<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1997; or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to .
Commission File Number 0-6106
UNITED LEISURE CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-2652243
- --------------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S.
Employer Incorporation or Organization) Identification No.)
18081 MAGNOLIA AVE., FOUNTAIN VALLEY, CALIFORNIA 92708
(Address of Principal Executive Offices)
(Zip Code)
(714) 378-8761
(Registrant's Telephone Number, Including Area Code)
Check whether the Issuer (1) filed all reports to be filed by Section 13 or
15(d) 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 at least the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at November 5, 1997
- ----------------------------- -------------------------------
COMMON STOCK, PAR VALUE 12,618,849 SHARES
$.01 PER SHARE
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
<PAGE> 2
PART I--FINANCIAL INFORMATION
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPT. 30, 1997 DEC. 31, 1996
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 253,231 $ 3,845,653
Receivables 16,812 128,843
Inventory 19,190 30,308
Prepaid expenses 89,724 90,958
------------ ------------
TOTAL CURRENT ASSETS 378,957 4,095,762
PROPERTY AND EQUIPMENT,
Less accumulated depreciation and amortization 6,189,020 6,578,586
OTHER ASSETS
Due from related parties 529,401 331,117
Loan receivable-Grand Havana Enterprises, Inc. 775,000
Investment in Grand Havana Enterprises, Inc. 1,335,000 511,766
Investment in HEP II 845,500 1,120,500
Investment in United Hotel & Casino 3,773,500
Restricted cash 884,434 875,000
Intangible assets, net of accumulated amortization 21,720 33,320
Deposits 135,474 208,835
------------ ------------
TOTAL OTHER ASSETS 8,300,029 3,080,538
------------ ------------
$ 14,868,006 $ 13,754,886
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 900,000 $
Accounts payable and accrued expenses 1,240,165 623,015
Deferred revenues 116,165 143,945
Deposits and other 104,275 124,275
------------ ------------
TOTAL CURRENT LIABILITIES 2,360,605 891,235
LONG TERM DEBT 2,742,000 842,000
------------ ------------
TOTAL LIABILITIES 5,102,605 1,733,235
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 126,188 123,688
Unrealized gain on investment 291,250 181,766
Capital in excess of par value 24,386,958 24,326,458
Accumulated deficit (15,038,995) (12,610,261)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 9,765,401 12,021,651
------------ ------------
$ 14,868,006 $ 13,754,886
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 3
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Rentals $ 0 $ 645,790 $ 79,383 $ 1,072,106
Children's recreational activities 1,123,752 1,514,643 2,294,528 2,580,429
------------ ------------ ------------ ------------
TOTAL REVENUES 1,123,752 2,160,433 2,373,911 3,652,535
------------ ------------ ------------ ------------
OPERATING EXPENSES
Occupancy 1,279,514 1,435,004 3,201,062 3,537,402
Selling, general and administrative 278,014 236,087 673,482 635,777
Depreciation and amortization 183,101 113,409 556,673 340,226
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 1,740,629 1,784,500 4,431,217 4,513,405
------------ ------------ ------------ ------------
LOSS BEFORE OTHER INCOME
(EXPENSE) AND INCOME TAXES (616,877) 375,933 (2,057,306) (860,870)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 105,992 106,493 276,940 299,597
Interest expense (86,827) (27,742) (128,954) (62,843)
Legal costs (47,288) (518,710) (152,521)
Management Consulting Expense (187,500) 0 (187,500) 0
Write-off disputed contingency claim 1,128,973 1,128,973
Equity in net earnings of United
Hotel & Casino 22,000 22,000
Other 57,411 820 164,797 92,017
------------ ------------ ------------ ------------
TOTAL OTHER INCOME
(EXPENSE) (136,212) 1,208,544 (371,427) 1,305,223
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES (753,089) 1,584,477 (2,428,733) 444,353
INCOME TAXES 0 51,453 0 63,073
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (753,089) $ 1,533,024 $ (2,428,733) $ 381,280
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 12,791,926 12,452,849 12,791,926 12,452,849
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE $ (.06) $ .12 $ (.019) $ .03
============ ============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $(2,428,733) $ 381,280
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization
of property and equipment 545,073 313,886
Amortization of intangibles 11,600 26,340
Equity in net earnings of
United Hotel & Casino (22,000) --
Common stock issued for services 63,000 --
Gain from write-off of provision
for disputed contingent claim (1,128,973)
Changes in operating assets and liabilities:
Receivables 112,031 (128,054)
Inventory 11,118 (12,607)
Prepaid expenses 1,234 (39,193)
Pre-opening costs (48,370)
Deposits 73,361 59,442
Accounts payable and accrued expenses 617,150 (17,312)
Income taxes payable 68,200
Due from related party (198,284)
Earned interest on restricted cash (9,434)
Deferred revenue and other (186,531) 4,324
---------- ----------
NET CASH USED IN OPERATING
ACTIVITIES (1,410,415) (521,037)
----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchase of property and equipment (155,507) (1,877,234)
Lease acquisition costs 1,585
Loan receivable from Grand Havana Enterprises, Inc. (775,000)
Investment in Grand Havana Enterprises, Inc. (575,000)
Investment in HEP II 275,000 (1,750,000)
Investment in United Hotel & Casino (3,751,500)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,982,007) (3,625,649)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Note payable - Bibicoff 900,000
Note payable - Westminster 1,900,000
Repayment of related party advances (901,192)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES 2,800,000 (901,192)
----------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (3,592,422) (5,047,878)
CASH AND CASH EQUIVALENTS, Beginning 3,845,653 9,929,785
----------- -----------
CASH AND CASH EQUIVALENTS, End $ 253,231 $ 4,881,907
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid $ 128,954 $ 62,843
Income taxes paid $ 13,073
Interest received $ 276,940 $ 96,696
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
The Company issued an aggregate of 250,000 shares
of its common stock for services rendered $ 70,000 $ --
The Company issued an aggregate of 150,000 warrants
to purchase its common stock $ 1,500 $ --
The Company issued options to purchase an aggregate
of 150,000 shares of its common stock to
members of its Board of Directors $ 1,500 $ --
The Company exchanged a note receivable for
outstanding options to one of its directors $ (10,000) $ --
--------- ---------
$ 63,000 $
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
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UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the annual
consolidated financial statements. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the footnotes thereto contained in the Annual Report on
Form 10-KSB for the year ended December 31, 1996 of United Leisure
Corporation and its subsidiaries (collectively, the Company), as filed
with the Securities and Exchange Commission. The December 31, 1996 balance
sheet was derived from audited consolidated financial statements, but does
not include all disclosures required by generally accepted accounting
principles.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (which are of a normal
recurring nature) necessary for a fair presentation of the financial
statements. The results of operations for the nine months ended September
30, 1997 are not necessarily indicative of the results to be expected for
the full fiscal year.
Concentration of Risk. The Company invests is excess cash in certificates
of deposit and money market funds, which, at times, may exceed federally
insured limits. The Company maintains its accounts with financial
institutions with high credit ratings.
Inventory. Inventory consists primarily of merchandise held for sale at
the Company's play learning centers. Inventory is stated at the lower of
cost (first-in, first-out) or market.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Termination of Ground Lease. The Company's major asset, a ground lease
(the "Ground Lease"), covering approximately 300 acres of real estate in
Irvine, California (the "Irvine Property"), terminated in February, 1997.
The Company, through its subsidiary, Lion Country Safari, Inc., has been
engaged in protracted and expensive litigation with its landlord, The
Irvine Company, relating to the Ground Lease, since 1987 (the "Irvine
Company Litigation"). Due to the inherent uncertainties of litigation,
there can be no assurance as to the outcome of the Irvine Company
Litigation. See Note 3, below. Historically, the Company had derived most
of its income from its sublease activities with respect to the Ground
Lease. During the last several years the Company has sought to diversify
its operations by increasing its children's recreational activities which
are unrelated to the Ground Lease, in particular, with respect to the
establishment of its children's play-learning centers known as "Planet
Kids", and the establishment of additional children's day camps, known as
"Camp Frasier" on locations other than the Irvine Property. There can be
no assurance that this new business area for the Company will be
successful.
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In addition, United Hotel & Casino, LLC, a limited liability company in
which the Company holds a 50% membership interest ("UHC"), acquired a
shopping center in Las Vegas, Nevada in July 1997. Although the Company
has previous experience in managing real property as a result of its
sublease activities with respect to the Ground Lease, the Company has
never owned or managed a commercial shopping center in Las Vegas, Nevada,
and there can be no assurance that the Company, through its representative
on the Management Committee of UHC, will be able to do so successfully.
3. LEGAL PROCEEDINGS
The Irvine Company Litigation arose out of various disputes between the
Company and its landlord, The Irvine Company, under the Ground Lease. A
trial of The Irvine Company Litigation was commenced in early October
1993, and in November 1993, the Company was awarded a jury verdict in the
total approximate amount of $42 million, and Irvine was denied any
recovery against the Company.
In April 1994, after a hearing on post-verdict motions brought by Irvine
for a new trial and/or judgment notwithstanding the verdict, the court
granted a new trial on all issues and denied Irvine's motion for a
judgment notwithstanding the verdict on the basis that the evidence was
not sufficient to justify the verdict reached by the Jury. The Company has
appealed this Order and intends to vigorously continue its prosecution of
The Irvine Company Litigation. The appeal has been fully briefed and is
currently scheduled for oral argument on November 18, 1997. There can be
no assurance as to the ultimate outcome of The Irvine Company Litigation.
On or about March 5, 1997, Irvine sued the Company for unlawful detainer.
Essentially, Irvine alleged that its Ground Lease with the Company expired
on February 28, 1997 and that Irvine was therefore entitled to immediate
possession of the leasehold premises. The Company contends that it has the
right, and has exercised the right to extend the initial term of the
Ground Lease for another 26 years. Judgment was entered granting the
Irvine Company possession of the Irvine Property on April 25, 1997. The
Company has appealed the judgment in this action, which appeal remains
pending. In view of the inherent uncertainties of litigation, no
prediction can be made as to the outcome of these matters.
For a further description of the above-described litigation and other
litigation in which the Company is involved, see Part II, Item 1, "Legal
Proceedings," of this Quarterly Report on Form 10-QSB.
7
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4. RELATED PARTY TRANSACTIONS
In February 1997, the Company entered into a financing agreement with
Grand Havana Enterprises, Inc. ("Grand Havana") whereby the Company agreed
to provide advances to Grand Havana, from time to time, during a period of
six months, of up to $1,250,000. As of September 30, 1997, the Company had
advanced to Grand Havana an aggregate of $775,000. Subsequent to September
30, 1997, $75,000 of the amount advanced was repaid. The maturity date of
the loan has been extended to March 31, 1998. Interest on the amount
advanced bears interest at the rate of 8% per annum. Harry Shuster, the
Chairman of the Board, President and Chief Executive Officer of the
Company is the Chairman of the Board and Chief Executive Officer of Grand
Havana.
On July 28, 1997, the Company and Harvey Bibicoff, a director of Grand
Havana, entered into a letter agreement pursuant to which the Company, in
consideration for management consulting services rendered by Mr. Bibicoff
to the Company, agreed (i) to transfer to Mr. Bibicoff, on or prior to
August 1, 1999, a 2-1/2% membership interest in the LLC free and clear of
any liens, claims, or encumbrances and (ii) to issue 150,000 shares of the
authorized but unissued shares of the common stock of the Company to Mr.
Bibicoff.
On July 15, 1997, the Company entered into an amendment to the financing
agreement dated as of September 10, 1996 between the Company and Grand
Havana, pursuant to which agreement the Company had agreed to provide
collateral for a letter of credit for $875,000 on behalf of Grand Havana.
The amendment to the financing agreement permits Grand Havana to forego
the requirement that it replace the collateral out of the initial
membership fees it receives from certain of its Grand Havana Room private
membership cigar clubs, in consideration for which Grand Havana agreed to
grant to the Company or its designee a three-year warrant to purchase
150,000 shares of the common stock of Grand Havana exercisable at the
lesser of $.75 per share of 75% of the average trading price of the common
stock of Grand Havana for a ten day period prior to the exercise of the
warrant. The Company subsequently designated Westminster Capital, Inc.,
which is not an affiliate of the Company, to receive this warrant from
Grand Havana in connection with the financing obtained by the Company in
connection with the acquisition of the Las Vegas Property. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview".
In connection with obtaining the necessary financing required for the
acquisition of the Las Vegas Property, Harvey Bibicoff made a 60- day loan
to the Company in the aggregate amount of $900,000. Subsequent to the
fiscal quarter ended September 30, 1997, $875,000 was paid down against
this loan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
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5. NEW ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share."
Under the new requirements, primary earnings per share will be renamed
basic earnings per share and will exclude the dilutive effect of stock
options. The statement is effective for annual and interim periods ending
after December 15, 1997. Earlier application is not permitted. After the
effective date, the Statement requires that all prior period earnings per
share data presented be restated to conform with the provisions of this
statement. The impact will not change primary earnings per share for the
three month and nine month periods ended September 30, 1997.
In February 1997, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure" which is effective for financial
statements ending after December 15, 1997. The new standard reinstates
various securities disclosure requirements previously in effect under APB
Opinion No. 15, which has been superseded by this statement. The Company
does not expect adoption of this statement to have a material effect, if
any, on its financial position or results of operations.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which is effective for financial statements with fiscal years
beginning after December 15, 1997. Earlier application is permitted. This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements. As of
September 30, 1997 the Company had items of other comprehensive income.
Had the Company adopted this statement during the three month and nine
month periods ended September 30, 1997, the statement of comprehensive
income would be as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net loss $(753,089) $(2,428,733)
Other comprehensive income (loss),
net of tax:
Unrealized gain on investment 445,126 109,484
----------- -----------
Comprehensive loss $ (307,963) $(2,319,249)
=========== ===========
</TABLE>
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which is effective for
financial statements beginning after December 15, 1997. The new standard
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the
enterprises and in condensed financial statements of interim periods
issued to shareholders. It also requires
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that public business enterprises report certain information about their
products and services, the geographic areas in which they operate and
their major customers. The Company does not expect adoption of this
statement will have a material effect, if any, on its results of
operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
To the extent any of the statements contained herein contain
forward-looking statements, such statements are based on current expectations
that involve a number of uncertainties and risks that could cause actual results
to differ materially from those projected in the forward-looking statements,
including risks and uncertainties associated with the costs of the litigation in
which the Company is involved, the outcome of this litigation and the costs
associated with the development of projects to be undertaken by the Company in
the future, including the acquisition and development of the Las Vegas Property
by United Hotel & Casino, L.L.C., as discussed below.
OVERVIEW
Until recently, the primary business of United Leisure Corporation, a
Delaware corporation (the "Company"), had been to act as a developer and manager
(rather than an operator) under a ground lease with The Irvine Company, which
ground lease covered approximately 300 acres of real estate in Irvine,
California (the "Ground Lease"). The Ground Lease terminated on February 28,
1997, and although litigation remains pending with respect to various aspects of
the Ground Lease, the Company does not anticipate that it will have any future
income from its Ground Lease operations. The Company has been planning for the
termination of its Ground Lease for the past several years, and its income from
its Ground Lease operations has been reduced as a percentage of its total income
from operations in the last several years.
The Company currently operates three Camp Frasier day camp locations,
three Planet Kids play/learning centers and one Frasier's Frontier, an amusement
park. The Company intends to continue to operate each of these locations;
however, the Company does not currently anticipate that it will continue to
expand its children's educational and recreational activities in the future.
On July 29, 1997, United Hotel & Casino, L.L.C., a Delaware limited
liability company ("UHC"), of which the Company currently owns a 50% membership
interest, acquired, in fee simple, approximately 8.5 acres of partially
developed land on the Las Vegas Strip in Las Vegas, Nevada (the "Las Vegas
Property"). The Las Vegas Property is located at 3025 Las Vegas Boulevard and
currently contains a shopping center consisting of approximately 20 retailers
and The Silver City Casino. Upon the acquisition of the Las Vegas Property, UHC
became the lessor of the shopping center and the Silver City Casino. The Silver
City Casino is owned and operated by Circus Circus and it is anticipated that
Circus Circus will continue to operate this casino on the Las Vegas Property.
UHC currently intends to continue to lease the existing shopping center on the
Las Vegas Property, but in the future UHC may determine to further develop the
Las Vegas Property. The Company has
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the right to appoint one member of the three member management committee of UHC.
Since 1986 the Company has been engaged in protracted and expensive
litigation involving the Ground Lease with its landlord, The Irvine Company, in
Orange County Superior Court (Case No. 49-12-02). The case is styled The Splash
v. The Irvine Company, et al. (the "Irvine Company Litigation"). The Irvine
Company Litigation, as well as several other actions between the Company and The
Irvine Company, and actions between the Company and its subtenants under the
Ground Lease, are still pending. In the Irvine Company Litigation the Company
was awarded a jury verdict in the total approximate amount of $42 million in
November 1993, and the Irvine Company was denied any recovery against the
Company on its claims. In April 1994, the Court granted a new trial on
post-verdict motions brought by The Irvine Company. The Company has appealed
this order. The appeal has been fully briefed and is currently scheduled for
oral argument on November 18, 1997. If a new trial is ordered in connection with
the Irvine Company Litigation, the Company anticipates that it may have to incur
substantial additional legal fees. In view of the inherent uncertainties of
litigation, the ultimate outcome of the Irvine Company Litigation cannot be
predicted. See Part II, Item 1, "Legal Proceedings."
During the nine months ended September 30, 1997 the Company's operations
consisted of two business segments, facility rentals, pursuant to which the
Company subleased or otherwise allowed others to use the Irvine Property, which
activities ceased at the termination of the Ground Lease on February 28, 1997,
and children's recreational activities which includes the operation of the
Company's Camp Frasier locations, Planet Kids locations and Frasier's Frontier.
The Company had total operating revenues from its Ground Lease operations of
$79,383 for the nine month period ended September 30, 1997 as compared to
$1,072,106 for the nine month period ended September 30, 1996, a decrease of
$992,723, due to the fact that the Company's operations with respect to the
Ground Lease ceased on February 28, 1997. The Company had total operating
revenues from its children's recreational activities of $2,294,528 for the nine
month period ended September 30, 1997 compared to $2,580,429 for the comparable
period in 1996.
All of the Company's current operations, other than its recent acquisition
of the Las Vegas Property through UHC, of which the Company holds a 50%
membership interest, are conducted in Southern California. The Company's Camp
Frasier operations are also seasonal in nature, conducted during the summer
season. Inflation in recent years has not been an important factor in the
Company's operations.
Las Vegas Property Acquisition. The purchase of the Las Vegas Property
closed on July 29, 1997. The Las Vegas Property is located at 3025 Las Vegas
Boulevard and currently contains a shopping center consisting of retailers and
The Silver City Casino, which is currently responsible for approximately 50% of
the rental income received by UHC from the Las Vegas Property. Upon the
acquisition of the
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Las Vegas Property, UHC became the lessor of the shopping center and the Silver
City Casino. The Silver City Casino is owned and operated by Circus Circus and
it is anticipated that Circus Circus will continue to operate this casino on the
Las Vegas property. UHC currently intends to continue to lease the existing
shopping center on the Las Vegas Property. UHC is determining its future use of
the Las Vegas Property. The Company has the right to appoint one member of the
three member Management Committee of the UHC.
The aggregate purchase price for the Las Vegas Property was approximately
$23,200,000, which was paid by a cash payment of approximately $5,590,000, by a
one-year note being carried by the seller of the Las Vegas Property in the
amount of $1,250,000 and by assumption of a first deed of trust on the Las Vegas
Property by UHC in the principal amount of approximately $16,360,000. Of the
cash down payment, the Company contributed approximately $3,800,000 to UHC as an
additional capital contribution which was used to make such cash down payment.
The Company obtained the $3,800,000 to make the additional capital
contribution in part from its working capital and in part from two different
loans as discussed below.
Concurrently with the closing of UHC's purchase of the Las Vegas Property,
Westminster Capital, Inc. ("Westminster"), an unrelated third party, made a loan
of $1,900,000 (the "Westminster Loan") to the Company to enable it to meet its
additional $3,800,000 capital contribution obligation. The loan was evidenced by
a Secured Convertible Promissory Note made by the Company and is secured by
Harry Shuster and Nita Shuster, the spouse of Harry Shuster. Harry Shuster is
the Chairman of the Board, President and Chief Executive Officer of the Company
and currently serves as a member of the Management Committee of UHC. The
Westminster Loan bears interest at the rate of 15% per annum and is due on the
earlier to occur of (i) the demand of the Holder (which demand may not be made
until July 29, 1998 unless there is a sooner event of default) or (ii) July 29,
1999 (the "Maturity Date"). The holder of the Note has the right, at any time
prior to the Maturity Date, to convert the entire outstanding principal balance
of the Note into a 25% membership interest in UHC, which would leave the Company
with a 25% membership interest in UHC after such conversion (or a 22-1/2%
membership interest at August 1, 1999, the date by which the Company has agreed
to transfer a 2-1/2% membership interest to Harvey Bibicoff in consideration for
management consulting services rendered). The Note may be prepaid by the
Company at any time after July 29, 1998. One-half of any cash distributions
which may be made by UHC to the Company prior to the repayment of the Note are
required to be paid to Westminster as a prepayment on the Note.
The Westminster Loan is secured by, among other things, a stock pledge
agreement pursuant to which the Company has pledged 408,333 of the 941,666
shares it owns in Grand Havana, an affiliated public company of which Harry
Shuster is the Chairman of the Board, President and Chief Executive Officer. As
additional
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security, the Company has granted a security interest to Westminster, pursuant
to a Security Agreement dated as of July 29, 1997, in the Company's 50%
membership interest in UHC and in the receivables and certain indebtedness due
to the Company from Grand Havana (approximately $775,000 in principal amount at
September 30, 1997). In addition, Harry Shuster and his spouse provided certain
other security individually with respect to the Westminster Loan.
As additional consideration for Westminster making the Westminster Loan
the Company granted Westminster a three-year warrant to purchase 150,000 shares
of the common stock of the Company exercisable at a per share price equal to the
lesser of $.40 or 75% of the average of the last trade prices for the ten
trading days immediately preceding the exercise of the warrants. At the request
of the holder of the warrants, the Company has filed a registration statement to
register the shares of common stock underlying the warrants. In addition, Grand
Havana, pursuant to the terms of an amendment dated July 15, 1997, to a
financing agreement dated September 10, 1996, between Grand Havana and the
Company, granted Westminster, as designee of the Company, a three-year warrant
to purchase 150,000 shares of the common stock of Grand Havana exercisable at a
per share price equal to the lesser of $.75 or 75% of the average of the last
trade prices for the ten trading days immediately preceding the exercise of the
warrants.
On July 29, 1997, Harvey Bibicoff, an individual, loaned to the Company
$900,000 (the "Bibicoff Loan"). The Bibicoff Loan is evidenced by a promissory
note, bears interest at the rate of 10% per annum and is due and payable on
September 28, 1997. Subsequent to the fiscal quarter ended September 30, 1997,
$875,000 of the $900,000 principal amount was repaid on this loan.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996.
The Company's business has historically been highly seasonal, with the
second and third quarters of each year being the strongest quarters of
operation. During the Company's third quarter ended September 30, 1997, the
Company received total revenues of $1,123,752, compared to revenues of
$2,160,433 for the third quarter of 1996. The decrease in revenues was primarily
due to the fact that the Company had no rental income from its Ground Lease
operations for the fiscal quarter ended September 30, 1997 compared to revenues
of $645,790 from its Ground Lease operations for its fiscal quarter ended
September 30, 1996. The Company's revenues from its children's recreational
activities for the comparable periods decreased from $1,514,643 for the fiscal
quarter ended September 30, 1996 to $1,123,752 for the fiscal quarter ended
September 30, 1997, a decrease of $390,891 or approximately 25.8%. This decrease
in revenues was due primarily to the fact that since the Ground Lease terminated
in February 1997, the Company had no revenues from its Camp Frasier located on
the Company's Irvine Property during the summer of 1997,
14
<PAGE> 15
which camp was the Company's largest summer day camp operation.
Operating expenses decreased from $1,784,500 for the quarter ended
September 30, 1996 to $1,740,629 for the quarter ended September 30, 1997, or an
aggregate decrease in operating expenses of $41,871. This decrease was due
primarily to decreases in occupancy expenses and selling, general and
administrative expenses associated with the Company's Ground Lease operations
which terminated in February, 1997 offset by services rendered in obtaining the
Westminster and Bibicoff Loans.
For the quarter ended September 30, 1997, the Company incurred a net loss
of $753,089 or ($.06) per share, as compared to net income of $1,533,024 or $.12
per share for the comparable period of 1996. This discrepancy is primarily due
to the fact that the Company wrote-off a reserve for disputed contingency claim
of $1,128,973 for the quarter ended September 30, 1996, and the fact that the
Company had revenues from its Ground Lease operations for the quarter ended
September 30, 1996, and no revenues from this source for the quarter ended
September 30, 1997.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996.
During the nine month period ended September 30, 1997, the Company
received total revenues of $2,373,911 as compared to total revenues of
$3,652,535 for the first nine months of 1996, or a decrease of $1,278,624 in
revenues, or approximately 35%. This decrease in revenues for the nine month
period ended September 30, 1997 was due primarily to the fact that the Company
had only $79,383 in rental income from the Company's Ground Lease operations for
the nine month period ended September 30, 1997 compared to revenue of $1,072,106
from its Ground Lease activities for the nine month period ended September 30,
1996, due to the fact that the Company's Ground Lease operations terminated as
of February 28, 1997.
Operating expenses decreased from $4,513,405 for the nine month period
ended September 30, 1996 to $4,431,217 for the nine month period ended September
30, 1997, or an aggregate decrease in operating expenses of $82,188.
Depreciation and amortization expense increased to $556,673 for the nine month
period ended September 30, 1997 from $340,226 for the nine month period
September 30, 1996, or an aggregate of $216,447, due primarily to improvements
made by the Company to its Frasiers Frontier location, Camp Frasier locations
and the building of one new Planet Kids location. Occupancy expenses decreased
to $3,201,062 for the nine month period ended September 30, 1997 compared to
$3,537,402 for the comparable period in 1996, a decrease of $336,340 due
primarily to termination of the Ground Lease.
Interest income for the nine months ended September 30, 1997 was $276,940
as compared to $299,597 for the comparable period in 1996, a decrease of
$22,657.
15
<PAGE> 16
The Company incurred legal costs of $518,710 during the nine month period
ended September 30, 1997 as compared to $152,521 during the nine month period
ended September 30, 1996, an increase of $366,189. This increase was due
primarily to substantial legal fees and costs incurred by the Company in
connection with several actions involving the Irvine Property, including the
defense of the unlawful detainer action and actions involving the Company's
subtenants on the Irvine Property. See Part II, Item 1, "Legal Proceedings".
The Company had a net loss of $2,428,733 or ($.19) per share, with respect
to the nine month period ended September 30, 1997 as compared to net income of
$381,280 or $.03 per share, for the comparable period of the previous year, for
an aggregate decrease in net income of $2,624,513. This increased loss is
largely attributable to increased attorneys' fees and costs with respect to the
various actions involving The Irvine Property and decreased revenues due to
termination of the Ground Lease. In addition, the write-off of the reserve for a
disputed contingent claim of $1,128,973 during the nine month period ended
September 30, 1996, substantially increased net income during this period.
LIQUIDITY AND FINANCIAL CONDITION
The Company has relied primarily on cash flows from operations as well as
from proceeds of its public offering in 1994 to finance working capital,
acquisitions and improvements in the past several years. These proceeds from the
Company's 1994 public offering have now been exhausted and at September 30, 1997
the Company had cash or cash equivalents in the amount of $253,231.
The Company's future capital requirements will depend on numerous factors.
If the $42 million judgment in the Irvine Company Litigation is not upheld and a
new trial is ordered, the Company anticipates that it will continue to expend
significant funds on legal expenses. There are numerous uncertainties associated
with the various aspects of the Irvine Company Litigation and the outcome of
these matters could have a material impact on the Company's liquidity in ways in
which the Company's management is unable to predict.
On July 28, 1997 UHC acquired the Las Vegas Property. The Company was
required to make an additional capital contribution to UHC of approximately
$3,800,000 in connection with the acquisition of the Las Vegas Property and in
connection therewith obtained two loans, one for $1,900,000 from Westminster
Capital, Inc. and one for $900,000 from Harvey Bibicoff the latter of which has
been substantially repaid. The loan from Westminster Capital, Inc. is secured by
a significant amount of the Company's assets, including the 50% membership
interest in UHC and a significant portion of the stock which the Company owns in
Grand Havana. See "Overview, above". Although the Company believes it will be
able to meet this loan obligation as it matures from working capital, from
repayment by Grand Havana of certain loans made by the Company to Grand Havana
and release
16
<PAGE> 17
of certain cash pledged by the Company to support a letter of credit for Grand
Havana, or from additional financing from affiliated or unaffiliated sources, if
the Company is unable to meet this loan obligation as becomes due, the
collateral pledged by the Company could be foreclosed upon.
As of September 30, 1997, amounts due and from, and investments in,
related parties totaled approximately $7,258,401 or 49% of total assets and 73%
of the Company's net worth. The above mentioned investments in assets or amounts
due from related parties have been made in or are due primarily from two
affiliates. Both affiliated companies, Grand Havana and HEP II, L.P., have had
substantial losses and have working capital deficits creating liquidity risks to
the Company. If these losses continue, a substantial portion of the Company's
net worth could be impaired or at risk. Even though Management believes that it
is more likely than not that the investments and receivables with related
companies are not impaired, the cumulative losses and liquidity problems of the
affiliated companies creates an inherent risk in these assets.
Although the Company believes that its current cash and income from
operations, distributions received by the Company as a result of its
investments, and repayment to the Company of amounts previously advanced by the
Company to Grand Havana will provide the Company with sufficient funds to meet
the Company's anticipated need for working capital and capital expenditures for
at least the next 12 months, there can be no assurance that this will be the
case, in particular with regard to the various uncertainties surrounding the
Irvine Company Litigation and related actions. If the Company is in need of
additional financing, there can be no assurance that the Company will be able to
acquire additional financing, or that if such financing is available, that it
will be available to the Company on acceptable terms.
17
<PAGE> 18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
For information with respect to the action styled The Splash v. The Irvine
Company, et. al. (Case No. 49-12-02), filed in the Orange County Superior Court,
reference is made to the description of such litigation set forth in the
Company's Annual Report on Form 10-KSB for its fiscal year ended December 31,
1996 and in the Company's Quarterly Report on Form 10-QSB for its fiscal
quarters ended March 31, 1997 and June 30, 1997. Oral argument of the appeal
remains scheduled for November 18, 1997. In view of the inherent uncertainties
of litigation, no prediction can be made as to the likely outcome of this
matter.
For information with respect to the action styled Lion Country Safari,
Inc. - California v. The Irvine Company, (Case No. 743669), reference is made to
the description of such litigation set forth in the Company's Annual Report on
Form 10-KSB for its fiscal year ended December 31, 1996 and in the Company's
Quarterly Report on Form 10-QSB for its fiscal quarters ended March 31, 1997 and
June 30, 1997. The appeal in this action remains pending. Within the next few
months the Court will set a date for oral argument. In view of the inherent
uncertainties of litigation, no predictions can be made as to the likely outcome
of this matter.
For information with respect to the action styled Irvine Meadows v.
Shuster, et.al., (OCSC Case No. 771509), reference is made to the description of
such litigation set forth in the Company's Annual Report on Form 10-KSB for its
fiscal year ended December 31, 1996 and in the Company's Quarterly Report on
Form 10-QSB for its fiscal quarters ended March 31, 1997 and June 30, 1997. On
February 19, 1997 the trial judge granted plaintiff Irvine Meadow's request for
an injunction against the Company, barring it from removing the Irvine Meadows
Amphitheater. The case remains pending. In view of the inherent uncertainties of
litigation, no prediction can be made as to the likely outcome of this matter.
With respect to the action titled The Splash dba Wild Rivers v. Harry
Shuster, et.al. (OCSC Case No. 771810) further described in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1996, and in the
Company's Quarterly Report on Form 10-QSB for its fiscal quarters ended March
31, 1997 and June 30, 1997, a trial date has been set in this matter for April
27, 1998. In view of the inherent uncertainties of litigation, no prediction can
be made as to the likely outcome of this matter.
For information with respect to the action styled Lion Country Safari,
Inc.-California v. The Irvine Co. (OCSC Case No. 775923) reference is made to
the description of this action in the Company's Quarterly Report on Form 10-QSB
for its fiscal quarters ended March 31, 1997 and June 30, 1997. The Irvine
Company
18
<PAGE> 19
moved for judgment on the pleadings in this action and to stay one of the causes
of action. Both motions were denied. Both sides have initiated discovery. The
trial has been schedule for early March, 1998. In view of the inherent
uncertainties of litigation, no prediction can be made as to the outcome of this
matter.
For information with respect to the case styled The Irvine Company vs.
Lion Country Safari, Inc. - California (OCSC Case No. 776187), reference is made
to the description of this action in the Company's Quarterly Report on Form
10-QSB for its fiscal quarters ended March 31, 1997 and June 30, 1997. The
Company intends to continue its appeal of the judgment in this unlawful detainer
action. In view of the inherent uncertainties of litigation, no predication can
be made as to the outcome of this matter.
ITEM 2. CHANGES IN SECURITIES.
On July 28, 1997, the Company issued 150,000 shares of its common stock to
Harvey Bibicoff in consideration for consulting services rendered by Mr.
Bibicoff to the Company, which shares were valued at $42,000 or $.028 per share,
the market price at the date of issuance.
On July 30, 1997 100,000 shares of common stock were issued to the law
firm of Richman, Lawrence, Mann, Greene, Chizever & Phillips in consideration
for professional services rendered as of July 30, 1997, which shares were valued
at $28,000 or $.028 per share, the market price at the date of issuance.
On July 29, 1997, in consideration for providing financing in connection
with the acquisition of the Las Vegas Property by UHC, Westminster Capital, Inc.
received a warrant to purchase up to 150,000 shares of the common stock of the
Company, valued at $1,500 or $.01 per share at the date of issuance, which
warrant is exercisable at the lesser of $.40 per share or 75% of the average
price for the ten trading days prior to exercise.
On July 3, 1997, in consideration for their service on the Board of
Directors of the Company, the following Board members received options to
purchase the following number of shares of common stock of the Company, all of
which options are exercisable at an exercise price of $.3125 per share (the
market price of the Company's common stock on the date of grant): J. Brooke
Johnston, Jr.-- options to purchase 50,000 shares; Brian Shuster-- options to
purchase 50,000 shares and Alvin Cassel-- options to purchase 25,000 shares.
Also on July 3, 1997, the Company exchanged options to purchase 25,000 shares
issued to Mr. Alexander for a note receivable of $10,000.
Each of the foregoing offerings was made directly by the officers and
directors of the Company and no underwriting discounts or commissions were paid.
Each of the forgoing transactions was exempt pursuant to Section 4(2) of the
Securities Act of 1933, as amended for issuance of securities not involving any
public offering.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a Report on Form 8K with the Commission on August 13,
1997, which Report on Form 8K was amended by the filing of a Form 8K/A with the
Commission on October 14, 1997, which report, as amended, contained audited
financial statements with respect to The Las Vegas Property.
No other Items of Part II are applicable to the Registrant for the period
covered by this Quarterly Report on Form 10-QSB.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. .
UNITED LEISURE CORPORATION
Date: December 4, 1997
By: /s/ Harry Shuster
----------------------------------------
Harry Shuster, Chairman of the
Board and Chief Executive
Officer (Principal Financial Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOR ITS FISCAL QUARTER ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 253,231
<SECURITIES> 0
<RECEIVABLES> 16,812
<ALLOWANCES> 0
<INVENTORY> 19,190
<CURRENT-ASSETS> 378,957
<PP&E> 10,986,796
<DEPRECIATION> 4,797,776
<TOTAL-ASSETS> 14,868,006
<CURRENT-LIABILITIES> 2,360,605
<BONDS> 842,000
0
0
<COMMON> 126,188
<OTHER-SE> 9,639,213
<TOTAL-LIABILITY-AND-EQUITY> 14,868,006
<SALES> 0
<TOTAL-REVENUES> 2,373,911
<CGS> 0
<TOTAL-COSTS> 4,433,217
<OTHER-EXPENSES> 371,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,954
<INCOME-PRETAX> (2,428,733)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,428,733)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
