<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_________TO_____________
COMMISSION FILE NUMBER 333-61433
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EPIC RESORTS, LLC
(Exact name of registrant as specified in its charter)
DELAWARE
(State or Other Jurisdiction of 23-2888968
Incorporation or Organization) (I.R.S. Employer Identification No.)
1150 FIRST AVENUE, SUITE 900
KING OF PRUSSIA, PA 19406
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (610) 992-0100
Securities registered pursuant to Section 12(b) of The Act: NONE
Securities registered pursuant to Section 12(g) of The Act: NONE
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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 April 14, 2000, 1,118,000 Membership Interests of the Registrant
were outstanding.
<PAGE>
Documents incorporated by reference: NONE
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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. 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 ("Vacation 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 1,700 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 marketed and sold its deeded vacation ownership interests
and markets and sells its Vacation points 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.
<PAGE>
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 Vacation Points owned. Currently,
the annual dues are 4-1/2(cent) per vacation point. 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 Vacation Points.
The vacation club system provides Purchasers with significant
flexibility in planning their vacations. Under this system, Purchasers can
select vacations according to their schedules, space needs and available
Vacation Points. The number of Vacation Points that are required to stay one day
at one of 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 1,000 Vacation Points per
night off-season and 1,500 Club Points per night in peak season. A midweek stay
at the same one-bedroom unit would require less Vacation Points. Vacation Points
are reissued on an anniversary date basis and any unused Vacation Points may be
carried over for one year. A Purchaser may also borrow Vacation Points from
their allotment for the next year.
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 Torrence, California; Schaumburg, Illinios and in
Philadelphia, Pennsylvania. The Company opened its fourth center in
Atlanta, Georgia in the first quarter and plans to add its fifth and
sixth centers by the end of 2000. 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.
<PAGE>
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 Points 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, 1997, 1998 and 1999. 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 J 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
Vacation Points with the Company. These customers are required to make a down
payment of at least 10% of the Vacation Points sales price. The balance is
typically financed for a period of seven to ten years at a fixed interest rate.
As of December 31, 1999, the Company had a vacation ownership
receivables portfolio totaling approximately $13.5 million in principal amount,
with a weighted average contractual yield of approximately 14.2%, 15.5%, and
14.9% for the years ended December 31, 1999, 1998 and 1997, 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
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>
1997 1998 1999
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YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
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<S> <C> <C> <C>
Notes receivable, gross, secured by Vacation Ownership Interests............. $37,898,000 $12,762,000 $13,502,000
Allowance for loan losses.................................................... (750,000) (991,000) (1,628,000)
--------- --------- -----------
Notes receivable, net........................................................ $37,148,000 $11,771,000 $11,874,000
Charge-offs.................................................................. $1,378,000 $875,000 $1,455,000
</TABLE>
<PAGE>
LOAN UNDERWRITING
Consistent with industry practice, Vacation Ownership Interest
financing is not subject to extensive loan underwriting criteria. 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 responsibility of overseeing collection
activities 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 notes and 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.
In December 1999, the Company and EPIC Funding completed a sale of $78
million of receivables to EPIC Receivables 1999, a wholly owned qualifying
special purpose entity for the purpose of Epic Receivables entering into a $95.0
million securitization. The closing was used to pay down the receivables
facility. Refer to Note C of the notes to the consolidated Financial statements
for additional disclosure.
RECEIVABLES SERVICING
Receivables servicing includes collecting payments from borrowers and
remitting such funds to the owners, lenders or investors in such receivables,
accounting for receivables principal and interest, making advances when
required, contacting delinquent borrowers, foreclosing in the event that
defaults are not remedied and performing other administrative duties. The
Company outsources the servicing of its receivables to a third party vendor, and
paid aggregate fees of $221,000 and $228,000 in fiscal 1998 and 1997,
respectively. For fiscal 1999, the Company performed 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.
<PAGE>
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.
All of EPIC's resorts 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 1,700 II resorts worldwide. All six Epic Resort
locations 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.
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.
<PAGE>
EMPLOYEES
As of December 31, 1999, the Company employed a total of 1,728 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.
DAYTONA BEACH REGENCY. The Daytona Beach Regency is located in Daytona Beach,
Florida and currently consists of 81 one- and two-bedroom suites. Formerly a 198
room hotel, the Company has renovated 81 of the resort's 90 vacation ownership
suites.
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.
ISLAND LINKS RESORT. Located on Hilton Head Island off the coast of South
Carolina, the Island Links Resort currently consists of 58 one-and two-bedroom
suites. The Company expects to complete development of a total of 102 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 three off-site sales centers located in
Philadelphia, Pennsylvania, Torrence, California and Schaumberg, Illinois.
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.
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 five years ended
December 31, 1999 have been derived from audited financial statements. 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>
1995 1996 1997 1998 1999
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AS OF OR FOR THE YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Sales of vacation ownership interests........................... $8,290 $10,584 $29,967 $36,344 $84,163
Resort operations............................................... 5,029 6,074 6,652 7,772 19,080
Gains on sales of receivables and other financing income........ - - - 10,232 11,813
Interest income and other....................................... 704 1,208 3,672 5,926 3,792
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Total revenues.................................................. 14,023 17,866 40,291 60,274 118,848
Cost of salesnvacation ownership interests...................... 3,154 3,544 7,337 8,075 15,727
Resort operations expense....................................... 4,103 4,806 4,599 7,067 23,681
Selling and marketing expenses.................................. 3,452 4,307 11,574 15,146 38,565
General and administrative expenses............................. 1,322 2,014 3,188 6,591 15,670
Depreciation.................................................... 644 799 772 652 1,130
Provision for losses............................................ 474 492 1,391 1,116 2,092
Financing and closing costs..................................... 460 323 868 1,055 852
Interest expense................................................ 894 2,143 3,748 12,107 19,037
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Income (loss) before minority interest and extraordinary item... (480) (562) 6,814 8,465 2,094
Minority interest............................................... - (473) 1,676 1,190 -
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Income (loss) before extraordinary item......................... (480) (89) 5,138 7,275 2,094
Extraordinary gain (loss) on settlement of debt................. 5,077 - - (5,364) -
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Net income (loss)............................................... $4,597 $(89) $5,138 $1,911 2,094
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OTHER DATA AND CREDIT STATISTICS:
Number of resorts at period end................................. 1 2 2 6 6
BALANCE SHEET DATA:
Mortgage Notes and Mortgages receivable, net.................... $7,641 $20,996 $37,148 $11,771 11,874
Inventory, net.................................................. 12,032 12,741 7,963 73,042 65,804
Total assets.................................................... 28,269 43,034 56,288 146,773 149,551
Senior secured notes payable.................................... - - - 127,432 127,825
Notes payable................................................... 18,780 34,009 42,891 621 351
Warrants........................................................ - - - 2,757 2,757
Member's equity................................................. 8,763 8,163 10,578 11,986 13,800
</TABLE>
<PAGE>
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
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<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>
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* 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
Points 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 Points 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 Points 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.
Epic vacation club belongs to the Homeowner's Association that has
been established for each resort. Currently, there are six (6) separate
homeowners associations. The 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, 1999 TO YEAR ENDED DECEMBER 31, 1998
REVENUES. For the year ended December 31, 1999, the Company recognized total
revenues of $118.8 million compared to $60.3 million for the year ended December
31, 1998, an increase of $58.5 million, or 97.0%. This increase was primarily
the result of $1.6 of gains recognized in 1999 from the sales of notes and
mortgages receivable and other financing income and a $47.9 million increase in
sales of Vacation Points and Ownership Interests to $84.2 million during 1999
from $36.3 million during 1998, an increase of 132.0% and increased revenues of
$19.0 million from resort operations.
<PAGE>
Sales of Vacation Points and Ownership Interests increased primarily as
a result of (i) increased sales growth due to expansion, the company added three
resorts and two additional sales centers in 1999 and (ii) an increase in Sales
Price.
Resort operations revenue increased 144.9%, to $19.1 million in 1999
from $7.8 million in 1998, primarily as a result of additional resort revenues
of $3.40 million during 1999 from the newly acquired resorts and the sale of
vacation packages of $7.9 million by Epic Marketing, a venture started in the
fourth quarter of 1998.
Gains on sales of receivables and other financing income increased
15.7% to $11.8 million in 1999 as compared to $10.2 million in 1998. This
increase can be attributed to additional sales into Epic's Receivables Facility
as discussed in Note C to the Company's consolidated financial statements.
Interest income decreased $4.4 million to $1.1 million in 1999 from
$5.5 million in 1998. The decrease of 80.0%, is attributed primarily from the
sale of receivables to the receivables facility reducing the portfolio of loans
held on the companies books.
Other income increased $2.3 million to $2.7 million in 1999 from $.4
million in 1998 primarily attributable to the $2.1 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 Points and
Ownership Interests decreased to 18.7% in 1999 from 22.3% in 1998, reflecting
higher average selling prices for Vacation Points and ownership interests as
well as a lower product cost for the Scottsdale Links, Palm Spring Marquis and
Desert Paradise properties.
RESORT OPERATIONS EXPENSE. Resort operations expense increased approximately
$16.6 million to $23.7 million in 1999 from $7.1 million in 1998. As a
percentage of resort operations revenue, resort operations expense increased to
124.1% in 1999 from 91.0% in 1998 primarily as a result of increased operational
expenses at the Scottsdale Links, Desert Paradise and Palm Springs Marquis
properties. The company expects this trend to stabalize as these resorts develop
a following among tourists and travel agents.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses (including
commissions) as a percentage of sales of Vacation Points and Ownership Interests
increased to 45.8% in 1999 from 41.6% in 1998. In 1999, the Company incurred
$327,000 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 $515,000 due to (ii) opening of its offsite sales center in
Schaumburg and Torrence in the middle of the fourth quarter of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 137.9% to $15.7 million in 1999 from $6.6 million in 1998 reflecting
the Company's continued growth. As a percentage of total revenues, general and
administrative expenses increased to 13.2% in 1999 from 10.9% in 1998 which was
attributable to the increased staffing incurred at each of the start-up
locations in 1999. As part of the Company's growth plan, the Company increased
general and administrative expenses at its headquarters by $1.0 million to have
in place the infrastructure required to support the Company's business plan to
continue to add offsite sales centers and new resorts. 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 $19.0 million in 1999 from
$12.1 million in 1998, an increase of $6.9 million, which reflects a full year
of debt service relating to the Notes issued in July 1998.
PROVISION FOR LOAN LOSSES. Provision for loan losses as a percentage of sales
of Vacation Points and Ownership Interests decreased to 2.5% in 1999 from 3.0%
in 1998.
<PAGE>
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%.
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 and other financing income 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 C 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
<PAGE>
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.
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.
CHANGES IN FINANCIAL CONDITION
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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
$13.7 million for the year ended December 31, 1999.
Net cash used in operating activities was $ 47.6 million, $74.2 million
and $3.5 million in 1999, 1998 and 1997, respectively. The change in net cash
used in operating activities from 1998 to 1999 is primarily attributed to the
increased issuance of notes receivable to finance Vacation Points Purchases
offset by the reduction of completed inventory as sales increased as well as the
increase in net income from operations. 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).
Net cash used in investing activities was $19.1 million, $17.8 million,
and $2.3 million in 1999, 1998, and 1997 respectively. The increase from 1998 to
1999 is primarily attributable to the purchase of equipment at each of the
resorts the tenant improvements incurred to open our new sales offices and sales
of notes and mortgages receivable to the receivable facility. 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.
Net cash provided by financing activities was $53.0 million, $107.9
million, and $6.0 million in 1999, 1998, and 1997 respectively. The net increase
in cash provided by financing activities from 1998 to 1999 is primarily
attributable to the increased sales of notes receivable. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations through the sale and
financing of Vacation Points, resort operations, transient rental of resort
accommodations and management fees. With respect to the sale of Vacation Points,
the Company generates cash from operations from customer downpayments and the
sale of notes receivable through the warehouse facility in amounts typically
equal to 88% of the related customer notes and mortgages receivable. The Company
generates additional cash flow from its Vacation 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
Points. Historically, these funds have been provided by indebtedness secured by
a portion of the Company's inventory of unsold Vacation Points and Vacation
Ownership Interests, customer notes and mortgages receivable and other assets.
<PAGE>
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 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 Points and 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 and (ii) proceeds from the Receivables
Facility. Thereafter, The Company maintains escrow funds in an escrow account
sufficient to make the next required interest payment of $8.5 million on the
Notes.
The Company is committed to make an offer to repurchase $65.0 million
of the Notes between June 15, 2000 and June 15, 2002. The Company does not
intend to make this offer in the year 2000.
The Company intends to pursue a growth-oriented strategy; accordingly,
the Company may, from time to time acquire, among other things, additional
vacation ownership resorts and additional land upon which vacation ownership
resorts may be developed, and companies operating quality resorts or having
vacation ownership assets, management, sales or marketing expertise commensurate
with the Company's operations in the vacation ownership industry.
The Company believes that the net proceeds from the sale of the
mortgages and notes receivable, 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 the result of computer programs being written
using two digits rather than four to define applicable years. Computer programs
that have date-sensitive software may recognize a date coded "00" as the year
may cause disruptions of operations, including temporary inability to process
transactions. Prior to year-end 1999, the Company completed an assessment of all
of its significant operating systems. The Company had, in the ordinary course of
business, purchased new software packages for most of its computer systems. Most
of these purchases occurred prior to the 1999 fiscal year. The Company had also
implemented, through routine software releases, Year 2000-compliant upgrades to
most of its financial and operational software. Any remaining software
applications were insignificant to the Company's operations, and were upgraded
to Year 2000-compliant status prior to the end of 1999. The Company had also
addressed the Year 2000 activities of its suppliers and customers. By reviewing
their Year 2000 Readiness Disclosures, or by direct contact, the Company
determined that substantially all of its significant suppliers and customers
were Year 2000 compliant. The Company has not, to date, experienced any negative
effects from its suppliers or customers related to the Year 2000 issue. While
there can be no guarantee that Year 2000 issues by a third party will not occur
in future periods, and such effects could have a material adverse effect on the
Company, management believes that its continuing communications with its
suppliers and customers will minimize these risks. The Company has to date not
experienced any negative effects from the Year 2000 date change, and does not
expect any such effects in future periods. The Company has not incurred and does
not anticipate incurring
<PAGE>
material incremental costs for Year 2000 issues relating to its computer
information systems, since all updates or replacements of such systems occurred
in the ordinary course of business, most of which occurred prior to the 1999
year.
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 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 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 and to repay subordinated debt 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 $13.0
million and must meet all financial covenants contained in the indenture under
which the Notes were issued.
<PAGE>
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
funds available for working capital, capital expenditures,
acquisitions and general corporate purposes may be limited.
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.
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Member
Epic Resorts, LLC
We have audited the accompanying consolidated balance sheet of Epic
Resorts, LLC (a Delaware limited liability company) as of December 31, 1999, and
the related consolidated statements of income, changes in member's equity and
cash flows for the year ended December 31, 1999. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides 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, 1999, and the results of its operations and its
cash flows for the year ended December 31, 1999, in conformity with auditing
standards generally accepted in the United States.
/s/ GRANT THORNTON, LLP
Philadelphia, Pennsylvania
April 3, 2000
<PAGE>
Report of Independent Public Accountants
To the Member of Epic Resorts, LLC:
We have audited the accompanying consolidated balance sheet of Epic Resorts, LLC
(a Delaware limited liability company) as of December 31, 1998, and the related
consolidated statements of operations, cash flows and changes in member's equity
for the years ended December 31, 1998 and 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted are audits in accordance with auditing standards generally accepted
in the United States. 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 the results of their operations and their cash
flows for the years ended December 31, 1998 and 1997, in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
March 25, 1999
<PAGE>
Epic Resorts, LLC
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1999 1998
---------------- ---------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 2,359,000 $ 16,095,000
CASH IN ESCROW 12,004,000 8,586,000
INVESTMENT IN RESIDUAL INTERESTS 29,465,000 15,223,000
NOTES AND MORTGAGES RECEIVABLE, net of allowance of $1,628,000
and $991,000 as of December 31, 1999 and 1998, respectively 11,874,000 11,771,000
INVENTORY 65,804,000 73,042,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $5,422,000
and $4,303,000 as of December 31, 1999 and 1998, respectively 15,665,000 11,909,000
DEFERRED FINANCING COSTS, net of accumulated amortization of
$2,374,000 and $692,000 as of December 31, 1999 and 1998, respectively 7,721,000 6,823,000
OTHER ASSETS 4,659,000 3,324,000
---------------- ---------------
Total assets $ 149,551,000 $146,773,000
---------------- ---------------
---------------- ---------------
LIABILITIES AND MEMBER'S EQUITY
ACCOUNTS PAYABLE $ 2,794,000 $ 1,154,000
ACCRUED EXPENSES 987,000 1,743,000
ACCRUED INTEREST PAYABLE 736,000 736,000
ADVANCE DEPOSITS 43,000 76,000
DEFERRED REVENUE 258,000 268,000
NOTES PAYABLE 351,000 621,000
SENIOR SECURED NOTES PAYABLE 127,825,000 127,432,000
---------------- ---------------
Total liabilities 132,994,000 132,030,000
COMMITMENTS AND CONTINGENCIES - -
WARRANTS 2,757,000 2,757,000
MEMBER'S EQUITY 13,800,000 11,986,000
---------------- ---------------
Total liabilities and member's equity $ 149,551,000 $146,773,000
---------------- ---------------
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Epic Resorts, LLC
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
REVENUE
Sales of vacation points and ownership interests $ 84,163,000 $ 36,344,000 $ 29,967,000
Resort operations 19,080,000 7,772,000 6,652,000
Gains on sales of receivables and other financing income 11,813,000 10,232,000 -
Interest income 1,055,000 5,499,000 3,535,000
Other income 2,737,000 427,000 137,000
-------------- ------------- -------------
118,848,000 60,274,000 40,291,000
COSTS AND EXPENSES
Cost of sales of vacation points and ownership interests 15,727,000 8,075,000 7,337,000
Resort operations 23,681,000 7,067,000 4,599,000
Selling and marketing costs 38,565,000 15,146,000 11,574,000
General and administrative expenses 15,670,000 6,591,000 3,188,000
Provision for doubtful accounts, net of recoveries 2,092,000 1,116,000 1,392,000
Depreciation 1,130,000 652,000 771,000
Financing and closing costs 852,000 1,055,000 868,000
Interest expense 19,037,000 12,107,000 3,748,000
-------------- ------------- -------------
116,754,000 51,809,000 33,477,000
-------------- ------------- -------------
Income before minority interest and
extraordinary item 2,094,000 8,465,000 6,814,000
Minority interest - 1,190,000 1,676,000
-------------- ------------- -------------
Income before extraordinary item 2,094,000 7,275,000 5,138,000
Extraordinary loss on extinguishment of debt - 5,364,000 -
-------------- ------------- -------------
NET INCOME $ 2,094,000 $ 1,911,000 $ 5,138,000
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Epic Resorts, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1997 $ 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
Distributions (280,000)
Net income 2,094,000
-----------
BALANCE, DECEMBER 31, 1999 $13,800,000
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Epic Resorts, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,094,000 $ 1,911,000 $ 5,138,000
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation 1,130,000 652,000 771,000
Amortization of financing costs 1,684,000 1,557,000 173,000
Provision for doubtful accounts 2,092,000 1,116,000 1,392,000
Accretion of senior secured notes payable 393,000 - -
Gains on sales of receivables and other financing income (11,813,000) (10,232,000) -
Minority interest - 1,190,000 1,676,000
Changes in assets and liabilities
Notes and mortgages receivable (49,957,000) (5,529,000) (17,543,000)
Inventory 7,238,000 (64,174,000) 4,779,000
Other assets (1,335,000) (3,096,000) (141,000)
Accounts payable 1,640,000 170,000 264,000
Accrued expenses (757,000) 1,247,000 90,000
Accrued interest payable - 655,000 13,000
Deferred revenue (10,000) 268,000 -
Advance deposits (33,000) 23,000 (86,000)
------------- -------------- --------------
Net cash used in operating activities (47,634,000) (74,242,000) (3,474,000)
------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (4,886,000) (2,590,000) (2,314,000)
Investment in residual interest (14,242,000) (15,223,000) -
------------- -------------- --------------
Net cash used in investing activities (19,128,000) (17,813,000) (2,314,000)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable and bridge loan (270,000) (109,600,000) (15,965,000)
Proceeds from sales of receivables 59,894,000 40,022,000 -
Cash escrows, net (3,736,000) (8,533,000) 86,000
Payment of deferred financing costs (2,582,000) (7,514,000) (237,000)
Proceeds from notes payable - 11,916,000 24,847,000
Proceeds from bridge loan - 55,414,000 -
Proceeds from senior secured notes payable - 130,000,000 -
Purchase of minority interest - (3,300,000) -
Contributions from sole member - 263,000 603,000
Distributions to sole member (280,000) (766,000) (3,325,000)
------------- -------------- --------------
Net cash provided by financing activities 53,026,000 107,902,000 6,009,000
------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (13,736,000) 15,847,000 221,000
Cash and cash equivalents, beginning of period 16,095,000 248,000 27,000
------------- -------------- --------------
Cash and cash equivalents, end of period $ 2,359,000 $ 16,095,000 $ 248,000
------------- -------------- --------------
------------- -------------- --------------
Supplemental disclosure of cash flow information
Interest paid $ 16,961,000 $ 9,894,000 $ 3,836,000
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - 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 points in its resorts. Customers acquire the right to
use a fully furnished vacation residence, based upon the number of points
purchased in Epic Vacation Club, in perpetuity or over an extended period not
less than 35 years (Vacation Points). The Company's principal operations
consist of (i) acquiring, developing and operating vacation ownership resort
locations, (ii) marketing and selling Vacation Points in its resorts, and
(iii) providing customer financing to individual purchasers of Vacation
Points at its resorts. The Company also generates income from the transient
rental of resort accommodations.
In January 1999, the Company adopted a vacation club system. The vacation club
holds units of each of the Company's resort locations. The units of each resort
location are contributed to the club. The club then sells "Vacation Points".
Prior to January 1999, the Company sold vacation ownership interests in its
resorts. The customer acquired the right to use a fully furnished vacation
residence, generally for a one-week period each year.
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 now doing business 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.
(Continued)
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE A - NATURE OF BUSINESS AND BASIS OF PRESENTATION - Continued
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 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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. 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 purchases 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.
2. NOTES AND MORTGAGES RECEIVABLE
Notes and mortgages receivable reflect the amounts due from purchases of
Vacation Points and Vacation Ownership Interests who have accepted financing
from the Company. The obligations are evidenced by promissory notes and
mortgages. The majority of these notes and mortgages receivable
collateralize certain debt obligations of the Company.
Notes receivable are sold by the Company on a non-recourse basis in
connection with a loan participation facility with a financial institution
(see note C) and a loan securitization.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides for estimated future losses related to uncollectible
receivables currently included in its notes receivable portfolio and in
connection with substitution of collateral provisions of sales of notes
receivables. The provision is estimated based upon management's estimate of
losses which may result because of cancellation of the related financing
contract.
(Continued)
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives. Furniture, fixtures
and equipment are depreciated over a period of 5 to 7 years. Buildings and
improvements are depreciated over 40 years.
5. 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.
6. 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.
7. SALES RECOGNITION AND SELLING POLICIES
The Vacation Points 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 period and points are 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.
8. COST OF SALES AND INVENTORY
Cost of sales is computed by allocating the total project acquisition and
conversion costs associated with the total Vacation Ownership Points
available for sale over the number of points available for sale, 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 greater than net realizable value. Points 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.
(Continued)
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. COMPREHENSIVE INCOME
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." The standard established 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 three year period ended December 31, 1999.
10. 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 amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 will require the Company
to record all derivatives on the balance sheet at fair value. Changes in
derivative fair values will either be recognized in earnings as offsets to
the changes in fair value of related hedged assets, liabilities and firm
commitments or for forecasted transactions, deferred and recorded as a
component of accumulated other comprehensive income (loss) in member's
equity until the hedged transactions could occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair
value will be immediately recognized in earnings. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133." SFAS No. 133
is now effective for fiscal years beginning after June 15, 2000. The Company
expects to adopt SFAS No. 133 on January 1, 2001 and does not believe the
effect of adopting SFAS No. 133 will have any material effect on its
consolidated financial position or results of operations.
NOTE C - NOTES AND MORTGAGES RECEIVABLE
The Company provides financing to its customers, which is collateralized by
such purchasers' Vacation Points or Vacation Ownership Interests. The
Company offers certain customers, who make deposits of 33%, one-year
financing on an noninterest-bearing basis. The notes generally mature over
terms which approximate 84 months, with fixed interest rates ranging from
13.9 percent to 16.9 percent, per annum. The notes may be prepaid at any
time, without penalty. The weighted average rate of interest on outstanding
notes receivable is 14.2%, 15.5% and 14.9% for the years ended December 31,
1999, 1998 and 1997, respectively.
(Continued)
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE C - NOTES AND MORTGAGES RECEIVABLE - Continued
The following schedule reflects the schedule principal maturities of notes
and mortgages receivable:
<TABLE>
<S> <C>
2000 $ 3,745,000
2001 908,000
2002 995,000
2003 1,139,000
2004 1,305,000
Thereafter 5,410,000
-----------
Total principal maturities of notes and mortgages receivable 13,502,000
Less allowance for doubtful accounts 1,628,000
-----------
Net principal maturities of notes and mortgages receivable $ 11,874,000
-----------
-----------
</TABLE>
The activity in the notes and mortgages receivable allowance for doubtful
accounts is as follow:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Balance, beginning of period $ 991,000 $ 750,000 $ 736,000
Provision for doubtful accounts, net of recoveries 2,092,000 1,116,000 1,392,000
Charge-offs (1,455,000) (875,000) (1,378,000)
---------------- --------------- ----------------
Balance, end of period $ 1,628,000 $ 991,000 $ 750,000
---------------- --------------- ----------------
---------------- --------------- ----------------
</TABLE>
During 1999 and 1998, the Company sold $68,061,000 and $45,479,000 of notes
and mortgages receivable as part of its $75 million Vacation Ownership Loan
Participation Facility (Receivables Facility). Under this Receivables
Facility, the Company sells its Vacation Points 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 Receivables
Facility 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.
(Continued)
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE C - NOTES AND MORTGAGES RECEIVABLE - Continued
The Company accounts for the transfers of receivables to Epic Funding as
sales in accordance with SFAS No. 125. Gains on the sale of a portion of
notes receivable are based on the relative fair market value of the note
receivable portions sold and retained. At December 31, 1999 and 1998, the
retained interests were valued by the Company assuming discount rates of
11.50% and 10% respectively, including estimated defaults and prepayments
applied to the residual cash flows. The Company accounts for this investment
as a trading security in accordance with SFAS No. 115, "Accounting for
Certain Investments and Debt Securities". The Company records changes in the
fair value of the investment as other financing income, which is a component
of gains on sales of receivables and other financing income in the
consolidated statements of income.
In December 1999, the Company and Epic Funding completed a sale of $78
million of receivables to Epic Receivables 1999, a wholly-owned qualifying
special purpose entity, for the purpose of Epic Receivables 1999 entering
into a $95 million securitization transaction. The closing resulted in net
proceeds of approximately $87 million, of which $68 million was used to pay
down the Receivables Facility. $16 million was recorded in a prefunding
account to be drawn on as additional receivables become available through
March 15, 2000, (which the Company drew down during the first quarter of
2000) and $3.1 million was placed into escrow as reserves for payments of
principal and interest to the note holders in the securitization. The
Company retains an interest in the excess cash flows of Epic Receivables
1999, which is recorded at fair value and is classified as a residual
interest. The escrow reserves are reflected in cash in escrow and have been
discounted to reflect their current fair market value.
Gains on sales of receivables and other financing income consists of the
following for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Gains on sales of receivables $ 9,464,000 $ 7,297,000 $ -
Other financing income 2,349,000 2,935,000 -
---------------- --------------- ---------------
$ 11,813,000 $ 10,232,000 $ -
---------------- --------------- ---------------
---------------- --------------- ---------------
</TABLE>
NOTE D - INVENTORY
Inventory and accumulated cost of sales consist of the following as of
December 31:
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
<S> <C> <C>
Acquisition and development costs $113,534,000 $ 105,964,000
Less accumulated costs of sales (47,730,000) (32,922,000)
---------------- -----------------
$ 65,804,000 $ 73,042,000
---------------- -----------------
---------------- -----------------
</TABLE>
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Land $ 2,913,000 $ 2,913,000
Building and improvements 13,125,000 11,177,000
Furniture, fixtures and equipment 5,049,000 2,122,000
--------------- ----------------
21,087,000 16,212,000
Less accumulated depreciation 5,422,000 4,303,000
--------------- ----------------
$15,665,000 $11,909,000
--------------- ----------------
--------------- ----------------
</TABLE>
NOTE F - SENIOR SECURED NOTES AND 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 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 interest of $29,465,000 and
$15,223,000 at December 31, 1999 and 1998, respectively, as described in
note C. 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.
Between June 15, 2000 and June 15, 2002, the Company is required to make
offers to the noteholders to purchase the notes at 101% of the aggregate
principal amount up to the maximum amount of $65,000,000.
Concurrent with the issuance of the Notes, the Company issued 130,000
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.
(Continued)
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE F - SENIOR SECURED NOTES AND NOTES PAYABLE - Continued
During 1998, in connection with the repayment of debt related to proceeds
of 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
extraordinary losses in the accompanying statement of income for the year
ended December 31, 1998.
Notes payable at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
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 2000 to 2001 $ 351,000 $ 621,000
--------------- ---------------
--------------- ---------------
</TABLE>
NOTE G - RELATED PARTY TRANSACTIONS
As of December 31, 1999 and 1998, the Company has accrued $967,000 and
$829,000 as receivables 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. The receivables are included in other
assets in the accompanying consolidated balance sheets.
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 market place.
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 subordinated to the claims of the Company's construction and equipment
loans and was not payable until these notes 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 during 1998 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.
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE H - COMMITMENTS AND CONTINGENCIES
1. LEASES
The Company leases commercial real estate to various retail operators, for
the operation of a shopping mall, under various lease agreements that
expire through January 2009. Future minimum rental income expected to be
recognized from noncancellable operating leases on a straight-line basis as
of December 31, 1999, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000 $ 468,000
2001 338,000
2002 155,000
2003 96,000
2004 44,000
Thereafter 84,000
------------
Total future minimum rentals $ 1,185,000
------------
------------
</TABLE>
The Company has various operating lease agreements, primarily for its home
office, sales offices and land at its Palm Springs, California resort. These
obligations generally have remaining noncancellable terms of five years or
less, except the land lease which has a sixty-five year term. Future minimum
lease payments are as follows for the years ending December 31:
<TABLE>
<S> <C>
2000 $ 983,000
2001 906,000
2002 715,000
2003 577,000
2004 380,000
Thereafter 8,327,000
-----------
$ 11,888,000
-----------
-----------
</TABLE>
Rent expense amounted to $1,087,000, $298,000 and $118,000 for the three
years ended December 31, 1999, 1998 and 1997, respectively.
2. LITIGATION
The Company is a defendant in various lawsuits in the ordinary course of
business. Management is defending against these actions and does not believe
the suits will have a material impact on the Company's financial position or
results of operations.
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures 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
sheets for cash and cash equivalents approximates their fair value because
of the short-term maturity of these instruments.
CASH IN ESCROW: The carrying amounts reported in the balance sheets have
been discounted to reflect estimated fair value.
INVESTMENT IN RESIDUAL INTERESTS: The carrying amounts reported in the
balance sheets approximate fair value.
NOTES AND MORTGAGES RECEIVABLE: The carrying amounts reported in the
balance sheets for notes and mortgages receivable approximates their fair
value because the weighted average interest rate on the portfolio of notes
and mortgages receivable approximates current interest rates to be received
on similar current notes and mortgages receivable.
SENIOR SECURED NOTES PAYABLE AND NOTES PAYABLE: The carrying amounts
reported in the balance sheets approximates their fair value because the
interest rates on these instruments approximate current interest rates
charged on similar current borrowings.
NOTE J - 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.
NOTE K - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following presents a summary of the unaudited quarterly financial
information for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $21,601,000 $33,848,000 $35,885,000 $27,514,000 $118,848,000
Total expenses 22,639,000 30,889,000 32,633,000 30,593,000 116,754,000
---------- ---------- ---------- ---------- -----------
Net income (loss) $(1,038,000) $ 2,959,000 $ 3,252,000 $(3,079,000) $ 2,094,000
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
</TABLE>
(Continued)
<PAGE>
Epic Resorts, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE K - SUMMARY OF QUARTERLY RESULTS (UNAUDITED) - Continued
<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>
------------------------------------
(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 interest 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 F to the consolidated
financial statements).
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The Company filed a current report on Form 8-K, regarding a change in
the Company's independent accountants, dated March 3, 2000.
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.
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas F. Flatley............................................ 48 President and Chief Executive Officer
Scott J. Egelkamp............................................ 41 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>
FISCAL SALARY BONUS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ------ ----- COMPENSATION
- --------------------------- ---- ------------
ANNUAL COMPENSATION
-------------------
<S> <C> <C> <C>
Thomas F. Flatley........................................................ 1999 $280,000
President and Chief Executive 1998 $280,000
Officer 1997 (a)
Scott J. Egelkamp........................................................ 1999 $125,000
Vice President and Chief Financial 1998 $125,000
Officer 1997 $125,000
</TABLE>
----------
(a) Mr. Flatley did not receive a salary in 1997.
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
<PAGE>
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS
Exhibit 27vFinancial Data Schedule.
(b) REPORTS. No reports on Form 8-K have been filed during the last quarter
of the fiscal year ended December 31, 1999.
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
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)
<PAGE>
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 ResortsnVacation 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)
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 10.9 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
ResortsnHilton 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 ResortsnWestpark 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
ResortsvPalm 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)
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
<PAGE>
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 ResortsnScottsdale 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 of the Act by Registrants which have not registered securities
pursuant to Section 12 of the Act. No annual report or proxy statement covering
<PAGE>
the Company's last fiscal year has been or will be circulated to security
holders.
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
Date: April 14, 2000 By:
Scott J. Egelkamp
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
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
--------- ----- ----
<S> <C> <C>
President and Chief Executive Officer (Principal April 14, 2000
Executive Officer)
Thomas F. Flatley
Vice President and Chief Financial Officer April 14, 2000
(Principal Financial and Accounting Officer)
Scott J. Egelkamp
Managing Member April 14, 2000
Epic Membership Corp.
By: Thomas F. Flatley, President
</TABLE>
<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.
<PAGE>
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 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.
2
<PAGE>
3.6. EFFECT OF HEADINGS. The Section headings herein are for
convenience only and shall not affect the construction hereof.
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
5
<PAGE>
RESORT INVESTMENT, LLC
By: /s/ T. F. Flatley
--------------------------------
Title: President
UNITED STATES TRUST COMPANY OF
NEW YORK, as Trustee
By: /s/ Patricia Stermer
--------------------------------
Title: Assistant 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:
<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
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<PAGE>
Company or any of its Restricted Subsidiaries or in satisfaction of
judgments or claims; (viii) Persons to the extent such Investment is
received by the Company or any Restricted Subsidiary as consideration for
asset dispositions effected in compliance with 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
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<PAGE>
by the Company or any of its Restricted Subsidiaries with its employees in
the ordinary course of business, (viii) the issuance of Capital Stock of
the Company (other than Disqualified Stock), (ix) the payment of reasonable
and customary fees to directors of the Company who are not employees of the
Company (including, without limitation, the grant of stock options), and
(x) Affiliate Transactions between either the Company or a Restricted
Subsidiary and a Receivables Subsidiary 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.
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<PAGE>
(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 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
6
<PAGE>
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 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
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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 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
8
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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 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
9
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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).
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.
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<PAGE>
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.
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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<PAGE>
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
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<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/ Gerard F. Ganey
--------------------------------------
Title: Senior Vice President
14
<PAGE>
EXHIBIT J
1<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").
<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
3
<PAGE>
Collateral, (ii) with respect to, or resulting from, any delay in complying
with any requirement of 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
4
<PAGE>
amendments to financing statements necessary to maintain the Liens created
hereby as required by Section 4(a) above.
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:
5
<PAGE>
(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 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
6
<PAGE>
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 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,
7
<PAGE>
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
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
8
<PAGE>
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.
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>
EPIC RESORTS AND SUBSIDIARIES(1)
Epic Resorts, LLC, a Delaware limited liability company
Epic Resorts - Palm Springs Marquis Villas, LLC, a Delaware limited liability
company
Epic Resorts - Westpark Resort, LLC, a Delaware limited liability company
Epic Resorts - Scottsdale Links Resort, LLC, a Delaware limited liability
company
London Bridge Resort, LLC, a Delaware limited liability company
Epic Resorts - Hilton Head, LLC, a Delaware limited liability company
Epic Resorts - Afton Resort, LLC, a Delaware limited liability company
Daytona Beach Regency, Ltd., a Florida limited partnership
Resort Management, LLC, a Delaware limited liability company
Resort Investment, LLC, a Delaware limited liability company
Epic Capital Corp., a Delaware corporation
Epic Warrant Co., a Delaware corporation
Epic Receivables, Inc., a Delaware corporation
Epic Membership Corp., a Delaware corporation
Epic Travel, LLC, a Delaware limited liability company
Epic Resorts - Vacation Showplace, LLC, a Delaware limited liability company
Epic Resorts Management, LLC, a Delaware limited liability company(2)
Epic Marketing, LLC, a Delaware limited liability company(3)
Epic Vacation Club, a Delaware non-profit corporation
Epic Master Funding Corporation, a Delaware corporation(4)
Epic Resorts - Planters Quarters, Inc., a Delaware corporation
Epic Receivables 1999, LLC, a Delaware limited liability company
- --------------------------
(1)ALL ARE DIRECT SUBSIDIARIES OF EPIC RESORTS, LLC EXCEPT DAYTONA BEACH
REGENCY, LTD.
(2)PROPERTY MANAGEMENT ARM OF EPIC VACATION CLUB
(3)ONE PERCENT INTEREST HELD BY EPIC MEMBERSHIP CORP.
(4)SPECIAL PURPOSE CORPORATION FOR MORTGAGE AND/OR CLUB RECEIVABLES
<PAGE>
Daytona Beach Regency Association, Inc., a Florida non-profit corporation(5)
Resort Association, Inc., an Arizona non-profit corporation
Scottsdale Links Condominium Association, an Arizona non-profit corporation
Island Links Resort Owners Association, Inc., a South Carolina non-profit
corporation
Palm Springs Marquis Villas Owners Association, a California non-profit Mutual
Benefit Corporation
Desert Paradise Resort Owners Association, a Nevada Non-profit corporation
- --------------------------
(5)NON-PROFIT CONDOMINIUM OWNERS ASSOCIATION
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001068052
<NAME> EPIC RESORTS LLC
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,363,000
<SECURITIES> 29,465,000
<RECEIVABLES> 13,502,000
<ALLOWANCES> 1,628,000
<INVENTORY> 65,804,000
<CURRENT-ASSETS> 0
<PP&E> 21,087,000
<DEPRECIATION> 5,422,000
<TOTAL-ASSETS> 149,551,000
<CURRENT-LIABILITIES> 9,818,000
<BONDS> 128,976,000
0
0
<COMMON> 0
<OTHER-SE> 13,800,000
<TOTAL-LIABILITY-AND-EQUITY> 149,551,000
<SALES> 84,163,000
<TOTAL-REVENUES> 118,848,000
<CGS> 15,727,000
<TOTAL-COSTS> 77,973,000
<OTHER-EXPENSES> 17,652,000
<LOSS-PROVISION> 2,092,000
<INTEREST-EXPENSE> 19,039,000
<INCOME-PRETAX> 2,094,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,094,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,094,000
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
