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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 Identification No.)
incorporation or organization)
1990 WESTWOOD BOULEVARD, PENTHOUSE
LOS ANGELES, CALIFORNIA 90025-4650
(Address, including zip code, of principal executive offices)
(310) 441-0900
(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [__]
Indicate the number of shares outstanding of each class of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING
----- -----------
Common Stock, par value 20,410,375 shares, as
$0.01 per share. of November 6, 2000
Transitional Small Business Disclosure
Format (Check one): Yes [_] No [X]
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<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements...................................1
Condensed Consolidated Balance Sheets,
September 30, 2000 (unaudited)
and December 31, 1999 (audited)........................1
Condensed Consolidated Unaudited
Statements of Operations and Comprehensive
Income (Loss) for the Three Months
Ended September 30, 2000 and 1999 and
Nine Months Ended September 30, 2000 and 1999..........2
Condensed Consolidated Unaudited Statements
of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999......................3
Notes to Condensed Consolidated
Unaudited Financial Statements.........................4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................8
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings.....................................15
ITEM 2. Changes in Securities.................................15
ITEM 3. Defaults Upon Senior Securities.......................15
ITEM 4. Submission of Matters to a Vote of
Security Holders......................................15
ITEM 5. Other Information.....................................15
ITEM 6. Exhibits and Reports on Form 8-K......................15
SIGNATURE.....................................................................16
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................... $ 9,725,952 $ 1,998,059
Receivables....................................................... 4,917 88,540
Deferred production cost.......................................... - 115,027
Prepaid expenses and other current assets......................... 194,438 75,208
----------------- -----------------
Total current assets................................................... 9,925,307 2,276,834
----------------- -----------------
Property and equipment, net............................................ 809,890 181,765
----------------- -----------------
Investments
Investment in HEP II at equity - related party.................... 100,000 100,000
Investment in Grand Havana at fair value - related party.......... 105,753 101,500
----------------- -----------------
Total investments...................................................... 205,753 201,500
----------------- -----------------
Other Assets
Loan receivable from Grand Havana - related party................. 830,722 779,680
Loans receivable from other - related party....................... 409,406 46,387
Patent costs ..................................................... 155,709 -
Capitalized development costs..................................... 488,507 -
Due from former officer........................................... - 81,027
Deposits and other assets......................................... 80,618 61,689
----------------- -----------------
Total other assets..................................................... 1,964,962 968,783
----------------- -----------------
Total assets........................................................... $ 12,905,912 $ 3,628,882
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses............................. $ 773,170 $ 751,976
Due to related parties............................................ 98,498 141,774
Deferred revenues................................................. 8,549 235,923
Deposits and other................................................ 3,412 2,612
----------------- -----------------
Total current liabilities.............................................. 883,629 1,132,285
Minority Interest...................................................... 306,814 -
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 - 20,405,742 shares in 2000 and
16,230,868 shares in 1999....................................... 202,766 161,468
Additional paid-in capital........................................ 41,129,392 26,892,688
Accumulated deficit............................................... (29,685,318) (24,620,392)
Accumulated other comprehensive income - unrealized gain on
investment...................................................... 68,629 62,833
----------------- -----------------
Total stockholders' equity............................................. 11,715,469 2,496,597
----------------- -----------------
Total liabilities and stockholders; equity............................. $ 12,905,912 $ 3,628,882
================= =================
</TABLE>
See accompanying notes to condensed consolidated unaudited financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- ---------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Revenue
Recreational and corporate activities.......... $ 222,539 $ 295,575 $ 700,049 $ 897,115
Licensing fees................................. - 40,000 701,567 240,000
----------------- ----------------- ----------------- ------------------
Total Revenue....................................... 222,539 335,575 1,401,616 1,137,115
Expenses
Direct operating expenses...................... 924,208 644,900 2,801,392 2,162,791
Selling, general and administrative expenses... 601,888 936,914 2,687,330 1,771,655
Non-cash compensation expense.................. 1,222,567 237,700 1,837,827 237,700
Depreciation and amortization.................. 39,896 24,302 67,199 110,129
----------------- ----------------- ----------------- ------------------
Total expenses...................................... 2,788,559 1,843,816 7,393,748 4,282,275
----------------- ----------------- ----------------- ------------------
Loss before other income (expense) ................. (2,566,020) (1,508,241) (5,992,132) (3,145,160)
Other income (expense)
Litigation settlement.......................... - (57,789) (5,000) (242,789)
Equity in net loss of United Hotel............. - (87,597) - (133,932)
Equity in net loss of Netcruise................ - - - (210,133)
Loss on sale of assets......................... - (705,265) - (705,265)
Gain on sale of investment in Netcruise........ - - 600,000 -
Interest income................................ 136,051 42,514 375,904 122,515
Interest expense............................... (2,126) (157,961) (71,916) (370,462)
Other, net..................................... 4,647 136,917 28,218 101,946
----------------- ---------------- ----------------- ------------------
Total other income (expense)........................ 138,572 (829,181) 927,206 (1,438,120)
----------------- ---------------- ----------------- ------------------
Net loss............................................ (2,427,448) (2,337,422) (5,064,926) (4,583,280)
Other comprehensive income
Foreign currency translation adjustment........ 1,543 - 1,543 -
Unrealized holding gain on securities
arising during the period.................... (30,160) - 4,253 -
----------------- ---------------- ----------------- ------------------
Comprehensive loss.................................. $ (2,456,065) $ (2,337,422) $ (5,059,130) $ (4,583,280)
================= ================ ================= ==================
Weighted average number of common shares outstanding 20,216,903 16,090,193 19,493,093 15,390,966
================= ================ ================= ==================
Basic and diluted loss per share.................... $ (0.12) $ (0.15) $ (0.26) $ (0.30)
================= ================ ================= ==================
</TABLE>
See accompanying notes to condensed consolidated unaudited financial statements.
2
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss........................................................................ $ (5,064,926) $ (4,583,280)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 67,199 110,129
Loss on termination of lease............................................... - 45,333
Non-cash compensation expense.............................................. 1,837,827 237,700
Loss on sale of assets..................................................... - 705,265
Equity in net loss of United Hotel......................................... - 133,932
Equity in net loss of Netcruise............................................ - 210,133
Accrual of interest income from related parties............................ (51,042) -
Changes in operating assets and liabilities:
Receivables................................................................ 83,623 17,191
Deferred production cost................................................... 115,027 -
Prepaid patent defense costs............................................... (155,709) -
Prepaid expenses and other current assets.................................. (119,230) (33,150)
Deposits................................................................... (18,129) (3,041)
Accrued interest........................................................... - (20,438)
Accounts payable and accrued expenses...................................... 21,194 627,756
Accrued expenses due to related parties.................................... 81,027 63,414
Deferred revenues.......................................................... (227,374) 8,888
Litigation settlement...................................................... - 176,842
------------------- ------------------
Net cash used in operating activities........................................... (3,430,513) (2,303,326)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............................................. (695,324) (65,584)
Distribution from United Hotel.................................................. - 149,999
Collections from disposition of assets held for sale and from fixed assets - 1,092,088
Loans receivable from Grand Havana.............................................. - (113,473)
Advances to related party....................................................... (363,019) 88,690
Payments of advances from related party......................................... (43,276) -
Development costs............................................................... (488,507) -
Deposits and other.............................................................. - 10,757
Minority Interest............................................................... 308,357 -
------------------- ------------------
Net cash used in investing activities........................................... (1,281,769) 1,162,477
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock.............................................. 5,701,949 1,500,000
Payment on long term debt....................................................... - (842,000)
Common stock issued for warrants and options exercised.......................... 6,738,226 186,300
------------------- ------------------
Net cash provided by financing activities....................................... 12,440,175 844,300
Net increase in cash and cash equivalents....................................... 7,727,893 (296,549)
Cash and cash equivalents, beginning of period.................................. 1,998,059 799,369
------------------- ------------------
Cash and equivalents, end of period............................................. $ 9,725,952 $ 502,820
=================== ==================
</TABLE>
See accompanying notes to condensed consolidated unaudited financial statements.
3
<PAGE>
UNITED LEISURE CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1 BASIS OF PRESENTATION
The interim condensed consolidated unaudited financial statements presented have
been prepared by United Leisure Corporation (the "Company" or "ULC") without
audit and, in the opinion of management, reflect all adjustments of a normal
recurring nature necessary for a fair presentation of (a) the consolidated
results of operations for the three and nine months ended September 30, 2000 and
1999, (b) the consolidated financial position at September 30, 2000 and December
31, 1999, and (c) the consolidated cash flows for the nine months ended
September 30, 2000 and 1999. The results of operations for the interim periods
are not necessarily indicative of results for the full year. The consolidated
balance sheet of the Company at December 31, 1999 was derived from the audited
consolidated balance sheet at that date. The condensed consolidated unaudited
financial statements and notes are condensed as permitted by Form 10-QSB and do
not contain certain information included in the Annual Report of the Company.
The condensed consolidated unaudited financial statements and notes included
herein should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999.
2. STOCKHOLDERS' EQUITY
In January 2000, the Company sold a total of 2,240,000 shares of its common
stock for a total consideration of $5,600,000, or $2.50 per share, to five
accredited investors. The offer and sale of the shares was exempt from the
registration provisions of the Securities Act of 1933, as amended (the "Act"),
pursuant to Section 4(2) of the Act. No general forms of advertising were used
in connection with the issuance of the shares. The purchasers acquired the
shares for their own account. Each purchaser was, prior to the sale of the
Company's securities, fully informed and advised about such matters concerning
the Company as its business, financial affairs and other matters.
From February 2000 to March 2000, options and warrants to purchase a total of
195,000 shares of common stock of the Company were exercised at prices ranging
from $0.23 to $1.50 per share for a total of $126,950. The options and warrants
were granted between 1988 and 1999 to employees of the Company and to certain
third parties in connection with certain services rendered by them to the
Company. The issuance of shares of common stock upon exercise of the options and
warrants was exempt from the registration provisions of the Act pursuant to
Section 4(2) thereof. The option and warrant holders acquired the shares for
their own account.
During the three months ended June 30, 2000, 1,049,959 Class A Warrants were
exercised at an exercise price of $4.00 each, resulting in proceeds of
$4,199,836 to the Company.
During the three months ended September 30, 2000, 591,762 Class A Warrants were
exercised at an exercise price of $4.00 each, resulting in proceeds of
$2,367,048 to the Company. During the three months ended September 30, 2000,
options to purchase a total of 50,000 shares of common stock of the Company were
exercised at prices ranging from $0.30 to $0.75 per share for a total of
$26,250. The options were granted in 1988 and 1990 to an individual in
connection with services rendered to the Company.
During the three months ended September 30, 2000, in a cashless exercise,
options and warrants exercised by a consultant of the company resulted in the
issuance of 48,153 shares. The options and warrants were granted to the
consultant of the Company in connection with certain services rendered by the
consultant to the Company. The issuance of shares of common stock upon exercise
of the options and warrants was exempt from the registration provisions of the
Act pursuant to Section 4(2) thereof. The option and warrant holder acquired the
shares for his own account.
In November 1999 and January 2000, the Company's subsidiary, United Internet
Technologies, Inc. ("UIT"), granted options to purchase 4,250,000 shares and
665,000 shares, respectively, of its common stock to employees, officers and a
member of the advisory board of UIT. In May and June 2000, UIT granted options
to purchase an aggregate of 1,302,500 shares of its common stock to employees
and members of the advisory board of UIT. During the three months ended
4
<PAGE>
UNITED LEISURE CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
September 30, 2000, UIT granted options to purchase 370,000 shares of its common
stock to its employees and to the management and employees of its German
subsidiary.
3. LITIGATION
The Company and UIT are parties to two patent infringement lawsuits, both
involving Hyperlock Technologies, Inc. In the first action, Case No. 99C3776,
filed on June 7, 1999 by Hyperlock in the Northern District of Illinois,
Hyperlock has alleged infringement by UIT of U.S. Patents Nos. 5,892,825 and
5,937,164. In the second action, originally filed by UIT on February 7, 2000 in
the Central District of California, UIT has alleged infringement by Hyperlock
and Broadbridge Media, LLC of UIT's U.S. Patent No. 5,996,000. The California
case has been transferred to the Northern District of Illinois, and has been
consolidated with the earlier filed Illinois case. On June 28, 2000, in response
to representations made by Broadbridge's counsel, the court dismissed Count I of
the complaint against UIT (alleging infringement by UIT of U.S. Patent No.
5,892,825) without prejudice.
4. SEGMENT INFORMATION
The Company operates in two business segments: developing and licensing Internet
technology and recreational and corporate activities. Recreational and corporate
activities consist of summer day camps and children's play-learning centers
known as Planet Kids. Segment operating loss is defined as total segment revenue
reduced by operating expenses identifiable to that business segment. Corporate
expenses include general corporate administrative costs. The accounting policies
of the reportable segments are the same as those described in the summary of
significant accounting policies. There are no intersegment sales.
<TABLE>
<CAPTION>
INTERNET RECREATIONAL AND CONSOLIDATED
TECHNOLOGY CORPORATE
<S> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenue................................................. $ 701,567 $ 700,049 $ 1,401,616
Direct Operating Expense................................ (1,689,287) (1,112,105) (2,801,392)
Selling, General and Administrative Expense............. (2,071,976) (615,354) (2,687,330)
Non-Cash Compensation Expense........................... (1,837,827) - (1,837,827)
Loss from operations.................................... (4,213,368) (1,778,764) (5,992,132)
Assets.................................................. 9,988,342 2,917,570 12,905,912
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenue................................................. 240,000 897,115 1,137,115
Direct Operating Expense................................ (716,558) (1,446,233) (2,162,791)
Selling, General and Administrative Expense............. (816,041) (955,614) (1,771,655)
Non-Cash Compensation Expense........................... (209,250) (28,450) (237,700)
Loss from operations.................................... (1,709,983) (1,435,177) (3,145,160)
Assets.................................................. 498,374 5,245,319 5,743,693
</TABLE>
5 INVESTMENT IN AND LOAN RECEIVABLE FROM GRAND HAVANA
On September 30, 2000, the quoted market value of the Company's investment in
Grand Havana was $105,753. The Company recorded changes in the market value in
Other Comprehensive Income. The valuation represents a mathematical calculation
based on the closing quotation published by the OTC Bulletin Board for the
common stock of Grand Havana and is not necessarily indicative of the amount
that could be realized upon sale.
5
<PAGE>
UNITED LEISURE CORPORATION
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
An additional $18,699 in Loan Receivable from Grand Havana represents accrued
interest income for the three months ended September 30, 2000 and reimbursable
health insurance premiums and information technology costs paid by the Company.
6 DUE FROM FORMER OFFICER
Changes in Due from Former Officer represent net changes in amounts due to and
from Harry Shuster, which arose from accrued interest income and accrued
interest expense.
<TABLE>
<CAPTION>
7 DUE FROM RELATED PARTIES
<S> <C> <C>
Due from Related Parties is composed of the following items at September 30: 2000 1999
Due from 1990 Westwood Boulevard, Inc........................................ $ 32,131 $ 31,387
Due from Grand Havana Enterprises, Inc....................................... - (5,000)
Due from Officer............................................................. 20,000 -
Due from IIT Shareholder..................................................... 337,275 -
Due from Consultant.......................................................... 20,000 20,000
----------- ----------
Total Due from Related Parties............................................... $409,406 $ 46,387
=========== ==========
</TABLE>
8. DUE TO RELATED PARTIES
Changes in Due to Related Parties represent payments to Brian Shuster of $65,000
for consulting fees earned in 1999, but not paid at that time, and advances to
Grand Havana of $21,724.
9. CAPITALIZATION OF DEVELOPMENT COSTS FOR SOFTWARE HELD FOR SALE
Costs incurred in creating computer software products held for sale are charged
to expense when incurred as research and development until technological
feasibility has been established for the product. Technological feasibility is
established upon the completion of a working prototype. Thereafter, all software
production costs are capitalized and subsequently reported at the lower of
unamortized cost or net realizable value. Capitalized costs are amortized based
on current and future revenue for each product with an annual minimum equal to
the straight-line amortization over the remaining estimated economic life of the
product.
10. PATENTS, TRADEMARKS, PROPRIETARY TECHNOLOGY AND OTHER INTANGIBLES
Patents, trademarks, proprietary technology and other intangibles are carried at
cost less accumulated amortization, which is calculated on a straight-line basis
over the estimated useful lives of the assets, not to exceed 17 years. Legal
fees and other costs to defend these assets are charged as prepaid until the
final outcome of the defense and are capitalized only if the defense is
successful; otherwise, these fees and costs are expensed as incurred.
6
<PAGE>
11. SUBSEQUENT EVENTS
On October 3, 2000, the Company extended the expiration date of its issued and
outstanding Class A Redeemable Common Stock Purchase Warrants to 5 p.m. EDT on
May 9, 2002. As of October 2, 2000, 3,303,279 Class A Warrants were outstanding.
The exercise price of the Class A Warrants is $4.00.
In October 2000, management determined to divest all of the Company's remaining
non-technology businesses. Management concluded that these operations were not
strategically compatible with the Company's core internet-technology business.
Management believes that the opportunity in its core business requires singular
focus of management time and resources. As a result, the decision was made to
divest non-core businesses. These non-core businesses consist of the Company's
Planet Kids business and its investments in Grand Havana, HEP II Limited
Partnership and certain other investments. The Company is currently evaluating
various alternatives for disposition of these businesses.
Net assets and liabilities related to the operations to be discontinued were
$1,170,781 and $341,865, respectively, at September 30, 2000, and $5,000,054 and
$2,819,838, respectively, at December 31, 1999. Net loss from operations to be
discontinued was $(1,778,764) for the nine months ended September 30, 2000.
Revenues generated by the operations to be discontinued were $700,049 for the
nine months ended September 30, 2000.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements regarding
events and financial trends that may affect our future operating results and
financial position. These statements can be identified by the use of such words
as "may," "expect," "believe," "anticipate," "intend" and similar expressions.
These statements involve risks and uncertainties that could cause our 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 our liquidity and financial
condition, regulatory policies, competition from other similar businesses, and
market and general economic factors. We undertake 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 our condensed consolidated unaudited financial statements and
the notes thereto appearing elsewhere in this Quarterly Report on Form 10-QSB.
Quarterly operating results have varied significantly in the past and
can be expected to vary in the future. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a full year.
OVERVIEW
Through our subsidiary, United Internet Technologies, Inc. ("UIT"), we
are primarily engaged in the business of developing technologies that control
and enable a wide range of devices, such as household and business appliances
and monitoring devices to communicate and be controlled over the Internet and
over other digital systems, such as cable, television and wireless networks. We
have developed two proprietary technologies: (1) an Intelligent Control
Interactive Technology(TM) (I-C-IT(TM)) platform and (2) Digitally Integrated
Video Overlay(TM) ("DIVO(TM)").
UIT has developed Intelligent Control Interactive Technology(TM)
("I-C-IT(TM)"), a proprietary platform of hardware and software for networking
devices through various digital delivery systems such as the Internet, cable,
television and wireless networks. Devices empowered with I-C-IT technology
become networkable. This means that these devices can communicate with the user
and/or other devices and be accessed and controlled by the user or other devices
from a remote location. The I-C-IT enabled products are built to function in low
bandwidth environments suitable for consumer markets. Management's intention is
to expand the I-C-IT platform by developing new applications for different
industry sectors serving specific business needs.
Digitally Integrated Video Overlay(TM) (DIVO(TM)) is a technology that
allows high-quality video to be delivered over the Internet while connected with
a standard dial-up telephone line. DIVO files are activated by a server that can
instruct any computer's CD-ROM or DVD-ROM drive and have it activate video files
that have been locally stored on a CD-ROM or DVD-ROM. This process integrates
video material into a website. Once the DIVO software has been downloaded to the
personal computer, the video content can be updated by passive download or
through the distribution of additional CD-ROMs/DVDs. DIVO technology enhances
the web presentation experience and management believes that it is suitable for
the entertainment, travel, shopping, corporate and educational markets.
In the past, we have generally licensed the DIVO technology to large
customers as part of turnkey projects custom-designed for each individual
customer. For instance, we licensed an application of the DIVO technology for
television to NBC, an application of the technology for wrestling and related
activities to World Championship Wrestling, Inc. ("WCW") and travel-related
applications of the technology to Netcruise.com., Inc. (formerly known as
Genisys Reservation Systems, Inc.). We have determined to focus our efforts on
technology development and licensing and move away from inclusive turnkey web
management projects for individual customers. We believe that the development of
licensable versions of our DIVO(TM) technologies will lead to higher margin
product and service offerings. Turnkey licensing efforts were reduced while we
focused our efforts on developing our new licensable DIVO software application.
We began offering a licensable software version of our DIVO technology in August
2000.
In July 2000 we formed a subsidiary in Germany, Interactive Internet
Technologies GmbH ("IIT"). We have invested US$28,302 in, and contributed a
non-exclusive license to market our technologies in Europe to, IIT and we
8
<PAGE>
retained a 61.11% ownership interest. IIT raised total capital of $964,496. IIT
is primarily engaged in the marketing of our DIVO technology in Europe. IIT's
investors, not including us, have committed to funding a further US$1,000,000
into IIT.
Before February 1997, our primary business was to act as a developer
and manager of facilities for recreational and corporate activities. As part of
our decision to reorient our business to developing and licensing our
technology, we closed some of these facilities. In August 1999, we sold real
property located in El Cajon, California, which was previously used for some of
our recreational and corporate activities. In October 1999, we sold our real
estate holdings in Las Vegas, Nevada.
In October 2000, we determined to divest all of our remaining
non-technology businesses. We concluded that these operations were not
strategically compatible with our core internet-technology business. We believe
that the opportunity in our core business requires singular focus of our time
and resources. As a result, we decided to divest our non-core businesses. These
non-core businesses consist of our Planet Kids business and our investments in
Grand Havana, HEP II, Limited Partnership and certain other investments. We are
currently evaluating various alternatives for disposition of these businesses.
CLASS A WARRANT EXTENSION
On October 3, 2000 we extended the expiration date of our issued and outstanding
Class A Redeemable Common Stock Purchase Warrants to 5 p.m. EDT on May 9, 2002.
As of October 2, 2000, there were 3,303,279 Class A Warrants outstanding. The
exercise price of the Class A Warrants is $4.00.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues
We had total revenues of $222,539 for the quarter ended September 30,
2000, compared to total revenues of $335,575 for the quarter ended September 30,
1999, a decrease of $113,036 or approximately 34%. This decrease was
attributable to recreational and corporate activities, which we have determined
to discontinue.
We have determined to focus our efforts on technology development and
licensing and move away from inclusive turnkey web management projects for
individual customers. We believe that the development of licensable versions of
our DIVO(TM) technologies will lead to higher margin product and service
offerings. Turnkey licensing efforts were reduced while we focused our efforts
on developing our new licensable DIVO software application. We began offering a
licensable software version of our DIVO technology in August 2000. In October
2000, we announced a restructuring to focus on our core technology business. We
intend to divest all of our remaining non-technology assets, which include our
recreational and corporate activities. Accordingly, these businesses will be
classified as discontinued operations in our future financial statements and are
not indicative of future revenue streams.
LICENSING FEES. We had no revenues from licensing fees for the quarter
ended September 30, 2000, compared to $40,000 or for the quarter ended September
30, 1999. This is a direct consequence of our change in business model,
involving a refocusing of our DIVO(TM) technology licensing strategy from
providing turnkey licensing projects to creating a licensable software product.
We believe that the development of licensable versions of our DIVO(TM)
technologies will lead to higher margin product and service offerings in the
future. Turnkey licensing efforts were reduced while we focused our efforts on
developing our new licensable DIVO software application. We began offering a
licensable software version of our DIVO technology in August 2000.
RECREATIONAL AND CORPORATE ACTIVITIES. In October 2000, we announced
our intention to restructure our operations by divesting all of our remaining
non-technology assets, which include our recreational and corporate activities.
Accordingly, these businesses will be classified as discontinued operations in
our future financial statements and are not indicative of future revenue
streams. Revenues from recreational and corporate activities were $222,539 for
the quarter ended September 30, 2000, compared to $295,575 for the quarter ended
September 30, 1999, a decrease of $73,036 or approximately 25%.
Operating Expenses
Total operating expenses were $2,788,559 for the quarter ended September
30, 2000 compared to $1,843,816 for the quarter ended September 30, 1999, an
increase of $944,743, or approximately 51%. Of this increase, $1,222,567 is due
to a non-cash compensation charge related to options to purchase shares of UIT
common stock granted to members of UIT's advisory board. Excluding this non-cash
compensation charge, operating expenses were $1,565,992 for the quarter ended
September 30, 2000 compared to $1,606,116 for the quarter ended September 30,
1999, a decrease of $40,124.
DIRECT OPERATING EXPENSES. Direct operating expenses were $924,208 for the
quarter ended September 30, 2000 compared to $644,900 for the quarter ended
September 30, 1999, an increase of $279,308 or approximately 43%. This increase
is primarily due to increased expenditures incurred in connection with the
build-up of our Internet technology business. Increased expenses in connection
with our recreational and corporate activities contributed to the increase in
direct operating expenses. As previously stated, in connection with our decision
to restructure and divest our remaining non-technology assets, the expenses
incurred in connection with our recreational and corporate activities are not
indicative of the future.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $601,888 for the quarter ended September 30, 2000
compared to $936,914 for the quarter ended September 30, 1999, a decrease of
$335,026 or approximately 36%. This decrease was primarily due to decreased
expenses in connection with our recreational and corporate activities and to the
decrease of expenses in connection with expenses connected to turnkey licensing
projects. These decreases were partially offset by our increased selling,
general and administrative expenses in connection with the development of our
I-C-IT technology platform, increased marketing expenditures related to our
DIVO(TM) technology and increased personnel costs as a result of the build-up of
employees in our Internet technology business.
NON-CASH COMPENSATION EXPENSES. We had non-cash compensation expenses
of $1,222,567 for the quarter ended September 30, 2000, compared to $237,700
non-cash compensation expenses for the quarter ended September 30, 1999. This
increase of $984,867, or approximately 414%, was due to options to purchase
shares of our subsidiary's common stock granted to members of UIT's advisory
board and other consultants. The expense was determined by use of the Black
Scholes valuation method.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
were $39,896 for the quarter ended September 30, 2000 compared to $24,302 for
the quarter ended September 30, 1999, an increase of $15,594 or approximately
64%. This increase was due to increased capital expenditures by our subsidiary,
UIT, partially offset by a reduced depreciable asset base and a result of the
sale of certain assets from our recreational and corporate activities.
Other Income
Other income consists of interest income, interest expense, gain on
sale, and litigation settlement. During the quarter ended September 30, 2000,
other income was $138,572 compared to other expense of $829,181 for the quarter
ended September 30, 1999, an increase of $967,753. This increase was primarily
due to an increase in interest income of $93,537 and the absence in the third
quarter of 2000 of an approximately $700,000 loss on sale of assets, which had
been recorded in the third quarter of 1999.
Net Loss
For the reasons stated above, for the quarter ended September 30, 2000,
the Company had a net loss of ($2,427,448) or ($0.12) per share as compared to a
net loss of ($2,337,422) or ($0.15) per share for the quarter ended September
30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues
We had total revenues of $1,401,616 for the nine months ended September
30, 2000, compared to total revenues of $1,137,115 for the nine months ended
September 30, 1999, an increase of $264,501 or approximately 23%. The increase
in total revenue was attributable to increased licensing revenues. We earned
$700,000 in licensing revenues in the first quarter of 2000 pursuant to a
licensing agreement related to interactive CD-ROM's utilizing our DIVO
technology, which we created for Teen People Magazine and Nordstrom, Inc. As
part of a change in strategy, we have decided to focus our efforts on technology
development and move away from inclusive turnkey projects for individual
customers. We believe that the development of licensable versions of our
DIVO(TM) technology will lead to higher margin product and service offerings.
Turnkey licensing efforts were reduced while we refocused our efforts on
developing our DIVO licensable software application. We began offering a
licensable software version of our DIVO technology in August 2000. In October
2000, we announced a restructuring to focus on our core technology business. We
intend to divest all of our remaining non-technology assets, which include our
recreational and corporate activities. Accordingly, these businesses will be
classified as discontinued operations in our future financial statements and are
not indicative of future revenue streams.
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LICENSING FEES. Revenues from licensing fees were $701,567 for the nine
months ended September 30, 2000, compared to $240,000 for the nine months ended
September 30, 1999, an increase of $461,567 or approximately 192%. The increase
is primarily from $700,000 in licensing revenues generated in the first quarter
of 2000 pursuant to a licensing agreement for interactive CD-ROM's utilizing our
DIVO technology, which we created for Teen People Magazine and Nordstrom, Inc.
We had no licensing revenues during the third quarter of 2000. This resulted
from our decision to refocus our licensing strategy from providing customized
turnkey licensing projects for individual customers to development of a
licensable DIVO software product. We began offering a licensable software
version of our DIVO technology in August 2000.
RECREATIONAL AND CORPORATE ACTIVITIES. In October 2000, we announced
our intention to restructure our operations by divesting all of our remaining
non-technology assets, which include our recreational and corporate activities.
Accordingly, these businesses will be classified as discontinued operations in
the future financial statements and are not indicative of future revenue
streams. Revenue from recreational and corporate activities for the nine months
ended September 30, 2000 were $700,049 compared to $897,115 for the nine months
ended September 30, 1999, a decrease of $197,066 or approximately 22%. This is
the result of our reorientation to focus on our Internet technology business
while moving away from our historical emphasis on recreational and corporate
activities.
Operating Expenses
Total operating expenses increased to $7,393,748 for the nine months
ended September 30, 2000, from $4,282,275 for the nine months ended September
30, 1999, an increase of $3,111,473 or approximately 73%. Of this increase,
$1,600,127 is due to a non-cash compensation charge related to options to
purchase shares of UIT common stock granted to members of UIT's advisory board
and consultants. Excluding this non-cash compensation charge, operating expenses
were $5,555,921 for the nine months ended September 30, 2000 compared to
$4,044,575 for the nine months ended September 30, 1999, an increase of
$1,511,346 or approximately 37%. The balance of the increase was primarily due
to increased expenses incurred in connection with the refocusing of our Internet
technology licensing strategy and development of the I-C-IT(TM) technology
platform, increased marketing expenditures related to our DIVO(TM) technology,
and increased personnel costs as a result of a significant build-up of employees
in the Internet technology business. For the nine months, the headcount in our
Internet technology business grew by nineteen people to a total of thirty-seven
at September 30, 2000.
DIRECT OPERATING EXPENSES. Direct operating expenses were $2,801,392
for the nine months ended September 30, 2000 compared to $2,162,791 for the nine
months ended September 30, 1999, an increase of $638,601 or approximately 30%.
This increase is primarily due to expenses incurred in connection with the Teen
People Magazine project in the first quarter of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2,687,330 for the nine months ended September 30,
2000 compared to $1,771,655 for the nine months ended September 30, 1999, an
increase of $915,675 or approximately 52%. This increase was primarily due to
increased expenses in connection with the development of the I-C-IT(TM)
technology platform, increased marketing expenditures related to our DIVO(TM)
technology and increased personnel costs as a result of a build-up of employees
in our Internet technology business.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
were $67,199 for the nine months ended September 30, 2000 compared to $110,129
for the nine months ended September 30, 1999, a decrease of $42,930 or
approximately 39%. This decrease was due to a reduced depreciable asset base as
a result of a sale of certain assets from our recreational and corporate
activities.
NON-CASH COMPENSATION EXPENSES. Non-cash compensation expenses were
$1,837,827 for the nine months ended September 30, 2000, compared to $237,700
for the nine months ended September 30, 1999, an increase of $1,600,127 or
approximately 673%. This increase is due to options to purchase shares of UIT
common stock granted to members of UIT's advisory board and consultants. The
expense was determined by use of the Black Scholes valuation method.
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Other Income
Other income consists of interest income, interest expense, gain on
sale, and litigation settlement. During the nine months ended September 30,
2000, other income was $927,206 compared to other expense of $1,438,120 for the
nine months ended September 30, 1999, an increase of $2,365,326. This increase
was primarily due to the gain of $600,000 during the nine months ended September
30, 2000 on the sale of our investment in Netcruise.com, Inc (formerly known as
Genisys Reservation Systems, Inc.). We received the Netcruise.com, Inc. shares
as compensation for the licensing of our technology in a prior year. The
remainder of the increase in other income resulted from the absence, in the nine
months ended September 30, 2000, of an approximately $700,000 loss on sale of
assets, which had been recorded in the nine months ended September 30, 1999 and
an increase in interest income of $253,389.
Net Loss
For the reasons stated above, for the nine months ended September 30,
2000, we had a net loss of ($5,064,926) or ($0.26) per share, compared to a net
loss of $(4,583,280) or ($0.30) per share for the nine months ended September
30, 1999.
LIQUIDITY AND FINANCIAL CONDITION
We are experiencing operating losses. At September 30, 2000, we had
cash and cash equivalents of $9,725,952 and working capital of $9,041,678,
compared to cash and cash equivalents of $1,998,059 and working capital of
$1,144,549 at December 31, 1999. These increases were in cash of $7,727,893 or
approximately 387% and in working capital of $7,897,129 or approximately 690%.
These increases are primarily due to the increase in cash generated from the
sale of common stock and the exercise of warrants and options for common stock
and a reduction in current liabilities during the nine months ended September
30, 2000.
Net cash used in operating activities was $3,430,513 for the nine
months ended September 30, 2000, compared to $2,303,326 for the nine months
ended September 30, 1999. This increase is primarily due to higher selling,
general and administrative and direct operating expenses in connection with the
build up of our Internet technology business, development of the I-C-IT(TM)
technology platform, increased marketing expenditures related to our DIVO(TM)
technology, increased personnel costs related to the build-up of employees in
the Internet technology business and increased legal and consulting expenses.
Net cash used in investing activities was $1,281,769 for the nine
months ended September 30, 2000, compared to net cash generated from investing
activities of $1,162,477 for the nine months ended September 30, 1999. This
increase in cash used in investing activities is primarily due to an increase in
purchases of equipment, organizational build up of UIT and capitalized
development costs in connection with our Internet technology business.
Additionally, $337,275 of this increase is attributable to a shareholder loan in
connection with our German subsidiary, IIT.
Net cash provided by financing activities was $12,440,175 for the nine
months ended September 30, 2000, compared to $844,300 for the nine months ended
September 30, 1999. This increase is due to a private placement of our common
stock in January 2000 and to issuances of common stock upon exercise of
outstanding Class A Warrants and stock options.
Our future capital requirements will depend on various factors,
including:
1. The number of applications using our technology that we
determine to develop; and
2. Our need to hire additional executive, technical and marketing
personnel in connection with our Internet technology business.
If we are unable to raise additional funds when needed, through the
private placement of our securities, we may seek financing from affiliated or
unaffiliated third parties. There can be no assurance, however, that such
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financing would be available to us when and if it is needed, or that if it is
available, that it will be available on terms acceptable to us. If we are unable
to sell our securities or obtain financing to meet our working capital needs, we
may have to consider such alternatives as selling or pledging portions of our
assets, among other possibilities, in order to meet such obligations.
We believe that our primary sources for cash over the next twelve
months will be our current cash and income from investments, and the exercise of
outstanding warrants. Although we believe these sources will provide us with
sufficient funds to meet our anticipated working capital and capital
expenditures needs for at least the next twelve months, there can be no
assurance that this will be the case. With respect to the warrants, there can be
no assurance that holders of warrants will exercise in a sufficient number to
generate significant cash for us.
We wish to expand our development and marketing capabilities for our
Internet 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, we 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 we will be able to acquire additional financing on favorable
terms, or at all.
YEAR 2000 COMPLIANCE
We did not experience any material business interruption as a result of
the Year 2000 issue. Our own software applications functioned well and we did
not experience any problems with the software applications of our suppliers and
vendors. We will continue to monitor our critical computer applications
throughout the Year 2000 to ensure that any Year 2000 matters that may arise are
addressed promptly.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 ("SFAS No. 133"), "Accounting for Derivative Investments and Hedging
Activities," which establishes standards for the accounting for derivative
transactions and the derivative portion of certain other contracts. SFAS No. 133
will become effective for our fiscal year beginning January 1, 2001. We believe
that SFAS No. 133 will not have a material effect on our financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. We adopted SAB 101 as
required in the second quarter of 2000. We have evaluated the effect of the
adoption and have determined that financial results for the fiscal year 2000
will not be materially affected.
EURO CONVERSION
A single currency called the Euro was introduced in Europe on January
1, 1999. Eleven of the fifteen member countries of the European Union adopted
the Euro as their common legal currency as of that date. Fixed conversion rates
between these participating countries' existing currencies (the "legacy
currencies") and the Euro were also established as of that date. The legacy
currencies will remain legal tender as denominations of the Euro until at least
January 1, 2002 (but not later than July 1, 2002). During this transition
period, parties may settle transactions using either the Euro or the
participating country's legacy currency.
We will convert our European operations to the Euro prior to January 1,
2002. We do not anticipate any business interruption during this conversion and
do not anticipate a material cost of conversion.
FOREIGN CURRENCY
We are exposed to the effect of foreign currency exchange rate
fluctuations on the U.S. dollar value of foreign currency-denominated operating
revenues and expenses. Our largest exposure comes from the Deutsch Mark and the
Euro. We have not hedged our exposure in foreign currency exchange rate risk.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings see Item 1 of Part II of our
Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000,
incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
(c) During the quarter ended September 30, 2000, consultants
to the Company exercised options and warrants to purchase an aggregate of 48,153
shares of common stock previously granted to them by the Company. The options
were exercised in a cashless exercise and resulted in no cash proceeds to the
Company. These sales were made in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act, on the basis that the
transactions did not involve a public offering. The agreements pursuant to which
the options and warrants were granted to the employees and consultants contained
representations as to their investment intent and imposed substantial
restrictions upon transfer of the securities received upon exercise.
(d) Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Not Applicable.
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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
(Registrant)
November 13, 2000 BY: /S/ BRIAN SHUSTER
--------------------------
Brian Shuster
Chairman of the Board and
Chief Executive Officer
(Principal Executive
Officer and Principal
Financial Officer)
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EXHIBIT INDEX
NO. DESCRIPTION
27 Financial Data Schedule
