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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
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1934
For the fiscal year ended December 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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For the transition period from to
Commission File Number 0-6106
UNITED LEISURE CORPORATION
(Name of small business issuer in its charter)
Delaware 13-2652243
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1990 Westwood Boulevard
Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (310) 441-0900
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Class A Common Stock Purchase Warrants
(Title of class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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
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No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B in this form and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
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State Issuer's revenues for its most recent fiscal year. $2,443,601
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
March 31, 1999: $14,238,887
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Outstanding at
Class March 31, 1999
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Common Stock, par value $.01 per share 14,218,850
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form
10-KSB.
Transitional Small Business Issuer Format: Yes No X
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PART I
Item 1. Description of Business
General
During the year ended December 31, 1998, the Company reoriented its
business, focusing its attention on the development and licensure of its
proprietary interactive Internet technology and moving away from its historical
emphasis on children's recreational activities. During 1998, the Company's
operations were primarily focused in three areas: (i) the development and
licensure of the Company's proprietary interactive Internet technology; (ii)
children's recreational activities, which includes the operation of the
Company's "Camp Frasier" locations, "Planet Kids" locations and "Frasier's
Frontier," all located in Southern California; and (iii) investments in
affiliated companies. Unless the context otherwise indicates, the term the
"Company" as used herein includes United Leisure Corporation, a Delaware
corporation, and its consolidated subsidiaries.
The Company was originally organized for the primary purpose of developing
and operating a chain of African wildlife preserve and theme amusement parks
known as "Lion Country Safari." The Company's last park operation, located in
Irvine, California, was closed in November, 1984. United Leisure Corporation is
the successor by change of name to Lion Country Safari Inc., a Delaware
corporation, which was originally organized in May 1969. The Company has
operated and plans to continue to operate primarily as a holding company for its
operating subsidiaries.
The Company's principal executive offices are located at 1990 Westwood
Boulevard, Los Angeles, CA 90025. Its telephone number is (310) 441-0900.
Interactive Internet Technology
Introduction.
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Through its wholly-owned subsidiary, United Internet Technologies, Inc.
(formerly known as United Leisure Interactive, Inc.) ("UIT"), the Company has
continued to develop its proprietary interactive Internet technology (the
"Technology").
The Company's Technology, which equips sites on the World Wide Web (the
"Web") with software, provides a means of linking a full-motion video on a CD-
ROM located on the user's personal computer to a Web site. The display of the
content of the CD-ROM is completely controlled by the remote Web server. The
Technology lets users interact with a Web site and experience full-motion video
and stereo audio in broadcast quality while on line, without having to download
files or play "streaming" video or audio. Current streaming applications are
limited by the availability of Internet bandwidth. The Company believes that
current streaming video technology delivers a video that is limited in motion,
has poor resolution, a small viewing window and is unstable. To solve this
problem, the Company's Technology permits the design of Web sites that integrate
video in innovative ways, without sacrificing quality or requiring large amounts
of bandwidth.
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The Technology equips Web sites with software that allows a Web server to
interact with a user's Internet browser and to access a media source located on
the user's personal computer. The result is full motion, full screen video and
stereo-audio on the end user's computer while the user is on the Internet.
Thus far, the Company has developed two distinct technologies that provide
the following video capabilities:
1. Parallel Addressing Video ("PAV")
This technology allows a Web designer to activate and use a video,
audio or other file from the user's local media source. This
technology allows a viewer to access broadcast quality, full-motion,
full-screen video selected from a Web site menu while the user remains
online.
The user is supplied with media containing the media plug-in, and any
data to be accessed such as video, audio or other multimedia
information. The user's local storage device can be a CD-ROM, DVD-ROM
or hard drive, with ample storage for the file being addressed.
2. Dynamic Integrated Video Overlay ("DIVO")
This technology permits video material to be embedded and seamlessly
integrated within regular Web pages. Using this technology, a host
can appear in full motion on the user's Web page to instruct,
entertain or educate the user.
This capability makes a wide array of applications possible, that bridge the use
of television style content with any number of Internet applications.
The Technology also enables any person connected to the Internet to shop for
services and products and view the related videos.
. The Technology allows for pay-per-view video content and controlled release
and metering of video usage by each end user. This added capability will
provide licensees the opportunity for financial gain via subscriber based
content services, audited advertising and marketing, and pay-per-view events
similar to television, but with the added benefits of the Internet's
interactivity.
. At the touch of a button a traveler can choose almost any spot on earth and
instantaneously preview and reserve cruises, hotels, airlines, tours and car
rentals.
. Because applications of the Technology are being developed for the
Internet, they easily adapt to new technologies and information content
resources that are developed. The Company currently has a wide range of in-
house developed
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databases, such as cruise, scheduling and search databases, as well as
partnered links with other large internet sales and database information
systems.
. The Technology allows companies to sell their goods over the Internet using
full motion video of their products, just like on television.
. The Technology has the capability of connecting a live operator to buyers
when they require assistance. The Company has integrated several
technologies to ensure that consumer and consultant needs are met. The
Company's infrastructure ensures that future technologies for customer
service and interaction are easily adapted to its applications.
. Users select a product and the amount they would like to spend, and the
system then provides details on all available products based on their
selection.
. The buyer need only click on an icon, and a video of that product will play
on the screen. After seeing the video, complete details are available on
all aspects of the product for viewing or printing.
. If the buyer would like to learn more about a product, or alternative
choices, clicking on the appropriate icon provides details on other choices.
. Once a product has been selected, a buyer may simply click and order.
. DIVO technology provides functions that allow video to be combined
seamlessly within the Internet users web browser software. This allows the
creators of content to create special effects unavailable via other video
formats and with the added quality benefits of full-motion, 30 frame-per-
second video. This new technology is designed to work with popular browsers
from both Netscape Communication Corporation and Microsoft Corporation.
. Server and client-side security and time-control functions will allow the
video to be delivered to the end user in a time-prescribed manner determined
by the licensee for each full-motion video. These will allow the licensees
of the Company's PAV and DIVO technologies to control the distribution of
video to each end user and to protect against unauthorized use or
distribution of video content.
. The Company has recently added security functionality to the technologies
it has developed. This functionality is client-server based and allows for
PAV and DIVO files to be "locked" on the media source using a proprietary
encryption scheme. The user's video player communicates with the web-
server, which in turn creates a secure encryption key to unlock video
contained on the delivery system.
. The Technology may also be used for Web-based training and education.
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The Company has spent approximately $127,000 in 1997 and $168,000 in 1998
developing the Technology.
The Company is also developing UIT's media player to incorporate additional
functionality and features. This includes a new technology, currently under
development, called Active Image Mapping. This technology would enable selected
video pixels to be clickable.
Brian Shuster, Executive Vice President and a director of the Company, has
rendered certain consulting services to the Company in connection with the
development of the Company's Technology and interactive multimedia products.
Brian Shuster is the son of Harry Shuster, Chairman of the Board, President and
Chief Executive Officer of the Company. See Part III, Item 12, "Certain
Relationships and Related Transactions."
Applications.
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Travel Applications. The Company has developed an application of the
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Technology called NetCruise(C), which allows anyone to book travel, including
cruise vacations, hotels, car rental and airline tickets from a one-stop-
shopping Web site, www.NetCruise.com. The CD-ROMs will contain video "virtual
tours" of cruise ships and luxury resorts, allowing a view of rooms, amenities
and other special features prior to booking, and will allow people to book every
aspect of their vacation all at once.
The NetCruise(C) software and technology allows the consumer to "Be Your Own
Travel Consultant". The software connects consumers to the Internet and walks
them through the process of booking and/or selling any travel arrangements and
receiving a percentage of the industry commissions paid for bookings.
The Company's software has the capability of full motion video, live vocal
interaction, combined with updated on-line information. Users can choose a
vacation and see their choice in full motion video to select a ship, and view
the stateroom, dining rooms, entertainment venues, casinos and other areas of
the ship.
It is presently anticipated that NetCruise(C) will initially be advertised
and sold via an infomercial displaying the product's features and allowing for
call-in purchase. An incentive to encourage consumers to buy the product,
rather than use a travel agent or Web sites run by cruise lines or hotels, will
be a rebate of one-half of the standard travel agent's commission for all travel
booked through the NetCruise(C) Web site.
NetCruise(C), along with all of the Company's right, title and interest in
any travel-related applications of the Technology, was licensed to Netcruise
Interactive, Inc. ("NII"), a wholly-owned subsidiary of Genisys Reservation
Systems, Inc. ("Genisys"), in July, 1998. In exchange for an exclusive,
worldwide and perpetual license of the Technology for all travel-related
operations, along with related hardware, the Company received a significant
amount of the issued and outstanding common stock of Genisys. It was also
agreed that Harry Shuster, Chairman of the Board, President and Chief Executive
Officer
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of the Company, and Brian Shuster, Executive Vice President of the Company, will
serve for three years on the Board of Directors of Genisys and will be Chairman
and President, respectively, of NII. See "Description of Business - Investments
and Financing Activities -The Genisys Transaction" and Part III, Item 12,
"Certain Relationships and Related Party Transactions".
Wrestling. Subsequent to the end of the fiscal year, UIT and World
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Championship Wrestling, Inc. ("WCW") entered into a License Agreement as of
February 23, 1999 (the "WCW License Agreement"), pursuant to which UIT granted
to WCW a limited non-exclusive license of the Technology. The Technology will
be used by WCW solely in connection with WCW's Worldwide Championship Wrestling
Web site and the CD-ROM or other discs and software (the "Discs") that permit
users access to the interactive features of the web site. UIT has agreed that
during the term of the WCW License Agreement, UIT will not use or license the
Technology in competition with WCW in the wrestling business or otherwise permit
the use of the Technology by any business or individual in the wrestling
business other than WCW. The term of the WCW License Agreement is three year;
provided, however, that WCW may terminate the WCW License Agreement at the end
of any one-year period by giving 30 days' prior written notice. Under certain
circumstances, either party may terminate the WCW License Agreement in the event
of material breaches.
In consideration of the License, WCW shall pay UIT royalties equal to:
(i) 15% of WCW's adjusted gross revenues resulting from banners or similar
advertisements and/or sponsorships that are now standard in the Internet
industry and are contained on or made accessible through use of the Discs; plus
(ii) 20% of WCW's adjusted gross revenues resulting from full-screen, full-
motion trailers and/or other full-screen or full-motion video and/or audio-
visual advertisements that are not standard in the Internet industry and are
contained on or made accessible through use of the Discs; plus
(iii) 15% of WCW's net revenues resulting from merchandise sales which are
promoted on or through access provided by the use of the Discs; plus
(iv) additional royalty payments to be agreed upon in good faith by the
parties for other sources of revenue that might be generated from or through
access provided by the use of the Discs.
WCW has paid to UIT as a non-refundable advance against such royalties the
amount of $200,000.
WCW has the right to approve the application of the Technology against
certain indicated specifications and descriptions during a testing period, which
the Company expects to be satisfactorily completed by mid-May 1999.
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During the term of the WCW License Agreement, any improvements and
enhancements made by UIT shall be made available to WCW. In addition, UIT has
agreed to provide certain technical and creative support services to WCW.
Other Commercial Applications. The Company is developing additional
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applications of the Technology for a number of different industries. No such
applications have been licensed and no assurance can be given that any such
licenses will be on terms favorable to the Company. The Company has adequate
funds from internal sources to complete development of certain applications
currently under development, but will require additional financing for more
aggressive development of the Technology. See Part II, Item 6, "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Financial
Condition."
Education. The Company has developed educational applications for the
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Technology. With such an application, a course lecture, supplemented by
commercial-quality video clips as appropriate, would be shipped to students on a
CD-ROM. For example, a geology lecture could be illustrated with location shots
of the regions described, an anatomy lecture with videos or animations of bodily
systems, an art history lecture with photographs of the work being discussed.
Because the software is connected to the Internet, students would be able to
submit questions, take tests, answer questions and receive a grade back almost
instantaneously. They could also signal the CD-ROM to replay selections from
the lecture with the answers to the questions the student might have missed,
integrating review and correction into the testing experience. There can be no
assurance, however, that such applications will be licensed or otherwise
exploited on terms favorable to the Company.
Children's Recreational Activities
Because the Company has determined to focus on its interactive Internet
technology business, the Company has closed most of its children's recreational
facilities and has decided to dispose of the remaining such facilities. In
1998, the Company's children's recreational activities consisted of two Camp
Frasier day camp locations, which operated from the last week of June through
late August, 1998; three Planet Kids, which are indoor multimedia interactive
play learning centers for children; and one Frasier's Frontier, an amusement
park. All of these facilities are located in Southern California.
Until February 28, 1997, when its Ground Lease (the "Ground Lease") with the
Irvine Company (the "Irvine Company"), as landlord, expired, the Company's
primary business had been to act as a developer and manager (rather than as an
operator) of approximately 300 acres of real estate in Irvine, California (the
"Irvine Property"). Since that time, the Company has not had any significant
income from its Ground Lease operations, amounting to less than three percent of
the Company's revenues for the year ended December 31, 1997 and no revenue for
the year ended December 31, 1998.
After 1984, the Company developed the Irvine Property, with emphasis on
leisure-time use and attractions, primarily through subleases. Each of the
subleases expired in February 1997 upon expiration of the Ground Lease.
Pursuant to the terms of the
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Ground Lease, the Company had the right to remove the leasehold improvements
made to the Irvine Property at the expiration of the Ground Lease. Two of the
Company's sublessees, Irvine Meadows Amphitheater ("Irvine Meadows") and The
Splash, a California limited partnership ("The Splash"), the operator of Wild
Rivers Park, brought actions against the Company seeking injunctions against the
Company from removing the improvements on the subleased premises at the
expiration of the term of the Ground Lease. Since 1986, the Company has been
engaged in protracted and expensive litigation involving the Ground Lease with
its former landlord, Irvine Company, in Orange County Superior Court (together
with related litigation, the "Irvine Company Litigation"). Most of the Irvine
Company Litigation was settled during 1998. See Part I, Item 3, "Legal
Proceedings."
Planet Kids.
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In June 1994, the Company entered into a joint venture with Master Glazier's
Karate International, Inc. ("MGK"), a public company engaged in the operation of
karate centers in New Jersey and Pennsylvania. The parties formed a new
company, Planet Kids, Inc. ("Planet Kids"), which initially was equally owned.
As of June 20, 1995, the Company bought out MGK's interest in the joint venture,
thus becoming the sole stockholder in exchange for the return of MGK's initial
investment of $500,000, plus accrued interest of approximately $40,500. In
addition, the Company's Board of the Directors granted to MGK an option to
acquire up to 150,000 shares of the Company's Common Stock at an exercise price
of $.01 per share. This option was exercised in 1995.
The Planet Kids concept is to operate state-of-the-art children's play-
learning centers to be operated out of leased premises and target children ages
3 through 13. Each center provides children with interactive multimedia
educational games, exercise playgrounds, educational computers, party facilities
and other indoor activities.
Planet Kids opened its first play-learning center in Laguna Hills,
California in July 1995 and its second play-learning center in Orange,
California in December 1995. A third center in Fountain Valley, California was
opened in September, 1996. The Company has provided for a loss for impairment
of value of certain of its Planet Kids assets in the amount of $3,862,554 and
intends to dispose of this asset. See Part II, Item 6, "Management's Discussion
and Analysis of Financial Condition or Plan of Operation" and "Financial
Statements -- Note 5 to Notes to Consolidated Financial Statements."
Camp Frasier and Frasier's Frontier.
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The Camp Frasier program, which the Company no longer operates, was offered
to children between the ages of 3 and 13 and was designed to provide significant
flexibility in attendance requirements, with a minimum of ten days per camper
during the summer. Campers were provided with planned activity programs which
included educational activities, horseback riding, swimming, arts and crafts,
fishing, a rope challenge course, go-carts and karate.
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During 1997, the Company accommodated approximately 1,486 campers and had
revenues of $542,102. During 1998, the Company accommodated approximately 1,281
campers and had revenues of $582,289. The Company will not operate its Camp
Frasier locations any longer, commencing in 1999.
In April 1995, the Company obtained the right to operate a portion of
Featherly Regional Park as a Camp Frasier day camp. The park is located in
Yorba Linda in Orange County, California. During 1997, this Camp Frasier
accommodated approximately 396 campers and realized revenues of $137,685.
During 1998, this facility accommodated approximately 302 campers and had
revenues of $146,011.
In April 1995, the Company acquired certain real and personal property in El
Cajon, in San Diego County, California (the "El Cajon Property"). The El Cajon
Property was subsequently renovated by the Company and reopened as "Frasier's
Frontier," an amusement park and summer camp. The Camp Frasier location on the
El Cajon Property had its first full season of operations in the summer of 1996.
During 1997, this Camp Frasier accommodated approximately 204 campers and had
revenues of $52,291. The Frasier's Frontier Amusement Park was closed in Spring
1998 and the Camp Frasier at this location did not operate in Summer 1998.
There are no plans to reopen either facility. The Company intends to sell the
El Cajon Property. See Part I, Item 2, "Description of Property."
In March 1996, the Company entered into a lease with the County of Orange to
operate a Camp Frasier location in Foothill Ranch, Orange County, California.
The lease is for a term of 15 years and provides that the Company will pay as
annual rental the greater of the minimum annual rental or the percentage rental.
The minimum annual rental is $10,000 for the first year, $20,000 for the second
year and $30,000 for years three through five. The percentage rental is equal
to 15% of the gross receipts of the Company from the day camp and any swimming
programs or lessons conducted by the Company. During 1997, this Camp Frasier
accommodated approximately 886 campers and had revenues of $352,126. During
1998, this facility accommodated approximately 979 campers and had revenues of
$436,278. This facility will no longer operate commencing in 1999.
The Company was a party to a Water Park Sublease with American Sportsworld,
Inc., pursuant to which the Company subleased approximately 15 acres of the
Irvine Property on which The Splash operates a theme family water park (the
"Water Park"). The Water Park Sublease was terminated on February 28, 1997 upon
the expiration of the Ground Lease. Additionally, the Company holds a 3.12%
limited partnership interest in The Splash. Under the terms of the Water Park
Sublease, The Splash paid a minimum annual rent of $475,000, payable $39,583 per
month, against a percentage rent equal to 10% of annual gross revenues. In
addition, The Splash paid additional rent to cover various increased expenses
with respect to the subleased property during the term of the Water Park
Sublease, as well as all taxes related to such property. The basis on which
rental under this sublease was calculated is part of the rent dispute with
Irvine Company in the Irvine Company Litigation. During the two months prior to
termination of the Water Park
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Sublease in 1997, The Splash paid the Company rentals of $39,583 and a limited
partnership distribution of $65,000. In 1998, the Company received $48,723 in
limited partnership distributions.
Investments and Financing Activities
The Genisys Transaction.
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On July 23, 1998, the Company, UIT, Genisys and its wholly-owned subsidiary,
NII, entered into an agreement ("the Genisys Agreement") pursuant to which UIT
granted to NII an exclusive, world-wide and perpetual license to the travel-
related applications of the Technology and sold to NII certain tangible assets
and intellectual property to be used in connection with the exploitation of the
licensed Technology. In consideration therefor, UIT received (i) 2,000,000
shares of restricted common stock of Genisys, (ii) a warrant to purchase up to
800,000 shares of Genisys common stock at $2.50 if the total pretax profits of
NII ("Total Pretax Profits") for the years 1999, 2000 and 2001 equal or exceed
$5,000,000 and (iii) a warrant to purchase up to 800,000 shares of Genisys
common stock at $6.00 if the Total Pretax Profits of NII for the years 1999,
2000 and 2001 equal or exceed $10,000,000. This transaction is referred to
herein as the "Genisys Transaction".
Subsequent to the date of the Genisys Agreement, Genisys informed the
Company and UIT of the following. Genisys was notified by the Nasdaq Stock
Market, Inc. ("Nasdaq") that the issuance of the 2,000,000 shares of Genisys
Common Stock and the Warrants to UIT caused Genisys to be inadvertently in
violation of a certain Nasdaq Marketplace Rule (the "Nasdaq Rule"), because the
issuance of the 2,000,000 shares of Genisys Common Stock and the Warrants
amounted to more than 20% of the issued and outstanding shares of Genisys and
the issuance thereof was not approved by Genisys' stockholders as required by
the Nasdaq Rule. Genisys was informed that Nasdaq intended to delist Genisys'
Common Stock as a result of Genisys' noncompliance with the Nasdaq Rule, unless
Genisys took curative action acceptable to Nasdaq. Pending the full
implementation of the proposed curative action described below, Genisys appealed
Nasdaq's determination. A hearing on the proposed delisting was held on
November 20, 1998, following which Nasdaq approved the continued listing of
Genisys Common Stock pending the holding of a stockholders meeting and subject
to certain additional changes in the Genisys Transaction.
As a result of the Nasdaq notification, UIT, Genisys and certain of Genisys'
principal stockholders entered into an agreement dated October 28, 1998 (the
"October Agreement") for the purpose of restructuring their transaction. Under
the terms of the October Agreement, UIT will return to Genisys (i) 1,100,000
shares of Genisys Common Stock (retaining 900,000 shares of Genisys Common Stock
(the "Retained Shares")) and (ii) the Warrants. Genisys will issue to UIT
1,100,000 shares of Genisys Convertible Series B Preferred Stock, par value
$.0001 per share (the "Genisys Preferred Shares"), which, among other things,
are automatically convertible into 1,100,000 shares of Genisys Common Stock upon
Genisys' obtaining stockholder approval, as required by the Nasdaq Rule. In
addition, upon the requisite stockholder approval, Genisys will reissue the
Warrants to UIT.
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Among other things, the Genisys Preferred Shares carry a mandatory dividend
of $275,000, payable on September 30, 1999, and mandatory quarterly dividends of
$68,750, commencing with the quarter ending December 31, 1999. No dividend is
payable if the Genisys stockholders approve the issuance of the 1,100,000 shares
of Genisys Common Stock and the Warrants to UIT, and the Genisys Preferred
Shares have been converted into 1,100,000 shares of Genisys Common Stock, prior
to June 30, 1999. The Genisys Preferred Shares are non-voting, unless voting is
required by New Jersey law. The Genisys Preferred Shares also carry a mandatory
liquidation preference of $2,750,000 plus all accrued and unpaid dividends.
In response to further requirements of Nasdaq, the parties entered into
another agreement dated January 25, 1999 (the "January Agreement"). The January
Agreement provides that in the event that the stockholders of Genisys do not
approve both (i) the acquisition of the assets and (ii) the issuance to Seller
of the 1,100,000 shares of Genisys Common Stock relating to the Genisys
Preferred Shares, and the Warrants, the Genisys Transaction shall be unwound.
Thereafter, Genisys would have an option until September 30, 1999 to again seek
and obtain approval of the Genisys Transaction by Genisys' stockholders on the
same terms and conditions as originally agreed to pursuant to the Genisys
Agreement, as amended by the October Agreement and the January Agreement.
UIT has agreed not to vote the Retained Shares and may not vote the Genisys
Preferred Shares at the Genisys stockholders meeting with respect to the
approval of the Genisys Transaction. Certain principal stockholders of Genisys
have agreed to vote their shares of Genisys Common Stock in favor of the
issuance of the 1,100,000 shares of Genisys Common Stock and the Warrants. The
Company has been informed that Genisys currently expects to hold its
stockholders meeting in May or June, 1999.
Investments in and Loans to Grand Havana Enterprises, Inc.
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The Company has an investment in the common stock of, and has made loans to,
Grand Havana Enterprises, Inc. ("GHEI"), an affiliate of the Company. GHEI is
primarily engaged in the business of the ownership and operation of private
membership restaurants and cigar clubs. Harry Shuster is the Chairman of the
Board, President, Chief Executive Officer and a principal stockholder of GHEI.
In September 1996, the Company entered into a financing agreement (the "GHEI
Financing Agreement"), in which it agreed to pledge the sum of $875,000 in order
to support a letter of credit required to be provided by GHEI in connection with
a lease which GHEI had entered into. In consideration for providing this pledge
of collateral for GHEI's letter of credit, GHEI agreed to pay the Company an
amount equal to 10% per annum on the amount of the pledged cash collateral as it
exists from time to time. The cash collateral was replaced by GHEI in full in
October 1997. As additional consideration, the Company received 100,000 shares
of the common stock of GHEI and a warrant to purchase an additional 100,000
shares of common stock of GHEI at an exercise price of $.75 per share, which was
exercised by the Company in February 1997. On July 15, 1997, the Company and
GHEI entered into an amendment to the GHEI Financing Agreement pursuant to
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which (in consideration for the Company's agreeing to forego the requirement
that GHEI replace the collateral pledged on an ongoing basis from certain
operations) GHEI agreed to issue to the Company or its designee a warrant to
purchase 150,000 shares of the common stock of GHEI at an exercise price of the
lesser of $.75 per share or 75% of the average of the last trade for the common
stock of GHEI for the 10 day period prior to the exercise of the warrant. The
Company subsequently designated Westminster Capital, Inc., which provided
financing to the Company in connection with the acquisition of certain property
in Las Vegas, as the entity to receive this warrant. See "Description of
Business -Investments and Financing Activities - Investments in United Hotel and
Casino, L.L.C."
In February 1997, the Company entered into an additional financing agreement
with GHEI pursuant to which the Company agreed to loan GHEI up to $1,250,000 in
order to fund the development of two private membership restaurant and cigar
clubs being developed by GHEI at that time. The loan bears interest at the rate
of 8% per annum on the outstanding principal amount. As additional
consideration for this loan, the Company received 75,000 shares of the stock of
GHEI. This loan was not repaid when due on September 30, 1997. The related
financing agreement provided that if the loan was not repaid by September 30,
1997, it would become payable on demand and the Company would then be entitled
to receive an additional 25,000 shares of the common stock of GHEI. In February
1998, GHEI issued 25,000 shares of its common stock to the Company pursuant to
the terms of this financing agreement. The parties agreed to extend the
maturity date of advances made under this financing agreement to September 30,
1998.
On September 30, 1998, the Company agreed to make a new installment loan to
GHEI in the amount of up to $1,250,000 in replacement of the previous loan.
GHEI executed a Secured Promissory Note dated September 30, 1998 (the "GHEI
Note"). The GHEI Note bears interest at 8% per annum and is due and payable in
full on March 31, 1999. The parties have agreed to extend the maturity to the
GHEI Note for an additional 60 days. The GHEI Note is secured pursuant to a
Security Agreement dated September 30, 1998 (the "GHEI Security Agreement"), in
which GHEI granted the Company a security interest in certain collateral.
The initial loan advance under the GHEI Note on September 30, 1998 was
$603,280, which represents the principal amount due under the previous note of
$536,000, together with accrued interest of $67,280. The Company may from time
to time, but shall not be obligated, to make future advances under the GHEI Note
up to a total amount of $1,250,000.
As of December 31, 1998, the Company held 966,666 shares of GHEI's common
stock. Management of the Company estimated the fair value of the investment in
GHEI of approximately $38,667 at December 31, 1998. Because Management of the
Company does not believe that it will recover the original cost of its
investment in GHEI, it has realized loss on this investment in the amount of
$1,043,764. On October 27, 1998, the common stock of GHEI was delisted from the
Nasdaq SmallCap Market (the "Nasdaq Market") for failure to satisfy the minimum
bid and net asset value requirements of Nasdaq
11
<PAGE>
Marketplace Rules. GHEI Common Stock is presently being quoted on the OTC
Bulletin Board.
At December 31, 1998, accrued interest amounted to $16,018, and an aggregate
of $603,280 in principal amount remained payable by GHEI to the Company pursuant
to this financing agreement. See Part III, Item 12, "Certain Relationships and
Related Transactions."
Investments in United Hotel & Casino, L.L.C.
- --------------------------------------------
In January 1997, the Company and two California limited liability companies
formed United Hotel & Casino, L.L.C., a Delaware limited liability company
("UHC"). The Company currently has a 50% membership interest in UHC. The
Company has the right to appoint one member (who has two votes), and the
remaining members have the right, in the aggregate, to appoint two members (each
of whom has one vote), of the three member Management Committee of UHC.
On July 29, 1997, UHC acquired approximately 8.5 acres of partially
developed land on the Las Vegas Strip in Las Vegas, Nevada (the "Las Vegas
Property"). The Las Vegas Property is located at 3025 Las Vegas Boulevard and
currently contains a shopping center consisting of approximately 20 retailers
and The Silver City Casino. Upon the acquisition of the Las Vegas Property, UHC
became the lessor of the shopping center and The Silver City Casino. The Silver
City Casino is owned and operated by Circus Enterprises, Inc. ("Circus"). UHC
currently intends to continue to lease the existing shopping center on the Las
Vegas Property. The Company has decided to sell its interest in UHC, unless the
Las Vegas Property itself is sold, and is considering proposals for both of
those alternatives. No assurance can be given that any particular proposal will
be accepted or that any agreement that may be entered into will be on terms
favorable to the Company. See Part II, Item 6, "Management's Discussion and
Analysis of Financial Condition or Plan of Operation - Liquidity and Financial
Condition."
The Las Vegas Property is located at 3025 Las Vegas Boulevard and currently
contains a shopping center consisting of approximately 20 retailers and The
Silver City Casino, which is currently responsible for a substantial percentage
of the rental income received by UHC from the Las Vegas Property. The purchase
of the Las Vegas Property closed on July 29, 1997. Upon the acquisition of the
Las Vegas Property, UHC became the lessor of the shopping center and The Silver
City Casino. The Silver City Casino is owned and operated by Circus and it is
anticipated that Circus will continue to operate this casino. The monthly income
of the Las Vegas Property is approximately $182,000 and the monthly expense is
approximately $37,000. The lease to The Silver City Casino is due to expire in
October 1999.
The aggregate purchase price for the Las Vegas Property was approximately
$23,200,000, which was paid in the form of (i) cash in the amount of
approximately $5,590,000, (ii) a one-year note in the amount of $1,250,000 and
(iii) assumption of a first deed of trust on the Las Vegas Property in the
principal amount of approximately
12
<PAGE>
$16,360,000. The Company contributed approximately $3,800,000 to the cash
payment, which cash came in part from its working capital and in part from two
different loans as discussed below.
Concurrently with the closing of UHC's purchase of the Las Vegas Property,
Westminster Capital, Inc. ("Westminster") made a loan of $1,900,000 (the "First
Westminster Loan") to the Company to enable it to meet a portion of its
additional capital contribution obligation to UHC. The loan was evidenced by a
Secured Convertible Promissory Note (the "First Westminster Note") made by the
Company. The First Westminster Loan bears interest at the rate of 15% per annum
and is due on the earlier to occur of (i) the demand of Westminster (which
demand may be made any time after July 29, 1998) or (ii) July 29, 1999 (the
"Maturity Date"). The holder of the First Westminster Note has the right, at
any time prior to the Maturity Date, to convert the entire outstanding principal
balance of the First Westminster Note into one-half of the Company's membership
interest in UHC. The conversion feature of the First Westminster Note has been
amended to extend the conversion date, as described below. The First
Westminster Note may be prepaid by the Company at any time prior to conversion
and after July 29, 1998. One-half of any cash distributions which may be made
by UHC to the Company prior to the repayment of the First Westminster Note are
required to be paid to Westminster as a prepayment on the First Westminster
Note.
The First Westminster Loan is secured by, among other things, a pledge of
408,333 of the 966,666 shares that the Company owns in GHEI. As additional
security, the Company has granted a security interest to Westminster, pursuant
to a Security Agreement dated as of July 29, 1997, in the Company's 50%
membership interest in UHC and in the receivables and certain indebtedness due
to the Company from GHEI. Harry Shuster is the Chairman of the Board, President
and Chief Executive Officer of the Company; serves as a member of the Management
Committee of UHC; and also serves as the Chairman of the Board, President, and
Chief Executive Officer, and is a principal stockholder of, GHEI. In addition,
Harry Shuster and his spouse, Nita Shuster, provided certain other security
individually and jointly with respect to the First Westminster Loan.
As additional consideration for Westminster making the First Westminster
Loan, the Company granted Westminster a three-year warrant to purchase 150,000
shares of the Common Stock of the Company at a per share price equal to the
lesser of $.40 or 75% of the average of the last trade prices for the ten
trading days immediately preceding the exercise of the warrants. At the request
of Westminster, the Company has filed a registration statement to register the
shares of Common Stock underlying the warrants, which registration statement has
been declared effective by the Securities and Exchange Commission. The Company
additionally arranged for GHEI to grant to Westminster a three-year warrant to
purchase 150,000 shares of the common stock of GHEI exercisable at a per share
price equal to the lesser of $.75 or 75% of the average of the last trade prices
for the ten trading days immediately preceding the exercise of the warrants.
On August 6, 1998, Westminster made a loan of $1,100,000 to UHC (the "Second
Westminster Loan"). The Second Westminster Loan is evidenced by a promissory
note in
13
<PAGE>
the amount of $1,100,000, which bears interest at the rate of 15% per annum and
matures on August 1, 1999 (the "Second Westminster Note"). In order to induce
Westminster to make the Second Westminster Loan, the Company agreed to amend the
First Westminster Note to provide that the holder of the First Westminster Note
now has the right, at any time prior to July 31, 2001, to convert the entire
outstanding principal balance of the First Westminster Note into one-half of the
Company's membership interest in UHC. It was also agreed by the parties that a
default by UHC under the Second Westminster Note will be deemed to be a default
by the Company under the First Westminster Note. Harry Shuster personally
guaranteed the obligations of UHC under the Second Westminster Loan and the
Company issued a non-recourse guaranty with joint and several liability, limited
to the Company's interest in UHC. See Part III, Item 12, "Certain Relationships
and Related Transactions."
As of December 31, 1998, the Company's investment in UHC was $3,432,452.
On July 29, 1997, Harvey Bibicoff, a former director of GHEI, made a short-
term loan to the Company in the amount of $900,000 (the "Bibicoff Loan"). The
Bibicoff Loan is evidenced by a promissory note and bears interest at the rate
of 10% per annum. On September 16, 1998, the Company paid Mr. Bibicoff $40,000,
consisting of $25,000 principal amount of the loan outstanding and $15,000
accrued interest. As of December 31, 1998, the Bibicoff Loan was repaid in
full.
Investments in HEP II L.P.
- --------------------------
In April 1996, the Company acquired 50% of the limited partnership interests
in HEP II L.P., a California limited partnership ("HEP II"), which was formed in
March 1996, for an initial capital contribution in the amount of $1,500,000.
HEP II is engaged in the motion picture production business. Limited partners
in HEP II are entitled to receive 99% of all distributions made by HEP II until
they receive a 110% return of their investment and thereafter they receive 50%
of distributions until a 200% return is achieved, at which time HEP II will
terminate. The general partner of HEP II is United Film Distributors, Inc., a
California corporation (formerly known as Hit Entertainment, Inc.) ("UFD").
Harry Shuster, the Chairman of the Board, President and Chief Executive Officer
of the Company is the Chairman of the Board of UFD as well as one of its
principal stockholders. Brian Shuster, Executive Vice President and a director
of the Company, is the President and a principal stockholder of UFD, and the son
of Harry Shuster. See Part III, Item 12, "Certain Relationships and Related
Transactions."
As of December 31, 1998, the Company's investment in HEP II was $700,000.
Business Segment Information
- ----------------------------
The Company's operations for 1997 and 1998 consisted of two business
segments. One business segment (for 1997 only) consisted of facility rentals,
pursuant to which the Company subleased or otherwise allowed others to use the
Irvine Property. This business segment was terminated in February 1997 when the
Ground Lease for the Irvine Property
14
<PAGE>
expired. Another business segment consists of children's recreational
activities, which during 1997 and 1998, included the operation of Camp Frasiers,
a day camp operated during the summer months (three of which operated in 1997
and two of which operated in 1998); three Planet Kids, the Company's play-
learning center operations; and one Frasier's Frontier, an amusement park (which
was closed in Spring 1998). In 1998, the Company's second business segment
consisted of Internet technology licensing fees. See Part II, Item 6,
"Management's Discussion and Analysis of Financial Condition or Plan of
Operation."
Patents, Trademarks and Licenses
A provisional application for a utility patent for the Technology was filed
with the U.S. Patent and Trademark Office in July 1997. However, there is no
assurance that a patent will be issued or, if a patent is issued, that it will
not be narrow in its coverage, thereby potentially permitting significant use of
similar technology by competitors. Even if a patent is not issued or is
narrowly issued, the Company believes that the value of the Technology will not
be critically impaired.
To date, the Company has entered into two licensing agreements for its
Technology. One agreement is with Genisys for travel-related applications of
the Technology, and the other agreement is with WCW for use of the Technology in
connection with WCW's Worldwide Championship Wrestling Web site. See
"Description of the Business - Interactive Internet Technology - Applications."
The Company intends to enter into other licensing agreements or strategic
alliances for other applications of the Technology which are being developed and
which may be developed in the future. Several such agreements are currently
being negotiated. No such other agreements have been entered into and there can
be no assurance that any additional agreements will be entered into or, if they
are entered into, whether they will be on terms favorable to the Company.
Competition
There is significant competition in the evolving market for video delivery
on the Internet. The Company and its primary competitors have each approached
the Internet video delivery system employing different technologies. Several of
the Company's competitors have substantially greater financial, marketing,
personnel and other resources than the Company. Management of the Company
believes that the barriers to enter this market are relatively high and there is
significant lead time required to market a competitive Internet video delivery
technology.
The Company's Las Vegas Property receives rental income from a shopping
center consisting of approximately 20 retailers and The Silver City Casino.
Both the casino and the retailers at the Las Vegas Property compete with a large
number of other similar operations on the Las Vegas Strip, and are dependent on
tourism for a substantial percentage of their revenues. Many of the Company's
competitors have substantially
15
<PAGE>
greater financial, marketing, personnel and other resources than the Company.
Additionally, businesses catering to the tourist trade are often affected by
changes in consumer taste and discretionary spending priorities, economic
conditions, demographic trends, and employee availability.
Any change in any or all of the foregoing factors could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Employees
At December 31, 1998, the Company had 14 full-time employees and 76 part-
time employees. The Company also retained approximately 80 seasonal employees
in 1998 who worked at the Company's children's recreational facilities. In
addition, Harry Shuster, Chairman of the Board, President and Chief Executive
Officer, is employed by the Company as a consultant, and Brian Shuster,
Executive Vice President and a director of the Company, provides consulting
services to the Company. See Part III, Item 10, "Executive Compensation --
Consulting and Employment Agreements" and Part III, Item 12, "Certain
Relationships and Related Transactions."
Item 2. Description of Property
The principal executive offices of the Company are located in Los Angeles
and are rented from certain affiliates of the Company. Monthly rental paid by
the Company with respect to its offices in Los Angeles is $6,344 per month. See
Part III, Item 12, "Certain Relationships and Related Transactions."
In connection with its children's recreational activities, the Company
acquired one piece of real property and entered into five leases. In April
1995, the Company acquired the El Cajon Property on which the Company formerly
operated one Camp Frasier and Frasier's Frontier Amusement Park. The El Cajon
Property was acquired for a purchase price of approximately $1,650,000, payable
$800,000 in cash, assumption of an existing note payable secured by the property
in the amount of $120,000 (the "Assumed Note") and the execution of a purchase
money note secured by the property in the amount of approximately $730,000 (the
"Purchase Money Note"). The Assumed Note is payable interest only at the rate
of 12% with the full principal amount due April 1, 2000. The Purchase Money
Note bears interest at the rate of 9.67% per annum and provides for 59 monthly
interest-only payments with all principal due and payable on March 1, 2000.
With the closure of the children's recreational facilities, the Company has
decided to sell the El Cajon Property.
In April 1995, the Company entered into a sub-operating agreement for its
Camp Frasier in Yorba Linda, California, located in the Featherly Regional Park
in Orange County, California. The agreement is for a term of 30 years. The
Company pays rental under the agreement of $.50 per day for each camper for the
first five years of the agreement, $1.00 per day for each camper for the next
five years of the agreement, and the greater of $1.50 per day for each camper or
five percent of that Camp Frasier's gross
16
<PAGE>
receipts for the balance of the term of the agreement. In addition, the Company
pays as additional rent 7% of all camper enrollment fees during the first 2
years of the agreement and 10% of all camper enrollment fees thereafter and 5%
of the gross receipts on all food and beverage sales at the camp and 5% on all
merchandise at the camp. In addition, the Company agreed to make capital
improvements to the Camp Frasier location of not less than $150,000 by the end
of the first 24 month term of the lease.
In March 1996, the Company entered into a lease with the County of Orange
with respect to its Camp Frasier location in Foothill Ranch, California in the
Irvine Regional Park. The term of the lease is for 15 years. The annual rental
paid by the Company under this lease is the greater of the "minimum annual
rental," which is $10,000 for the first year of the lease, $20,000 for the
second year of the lease and $30,000 for the third through fifth years of the
lease, or a percentage rental equal to 15% of the gross receipts from the Camp
Frasier at this location and from any Swim Programs/Lessons conducted by the
Company at this location. On the fifth anniversary of the Lease, the minimum
annual rental will be adjusted to the greater of 75% of the average annual rent
paid by the Company for the preceding three years or $30,000, adjusted in
proportion to changes to the Consumer Price Index for Los Angeles-Anaheim-
Riverside promulgated by the Bureau of Labor Statistics of the U.S. Department
of Labor. This lease was terminated in February 1999.
The Company entered into the lease for its Planet Kids location in Orange,
California in August 1995 (the "Orange Lease"). The Orange Lease is for a term
of ten years and the Company has two five year options to extend the lease. The
initial base rental under the Orange Lease is $10,400 per month for the first
year, $12,240 for the second through fifth years of the lease and $14,076 for
the sixth through tenth years of the lease.
The Company's lease for its Planet Kids location in Laguna Hills, California
was entered into in October 1994 (the "Laguna Hills Lease"). The Laguna Hills
Lease is for an initial term of ten years and the Company has three five-year
options to extend this lease. The initial base rental on this lease is $11,590
per month, which base rental will be increased to $14,030 for the fifth through
tenth years of the lease.
The lease for the Company's Fountain Valley, California Planet Kids location
was entered into in June 1995 (the "Fountain Valley Lease"). The Fountain
Valley Lease is for a term of ten years and the Company has three five-year
options to extend the lease term. The initial base rent under the Fountain
Valley Lease is $9,032 per month which base rent increases to $10,835 per month
for the sixth through tenth years of the lease.
UHC, in which the Company holds a 50% membership interest, acquired the Las
Vegas Property on July 29, 1997. The Las Vegas Property is located at 3025 Las
Vegas Boulevard and currently contains a shopping center consisting of
approximately 20 retailers and The Silver City Casino. Upon the acquisition of
the Las Vegas property, UHC became the lessor of the shopping center and The
Silver City Casino. The Silver City Casino is owned and operated by Circus and
it is anticipated that Circus, which accounts for a substantial percentage of
the rental income from the Las Vegas property, will continue to
17
<PAGE>
operate this casino on the Las Vegas Property. The lease for The Silver City
Casino currently is due to expire in October 1999. See Part I, Item 1,
"Description of Business -Investments and Financing Activities - Investments in
United Hotel & Casino, L.L.C."
In the opinion of management, all of the property which the Company owns or
leases is adequate to conduct the Company's business as it is presently
conducted, and is adequately covered by insurance.
Item 3. Legal Proceedings
Most of the Irvine Company Litigation was settled during 1998. In September
1998, the Company and its subsidiary, Lion Country Safari, Inc. - California,
and The Irvine Company settled their longstanding litigation and dismissed all
superior court and appellate court actions pending between them, i.e. The Splash
v. The Irvine Company, et al. (Case No. 491202), Lion Country Safari, Inc. --
California v. The Irvine Company (OCSC Case No. 743669), Lion Country Safari,
Inc. -- California v. The Irvine Company (OCSC Case No. 775923), and Lion
Country Safari, Inc. -- California v. The Irvine Company (OCSC Case No. 776187).
Pursuant to the terms of the settlement agreement between the parties, The
Irvine Company paid the Company $4.0 million without admitting any liability on
the part of The Irvine Company.
The Company also settled the lawsuit titled The Splash dba Wild Rivers v.
Harry Shuster, et al. (OCSC Case No. 771810) and the parties dismissed that
suit. No payments were made by either party in connection with the settlement
of the lawsuit.
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 a case styled Irvine Meadows v. Shuster, et al. (OCSC Case No.
771509). The suit sought an injunction against those parties preventing them
from removing the Amphitheater pursuant to a provision in the Ground Lease that
gives the Company the right to remove leasehold improvements at the expiration
of the lease. On January 3, 1997, Irvine Meadows filed a first amended
complaint in that action. As against the Company, the first amended complaint
sought an injunction and declaratory relief but no money damages. On February
19, 1997, the trial judge granted Irvine Meadows' request for an injunction
against the Company barring it from removing the Amphitheater. The plaintiffs
prevailed in the matter in May 1998, on a motion for summary judgment. The
Company is pursuing its appeal of the judgment of the trial court in that
matter. On October 27, 1998, the plaintiffs, as the prevailing party in this
matter, were awarded costs in the amount of approximately $545,000. The Company
is also appealing this award. The parties are currently engaged in settlement
negotiations, the outcome of which cannot be predicted. Due to the inherent
uncertainties regarding litigation, it is not possible to assess the likelihood
that the Company will prevail on appeal if the settlement negotiations are not
successful.
Except as set forth above, the Company is not a party to any material
pending legal proceedings other than ordinary routine litigation incidental to
its business.
18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None.
19
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock was traded on the Nasdaq Market under the symbol
UTDL from November 10, 1994 until December 1, 1998. In its 1994 public offering,
the Company sold a total of 4,945,000 Units, each Unit consisting of one share
of Common Stock and one Class A Warrant. Each of the Class A Warrants entitles
the holder thereof to purchase one share of the Company's Common Stock at an
exercise price of $4.00 per share. On February 26, 1998, the Company's Class A
Warrants were delisted from the Nasdaq Market because there were no longer any
active market makers registered to trade the Warrants. Effective the close of
business on December 1, 1998, the Company's Common Stock was delisted from the
Nasdaq Market because of the failure to satisfy Nasdaq's minimum bid requirement
of $1.00 per share. The Company's Common Stock is now quoted on the OTC
Bulletin Board.
The table below sets forth, for the periods indicated, the high and low bid
prices of the Common Stock, for the period January 1, 1997 through December 31,
1998, on the Nasdaq Market (through December 1, 1998) and on the OTC Bulletin
Board (from December 2, 1998).
<TABLE>
<CAPTION>
1997 1998
---- ----
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1st Quarter............. $ 7/8 $ 3/8 $ 3/8 $ 1/4
2nd Quarter............. $ 7/16 $ 1/4 $ 1/4 $5/32
3rd Quarter............. $ 5/16 $5/16 $5/16 $3/16
4th Quarter............. $13/16 $ 1/4 $ 1/4 $5/32
</TABLE>
On March 31, 1999, the closing bid price of the Common Stock on the OTC
Bulletin Board was $1.38 per share.
The above quotations represent prices between market makers, do not include
retail mark-up, mark-down or commission and do not necessarily represent actual
transactions.
There were approximately 2,442 record holders of the Common Stock as of
March 31, 1999.
The Company has never declared or paid any cash dividends and does not
intend to pay cash dividends in the foreseeable future on the shares of Common
Stock. Cash dividends, if any, that may be paid in the future to holders of
Common Stock will be payable when, as and if declared by the Board of Directors
of the Company, based upon the Board's assessment of the financial condition of
the Company, its earnings, need for funds, capital requirements, and prior
claims, if any, of Preferred Stock to the extent issued, and other factors,
including any applicable laws. The Company is not currently a party to any
agreement restricting the payment of dividends.
20
<PAGE>
Recent Sales of Unregistered Securities
In the year ended December 31, 1998, the Company did not conduct any sales
of its securities that were not registered under the Securities Act of 1933, as
amended (the "Securities Act"), except as follows:
On February 2, 1998, in consideration for certain financial advisory
services, the Company issued 100,000 shares of Common Stock to Transit
Securities, Inc., which shares were valued at $31,300 or $0.313 per share.
In April 1998, the Company issued 10 units (each unit consisting of 120,000
shares of Common Stock and warrants to purchase 60,000 shares of Common Stock at
$.27 per share) to Strata Equities Limited, at $26,400 per unit, in an offering
pursuant to Regulation S promulgated under the Securities Act, with aggregate
gross proceeds to the Company of $264,000. The warrants may be exercised for a
period of five years from issuance. The Regulation S offering was placed
through Baytree Associates, Incorporated, which received a 10% commission and a
3% non-accountable expense allowance in connection with the Regulation S
offering, resulting in net proceeds to the Company of approximately $229,680.
In July 1998, the Company issued stock purchase warrants to Sands Brothers &
Co., Ltd. ("Sands Brothers"). The warrants are for 250,000 shares of the
Company's Common Stock at an exercise price of $.25 per share. The warrants are
exercisable at any time commencing June 25, 1998 until June 25, 2003. The
Company may redeem the warrants for $.10 per warrant under certain
circumstances, including (i) the Company has an effective Registration Statement
covering the shares of the Company's Common Stock issuable upon exercise of the
warrants, and (ii) the Company's Common Stock has been trading at or above $2.50
per share for the previous thirty business days. The holder of the warrants has
registration rights with respect to the shares of Common Stock issuable upon
exercise of the warrants for five years commencing June 25, 1998, and one
"demand" registration right with respect thereto. The warrants have anti-
dilution protection. The warrants were issued in connection with financial
advisory services being rendered to the Company by Sands Brothers. The Company
received no proceeds from this issuance.
On October 8, 1998, the Company issued 150,001 shares of common stock to six
stockholders in the professional corporation of Call, Clayton & Jensen for legal
services rendered to the Company in connection with the settlement of Irvine
Company Litigation. These shares were valued at the price of the Company's
Common Stock on August 27, 1998, which was $.28 per share, for a total value of
$42,000. The Company received no proceeds from this issuance. The Company
further agreed to repurchase, on or after August 27, 1999, from any of the
individuals to whom shares of the Company's Common Stock were issued, any or all
of his or her shares at a cash price of $1.00 per share. If the Company is
legally unable or otherwise fails to repurchase such shares, Harry Shuster,
Chairman of the Board, President and Chief Executive Officer of the Company, has
agreed to personally purchase such shares at such price.
21
<PAGE>
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. Management's Discussion and Analysis of Financial Condition or Plan of
Operation
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10-KSB. Certain statements contained herein that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position,
expectations about pending litigation and estimated cost savings, are forward-
looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Securities
Exchange Act") and involve risks and uncertainties. Although the Company
believes that the assumptions on which these forward-looking, statements are
based are reasonable, there can be no assurance that such assumptions will prove
to be accurate and actual results could differ materially from those discussed
in the forwarding-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, regulatory policies,
competition from other similar businesses, and market and general economic
factors. All forward-looking statements contained in this Form 10-KSB are
qualified in their entirety by this statement.
Overview
The Company is primarily engaged in the development and licensure of
Internet related technology and Web sites incorporating the Company's
proprietary technology. The Company has developed two proprietary technologies,
Parallel Addressing Technology (PAV) and Dynamic Integrated Video Overlay
(DIVO). The Company licenses the use of the Technology to others and in some
cases develops its own Web sites. The Company has licensed the travel related
applications to Genisys and has also licensed the rights to wrestling and
related activities to WCW. The Company's Technology utilizes proprietary
program instructions applications to provide a means of linking a full motion
video on a user's CD-ROM or DVD-ROM drive to a commercial site on the Web. The
Company intends to continue to pursue licensing agreements with others and will
continue to develop and market its own Web sites.
Prior to February 1997, the primary business of the Company had been to act
as a developer and manager (rather than as an operator) under the Ground Lease
with the Irvine Company on the Irvine Property. The Ground Lease terminated in
February 1997. As part of management's decision to reorient the Company's
business to the development and licensure of the Technology, the Company's Camp
Frasiers have been discontinued and the Company has decided to dispose of its
Planet Kids facilities. In connection therewith, the Company will have
significantly reduced employment requirements, primarily part-time and seasonal
employees, in 1999.
22
<PAGE>
During the year ended December 31, 1998, the Company's operations consisted
of:
1. The development and licensure of the Technology and related
activities.
2. Children's recreational activities, which included the operations of
the Company's Camp Frasier at two locations, Planet Kids at three
locations, and Frasier's Frontier at one location.
Results of Operations
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31,
1997
The Company had total revenues during the fiscal year ended December 31,
1997, in the amount of $2,889,141 as compared to $2,443,601 for the fiscal year
ended December 31, 1998, a decrease of $445,540. The decrease is due primarily
to the fact that the Company had reduced revenues from its children's
recreational activities. The Company's revenues from its children's
recreational activities decreased from $2,802,342 for the fiscal year ended
December 31, 1997 to $2,032,784 for the fiscal year ended December 31, 1998, a
decrease of $775,558. This decrease in revenues was due primarily to lower
attendance at the facilities. The Company had revenues for the first time from
the licensing of its proprietary Internet technology of $410,817.
Operating expenses, excluding impairment losses, decreased from $5,825,624
for the fiscal year ended December 31, 1997, to $4,029,035 for the fiscal year
ended December 31, 1998, or a decrease in operating expenses of $1,796,589.
This decrease was due primarily to decreases in occupancy expenses and selling,
general and administrative expenses associated with termination of the Company's
Ground Lease operations in February 1997. In addition, depreciation and
amortization for the fiscal year ended December 31, 1997 was $747,282, compared
to $171,623 for fiscal year ended December 31, 1998. This decrease in
depreciation and amortization was as a result of the impairment loss of
$3,862,554 taken in the fiscal year ended December 31, 1997.
For the fiscal year ended December 31, 1997, the Company had a net loss of
$7,313,545 or ($0.59) per share, compared with a net loss of $514,839 or ($0.04)
per share for the fiscal year ended December 31, 1998. The net loss in the
fiscal year ended December 31, 1997 was primarily attributable to the impairment
loss in the amount of $3,862,554 relating to Planet Kids, additional legal
expenses relating to the Irvine Company Litigation and the fact that the Company
had only two months of revenues from its Ground Lease operations prior to the
expiration of the Ground Lease in February 1997.
Legal expenses incurred by the Company were $716,291 in the fiscal year
ended December 31, 1997, as compared to $603,183 in the fiscal year ended
December 31, 1998. In addition, the Company wrote down $1,464,264 of its
various investments and its equity in net losses of investees of $475,881 in the
fiscal year ending December 31, 1998. This was offset by an extraordinary gain
of $4,043,020 resulting from the settlement of the Irvine Company Litigation.
23
<PAGE>
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December 31,
1996
The Company had total revenues during the year ended December 31, 1996, in
the amount of $4,495,500 as compared to $2,889,141 for 1997, a decrease of
$1,606,359. The decrease is due primarily to the fact that the Company had
rental income from its Ground Lease operations of $80,799 for the fiscal year
ended December 31, 1997 compared to $1,444,284 for the fiscal year ended
December 31, 1996. The Company's revenues from its children's recreational
activities decreased from $3,051,216 for the fiscal year ended December 31, 1996
to $2,808,342 for the fiscal year ended December 31, 1997, a decrease of
$242,874. This decrease in revenues was due primarily to the fact that since
the Ground Lease terminated in February 1997, the Company had no revenues in
1997 from its Camp Frasier formerly located on the Irvine Property. This camp
had been the Company's largest summer day camp operation.
Operating expenses, excluding impairment losses, decreased from $6,055,281
for the fiscal year ended December 31, 1996 to $5,825,624 for the fiscal year
ended December 31, 1997, or an aggregate decrease in operating expenses of
$229,657. This decrease was due primarily to decreases in occupancy expenses
and selling, general and administrative expenses associated with termination of
the Company's Ground Lease operations in February 1997, offset by services
rendered in obtaining the First Westminster Loan and the Bibicoff Loan.
Impairment losses recognized during 1997 of $3,862,554 were due to a write-off
of certain property and equipment of Planet Kids play-learning centers.
For the fiscal year ended December 31, 1996, the Company had a net loss of
$403,275 or ($.03) per share compared with a net loss of $7,313,545 or ($0.59)
per share for the fiscal year ended December 31, 1997. The net loss in the
fiscal year ended December 31, 1996 included income from reversal of provision
of disputed contingent claims of approximately $1,100,000. The net loss in the
fiscal year ended December 31, 1997 was primarily attributable to the impairment
loss in the amount of $3,862,554 relating to Planet Kids, additional legal
expenses relating to the Irvine Company Litigation and the fact that the Company
had only two months of revenues from its Ground Lease operations for the fiscal
year ended December 31, 1997.
Legal expenses incurred by the Company were $331,291 for 1996 as compared to
$716,291 for 1997. Interest income on the invested net proceeds of the 1994
public offering produced interest income of $382,028 in 1996, as compared to
$344,009 in 1997. This decrease is due primarily to the fact that the Company
expended substantially all of the net proceeds from its 1994 public offering by
December 31, 1996.
In 1996 the Company wrote-off a previous provision for a disputed
contingency claim in the amount of $1,128,973 which it had previously
established with respect to the Irvine Company Litigation due to management's
belief that it was unlikely that any portion of this amount would ever have to
be paid.
24
<PAGE>
Liquidity and Financial Condition
The Company has experienced operating losses in recent years. For the
fiscal year ended December 31, 1997, the Company experienced a net loss of
$7,313,545, including impairment losses of $3,862,554. For the fiscal year
ended December 31, 1998, the Company experienced a loss of $514,839.
The Company's working capital requirements have been and will continue to be
significant. As of December 31, 1998, the Company had cash and cash equivalents
of $799,369 and a working capital deficit of $1,996,236. The majority of the
cash and cash equivalents on hand comes from the settlement of the Irvine
Company Litigation, which resulted in a payment to the Company of $4.0 million.
The Company's future capital requirements will depend on various factors,
including:
1. The number of applications utilizing the Company's Technology that the
Company wants to develop;
2. The length of time that it takes for the Company to dispose of its
children's recreation facilities and the manner of disposition; and
3. The Company and other members of UHC are actively entertaining various
opportunities of selling or otherwise disposing of the Las Vegas
Property. The Company believes that based on existing negotiations,
the amount realized from the disposition will be considerably more
than the cost; however, the Company cannot give any assurance that
this will in fact be the case or that the Las Vegas Property will be
sold or whether any such disposition will be on terms favorable to the
Company. In the alternative, the Company is actively entertaining
offers to sell its membership interest in UHC; however, the Company
cannot give any assurance that this in fact will be the case or
whether any such disposition will be on terms favorable to the
Company.
Due to the fact that the Company does not currently meet the new minimum bid
listing requirements for maintenance of the Company's Common Stock on the Nasdaq
Market, effective the close of business on December 1, 1998, the Company's
Common Stock was delisted from the Nasdaq Market. The Company's Common Stock is
now quoted on the OTC Bulletin Board. The delisting could result in the
Company's having difficulty in offering and selling its securities to
prospective investors.
If the Company is unable to raise additional funds, when needed, through the
private placement of its securities, it may seek financing from affiliated or
unaffiliated third parties. There can be no assurance, however, that such
financing would be available to the Company when and if it is needed, or that if
it is available, that it will be available on terms acceptable to the Company.
If the Company is unable to sell its securities or obtain financing to meet its
working capital needs and to repay indebtedness as it becomes due,
25
<PAGE>
the Company may have to consider such alternatives as selling or pledging
portions of its assets, among other possibilities, in order to meet such
obligations.
On July 28, 1997 UHC acquired the Las Vegas Property. The Company was
required to make an additional capital contribution to UHC of approximately
$3,800,000 in connection with the acquisition of the Las Vegas Property and in
connection therewith obtained two loans, including one for $1,900,000 from
Westminster. The First Westminster Loan is secured by a significant amount of
the Company's assets, including its 50% membership interest in UHC and a
significant portion of GHEI's common stock which the Company owns. Although the
Company believes it will be able to meet this loan obligation as it matures,
upon the sale of the Las Vegas Property, the sale of the Company's interest in
UHC, from additional financing from affiliated or unaffiliated sources, there is
no agreement in place to provide such financing. If the Company is unable to
meet the obligation under First Westminster Loan as it becomes due, the
collateral pledged by the Company could be foreclosed upon. In addition, the
Company issued a non-recourse guaranty with joint and several liability, limited
to the Company's interest in UHC, in connection with the Second Westminster Loan
made by Westminster to UHC.
As of December 31, 1998, investments in and loans to affiliated companies,
Genisys, GHEI, UHC and HEP II, totaled approximately $4,381,252 or approximately
52.2% of total assets.
All of the affiliated companies have had substantial losses and have working
capital deficits (except that Genisys does not have a working capital deficit),
creating liquidity risks for the Company. If these losses continue, a
substantial portion of the Company's net worth would be impaired or at risk.
Although Management believes that it is more likely than not that the
investments and receivables with related companies are not impaired, the
cumulative losses and liquidity problems of the affiliated companies create an
inherent risk in these assets. In addition, at December 31, 1998, the Company
had a net receivable from officer of $332,627. See Part III, Item 12, "Certain
Relationships and Related Transactions."
Although the Company believes that its current cash and income from
operations, distributions received by the Company as a result of its
investments, repayment to the Company of amounts previously advanced by the
Company to GHEI, proceeds from any sale of the El Cajon Property, and proceeds
from any sale of the Las Vegas Property or the Company's interest in UHC, will
provide the Company with sufficient funds to meet the Company's anticipated need
for working capital and capital expenditures for at least the next 12 months,
there can be no assurance that this will be the case.
The Company wishes to expand its development and marketing capabilities for
the Technology. While development of certain applications currently under
development can be funded from internal sources, more aggressive development
will require additional financing from either public or private sources. To
this end, the Company intends to raise additional capital either by borrowing
money or a public or private sale of equity or both. There can be no assurance
that the Company will be able to acquire additional financing,
26
<PAGE>
or that if such financing is available, that it will be available to the Company
on favorable terms.
Year 2000 Issues
The Company has a Year 2000 project designed to identify and assess the
risks associated with its information systems, operations, infrastructure and
technology products, and customers and suppliers, that are not Year 2000
compliant, and to develop, implement, and test remediation and contingency plans
to mitigate these risks. The project comprises four phases: (1) identification
of risks, (2) assessment of risks, (3) development of correction and contingency
plans, and (4) implementation and testing.
The Company's Year 2000 project is being overseen by a consultant to the
Company. The Company's Year 2000 project is currently in the assessment phase.
During an initial assessment, the Company has determined that although several
applications being used may be Year 2000 compliant, operating systems such as
Microsoft DOS, Windows 3.11, Windows 95 and Windows NT are not compliant. The
Company will make a determination as to which operating systems will need to be
replaced entirely and which will be upgraded to become Year 2000 compliant. It
is the Company's expectation that a final determination on these matters will be
made by April 30, 1999. Because this assessment is still in a preliminary
phase, it is not known at this time if the cost of any such upgrades or
replacements will be material.
The Company believes that software products currently produced by the
Company are Year 2000 compliant; however, additional testing is in progress. It
is not believed that there will be any adverse effects on the ability to use the
interactive products being developed by the Company.
The Company expects to have completed by April 30, 1999 a full assessment of
all hardware, operating systems and software applications in use on a Company-
wide basis. Some upgrading is expected to be required, including upgrading to
uniform operating and accounting systems on a Company-wide basis. In addition,
the hardware used in connection with the children's recreational activities
business conducted by the Company will have to be replaced, if the remaining
assets are not sold by the end of 1999. The costs of such assessments and
upgradings or replacements are not expected to be material. Required upgrading
is expected to be completed on or before June 30, 1999. In addition, the Company
is in the process of obtaining Year 2000 compliance statements from the
manufacturers of the Company's hardware and software products.
The Company believes that its greatest potential risks are associated with
(i) its information systems and systems embedded in its operations and
infrastructure; and (ii) its reliance on Year 2000 compliance by the Company's
vendors and suppliers of operating systems and software applications. The
Company is at the beginning stage of assessments for its operations and
infrastructure, and cannot predict whether significant problems will be
identified. The Company is asking its critical vendors and suppliers to provide
information on the status of the Year 2000 compliance in order to assess the
effect it could
27
<PAGE>
have on the Company. The Company has supplied all such requests to such
vendors. The Company has not yet determined the full extent of contingency
planning that may be required. Based on the status of the assessments made and
remediation plans developed to date, the Company is not in a position to state
the total cost of remediation of all Year 2000 Issues. Costs identified to date
have not been material. However, the Company has not yet completed its
assessments, developed remediations for all problems, developed any contingency
plans, or completely implemented or tested any of its remediation plans.
Based on the Company's current analysis and assessment of the state of its
Year 2000 compliance, the Company's most reasonably likely worst case scenario
involves delays in shipping of products by its vendors and suppliers. Such
delays could cause the Company to experience delays in delivering its own
products. Specific contingency plans will be formulated after the Company has
received information on the status of vendor and supplier Year 2000 compliance.
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement, or test corrections or
contingency plans, or may find that the costs of these activities exceed current
expectations and become material. In many cases, the Company is relying on
assurances from suppliers that new and upgraded information systems and other
products will be Year 2000 compliant. The Company plans to test such third-
party products, but cannot be sure that its tests will be adequate or that, if
problems are identified, they will be addressed in a timely and satisfactory
way. Because the Company uses a variety of information systems and has
additional systems embedded in its operational infrastructure, the Company
cannot be sure that all its systems will work together in a Year 2000 compliant
fashion. Furthermore, the Company cannot be sure that it will not suffer
business interruptions, either because of its own Year 2000 problems, or those
of its customers or suppliers whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to the Company. If the Company
fails to satisfactorily resolve Year 2000 issues related to its product 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.
Item 7. Financial Statements
The Financial Statements of the Company are submitted as a separate section
of this Form 10-KSB commencing on page F-1 immediately following Part IV of this
Form 10-KSB.
28
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers
The following table sets forth certain information concerning the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
All Positions Position Held
Name Age with the Company Since
- ---- --- ---------------- -------------
<S> <C> <C> <C>
Harry Shuster 64 Chairman of the Board 1969
President and Chief Executive
Officer, Chief Financial Officer,
and Director
Brian Shuster 40 Executive Vice President and Director 1996
Alvin Cassel 85 Secretary, Treasurer and Director 1969
Alvin Alexander 70 Director 1975
J. Brooke Johnston, Jr. 59 Director 1996
</TABLE>
Harry Shuster has been engaged in managing the affairs of the Company since
1967, serving in the capacity of Chairman of the Board, President and Chief
Executive Officer since April 1975. Mr. Shuster is also the Chairman of the
Board, President and Chief Executive Officer of GHEI, a publicly-traded company
primarily engaged in the business of the ownership and operation of private
membership restaurants and cigar clubs whose offices are located in Los Angeles,
California, and which is an affiliate of the Company. Mr. Shuster is also the
Chairman of the Board of UFD, which is a privately-held independent motion
picture production company in Los Angeles, California and the general partner of
HEP II. Harry Shuster is the father of Brian Shuster. See Part III, Item 12,
"Certain Relationships and Related Transactions."
Brian Shuster has been the President of UFD since 1995. From 1993 through
1995, Brian Shuster was President of Beverly Hills Producers Group, an
independent motion picture production company. From 1990 through 1993, Mr.
Shuster was Vice President of Worldwide Entertainment Group, an independent
motion picture production company. Brian Shuster is the son of Harry Shuster.
See Part III, Item 12, "Certain Relationships and Related Transactions."
Alvin Cassel is of counsel to the law firm of Broad and Cassel, Miami,
Florida. He has been engaged in a general civil law practice for more than 60
years. Mr. Cassel is also a director of GHEI, an affiliate of the Company. Mr.
Cassel is also Managing Director of Koorn N.V., all of whose stock is owned by
Harry Shuster. See Part III, Item 11, "Security Ownership of Certain Beneficial
Owners and Management."
Alvin Alexander is and has been for more than five years President of Skip
Alexander Productions, a company located in Los Angeles, California, which
develops game shows and other television properties.
29
<PAGE>
J. Brooke Johnston, Jr. is a partner of the law firm of Baker, Johnston &
Wilson LLP, in Birmingham, Alabama. He was Senior Vice President and General
Counsel for Med Partners, Inc., in Birmingham, Alabama from April 1996 until
July 1998. Prior to that, Mr. Johnston was a senior principal of the law firm
of Haskell Slaughter Young & Johnston, a Professional Association, in
Birmingham, Alabama, where he practiced securities law for over 17 years. Mr.
Johnston is also a director of GHEI, an affiliate of the Company.
The present term of each Director will expire at the time of the next Annual
Meeting of Stockholders of the Company. Executive officers are elected at the
Annual Meeting of the Board of Directors held immediately following the Annual
Meeting of Stockholders and hold office until the next Annual Meeting of the
Board of Directors or until their successors are duly elected and qualified.
There are no arrangements or understandings known to the Company between any
of the Directors or executive officers of the Company and any other person,
pursuant to which any of such persons was or is to be selected as a Director or
an executive officer, except the Amended and Restated Consulting Agreement
between the Company and Harry Shuster. See Part III, Item 10, "Executive
Compensation - Consulting and Employment Agreements."
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16 (a) of the Securities Exchange Act requires the Company's
officers and Directors, and persons who beneficially own more than 10% of a
registered class of the Company's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership of the Company's
Securities with the Securities and Exchange Commission. Officers, Directors and
beneficial owners of more than 10% of the Company's Common Stock are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms that they file. Based solely on review of the copies of such forms
furnished to the Company, or written representations that no reports on Form 5
were required, the Company believes that for the period from January 1, 1998
through December 31, 1998, all officers, Directors and greater-than-10%
beneficial owners complied with all Section 16(a) filing requirements applicable
to them, except that Harry Shuster was late in filing one Form 4 involving seven
transactions with regard to gifts of shares made by him and Brian Shuster was
late in filing one Form 4 involving four transactions with regard to gifts of
shares made to him. All such filings have been made as of the date hereof.
Item 10. Executive Compensation
Cash Compensation
The following table sets forth compensation paid or awarded to the Chief
Executive Officer and all officers of the Company whose compensation exceeded
$100,000 (the "Named Executive Officers") for all services rendered to the
Company in 1998, 1997 and 1996.
30
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term All Other
Annual Compensation Compensation Compensation(1)
----------------------- ------------------ ---------------
Name and Principal Securities
Position Year Salary Bonus Underlying Options
- ------------------------- ---- -------- ----- ------------------
<S> <C> <C> <C> <C> <C>
Harry Shuster 1998 $300,663 $ --- 2,100,000 $ -----
Chairman of the Board, 1997 $273,330 $ --- --- $ -----
President and Chief 1996 $248,482 $ --- --- $ 3,600
Executive Officer
</TABLE>
(1) Consists of $300 per month car allowance paid Mr. Shuster.
Consulting and Employment Agreements
As of June 1, 1994, the Company and Mr. Shuster entered into an Amended and
Restated Consulting Agreement (the "Consulting Agreement"), updating an
arrangement originally effective as of September 1, 1984. The Consulting
Agreement provides that Mr. Shuster will act as the President and Chief
Executive Officer and a director of the Company throughout the five-year term of
the Agreement for annual compensation set at $208,984 per annum for 1994, to be
increased 10% during each successive year of the Agreement. Mr. Shuster is also
provided with either the use of a Company car or a $300 per month car allowance.
The Company incurred consulting fees pursuant to the Consulting Agreement of
$248,482 in 1996, $273,330 in 1997, and $300,663 in 1998. The Consulting
Agreement also provides for certain disability benefits for a period of up to
three years. The Consulting Agreement provides that, so long as Mr. Shuster
spends as much time as is necessary to properly carry out his duties as
President and Chief Executive Officer of the Company, he will be otherwise
permitted to spend a reasonable amount of time pursuing his own outside
interests. It is estimated that Mr. Shuster devoted approximately 30 hours per
week to the affairs of the Company during 1996, 1997 and 1998. The Consulting
Agreement provides for automatic one year renewals for each contract year that
ends without termination of the Consulting Agreement by either party. The
Consulting Agreement will be renewed when the original term expires in June
1999. The Consulting Agreement terminates upon Mr. Shuster's death or in the
event of a breach of the Consulting Agreement by Mr. Shuster.
Since October 1, 1997, the Company has paid or accrued rent, including
homeowner association dues, to Mr. Shuster in the aggregate amount of $34,676,
for an apartment which he owns and which he and Brian Shuster use while they are
in New York City on Company business. The Company believes that the rent is at
least as favorable as the cost of comparable housing over the significant period
of time that Messrs. Shuster are in New York City on Company business. See Part
III, Item 12, "Certain Relationships and Related Transactions."
31
<PAGE>
The Company has no employee bonus or benefit plans, profit sharing plans,
retirement plans or deferred compensation plans. No fees are paid directors for
attendance at meetings of the Board of Directors, although out-of-pocket
expenses incurred in connection therewith are reimbursed.
Stock Option Grants
The table below sets forth information regarding stock option grants made to
each of the Named Executive Officers of the Company who received options during
the fiscal year ended December 31, 1998. All of the options were issued at not
less than the fair market value of the Common Stock on the date of grant and are
currently 100% vested.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Percent of
Total Options
Number of Shares Granted to Exercise
Underlying Employees in Price
Name Options Granted Fiscal Year ($/Share) Expiration Date
- ---- ---------------- ------------- --------- ---------------
<S> <C> <C> <C> <C>
Harry Shuster.................. 2,100,000 87.5% $.625 September 30, 2003
</TABLE>
Stock Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth information regarding unexercised options
held by the Named Executive Officers. No options were exercised during the
fiscal year ended December 31, 1998.
Aggregated Option Exercise in Last Fiscal Year
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 at December 31, 1998(1)
--------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Harry Shuster..... 2,606,950 -- $ 0 $ --
</TABLE>
______________
(1) Represents the difference between market price of the Company's Common Stock
and the respective exercise prices of the options at December 31, 1998. Since
the market price of the Common Stock at December 31, 1998 was less than the
exercise prices of any of Mr. Shuster's outstanding options, the options were
not "in-the-money" at December 31, 1998. Actual values which may be realized,
if any, upon any exercise of such options will be based on the market price of
the Common Stock at the time of any such exercise and thus are dependent upon
future performance of the Common Stock.
32
<PAGE>
Stock Options
At December 31, 1998, there were outstanding presently exercisable non-
qualified stock options to purchase an aggregate of 3,166,950 shares of the
Common Stock of the Company held by the Company's officers and directors. Of
these, 2,606,950 were held by Harry Shuster, Chairman of the Board, President
and Chief Executive Officer of the Company, and the balance were held by the
other directors of the Company, at option prices ranging from $.30 to $1.38 per
share. See Part III, Item 11, "Security Ownership of Certain Beneficial Owners
and Management".
All non-qualified stock options issued by the Company to its directors and
executive officers are in substantially the same form. All options issued have
a term which expires on December 31, 2002, except for options granted during
1998, which have a term of five years from date of grant (expiring in September
2003), and are immediately exercisable as to all of the shares of Common Stock
covered thereby. The option price is the fair market value of the Common Stock
of the Company as of the date of grant. Each option terminates at the end of 90
days following termination of association with or employment by the Company for
any reason other than death or at the end of one year in the event such
termination is caused by death.
In addition to the non-qualified stock options held by directors and
executive officers of the Company, at December 31, 1998, there were outstanding
non-qualified options to purchase an aggregate of 100,000 shares of the Common
Stock of the Company held by third parties. All of these non-qualified options
are in substantially in the same form as those issued to directors and executive
officers of the Company, except that generally they are not terminable until
they expire. These options have exercise prices ranging from $.30 to $.75 and
expire at December 31, 2002.
33
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
General
The following table sets forth certain information with respect to all persons,
or groups of persons, known by the Company to own beneficially more than five
percent of the Common Stock of the Company, and as to the beneficial ownership
thereof of the directors and executive officers of the Company, individually and
as a group, all as at March 31, 1999:
<TABLE>
<CAPTION>
Shares
Beneficially Percentage
Names and Address of Beneficial Owner Owned(1) Ownership
- ------------------------------------- ------------- ----------
<S> <C> <C>
Harry Shuster (2)(3).......................... 5,879,933 34.9%
Brian Shuster (2)(4).......................... 1,050,300 7.1%
Alvin Cassel (2)(5)........................... 185,100 1.3%
Alvin Alexander (2)(6)........................ 13,021 *
J. Brooke Johnston, Jr (2)(7)................. 105,000 *
Walton N.B. Imrie (8)......................... 654,430 4.6%
c/o Kestral S.A
Pausilippe Ch
Des Trois-Portes 11
2006 Neuchatel, Switzerland
All Directors and Executive Officers
as a Group (5 persons) (2)(3)(4)(5)(6)(7)... 7,233,354 41.0%
</TABLE>
_________________
* Less than 1%
(1) Includes shares issuable upon the exercise of options or warrants that are
exercisable within 60 days. The shares underlying such options or warrants
are deemed to be outstanding for the purpose of computing the percentage of
outstanding stock owned by such persons individually and by each group of
which they are a member, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
(2) The address of all officers and directors is c/o the Company at 1990
Westwood Boulevard, Penthouse, Los Angeles, CA 90025.
(3) Includes 110,100 shares owned by Koorn N.V., a Netherlands Antilles
corporation, all of whose capital shares are owned by Harry Shuster. Mr.
Shuster has sole investment power over the shares owned by Koorn N.V., but
shares voting power of these shares. Alvin Cassel, a director of the
Company, acts as Managing Director of Koorn N.V. Also includes 125,000
shares owned by the Harry and Nita Shuster Charitable Foundation and 300
shares owned by Nita Shuster, the spouse of Harry Shuster. Does not include
10,000 shares owned by Bardene Shuster, 300 shares owned by Nita Shuster and
Bardene Anne Shuster, 300 shares owned by Nita Shuster and Brian Shuster,
and 300 shares owned by Nita Shuster and Stanley Shuster, of which shares
Mr. Shuster disclaims beneficial ownership. Also includes options to
purchase 2,606,950 shares of common stock which are currently exercisable as
well as 3,037,583 shares of stock owned directly by Mr. Shuster. Also does
not include an aggregate of 480,000 shares owned by trusts of which Mr.
Shuster's adult children are the beneficial owners.
(4) Consists of 300 shares owned by Nita Shuster and Brian Shuster, 160,000
shares owned by The Brian Shuster Trust, 240,000 shares owned by Brian
Shuster for the benefit of his three minor children and options to purchase
650,000 shares which are currently exercisable.
34
<PAGE>
(5) Consists of 110,100 shares held by Koorn N.V., as to which Mr. Cassel has
shared voting power and options to purchase 75,000 shares of common stock
which are currently exercisable.
(6) Includes options to purchase 10,000 shares that are currently exercisable.
(7) Includes options to purchase 100,000 shares which are currently
exercisable, of which amount options to purchase 50,000 shares are held by
Mr. Johnston directly and options to purchase 100,000 shares are held by a
law firm in which Mr. Johnston was a partner, half of which he is entitled
to receive and as to the other half of which he disclaims beneficial
ownership.
(8) These shares are owned by Plus One Finance, Ltd., a British Virgin Islands
corporation, which is wholly-owned by Walton N.B. Imrie, a resident of
Switzerland. Includes warrants to purchase 83,000 shares of common stock
which are currently exercisable.
Item 12. Certain Relationships and Related Transactions
Certain Relationships and Transactions with Directors
Harry Shuster is the Chairman of the Board, Chief Executive Officer and
President of the Company. He is also Chairman of the Board, Chief Executive
Officer and President of GHEI, an affiliate of the Company; Chairman of the
Board and a principal stockholder of UFD, which is the general partner of HEP
II, an affiliate of the Company; a member of the Management Committee of UHC; a
director of Genisys, an affiliate of the Company and to whose wholly-owned
subsidiary, NII, the Company has licensed the travel-related applications of the
Technology; and Chairman of NII. Harry Shuster is the father of Brian Shuster.
Brian Shuster is Executive Vice President and a director of the Company and
provides consulting services to the Company in connection with the development
of the Technology and its multimedia interactive products. He is also the
President and a principal stockholder of UFD, which is the general partner of
HEP II, an affiliate of the Company; a director of Genisys, an affiliate of the
Company and to whose wholly-owned subsidiary, NII, the Company has licensed the
travel-related applications of the Technology; and President of NII. Brian
Shuster is the son of Harry Shuster.
In prior years, Harry Shuster advanced working capital to the Company at the
prime rate plus 3%. Such advances were secured by the Company's rights under
its sublease arrangements. In June 1995, advances in the amount of $649,800,
excluding accrued interest of $789,649, were converted by Mr. Shuster into
equity by the exercise of options to purchase 755,550 shares of the Company's
Common Stock. Mr. Shuster has deferred payment of certain of the interest due to
him under the loan arrangement and certain of the amounts due him under the
Consulting Agreement. At December 31, 1998, accrued interest payable to Mr.
Shuster amounted to $1,136,886. Loans receivable, including accrued interest,
from Mr. Shuster at December 31, 1998 and 1997 amounted to $1,430,185 and
$1,002,072, respectively. As of December 31, 1998, prepaid consulting fees to
Mr. Shuster amounted to $39,328. As of December 31, 1998, the net receivable
from Mr. Shuster amounted to $332,627. See "Financial Statements - Note 8 to
Notes to Consolidated Financial Statements."
35
<PAGE>
The Company leases its principal executive offices, on a month-to-month
basis, from a company in which Harry Shuster is an officer and principal
stockholder. The Company paid rent to this company in the amount of $31,044 in
1997 and $43,624 in 1998. In addition, since October 1, 1997, the Company paid
or accrued rent, including homeowner association dues, to Mr. Shuster in the
amount of $34,676, for an apartment which he owns and which he and Brian Shuster
use while they are in New York City on Company business. The Company believes
that the rent is at least as favorable as the cost of comparable housing over
the significant period of time that Messrs. Shuster are in New York City on
Company business.
Brian Shuster provides consulting services to the Company with respect to
the development of the Technology and interactive multimedia products. Brian
Shuster receives $5,000 per month in consulting fees. The consulting agreement
is an oral arrangement, which may be terminated by either party upon 30 days
notice. During the years ended December 31, 1998 and 1997, the Company paid
Brian Shuster or accrued consulting fees of $60,000 and $60,000, respectively.
On June 3, 1997, the Company exchanged options to purchase 25,000 shares of
Common Stock issued to Alvin Alexander, a director of the Company, for a note
receivable of $10,000.
Transactions with GHEI
In September 1996, the Company entered into the GHEI Financing Agreement, in
which it agreed to pledge the sum of $875,000 in order to support a letter of
credit required to be provided by GHEI in connection with a lease that GHEI had
entered into. In consideration for providing this pledge of collateral for
GHEI's letter of credit, GHEI agreed to pay the Company an amount equal to 10%
per annum on the amount of the pledged cash collateral as it exists from time to
time. All of the cash collateral was replaced by October 1997. As additional
consideration, the Company was issued 100,000 shares of the common stock of GHEI
and a warrant to purchase an additional 100,000 shares of common stock of GHEI
at an exercise price of $.75 per share, which was exercised by the Company in
February 1997. Harry Shuster is the Chairman of the Board, President, Chief
Executive Officer and a principal stockholder of GHEI. On July 15, 1997, the
Company and GHEI entered into an amendment to the GHEI Financing Agreement
pursuant to which (in consideration for the Company's agreeing to forego the
requirement that GHEI replace the collateral pledged on an ongoing basis from
certain operations) GHEI agreed to issue to the Company or its designee a
warrant to purchase 150,000 shares of the common stock of GHEI at an exercise
price of the lesser of $.75 per share or 75% of the average of the last trade
for the common stock of GHEI for the 10 day period prior to the exercise of the
warrant. The Company subsequently designated Westminster, which provided
financing to the Company in connection with the acquisition of the Las Vegas
Property, as the entity to receive this warrant.
In February 1997, the Company entered into an additional financing agreement
with GHEI pursuant to which the Company agreed to loan GHEI up to $1,250,000 in
order to
36
<PAGE>
fund the development of two private membership restaurant and cigar clubs being
developed by GHEI at that time. The loan bears interest at the rate of 8% per
annum on the outstanding principal amount. As additional consideration for this
loan, the Company received 75,000 shares of the common stock of GHEI. This loan
was not repaid when due on September 30, 1997. The related financing agreement
provided that if the loan was not repaid by September 30, 1997, it would become
payable on demand and the Company would then be entitled to receive an
additional 25,000 shares of the common stock of GHEI. In February 1998, GHEI
issued 25,000 shares of its common stock to the Company pursuant to the terms of
this financing agreement. The parties agreed to extend the maturity date of
advances made under this financing agreement to September 30, 1998.
On September 30, 1998, the Company agreed to make a new installment loan to
GHEI in the amount of up to $1,250,000 in replacement of the previous loan.
GHEI executed the GHEI Note, which bears interest at 8% per annum and is due and
payable in full on March 31, 1999. The parties have agreed to extend the
maturity to the GHEI Note for an additional 60 days. The GHEI Note is secured
pursuant to the GHEI Security Agreement, in which GHEI granted the Company a
security interest in certain collateral.
The initial loan advance under the GHEI Note on September 30, 1998 was
$603,280, which represents the principal amount due under the previous note of
$536,000, together with accrued interest of $67,280. The Company may from time
to time, but shall not be obligated, to make future advances under the GHEI Note
up to a total amount of $1,250,000.
As of December 31, 1998, the Company held 966,666 shares of GHEI's common
stock. Management of the Company estimated the fair value of the investment in
GHEI of approximately $38,667 at December 31, 1998. Because Management of the
Company does not believe that it will recover the original cost of its
investment in GHEI, it has realized loss on this investment in the amount of
$1,043,764. On October 27, 1998, the common stock of GHEI was delisted from the
Nasdaq Market for failure to satisfy the minimum bid and net asset value
requirements of Nasdaq Marketplace Rules. GHEI Common Stock is presently being
quoted on the OTC Bulletin Board.
At December 31, 1998, accrued interest amounted to $16,018, and an aggregate
of $603,280 in principal amount remained payable by GHEI to the Company pursuant
to this financing agreement.
Transactions with UHC
Concurrently with the closing of UHC's acquisition of the Las Vegas
Property, Westminster made the First Westminster Loan in the amount of
$1,900,000 to the Company, to enable the Company to meet a portion of its
$3,800,000 capital contribution obligation to UHC. The First Westminster Loan
was evidenced by the First Westminster Note. The First Westminster Loan bears
interest at the rate of 15% per annum and is due on the earlier to occur of (i)
the demand of Westminster (which demand may be made any time after July 29,
1998) or (ii) the Maturity Date. The holder of the First Westminster
37
<PAGE>
Note has the right, at any time prior to the Maturity Date, to convert the
entire outstanding principal balance of the First Westminster Note into one-half
of the Company's membership interest in UHC. The conversion feature of the
First Westminster Note has been amended to extend the conversion date, as
described below. The First Westminster Note may be prepaid by the Company at
any time prior to conversion and after July 29, 1998. One-half of any cash
distributions which may be made by UHC to the Company prior to the repayment of
the First Westminster Note are required to be paid to Westminster as a
prepayment on the First Westminster Note.
The First Westminster Loan is secured by, among other things, a pledge of
408,333 of the 966,666 shares that the Company owns in GHEI. As additional
security, the Company has granted a security interest to Westminster, pursuant
to a Security Agreement dated as of July 29, 1997, in the Company's 50%
membership interest in UHC and in the receivables and certain indebtedness due
to the Company from GHEI. Harry Shuster is the Chairman of the Board, President
and Chief Executive Officer of the Company; serves as a member of the Management
Committee of UHC; and also serves as the Chairman of the Board, President, and
Chief Executive Officer, and is a principal stockholder of, GHEI. In addition,
Harry Shuster and his spouse, Nita Shuster, provided certain other security
individually and jointly with respect to the First Westminster Loan.
As additional consideration for Westminster making the First Westminster
Loan, the Company granted Westminster a three-year warrant to purchase 150,000
shares of the Common Stock of the Company at a per share price equal to the
lesser of $.40 or 75% of the average of the last trade prices for the ten
trading days immediately preceding the exercise of the warrants. At the request
of Westminster, the Company has filed a registration statement to register the
shares of Common Stock underlying the warrants, which registration statement has
been declared effective by the Securities and Exchange Commission. The Company
additionally arranged for GHEI to grant to Westminster a three-year warrant to
purchase 150,000 shares of the common stock of GHEI exercisable at a per share
price equal to the lesser of $.75 or 75% of the average of the last trade prices
for the ten trading days immediately preceding the exercise of the warrants.
On August 6, 1998, Westminster made the Second Westminster Loan to UHC. The
Second Westminster Loan is evidenced by the Second Westminster Note. In order
to induce Westminster to make the Second Westminster Loan, the Company agreed to
amend the First Westminster Note to provide that the holder of the First
Westminster Note now has the right, at any time prior to July 31, 2001, to
convert the entire outstanding principal balance of the First Westminster Note
into one-half of the Company's membership interest in UHC. It was also agreed
by the parties that a default by UHC under the Second Westminster Note will be
deemed to be a default by the Company under the First Westminster Note. Harry
Shuster personally guaranteed the obligations of UHC under the Second
Westminster Loan and the Company issued a non-recourse guaranty with joint and
several liability, limited to the Company's interest in UHC.
38
<PAGE>
Transactions with HEP II
In April 1996, the Company acquired 50% of the limited partnership interests
in HEP II, for a capital contribution in the amount of $1,500,000. HEP II is
engaged in the motion picture production business. Its general partner is UFD.
Harry Shuster is the Chairman of the Board of UFD as well as one of its
principal stockholders. Brian Shuster is the President of UFD as well as one of
its principal stockholders.
In 1997, at the request of Harry Shuster, UFD paid an aggregate of $325,000
to the Company, which amount was applied to reduce the Company's net receivable
from him. UFD is the general partner of HEP II, in which the Company had an
investment at December 31, 1998 in the amount of $700,000. See "Financial
Statements - Note 4 and Note 8 to Notes to Consolidated Financial Statements."
39
<PAGE>
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements.
The audited consolidated financial statements of United Leisure Corporation
and Subsidiaries filed as a part of this Form 10-KSB are listed in the "Index to
Consolidated Financial Statements" preceding the Company's Consolidated
Financial Statements contained in Item 7 of this Form 10-KSB, which "Index to
Consolidated Financial Statements" is hereby incorporated herein by reference.
2. Exhibits.
The Exhibit Index immediately following the signature page of this Form 10-
KSB is incorporated herein.
(b) Reports on Form 8-K.
On November 4, 1998, the Company filed Amendment No. 1 to a Current Report
on Form 8-K dated July 23, 1998, with respect to the Genisys Transaction.
On December 2, 1998, the Company filed a Current Report on Form 8-K, with
respect to the delisting of the Company's Common Stock from the Nasdaq Market.
40
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-2
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the years ended December 31, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
United Leisure Corporation
We have audited the accompanying consolidated balance sheets of United Leisure
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
United Leisure Corporation and subsidiaries as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as going concern. As discussed in Note 2 to the
consolidated financial statements, there is a substantial doubt about the
ability of the Company to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
March 6, 1999
F-1
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 799,369 $ 152,770
Receivables 53,153 21,732
Prepaid expenses and other current assets 78,082 59,690
------------ ------------
TOTAL CURRENT ASSETS 930,604 234,192
------------ ------------
PROPERTY AND EQUIPMENT, NET 384,984 2,172,569
------------ ------------
INVESTMENTS
Investment in United Hotel at equity - related party 3,432,452 3,633,800
Investment in HEP II at equity - related party 700,000 1,120,500
Investment in Genisys at equity - related party 210,133 -
Investment in Grand Havana at fair value - related party 38,667 340,025
------------ ------------
TOTAL INVESTMENTS 4,381,252 5,094,325
------------ ------------
OTHER ASSETS
Loan receivable from Grand Havana - related party 619,298 681,643
Due from officer 332,627 12,567
Assets held for sale 1,663,857 -
Deposits and other assets 78,929 82,043
------------ ------------
TOTAL OTHER ASSETS 2,694,711 776,253
------------ ------------
$ 8,391,551 $ 8,277,339
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,900,000 $ 1,925,000
Accrued interest 406,808 143,973
Accounts payable and accrued expenses 478,785 1,243,066
Due to related parties 107,535 -
Deferred revenues 28,060 32,710
Deposits and other 5,652 43,426
------------ ------------
TOTAL CURRENT LIABILITIES 2,926,840 3,388,175
LONG-TERM DEBT 842,000 842,000
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 - 13,918,849 shares in 1998 and
12,618,849 shares in 1997 139,188 126,188
Additional paid-in capital 24,844,168 24,587,188
Accumulated deficit (20,438,645) (19,923,806)
Accumulated other comprehensive loss - Unrealized loss on investment - (742,406)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,544,711 4,047,164
------------ ------------
$ 8,391,551 $ 8,277,339
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUE
Rentals $ - $ 80,799
Children's recreational activities 2,032,784 2,808,342
Licensing fees 410,817 -
----------- -----------
TOTAL REVENUE 2,443,601 2,889,141
----------- -----------
EXPENSES
Direct operating expenses 3,114,182 3,971,056
Selling, general and administrative expenses 743,230 1,107,286
Depreciation and amortization 171,623 747,282
Impairment losses - 3,862,554
----------- -----------
TOTAL EXPENSES 4,029,035 9,688,178
----------- -----------
LOSS BEFORE OTHER INCOME (EXPENSE) (1,585,434) (6,799,037)
----------- -----------
OTHER INCOME (EXPENSE)
Litigation settlement 4,043,020 -
Legal costs (603,183) (716,291)
Equity in net loss of United Hotel (226,348) (117,700)
Equity in net loss of Genisys (249,533) -
Realized loss from write-down of investment in HEP II (420,500) -
Realized loss from write-down of investment in Grand Havana (1,043,764) -
Interest income 158,916 344,009
Interest expense (697,047) (303,823)
Other, net 109,034 279,297
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 1,070,595 (514,508)
----------- -----------
NET LOSS (514,839) (7,313,545)
----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized loss on securities available for sale:
Unrealized holding (loss) on securities arising during the period (301,358) (924,172)
Reclassification adjustment for loss realized in net loss 1,043,764 -
----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS) 742,406 (924,172)
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 227,567 $(8,237,717)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 13,502,182 12,493,849
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.04) $ (0.59)
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock
---------------------- Accumulated
Additional Other
Number of Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income (Loss) Total
---------- -------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 12,368,849 $123,688 $24,326,458 $(12,610,261) $ 181,766 $12,021,651
Issuance of common stock for
services 250,000 2,500 67,500 70,000
Fair value of options and
warrants issued to non-
employees 193,230 193,230
Unrealized loss on investment (924,172) (924,172)
Net loss (7,313,545) (7,313,545)
---------- -------- ----------- ------------ --------- -----------
Balance, December 31, 1997 12,618,849 126,188 24,587,188 (19,923,806) (742,406) 4,047,164
Issuance of common stock for
services 100,000 1,000 30,300 31,300
Sale of common stock 1,200,000 12,000 217,680 229,680
Fair value of options and
warrants issued to non-
employees 45,000 45,000
Accretion in the carrying
amount of common stock
subject to repurchase (36,000) (36,000)
Realized loss on investment 742,406 742,406
Net loss (514,839) (514,839)
---------- -------- ----------- ------------ --------- -----------
Balance, December 31, 1998 13,918,849 $139,188 $24,844,168 $(20,438,645) $ - $ 4,544,711
========== ======== =========== ============ ========= ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (514,839) $(7,313,545)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 171,623 741,642
Impairment losses - 3,862,554
Issuance of common stock for services 73,300 70,000
Fair value of options and warrants issued to non-employees 45,000 193,230
Licensing fees (410,817) -
Write-down of investment in Grand Havana 1,043,764 -
Write-down of investment in HEP II 420,500 -
Equity in net loss of Genisys 249,533 -
Equity in net loss of United Hotel 226,348 117,700
Accrual of interest from related parties (144,468) (99,044)
Write-off of loan from director - 10,000
Receipt of common stock of Grand Havana as loan fees - (177,431)
Changes in operating assets and liabilities:
Receivables (31,421) 107,111
Prepaid expenses and other current assets (18,392) 61,576
Deposits 3,114 160,112
Accrued interest 262,835 -
Accounts payable and accrued expenses (764,281) 764,024
Accrued expenses due to related parties 215,588 25,951
Deferred revenues (4,650) (111,235)
Other current liabilities (37,774) (80,849)
---------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVIES 784,963 (1,668,204)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (96,744) (198,179)
Restricted cash - 875,000
Investment in Grand Havana - (575,000)
Advances to related party (335,300) -
Collection of advances due from officer - 350,000
Investment in United Hotel (25,000) (3,751,500)
Loan receivable from Grand Havana - (775,000)
Collection of loan receivable from Grand Havana 114,000 125,000
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (343,044) (3,949,679)
---------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - 2,800,000
Repayments of notes payable (25,000) (875,000)
Sale of common stock 229,680 -
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 204,680 1,925,000
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 646,599 (3,692,883)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 152,770 3,845,653
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 799,369 $ 152,770
========== ===========
CASH PAID FOR:
Interest $ 121,975 $ 159,850
========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock for services $ 31,300 $ 70,000
Fair value of options and warrants to non-employees 45,000 193,230
Investment in Genisys for licensing fees 410,817 -
Reclassification of property and equipment to assets held for sale 1,663,857 -
Issuance of common stock subject to repurchase 42,000 -
Accretion in the carrying amount of common stock subject to repurchase 36,000 -
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. Summary of Significant Accounting Policies
Description of Business - The Company is in the business of developing and
licensing for various applications its internet video technology ("Technology").
The Technology, which equips sites on the World Wide Web (the "Web") with
software, provides a means of linking a full-motion video on CD-ROM located
on the user's personal computer to the Web sites. The display of the content of
the CD-ROM is completely controlled by the remote Web server.
During 1997, the Company operated summer day camps in two locations in
Southern California and one in its property in San Diego County, California, and
children's play-learning centers known as Planet Kids in three locations in
Southern California. During 1998, the Company did not open the summer day camp
in San Diego County, California. The property in San Diego County is being held
for sale.
Principles of Consolidation - The consolidated financial statements include
the accounts of United Leisure Corporation and its wholly-owned subsidiaries.
All significant intercompany transactions and balances have been eliminated.
Investments - Investments in 20 percent to 50 percent owned limited
partnership and limited liability company are carried at equity. Investment in
less than 20% owned partnership is carried at cost less distributions.
Investments in available for sale securities are carried at fair value, with the
unrealized gains and losses reported as a separate component of stockholders'
equity.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Cash and cash equivalents - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Fair Value of Financial Instruments - The Company's financial instruments
consist of cash equivalents, receivables, accounts payable, accrued expenses,
notes payable and due to related parties. The fair values of the Company's
financial instruments approximate the carrying value of the instruments.
Concentration of Risk - The Company invests its excess cash in certificates
of deposit and money market funds, which, at times, may exceed federally insured
limits. The Company maintains its accounts with financial institutions with high
credit ratings.
Property and Equipment - Property and equipment is recorded at cost and
depreciation is computed on the straight-line method based upon the estimated
useful life of the related asset as follows:
<TABLE>
<S> <C>
Buildings and improvements............................. 3-27 years
Machinery, equipment and vehicles...................... 4-10 years
Furniture, fixtures and office equipment............... 5-10 years
Computers.............................................. 6 years
Signs.................................................. 10 years
</TABLE>
Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows are not
sufficient to recover its carrying amount. The Company measures an impairment
loss by comparing the fair value of the asset to its carrying amount. Fair value
of an asset is calculated as the present value of expected future cash flows.
F-7
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
Capitalized Technology Costs - The Company capitalizes certain costs incurred
to internally develop its Technology which is licensed to third parties.
Capitalization of internally developed Technology begins upon the establishment
of technological feasibility. Costs incurred prior to the establishment of
technological feasibility are expensed as incurred. Technological feasibility is
established when the Company has completed all activities that are necessary to
establish that the product can be produced to meet specifications.
Development expenses were $168,179 and $126,917 in 1998 and 1997,
respectively. No costs had been capitalized at December 31, 1998.
Licensing Revenue Recognition Policies - The Company is engaged as a licensor
of its Technology. Generally, revenue is recognized upon delivery of the
Technology. For arrangements to deliver the Technology that require significant
modification or customization, revenue is recognized on the percentage-of-
completion method.
Stock-Based Compensation - Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), encourages, but
does not require a fair value based method of accounting for stock options. The
Company elected to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations, under which no compensation cost related to stock options has
been recognized as the exercise price of each option at the date of grant was
equal to the fair value of the underlying common stock.
Earnings per Share - Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share" which
established simplified standards for computing and presenting earnings per share
information. Basic EPS is calculated by dividing income available to common
stockholders (the "numerator") by the weighted-average number of common shares
outstanding (the "denominator") during the period. The computation of diluted
EPS is similar to the computation of basic EPS except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares (that is, securities such as
options, warrants, convertible securities, or contingent stock agreements) had
been issued. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back (a) any convertible preferred
dividends and (b) the after-tax amount of interest recognized in the period
associated with any convertible debt. The computation of diluted EPS shall not
assume conversion, exercise, or contingent issuance of securities that would
have an antidilutive effect on EPS.
Comprehensive Income - The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" effective January 1, 1998.
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements. Components of
comprehensive income (loss) for the Company include net income (loss) and
changes in the value of available-for-sale securities. The statements of
operations for the year ended December 31, 1997 were reclassified for
comparative purposes.
Segment Information - As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS No. 131") issued by the FASB. SFAS
No. 131 requires that public companies report certain information about
operating segments, products, services and geographical areas in which they
operate and their major customers.
Income Taxes - The Company utilizes the asset and liability method for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
New Accounting Pronouncement - In April 1998, the Accounting Standards
Executive Committee of the AICPA issued Statement of Position ("SOP") No. 98-5
"Reporting on the Costs of Start-Up Activities." Costs of start-up activities,
including organization costs, should be expensed as incurred. This SOP is
effective for financial statements for the fiscal year beginning after December
15, 1998. The Company does not expect adoption of SOP No. 98-5 to have a
material effect, if any, on its financial position or results of operations.
Reclassifications - Certain 1997 balances have been reclassified to conform
with 1998 presentation.
F-8
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
2. Disclosure of Certain Significant Risks and Uncertainties
Going Concern - The Company has experienced operating losses in recent years.
For the years ended December 31, 1997 and 1998, the Company experienced net
losses of $7,313,545 (which includes impairment losses of $3,862,554) and
$514,839, respectively. The Company's working capital requirements have been and
will continue to be significant. As of December 31, 1998, the Company had cash
and cash equivalents of $799,369 and a working capital deficit of $1,996,236. In
December 1998, the Company's common stock was delisted on the Nasdaq's SmallCap
Market.
Liquidity - As of December 31, 1998, investments and loans to Grand Havana
Enterprises, Inc. ("Grand Havana") and HEP II, LP ("HEP II") totaled
approximately $1,358,000 or 16% of total assets and 30% of the Company's
stockholders' equity. Both affiliated companies had substantial losses creating
liquidity risks to the Company. If these losses continue, a substantial portion
of the Company's net worth would be impaired or at risk.
The Company's significant operating losses and significant capital
requirements raise substantial doubt about the Company's ability to continue as
a going concern. The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability of the recorded assets or
the classification of the liabilities that might be necessary should the Company
be unable to continue as a going concern.
3. Property and Equipment
Property and equipment consisted of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Land $ - $1,247,003
Buildings and improvements 328,233 752,554
Machinery, equipment and vehicles 98,184 242,006
Furniture, fixtures and office equipment 17,508 139,690
Computers 111,136 139,325
Signs and other 296 296
--------- ----------
555,357 2,520,874
Less accumulated depreciation and amortization (170,373) (348,305)
--------- ----------
$ 384,984 $2,172,569
========= ==========
</TABLE>
The Company's Planet Kids play-learning centers has generated increasing
operating cash flow losses since its opening in 1995. These circumstances
indicated that the carrying amounts related to these play-learning centers may
not be recoverable. Accordingly, management reviewed the property and equipment
related to these play-learning centers for recoverability in accordance with
SFAS No. 121 and determined that these assets were impaired. For each play-
learning center, the Company determined impairment by computing the sum of the
estimated future operating cash flows (undiscounted and without interest
charges) and comparing that result to its carrying value. If such sum was less
than the carrying value of the play-learning center's assets, an impairment
condition was considered to exist and an impairment loss was recognized. The
impairment loss was measured as the amount by which the carrying amount exceeded
the fair value of the play-learning center's assets. The estimate of
F-9
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
fair value was determined using the present values of each play-learning
center's estimated future operating cash flows. The Company recognized
impairment losses in the fourth quarter of 1997 of $3,862,554. Management's
judgment is necessary to estimate future operating cash flows. Accordingly,
actual results could vary from such estimates.
As of December 31, 1998, the Company decided that Frasier's Frontier amusement
park in San Diego County did not meet the Company's long-term strategic goals.
The amusement park was closed in Spring 1998 and the Company intends to sell the
facility. The sale is not expected to occur within the next twelve months since
the property is in the process of being rezoned. The assets of this amusement
park include land, buildings and leasehold improvements, machinery and
equipment, vehicles, furniture and fixtures, computers, and rides. The carrying
value of these assets of $1,663,857 was reclassified as assets held for sale at
December 31, 1998. Management believes that the fair value of these assets is
in excess of its carrying amount.
4. Investments
Investment in The Splash - The Company has a 3.12% interest in The Splash, a
California limited partnership organized for the purpose of developing and
operating a water park on a parcel of property previously subleased from the
Company. At December 31, 1998 and 1997, the carrying value of the Company's
investment, net of distributions, was $0. During 1998 and 1997, the Company
received distributions of $48,723 and $65,000, respectively, which were included
in other income in the accompanying statements of operations.
Investment in United Hotel - In January 1997, the Company and two unrelated
California limited liability companies formed United Hotel & Casino, LLC
("United Hotel"), organized under the laws of the State of Delaware. On July 29,
1997, United Hotel acquired the a real property commonly known as The Silver
City/Las Vegas Plaza Shopping Center ("Las Vegas Property") in Las Vegas,
Nevada. The aggregate purchase price was approximately $23,200,000, which was
paid by a cash payment of approximately $5,590,000, a one-year note being
carried by the seller of the property in the amount of $1,250,000 and the
assumption of a first deed of trust in the amount of approximately $16,360,000.
The Company contributed $3,751,500 to the cash payment. The Company holds a 50%
membership interest in United Hotel & Casino which is being accounted for under
the equity method. During 1998, the Company contributed an additional $25,000
to United Hotel.
The following is the financial summary of United Hotel as of and for the year
ended December 31, 1998:
<TABLE>
<S> <C>
Balance Sheet:
Current Assets
Rents receivable $ 1,230
Prepaid Expenses 60,976
-----------
Total Current Assets 62,206
Property and equipment, net 21,958,383
Other assets 32,044
-----------
Total Assets $22,052,633
===========
Current Liabilities
Checks drawn in excess of available bank balances $ 89,560
Payroll taxes payable 305
Note payable 1,100,000
Current maturities of long-term debt 176,518
Tenant security deposits 50,836
Tenant prepaid rent 2,160
-----------
Total Current Liabilities 1,419,379
</TABLE>
F-10
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
<TABLE>
<S> <C>
Long-Term Debt, net 15,880,938
Members' Capital 4,752,316
------------
Total Liabilities and Members' Capital $22,052,633
============
Company's equity in net assets $ 3,432,452
============
Statement of Operations:
Rental Income $ 2,734,905
Operating Expenses 530,258
Depreciation and amortization 921,954
Interest expense 1,734,588
Provision for franchise tax 800
------------
Net loss ($ 452,695)
============
Company's equity in net loss ($ 226,348)
============
</TABLE>
Investment in HEP II - On April 23, 1996, the Company acquired 50% of the
limited partnership interests for an initial investment of $1,500,000 in HEP II,
a California limited partnership, engaged in the motion picture production
business. The Company made advances of $250,000 in HEP II on July 9, 1996, which
was repaid in October 1996 to Mr. Harry Shuster on behalf of the Company. This
repayment was included in advances to Mr. Shuster (see Note 6). On July 22,
1996, the Company advanced $500,000 to HEP II, which was repaid by HEP II on
July 25, 1996. The Company received capital distributions of $379,500 from HEP
II in 1996. The general partner of HEP II is United Film Distributors, Inc., a
California corporation (formerly known as Hit Entertainment, Inc.) ("UFD"), of
which Harry Shuster, the Chairman of the Board, President and Chief Executive
Officer of the Company, is the Chairman of the Board and a principal
stockholder. Brian Shuster, a director of the Company, is the President of UFD.
Brian Shuster is the son of Harry Shuster. During the year ended December 31,
1998, the Company realized a loss from the write-down of the investment of
$420,500. As of December 31, 1998 and 1997, the balance of the Company's
investment in HEP II was $700,000 and $1,120,500, respectively.
As a result of UFD's failure to timely notify HEP II as to how UFD desired to
characterize its advances to HEP II, the historical financial statements of HEP
II through December 31, 1997 were prepared based on the assumption that UFD had
made a capital contribution to HEP II and therefore had become a limited partner
in HEP II. In fact, UFD wished to treat these advances as a loan to HEP II. UFD
clarified its position during 1998. As a result of this clarification, the
accounts of HEP II have been adjusted to reflect UFD's election to have these
payments treated as a loan to HEP II. In consideration for this clarification,
UFD has waived its right to be repaid the balance of the loan and in addition,
has waived its right to receive future payments for its general partnership
interest in HEP II. The following is the summarized financial information of HEP
II as of and for the year ended December 31, 1998:
<TABLE>
<S> <C>
Balance Sheet:
Film costs, net $1,500,000
----------
Total Assets $1,500,000
==========
Limited Partners' Capital $1,500,000
==========
Statement of Operations:
Revenue $ 533,487
Distribution fees paid to UFD 106,697
Amortization of Film Costs 1,170,964
----------
Net Loss $ (744,174)
==========
</TABLE>
F-11
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
Investment in Genisys - As of June 30, 1998, the Company's wholly owned
subsidiary, United Internet Technologies, Inc. ("United Internet") granted to
NetCruise Interactive, Inc. ("NetCruise"), a wholly owned subsidiary of Genisys
Reservation Systems, Inc. ("Genisys"), an exclusive and worldwide and perpetual
license for travel related applications of certain interactive technology. In
addition, the Company sold certain related intellectual properties and computer
equipment.
As consideration for the sale, United Internet received (i) 2,000,000 of
unregistered shares of common stock of Genisys, (ii) a warrant to purchase up to
800,000 shares of Genisys common stock at $2.50 per share if the total pretax
profits of NetCruise for the years 1999, 2000 and 2001 equal or exceed
$5,000,000 and (iii) a warrant to purchase up to 800,000 shares of Genisys
common stock at $6.00 per share if the total pretax profits of NetCruise for the
years 1999, 2000, and 2001 equal or exceed $10,000,000.
For a period of three years, Harry Shuster will serve as Chairman and Brian
Shuster will serve as President of NetCruise. In addition, both Harry Shuster
and Brian Shuster will serve on the Board of Directors of Genisys for the same
period. Brian Shuster was issued warrants to purchase Genisys common stock on
the same terms as the warrants issued to United Internet, except that each of
the two warrants issued to Brian Shuster represents the right to purchase up to
200,000 shares of Genisys common stock.
Subsequent to the date of the transaction described above, Genisys informed
the Company and United Internet of the following. Genisys was notified by The
Nasdaq Stock Market, Inc. ("Nasdaq") that the issuance of the 2,000,000 shares
of Genisys common stock and the warrants to United Internet caused Genisys to be
inadvertently in violation of a certain Nasdaq Marketplace Rule (the "Nasdaq
Rule"), because the issuance of the 2,000,000 shares of Genisys common stock and
warrants amounted to more than 20% of the issued and outstanding shares of
Genisys and the issuance thereof was not approved by Genisys' stockholders as
required by the Nasdaq Rule. Genisys was informed that Nasdaq intended to
delist Genisys' common stock as a result of its noncompliance with the Nasdaq
Rule, unless Genisys took curative action acceptable to Nasdaq. Pending the
full implementation of the proposed curative action described below, Genisys
appealed Nasdaq's determination. A hearing on the proposed delisting was held
on November 20, 1998, following which Nasdaq approved the continued listing of
Genisys common stock pending the holding of a stockholders' meeting and subject
to certain additional changes in the Genisys transaction.
As a result of the Nasdaq notification, United Internet, Genisys and certain
of Genisys' principal stockholders have entered into an agreement dated October
28, 1998 (the "Agreement") for the purpose of restructuring their transaction.
Under the terms of the Agreement, United Internet will return to Genisys (i)
1,100,000 shares of Genisys common stock , retaining 900,000 shares of Genisys
common stock (the "Retained Shares") and (ii) the warrants. Genisys will
promptly issue to United Internet 1,100,000 shares of Genisys Convertible Series
B Preferred Stock, par value $.0001 per share (the "Genisys Preferred Shares"),
which, among other things, are automatically convertible into 1,100,000 shares
of Genisys common stock upon Genisys' obtaining stockholder approval as required
by the Nasdaq Rule. In addition, upon obtaining the requisite stockholder
approval, Genisys will reissue the warrants to United Internet.
Among other things, the Genisys Preferred Shares carry a mandatory dividend
of $275,000, payable on September 30, 1999, and mandatory quarterly dividends of
$68,750, commencing with the quarter ending December 31, 1999. No dividend is
payable if the Genisys stockholders approve the issuance of the 1,100,000 shares
of Genisys common stock and the warrants to United Internet, and the Genisys
Preferred Shares have been converted into 1,100,000 shares of Genisys common
stock, prior to June 30, 1999. The Genisys Preferred Shares are non-voting,
unless voting is required by New Jersey law. The Genisys Preferred Shares also
carry a mandatory liquidation preference of $2,750,000 plus all accrued and
unpaid dividends.
In response to further requirements of Nasdaq, the parties entered into
another agreement dated January 25, 1999 (the "January Agreement"). The January
Agreement provides that in the event that the holders of Genisys do
F-12
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
not approve both (i) the acquisition of the assets and (ii) the issuance to
Seller of the 1,100,000 shares of Genisys common stock relating to the Genisys
Preferred Shares, and the Warrants, the Genisys Transaction shall be unwound.
Thereafter, Genisys would have an option until September 30, 1999 to again seek
and obtain approval of the Genisys Transaction by Genisys' stockholders on the
same terms and conditions as originally agreed to pursuant to the Genisys
Agreement, as amended by the October Agreement and the January Agreement.
United Internet has agreed not to vote the Retained Shares and may not vote
the Genisys Preferred Shares at the Genisys stockholders meeting with respect to
the approval of the Genisys Transaction. Certain principal stockholders of
Genisys have agreed to vote their shares of Genisys Common Stock in favor of the
issuance of the 1,100,000 shares of Genisys Common Stock and the Warrants. The
Company has been informed that the Genisys Stockholders Meeting is expected to
be held in May or June 1999.
For accounting purposes, the Company and Genisys had taken the position that
the transaction was completed based on its original terms on June 30, 1998, and
as such, United Internet's investment in Genisys common stock was accounted for
under the equity method effective June 30, 1998, resulting in a recognition of
licensing fees of $410,817. United Internet's investment represents 29% of the
outstanding common stock of Genisys at December 31, 1998. Equity in net loss of
Genisys for the year ended December 31, 1998 was $249,533. The Company's equity
in net assets, as adjusted to eliminate the write-up of the transferred assets
and Technology, was $210,133 at December 31, 1998.
Brian Shuster, Executive Vice President and a director of the Company,
provides consulting services to the Company with respect to the development of
the Company's internet video. Brian Shuster receives $5,000 per month consulting
fees. The consulting arrangement is an ongoing oral arrangement, which may be
terminated by either party upon 30 days notice. During the years ended December
31, 1998 and 1997, the Company paid or accrued Brian Shuster consulting fees of
$60,000 and $60,000, respectively.
Investment in Grand Havana - In September 1996, the Company put up a
certificate of deposit in the amount of $875,000 as collateral for a letter of
credit for Grand Havana. Grand Havana was required to provide such letter of
credit in connection with one of its leases. Grand Havana has agreed to replace
the collateral in full by March 1, 1998. In consideration for providing such
collateral, Grand Havana agreed to pay an amount to the Company equal to 10% per
annum on the amount of the pledged cash collateral as it exists from time to
time. As additional consideration, Grand Havana issued to the Company 100,000
shares of its restricted common stock and warrants to purchase 100,000 shares of
common stock at an exercise price of $.75 per share. The Company valued the
shares in the aggregate amount of $80,000 based on the discounted trading price
of the stock at that time. Harry Shuster is the Chairman of the Board, President
and Chief Executive Officer of Grand Havana.
On July 15, 1997, the Company entered into an amendment to a financing
agreement dated as of September 10, 1996 between the Company and Grand Havana,
pursuant to which agreement the Company had agreed to provide collateral for a
letter of credit for $875,000 on behalf of Grand Havana. The amendment to the
financing agreement permitted Grand Havana to forego the requirement that it
replace the collateral out of the initial membership fees it received from
certain of its Grand Havana Room private membership cigar clubs, in
consideration for which Grand Havana agreed to grant to the Company or its
designee a three-year warrant to purchase 150,000 shares of the common stock of
Grand Havana exercisable at the lesser of $.75 per share or 75% of the average
trading price of the common stock of Grand Havana for a ten day period prior to
the exercise of the warrant. The Company subsequently designated Westminster
Capital, Inc. to receive this warrant from Grand Havana in connection with the
financing obtained by the Company related to the acquisition of United Hotel.
In October 1997, Grand Havana replaced the collateral.
F-13
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
In October 1996, the Company acquired in private placement 333,333 shares of
common stock and warrants to purchase 333,333 shares of common stock at an
exercise price of $1.50 per share of Grand Havana for $250,000. In February
1997, the Company exercised its warrants to purchase 433,333 shares of common
stock of Grand Havana for a total exercise price of $575,000. In consideration
for making the loan to Grand Havana in February 1997, Grand Havana issued to the
Company 75,000 shares of Grand Havana's common stock valued at $138,750. In
February, 1998, Grand Havana also issued to the Company, as a late fee, an
additional 25,000 shares of common stock valued at $38,691.
As of December 31, 1998 and 1997, the Company had 966,666 shares
(approximately 7% of the issued and outstanding common stock) of Grand Havana's
restricted common stock. The Company accounted for this investment as available
for sale security. At December 31, 1998, the quoted market value of the
Company's investment in Grand Havana was $38,667. The valuation represents a
mathematical calculation based on the closing quotation published by OTC
Bulletin Board and is not necessarily indicative of the amounts that could be
realized upon sale. Because Management of the Company does not believe that it
will recover the original cost of its investment in Grand Havana, the Company
has recognized a permanent impairment loss on this investment in the amount of
$1,043,764 during the year ended December 31, 1998.
5. Loan Receivable from Grand Havana
In February 1997, the Company entered into an additional financing agreement
with Grand Havana whereby the Company agreed to loan Grand Havana, from time to
time, during a period of six months, of up to $1,250,000. The loan, which may be
advanced in such increments as shall be requested by Grand Havana from time to
time, bears interest at the rate of 8% per annum on the outstanding principal
amount. As additional consideration for this loan, the Company received 75,000
shares of Grand Havana's common stock. This loan was not repaid when due on
September 30, 1997. The financing agreement provided that if the loan was not
repaid by such date, it would become payable on demand and the Company would
then be entitled to receive an additional 25,000 shares of the common stock of
Grand Havana. In February 1998, Grand Havana issued 25,000 shares of its common
stock to the Company pursuant to the terms of this agreement. The parties agreed
to extend the maturity date of advances made under this financing agreement to
March 31, 1998 and subsequently to September 30, 1998. During 1997, the Company
advanced $775,000 and collected $125,000 from Grand Havana. During 1998, the
Company collected $114,000 from Grand Havana.
On September 30, 1998, the Company agreed to make a new installment loan to
Grand Havana in the amount of up to $1,250,000 in replacement of the previous
loan. Grand Havana executed a Secured Promissory Note dated September 30, 1998
(the "Grand Havana Note"). The Grand Havana Note bears interest at 8% per annum
and is due and payable in full on March 31, 1999. The parties have agreed to
extend the maturity date for an additional 60 days. The Grand Havana Note is
secured pursuant to a Security Agreement dated September 30, 1998 (the "Grand
Havana Agreement"), in which Grand Havana granted the Company a security
interest in certain collateral.
The initial loan advance under the Grand Havana Note on September 30, 1998
was $603,280, which represents the principal amount due under the previous note
of $536,000, together with accrued interest of $67,280. The Company may from
time to time, but shall not be obligated, to make future advances under the
Grand Havana Note up to a total amount of $1,250,000. As of December 31, 1998,
accrued interest amounted to $16,018.
F-14
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
6. Due from Officer
Due from Harry Shuster consisted of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Loans receivable, including accrued interest at 11.25% per
annum (a) $ 1,430,185 $1,002,072
Loan payable and accrued interest payable at 11.25% per
annum (b) (1,136,886) (789,649)
Prepaid (accrued) consulting fee (Note 13) (c) 39,328 (199,856)
----------- ----------
Due from officer, net $ 332,627 $ 12,567
=========== ==========
</TABLE>
(a) In 1996, the Company made a loan of $825,000 to Mr. Shuster. In 1997, at
the request of Mr. Shuster, UFD, an affiliated company, paid an
aggregate of $325,000 to the Company, which amount was applied to the
Company's additional loans of $325,000 to Mr. Shuster during 1997. Mr.
Shuster is the Chairman of the Board, President and Chief Executive
Officer of the Company, and the Chairman of the Board and a principal
stockholder of UFD. UFD is the general partner of HEP II, in which the
Company had an investment at December 31, 1998 in the amount of
$700,000. In 1998, the Company made additional loans of $335,300 to Mr.
Shuster. At December 31, 1998, the Company's loans receivable from Mr.
Shuster had an outstanding balance of $1,160,300 plus accrued interest
of $269,885.
(b) During 1997, interest of $312,237 was accrued on the accrued interest
payable of $789,649 and loan payable of $35,000.
(c) During 1998, Mr. Shuster was paid total of $559,136 consisting of
accrued consulting fees for 1997 of $199,856, consulting fees for 1998
of $300,663, health insurance of $19,289, and prepaid consulting fees of
$39,328.
7. Notes Payable
Notes payable consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Westminster Capital, Inc. $1,900,000 $1,900,000
Harvey Bibicoff - 25,000
---------- ----------
$1,900,000 $1,925,000
========== ==========
</TABLE>
Concurrently with the closing of United Hotel's acquisition of the Las Vegas
Property, Westminster Capital, Inc. ("Westminster") made a loan of $1,900,000 to
the Company to enable it to meet its $3,800,000 capital contribution. The loan
was evidenced by a secured convertible promissory note made by the Company. The
loan bears interest at 15% per annum and is due on the earlier to occur of (i)
the demand of the holder which demand may not be made until July 29, 1998 unless
there is a sooner event of default or (ii) July 29, 1999. The holder of the note
has the right, at any time prior to maturity date, to convert the entire
outstanding principal balance of the note into a 25% membership interest in
F-15
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
United Hotel, which would leave the Company with a 25% membership interest in
United Hotel after such conversion (or a 22 1/2% membership interest at August
1, 1999, the date by which the Company has agreed to transfer a 2 1/2%
membership interest to Harvey Bibicoff). The note may be prepaid by the Company
at any time after July 29, 1998. One-half of any cash distributions which may be
made by United Hotel to the Company prior to the repayment of the Note are
required to be paid to Westminster as a prepayment on the note. The loan is
secured by, among other things, a stock pledge agreement pursuant to which the
Company has pledged 408,333 of the 966,666 shares of common stock it owns in
Grand Havana. As additional security, the Company has granted a security
interest to Westminster, in the Company's 50% membership interest in United
Hotel and in the receivables and certain indebtedness due to the Company from
Grand Havana (approximately $607,155 in principal amount at December 31, 1998).
In addition, Harry Shuster and Nita Shuster provided certain other security
individually with respect to the loan. On July 30, 1998, the note become
payable on demand. As of December 31, 1998, accrued interest on the loan
amounted to $406,808.
As additional consideration for Westminster making the loan, the Company
granted Westminster a three-year warrant to purchase 150,000 shares of common
stock of the Company exercisable at a per share price equal to the lesser of
$.40 or 75% of the average of the last trade prices for the ten trading days
immediately preceding the exercise of the warrants. In addition, Grand Havana,
pursuant to the terms of an amendment dated July 15, 1997, to a financing
agreement dated September 10, 1996, between Grand Havana and the Company,
granted Westminster, as designee of the Company, a three-year warrant to
purchase 150,000 shares of common stock of Grand Havana exercisable at a per
share price equal to the lesser of $.75 or 75% of the average of the last trade
prices for the ten trading days immediately preceding the exercise of the
warrants.
On August 6, 1998, United Hotel borrowed $1,100,000 from Westminster. The
Company and two other members of United Hotel executed a non-recourse secured
guaranty under which each entity pledged their interests in United Hotel as
collateral under the guaranties. Harry Shuster and two other individuals
personally guaranteed the loan. A default under this loan shall constitute a
default under the "Secured Convertible Promissory Note" dated as of July 29,
1997. The conversion rights granted to Westminster under the "Secured
Convertible Promissory Note" dated as of July 29, 1997 was extended until July
31, 2001.
In connection with obtaining the necessary financing required for the
acquisition of the Las Vegas Property, on July 29, 1997, Harvey Bibicoff made a
loan to the Company of $900,000. The loan was evidenced by a promissory note,
bore interest at 10% per annum and was due and payable on September 28, 1997.
The Company repaid $875,000, leaving a principal loan balance of $25,000 at
December 31, 1997. On September 30, 1998, the Company paid Mr. Bibicoff
$40,000, consisting of $25,000 principal amount of the loan outstanding and
$15,000 accrued interest.
On July 28, 1997, the Company and Harvey Bibicoff, a director of Grand
Havana, entered into an agreement pursuant to which the Company, in
consideration for management consulting services rendered by Mr. Bibicoff to the
Company, agreed (i) to transfer to Mr. Bibicoff, on or prior to August 1, 1999,
a 2 1/2% membership interest in United Hotel free and clear of any liens,
claims, or encumbrances and (ii) to issue 150,000 shares of common stock of the
Company to Mr. Bibicoff. The obligations of the Company under the agreement were
guaranteed by Harry Shuster and Nita Shuster, the spouse of Harry Shuster.
During 1997, 150,000 shares valued at $42,000 were issued to Mr. Bibicoff. The
Company valued the 2 1/2% membership interest at $187,500, which was accrued as
consulting fees in 1997.
8. Long-Term Debt
Long-term debt consisted of the following at December 31, 1998 and 1997:
F-16
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
<TABLE>
<S> <C>
Note payable dated April 5, 1995, secured by first deed of
trust, payable interest only at 12%, principal due April 1,
2000, secured by real property located in San Diego County,
California $ 120,000
Purchase money loan dated April 5, 1995, payable interest only
at 9.67%, principal due March 1, 2000, secured by a second
deed of trust on real property located in San Diego County,
California 722,000
---------
$ 842,000
=========
</TABLE>
9. Due to Related Parties
Due to related parties consisted of the following at December 31, 1998:
<TABLE>
<S> <C>
Due to Grand Havana $ 51,358
Due to Brian Shuster 60,000
--------
$111,358
========
Due from United Hotel $ 2,179
Due from Genisys 1,644
--------
$ 3,823
========
</TABLE>
10. Common Stock Subject to Repurchase
In August 1998, the Company agreed to issue 150,001 shares of common stock
with a total fair value of $42,000 as payment of legal fees. These shares were
issued in October 1998. The Company agreed to repurchase the shares, one year
from August 1998, at such stockholders' election, at a cash price of $1.00 per
share. If the Company is legally unable or otherwise fails to make such
purchase when due, Harry Shuster agreed to make such purchase at the same price
per share.
Staff Accounting Bulletin No. 64 describes the Securities and Exchange
Commission staff's policy on accounting for mandatorily redeemable stock. It
requires that stocks that are subject to "put rights" on redemption outside of
the Company's control should be presented separately from common stock which is
not subject to "put rights" in order to distinguish it from permanent capital of
the Company. Further, such accounting standards require the Company to present
such shares on the balance sheet at its fair value at the date of issuance. If
that amount is less than the amount which would be paid if repurchased, the
carrying amount should be increased periodically to equal the repurchase price.
The periodic accretions in the carrying amount is determined using the interest
method. The accretion of $36,000 in the repurchase price was charged to
additional paid-in capital in 1998 and has been deducted from earnings available
for common stockholders in the computation of earnings per share.
11. Stockholders' Equity
On July 28, 1997, the Company issued 150,000 shares of its common stock to
Harvey Bibicoff in consideration for consulting services rendered by Mr.
Bibicoff to the Company, which shares were valued at $42,000 or S.28 per share,
the market price at the date of issuance.
On July 29, 1997, in consideration for providing financing in connection
with the acquisition of the Las Vegas Property by United Hotel, Westminster
received a warrant to purchase up to 150,000 shares of Common Stock, valued at
$1,500 or $.01 per share at the date of issuance, which warrant is exercisable
at the lesser of $.40 per share or 75% of the average price for the ten trading
days prior to exercise.
F-17
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
On July 30, 1997, 100,000 shares of Common Stock were issued to the law firm
of Richman, Lawrence, Mann, Greene, Chizever & Phillips in consideration for
professional services rendered as of July 30, 1997, which shares were valued at
$28,000 or $.28 per share, the market price at the date of issuance. That firm
serves as general counsel to the Company and represents Harry Shuster.
On February 2, 1998, in consideration for certain financial advisory
services, the Company issued 100,000 shares of Common Stock to Transit
Securities, Inc., which shares were valued at $31,300 or $0.313 per share.
In April 1998, the Company sold 10 Units at $26,400 per Unit in an offering
of securities exempt from registration under the Securities Act of 1933. Each
Unit consists of 120,000 shares of common stock and warrants to purchase 60,000
shares at $0.27 per share. The Company received net proceeds of $229,680 from
this offering and issued 1,200,000 shares of common stock and warrants to
purchase 600,000 shares of common stock. The warrants expire on April 2, 2003.
In June 1998, the Company issued stock purchase warrants (the "Warrants") to
Sands Brothers & Co., Ltd. ("Sands Brothers"). The Warrants are for 250,000
shares of the Company's Common Stock at an exercise price of $.25 per share. The
Warrants are exercisable at any time commencing June 25, 1998 until June 25,
2003. The Company may redeem the Warrants for $.10 per Warrant under certain
circumstances, including (i) the Company has an effective Registration Statement
covering the shares of the Company's common stock issuable upon exercise of the
Warrants, and (ii) the Company's common stock has been trading at or above $2.50
per share for the previous thirty business days. The holder of the Warrants has
registration rights with respect to the shares of common stock issuable upon
exercise of the Warrants for five years commencing June 25, 1998, and one
"demand" registration right with respect thereto. The Warrants have anti-
dilution protection. The Warrants were issued in connection with financial
advisory services being rendered to the Company by Sands Brothers. The Company
received no proceeds from this issuance.
The following non-qualified stock options granted by the Company were
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Exercise
Number of Price per
Shares Share Date of Grant Date of Expiration
--------- --------- ------------------- --------------------
<S> <C> <C> <C>
15,000 $ 0.68 January 20, 1987 December 31, 2002
356,950 1.00 July 24, 1987 December 31, 2002
90,000 0.30 April 22, 1988 December 31, 2002
37,500 1.33 October 7, 1988 December 31, 2002
75,000 1.25 November 17, 1988 December 31, 2002
37,500 1.38 December 5, 1988 December 31, 2002
70,000 0.75 December 7, 1990 December 31, 2002
60,000 1.00 September 23, 1993 December 31, 2002
125,000 0.31 July 3, 1997 December 31, 2002
300,000 0.25 September 22, 1998 September 21, 2003
2,100,000 0.625 September 30, 1998 September 29, 2003
---------
3,266,950
=========
</TABLE>
F-18
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
The following table summarizes the activity of common shares under stock
options for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Balance - beginning of year 866,950 851,950
Options granted 2,400,000 125,000
Options expired - (110,000)
--------- --------
Balance - end of year 3,266,950 866,950
========= ========
</TABLE>
The non-qualified stock options of 125,000 granted to non-employee directors
during 1997 were valued using the fair value at the grant date consistent with
the methodology prescribed under SFAS No. 123. Compensation expense recognized
amounted to $31,250 in 1997. The fair value of the options granted during 1997
is estimated on the date of the grant using the Black-Scholes pricing model with
the following weighted average assumptions: dividend yield of 0%, volatility of
107%, risk-free interest rate of 6.7% and an expected life of 5 years.
The Company applies APB No. 25 and related interpretations in accounting for
its stock options. Accordingly, no compensation expense has been recognized for
its stock options. Had compensation cost for the Company's stock options been
determined based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS No. 123, the Company's net loss and loss per
share would have been increased by approximately $1,023,000, or $0.08 per share
for 1998. The fair value of the options granted during 1998 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 93%, risk-free interest rate of
5.5% and an expected life of 5 years.
Option valuation models require the input of highly subjective assumptions.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its stock options.
At December 31, 1998, the following warrants were outstanding:
<TABLE>
<CAPTION>
Exercise
Number of Price per
Shares Share Date of Grant Date of Expiration
--------- --------- ---------------- --------------------
<S> <C> <C> <C>
4,945,000 $4.00 November 10, 1994 November 10, 1999
430,000 6.60 November 10, 1994 November 10, 1999
150,000 (i) July 29, 1997 July 29, 2000
200,000 0.75 October 15, 1997 October 15, 2002
250,000 0.25 June 25, 1998 June 25, 2003
600,000 0.27 April 2, 1998 April 2, 2003
---------
6,575,000
=========
</TABLE>
(i) The exercise price is the lesser of $.40 per share or 75% of the average
price for the ten trading days prior to exercise. The warrants granted to
non-employees during 1997 were valued using the fair value at the grant
date consistent with the methodology prescribed under SFAS No. 123.
Compensation expense recognized amounted to $161,980 in 1997. The fair
value of the options granted during 1997 is estimated on the date of the
grant using the Black-Scholes pricing model with the following weighted
average
F-19
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
assumptions: dividend yield of 0%, volatility of 107%, risk-free
interest rate of 6.7% and an expected life of 4 years.
(ii) The warrants granted to non-employees during 1998 were valued using the
fair value at the grant date consistent with the methodology prescribed
under SFAS No. 123. Compensation expense recognized amounted to $45,000 in
1998. The fair value of the options granted during 1998 is estimated on the
date of the grant using the Black-Scholes pricing model with the following
weighted average assumptions: dividend yield of 0%, volatility of 93%,
risk-free interest rate of 5.5% and an expected life of 5 years. The
exercise price is $.25 per share.
Computation of Loss Per Share:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
---------------------------------------------------
Income Shares Per Share
(Numerator (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Basic loss per share:
Net loss $(514,839) 13,502,182 $(0.04)
Less: accretion in the carrying amount
of common stock subject to
Repurchase (36,000) - -
--------- ---------- ------
Net loss attributable to common
Stockholders $(550,839) 13,502,182 $(0.04)
========= ========== ======
</TABLE>
Options and warrants to purchase 9,841,950 shares were outstanding at December
31, 1998, but were not included in the computation of diluted loss per common
share because the effect would be antidilutive.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
---------------------------------------------------
Income Shares Per Share
(Numerator (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Basic loss per share:
Net loss attributable to common
stockholders $(7,313,545) 12,493,849 $(0.59)
=========== ========== ======
</TABLE>
Options and warrants to purchase 6,591,950 were outstanding at December 31,
1997, but were not included in the computation of diluted loss per common share
because the effect would be antidilutive.
12. Legal Proceedings
In September 1998, the Company and its subsidiary, Lion Country Safari, Inc.
- - California, and The Irvine Company settled their long-standing litigations and
have dismissed all superior court and appellate court actions pending between
them, i.e. The Splash v. The Irvine Company, et al. (Case No. 491202), Lion
Country Safari, Inc. - California v. The Irvine Company (OCSC Case No. 743669),
Lion Country Safari, Inc. - California v. The Irvine Company (OCSC Case No.
775923) and The Irvine Company v. Lion Country Safari, Inc. - California (OCSC
Case No. 776187). Pursuant to the terms of the settlement agreement between the
parties, The Irvine Company paid the Company $4,000,000 without admitting any
liability on the part of The Irvine Company.
F-20
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
On November 12, 1996, Irvine Meadows, a former sublessee and the operator of
the Irvine Meadows Amphitheater, sued the Company and Harry Shuster (OCSC Case
No. 771509). The suit sought an injunction against those parties preventing them
from removing the Amphitheater pursuant to a provision in the Ground Lease that
gives the Company the right to remove leasehold improvements at the expiration
of the lease. On January 3, 1997, Irvine Meadows filed a first amended complaint
in that action. As against the Company, the first amended complaint sought an
injunction and declaratory relief but no money damages. On February 19, 1997,
the trial judge granted Irvine Meadows' request for an injunction against the
Company barring it from removing the Amphitheater. In May 1998, Irvine Meadows
obtained a summary judgment against the Company and Mr. Shuster, awarding Irvine
Meadows a permanent injunction against removal of the Amphitheater. On October
27, 1998, Irvine Meadows was awarded costs in the amount of approximately
$545,000. The Company and other defendants have appealed the judgment and the
award of fees to the California Court of Appeal. Settlement negotiations are
underway. If the matter cannot be settled, management intends to pursue the
appeal vigorously. However, due to the inherent uncertainties of litigation, the
outcome of the appeal cannot be predicted.
13. Commitments and Contingencies
Consulting Agreement - As of June 1, 1994, the Company and Mr. Shuster
entered into an amended and restated consulting agreement updating an
arrangement originally effective as of September 1, 1984. The consulting
agreement provides that Mr. Shuster will act as the President and Chief
Executive Officer and a Director of the Company throughout the rolling five-year
term of the agreement for annual compensation set at $208,984 per annum for
1994, to be increased 10% during each successive year of the agreement. Mr.
Shuster is also to be provided with either the use of a company car in carrying
out his duties for the Company or $300 per month car allowance. The consulting
agreement provides for certain disability benefits for a period of up to three
years. The consulting agreement provides that, so long as Mr. Shuster spends as
much time as is necessary to properly carry out his duties as President and
Chief Executive Officer of the Company, he will be otherwise permitted to spend
a reasonable amount of time pursuing his own outside interests. The consulting
agreement provides for automatic one-year renewals for each contract year that
ends without termination of the consulting agreement by either party. During
1998 and 1997, the Company incurred consulting fees pursuant to this agreement
in the amount of $300,663 and $273,330, respectively.
Lease Arrangements - At December 31, 1998, minimum annual rentals under non-
cancelable leases and minimum sub-lease income are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Leases Subleases
------------ ----------- ---------
<S> <C> <C>
1999 $ 394,353 $51,931
2000 420,613 33,648
2001 461,921 1,676
2002 467,339 -
2003 467,339 -
Thereafter 798,606 -
---------- -------
Total $3,010,171 $87,255
========== =======
</TABLE>
Rent expense, net of sublease income of $38,015 in 1998 and $0 in 1997, was
$616,790 in 1998 and $660,045 in 1997.
F-21
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
The Company leases certain of its office space on a month-to-month basis
from a corporation of which Harry Shuster, is an officer and a principal
stockholder. The Company paid or accrued rent to this corporation of $31,044 in
1997 and $43,624 in 1998
Since October 1, 1997, the Company has paid rental, including homeowners
association dues, in the amount of $34,676 to Harry Shuster for an apartment
which he owns and which he and Brian Shuster use while they are in New York City
on business.
14. Income Taxes
At December 31, 1998, the Company had net operating loss carryforwards for
federal tax purposes expiring as follows:
<TABLE>
<CAPTION>
Year Expires Amount
------------ ---------
<S> <C>
1999 742,000
2000 1,562,000
2001 808,000
2002 282,000
2005 111,000
2007 19,000
2008 523,000
2010 655,000
2011 427,000
2012 2,900,000
----------
$8,029,000
==========
</TABLE>
The components of deferred taxes were as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,802,000 $ 3,402,000
Accrued expenses to related party - 428,000
Impairment losses 2,209,000 1,672,000
Non-cash compensation 102,000 84,000
Other accruals - 81,000
State income taxes 2,000 2,000
Partnership interests 195,000 27,000
Valuation allowance (5,205,000) (5,675,000)
----------- -----------
Total deferred tax assets 105,000 21,000
Deferred tax liability:
Depreciation 105,000 21,000
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
</TABLE>
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has duly caused this Annual Report on Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED LEISURE CORPORATION
By: /s/ Harry Shuster
--------------------------------------------
Harry Shuster
Chairman of the Board,
President and Chief Executive Officer
Date: April 15, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-KSB has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Harry Shuster Chairman of the Board, President April 15, 1999
-------------------------------- and Chief Executive Officer
Harry Shuster (Principal Executive Officer and
Principal Accounting and
Financial Officer)
/s/ Brian Shuster Executive Vice President and April 15, 1999
-------------------------------- Director
Brian Shuster
/s/ Alvin Cassel Secretary, Treasurer and April 15, 1999
-------------------------------- Director
Alvin Cassel
/s/ Alvin Alexander Director April 15, 1999
--------------------------------
Alvin Alexander
/s/ J. Brooke Johnston, Jr. Director April 15, 1999
--------------------------------
J. Brooke Johnston, Jr.
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
2-1 Asset Purchase Agreement dated as of June 30, 1998 by and among United
Leisure Interactive, Inc., NetCruise Interactive, Inc., Genisys
Reservation Systems, Inc. and United Leisure Corporation, filed an
exhibit to the Company's Current Report on Form 8-K dated August 7, 1998
(as amended on November 4, 1998), is hereby incorporated by reference
2-2 Agreement dated October 27, 1998, by and among United Internet
Technologies, Inc., Genisys Reservation Systems, Inc., Warren D.
Bagatelle, Loeb Holding Corporation, Loeb Partners Corp., HSB Capital,
David W. Sass, Mark A. Kenny, John H. Wasko, Joan E. Wasko, Lawrence E.
Burk and S. Charles Tabak, filed as Exhibit 2-2 to the Company's Current
Report on Form 8-K/A (Amendment No.1) dated November 4, 1998, is hereby
incorporated by reference
2-3* Agreement dated as of January 25, 1999, by and among United Internet
Technologies, Inc. (formerly known as United Leisure Interactive, Inc.),
Netcruise Interactive, Inc., Genisys Reservation Systems, Inc. and United
Leisure Corporation
3-1 Restated Certificate of Incorporation of the Company, as filed in the
office of the Secretary of State of the State of Delaware on June 27,
1988, filed as Exhibit 3-1 to the Company's Registration Statement on
Form SB-2 (Registration No. 33-81074), is hereby incorporated herein by
reference
3-2 Bylaws of the Company, filed as Exhibit 3-2 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-81074), are hereby
incorporated herein by reference
4-1 Warrant Agreement, dated November 18, 1994, between the Company and OTR,
Inc., filed as Exhibit 4-1 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994, is hereby incorporated
herein by reference
4-2 Form of Warrant to Purchase Common Stock used in connection with 12%
Promissory Note unit private placement and Bankruptcy Court deposit,
filed as Exhibit 4-3 to the Company's Registration Statement on Form SB-2
(Registration No. 33-81074), is hereby incorporated herein by reference
4-3 Underwriters Unit Purchase Option, dated November 18, 1994, issued to
Stratton Oakmont, Inc., filed as Exhibit 4-3 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1994, is
hereby incorporated herein by reference
4-4 Warrant to Purchase 600,000 Shares of Common Stock of United Leisure
Corporation dated April 2, 1998, issued to Strata Equities Limited, filed
as Exhibit 4-4 to the Company's Quarterly Report on Form 10-QSB for the
Quarter Ended June 30, 1998, is hereby incorporated by reference
<PAGE>
Exhibit
Number Description
- ------- -----------
4-5 Warrant Agreement dated as of June 25, 1998 between United Leisure
Corporation and Sands Brothers & Co., filed as Exhibit 4-5 to the
Company's Quarterly Report on Form 10-QSB for the Quarter Ended September
30, 1998, is hereby incorporated by reference
10-1 Ground Lease, dated February 11, 1968, between The Irvine Company and
National Leisure, Inc., a Florida corporation (the "Ground Lease"),
Amendment No. 1 to the Ground Lease, dated July 13, 1970; Amendment No. 2
to the Ground Lease, dated March 8, 1971; Amendment No. 3 to Ground
Lease, dated May 8, 1972; Amendment No. 4 to Ground Lease, dated January
12, 1976; Amendment No. 5 to Ground Lease, dated April 1, 1976; Amendment
No. 6 to Ground Lease, dated August 11, 1976; Amendment No. 7 to Ground
Lease, dated March 7, 1977; Amendment No. 8 to Ground Lease, dated April
22, 1977; Amendment No. 9 to Ground Lease, dated March 23, 1983; Letter,
dated June 4, 1994, from The Irvine Company addressed to Lion Country
Safari Inc.; Amendment to Ground Lease (unnumbered), dated November 15,
1984; Amendment No. 10 to Ground Lease, dated January 20, 1986; Consent
to Sublease; Nondisturbance Agreement: Amendment to Sublease, dated as of
December 26, 1985; Consent to and Agreement Concerning Encumbrance of
Sublease, dated January 22, 1986 among The Irvine Company and Lion
Country Safari Inc.-The Irvine Company and Lion Country Safari, Inc.-
California; Assignment and Purchase Agreement, dated March 23, 1983,
between The Irvine Company and Lion Country Safari, Inc.-California;
Partial Assignment of Sublessor's Interest in Sublease, dated March 23,
1983, by Lion Country Safari, Inc. to The Irvine Company, filed as
Exhibit 10-1 to the Company's Registration Statement on Form SB-2
(Registration No. 33-81074), is hereby incorporated herein by reference
10-2 Sublease Agreement, dated August 7, 1980, between Lion Country Safari,
Inc.-California and Feyline Presents, Inc.; Assignment of Sublease
Agreement, dated August 19, 1980, between Feyline Presents, Inc. and
Irvine Meadows Amphitheater, Amendment to Sublease, dated September 16,
1980, between Lion Country Safari, Inc.-California and Irvine Meadows
Amphitheater; Agreement dated September 12, 1980, among The Irvine
Company, Lion Country Safari, Inc. and Lion Country Safari Inc.-
California; Letter Agreement, between The Irvine Company and Lion Country
Safari, Inc.-California; Amendment to Sublease, dated January 1, 1981,
between Lion Country Safari, Inc. and Irvine Meadows Amphitheater;
Letter, dated July 28, 1981, of Irvine Meadows Amphitheater addressed to
the Company, filed as Exhibit 10-2 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-81074), is hereby
incorporated herein by reference
10-3 Amended and Restated Consulting Agreement, dated as of June 1, 1994,
between the Company and Harry Shuster, filed as Exhibit 10-3 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-
81074), is hereby incorporated herein by reference
<PAGE>
Exhibit
Number Description
- ------- -----------
10-5 Stock Option Agreement, dated December 7, 1990, between the Company and
Haskell Slaughter Young & Johnston, Professional Association, covering
50,000 shares of Common Stock, par value $.01 per share, of the Company,
filed as Exhibit 10-5 to the Company's Registration Statement on Form SB-2
(Registration No. 33-81074), is hereby incorporated herein by reference
10-6 Stock Option Agreement, dated December 7, 1990, between the Company and
Alvin Cassel covering 10,000 shares of Common Stock, par value $.01 per
share, of the Company, filed as Exhibit 10-6 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-81074), is hereby incorporated
herein by reference
10-7 Stock Option Agreement, dated December 7, 1990, between the Company and
Renate Graf covering 10,000 shares of Common Stock, par value $.01 per
share, of the Company, filed as Exhibit 10-7 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-81074), is hereby incorporated
herein by reference
10-8 Stock Option Agreement, dated April 22, 1988, between the Company and
Renate Graf covering 25,000 shares of Common Stock, par value $.01 per
share, of the Company; Extension of Option Agreement, dated April 20,
1993, between the Company and Renate Graf, filed as Exhibit 10-9 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-81074),
is hereby incorporated herein by reference
10-9 Stock Option Agreement dated April 22, 1988, between the Company and Alvin
Cassel covering 10,000 shares of Common Stock par value $.01 per share, of
United Leisure Corporation; Extension of Option Agreement, dated April 20,
1993, between the Company and Alvin Cassel, filed as Exhibit 10-10 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-81074),
is hereby incorporated herein by reference
10-10 Stock Option Agreement, dated October 7, 1988, between the Company and
Harry Shuster covering 37,500 shares of Common Stock, par value $.01 per
share, of the Company; Extension of Option Agreement, dated April 20,
1993, between the Company and Harry Shuster, filed as Exhibit 10-12 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-81074),
is hereby incorporated herein by reference
10-11 Stock Option Agreement, dated November 17, 1988, between the Company and
Harry Shuster covering 75,000 shares of Common Stock, par value $.01 per
share, of the Company; Extension of Option Agreement, dated April 20,
1993, between the Company and Harry Shuster, filed as Exhibit 10-13 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-81074),
is hereby incorporated herein by reference
<PAGE>
Exhibit
Number Description
- ------- -----------
10-12 Stock Option Agreement, dated December 5, 1988, between the Company and
Harry Shuster covering 37,500 shares of Common Stock, par value $.01 per
share, of the Company; Extension of Option Agreement, dated April 20,
1993, between the Company and Harry Shuster, filed as Exhibit 10-14 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-81074),
is hereby incorporated herein by reference
10-14 Stock Option Agreement, dated July 24, 1987, between the Company and Harry
Shuster, Extension of Option Agreement, dated April 20, 1993, between the
Company and Harry Shuster, covering 750,000 shares of Common Stock, par
value $.01 per share, of the Company, filed as Exhibit 10-16 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-81074),
is hereby incorporated herein by reference
10-15 Option Agreement dated as of April 22, 1988, between the Company and
Haskell Slaughter Young & Johnston, Professional Association, covering
50,000 shares of Common Stock, par value $.01 per share, of the Company;
Extension of Option Agreement, dated April 20, 1993, between the Company
and Haskell Slaughter Young & Johnston, Professional Association, filed as
Exhibit 10-17 to the Company's Registration Statement on Form SB-2
(Registration No. 33-81074), is hereby incorporated herein by reference
10-16 Option to Sublease, dated as of September 25, 1984, between Lion Country
Safari, Inc.-California and American Sportsworld, Inc., including the
proposed Lease and Agreement to be entered into upon exercise thereof,
filed as Exhibit 10-19 to the Company's Registration Statement on Form SB-
2 (Registration No. 33-81074), is hereby incorporated herein by reference
10-17 Letter, dated February 22, 1985, from Lion Country Safari, Inc.-
California, addressed to American Sportsworld, Inc.; Lease, dated as of
May 14, 1985, between Lion Country Safari, Inc.-California and American
Sportsworld, Inc.; Amendment to Lease, dated December 2, 1985, between
Lion Country Safari, Inc. and American Sportsworld, Inc.; Letter Contract,
dated June 27, 1985, between the Company and The Splash; Assignment of
Sublease, dated as of December 26, 1985, between Lion Country Safari Inc.-
California, American Sportsworld, Inc. and The Splash; Bill of Sale, dated
January 10, 1986, between Lion Country Safari, Inc.-California and The
Splash; Agreement of Limited Partnership (undated) of The Splash; Letter
Agreement, dated October 16, 1986, between Lion Country Safari Inc.-
California, and The Splash; Letter Agreement, dated November 21, 1986,
between Lion Country Safari, Inc.-California, and The Splash; Letter
Agreement, dated November 25, 1986, between Lion Country Safari, Inc.-
California, and The Splash, filed as Exhibit 10-20 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-81074), is hereby
incorporated herein by reference
10-18 Letter Agreement, dated January 31, 1986, between Africa Arts of
California, Inc. and the Company, filed as Exhibit 10-21 to the Company's
Registration Statement
<PAGE>
Exhibit
Number Description
- ------- -----------
on Form SB-2 (Registration No. 33-81074), is hereby incorporated herein by
reference
10-19 Option Agreement, dated as of February 1, 1986, between the Company and
Africa Arts of California, Inc. covering 35,000 shares of Common Stock,
par value $.01 per share, of the Company, filed as Exhibit 10-22 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-81074),
is hereby incorporated herein by reference
10-20 Promissory Note, dated June 1, 1985, of Lion Country Safari Inc.-
California, in the principal amount of $973,927 drawn to the order of
Harry Shuster, filed as Exhibit 10-23 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-81074), is hereby incorporated
herein by reference
10-21 Deed of Trust, Assignment of Rents and Security Agreement, dated June 1,
1985, between Lion Country Safari Inc.-California, Brian H. Kay, Trustee,
and Harry Shuster, filed as Exhibit 10-24 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-81074), is hereby incorporated
herein by reference
10-22 Collateral Assignment of Leases and Rents, dated June 1, 1985, between
Lion Country Safari Inc.-California and Harry Shuster, filed as Exhibit
10-25 to the Company's Registration Statement on Form SB-2 (Registration
No. 33-81074), is hereby incorporated herein by reference
10-23 Commercial Lease (General Form), dated July 21, 1986, between Lion Country
Safari Inc.-California and Orange County Transit District; Amendment No. 3
to Lease Agreement, dated April 17, 1989, between Lion Country Safari
Inc.-California, and Orange County Transit District filed as Exhibit 10-26
to the Company's Registration Statement on Form SB-2 (Registration No. 33-
81074), is hereby incorporated herein by reference
10-24 Stock Option Agreement, dated as of February 22, 1989, covering 67,500
shares of the Common Stock, par value $.01 per share, of the Company in
favor of Tactron Liquidating Trust, filed as Exhibit 10-27 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-81074),
is hereby incorporated herein by reference
10-25 Stock Option Agreement, dated as of February 22, 1989, covering 7,500
shares of the Common Stock, par value $.01 per share, of the Company in
favor of Lindsey & Associates, Inc., filed as Exhibit 10-28 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-81074),
is hereby incorporated herein by reference
10-26 Memorandum of Agreement, dated March 7, 1990, between Lion Country Safari,
Inc.-California and James Productions, Inc., filed as Exhibit 10-34 to
the Company's Registration Statement on Form SB-2 (Registration No. 33-
81074), is hereby incorporated herein by reference
<PAGE>
Exhibit
Number Description
- ------- -----------
10-27 Form of Indemnity Agreement entered into by the Company with each of its
Directors, filed as Exhibit 10-35 to the Company's Registration Statement
on Form SB-2 (Registration No. 33-81074), is hereby incorporated herein by
reference
10-28 Stock Option Agreement, dated September 23, 1993, between the Company and
Renate Graf, covering 50,000 shares of Common Stock par value $.01 per
share, of the Company, filed as Exhibit 10-40 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-81074), is hereby
incorporated herein by reference
10-29 Stock Option Agreement, dated September 23, 1993, between the Company and
Alvin Cassel, covering 5,000 shares of Common Stock, par value $.01 per
share, of the Company, filed as Exhibit 10-41 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-81074), is hereby
incorporated herein by reference
10-30 Agreement for Purchase and Sale and Joint Escrow Instructions, dated April
5, 1995, between PLC Properties, Inc. and United Leisure Corporation,
filed as Exhibit 10-30 to Amendment No. I to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995, is hereby
incorporated by reference
10-31 Sub-Operating Agreement, dated April 11, 1995, between Canyon R.V. Park
and Camp Frasier, Inc., together with related Operating Agreements, filed
as Exhibit 10-31 to Amendment No. I to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995, is hereby incorporated
by reference
10-32 Standard Retail/Office Complex Lease, dated October 12, 1994, between PSA
Properties and Planet Kids, Inc., filed as Exhibit 10-32 to Amendment No.
I to the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995, is hereby incorporated by reference
10-33 Commercial Lease, between Eastrich Multiple Investor Fund L.P., Midland
Loan Services, L.P. et al., and Planet Kids, Inc., effective August 9,
1995 and Rider thereto filed as Exhibit 10-33 to Amendment No. I to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995, is hereby incorporated by reference
10-34 Lease, dated June 29, 1995, between Magnolia Square and Planet Kids, Inc.
and Addendum thereto, filed as Exhibit 10-34 to Amendment No. 1 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995, is hereby incorporated by reference
10-35 Territory Rights Agreement, between Planet Kids, Inc. and PT Planet
Kidsindo, filed as Exhibit 10-35 to Amendment No. 1 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995,
is hereby incorporated by reference
<PAGE>
Exhibit
Number Description
- ------- -----------
10-36 Financing Agreement dated as of February 12, 1997 between the Company and
Grand Havana Restaurants, Inc., filed as Exhibit 10-36 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996,
is hereby incorporated by reference
10-37 Financing Agreement dated as of September 10, 1996 between the Company and
Grand Havana Enterprises, Inc., filed as Exhibit 10-37 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996,
is hereby incorporated by reference
10-38 Operating Agreement for United Hotel & Casino, LLC, dated as of January
22, 1997, filed as Exhibit 10-38 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996, is hereby incorporated
by reference
10-39 Lease dated March 7, 1996 between County of Orange and Camp Frasier, Inc.,
filed as Exhibit 10-39 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996, is hereby incorporated by
reference
10-40 Secured Convertible Promissory Note dated July 29, 1997 for $1,900,000
made by the Company and Harry and Nita Shuster to Westminster Capital,
Inc., filed as Exhibit 10.2 to the Company's current Report on Form 8-K/A
dated July 29, 1997, is hereby incorporated by reference
10-41 Security Agreement dated July 29, 1997 by and between the Company and
Westminster Capital, Inc., filed as Exhibit 10.3 to the Company's current
Report on Form 8-K/A dated July 29, 1997, is hereby incorporated by
reference
10-42 Security Promissory Note dated July 28, 1997 in the principal amount of
$900,000 made by the Company to Harvey Bibicoff, filed as Exhibit 10.4 to
the Company's current Report on Form 8-K/A dated July 29, 1997, is hereby
incorporated by reference
10-43 Pledge Agreement dated July 28, 1997 by and between the Company and Harvey
Bibicoff, filed as Exhibit 10.5 to the Company's current Report on Form 8-
K/A dated July 29, 1997, is hereby incorporated by reference
10-44 Pledge Agreement dated July 29, 1997 by and between the Company and
Westminster Capital, Inc., filed as Exhibit 10.6 to the Company's current
Report on Form 8-K/A dated July 29, 1997, is hereby incorporated by
reference
10-45 Option Agreement dated as of September 22, 1998 between United Leisure
Corporation and Brian Shuster, filed as Exhibit 10-45 to the Company's
Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 1998,
is hereby incorporated by reference
10-46 Option Agreement dated as of September 30, 1998 between United Leisure
Corporation and Harry Shuster, filed as Exhibit 10-46 to the Company's
Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 1998,
is hereby incorporated by reference
<PAGE>
Exhibit
Number Description
- ------- -----------
10-47* Quitclaim Deed dated January 18, 1999, between County of Orange,
California and Camp Frasier, Inc.
10-48* License Agreement dated as of February 23, 1999, by and between United
Internet Technologies, Inc. and World Championship Wrestling, Inc.
21* Subsidiaries of the Company
23* Consent of Hollander, Lumer & Co. LLP
27* Financial Data Schedule
____________________________
* filed herewith
<PAGE>
EXHIBIT 2.3
AGREEMENT
---------
AGREEMENT, dated as of January 25, 1999, by and among United Internet
Technologies, Inc. (formerly known as United Leisure Interactive, Inc.)
("Seller"), Netcruise Interactive, Inc. ("Purchaser" or "Netcruise"), Genisys
Reservation Systems, Inc. ("Genisys") and United Leisure Corporation ("ULC").
W I T N E S S E T H:
--------------------
WHEREAS, the parties hereto are parties to that certain Asset Purchase
Agreement dated as of June 30, 1998 (the "Asset Purchase Agreement"), pursuant
to which Seller sold to Purchaser, and Purchaser purchased from Seller, all of
Seller's right, title and interest in and to (i) the License, and (ii) the
assets owned by Seller and described in Exhibit B attached to the Asset Purchase
Agreement (collectively, the "Transaction"); and
WHEREAS, the parties hereto are parties to that certain Agreement dated as
of October 28, 1998 (the "Amendment Agreement"), the purpose of which is to
amend certain provisions of the Asset Purchase Agreement and to provide for such
other matters as therein provided; and
WHEREAS, the parties desire to modify and amend further certain provisions
of the Asset Purchase Agreement and the Amendment Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. All capitalized terms not defined herein shall have the meaning
ascribed to them in the Asset Purchase Agreement or the Amendment Agreement, as
the case may be.
2. Paragraph 4 of the Amendment Agreement, entitled "Shareholders
Meeting", is hereby amended by deleting the third full paragraph thereof in its
entirety. For purposes of clarification only, said deleted paragraph is set
forth below:
"If, for any reason whatsoever, the aforesaid 1,100,000 Shares and the
Warrants are not issued to Netcruise on or before June 30, 1999, then, in
addition to any and all other rights and remedies available to United, at
United's option, up to four (4) members of the Board of Directors of
Genisys ("Board"), which members shall be selected buy United, shall
forthwith resign and, concurrently therewith, all of the remaining members
of the Board shall elect those persons chosen by United to replace them. By
their signatures below, those shareholders of Genisys who are also members
of the Board agree to take such action as to carry out the terms of this
provision."
1
<PAGE>
3. Notwithstanding anything else contained in the Asset Purchase
Agreement or the Amendment Agreement to the contrary, in the event that the
shareholders of Genisys (not including Seller who shall not vote on the matter)
do not approve, at a Meeting of Shareholders properly noticed and duly called
and at which such shareholders' votes have been solicited pursuant to a Proxy
Statement under the Proxy Rules adopted by the Securities and Exchange
Commission, both (i) the acquisition of the Assets and (ii) the issuance to
Seller of the 1,100,000 shares of Genisys Common Stock which were not subject to
the Return and the Warrants, such negative vote shall be deemed a "Shareholder
Termination."
4. In the event of a Shareholder Termination, the Transaction shall be
Unwound. For purposes of this Agreement, the term "Unwound" or "Unwinding"
shall mean one or more acts, transactions or closings, to be accomplished as
soon as reasonably practicable following a Shareholder Termination, the
cumulative effect of which is that all of the following shall occur:
a. All of the Assets shall be returned by Purchaser to Seller;
b. Seller shall return to Genisys a stock certificate representing the
Retained Shares;
c. Seller shall return to Genisys a stock certificate representing the
United Preferred Shares;
d. Brian Shuster shall return the warrants issued to him by Genisys
pursuant to Paragraph 5 of the Asset Purchase Agreement;
e. Harry Shuster shall resign as a director of Genisys and Chairman of
Netcruise and from all other offices he holds with either Genisys or Netcruise;
f. Brian Shuster shall resign as a director of Genisys and President of
Netcruise, and from all other offices he holds with either Genisys or Netcruise;
g. Brian Shuster's consulting fee of $5,000 per month shall be prorated
to the date of his resignation as President of Netcruise and shall cease as of
such date;
h. the services of Robert Eady shall cease to be provided to Purchaser
and Genisys;
i. Subject to obtaining the required consent of the Landlord (as
defined below), Purchaser shall assign to Seller that certain Commercial Lease
dated March 1, 1996 between Seller and 1990 Westwood Blvd., Inc. (the
"Landlord"), pertaining to the office premises at 1990 Westwood Boulevard, Los
Angeles, California;
2
<PAGE>
j. Genisys and Purchaser will return to ULC and Seller all documents
(including all copies thereof), including without limitation "due diligence"
material and all other confidential material, previously delivered by ULC or
Seller to Genisys or Purchaser;
k. ULC and Seller will return to Genisys and Purchaser all documents
(including all copies thereof), including without limitation "due diligence"
material and all other confidential material, previously delivered by Genisys or
Purchaser to ULC or Seller; and
l. The noncompetition clause contained in Paragraph 9 of the Asset
Purchase Agreement shall be null and void.
In the event of a Shareholder Termination, the parties agree to cooperate fully
with each other, including without limitation executing all such certificates,
instruments and other documents, and giving all such consents, as may be
necessary or reasonably requested to effect the Unwinding. The cost of the
Unwinding (including, without limitation, attorneys' fees and expenses), shall
be borne by Genisys pursuant to Paragraph 5 of the Amendment Agreement.
5. In the event of a Shareholder Termination and following the Unwinding
of the Transaction, Genisys shall have an option (the "Option") until September
30, 1999 (the "Termination Date") to again seek and obtain approval of the
Transaction by Genisys' shareholders on the same terms and conditions as
originally agreed to pursuant to the Asset Purchase Agreement, as amended by the
Amendment Agreement and this Agreement. Such shareholder approval shall be
obtained in accordance with all requirements of the Securities and Exchange
Commission (the "Commission") and The Nasdaq Stock Market, Inc. ("Nasdaq").
Genisys shall indicate its desire to exercise the Option pursuant to this
Paragraph 5 by providing written notice to Seller and ULC within ten business
days following the completion of the Unwinding of the Transaction. In the event
that Genisys exercises the Option, the parties agree to cooperate fully with
each other, including without limitation executing all such certificates,
instruments and other documents, and giving all such consents, as may be
necessary or reasonably requested to effect the Transaction pursuant to the
Option. However, notwithstanding anything contained in the Asset Purchase
Agreement, the Amendment Agreement or herein to the contrary, the Transaction
shall not close pursuant the Option until and unless the Genisys shareholders
lawfully approve the Transaction on or before the Termination Date in compliance
with all requirements of the Commission and Nasdaq. The cost of consummating
the Transaction pursuant to the Option under this Paragraph 5 (including,
without limitation, attorneys' fees and expenses), shall be borne by Genisys
pursuant to Paragraph 5 of the Amendment Agreement.
3
<PAGE>
6. Exhibit E to the Asset Purchase Agreement is hereby amended in its
entirety to read as follows:
"The undersigned agrees to execute an agreement restricting the sale of the
securities issued by the Company acquired in this transaction. Such
restriction shall be for a period of 24 months from the date of this
agreement, June 30, 1998."
7. All other provisions of the Asset Purchase Agreement and the Amendment
Agreement not inconsistent with the provisions hereof shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date above first written.
UNITED LEISURE CORPORATION UNITED INTERNET TECHNOLOGIES,
INC. (formerly known as United
Leisure Interactive, Inc.)
By /s/ Harry Shuster By /s/ Harry Shuster
---------------------------- ---------------------------
Harry Shuster Harry Shuster
Title: Chairman and Chief Title: Chairman and Chief
Executive Officer Executive Officer
GENISYS RESERVATION SYSTEMS, INC. NETCRUISE INTERACTIVE, INC.
By /s/ Lawrence E. Burk By /s/ Lawrence E. Burk
---------------------------- ---------------------------
Lawrence E. Burk Lawrence E. Burk
Title: Chairman and Chief Title: Chairman and Chief
Executive Officer Executive Officer
4
<PAGE>
EXHIBIT 10.47
RECORDED AT REQUEST OF AND
WHEN RECORDED MAIL TO
County of Orange
Public Facilities and Resources Dept.
Real Property
P.O. Box 4048
Santa Ana, CA 92702
ATTN: Michael Hentzen
SPACE ABOVE THIS LINE FOR RECORDER'S USE
- --------------------------------------------------------------------------------
MAIL TAX STATEMENTS TO:
DOCUMENTARY TRANSFER TAX $ EXEMPT
--------
__________ Computed on the consideration or value of
property conveyed; or
__________ Computed on the consideration or value less
liens or encumbrances remaining at the time
of sale.
By:__________________________________________________
PFRD/Real Property Division
A.P. NO:
- --------------------------------------------------------------------------------
X UNINCORPORATED AREA
-------
_______ INCORPORATED, CITY OF ORANGE
Project Number: PR23A-150
Project Name: Irvine Regional Park
QUITCLAIM DEED
FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, Camp
Frasier, Inc., a California corporation, does hereby REMISE, RELEASE and FOREVER
QUITCLAIM to County of Orange ALL RIGHT, TITLE, and INTEREST in and to the real
property in the County of Orange, State of California, described as:
(See map attached hereto and made a part hereof)
The purpose of this quitclaim deed is to terminate and extinguish the effect of
that certain Lease dated May 8, 1996 between the County of Orange and Camp
Frazier, Inc. Neither party shall have any claims against the other arising
from said Lease.
MAIL TAX STATEMENTS AS DIRECTED ABOVE
<PAGE>
CAMP FRASIER, INC., a California corporation
Dated: March 2, 1999 By: /s/ Harry Shuster
------------- -------------------------------------
Harry Shuster, President
CERTIFICATE OF ACCEPTANCE
This is to certify that the interest in real property conveyed by within deed or
grant to the County of Orange, a body corporate and politic, is hereby accepted
by the undersigned officer or agent on behalf of the Board of Supervisors of
Orange County pursuant to authority conferred by resolution of the said Board of
Supervisors adopted on November 4, 1975, and the County of Orange consents to
recordation thereof by its duly authorized officer.
COUNTY OF ORANGE
Dated________________________ By____________________________________
APPROVED AS TO FORM
Laurence M Watson
County Counsel
By: /s/ Laurence M. Watson Date: 1/18/99
------------------------
Description Compared
By:________________________
2
<PAGE>
[No map was attached to the document]
3
<PAGE>
EXHIBIT 10.48
LICENSE AGREEMENT
This License Agreement (the "Agreement") is made and entered into as
of the 23 day of February, 1999, by and between United Internet Technologies,
Inc., a Delaware corporation ("UIT"), and World Championship Wrestling, Inc., a
Georgia corporation ("WCW"), with reference to the following facts:
A. UIT, together with its affiliates, developed, and UIT owns, all
intellectual property, proprietary and other rights in and to the Internet
related technology described on Exhibit A hereto, together with any and all
improvements or enhancements thereof or additions thereto (the "Technology");
and
B. WCW desires to license from UIT, and UIT is willing to license to WCW,
the Technology, in each case upon and subject to the terms and conditions
provided in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Warranties. UIT hereby represents and warrants that Paragraph A
----------
of the recitals above is true and correct. Each party represents and warrants
that it has full power to enter into this Agreement, to carry out its
obligations hereunder, and to grant and/or assign any and all rights granted
and/or assigned herein.
2. Grant of License. UIT hereby grants to WCW, for the term of this
----------------
Agreement, the limited, non-exclusive (except to the extent provided in Section
2 hereof) right and license (the "License") to use the Technology. It is
expressly understood and agreed that the Technology (i) shall be used by WCW
solely in connection with, and that the License pertains exclusively to, WCW`s
Worldwide Championship Wrestling site or sites on the World Wide Web (the
"Website") and the CD-ROM or other discs and software (the "Discs") that will
permit holders thereof access to the interactive features thereof, and (ii)
shall not be used by WCW in any other manner or for any other purpose or
application. WCW further expressly acknowledges and agrees that the Technology,
together with any and all improvements thereon or enhancements thereof or
additions thereto developed during the term of this Agreement (whether developed
by UIT or WCW) constitute confidential, proprietary information of UIT and shall
at all times be and remain the sole property of UIT.
-1-
<PAGE>
(a) Restrictions on Use of Technology by UIT. UIT agrees that it will
----------------------------------------
not, during the term of this Agreement, use or license the use of the Technology
in competition with WCW in the wrestling business, or to otherwise permit the
use of the Technology by any business or individual in the wrestling business
other than WCW.
(b) Improvements and Enhancements. During the term of this Agreement,
-----------------------------
UIT shall make reasonable commercial efforts to develop improvements and
enhancements to the Technology and shall, as promptly as is commercially
feasible, make such improvements and enhancements available to WCW by CD-ROM or
such other means as the parties reasonably agree upon.
3. Testing and Acceptance of Technology. Within twenty-one (21)
------------------------------------
days of the execution of this Agreement (the "Testing Period") UIT shall: (a)
make available to WCW one or more test applications of the Technology sufficient
to enable WCW to assess whether the Technology materially conforms to the
specifications and description set forth in Exhibit A (the "Specifications");
and (b) if so requested by WCW, send one or more representatives of UIT to WCW's
home offices to cooperate with and assist WCW in such testing on WCW's existing
equipment. The representatives of UIT shall visit WCW's home offices at a time
during the Testing Period to be reasonably agreed upon by the parties. WCW
shall reimburse UIT for all travel, lodging, and other out-of-pocket costs (not
including salaries of UIT's representatives) reasonably incurred by UIT and its
representatives in connection with such visit. WCW shall notify UIT in writing
as soon as possible after the Testing Period, and in no event later than thirty
(30) days after the execution of this Agreement, whether WCW accepts or rejects
the Technology; provided, however, that WCW may only reject such Technology if
WCW reasonably determines that the Technology does not materially conform to the
Specifications. In the event of rejection, WCW shall so notify UIT in writing,
specifying in detail such material nonconformance. As promptly as is
commercially feasible, and in no event later that thirty (30) days following
receipt from WCW of the notice of rejection, UIT shall correct such
nonconformance and deliver to WCW a test application of the Technology which
substantially conforms to the Specifications, whereupon WCW shall have an
additional ten (10) business days after delivery to accept or reject the
Technology pursuant to the foregoing procedure. In the event the redelivered
test application is rejected by WCW pursuant to the foregoing procedure, WCW may
elect to continue the correction and redelivery process or terminate this
Agreement by written notice. In the event of termination by WCW pursuant to the
testing procedure, UIT shall, within thirty (30) days of such termination, and
notwithstanding any other provisions of this Agreement, refund to WCW any
advance on royalty previously paid to UIT pursuant to this Agreement. The
Technology shall be deemed accepted if not
-2-
<PAGE>
rejected in writing by WCW within thirty (30) business days after delivery of
the first test application or within ten (10) business days after redelivery of
test applications.
4. Technology and Creative Support Services. The parties recognize
----------------------------------------
that in order to facilitate proper use and exploitation of the Technology by
WCW, WCW will require from UIT support services in connection with both the use
and application of the Technology ("Technology Support") and the creation,
design, and implementation of content utilizing the Technology ("Creative
Support"). Accordingly, the parties agree as follows:
(i) Until the earliest to occur (the "Services Change Date") of the
(1) 180th day following the date of this Agreement or (2) completion of WCW's
second master Disc, UIT shall provide to WCW Technology Support and Creative
Support as may be reasonably requested by WCW in order to complete WCW's second
master Disc. Such complete Technology Support and Creative Support shall be
provided by UIT to WCW without charge; provided, however, that WCW shall
reimburse UIT, within 30 days of UIT's written request therefor, for all of
UIT's reasonable out-of-pocket expenses incurred in connection with the
provision of such Technology Support and Creative Support (other than the
salaries of UIT employees) and approved in advance by WCW, including without
limitation, travel, lodging, meals and related expenses in the event that travel
is requested and/or approved by WCW (the "Pre-Services Change Date Expenses").
(ii) After the Services Change Date: (1) UIT shall continue to provide
to WCW without charge such Technology Support as may from time to time
reasonably be requested by WCW, including, without limitation, support related
to the implementation and use of enhancements and improvements to the
Technology; provided, however, that WCW shall reimburse UIT, within 30 days of
UIT's written request therefor, for all of UIT's reasonable out-of-pocket
expenses incurred in connection with the provision of such Technology Support
(other than the salaries of UIT employees) and approved in advance by WCW,
including, without limitation, travel, lodging, meals and related expenses in
the event that travel is requested and/or approved by WCW; and (2) UIT shall
provide to WCW such Creative Support as may be agreed upon by the parties,
subject to such terms and conditions as may be agreed upon by the parties.
5. Delivery of Master Discs and Technology. UIT shall assist WCW in
---------------------------------------
the creation of the first two Master Discs and shall provide to WCW, by CD-ROM
or such other means as reasonably agreed upon by the parties, such elements of
the Technology as reasonably necessary for WCW to make the content on the Discs
available to holders of the Discs who access the Website. Upon the completion
of the second master Disc, or at such earlier time as reasonably
-3-
<PAGE>
agreed upon by the parties, UIT shall deliver to WCW, by CD-ROM or such other
means as reasonably agreed upon by the parties, all elements of the Technology,
including, without limitation, all coding or other elements reasonably necessary
for WCW to create additional master Discs, to make content on the Discs
available to holders of the Discs who access the Website, and to prevent access
of the content on the Discs only to those holders of the Discs who access the
Website.
6. Royalties. WCW shall pay the following royalty amounts (the
---------
"Royalties") to UIT in consideration of the License:
(a) 15% of WCW's adjusted gross revenues (i.e., WCW's gross
revenues, reduced by associated commissions payable by WCW) resulting from
banners or similar advertisements and/or sponsorships that are now standard in
the Internet industry and are contained on or made accessible through the use of
the Discs; plus
(b) 20% of WCW's adjusted gross revenues (i.e., as defined above)
resulting from full-screen, full-motion trailers and/or other full-screen, or
full-motion video and/or audio-visual advertisements that are not standard in
the Internet industry and are contained on or made accessible through the use of
the Discs; plus
(c) 15% of WCW`s net revenues (i.e., gross sales minus cost of
goods and fulfillment costs) resulting from merchandise sales which are promoted
on or through access provided by the use of the Discs; plus
(d) Additional royalty payments to be agreed upon in good faith
between the parties, based upon the percentages stated above, for other sources
of revenue that might be generated from the Discs or as a result of access
provided by the use thereof.
7. Payment. WCW shall make payment to UIT as follows:
-------
(a) WCW shall pay to UIT as a non-refundable advance against
Royalties contemplated by the foregoing paragraph 3 (the "Advance") the total
sum of $200,000 in immediately available funds, as follows: (i) one-half
($100,000) within ten (10) days of the execution of this Agreement; and (ii)
one-half ($100,000) within ten (10) days of acceptance of the Technology by WCW
in accordance with Paragraph 3.
(b) All Royalty payments in excess of the Advance which are
payable by WCW to UIT hereunder shall be paid by WCW to UIT within 45 business
days following the end of each calendar quarter in which the related revenues
are received by WCW. WCW shall provide to UIT, within 10 business days following
the end of
-4-
<PAGE>
each calendar month, monthly reports which accurately reflect the computation of
Royalties payable with respect to the preceding calendar month, which reports
shall be certified as true and correct by WCW`s chief financial officer.
(c) WCW agrees to use commercially reasonable efforts throughout
the term hereof to exploit the Technology to generate the Royalties that will be
payable by WCW to UIT hereunder. WCW further agrees that UIT (together with its
representatives) shall have the right, from time-to-time upon reasonable advance
notice by UIT, to audit all books and records pertaining to the Royalties (and
the revenues and expenses upon which they are based) for purposes of verifying
that WCW is in compliance with its Royalty payment obligations hereunder. In the
event that any such audit reflects that WCW has not paid at least 85 per cent of
all Royalties owing, WCW shall reimburse UIT for all expenses incurred by UIT in
connection with such audit. Otherwise, such expenses shall be borne by UIT. WCW
agrees to cooperate fully with UIT in connection with any such audit.
8. Indemnity. Each party (the "Indemnifying Party") shall
---------
indemnify, defend and hold harmless the other party (and its parent,
subsidiaries and affiliates), and the respective officers, directors and
employees thereof, from and against all costs, damages, claims (threatened or
actual) and expenses (including, without limitation, reasonable attorneys' fees
and allocations for in-house counsel) which may arise or derive in any way from
the Indemnifying Party's breach of any of its duties, obligations,
representations or warranties under this Agreement. Without limiting the
foregoing, the parties hereby further agree that: (a) UIT's obligations
hereunder to indemnify, defend and hold harmless shall include, but shall not be
limited to, any claims or actions based on an assertion that the Technology or
the use thereof by WCW infringes or violates any patent, copyright, trademark,
trade secret or other intellectual property right of any third party; and (b)
WCW's obligations to indemnify, defend, and hold harmless shall include, but
shall not be limited to, any claims or actions based on any assertion that any
video, text, graphics or other content distributed by WCW (provided that such
content is not furnished to WCW by UIT) libels, defames, or violates the rights
of privacy and/or publicity of any third party. UIT agrees to maintain
insurance covering its obligations hereunder to indemnify, defend and hold
harmless WCW in an amount of at least two million dollars ($2,000,000) per
occurrence, with deductible per occurrence no greater than two hundred thousand
dollars ($200,000) and to provide proof of such coverage to the WCW upon
reasonable request.
9. Non-Disclosure. Each party acknowledges that by virtue of its
--------------
relationship to the other party under this Agreement it will have access to
certain information and materials concerning the other party's business, plans,
customers, products and
-5-
<PAGE>
technology, including but not limited to the Technology, WCW's business records
and plans, and the terms of this Agreement, that are confidential and of such
substantial value to such party ("Information"), which value would be impaired
if such Information were disclosed to third parties. Each party agrees to
maintain all information received from the other, both orally and in writing, in
confidence and agrees not to disclose or otherwise make available such
Information to any third party without the prior written consent of the
disclosing party, except as is expressly permitted by the provisions of this
Agreement. The parties' obligations of non-disclosure under this Agreement shall
not apply to any information which: (i) is or becomes a matter of public
knowledge through no fault of or action by the receiving party; (ii) was
rightfully in the receiving party's possession prior to disclosure by the
disclosing party; (iii) subsequent to disclosure, is rightfully obtained by the
receiving party from a third party who is lawfully in possession of such
Information without restriction; (iv) is independently developed by the
receiving party without resort to Information which is confidential under this
Agreement; or (v) is required by law or judicial order, provided that prior
written notice of such required disclosure is furnished to the disclosing party
as soon as is practicable in order to afford the disclosing party an opportunity
to seek a protective order. The obligations of confidentiality shall survive the
termination of this Agreement.
10. Term. The term of this Agreement shall be for a period of three
----
years, commencing on the date hereof; provided, however, that WCW shall be
entitled to terminate this Agreement at the end of any one-year period during
the term hereof by written notice to UIT given by WCW to UIT at least 30 days
prior to such year end. Additionally, either party shall be entitled to
terminate this Agreement upon 30 days' advance written notice to the other in
the event of any material breach by such other party of its obligations
hereunder which is not cured within such 30-day period. For a period of one
year following the effectiveness of any such termination (the "Extended Term"),
WCW shall be entitled, at its discretion, to use the Technology solely for the
purpose of allowing holders of Discs created during the Term to access the
content thereon. During the Extended Term, WCW shall not use the Technology for
the distribution of new Discs or other content. Upon the effectiveness of any
termination, WCW shall, at its expense, promptly deliver to UIT all
documentation or other items embodying the Technology or portions thereof
relating to the creation of new Discs or other content (or, at the request of
UIT, destroy the same); and immediately cease all use of the Technology except
as set forth above. Upon the expiration of the Extended Term, WCW shall, at its
expense, promptly deliver to UIT all remaining items embodying the Technology or
portions thereof (or, at the request of UIT, destroy the same). Termination of
this Agreement shall not affect any party's obligations, rights or
-6-
<PAGE>
remedies hereunder, which, by their nature, are intended to survive. By way of
illustration only, WCW shall continue to have the obligation to pay Royalties to
UIT in respect of all Discs disseminated by WCW prior to the effectiveness of
termination.
11. Miscellaneous.
-------------
(a) Notices. Except as either party may hereafter notify the
-------
other with respect to itself, the addresses of the parties for all purposes of
this Agreement shall be:
UIT: United Internet Technologies, Inc.
1990 Westwood Blvd., Third Floor
Los Angeles, CA 90025
Fax: (310) 474-7475
Attention: Brian Shuster, President
with a copy to: Richman, Lawrence, Mann, Chizever & Phillips
9601 Wilshire Blvd., Penthouse
Beverly Hills, CA 90210-5270
Fax: (310) 274-2831
Attention: Gerald M. Chizever, Esq.
WCW: Worldwide Championship Wrestling
2865 Wall Cabin Drive
Smyrna, GA 30080
Fax: (404) 603-4044
Attention: Bill Busch
with a copy to: Turner Entertainment Group Legal Department
1030 Techwood Drive
Atlanta, GA 30318
Fax: (404) 885-0600
Attention: James W. Kimmell, Jr., Esq.
All notices, requests, consents, waivers and other communications pursuant to
this Agreement (collectively "Notices") shall be in writing and addressed as set
forth above or to such other address as the addressee may have specified in a
Notice duly given to the sender as provided herein. Such Notice shall be
delivered to the party for whom intended by facsimile (with a copy delivered by
one of the other methods described herein), by hand or by postage prepaid, first
class, registered or certified mail, return receipt requested. Such Notices
shall be deemed to have been given and delivered as of the date of receipt or
the date delivery is refused.
(b) Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of California.
-7-
<PAGE>
(c) Attorneys' Fees. Should any party be required to bring legal
---------------
action (including arbitration) to enforce its rights under this Agreement, the
prevailing party in such action shall be entitled to recover from the losing
party its reasonable attorneys' fees and expenses in addition to any other
relief to which it is entitled.
(d) Entire Agreement. No party has made any representations,
----------------
warranties, covenants or promises relating to the subject matter of this
Agreement except as expressly set forth herein, and any prior agreements or
understandings not specifically set forth herein shall be of no force or effect.
This Agreement constitutes the entire agreement of the parties relative to the
subject matter hereof.
(e) Interpretation. The parties agree that each party has been
--------------
represented by legal counsel of its own selection and jointly participated with
the other in the drafting of this Agreement; and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement.
The headings of the sections of this Agreement are inserted for convenience of
reference only and shall not affect the meaning or interpretation of this
Agreement.
(f) Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such a manner as to be enforceable under applicable law.
However, if any provision of this Agreement shall be deemed unenforceable under
applicable law pursuant to Section 7(l) below or by a court having jurisdiction,
such provision shall be unenforceable, without invalidating the remainder
thereof or any of the remaining provisions of this Agreement.
(g) Binding Agreement. This Agreement shall be binding upon, and
-----------------
inure to the benefit of, WCW and UIT and their respective successors and
assigns; provided, however, that, neither WCW nor UIT may assign any right or
obligation arising pursuant to this Agreement without first obtaining the
written consent of the other party.
(h) Modification. No course of performance or other conduct hereafter
------------
pursued, accepted or acquiesced in, and no oral agreement or representation made
in the future, by WCW or UIT, whether or not relied or acted upon, shall (i)
modify or terminate this Agreement, or (ii) impair or otherwise affect any
obligation, right or remedy of WCW or UIT pursuant to this Agreement.
(i) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and
-8-
<PAGE>
the same instrument. Any party may execute this Agreement by facsimile signature
and the other party shall be entitled to rely on such facsimile signature as
evidence that this Agreement has been duly executed by such party. Any party
executing this Agreement by facsimile signature shall immediately forward to the
other party an original signature page by overnight mail.
(j) Additional Acts. The parties agree to perform such further acts
---------------
and to execute, acknowledge and deliver such further documents as may be
necessary to effectuate the purposes of this Agreement.
(k) Waiver. The failure of any party, at any time, to require timely
------
performance by any other party of any provision of this Agreement shall not
affect such party's rights thereafter to enforce the same, nor shall the waiver
by any party of any breach of any provision of this Agreement, whether or not
agreed to in writing, be taken or held to be a waiver of the breach of any other
provision or a waiver of any subsequent breach of the same provision of this
Agreement. No extension of time for the performance of any obligation or act
hereunder shall be deemed to be an extension of time for the performance of any
other obligation or act hereunder.
(l) Arbitration. Any controversy, dispute or claim arising out of or
-----------
in connection with or relating to this Agreement, or the breach, termination,
validity or interpretation hereof or any good faith negotiation or transaction
contemplated hereby (any such controversy, dispute or claim being referred to as
a "Dispute") shall be resolved exclusively by arbitration conducted in Los
Angeles, California in accordance with the Commercial Arbitration Rules then in
force (the "AAA Rules") of the American Arbitration Association (the "AAA"),
unless the parties shall mutually agree to use an entity or group other than AAA
for arbitration of a Dispute. In the event that AAA is used for arbitration of
a Dispute, the following procedures shall apply. There shall be a panel of
three arbitrators who shall be appointed pursuant to AAA procedure, in each
case, within 15 business days after receipt of the demand for arbitration by the
respondent(s) in any such proceeding. A final award shall be rendered as soon
as reasonably possible, and, in any event, within 90 days following appointment
of the panel of arbitrators; provided, however, that if the arbitrators
determine by majority vote that fairness so requires, such 90 day period may be
extended by no more than 60 additional days. The parties agree that the
arbitrators shall have the right and power to shorten the length of any notice
periods or other time periods provided in the AAA Rules and to implement
expedited procedures under the AAA Rules in order to ensure that the arbitration
process is completed within the time frames provided herein. The arbitration
decision or award shall be reasoned and in writing. Judgment on the decision or
award
-9-
<PAGE>
rendered by the arbitrators may be entered and specifically enforced in any
court having jurisdiction thereof. Notwithstanding the provisions of this
Section 7(l), any arbitration held pursuant to the provisions of this Section
7(l) shall be governed by the Federal Arbitration Act and the California Code of
Civil Procedure. All arbitrations commenced pursuant to this Agreement while any
other arbitration hereunder shall be in progress shall be consolidated and heard
by the initially constituted panel of arbitrators. Notwithstanding anything to
the contrary set forth above in this Section 7(l), UIT shall, in addition to all
of its other rights and remedies hereunder, be entitled to enforce its rights
under this Agreement in respect of the Technology, or any misuse, threatened
misuse, prohibited disclosure, or threatened prohibited disclosure thereof by
WCW, by seeking permanent and/or interim injunctive relief in any court of
competent jurisdiction in the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
UIT: WCW:
United Internet Technologies, Inc., World Championship Wrestling, a
a Delaware corporation Georgia corporation
By: /s/ Brian Shuster By: /s/ Eric Bischoff
----------------------------- ----------------------------
Its: President Its: President
----------------------------- ----------------------------
-10-
<PAGE>
EXHIBIT A
DESCRIPTION AND SPECIFICATIONS OF TECHNOLOGY
The UIT Technology is used in providing Internet and Intranet websites with
zero-wait time, full-motion, full-screen video (30 frames per second video, the
same standard as standard television broadcasts), with stereo audio to the
interactive audience. Unlike various forms of streaming video, live media and
Internet video broadcasts, the Technology does not rely on bandwidth as the
medium for delivery of video. The Technology permits a website to be protected
with time-lock security, thereby enabling the website operator to allow end
users to access full-motion, full-screen audio and video (or particular portions
thereof selected by the website operator) only while on the website and for the
specific period of time selected by the website operator and incorporated into
the time-lock security code.
The Technology consists of the following components:
1. Parallel Addressing Video (PAV)
-------------------------------
Parallel Addressing Video is a technology that enables the user to select
and call up video on a remote computer over a network without prior knowledge of
the remote computer configuration. The current design is for use with removable
media such as CD-ROM or DVD discs. The technology allows a hyperlink to be
placed within a web page that upon selection (a click of the mouse) sends a
small file to the remote computer. The associated software uses information
contained in this small file to identify the "address" on the disc. The
"address" is broken down into a specific disc volume label and the specific name
of the file contained on it. It can identify the volume label, and, if not
present, will prompt the user to insert the disc into any available drive. From
the point of insertion, the disc can then be located and the media file found.
This technology can also play audio files.
2. Dynamic Interactive Video Overlay (DIVO)
----------------------------------------
Dynamic Interactive Video Overlay is a technology whereby the user is able
to place video within a computer user's Internet web-browser window. The video
is filmed using blue/green screen technologies and this is then placed on
background footage, graphics, etc. that has been designed to integrate with the
web page design. This allows a designer to overlay a small video on a web page
and have the full-screen appear to be a video. This technology requires less
space on a disc, thereby allowing more
-11-
<PAGE>
high-quality footage to be placed on a disc at one time. The web browser appears
as a full-screen video that is interactive with hyperlinks, etc.
PAV and DIVO can be changed or updated by re-addressing any video file at
any time from UIT's mainframe server.
3. Server Side Key Generator Program
---------------------------------
Server Side Key Generator Program ("SSKGP") is designed to protect the
videos from being viewed by users not connected to the web site. The
application resides on the web server. It follows the "CGI" web standards used
for intercommunication between the web server and the external applications of
the Technology. SSKGP is designed to work with the Unix operating system and
with Netscape Enterprise Web Server; however, the application can be customized
to work with any operating system and/or other web servers. The application
will have the capability to create security keys based on time. Therefore, the
end user will only be able to utilize the video while they are connected to the
Internet and only for specific amounts of time. UIT can program the security
time period(s) as required by the website operator, or will provide the operator
with the ability to do so. Thus, for example, a video can be programmed to be
played for 10 minutes after it has reached the user computer, after which the
player will not play it again.
4. Video (DIVO/PAV) Creation Program
---------------------------------
This software is designed to create the proprietary files used by the video
player. The application is compatible with Windows 95, Windows 98 and Windows
NT computer. Its purpose is to convert the video from the MPEG standard video
format to the encoded/encrypted format used with security features. It creates
the proprietary support files distributed on the CD-ROM and via the web server
to the end users.
5. ULI Video Player
----------------
This application enables the end user to open and play DIVO and PAV files
within the browser while connected to the website server ( subject to any
limitations programmed by the website operator). The ULI Video Player is
compatible with Internet Explorer versions 3.0 and higher, and Netscape
Navigator 3.0 and higher.
6. Year 2000 Compliance
--------------------
All applications developed by United Internet Technologies are Year 2000
Compliant. For purposes of the Agreement, Year 2000 Compliant means that,
without interruption or manual intervention, the Technology will perform all
functions required by this
-12-
<PAGE>
Agreement with no diminution or change in performance, functionality, accuracy
or otherwise through 1999 and following December 31, 1999, and through and
following February 29, 2000 and all subsequent leap days.
-13-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF UNITED LEISURE CORPORATION
------------------------------------------
Set forth below is a list of all subsidiaries of United Leisure
Corporation, indicating their jurisdictions of incorporation.
Name Jurisdiction of Incorporation
---- -----------------------------
Camp Frasier, Inc. California
Frasiers Frontier, Inc. California
LCS Tours, Inc. Delaware
Lion Country Safari, Inc. -- California Florida
Planet Kids, Inc. California
Planet Kids Learning Centers, Inc. Delaware
United Internet Technologies, Inc. Delaware
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in United Leisure
Corporation's Registration Statement on Form S-3 dated November 6, 1997 of our
report dated March 6, 1999 with reference to our audit of the consolidated
financial statements of United Leisure Corporation as of December 31, 1998 and
for the year then ended, which report is included in United Leisure
Corporation's Annual Report on Form 10-KSB for the year ended December 31, 1998.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
April 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 799,369
<SECURITIES> 0
<RECEIVABLES> 53,153
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 930,604
<PP&E> 384,984
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,391,551
<CURRENT-LIABILITIES> 2,926,840
<BONDS> 842,000
0
0
<COMMON> 139,188
<OTHER-SE> 4,405,523
<TOTAL-LIABILITY-AND-EQUITY> 8,391,551
<SALES> 0
<TOTAL-REVENUES> 2,443,601
<CGS> 0
<TOTAL-COSTS> 4,029,035
<OTHER-EXPENSES> 2,543,328
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 697,047
<INCOME-PRETAX> (514,839)
<INCOME-TAX> 0
<INCOME-CONTINUING> (514,839)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (514,839)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
