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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT ON FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-6106
UNITED LEISURE CORPORATION
(Exact name of registrant as specified in it charter)
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Delaware 13-2652243
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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1990 Westwood Blvd., Los Angeles, CA 90025
Issuer telephone number, including area code: (310) 441-0900
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained 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. [X]
The Issuer's revenues for the most recent fiscal year were $1,377,770.
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 17, 2000, based on the average closing
bid and asked price of the Common Stock as quoted on the OTC Bulletin Board on
such date, was approximately $140,376,888.
The number of shares of the Registrant's Common Stock outstanding as of
March 17, 2000 was 18,815,868 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format (Check One): Yes _____; No
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UNITED LEISURE CORPORATION
ANNUAL REPORT ON FORM 10-KSB
INDEX
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PART I
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Item 1. Business...................................................................... 3
Item 2. Description of Property....................................................... 11
Item 3. Legal Proceedings............................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders........................... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 12
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 12
Item 7. Financial Statements.......................................................... 14
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial 14
Disclosure....................................................................
PART III
Item 9. Directors and Executive Officers of the Registrant............................ 14
Item 10. Executive Compensation........................................................ 16
Item 11. Security Ownership of Certain Beneficial Owners and Management................ 18
Item 12. Certain Relationships and Related Transactions................................ 20
Item 13. Exhibits and Reports on Form 8-K.............................................. 21
Signatures........................................................................................ 24
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PART I
This Annual Report on Form 10-KSB includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Exchange Act of 1934, as amended. These include, among
others, the statements about United Leisure's plans and strategies under the
headings "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Although United Leisure believes that its
plans, intentions and expectations reflected in or suggested by such forward
looking statements are reasonable, it cannot assure that such plans, intentions
or expectations will be achieved. Actual results may differ materially from the
forward-looking statements made in this Annual Report on Form 10-KSB.
ITEM 1. BUSINESS
General
United Leisure Corporation ("United Leisure") has business activities in
two areas. First, we operate children's indoor learning centers. This is
becoming a smaller part of our operations. Second, through our wholly owned
subsidiary United Internet Technologies, Inc. ("United Internet Technologies"),
we develop proprietary solutions for enhancing the Internet properties of
partners and clients in entertainment, e-commerce and other industries. This
is a growing area of activity for us.
Our solutions allow businesses to provide superior video functionality in
combination with the Internet, provide a unique experience to consumers, help
drive greater volumes of traffic to their Web sites and ultimately create
greater value. The solutions that we have offered to date include:
. Parallel Addressing Video Technology;
. Dynamic Integrated Video Overlay; and
. Innovative Web design solutions.
United Internet Technologies has the capability to provide a turn-key and
end-to-end solution. Our capabilities include:
. Concept and business model development;
. Branding;
. Content production;
. Video development; and
. CD distribution.
We have developed solutions for the following partners and clients:
. NBC;
. World Championship Wrestling, Inc.;
. Genisys Reservation Systems, Inc., also known as Netcruise.com; and
. Teen People.
We also have investments in two affiliated companies. These investments
consist of:
. Grand Havana Enterprises, Inc. , which owns and operates private
membership restaurants and cigar clubs;
. HEP II L.P., which is in the motion picture production business.
United Leisure was incorporated under the laws of the State of Delaware in
May 1969 under the name "Lion Country Safari, Inc." Lion Country Safari was
formed to develop and operate a chain of African wildlife preserve and theme
amusement parks.
Our principal executive offices are located at 1990 Westwood Boulevard,
Los Angeles, California 90025 and our telephone number is (310) 441-0900.
References to United Leisure herein include United Leisure Corporation and its
consolidated subsidiaries, unless the context otherwise requires.
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Background
Before February 1997, our primary business was to develop and manage
facilities for children's recreational activities. In connection with our
decision to reorient our business to develop solutions for enhancing Internet
properties, we closed most of our children's facilities. In August 1999, we sold
real property located in El Cajon, California that had been used for children's
recreational activities. In October 1999, we sold our real estate holdings in
Las Vegas.
Industry Background
Currently there are several technologies and methods to communicate
and retrieve various types of information from Internet resources. The format
for retrieving much of this information is satisfactory, but the length of time
that it takes to transfer some audio and video content is inconvenient or
unacceptable to many users.
Originally, users were required to download audio and video content in its
entirety before they could view or listen to the content. The length of time it
took to accomplish this varied depending on the transmission speed of the user's
modems as well as other factors. In addition, the downloaded files took up a lot
of space on the user's hard disk drive.
The development of streaming technology overcame some of these limitations.
This technology allows the user to begin watching or listening to the content
while it is being transmitted. To take advantage of streaming technology, the
user must have a multimedia computer with certain microprocessor requirements,
at least a 28.8 kbps modem and streaming media software. The streaming media
software, such as RealNetwork's RealPlayer and Microsoft Windows Media Player,
can be downloaded from the Internet free of charge.
Despite these improvements, there are significant limitations with
streaming technology, especialy with respect to the quality of the video images.
Streaming technology is limited by available bandwidth. For example, a video
streaming at 28.8 kbps will produce a jumpy or choppy video that the viewer
perceives as less than full motion. In addition, streaming video is displayed in
a small window on the viewer's computer screen and enlarging the image further
reduces its quality. Internet congestion or losses in Internet connection may
also interrupt audio and video streams.
These factors can result in an unsatisfying experience for users of
streaming technology. Increased transmission speeds will enhance the quality of
the technology but industry analysts disagree as to the time frame in which
transmission speeds sufficient to overcome the current limitations will be in
use.
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Our Solutions
We believe that current streaming technology delivers an unsatisfying video
experience because the video is limited in motion, has poor resolution, has a
small viewing window and is relatively unstable. We developed our technology to
permit Web site design that will integrate video in innovative ways without
sacrificing quality or requiring large amounts of bandwidth. In 1998, we spent
approximately $168,000 for research and development of our Internet technology.
In 1999, we spent approximately $782,000 on research and development. These
expenditures are included in our direct operating expenses.
To date, we have developed the following solutions for audio and video
delivery:
Parallel Addressing Video
This technology, which is not a broadcast, downloaded or streaming
technology, uses pre-recorded audio and video that is distributed to the user on
a CD-ROM or DVD-ROM. The technology equips Websites with software that allow the
Web site to interact with a user's Internet browser and activate the CD-ROM or
DVD-ROM. The result is a 30 frame-per-second broadcast quality, full-motion,
full-screen video and audio on the user's computer, while the user is connected
to the Internet.
Unlike traditional CD-ROM or DVD-ROM multimedia products, such as
interactive encyclopedias or magazines, which are completely controlled by the
user from their computer, with our technology the display of the content is
completely controlled from the Web site.
Various security techniques allow the creator of the pre-recorded material
to control when and how much of the material is available to the user. For
example, a Web site administrator could pre-record more video than would be
available on the Web site at any one time, distribute it on a CD-ROM or DVD-ROM
and make it accessible by the user either in a time-released fashion or with
proprietary security codes. The user's video player communicates with the Web
server which creates a secure encryption key to unlock the video. Security and
time-control functions exist on both the Web site and the distributed medium
that allow the video to be delivered to the user in the manner that the content
provider desires. Encryption keys also allow the owners of the Web sites to
protect against unauthorized use or distribution of their video content.
In addition, Parallel Addressing Video technology permits all information
other than the actual pre-recorded material to be changed on the Web site. This
results in a more diverse interactive experience that can change as frequently
as the Web site administrator desires. As a result, the Web site content
remains current and the context in which the material is viewed can be updated
to maintain the user's interest.
Dynamic Integrated Video Overlay
This technology enhances our Parallel Addressing Video technology by
allowing video that is distributed and controlled through Parallel Addressing
Video technology to be integrated within a Web page. This allows special effects
and videoactive interface design using a combination of video and fixed Web
design tools and technologies. These innovations do not currently exist in other
video formats. Combining these innovations with full motion 30 frame-per-second
broadcast quality video results in a more multimedia enhanced Web page than
those using traditional static elements and streaming video. For example, using
Dynamic Integrated Video Overlay technology, a host can appear in full motion
video on the Web page to educate or entertain the user. This technology allows
the host to appear as an actual part of the video although two different sources
are involved.
Dynamic Integrated Video Overlay technology also provides functions that
allow video to be combined seamlessly within the user's own Web browser
software. Like Parallel Addressing Video, Dynamic Integrated Video Overlay
technology is designed to work with popular browsers from both Netscape
Communication Corporation and Microsoft Corporation.
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Vector Image Mapping
We are developing a media player to incorporate additional functions and
features. This includes new technology called Vector Image Mapping. This
technology will enable a user to click on selected pixels within a video to
create an interactive experience with that image.
Applications
Television. In July 1999, we entered into a Master Development Agreement
with the National Broadcasting Company. We mastered, reproduced and distributed
1 million CD-ROMs showcasing NBC's fall 1999 season incorporating an interactive
game/contest. The CD-ROMs used our Parallel Addressing Video and Dynamic
Integrated Video Overlay technologies linked to a special NBC Web site. They
were distributed free in newspapers in September 1999 in six major metropolitan
areas. We received a fixed fee of $100,000 for delivery of the CD-ROMs.
Users who received a copy of the NBC disc could access the special NBC Web
site and activate encrypted video to play excerpts from seven returning NBC
television shows and seven new shows in the fall 1999 lineup. Users were also
able to play an interactive game and participate in a contest where the first
prize winner would win a spot on an NBC television show.
Wrestling. In February 1999, we entered into a license agreement with
World Championship Wrestling. Under the agreement, we granted WCW a non-
exclusive license to use our Parallel Addressing Video and Dynamic Integrated
Video Overlay technologies in connection with their Web site.
The agreement provided that WCW would pay certain royalties to us based
upon gross revenues from (1) banner or similar advertisements and/or
sponsorships contained on or accessed through use of the CD-ROMs or other discs
and (2) 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 accessed through use of the CD-ROMs or
other discs.
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WCW also paid us a non-refundable advance against these royalties of
$200,000.
In August 1999, we received video content from WCW to produce a master CD-
ROM containing wrestling video for use in conjunction with WCW's Web site. We
produced and distributed approximately 750,000 discs in the first run. WCW began
marketing CD-ROMs containing our technologies in October 1999 through four
avenues:
. WCW's Web site at www.wcw.com;
. WCW television broadcasts, which consist of seven prime time hours per
week in major markets;
. Live events, at which WCW had an estimated total attendance of
approximately 2 million people for 1999; and
. Inserts in wrestling magazines.
Travel. We developed an application of our Parallel Addressing Video
technology called Netcruise(C) that allows anyone to book travel, including
cruises, hotels, car rental and airline tickets from a one-stop shopping Web
site at netcruise.com. In July 1998, we licensed Netcruise(C), together with
all other travel-related applications of our Parallel Addressing Video
technology, to a wholly owned subsidiary of Genisys Travel Reservations, Inc.
The CD-ROMs and DVD-ROMs that Genisys distributes will contain full motion
video and virtual tours of approximately seven cruise lines and approximately
thirteen travel destinations. For example, a user can view staterooms, dining
rooms, entertainment venues, casinos and other areas of a ship before booking a
cruise. The Netcruise(C) software has full motion video and live vocal
interaction and is updated with online information.
The Netcruise(C) product will allow individuals to book every aspect of
their own vacation at one time, as well as to book travel for others. The
Genisys Web site will walk users through the process of booking and/or selling
any travel arrangements.
In June 1998, our wholly owned subsidiary, United Internet Technologies,
Inc., granted to NetCruise Interactive, Inc., a wholly owned subsidiary of
Genisys, an exclusive, worldwide and perpetual license for travel related
applications of certain interactive technology. In addition, we sold Genisys
certain intellectual property and computer equipment.
As consideration for the sale, we received (1) 2,000,000 shares of common
stock of Genisys, (2) 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 (3) 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.
In October 1999, United Internet, Genisys and certain of Genisys' principal
stockholders entered into an agreement to restructure the transaction. Under the
terms of this agreement, United Internet returned to Genisys (1) 1,100,000
shares of Genisys common stock and (2) the warrants. Genisys agreed to issue to
United Internet 1,100,000 shares of Genisys Convertible Series B Preferred
Stock, par value $.0001 per share, which, among other things, are automatically
convertible into 1,100,000 shares of Genysis common stock upon Genisys'
obtaining stockholder approval as required by Nasdaq Rule 4460. In addition,
upon obtaining stockholder approval, Genisys agreed to reissue the warrants to
United Internet.
The Genisys preferred shares have a mandatory dividend of $275,000 payable
on September 30, 1999, and a mandatory quarterly dividend of $68,750 beginning
December 31, 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.
Marketing
In June 1999, we entered into a marketing agreement with AT&T Corp. Under
the agreement, AT&T granted us a non-exclusive license to distribute software of
AT&T's Internet service provider service. We must distribute one million CD-
ROMs or other products that combine or bundle AT&T's software with other
material that we place on the discs. The agreement has a one-year term. The
distributed material must meet certain technical and other specifications
established by AT&T and must be tested by AT&T before distribution.
The agreement provides that AT&T will pay us $20 for each person that
switches to AT&T's Internet service provider as a result of using the AT&T
software on one of our distributed CD-ROMs, provided that the user pays AT&T at
least $19.95 during the first three months after registering for the service.
We received no advance payment from AT&T under this agreement.
AT&T provides technical support and customer care services for users of
their service and we provide all technical support and customer care services
for users of the bundled material contained on the distributed discs. AT&T has
the right to approve any bundled product that contains their software.
In July 1999, we entered into a distribution agreement with Earthlink
Network, Inc. to market Earthlink's Internet service provider software on discs
produced using our technology. Earthlink pays us a fixed amount for each new
customer that subscribes to Earthlink in connection with using any of our discs
for various services or products. The amount varies from $20 to $50 per
customer depending on the number of subscribers and is cumulative from one
project
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to the next. In addition, Earthlink paid a $40,000 nonrefundable advance against
these payments. The term of the agreement is for one year with automatic renewal
unless terminated by either party upon 30 to 90 days notice prior to the end of
each one-year term.
Our first distribution in connection with the Earthlink agreement was made
in conjunction with the distribution of the NBC preview CD-ROMs in September
1999. These CD-ROMs contained Earthlink software and gave the user's the option
to subscribe to Earthlink services. Under our agreement with NBC, we share the
revenue equally with NBC after we each recoup the pro rata share of our
investment.
In November 1999, we entered into an agreement with Teen People Magazine to
design and produce a 12-page "magalog" of Nordstrom fashions, accessories and
beauty products and an interactive CD-ROM. The mini-catalog will serve as a
self-mailer for the CD-ROM. In addition, we will include Internet Service
Provider software as part of the package. Approximately 600,000 CD-ROMs were
distributed in March 2000. We received revenues of approximately $700,000 in the
first quarter of 2000 in connection with this agreement.
In February 2000, we entered into an agreement with Liquid Audio, Inc.
under which Liquid Audio granted us a limited, non-exclusive, worldwide,
royalty-free license to reproduce, market and distribute Liquid Audio products
along with the distribution of our proprietary software. The agreement
continues until terminated upon 30 days written notice by either party.
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Children's Recreational Activities
We have closed most of our children's recreational facilities. In 1999, our
children's recreational activities consisted of three Planet Kids operations,
which are indoor multimedia interactive play learning centers for children.
Each Planet Kids facility provides interactive multimedia educational
games, exercise playgrounds, education computers, party facilities and other
indoor activities to children ages three to thirteen.
The first Planet Kids facility opened in Laguna Hills, California in July
1995 and the second facility opened in Orange, California in December 1995. A
third Planet Kids facility opened in Fountain Valley, California in September
1996. See Part II, Item 6, "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and "Financial Statements - Note 3 to Notes
to Consolidated Financial Statements."
Patents and Trademarks
In November 1999, we were issued a utility patent for our Parallel
Adressing Video and Dynamic Intergrated Overlay Video technologies. In May
1999, we filed a patent application relating to our Dynamic Intergrated Overlay
Video enhancements. We do not know if this patent will be issued, or if issued,
how broad it will be. We do not believe that the failure to receive a patent
for our enhancement technology will critically impair the value of our Dynamic
Intergrated Overlay Video technology. We cannot be sure that any current or
future patents will provide protection from infringement. Our patent
applications may also be challenged. If challenged, we may not have adequate
resources to enforce or defend our rights. In June 1999, we were sued for
patent infringement by a company that claims to have a patent for technology
similar to ours. See "Legal Proceedings."
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Competition
There is significant competition in the evolving market for delivery of
video content on the Internet. We have approached the delivery using different
technology than that of our competitors. Our competitors, however, have
substantially greater financial, marketing, personnel and other resources than
we do.
There is also significant competition for content development and
broadcasting on the Internet. Our largest competitors in this area are
broadcast.com and RealNetworks, Inc. These and other competitors in the content
development and broadcast area, also have greater resources than we do. We
expect competition in this area to remain strong and to increase further.
Government Regulation
Although there are currently few laws and regulations that apply directly
to the Internet, it is likely that new laws and regulations will be enacted in
the United States and elsewhere covering a wide range of Internet-related
issues. These could enclose broadcast license fees, music licensing,
copyrights, privacy, pricing, sales tax and characteristics and quality of
Internet services. It is also possible that laws could be passed that would
apply to us in the areas of content, network security, encryption, privacy
protection, electronic authentification or digital signatures, illegal or
harmful content, access charges and re-transmission activities. If certain laws
or regulations apply to the type of service we provide, we could be exposed to
significant liabilities in connection with the content on our Web sites. We
could also have liability for the content on the Web sites of our licensees.
If restrictive laws or regulations are adopted, it could also slow Internet
growth and increase our cost of doing business.
There are also uncertainties about how existing laws in other areas apply
to the Internet. Some of these laws deal with issues like property ownership,
libel, taxatioon, defamation and personal privacy. The majority of these laws
were adopted before the widespread use of the Internet and do not address the
unique nature of the Internet and related technologies.
In 1996, Congress enacted the Communications Decency Act of 1996. Although
the Supreme Court ruled that sections of this legislation that would have
imposed criminal penalties for the distribution of indecent material to minors
over the Internet were unconstitutional, it is possible that similar
legislation could be adopted and upheld in the future. Even though we do not
distribute content that the Communications Decency Act would consider illegal,
it is not possible to predict how any future laws or regulations regarding
indecency would be interpreted. If Internet growth is slowed as a result of
restrictive legislation, the demand for our technology could be adversely
impacted. We do not require our licensees to indemnify us against these
potential liabilities, nor do we have insurance to cover such liabilities.
If we are considered to be a distributor of Internet content, we could face
potential liability for negligence, copyright, patent, trademark, defamation,
indecency and other claims. These types of lawsuits have been brought against
Internet content distributors. In addition, we could be liable for the
broadcast content or unauthorized duplication of broadcast content. We do not
require our licensees to indemnify us against these potential liabilities, nor
do we have insurance to cover such liabilities.
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Employees
As of March 17, 2000, we had 19 employees, including 14 full-time and 5
part-time employees. In addition, we had 8 full-time consultants. None of our
employees are covered by a collective bargaining agreement. We believe that our
relations with our employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
United Leisure maintains its principal executive offices in approximately
6,000 square feet of leased office space in Los Angeles under a lease with a
term that expires in January 2004. The lease was entered into with 1990
Westwood Boulevard, Inc. which is owned 65% by Harry Shuster, the former
Chairman of the Board, President, Chief Executive Officer, Chief Financial
Officer and a current principal stockholder of United Leisure. United Leisure
believes that the rent and other terms of the lease are no more favorable to the
lessor than could have been obtained in a similar building in the same area from
an unrelated lessor. See Item 12, "Certain Relationships and Related
Transactions."
United Leisure believes that its existing leased properties are adequate
for its current needs. United Leisure also believes that all of the properties
are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
In June 1999, we were sued by Hyperlock Technologies, Inc. In the United
States District Court for the Northern District of Illinois, Eastern Division.
Hyperlock alleges that we have infringed United States Patent No. 5,892,825
entitled "Method of Secure Server Control of Local Media via a Trigger Through a
Netword for Instant Local Access of Encrypted Data on Local Media." In October
1999, Hyperlock amended its complaint to allege the infringement of an
additional patent. Hyperlock is seeking an injunction against us and
unspecified damages. Hyperlock also seeks treble damages, court costs and
reasonable attorneys' fees and other relief that the court deems just and
proper. In February 2000, we filed an action in California alleging that
certain Hyperlock products infringe our Patent No. 5,996,000. Also in February
2000, Hyperlock filed a declaratory judgment action in Illinois alleging non-
infringement, invalidity and unenforceability of our patent. Hyperlock also
seeks to have the California case reassigned to thejudge who is presiding over
the Illinois case. We have filed a motion to oppose the reassignment. Based on
a review of Hyperlock's patent, we believe that Hyperlock's suit is without
merit. We do not believe that we have committed any acts of infringement and we
intend to vigorously defend this suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the Over the Counter Bulletin Board (the "OTC
Bulletin Board") under the symbol "UTDL." The common stock was traded on the
Nasdaq SmallCap Market from November 1994 through December 1, 1998, when it was
delisted for failure to meet the minimum bid requirements. The following table
sets forth the high and low bid prices of the common stock for the quarters
indicated as quoted on the OTC Bulletin Board. On March 1, 2000 we submitted an
application to The Nasdaq Stock Market for listing on The Nasdaq National
Market. Although we believe that we currently meet all the criteria for listing
on the Nasdaq National Market, our application may be denied. In addition, even
if we qualify for listing now, we could be delisted in the future if we fail to
meet the requirements for continued listing. This could result in our being
listed on the Nasdaq SmallCap Market or OTC Bulletin Board.
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1998 1999
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High Low High Low
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First Quarter $ .375 $ .25 $1.9062 $ .2188
Second Quarter .25 .1562 4.875 1.375
Third Quarter .3125 .1875 3.375 1.4688
Fourth Quarter .25 .1562 3.2812 1.25
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The above quotations represent prices between dealers without adjustments for
retail markups, markdowns or commissions and may not represent actual
transactions.
As of March 17, 2000, there were approximately 2,365 holders of record of
United Leisure common stock.
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings to finance our
operations and fund the growth of our business. Any payment of future dividends
will be at the discretion of the Board of Directors of United Leisure and will
depend upon, among other things, our earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions in respect to the
payment of dividends and other factors that our Board of Directors deems
relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Fiscal Year Ended December 31, 1999 Compared to Fiscal Year Ended December
31, 1998
Net Revenues. For the fiscal year ended December 31, 1999, we had revenues
of $1,377,770 compared to revenues of $2,443,601 for the fiscal year ended
December 31, 1998, a decrease of $1,065,831 or approximately 44%. The decrease
in revenues for fiscal 1999 compared to fiscal 1998 is primarily due to reduced
revenues from our children's recreational activities.
Operating Expenses. Total costs and expenses increased to $3,087,736 for
the fiscal year ended December 31, 1999 from $2,526,007 for the fiscal year
ended December 31, 1998, an increase of $561,729 or approximately 22%. The
increase is mainly due to increases associated with United Internet
Technologies, including salaries and consulting fees in connection with
developing and promoting our technology. This increase was partially offset by
decreased expenses for personnel at our children's recreational facilities.
Selling, general and administrative expenses were $2,227,079 for the year ended
December 31, 1999 compared to $1,133,405 for the year ended December 31, 1998,
an increase of $895,674 or approximately 67%. Depreciation and amortization for
the year ended December 31, 1999 was $128,019 compared to $171,623 for the year
ended December 31, 1998, a decrease of $43,604 or approximately 25%.
For the year ended December 31, 1999, we had a net loss of $4,181,747 or
$(0.27) per share, compared with a net loss of $514,839 or $(0.04) per share for
the year ended December 31, 1998. The net loss for the year ended December 31,
1999 is primarily attributable to an increase in expenses in connection with our
Internet business, partially offset by the sale of real estate holdings.
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Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended
December 31, 1997
Net Revenues. Total revenues for the fiscal year ended December 31, 1998,
were $2,443,601 compared to revenues of $2,899,141 in the fiscal year ended
December 31, 1997, a decrease of $445,540 or approximately 15.4%. The decrease
in revenues is primarily due to reduced revenues from our children's
recreational activities.
Revenues from children's activities decreased to $2,032,784 for the fiscal
year ended December 31, 1998 from $2,802,342 for the fiscal year ended December
31, 1997, a decrease of $769,558 or approximately 27.4%. This was due primarily
to decreased attendance at our children's facilities partially offset by
revenues from the licensing of our proprietary Internet technology of $410,817.
Operating expenses. Total cost and expenses, excluding impairment losses,
decreased to $4,029,035 for the fiscal year ended December 31, 1998 from
$5,825,624 for the fiscal year ended December 31, 1997, a decrease of 1,796,058
or approximately 30.8%. This decrease was due primarily to decreases in
occupancy expenses and selling, general and administrative expenses associated
with terminating our ground lease operations in February 1997. In addition,
depreciation and amortization for the fiscal year ended December 31, 1998 was
$171,623 for the fiscal year ended December 31, 1998 compared to $747,282 for
the fiscal year ended December 31, 1997, a decrease of 575,659 or approximately
77%. This decrease was the result of an impairment loss of $3,862,554 taken in
the fiscal year ended December 31, 1997.
For the fiscal year ended December 31, 1998, we had net loss of $514,839 or
($0.04) per share compared to $7,313,545 or ($0.59) per share for the fiscal
year ended December 31, 1997. The net loss in 1997 was primarily attributable to
the impairment losses in the amount of $3,862,554 related to our Planet Kids
operations and legal expenses in connection with litigation. In addition, we
received only two months of revenues from our ground lease prior to its
expiration in February 1997.
We incurred legal expenses of $603,183 in the fiscal year ended December
31, 1998 compared to $716,291 in the fiscal year ended December 31, 1997. In
addition, we wrote down $1,464,262 of various investments and equity in net
losses of investees of $475,881 in the fiscal year ended December 31, 1998. This
was offset by an extraordinary gain of $4,043,020 as settlement in connection
with certain litigation.
Liquidity and Capital Resources
We have experienced operating losses in recent years. For the year ended
December 31, 1999, we had cash and cash equivalents of $1,198,059 and an
accumulated deficit of $24,620,392.
Our future capital requirements will depend on various factors including:
1. The number of applications using our technology and solutions that we
decide to develop;
2. United Internet Technologies' need to hire additional technical and
marketing personnel; and
3. The length of time that it takes us to restructure and dispose of our
remaining children's recreational facilities and the manner of
disposition.
Effective at the close of business on December 31, 1998, our common
stock was delisted from The Nasdaq Stock Market because it did not meet the
minimum bid requirement for continued listing on the Nasdaq SmallCap Market. Our
common stock is now listed on the OTC Bulletin Board which may make it more
difficult for us to offer and sell our securities to prospective investors. In
March 2000, we submitted an application to The Nasdaq Stock Market for listing
on the Nasdaq National Market. See "Market for Registrant's Common Equity and
Related Stockholder Matters."
If we are unable to raise additional funds, when needed, through the
private placement of our securities, we may seek financing from affiliated or
unaffiliated third parties. Such financing, however, may not be available when
and if
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it is needed, or if available, it may not be available on acceptable terms. If
we are unable to sell our securities or obtain financing to meet our working
capital needs and to repay indebtedness as it becomes due, we may have to
consider such alternatives as selling or pledging portions of our assets, among
other possibilities, in order to meet such obligations.
As of December 31, 1999, investments in and loans to affiliated companies,
Grand Havana and HEP II, L.P., totaled approximately $981,000 or approximately
27% of total assets. In addition, at December 31, 1999, we had a net receivable
from Harry Shuster, former President and CEO of United Leisure, of approximately
$81,027. See "Certain Relationships and Related Transactions."
Although we believe that our current cash and income investments, repayment
of amounts previously advanced by us to Grand Havana, proceeds from the sale of
our property in El Cajon, California and Las Vegas and the proceeds from our
private placement in the first quarter of 2000 will provide us with sufficient
funds to meet our anticipated working capital and capital expenditures needs for
at least the next 12 months, this may not be the case.
We intend to expand the development and marketing capabilities for our
technology. While the continued development of some applications can be funded
from internal sources, more aggressive development and marketing may require
additional financing from either public or private sources. To accomplish this,
we may raise additional capital by borrowing money or through a public or
private sale of debt or equity securities. We may not be able to acquire
additional financing on favorable terms, or at all.
Recent Developments
In January 2000 we completed a private placement of our securities in which
we issued an aggregate of 2,240,000 shares of common stock to six investors for
a total of $5.6 million. We intend to use the proceeds for the operations of our
wholly owned subsidiary, United Internet Technologies.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplemental data required by this Item 7
follow the index to financial statements appearing at Item 14 of this Form 10-
KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors and Executive Officers
Set forth in the table below are the names, ages and positions of the
current directors and executive officers of United Leisure. Ages are shown as
of December 31, 1999. Directors hold office until the next annual meeting of
stockholders and until their successors are elected and qualified. Executive
officers are elected by and serve at the discretion of the United Leisure Board.
None of the executive officers has any family relationship to any director or
any other executive officer of United Leisure.
<TABLE>
<CAPTION>
Positions Currently Held
Name Age With United Leisure Director Since
- ---- --- -------------------------------------------- --------------
<S> <C> <C> <C>
Brian Shuster 41 Chief Executive Officer, President, 1996
Chairman of the Board and Director
Julie Lepere 39 Secretary - -
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Alvin Cassell 85 Director 1969
J. Brooke Johnston, Jr. 59 Director 1996
Alvin Alexander 70 Director 1975
</TABLE>
Set forth below is a brief description of the business experience for the
previous five years of all current directors and executive officers of United
Leisure.
Brian Shuster has served as a director of United Leisure since May 1996
and as Chief Executive Officer and President of United Leisure since May 1999.
From March 1997 to May 1999, he also served as Executive Vice President of
United Leisure. From July 1998 through August 1999, Mr. Shuster also served as
a director of Genisys Reservation Systems, Inc. From 1993 through 1995, Mr.
Shuster served as President of Beverly Hills Producers Group, an independent
motion picture production company.
Julie Lepere has served as Secretary of United Leisure since May 1999.
Prior to that, since 1984, Ms. Lepere served as assistant to our Vice President
and Controller. In addition, Ms. Lepere served as administration director for
our children's recreational facilities from 1984 through 1988.
Alvin Cassell has served as a director of United Leisure since March 1969.
Mr. Cassell is of counsel to the law firm of Broad and Cassell, Miami, Florida.
He has been engaged in a general civil law practice for more than 60 years. Mr.
Cassell is also a director of Grand Havana Enterprises, Inc., one of our
affiliates.
J. Brooke Johnston, Jr. has served as a director of United Leisure since
May 1996. Mr. Johnston 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, 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 Grand Havana Enterprises, Inc.
Alvin Alexander has served as a director of United Leisure since 1975. Mr.
Alexander has served as President of Skip Alexander Productions, which develops
games shows and other television properties, for over five years.
Significant Employees
The following individuals are significant employees of our subsidiary,
United Internet Technologies:
Jay Dunn, 34, has served as Creative Director of Motion Graphics
Programming since October 1998. From 1997 through October 1998, Mr. Dunn
designed motion graphic videos for the "Eyes of the Nation" project for the
Library of Congress. From 1992 through 1997, he was a freelance computer motion
graphics consultant. Mr. Dunn studied computer arts and sciences at Ohio State
University. From 1983 through 1989, Mr. Dunn served in the United States Navy,
performing the duties of electronics technician and nuclear reactor operation.
Robert Eady, 27, has served as Senior Programming Consultant since
September 1997, supervising the creation and implementation of applications of
our technology and providing other software design and operations services.
From February 1996 through August 1997, he served as Manager of Internet
Product/Service Development for Positive Developments Limited, an Internet and
commercial software firm. From May 1994 through December 1995, he was a
Computer Services Administrator in the Planning & New Programs Department of
Cognos Corporation. From September 1993 through March 1994, he was the
principal consultant for Eady & Associates, providing computer communications
and software consulting services.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our 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 ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and beneficial owners of more
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<PAGE>
than 10% of our Common Stock are required by SEC regulations to furnish us with
copies of all Section 16(a) forms that they file. Based solely on review of the
copies of such forms furnished to us, or written representations that no reports
on Form 5 were required, we believe that for the period through December 31,
1999, all officers, directors and greater-than-10% beneficial owners complied
with all Section 16(a) filing requirements applicable to them.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth all compensation received for services
rendered to United Leisure in all capacities for the three fiscal years ended
December 31, 1999 by our Chief Executive Officer during fiscal 1999 and the most
highly compensated executive officers at the end of fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term Compensation
Compensation ----------------------
------------
Name and Principal Positions Year Salary Securities and Underlying Options
- ---------------------------- ---- ------ ---------------------------------
<S> <C> <C> <C>
Harry Shuster(1) 1999 $330,703 2,606,950(2)
Chairman of the Board, 1998 300,663
President, Chief Executive Officer and Chief 1997 273,330
Financial Officer
Brian Shuster(3) 1999 $240,000 300,000
Chairman of the Board, 1998 - -
President, Chief Executive Officer, Chief 1997 - -
Financial Officer and
Executive Vice President
- ------------
</TABLE>
(1) Effective May 24, 1999, Harry Shuster resigned as a director and from
all positions as an officer.
(2) Of this amount, an option to purchase 2,100,000 shares was granted to
Harry Shuster in connection with a guaranty by Harry Shuster to
collateralize certain of our corporate debt. See "Certain
Relationships and Related Transactions."
(3) Effective May 24, 1999, Brian Shuster was appointed to serve as
Chairman of the Board, Chief Executive Officer, President and Chief
Financial Officer.
Directors receive no cash compensation for their services to the Company as
directors, but are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors.
Stock Option Grants
This table shows information regarding stock option grants made to each of
our Named Executive Officers who received options during the fiscal year ended
December 31, 1999. All of the option were issued at not less than the fair
market value of our common stock on the date of the grant and are 100% vested.
OPTION/SAR GRANTS IN LAST FISCAL YEARS
<TABLE>
<CAPTION>
Percent of Total
Number of Options/SARS
Securities Granted to
UnderlyingOptions/ Employees in Fiscal Exercise Price
Name SARs Granted (3) Year ($/sh) Expiration
==================================================================================================================
<S> <C> <C> <C> <C>
Brian Shuster 100,000 26.7% $.23 January 1, 2004
200,000 51.7% $.35 February 1, 2004
</TABLE>
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This table shows information regarding unexercised options held by our
Named Executive Officers. No options were exercised during the fiscal year ended
December 31, 1999.
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Options at Value of Unexercised In The Money Options
December 31, 1999 at December 31, 1999(1)
Name Exercisable Unexercisable Exercisable Unexercisable
=============================================================================================================
<S> <C> <C> <C> <C>
Brian Shuster 650,000 -- $1,919,000 --
- ------------
</TABLE>
(1) Represents the difference between market price or our common stock and
the respective exercise prices of the options at December 31, 1999.
Actual values which may be realized, if any, upon any exercise of these
options will be based on the market price of our common stock at the time
of any exercise and are therefore dependent upon future performance of
our common stock.
Consulting and Employment Agreements
United Internet Technologies and Brian Shuster entered into a five-year
employment agreement dated as of January 1, 1999. Under this employment
agreement, Mr. Shuster is employed as the President of United Internet
Technologies at an initial base salary of $240,000 per year. United Internet
Technologies may offset up to $5,000 per month of Mr. Shuster's base salary from
payment he receives under his oral consulting arrangement. See "Certain
Relationships and Related Transactions." The employment agreement provides for
annual 10% increases in Mr. Shuster's base salary. The employment agreement is
automatically extended for one-year unless either party provides written notice
of termination at least 60 days before the end of the first year of the current
five-year period. The employment agreement also provides that any inventions
developed by Mr. Shuster during his employment by United Internet Technologies
that relate to the business of United Internet Technologies , will remain United
Internet Technologies' property. The employment agreement also contains a
confidentiality provision. Mr. Shuster is permitted to engage in outside
business activities to the extent that these obligations do not interfere with
his duties to United Internet Technologies.
Prior to becoming President and Chief Executive Officer of our company in
May 1999, Brian Shuster provided certain consulting services to us and received
$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.
Amounts received by Brian Shuster under this arrangement up to $5,000 per month
are credited against payment made to him under his employment agreement with
United Internet Technologies.
We entered into a consulting agreement with Harry Shuster in June 1994.
Under this agreement, Harry Shuster served as President, Chief Executive Officer
and a director. In 1998, we accrued base compensation to Mr. Shuster of
$300,663. In June 1999, the consulting agreement was amended to provide that
Mr. Shuster will be paid $5,000 per month and the balance of his compensation
will be applied to offset amounts that he owes to United Leisure. The
agreement terminates upon Mr. Shuster's death or breach of the agreement.
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<PAGE>
We entered into a consulting agreement with C4 Design, a division of
1150250 Inc., in September 1998. Under this consulting agreement, C2 has made
the services of Robert Eady available to United Internet Technologies for a
five-year period, beginning September 1, 1998. Mr. Eady's responsibilities
include planning, implementing and configuring real-time interactive software
andhardware systems for Internet applications and other functions associated
with the development of applications of our technology. Mr. Eady receives
$75,000 per year for the first year of the consulting agreement, with annual
increases of 10% effective on each anniversary date of the consulting agreement.
The consulting agreement also provides that any inventions developed by
Robert Eady during his work for United Internet Technologies which relate to
the business of United Internet Technologies, will remain United Internet
Technologies' property. The consulting agreement also contains a
confidentiality provision.
Stock Options
On December 31, 1999, there were outstanding presently exercisable non-
qualified stock options to purchase a total of 900,000 shares of our common
stock held by our officers and directors. Of this amount, 650,000 were held by
Brian Shuster, our Chairman of the Board, President and Chief Executive Officer,
and the balance were held by the other directors of our company, at option
prices ranging from $.25 to $1.75 per share. See "Security Ownership of Certain
Beneficial Owners and Management."
All non-qualified stock options that we have issued to our directors and
executive officers are in substantially the same form. All options have a term
which expires on December 31, 2000, 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 our common stock
covered by the option. The option price is the fair market value of our common
stock as of the date of grant. Each option terminates at the end of 90 days
following termination of association with or employment by us for any reason
other than death, or at the end of one year in the event termination is caused
by death.
In addition to the non-qualified stock options held by our directors and
executive officers on December 31, 1999, there were outstanding non-qualified
options to purchase a total of 560,000 shares of our common stock held by third
parties. All of these non-qualified options are in substantially the same form
as those issued to our directors and executive officers, except that generally
they are not terminable until they expire. These options have exercise prices
ranging from $.23 to $1.75 and expire from December 31, 2002 through
September 29, 2003.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of United Leisure common stock as of December 31, 1999, (a) by each
person who is known by United Leisure to own beneficially more than 5% of the
its common stock, (b) by each of United Leisure's directors and (c) by all
officers and directors of United Leisure as a group:
<TABLE>
<CAPTION>
Percentage
Name and Address Number of Shares Ownership
of Beneficial Owner(1) Beneficially Owned (2)(3) of Class(3)
- ------------------------ -------------------------- -----------
<S> <C> <C>
Brian Shuster 1,050,300 (4) 5.4%
Alvin Cassell 260,100 (5) *
J. Brooke Johnston, Jr. 105,000 (6) *
Alvin Alexander 10,000 *
Harry Shuster 5,879,933 (7) *
Klaus Helbert (8) 1,861,000 (9) 9.9%
Bural, Inc. (10) 1,375,000 (11) 7.3%
Wolfgang Biehler (12) 1,299,000 (13) 6.9%
Rainer Umbach (14) 1,299,000 (13) 6.9%
All officers and directors 1,353,121 6.9%
as a group (4 people)
- ------------
</TABLE>
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<PAGE>
*1ess than 1%
(1) Each person's address is c/o United Leisure, 1990 Westwood Boulevard, Los
Angeles, California 90025, unless otherwise noted.
(2) Unless otherwise indicated, United Leisure believes that all persons
named in the table have sole voting and investment power with respect to
the shares of common stock beneficially owned by them.
(3) A person is deemed to be the beneficial owner of Common stock that can be
acquired by such person within 60 days of the date hereof upon the
exercise of warrants or stock options. Except as otherwise specified,
each beneficial owner's percentage ownership is determined by assuming
that warrants and stock options that are held by such person (but not
those held by any other person) and that are exercisable within 60 days
from the date hereof, have been exercised.
(4) Includes 80,000 shares held by Brian Shuster as trustee of each of
Bennett Shuster Trust, Bentley Shuster Trust and Blake Shuster Trust and
300 shares held by Nita Shuster and Brian Shuster. Also includes an
option to purchase 650,000 shares of common stock.
(5) Includes 110,100 shares of common stock held by Koorn N.V., a Netherlands
Antilles corporation of which Mr. Cassell is a managing director and of
which he may deemed to be the beneficial owner. Also includes options to
purchase 150,000 shares of common stock. See footnote 7.
(6) Includes an option to purchase 100,000 shares of common held by a law
firm in which Mr. Johnston was a partner, Mr. Johnston disclaims
beneficial ownership as to 50,000 of these shares.
(7) Includes 111,000 shares of common stock held by Koorn N.V., all of whose
capital stock is owned by Mr. Shuster. Also includes 125,000 shares of
common stock held 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 Mr. Shuster disclaims beneficial ownership. Also includes
options to purchase 2,606,950 shares of our common stock and 3,037,583
shares of our common stock owned directly by Mr. Shuster. Also does not
include an aggregate of 480,000 shares of our common stock owned by
trusts of which Mr. Shuster's adult children are the beneficial owners.
Until May 24, 1999, Mr. Shuster served as Chairman of the Board,
President, Chief Executive Officer and a director of United Leisure.
(8) Mr. Helbert's address is Postfach 3012, 6519 Wiesbaden, Germany.
(9) Includes warrants to purchase 112,000 shares of common stock.
(10) Bural, Inc.'s address is c/o Dr. Hans Urlich Stucki, Talacker 50, 8001
Zurich, Switzerland.
(11) Includes warrants to purchase 200,000 shares of common stock.
(12) Mr. Biehler's address is Am Ohlendortum 31, 22149 Hamburg Germany.
(13) Includes warrants to purchase 475,000 shares of common stock.
(14) Mr. Umbach's address is Alter Landstr. 272, Hamburg 22391 Germany.
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<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with Harry Shuster. In prior years, Harry Shuster advanced
working capital to us at the prime rate plus 3%. These advances were secured by
our rights under various sublease arrangements in connection with our children's
recreation activities. In June 1995, Mr. Shuster converted advances in the
amount of $649,800, excluding accrued interest of $789,649, into equity, by
exercising options to purchase 755,550 shares of our common stock. Mr. Shuster
has deferred payment of certain of the interest due to him under this loan
arrangement and certain amounts due to him under his consulting agreement. We
have also advanced money to Mr. Shuster from time to time. At December 31, 1999,
we had a net receivable from Mr. Shuster of approximately $81,000.
From October 1, 1997 through May 31, 1999, we accrued rent, including
homeowner association dues, payable to Harry Shuster in the amount of $49,551,
for an apartment which he owns and which he and Brian Shuster use while in New
York City on company business. Since June 1, 1999, we have accrued rent and
homeowner association dues in the amount of $300 per day for each day of use by
Harry Shuster or Brian Shuster. We believe that this rent is at least as
favorable as the cost of comparable housing over the significant period of time
that Messrs. Shuster have been in New York City on business.
Lease of Office Premises. On January 1, 1999, we entered into a five-year
lease with 1990 Westwood Boulevard, Inc. This agreement was amended on May 1,
1999 and covers approximately 6,000 square feet of office space for our
principal executive offices. The lease provides for rent of $10,500 per month.
1990 Westwood Boulevard, Inc. is presently owned 65% by Harry Shuster, our
former Chairman of the Board, President, Chief Executive Officer, Chief
Financial Officer, and a principal stockholder of United Leisure. We believe
that the rent and other terms of the lease are no more favorable to the lessor
than could have been obtained in a similar building in the same area from an
unrelated lessor.
Transactions With Grand Havana. On September 30, 1998, in replacement of a
previous loan to Grand Havana, United Leisure agreed to make a new installment
loan to Grand Havana of up to $1,250,000, for which Grand Havana executed and
delivered a secured promissory note. The promissory note is secured by a first
lien on the assets of Grand Havana.
The initial loan advance under the promissory note was $607,154, which
represents the principal amount due under the previous note of $536,000,
together with accrued interest of $71,154. The promissory note was due and
payable on March 31, 1999, which due date was first extended to April 30, 2000.
As of December 31, 1999, we held 966,666 shares of Grand Havana's common
stock.
Transactions With HEP II, L.P. In April 1996, we acquired 50% of the
limited partnership interests in HEP II, L.P. The general partner of HEP II is
United Film Distributors, Inc. of which Harry Shuster, the former Chairman of
the Board, President, Chief Executive Officer, Chief Financial Officer, and
director of United Leisure is the Chairman of the Board. Harry Shuster's son,
Brian Shuster, is the President of United Film Distributor. At December 31,
1999, we had a $100,000 investment in HEP II, L.P.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
--------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Asset Purchase Agreement dated June 30, 1998 by and among United Leisure
Interactive, Inc., Net Cruise Interactive, Inc., Genysis Reservation Systems,
Inc. and United Leisure Corporation (incorporated by reference to Exhibit 2.1 of
United Leisure's Current Report on From 8-K dated July 23, 1998, as amended by
United Leisure's Amendment No. 1 to Current Report on Form 8-K dated November 4,
1998 (the "Form 8-K/A")).
2.2 Agreement date October 27, 1998 by and among United Internet Technologies, Inc.
Genisys Reservation Systems, Inc. Warren D. Bagatelle, Loeb Holding Corporation,
Loeb Partners Group. HSB Capital, David W. Sass, Mark A Kenny, Hohn H. Wasko,
Hoan E. Wasko, Lawrence E. Burk and S. Charels Tubak (incorporated by reference
to Exhibit 2.2 of the Form 8-K/A).
3.1 Restated Certificate of Incorporation of United Leisure (incorporated by
reference to Exhibit 3.1 of United Leisure's Form SB-2 (File No. 33-81074 (the
"SB-2")).
3.2 Bylaws of United Leisure (incorporated by reference to Exhibit 3.2 of the SB-2).
4.1 Warrant Agreement, dated November 18, 1994 between United Leisure and OTR, Inc.
(incorporated by reference to Exhibit 4.1 of the SB-2).
4.2 Form of Warrant to Purchase Common Stock in connection with 12% Promissory Note
unit private placement and Bankruptcy Court deposit (incorporated by reference
to Exhibit 4.3 of the SB-2).
10.1 Stock Option Agreement dated December 7, 1990, between United Leisure and
Haskell Slaughter Young & Johnston, Professional Association, (incorporated by
reference to Exhibit 10.5 of the SB-2).
10.2 Stock Option Agreement dated December 7, 1990, between United Leisure and Alvin
Cassel (incorporated by reference to Exhibit 10.6 of the SB-2.)
10.3 Stock Option Agreement dated April 22, 1988, between United Leisure and Alvin
Cassel as extended by Extension of Option Agreement, dated April 20, 1993,
between United Leisure and Alvin Cassel. (incorporated by reference to Exhibit
10.10 of the SB-2).
10.4 Stock Option Agreement dated October 7, 1988, between United Leisure and Harry
Shuster as extended by Extension of Option Agreement, dated April 20, 1993
between United Leisure and Harry Shuster (incorporated by reference to Exhibit
10.12 of the SB-2).
10.5 Stock Option Agreement dated November 17, 1988, between United Leisure and Harry
Shuster as extended by Extension of Option Agreement, dated April 20, 1993
between United Leisure and Harry Shuster (incorporated by reference to Exhibit
10.13 of the SB-2).
10.6 Stock Option Agreement dated December 5, 1988, between United Leisure and Harry
Shuster as extended by Extension of Option Agreement, dated April 20, 1993
between United Leisure and Harry Shuster (incorporated by reference to Exhibit
10.14 of the SB-2).
10.7 Stock Option Agreement dated July 24, 1987, between United Leisure and Harry
Shuster as extended by Extension of Option Agreement, dated April 20, 1993
between United Leisure and Harry Shuster (incorporated by reference to Exhibit
10.16 of the SB-2).
10.8 Option Agreement dated as of April 22, 1988, between United Leisure and Haskell
Slaughter Young & Johnston covering United Leisure, Extension of Option
Agreement, dated April 20, 1993 between United Leisure and Haskell Slaughter
Young & Johnston, Professional Association (incorporated by reference to Exhibit
10.17 of the SB-2).
10.9 Promissory Note dated June 1, 1985, by Lion County Safari Inc. in the principal
amount of $973,927 drawn to the order of Harry Shuster (incorporated by
reference to Exhibit 10.23 of the SB-2).
10.10 Stock Option Agreement, dated February 22, 1989, between United Leisure and
Tactron Liquidating Trust (incorporated by reference to Exhibit 10.27 of the
SB-2).
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.11 Stock Option Agreement, dated February 22, 1989, between United Leisure and
Lindsey & Associates, Inc. (incorporated by reference to Exhibit 10.28 of the
SB-2).
10.12 Form of Indemnity Agreement entered into by United Leisure with each of its
directors (incorporated by reference to Exhibit 10.35 of the SB-2).
10.13 Stock Option Agreement, dated September 23, 1993, between United Leisure and
Alvin Cassel (incorporated by reference to Exhibit 10.41 of the SB-2).
10.14 Standard Retail/Office Complex Lease dated October 12, 1994, between PSA
Properties and Planet Kids, Inc., (incorporated by reference to Exhibit 10.32 of
United Leisure's Amendment No. I to Annual Report on Form 10K-SB for the fiscal
year ended December 31, 1995 (the "1995 10-KSB")).
10.15 Commercial Lease among Eastrich Multiple Investor Fund, L.P., Midland Loan
Services, L.P. et al., and Planet Kids, Inc., effective August 9, 1995 and Rider
thereto (incorporated by reference to Exhibit 10.33 of the 1995 10-KSB).
10.16 Lease dated June 29, 1995, between Magnolia Square and Planet Kids, Inc. and
Addendum thereto (incorporated by reference to Exhibit 10.34 of the 1995 10-KSB).
10.17 Territory Rights Agreement between Planet Kids, Inc., and PT Planet Kidsindo
(incorporated by reference to Exhibit 10.35 of the 1995 10-KSB).
10.18 Financing Agreement dated as of February 12, 1997, between United Leisure and
Grand Havana Restaurants, Inc. (incorporated by reference to Exhibit 10.36 of
United Leisure's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996 (the "1996 10-KSB")).
10.19 Financing Agreement dated as of September 10, 1996, between United Leisure and
Grand Havana Enterprises, Inc. (incorporated by reference to Exhibit 10.37 the
1996 10-KSB).
10.20 Option Agreement dated as of September 22, 1998, between United Leisure and
Brian Shuster (incorporated by reference to Exhibit 10.45 of the United
Leisure's Quarterly Report on Form 10-QSB for the quarter ended September 30,
1998 (the "September 30, 1998 10-QSB")).
10.21 Option Agreement dated as of September 30, 1998, by and between United Leisure
and Brian Shuster (incorporated by reference to Exhibit 10.46 of the September
30, 1998 10-QSB).
10.22 Option Agreement dated as of January 4, 1999 between United Leisure and Brian
Shuster (incorporated by reference to Exhibit 10.49 of United Leisure's
Quarterly Report on Form 10-QSB for the period ended June 30, 1999 (the "June
30, 1999 10-QSB")).
10.23 Option Agreement dated as of January 4, 1999, between United Leisure and Alvin
Cassel (incorporated by reference to Exhibit 10.50 of the June 30, 1999 10-QSB).
10.24 Option Agreement dated as of January 4, 1999 between United Leisure and J.
Brooke Johnston (incorporated by reference to Exhibit 10.51 of the June 30, 1999
10-QSB).
10.25 Option Agreement dated as of February 1, 1999, between United Leisure and Brian
Shuster (incorporated by reference to Exhibit 10.52 of the June 30, 1999 10-QSB).
10.26 Employment Agreement dated as of January 1, 1999 between United Leisure and
Brian Shuster, together with supplemental agreement between the Company, United
Internet Technologies, Inc. and Brian Shuster (incorporated by reference to
Exhibit 10.53 of the June 30, 1999 10-QSB).
10.27 Consulting Agreement dated as of January 1, 1999, between United Internet
Technologies and Harry Shuster (incorporated by reference to Exhibit 10.54 of
the June 30, 1999 10-QSB).
10.28 Agreement dated as of July 21, 1999 between United Leisure and Media Group, Inc.
(incorporated by reference to Exhibit 10.55 of the June 30, 1999 10-QSB).
10.29 Purchase Agreement and Escrow Instructions dated as of June 10, 1999, between
United Leisure and Shih Ching Chiang, as amended on August 7, 1999
(incorporated by reference to Exhibit 10.1 of United Leisure's Current Report on
Form 8-K dated August 23, 1999).
</TABLE>
-22-
<PAGE>
<TABLE>
<S> <C>
10.30 Total Access Software Distribution Agreement between Earthlink Network, Inc.
and United Internet Technologies, Inc. together with related letter agreement
dated July 21, 1999 (incorporated by reference to Exhibit 10.42 of United Leisure's
Registration Statement on Form SB-2 (File no. 333-86335) filed with the Commission
on September 1, 1999 (the "1999 SB-2")).
10.31+ Agreement dated as of June 1, 1999 between United Leisure Corporation and Harry
Shuster, amending Amended and Restated Consulting Agreement dated as of June 1,
1994 (incorporated by reference to Exhibit 10.33 of the 1999 SB-2).
10.32* Software License and Distribution Agreement dated June 15, 1999 between United
Internet Technologies and AT&T Corp.
10.33* Letter Agreement dated November 19, 1999 between United Internet Technologies
and Teen People Magazine.
10.34* Distribution Agreement dated February 2, 2000 between United Internet
Technologies and Liquid Audio, Inc.
21.1* Subsidiaries of United Leisure
23.1* Consent of Hollander, Lumer & Co., LLP
27.1* Financial Data Schedule
</TABLE>
* Filed herewith.
+ Management contract or compensatory plan required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(b) Reports on Form 8-K.
-------------------
None.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1943, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNITED LEISURE CORPORATION
By:/s/BRIAN SHUSTER
----------------
Brian Shuster
President, Chief Executive Officer and Director
Date: March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ BRIAN SHUSTER Chairman of the Board, President, Chief Executive Officer
----------------------------------------
Brian Shuster Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ ALVIN CASSEL
-----------------------------------------
Alvin Cassel Director
/s/ J. BROOKE JOHNSTON, JR.
-----------------------------------------
J. Brooke Johnston, Jr. Director
/s/ ALVIN ALEXANDER
-----------------------------------------
Alvin Alexander Director
</TABLE>
-24-
<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, 1999 and 1998 F-2
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the years ended December 31, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 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, 1999 and 1998, 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, 1999 and 1998,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
March 17, 2000
F-1
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,998,059 $ 799,369
Receivables 88,540 53,153
Deferred production cost 115,027 -
Prepaid expenses and other current assets 75,208 78,082
------------ ------------
TOTAL CURRENT ASSETS 2,276,834 930,604
------------ ------------
PROPERTY AND EQUIPMENT, NET 181,765 384,984
------------ ------------
INVESTMENTS
Investment in United Hotel at equity - related party - 3,432,452
Investment in HEP II at equity - related party 100,000 700,000
Investment in Genisys at equity - related party - 210,133
Investment in Grand Havana at fair value - related party 101,500 38,667
------------ ------------
TOTAL INVESTMENTS 201,500 4,381,252
------------ ------------
OTHER ASSETS
Loan receivable from Grand Havana - related party 779,680 619,298
Due from former officer 81,027 332,627
Assets held for sale - 1,663,857
Deposits and other assets 61,689 78,929
------------ ------------
922,396 2,694,711
------------ ------------
$ 3,582,495 $ 8,391,551
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ - $ 1,900,000
Accrued interest - 406,808
Accounts payable and accrued expenses 751,976 478,785
Due to related parties 95,387 107,535
Deferred revenues 235,923 28,060
Deposits and other 2,612 5,652
------------ ------------
TOTAL CURRENT LIABILITIES 1,085,898 2,926,840
LONG-TERM DEBT - 842,000
COMMON STOCK SUBJECT TO REPURCHASE - 150,001 shares - 78,000
STOCKHOLDERS' EQUITY
Preferred stock, $100 par value; authorized - 100,000 shares;
issued and outstanding - none - -
Common stock, $.01 par value; authorized - 30,000,000 shares;
issued and outstanding - 16,146,868 shares in 1999
and 13,918,849 shares in 1998 161,468 139,188
Additional paid-in capital 26,892,688 24,844,168
Accumulated deficit (24,620,392) (20,438,645)
Accumulated other comprehensive income - unrealized gain on investment 62,833 -
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,496,597 4,544,711
------------ ------------
$ 3,582,495 $ 8,391,551
============ ============
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUE
Licensing fees $ 240,000 $ 410,817
Children's recreational activities 1,137,770 2,032,784
------------ ------------
TOTAL REVENUE 1,377,770 2,443,601
------------ ------------
COSTS AND EXPENSES
Direct operating expenses 3,087,736 2,526,007
Selling, general and administrative expenses 2,227,079 1,331,405
Depreciation and amortization 128,019 171,623
------------ ------------
5,442,834 4,029,035
------------ ------------
LOSS BEFORE OTHER INCOME (EXPENSE) (4,065,064) (1,585,434)
OTHER INCOME (EXPENSE)
Litigation settlement (255,333) 4,043,020
Legal (costs) recoveries 12,544 (603,183)
Equity in net income (loss) of United Hotel (133,932) (226,348)
Equity in net loss of Genisys (210,133) (249,533)
Realized loss from write-down of investment in HEP II (600,000) (420,500)
Realized loss from write-down of investment in Grand Havana - (1,043,764)
Realized gain from investment in United Hotel 1,869,584 -
Interest income 178,516 158,916
Interest expense (422,049) (697,047)
Other, net (555,880) 109,034
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (116,683) 1,070,595
------------ ------------
NET LOSS (4,181,747) (514,839)
OTHER COMPREHENSIVE LOSS
Unrealized holding gain (loss) on securities arising during the period 62,833 (301,358)
Less: reclassification adjustment for loss realized in net loss - 1,043,764
------------ ------------
62,833 742,406
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (4,118,914) $ 227,567
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 15,558,608 13,502,182
============ ============
LOSS PER SHARE $ (0.27) $ (0.04)
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<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, 1998 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
---------- --------- ----------- ------------ ------------ -----------
Cashless warrants exercise 858,018 8,580 (8,580) -
Sale of common stock 750,000 7,500 1,492,500 1,500,000
Exercise of stock option 470,000 4,700 181,600 186,300
Fair value of options or warrants issued
Non-employees 306,500 306,500
Expiration of put option 150,001 1,500 76,500 78,000
Unrealized gain on investment 62,833
62,833
Net loss
(4,181,747) (4,181,747)
Balance, December 31, 1999
---------- --------- ----------- ------------ ------------ -----------
16,146,868 $ 161,468 $26,892,688 $(24,620,392) $ 62,833 $ 2,496,597
========== ========= =========== ============ ============ ===========
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,181,747) $ (514,839)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 128,019 171,623
Loss on termination of lease 45,333 -
Issuance of common stock for services - 73,300
Fair value of options granted to non-employees 306,500 45,000
Write-down of investment in Grand Havana - 1,043,764
Write-down of investment in HEP II 600,000 420,500
Realized gain on investment in United Hotel (1,869,584) -
Loss on sale of assets 705,265 -
Licensing fees - (410,817)
Equity in net loss of United Hotel 133,932 226,348
Equity in net loss of Genisys 210,133 249,533
Accrual of interest income from related parties (85,382) (144,468)
Changes in operating assets and liabilities:
Receivables (35,387) (31,421)
Deferred production costs (115,027) -
Prepaid expenses and other current assets 2,874 (18,392)
Deposits and other assets 17,240 3,114
Accrued interest (406,808) 262,835
Accounts payable and accrued expenses 273,191 (764,281)
Due to related parties (12,148) 215,588
Deposits and other liabilities (3,040) (37,774)
Deferred revenues 207,863 (4,650)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (4,078,773) 784,963
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (99,341) (96,744)
Investment in United Hotel 5,168,104 (25,000)
Loans receivable from Grand Havana (75,000) 114,000
Advances to related party 251,600 (335,300)
Collections from disposition of assets held for sale and fixed assets 1,087,800 -
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 6,333,163 (343,044)
------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock $ 1,500,000 $ 229,680
Payment on notes payable (1,900,000) (25,000)
Payment on long term debt (842,000) -
Common stock issued for warrants and options exercised 186,300 -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (1,055,700) 204,680
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 1,198,690 646,599
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 799,369 152,770
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,998,059 $ 799,369
============ ============
CASH PAID FOR:
Interest $ 406,808 $ 121,975
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Cashless warrant excercise $ 8,580 $ -
Issuance common stock for services - 31,300
Fair value of options and warrrants to non-employees 306,500 45,000
Investment in Genisys for licensing fees - 410,817
Reclassification of property and equipment to assets held for sale - 1,663,857
Expiration of put option 78,000 -
Issuance 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
1. Summary of Significant Accounting Policies
Description of Business - Through its wholly owned subsidiary, United
Internet Technologies, Inc., the Company is in the business of developing and
licensing its Internet video technology for various applications ("Technology").
The Technology, which equips sites on the World Wide Web ("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.
The Company's other business consists of children's recreational activities
and investments in affiliated companies.
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
consists 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:
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
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
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.
Revenue Recognition - The Company is engaged as a provider of consultancy
services and as a licensor of its Technology. Generally, revenue is recognized
upon delivery of the Technology. For arrangements to deliver the Technology that
requires significant modification or customization, revenue is recognized on the
percentage-of-completion method.
Deferred Production Cost - All expenses incurred to modify and customize
its Technology are deferred and charged against revenue when earned.
Stock-Based Compensation -The Company has 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 -Basic Earning Per Share (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 - Components of comprehensive income (loss) for the
Company include net income (loss) and changes in the value of available-for-sale
securities.
Segment Information - 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.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information, as presented in
Note 3.
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.
Start-up Costs - Costs of start-up activities, including organization
costs, should be expensed as incurred.
Reclassifications - Certain 1998 amounts in direct operating expenses have
been reclassified to selling, general and administrative expenses to conform
with 1999 presentation.
F-8
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. Disclosure of Certain Significant Risks and Uncertainties
Limited Operating History- Through its wholly owned subsidiary, the
Company's primary business is developing and licensing proprietary interactive
Internet technology. This business started in 1998 and as such the Company is
subject to various risks and uncertainties frequently encountered by companies
in the early stage of development. Such risks and uncertainties include, but are
not limited to, its limited operating history, an evolving and unpredictable
developing Internet technology, and increasing number of competitors.
Possibly a Securities Law Violation - On February 10, 2000, the Company
filed a registration statement for the shares of common stock to be issued for
the exercising of warrants. According to their terms, the warrants became
exercisable on November 10, 1995, although under the warrant agreement the
Company was not obligated to deliver the common stock pursuant to an exercise
unless a registration statement was effective. Due to the fact that the price of
the Company common stock in the public market has, until January 14, 2000, been
below the exercise price of the warrants, such registration was delayed. The
Company has been advised by the Securities Exchange Commission ("SEC") that it
is its position that the registration statement should have been filed by
November 10, 1995 and by failing to do so the Company has been conducting an
unregistered offering (but not sale) of common stock in violation of Section 5
of Securities Act of 1933. That position could provide the basis for an action
against the Company by the SEC, possibly resulting in fines and other sanctions.
That position could also give rise to actions by the shareholders for violation
of Section 5, although because the Company has not yet issued common stock in
exercise of the warrants (and will not do so until a registration statement is
declared effective), it is impossible to determine what damages, if any, the
Company may be liable for.
3. Segment Information
The Company operates in two business segments: developing and licensing
Internet video technology and children's recreational activities. Children's
recreational activities consist of summer day camps and children's play-learning
centers known as Planet Kids.
Segment operating income (loss) is total segment revenue reduced by
operating expenses identifiable to with that business segment. Corporate
includes general corporate administrative costs. The Company evaluates
performance and allocates resources based on operating income. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. There are no intersegment sales.
<TABLE>
<CAPTION>
INTERNET CHILDREN'S CONSOLIDATED
1999 RECREATIONAL
- ---- -------------- -------------- ----------------
<S> <C> <C> <C>
Revenue $ 240,000 $ 1,137,770 $ 1,377,770
Loss from operations (2,618,468) (1,310,495) (3,928,963)
Assets 412,863 156,450 569,313
1998
- ----
Revenue 410,817 2,032,784 2,443,601
Income (loss) from operations 19,043 (555,550) (536,507)
Assets 285,613 2,113,348 2,398,961
</TABLE>
Reconciliation from the segment information to the consolidated balances for
loss from operations and assets is set forth below:
F-9
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Segment loss from operations $ (3,928,963) $ (536,507)
Selling, general & administrative expense (1,016,921) (1,036,081)
Depreciation and amortization (9,612) (9,612)
Other income 773,749 1,067,361
-------------- --------------
Consolidated net loss $ (4,181,747) $ (514,839)
============== ==============
Segment asset $ 569,313 $ 2,398,961
Cash and cash equivalent 1,908,325 733,423
Receivables - 48,890
Prepaid expense 27,158 39,244
Property and equipment 28,384 37,167
Investments 201,500 4,171,119
Other assets 847,815 962,747
-------------- --------------
Consolidated total assets $ 3,582,495 $ 8,391,551
============== ==============
</TABLE>
4. Property and Equipment
Property and equipment consisted of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Buildings and improvements $ 30,765 $ 328,233
Machinery, equipment and vehicles 44,993 98,184
Furniture, fixtures and office equipment 25,728 17,508
Computers 145,487 111,136
Signs and other 296 296
-------------- --------------
247,269 555,357
Less accumulated depreciation and amortization (65,504) (170,373)
-------------- --------------
$ 181,765 $ 384,984
============== ==============
</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 might
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 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.
F-10
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In 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 sold the facility in
1999. 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. In August 1999, the
Company sold the asset for $975,000.
5. 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, 1999 and 1998, the carrying value of the Company's
investment, net of distributions, was $0. During 1999 and 1998, the Company
received distributions of $59,550 and $48,723, 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. In 1999,
the Company sold its investment in United Hotel and recognized $1,869,584 net
realized distribution from this investment.
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 received capital distributions of $379,500 from HEP II in
1996.
In 1999 the management reviewed the investment in HEP II for recoverability
in accordance with SFAS No. 121 and determined that this investment was
impaired. The Company determined impairment by computing the sum of the
estimated future cash flows (undiscounted and without interest charges) and
comparing that result to its carrying value. The Company recognized impairment
losses in the fourth quarter of 1999 of $600,000. The impairment loss was based
on the management's judgment of the estimated future cash flows of $100,000.
Accordingly, actual results could vary from such estimates. 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, 1999 and 1998, the balance of the
Company's investment in HEP II was $100,000 and $700,000, respectively.
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 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 to a recognition
F-11
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. In the first quarter
of 1999, the Company wrote-down the investment in Genisys to $0.
6. Investment in and Loan Receivable from Grand Havana
As of December 31, 1999, 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. 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. At December 31,
1999, the quoted market value of the Company's investment in Grand Havana was
$101,500. The Company recorded changes of the market value in other
comprehensive income. 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.
The Company has entered into a number of financing agreements with Grand
Havana over the past years. In February 1997, the Company agreed to make a loan
available at an interest rate of 8% per annum on any outstanding principal
amount, in return for receiving 75,000 shares of Grand Havana Common stock. The
Company received an additional 25,000 shares of Grand Havana stock in return for
extending this loan facility.
On September 30, 1998, the Company extended an installment loan to Grand
Havana in the amount of up to $1,250,000, by way of a Secured Promissory Note,
which bears an interest of 8% per annum and is due and payable on April 30,
2000. The total loan advance in 1998 was $607,154. During 1999, the Company
advanced additional $75,000.
Brian Shuster, the Chairman of the Board and Chief Executive Officer of the
Company, is the brother of Stanley Shuster, the Chairman of the Board and Chief
Executive Officer of Grand Havana.
7. Due from Former Officer
As of December 31, 1999, the Company had a net receivable from
Harry Shuster, former President and Chief Executive Officer of the Company, of
$81,027, compared with a net receivable of $322,627 in 1998.
8. Note Payable
In connection with the acquisition of the Las Vegas Property, Westminster
Capital, Inc ("Westminster") made a loan of $1,900,000 to the Company. In 1999
the Company used its distribution from its investment in United Hotel, as a
result of the sale of its property in Las Vegas, to repay the note payable to
Westminster Capital, Inc.
9. Long-Term Debt
Long-term debt at December 31, 1998 consists of a note payable dated April
5, 1995, with a payable interest only at 12%, and a purchase money loan dated
April 5, 1995, with a payable interest only at 9.67%. Both were secured by deed
of trust on real property located in San Diego County, California. In 1999, the
Company used the proceeds from the sale of this property to pay off this debt.
F-12
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. Due to Related Parties
Due to related parties at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Due to Brian Shuster $ 65,000 $ 60,000
Due to Grand Havana 81,774 51,358
-------------- --------------
146,774 111,358
Due from United Hotel - 2,179
Due from 1990 Westwood Blvd. 31,387 -
Due from a consultant 20,000
Due from Genisys - 1,644
-------------- --------------
$ 95,387 $ 107,535
============== ==============
</TABLE>
11. 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.
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.
When the repurchase requirements lapsed in 1999, the accretion in the
carrying amount of common stock subject to repurchase was reversed from
additional paid-in capital and the stock were recorded as equity.
12. Stockholders' Equity
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.
F-13
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
In September 1998, the Company granted option to Brian Shuster to purchase
300,000 shares of the Company's common stock at $0.25 per share. This option is
exercisable immediately upon grant and expires on September 21, 2003. In
September 1998, the Company as consideration for guaranteeing the loan also
granted option to Harry Shuster to purchase 2,100,000 shares at $0.625 per
share. This option is exercisable immediately upon grant and expires on
September 29, 2003.
On January 4, 1999, the Company granted stock options to the Company's
general outside counsel, Richman, Lawrence, Mann, Chizever & Phillips, a
Professional Corporation ("Richman, Lawrence"), to purchase 200,000 shares of
the Company's common stock at $.23 per share. The shareholders of Richman,
Lawrence exercised the options effective the same day for total exercise price
of $46,000.
On January 4, 1999, the Company issued stock options to purchase shares of
the Company's common stock to the following: 100,000 to two outside directors,
100,000 to Brian Shuster, an employee-director, 210,000 to certain employees and
165,000 to certain consultants. All such options are exercisable at $.23 per
share. The options granted to the directors vest immediately and the options
granted to the employees vest on varying terms ranging from immediately to five
years.
On February 1, 1999, the Company issued a stock option to Brian Shuster to
purchase 200,000 shares of the Company's common stock. The option is
exercisable at $.35 per share and vests immediately.
In March 1999, the Company issued 150,000 shares of common stock to
Westminster Capital, Inc., upon the exercise of a stock purchase warrant for
150,000 shares of the Company's common stock at $.40 per share for gross
proceeds of $60,000.
In March 1999, the Company issued 100,000 shares of common stock to Whale
Securities Co., L.P., upon the exercise of a stock purchase warrant for 100,000
shares of the Company's common stock at $.75 per share for gross proceeds of
$75,000.
On April 13, 1999, the Company and Strata Equities Limited ("Strata")
amended the Warrant Agreement dated April 2, 1998 relating to the issuance of a
stock purchase warrant (the "Warrant") for 600,000 shares of the Company's
common stock at $.27 per share, to permit a cashless exercise of the Warrant,
and Strata exercised the Warrant on a cashless basis. Based on an intraday
trading price of $4.60 per share of the Company's common stock on April 13,
1999, the Company issued to Strata 564,783 shares of the Company's common stock.
The Company received no proceeds from the issuance, as a result of the cashless
exercise.
F-14
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED
On April 29, 1999, the Company sold 500,000 shares of common stock to one
individual, at a purchase price of $2.00 per share for gross proceeds of
$1,000,000.
In April 1999, the Company issued 82,222 shares of common stock to an
investment banker for consulting services upon the cashless exercise of a stock
purchase warrant for 100,000 shares of the Company's common stock at $.75 per
share. The Company received no proceeds from the issuance, as a result of the
cashless exercise.
In April 1999, the Company issued 10,000 shares of common stock to Alvin
Alexander, a director of the Company, upon the exercise of a stock option at an
exercise price of $.30 per share for gross proceeds of $3,000.
In April 1999, the Company granted options to Richard Ames, a consultant
to the Company, to purchase 100,000 shares of the Company's common stock at
$1.75 per share. The option is exercisable immediately upon grant and expires on
January 3, 2004.
On May 26, 1999, the Company granted options to Julie Lepere, Secretary of
the Company, to purchase an aggregate of 16,000 shares of the Company's common
stock, at various exercise prices and subject to vesting, as follows:
(i) $1.00 per share as to 5,000 shares, which are immediately exercisable;
(ii) $2.25 per share as to 6,500 shares, which are exercisable at any time
after May 26,2000 and on or before May 26, 2001;
(iii) $1.50 per share as to 4,500 shares, which are exercisable at any time
after May 26, 2001 and on or before May 26, 2002;
Provided, however, that in the event the employee's employment with the Company
is terminated prior to May 26, 2002, the vested portions of the options become
non-exercisable six months after such termination.
On May 26, 1999, the Company granted an option to purchase 100,000 shares
of the Company's common stock to Lou Pitt, a consultant to the Company, at an
exercise price of $1.00 per share. The option is exercisable immediately upon
grant and expires on May 26, 2002.
On June 24, 1999, the Company sold 250,000 shares of common stock at a
purchase price of $2.00 per share for gross proceeds of $500,000 to the same
individual who had purchased 500,000 shares of the Company's common stock on
April 29, 1999.
In June 1999, the Company issued 10,000 shares of its common stock to
Shannon Taylor, a consultant to the Company, in connection with her exercise of
options which were granted on January 4, 1999. Proceeds to the Company in
connection with such exercise were $2,300.
On July 16, 1999, the Company granted an option to purchase 10,000 shares
of the Company's common stock to James Orr, a consultant to the Company, at an
exercise price of $1.00 per share. On the date of such grant, the closing bid
price of the Company's common stock as quoted on the OTC Bulletin Board was
$3.1875. The option is exercisable immediately upon grant and expires on July
16, 2000.
On July 21, 1999, the Company and Media Group, Inc. ("MGI") entered into
an agreement (the "MGI Agreement") for the duplication of one million CD-ROM
shrink-wrapped packages for NBC. The total order is $380,000. Pursuant to the
MGI Agreement, the Company made a payment of $95,000 to MGI and delivered
150,000 shares of its common stock (the "MGI Shares"). The Company recorded a
liability on its books for the remaining outstanding balance of $285,000. The
Company further agreed to include the MGI Shares in a registration statement
which the Company filed with the Securities and Exchange Commission on September
1, 1999 for the benefit of certain selling stockholders (the "Selling
Stockholders' Registration Statement"). The Company has agreed to make further
F-15
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED
payments to MGI under the MGI Agreement until the full $380,000 is paid. The
Company has the right to have the MGI Shares returned to the Company and to pay
the $380,000 in full. If the Company does not so elect, MGI has the right to (i)
put the MGI Shares to the Company and the Company will pay the balance then due
under the MGI Agreement, or (ii) retain the MGI Shares and sell them pursuant to
the prospectus forming a part of the Selling Stockholders' Registration
Statement, in which case any amounts received by MGI over the balance due at
that time shall be refunded to the Company. The Company has further agreed to
pay to MGI any shortfall between the net proceeds of any sale of the MGI Shares
and the balance owing under the MGI Agreement. There were no proceeds to the
Company in connection with this issuance. In February 2000, the Company paid off
the balance and cancelled this issuance. These shares of common stock were not
included in the calculation of earnings per share.
In September 1999, the Company issued 211,013 shares of common stock upon
the cashless exercise of a stock purchase warrants for 250,000 shares of the
Company's common stock. The Company received no proceeds from the issuance, as a
result of the cashless exercise.
In November 1999, the Company granted warrants to Michael Peshey to
purchase 50,000 shares of the Company's common stock at $1.50 per share. This
warrant is exercisable immediately upon grant and expires on November 2000.
In December 1999, the Company granted options to Alvin Cassel, a director
of the Company, to purchase 50,000 shares of the Company's common stock at $1.75
per share. The option is exercisable immediately upon grant and expires on
December 16, 2001.
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.
The following non-qualified stock options granted by the Company were
outstanding at December 31, 1999:
<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
80,000 0.30 April 22, 1988 December 31, 2002
75,500 1.33 October 7, 1988 December 31, 2002
37,500 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
565,000 0.23 January 4, 1999 Various
200,000 0.35 February 1, 1999 Immediate
100,000 1.75 April 8, 1999 January 3, 2004
100,000 1.00 May 26, 1999 May 26, 2002
16,000 Various May 26, 1999 May 26, 2002
10,000 1.00 July 16, 1999 July 16, 2000
50,000 1.75 December 16, 1999 December 16, 2001
---------
4,297,950
=========
</TABLE>
F-16
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes the activity of common shares under stock options
for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Balance - beginning of year 3,266,950 866,950
Options granted 1,251,000 2,400,000
Options exercised (220,000) -
----------- -----------
Balance - end of year 4,297,950 3,266,950
=========== ===========
</TABLE>
The stock options of 725,000 granted to non-employee during 1999 were
valued using the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123. Compensation expense recognized amounted to
$306,500 in 1999. The fair value of the options granted during 1999 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
100%, risk-free interest rate of 5.5% 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 $48,065, or $0.03 per share for
1999. The fair value of the options granted during 1999 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 100%, 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.
In November, 1999, 430,000 warrants were expired. At December 31, 1999, 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 9, 2000/1/
50,000 1.50 November 24, 1999 November 24, 2000
---------
4,995,000
=========
</TABLE>
/1/ Original date of expiration was November 9, 1999, which was
subsequently extended.
F-17
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED
Computation of Loss Per Share for the year ended December 31, 1998:
<TABLE>
<CAPTION>
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>
Outstanding options and warrants to purchase shares at December 31, 1999 were
not included in the computation of diluted loss per common share because the
effect would be antidilutive.
13. 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.
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 plaintiffs sought an injunction preventing the Company
from removing certain improvements from the property at the expiration of the
lease. On January 3, 1997, Irvine Medows filed a first amended complaint and
sought an injunction a declaratory relief but no money damages. On February 19,
1997, the trial judge granted Irvine Medows' request for an injunction and
barred the Company from removing the leasehold improvements from the property.
The plaintiffs won the suit on a motion for summary judgment in May 1998.
The Company appealed the decision of the court. On October 27, 1998, the
plaintiffs were awarded costs in the amount of approximately $545,000. The
Company also appealed this award.
On May 7, 1999, the Company settled this litigation. The Company agreed to
dismiss with prejudice the appeal of the trial court's judgment. The Company
also agreed to pay the plaintiffs not less than $225,000 in principal amount,
plus 6% interest compounded daily, in installments. Of this amount, the
Company's litigation counsel agreed to contribute approximately $40,000.
Concurrently with the signing of the settlement agreement, $26,316 was paid,
which includes principal of $25,000. As of end of 1999, the Company has paid off
the balance.
In June, 1999, the Company was sued by Hyperlock Technologies, Inc.
("Hyperlock") in the United States District Court for the Northern District of
Illinois, Eastern Division. Hyperlock alleges that the Company has infringed
United States Patent No. 5,892,825, (the "825 patent") entitled, "Method of
Secure Server Control of Local Media Via a Trigger Through a Network for Instant
F-18
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED
Local Access of Encrypted Data on Local Media." On October 14, 1999, Hyperlock
amended its complaint to allege the infringement of an additional patent.
Hyperlock is seeking an injunction against the Company and unspecified damages.
Hyperlock also seeks treble damages, court costs and reasonable attorneys' fees
and other relief as the court may deem to be just and proper. In February 2000,
the Company filed a declaratory judgment action in Illinois alleging non-
infringement, invalibility and unenforceability of our patent. Hyperlock also
seeks to have the California case reassigned to the judge who is presiding over
the Illinois case. The Company has filed a motion to oppose the reassignment.
Based on a review of the "825 patent", the Company believes that the suit is
without merit. The Company believes that it has not committed any acts of
infringement, and intends to defend this suit vigorously. Due to the inherent
uncertainties regarding litigation, the Company can make no prediction about the
outcome of the litigation.
14. Commitments and Contingencies
Consulting Agreement - As of June 1, 1999, the Company and Harry Shuster
entered into an amended and restated Consulting Agreement updating an
arrangement originally effective as of September 1, 1984, which was subsequently
amended on June 1, 1994 ("the Consulting Agreement"). The Consulting Agreement
provides that Harry Shuster will relinquish the titles of Chairman of the Board,
President, and Chief Executive Officer, effective May 24, 1999. Harry Shuster
shall continue to render consulting services to the Company and its affiliates
in connection with its non-Internet business as requested by the President of
the Company or the Company's Board of Directors. The Consulting Agreement
provides that Harry Shuster, as a consultant, will be paid $5,000 per month by
the Company and be given either the use of a company car or $300 per month car
allowance in carrying out his duties for the Company. For any given year of the
term of the Consulting Agreement, the balance of the then-current Gross
Compensation shall be applied by the Company, on a monthly basis, to reduce the
net amount owed by Consultant to the Company, including interest (the "Company
Receivable"), which on June 1, 1999 is acknowledged by the parties to be
$420,263. After the Company Receivable has been reduced to zero, the entire
amount of the Gross Compensation shall be paid to Harry in accordance with the
terms of the consulting agreement. In addition, the consulting agreement
provides for certain disability benefits for a period of up to three years. 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 1999 and 1998, the Company incurred consulting fees pursuant to this
agreement in the amount of $330,730 and $300,663, respectively.
United Internet Technologies ("UIT") and Brian Shuster have entered into an
Employment Agreement dated as of January 1, 1999 ("the Employment Agreement"),
pursuant to the terms of which Brian Shuster is employed as President of UIT at
an initial base salary of $240,000 per year. The Employment Agreement provides
for annual 10% increases in Brian Shuster's base salary. The Employment
Agreement provides for a rolling five-year term. This is accomplished by
extending the initial five-year term of the Employment Agreement automatically
for successive one-year periods unless written notice of termination is given at
least 60 days prior to the end of the completion of the first year of the then-
current five-year period. The Employment Agreement also provides that any
inventions developed by Brian Shuster during his employment by UIT and which
relate to the business of UIT, will remain property of UIT. The Employment
Agreement also contains a confidentiality provision to protect UIT's trade
secrets and other confidential information. Brian Shuster is permitted to
engage in outside business activities to the extent that such obligations do not
interfere with his duties to UIT.
In addition, the Company and UIT have entered into an agreement dated as of
January 1, 1999, pursuant to which UIT has agreed to make available the services
of Brian Shuster to consult for the Company on a variety of matters. The Company
has agreed to pay UIT $5,000 per month for making available to Brian Shuster's
F-19
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED
services under this agreement; Brian Shuster will receive no payments under this
agreement. Brian Shuster has also agreed that UIT may credit against his salary
any amounts he actually receives from Genisys pursuant to the Genisys Agreement
for consulting services.
Lease Arrangements - At December 31, 1999, 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>
2000 $ 504,174 $33,648
2001 545,482 1,676
2002 518,118 -
2003 467,339 -
2004 467,339 -
Thereafter 331,266 -
---------- -------
Total $2,833,718 $35,324
========== =======
</TABLE>
Rent expense, net of sublease income of $44,830 in 1999 and $38,015 in
1998, was $619,580 in 1999 and $616,790 in 1998.
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 $81,860 in
1999 and $43,624 in 1998.
The Company has paid rental, including homeowners association dues 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. In 1999 and 1998 the Company paid $25,114
and $26,850, respectively.
15. Income Taxes
At December 31, 1999, the Company had net operating loss carryforwards for
federal tax purposes expiring as follows:
<TABLE>
<CAPTION>
Year Expires Amount
------------ ------
<S> <C>
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
----------
$7,287,000
==========
</TABLE>
F-20
<PAGE>
UNITED LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED
The components of deferred taxes were as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,369,000 $ 2,802,000
Impairment losses 747,000 2,209,000
Non-cash compensation 307,000 102,000
State income taxes 2,000 2,000
Partnership interests 193,000 195,000
Valuation allowance (3,403,000) (5,205,000)
----------- -----------
Total deferred tax assets 215,000 105,000
Deferred tax liability:
Depreciation 215,000 105,000
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
</TABLE>
Subsequent Events
In January 2000, the Company has completed a $5.6 million private placement
of its common stock. The proceeds from this private placement will be used to
finance the operation of UIT.
In March 2000, the Company filed an application with NASDAQ Stock Market to
have its common stock listed for trading on the NASDAQ National Market.
F-21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Asset Purchase Agreement dated June 30, 1998 by and among United Leisure
Interactive, Inc., Net Cruise Interactive, Inc., Genysis Reservation Systems,
Inc. and United Leisure Corporation (incorporated by reference to Exhibit 2.1 of
United Leisure's Current Report on From 8-K dated July 23, 1998, as amended by
United Leisure's Amendment No. 1 to Current Report on Form 8-K dated November 4,
1998 (the "Form 8-K/A")).
2.2 Agreement date October 27, 1998 by and among United Internet Technologies, Inc.
Genisys Reservation Systems, Inc. Warren D. Bagatelle, Loeb Holding Corporation,
Loeb Partners Group. HSB Capital, David W. Sass, Mark A Kenny, Hohn H. Wasko,
Hoan E. Wasko, Lawrence E. Burk and S. Charels Tubak (incorporated by reference
to Exhibit 2.2 of the Form 8-K/A).
3.1 Restated Certificate of Incorporation of United Leisure (incorporated by
reference to Exhibit 3.1 of United Leisure's Form SB-2 (File No. 33-81074 (the
"SB-2")).
3.2 Bylaws of United Leisure (incorporated by reference to Exhibit 3.2 of the SB-2).
4.1 Warrant Agreement, dated November 18, 1994 between United Leisure and OTR, Inc.
(incorporated by reference to Exhibit 4.1 of the SB-2).
4.2 Form of Warrant to Purchase Common Stock in connection with 12% Promissory Note
unit private placement and Bankruptcy Court deposit (incorporated by reference
to Exhibit 4.3 of the SB-2).
10.1 Stock Option Agreement dated December 7, 1990, between United Leisure and
Haskell Slaughter Young & Johnston, Professional Association, (incorporated by
reference to Exhibit 10.5 of the SB-2).
10.2 Stock Option Agreement dated December 7, 1990, between United Leisure and Alvin
Cassel (incorporated by reference to Exhibit 10.6 of the SB-2.)
10.3 Stock Option Agreement dated April 22, 1988, between United Leisure and Alvin
Cassel as extended by Extension of Option Agreement, dated April 20, 1993,
between United Leisure and Alvin Cassel. (incorporated by reference to Exhibit
10.10 of the SB-2).
10.4 Stock Option Agreement dated October 7, 1988, between United Leisure and Harry
Shuster as extended by Extension of Option Agreement, dated April 20, 1993
between United Leisure and Harry Shuster (incorporated by reference to Exhibit
10.12 of the SB-2).
10.5 Stock Option Agreement dated November 17, 1988, between United Leisure and Harry
Shuster as extended by Extension of Option Agreement, dated April 20, 1993
between United Leisure and Harry Shuster (incorporated by reference to Exhibit
10.13 of the SB-2).
10.6 Stock Option Agreement dated December 5, 1988, between United Leisure and Harry
Shuster as extended by Extension of Option Agreement, dated April 20, 1993
between United Leisure and Harry Shuster (incorporated by reference to Exhibit
10.14 of the SB-2).
10.7 Stock Option Agreement dated July 24, 1987, between United Leisure and Harry
Shuster as extended by Extension of Option Agreement, dated April 20, 1993
between United Leisure and Harry Shuster (incorporated by reference to Exhibit
10.16 of the SB-2).
10.8 Option Agreement dated as of April 22, 1988, between United Leisure and Haskell
Slaughter Young & Johnston covering United Leisure, Extension of Option
Agreement, dated April 20, 1993 between United Leisure and Haskell Slaughter
Young & Johnston, Professional Association (incorporated by reference to Exhibit
10.17 of the SB-2).
10.9 Promissory Note dated June 1, 1985, by Lion County Safari Inc. in the principal
amount of $973,927 drawn to the order of Harry Shuster (incorporated by
reference to Exhibit 10.23 of the SB-2).
10.10 Stock Option Agreement, dated February 22, 1989, between United Leisure and
Tactron Liquidating Trust (incorporated by reference to Exhibit 10.27 of the
SB-2).
10.11 Stock Option Agreement, dated February 22, 1989, between United Leisure and
Lindsey & Associates, Inc. (incorporated by reference to Exhibit 10.28 of the
SB-2).
10.12 Form of Indemnity Agreement entered into by United Leisure with each of its
directors (incorporated by reference to Exhibit 10.35 of the SB-2).
10.13 Stock Option Agreement, dated September 23, 1993, between United Leisure and
Alvin Cassel (incorporated by reference to Exhibit 10.41 of the SB-2).
10.14 Standard Retail/Office Complex Lease dated October 12, 1994, between PSA
Properties and Planet Kids, Inc., (incorporated by reference to Exhibit 10.32 of
United Leisure's Amendment No. I to Annual Report on Form 10K-SB for the fiscal
year ended December 31, 1995 (the "1995 10-KSB")).
10.15 Commercial Lease among Eastrich Multiple Investor Fund, L.P., Midland Loan
Services, L.P. et al., and Planet Kids, Inc., effective August 9, 1995 and Rider
thereto (incorporated by reference to Exhibit 10.33 of the 1995 10-KSB).
10.16 Lease dated June 29, 1995, between Magnolia Square and Planet Kids, Inc. and
Addendum thereto (incorporated by reference to Exhibit 10.34 of the 1995 10-KSB).
10.17 Territory Rights Agreement between Planet Kids, Inc., and PT Planet Kidsindo
(incorporated by reference to Exhibit 10.35 of the 1995 10-KSB).
10.18 Financing Agreement dated as of February 12, 1997, between United Leisure and
Grand Havana Restaurants, Inc. (incorporated by reference to Exhibit 10.36 of
United Leisure's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996 (the "1996 10-KSB")).
10.19 Financing Agreement dated as of September 10, 1996, between United Leisure and
Grand Havana Enterprises, Inc. (incorporated by reference to Exhibit 10.37 the
1996 10-KSB).
10.20 Option Agreement dated as of September 22, 1998, between United Leisure and
Brian Shuster (incorporated by reference to Exhibit 10.45 of the United
Leisure's Quarterly Report on Form 10-QSB for the quarter ended September 30,
1998 (the "September 30, 1998 10-QSB")).
10.21 Option Agreement dated as of September 30, 1998, by and between United Leisure
and Brian Shuster (incorporated by reference to Exhibit 10.46 of the September
30, 1998 10-QSB).
10.22 Option Agreement dated as of January 4, 1999 between United Leisure and Brian
Shuster (incorporated by reference to Exhibit 10.49 of United Leisure's
Quarterly Report on Form 10-QSB for the period ended June 30, 1999 (the "June
30, 1999 10-QSB")).
10.23 Option Agreement dated as of January 4, 1999, between United Leisure and Alvin
Cassel (incorporated by reference to Exhibit 10.50 of the June 30, 1999 10-QSB).
10.24 Option Agreement dated as of January 4, 1999 between United Leisure and J.
Brooke Johnston (incorporated by reference to Exhibit 10.51 of the June 30, 1999
10-QSB).
10.25 Option Agreement dated as of February 1, 1999, between United Leisure and Brian
Shuster (incorporated by reference to Exhibit 10.52 of the June 30, 1999 10-QSB).
10.26 Employment Agreement dated as of January 1, 1999 between United Leisure and
Brian Shuster, together with supplemental agreement between the Company, United
Internet Technologies, Inc. and Brian Shuster (incorporated by reference to
Exhibit 10.53 of the June 30, 1999 10-QSB).
10.27 Consulting Agreement dated as of January 1, 1999, between United Internet
Technologies and Harry Shuster (incorporated by reference to Exhibit 10.54 of
the June 30, 1999 10-QSB).
10.28 Agreement dated as of July 21, 1999 between United Leisure and Media Group, Inc.
(incorporated by reference to Exhibit 10.55 of the June 30, 1999 10-QSB).
10.29 Purchase Agreement and Escrow Instructions dated as of June 10, 1999, between
United Leisure and Shih Ching Chiang, as amended on August 7, 1999
(incorporated by reference to Exhibit 10.1 of United Leisure's Current Report on
Form 8-K dated August 23, 1999).
10.30 Total Access Software Distribution Agreement between Earthlink Network, Inc.
and United Internet Technologies, Inc. together with related letter agreement
dated July 21, 1999 (incorporated by reference to Exhibit 10.42 of United Leisure's
Registration Statement on Form SB-2 (File no. 333-86335) filed with the Commission
on September 1, 1999 (the "1999 SB-2")).
10.31+ Agreement dated as of June 1, 1999 between United Leisure Corporation and Harry
Shuster, amending Amended and Restated Consulting Agreement dated as of June 1,
1994 (incorporated by reference to Exhibit 10.33 of the 1999 SB-2).
10.32* Software License and Distribution Agreement dated June 15, 1999 between United
Internet Technologies and AT&T Corp.
10.33* Letter Agreement dated November 19, 1999 between United Internet Technologies
and Teen People Magazine.
10.34* Distribution Agreement dated February 2, 2000 between United Internet
Technologies and Liquid Audio, Inc.
21.1* Subsidiaries of United Leisure
23.1* Consent of Hollander, Lumer & Co., LLP
27.1* Financial Data Schedule
</TABLE>
* Filed herewith.
+ Management contract or compensatory plan required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
<PAGE>
UIT-PPO-RJS-June 17, 1999
Exhibit 10.32
SOFTWARE LICENSE
AND
DISTRIBUTION AGREEMENT
between
UNITED INTERNET TECHNOLOGIES, INC.
and
AT&T CORP.
dated as of June 15, 1999
-------
AT&T/UIT - Confidential
<PAGE>
TABLE OF CONTENTS
1 BACKGROUND
2 DEFINITIONS
3 GRANT OF LICENSES AND RIGHTS
4 MARKETING, DISTRIBUTION AND CUSTOMER CARE
5 PRODUCT DELIVERABLES AND UPDATES
6 PAYMENTS
7 TRADEMARKS, SERVICE MARKS AND TRADE NAMES
8 PROPRIETARY RIGHTS
9 CONFIDENTIAL INFORMATION AND DISCLOSURE
10 REPRESENTATIONS AND WARRANTIES
11 INDEMNIFICATION
12 LIMITATION OF LIABILITY
13 TERM AND TERMINATION
14 GENERAL PROVISIONS
Attachment A - UIT Products
Attachment B - Prominent Placement Technical Requirements
AT&T/UIT - Confidential
<PAGE>
SOFTWARE LICENSE AND DISTRIBUTION AGREEMENT
In this Software License and Distribution Agreement ("Agreement") United
Internet Technologies, Inc. ("UIT"), with offices at 1990 Westwood Blvd.,
Penthouse Floor, Los Angeles, California 90026, and AT&T Corp, on behalf of
itself and its Affiliates ("AT&T"), with offices at 295 North Maple Avenue,
Basking Ridge, New Jersey 07920, agree as follows:
1. BACKGROUND
AT&T provides an internet service called AT&T WorldNet/R/ Service which is
accessed using AT&T-provided client software.
UIT develops, manufactures and markets enhanced Internet content and Internet
video technologies. On the terms of this Agreement, UIT will distribute AT&T
WorldNet Service Software in conjunction with certain of its own products.
2. DEFINITIONS
As used in this Agreement
"Affiliate" means a corporation or other entity that controls, is controlled by
---------
or is under common control with another corporation or entity, where "control"
means the direct or indirect ownership or control of more that 50% of the stock
or other equity interest entitled to vote for the election of directors or
equivalent governing body.
"AT&T Mark" means a trademark, service mark, logo, trade name, or other insignia
---------
or symbol owned by AT&T and used in connection with the Service, including but
not limited to the AT&T WORLDNET mark.
"AT&T WorldNet Software" means the executable version (but not the source code
----------------------
version) of the client software used for access to the Service)
"Content" means AT&T approved marketing language about AT&T WorldNet Services,
-------
AT&T WorldNet Software or any other related offering provided by AT&T.
"Delivered Member" means a person or entity who (i) has registered, and has
----------------
been billed, for the Service using a Bundled UIT Product (a "UIT Member"); (ii)
-------------
has provided a unique identifying affinity code to identify the person or
entity as a UIT Member in the course of registering for the Service; and (iii)
has paid at least $19.95 of Member Revenue to AT&T using the Service during the
first three months after registering for the Service.
"Derivative Work" means a revision, modification, translation, abridgment,
---------------
condensation or expansion of the AT&T WorldNet Software or any form in which the
AT&T WorldNet Software or any form in which the AT&T WorldNet Software may be
recast, transferred, transformed, or adapted, which, if prepared without the
consent of AT&T would be a copyright infringement.
"Developer Marks" means a trademark, service mark, logo, trade name, or other
---------------
insignia or symbol owned by an entity and used in connection with a UIT Product
for which such entity has developed, in whole or in part, a substantial portion
of such UIT Product.
"Distributor" means any third party that acquires possession of a UIT Product
-----------
from UIT and distributes such UIT Product on tangible media, along with an End
User License Agreement.
<PAGE>
"Documentation" means those software user manuals, reference manuals and
-------------
installation guides, or portions thereof, and any other marketing collateral
material made generally available in connection with Bundled UIT Products of the
Service, as the same may be updated from time to time. "AT&T Documentation"
------------------
refers only to Documentation made available in connection with the AT&T WorldNet
Software of the Service, and "UIT Documentation" refers only to Documentation
-----------------
made available in connection with the Bundled UIT Products.
"Effective Date" means the date last set forth on the signature page of this
--------------
Agreement.
"End User" means any third party licensed by UIT or a Distributor to use the
--------
AT&T WorldNet Software.
"Information" means information of any type, including descriptions of all
-----------
inventions, creations, ideas, know-now, specifications, designs, software,
simulations, test results, reports, drawings, manufacturing processes,
algorithms, improvements, and other developments, whether or not fixed in a
tangible, reproducible medium, and whether or not protected or protectible by
patents, copyrights, mask work rights, trade secret rights, or other
intellectual property rights.
"Member Revenue" means any revenue derived from the Service that is received by
--------------
AT&T or an Affiliate, as the case may be, from a Delivered Member, less rebates
and refunds, and less any federal, state or local taxes based on such fees
(except taxes based on AT&Ts net income). In no event shall Member Revenue be
deemed to include unbundled charges for transport, tariffed services not bundled
with the Service, or value added internet-related services (e.g. hosting
security, directory, content services, products, etc.).
"On-line Service Provider" means any entity that markets, offers or provides
------------------------
on-line computer services or any other form of interactive services (whether or
not such services include or offer access to the Internet), Internet access
services or communications services (including local exchange, interexchange or
international communications services), other than AT&T.
"Prominent Placement" means that the AT&T WorldNet Software is (1) the exclusive
-------------------
Internet Service Provider or On-Line Service Provider on the integrated UIT
Bundled Products and (2) integrated with the UIT Bundled Product in the
prescribed manner described in Attachment B.
"Quarterly Report" means a list containing all UIT Product titles and the total
----------------
volume of UIT Products distributed in any given calendar quarter integrated with
AT&T WorldNet Software, provided and signed by a duly authorized UIT
representative.
"Scheduled Update" means an Update to the UIT Bundled CD-ROM which UIT shall use
----------------
reasonable efforts to cause to occur at least once every twelve (12) months.
"Service" means the standard AT&T WorldNet Services provided by AT&T that has
-------
dial-up Internet access.
"Term" means the period of time from the Effective Date through the termination
----
of this Agreement as provided in Section 13.
"Territory" means (1) the continental United States, Alaska, Hawaii, the U.S.
---------
Virgin Islands and Puerto Rico, and (2) any other territory agreed to by the
parties in writing pursuant to such additional terms as may also be agreed upon
in writing with reference to this Agreement.
"Third Party Mark" means a trademark, service mark, logo, trade name, or other
----------------
insignia or symbol owned by an individual or entity other than UIT, AT&T or
their respective Affiliates.
"UIT Mark" means a trademark, service mark, logo, trade name, or other insignia
--------
or symbol owned by UIT and used in connection with UIT Products, including but
not limited to UIT and the UIT logo.
2
<PAGE>
"UIT Products" means collectively Bundled UIT Products and Unbundled UIT
------------
Products. "Bundled UIT Product" means a product listed in Attachment A together
-------------------
with its Documentation bundled with AT&T WorldNet Software. "Unbundled UIT
-------------
Product" means a product listed in Attachment A that is not bundled with AT&T
WorldNet Software.
"Updates" means updates, revisions or other modifications or enhancements to the
-------
AT&T Worldnet Software or UIT Products.
"Virus" means a time bomb, worm, virus, lock, drop-dead device, trojan horses
-----
or other similar component of software or electronically stored or transmitted
information that, contrary to the expectation of a user of that software or
information, is intended in any manner to (i) damage, destroy, alter, or
adversely affect the operation of software, firmware, or hardware, (ii) reveal,
damage, destroy, or alter any data or other information or (iii) permit
unauthorized access.
3. GRANT OF LICENSES AND RIGHTS
3.1 Software License, Beginning on the Effective Date, AT&T grants to UIT a
----------------
nonexclusive, nontransferable license to reproduce and Distribute the AT&T
WorldNet Software to Distributors and End Users throughout the Territory subject
to the following:
3.1.1 UIT may reproduce and distribute the AT&T WorldNet Software only as
a component of a Bundled UIT Product for use in conjunction with the Service
within the United States.
3.1.2 UIT and its Distributors may not transmit the AT&T WorldNet Software
to any third party electronically.
3.1.3 UIT and its Distributors are expressly prohibited from (i) modifying
the AT&T WorldNet Software in any way except as provided in Section 4.8; and
from (ii) marketing or distributing of the AT&T WorldNet Software or Updates
thereto other than as a component of a Bundled UIT Product.
3.1.4 UIT, itself or through any Distributor, shall have the right to
grant to End Users the right to use the AT&T Worldnet Software as a component of
a Bundled UIT Product for use in conjunction with the Service within the United
States.
3.1.5 This license grant is conditional upon marketing and bundling the
AT&T WorldNet Software as required herein and all other terms and conditions of
this Agreement.
3.2 Exclusivity. AT&T WorldNet Software shall be the exclusive Internet
-----------
Service Provider or On-Line Service provider on the Bundled UIT Products listed
on Attachment A. AT&T reserves the right to grant the rights granted herein to
others.
3.3 Source Code Restrictions. UIT agrees (i) not to decompile, disassemble, or
------------------------
otherwise determine or attempt to determine source code for the executable code
of the AT&T WorldNet Software or any other software included in the Service or
to create any Derivative Works based upon the AT&T WorldNet Software, the
Service or AT&T Documentation (except as may be expressly authorized in this
Agreement), (ii) that it will prohibit UIT Distributors from any of the
foregoing actions and (iii) not to authorize anyone else to do so. UIT agrees
that no software included in the Bundled UIT Product shall rely upon, cooperate
with, or share in any way any component of, or the entirety of, the AT&T
WorldNet Software or the Service without the prior written consent of AT&T or
except as provided in Section 4.8
3.4 Bundled Products. Commencing on the Effective Date and throughout the
----------------
remainder of the Term of this Agreement, UIT shall not market, distribute, or
offer for sale within the Territory any UIT Product listed on Attachment A
including any successor products or versions thereof, without bundling the AT&T
3
<PAGE>
WorldNet Software. UIT shall send a Quarterly Report to the AT&T Relationship
Manager within 30 days following the end of each calendar quarter. During the
Term, UIT shall distribute a minimum of one million (1,000,000) Bundled UIT
Products. In accordance with the Terms of this Agreement. Nothwithstanding the
foregoing, nothing herein shall be construed to require UIT to destroy any
inventory which is not in compliance with the obligations set forth herein and
which is in existence before the Effective Date.
4. MARKETING, DISTRIBUTION, AND CUSTOMER CARE
4.1 Service Collateral. UIT shall insert AT&T Documentation or include an
------------------
on-line read me file which will be activated prior to the AT&T WorldNet Software
being installed, as AT&T shall specify from time to time, with all Bundled UIT
Products sold or offered for sale.
4.2 Reproduction of Inserts. For each different Bundled UIT Product
-----------------------
4.2.1 AT&T shall provide UIT with Content. UIT shall use the Content
to prepare inserts or an on-line read me file in the Bundled UIT Products, at
UIT's expense, for inclusion with the Bundled UIT Product. The on-line read me
file will be activated prior to the AT&T WorldNet Software being installed. UIT
shall supply AT&T with a master copy of such inserts or on-line read me file.
4.2.2 AT&T may request UIT to revise the inserts or on-line read me
file at any time provided AT&T gives UIT 30 days notice prior to such revision
appearing in the next Scheduled Update of the Bundled UIT Product.
4.2.3 If UIT wishes to modify the inserts or an on-line read me file
in any way, such a modification must be reviewed and approved in writing by AT&T
before an initial run of actual copies of such modified Inserts or an on-line
read me file. If AT&T has not approved such modified insert or an on-line read
me file and UIT prepares such inserts or an on-line read me file, UIT shall be
liable to AT&T for any damages, claims, etc., which may result from such
modified inserts or an on-line read me file.
4.3 Required Product Packaging. UIT shall be required to identify the AT&T
--------------------------
WorldNet Software and the Service on its product packaging as follows:
4.3.1 the AT&T WorldNet mark, solely as depicted in an AT&T approved
representation to be provided by AT&T, must appear on the outside of the Bundled
UIT Product package, such depiction may be via a sticker;
4.3.2 the AT&T WorldNet mark, solely as depicted in an AT&T approved
representation to be provided by AT&T, must appear in the operating system
program group or desk top;
4.3.3 the AT&T WorldNet mark must not appear any less prominently than
any other Third Party Mark (excepting Developer Marks) used on the Bundled UIT
Product or its packaging; and
4.3.4 the Bundled UIT Product package and documentation must state
that the AT&T WorldNet Service is only available in the United States as of the
Effective Date.
4.4 Customer Care. AT&T will provide all technical support and customer
-------------
care functions for End Users of the Service and the AT&T WorldNet Software and
UIT will provide all technical support and customer care for users of Bundled
UIT Products.
4.5 Public Announcements and Promotional Materials. AT&T and UIT shall
----------------------------------------------
cooperate so that each party may issue press releases concerning this Agreement,
provided that each party must approve any
4
AT&T/UIT-Confidential
<PAGE>
press release prior to its release. The parties shall cooperate in their
development of marketing and sales materials used to promote the distribution of
Bundled UIT Products.
4.6 Terms Relating to Distribution. UIT agrees to comply with and shall
------------------------------
require its Distributors to comply with all applicable laws, rules and
regulations to preclude the acquisition of unlimited rights to technical data,
software and documentation provided with the Service to a governmental agency,
and ensure the inclusion of the appropriate "Restricted Right" or "Limited
Rights" notices required by the U.S. Government agencies. UIT acknowledges that
this Agreement grants distribution rights only within the Territory. UIT
acknowledges that the Service is only provided within the United States.
4.7 No Modification of End User Agreements. UIT and its Distributors shall
--------------------------------------
not remove, alter or otherwise interfere with the distribution and delivery of
any End User license agreements packaged, distributed, or otherwise associated
with the AT&T WorldNet Software and/or Service.
4.8 Icon Development. AT&T permits UIT to develop a UIT Icon to appear in
----------------
UIT's desktop application software which will take an End User directly to UIT's
home page using the Service. Such Icon shall be labeled "UIT Home Page" and
shall solely be promoted and used by UIT to enable End Users to gain "one-
button" access to UIT's home page. In no event shall UIT be permitted to market,
promote or label such Icon as a means for obtaining Internet access generally or
in association with the AT&T brand or the AT&T globe. Nothing herein shall be
deemed to authorize UIT to make any Derivative Works of the AT&T WorldNet
Software or the Service.
5. PRODUCT DELIVERABLES AND UPDATES
5.1 Delivery of Software and Updates. Promptly after the Effective Date,
--------------------------------
AT&T shall provide UIT with access to the AT&T proprietary alliance marketing
site to enable UIT to download the AT&T WorldNet software and any Updates to the
AT&T WorldNet Software.
5.2 Integration Development. Commencing on the Effective Date of this
-----------------------
Agreement and throughout its Term, UIT agrees to develop, test and integrate the
AT&T WorldNet Software as a component of each different Bundled UIT Product to
enable users of Bundled UIT Products to access and register for the Service
using the AT&T WorldNet Software.
5.3 Requirement for Testing (AT&T WorldNet Software). Within 60 days of
-----------------------------------------------
execution of this Agreement UIT shall cause each Bundled UIT Product listed in
Attachment A to be bundled with AT&T WorldNet Software and comply in all
respects with the AT&T WorldNet Service Integration Check-List.
5.4 Requirement for Testing (UIT Updates). On the date on which UIT makes
-------------------------------------
any Update to a Bundled UIT Product generally available to customers, UIT shall
cause each Bundled UIT Product generally available to customers. UIT shall cause
each Bundled UIT Product to which the Update pertains to comply in all respects
with the AT&T WorldNet Service Integration Check-List.
5.5 AT&T Testing. AT&T will test the Bundled UIT Products for compliance with
------------
the AT&T WorldNet Service Integration Check-List. UIT shall send Bundled UIT
Product to be tested to: Brian Curtin c/o On Demand Solutions, 30A Upton Drive,
Wilmington, Massachusetts, 01887, Voice 978-658-7709 x326 Fax: 978-658-7721,
e-mail: [email protected]. UIT Shall send all associated marketing, Insert,
packaging, etc. to: Sharon Love c/o, AT&T WorldNet Service, 295 N. Maple Avenue-
Rm. 224F3F, Basking Ridge, NJ 07920, Voice: 908-221-6811, FAX: 908-630-1100, E-
mail: [email protected]. Within five (5) business days of receipt of the Bundled
UIT Product, appropriate documentation and completed AT&T WorldNet Service
Integration Check-List, AT&T will provide the test results. If a Bundled UIT
Product fails to satisfy the applicable certification and testing requirements,
AT&T will specify the reason for the failure. UIT shall use all commercially
reasonable efforts to cause any Bundled UIT Product which fails AT&T random
testing to comply with the AT&T WorldNet Service Integration Check-List, and UIT
shall promptly re-submit such failed Bundled UIT Product for re-testing.
Compatibility certification shall be valid only for the
<PAGE>
specific version of a Bundled UIT Product and the specific version of the AT&T
WorldNet Software for which such Bundled UIT Product was tested.
5.6 AT&T WorldNet Software Updates. AT&T shall provide UIT with notification
------------------------------
that Updates to the AT&T WorldNet software are available on the AT&T proprietary
marketing site. All Updates to the AT&T WorldNet Software shall be incorporated
into the next Scheduled Update to the Bundled UIT Product(s). Subject to UIT's
right to exhaust all of its existing inventory pursuant to Section 5.8, (i)
UIT's rights under Section 3.1 for each of the Bundled UIT Products shall be
void; and (ii) UIT must remove any AT&T Mark from all product packaging,
labeling, advertising and marketing materials for each of the Bundled UIT
Products, unless and until the Bundled UIT Product(s) incorporating any and all
Updates have successfully completed the AT&T WorldNet Service Integration Check-
List.
5.7 UIT Product Updates. Upon the release of general availability of an Update
-------------------
to a Bundled UIT Product, UIT must incorporate the most updated version of the
AT&T WorldNet Software into any Bundled UIT Product to which such Update
pertains.
5.8 Exhaustion of Inventory. Upon notification by AT&T of any Update to the
-----------------------
AT&T WorldNet Software to UIT, UIT shall no longer be permitted to reproduce or
distribute pursuant to Section 3.1 versions of any Bundled UIT Product not
bundled with the most current Update ("Outdated Product") which is not
incorporated into the next Scheduled Update of a Bundled UIT Product, except
that UIT shall be permitted to exhaust existing inventory of Outdated Product
for a period of 180 days following the general release of the next Scheduled
Update of a Bundled UIT Product. The parties will discuss how to handle any
inventory that may exist after such period.
5.9 Internal Use. UIT grants to AT&T a royalty-free, nonexclusive license
------------
during the Term of this Agreement to use internally, solely for purposes of
marketing, promotion, demonstration, testing and technical support, at least 20
samples of each different Bundled UIT Product, or such number of copies as the
parties shall mutually agree upon. All such copies of Bundled UIT Products
shall contain all appropriate and customary proprietary rights notices provided
by UIT with such Bundled UIT Products. The license granted under this Section
5.9 expressly excludes the right to distribute Bundled UIT Products. Nothing in
this Agreement shall be construed as giving AT&T any right to manufacture or
otherwise make or distribute copies of Bundled UIT Products.
5.10 Updates/Service Changes. Nothing in this Agreement shall limit AT&T's
-----------------------
right to change the functionality or pricing of the Service or AT&T's and its
suppliers' rights to change the functionality of the AT&T WorldNet Software at
any time. AT&T's or its suppliers' exercise of such rights shall not be grounds
for termination of this Agreement by UIT, provided that the exercise of such
rights does not adversely impact the compatibility of the AT&T WorldNet Software
and the Bundled UIT Products.
6. PAYMENTS
6.1 Accrual of Payments for Prominent Placement. On the date an individual
-------------------------------------------
becomes a Delivered Member through Prominent Placement in accordance with
Section 3.4 on Bundled UIT Products and for a period of 90 days after
termination of this agreement, provided termination is not a result of a
material breach by UIT, a credit of $20.00 shall accrue to UIT. Within
forty-five (45) days following the end of each calendar quarter, AT&T shall
provide to UIT a quarterly report specifying the amounts of credits accrued for
new Prominent Placement Delivered Members during that quarter.
6.2 Payments. Accrued payments under Section 6.1 shall be paid to UIT within
--------
forty-five (45) days following the end of each calendar quarter. All payments
shall be sent to the address set forth in the introductory paragraph to this
Agreement, Attention: Brian Shuster.
6.3 Taxes. Each party agrees to pay for any taxes, charges or fees arising out
-----
of its obligations or acts hereunder.
6
<PAGE>
6.4 Audit. UIT shall have the right to have its representative examine
-----
AT&T's records concerning Delivered Members and payments accrued to UIT during
normal business hours and upon not less than ten (10) days prior written
notice. Promp adjustment shall be made to compensate for any errors or omissions
disclosed by such examination.
7. TRADEMARKS AND TRADE NAMES
7.1 License to AT&T Marks. Commencing on the Effective Date and subject to
---------------------
the terms and conditions of Agreement, UIT is hereby granted for the remainder
of the Term of this Agreement a nontransferable, nonexclusive, royalty-free
restricted license extending to the Territory to market each version of each of
the Bundled UIT Products as including the AT&T WorldNet Software and otherwise
solely use on the Bundled UIT Products and in advertising and marketing
materials thereof any AT&T Marks provided by AT&T to UIT expressly for use with
Bundled UIT Products which are distributed by UIT or its Distributors in
connection with this Agreement, provided that AT&T shall have given UIT written
confirmation that UIT has, in form, met the requirements set forth in the AT&T
Trademark/Service mark guidelines with respect to such version of the Bundled
UIT Product, and provided further that such grant shall be conditioned on and
subject to UIT's compliance with the requirements of Section 5 at all times. All
such usage of AT&T Marks shall inure solely to the benefit of AT&T and shall not
create any rights, title or interest for UIT in and to the AT&T Marks. All such
usage of the AT&T Marks shall contain a notice in the following form, AT&T
WorldNet(R) Service is a registered trademark of AT&T. UIT may use Third Party
Marks on the Bundled UIT Products and in advertising and marketing materials
thereof in connection with the permitted marketing and distribution of UIT
Products under this Agreement, provided that the AT&T Marks are used at least as
prominently as the Third Party Marks of any service provider or product
manufacturer other than UIT, excepting Developer Marks, whose goods or services
are bundled with or packaged with UIT. Upon AT&T's request from time to time UIT
agrees to provide AT&T with copies of UIT Products bearing AT&T Marks so that
AT&T can verify their adequate quality. UIT shall suspend use of AT&T Marks if
such quality is reasonably deemed inferior by AT&T until UIT has taken such
steps as AT&T may reasonably require to solve the quality deficiencies, but any
such suspension of AT&T Marks usage will not result in suspension of the license
to use, reproduce and distribute the AT&T WorldNet Software granted to UIT
hereunder provided that UIT is diligently taking the required steps to solve the
quality deficiencies.
7.2 License to UIT Marks. Commencing on the Effective Date and subject to
--------------------
the terms and conditions of this Agreement, UIT hereby grants to AT&T for the
Term of this Agreement a nontransferable, nonexclusive, royalty-free, restricted
license extending to the Territory to use the UIT Marks solely to promote,
advertise, and market the Service and the Bundled UIT Products and in
advertising and marketing materials thereof and on promotional, advertising, and
marketing materials in connection with the Service. AT&T shall use such UIT
Marks in accordance with the guidelines provided to AT&T by UIT. All such usage
of UIT Marks shall be subject to UIT's prior written approvals, shall inure
solely to the benefit of UIT and shall not create any rights, title or interest
for AT&T in and to the UIT Marks. AT&T agrees to cooperate with UIT in
facilitating UIT's monitoring and control of the use of the UIT Marks and to
supply UIT with samples of use of the UIT Marks. Except for the UIT Marks, AT&T
will be the owner of all marks used solely to distribute, promote, advertise and
market the Service and the goodwill related thereto and all uses thereof shall
inure solely to the benefit of AT&T.
8. PROPRIETARY RIGHTS
8.1 AT&T Proprietary Rights. Title to and ownership of all copies of AT&T
-----------------------
WorldNet Software and AT&T Documentation, whether in machine-readable or printed
form, and including, without limitation, Derivative Works, compilations, or
collective works thereof prepared by AT&T and all related technical know-how
and all rights therein (including without limitation rights in patents,
copyrights, and trade secrets applicable thereto), are and shall remain the
exclusive property of AT&T and its suppliers. UIT shall not take any action to
jeopardize, limit or interfere in any manner with AT&T's ownership of and rights
with
7
AT&T/UIT-Confidential
<PAGE>
respect to the AT&T WorldNet Software and AT&T Documentation. UIT shall have
only those rights in or to the AT&T WorldNet Software and AT&T Documentation
granted to it pursuant to this Agreement. Nothing herein shall be deemed to
affect UIT's ownership of or rights in or to any information developed or owned
by, or made available by third parties to, UIT.
8.2 UIT Proprietary Rights. Title to and ownership of all copies of UIT
---------------------
Product and UIT Documentation, whether in machine-readable or printed form, and
including, without limitation, Derivative Works, compilations, or collective
works thereof prepared by UIT and all related technical know-how and all rights
therein (including without limitation rights in patents, copyrights, and trade
secrets applicable thereto), are and shall remain the exclusive property of UIT
and its suppliers. AT&T shall not take any action to jeopardize, limit or
interfere in any manner with UIT's ownership of and rights with respect to the
UIT Product and UIT Documentation. AT&T shall have only those rights in or to
the UIT Product and UIt Documentation granted to it pursuant to this Agreement.
Nothing herein shall be deemed to affect AT&T's ownership of or rights in or to
any information developed or owned by, or made available by third parties to,
AT&T.
8.3 Proprietary Notices.
-------------------
8.3.1 NO Alteration of Notices. UIT and its employees and agents
------------------------
shall not remove or alter any proper trademark, service mark, trade name,
copyright, or other proprietary notices appearing on or in copies of AT&T
WorldNet Software and AT&T Documentation delivered to UIT by AT&T and shall use
the same notices in and on copies of UIT Products and AT&T Documentation made
pursuant to Section 3.1 as are contained in and on such copies of the AT&T
WorldNet Software and AT&T Documentation.
8.3.2 Notice. Each portion of the AT&T WorldNet Software and AT&T
------
Documentation reproduced by UIT or its Distributors shall include the
intellectual property notice or notices appearing in or on the corresponding
portion of such materials as delivered by AT&T hereunder. UIT further agrees
that, to the extent that UIT prepares any Derivative Works of UIT Products
Incorporating, in whole or in part, the AT&T WorldNet Software as permitted by
this Agreement it will include an appropriate copyright notice of AT&T.
9. CONFIDENTIAL INFORMATION AND DISCLOSURE
9.1 Confidential Information. Each party agrees to maintain all Confidential
------------------------
Information in confidence to the same extent that it protects its own similar
Confidential Information and to use such Confidential Information only as
permitted under this Agreement. For purposes of this Agreement "Confidential
Information" shall mean confidential or proprietary technical or business
Information, Including this Agreement, given by the discloser of the Information
to the recipient of the Information. All Information which is disclosed by one
party to the other in connection with this Agreement or received from the
proprietary Alliance member website (whether orally, in writing or by any other
means or media) shall automatically be deemed proprietary to the discloser of
the Information and subject to this Agreement, unless otherwise confirmed in
writing by the discloser of the Information. Each party agrees to take all
reasonable precautions to prevent any unauthorized disclosure or use of
Confidential Information Including, without limitation, disclosing Confidential
Information only to its employees and in the case of AT&T its Affiliates and in
the case of UIT its Distributors (a) with a need to know to further permitted
uses of such Information and (b) who are parties to appropriate agreements
sufficient to comply with this Section 9, and (o) who are Informed of the
nondisclosure/non-use obligations imposed by this Section 9, and both parties
shall take appropriate steps to implement and enforce such non-disclosure/non-
use obligations. The foregoing restrictions on disclosure and use shall survive
for 3 years following termination of this Agreement but shall not apply with
respect to any Confidential Information which (i) was or becomes publicly known
through no fault of the receiving party: (ii) was rightfully known or becomes
rightfully known to the receiving party without confidential or proprietary
restriction from a source other than the disclosing party; (iii) is
independently developed by the receiving party without the participation of
Individuals who have had access to the Confidential Information; (iv) is
approved by the disclosing party.
8
AT&T/UIT-Confidential
<PAGE>
for disclosure without restriction in a written document which is signed by a
duly authorized officer of such disclosing party; and (v) the receiving party is
legally compelled to disclose; provided, however, that prior to any such
compelled disclosure, the receiving party will (a) assert the privileged and
confidential nature of the Confidential Information against the third party
seeking disclosure and (b) cooperate fully with the disclosing party in
protecting against any such disclosure and/or obtaining a protective order
narrowing the scope of such disclosure and/or use of the Confidential
Information. In the event that such protection against disclosure is not
obtained, the receiving party will be entitled to disclose the Confidential
Information, but only as and to the extent necessary to legally comply with such
compelled disclosure.
9.2 Member Information. UIT agrees that all information concerning
------------------
customers who subscribe to the Service (including quantities or percentages of
such Members who sign up through UIT Products) is the Confidential Information
of AT&T. AT&T shall include in its quarterly reports pursuant to Section 6 the
number of Delivered Members registered for the Service during the quarter in
connection with which the quarterly report is issued.
10. REPRESENTATIONS AND WARRANTIES
10.1 No Warranty. EXCEPT AS MAY BE PROVIDED IN THE AT&T MEMBER AGREEMENT
-----------
OR ANY END USER LICENSE AGREEMENT ASSOCIATED WITH THE AT&T WORLDNET SOFTWARE,
AT&T MAKES NO REPRESENTATIONS OR WARRANTY OF ANY KIND WHETHER EXPRESS OR IMPLIED
(EITHER IN FACT OR BY OPERATION OF LAW) WITH RESPECT TO THE AT&T WORLDNET
SOFTWARE OR ANY OTHER PRODUCT OR SERVICE RELATED THERETO. AT&T EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
AT&T DOES NOT WARRANT, FOR EXAMPLE, THAT THE AT&T WORLDNET SOFTWARE OR ANY OTHER
PRODUCT OR SERVICE RELATED THERETO IS ERROR-FREE OR THAT OPERATION OF THE AT&T
WORLDNET SOFTWARE OR ANY PRODUCTS OR SERVICES RELATED THERETO WILL BE SECURE OR
UNINTERRUPTED. THERE IS ALSO NO IMPLIED WARRANTY OF NONINFRINGEMENT: THE SOLE
REMEDY FOR INFRINGEMENT IS PROVIDED IN SECTION 11.
10.2 Netscape Representations and Warranties. UIT acknowledges that (i) the
---------------------------------------
AT&T WorldNet Software contains, as critical component thereof, a Netscape
Navigator(TM) brand browser; (ii) representations and warranties are made by
Netscape Communications Corp. ("Netscape") to AT&T in an agreement between
Netscape and AT&T (the "AT&T/Netscape Agreement"); and (iii) AT&T has the right
to fulfill any and all of its obligations to UIT under this Agreement by
exercising its right under the AT&T/Netscape Agreement and securing performance
of such obligations by Netscape.
10.3 Microsoft Representations and Warranties. UIT acknowledges that (i) the
----------------------------------------
AT&T WorldNet Software contains, as a critical component thereof, an Internet
Explorer(TM) brand browser; (ii) representations and warranties are made by
Microsoft Communications Corp. ("Microsoft") to AT&T in an agreement between
Microsoft and AT&T (the "AT&T/Microsoft Agreement"); and (iii) AT&T has the
right to fulfill any and all of its obligations to UIT under this Agreement by
exercising its rights under the AT&T/Microsoft Agreement and securing
performances of such obligations by Microsoft.
10.4 UIT Representations and Warranties. UIT warrants and represents to AT&T
-----------------------------------
that: (i) UIT owns or has licensed, and will own or have licensed, the UIT
Products and UIT Marks and all necessary Intellectual Property right therein,
and has and will have the full power and authority to license and deliver copies
of the UIT Products and, to UIT's knowledge, UIT Products do not contain
Viruses.
9
AT&T/UIT-Confidential
<PAGE>
10.5 Testing Representations Warranties. UIT represents and warrants that the
----------------------------------
Bundled UIT Product referenced in such notice: (i) is ready for release for
general distribution; (ii) has been adequately and extensively tested; (iii) has
been fixed to correct any major errors affecting its functionality which have
been detected by UIT or its customers; (iv) is subject to ongoing support, error
detection and correction; and (v) complies in all respects with the AT&T
WorldNet Service Integration Check-List. AT&T shall have the right, but not the
obligation, to participate in any such testing with UIT.
11. INDEMNIFICATION.
11.1 AT&T Indemnity.
--------------
11.1.1 Obligation. AT&T shall defend, indemnify and hold harmless UIT and
----------
its directors, officers, agents, employees and representatives, in any third
party action for infringement by, or alleged infringement by, the AT&T WorldNet
Software of any U.S. trademark or service mark, or any U.S. patent issued as of
the Effective Date, any U.S. patent issued after the Effective Date or any
copyright, or misappropriation of any trade secret by the AT&T WorldNet
Software, and to pay any final judgments awarded or settlements entered into in
any such action. UIT agrees that it shall notify AT&T of all threats, claims and
proceedings related to any such suit promptly after such threat, claim or
proceeding comes to the attention of UIT. AT&T shall have sole control of the
defense and/or settlement of any such suit, and UIT shall furnish to AT&T, upon
request, Information available to UIT for such defense, and shall provide AT&T
with such assistance in defending such suits as is requested by AT&T.
11.1.2 Options. If UIT's use of the AT&T WorldNet Software under the
-------
terms of this Agreement is, or in AT&T's opinion is likely to be, enjoined due
to the type of infringement or misappropriation specified above, then AT&T may,
at its sole option and expense, either (i) procure for UIT the right to continue
using such the AT&T WorldNet Software under the terms of this Agreement, or (ii)
modify the AT&T WorldNet Software so that it is noninfringing and substantially
equivalent in function to the enjoined AT&T WorldNet Software.
11.1.3. Exceptions. The foregoing obligation of AT&T does not apply (i)
----------
with respect to versions of the AT&T WorldNet Software or portions or components
thereof; (a) which are modified after shipment, if the alleged infringement
relates to such modification, and if such modification was not authorized,
expressly permitted or performed by AT&T; (b) which are combined with other
products, processes or materials, if the alleged infringement relates to such
combination and if AT&T did not authorize or expressly permit the combination;
or (c) where UIT's use of the AT&T WorldNet Software is incident to an
infringement not resulting primarily from the AT&T WorldNet Software or is not
in accordance with the license granted under this Agreement or (ii) for use or
distribution of AT&T WorldNet Software or the Service or the use of any AT&T
Marks by UIT, outside the Territory or otherwise not in accordance with the
terms and conditions of this Agreement.
11.1.4 Netscape Indemnity. UIT acknowledges that (i) the AT&T WorldNet
------------------
Software contains, as a critical component thereof, a Netscape NavigatorTM
Internet browser; (ii) certain indemnity obligations are made by Netscape to
AT&T in the AT&T/Netscape Agreement; and (iii) AT&T has the right to fulfill any
and all of its indemnity obligations to UIT under this Agreement by exercising
its rights under the AT&T/Netscape Agreement and securing performance by
Netscape.
11.1.5 Microsoft Indemnity. UIT acknowledges that (i) the AT&T WorldNet
-------------------
Software contains, as a critical component thereof, an Internet ExplorerTM
Internet browser; (ii) certain indemnity obligations are made by Microsoft to
AT&T in the AT&T/Microsoft Agreement; and (iii) AT&T has the right to fulfill
any and all of its indemnity obligations to UIT under this Agreement by
exercising its rights under the AT&T/Microsoft Agreement and securing
performance by Microsoft.
11.1.6 Sole Liability. THE FOREGOING IS UIT'S SOLE AND EXCLUSIVE REMEDY
--------------
WITH RESPECT TO INFRINGEMENT OR ALLEGED INFRINGEMENT OF ANY INTELLECTUAL
PROPERTY.
10
AT&T/UIT-Confidential
<PAGE>
RIGHTS BY THE AT&T WORLDNET SOFTWARE, THE SERVICE OR ANY AT&T MARKS, WHETHER
UNDER THEORY OR INDEMNITY, WARRANTY OR OTHERWISE.
11.2 UIT Indemnity.
-------------
11.2.1 Obligation. UIT shall defend, Indemnify and hold harmless AT&T,
----------
its Affiliates, and their respective directors, officers, agents, employees and
representatives, in any third party action for infringement by, or alleged
infringement by, UIT Products, UIT Marks, or any modification of the AT&T
WorldNet Software by UIT (when the Infringement or alleged infringement would
not be present in the AT&T WorldNet Software standing alone, as provided by
AT&T), of any U.S. Third Party Mark, or any U.S. patent issued as of the
Effective Date, any U.S. patent issued after the Effective Date or any
copyright, or misappropriation of any trade secret by the UIT Products, and any
action by any party based on a claim related to (i) defective disks or defective
duplication in copies of UIT Products distributed by UIT, or (ii) the UIT
Website or the use thereof and to pay any final judgements awarded or
settlements entered into in any such action, AT&T agrees that it shall notify
UIT of all threats, claims and proceedings related to any such suit promptly
after such threat, claim or proceeding comes to the attention of AT&T. UIT shall
have sole control of the defense and/or settlement of any such suit, and AT&T
shall furnish to UIT upon request, information available to AT&T for such
defense, and shall provide UIT with reasonable assistance.
11.2.2 Sole Liability. THE FOREGOING IS AT&TS SOLE AND EXCLUSIVE REMEDY
--------------
WITH RESPECT TO INFRINGEMENT OR ALLEGED INFRINGEMENT OF ANY INTELLECTUAL
PROPERTY RIGHTS BY OR RELATED TO THE UIT PRODUCTS, THE UIT MARKS, OR ANY
MODIFICATION OF THE AT&T WORLDNET SOFTWARE BY UIT AND ANY PRODUCTS OR SERVICES
RELATED THERETO, WHETHER UNDER THEORY OF INDEMNITY, WARRANTY OR OTHERWISE.
12. LIMITATION OF LIABILITY
IN NO EVENT SHALL EITHER PARTY (OR ITS RESPECTIVE DIRECTORS, OFFICERS,
EMPLOYEES, SUPPLIERS, AGENTS, REPRESENTATIVES, DISTRIBUTORS OR AT&T AFFILIATES)
BE LIABLE FOR ANY LOSS OF PROFITS, LOSS OF BUSINESS, LOSS OF USE OR DATA,
INTERRUPTION OF BUSINESS, OR FOR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES OF ANY KIND, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES (AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY
LIMITED REMEDY), OR FOR ANY CLAIM AGAINST THE OTHER PARTY BY ANY THIRD PARTY,
EXCEPT AS PROVIDED IN SECTION 11 ENTITLED "INDEMNIFICATION." IN NO EVENT WILL
EITHER PARTY (OR ITS RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, SUPPLIERS,
AGENTS, REPRESENTATIVES, DISTRIBUTORS OR AT&T AFFILIATES) BE LIABLE FOR (a) ANY
REPRESENTATION OR WARRANTY MADE TO ANY THIRD PARTY BY THE OTHER PARTY (OR ITS
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, SUPPLIERS, AGENTS,
REPRESENTATIVES OR DISTRIBUTORS): (b) IN THE CASE OF AT&T. (i) FAILURE OF
THE AT&T WORLDNET SOFTWARE OR ANY PRODUCTS OR SERVICES RELATED THERETO TO
PERFORM AS SPECIFIED HEREIN EXCEPT AS, AND TO THE EXTENT, OTHERWISE EXPRESSLY
PROVIDED HEREIN, (ii) FAILURE OF THE AT&T WORLDNET SOFTWARE AND ANY PRODUCTS OR
SERVICES RELATED THERETO TO PROVIDE SECURITY, OR (iii) ANY USE OF THE AT&T
WORLDNET SOFTWARE OR ANY PRODUCTS OR SERVICES RELATED THERETO OR THE
DOCUMENTATION FOR SAME OR THE RESULTS OR INFORMATION OBTAINED OR DECISIONS MADE
BY END USERS OF THE AT&T WORLDNET SOFTWARE OR ANY PRODUCTS OR SERVICES RELATED
THERETO OR THE DOCUMENTATION FOR SAME. NOTWITHSTANDING ANYTHING IN THIS
AGREEMENT TO THE CONTRARY, EACH PARTY'S ENTIRE LIABILITY TO THE OTHER PARTY FOR
DAMAGES CONCERNING PERFORMANCE OR NONPERFORMANCE BY SUCH PARTY OR IN ANY WAY
RELATED TO THE SUBJECT MATTER OF THIS AGREEMENT, AND REGARDLESS OF WHETHER THE
CLAIM FOR SUCH DAMAGES IS BASED IN CONTRACT OR IN TORT (INCLUDING NEGLIGENCE),
SHALL NOT EXCEED AN AMOUNT EQUAL TO THE AMOUNT PAID (AND
11
<PAGE>
OBLIGATED TO BE PAID) BY AT&T UNDER THIS AGREEMENT, NOTHING IN THIS SECTION 12
SHALL BE DEEMED TO LIMIT OR EXPAND EITHER PARTY'S RIGHTS OR LIABILITY (I) UNDER
SECTION 11, (II) FOR INTELLECTUAL PROPERTY INFRINGEMENT OR MISAPPROPRIATION OF
TRADE SECRETS BY EITHER PARTY OR (III) FOR BREACH OF SECTION 9 BY EITHER PARTY.
IN ADDITION, THE FOREGOING PROVISIONS OF THIS SECTION 12 WILL NOT AFFECT EITHER
PARTY'S LIABILITY, IF ANY, WITH RESPECT TO CONTRIBUTION OR INDEMNITY FOR THIRD
PARTY CLAIMS FOR PERSONAL INJURY, DEATH, OR PHYSICAL DAMAGE TO PROPERTY.
13. TERM AND TERMINATION
13.1 Term. Unless sooner terminated under the provisions of this Section 13, or
----
otherwise rightfully terminated, this Agreement shall remain in effect for a
period of one (1) year from the Effective Date.
13.2 Termination for Default. If either party defaults in any of its
-----------------------
obligations under this Agreement, the non-defaulting party, at its option, shall
have the right to terminate this Agreement by written notice unless, within 30
calendar days after receipt of written notice of such default, the defaulting
party remedies the default, or, in the case of a default which cannot with due
diligence be cured within a period of 30 calendar days, the defaulting party
institutes within the 30 calendar days steps necessary to remedy the default and
thereafter diligently prosecutes the same to completion.
13.3 Termination of Browser or Service. AT&T may terminate this Agreement on 60
---------------------------------
days' notice in the event AT&T determines to terminate all or a substantial part
of the Service.
13.4 Effect on Rights.
----------------
13.4.1 Termination of this Agreement by either party shall not act as a
waiver of any breach of this Agreement and shall not act as a release of either
party from any liability for breach of such party's obligations under this
Agreement.
13.4.2 Except as specified in Sections 13.5 and 13.6 below, upon
termination or expiration of this Agreement, all licenses for AT&T WorldNet
Software and its Documentation granted under this Agreement shall terminate.
13.4.3 Except where otherwise specified, the rights and remedies granted to
a party under this Agreement are cumulative and in addition to, and not in lieu
of, any other rights or remedies which the party may possess at law or in
equity, including without limitation rights or remedies under applicable patent,
copyright trade secrets, or propriety rights laws, rules or regulations.
13.5 Effect of Termination. Within 30 calendar days after termination of this
---------------------
Agreement, each party shall, on request by the other party, either deliver to
the other party or destroy all copies of the requesting party's Confidential
Information, including (in the case of UIT) AT&T WorldNet Software and
Documentation (except as provided in Section 13.6) and any other materials
provided by the requesting party to the other party hereunder in its possession
or under its control, and shall furnish to the requesting party a certificate
signed by an officer of the other party certifying that, to the best of its
knowledge, such delivery or destruction has been fully effected. Notwithstanding
the foregoing, and provided UIT fulfills its obligations specified in this
Agreement with respect to such items, UIT may continue to use and retain copies
of the AT&T WorldNet Software and Documentation to the extent, but only to the
extent, necessary to support and maintain UIT Products rightfully distributed to
Ender Users by UIT prior to termination of this Agreement and UIT may exhaust
its existing inventory in accordance with Section 5.8.
13.6 Continuing Obligations.
----------------------
13.6.1 Other Continuing Obligations. In addition to the foregoing, all
----------------------------
other respective rights and obligations of AT&T and UIT which by their nature
survive termination of this Agreement (including without
12
<PAGE>
UIT-PPO-RJS-June 17, 1999
limitation under the provisions of Sections 3.3, 4.7, 6, 8, 9, 10, 11, 12 and
14) shall survive termination of this Agreement.
13.6.2 Injunctive Relief. Consistent with the protection of the rights
------------------
of the party seeking injunctive relief as permitted hereunder, any injunctive
relief sought by either party to enforce the obligations of the other party
under this Agreement shall be structured, to the greatest extent possible, in a
manner that will maintain the business operations of the party on which any such
relief is imposed.
14. GENERAL PROVISIONS
14.1 Notices. Any notice required or permitted hereunder shall be in writing
--------
and shall be deemed to be properly given upon the earlier of (a) actual receipt
by the addressee or (b) five business days after deposit in the U.S. mail,
postage prepaid, when mailed by registered or certified U.S. mail, return
receipt requested, or two (2) business days after being sent via overnight
courier to the respective parties at the addresses first set forth above or to
such other person or address as the parties may from time to time designate in a
writing delivered pursuant to this Section 14.1. Notices to AT&T shall be sent
to the address set forth in the introductory paragraph to this Agreement,
attention: Vice President, Law-Consumer Marketing Division. Notices at UIT shall
be sent to the address set forth in the introductory paragraph to this
Agreement, attention: Brian Shuster.
14.2 Waiver and Amendment. The waiver by either party of a breach of or a
---------------------
default under any provision of this Agreement, shall not be construed as a
waiver of any subsequent breach of the same or any other provision of the
Agreement, nor shall any delay or omission on the part of either party to
exercise or avail itself of any right or remedy that it has or may have
hereunder operate as a waiver of any right or remedy. No amendment or
modification of any provision of this Agreement shall be effective unless in
writing and signed by a duly authorized signatory of AT&T and UIT.
14.3 Assignment.
-----------
14.3.1 No Assignment. Except as expressly provided herein, neither party
--------------
may assign this Agreement without the prior written consent of the other party
provided that either party may assign this agreement to any person or entity
that acquires all or substantially all of that party's business. Such consent
shall be in the sole discretion of the party requested to give consent. Any
attempt to sublicense, assign or transfer (except as expressly provided herein)
any of the rights, duties or obligations under this Agreement in derogation
hereof shall be null and void.
14.3.2 AT&T Restructuring. By the provision of notice in accordance with
-------------------
this Agreement, AT&T shall have the right to assign this Agreement and to
assign its rights and delegate its obligations and liabilities under this
Agreement either in whole or in part (an "Assignment") to any entity that is, or
that was immediately preceding such Assignment (i) a current or former
subsidiary, business unit, or division of AT&T; or (ii) an entity in which AT&T
had an ownership interest. The notice of Assignment shall state the effective
date thereof. Upon the effective date and to the extent of the Assignment, AT&T
shall be released and discharged from all obligations and liabilities under this
Agreement. Such Assignment, release and discharge shall be complete and shall
not be altered by the termination of the affiliation between AT&T and the entity
assigned rights or delegated obligations and liabilities under this Agreement.
14.4 Governing Law; Dispute Resolution. This Agreement and all disputes
----------------------------------
hereunder shall be governed by the substantive law of the State of New York,
without regard to the conflicts of law provisions therein, and the parties
hereby expressly consent to be subject to the jurisdiction of the courts of the
State of New York. In the event of a dispute regarding any matter under this
Agreement which cannot be resolved by the parties, the dispute shall be referred
to a Vice President of AT&T and a Vice President of UIT, who will attempt to
resolve the dispute within 10 business days of such referral date. If such
officers resolve the dispute they shall set forth in writing the resolution. If
such officers are unable to resolve the dispute within such 10 business day
period, the parties shall further seek to resolve the dispute pursuant
13
AT&T/UIT - Confidential
<PAGE>
UIT-PPO-RJS-June 17, 1999
to arbitration as set forth below. All disputes hereunder which cannot be
amicably resolved by the parties as described above, except those solely
concerned with AT&T's intellectual property rights in the AT&T WorldNet Software
or UIT's intellectual property rights in the Bundled UIT Product shall be
settled exclusively by binding arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The arbitration shall
be held in New York City, New York and shall be conducted by a single arbitrator
who shall be a lawyer familiar with computer software development and license
agreements. The decision of the arbitrator shall be final and binding upon the
parties and may be enforced by either party in any court of competent
jurisdiction. Each party shall bear the cost of preparing and presenting its
case. The costs of the arbitration, including the fees and expenses of the
arbitrator, will be shared equally by the parties unless the award otherwise
provides. This provision shall not be construed to prohibit either party from
seeking preliminary or permanent injunctive relief in any court of competent
jurisdiction to the extent not prohibited by this Agreement.
14.5 Regulatory Compliance. The parties recognize that the Service may be
----------------------
subject to regulation by the Federal Communications Commission and/or state
regulatory agencies. If any applicable regulation, whether now existing and
hereafter enacted, requires a modification of this Agreement or the waiver of
any right hereunder in order to market and offer UIT Products, and/or the
Service as contemplated hereunder, the parties agree to take such reasonable
actions as are required under the circumstances in order to accomplish the
purposes of this Agreement. Each party shall comply with all requirements of
applicable laws, ordinances, administrative rules and regulations in the
performance of this Agreement, and shall take prompt action to remove or remedy
any violation that occurs or is discovered during the Term of this Agreement.
14.6 RELATIONSHIP OF THE PARTIES. NO AGENCY, PARTNERSHIP, FRANCHISE, JOINT
----------------------------
VENTURE OR EMPLOYMENT IS CREATED AS A RESULT OF THIS AGREEMENT AND NEITHER UIT
NOR ITS AGENTS HAVE ANY AUTHORITY OF ANY KIND TO BIND AT&T IN ANY RESPECT
WHATSOEVER.
14.7 Severability. If the application of any provision or provisions of this
-------------
Agreement to any particular facts of circumstances shall be held to be invalid
or unenforceable by any court of competent jurisdiction, than (a) the validity
and enforceability of such provision or provisions as applied to any other
particular facts or circumstances and the validity of other provisions of this
Agreement shall not in any way be affected or impaired thereby and (b) such
provision or provisions shall be reformed without further action by the parties
hereto to and only to the extent necessary to make such provision or provisions
valid and enforceable when applied to such particular facts and circumstances.
14.8 Force Majeure. Either party shall be excused from any delay or failure in
--------------
performance hereunder caused by reason of any occurrence or contingency beyond
its reasonable control, including but not limited to, acts of God, earthquake,
labor disputes and strikes, riots, war, novelty of product manufacture or other
unanticipated product development problems, and governmental requirements. The
obligations and rights of the party so excused shall be extended on a day-to-day
basis for the period of time equal to that of the underlying cause of the delay.
14.9 Expenses. Each party shall bear its own costs and expenses in connection
---------
with this Agreement, except as expressly provided herein.
14.10 Compliance with all Laws. Each party shall comply fully with all require
------------------------
ments of applicable laws, ordinances, administrative rules and regulations,
including but not limited to those relating to the export of technical data,
those of the United States Departments of State and Commerce and other
applicable governmental agencies, and each party acknowledges that by virtue of
certain security technology embedded in the AT&T WorldNet Software, the export
of such software may not be legal. Further, each party agrees to comply with and
require its Distributors to comply with rules and regulations to preclude the
acquisition of unlimited rights to technical data, software and documentation
provided with the AT&T
14
AT&T/UIT - Confidential
<PAGE>
WorldNet Software and Bundled UIT Products to a governmental agency, and ensure
the inclusion of appropriate "Restricted Rights" or "Limited Rights" notices
required by the U.S. government agencies.
14.11 Entire Agreement. This Agreement, including the Attachments hereto,
-----------------
constitutes the entire agreement between the parties concerning the subject
matter hereof and supersedes all proposals or prior agreements whether oral or
written, and all communications between the parties relating to the subject
matter of this Agreement and all past courses of dealing or industry custom. The
terms and conditions of this Agreement shall prevail, notwithstanding any
variance with any purchase order or other written instrument submitted by UIT,
unless specifically agreed in writing by AT&T.
AUTHORIZED SIGNATURES
In order to bind the parties to this Agreement, their duly authorized
representatives have signed their names below on the dates indicated. This
Agreement shall be binding on both parties when signed on behalf of each party
and delivered to the other party (which delivery may be accomplished by
facsimile transmission of the signature pages hereto).
UNITED INTERNET TECHNOLOGIES, INC. AT&T CORP.
By: /s/ Brian Shuster By: /s/ Dean Colantino
-------------------------- --------------------------
Brian Shuster Dean Colantino
Title: President Title: Director of Sales AT&T
-------------------------- WorldNet Service
---------------------------
Date: June 15-99 Date: 6/29/99
-------------------------- --------------------------
Attachment A - UIT Products
PlanetKids
15
AT&T/UIT - Confidential
<PAGE>
Attachment B
AT&T has created the concept of "Prominent Placement". Prominent Placement is
when the AT&T WorldNet Software is integrated in a prescribed manner. This
document outlines the rules for achieving this preferred status.
PROMINENT PLACEMENT PROFILE
The following is a list of required actions the vendor must take to achieve
Prominent Placement.
. Install AT&T WorldNet(R) Service during your product installation
Use supplied logo files for your splash screens, give it adequate
visibility, and allow the user to install AT&T WorldNet Service software
during your product install. Remember that our install might want the user
to re-boot, so plan on making it install last.
. Embed the Registration Code
This feature will auto-populate (invisible to the user) the registration code
filed during registration.
To embed the registration code, add the two lines indicated below in the
mediaxx.ini file. This file will actually be called media95.ini or
media31.ini for Win95 or Win3x installations respectively. This will allow
auto-population of the registration code during registration. Note that it's
just one registration code. If you were given a pair of codes (AT&T LD, and
other LD Company), use the AT&T LD code pair. Note - after 5/1/97, we will
only be issuing one code.
Here is what you need to add (if they don't already exist) to the end of
Media(31/95).ini file, replacing
"XXXXXXXXX" with your assigned 9 character registration code:
[Registration Server]
RegCodesXXXXXXXXX
. Create an icon in the program group that points to the AT&T WorldNet Service
software install program on you CD. For Windows-95, also create a menu item
under your heading.
This will allow the user to subscribe later on, if they didn't want to during
the initial install. If not done, the user would have to re-install your
program in order to install AT&T WorldNet Service software. The icon must be
the standard AT&T WorldNet shortcut icon, and the caption should say "install
AT&T WorldNet(R) Service"
. Incorporate the electronic Marketing insert
An electronic marketing insert is required for this program. If does come in
two formats; paper and electronic. The marketing insert contains AT&T
WorldNet Service warrantee information, your registration code, LD switch
information, and simple user installation instructions.
You must give the user the option to view it BEFORE starting the AT&T
WorldNet install. It is possible that this "readme" file is already a part of
AT&T WorldNets install (since we are working on it now). Please verify if
it's been done before doing it again.
16
AT&T/UIT - Confidential
<PAGE>
Exhibit 10.33
November 19, 1999
Lauren Renaud
Teen People Magazine
Rockefeller Center
New York, NY 11020-1393
Re: Nordstrom CD-Rom Promotion
Dear Lauren:
As per our various conversations this document serves to bullet point the
parameters of the project and set forth a preliminary schedule for a firm March
9th 2000 completion.
1. We will create from start to completion all the elements requested by
Teen People based on Attachment "A" (2 pages).
2. Timeline based on attached Schedule B.
3. UIT will assign 2 project coordinators. Larry Deleon from United
Internet Technologies and Liz Kieman as an outside consultant
recommended by TEEN PEOPLE who will have day-to-day contact and
reporting responsibility to TEEN PEOPLE, NORDSTROM and UIT on the
project.
Please review the attached preliminary schedule timeline and the attached spec
breakdown of the project. The schedule is only a first pass, and will be
adjusted over the next week as we begin the pre-production phase.
Please sign the attached pages as an indication of your approval so that we can
start moving forward. Because of all the holidays, the only way to meet the
deadline with a level of comfort is to start by this Monday.
Sincerely,
/s/
Brian Shuster
President
1995 Westwood Blvd.
Penthouse Floor
Los Angeles, CA 90025
Phone: (310)441-0800
Fax: (310) 474-7466
<PAGE>
ATTACHMENT "A" SPECS (2 PAGES)
United Internet Technologies will create, design and implement to
completion the following specifics requested by Teen People:
a. Design, creation and production of a 12-page "mini-magalog". The
magalog will be a 4-color catalog of merchandise with TEEN PEOPLE
supplied advertorial copy, appropriate for NORDSTROM target
audience. The magalog will also act as a self-mailer for the CD-ROM.
b. Printing of 500,000 magalog pieces. We have estimated a 5-1/2 x 7-
1/2 piece with card stock covers and inside pages.
c. Third class postage and fulfillment to client supplied mail list.
d. Although the primary responsibility for casting the project will be
with TP, UIT will assist in casting and will also provide a facility
to cast from. All casting will be done in Los Angeles. TP will pay
all talent directly.
e. Fashion/advertorial photography sheet of 65 original shots on
location and in studio here in Los Angeles.
f. We will design and produce the interactive CD-ROM based on the
template you supplied.
g. Links will be provided to the NORDSTROM web site. The content of the
CD-ROM will include the copy and merchandise provided for the
magalog, plus additional video and audio assets, provided by client.
In no case, shall the overall content exceed that of the previous
BP magalog. Should this occur, additional cost will be applied. Any
such costs will be presented prior to expense.
h. One day of blue screen video production for host talent on a sound
stage. The resulting footage will be composited over interactive
graphic backgrounds. The edited footage will not exceed 15 minutes
in length. The overall total running time of all video on the CD-ROM
will not exceed 45 minutes.
i. Production schedule based on pre-production beginning Monday
November 22nd.
j. UIT will require that the CD-ROM carry UIT credit information page
and that TEEN PEOPLE/NORDSTROM will authorize UIT to announce
publicly its production involvement in creating the project for
client. All such announcements are subject to the prior approval of
both NORDSTROM and Teen People.
<PAGE>
k. UIT will bundle an Internet Service Provider software package as a
consumer option. Revenues derived from such bundling shall accrue to
United Internet Technology.
l. Client shall have the option of AT&T, Earthlink or America Online.
TEEN PEOPLE/NORDSTROM will supply the following:
a. All approvals on a timely manner
b. All talent cost including actors for all shoots, talent and any
talent travel for video.
c. All camera-ready wardrobe, product and featured accessories and logo
art.
d. Broadcast clubs of television previews, movie trailers and CD audio
clips including necessary clearances.
e. Copy for advertorial tips for CD and magalog, and client approved
copy for product descriptions. This copy will be written and
advertised by client to requirements for magalog.
f. Mail list (format to be decided)
<PAGE>
Exhibit 10.34
DISTRIBUTION AGREEMENT
FOR PLAYER PRODUCTS
This Distribution Agreement (the "Agreement") is made as of February 2,
2000 (the "Effective Date") by and between Liquid Audio, Inc. (Liquid Audio"),
and United Internet Technologies ("United Internet Technologies") a Delaware
corporation doing business at 1990 Westwood Blvd, Los Angeles, California 90025
("Distributor").
The parties agree as follows:
1. DEFINITIONS.
(a) "Bundle" means the combination of the Liquid Audio Products and the
Distributor Products as packaged together or otherwise combined by Distributor
for distribution where such Liquid Audio Products are included on a tangible
medium.
(b) "Distributor Products" means the Distributor products, as amended
from time to time specified in the Distributor Products Attachment attached as
Exhibit B hereto subject to amendment.
- ---------
(c) "End User Agreement" means Liquid Audio's standard end user agreement
for the Liquid Audio Products, in such form as Liquid Audio may determine from
time to time in its sole discretion. The End User Agreement is incorporated by
Liquid Audio into the Liquid Audio Products and is displayed to an end user
when such end user downloads or installs the Liquid Audio Products.
(d) "Liquid Audio Products" means object code versions of those Liquid
Audio products listed in the Liquid Audio Products Attachment attached as
Exhibit A hereto and those additional Liquid Audio products, if any, that may
- ---------
from time to time be added by mutual written agreement of the parties, and all
associated Liquid Audio end-user documentation and manuals. Any modifications,
additions, or adaptations to the Liquid Audio Products that are made available
to Distributor by Liquid Audio, if any, in order to customize the Liquid Audio
Products for use with the Distributor Products or for any other reason will be
considered part of the "Liquid Audio Products."
2. DISTRIBUTION.
(a) Subject to the terms of this Agreement, Liquid Audio grants to
Distributor a limited, non-exclusive, worldwide, royalty-free, non-transferable
license to reproduce, market and distribute the Liquid Audio Products solely as
part of the Bundle.
(b) Distributor will reproduce, market and distribute all Bundles
accurately and in a manner that is consistent with the "Summary of Requirements
for Use of Dolby Marks" attached as Exhibit C hereto (the "Summary
---------
Requirements"), and to the extent not in conflict with the Summary Requirements,
consistent with the quality standards Distributor uses for its own products.
Distributor will provide Liquid Audio with five (5) units of each version of the
Bundle.
(c) Except as specified in subsection (a) above, Distributor will have no
right to make, distribute or promote any copies of the Liquid Audio Products or
any portion of them, nor, except as required by law, any right to modify,
decompile, recompile, disassemble, reverse engineer, or make or distribute any
other form of, or derivative work from, the Liquid Audio Products, or authorize
or assist any third party to do any of the foregoing. Distributor will not use
the Liquid Audio Products to provide service bureau, time sharing or other
computer services to third parties. All rights not expressly granted to
Distributor in this Agreement are retained by Liquid Audio and its licensors.
1
<PAGE>
(d) Distributor will submit quarterly reports to Liquid Audio
fully documenting the sales and distribution of all Bundles. Distributor shall
refer to Liquid Audio all inquiries and requests for additional information
regarding Liquid Audio products.
(e) All licenses of the Liquid Audio Products to Distributor's
customers shall be subject to an End User Agreement and shall run directly from
Liquid Audio to such customers.
(f) Distributor may appoint sub-distributors upon providing reasonable
advance written notice to Liquid Audio. Each sub-distributor (a
"Sub-Distributor") shall execute an agreement with Distributor that includes
terms and conditions at least as protective of Liquid Audio's, and its
licensors', rights in the Liquid Audio Products and in all related intellectual
property, as the terms and conditions of this Agreement.
(g) Distributor shall provide Liquid Audio with samples of all
advertising and promotional materials and documentation to the extent that they
relate to the Liquid Audio Products, and prior to any use, Distributor must
request Liquid Audio's written approval of all such materials and documentation
and Liquid Audio must provide such approval or denial within 48 hours. If
Liquid Audio does not provide such written approval or denial within 48 hours
from the time request is received by Liquid Audio, approval shall be deemed made
by Liquid Audio.
3. INTERNET MARKETING. All marketing of the Liquid Audio Products by
Distributor over the Internet shall be accomplished by means of Distributor
providing its customers with access to a World Wide Web page containing a
hypertext link pointing to a URL address specified by Liquid Audio. The address
will specify a web page which will allow such customers to download the Liquid
Audio Products in accordance with Liquid Audio's then-current terms and
procedures.
4. DELIVERY OF LIQUID AUDIO PRODUCTS. Liquid Audio will deliver to
Distributor a master copy of the Liquid Audio Products within ten (10) days of
the Effective Date of this Agreement.
5. WARRANTIES; SUPPORT AND SERVICES.
(a) Liquid Audio will warrant the Liquid Audio Products directly to
Distributor's end user customers in accordance with the terms and conditions of
the End User Agreement.
(b) THE WARRANTIES OF LIQUID AUDIO IN THIS AGREEMENT ARE IN LIEU OF ALL
OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NON-INFRINGEMENT.
(c) Subject to payment by Distributor's end user customers of Liquid
Audio's then-current maintenance and support fees, Liquid Audio will provide
Distriubutor's end user customers of the Bundle with the same level and extent
of service and support that Liquid Audio generally provides to its other end
user customers of the Liquid Audio Products.
6. COPYRIGHT NOTICES/TRADEMARKS. Subject to the terms of this Agreement,
Liquid Audio grants to Distributor a non-exclusive, non-transferable, worldwide
license to use the Liquid Audio trademarks set forth on the Liquid Audio
Products Attachment (the "Trademarks") and to use the Dolby Marks, as defined in
the Summary Requirements attached hereto, solely in connection with marketing
and distribution of the Bundle and the marketing of Liquid Audio products on the
Internet. Distributor agrees to prominently incorporate the Trademarks on the
packaging and on all promotional materials and documentation for the Liquid
Audio Products. Distributor's use of the Trademarks under this Agreement will be
subject to Liquid Audio's then current trademark usage guidelines. Distributor
will not seek to register the Trademarks in any jurisdiction. Distributor will
at all times comply with the terms of the Summary Requirements.
<PAGE>
7. TERM. This Agreement will commence on the Effective Date and will
continue in effect unless earlier terminated by the parties as provided herein.
8. PROPRIETARY RIGHTS AND CONFIDENTIALITY.
(a) Distributor will at all times respect, protect, and not infringe
upon Liquid Audio's or its licensor's patents, copyrights, trade secrets,
trademarks, or other proprietary rights. Distributor will not obscure, and will
accurately reproduce any serial numbers or patent, trademark or copyright
notices, on and in the Liquid Audio Products. Distributor will not include
trade names or trademarks of Liquid Audio in any trade name under which such
party does business.
(b) Distributor acknowledges that the Liquid Audio Products contain
proprietary trade secrets and confidential information (collectively,
"Confidential Information"). Distributor agrees that: (i) it will not disclose
to any third party or use any Confidential Information except as expressly
permitted in this Agreement, and (ii) it will take all reasonable measures to
maintain the confidentiality of all Confidential Information in its possession
or control, which will in no event be less than the measures it uses to maintain
the confidentiality of its own information of similar importance. Confidential
Information will not include information that (i): is in or enters the public
domain without breach of this Agreement; (ii) the Distributor lawfully receives
from a third party without restriction on disclosure and without breach of a
nondisclosure obligation; or (iii) the Distributor develops independently based
on its written records. Distributor acknowledges that any breach of this Section
8(b) would cause irreparable harm to Liquid Audio, and that without limiting
Liquid Audio's remedies hereunder, in such event Liquid Audio shall be entitled
to injunctive and other appropriate equitable relief.
9. RELATIONSHIP OF THE PARTIES. The relationship between Distributor and
Liquid Audio will be that of licensor and licensee, as independent contractors.
Nothing contained in this Agreement will constitute Distributor the partner,
broker, employee or agent of or for Liquid Audio. Neither party hereto will
have any right to make any warranties or to incur any liabilities or obligations
on behalf of or binding upon the other party, or the other party's licensors.
10. REPRESENTATIONS AND WARRANTIES.
(a) Liquid Audio represents and warrants that (i) it has all necessary
corporate right, power and authority to enter into this Agreement and perform
its obligations hereunder; (ii) this Agreement is valid, binding and enforceable
against Liquid Audio; and (iii) the Liquid Audio Products do not infringe or
violate any copyright or trade secret of any third party.
11. INTELLECTUAL PROPERTY INDEMNIFICATION.
(a) Liquid Audio will defend, hold harmless and indemnify Distributor
from and against all third party claims, damages, costs, or expenses (including
reasonable attorneys' fees) suffered or incurred by Distributor in connection
with a breach of Liquid Audio's representations and warranties set forth in
Section 10(a) above ("Warranty Claims"), provided that Distributor will promptly
notify Liquid Audio of any Warranty Claims, will cooperate with Liquid Audio in
good faith in the defense of such claims, and will permit Liquid Audio to have
sole control of the defense of any Warranty Claims.
(b) If Distributor's use of any of the Liquid Audio Products under the
terms of this Agreement is, or in Liquid Audio's option, is likely to be,
enjoined in connection with a Warranty Claim, then Liquid Audio may, at its sole
option and expense, either: (1) procure for Distributor the right to continue
using such products under the terms of this Agreement; or (ii) replace or modify
such products so that they are noninfringing and
<PAGE>
substantially equivalent in function to the enjoined products; or (iii) if
options (i) and (ii) above cannot be accomplished despite the reasonable efforts
of Liquid Audio, then Liquid Audio may terminate Distributor's rights, and
Liquid Audio's obligations, under this Agreement with respect to such products.
(c) Liquid Audio will have no obligations under this Section with
respect to infringement or misappropriation arising from: (i) modifications to
products that were not authorized by Liquid Audio (ii) product specifications
requested by Distributor, or (iii) the use of products in combination with
products not provided by Liquid Audio.
(d) THE FOREGOING ARE LIQUID AUDIO'S SOLE AND EXCLUSIVE OBLIGATIONS AND
DISTRIBUTOR'S SOLE AND EXCLUSIVE REMEDIES WITH RESPECT TO INFRINGEMENT OR
MISAPPROPRIATION OF INTELLECTUAL PROPERTY RIGHTS.
12. LIMITATIONS OF LIABILITY AND REMEDIES. IN NO EVENT WILL EITHER PARTY BE
LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES OR LOST
PROFITS OR LOST SAVINGS SUFFERED BY THE OTHER PARTY, ITS CUSTOMERS, AFFILIATES,
OR CONTRACTORS, OR ANY OTHER PERSON OR ENTITY, EVEN IF SUCH PARTY OR ITS AGENTS
ARE MADE AWARE OF THE POSSIBILITY OF SUCH DAMAGES.
13. INDEMNIFICATION. With the exception of claims indemnified by Liquid
Audio in accordance with Section 11 above, Distributor shall defend, indemnify
and hold harmless Liquid Audio from and against all claims, damages, costs or
expenses (including reasonable attorney's fees) suffered or incurred by Liquid
Audio as a result of Distributor's, or its Sub-Distributor's, acts or
omissions when performing under this Agreement. Distributor may not enter
into any settlement agreement on behalf of Liquid Audio without Liquid Audio's
prior written consent.
14. ASSIGNMENT AND SUBLICENSE. This Agreement will bind each party and its
successors and permitted assigns but will not be assignable or delegable by such
party except with the other party's prior written consent. Any such purported
assignment or delegation in contravention of the foregoing will be void. Any
merger, sale of all or substantially all assets or business, or transfer of
control of either party will not constitute an assignment requiring the consent
of the other party.
15. DEFAULT AND TERMINATION. Either party may terminate this Agreement for
any reason upon providing thirty (30) days written notice to the other party.
This Agreement may be terminated by a party if the other party materially fails
to perform or comply with this Agreement or any provision hereof. Termination
will be effective thirty (30) days after notice of termination to the defaulting
party if the applicable event(s) of default has not been cured within such
thirty (30) day period.
16. OBLIGATION UPON TERMINATION
(a) Within thirty (30) days of the termination or expiration of this
Agreement, Distributor will return to Liquid Audio or destroy, and remove from
its computer systems, all copies of Liquid Audio Products, and all materials
containing trade secrets or Confidential Information of Liquid Audio (as
specified in Section 8(c)), except pursuant to subsection (b) below.
(b) From and after termination or expiration, Distributor will not use
internally nor employ any Liquid Audio Product as part or portion of any product
that Distributor may use, sell, assign, lease, license, or transfer to third
parties, except that for a period of one hundred twenty (120) days after the
Effective Date of any such termination or expiration, Distributor shall retain
the right to dispose of Liquid Audio Products as part of the Bundles remaining
in its inventory prior to the date of such termination or expiration in
accordance with the terms of this Agreement. Except for such limited disposal
right all licenses granted hereunder shall immediately terminate upon any
termination or expiration of this Agreement. Distributor shall have no such
disposal right in the event that this Agreement is terminated by Liquid Audio as
a result of a breach by Distributor.
<PAGE>
(c) No termination or expiration hereof for any reason will lessen or
affect the obligations of each party under provisions hereof which by their
terms continue after the termination or expiration of this Agreement (including
Sections 8 through 17), and all such provisions and obligations will fully
survive and continue thereafter.
17. MISCELLANEOUS
Distributor shall ensure that the export of all Liquid Audio Products is
in compliance with the export control laws of the United States and all other
nations and territories. All notices, authorizations, and requests in connection
with this Agreement will be deemed given on the earlier of: (i) actual receipt;
(ii) the third day following deposit in the U.S. mails, postage prepaid,
certified or registered, return receipt requested; or (iii) the business day
after they are sent by overnight courier or national express mail, charges
prepaid, with a confirming fax, to the address first specified above. This
Agreement will be governed by and construed in accordance with the laws of the
State of California, except for its conflict of laws rules. If any provision of
this Agreement is determined to be invalid or unenforceable to any extent when
applied to any person or circumstance, the remainder of this Agreement and the
application of such provision to other persons or circumstances or to another
extent will not be affected and will remain in full force. If either party
employs attorneys to litigate any rights arising out of or relating to this
Agreement, the prevailing party will be entitled to recover its reasonable
attorneys' fees, costs and other expenses. No waiver of any breach of any
provision of this Agreement will constitute a waiver of any prior, concurrent or
subsequent breach of the same or any other provisions hereof, and no waiver will
be effective unless made in writing and signed by an authorized representative
of the waiving party. This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof and supersedes all prior
and contemporaneous agreements or communications regarding such subject matter.
This Agreement may not be modified except by a written agreement signed on
behalf of the parties. This Agreement may be signed in counterparts.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
United Internet Technologies, Inc. LIQUID AUDIO, INC.
By: /s/ Christopher Riley By:
----------------------------- ------------------
Name: Christopher Riley Name:
----------------------------- ------------------
Title: CFO Title:
----------------------------- ------------------
5
<PAGE>
EXHIBIT B
Distributor Products Attachment
Project 1:
TITLE: BP.-ROM SPRING 2000
- -----
DESCRIPTION:
- -----------
Interactive CD-Rom for Nordstrom Stores and Teen People Magazine. This CD-ROM
release is a "magalog" (magazine-catalog) of Nordstrom junior department fashion
from its BP department (formerly known as Brass Plum). Teen People Magazine is
a co-branded sponsor supplying editorial content and promotional content from
music labels, television networks and movie studios.
BP.ROM is targeted to Nordstrom cardholder customers who shop at BP, and Teen
People subscribers in the Nordstrom markets. 600,000 CDs are being direct
mailed to this list the week of March 6, 2000, with an additional 15,000 disks
sent to all 72 Nordstrom stores for distribution in the BP department. The
promotion also receives in-store video promotion.
BP.ROM also contains a bundled subscriber offer for America Online service.
<PAGE>
EXHIBIT 21.1
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
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 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statement
No.333-30128 of United Leisure Corporation on Form S-3 of our report dated March
17, 2000 appearing in this Annual Report on Form 10-KSB of United Leisure
Corporation for the year ended December 31, 1999.
/s/ Hollander, Lumer & Co. LLP
------------------------------
Hollander, Lumer & Co. LLP
Los Angeles, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,998,059
<SECURITIES> 0
<RECEIVABLES> 88,540
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,276,834
<PP&E> 181,765
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,582,495
<CURRENT-LIABILITIES> 1,085,898
<BONDS> 0
0
0
<COMMON> 161,468
<OTHER-SE> 2,335,129
<TOTAL-LIABILITY-AND-EQUITY> 3,582,495
<SALES> 1,377,770
<TOTAL-REVENUES> 1,377,770
<CGS> 3,087,736
<TOTAL-COSTS> 5,442,834
<OTHER-EXPENSES> (305,366)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 422,049
<INCOME-PRETAX> (4,181,747)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,181,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,181,747)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
