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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to ________________
Commission File Number: 333-61433
EPIC RESORTS, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 23-2888968
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1150 FIRST AVENUE, SUITE 900 19407
KING OF PRUSSIA, PA (Zip Code)
(Address of principal executive offices)
(610) 992-0100
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of June 30, 1999, 1,118,000 membership interests of the registrant
were outstanding.
- -------------------------------------------------------------------------------
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EPIC RESORTS, LLC
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998...................................................................3
Consolidated Statements of Income - Three and Six Months Ended
June 30, 1999 and 1998...............................................................4
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1999 and 1998...............................................................5
Notes to Consolidated Financial Statements...........................................6
ITEM 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations............................................................7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..........................11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K......................................................
SIGNATURES
EXHIBIT INDEX
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PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EPIC RESORTS, LLC
CONSOLIDATED BALANCE SHEETS
(unaudited)
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<CAPTION>
June 30, December 31,
1999 1998
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ASSETS
Cash and cash equivalents $ 4,158,000 $ 16,095,000
Cash in escrow 8,701,000 8,586,000
Investment in residual interests 22,345,000 15,223,000
Mortgages receivable, net of allowance of $864,000 and $991,000 as
of June 30, 1999 and December 31, 1998, respectively 19,706,000 11,771,000
Inventory 68,984,000 73,042,000
Property and equipment, net 14,229,000 11,909,000
Deferred financing costs, net 6,156,000 6,823,000
Other assets 4,804,000 3,324,000
----------------------------------
Total assets $149,083,000 $146,773,000
==================================
LIABILITIES AND MEMBER'S EQUITY
Accounts payable $ 1,925,000 $ 1,154,000
Accrued expenses 1,314,000 1,743,000
Accrued interest payable 736,000 736,000
Advance deposits 94,000 76,000
Deferred revenue 302,000 268,000
Notes payable 560,000 621,000
Senior secured notes payable 127,628,000 127,432,000
----------------------------------
Total liabilities 132,559,000 132,030,000
----------------------------------
Commitments and contingencies - -
Warrants 2,757,000 2,757,000
Member's equity 13,767,000 11,986,000
----------------------------------
Total liabilities and member's equity $149,083,000 $146,773,000
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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EPIC RESORTS, LLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
--------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
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Revenue:
Sales of vacation ownership interests $23,224,000 $ 9,253,000 $38,875,000 $16,666,000
Resort operations 6,181,000 1,919,000 9,631,000 3,416,000
Gain on sales of receivables 3,539,000 - 5,319,000 -
Other income 904,000 1,312,000 1,624,000 2,511,000
-----------------------------------------------------------------
33,848,000 12,484,000 55,449,000 22,593,000
-----------------------------------------------------------------
Costs and expenses:
Cost of sales of vacation ownership interests 4,575,000 2,066,000 7,702,000 3,861,000
Resort operations 6,862,000 1,073,000 10,542,000 2,011,000
Selling and marketing costs 10,007,000 3,546,000 16,655,000 6,449,000
General and administrative 3,424,000 982,000 6,722,000 1,775,000
Provision for doubtful accounts 673,000 371,000 1,408,000 698,000
Depreciation 170,000 177,000 382,000 375,000
Financing and closing costs 375,000 357,000 515,000 579,000
Interest expense 4,803,000 1,053,000 9,602,000 2,070,000
-----------------------------------------------------------------
30,889,000 9,625,000 53,528,000 17,818,000
-----------------------------------------------------------------
Income before minority interest 2,959,000 2,859,000 1,921,000 4,775,000
Minority interest - 646,000 - 1,189,000
-----------------------------------------------------------------
Net income $ 2,959,000 $ 2,213,000 $ 1,921,000 $ 3,586,000
=================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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EPIC RESORTS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30
-------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,921,000 $ 3,586,000
Adjustments to reconcile net income to net cash used in
operating activities-
Depreciation 382,000 376,000
Amortization of deferred financing costs 863,000 94,000
Provision for doubtful accounts 1,408,000 698,000
Gain on sale of receivables (5,319,000) -
Minority interest - 1,190,000
Change in assets and liabilities--
Mortgages receivable (17,264,000) (8,585,000)
Inventory of vacation ownership intervals 4,058,000 900,000
Other assets (1,480,000) (748,000)
Accounts payable 771,000 227,000
Accrued expenses (430,000) (83,000)
Due to Association - (56,000)
Advance deposits 18,000 140,000
Deferred Revenue 34,000 584,000
------------------------------
Net cash used in operating activities (15,038,000) (1,647,000)
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,702,000) (506,000)
Resort Acquistions - (55,792,000)
Investment in residual interests (7,122,000) -
------------------------------
Net cash used in investing activities (9,824,000) (56,298,000)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 11,916,000
Proceeds from bridge loan - 55,414,000
Payments on notes payable (61,000) (8,651,000)
Interest Escrows (115,000) 30,000
Proceeds from sale of receivables 13,241,000 -
Payment of deferred financing costs - (690,000)
Contributions from sole member - 163,000
Distributions to sole member (140,000) (414,000)
------------------------------
Net cash provided by financing activities 12,925,000 57,738,000
------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (11,937,000) (207,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,095,000 248,000
------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,158,000 $ 41,000
------------------------------
------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 8,647,000 $ 2,172,000
------------------------------
------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
5
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EPIC RESORTS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1. BASIS OF PRESENTATION:
The consolidated financial statements have been prepared by the
Registrant, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Registrant believes that the
disclosures are adequate to make the information presented not misleading. It
is suggested that these consolidated financial statements be read in
conjunction with the audited financial statements and the notes thereto
included in the Registrant's latest annual report on Form 10-K. In the
opinion of the Registrant, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the consolidated financial
position and the consolidated results of its operations and its cash flows,
have been included. The results of operations for such interim periods are
not necessarily indicative of the results for the full year.
The Company has reclassified certain prior period amounts to conform to the
current year presentation.
2. NATURE OF BUSINESS:
Epic Resorts, LLC (a sole-member Delaware limited liability company)
and its wholly owned subsidiaries (collectively, the "Company") generate
revenue from the sale and financing of vacation ownership interests in its
resorts. Customers acquire the right to use a fully furnished vacation
residence, generally for a one-week period each year, in perpetuity
("Vacation Ownership Interests"). The Company's principal operations consist
of (i) acquiring, developing and operating vacation ownership resort
locations, (ii) marketing and selling Vacation Ownership Interests in its
resorts, and (iii) providing customer financing to individual purchasers of
Vacation Ownership Interests at its resorts. The Company also generates
income from the transient rental of resort accommodations.
Beginning in the first quarter of 1999, 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.
3. RELATED PARTY TRANSACTIONS:
The Company has accrued $920,000 and $829,000 as of June 30,1999 and
December 31,1998, respectively, as a receivable from various homeowners'
associations at its resorts. The Company generally accrues receivables from
homeowners' associations for management fees and certain other expenses paid
on behalf of the homeowners' associations. This receivable is included in
other assets in the accompanying consolidated balance sheets.
4. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in one industry segment, which includes the
development, acquisition, marketing, financing, and management of vacation
ownership resorts. The Company does not operate outside the United States.
The Company's customers are not concentrated in any specific geographic
region and no single customer accounts for a significant amount of the
Company's revenue.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS QUARTERLY REPORT AND OTHER WRITTEN REPORTS AND ORAL STATEMENTS
MADE FROM TIME TO TIME BY THE COMPANY MAY CONTAIN "FORWARD-LOOKING
STATEMENTS". ALL STATEMENTS THAT ADDRESS OPERATING PERFORMANCE, EVENTS OR
DEVELOPMENTS THAT MANAGEMENT ANTICIPATES WILL OCCUR IN THE FUTURE, INCLUDING
STATEMENTS RELATED TO FUTURE SALES, PROFITS, EXPENSES, AND INCOME, OR
STATEMENTS EXPRESSING GENERAL OPTIMISM ABOUT FUTURE RESULTS, ARE
FORWARD-LOOKING STATEMENTS. IN ADDITION, WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "INTENDS," "PLANS," "BELIEVES," AND "ESTIMATES," AND
VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS.
BECAUSE FORWARD-LOOKING STATEMENTS ARE BASED ON A NUMBER OF
BELIEFS, ESTIMATES AND ASSUMPTIONS BY MANAGEMENT THAT COULD ULTIMATELY PROVE
INACCURATE, THERE IS NO ASSURANCE THAT FORWARD-LOOKING STATEMENTS WILL PROVE
TO BE CORRECT. ANY NUMBER OF FACTORS COULD AFFECT FUTURE OPERATIONS AND
RESULTS, INCLUDING THE FOLLOWING: INCREASING COMPETITION; FLUCTUATIONS IN
CONSUMER DEMAND AND CONFIDENCE; FLUCTUATIONS IN COSTS AND EXPENSES; THE
EFFECTIVENESS OF ADVERTISING, MARKETING AND PROMOTIONAL PROGRAMS; WEATHER
CONDITIONS THAT AFFECT THE GEOGRAPHIC AREAS WHERE THE COMPANY'S RESORTS ARE
LOCATED; THE EFFECTIVENESS OF THE INTEGRATION OF THE COMPANY'S RECENTLY
ACQUIRED RESORTS; THE TIMING, QUALITY AND COMPLETION OF CONSTRUCTION AND
DEVELOPMENT ACTIVITIES AT THE COMPANY'S RESORTS; THE TIMING AND AVAILABILITY
OF GOVERNMENTAL PERMITS AND AUTHORIZATIONS REGARDING THE COMPANY'S RESORTS;
THE CONTINUED AVAILABILITY AND TERMS OF FINANCING; AND OTHER GENERAL ECONOMIC
CONDITIONS, SUCH AS THE RATE OF EMPLOYMENT, INFLATION AND INTEREST RATES.
THIS LIST OF FACTORS IS NOT EXCLUSIVE.
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO THE SAFE HARBORS CREATED
IN THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934. THE
COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE.
OVERVIEW
Epic Resorts, LLC, a Delaware limited liability company (the "Company"), was
formed in June 1998 to merge with Epic Resorts, Inc., which had been formed
to combine the ownership of the London Bridge Resort and the Daytona Beach
Regency, and their vacation ownership acquisition and development businesses.
London Bridge Resort was acquired in 1986 by London Bridge Resort, Inc., a
Delaware corporation wholly-owned by Thomas F. Flatley, the Company's
President. In 1991, the conversion of the London Bridge Resort into a
vacation ownership resort was completed and sales of Vacation Ownership
Interests at such resort commenced. In April 1996, the Daytona Beach Regency
was acquired by Daytona Beach Regency, Ltd. and sales of Vacation Ownership
Interests commenced at such resort in November 1996. In connection with the
private placement of the Company's $130 million Senior Secured Redeemable
Notes due 2005 (the "Notes") in July 1998, Epic Resorts, Inc. was merged into
Epic Resorts, LLC and certain of its subsidiaries were merged into limited
liability companies. Mr. Flatley simultaneously contributed his membership
interests in certain of such subsidiaries to the Company.
The Company generates revenues from the sale and financing of membership
interests in Epic Vacation Club, Vacation Ownership Interests at its resorts,
as well as from resort operations which include commercial rentals, food and
beverage sales, greens fees, rentals of suites available at the Company's
resorts and from fees associated with managing the vacation ownership resorts.
The Company recognizes revenue from Vacation Ownership Interest sales when a
minimum of 10% of the sales price has been received in cash, the refund or
rescission period has expired, collectibility of the receivable representing
the remainder of the sales price is reasonably assured and the Company has
completed substantially all of its obligations with respect to any
development relating to the Vacation Ownership 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 existing resort properties currently in operation, a
Homeowners Association (each an "Association") is established. Each
Association is a not-for-profit corporation and operates primarily to collect
the assessments from its members and remit to the developer of the property
the Association's pro-rata share of direct and allocated expenditures
including real estate taxes, property insurance, grounds maintenance, utility
costs and
7
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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 by the management of the Company summarizes the
significant changes in the results of operations presented in the statements
of income for the three and six months ended June 30, 1999 and 1998, and
presents an analysis of the financial condition of the Company as of June 30,
1999.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 TO THE THREE MONTHS ENDED
JUNE 30, 1998
REVENUES. For the three months ended June 30, 1999, the Company generated
total revenues of $33.8 million compared to $12.5 million for the three
months ended June 30, 1998, an increase of $21.3 million, or 170%. This
increase is primarily the result of a $14.0 million increase in sales of
Vacation Ownership Interests to $23.2 million for the three months ended June
30, 1999 from $9.2 million for the comparable period in 1998, an increase of
152%. Sales of Vacation Ownership Interests include the new sales activities
at Scottsdale Links, Desert Paradise, Palm Springs Marquis and Hilton Head
Resorts of $12.7 million for the three months ended June 30, 1999.
Resort operations revenue increased 210% to $6.2 million for the three months
ended June 30, 1999 from $2.0 million for the comparable period in 1998, as a
result of $1.3 million of additional resort revenues from the recently
acquired resorts, as well as increased revenues of $3.3 million from the sale
of vacation packages. Revenue from vacation package sales is deferred until
the Company fulfills the client vacation.
Gain on sales of receivables increased to $3.5 million for the three months
ended June 30, 1999 from $0 for the comparable prior period. This increase is
attributable to the Receivables Facility entered into in October 1998.
Other income decreased 31% to $904,000 for the three months ended June 30,
1999 from $1.3 million for the comparable period in 1998, this decrease
reflects a reduction in interest income, due to the sale of the notes
receivable under the Company's receivables facility.
COST OF SALES. Cost of sales for Vacation Ownership Interests as a percentage
of sales of Vacation Ownership Interests decreased to 19.7% for the three
months ended June 30, 1999 from 22.3% for the comparable period in 1998. This
decrease was attributable to the increase in the average sales price of
Vacation Ownership Interests at the resorts, as well as the lower cost of
sales from the newer resorts.
RESORT OPERATIONS EXPENSE. Resort operations expense increased 527% to $6.9
million for the three months ended June 30, 1999 from $1.1 million for the
comparable period in 1998, reflecting increased expenses to operate
Scottsdale Links, Desert Paradise and Palms Springs Marquis resorts, as well
as increased expenses of $1.2 million relating to the sale of vacation
packages.
SELLING AND MARKETING. Selling and marketing expenses (including commissions)
as a percentage of Sales of Vacation Ownership Interests increased to 43.1%
for the three months ended June 30, 1999 from 38.3% for the comparable period
in 1998. This increase was primarily a result of the marketing costs incurred
to generate tours as sales commenced at the Scottsdale Links, Desert
Paradise, Island Links and Palm Springs Marquis resorts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$3.4 million for the three months ended June 30, 1999 from $1.0 million for
the comparable period in 1998. As a percentage of Sales of Vacation Ownership
Interests and resort operations revenue, general and administrative expenses
increased to 11.6% for the three months ended June 30, 1999 from 8.8% for the
comparable period in 1998 primarily as a result of increased staffing and
costs incurred to properly support the newly acquired resorts.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts as a
percentage of sales of Vacation Ownership Interests decreased to 2.9% for the
three months ended June 30, 1999 from 4.0% for the comparable period in 1998
which reflects the increased number of financed sales at the Company's
resorts.
INTEREST EXPENSE. Interest expense increased to $4.8 million for the three
months ended June 30, 1999 from $1.1
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million for the comparable period in 1998 reflecting additional interest on
the Notes.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS ENDED JUNE
30, 1998
REVENUES. For the six months ended June 30, 1999, the Company generated total
revenues of $55.5 million compared to $22.6 million for the six months ended
June 30, 1998, an increase of $32.9 million, or 145.6%. This increase is
primarily the result of an $22.2 million increase in sales of Vacation
Ownership Interests to $38.9 million for the six months ended June 30, 1999
from $16.7 million for the comparable period in 1998, an increase of 132.9%.
Sales of Vacation Ownership Interests include the new sales activities at
Scottsdale Links, Desert Paradise, Island Links and Palm Springs Marquis
Resorts of $18.4 million for the six months ended June 30, 1999.
Resort operations revenue increased 188.2% to $9.6 million for the six months
ended June 30, 1999 from $3.4 million for the comparable period in 1998, as a
result of $3.0 million of additional resort revenues from the recently
acquired resorts, as well as increased revenues of $3.9 million from the sale
of vacation packages.
Gain on sales of receivables increased to $5.3 million for the six months
ended June 30, 1999 from $0 for the comparable prior period. This increase is
attributable to the Company's receivables facility entered into in October 1998.
Other income decreased 36% to $1.6 million for the six months ended June 30,
1999 from $2.5 million for the comparable period in 1998 due to the sale of
the notes receivable under the Company's receivables facility.
COST OF SALES. Cost of sales for Vacation Ownership Interests as a percentage
of sales of Vacation Ownership Interests decreased to 19.8% for the six
months ended June 30, 1999 from 23.2% for the comparable period in 1998. This
decrease was attributable to the increase in the average sales price of
Vacation Ownership Interests at the resorts and the lower cost of sales from
the newer resorts.
RESORT OPERATIONS EXPENSE. Resort operations expense increased 425% to $10.5
million for the six months ended June 30, 1999 from $2.0 million for the
comparable period in 1998, reflecting increased expenses to operate
Scottsdale Links, Desert Paradise and Palms Springs Marquis resorts, as well
as increased expenses of $2.4 million relating to the sale of vacation
packages.
SELLING AND MARKETING. Selling and marketing expenses (including commissions)
as a percentage of Sales of Vacation Ownership Interests increased to 42.8%
for the six months ended June 30, 1999 from 38.7% for the comparable period
in 1998. This increase was primarily a result of the marketing costs incurred
to generate tours as sales commenced at the Scottsdale Links, Desert
Paradise, Island Links and Palm Springs Marquis resorts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$6.7 million for the six months ended June 30, 1999 from $1.8 million for the
comparable period in 1998. As a percentage of Sales of Vacation Ownership
Interests and resort operations revenue, general and administrative expenses
increased to 13.9% for the six months ended June 30, 1999 from 8.8% for the
comparable period in 1998 primarily as a result of increased staffing and
costs incurred to properly support the newly acquired resorts.
INTEREST EXPENSE. Interest expense increased to $9.6 million for the six
months ended June 30, 1999 from $2.1 million for the comparable period in
1998 reflecting additional interest on the Notes.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts as a
percentage of sales of Vacation Ownership Interests decreased to 3.6% for the
six months ended June 30, 1999 from 4.2% for the comparable period in 1998
which reflects the increased number of financed sales at the Company's
resorts.
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LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations through the sale and financing of
membership interests in Epic Vacation Club, Vacation Ownership Interests,
resort operations, transient rental of resort accommodations and management
fees. With respect to the sale of Vacation Ownership Interests, 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 expects
to generate additional cash flow from its Vacation Ownership Interests
Receivable portfolio through receipt of the spread between the yield on such
portfolio and the cost of its receivables facility upon completion of
securitizations of such receivables.
The Company requires funds to finance the acquisition and development of
resorts and related inventory, and to finance customer purchases of Vacation
Ownership Interests. These funds are provided by the Company's non-recourse
$75 million vacation ownership loan participation facility. Under this
receivables facility, the Company sells Vacation Ownership Interest
Receivables to a limited purpose, bankruptcy remote subsidiary of the
Company, and a financial institution purchases from the subsidiary
participation interests in such receivables. The proceeds from the sale of
the participation interests are paid to the Company as consideration for the
receivables sold to the subsidiary. The receivables facility provides for
advance rates of 88% of the lesser of (i) unpaid principal balance of the
receivables sold to the subsidiary or (ii) the market value of such
receivables as determined by the financial institution. The receivables
facility provides non-recourse interim funding for the Vacation Ownership
Interests 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 its
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) working capital. In addition, $8.5 million representing an amount equal
to one interest payment under the Notes, is held in an escrow account for the
benefit of the holders of the Notes to pay interest on the Notes. The escrow
funds may be disbursed to the extent necessary to make the interest payment
on the Notes. The Company must at all times maintain escrow funds in an
escrow account sufficient to make the next required interest payment on the
Notes.
The Company intends to pursue a growth-oriented strategy; accordingly, the
Company may, from time to time acquire, among other things, additional
vacation ownership resorts and additional land upon which vacation ownership
resorts may be developed, and companies operating quality resorts or having
vacation ownership assets, management, sales or marketing expertise
commensurate with the Company's operations in the vacation ownership industry.
The Company believes that its available working capital, together with cash
generated from operations and future borrowings, will be sufficient to meet
the Company's working capital and capital expenditure needs for future
business operations. The Company may obtain additional credit facilities or
issue other corporate debt or equity securities in connection with future
acquisitions. Any debt incurred or issued by the Company may be secured or
unsecured, at fixed or variable rates of interest and may be subject to such
terms as management deems prudent.
YEAR 2000
The Year 2000 issue is a flaw in many electronic data processing
systems, which prevents them from processing year-date data accurately beyond
the year 1999. This is the result of using a two-digit representation for the
year, for example "99" for "1999." This approach assumed that the first two
digits of the abbreviated date are "19." However, when the computer reaches
2000 it may interpret "00" as the year 1900 possibly causing inaccurate data
processing or processing to stop altogether.
The Company is addressing the Year 2000 issue with a corporate wide
initiative led by the Director of Information Systems and involving the
Company's Risk Manager. The initiative includes ascertaining that each of the
software packages in use has been certified as Year 2000 compliant.
The Company has conducted tests of its existing computer hardware
and software and determined that they are Year 2000 compliant. Because most
of its computer hardware and software is less than two years old, and the
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fact that each of the software packages have already been certified as
compliant, the Company believes that its exposure to Year 2000 problems with
respect to this hardware and software is minimal.
At each of the Company's resort locations, the general manager has
been advised that the resort's suppliers are Year 2000 compliant or that such
suppliers have taken the necessary steps to become compliant before the end
of 1999.
While the Company believes that its exposure to risks involving the
Year 2000 problem is minimal, there can be no assurance that the systems of
suppliers or third party service providers are Year 2000 compliant, or that
the failure of such suppliers or third party providers to be Year 2000
compliant will not have an effect on the Company. The Company believes that
its reasonably likely worst case scenario regarding Year 2000 noncompliance
is that certain functions currently performed by its computer systems will
have to be performed manually. This could result in increased administrative
burden and expense. The Company has not made any material
expenditures regarding the Year 2000 issue and has utilized its internal
staff to make all required Year 2000 upgrades and conversions. These costs
are not separately tracked.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is not exposed to interest rate risk in the near term,
as substantially all of the Company's indebtedness is at fixed rates
(principally the $130 million of senior secured redeemable notes which bear
interest at a fixed rate of 13.0%). The Company does not maintain a trading
account for any class of financial instrument, has never purchased any
derivative instruments, and is not directly subject to any foreign currency
exchange or commodity price risk.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are included in this Quarterly Report on
Form 10-Q:
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1999.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPIC RESORTS, LLC
Dated: , 1999 By:
------------------ ----------------------------------
Scott J. Egelkamp
Vice President and Chief Financial
Officer
Duly Authorized Principal
Financial Officer
13
<PAGE>
EXHIBIT INDEX
Exhibit 27. Financial Data Schedule
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001068052
<NAME> EPIC RESORTS LLC
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,859,000
<SECURITIES> 22,345,000
<RECEIVABLES> 20,570,000
<ALLOWANCES> 864,000
<INVENTORY> 68,984,000
<CURRENT-ASSETS> 10,960,000
<PP&E> 18,914,000
<DEPRECIATION> 4,685,000
<TOTAL-ASSETS> 149,083,000
<CURRENT-LIABILITIES> 4,931,000
<BONDS> 130,385,000
0
0
<COMMON> 0
<OTHER-SE> 13,767,000
<TOTAL-LIABILITY-AND-EQUITY> 149,083,000
<SALES> 23,224,000
<TOTAL-REVENUES> 33,848,000
<CGS> 4,575,000
<TOTAL-COSTS> 21,444,000
<OTHER-EXPENSES> 3,969,000
<LOSS-PROVISION> 673,000
<INTEREST-EXPENSE> 4,803,000
<INCOME-PRETAX> 2,959,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,959,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,959,000
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
