<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For quarterly period ended June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________________
Commission File Number: 333-61433
EPIC RESORTS, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 23-2888968
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1150 FIRST AVENUE, SUITE 900 19406
KING OF PRUSSIA, PA (Zip Code)
(Address of principal executive offices)
(610) 992-0100
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
-------------------------------------------------------------------------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-----
As of June 30, 2000, 1,118,000 membership interests of the registrant
were outstanding.
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EPIC RESORTS, LLC
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999.............................................. 3
Consolidated Statements of Income - Three and Six Months Ended
June 30, 2000 and 1999.......................................... 4
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2000 and 1999.......................................... 5
Notes to Consolidated Financial Statements...................... 6
ITEM 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations............................. 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...... 13
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................
SIGNATURES
EXHIBIT INDEX ............................................................
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PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EPIC RESORTS, LLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,795,000 $ 2,359,000
Cash in escrow 12,212,000 12,004,000
Investment in residual interests 42,363,000 29,465,000
Notes and mortgages receivable, net of allowance of $1,787,000 and
as $1,628,000of June 30, 2000 and December 31, 1999, respectively 12,931,000 11,874,000
Inventory 56,727,000 65,804,000
Property and equipment, net 16,166,000 15,665,000
Deferred financing costs, net 7,292,000 7,721,000
Other assets 7,170,000 4,659,000
----------------- ------------------
Total assets $156,656,000 $149,551,000
================= ==================
LIABILITIES AND MEMBER'S EQUITY
Accounts payable $ 4,212,000 $ 2,794,000
Accrued expenses 843,000 987,000
Accrued interest payable 736,000 736,000
Advance deposits 44,000 43,000
Deferred revenue 209,000 258,000
Notes payable 265,000 351,000
Senior secured notes payable 128,022,000 127,825,000
----------------- ------------------
Total liabilities 134,331,000 132,994,000
----------------- ------------------
Commitments and contingencies - -
Warrants 2,757,000 2,757,000
Member's equity 19,568,000 13,800,000
----------------- ------------------
Total liabilities and member's equity $156,656,000 $149,551,000
================= ==================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
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EPIC RESORTS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Sales of vacation points $29,692,000 $ 23,224,000 $55,751,000 $38,875,000
Resort operations 5,272,000 6,181,000 11,015,000 9,631,000
Gain on sales of receivables and other financing income 6,391,000 3,539,000 12,050,000 5,319,000
Other income 616,000 904,000 1,377,000 1,624,000
----------------- ---------------- ---------------- ----------------
41,971,000 33,848,000 $80,193,000 55,449,000
----------------- ---------------- ---------------- ----------------
Costs and expenses:
Cost of sales of vacation points 5,100,000 4,575,000 9,870,000 7,702,000
Resort operations 6,575,000 6,862,000 13,122,000 10,542,000
Selling and marketing costs 14,057,000 10,007,000 26,129,000 16,655,000
General and administrative 6,816,000 3,424,000 12,869,000 6,722,000
Provision for doubtful accounts 770,000 673,000 1,408,000 1,408,000
Depreciation 420,000 170,000 816,000 382,000
Financing and closing costs 540,000 375,000 750,000 515,000
Interest expense 4,661,000 4,803,000 9,321,000 9,602,000
----------------- ---------------- ---------------- ----------------
38,939,000 30,889,000 74,825,000 53,528,000
----------------- ---------------- ---------------- ----------------
Income before minority interest 2,959,000 1,921,000
Minority interest - - - -
----------------- ---------------- ---------------- ----------------
Net (loss) income $ 3,032,000 $ 2,959,000 $ 5,908,000 $ 1,921,000
================= ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
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EPIC RESORTS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30
------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,908,000 $ 1,921,000
Adjustments to reconcile net income to net cash used in operating activities-
Depreciation 816,000 382,000
Amortization of deferred financing costs 654,000 863,000
Provision for doubtful accounts 1,408,000 1,408,000
Gain on sale of receivables and other financing income (12,050,000) (5,319,000)
Accretion of senior secured notes payable 197,000 -
Change in assets and liabilities--
Notes and mortgages (32,363,000) (17,264,000)
receivable
Inventory 9,077,000 4,058,000
Other assets (2,511,000) (1,480,000)
Accounts payable 1,418,000 771,000
Accrued expenses (143,000) (430,000)
Advance deposits 1,000 18,000
Deferred Revenue (49,000) 34,000
----------------- ------------------
Net cash used in operating activities (27,637,000) (15,038,000)
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,317,000) (2,702,000)
Investment in residual interests (12,898,000) (7,122,000)
----------------- ------------------
Net cash used in investing activities (14,215,000) (9,824,000)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (86,000) (61,000)
Cash escrows, net (209,000) (115,000)
Proceeds from sale of receivables 41,948,000 13,241,000
Payment of deferred financing costs (225,000) -
Distributions to members (140,000) (140,000)
----------------- ------------------
Net cash provided by financing activities 41,288,000 12,925,000
----------------- ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (564,000) (11,937,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,359,000 16,095,000
----------------- ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,795,000 $ 4,158,000
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 8,470,000 $ 8,647,000
================= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
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EPIC RESORTS, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
1. BASIS OF PRESENTATION:
The consolidated financial statements have been prepared by the
Registrant, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Registrant believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the audited
financial statements and the notes thereto included in the Registrant's latest
annual report on Form 10-K. In the opinion of the Registrant, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
consolidated financial position and the consolidated results of its operations
and its cash flows, have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the full year.
2. NATURE OF BUSINESS:
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's 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.
3. SALES OF NOTES AND MORTGAGES RECEIVABLE:
During the six months ended June 30, 2000, EPIC sold $48,307,000 of notes
and mortgages receivables as part of its $100 million Vacation Ownership Loan
Participation Facility ("Receivables Facility"). Under this Receivables
Facility, EPIC sells its Vacation Ownership Interest Receivables on a
non-recourse basis to EPIC Master Funding Corporation ("EPIC Funding"), a
wholly-owned subsidiary which is a qualifying special purpose entity as defined
in SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
(i) unpaid principal balance of the receivables sold or (ii) the market value of
such receivables as determined by the financial institution. The Receivable
Facility contains a customary provision requiring the substitution of collateral
in an equal amount if receivables become 60 days past due.
4. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in one industry segment, which includes the
development, acquisition, marketing, financing, and management of vacation
ownership resorts. The Company does not operate outside the United States. The
Company's customers are not concentrated in any specific geographic region and
no single customer accounts for a significant amount of EPIC's revenue.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report, and other written reports and oral statements made
from time to time by EPIC , may contain "forward-looking statements." All
statements that address operating performance, events or developments that
management anticipates will occur in the future, including statements related to
future sales, profits, expenses, and income, or statements expressing general
optimism about future results, are forward-looking statements. In addition,
words such as "expects," "anticipates," "intends," "plans," "believes," and
"estimates," and variations of such words and similar expressions are intended
to identify forward-looking statements.
Because forward-looking statements are based on a number of beliefs,
estimates and assumptions by management that could ultimately prove inaccurate,
there is no assurance that forward-looking statements will prove to be correct.
Any number of factors could affect future operations and results, including the
following: increasing competition; fluctuations in consumer demand and
confidence; fluctuations in costs and expenses; the effectiveness of
advertising, marketing and promotional programs; weather conditions that affect
the geographic areas where the Company's resorts are located; the effectiveness
of the integration of the Company's recently acquired resorts; the timing,
quality and completion of construction and development activities at the
Company's resorts; the timing and availability of governmental permits and
authorizations regarding the Company's resorts; the continued availability and
terms of financing; and other general economic conditions, such as the rate of
employment, inflation and interest rates. This list of factors is not exclusive.
Forward-looking statements are subject to the safe harbors created in the
Securities Act of 1933 and the Securities Exchange Act of 1934. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
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 controlled by Mr. Flatley.
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, 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.
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
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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 Points 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.
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 fewer 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 Torrance, California; Schaumburg, Illinois, Atlanta, Georgia
and in Philadelphia, Pennsylvania. The Company intends to open
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its fifth center in Minnetonka, Minnesota in the third quarter and plans
to add its sixth center 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 Points and
referrals. The Company's completed but unsold inventory of resort units
also provides additional revenue as well as sales and marketing cost
advantages through (i) rental income, (ii) access to a steady source of
high quality, low cost, on-site sales tours from rental customers, and
(iii) lower mini-vacation marketing costs.
The Company'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 Points 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
Points 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.
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.
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.
EPIC believes that its financing is attractive to purchasers who find it
convenient to handle all facets of the purchase of Vacation Ownership Interests
through a single source. In addition, the down payments required by EPIC are
similar to those required by banks and mortgage companies that offer this type
of credit, when such credit is available.
VACATION POINT EXCHANGE NETWORKS
According to the American Resort Developers Association, the primary
reason cited by consumers for purchasing a Vacation Points 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 to exchange their occupancy right for a similar
right at another participating resort, based upon availability and the payment
of a variable exchange fee. Vacation Points can be exchanged by listing the
interest as available with the exchange network 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.
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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
1,700 member resorts.
RESULTS OF OPERATIONS
The following analysis by the management of the Company summarizes the
significant changes in the results of operations presented in the statements of
income for the three and six months ended June 30, 2000 and 1999 and presents
an analysis of the financial condition of the Company as of June 30, 2000.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 TO THE THREE MONTHS ENDED
JUNE 30, 1999
REVENUES: For the three months ended June 30, 2000 the Company generated total
revenues of $42.0 million compared to $33.8 million for the three months ended
June 30, 1999, an increase of $8.2 million, or 24.3%. This increase is primarily
the result of a $6.8 million increase in sales of Vacation Points to $30.0
million for the three months ended June 30, 2000 from $23.2 million for the
comparable period in 1999, an increase of 29.3%. The increased volume is due to
the increased sales locations from seven in 1999 to ten in 2000, along with
growth in sales as the existing locations mature.
Resort operations revenue decreased to $5.3 million for the three months ended
June 30, 2000 from $6.2 million for the comparable period in 1999. This decrease
is attributed to the seasonality of the resorts as well as a decrease in the
number of rental units available to the general public.
Gain on sales of receivables increased to $6.4 million for the three months
ended June 30, 2000 from $3.5 for the comparable prior period. This increase is
attributable to increased sales to the Receivables Facility.
Other income decreased 33.3% to $0.6 million for the three months ended June 30,
2000 from $0.9 million for the comparable period in 1999. This decrease reflects
a reduction in interest income, due to the sale of the notes receivable under
the Company's receivables facility.
COST OF SALES: Cost of sales for Vacation Points as a percentage of sales of
Vacation Points decreased to 17.2% for the three months ended June 30, 2000 from
19.7% for the comparable period in 1999. This decrease was attributable to the
increase in the average sales price of Vacation Points at the resorts.
RESORT OPERATIONS EXPENSE: Resort operations expense decreased 4.3% to $6.6
million for the three months ended June 30, 2000 from $6.9 million for the
comparable period in 1999, reflecting stabilization of the resort division
costs.
SELLING AND MARKETING: Selling and marketing expenses (including commissions) as
a percentage of Sales of Vacation Points increased to 47.5% for the three months
ended June 30, 2000 from 43.1% for the comparable period in 1999. This increase
can be attributed to increased costs needed to generate tours and the
implementation of new marketing programs to continue the company's sales growth.
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GENERAL AND ADMINISTRATIVE: General and administrative expenses increased to
$6.8 million for the three months ended June 30, 2000 from $3.4 million for
the comparable period in 1999. As a percentage of revenues, general and
administrative expenses increased to 16.2% for the three months ended June
30, 2000 from 10.1% for the comparable period in 1999 primarily as a result
of increased staffing required to properly support the company's sales and
marketing locations.
PROVISION FOR DOUBTFUL ACCOUNTS: Provision for doubtful accounts as a percentage
of sales of Vacation Points decreased to 2.6% for the three months ended June
30, 2000 from 2.9% for the comparable period in 1999.
INTEREST EXPENSE: Interest expense decreased to $4.7 million for the three
months ended June 30, 2000 from $4.8 million at June 30, 1999, a decrease of
$.1 million or 2.1%. This decrease is attributable to lower interest related
to equipment loans.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 TO THE SIX MONTHS ENDED
JUNE 30, 1999
REVENUES: For the six months ended June 30, 2000, the Company generated total
revenues of $80.2 million compared to $55.4 million for the six months ended
June 30, 1999, an increase of $24.8 million, or 44.8%. This increase can be
attributed to a $16.9 million increase in sales of Vacation Ownership Points to
$55.8 million in 2000 from $38.9 million in 1999, an increase of 43.4% sales of
Vacation Ownership. Vacation Ownership point sales continue to grow as the sales
locations mature.
Resort operations revenue increased 14.6% to $11.0 million for the six months
ended June 30, 2000 from $9.6 million for the comparable period in 1999, as a
result of increased revenues from package sales and hotel operations. The
Company has benefited from several marketing programs that have helped create
exposure for the resorts and created new business during the first six months of
2000.
Gains on sales of receivables increased to $12.1 million for the six months
ended June 30, 2000 from $5.3 million for the comparable prior period. This
increase is attributable to the higher volume of sales that have been sold to
the receivables facility.
Other income decreased $.2 million for the six months ended June 30, 2000 from
$1.6 million for the comparable period in 1999, due to a decrease in interest
income of $.2 million.
COST OF SALES: Cost of sales for Vacation Ownership Points as a percentage of
sales of Vacation Ownership decreased to 17.7% for the six months ended June 30,
2000 from 19.8% for the comparable period in 1999. This decrease was
attributable to the increase in the average sales price of Vacation Ownership
Points at the resorts.
RESORT OPERATIONS EXPENSE: Resort operations expense increased 24.8% to $13.1
million for the six months ended June 30, 2000 from $10.5 million for the
comparable period in 1999, reflecting increased expenses to support the
additional revenues being generated by transient rentals at the resorts.
SELLING AND MARKETING: Selling and marketing expenses (including commissions) as
a percentage of Sales of Vacation Ownership Points increased to 46.8% for the
six months ended June 30, 2000 from 42.9% for the comparable period in 1999.
This increase was primarily a result of the marketing costs incurred to continue
to implement the Corporate Growth Plan.
GENERAL AND ADMINISTRATIVE: General and Administrative expenses increased to
$12.9 million for the six months ended June 30, 2000 from $6.7 million for the
comparable period in 1999. As a percentage of revenues, general and
administrative expenses increased to 16.1% for the six months ended June 30,
2000 from 12.1% for the comparable period in 1999 primarily as a result of
increased staffing to support the company's sales and marketing locations.
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INTEREST EXPENSE: Interest expense decreased to $9.3 million for the six months
ended June 30, 2000 from $9.6 million for the comparable period in 2000,
reflecting a decrease in the interest payable on the company's equipment loan.
PROVISION FOR DOUBTFUL ACCOUNTS: Provision for doubtful accounts as a percentage
of financed sales of Vacation Ownership Points decreased to 3.2% for the six
months ended June 30, 2000 from 4.1% for the comparable period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations through the sale and financing of
membership interests in Epic Vacation Club, Vacation Ownership Interests,
resort operations, transient rental of resort accommodations and management
fees. With respect to the sale of Vacation Ownership Interests, Epic
generates cash from operations from customer down payments and third party
financing of customer mortgages receivable in amounts typically equal to 90%
of the related customer mortgages receivable. The Company generates
additional cash from the financing of Vacation Ownership Interests equal to
the difference between the interest charged on the customer mortgages
receivable and the interest paid on the notes payable secured by Epic's
pledge of such customer mortgages receivable. The Company expects to generate
additional cash flow from its Vacation Ownership Interests Receivable
portfolio through receipt of the spread between the yield on such portfolio
and the cost of its receivables facility upon completion of securitizations
of such receivables.
The Company requires funds to finance the acquisition and development of resorts
and related inventory, and to finance customer purchases of Vacation Ownership
Interests. These funds are provided by Epic's non-recourse $100 million vacation
ownership loan participation facility. Under this receivables facility, Epic
sells Vacation Ownership Interest receivables to a limited purpose, bankruptcy
remote subsidiary of Epic, and a financial institution purchases from the
subsidiary participation interests in such receivables. The proceeds from the
sale of the participation interests are paid to Epic as consideration for the
receivables sold to the subsidiary. The receivables facility provides for
advance rates of 88% of the lesser of (i) unpaid principal balance of the
receivables sold to the subsidiary or (ii) the market value of such receivables
as determined by the financial institution. The receivables facility provides
non-recourse interim funding for the Vacation Ownership Interests receivables
pending their permanent funding through receivables securitization transactions.
The Company expects to be able to fund a significant portion of its future
development from funds provided by its receivables facility.
The Company's capital resources are provided from the following sources: (i)
cash flows from operations, (ii) proceeds from the receivables facility and
(iii) working capital. The Company intends to pursue a growth-oriented strategy;
accordingly, the Company may, from time to time acquire, among other things,
additional vacation ownership resorts and additional land upon which vacation
ownership resorts may be developed, and companies operating quality resorts or
having vacation ownership assets, management, sales or marketing expertise
commensurate with the Company's operations in the vacation ownership industry.
The Company believes that its available working capital, together with cash
generated from operations and future borrowings, will be sufficient to meet the
Company's working capital and capital expenditure needs for future business
operations. The Company may obtain additional credit facilities or issue other
corporate debt or equity securities in connection with future acquisitions. Any
debt incurred or issued by Epic may be secured or unsecured, at fixed or
variable rates of interest and may be subject to such terms as management deems
prudent.
YEAR 2000
The Year 2000 issue is 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
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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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to interest rate risk in the near term, as
substantially all of the Company's indebtedness is at fixed rates (principally
the $130 million of senior secured notes which bear interest at a fixed rate of
13.0%). The Company does not maintain a trading account for any class of
financial instrument, has never purchased any derivative instruments and is not
directly subject to any foreign currency exchange or commodity price risk.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are included in this Quarterly Report on
Form 10-Q:
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended June 30,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPIC RESORTS, LLC
Dated: August 11, 2000 By: /s/ Scott J. Egelkamp
-----------------------------
Scott J. Egelkamp
Vice President and Chief
Financial Officer
Duly Authorized Principal
Financial Officer
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EXHIBIT INDEX
Exhibit 27. Financial Data Schedule
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