND ASSIGNS. All covenants and agreements in this
First Supplemental Indenture by the Issuers, the Subsidiary Guarantors and
the New Subsidiary Guarantors shall bind their successors and assigns,
whether so expressed or not.
3.9. NEW YORK LAW TO GOVERN. This First Supplemental Indenture shall
be governed by and construed in accordance with the laws of the State of New
York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the laws of another jurisdiction would
be required thereby.
3.10. COUNTERPARTS. This First Supplemental Indenture may be executed
in counterparts, each of which shall be an original, but all such
counterparts shall together constitute one and the same instrument.
3.11 THE TRUSTEE. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this First
Supplemental Indenture or for or in respect of the recitals contained herein,
all of which recitals are made solely by the Issuers, the Subsidiary
Guarantors and the New Subsidiary Guarantors.
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed as of the date and the year first
above written.
EPIC RESORTS, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC CAPITAL CORP.
By: /s/ T. F. Flatley
----------------------------------------
Title: President
3
<PAGE>
EPIC RESORTS - VACATION SHOWPLACE, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC RESORTS MANAGEMENT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC MARKETING, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC TRAVEL, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC RESORTS - PALM SPRINGS MARQUIS
VILLAS, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC RESORTS - SCOTTSDALE LINKS
RESORT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
4
<PAGE>
EPIC RESORTS - HILTON HEAD RESORT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC RESORTS - WESTPARK RESORT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
DAYTONA BEACH REGENCY, LTD., by Resort
Management, LLC, its general partner
By: /s/ T. F. Flatley
----------------------------------------
Title: President
LONDON BRIDGE RESORT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC WARRANT CO.
By: /s/ T. F. Flatley
----------------------------------------
Title: President
RESORT MANAGEMENT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
RESORT INVESTMENT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
5
<PAGE>
UNITED STATES TRUST COMPANY OF
NEW YORK, as Trustee
By: /s/ Illegible
----------------------------------------
Title: Vice President
6
<PAGE>
- - - - - - - - - - - ------------------------------------------------------------------------------
EPIC RESORTS, LLC
EPIC CAPITAL CORP.
as Issuers,
The Subsidiary Guarantors Named Herein or
which become a party pursuant to Article 10 hereof
and
UNITED STATES TRUST COMPANY OF NEW YORK
as Trustee
$130,000,000
13% Senior Secured Redeemable Notes Due 2005, Series A
13% Senior Secured Redeemable Notes Due 2005, Series B
SECOND SUPPLEMENTAL INDENTURE
Dated as of February 3, 1999
- - - - - - - - - - - ------------------------------------------------------------------------------
<PAGE>
THIS SECOND SUPPLEMENTAL INDENTURE (the "SECOND SUPPLEMENTAL
INDENTURE"), dated as of February 3, 1999, between EPIC RESORTS, LLC, a
Delaware limited liability company ("EPIC"), EPIC CAPITAL CORP., a Delaware
corporation ("CAPITAL CORP.", and together with Epic, the "ISSUERS"), the
Subsidiary Guarantors named on the Signature Page hereto (the "SUBSIDIARY
GUARANTORS") and UNITED STATES TRUST COMPANY OF NEW YORK, a banking
corporation organized and existing under the laws of the State of New York,
in its capacity as trustee (the "TRUSTEE").
RECITALS:
A. The Issuers, the Subsidiary Guarantors and the Trustee entered into
that certain Indenture, dated as of July 8, 1998 (the "ORIGINAL INDENTURE")
and supplemented on January 7, 1999 (the "FIRST SUPPLEMENTAL INDENTURE," and
together with the Original Indenture, the "INDENTURE").
B. Epic has chosen to convert some of its timeshare operations into a
vacation club system. Under Epic's current timeshare operations, timeshare
interests constituting actual undivided interests in specific units at each
resort location ("Real Property Timeshare Interests") are sold to purchasers,
and the purchaser receives a deed evidencing the purchaser's undivided
interest in the unit and the resort. Prior to the time the Real Property
Timeshare Interests are sold, the Trustee holds a mortgage on the Real
Property Timeshare Interests. Under the vacation club system, units at
Epic's resorts will from time to time be conveyed, prior to sale of any
timeshare interests therein to customers, to Epic Vacation Club, a Delaware
nonprofit corporation (the "Vacation Club"), which at all times will continue
to own and hold the entire legal title thereto; however, pursuant to a
declaration executed by the transferring Subsidiary Guarantor and the
Vacation Club, all units transferred to the Vacation Club will be subjected
to a timeshare regime wherein the right to use and occupy those units will be
evidenced by membership interests in the Vacation Club ("Club Membership
Interests") constituting personal property rather than by Real Property
Timeshare Interests. In consideration for conveyance of units to it, the
Vacation Club will transfer to the transferring Subsidiary Guarantor the Club
Membership Interests allocable to such units. The transferring Subsidiary
Guarantor will then own and sell the Club Membership Interests rather than
Real Property Timeshare Interests. Prior to conveyance of units to the
Vacation Club, the Trustee will maintain its mortgage on those units. As a
result, the Trustee's lien on the units deeded to the Vacation Club must be
released prior to the transfer of those units into the Vacation Club. The
Trustee will maintain its secured position through the procedures set forth
in Section 11.03 of the Indenture, as amended by the Second Supplemental
Indenture, whereby the Trustee will be granted a security interest in the
Club Membership Interests that the transferring Subsidiary Guarantor receives
from the Vacation Club. This Second Supplemental Indenture will amend the
Indenture to permit Epic to organize and operate the Vacation Club as
described above.
C. The amendments to the Indenture as hereinafter set forth are
permitted under Section 9.01(a)(vii) and 9.01(a)(x) of the Indenture without
the consent of any Securityholder. The Issuers have delivered, or caused to
be delivered to the Trustee, an Opinion of Counsel to that effect.
<PAGE>
D. This Second Supplemental Indenture has been duly authorized by all
necessary corporate action on the part of the Issuers and the Subsidiary
Guarantors.
E. The Issuers have delivered, or caused to be delivered to the
Trustee, an Officer's Certificate and an Opinion of Counsel stating that all
conditions precedent and covenants, if any, provided for in the Indenture
relating to this Second Supplemental Indenture have been satisfied.
AGREEMENT:
The Issuers, the Subsidiary Guarantors and the Trustee mutually covenant
and agree for the equal and proportionate benefit of the respective Holders
from time to time of the Securities as follows:
SECTION 1. DEFINITIONS. Capitalized terms used in this Second
Supplemental Indenture and not otherwise defined herein have the meanings
given them in the Indenture.
SECTION 2. AMENDMENTS.
2.1 The definition of Asset Disposition in Section 1.01 of the
Indenture is amended and restated as follows:
"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 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) and transfers of real and personal property
from a Restricted Subsidiary to the Vacation Club provided that the
transferor retains or immediately receives from the Vacation Club the
entirety of the Vacation Ownership Interests allocable to such transferred
property, (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
Section 5.01 hereunder; and (vi) Permitted Investments. Notwithstanding
anything to the contrary contained above, a Restricted Payment made in
compliance with Section 4.07 hereunder shall not constitute an Asset
Disposition except for purposes of determinations of the Consolidated
Coverage Ratio.
2.2 Section 1.01 of the Indenture is amended to include the following
definition:
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<PAGE>
"CLUB MEMBERSHIP INTEREST" means an interest evidencing the right to use or
occupy units in any resort subject to the Vacation Club.
2.3 Section 1.01 of the Indenture is amended to include the following
definition:
"CLUB SECURITY AGREEMENT" means a Vacation Club Security Agreement (a form
of which is attached hereto as Exhibit J) between the Issuers, the
Subsidiary Guarantors and the Trustee, whereby the Trustee will receive a
security interest in the Vacation Ownership Interests in the Vacation Club
owned, from time to time, by the Subsidiary Guarantors prior to their sale
in accordance with the terms of this Indenture. The form of Club Security
Agreement attached hereto as Exhibit J is subject to modification according
to the local laws and regulations of the jurisdiction in which the
applicable resort is located.
2.4 The definition of Collateral Documents in Section 1.01 of the
Indenture is amended and restated as follows:
"COLLATERAL DOCUMENTS" means each Mortgage (a form of which is attached
hereto as Exhibit E), the Security Agreement (a form of which is attached
hereto as Exhibit G), the Escrow and Disbursement Agreement (a form of
which is attached hereto as Exhibit H), the Club Security Agreements (a
form of which is attached hereto as Exhibit J) and any other agreements
creating a Lien in favor of the Trustee securing the Securities.
2.5 The definition of Permitted Investment in Section 1.01 of the
Indenture is amended and restated as follows:
"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 or, solely
with respect to the transfer of real and personal property by a Restricted
Subsidiary to the Vacation Club as to which the transferor retains or
obtains simultaneously with such transfer the corresponding Vacation
Ownership Interests, the Vacation Club; (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
3
<PAGE>
received by the Company or any Restricted Subsidiary as consideration
for asset dispositions effected in compliance with Section 4.10; (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; and (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.
2.6 Section 1.01 of the Indenture is amended to include the following
definition:
"PLEDGED VACATION OWNERSHIP INTERESTS" means the Vacation Ownership
Interests at the resorts owned or developed by the Issuers that are subject to
the Collateral Documents.
2.7 The definition of Vacation Ownership Interests in Section 1.01 of the
Indenture is amended and restated as follows:
"VACATION OWNERSHIP INTERESTS" means the right to use (whether arising by
virtue of a deeded interest in real property or otherwise, including
pursuant to a Club Membership Interest), a fully-furnished vacation
residence (whether specifically identified or not) for a specified period
each year or otherwise.
2.8 Section 1.01 of the Indenture is amended to include the following
definition:
"VACATION CLUB" means Epic Vacation Club, a Delaware nonprofit
corporation, through which the Company operates its vacation club system.
2.9 Section 4.11(b) of the Indenture, regarding limitations on affiliate
transactions, is amended and restated as follows:
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to Section 4.07, (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 benefits 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 Offering
Memorandum 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
4
<PAGE>
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 or the Vacation Club involving the transfer or sale of
Vacation Ownership Interests Receivables or Vacation Ownership
Interests, respectively.
2.10 Section 11.02(b), regarding Recording and Opinions, is amended and
restated as follows:
(b) The Issuers shall furnish to the Trustee within three months after
each anniversary of the date of the Indenture, an Opinion of Counsel, dated
as of such date, stating either that (i) in the opinion of such counsel,
all action has been taken with respect to the recording, registering,
filing, re-recording, re-registering and refiling of all supplemental
indentures, financing statements, continuation statements or other
instruments of further assurance as is necessary to maintain the Liens of
the Collateral Documents and reciting the details of such action or (ii) in
the opinion of such counsel, no such action is necessary to maintain such
Liens, and (iii) that none of the Issuers or Subsidiary Guarantors are
delinquent in the payment of any assessments levied by or owed to the
Vacation Club with respect to Vacation Ownership Interests owned by them.
2.11 Section 11.03 of the Indenture, regarding release of collateral, is
amended and restated as follows:
SECTION 11.03. RELEASE OF COLLATERAL.
(a) Subject to subsections (b), (c), (d), (e), (f), (g) and (h) of
this Section 11.03, Collateral may be released from the Lien and
security interest created by the Collateral Documents at any time or
from time to time at the sole cost and expense of the Issuers (x) upon
payment in full of the Securities in accordance with the terms thereof
and of this Indenture and all other Obligations of the Issuers and the
Subsidiary Guarantors then due and owing under this Indenture, the
Securities and the Collateral Documents, including any defeasance
pursuant to Section 8.01 and (y) the delivery to the Trustee of an
Opinion of Counsel that such release of the Collateral is authorized and
permitted by this Section 11.03 and the applicable Collateral Documents
and that all conditions precedent to such release contained in this
Indenture and the Collateral Documents have been satisfied. Upon
compliance with the above provisions and the provisions of Section 12.04
hereof, the Trustee shall execute, deliver or acknowledge any necessary
or proper instruments or termination, satisfaction or release provided
by or on behalf of the Issuers to evidence the release of any Collateral
permitted to be released pursuant to this Indenture or the Collateral
Documents.
(b)(1) The Trustee shall release the Lien and security interest
created by the Collateral Documents from each Pledged Vacation Ownership
Interest covered thereby at the time of the transfer of title to such
Pledged Vacation Ownership Interest (a "Transfer") by an Issuer or
Subsidiary Guarantor upon receipt
5
<PAGE>
of an Officer's Certificate stating that the following conditions have
been met with respect to such Transfer:
(A) The Transfer must be pursuant to a written agreement (a "Purchase
Agreement") providing for the purchase and sale of one or more Pledged
Vacation Ownership Interests (any Pledged Vacation Ownership Interest
which is the subject of a Purchase Agreement is referred to in this
Section 11.03 as a "Sold Interest").
(B) The Transfer must be in the ordinary course of business.
(C) The Transfer must be to a Person who is not an Affiliate of the
Issuers or the Subsidiary Guarantors.
(2) The releases described in subsection 11.03(b)(1) above
("Partial Releases") shall be effectuated (a) if the sale of the Pledged
Vacation Ownership Interest is effectuated by a deed or other real
property conveyance (a "Deeded Interest"), pursuant to an instrument
prepared by the Issuers or such Subsidiary Guarantor which shall
specifically recite that the partial release of the Mortgage on the sold
Pledged Vacation Ownership Interest shall not otherwise affect or impair
the Liens created by the Collateral Documents on any other Pledged
Vacation Ownership Interests encumbered thereby, or (b) if sale of the
Pledged Vacation Ownership Interest is effectuated by a transfer of a
Club Membership Interest, automatically pursuant to the terms of the
related Club Security Agreement upon compliance by the Issuer or the
transferring Subsidiary Guarantor with the terms of Section 11.03(b)(1)
hereof, except for the requirement to deliver an Officer's Certificate
to the Trustee.
(3) In order to facilitate Partial Releases of Sold Interests
which are Deeded Interests, the Trustee from time to time shall, upon
written request of the Issuers or a Subsidiary Guarantor, execute,
acknowledge, and deliver powers of attorney in the form provided by the
Issuers (each, a "Power of Attorney"), which form shall conform
substantially to Exhibit I-1 annexed hereto, appointing such title
company or title agency (each, an "Agent") as is designated by the
Issuers or a Subsidiary Guarantor which owns the real property of which
any Sold Interest which is a Deeded Interest is a part as the Trustee's
attorney-in-fact for the purpose of executing, acknowledging and
delivering Partial Releases of such Sold Interests. Each Power of
Attorney shall be delivered by the Trustee to the Agent within five days
of the Issuers' or Subsidiary Guarantor's request therefor, and shall be
delivered with written authorization prepared by the Issuers and
executed and delivered by the Trustee to the Agent to record the Power
of Attorney and to execute Partial Releases pursuant thereto in
connection with the Transfers of Sold Interests which are Deeded
Interests upon receipt by such Agent of the Officer's Certificate
described in subsection 11.03(b)(1) above. Each Power of Attorney by
its terms shall be revocable only by the recording in the county in
which the Power of Attorney is recorded of an instrument executed by the
Trustee specifically revoking the Power of Attorney. The Trustee shall
revoke each Power of Attorney promptly after
6
<PAGE>
obtaining knowledge of the occurrence and continuance of an Event of
Default; PROVIDED, that if an Event of Default is no longer continuing,
the Trustee may execute new Powers of Attorney in accordance with this
clause (3). The Trustee shall revoke a Power of Attorney promptly after
obtaining knowledge that the Agent thereunder has failed to comply with
its obligations hereunder as assigned pursuant to such Power of
Attorney; PROVIDED, that if a Power of Attorney is so revoked, the
Trustee may execute a new Power of Attorney in accordance with this
clause (3); PROVIDED, FURTHER, that no Agent as to whom a Power of
Attorney has been revoked may thereafter be appointed as an Agent.
(4) Notwithstanding the revocation of a Power of Attorney by the
Trustee as permitted in subsection 11.03(b)(3) above, the Trustee shall
deliver or cause to be delivered Partial Releases with respect to
Transfers of Sold Interests which are Deeded Interests pursuant to
Purchase Agreements entered into prior to the occurrence of an Event of
Default.
(5) In connection with any release of Liens on a Pledged Vacation
Ownership Interest by an Agent with respect to Deeded Interests pursuant
to subsection 11.03(b), the Issuers or the applicable Subsidiary
Guarantor shall deliver or cause to be delivered to such Agent any
certificates, opinions of counsel or other documents or instruments
required to be delivered to the Trustee under applicable law. The
Issuers or the applicable Subsidiary Guarantor shall then cause such
Agent to deliver to the Trustee originals or photostatic copies of each
of the documents relating to such release, including any such
certificates or opinions of counsel, as promptly as is reasonably
practicable.
(6) In connection with any Partial Release, the Trustee and, if
applicable, any Agent shall not be required to obtain any other
certificates, opinions of counsel or other documents and instruments
except such as are specifically required by subsection 11.03(b).
(c) In the event that (i) real property is acquired and/or
developed with Indebtedness Incurred under an A&D Facility, (ii) the
lender or lenders thereunder requires the Indebtedness under such A&D
Facility to be secured by a first priority Lien on such real property
and (iii) such property is not subject to a Mortgage in favor of the
Trustee, the provisions of Section 11.01(b) requiring that a Mortgage on
such property be granted to the Trustee shall, subject to Section
11.03(e), not apply.
(d) In the event that the Trustee is furnished with an Officer's
Certificate certifying that (i) real property is to be acquired and/or
developed with Indebtedness Incurred under an A&D Facility, (ii) the
lender or lenders thereunder require the Indebtedness under such A&D
Facility to be secured by a first priority Lien on such real property
and (iii) such property is already subject to a Mortgage in favor of the
Trustee, the Trustee shall, upon receipt of an Opinion of Counsel to the
effect set forth in clause (a)(y) above, release such Mortgage to the
extent required
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<PAGE>
by such lender or lenders in accordance with instructions set forth in such
Officer's Certificate.
(e) Upon the repayment in full of any A&D Facility secured by a
Lien, the Issuers or the applicable Subsidiary Guarantor will promptly cause
such Lien to be removed and shall grant to the Trustee a Mortgage in
accordance with Section 11.01(b).
(f) Notwithstanding any other provisions of this Section 11.03,
absent the occurrence and continuance of an Event of Default, Collateral in
the Cash Collateral Account (as defined in the Security Agreement) may be
released solely in accordance with the terms of the Security Agreement.
(g) In order to facilitate the sale of Pledged Vacation Ownership
Interests, the Trustee shall subordinate the Collateral Documents encumbering
any real property to the documents or instruments creating time share
interest therein (the "Time Share Documents") as permitted by the terms of
the Collateral Documents, whereupon the Collateral Documents shall be subject
and subordinate to the Time Share Documents and the provisions therein
dealing with insurance and the use and application of insurance and
condemnation proceeds. Before taking any actions required pursuant to this
subsection 11.03(g), the Trustee shall be entitled to receive an Officer's
Certificate setting forth the actions that the Trustee is to take and an
Opinion of Counsel to the effect that such actions are permitted by
applicable law and by the terms of the Indenture and the Collateral Documents.
(h) In order to facilitate the sale of Pledged Vacation Ownership
Interests which are or are to become Club Membership Interests, the Trustee,
within five Business Days following request, shall execute and return to the
Issuers a release of the Lien of the Mortgage encumbering any real or
personal property conveyed to the Vacation Club ("Transferred Property")
pursuant to Partial Releases upon prior or concurrent satisfaction of the
following conditions:
(1) The Transferred Property conveyed to the Vacation Club
which consists of real property must consist of parcels or units of
real property which lawfully may be conveyed separately from any
real property not being transferred to the Vacation Club.
(2) The Transferred Property conveyed to the Vacation Club
which consists of real property must be subjected, by means of an
instrument filed in the real property records in the county and
state in which such real property is located, to a declaration or
other instrument which subjects such real property to a time share
regime pursuant to which the Vacation Ownership Interests therein
are evidenced by Club Membership Interests.
(3) The Subsidiary Guarantor transferring the Transferred
Property to the Vacation Club must retain, or simultaneously
receive
8
<PAGE>
from the Vacation Club, ownership of all Club Membership
Interests allocable to such Transferred Property.
(4) The Club Membership Interests allocable to the Transferred
Property must be subject to, or subjected to, a Club Security
Agreement which creates a security interest therein, subject only to
(A) Permitted Liens, (B) to Liens subsequently arising in favor or
the Vacation Club for non-payment of future assessments and fees
with respect to such Club Membership Interests, (C) Liens which, in
the aggregate, would not have a materially adverse effect upon the
ability of the Subsidiary Guarantor to sell the Club Membership
Interests owned by it to purchasers in the ordinary course of
business as provided in Section 11.03(b)(1), and (D) Liens which
are being contested by the Subsidiary Guarantor or the Vacation
Club in good faith.
(5) The Trustee shall have been provided with copies of
UCC/Tax Lien/Litigation search results, current as of a date not
more than 30 days earlier than the date of conveyance of the
Transferred Property to the Vacation Club, conducted in the names
of the transferring Subsidiary Guarantor and the Vacation Club
(such searches shall be conducted in the county and state in which
the Transferred Property is located and in the county and state in
which the chief executive offices of the Vacation Club and the
transferring Subsidiary Guarantor are located).
(6) The Trustee shall be provided with an Officer's
Certificate stating that the requirements of subsections
11.03(h)(1) through (5) have been satisfied and that none of the
items disclosed by the searches referenced in Sections 11.03(h)(5)
is other than one permitted by subsection 11.03(h)(4), which
Officer's Certificate shall have appended thereto an Opinion of
Counsel, furnished by counsel licensed to practice in the state in
which the Transferred Property is located, addressed to the
Issuers, the transferring Subsidiary Guarantor, and the Trustee to
the effect that the requirements of subsections 11.03(h)(1) through
(5) have been satisfied.
The Partial Releases of Transferred Property described in this Section
11.03(h) shall be effectuated pursuant to an instrument prepared by the
Issuers or the transferring Subsidiary Guarantor which shall specifically
recite that the partial release of the Mortgage from the Transferred Property
shall not otherwise affect or impair the Lien of the Mortgage upon any other
real property remaining encumbered thereby.
(i) The Trustee has no liability for any act or failure to act of
any Agent except as may result from the Trustee's willful or grossly
negligent failure to fulfill its obligations under Section 11.03(b)(3).
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<PAGE>
2.12 The exhibits to the Indenture are amended to include Exhibit J, a
form of Club Security Agreement in the form annexed to this Second
Supplemental Indenture. The form of Club Security Agreement is subject to
modification according to the local laws and regulations of the jurisdiction
in which the applicable resort is located.
SECTION 3. MISCELLANEOUS.
3.1. EFFECT AND OPERATION OF SECOND SUPPLEMENTAL INDENTURE. This Second
Supplemental Indenture shall be effective upon the execution and delivery
hereof by the Issuers, the Subsidiary Guarantors and the Trustee. The
Indenture shall be supplemented and amended in accordance therewith, and this
Second Supplemental Indenture shall form a part of the Indenture for all
purposes, and every Security heretofore or hereafter authenticated and
delivered under the Indenture shall be bound thereby. Except as supplemented
hereby, all provisions of the Indenture shall remain in full force and
effect.
3.2. INDENTURE AND SECOND SUPPLEMENTAL INDENTURE CONSTRUED TOGETHER.
This Second Supplemental Indenture is an indenture supplemental to and in
implementation of the Indenture, and the Indenture and this Second
Supplemental Indenture shall from the date hereof be read and construed
together.
3.3. CONFIRMATION AND PRESERVATION OF THE INDENTURE. The Indenture, as
supplemented by this Second Supplemental Indenture, is in all respects
confirmed and preserved.
3.4. CONFLICT WITH TRUST INDENTURE ACT. If any provision of this Second
Supplemental Indenture limits, qualifies or conflicts with any provision of
the Trust Indenture Act of 1939, as amended (the "ACT"), that is required
under such Act to be part of and govern any provision of this Second
Supplemental Indenture, the provisions of such Act shall control. If any
provision of this Second Supplemental Indenture modifies or excludes any
provision of the Act that may be so modified or excluded, the provisions of
the Act shall be deemed to apply to the Indenture as so modified or to be
excluded by this Second Supplemental Indenture, as the case may be.
3.5. SEPARABILITY. In case any provision of this Second Supplemental
Indenture shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
3.6. EFFECT OF HEADINGS. The Section headings herein are for
convenience only and shall not affect the construction hereof.
3.7. BENEFITS OF SECOND SUPPLEMENTAL INDENTURE. Nothing in the
Indenture, this Second Supplemental Indenture or the Securities, express or
implied, shall give to any Person, other than the parties hereto and thereto
and their successors hereunder and thereunder, and the Securityholders, any
benefit of any legal or equitable right, remedy or claim under the Indenture
as supplemented and amended hereby or the Securities.
10
<PAGE>
3.8. SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Second Supplemental Indenture by the Issuers and the Subsidiary Guarantors
shall bind their successors and assigns, whether so expressed or not.
3.9. NEW YORK LAW TO GOVERN. This Second Supplemental Indenture shall
be governed by and construed in accordance with the laws of the State of New
York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the laws of another jurisdiction would
be required thereby.
3.10. COUNTERPARTS. This Second Supplemental Indenture may be
executed in counterparts, each of which shall be an original, but all such
counterparts shall together constitute one and the same instrument.
3.11 THE TRUSTEE. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this Second
Supplemental Indenture or for or in respect of the recitals contained herein,
all of which recitals are made solely by the Issuers and the Subsidiary
Guarantors.
[SIGNATURES ON NEXT PAGE]
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IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be duly executed as of the date and the year first above written.
EPIC RESORTS, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC CAPITAL CORP.
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC RESORTS - VACATION SHOWPLACE, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC RESORTS MANAGEMENT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC MARKETING, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC TRAVEL, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
12
<PAGE>
EPIC RESORTS - PALM SPRINGS MARQUIS VILLAS, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC RESORTS - SCOTTSDALE LINKS RESORT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC RESORTS - HILTON HEAD RESORT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
EPIC RESORTS - WESTPARK RESORT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
DAYTONA BEACH REGENCY, LTD., by Resort
Management, LLC, its general partner
By: /s/ T. F. Flatley
----------------------------------------
Title: President
LONDON BRIDGE RESORT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
13
<PAGE>
EPIC WARRANT CO.
By: /s/ T. F. Flatley
----------------------------------------
Title: President
RESORT MANAGEMENT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
RESORT INVESTMENT, LLC
By: /s/ T. F. Flatley
----------------------------------------
Title: President
UNITED STATES TRUST COMPANY OF
NEW YORK, as Trustee
By: /s/ Illegible
----------------------------------------
Title: Vice President
14
<PAGE>
Form Only (may need to be modified to conform to local law)
VACATION CLUB SECURITY AGREEMENT
THIS VACATION CLUB SECURITY AGREEMENT (this "Agreement"), dated as of
the ___ day of _______________, 1999, made by _________ (the "Grantor"), in
favor of United States Trust Company of New York ("U.S. Trust"), in its capacity
as trustee (in such capacity, the "Trustee") under the Indenture (as defined),
for the ratable benefit of the Holders (the "Noteholders") of the 13% Senior
Secured Notes due 2005 (the "Notes") issued by Epic Resorts, LLC, a Delaware
limited liability company (the "Company"), and Epic Capital Corp., a Delaware
corporation ("Capital Corp." and, together with the Company, the "Note Issuers")
under the Indenture dated as of July 8, 1998 (as heretofore and hereafter
amended, the "Indenture"), among the Note Issuers, the Subsidiary Guarantors
named therein and the Trustee.
RECITALS
A. Grantor is, or heretofore was, the owner of [identify Resort]
(the "Resort").
B. Grantor's interest in the Resort is encumbered by a mortgage or
deed of trust (the "Security Instrument") granted to or for the benefit of
Trustee as security for the Obligations (hereinafter defined).
C. Grantor has conveyed, or is about to convey, portions of the
Resort to the Vacation Club (hereinafter defined) and may convey additional
portions of the Resort to the Vacation Club in the future.
D. Grantor has requested Trustee to release, from time to time, the
lien of the Security Instrument from the portions of the Resort conveyed from
time to time by Grantor to the Vacation Club, and Trustee is willing to do so
pursuant to the terms of the Indenture.
E. One of the conditions to Trustee's obligation to release the
portions of the Resort conveyed to the Vacation Club is that Grantor retain, or
immediately obtain from the Vacation Club at the time of such conveyance, Club
Membership Interests (hereinafter defined) in the Vacation Ownership Interests
(hereinafter defined) allocable and attributable to the portions of the Resort
conveyed to the Vacation Club by Grantor, and that Grantor grant to Trustee a
security interest in and to those Club Membership Interests.
NOW, THEREFORE, in consideration of the premises and pursuant to the
Indenture, the Grantor hereby agrees with the Trustee, as follows:
1. DEFINED TERMS. Unless otherwise defined herein, terms which are
defined in the Indenture and used herein are so used as so defined, and the
meanings assigned to terms defined herein or in the Indenture shall be equally
applicable to both the singular and plural forms of such terms; the following
terms which are defined in the Uniform Commercial Code in effect in the State of
________________ on the date hereof are used herein as so defined: Accounts,
Chattel Paper, Documents, Equipment, Farm Products, General Intangibles,
Instruments, Inventory and Proceeds; and the following terms shall have the
following meanings:
<PAGE>
"Club Membership Interest" means a Vacation Ownership Interest in the
Resort evidenced by membership interests, or points, in the Vacation Club.
"Code" means the Uniform Commercial Code as from time to time in
effect in the State of ______________________________.
"Collateral" shall have the meaning assigned to it in Section 2 of
this Security Agreement.
"Obligations" shall mean the unpaid principal amount of, or any
premium applicable to, and interest on the Notes (including, without
limitation, interest accruing after the maturity of the Notes and interest
accruing after the filing of any petition in bankruptcy, or the commencement
of any insolvency, reorganization or like proceeding, relating to any
Subsidiary Guarantor, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding) and all other obligations and
liabilities of any Subsidiary Guarantor to the Holders or the Trustee,
whether direct or indirect, absolute or contingent, due or to become due, or
now existing or hereafter incurred, which may arise under, out of, or in
connection with, the Notes, the Indenture or this Security Agreement (in each
such case as the same may be amended, supplemented or modified from time to
time) and any other document made, delivered or given in connection therewith
or herewith, whether on account of principal, premium, interest,
reimbursement obligations, fees, indemnities, costs, expenses (including,
without limitation, all fees and disbursements of counsel) or otherwise.
"Security Agreement" means this Agreement, as amended, supplemented or
otherwise modified from time to time.
"Termination Date" means the date upon which the Grantor under this
Security Agreement, and the Note Issuers under the Indenture have fulfilled
all obligations under the Notes and the aforementioned agreements.
"Vacation Club" means Epic Vacation Club, a Delaware nonprofit
corporation, through which the Company operates its vacation club system.
"Vacation Ownership Interests" means the right to use (whether arising
by virtue of a deeded interest in real property or otherwise, including pursuant
to a membership interest in the Vacation Club), a fully-furnished vacation
residence (whether specifically identified or not) in the Resort for a specified
period each year or otherwise.
2. GRANT OF SECURITY INTEREST. As collateral security for the
prompt and complete payment and performance when due (whether at the Stated
Maturity, by acceleration or otherwise) of the Obligations, Grantor hereby
grants to the Trustee a security interest for the benefit of the Holders and
the Trustee in Club Membership Interests now owned or at any time hereafter
acquired by Grantor or in which Grantor now has or at any time in the future
may acquire any right, title or interest (collectively, the "Collateral").
2
<PAGE>
3. REPRESENTATIONS AND WARRANTIES. Grantor hereby represents and
warrants that:
(a) TITLE, NO OTHER LIENS. Except for the Lien granted to the
Trustee pursuant to this Security Agreement, the Grantor owns the Collateral
free and clear of any and all Liens or claims of others except as permitted
by the Indenture. No security agreement, financing statement or other public
notice with respect to all or any part of the Collateral is on file or of
record in any public office, except as permitted by the Indenture and such as
may have been filed in favor of the Trustee, pursuant to this Security
Agreement.
(b) PERFECTED FIRST PRIORITY LIENS. The Liens granted pursuant to
this Security Agreement will constitute upon the completion of all necessary
filings or notices in proper public offices or the taking of any necessary
possessions or similar acts, perfected Liens on all Collateral, which are,
except as permitted by the Indenture, prior to all other Liens on such
Collateral created by Grantor and in existence on the date hereof and which
are enforceable as such against all creditors of Grantor.
(c) CHIEF EXECUTIVE OFFICE. Grantor's chief executive office and
chief place of business is located at 1150 First Avenue, Suite 900, King of
Prussia, Pennsylvania 19406.
(d) FARM PRODUCTS. None of the Collateral constitutes, or is the
Proceeds of, Farm Products.
4. COVENANTS. Grantor covenants and agrees with the Trustee,
from and after the date of this Security Agreement, until the Obligations are
paid in full:
(a) FURTHER DOCUMENTATION, PLEDGE OF INSTRUMENTS AND CHATTEL
PAPER. At any time and from time to time, upon the written request of the
Trustee, and at the sole expense of Grantor, Grantor will promptly and duly
execute and deliver such further instruments and documents and take such
further action as may be required by applicable law or as the Trustee may
reasonably request for the purpose of obtaining or preserving the full
benefits of this Security Agreement and of the rights and powers herein
granted, including, without limitation, the filing of any financing or
continuation statements under the Uniform Commercial Code in effect in any
such jurisdiction with respect to the Liens created hereby. Grantor also
hereby authorizes the Trustee to file any such financing or continuation
statement without the signature of Grantor to the extent permitted by
applicable law. A carbon, photographic or other reproduction of this Security
Agreement shall be sufficient as a financing statement for filing in any
jurisdiction. If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any Instrument or Chattel Paper,
such Instrument or Chattel Paper shall be immediately delivered to the
Trustee, duly endorsed in a manner satisfactory to the Trustee, to be held as
Collateral pursuant to this Security Agreement.
(b) INDEMNIFICATION. Grantor agrees to pay, and to save the Trustee
harmless from, any and all liabilities, costs and expenses (including, without
limitation, legal fees and expenses) (i) with respect to, or resulting from, any
delay in paying, any and all excise, sales or other taxes which may be payable
or determined to be payable with respect to any of the Collateral, (ii) with
respect to, or resulting from, any delay in complying with any requirement of
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<PAGE>
law applicable to any of the Collateral or (iii) in connection with any of
the transactions contemplated by this Security Agreement. In any suit,
proceeding or action brought by the Trustee under any Account or Contract for
any sum owing thereunder, or to enforce any provisions of any Account or
Contract, Grantor will save, indemnify and keep the Trustee harmless from and
against all expense, loss or damage suffered by reason of any defense,
setoff, counterclaim, recoupment or reduction or liability whatsoever of the
account debtor or obligor thereunder, arising out of a breach by Grantor of
any obligation thereunder or arising out of any other agreement, indebtedness
or liability at any time owing to or in favor of such account debtor or
obligor or its successors from Grantor.
(c) MAINTENANCE OF RECORDS. Grantor will keep and maintain at its
own cost and expense satisfactory and complete records of the Collateral. For
the Trustee's further security, the Trustee shall have a security interest in
all of Grantor's books and records pertaining to the Collateral, and Grantor
shall turn over any such books and records for inspection at the office of
Grantor to the Trustee or to its representatives during normal business hours
at the request of the Trustee.
(d) LIMITATION ON LIENS ON COLLATERAL. Grantor (x) will not create,
incur or permit to exist, will defend the Collateral against, and will take such
other action as is necessary to remove, any Lien or claim on or to the
Collateral, other than the Liens created hereby and other than as permitted
pursuant to the Indenture, and (y) will defend the right, title and interest of
the Trustee in and to any of the Collateral against the claims and demands of
all Persons whomsoever.
(e) LIMITATIONS ON DISPOSITIONS OF COLLATERAL. Grantor will not
sell, transfer, lease or otherwise dispose of any of the Collateral, or
attempt, offer or contract to do so, except for as permitted by the Indenture
and as provided herein.
(f) FURTHER IDENTIFICATION OF COLLATERAL. Grantor will furnish to
the Trustee from time to time, statements and schedules further identifying
and describing the Collateral and such other reports in connection with the
Collateral as the Trustee may reasonably request, all in reasonable detail.
(g) NOTICES. Grantor will advise the Trustee promptly, in
reasonable detail, of (i) any Lien (other than Liens created hereby or
permitted under the Indenture) on, or claim asserted against, any of the
Collateral, and (ii) the occurrence of any other event which could reasonably
be expected to have a material adverse effect on the aggregate value of the
Collateral or on the Liens created hereunder.
(h) CHANGES IN LOCATIONS, NAME, ETC. Grantor will not (i) change
the location of its chief executive office/chief place of business from that
specified in Section 3(c) or (ii) change its name, identity or corporate
structure, to such an extent that any financing statement filed by Grantor in
connection with this Security Agreement would become misleading, unless it
shall have given the Trustee at least 30 days' prior written notice thereof
and shall have filed all amendments to financing statements necessary to
maintain the Liens created hereby as required by Section 4(a) above.
4
<PAGE>
5. PARTIAL RELEASES OF COLLATERAL.
(a) AUTOMATIC PARTIAL RELEASE UPON SALE IN ORDINARY COURSE OF
BUSINESS. The Lien and security interest created hereby on each Club
Membership Interest covered hereby shall be released automatically (a
"Partial Release") at the time of the transfer of title to such Club
Membership Interest (a "Transfer") by Grantor, provided that the following
conditions have been met with respect to such Transfer:
(A) The Transfer must be pursuant to a written agreement (a "Purchase
Agreement") providing for the purchase and sale of one or more Club
Membership Interests (any Club Membership Interest which is the
subject of a Purchase Agreement is referred to in this Section 5 as a
"Sold Interest").
(B) The Transfer must be in the ordinary course of business.
(C) The Transfer must be to a Person who is not an Affiliate of the
Issuers, Grantor, or any other Subsidiary Guarantor.
(b) CONFIRMATION OF COLLATERAL AND PARTIAL RELEASES. From time to
time, upon request of the Trustee, Grantor shall provide to the Trustee a
list of all Collateral then subject to the terms of this Security Agreement,
identifying all Club Membership Interests which have become subject hereto as
of that date, and all Club Membership Interests which have been released
herefrom as of that date, pursuant to the terms of Section 5(a). From time
to time, upon the written request of Grantor and upon compliance by the
Grantor with Section 11.03 of the Indenture, the Trustee shall execute such
instruments, including UCC Statements of Partial Release, reasonably
requested by Grantor (and prepared by Grantor and submitted to Trustee for
execution) evidencing and confirming that the lien and security interest
hereof has been released from the Sold Interests.
6. TRUSTEE'S APPOINTMENT AS ATTORNEY-IN-FACT.
(a) POWERS. Grantor hereby irrevocably constitutes and appoints
the Trustee and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of Grantor and in the name of
Grantor or in its own name, from time to time (in the Trustee's discretion)
for the purpose of carrying out the terms of this Security Agreement, to take
any and all appropriate action and to execute any and all documents and
instruments which may be necessary or desirable to accomplish the purposes of
this Security Agreement, and, without limiting the generality of the
foregoing, Grantor hereby gives the Trustee the power and right, on behalf of
Grantor, without notice to or assent by Grantor, except any notice required
by law referred to in Section 9 hereof, to do the following:
(i) at any time when any Event of Default shall have occurred
and is continuing, in the name of Grantor or its own name, or otherwise, to
take possession of and indorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys or with respect
to any of the Collateral and to file any claim or to take any other action
or proceeding in any court of law or equity or otherwise deemed
5
<PAGE>
appropriate by the Trustee for the purpose of collecting any and all such
moneys with respect to any of the Collateral whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral; and
(iii) upon the occurrence and during the continuance of any
Event of Default, (A) to direct any Person liable for any payment under any
of the Collateral to make payment of any and all moneys due or to become
due thereunder directly to the Trustee or as the Trustee shall direct; (B)
to ask for or demand, collect, receive payment of and receipt for, any and
all moneys, claims and other amounts due or to become due at any time in
respect of or arising out of any Collateral; (C) to sign and indorse any
invoices, freight or express bills, bills of lading, storage or warehouse
receipts, drafts against debtors, assignments, verifications, notices and
other documents in connection with any of the Collateral, including
Purchase Agreements; (D) to commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Collateral or any thereof and to enforce any other right in
respect of any Collateral, including Purchase Agreements; (E) to defend any
suit, action or proceeding brought against Grantor with respect to any
Collateral; (F) to settle, compromise or adjust any suit, action or
proceeding described in clause (E) above and, in connection therewith, to
give such discharges or releases as the Trustee may deem appropriate; (G)
generally, to sell, transfer, pledge and make any agreement with respect to
or otherwise deal with any of the Collateral as fully and completely as
though the Trustee were the absolute owner thereof for all purposes, and to
do, at the Trustee's option and Grantor's expense, at any time, or from
time to time, all acts and things which the Trustee deems necessary to
protect, preserve or realize upon the Collateral and the Trustee's Liens
thereon and to effect the intent of this Security Agreement, all as fully
and effectively as the Grantor might do.
Grantor hereby ratifies all that said attorneys shall lawfully do or cause to
be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable until the Obligations are paid in full.
(b) OTHER POWERS. Grantor hereby authorizes the Trustee, at any
time and from time to time, to execute, in connection with the sale provided
for in Section 9 hereof, any endorsements, assignments or other instruments
of conveyance or transfer with respect to the Collateral.
(c) NO DUTY ON TRUSTEE'S PART. The powers conferred on the
Trustee hereunder are solely to protect the Trustee's interests in the
Collateral and shall not impose any duty upon the Trustee to exercise any
such powers. The Trustee shall be accountable only for amounts that it
actually receives as a result of the exercise of such powers, and neither it
nor any of its officers, directors, employees or agents shall be responsible
to Grantor for any act or failure to act hereunder, except for their own
gross negligence or willful misconduct.
7. PERFORMANCE BY TRUSTEE OF GRANTOR'S OBLIGATIONS. If Grantor
fails to perform or comply with any of its agreements contained herein and the
Trustee, as provided for
6
<PAGE>
by the terms of this Security Agreement, shall itself perform or comply, or
otherwise cause performance or compliance, with such agreement, the expenses
of the Trustee incurred in connection with such performance or compliance,
together with interest thereon at a rate per annum specified in Section
4.01(b) of the Indenture, shall be payable by Grantor to the Trustee on
demand and shall constitute Obligations secured hereby.
8. PROCEEDS. It is agreed that if an Event of Default shall
occur and be continuing (a) all Proceeds received by Grantor consisting of
cash, checks and other instruments in respect of sales of Vacation Ownership
Interests, sales of Club Membership Interests, and the cash proceeds thereof
shall be held by Grantor in trust for the Trustee, segregated from other
funds of Grantor, and shall, forthwith upon receipt by Grantor, be turned
over to the Trustee in the exact form received by Grantor (duly indorsed by
Grantor to the Trustee, if required), and (b) any and all such Proceeds
received by the Trustee (whether from Grantor or otherwise) may, in the sole
discretion of the Trustee, be held by the Trustee as collateral security for,
and/or then or at any time thereafter may be applied by the Trustee against,
the Obligations (whether matured or unmatured), such application to be in
such order as the Trustee shall elect. Any balance of such Proceeds remaining
after the Obligations shall have been paid in full shall be paid over to
Grantor or to whomsoever may be lawfully entitled to receive the same.
9. REMEDIES. If an Event of Default shall occur and be
continuing, the Trustee may exercise, in addition to all other rights and
remedies granted to it in this Security Agreement, in the Indenture and in
any other instrument or agreement securing, evidencing or relating to the
Obligations, all rights and remedies of a secured party under the Code.
Without limiting the generality of the foregoing, the Trustee, without demand
of performance or other demand, presentment, protest, advertisement or notice
of any kind (except any notice required by law referred to below) to or upon
Grantor or any other Person (all and each of which demands, defenses,
advertisements and notices are, to the extent permitted by applicable law,
hereby waived), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or may
forthwith sell, lease, assign, give option or options to purchase, or
otherwise dispose of and deliver the Collateral or any part thereof (or
contract to do any of the foregoing), in one or more portions at public or
private sale or sales, at any exchange, broker's board or office of the
Trustee or elsewhere upon such terms and conditions as it may deem advisable
and at such prices as it may deem best, for cash or on credit or for future
delivery without assumption of any credit risk. The Trustee shall have the
right upon any such public sale or sales, and, to the extent permitted by
law, upon any such private sale or sales, to purchase the whole or any part
of the Collateral so sold, free of any right or equity of redemption in
Grantor, which right or equity is hereby waived, to the extent permitted by
applicable law, or released. Grantor further agrees, at the Trustee's
request, to assemble the Collateral and make it available to the Trustee at
places which the Trustee shall reasonably select, whether at Grantor's
premises or elsewhere. The Trustee shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all costs and expenses of every kind incurred therein or incidental
to the care or safekeeping of any of the Collateral or in any way relating to
the Collateral or the rights of the Trustee hereunder, including, without
limitation, reasonable attorneys' fees and disbursements, to the payment in
whole or in part of the Obligations, as required by Section 6.10 of the
Indenture, and only after such application and after the payment by the
Trustee of any other amount required by any provision of law, including,
without limitation, Section 9-504(l)(c) of the Code, need the Trustee account
for the surplus, if any, to
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<PAGE>
Grantor. To the extent permitted by applicable law, Grantor waives all
claims, damages and demands it may acquire against the Trustee arising out of
the exercise by the Trustee of any rights hereunder. If any notice of a
proposed sale or other disposition of Collateral shall be required by law,
such notice shall be deemed reasonable and proper if given at least ten days
before such sale or other disposition. Grantor shall remain liable for any
deficiency if the proceeds of any sale or other disposition of the Collateral
are insufficient to pay the Obligations and the fees and disbursements of any
attorneys employed by the Trustee to collect such deficiency. All rights of
the Trustee with respect to the Collateral shall be subject to the rights of
purchasers who have entered into Purchase Agreements with respect thereto.
10. LIMITATION ON DUTIES REGARDING PRESERVATION OF COLLATERAL.
The Trustee's sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9-207 of the
Code or otherwise, shall be to deal with it in the same manner as the Trustee
deals with similar property for its own account. Neither the Trustee, nor any
of its directors, officers, employees or agents shall be liable for failure
to demand, collect or realize upon all or any part of the Collateral or for
any delay in doing so or shall be under any obligation to sell or otherwise
dispose of any Collateral upon the request of Grantor or otherwise. For all
purposes of this Security Agreement, in the performance of its duties or
obligations hereunder, the Trustee shall be entitled to the benefits of the
Trustee set forth in Article 7 of the Indenture.
11. POWERS COUPLED WITH AN INTEREST. All authorizations and
agencies herein contained with respect to the Collateral are irrevocable and
powers coupled with an interest until the Obligations are indefeasibly paid
in full.
12. SEVERABILITY. Any provision of this Security Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
13. PARAGRAPH HEADINGS. The paragraph headings used in this
Security Agreement are for convenience of reference only and are not to
affect the construction hereof or be taken into consideration in the
interpretation hereof
14. NO WAIVER, CUMULATIVE REMEDIES. The Trustee shall not by any
act (except by a written instrument pursuant to Section 15 hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or
remedy hereunder or to have acquiesced in any Default or Event of Default or
in any breach of any of the terms and conditions hereof. No failure to
exercise, nor any delay in exercising, on the part of the Trustee, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude
any other or further exercise thereof or the exercise of any other right,
power or privilege. A waiver by the Trustee of any right or remedy hereunder
on any one occasion shall not be construed as a bar to any right or remedy
which the Trustee would otherwise have on any future occasion. The rights and
remedies herein provided are cumulative, may be exercised singly or
concurrently and are not exclusive of any rights or remedies provided by law.
8
<PAGE>
15. WAIVERS AND AMENDMENTS, SUCCESSORS AND ASSIGNS. None of the
terms or provisions of this Security Agreement may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
Grantor and the Trustee, provided that any provision of this Security
Agreement may be waived by the Trustee in a written letter or agreement
executed by the Trustee or by facsimile transmission from the Trustee. This
Security Agreement shall be binding upon the successors and assigns of
Grantor and shall inure to the benefit of the Trustee, the Holders and their
respective successors and assigns.
16. TERMINATION OF SECURITY INTEREST, RELEASE OF COLLATERAL.
(a) Upon the repayment in full of all Obligations, the security
interest granted in the Collateral pursuant to this Security Agreement shall
terminate and all rights to the Collateral shall revert to the Grantor.
(b) Upon any such termination of the security interest granted in
the Collateral pursuant to this Security Agreement or release of Collateral
pursuant to this Section, the Trustee will, at the expense of Grantor and
upon compliance by the Grantor with Section 11.03 of the Indenture, execute
and deliver to Grantor such documents as Grantor shall reasonably request to
evidence the termination of such security interest and deliver to Grantor all
Collateral so released then in its possession.
17. NOTICES. All notices or other communications provided for
hereunder shall be in writing and sent by first class mail or nationwide
overnight delivery service, (i) if to Grantor, addressed to it at 1150 First
Avenue, Suite 900, King of Prussia, Pennsylvania 19406, or at such other
address as Grantor shall have specified to the Trustee, and (ii) if to the
Trustee, addressed to it at 114 West 47th Street, New York, New York
10036-1532, or at such other address as the Trustee shall have specified to
Grantor.
18. INTEGRATION. This Security Agreement and the Indenture
represent the agreement of Grantor and the Trustee with respect to the
subject matter hereof, and there are no promises, undertakings,
representations or warranties by the Trustee relative to subject matter
hereof not expressly set forth or referred to herein and in the Indenture.
19. GOVERNING LAW. THIS SECURITY AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF GRANTOR UNDER THIS SECURITY AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF
______________.
9
<PAGE>
IN WITNESS WHEREOF, Grantor has caused this Security Agreement to
be duly executed and delivered as of the date first above written.
GRANTOR: [SUBSIDIARY GUARANTOR]
By:
-------------------------------------
Name:
Title:
Accepted and Agreed:
UNITED STATES TRUST COMPANY
OF NEW YORK, as Trustee
By:
------------------------------
Name:
Title:
10
<PAGE>
EXHIBIT 21.1
STATE OF
SUBSIDIARY ORGANIZATION
- - - - - - - - - - - ---------- ------------
Epic Capital Corp. ....................................... Delaware
Epic Travel, LLC ......................................... Delaware
London Bridge Resort, LLC ................................ Delaware
Daytona Beach Regency, Ltd. .............................. Florida
Resort Management, LLC ................................... Delaware
Resort Investment, LLC ................................... Delaware
Epic Resorts - Hilton Head, LLC .......................... Delaware
Epic Resorts - Palm Springs Marquis Villas, LLC .......... Delaware
Epic Resorts - Scottsdale Links Resort, LLC .............. Delaware
Epic Resorts - Westpark Resort, LLC ...................... Delaware
Epic Warrant Co. ......................................... Delaware
Epic Marketing, LLC ...................................... Delaware
Epic Resorts Management, LLC ............................. Delaware
Epic Resorts - Vacation Showplace, LLC ................... Delaware
Epic Master Funding Corporation .......................... Delaware
Epic Resorts - Afton Resort, LLC ......................... Delaware
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001068052
<NAME> EPIC RESORTS LLC
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,681,000
<SECURITIES> 0
<RECEIVABLES> 12,762,000
<ALLOWANCES> 991,000
<INVENTORY> 93,042,000
<CURRENT-ASSETS> 0
<PP&E> 16,212,000
<DEPRECIATION> 4,303,000
<TOTAL-ASSETS> 146,773,000
<CURRENT-LIABILITIES> 3,977,000
<BONDS> 128,053,000
0
0
<COMMON> 0
<OTHER-SE> 11,986,000
<TOTAL-LIABILITY-AND-EQUITY> 146,773,000
<SALES> 36,344,000
<TOTAL-REVENUES> 60,274,000
<CGS> 8,075,000
<TOTAL-COSTS> 30,288,000
<OTHER-EXPENSES> 8,298,000
<LOSS-PROVISION> 1,116,000
<INTEREST-EXPENSE> 12,107,000
<INCOME-PRETAX> 8,465,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,465,000
<DISCONTINUED> 0
<EXTRAORDINARY> 5,364,000
<CHANGES> 0
<NET-INCOME> 1,911,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
