-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KUVikiv0mD4c/KD2r0p1bT/+qTk/SLZnMzjwhUlvQGLYqMtevE1iINlP+AfeFSEz JmK3j0mMyyv+mCP6ENhBQg== 0000912057-00-018217.txt : 20000417 0000912057-00-018217.hdr.sgml : 20000417 ACCESSION NUMBER: 0000912057-00-018217 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC RESORTS LLC CENTRAL INDEX KEY: 0001068052 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE AGENTS & MANAGERS (FOR OTHERS) [6531] IRS NUMBER: 232888968 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433 FILM NUMBER: 602064 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVE., SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC CAPITAL CORP CENTRAL INDEX KEY: 0001068051 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-01 FILM NUMBER: 602065 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVE., SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LONDON BRIDGE RESORT LLC CENTRAL INDEX KEY: 0001068053 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-02 FILM NUMBER: 602066 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVE., SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC WARRANT CO CENTRAL INDEX KEY: 0001068054 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-03 FILM NUMBER: 602067 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVE., SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC RESORTS SCOTTSDALE LINKS RESORT LLC CENTRAL INDEX KEY: 0001068055 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-04 FILM NUMBER: 602068 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVE., SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC RESORTS WESTPARK RESORT LLC CENTRAL INDEX KEY: 0001068056 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-05 FILM NUMBER: 602069 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVE., SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC RESORTS HILTON HEAD LLC CENTRAL INDEX KEY: 0001068057 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-06 FILM NUMBER: 602070 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVE., SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC RESORTS PALM SPRINGS MARQUIS VILLAS LLC CENTRAL INDEX KEY: 0001068058 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-07 FILM NUMBER: 602071 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVE., SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAYTONA BEACH REGENCY LTD CENTRAL INDEX KEY: 0001068059 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-08 FILM NUMBER: 602072 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVE., SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESORT MANAGEMENT LLC CENTRAL INDEX KEY: 0001068060 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-09 FILM NUMBER: 602073 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVE., SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESORT INVESTMENT LLC CENTRAL INDEX KEY: 0001068077 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-10 FILM NUMBER: 602074 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVENUE STREET 2: SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920100 MAIL ADDRESS: STREET 1: 1150 FIRST AVENUE STREET 2: SUITE 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC TRAVEL LLC CENTRAL INDEX KEY: 0001068301 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-11 FILM NUMBER: 602075 BUSINESS ADDRESS: STREET 1: 1150 FIRST AVENUE #900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC MARKETING LLC CENTRAL INDEX KEY: 0001072441 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-14 FILM NUMBER: 602076 BUSINESS ADDRESS: STREET 1: C/O EPIC RESORTS INC STREET 2: 1150 FIRST AVE # 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 MAIL ADDRESS: STREET 1: C/O EPIC RESORTS INC STREET 2: 1150 FIRST AVE #900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC RESORTS VACATION SHOWPLACE LLC CENTRAL INDEX KEY: 0001072442 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-12 FILM NUMBER: 602077 BUSINESS ADDRESS: STREET 1: C/O EPIC RESORTS INC STREET 2: 1150 FIRST AVE # 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 MAIL ADDRESS: STREET 1: C/O EPIC RESORTS INC STREET 2: 1150 FIRST AVE #900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIC RESORTS MANAGEMENT LLC CENTRAL INDEX KEY: 0001072443 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61433-13 FILM NUMBER: 602078 BUSINESS ADDRESS: STREET 1: C/O EPIC RESORTS INC STREET 2: 1150 FIRST AVE # 900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6109920110 MAIL ADDRESS: STREET 1: C/O EPIC RESORTS INC STREET 2: 1150 FIRST AVE #900 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- 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 ----------- 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 ----------- 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. Documents incorporated by reference: NONE ================================================================================ 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. 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. 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).
1997 1998 1999 ---- ---- ---- YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31 DECEMBER 31 DECEMBER 31 ----------- ----------- ----------- 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
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. 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. 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. 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.
1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- AS OF OR FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICE DATA) 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 ----------------------------------------------------------- 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 ----------------------------------------------------------- Income (loss) before minority interest and extraordinary item... (480) (562) 6,814 8,465 2,094 Minority interest............................................... - (473) 1,676 1,190 - ----------------------------------------------------------- Income (loss) before extraordinary item......................... (480) (89) 5,138 7,275 2,094 Extraordinary gain (loss) on settlement of debt................. 5,077 - - (5,364) - ----------------------------------------------------------- Net income (loss)............................................... $4,597 $(89) $5,138 $1,911 2,094 ----------------------------------------------------------- ----------------------------------------------------------- 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
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:
RESORT PROPERTY DATE ACQUIRED --------------- ------------- 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
- ---------- * 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. 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. 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 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. 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 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. 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. 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 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 Epic Resorts, LLC CONSOLIDATED BALANCE SHEETS December 31,
ASSETS 1999 1998 ---------------- --------------- 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 ---------------- --------------- ---------------- ---------------
The accompanying notes are an integral part of these statements. Epic Resorts, LLC CONSOLIDATED STATEMENTS OF INCOME Years ended December 31,
1999 1998 1997 -------------- ------------- ------------- 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 -------------- ------------- ------------- -------------- ------------- -------------
The accompanying notes are an integral part of these statements. Epic Resorts, LLC CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY Years ended December 31, 1999, 1998 and 1997 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 ----------- -----------
The accompanying notes are an integral part of these statements. Epic Resorts, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
1999 1998 1997 -------------- ------------- ------------- 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 ------------- -------------- -------------- ------------- -------------- --------------
The accompanying notes are an integral part of these statements. 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) 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) 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) 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) 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: 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 ----------- -----------
The activity in the notes and mortgages receivable allowance for doubtful accounts is as follow:
DECEMBER 31, --------------------------------------------------- 1999 1998 1997 ---------------- --------------- ---------------- 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 ---------------- --------------- ---------------- ---------------- --------------- ----------------
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) 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:
1999 1998 1997 ---------------- --------------- --------------- 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 $ - ---------------- --------------- --------------- ---------------- --------------- ---------------
NOTE D - INVENTORY Inventory and accumulated cost of sales consist of the following as of December 31:
1999 1998 ---------------- ----------------- 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 ---------------- ----------------- ---------------- -----------------
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:
1999 1998 --------------- ---------------- 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 --------------- ---------------- --------------- ----------------
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) 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:
1999 1998 --------------- --------------- 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 --------------- --------------- --------------- ---------------
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. 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:
YEAR ENDING DECEMBER 31, ------------------------ 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 ------------ ------------
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: 2000 $ 983,000 2001 906,000 2002 715,000 2003 577,000 2004 380,000 Thereafter 8,327,000 ----------- $ 11,888,000 ----------- -----------
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. 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:
FOR THE YEAR ENDED DECEMBER 31, 1999 -------------------------------------------------------------------------------- 1ST 2ND 3RD 4TH TOTAL ---------- ---------- ---------- ---------- ----------- 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 ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
(Continued) Epic Resorts, LLC NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1999, 1998 and 1997 NOTE K - SUMMARY OF QUARTERLY RESULTS (UNAUDITED) - Continued
FOR THE YEAR ENDED DECEMBER 31, 1998 --------------------------------------------------------------------------------- 1ST 2ND 3RD 4TH TOTAL ----------- ------------ ----------- ----------- ----------- 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 ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- -----------
------------------------------------ (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.
NAME AGE POSITION - ---- --- -------- Thomas F. Flatley............................................ 48 President and Chief Executive Officer Scott J. Egelkamp............................................ 41 Vice President and Chief Financial Officer
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.
FISCAL SALARY BONUS ALL OTHER NAME AND PRINCIPAL POSITION YEAR ------ ----- COMPENSATION - --------------------------- ---- ------------ ANNUAL COMPENSATION ------------------- 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
---------- (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 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
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------ ----------------------- 3.1 Certificate of Formation of Epic Resorts, LLC. (incorporated by reference to Exhibit 3.1 to the Company's registration statement on Form S-4, File No. 333-61433) 3.2 Operating Agreement of Epic Resorts, LLC. (incorporated by reference to Exhibit 3.2 to the Company's registration statement on Form S-4, File No. 333-61433) 3.3 By-Laws of Epic Resorts, LLC. (incorporated by reference to Exhibit 3.3 to the Company's registration statement on Form S-4, File No. 333-61433) 3.4 Certificate of Incorporation of Epic Vacation Club. 3.5 By-Laws of Epic Vacation Club (to be filed on a Current Report on Form 8-K) 4.1 Indenture, dated July 8, 1998 between Epic Resorts, LLC, Epic Capital Corp., the Subsidiary Guarantors signatory thereto and United States Trust Company of New York, as Trustee relating to the 13% Senior Secured Redeemable Notes due 2005 (the form of which is included in such indenture). (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-4, File No. 333-61433) 4.2 Form of Global Exchange Note (included in Exhibit 4.1). (incorporated by reference to Exhibit 4.2 to the Company's registration statement on Form S-4, File No. 333-61433) 4.4 First Supplemental Indenture, dated January 7, 1999 between Epic Resorts, LLC, Epic Capital Corp., the Subsidiary Guarantors signatory thereto, Epic Marketing, LLC, Epic 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 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.
(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 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.
SIGNATURE TITLE DATE --------- ----- ---- 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
EX-4.4 2 EXHIBIT 4.4 ================================================================================ 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 ================================================================================ THIS FIRST SUPPLEMENTAL INDENTURE (the "FIRST SUPPLEMENTAL INDENTURE"), dated as of January 7, 1999, between EPIC RESORTS, LLC, a Delaware limited liability company ("EPIC"), EPIC CAPITAL CORP., a Delaware corporation ("CAPITAL CORP.", and together with Epic, the "ISSUERS"), the Subsidiary Guarantors named on the Signature Page hereto (the "SUBSIDIARY GUARANTORS"), Epic Resorts - Vacation Showplace, a Delaware limited liability company ("SHOWPLACE"), Epic Resorts Management, LLC, a Delaware limited liability company ("MANAGEMENT"), Epic Marketing, LLC, a Delaware limited liability company ("MARKETING") and UNITED STATES TRUST COMPANY OF NEW YORK, a banking corporation organized and existing under the laws of the State of New York, in its capacity as trustee (the "TRUSTEE"). RECITALS: A. The Issuers, the Subsidiary Guarantors and Trustee entered into that certain Indenture, dated as of July 8, 1998 (the "INDENTURE"). B. On September 3, 1998, Epic formed two new subsidiaries, Showplace and Management, and on October 5, 1998, Epic formed another new subsidiary, Marketing. Each subsidiary was formed as a limited liability company under the laws of the State of Delaware. Showplace, Management and Marketing are sometimes collectively referred to herein as the "New Subsidiary Guarantors." C. The amendments to the Indenture as hereinafter set forth are permitted under Section 9.01(a)(iv) of the Indenture without the consent of any Securityholder. The Issuers have delivered, or caused to be delivered to the Trustee, an opinion of counsel to that effect. D. This First Supplemental Indenture has been duly authorized by all necessary corporate action on the part of the Issuers, the Subsidiary Guarantors and each New Subsidiary Guarantor. E. The Issuers have delivered, or caused to be delivered to the Trustee, an Officer's Certificate and an Opinion of Counsel stating that all conditions precedent and covenants, if any, provided for in the Indenture relating to this First Supplemental Indenture have been satisfied. AGREEMENT: The Issuers, the Subsidiary Guarantors, the New Subsidiary Guarantors and the Trustee mutually covenant and agree for the equal and proportionate benefit of the respective Holders from time to time of the Securities as follows: SECTION 1. DEFINITIONS. Capitalized terms used in this First Supplemental Indenture and not otherwise defined herein have the meanings given them in the Indenture. SECTION 2. ADDITIONAL SUBSIDIARY GUARANTORS. 2.1. RESTRICTED SUBSIDIARIES. None of the New Subsidiary Guarantors has been designated as an Unrestricted Subsidiary pursuant to Section 4.19 of the Indenture, and therefore 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 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 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 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 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 EX-4.5 3 EXHIBIT 4.5 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. 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: "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 3 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 4 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. 5 (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 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 7 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 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 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. 10 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] 11 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 EPIC RESORTS - PALM SPRINGS MARQUIS VILLAS, LLC By: /s/ T. F. Flatley -------------------------------------- Title: President EPIC RESORTS - SCOTTSDALE LINKS RESORT, LLC By: /s/ T. F. Flatley -------------------------------------- Title: President EPIC RESORTS - HILTON HEAD RESORT, LLC By: /s/ T. F. Flatley -------------------------------------- Title: President EPIC RESORTS - WESTPARK RESORT, LLC By: /s/ T. F. Flatley -------------------------------------- Title: President DAYTONA BEACH REGENCY, LTD., by Resort Management, LLC, its general partner By: /s/ T. F. Flatley -------------------------------------- Title: President LONDON BRIDGE RESORT, LLC By: /s/ T. F. Flatley -------------------------------------- Title: President 13 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 EXHIBIT J EX-10.18 4 EXHIBIT 10.18 1 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: "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"). 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 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 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 (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 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 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 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 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 EX-21 5 EXHIBIT 21 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 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 EX-27 6 EXHIBIT 27
5 0001068052 EPIC RESORTS LLC YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 14,363,000 29,465,000 13,502,000 1,628,000 65,804,000 0 21,087,000 5,422,000 149,551,000 9,818,000 128,976,000 0 0 0 13,800,000 149,551,000 84,163,000 118,848,000 15,727,000 77,973,000 17,652,000 2,092,000 19,039,000 2,094,000 0 2,094,000 0 0 0 2,094,000 0 0
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