<PAGE>
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 March 31, 1999
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.)
1990 Westwood Boulevard, Los Angeles, California 90025
(Address of Principal Executive Offices) (Zip Code)
310/441-0900
(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 May 11, 1999
- -------------------- --------------------------------
Common Stock, par 15,675,855 shares
value $.0l per share
Transitional Small Business Disclosure Format (check one):
YES [_] NO [X]
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 461,656 $ 799,369
Receivables 133,036 53,153
Prepaid expenses and other current assets 42,658 78,082
------------ ------------
TOTAL CURRENT ASSETS 637,350 930,604
------------ ------------
PROPERTY AND EQUIPMENT, NET 271,874 384,984
------------ ------------
INVESTMENTS
Investment in United Hotel at equity - related party 3,482,593 3,432,452
Investment in HEP II at equity - related party 700,000 700,000
Investment in Genisys at equity - related party - 210,133
Investment in Grand Havana at fair value - related party 38,667 38,667
------------ ------------
TOTAL INVESTMENTS 4,221,260 4,381,252
------------ ------------
OTHER ASSETS
Loan receivable from Grand Havana - related party 705,903 619,298
Due from officer 419,858 332,627
Assets held for sale 1,640,122 1,663,857
Deposits and other assets 80,413 78,929
------------ ------------
2,846,296 2,694,711
------------ ------------
$ 7,976,780 $ 8,391,551
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,622,000 $ 1,900,000
Accrued interest 484,101 406,808
Accounts payable and accrued expenses 461,285 478,785
Due to related parties 177,520 107,535
Deferred revenues 279,908 28,060
Deposits and other 5,652 5,652
------------ ------------
TOTAL CURRENT LIABILITIES 4,030,466 2,926,840
LONG-TERM DEBT 120,000 842,000
COMMON STOCK SUBJECT TO REPURCHASE - 150,001 SHARES 105,000 78,000
STOCKHOLDERS' EQUITY
Preferred stock, $100 par value; authorized - 100,000 shares;
issued and outstanding - none - -
Common stock, $.01 par value; authorized - 30,000,000 shares;
issued and outstanding - 14,368,849 shares at March 31, 1999
and 13,918,849 shares at December 31, 1998 143,688 139,188
Additional paid-in capital 25,027,856 24,844,168
Accumulated deficit (21,450,230) (20,438,645)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,721,314 4,544,711
------------ ------------
$ 7,976,780 $ 8,391,551
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
March 31, March 31,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUE
Rentals $ - $ 4,247
Children's recreational activities 319,443 486,909
----------- -----------
TOTAL REVENUE 319,443 491,156
EXPENSES
Direct operating expenses 704,512 668,370
Selling, general and administrative expenses 278,365 137,170
Depreciation and amortization 44,838 41,123
----------- -----------
1,027,715 846,663
----------- -----------
LOSS BEFORE OTHER INCOME (EXPENSE) (708,272) (355,507)
OTHER INCOME (EXPENSE)
Legal costs - (141,946)
Equity in net income (loss) of United Hotel 50,141 (149,000)
Estimated equity in net loss of Genisys (210,133) -
Interest income 38,195 34,445
Interest expense (115,735) (93,444)
Other, net (65,781) 7,531
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (303,313) (342,414)
----------- -----------
NET LOSS (1,011,585) (697,921)
----------- -----------
OTHER COMPREHENSIVE LOSS
Unrealized holding loss on securities arising during the period - (181,025)
----------- -----------
COMPREHENSIVE LOSS $(1,011,585) $ (878,946)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,202,000 12,686,000
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.07) $ (0.06)
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
March 31, March 31,
1999 1998
----------- ---------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,011,585) $(697,921)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 44,838 41,123
Loss on termination of lease 45,333 -
Issuance of common stock for services - 31,300
Fair value of options granted to non-employees 34,188 -
Equity in net income (loss) of United Hotel (50,141) 149,000
Estimated equity in net loss of Genisys 210,133 -
Accrual of interest income from related parties (34,490) -
Changes in operating assets and liabilities:
Receivables (79,883) 686
Prepaid expenses and other current assets 35,424 4,753
Deposits - (374)
Accrued interest 77,293 -
Accounts payable and accrued expenses 54,172 288,682
Accrued expenses due to related parties 107,194 40,615
Deferred revenues 251,848 8,721
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (315,676) (133,415)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (13,589) (19,843)
Loans receivable from Grand Havana (75,000) -
Advances to officer (101,555) -
Collection of loan receivable from Grand Havana - 118,558
Deposits and other (12,893) 1,500
----------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (203,037) 100,215
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for warrants and options exercised 181,000 -
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 181,000 -
----------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (337,713) (33,200)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 799,369 152,770
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 461,656 $ 119,570
=========== =========
CASH PAID FOR:
Interest $ 16,233 $ 21,054
=========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
UNITED LEISURE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF PRESENTATION
The interim consolidated financial statements presented have been prepared
by United Leisure Corporation (the "Company" or "ULC") without audit and,
in the opinion of the management, reflect all adjustments of a normal
recurring nature necessary for a fair statement of (a) the consolidated
results of operations for the three months ended March 31, 1999 and 1998,
(b) the consolidated financial position at March 31, 1999 and (c) the
consolidated cash flows for the three months ended March 31, 1999 and 1998.
Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 1998 has been
derived from the consolidated financial statements that have been audited
by the Company's independent public accountants. The consolidated financial
statements and notes are condensed as permitted by Form 10-QSB and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-KSB.
2. LICENSING REVENUE
During the quarter ended March 31, 1999, United Internet Technologies, Inc.
("UIT), a wholly-owned subsidiary of the Company, received $200,000 as a
non-refundable advance against royalties pursuant to a License Agreement
entered into by UIT and World Championship Wrestling, Inc. ("WCW") as of
February 23, 1999. UIT granted to WCW a limited non-exclusive license of
the Technology. WCW has the right to approve the application of the
Technology against certain indicated specifications and descriptions during
a testing period, which approval the Company obtained subsequent to March
31, 1999. As of March 31, 1999, the Company reflected the $200,000 as
deferred revenue in the accompanying balance sheets.
3. STOCKHOLDERS' EQUITY
On January 4, 1999, the Company granted stock options to the Company's
general outside counsel, Richman, Lawrence, Mann, Chizever & Phillips, a
Professional Corporation ("Richman, Lawrence"), to purchase 200,000 shares
of the Company's common stock at $.23 per share. The shareholders of
Richman, Lawrence exercised the options effective the same day for total
exercise price of $46,000.
On January 4, 1999, the Company issued stock options to purchase shares of
the Company's common stock to the following: 100,000 to two outside
directors, 100,000 to Brian Shuster, an employee-director, 210,000 to
certain employees and 165,000 to certain consultants. All such options are
exercisable at $.23 per share. The options granted to the directors vest
immediately and the options granted to the employees vest on varying terms
ranging from immediately to five years.
On February 1, 1999, the Company issued a stock option to Brian Shuster to
purchase 200,000 shares of the Company's common stock. The option is
exercisable at $.35 per share and vests immediately.
In March 1999, the Company issued 150,000 shares of common stock to
Westminster Capital, Inc., upon the exercise of a stock purchase warrant
for 150,000 shares of the Company's common stock at $.40 per share for
gross proceeds of $60,000.
In March 1999, the Company issued 100,000 shares of common stock to Whale
Securities Co., L.P., upon the exercise of a stock purchase warrant for
100,000 shares of the Company's common stock at $.75 per share for gross
proceeds of $75,000.
5
<PAGE>
UNITED LEISURE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
Subsequent to the end of the quarter ended March 31, 1999, the following
transactions took place:
(i) On April 13, 1999, the Company and Strata Equities Limited ("Strata")
amended the Warrant Agreement dated April 2, 1998 relating to the issuance
of a stock purchase warrant (the "Warrant") for 600,000 shares of the
Company's common stock at $.27 per share, to permit a cashless exercise of
the Warrant, and Strata exercised the Warrant on a cashless basis. Based
on an intraday trading price of $4.60 per share of the Company's common
stock on April 13, 1999, the Company issued to Strata 564,783 shares of the
Company's common stock. The Company received no proceeds from the
issuance, as a result of the cashless exercise.
(ii) On April 29, 1999, the Company sold 500,000 shares of common stock to
one individual, at a purchase price of $2.00 per share for gross proceeds
of $1,000,000.
(iii) In April 1999, the Company issued 82,222 shares of common stock to
Mary Jane Shapiro, upon the cashless exercise of a stock purchase warrant
for 100,000 shares of the Company's common stock at $.75 per share. The
Company received no proceeds from the issuance, as a result of the cashless
exercise.
(iv) In April 1999, the Company issued 10,000 shares of common stock to
Alvin Alexander, a director of the Company, upon the exercise of a stock
option at an exercise price of $.30 per share for gross proceeds of $3,000.
Each of the foregoing offerings (i) was made directly by the officers and
directors of the Company and no underwriting discounts or commissions were
paid, and (ii) was exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof, for transactions by an
issuer not involving any public offering; or did not involve the "sale" of
a security.
4. RELATED PARTY TRANSACTIONS
During the quarter ended March 31, 1999, the Company advanced $101,555 to
Harry Shuster, the Company's Chairman of the Board, President and Chief
Executive Officer.
On March 8, 1999, the Company made a $75,000 loan to Grand Havana
Enterprises, Inc. The loan accrues interest at 8% per annum. Both principal
and interest are due on September 8, 2000. The loan is guaranteed by Harry
Shuster.
UIT and Brian Shuster have entered into an Employment Agreement dated as of
January 1, 1999 (the "Employment Agreement"), pursuant to the terms of
which Brian Shuster is employed as President of UIT at an initial base
salary of $240,000 per year. The Employment Agreement provides for annual
10% increases in Brian Shuster's base salary. The Employment Agreement
provides for a rolling five-year term. This is accomplished by extending
the initial five-year term of the Employment Agreement automatically for
successive one-year periods unless written notice of termination is given
at least 60 days prior to the end of the completion of the first year of
the then-current five-year period. The Employment Agreement also provides
that any inventions developed by Brian Shuster during his employment by UIT
6
<PAGE>
UNITED LEISURE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
and which relate to the business of UIT, will remain the property of UIT.
The Employment Agreement also contains a confidentiality provision to
protect UIT's trade secrets and other confidential information. Brian
Shuster is permitted to engage in outside business activities to the extent
that such obligations do not interfere with his duties to UIT.
In addition, the Company and UIT have entered into an agreement dated as of
January 1, 1999, pursuant to which UIT has agreed to make available the
services of Brian Shuster to consult for the Company on a variety of
matters. The Company has agreed to pay UIT $5,000 per month for making
available Brian Shuster's services under this agreement; Brian Shuster will
receive no payments under this agreement. Brian Shuster has also agreed
that UIT may credit against his salary any amounts he actually receives
from Genisys pursuant to the Genisys Agreement for consulting services
rendered to NII since January 1, 1999.
UIT and Harry Shuster have entered into a Consulting Agreement dated as of
January 1, 1999 (the "Consulting Agreement"), pursuant to the terms of
which Harry Shuster is retained as a consultant to UIT at an initial
compensation of $60,000 per year. The Consulting Agreement provides for
annual 10% increases in Harry Shuster's compensation. The Consulting
Agreement provides for a rolling five-year term. This is accomplished by
extending the initial five-year term of the Consulting Agreement
automatically for successive one-year periods unless written notice of
termination is given at least 60 days prior to the end of the completion of
the first year of the then-current five-year period. Harry Shuster is
permitted to engage in outside business activities to the extent that such
obligations do not interfere with his duties to UIT.
5. COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1999
-------------------------------------------------------
Income Shares Per Share
(Numerator (Denominator) Amount
--------------- ---------------- --------------
<S> <C> <C> <C>
Basic loss per share:
Net loss $(1,011,585) 14,202,000 $(0.07)
Less: accretion in the carrying amount
of common stock subject to
repurchase (27,000) - -
--------------- ---------------- --------------
Net loss attributable to common
stockholders $(1,038,585) 14,202,000 $(0.07)
=============== ================ ==============
</TABLE>
Options and warrants to purchase 10,366,950 shares were outstanding at
March 31, 1999, but were not included in the computation of diluted loss
per common share because the effect would be antidilutive.
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1998
-------------------------------------------------------
Income Shares Per Share
(Numerator (Denominator) Amount
--------------- ---------------- --------------
<S> <C> <C> <C>
Basic loss per share:
Net loss attributable to common
stockholders $(697,921) 12,686,000 $(0.06)
=============== ================ ==============
</TABLE>
Options and warrants to purchase 6,591,950 were outstanding at March 31,
1998, but were not included in the computation of diluted loss per common
share because the effect would be antidilutive.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Quarterly Report on Form 10-QSB. Certain statements contained herein that
are not related to historical results, including, without limitation, statements
regarding the Company's business strategy and objectives, future financial
position, expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and involve risks and
uncertainties. Although the Company believes that the assumptions on which
these forward-looking statements are based are reasonable, there can be no
assurance that such assumptions will prove to be accurate and actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, the risks, uncertainties, costs and outcome of pending litigation in
which the Company is involved, costs and uncertainties associated with future
developments, concerns regarding the Company's liquidity and financial
condition, regulatory policies, competition from other similar businesses, and
market and general economic factors. All forward-looking statements contained
in this Quarterly Report on Form 10-QSB are qualified in their entirety by this
statement.
Overview
Through its wholly-owned subsidiary, United Internet Technologies, Inc.
("UIT"), the Company is primarily engaged in the development and licensure of
the Company's proprietary Internet related technology (the "Technology") and
sites on the World Wide Web (the "Web") incorporating the Technology. The
Company has developed two proprietary technologies, Parallel Addressing
Technology (PAV) and Dynamic Integrated Video Overlay (DIVO). The Company
licenses the use of the Technology to others and in some cases develops its own
Web sites. The Company has licensed the travel related applications to Genisys
Reservation Systems, Inc. ("Genisys") and has also licensed the rights to
wrestling and related activities to World Championship Wrestling, Inc. The
8
<PAGE>
Company's Technology utilizes proprietary program instructions applications to
provide a means of linking a full motion video on a user's CD-ROM or DVD-ROM
drive to a commercial site on the Web. The Company intends to continue to
pursue licensing agreements with others and will continue to develop and market
its own Web sites.
Prior to February 1997, the primary business of the Company had been to act
as a developer and manager (rather than as an operator) under a ground lease
(the "Ground Lease") with the Irvine Company. The Ground Lease terminated in
February 1997. As part of management's decision to reorient the Company's
business to the development and licensure of the Technology, the Company's Camp
Frasiers have been discontinued and the Company has decided to dispose of its
Planet Kids facilities. In connection therewith, the Company will have
significantly reduced employment requirements, primarily part-time and seasonal
employees, in 1999.
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
The Company had total revenue of $319,443 in the quarter ended March 31,
1999, compared to total revenue of $491,156 for the quarter ended March 31,
1998, a decrease of $171,713 or approximately 35.0%. This decrease results from
lower revenue from children's recreational activities, due primarily to declines
in admissions in the Company's three Planet Kids centers, as well as the fact
that Frasier's Frontier amusement park did not operate at all during the first
quarter of 1999. All of the Company's revenue in the quarter ended March 31,
1999 was provided by Planet Kids centers. Because the Company has reoriented
its business to focus on the Technology and move away from its historical
emphasis on children's recreational activities, the Company expects its revenue
from children's recreational activities to continue to decline in future
periods.
Total operating expenses increased to $1,027,715 for the quarter ended
March 31, 1999 from $846,663 for the quarter ended March 31 1998, an increase of
$181,052 or approximately 21.4%. This increase was due primarily to increases
in operating expenses of UIT, specifically increased salaries and consulting
fees for management, as well as for programmers.
Other expense decreased to $303,313 in the quarter ended March 31, 1999,
from $342,414 in the quarter ended March 31, 1998, a decrease of $39,101 or
approximately 11.4%. Included in other
9
<PAGE>
expense is estimated equity in net loss of Genisys, an affiliate of the Company,
of $210,133.
For the quarter ended March 31, 1999, the Company had a net loss of
$(1,011,585) or ($.07) per share, as compared to a net loss of $(697,921) or
($0.06) per share for the quarter ended March 31, 1998.
Liquidity and Financial Condition
The Company has experienced operating losses in recent years. For the
quarter ended March 31, 1999, the Company experienced a net loss of
$(1,011,585). For the quarter ended March 31, 1998, the Company experienced a
net loss of $(697,921).
The Company's working capital requirements have been and will continue to
be significant. As of March 31, 1999, the Company had cash and cash equivalents
of $461,656 and a working capital deficit of $3,393,116. Subsequent to the end
of the quarter ended March 31, 1999, the Company received $1,000,000 in cash
from the sale of 500,000 shares of its Common Stock to one investor in a private
placement.
The Company's future capital requirements will depend on various factors,
including:
1. The number of applications utilizing the Company's Technology that the
Company wants to develop;
2. The length of time that it takes for the Company to dispose of its
children's recreation facilities and the manner of disposition; and
3. The Company and other members of United Hotel & Casino, L.L.C.
("UHC"), an affiliate of the Company, are actively entertaining
various opportunities of selling or otherwise disposing of the
commercial property UHC owns in Las Vegas (the "Las Vegas Property").
The Company believes that based on existing negotiations, the amount
realized from the disposition will be considerably more than the cost;
however, the Company cannot give any assurance that this will in fact
be the case or that the Las Vegas Property will be sold or whether any
such disposition will be on terms favorable to the Company. In the
alternative, the Company is actively entertaining offers to sell its
membership interest in UHC; however, the Company cannot give any
assurance that this in fact will be the case or whether any such
disposition will be on terms favorable to the Company.
10
<PAGE>
Due to the fact that the Company did not meet the new minimum bid listing
requirements for maintenance of the Company's Common Stock on the Nasdaq
SmallCap Market (the "Nasdaq Market"), effective the close of business on
December 1, 1998, the Company's Common Stock was delisted from the Nasdaq
Market. The Company's Common Stock is now quoted on the OTC Bulletin Board. The
delisting could result in the Company's having difficulty in offering and
selling its securities to prospective investors.
If the Company is unable to raise additional funds, when needed, through
the private placement of its securities, it may seek financing from affiliated
or unaffiliated third parties. There can be no assurance, however, that such
financing would be available to the Company when and if it is needed, or that if
it is available, that it will be available on terms acceptable to the Company.
If the Company is unable to sell its securities or obtain financing to meet its
working capital needs and to repay indebtedness as it becomes due, the Company
may have to consider such alternatives as selling or pledging portions of its
assets, among other possibilities, in order to meet such obligations.
On March 8, 1999, the Company loaned $75,000 to Grand Havana Enterprises,
Inc. ("GHEI"), an affiliate of the Company. The loan accrues interest at 8% per
annum and is payable, as to both principal and interest, upon maturity on
September 8, 2000. The loan has been guaranteed by Harry Shuster, the Chairman
of the Board, Chief Executive Officer and President of the Company. Mr. Shuster
is also the Chairman of the Board, Chief Executive Officer and President of
GHEI.
As of March 31, 1999, investments in and loans to certain affiliated
companies, GHEI, UHC and HEP II, L.P., totaled approximately $4,927,163, or
approximately 61.8% of total assets. These affiliated companies have had
substantial losses and have working capital deficits, creating liquidity risks
for the Company. If these losses continue, a substantial portion of the
Company's net worth would be impaired or at risk. Although 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 create an inherent risk in these assets. In
addition, at March 31, 1999, the Company had a net receivable from Harry Shuster
of $419,858.
Although the Company believes that its current cash and revenue from
operations, distributions received by the Company as a result of its
investments, repayment to the Company of amounts previously advanced by the
Company to GHEI, proceeds from any sale of the Company's real property located
in El Cajon, California
11
<PAGE>
(previously used in connections with children's recreational activities) and
proceeds from any sale of the Las Vegas Property or the Company's interest in
UHC, 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.
The Company wishes to expand its development and marketing capabilities for
the Technology. While development of certain applications currently under
development can be funded from internal sources, more aggressive development
will require additional financing from either public or private sources. To
this end, the Company intends to raise additional capital either by borrowing
money or a public or private sale of equity or both. 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 favorable
terms.
Year 2000 Issues
The Company has a Year 2000 project designed to identify and assess the
risks associated with its information systems, operations, infrastructure and
technology products, and customers and suppliers, that are not Year 2000
compliant, and to develop, implement, and test remediation and contingency plans
to mitigate these risks. The project comprises four phases: (1) identification
of risks, (2) assessment of risks, (3) development of correction and contingency
plans, and (4) implementation and testing.
The Company's Year 2000 project is being overseen by a consultant to the
Company. The Company's Year 2000 project is currently in the development of
correction plans phase. Based on vendor-provided information, the Company
believes that all primary software applications being used within the Company
are either Year 2000 compliant or, with upgrades, can be made Year 2000
compliant. Based on testing of certain hardware, it was determined to replace
certain systems. Such upgrading or replacement of software and hardware is
expected to be completed by June 30, 1999. Based on current estimates, the
Company does not believe that the cost of upgrading or replacing such software
and hardware will be material. After all upgrading and replacement is complete,
all new systems will be evaluated for Year 2000 compliance. The Company's
technical consultant will continue to analyze the current software and hardware
vendors for Year 2000 compliance as issues may be discovered within the Company
or within the industry.
The Company believes that software products currently produced by the
Company are Year 2000 compliant; however, additional testing is in progress. It
is not believed that there will be any adverse effects on the ability to use the
interactive products being developed by the Company.
12
<PAGE>
Upgrading to uniform operating and accounting systems on a Company-wide
basis is in process. In addition, the hardware used in connection with the
children's recreational activities business conducted by the Company will have
to be replaced, if the remaining assets are not sold by the end of 1999. The
costs of such assessments and upgradings or replacements are not expected to be
material. Required upgrading is expected to be completed on or before June 30,
1999. In addition, the Company is in the process of obtaining Year 2000
compliance statements from the manufacturers of the Company's hardware and
software products.
The Company believes that its greatest potential risks are associated with
(i) its information systems and systems embedded in its operations and
infrastructure; and (ii) its reliance on Year 2000 compliance by the Company's
vendors and suppliers of operating systems and software applications. The
Company is continuing its assessments for its operations and infrastructure, and
cannot predict whether significant additional problems will be identified. The
Company is asking its critical vendors and suppliers to provide information on
the status of the Year 2000 compliance in order to assess the effect it could
have on the Company. The Company has supplied all such requests to such vendors.
The Company has not yet determined the full extent of contingency planning that
may be required. Based on the status of the assessments made and remediation
plans developed to date, the Company is not in a position to state the total
cost of remediation of all Year 2000 Issues. Costs identified to date have not
been material. However, the Company has not yet completed its assessments,
developed remediations for all problems, developed any contingency plans, or
completely implemented or tested any of its remediation plans.
Based on the Company's current analysis and assessment of the state of its
Year 2000 compliance, the Company's most reasonably likely worst case scenario
involves delays in shipping of products by its vendors and suppliers. Such
delays could cause the Company to experience delays in delivering its own
products. Specific contingency plans will be formulated after the Company has
received information on the status of vendor and supplier Year 2000 compliance.
As the Year 2000 project continues, the Company may discover additional
Year 2000 problems, may not be able to develop, implement, or test corrections
or contingency plans, or may find that the costs of these activities exceed
current expectations and become material. In many cases, the Company is relying
on assurances from suppliers that new and upgraded information systems
13
<PAGE>
and other products will be Year 2000 compliant. The Company plans to test such
third-party products, but cannot be sure that its tests will be adequate or
that, if problems are identified, they will be addressed in a timely and
satisfactory way. Because the Company uses a variety of information systems and
has additional systems embedded in its operational infrastructure, the Company
cannot be sure that all its systems will work together in a Year 2000 compliant
fashion. Furthermore, the Company cannot be sure that it will not suffer
business interruptions, either because of its own Year 2000 problems, or those
of its customers or suppliers whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to the Company. If the Company
fails to satisfactorily resolve Year 2000 issues related to its products in a
timely manner, it could be exposed to liability to third parties. The Company
is continuing to evaluate Year 2000 related risks and will take such further
corrective actions as may be required.
14
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is pursuing its appeal of the judgment of the trial court in
the lawsuit titled Irvine Meadows v. Shuster, et al. (OCSC Case No. 771509). On
October 27, 1998, the plaintiffs, as the prevailing party in this matter, were
awarded costs in the amount of approximately $545,000. The Company is also
appealing this award. Subsequently, the parties entered into settlement
negotiations, which are ongoing. There can be no assurance whether a settlement
will be reached, or what the terms of such settlement may be. Due to the
inherent uncertainties regarding litigation, it is not possible to assess the
likelihood that the Company will prevail on appeal if a settlement is not
reached.
Item 2. Changes in Securities
On January 4, 1999, the Company granted stock options to the Company's
general outside counsel, Richman, Lawrence, Mann, Chizever & Phillips, a
Professional Corporation ("Richman, Lawrence"), to purchase 200,000 shares of
the Company's Common Stock at $.23 per share. The shareholders of Richman,
Lawrence exercised the options effective the same day. Proceeds to the Company
from this exercise were $46,000.
On January 4, 1999, the Company issued stock options to purchase an
aggregate of 200,000 shares of the Company's Common Stock to certain directors,
including Brian Shuster, and an aggregate of 375,000 shares of the Company's
Common Stock to certain employees of the Company. All such options are
exercisable at $.23 per share. The options granted to the directors vest
immediately and the options granted to the employees vest on varying terms
ranging from immediately to five years.
On February 1, 1999, the Company issued a stock option to Brian Shuster to
purchase 200,000 shares of the Company's Common Stock. The option is
exercisable at $.35 per share and vests immediately.
In March 1999, the Company issued 150,000 shares of Common Stock to
Westminster Capital, Inc., upon the exercise of a stock purchase warrant for
150,000 shares of the Company's Common Stock at $.40 per share. Proceeds to the
Company in connection with the exercise were $60,000.
In March 1999, the Company issued 100,000 shares of Common Stock to Whale
Securities Co., L.P., upon the exercise of a stock purchase warrant for 100,000
shares of the Company's Common Stock
15
<PAGE>
at $.75 per share. Proceeds to the Company in connection with the exercise were
$75,000.
Subsequent to the end of the quarter ended March 31, 1999, the following
transactions took place:
(i) on April 13, 1999, the Company and Strata Equities Limited ("Strata")
amended the Warrant Agreement dated April 2, 1998 relating to the issuance of a
stock purchase warrant (the "Warrant") for 600,000 shares of the Company's
Common Stock at $.27 per share, to permit a cashless exercise of the Warrant,
and Strata exercised the Warrant on a cashless basis. Based on an intraday
trading price of $4.60 per share of the Company's Common Stock on April 13,
1999, the Company issued to Strata 564,783 shares of the Company's Common Stock.
The Company received no proceeds from the issuance, as a result of the cashless
exercise.
(ii) on April 29, 1999, the Company sold 500,000 shares of Common Stock to
one individual, at a purchase price of $2.00 per share. Proceeds to the Company
in connection with the sale were $1,000,000.
(iii) in April 1999, the Company issued 82,222 shares of Common Stock to
Mary Jane Shapiro, upon the cashless exercise of a stock purchase warrant for
100,000 shares of the Company's Common Stock at $.75 per share. The Company
received no proceeds from the issuance, as a result of the cashless exercise.
(iv) in April 1999, the Company issued 10,000 shares of Common Stock to
Alvin Alexander, a director of the Company, upon the exercise of a stock option
at an exercise price of $.30 per share. Proceeds to the Company in connection
with the exercise were $3,000.
Each of the foregoing offerings (i) was made directly by the officers and
directors of the Company and no underwriting discounts or commissions were paid,
and (ii) was exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof, for transactions by an issuer not involving
any public offering; or did not involve the "sale" of a security.
Item 3. Other Information
UIT and Brian Shuster have entered into an Employment Agreement dated as of
January 1, 1999 (the "Employment Agreement"), pursuant to the terms of which
Brian Shuster is employed as President of UIT at an initial base salary of
$240,000 per year. The Employment Agreement provides for annual 10% increases in
16
<PAGE>
Brian Shuster's base salary. The Employment Agreement provides for a rolling
five-year term. This is accomplished by extending the initial five-year term of
the Employment Agreement automatically for successive one-year periods unless
written notice of termination is given at least 60 days prior to the end of the
completion of the first year of the then-current five-year period. The
Employment Agreement also provides that any inventions developed by Brian
Shuster during his employment by UIT and which relate to the business of UIT,
will remain the property of UIT. The Employment Agreement also contains a
confidentiality provision to protect UIT's trade secrets and other confidential
information. Brian Shuster is permitted to engage in outside business activities
to the extent that such obligations do not interfere with his duties to UIT.
In addition, the Company and UIT have entered into an agreement dated as of
January 1, 1999, pursuant to which UIT has agreed to make available the services
of Brian Shuster to consult for the Company on a variety of matters. The Company
has agreed to pay UIT $5,000 per month for making available Brian Shuster's
services under this agreement; Brian Shuster will receive no payments under this
agreement. Brian Shuster has also agreed that UIT may credit against his salary
any amounts he actually receives from Genisys pursuant to the Genisys Agreement
for consulting services rendered to NII since January 1, 1999.
UIT and Harry Shuster have entered into a Consulting Agreement dated as of
January 1, 1999 (the "Consulting Agreement"), pursuant to the terms of which
Harry Shuster is retained as a consultant to UIT at an initial compensation of
$60,000 per year. The Consulting Agreement provides for annual 10% increases in
Harry Shuster's compensation. The Consulting Agreement provides for a rolling
five-year term. This is accomplished by extending the initial five-year term of
the Consulting Agreement automatically for successive one-year periods unless
written notice of termination is given at least 60 days prior to the end of the
completion of the first year of the then-current five-year period. Harry
Shuster is permitted to engage in outside business activities to the extent that
such obligations do not interfere with his duties to UIT.
Item 4. Exhibits and Reports on Form 8-K
(a) Exhibits
(4-6) Agreement dated April 13, 1999 between United Leisure
Corporation and Strata Equities Limited
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
17
<PAGE>
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.
Date: May 17, 1999 UNITED LEISURE CORPORATION
By: /s/ Harry Shuster
------------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Financial Officer)
18
<PAGE>
EXHIBIT 4-6
UNITED LEISURE CORPORATION
1990 Westwood Boulevard, Penthouse
Los Angeles, California 90025
April 13, 1999
Strata Equities Limited
c/o Camhy, Karlinsky & Stein, LLP
1740 Broadway, 16th Floor
New York, New York 10019
Re: Warrant to Purchase 600,000 Shares of Common Stock of United Leisure
Corporation, Dated April 2, 1998. Issued to Strata Equities Limited
--------------------------------------------------------------------
Gentlemen:
This letter shall constitute the following agreement between Strata
Equities Limited ("Strata") and United Leisure Corporation ("ULC") regarding the
above-referenced Warrant ("Warrant").
1. ULC hereby agrees to permit Strata to fully exercise the Warrant based
on a cashless exercise instead of the stated exercise price of $.27 per share.
2. Based upon the $4.60 per share market value of ULC common stock on
today's date, Strata shall be entitled to receive 564,783 shares of ULC common
stock as a result of the cashless exercise of the Warrant.
3. ULC acknowledges and agrees that the aforesaid 564,783 shares are
tradable pursuant to Regulation S and Rule 144 under the Securities Act of 1933,
as amended.
4. By its signature below, Strata hereby exercises the Warrant pursuant
to the foregoing terms and conditions.
UNITED LEISURE CORPORATION
By: /s/ Harry Shuster
--------------------------
Harry Shuster, President
The foregoing is agreed to and accepted:
STRATA EQUITIES LIMITED
By: /s/ E. Morrison
---------------
Its: Director
---------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 461,656
<SECURITIES> 0
<RECEIVABLES> 133,036
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 637,350
<PP&E> 271,874
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,976,780
<CURRENT-LIABILITIES> 4,030,466
<BONDS> 120,000
0
0
<COMMON> 143,688
<OTHER-SE> 3,577,626
<TOTAL-LIABILITY-AND-EQUITY> 7,976,780
<SALES> 0
<TOTAL-REVENUES> 319,443
<CGS> 0
<TOTAL-COSTS> 1,027,715
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (115,735)
<INCOME-PRETAX> (1,011,585)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,011,585)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,011,585)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
