<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the
- ------ Securities Exchange Act of 1934 for the quarterly period ended
June 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) 837-1200
--------------
(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 June 30, 1997
----------------------- ----------------------------
COMMON STOCK, PAR VALUE 12,368,849 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>
June 30, 1997 Dec. 31, 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,660,302 $ 3,845,653
Receivables 27,721 128,843
Inventory 24,489 30,308
Prepaid expenses 216,471 90,958
------------ ------------
TOTAL CURRENT ASSETS 1,928,983 4,095,762
PROPERTY AND EQUIPMENT,
Less accumulated depreciation and amortization 6,306,676 6,578,586
OTHER ASSETS
Due from related parties 501,251 331,117
Loan receivable-Grand Havana Enterprises, Inc. 775,000
Investment in Grand Havana Enterprises, Inc. 889,874 511,766
Investment in HEP II 1,120,500 1,120,500
Restricted cash 884,434 875,000
Intangible assets, net of accumulated amortization 23,130 33,320
Deposits 183,136 208,835
------------ ------------
TOTAL OTHER ASSETS 4,377,325 3,080,538
------------ ------------
$ 12,612,984 $ 13,754,886
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,048,604 $ 623,015
Deferred revenues 607,741 143,945
Deposits and other 104,275 124,275
------------ ------------
TOTAL CURRENT LIABILITIES 1,760,620 891,235
LONG TERM DEBT 842,000 842,000
------------ ------------
TOTAL LIABILITIES 2,602,620 1,733,235
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 123,688 123,688
Unrealized gain on investment (153,876) 181,766
Capital in excess of par value 24,326,458 24,326,458
Accumulated deficit (14,285,906)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,010,364 12,021,651
------------ ------------
$ 12,612,984 $ 13,754,886
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Rentals $ 0 $ 258,466 $ 79,383 $ 426,316
Children's recreational activities 625,873 603,363 1,170,776 1,065,786
------------ ------------ ------------ ------------
TOTAL REVENUES 625,873 861,829 1,250,159 1,492,102
------------ ------------ ------------ ------------
OPERATING EXPENSES
Occupancy 1,063,566 1,229,971 1,921,548 2,102,397
Selling, general and administrative 122,741 219,745 395,468 399,690
Depreciation and amortization 183,101 113,408 373,572 226,817
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 1,369,408 1,563,124 2,690,588 2,728,904
------------ ------------ ------------ ------------
LOSS BEFORE OTHER INCOME
(EXPENSE) AND INCOME TAXES (743,535) (701,295) (1,440,429) (1,236,802)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 74,252 102,237 170,948 193,104
Interest expense (21,067) (14,037) (42,127) (35,102)
Legal costs (451,289) (64,144) (471,422) (152,521)
Other 65,825 81,827 107,386 91,197
------------ ------------ ------------ ------------
TOTAL OTHER INCOME
(EXPENSE) (332,279) 105,883 (235,215) 96,678
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES (1,075,814) (595,412) (1,675,644) (1,140,124)
INCOME TAXES 0 11,620 0 11,620
------------ ------------ ------------ ------------
NET (LOSS) (1,075,814) (607,032) (1,675,644) (1,151,744)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,368,849 12,368,849 12,368,849 12,368,849
============ ============ ============ ============
NET (LOSS) PER SHARE (.09) (.05) (.14) (.09)
============ ============ ============ ============
</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>
Six months ended June 30,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(1,675,644) $(1,151,744)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization of property and equipment 363,382 209,257
Amortization of intangibles 10,190 17,560
Changes in operating assets and liabilities:
Receivables 104,940 110,269
Inventory 5,820 2,178
Prepaid expenses (125,512) (35,711)
Pre-opening costs (122,149)
Deposits 25,699 (176,754)
Accounts payable and accrued expenses 425,586 63,918
Due from related party (312,703)
Earned interest on restricted cash (9,434)
Deferred revenue and other 463,797 887,094
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (723,879) (196,082)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (91,472 (518,339)
Lease acquisition costs 1,057
Loan receivable from Grand Havana Enterprises, Inc. (775,000)
Investment in Grand Havana Enterprises, Inc. (575,000)
Investment in HEP II (1,500,000)
Deposits & Others (20,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,461,472) (2,017,282)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to related Party (675,000)
Repayment of related party advances (241,120)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (916,120)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,185,351) (3,129,484)
CASH AND CASH EQUIVALENTS,
Beginning 3,845,653 9,929,785
----------- -----------
CASH AND CASH EQUIVALENTS,
End $ 1,660,302 $ 6,800,301
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid $ 42,127 $ 62,873
Interest received $ 170,948 $ 96,696
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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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 six months ended June 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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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 in November 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. The Irvine
Company brought a Motion for Summary Judgment on April 5, 1997 which
was denied on April 11, 1997. On April 16, 1997, the Irvine Company
brought various motions in limine which were decided by the Court on
April 17, 1997 without allowing the Company sufficient time to file
opposing papers. The Court granted all of The Irvine Company's motions
and ruled that the Company could not offer any evidence to defend
itself against the unlawful detainer claim. The Irvine Company made an
oral motion for a judgment on the pleadings on April 18, 1997 which was
granted by the Court. Judgment was entered granting the Irvine Company
possession of the Irvine Property on April 25, 1997. The Company filed
a Notice of Appeal of this Judgment on May 1, 1997, which appeal is
pending. A writ of execution on the Judgment was issued. The Company
petitioned for a stay of execution to the trial court and thereafter to
the Court of Appeals pending the Company's appeal of the judgment. Both
courts denied the Company's petition. The Company was evicted from the
Irvine Property on May 6, 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 prediction can be made as to
the outcome of these matters. On May 5, 1997 The Irvine Company filed a
motion to recover attorneys' fees and costs in connection with the
unlawful detainer action in the amount of $397,778. The Court granted
the Irvine Company $125,000 in attorneys' fees and $25,000 in costs.
For further description of the above-described litigation and other
litigation in which the Company is involved, see the Company's Annual
Report on Form 10-KSB for its fiscal year ended December 31, 1996, and
Part II, Item 1, "Legal Proceedings," of this Quarterly Report on Form
10-QSB.
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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. Interest on the amount
advanced bears interest at the rate of 8% per annum. The full principal
amount and accrued interest on any amounts advanced is payable on
September 30, 1997. In consideration for making the loan, the Company
received 75,000 shares of common stock of Grand Havana which were
valued at $138,750. If the loan is not paid by the maturity date, then
Grand Havana will issue to the Company, as a late fee, an additional
25,000 share of common stock. As of June 30, 1997, the Company has
advanced to Grand Havana an aggregate of $775,000. The Chairman of the
Board, President and Chief Executive Officer of the Company is the
Chairman of the Board, President and Chief Executive Officer of Grand
Havana.
5. SUBSEQUENT EVENTS
Additional New Business Area. On July 29, 1997, United Hotel & Casino,
LLC, a Delaware limited liability company (the "LLC") in which the
Company holds 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 several retailers and The Silver City
Casino. The Company is now the lessor of the shopping center and the
Silver City Casino. The Silver City Casino is owned and operated by
Circus Circus. It is anticipated that Circus Circus will continue to
conduct its casino operations on the Las Vegas Property. The LLC
currently intends to continue to lease the existing premises on the Las
Vegas Property, but in the future the LLC may determine to further
develop the Las Vegas Property. The Company has the right to appoint
one member of the three member Management Committee of the LLC.
Although the Company has experience in managing real property
operations, it has never owned real property in Las Vegas, Nevada, and,
in particular, real property on which a retail shopping center and
casino operations are located. There can be no assurance that this new
business area for the Company will be successful. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-- Overview."
Related Party Transactions. Subsequent to the fiscal quarter ended June
30, 1997, the Company and Harvey Bibicoff, a director of Grand Havana,
entered into a letter agreement pursuant to which the Company, in
consideration for consulting services rendered by Mr. Bibicoff, 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.
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Subsequent to the fiscal quarter ended June 30, 1997, the Company
entered into an amendment to the 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 Agreement
permits Grand Havana to forego the requirement that it replace the
collateral out of the 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 or 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. 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 addition, subsequent to June 30, 1997, and 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Liquidity
and Capital Resources."
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
The Company's Ground Lease for the Irvine Property, which historically
provided the Company with most of its income, terminated on February 28, 1997.
Although the Company instituted an action for declaratory relief against The
Irvine Company in February 1997 in which the Company alleged it had the right to
extend the term of the Ground Lease, the Irvine Company in March 1997 filed an
action for unlawful detainer. The trial court granted the Irvine Company
possession of the Irvine Property on April 25, 1997, and the Company was
subsequently evicted from the Irvine Property. The Company filed a notice of
appeal of this judgment on May 1, 1997 which appeal is pending. Accordingly, at
this time the Company has no income from the Irvine Property and management does
not anticipate that
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the Company will have any income from the Irvine Property in the future. See
Part II, Item 1. "Legal Proceedings".
The Company has been planning for the termination of the 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 for the past
several years. The Company had revenues from its Ground Lease sublease
activities of $79,383 for the six months ended June 30, 1997 and had no revenues
from its Ground Lease sublease activities for the three-month period ended June
30, 1997. The Company does not anticipate that it will have future revenues from
its Ground Lease operations.
Since 1987 the Company has been engaged in protracted and expensive
litigation 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 is still pending. In this litigation,
involving disputes between the parties under the Ground Lease, 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 in November 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".
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. The
Company's fourth Camp Frasier day camp location was located on the Irvine
Property and accordingly had its last summer of operations in 1996.
During the six months ended June 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 six month period ended June 30, 1997 as compared to $426,316 for
the six month period ended June 30, 1996, a decrease of $346,933, 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 $1,170,776 for the six month period ended June 30,
1997 compared to $1,065,786 for the comparable period in 1996.
All of the Company's current operations are conducted in Southern
California. The Company's Camp Frasier operations are also seasonal in nature,
conducted during the
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summer season. Inflation in recent years has not been an important factor in the
Company's operations.
Las Vegas Property Acquisition By LLC. In January 1997 the Company
acquired a 50% membership interest in United Hotel & Casino, L.L.C., a Delaware
limited liability company (the "LLC"), which was formed for the purpose of
acquiring approximately 8.5 acres of partially developed land on the Las Vegas
Strip in Las Vegas, Nevada (the "Las Vegas Property"). The purchase of the Las
Vegas Property was conditioned on the current trust deed lender's approval of
the assignment and assumption of the existing trust deed on the property. The
LLC filed an action for declaratory relief to seek to cause the lender to agree
to the assignment of the trust deed. The action was subsequently dismissed when
the lender consented to the assignment and assumption of the existing deed of
trust. 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 several retailers and The
Silver City Casino. Upon the acquisition of the Las Vegas Property the Company
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.
The LLC currently intends to continue to lease the existing shopping center on
the Las Vegas Property, but in the future the LLC may determine to further
develop the Las Vegas Property. The Company has the right to appoint one member
of the three member Management Committee of the LLC.
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 the LLC in the principal amount of approximately
$16,360,000. Of the cash down payment, the Company contributed approximately
$3,800,000 to the LLC 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 the LLC'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 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 the
LLC. 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 prior to 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
the LLC, which would leave the Company with a 25% membership interest in
the LLC
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after such conversion. 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 the LLC
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 Enterprises, Inc. ("Grand Havana"), an affiliated
public company of which Harry Shuster is the Chairman of the Board, President
and Chief Executive Officer. As additional 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 the LLC and in the
receivables and certain indebtedness due to the Company from Grand Havana
(approximately $775,000 in principal amount at June 29, 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. Upon receipt by
the Company of notice that the warrants are being exercised, the Company has
agreed 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 an 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. See Note 5 to Financial Statements.
On July 28, 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. The Bibicoff Loan is secured by 300,000 shares of the common
stock of Grand Havana Enterprises, Inc. owned by the Company (the "Bibicoff
Pledged Shares"). In addition, Mr. Bibicoff has piggyback registration rights
with respect to the Bibicoff Pledged Shares and, in the event of a default under
the promissory note, demand registration rights with respect to the Bibicoff
Pledged Shares. The Bibicoff Loan has been individually guaranteed by Harry
Shuster and his spouse. See Note 5 to Financial Statements.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 Compared to Three Months Ended June 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 second quarter ended June 30, 1997, the Company
received total revenues of $625,873,
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compared to revenues of $861,829 for the second quarter of 1996. The decrease in
revenues was due to the fact that the Company had no rental income from its
Ground Lease operations for the fiscal quarter ended June 30, 1997. The
Company's revenues from its children's recreational activities for the
comparable periods in both quarters was substantially unchanged.
Operating expenses decreased from $1,563,124 for the quarter ended June
30, 1996 to $1,369,408 for the quarter ended June 30, 1997, or an aggregate
decrease in operating expenses of $193,716. 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.
For the quarter ended June 30, 1997, the Company incurred a net loss of
$1,075,814 or ($.09) per share, as compared to a net loss of $607,032 or ($.05)
per share for the comparable period in 1996.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
During the six month period ended June 30, 1997, the Company received
total revenues of $1,250,159 as compared to total revenues of $1,492,102 for the
first six months of 1996. This decrease in revenues for the six month period
ended June 30, 1997 was due primarily to the fact that the Company had only
$79,383 in rental income from the Company' Ground Lease operations for the six
month period ended June 30, 1997 compared to revenue of $426,316 from its Ground
Lease activities for the six month period ended June 30, 1996, due to the fact
that the Company's Ground Lease operations terminated on February 28, 1997.
Operating expenses decreased from $2,728,904 for the six month period
ended June 30, 1996 to $2,690,588 for the six month period ended June 30, 1997,
or an aggregate decrease in operating expenses of $38,316. Depreciation and
amortization expense increased to $373,572 for the six month period ended June
30, 1997 from $226,817 for the six month period ended June 30, 1996, or an
aggregate of $146,755, 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 $1,921,548 for the six
month period ended June 30, 1997 compared to $2,102,397 for the comparable
period in 1996, a decrease of $180,849 due primarily to termination of the
Ground Lease.
Interest income for the six months ended June 30, 1997 was $170,948 as
compared to $193,104 for the comparable period in 1996, an decrease of $22,156.
This decrease was due to decreased lending to a related party by the Company.
See Note 4 to Financial Statements.
The Company incurred legal costs of $471,422 during the six month
period ended June 30, 1997 as compared to $152,521 during the six month period
ended June 30, 1996, an increase of $318,901. This increase was due primarily to
substantial legal fees and costs incurred by the Company in connection with
several actions involving The Irvine Property,
12
<PAGE> 13
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 $1,675,644 or ($.14) per share, with
respect to the six month period ended June 30, 1997 as compared to a net loss of
$1,151,744 or ($.09) per share, for the comparable period of the previous year,
for an aggregate decrease in net income of $523,900. 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.
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. At June 30, 1997 the
Company had cash or cash equivalents in the amount of $1,660,302.
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 29, 1997 the LLC acquired the Las Vegas Property. The Company
was required to make an additional capital contribution to the LLC 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. These loans
are secured by a significant amount of the Company's assets, including the 50%
membership interest in the LLC 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 these loan obligations as they mature from
working capital, from repayment by Grand Havana of certain loans made by the
Company to Grand Havana and release of certain cash pledged by the Company to
support a letter of credit for Grand Havana, or from additional financing from
affiliated or non-affiliated sources, if the Company is unable to meet these
loan obligations as they become due, the collateral pledged by the Company could
be foreclosed upon.
As of June 30, 1997, amounts due and from, and investments in, related
parties totaled approximately $4,171,059 or 33% of total assets and 42% 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
13
<PAGE> 14
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.
14
<PAGE> 15
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. The appeal of the trial court's new trial order in this action remains
pending. The Irvine Company has filed a cross-appeal. Oral argument of the
appeal is now scheduled for November 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. 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
prediction 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. 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 quarter ended March 31,
1997, a mandatory settlement conference for this action remains scheduled for
September 26, 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 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 quarter ended March 31, 1997. The Irvine Company has filed by
stipulation a First Amended Complaint in this action that contains causes of
action for conversion, breach of contract and declaratory relief. The Irvine
Company has indicated it will file a demurrer or move for judgment on the
pleadings; it may also move to stay any cause of action concerning possession of
the Irvine Property until the unlawful detainer action is fully and finally
adjudicated. Neither side has as yet initiated discovery in this action. In view
of the inherent uncertainties of litigation, no predication can be made as to
the outcome of this matter.
15
<PAGE> 16
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 quarter ended March 31, 1997. In connection with The
Irvine Company's motion to recover attorneys' fees and costs in this matter in
the amount of $397,778, the Court granted The Irvine Company $125,000 in fees
and $25,000 in costs. 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.
The action titled Silver City Holdings, Inc.; United Hotel and Casino,
LLC, et al. V. American Realty Trust, Inc. et al. (Case No. A369908) was
dismissed when American Realty Trust consented to the assignment and assumption
of the existing deed of trust on the Las Vegas Property to the LLC. See the
Company's Report on Form 10-KSB for its fiscal year ended December 31, 1996 for
a further description of this action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the
period covered by this Quarterly Report on Form 10-QSB.
No other Items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-QSB.
16
<PAGE> 17
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: August 13, 1997 By: /s/ Harry Shuster
------------------------------
Harry Shuster,
Chairman of the Board
and Chief Executive Officer
Date: August 13, 1997 By: /s/ David M. Kane
------------------------------
David M. Kane
Chief Financial Officer
17
<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 JUNE 30, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,660,302
<SECURITIES> 0
<RECEIVABLES> 27,721
<ALLOWANCES> 0
<INVENTORY> 24,489
<CURRENT-ASSETS> 1,928,983
<PP&E> 10,922,760
<DEPRECIATION> 4,616,084
<TOTAL-ASSETS> 12,612,984
<CURRENT-LIABILITIES> 12,612,984
<BONDS> 842,000
0
0
<COMMON> 123,688
<OTHER-SE> 9,886,676
<TOTAL-LIABILITY-AND-EQUITY> 12,612,984
<SALES> 0
<TOTAL-REVENUES> 1,250,159
<CGS> 0
<TOTAL-COSTS> 3,072,273
<OTHER-EXPENSES> 89,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,127
<INCOME-PRETAX> (1,675,644)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,675,644)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> 0
</TABLE>
