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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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UNITED LEISURE CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 13-2652243
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1990 Westwood Boulevard 90025
Los Angeles, California (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
(Registrant's telephone number, including area code) (310) 441-0900
Check whether the issuer (1) filed all reports required 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 the past 90 days. Yes [X] No [_]
The number of shares of Common Stock, $.01 par value, outstanding (the only
class of common stock of the Company outstanding) was 16,515,868 on November 10,
1999.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
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UNITED LEISURE CORPORATION AND SUBSIDIARIES
Quarter Ended September 30, 1999
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited) 3
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operation and Comprehensive
Income (Loss) for the Three Months Ended September 30,
1999 and 1998 and the Nine Months Ended September 30,
1999 and 1998 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31,
1999 1998
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(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 502,822 $ 799,369
Receivables 35,962 53,153
Prepaid expenses and other current assets 111,232 78,082
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TOTAL CURRENT ASSETS 650,015 930,604
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PROPERTY AND EQUIPMENT, NET 161,611 384,984
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INVESTMENTS
Investment in United Hotel at equity - related party 3,148,521 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 3,887,188 4,381,252
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OTHER ASSETS
Loan receivable from Grand Havana - related party 732,771 619,298
Due from former officer 243,937 332,627
Assets held for sale - 1,663,857
Deposits and other assets 68,172 78,929
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1,044,879 2,694,711
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$ 5,743,693 $ 8,391,551
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,900,000 $ 1,900,000
Accrued interest 386,370 406,808
Accounts payable and accrued expenses 1,106,541 478,785
Due to related parties 170,949 107,535
Deferred revenues 36,948 28,060
Litigation Settlement 176,842 -
Deposits and other 2,612 5,652
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TOTAL CURRENT LIABILITIES 3,780,262 2,926,840
LONG-TERM DEBT - 842,000
COMMON STOCK SUBJECT TO REPURCHASE - 150,001 SHARES - 78,000
STOCKHOLDERS' EQUITY
Preferred stock, $100 par value; authorized - 100,000 shares;
issued and outstanding - none - -
Common stock, $.01 par value; authorized - 30,000,000 shares;
issued and outstanding - 16,085,854 shares at September 30, 1999
and 13,918,849 shares at December 31, 1998 159,358 139,188
Additional paid-in capital 26,825,998 24,844,168
Accumulated deficit (25,021,925) (20,438,645)
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TOTAL STOCKHOLDERS' EQUITY 1,963,431 4,544,711
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$ 5,743,693 $ 8,391,551
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</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Licensing fees $ - $ - $ 200,000 $ 410,817
Children's recreational activities 150,037 816,438 751,577 1,747,931
----------- ----------- ----------- -----------
TOTAL REVENUE 150,037 816,438 951,577 2,158,748
EXPENSES
Direct operating expenses 1,261,008 954,059 2,778,899 2,387,640
Selling, general and administrative expenses 277,037 233,348 1,051,778 534,589
Depreciation and amortization 24,302 42,387 110,129 127,901
----------- ----------- ----------- -----------
1,562,347 1,229,794 3,940,806 3,050,130
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LOSS BEFORE OTHER INCOME (EXPENSE) (1,412,310) (413,356) (2,989,229) (891,382)
OTHER INCOME (EXPENSE)
Litigation settlement - 4,043,020 (185,000) 4,043,020
Legal costs 12,544 (340,190) 12,544 (590,640)
Equity in net income (loss) of United Hotel (87,597) (61,000) (133,932) (176,000)
Equity in net loss of Genisys - - (210,133) -
Realized loss from write-down of investment in
Grand Havana - - - (946,131)
Loss on sale of assets (705,265) (705,265)
Interest income (80,001) 40,243 - 108,951
Interest expense (157,961) (97,081) (370,462) (288,306)
Other, net 33,168 18,525 (1,803) 45,318
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TOTAL OTHER INCOME (EXPENSE) (985,112) 3,603,517 (1,594,051) 2,196,212
----------- ----------- ----------- -----------
NET LOSS (2,397,422) 3,190,161 (4,583,280) 1,304,830
----------- ----------- ----------- -----------
OTHER COMPREHENSIVE LOSS
Unrealized holding loss on securities arising during
the period - - - (203,725)
Less: reclassification adjustment for loss realized
in net loss - - - 946,131
----------- ----------- ----------- -----------
- - - 742,406
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COMPREHENSIVE LOSS $(2,397,422) $ 3,190,161 $(4,583,280) $ 2,047,236
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,842,186 13,918,000 15,600,854 13,508,000
=========== =========== =========== ===========
BASIC AND DILUTED EARNING (LOSS) PER SHARE $ (0.16) $ 0.23 $ (0.29) $ 0.10
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
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UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<CAPTION>
Nine Months Ended
--------------------------------------
September 30, September 30,
1999 1998
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(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,583,280) $1,304,830
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 110,129 127,901
Loss on termination of lease 45,333 -
Issuance of common stock for services - 118,300
Fair value of options granted to non-employees 237,700 -
Write-down of investment in Grand Havana - 946,131
Loss on sale of assets 705,265
Licensing fees - (410,817)
Equity in net loss of United Hotel (87,597) 176,000
Equity in net loss of Genisys 210,133 -
Accrual of interest income from related parties - 93,878
Changes in operating assets and liabilities:
Receivables 17,191 11,364
Prepaid expenses and other current assets (33,150) (52,125)
Deposits - (1,335)
Accrued interest (20,438) -
Accounts payable and accrued expenses 627,756 (561,018)
Accrued expenses due to related parties 63,414 (255,657)
Litigation settlement 176,842
Deposits and other liabilities (3,041) -
Deferred revenues 8,888 8,081
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NET CASH USED IN OPERATING ACTIVITIES (2,524,853) 1,505,533
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (65,584) (49,706)
Distribution from United Hotel 371,528
Loans receivable from Grand Havana (113,473) -
Advances to former officer, net 88,690 -
Collection of loan receivable from Grand Havana - -
Collections from disposition of assets held for sale and
fixed assets 1,092,088
Deposits and other 10,757 (58,519)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,384,007 (108,225)
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CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 1,500,000 229,680
Notes payable - (25,000)
Payment on long term debt (842,000)
Common stock issued for warrants and options exercised 186,300 -
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NET CASH PROVIDED BY FINANCING ACTIVITIES 844,300 204,680
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NET DECREASE IN CASH AND CASH EQUIVALENTS (296,547) 1,601,988
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 799,369 152,770
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 502,822 $1,754,758
=========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
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UNITED LEISURE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 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 nine months ended September 30, 1999 and
1998, (b) the consolidated financial position at September 30, 1999 and (c)
the consolidated cash flows for the nine months ended September 30, 1999
and 1998. Interim results are not necessarily indicative of results for a
full year.
The interim consolidated financial statements and notes are condensed and
do not contain certain information included in the annual financial
statements and notes of the Company. The interim consolidated financial
statements and notes included herein should be read in conjunction with the
year-end financial statements and notes included herein.
2. LICENSING REVENUE
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.
3. STOCKHOLDERS' EQUITY
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 .
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.
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.
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.
On May 26, 1999, the Company granted options to Julie Lepere, Secretary of
the Company, to purchase an aggregate of 16,000 shares of the Company's
Common Stock, at various exercise prices and subject to vesting, as
follows:
(i) $1.00 per share as to 5,000 shares, which are immediately
exercisable;
(ii) $2.25 per share as to 6,500 shares, which are exercisable at any time
after May 26, 2000 and on or before May 26,2001;
(iii) $1.50 per share as to 4,500 shares, which are exercisable at any
time after May 26, 2001 and on or before May 26,2002;
provided, however, that in the event the employee's employment with the
Company is terminated prior to May 26, 2002, the vested portion of the
options become non-exercisable six months after such termination.
On May 26, 1999, the Company granted an option to purchase 100,000 shares
of the Company's Common Stock to Lou Pitt, a consultant to the Company, at
an exercise price of $1.00 per share. The option is exercisable immediately
upon grant and expires on May 26, 2002.
On June 24, 1999, the Company sold 250,000 shares of its Common Stock at a
purchase price of $2.00 per share, to the same individual who had purchased
500,000 shares of the Company's Common Stock on April 29, 1999. Proceeds to
the Company from the second sale were $500,000.
In June 1999, the Company issued 10,000 shares of its Common Stock to
Shannon Taylor, a consultant to the Company, in connection with her
exercise of options which were granted on January 4, 1999. Proceeds to the
Company in connection with such exercise were $2,300.
On July 16, 1999, the Company granted an option to purchase 10,000 shares
of the Company's Common Stock to James Orr, a consultant to the Company, at
an exercise price of $1.00 per share. On the date of such grant, the
closing bid price of the Company's Common Stock as quoted on the OTC
Bulletin Board was $3.1875. The option is exercisable immediately upon
grant and expires on July 16, 2000.
On July 21, 1999, the Company and Media Group, Inc. ("MGI") entered into an
agreement (the "MGI Agreement") for the duplication of one million CD-ROM
shrink-wrapped packages for NBC. The total order is $380,000. Pursuant to
the MGI Agreement, the Company made a payment of $95,000 to MGI and
delivered 150,000 shares of its Common Stock (the "MGI Shares"). The
Company recorded a liability on its books for the remaining outstanding
balance of $285,000. The Company further agreed to include the MGI Shares
in a registration statement which the Company filed with the Securities and
Exchange Commission on September 1, 1999 for the benefit of certain selling
stockholders (the "Selling Stockholders' Registration Statement"). The
Company has agreed to make further payments to MGI under the MGI Agreement
until the full $380,000 is paid. The Company has the right to have the MGI
Shares returned to the Company and to pay the $380,000 in full. If the
Company does not so elect, MGI has the right to (i) put the MGI Shares to
the Company and the Company will pay the balance then due under the MGI
Agreement, or (ii) retain the MGI Shares and sell them pursuant to the
prospectus forming a part of the Selling Stockholders' Registration
Statement, in which case any amounts received by MGI over the balance due
at that time shall be refunded to the Company. The Company has further
agreed to pay to MGI any shortfall between the net proceeds of any sale of
the MGI Shares and the balance owing under the MGI Agreement. There were no
proceeds to the Company in connection with this issuance.
During the quarter ended September 30, 1999, 150,000 shares of the
Company's Common Stock subject to a repurchase agreement were recorded as
equity when the repurchase requirement lapsed.
6
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UNITED LEISURE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
4. LITIGATION
On November 12, 1996, Irvine Meadows, one of the Company's sublessees and
the operator of the Irvine Meadows Amphitheater, sued the Company and Harry
Shuster in Orange County, California Superior Court (Case No. 771509). The
plaintiff sought an injunction preventing the Company from removing certain
improvements from the property at the expiration of the lease. On January
3, 1997, Irvine Meadows filed a first amended complaint and sought an
injunction and declaratory relief but no money damages. On February 19,
1997, the trial judge granted Irvine Meadows' request for an injunction and
barred the Company from removing the leasehold improvements from the
property.
The plaintiffs won the suit on a motion for summary judgment in May 1998.
The Company appealed the decision of the court. On October 27, 1998, the
plaintiffs were awarded costs in the amount of approximately $545,000. The
Company also appealed this award.
On May 7, 1999, the Company settled this litigation. The Company agreed to
dismiss with prejudice the appeal of the trial court's judgment. The
Company also agreed to pay the plaintiffs not less than $225,000 in
principal amount, plus 6% interest compounded daily, in installments. Of
this amount, the Company's litigation counsel agreed to contribute
approximately $40,000. Concurrently with the signing of the settlement
agreement, $26,316.23 was paid, which includes principal of $25,000. On
July 1, 1999, an additional $26,841.61 was paid, which includes principal
of $25,000. The Company is required to make an additional payment of
$90,144.56, which includes principal of $87,500, on October 1, 1999, and a
final payment of $88,822.28, which includes principal of $87,500, on
December 31, 1999. If the Company fails to make any payment when it is due,
the Company can be held in default of the settlement agreement. In such
case, the plaintiffs could seek to enforce the original court's judgment in
an amount not to exceed $300,000, less any payments of principal the
Company has already made under the settlement agreement, plus 6% interest.
On June 7, 1999, the Company was sued by Hyperlock Technologies, Inc.
("Hyperlock") in the United States District Court for the Northern District
of Illinois, Eastern Division. Hyperlock alleges that the Company has
infringed United States Patent No. 5,892,825, (the "'825 patent") entitled,
"Method of Secure Server Control of Local Media Via a Trigger Through a
Network for Instant Local Access of Encrypted Data on Local Media." On
October 14, 1999, Hyperlock amended its complaint to allege the
infringement of an additional patent. Hyperlock is seeking an injunction
against the Company and unspecified damages. Hyperlock also seeks treble
damages, court costs and reasonable attorneys' fees and such other and
further relief as the court may deem to be just and proper. Based on a
review of the '825 patent, the Company believes that the suit is without
merit. The Company believes that it has not committed any acts of
infringement, and intends to defend this suit vigorously. Due to the
inherent uncertainties regarding litigation, the Company can make no
prediction about the outcome of the litigation.
5. SUBSEQUENT EVENT
In October, 1999, the Company received approximately $3,000,000 as the
result of the distribution from its investment in Hotel and Casino. This
distribution resulted from the sale of the real estate in Hotel and Casino.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward looking statements regarding
events and financial trends that may affect the Company's future operating
results and financial position. Such statements can be identified by the use of
such words as "may," "expect," "believe," "anticipate," "intend" and similar
expressions. Such statements involve risks and uncertainties that could cause
the Company's actual results to differ materially. Factors that could cause or
contribute to such differences include, but are not limited to, 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. The
Company undertakes no obligation to publicly release the result of any revision
of these forward-looking statements to reflect events or circumstances after the
date they are made or to reflect the occurrence of unanticipated events. 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.
OVERVIEW
Through its wholly owned subsidiary, United Internet Technologies, Inc.
("United Internet"), the Company is primarily engaged in the business of
developing and licensing proprietary Internet technology and sites on the World
Wide Web that incorporate the Company's technology. The Company has developed
two proprietary technologies: (1) Parallel Addressing Technology and (2) Dynamic
Integrated Video Overlay. The use of this technology is primarily licensed to
others for their use. The Company has licensed an application for television to
NBC, an application for wrestling and related activities to World Championship
Wrestling, Inc. ("WCW") and travel-related applications to Genisys Reservation
Systems, Inc. The Company's technology uses proprietary program instruction
applications to provide a means of linking a full motion video on a user's CD-
ROM or DVD-ROM drive to a site on the Web. The Company intends to pursue
licensing agreements with others and may also develop its own Web sites.
Before February 1997, the Company's primary business was to act as a
developer and manager of facilities for children's recreational activities. As
part of the Company's decision to reorient its business to developing and
licensing its technology, it closed some of its facilities and intends to
dispose of others. In August 1999, the Company sold real property located in El
Cajon, California which was previously used for some of its children's
recreational activities. In October 1999, the Company sold its real estate
holdings in Las Vegas. As a result of the reduced operations of the Company's
children's recreational activities, it had significantly fewer employees through
the third quarter of 1999.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998.
The Company had total revenue of $150,037 in the quarter ended September
30, 1999, compared to total revenue of $816,438 for the quarter ended September
30, 1998, a decrease of $666,401 or approximately 81.6%. This decrease results
primarily from lower revenue from children's recreational activities, due
primarily to a decline in admissions at the Company's three Planet Kids
locations, as well as the fact that Frasier's Frontier amusement park and Camp
Frasier facilities did not operate at all during 1999. All of the Company's
revenue in the quarter ended September 30, 1999 was provided by Planet Kids
centers. Because the Company has reoriented its business to focus on its
Internet 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. There were no
licensing fees received in the quarter ended September 30, 1999.
Total operating expenses increased from $1,229,794 for the quarter ended
September 30, 1998 to $1,562,347 for the quarter ended September 30, 1999, an
increase of $332,553 or approximately 27%. This increase was due primarily to
increases in operating expenses of United Internet, including salaries and
consulting fees for management and
8
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programmers and promoting the Company's technology. This increase was partially
offset by decreased expenses for personnel related to the Company's remaining
children's recreational facilities.
For the quarter ended September 30, 1999, the Company had a net loss of
$(2,397,422) or $(.16) per share as compared to net income of $3,190,161 or $.23
per share for the quarter ended September 30, 1998. This decrease in net income
is primarily a result of the receipt by the Company of approximately $4 million
in settlement of litigation that the Company recorded in the third quarter of
1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998.
The Company had total revenue of $951,577 in the nine-month period ended
September 30, 1999, compared to total revenue of $2,158,748 for the nine-month
period ended September 30, 1998, a decrease of $1,207,171 or approximately
55.9%. This decrease results primarily from a decrease in revenue from
children's recreational activities partially offset by licensing fees received
from the licensing of the Company's interactive technology to WCW in connection
with its wrestling Web site.
Total operating expenses increased from $3,050,130 for the nine-month
period ended September 30, 1998 to $3,940,806 for the nine-month period ended
September 30, 1999, an increase of $890,676 or approximately 29.2%. This
increase was due to increases in direct operating expenses, primarily those
associated with United Internet, including salaries and consulting fees for
management and programmers and promoting the Company's technology.
For the nine months ended September 30, 1999, the Company had a net loss of
$(4,583,280) or $(.29) per share, as compared to net income of $2,047,236 or
$.10 per share for the nine months ended September 30, 1998, a decrease of
$6,630,516. This decrease of $6,630,516 is a result of the loss of
approximately $705,000 on the sale of assets, a decrease in revenue from
licensing fees compared to the comparable nine-month period in 1998 and a
decrease in revenue from children's recreational activities. In addition, the
Company received a payment of approximately $4 million in settlement of
litigation in the comparable nine-month period in 1998.
Liquidity and Financial Condition
The Company has experienced operating losses in recent years. For the
three months ended September 30, 1999, the Company had cash and cash equivalents
of $502,821 and a working capital deficit of $3,130,247.
The Company's future capital requirements will depend on various factors
including:
1. The number of applications using the Company's technology that the
Company wants to develop;
2. United Internet's need to hire additional technical and marketing
personnel; and
3. The length of time that it takes the Company to dispose of its remaining
children's recreational facilities and the manner of disposition.
Effective at the close of business on December 31, 1998, the Company's
Common Stock was delisted from The Nasdaq Stock Market because it did not meet
the minimum bid requirement for continued listing on the Nasdaq SmallCap Market.
The Company's Common Stock is now listed on the OTC Bulletin Board which may
make it more difficult for the Company to offer and sell 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.
9
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As of September 30, 1999, investments in and loans to affiliated companies,
Grand Havana Enterprises, Inc., a Delaware corporation ("Grand Havana"), HEP II,
L.P., a California limited partnership ("HEP II") and United Hotel & Casino,
L.L.C., a Delaware limited liability company, totaled approximately $3,887,188
or approximately 66.5% of total assets. Grand Havana and HEP II have substantial
losses and working capital deficits, creating potential 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 in and receivables from 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 September 30,
1999, the Company had a net receivable from Harry Shuster, former President and
CEO of the Company, of approximately $244,000.
The Company expects that its primary sources for cash over the next twelve
months will be its current cash and income investments, repayment of amounts
previously advanced by the Company to Grand Havana and proceeds from the
recently completed sales of its property in El Cajon, California and Las Vegas.
After repayment of a $1.9 million note payable to Westminster Capital, Inc., the
Company realized in excess of $3 million from the October 1999 sale of its real
estate holdings in Las Vegas. Although the Company believes these sources will
provide the Company with sufficient funds to meet the Company's anticipated
working capital and capital expenditures needs 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
its technology. While the continued development of some applications can be
funded from internal sources, more aggressive development and marketing may
require additional financing from either public or private sources. To
accomplish this, the Company may raise additional capital by borrowing money or
through a public or private sale of debt or equity securities. There can be no
assurance, however, that the Company will be able to acquire additional
financing on favorable terms, or at all.
Year 2000 Compliance
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 is comprised of four phases: (1) risk
identification, (2) risk assessment, (3) correction and contingency development,
and (4) implementation and testing. The Company's Year 2000 project is
currently in the implementation and testing phase.
The Company believes that the software products currently produced by the
Company are Year 2000 compliant, although 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. 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. Based on
information received from vendors so far, the Company believes that all primary
software applications that the Company uses are either Year 2000 compliant or,
with upgrades, will be Year 2000 compliant. The costs of the upgrades are not
expected to be material.
The Company believes that its greatest potential risks are associated with
information systems and systems embedded in its operations and infrastructure,
as well as its reliance on Year 2000 compliance by the Company's vendors and
suppliers of operating systems and software applications. The Company is
continuing to assess its operations and infrastructure and cannot yet predict
whether significant additional problems will be identified. The Company has not
yet determined the full extent of contingency planning that may be required if
additional problems are identified.
Based on the status of the assessments made and remediation plans developed
to date, the Company is not able 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 developed remediations for all problems, developed any
contingency plans, or completely implemented or tested any of its remediation
plans.
10
<PAGE>
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
software 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 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 operations and 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.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On July 16, 1999, the Company granted an option to purchase 10,000 shares
of the Company's Common Stock to James Orr, a consultant to the Company, at an
exercise price of $1.00 per share. On the date of such grant, the closing bid
price of the Company's Common Stock as quoted on the OTC Bulletin Board was
$3.1875. The option is exercisable immediately upon grant and expires on July
16, 2000.
On July 21, 1999, the Company and Media Group, Inc. ("MGI") entered into an
agreement (the "MGI Agreement") for the duplication of one million CD-ROM
shrink-wrapped packages for NBC. The total order is $380,000. Pursuant to the
MGI Agreement, the Company made a payment of $95,000 to MGI and delivered
150,000 shares of its Common Stock (the "MGI Shares"). The Company has recorded
a liability on its books for the remaining outstanding balance of $285,000. The
Company further agreed to include the MGI Shares in a registration statement
which the Company filed with the Securities and Exchange Commission for the
benefit of certain selling stockholders (the "Selling Stockholders' Registration
Statement") on September 1, 1999. The Company has agreed to make further
payments to MGI under the MGI Agreement until the full $380,000 is paid. The
Company has the right to have the MGI Shares returned to the Company and to pay
the $380,000 in full. If the Company does not so elect, MGI has the right to
11
<PAGE>
(i) put the MGI Shares to the Company and the Company will pay the balance then
due under the MGI Agreement, or (ii) retain the MGI Shares and sell them
pursuant to the prospectus forming a part of the Selling Stockholders'
Registration Statement, in which case any amounts received by MGI over the
balance due at that time shall be refunded to the Company. The Company has
further agreed to pay to MGI any shortfall between the net proceeds of any sale
of the MGI Shares and the balance owing under the MGI Agreement. There were no
proceeds to the Company in connection with this issuance.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
__________
(1) Form 8-K dated August 11, 1999, and filed with the Commission on August
24, 1999, with respect to the disposition of certain real property located in El
Cajon, California pursuant to a Purchase Agreement entered into between the
Company and Shih Ching Chiang.
(2) Form 8-K dated October 5, 1999, and filed with the Commission on
October 6, 1999, with respect to a press release announcing the extension of the
expiration date of the Company's Class A Common Stock Purchase Warrants.
(3) Form 8-K dated October 21, 1999, and filed with the Commission on
October 26, 1999, with respect to a press release reporting the sale of the
Company's real estate holdings in Las Vegas.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
United Leisure Corporation,
a Delaware corporation
November 12, 1999 By: /s/ Brian Shuster
--------------------------------------
Brian Shuster
Chairman of the Board and Chief Executive
Officer
(Duly Authorized Officer and Principal
Financial Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 502,822
<SECURITIES> 0
<RECEIVABLES> 35,962
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 650,015
<PP&E> 161,611
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,743,693
<CURRENT-LIABILITIES> 3,780,262
<BONDS> 0
0
0
<COMMON> 159,358
<OTHER-SE> 1,804,073
<TOTAL-LIABILITY-AND-EQUITY> 5,743,693
<SALES> 951,577
<TOTAL-REVENUES> 951,577
<CGS> 3,830,677
<TOTAL-COSTS> 3,940,806
<OTHER-EXPENSES> 1,223,589
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 370,462
<INCOME-PRETAX> (4,583,280)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,583,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,583,280)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
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