MASTER GLAZIERS KARATE INTERNATIONAL INC, 10KSB, 1997-04-15

MASTER GLAZIERS KARATE INTERNATIONAL INC
10KSB, 1997-04-15
MEMBERSHIP SPORTS & RECREATION CLUBS

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SECURITIES AND EXCHANGE COMMISSION

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, 1996

[ ] Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934

For the transition period from ___________ to____________.

Commission File No. 33-63008-NY

MASTER GLAZIER'S KARATE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

Delaware 22-3234110
(State of or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

377 Hoes Lane
Piscataway, New Jersey 08854
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (908) 981-0077

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $.0001 Per Share
(Title of Class)

Class A Redeemable Common Stock Purchase Warrants
(Title of Class)

Class B Redeemable Common Stock Purchase Warrants
(Title of Class)

Check whether the Registrant (1) has filed all reports required to be filed
by Sections 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 pursuant to Item 405
of the Regulation S-B is not 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. [ ]

Issuer's revenues for its most recent fiscal year were $ 1,474,629.

The aggregate market value of the voting stock held by non- affiliates of
the Registrant, computed by reference to the closing price of such stock as of
March 31, 1997, was approximately $ 2,157,896.

Number of shares outstanding of the issuer's common stock, as of March 31,
1997, was 10,350,000.

DOCUMENTS INCORPORATED BY REFERENCE: None.

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PART I

Item 1. BUSINESS.

General

Master Glazier's Karate International, Inc., a Delaware corporation
(the"Company"), which was incorporated on March 22, 1993, manages and operates
Master Glazier Karate Centers (the"Karate Centers") located in Pennsylvania. The
Company was formed to acquire and operate several companies engaged in the
martial arts instruction service business. The Company's business is the
successor to the business operated by several companies with which the Company
has merged or which the Company has acquired. Mark Glazier, the Company's
founder and President, is a master in Karate and Tae-Kwon-Do. The Master Glazier
system teaches a proprietary style of martial arts based on realistic self
defense methods, effective physical conditioning and positive mental training.

Until recently, the Company operated seven (7) Karate Centers one (1)
directly and six (6) through wholly owned subsidiaries. During the two year
period following the Company's initial public offering in 1993, the Company
pursued an aggressive expansion program. The Company long believed that by
increasing the number of students and overall revenues it would reduce its
overhead costs per student. This would enable the Company to operate profitably.
However, after some time, it became apparent to management that despite having
necessary capital, the Company was incapable of training and developing a
sufficient number of instructors skilled in the Company's style of martial arts
in order to staff the opening of several new Karate Centers.

The Company then aggressively pursued acquiring existing martial arts
centers. However, because of the Company's unique style of martial arts
instruction and the fragmented, "mom and pop" nature of the martial arts
industry, it was difficult to identify numerous appropriate acquisition
candidates. The Company discussed potential transactions with a limited number
of acquisition targets. After unsuccessful attempts at negotiating an acceptable
acquisition transaction, the Company refocused its attention to divesting its
unprofitable Karate Centers. During the past two fiscal years ending December
1995 and 1994, the Company recorded net losses of $882,960 and $911,080,
respectively, and for the nine months ended September 30, 1996, the Company
recorded a net loss of $441,852. The Company also incurred a net loss of
$1,252,790 for the year ended December 31, 1996. See "Management's Discussion
and Analysis."

Since the Company has been unable to operate profitably, and because the
Company could neither expand its business internally (by training and developing
an adequate number of instructors) or by acquiring other martial arts
instruction centers, management believed that the sale of unprofitable Karate
Centers was in the best interests of the Company's stockholders. Accordingly, on
December 17, 1996 and January 10, 1997, the Company, through its wholly owned
subsidiaries, entered into five (5) separate Asset Purchase Agreements (the
"Purchase Agreements") for the sale

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of five (5) of its karate centers to affiliates of Tiger Schulmann's Karate (the
"Purchasers") (the "Sales Transaction"). On March 28, 1997, shortly after
receiving the approval of the Company's stockholders, the Sales Transaction
closed. In light of the fact that the Company closed the Sales Transaction, the
Company is currently seeking to acquire alternative businesses with which the
Company can expand its operations and enhance its profitability. See "The Sales
Transaction."

On October 18, 1996, the Company entered into convertible preferred stock
subscription agreements (the "Agreements") with each of Mark Glazier (the
Registrant's President and Chairman of the Board), Fair Lane, LLC., Cristine
Cowan, Euro Translation Limited and CRC Partners, Ltd. (collectively, the
"Subscribers") pursuant to which the Subscribers purchased an aggregate of
750,000 shares of the Registrant's Series A Preferred Stock (the "Preferred
Stock") for $1.20 per share. The shares of Preferred Stock were convertible at
any time after April 18, 1997 into twenty (20) shares of the Registrant's Common
Stock so long as the Company amended its Certificate of Incorporation to
authorize a sufficient number of shares of Common Stock. Each share of Preferred
Stock had ten (10) votes per share on matters presented to the shareholders for
a vote.

On December 26, 1996, the Company entered into a Stock Exchange Agreement (the
"Stock Exchange Agreement") with Mark Glazier, Fair Lane, LLC, Cristine Cowan,
Euro Translation Limited and CRC Partners, Ltd. (collectively, the "Preferred
Stockholders") pursuant to which the Preferred Stockholders exchanged an
aggregate of 750,000 shares of the Company's Series A Preferred Stock (the
"Preferred Stock") for 5,000,000 shares (the "Common Shares") of common stock of
the Company, par value $.0001 per share (the "Common Stock"), and 10,000,000
options (the "Investor Options") each exercisable to purchase one (1) share of
Common Stock. The Investor Options become exercisable on April 17, 1997 at an
exercise price of $.0001 per share so long as not less than 30,000,000 shares of
Common Stock are authorized for issuance. As a result of the transaction, there
are currently no shares of Series A Preferred Stock issued and outstanding.

On March 25, 1997, at the Company's annual meeting of stockholders, the
Company's stockholders approved the Sales Transaction. Additionally, the
Company's stockholders approved an increase in the Company's authorized capital
stock from 15,000,000 shares of common stock, par value $.0001 per share, (the
"Common Stock") to 40,000,000 shares of Common Stock, as well as a one-for-five
reverse stock split of the Company's Common Stock.

The Company's executive offices are located at 377 Hoes Lane, Piscataway,
New Jersey, telephone number (908) 981-0077.

The Sales Transaction

Upon the terms and subject to the conditions of the Purchase Agreements,
effective as of March 28, 1997 (the "Closing Date"), (i) the Company and the
Subsidiaries sold and transferred, and the Purchasers purchased and acquired,
the Assets, including all of the right, title and interest of the Company and
the Subsidiaries in and to (a) all Equipment (as defined in the Purchase

Agreements), and (b) contracts, agreements and commitments specified in the
Purchase Agreements, including,

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but not limited to, the lease agreements for the leased five (5) Karate Centers'
premises, including leasehold improvements, subject to the approval of their
respective lessors; and (ii) the Company and the Subsidiaries transferred and
delegated to the Purchasers, and the Purchasers assumed and agreed to pay,
perform and discharge (the extent not paid, performed or discharged prior to the
Closing Date) the Assumed Liabilities, including all liabilities and obligations
of the Subsidiaries and the Company which related to the leases, agreements
contracts and commitments transferred to the Purchasers under the Purchase
Agreements.

In consideration for the purchase of the Assets, the Purchasers paid to the
Company an aggregate of $505,000, consisting of $225,000 in cash (the "Cash")
and an aggregate of $280,000 in three promissory notes (the "Notes"; the Cash
and Notes are hereinafter referred to collectively as the "Purchase Price"), and
assumed all of the Assumed Liabilities. The Purchase Price for each school was
$100,000, except for the Great Neck location, the purchase price of which was
$105,000. The Purchase Price was determined by negotiation between the Company
and the Purchasers. The Company did not utilize an appraisal or other
independent determination of asset value nor did the Company obtain a fairness
opinion.

The three Notes held by the Company are in the aggregate principal amount
of $280,000 and do not bear interest. The Notes are to be repaid in monthly
installments over a thirty (30) month period following the Closing Date. The
Company and the Subsidiaries received a security interest in all the Assets
transferred to the Purchasers pursuant to the Purchase Agreements as collateral
for the obligations set forth in the Notes. The Notes are also personally
guaranteed by Daniel Schulmann, President of UAK Management, Inc.

In connection with the sale of the Great Neck location and the Hicksville
location, the Company paid $76,375 to two (2) of its landlords to secure the
consent of such landlords to the assignment of the leases by the Company to the
purchasers of such karate schools. In addition, the Company remains a guarantor
of certain of the Purchaser's obligations under the Hicksville lease and, for a
period of one (1) year, the Company remains a guarantor of certain of the
Purchaser's obligations under the Ramsey lease.

Prior to the Closing Date, the Assets were operated and managed by the
Purchasers, pursuant to the terms of individual Operating Agreements by and
among the Subsidiaries and each of the Purchasers dated the same date of the
Purchase Agreements (the "Operating Agreements"). The operating Agreements
provided that the Purchasers were to (i) continue to operate the business of the
Subsidiaries in accordance with past practice; (ii) provide all necessary
accounting, maintenance, operational and administrative services; and (iii) be
entitled to collect all gross revenue generated by the businesses of the
Subsidiaries. The Operating Agreements expired upon the closing of the Sales
Transaction.

The Company anticipates using the proceeds from the Sales Transaction to
acquire an alternative business. However, no definitive agreement or arrangement
has been made regarding such a transaction. The Company plans on divesting all
or a portion of its ownership interest in the

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two (2) remaining Karate Centers in the future.

The Karate Business

The terms of the transactions pursuant to which the Company's predecessors
were merged into or acquired by the Company are summarized below:

Body Motion

On September 1, 1987, Mr. Glazier acquired all of the outstanding shares of
Common Stock of Richard Raciti, Inc. ("Richard Raciti") for $9,907. Richard
Raciti was incorporated on October 26, 1986 and operated a karate studio prior
to the acquisition by Mr. Glazier. In September 1987, Mr. Glazier changed the
name from Richard Raciti, Inc. to U.S.A. Karate & Fitness, Inc. and commenced
operating a Karate Center in Hasbrouck Heights, NJ. In March 1993, this location
was converted from a Karate Center into an aerobics studio and such corporation
changed its name to Body Motion Women's Aerobics, Inc. ("Body Motion"). Karate
students were afforded the opportunity to transfer to the Company's Karate
Center in Hackensack, NJ. In April 1994, the Company sold all of the capital
stock of Body Motion, effectively exiting from the aerobics instruction
business.

Allentown Karate

On January 22, 1990, Mr. Glazier incorporated Allentown Karate Associates,
Inc., a Pennsylvania corporation ("Allentown Karate"). In January 1990, Mr.
Glazier purchased 45 shares of Class A Voting Common Stock of Allentown Karate
for $1,149, Scott Van Dine, an instructor with the Company, purchased 45 shares
of Class B Non-Voting Common Stock of Allentown Karate for $1,148 and Allentown
Karate commenced operating a Karate Center in Whitehall, PA.

Bethlehem Karate

On August 28, 1990, Mr. Glazier incorporated Bethlehem Karate, Inc., a
Pennsylvania corporation ("Bethlehem Karate"). In August 1990, Mr. Glazier
purchased 40 shares of Class A Voting Common Stock and 50 shares of Class B
Non-Voting Common Stock of Bethlehem Karate for $5,000, Jordan Belfort, formerly
the President and principal stockholder of Stratton Oakmont Inc., the
Underwriter of the Company's initial public offering in October, 1993, purchased
10 shares of Class A Voting Common Stock and 100 shares of Class B Non-Voting
Common Stock of Bethlehem Karate for $40,000, and Bethlehem Karate commenced
operating a Karate Center in Bethlehem, PA. In July 1991, Mr. Belfort made a
capital contribution of $20,000 to Bethlehem Karate, and simultaneously
therewith, Mr. Glazier, in lieu of a cash investment, surrendered, as a

corresponding capital contribution, 10 shares of Class B Non-Voting Common Stock
of Bethlehem Karate to be retained as treasury shares. In December 1992, Mr.
Belfort made an additional capital contribution of $100,000 to Bethlehem Karate,
and

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simultaneously therewith, Mr. Glazier, in lieu of a cash investment,
surrendered, as a corresponding capital contribution, 30 shares of Class A
Voting Common Stock of Bethlehem Karate to be retained as treasury shares. As a
result of these transactions, Mr. Glazier held 10 shares of Class A Voting
Common Stock and 40 shares of Class B Non-Voting Common Stock of Bethlehem
Karate and Mr. Belfort held 10 shares of Class A Voting Common Stock and 100
shares of Class B Non-Voting Common Stock of Bethlehem Karate. Mr. Glazier and
Mr. Belfort in December 1992 entered into a Voting Trust Agreement ("Voting
Trust Agreement") pursuant to which Mr. Glazier acquired the right to vote all
shares of Voting Common Stock held by Mr. Belfort on all matters on which
stockholders were entitled to vote. Mr. Glazier retained the right to vote the
shares of the Company held by Mr. Belfort until the earlier of (i) the date on
which Mr. Belfort transferred or sold his shares to the public or (ii) December
1, 1998. However, on September 17, 1993, Mr. Belfort transferred or sold all
shares of Common Stock held by him to MG Holdings, Inc., a Delaware corporation,
wholly owned by Mr. Glazier, and therefore, the Voting Trust Agreement was
simultaneously canceled therewith.

MGKI-NJ

On July 2, 1991, Mr. Glazier incorporated Master Glazier's Karate
International, Inc., a New Jersey corporation ("MGKI-NJ"). In August 1992, Mr.
Glazier purchased 100 shares of Common Stock of MGKI-NJ for $33,188 and MGKI-NJ
commenced providing management, marketing and financial advisory services to the
Karate Centers. For each of the Karate Centers, MGKI-NJ was responsible for
hiring and training all sales and management personnel, managing accounts
receivable, accounts payable, inventory accounts and invoicing, and creating,
producing and implementing all sales promotion and marketing campaigns.

Paramus Karate

On August 25, 1992, Mr. Glazier incorporated Paramus Karate, Inc., a New
Jersey corporation ("Paramus Karate"). In August 1992, Mr. Glazier purchased 100
shares of Common Stock of Paramus Karate for $1.00. In May 1993, Paramus Karate
commenced operating a Karate Center in Paramus, NJ. The assets of Paramus Karate
were sold to Central Bergen Karate, Inc. on March 28, 1997. See "The Sales
Transaction."

Hackensack Karate

On September 16, 1992, Mr. Glazier incorporated Hackensack Karate, Inc., a
New Jersey corporation ("Hackensack Karate"). In September 1992, Mr. Glazier
purchased 100 shares of Common Stock of Hackensack Karate for $1.00. In December
1992, Hackensack Karate commenced operating a Karate Center in Hackensack, NJ.
The assets of Hackensack Karate were sold to Southern Bergen Karate, Inc. on

March 28, 1997. See "The Sales Transaction."

Great Neck Karate

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On November 7, 1994, the Company incorporated Great Neck, Karate, Inc. a
New York corporation ("Great Neck Karate"). In November 1994, Great Neck Karate
commenced operating a Karate Center in Great Neck, NY. The assets of Great Neck
Karate were sold to Northern Nassau Karate, Inc. on March 28, 1997. See "The
Sales Transaction."

Hicksville Karate

On April 17, 1995, the Company incorporated Hicksville Karate, Inc. a New
York corporation ("Hicksville Karate"). In November, 1995, Hicksville Karate
commenced operating a Karate Center in Hicksville, N.Y. The assets of Hicksville
Karate were sold to Central Nassau Karate, Inc. on March 28, 1997. See "The
Sales Transaction."

Ramsey Karate

On August 22, 1995, the Company incorporated Ramsey Karate Center, Inc. a
New Jersey corporation. ("Ramsey Karate Center"). In March, 1996, Ramsey Karate
Center commenced operating a Karate Center in Ramsey, N.J. The assets of Ramsey
Karate Center were sold to Northern Bergen Karate, Inc. on March 28, 1997. See
"The Sales Transaction."

Corporate Reorganization

The Company was incorporated on March 22, 1993. None of the Company's
securities were issued prior to March 31, 1993. As of that date, the Company
purchased 45 shares of Class B Non-Voting Common Stock of Allentown Karate from
Scott Van Dine, an instructor with the Company, and delivered 55,000 shares of
the Company's Common Stock as payment therefor. As a result of such transaction,
the shares of Class B Non-Voting Common Stock repurchased from Mr. Van Dine were
canceled, Mr. Van Dine became the sole stockholder of the Company, and Mr.
Glazier became the sole shareholder of Allentown Karate.

In April, 1993, Mr. Glazier transferred (i) 100 shares of Common Stock of
Body Motion, representing all of the outstanding shares of capital stock of Body
Motion, for 10 shares of Class B Non-Voting Common Stock of Bethlehem Karate,
(ii) 45 shares of Class A Common Voting Stock of Allentown Karate, representing
all of the outstanding shares of capital stock of Allentown Karate, for 10
shares of Class A Voting Common Stock of Bethlehem Karate, (iii) 100 shares of
Common Stock of Hackensack Karate, representing all of the outstanding shares of
capital stock of Hackensack Karate, for 10 shares of Class A Voting Common Stock
of Bethlehem Karate and (iv) 100 shares of Common Stock of Paramus Karate,
representing all of the outstanding shares of capital stock of Paramus Karate,
for 10 shares of Class A Voting Common Stock of Bethlehem Karate. As a result of
such transactions, Mr. Glazier owned an aggregate of 40 shares of Class A Voting
Common Stock and 50 shares of Class B Non-Voting Common Stock of Bethlehem

Karate, Mr. Belfort owned an aggregate of 10 shares of Class A Voting Common
Stock and 100 shares of Class B Non-Voting Common Stock of Bethlehem Karate, and
Bethlehem Karate held all of the outstanding capital stock of Body Motion,
Allentown Karate, Hackensack Karate and

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Paramus Karate.

Effective as of June 25, 1993, Bethlehem Karate and MGKI-NJ were merged
with and into the Company. Pursuant to the terms of the merger, each outstanding
share of Bethlehem Karate was entitled to receive 7,500 shares, and each
outstanding share of MGKI-NJ was entitled to receive 1,500 shares, of the
Company's Common Stock.

On the effective date of the merger, Mr. Glazier received an aggregate of
675,000 shares of the Company's Common Stock in exchange for 40 shares of Class
A Voting Common Stock and 50 shares of Class B Non-Voting Common Stock of
Bethlehem Karate as well as 150,000 shares of the Company's Common Stock in
exchange for 100 shares of Common Stock of MGKI-NJ. In addition, Mr. Belfort
received an aggregate of 825,000 shares of the Company's Common Stock in
exchange for 10 shares of Class A Voting Common Stock and 100 shares of Class B
Non-Voting Common Stock of Bethlehem Karate. Effective as of June 26, 1993, the
Company effected a 1.81818-for-one stock split with respect to the shares of its
Common Stock. As a result of such stock split, Mr. Glazier and Mr. Belfort each
owned 1,500,000 shares of Common Stock of the Company.

In view of the NASDAQ Industry Panel's initial decision regarding the
rejection of the Company's listing application, on September 17, 1993, MG
Holdings, Inc., a Delaware corporation wholly owned by Mr. Glazier ("MG
Holdings"), and Mr. Belfort entered into a Stock Purchase Agreement, pursuant to
which MG Holdings purchased one million five hundred thousand (1,500,000) shares
of Common Stock from Mr. Belfort. As consideration for such shares of Common
Stock, MG Holdings delivered a promissory note to Mr. Belfort in the aggregate
principal amount of $3,750,000, bearing interest at the rate of four percent
(4%) per annum and due and payable on September 20, 1995. Simultaneously
therewith, Mr. Belfort and Mr. Glazier canceled the Voting
Trust Agreement. MG Holdings repaid the note in full in 1995.

Courses; Payment Plans

At the Karate Centers located in Bethlehem and Allentown, Pa., the Company
currently offers a basic training course a black belt course, a second degree
black belt course and master training course. The basic training course, is
divided into four (4) different achievement levels, the black belt course is
divided into twelve 12 different achievement levels (which encompasses the
basic training program) and the second degree black belt course has one (1)
achievement level. The introductory level for the basic training course is
offered approximately four (4) times each week. Students may therefore join the
program at any time by attending an introductory class or classes.

There is currently no backlog or waiting list to enroll in any of the

courses at any of the Karate Centers; however, from time to time there is a
waiting list for the introductory level of the basic training course.

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Each of the Company's instructors, all of whom are black belts in Master
Glazier's Karate, have undergone a rigorous training program conducted by Mr.
Glazier. Each Karate Center conducts approximately 35 classes each week, each
for a 45 minute period. Each class is generally comprised of 20 to 25 students
and taught by one to three instructors. Students are initially enrolled in a
basic training course. However, many students eventually convert to the more
intensive, longer black belt program. Classes are organized by skill level and
age group. The term of a basic training program is twelve months or 100 classes,
whichever occurs first. Students may take up to two classes each week. However,
once students register for a full black belt program, they are entitled to take
three classes per week. Fees, if paid in advance, are generally $1,100 and
$3,850 for the basic training and black belt programs, respectively. If a
student has graduated from the basic training program the cost to register for a
black belt program is $2,750. An installment payment plan is available at higher
rates. At each Karate Center, the Company houses a full proshop which sells
martial arts related products, such as uniforms, other clothing and safety
equipment.

Government Regulation

The Company has been subject to various state and local laws affecting its
businesses. Some of the Company's Karate Centers have been subject to licensing
requirements and other regulations by numerous governmental authorities. Some
states require that health and other fitness clubs register with the appropriate
regulatory authority and post a bond in order to secure payment of "unearned"
membership fees (in the case where a club closes and as a result, a member who
has paid his full membership fee is unable to utilize his membership through the
end of the term). Currently, the attorney general in the Commonwealth of
Pennsylvania (the only state in which the Company currently operates Karate
Centers) has taken the position that Pennsylvania requires the posting of bonds
by martial arts centers in addition to health spas, racquet and other fitness
clubs. In the event that it is determined that Pennsylvania requires the posting
of a bond by a martial arts center, the Company will post a bond and use its
best efforts to comply with all rules and regulations.

Competition

The martial arts instruction industry is highly competitive with many small
instruction centers located in the northeastern United States. The Company's
competitors include small martial arts centers, none of which has a significant
percentage of the total market. Some of these competitors have more than one
location and may have greater financial and other resources than the Company.
The Company does not perceive its Karate Centers to be in competition with
health or fitness clubs, gyms or YMCA's and YWCA's. Although such facilities may
offer some martial arts classes, they do not generally offer intensive martial
arts programs emphasizing discipline and the development of self-confidence.

Businesses in the United States which are for children are characterized by
intense and substantial competition.

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Marketing and Advertising

The Company offers two introductory classes at prices ranging from $10 to
$49 to acquaint potential students with the benefits of the Company's martial
arts programs. These introductory programs and other promotions, including
print, radio, television and direct mail advertising are coordinated by the
Company's corporate offices. The Company's current newspaper advertising
campaign features photographs of the Company's students and professional models
being depicted as students. Each advertisement is targeted to a different
demographic group and appears in major newspapers in the markets in which the
Company operates Karate Centers. The Company also advertises its courses in the
Yellow Pages, and through direct mail flyers. In 1995 the Company directed a
significant portion of its budget to radio advertising, including the New York
based "Howard Stern Show." The Company believes that its marketing strategy has
contributed to its sales growth and greater consumer awareness of the Company
and its courses.

Other Products

The Company sells a variety of martial arts products and clothing in pro
shops maintained at each of the Karate Centers. The Company obtains all of such
products from suppliers which are unaffiliated with the company. Some vendors
print on or emboss the "Master Glazier's Karate" logo on many of such products.
While the sale of martial arts products does not constitute a substantial part
of revenues earned by the Company, management believes that the sale of such
products bearing the Company's logo helps create name recognition for the
Company.

Computerized Systems

The Company has invested approximately $100,000 since its inception in
computer equipment and programming that is designed to provide (i) receivables,
payables, purchasing, receiving, inventory management, accounting and financial
reporting and (ii) the Company with desktop publishing capabilities. The
Company's data processing system is capable of (i) monitoring membership
retention and usage, (ii) assessing the effectiveness of various marketing
campaigns, and (iii) providing current inventory reports thereby reducing
pilferage and theft. The Company believes its data processing systems will allow
it to continue to operate more efficiently.

Nevertheless, rapid expansion of the Company's business would require
enhancements to the Company's current data processing system and/or upgrades to
more powerful systems.

Liability Insurance

The Company has purchased liability insurance for each of its Karate

Centers in the amount of $1,000,000 per occurrence and $1,000,000 in the
aggregate. In addition, the Company purchased, a general liability "umbrella"
policy covering claims up to $5,000,000. The Company

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believes that its present insurance coverage is sufficient for its current level
of business operations. A successful claim against the Company in excess of the
liability limits or relating to an injury excluded under the policy could have a
material adverse effect on the Company.

Employees

As of March 31, 1997, the Company employs a total of 9 employees on a full
time basis and 5 employees on a part time basis. Each Karate Center employs four
full time staff, consisting of an instructor, assistant instructor, an office
manager and a sales director, and part-time staff, including instructors. Since
the closing of the Sales Transaction at the Company's principal executive
offices, the Company employs Mark Glazier the President, Chief Financial Officer
and Secretary on a full time basis. The Company also employs a bookkeeper of the
Company headquarters.

Employee Cash Bonuses

Instructors at each of the Karate Centers are entitled to receive an
aggregate monthly cash bonus equal to twenty-five percent (25%) of that
particular Karate Center's net profit (actual gross revenue on a cash accounting
basis after deduction for selling and general and administrative expenses) for
the preceding month.

It is important to note that because such cash bonuses are calculated on a
cash basis (while the Company otherwise recognizes income on an accrual basis)
and because such bonuses are calculated on a monthly basis, the Company may be
required to pay during periods in which the Company has minimal (or no) net
income.

Play-Learning Centers Joint Venture

In June, 1994, the Company entered into a joint venture with United
Leisure. The parties formed a new company, Planet Kids Learning Centers, Inc.
("Planet Kids") which was equally owned, to create and operate state-of-the art
children's play learning centers.

The terms and provisions of the joint venture are contained in a
Subscription and Stockholders' Agreement, dated as of June 20, 1994, among the
company, United Leisure and Planet Kids ("the S&S Agreement"). The Joint Venture
had an initial term of ten years. Each of the parties has contributed $500,000
to the joint venture as equity. The Company and United Leisure have each loaned
Planet Kids an additional $500,000.

On June 1, 1995, pursuant to a termination agreement, the Company
terminated it's joint venture agreement with Planet Kids Learning Centers. In

connection with such termination, the Company received its $500,000 investment
and the $500,000 loan plus accrued interest. In addition, the Company was
granted an option to purchase up to 150,000 shares of common stock of United
Leisure corporation at $.01 per share, during any time until May 31, 2000. In
return

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for the option the Company will perform consulting services from June 1, 1995
through May 31, 1996. During November, 1995 the Company fully exercised it's
option and purchased 150,000 shares of United Leisure Corporation for $1,500. In
February 1996, the Company sold the shares of United Leisure Corporation with
proceeds of approximately $450,000 going to the Company.

Investment In Limited Partnership

On March 4, 1996, the Company entered into an Agreement of Limited
Partnership with HEP II, L.P. Pursuant to the terms of such agreement, the
Company invested $1,500,000 in exchange for limited partnership interests. HEP
II, L.P. was organized to develop, produce and distribute not less than two (2)
full length motion pictures. On October 24, 1996 the Company received a
partnership distribution of $379,500 from HEP II, L.P. In 1996, HEP II, L.P.
released Santa with Muscles starring Hulk Hogan and in 1997 HBO will showcase
the world premiere of HEP II's Skeltons starring Ron Silver and James Coburn.

Item 2. PROPERTIES

The Company maintains its principal executive offices at 377 Hoes Lane, NJ
08854 and its telephone number is (908) 981-0077.

The Company operated Karate Centers during 1996 at each of the following
locations, subject to the Sales Transaction:

a. Whitehall, Pennsylvania

On February 12, 1990, Allentown Karate, a subsidiary of the Company,
entered into a lease with Bernard J. Rosenshein for its Whitehall, Pennsylvania
Karate Center. The lease is for 3,000 square feet and has a term of five(5)
years with a fixed rent of $45,000 per year, plus a percentage of gross sales
above a significant base amount.

Such Karate Center's annual lease payments were approximately 27% of the
Karate Center's annual gross sales for the calendar year 1995. In January 1995,
a lease extension agreement was signed extending the period of the lease through
April 30, 2005, with an annual rent schedule starting at $45,000 for the first
year and escalating to $51,000 in the tenth year.

b. Bethlehem, Pennsylvania

On August 23, 1990, Bethlehem Karate, a predecessor to the Company, entered

into a lease with Bernard J. Rosenshein for its Bethlehem, Pennsylvania Karate
Center. The lease is for approximately 3,000 square feet and has a term of ten
(10) years with a fixed rent of $47,040 per year for the first five years and
$52,920 per year for the second five years, plus a percentage of

<PAGE>

gross sales above a significant base amount. Such Karate Center's annual lease
payments were approximately 16% of the Karate Center's annual gross sales for
the calendar year 1995. As a result of the merger of Bethlehem Karate with and
into the Company, the Company has assumed all of the obligations of Bethlehem
Karate under the lease with its landlord, Bernard J.

Rosenshein.

c. Paramus, New Jersey

On July 1, 1992, Paramus Karate, a subsidiary of the Company, entered into
a lease with 221 Route 4 East Corp. for its Paramus, New Jersey Karate Center.
The lease is for 3,544 square feet, has a term of five (5) years with an annual
rent schedule starting at $70,880 for the first year and escalating to $81,334
for the fifth year. Such Karate Center's annual lease payments were
approximately 37% of the Karate Center's annual gross sales for the calendar
year 1995. This location was operated by Tiger Schulmann's Karate since December
17, 1996 in accordance with that certain Operating Agreement dated December 17,
1996 by and between Paramus Karate, Inc. and Central Bergen Karate, Inc. On
March 28, 1997, the Company assigned the lease to Central Bergen Karate, Inc.

d. Hackensack, New Jersey

On October 8, 1992, Hackensack Karate, a subsidiary of the Company, entered
into a lease with 17 & Summit Associates for its Hackensack Karate Center. The
lease is for approximately 3,000 square feet and has a term of five (5) years
with fixed rent of $75,000 per year plus an annual cost of living adjustment.
Such Karate Center's annual lease payments were approximately 40% of the Karate
Center's annual gross sales for the calendar year 1995. This location was
operated by Tiger Schulmann's Karate since December 17, 1996 in accordance with
that certain Operating Agreement dated December 17, 1996 by and between
Hackensack Karate, Inc. and Southern Bergen Karate, Inc. On March 28, 1997, the
Company assigned the lease to Southern Bergen Karate, Inc.

e. Great Neck, New York

On March 7, 1994, the Company entered into a lease with Great Neck Plaza,
L.P. for a Karate Center to be located in Great Neck, NY. The lease is for 4,200
square feet and has term of ten (10) years with an annual rent schedule starting
at $75,600 for the first year and escalating to $103,463 for the tenth year. The
Company also has the right to renew the lease for an additional five year
period. Such Karate Center's annual lease payments were approximately 45% of the
Karate Center's annual gross sales for the calendar year 1995. This location was
operated by Tiger Schulmann's Karate since January 10, 1997 in accordance with
that certain Operating Agreement dated January 10, 1997 by and between Great

Neck Karate, Inc. and Northern Nassau Karate, Inc. On March 28, 1997, the
Company assigned the lease to Northern Nassau Karate, Inc.

<PAGE>

f. Hicksville, New York

On April 12, 1995, Hicksville Karate, a subsidiary of the Company entered
into a lease with Delco Development Co. of Hicksville, L.P. for it's Hicksville
Karate Center. The lease is for 3000 square feet and has a term of ten years
with an annual rent schedule starting at $57,000 for the first year and
escalating to $77,685 for the tenth year. The Company also has the right to
renew the lease for an additional five year period. The Company commenced
operations of the Hicksville Karate Center in November, 1994. This location was
operated by Tiger Schulmann's Karate since December 17, 1996 in accordance with
that certain Operating Agreement dated December 17, 1996 by and between
Hicksville Karate, Inc. and Central Nassau Karate, Inc. On March 28, 1997, the
Company assigned the lease to Central Nassau Karate, Inc.

g. Ramsey, New Jersey

On August 22, 1995, Ramsey Karate Center, a subsidiary of the Company
entered into a lease with Gabrellian Associates, for it's Ramsey Karate Center.
The lease is for approximately 3626 square feet and has a term of five years
with a rent schedule starting at $68,894 for the first year and escalating to
$77,541 for the fifth year. The Company also has the right to renew the lease
for an additional two five year periods. The Company commenced operation of the
Ramsey Karate Center in March, 1996. This location was operated by Tiger
Schulmann's Karate since December 17, 1996 in accordance with that certain
Operating Agreement dated December 17, 1996 by and between Ramsey Karate Center,
Inc. and Northern Bergen Karate, Inc. On March 28, 1997, the Company assigned
the lease to Northern Bergen Karate, Inc.

On September 1, 1990, Body Motion (formerly, USA Karate & Fitness, Inc.), a
subsidiary of the Company, entered into a lease with Vincent E. Chirop for its
Hasbrouck Heights, New Jersey location. The term of the lease is for five (5)
years with a fixed rent of $24,792 per year with certain escalation clauses for
subsequent tax assessments. In March 1993, this location was converted from a
Karate Center into the Aerobics Center and Karate students were transferred to
the Company's new Karate Center in Hackensack, New Jersey, less than ten (10)
miles away. This lease was assumed by the purchaser of Body Motion in April
1994.

Item 3. LEGAL PROCEEDINGS.

There is no material litigation pending against the Company.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) On March 25, 1997, an annual meeting of stockholders (the "Annual Meeting")
was held. The following matters were submitted to a vote of securityholders: (i)
the election of three (3)

<PAGE>

directors to the Board of the Company for a one (1) year term; (ii) the
ratification of the appointment of Moore Stephens, P.C. as the Company's
Independent Certified Public Accountants; (iii) the amendment of the Company's
Certificate of Incorporation to increase the authorized capital stock of the
Company from 15,000,000 to 40,000,000 shares of common stock; (iv) the amendment
of the Company's Certificate of Incorporation to effect a one-for-five reverse
stock split of the Company's common stock; and (iv) the approval of the sale of
five of the Company's karate center locations to affiliates of Tiger Schulmann's
Karate organization.

(b) The following directors were elected to the Board of Directors of the
Company for a one (1) year term: Mark Glazier, Richard Schechtman and Marc
Zwetchenbaum.

(c) The first matter considered at the Annual Meeting was the election of the
aforementioned three (3) directors to the Board for a one (1) year term. A
majority of the shares of common stock present in person or by Proxy voted for
the election of the three (3) Directors nominated by the management of the
Company. Specifically, (i) 9,104,264 shares, representing 87.9% of the issued
and outstanding shares of common stock voted for the election of Mark Glazier
and 225,410 shares, representing 2.2% of the issued and outstanding shares of
common stock voted against the election of Mark Glazier; (ii) 9,130,764 shares,
representing 88.2% of the issued and outstanding shares of common stock voted
for the election of Richard Schechtman, 198,910 shares representing 1.9% of the
issued and outstanding shares of common stock voted against the election of
Richard Schechtman; and (iii) 9,139,364 shares, representing 88.3% of the issued
and outstanding shares of common stock voted for the election of Marc
Zwetchenbaum, and 198,310 shares, representing 1.9% of the issued and
outstanding shares of common stock voted against the election of Marc
Zwetchenbaum. There were no broker held non-voted shares represented at the
meeting with respect to this matter.

(d) The second matter considered at the Annual Meeting was to ratify the
appointment of Moore Stephens, P.C. as the Company's Independent Certified
Public Accountants. An affirmative vote of the holders of a majority of the
shares of common stock of the Company in person or by Proxy voted to ratify the
selection of Moore Stephens, P.C. Specifically, 9,195,874 shares, representing
88.9% of the issued and outstanding shares of common stock voted for the
ratification of Moore Stephens, P.C., 132,300 shares, representing 1.3% of the
issued and outstanding shares of common stock voted against the ratification of
Moore Stephens, P.C., and 1,500, representing .01% of the issued and outstanding
common stock abstained. There were no broker held non-voted shares represented
at the meeting with respect to this matter.

(e) The third matter considered at the Annual Meeting was to approve the
amendment to the Company's Certificate of Incorporation to increase the
authorized capital stock of the Company from 15,000,000 to 40,000,000. An
affirmative vote of the holders of a majority of the shares of common stock of
the Company in person or by Proxy voted to approve the increase in the number of

authorized shares of common stock. Specifically, 9,072,904 shares, representing
87.7% of the issued and outstanding shares of common stock voted for the
increase, 251,570, representing 2.4% of the issued and outstanding shares of
common stock voted against the increase in

<PAGE>

authorized capital stock, and 3,500 shares, representing .03% of the issued and
outstanding common stock abstained. There were no broker held non-voted shares
represented at the meeting with respect to this matter.

(f) The fourth matter considered at the Annual Meeting was to approve the
amendment to the Company's Certificate of Incorporation to effect a one-for-five
reverse stock split (the "Reverse Stock Split") of the Company's common stock.
An affirmative vote of the holders of a majority of the shares of common stock
of the Company in person or by Proxy voted to approve Reverse Stock Split of the
Company's common stock. Specifically, 9,149,139 shares, representing 88.4% of
the issued and outstanding shares of common stock voted for the Reverse Stock
Split, 177,035, representing 1.7% of the issued and outstanding shares of common
stock voted against the Reverse Stock Split, and 5,200 shares, representing .05%
of the issued and outstanding common stock abstained. There were no broker held
non-voted shares represented at the meeting with respect to this matter.

(g) The fifth and final matter considered at the Annual Meeting was to approve
the sale of five of the Company's karate centers to affiliates of the Tiger
Schulmann Karate organization (the "Sale Transaction"). An affirmative vote of
the holders of a majority of the shares of common stock of the Company in person
or by Proxy voted to approve the Sale Transaction. Specifically, 6,817,162
shares, representing 65.9% of the issued and outstanding shares of common stock
voted for the Sale Transaction, 161,450, representing 1.5% of the issued and
outstanding shares of common stock voted against the Sale Transaction, and
24,200 shares, representing .2% of the issued and outstanding common stock
abstained. There were 2,362,862 broker held non-voted shares represented at the
meeting with respect to this matter.

<PAGE>

PART II

Item 5. PRICE RANGE OF COMMON STOCK AND WARRANTS

The Company's Common Stock has been listed on The Nasdaq Small Cap Market
since October 15, 1993. The following table sets forth the high and low bid
quotations for the Common Stock for the periods indicated. Such information is
compiled from various sources and is believed to be accurate although no
assurance can be given. These over-the-counter market quotations reflect prices
between dealers and do not include retail mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions. In November 1996, the
Company's Class A Warrants and Class B Warrants were de-listed from the Nasdaq
SmallCap Market.

Common Stock
------------

Fiscal Year 1993 High Low
- ---------------- ---- ----
Fourth Quarter(1) $7-1/2 $2-1/8

Fiscal Year 1994 High Low
- ---------------- ---- ---
First Quarter $3-1/8 $1-7/8
Second Quarter $2-5/8 $1
Third Quarter $2-3/4 $2-3/8
Fourth Quarter $3-3/8 $2-1/2

Fiscal Year 1995 High Low
- ---------------- ---- ---
First Quarter $3-1/4 $7/8
Second Quarter $7/8 $1/4
Third Quarter $7/16 $3/8
Fourth Quarter $19/32 $3/8

Fiscal Year 1996 High Low
- ---------------- ---- ---
First Quarter $1-1/8 $3/8
Second Quarter $15/16 $7/16
Third Quarter $13/16 $3/16
Fourth Quarter $3/4 $3/8

(1) The Company's securities commenced trading on Nasdaq' SmallCap Market
on October 15, 1993.

The Class A and Class B Warrants were listed on the Nasdaq Small Cap Market
on October 15, 1993. the high and low prices as reported by NASDAQ were as
follows:

<PAGE>

Class A Warrants Class B Warrant
---------------- ---------------
High Low High Low
---- --- ---- ---

Fiscal Year 1993

Fourth Quarter $2-3/8 $1/2 $1-9/16 $3/8

Fiscal Year 1994

First Quarter $3/4 $3/16 $11/16 $1/8
Second Quarter $5/16 $3/16 $1/4 $1/8
Third Quarter $5/8 $1/4 $9/32 $1/8
Fourth Quarter $13/16 $5/8 $13/16 $5/16

Fiscal Year 1995

First Quarter $1-1/2 $-3/16 $1-1/8 $1/16
Second Quarter $7/16 $1/16 $9/32 $1/16
Third Quarter $9/32 $1/16 $5/32 $1/16
Fourth Quarter $3/16 $1/8 $3/32 $1/16

Fiscal Year 1996

First Quarter $* $* $* $*
Second Quarter $* $* $* $*
Third Quarter $1/16 $1/16 $1/16 $1/16
Fourth Quarter $0 $0 $* $*

- -----------------
*Indicated security was not traded during this quarter.

On March 31, 1997, the final quoted prices as reported by the Nasdaq
SmallCap Market were $.4375 per share. As of March 31, 1997 there were
10,350,000 shares of Common Stock outstanding, held of record by approximately
32 record holders and 584 beneficial owners.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

For the Years Ended December 31, 1996 and December 31, 1995

The Company had sales for the year ended December 31, 1996 and December
1995 of $1,474,629 and $1,328,220 respectively. Sales were derived predominantly
from membership tuition sold in seven of the Company's karate centers of
$1,282,920 for 1996 and $1,163,852 for the year ended 1995. The amount of other
goods sold was $191,709 and $164,368 for 1996 and

<PAGE>

1995 respectively.

The 11% increase in sales of $146,409 was primarily attributable to the
opening of the Ramsey store in March of 1996. Total sales for the six stores
excluding Ramsey remained relatively constant form 1995 to 1996 although same
store sales varied between the two periods.

The net (loss) for the years ended December 31, 1996 and December 31, 1995
were $1,252,790 and $882,960 respectively. The increase in net (loss) can be
attributed mainly to additional overhead expenses derived from the opening of
the Ramsey store in March of 1996 and the Hicksville store in November 1995. The
Company increased staffing and expanded its corporate offices for planned
expansion which it later abandoned with its decision to sell of the majority of
its assets of five of its subsidiaries and subsequently close their operations.

The major components of the General and Administrative Expenses are as
follows:

December 31, 1996 December 31, 1995
----------------- -----------------

Professional Fees $ 153,390 $ 86,602

Salaries and Payroll Taxes 1,042,500 941,670

Rent 593,142 462,804

Advertising and Promotional 177,346 245,739

Utilities 62,522 44,291

Office Expense and Other 721,206 527,812
Expenses

Total $2,750,106 $2,308,918
========== ==========

The increase in salaries and payroll of $100,830 taxes during the year
ended December 31, 1996 resulted from (i) hiring and training of staff for the
Ramsey karate center, (ii) newly retained corporate and administrative staff for
the Company's planned expansion including new vice president of operations,
marketing director and operations manager. Professional fees increased by
$66,788 primarily attributable to legal and accounting fees associated with the
sale of the Company's assets and in connection with the preparation of the
company's annual meeting and proxy. The Company also retained the services of a
new accounting firm to offset the reduction in in-house accounting staff.

Advertising and promotion expenses decreased by $68,393 despite the
addition of new stores. This 28% decrease was due to the change in the mix of
advertising media from radio broadcast to more localized methods. The increase
in utilities and rents were due to the addition of the Ramsey studio in the

first quarter of 1996 and the Hicksville store in the fourth quarter of 1995.

<PAGE>

On December 17, 1996 and January 10, 1997, the Company entered into five
Asset Purchase Agreements, whereby the Company sold substantially all of the
assets of its Hackensack, Ramsey, Paramus, Great Neck and Hicksville karate
centers. In consideration for the purchase of the assets, the purchasers paid
the Company $225,000 in cash, and an aggregate of $280,000 in three promissory
notes. The purchasers also assumed the Company's liabilities in relation to
certain real estate leases and student contracts fro which tuition was collected
but services were not rendered. The Company recognized an approximate $383,000
loss on the sale of assets pertaining to this transaction. The $383,000 loss
consists of the purchase price of $505,000 plus the $190,000 in deferred income
less the net book value of the assets. The net book value of the assets sold was
$1,078,000 which consists almost entirely of leasehold improvements for the five
stores. The sale of the assets were approved by the Company's stockholders on
March 25, 1997. Management anticipates a decrease in general and administrative
expenses and net (losses) due to the sale of the assets of the five subsidiaries
and the subsequent closing their operation. All five subsidiaries were operating
in a loss position and had a negative cash flow at the time of the sale.

On March 4, 1996, the Company entered into a limited partnership agreement
with HEP II, L.P. a limited partnership, to license ancillary rights to two
Motion Pictures which have since been produced. The Company has a 49% interest
in HEP II and does not have any personal liability to any of the partners,
creditors or debt of the partnership. The company contributed $1,500,000 to the
capital of the partnership and will receive interest at the rate of 7% to be
paid quarterly. During 1996, the Company earned interest of $87,500 on its
capital contribution and received a partnership distribution of $292,000.

On June 1, 1995 pursuant to a termination agreement, the Company terminated
its joint venture agreement with Planet Kids Learning Centers. In connection
with such termination, the Company received its $500,000 investment and $500,000
loan plus accrued interest. In addition, the Company was granted an option to
purchase up to 150,000 shares of common stock of United Leisure Corporation at
$.01 per share. In return for the option, the Company performed consulting
services from June 1, 1995 through May 31, 1996. During November 1995, the
Company fully exercised its options and purchased 150,000 shares of United
Leisure Corporation for $1,500. In February of 1996, the Company sold its shares
resulting in a gain of $448,359.

On October 18, 1996, the Company entered into convertible preferred stock
subscription agreement with the President of the Company and others subscribers
pursuant to which an aggregate of 750,000 shares of the Company's preferred
stock was purchased for $1.20 per share. The Company realized proceeds from
this transaction of $900,000.

Liquidity and Capital Resources

Cash and cash equivalents decreased for the years ended December
31, 1996 and 1995 by $1,394,885 and $925,423 respectively. Cash and cash

equivalents utilized for operations for the years ended December 31,
1996 and 1995 was $930,886 and $924,959 respectively.

Net cash and cash equivalents applied to investing activities was
$456,499 for December 31, 1996. During 1996, the Company invested
$1,500,000 in a limited partnership and purchased property and equipment
of approximately $302,000 and marketable securities of approximately
$427,000. Also during the year, the Company received proceeds from the
sale of marketable securities of $1,478,000 and a partnership
distribution of $292,000.

During 1995, the Company received it's initial investment and loan
receivable from the Joint Venture amounting to $1,000,000. The Company
used this proceeds to purchase property and equipment and marketable
securities.

Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Index to Financial Statements on page F-1 for a listing of the
financial statements.

Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.

None.

<PAGE>

PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

The following persons are the current executive officers and directors.

Name Age Position
- ---- --- --------

Mark Glazier 34 Chairman of the Board, President, Chief
Financial Officer and Director

Donald Southerton1 43 Vice President of Operations

Larry Kaufman 2 54 Chief Financial Officer

Richard A. Schechtman 35 Director

Kenneth Kliesch3 53 Secretary

Marc Zwetchenbaum 40 Director

- ---------------------------------
1 Donald Sutherton's employment was terminated on August 30, 1996.
2 Larry Kaufman's employment was terminated on April 15, 1996.
3 Kenneth Kliesch's employment was terminated April, 1996.

BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS

MARK GLAZIER has been President and Chairman of the Board of the Company
since its inception. He attended the American University in Washington, D.C. and
also served as the Business Manager and Instructor at the Jhoon Rhee Institute,
a karate school located in Kensington, MD, from 1981--1983. From 1984 to 1986,
Mr. Glazier was a partner in, and Business Manager and Head Instructor of, USA
Karate Institute, Inc. located in Bethesda and Gaithursburg MD. Mr. Glazier
subsequently opened USA Karate and Fitness, Inc. in 1986 and provided management
to a number of martial art companies, including Tiger Schulmann, Korean Martial
Art Centers (located in New Jersey) and Pan American Tae Kwon Do (located in New
Jersey). Mr. Glazier then opened the Company's Hasbrouck Heights location in
1987, its Whitehall and Bethlehem locations in 1990, the Hackensack location in
1992 and the Paramus location in 1993. Mr. Glazier is a master in both karate
and tae kwon do.

DONALD SOUTHERTON, was the Vice-President of Operations from September,
1995 to August 30, 1996. Mr. Southerton has an extensive background in the
martial arts industry. From 1975 to 1995, he operated a chain of martial arts
studios in New York. Mr. Southerton is on the board of directors of Educational
Funding Company, the nation's largest martial arts tuition billing company. He
has also served as a board member of U.S. Martial Arts Schools with more than
1200 affiliates worldwide.

<PAGE>

LARRY KAUFMAN, had been Chief Financial Officer of the Company from June
1994 until April 15, 1996. From 1977 to October 1993, Mr. Kaufman was Financial
Vice President and on the Board of Directors of Basic Corp., a public company
traded on the "pink sheets" of the over-the-counter market, which is engaged in
the sales, service and leasing of equipment, chemicals and supplies to the
commercial food service industry.

RICHARD A. SCHECHTMAN, has been a Director of the Company since its
inception. Mr. Schechtman has since September 1988 been the store manager of
Dinette Gallery/All America Oak Furniture, a furniture store located in Yonkers,
New York. From July 1986 to September 1988, Mr. Schechtman was a top sales
representative of such store. Mr. Schechtman graduated in 1983 from University
of Michigan with a Bachelors of Arts degree in Psychology.

KENNETH KLIESCH, was the Secretary and the Director of Marketing and
Merchandise Manager from 1992 until April 1996. Mr. Kliesch also served as an
independent consultant from November 1996 until January 1997. From 1988 to 1992,
Mr. Kliesch owned and operated a Sir Speedy Printing franchise in Hoboken, N.J.
From 1972 to 1988, Mr. Kliesch served as the Advertising Manager of United
States Testing Co., Inc., a nationwide laboratory testing company.

MARC ZWETCHENBAUM, has served as a Director of the Company since March
1997. Mr. Zwetchenbaum has been general counsel since 1983 to Retail
Recruiters/Spectra Professional Search International, Inc., a franchiser of
personnel placement firms. Additionally, Mr. Zwetchkenbaum has served as outside
counsel for Jan-Pro, a national commercial cleaning franchisor, as well as
outside counsel for two major fitness corporations. He is a member of the
Massachusetts, Rhode Island and Washington, D.C. bar associations. Marc
Zwentchkenbaum, received his B.A., cum laude, from American University in 1979,
and received his J.D. from the University of Miami School of Law in 1982.

There are no family relationship among the directors and executive officers
of the Company, except that Mr. Glazier is the brother-in-law of Mr. Schechtman.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the Company.
Officers, directors and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.

Except as provided below, to the Company's knowledge, based solely on its
review of the copies of such reports furnished to the Company during the year
ended December 31, 1996, all Section 16(a)filing requirement applicable to its
officers, directors and greater than ten percent beneficial owners were
satisfied.

For the year ended December 31, 1996, Mr. Donald Southerton (formerly the
Vice President of Operations of the Company) and Mr. Larry Kaufman (formerly the
Chief Financial Officer and Secretary of the Company) did not, to the Company's
knowledge, file Form 4's reflecting their resignations.

<PAGE>

Item 10. EXECUTIVE COMPENSATION.

The following table sets forth for each of the last three fiscal years
ended December 31, the remuneration paid by the Company to its Chief Executive
officer and the Company's four most highly paid executive officers who received
aggregate remuneration in excess of $100,000 during such year and to all
executive officers as a group.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts

Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus Options/SARs(#) Compensation
(a) (b) (c) (d) (g) (i)
<S> <C> <C> <C> <C> <C>
Mark Glazier, President 1996 $330,395
and Chairman of the Board 1995 $284,549 1,000,000
1994 $282,700

All Executive Officers 1996 $330,395
as a Group (1 person) 1995 $346,440 1,000,000
1994 $282,700
</TABLE>

Employment Agreement

On March 30, 1993, the Company entered into an employment agreement for a
five (5) year term (the "Employment Term") with Mark Glazier, President and
Chairman of the Board of the Company. Pursuant to such employment agreement, Mr.
Glazier will receive an annual salary of $260,000 per annum for the 1993
calendar year with annual ten percent (10%) increases effective January 1, 1994.
In addition, Mr. Glazier will have the option (the "Option") during the
Employment Term to purchase up to twenty percent (20%) of the Company's Common
Stock, so long as the Company achieves certain pre-tax earnings targets. If the
Company achieves earnings before interest, amortization, depreciation and the
payment of taxes during the Employment Term, of not less than $500,000,
$1,000,000 or $2,000,000 during any fiscal year, then Mr. Glazier shall have the
right to purchase from the Company shares of Common Stock equal to 5%, 10% and
20% respectively, of the Company's Outstanding Common Stock, which shall be
issued to him by the Company. "Outstanding Common Stock" means, as of the
December 31, 1993 of the

24
<PAGE>
relevant fiscal year, the number of shares of Common Stock issued and
outstanding, excluding all shares of Common Stock issuable upon exercise of
warrants, options or any other security exercisable or exchangeable for, or
convertible into, shares of Common Stock. For purposes of calculating whether
Mr. Glazier is entitled to receive shares of Common Stock pursuant to the
Option, the Company's earnings shall be calculated at the conclusion of each
fiscal year during the Employment Term (as hereinafter defined). The purchase
price for the shares of Common Stock purchasable pursuant to the Option shall be
equal to $.50 per share.

The Company does not anticipate that such shares will be registered when
issued nor have any rights with respect to the registration thereof been granted
by the Company to Mr. Glazier. Such shares will be considered "restricted
securities" under Rule 144, but other restrictions on transfer will not limit
the transfer thereof by Mr. Glazier. The employment agreement also provides for
the use by Mr. Glazier of a Company car and for bonuses and other incentive
compensation as the Board of Directors deems appropriate, based upon the
Company's operating performance or other reasonable criteria. The criteria to be
used to determine the amount of Mr. Glazier's bonuses and other incentive
compensation has not yet been set by the Board of Directors. It should be noted

that Mr. Glazier will be involved in determining the bonus policies for the
Company's employees. Although he will not directly participate in determining
the amount of his own bonus, the policies instituted by the Company may
influence his bonus. Such bonuses and other compensation may be substantial.

On May 16, 1995, the Company granted Mark Glazier, President of the Company
an option to purchase from the company at any time commencing on this date
through May 16, 2000, 1,000,00 shares of common stock at an exercise price of
$.30 per share.

On October 21, 1996, the Company granted to a director of the Company
options to purchase 75,000 shares of common stock at an exercise price o $.38
per share, commencing April 21, 1997 through April 21, 2006.

On October 28, 1996, the Company granted incentive stock options to an
employee to purchase at any time commencing on April 28, 1997 through April 28,
2002, 50,000 shares of common stock at an exercise price of $.53 per share.

On October 28, 1996, the Company granted incentive stock options to an
employee to purchase at any time commencing on April 28, 1997 through April 28,
2002, 5,000 shares of common stock at an exercise price of $.53 per share.

<PAGE>

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information as of March 31, 1995 with
respect to the beneficial ownership of the outstanding shares of the Company's
Common Stock by (i) any holder of more than five (5%) percent of the outstanding
shares; and (ii) the Company's officers and directors; and (iii) the directors
and officers of the Company as a group.

Number of Shares Percentage (%)
Name and Address of Common Stock of Class
of Beneficial Owner Beneficially Owned(1) Outstanding (2)
- ------------------- --------------------- ---------------

Mark Glazier (3) 10,251,000(4) 61.4%
c/o Master Glazier's
Karate International, Inc.
377 Hoes Lane
Piscataway, NJ 08854

Richard A. Schechtman(5) 75,000 .7%
98 Heritage Drive
New City, NY 10956

Fair Lane, LLC(6) 4,500,000 33.7%
6900 N. Andrews Avenue
Suite 500

Fort Lauderdale, FL 33309

Kenneth Kliesch(7) --- ---
c/o Master Glazier's
Karate International, Inc.
377 Hoes Lane
Piscataway, NJ 08854

Directors and Officers
as a Group (4 persons) 10,326,001(4) 61.6%
------------

(1) Beneficial ownership as reported in the table above has been determined in
accordance with Instruction (4) to Item 403 of Regulation S-B of the
Securities Exchange Act.
(2) Percentage of Class based upon 10,350,000 shares of Common Stock
outstanding on the Record Date.
(3) Mr. Glazier is the Chairman of the Board, President and Chief Financial
Officer of the Company.
(4) Includes (i) 1,000,000 shares of Common Stock issuable to Mr. Glazier upon
the exercise of an option held by him at an exercise price of $.30 per
share and (ii) 5,333,334 shares of Common Stock issuable to Mr. Glazer
upon the exercise of an option issued to Mr. Glazier in December 1996. Such
option is exercisable commencing on April 17, 1997 at an exercise price of
$.0001 per share. See "Certain Transactions".
(5) Director.
(6) Includes 3,000,000 shares of Common Stock issuable to Fair Lane, LLC upon
the exercise of an option issued to Fair Lane, LLC in December 1996. Such
option is exercisable commencing April 17, 1997 at an exercise price of
$.0001 per share.
(7) Mr. Kliesch was the Secretary of the Company until April, 1996.

26
<PAGE>

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

On September 1, 1987, Mr. Glazier acquired all of the outstanding shares
of Common Stock of Richard Raciti, Inc. ("Richard Raciti") for $9,907. Richard
Raciti was incorporated on October 26, 1986 and operated a karate studio prior
to the acquisition by Mr. Glazier. In September 1987, Mr. Glazier changed the
name from Richard Raciti, Inc. to U.S.A. Karate & Fitness, Inc. and commenced
operating a Karate Center in Hasbrouck Heights, NJ. In March 1993, this location
was converted from a Karate Center into an aerobics studio and such corporation
changed its name to Body Motion Women's Aerobics, Inc. ("Body Motion"). Karate
students were afforded the opportunity to transfer to the Company's Karate
Center in Hackensack, NJ. The Aerobics Center was sold in April of 1994.

On January 22, 1990, Mr. Glazier incorporated Allentown Karate Associates,
Inc., a Pennsylvania corporation ("Allentown Karate"). In January 1990, Mr.
Glazier purchased 45 shares of Class A Voting Common Stock of Allentown Karate
for $1149, Scott Van Dine, an instructor with the Company, purchased 45 shares
of Class B Non-Voting Common Stock of Allentown Karate for $1148 and Allentown
Karate commenced operating a Karate Center in Whitehall, PA.

On August 28, 1990, Mr. Glazier incorporated Bethlehem Karate, Inc., a
Pennsylvania corporation ("Bethlehem Karate"). In August 1990, Mr. Glazier
purchased 40 shares of Class A Voting Common Stock and 50 shares of Class B
Non-Voting Common Stock of Bethlehem Karate for $5,000, Jordan Belfort,
President and principal stockholder of the Underwriter, purchased 10 shares of
Class A Voting Common Stock and 100 shares of Class B Non-Voting Common Stock of
Bethlehem Karate for $40,000, and Bethlehem Karate commenced operating a Karate
Center in Bethlehem, PA. In July 1991, Mr. Belfort made a capital contribution
of $20,000 to Bethlehem Karate, and simultaneously therewith, Mr. Glazier, in
lieu of a cash investment, surrendered, as a corresponding capital contribution,
10 shares of Class B Non-Voting Common Stock of Bethlehem Karate to be retained
as treasury shares.

In December 1992, Mr. Belfort made an additional capital contribution of
$100,000 to Bethlehem Karate, and simultaneously therewith, Mr. Glazier, in lieu
of a cash investment, surrendered, as a corresponding capital contribution, 30
shares of Class A Voting Common Stock of Bethlehem Karate to be retained as
treasury shares. As a result of these transactions, Mr. Glazier held 10 shares
of Class A Voting Common Stock and 40 shares of Class B Non-Voting Common Stock
of Bethlehem Karate and Mr. Belfort held 10 shares of Class A Voting Common
Stock and 100 shares of Class B Non-Voting Common Stock of Bethlehem Karate. Mr.
Glazier and Mr. Belfort in December 1992 entered into a voting Trust Agreement
("The Voting Trust Agreement") pursuant to which Mr. Glazier acquired the right
to vote all shares of Voting Common Stock held by Mr. Belfort on all matters on
which stockholders were entitled to vote. Mr. Glazier retained the right to vote
the shares of the Company held by Mr. Belfort until the earlier of (i) the date
on which Mr. Belfort transfers or sells his shares to the public or (ii)
December 1, 1998. However, on September 17, 1993, Mr. Belfort sold all shares of
Common Stock held by him to MG Holdings, Inc., a Delaware corporation wholly
owned by Mr. Glazier, and therefore, the Voting Trust Agreement was
simultaneously canceled therewith.

On July 2, 1991, Mr. Glazier incorporated Master Glazier's Karate
International, Inc., a
27

<PAGE>

New Jersey corporation ("MGKI-NJ"). In August 1992, Mr. Glazier purchased 100
shares of Common Stock of MGKI-NJ for $33,188 and MGKI-NJ commenced providing
management, marketing and financial advisory services to the Karate Centers.

In July 1992 Mr. Glazier made a non-interest bearing loan of $64,984 to the
Company and, in January 1993, Mr. Glazier loaned $100,000 to the Company in
exchange for an 8% promissory note.

On August 25, 1992, Mr. Glazier incorporated Paramus Karate, Inc., a New
Jersey corporation ("Paramus Karate"). In August 1992, Mr. Glazier purchased 100
shares of Common

Stock of Paramus Karate for $1.00. In May 1993, Paramus Karate commenced
operating a Karate Center in Paramus, NJ.

On January 1, 1993, Mark Glazier, the Company's President and founder,
loaned $100,000 to MGKI-NJ in exchange for an 8% promissory note due upon
demand. As a result of the merger of MGKI-NJ with and into the Company, the
Company assumed the obligation to repay such note by operation of law. This loan
was repaid by the Company in October 1993, utilizing a portion of the proceeds
from the Company's initial public offering of securities.

The Company was incorporated on March 22, 1993. None of the Company's
securities were issued prior to March 31, 1993. As of that date, the Company
purchased 45 shares of Class B Non-Voting Common Stock of Allentown Karate from
Scott Van Dine, an instructor with the Company, and delivered 55,000 shares of
the Company's Common Stock as payment therefor. As a result of such transaction,
the shares of Class B Non-Voting Common Stock repurchased from Mr. Van Dine were
canceled, Mr. Van Dine became the sole stockholder of the Company and Mr.
Glazier became the sole shareholder of Allentown Karate.

In April 1993, Mr. Glazier transferred (i) 100 shares of Common Stock of
Body Motion, representing all of the outstanding shares of capital stock of Body
Motion, for 10 shares of Class B Non-Voting Common Stock of Bethlehem Karate,
(ii) 45 shares of Class A Common Voting Stock of Allentown Karate, representing
all of the outstanding shares of capital stock of Allentown Karate, for 10
shares of Class A Voting Common Stock of Bethlehem Karate, (iii) 100 shares of
Common Stock of Hackensack Karate, representing all of the outstanding shares of
capital stock of Hackensack Karate, for 10 shares of Class A Voting Common Stock
of Bethlehem Karate and (iv) 100 shares of Common Stock of Paramus Karate,
representing all of the outstanding shares of capital stock of Paramus Karate,
for 10 shares Class A Voting Common Stock of Bethlehem Karate. As a result of
such transactions, Mr. Glazier owned an aggregate of 40 shares of Class A Voting
Common Stock and 50 shares of Class B Non-Voting Common Stock of Bethlehem
Karate, Mr. Belfort owned an aggregate of 10 shares of Class A Voting Common
Stock and 100 shares of Class B Non-Voting Common Stock of Bethlehem Karate, and
Bethlehem Karate held all of the outstanding capital stock of Body Motion,
Allentown Karate, Hackensack Karate and Paramus Karate.

<PAGE>

exchange for 100 shares of Common Stock of MGKI-NJ. In addition, Mr. Belfort
received an aggregate of 825,000 shares of the Company's

Common Stock in exchange for 10 shares of Class A Voting Common Stock and 100
shares of Class B Non-Voting Common Stock of Bethlehem Karate. Effective as of
June 26, 1993, the Company effected a 1.81818-for-one stock split with respect
to the shares of its Common Stock. As a result of such stock split, Mr. Glazier
and Mr. Belfort each owned 1,500,000 shares of Common Stock of the Company.

In view of the NASDAQ Industry Panel's initial decision regarding the
rejection of the Company's listing application, on September 17, 1993, MG
Holdings, Inc., a Delaware corporation wholly owned by Mr. Glazier ("MG
Holdings"), and Mr. Belfort entered into a Stock Purchase Agreement, pursuant to
which MG Holdings purchased 1,500,000 shares of Common Stock from Mr. Belfort.
As consideration for such shares of Common Stock, MG Holdings delivered a
promissory note to Mr. Belfort in the aggregate principal amount of $3,750,000,
bearing interest at the rate of four percent (4%) per annum and due and payable
on September 20, 1995. Simultaneously therewith, Mr. Belfort and Mr. Glazier
canceled the Voting Trust Agreement. As a result, Mr. Belfort does not hold any
shares of capital stock of the Company, nor does he have any rights to acquire
shares of capital stock of the Company. MG Holdings repaid the note in full in
1995.

In connection with the execution by the Company of the lease for the Karate
Center located in Hackensack. Mr. Glazier has agreed to personally guarantee the
Company's obligations thereunder. In exchange for such guarantees, the Company
has agreed to indemnify Mr. Glazier with respect any loss he may incur in
connection therewith.

<PAGE>

stock of the Company, par value $.0001 per share (the "Common Stock"), and
10,000,000 options (the "Investor Options") each exercisable to purchase one (1)
share of Common Stock. The Investor Options become exercisable on April 17, 1997
at an exercise price of $.0001 per share so long as not less than 30,000,000
shares of Common Stock are authorized for issuance. As a result of the
transaction, there are currently no shares of Series A Preferred Stock issued
and outstanding.

<PAGE>

PART IV

Item 13. EXHIBITS AND REPORTS ON FORM 10-KSB

(a)(1) Financial Statements.

The following Financial Statements are included in Part II, Item 8:

Independent Auditor's Report F-2

Consolidated Balance Sheet as of December 31, 1996 F-3

Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 F-4

Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1996 and 1995 F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 F-6 - F-7

Notes to Financial Statements F-8 - F-16

(a)(2) Financial Statement Schedules

All schedules are omitted because they are not applicable or the
information required is included in the financial statements and notes thereto.

(a) (3) Exhibits

1.01* Revised Form of Underwriting Agreement.

1.02* Revised Form of Selected Dealers Agreement.

3.01* Certificate of Incorporation of the Company.

3.02* Amended By-Laws of the Company.

3.03* Certificate of Incorporation of Body Motion Women's Aerobics, Inc.

3.04* Certificate of Incorporation of Allentown Karate Associates, Inc.

3.05* Certificate of Incorporation of Bethlehem Karate, Inc.

<PAGE>

3.06* Certificate of Incorporation of Hackensack Karate, Inc.

3.07* Certificate of Incorporation of Master Glazier's Karate

International, Inc.

3.08* Certificate of Incorporation of Paramus Karate, Inc.

3.09* Plan and Agreement of Merger of Bethlehem Karate, Inc., a
Pennsylvania corporation, Master Glazier's Karate International,
Inc., a New Jersey corporation, with and into Master Glazier's
Karate International, Inc., a Delaware corporation.

4.01* Specimen Certificate for shares of Common Stock.

4.02* Specimen Certificate for Class A Redeemable Common Stock Purchase
Warrant.

4.03* Specimen Certificate for Class B Redeemable Common Stock Purchase
Warrant.

4.04* Form of Warrant Agreement by and among the Company, the
Underwriter and American Stock Transfer & Trust Company.

4.05* Revised Form of Underwriter's Unit Purchase Option.

4.06 [Intentionally Left Blank]

5.01* Opinion of Bernstein & Wasserman, as counsel to the Company.

5.02 [Intentionally Left Blank]

10.01* Employment Agreement between the Company and Mark Glazier.

10.02* Voting Trust Agreement between Mark Glazier and Jordan Belfort
dated as of December 1, 1992.

10.03* Retainer Agreement with Bonomo, Inc.

10.04* Subscription Agreement between Jordan Belfort and Bethlehem
Karate, Inc. dated as of August 30, 1990.

10.05* Lease for Whitehall, Pennsylvania Karate Center.

10.06* Lease for Bethlehem, Pennsylvania Karate Center.

10.07* Lease for Hasbrouck Heights, New Jersey Aerobics Center.

10.08* Lease for Paramus, New Jersey Karate Center.

10.09* Lease for Hackensack, New Jersey Karate Center.

<PAGE>

10.10* Lease for Elizabeth, New Jersey facility.

10.11* Form of Bridge Loan Documents.

10.12* Purchase Agreement between Bethlehem Karate, Inc. and Scott Van
Dine.

10.13* Stock Purchase Agreement dated as of September 20, 1993, by and
between MG Holdings, Inc. and Jordan Belfort.

10.14* Amendment to Bridge Loan Agreement between the Company and Don
Jen,Inc.

10.15* Promissory Note dated January 1, 1993 issued by MGKI-NJ to Mark
Glazier

10.16* Lease for Great Neck, New York Karate Center.

10.17** Lease for Hicksville, New York Karate Center.

10.18** Lease for Ramsey, New Jersey Karate Center.

10.19*** Asset Purchase Agreement, dated December 17, 1996 by and between
Paramus Karate, Inc. and Central Bergen Karate, Inc.

10.20*** Asset Purchase Agreement, dated December 17, 1996 by and between
Hackensack Karate, Inc. and Southern Bergen Karate, Inc.

10.21*** Asset Purchase Agreement, dated December 17, 1996 by and between
Hicksville Karate, Inc. and Central Nassau Karate, Inc.

10.22*** Asset Purchase Agreement, dated December 17, 1996 by and between
Ramsey Karate Center, Inc. and Northern Bergen Karate, Inc.

10.23*** Asset Purchase Agreement, dated January 10, 1997 by and between
Great Neck Karate, Inc. and Northern Nassau Karate, Inc.

24.02 Consent of Mortenson & Associates, P.C.
- --------

* Incorporated by Reference to the Company's Registration Statement
on Form SB-2, File No. 33-63008--NY.

** Incorporated by Reference to the Company's Form 10-KSB for the
year ended December 31, 1995.

*** Incorporated by Reference to the Company's definitive proxy
statement filed pursuant to Section 14A of the Securities Exchange
Act of 1934, filed with the Commission on February 19, 1997.

<PAGE>

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: Piscataway, New Jersey
April 15, 1997

MASTER GLAZIER'S KARATE INTERNATIONAL, INC.

By: /s/ Mark Glazier
-----------------------------------------
Name: Mark Glazier
Title: President and Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Mark Glazier
- -------------------------- President, Chief Financial April 15, 1997
Mark Glazier Officer and Director

/s/ Richard Schechtman
- -------------------------- Director April 15, 1997
Richard Schechtman

- -------------------------- Director April 15, 1997
Marc Zwetchenbaum

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Page to Page

Item 7: Financial Statements

Independent Auditor's Report......................................... F-2..

Consolidated Balance Sheet as of December 31, 1996................... F-3..

Consolidated Statements of Operations for the years ended

December 31, 1996 and 1995........................................... F-4..

Consolidated Statements of Stockholders' Equity for the years ended

December 31, 1996 and 1995........................................... F-5..

Consolidated Statements of Cash Flows for the years ended

December 31, 1996 and 1995 .......................................... F-6.. F-7

Notes to Consolidated Financial Statements........................... F-8.. F-16

. . . . . . . . . . . . . . .

<PAGE>

INDEPENDENT AUDITOR'S REPORT

To the Stockholders and Board of Directors of
Master Glazier's Karate International, Inc.
Piscataway, New Jersey

We have audited the accompanying consolidated balance sheet of Master
Glazier's Karate International, Inc. and its subsidiaries as of December 31,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1996. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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
Master Glazier's Karate International, Inc. and its subsidiaries as of December
31, 1996, and the consolidated results of their operations and their cash flows
for each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.

MOORE STEPHENS, P. C.
Certified Public Accountants.

Cranford, New Jersey
April 4, 1997

F-2

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
- --------------------------------------------------------------------------------

Assets:
Current Assets:
Cash and Cash Equivalents $ 1,332,776
Cash Held in Escrow 1,125,000
Accounts Receivable - Net 77,783
Inventory 41,588
Prepaid Expenses and Miscellaneous Receivables 16,174
Notes Receivable - Current Portion 74,667
------

Total Current Assets 2,667,988
---------

Property and Equipment:
Office Equipment 51,009
Furniture and Fixtures 84,254
Leasehold Improvements 100,209
Vehicles 50,326
------

Total - At Cost 285,798
Less: Accumulated Depreciation 155,569
-------

Property and Equipment - Net 130,229
-------

Other Assets:
Investment in Limited Partnership 1,208,000
Security Deposits 39,094
Notes Receivable - Long-Term 205,333
-------

Total Other Assets 1,452,427
---------

Total Assets $ 4,250,644
=========

Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 175,943
Deferred Revenue 285,667
-------

Total Current Liabilities 461,610

-------

Deferred Revenue 71,114
------

Commitments and Contingencies --
-------

Stockholders' Equity:
Preferred Stock, No Par Value; 1,000,000 Sha --

Common Stock, $.0001 Par Value 40,000,000 Sh
Authorized, 2,070,000 Issued and Outstan 207

Paid-in Capital 8,280,820

Accumulated Deficit (4,563,107)
----------

Total Stockholders' Equity 3,717,920
----------

Total Liabilities and Stockholders' Equity $ 4,250,644
=========

The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.

F-3

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------

Years ended
December 31,
---------------------
1 9 9 6 1 9 9 5
------- -------

Net Sales $ 1,474,629 $ 1,328,220
------------ ------------

Costs and Expenses:
Costs of Accessories Sold 158,365 131,421
Salaries and Payroll Taxes 1,042,500 941,670
Rent Expense 593,142 462,804
Other General and Administrative Expenses 1,114,464 904,444
--------- -------

Total Costs and Expenses 2,908,471 2,440,339
--------- ---------

Loss from Operations (1,433,842) (1,112,119)
---------- ----------

Other Income [Expense]:
Interest Income 167,521 219,831
Gain on Sale of Investment -- 6,791
Gain on Sale of Securities 438,527 2,537
Loss on Sale of Assets (424,996) --
-------- --

Other Income - Net 181,052 229,159
------- -------

Net Loss $ (1,252,790) $ (882,960)
========== ========

Net Loss Per Share $ (1.16) $ (0.83)
========== ========

Weighted Average Shares Outstanding 1,083,699 1,070,000
========= =========

The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.

F-4

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ ----------------- Unrealized Total
Number of Number of Paid-in Accumulated Holding Stockholders'
Shares Amount Shares Amount Capital Deficit Gain Equity
------ ------ ------ ------ ------- ------- ---- ------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1994 -- $ -- 1,070,000 $ 107 $ 7,388,420 $(2,427,357) $ -- $ 4,961,170

Net Loss for the year ended
December 31, 1995 -- -- -- -- -- (882,960) -- (882,960)

Unrealized Holding Gain -- -- -- -- -- -- 345,507 345,507
-------- ------- --------- ------ ---------- --------- -------- ---------

Balance - December 31, 1995 -- -- 1,070,000 107 7,388,420 (3,310,317) 345,507 4,423,717

Issuance of Preferred Stock - Net
of Stock Issuance Costs 750,000 900,000 -- -- (7,500) -- -- 892,500

Stock Exchange Agreement (750,000) (900,000) 1,000,000 100 299,900 -- -- (600,000)

Paid-in Capital from Anticipated
Exercise of Stock Options -- -- -- -- 600,000 -- -- 600,000

Net Loss for the year ended
December 31, 1996 -- -- -- -- -- (1,252,790) -- (1,252,790)

Realized Gain on Marketable
Securities -- -- -- -- -- -- (345,507) (345,507)
-------- ------- --------- ------ ---------- --------- -------- ---------

Balance - December 31, 1996 -- $ -- 2,070,000 $ 207 $ 8,280,820 $(4,563,107) $ -- $ 3,717,920
======== ======= ========= ====== ========== ========= ======== =========
</TABLE>

The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.

F-5

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

Years ended
December 31,
------------------------
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>

Operating Activities:
Net Loss $(1,252,790) $ (882,960)
----------- -----------
Adjustments to Reconcile Net Loss to Net
Cash Used for Operating Activities:
Depreciation and Amortization 145,998 108,916
Provision For Doubtful Accounts 10,140 24,079
Gain on Sale of Securities Available for Sale (438,527) (2,537)
Gain on Sale of Investment -- (6,791)
Equity in [Loss] of Joint Venture -- 6,791
Loss on Sale of Assets 424,996 --

Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (28,640) (17,751)
Interest Receivable -- 20,000
Security Deposits (11,940) (19,257)
Inventory 15,439 (39,672)
Prepaid Expenses 22,546 (7,231)
Miscellaneous Receivable 17,299 (13,463)

[Decrease] Increase in:
Accounts Payable and Accrued Expenses (62,428) (34,671)
Payroll and Sales Tax Payable -- (3,396)
Deferred Revenue 227,021 (57,016)
----------- -----------

Total Adjustments 321,904 (41,999)
----------- -----------

Net Cash - Operating Activities (930,886) (924,959)
----------- -----------

Investing Activities:
Purchase of Property and Equipment (302,286) (390,374)
Investment - United Leisure - Joint Venture -- 500,000

Notes Receivable - United Leisure - Joint Venture -- 500,000
Investment in Limited Partnership (1,500,000) --
Start-Up Costs 2,955 (322)
Purchase of Securities Available for Sale (426,750) (1,064,207)
Proceeds From Sales of Securities Available for Sale 1,477,582 454,439
Partnership Distribution 292,000 --
----------- -----------

Net Cash - Investing Activities (456,499) (464)
----------- -----------

Financing Activities:
Preferred Stock Issuance Costs (7,500) --
----------- -----------

Net [Decrease] in Cash and Cash Equivalents (1,394,885) (925,423)

Cash and Cash Equivalents - Beginning of Years 2,727,661 3,653,084
----------- -----------

Cash and Cash Equivalents - End of Years $ 1,332,776 $ 2,727,661
=========== ===========
</TABLE>

The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.

F-6

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

Years ended
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Taxes $ -- $ --
Interest $ -- $ --

Supplemental Schedule of Non-Cash Investing Activities:

During October 1996, the Company sold 750,000 shares of its preferred
stock for $1.20 per share. The proceeds were held in an attorney's trust account
at December 31, 1996 and subsequently released to the Company in January 1997.

During December 1996, the Company entered into Asset Purchase Agreements,
whereby the Company sold substantially all of the assets of five of its karate
centers and received $225,000 in cash [which was held in escrow] and $280,000 in
notes receivable. The $225,000 was released to the Company in April 1997.

The Accompanying Notes are an integral Part of These Consolidated Financial
Statements.

F-7

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

[1] Nature of Operations

Master Glazier's Karate International, Inc. a Delaware corporation [the
"Company"], incorporated on March 22, 1993, manages and operates Master Glazier
Karate Centers located in the Northeastern United States through its several
wholly-owned subsidiaries. At December 31, 1996, the Company presently owns and
operates two karate centers.

During December 1996, the Company entered into Asset Purchase Agreements,
whereby, the Company sold substantially all of the assets of five of its karate
centers in New York and New Jersey [See Note 16].

The Company is engaged in the martial arts instruction service and offers
various belt courses on a membership basis. The Company's sales result primarily
from memberships sold at each center.

[2] Summary of Significant Accounting Policies

[A] Consolidated Financial Statements - The Company's financial statements are
consolidated based on the controlling financial interests of the Company. All
material intercompany transactions have been eliminated.

[B] Revenue Recognition - Revenue is recognized by the Company over the term of
the customer contracts. Included in each contract, is a $99 non-refundable
registration fee which is recognized immediately as revenue. The average length
of the customers initial contract for most belt courses is primarily 10-20
months. The average length of a black belt contract is primarily 30-36 months.

[C] Accounts Receivable - The Company establishes an allowance for doubtful
accounts based on historical bad debt experience. The allowance for doubtful
accounts at December 31, 1996 was $18,964.

[D] Inventory - Inventory consists of martial arts products and clothing and is
valued at the lower of the cost [determined on the first-in, first-out basis] or
market.

[E] Net [Loss] Per Share - The net [loss] per share has been computed based upon
the weighted average number of shares outstanding. No dual presentation of
earnings [loss] per share is presented because inclusion of the Company's
warrants and options as common stock equivalents would be anti-dilutive.

[F] Property and Equipment and Depreciation - Property and equipment are carried
at cost, less accumulated depreciation and amortization. Expenditures for normal
repairs and maintenance are charged against income as incurred. Depreciation and
amortization are provided over the estimated useful lives of the assets, using
the straight-line and double declining methods as follows:

Vehicles 5 years

Furniture, Fixture and Office Equipment 7 years
Leasehold Improvements Shorter of Useful Life of Assets or
Length of Lease Term

All expenditures for betterments and additions are capitalized.

Depreciation expense for the years ended December 31, 1996 and 1995 was $145,998
and $108,916, respectively.

[G] Cash and Cash Equivalents - The Company considers certain highly liquid
instruments purchased with original maturities of three months or less to be
cash equivalents. The Company had approximately $1,250,000 of cash equivalents
at December 31, 1996.

F-8

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------

[2] Summary of Significant Accounting Policies [Continued]

[H] 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.

[I] Advertising Costs - Advertising costs are expensed as incurred. Advertising
expense amounted to $171,121 and $245,739 for the years ended December 31, 1996
and 1995, respectively.

[J] Concentrations of Credit Risk - Financial instruments which potentially
subject the company to concentrations of credit risk are cash and cash
equivalents and accounts receivable, arising from its normal business
activities. The Company establishes an allowance for uncollectible accounts and,
as a consequence, believes that its accounts receivable credit risk exposure
beyond such allowances is limited. The Company places its cash and cash
equivalents with high credit quality financial institutions. The amount on
deposit in any one institution that exceeds federally insured limits is subject
to credit risk. The Company had approximately $3,000 of cash subject to such
risk at December 31, 1996.

[K] Sales Returns - Under New Jersey, Pennsylvania and New York State law, the
Company is required to return the unearned portion of membership fees to karate
members upon the occurrence of certain events. The Company does not currently
maintain a reserve account for the return of membership fees because it believes
that any such reserve would be insignificant.

[L] Stock Options - On January 1, 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards ["SFAS"] No. 123,
"Accounting for Stock-Based Compensation," for stock options and similar equity
instruments [collectively, "Options"] issued to employees, however, the Company

will continue to apply the intrinsic value based method of accounting for
options issued to employees prescribed by Accounting Principles Board ["APB"]
Opinion No. 25, "Accounting for Stock Issued to Employees" rather than the fair
value based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.

[M] Reclassification - Certain prior year amounts have been reclassified to
conform with the current year's presentation.

[3] Cash in Escrow

At December 31, 1996, the Company had $1,125,000 held in escrow. Of this amount,
$225,000 pertained to the Asset Purchase Agreement and $900,000 pertained to the
Stock Exchange Agreement. Total amount became unrestricted in 1997 and was
deposited into the Company's bank account.

[4] Marketable Securities

The Company has classified its investments in marketable securities as
"Available for Sale" pursuant to Statement of Financial Accounting Standards
["SFAS"] No. 115, "Accounting For Certain Investments in Debt and Equity
Securities". Such investments are required to be reported at fair value, with
unrealized gains and losses shown as a separate component of stockholders
equity.

F-9

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------

[4] Marketable Securities [Continued]

Realized gains and losses are determined on the basis of sales price compared to
original cost. Cost is determined under the specific identification method.
During the years ended December 31, 1996 and 1995, sales proceeds and gross
realized gains and losses on securities classified as available for sale were:

1 9 9 6 1 9 9 5
------- -------

Sales Proceeds $1,477,582 $ 450,902
Gross Realized Losses $ 9,832 $ --
Gross Realized Gains $ 448,359 $ 2,537

The net realized gains of $438,527 and $2,537 are shown on the Statements of
Operations for the years ended December 31, 1996 and 1995, respectively.

During 1996, there was a $345,507 decrease in the unrealized holding gain which
is reflected on the Statements of Stockholders' Equity.

[5] Notes Receivable

Notes receivable consist of three promissory notes that the Company received
pursuant to the Asset Purchase Agreements [See Note 16]. The notes are in the
aggregate principal amount of $280,000 and do not bear interest. The notes are
to be repaid in monthly installments over a 30 month period beginning May 1,
1997. The notes are collateralized by the assets transferred to the purchasers
and are personally guaranteed by the President of the purchasers. Management
believes that if such repayment should not occur, that the pledged collateral
and personal guarantee provided will enable the Company to receive the full
principal amount.

[6] Deferred Revenue

Deferred revenue consists of prepaid memberships.

[7] Commitments

The Company occupies certain stores and office facilities under lease agreements
expiring in 2009 which are classified as operating leases. Management expects
that in the normal course of business, leases that expire will be renewed or
replaced by other leases. The leases contain clauses which permit adjustments of
lease payments based upon changes in the "Consumer Price Index," and additional
payments for a proportionate share of real estate taxes and common area
operating expenses. Rent expense, including real estate taxes, was $593,142 and
$462,804 for the years ended December 31, 1996 and 1995, respectively.

The following is an analysis of operating lease commitments assuming all renewal
options are exercised.

December 31,
- ------------
1997 $139,490
1998 144,391
1999 119,852
2000 100,920
2001 70,050
Thereafter 169,000
-------

Total Minimum Payments Required $743,703
------------------------------- ========

In 1997, pursuant to the Asset Purchase Agreements, the Company paid $76,375 to
two of its landlords to secure the consent of the landlords to the assignment of
the leases by the Company to the purchasers [See Note 16].

F-10

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------

[8] Fair Value of Financial Instruments

Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 107, "Disclosure about Fair Value of Financial
Instruments," which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
The following table summarizes financial instruments by balance sheet
classifications as of December 31, 1996:

Carrying Fair
Amount Value
-------- -----

Notes Receivable $ 280,000 $ 251,000
=========== ===========

In assessing the fair value of financial instruments, the Company was required
to make assumptions, which were based on estimates of market conditions and risk
existing at that time. For certain instruments, including cash and cash
equivalents, trade receivables, and payables, management estimates that the
carrying amount approximated fair value for the majority of these instruments
because of their short maturities.

[9] Income Taxes

At December 31, 1996, the Company has available, $3,913,679 of unused operating
loss carryforwards which expire in 2006. Generally accepted accounting
principles require the establishment of a deferred tax asset for all deductible
temporary differences and operating loss carryforwards. As a result, the Company
has a deferred tax asset of $1,330,650. Realization of the tax asset is
dependent upon future events affecting utilization of these carryforwards.
Because of the uncertainty that the Company will generate income in the future
sufficient to fully or partially utilize these carryforwards, a valuation
allowance has been established for the full amount of the tax asset.

[10] Related Parties

Commencing April, 1, 1993, the Company entered into a lease agreement with a
company affiliated with an officer of the Company. The lease was terminated as
of April 30, 1996. Rent expense amounted to $8,000 and $24,000 for the years
ended December 31, 1996 and 1995, respectively.

In December 1996, the Company transferred ownership of training equipment to the
President of the Company in lieu of compensation pursuant to the employment
agreement. The training equipment had a net book value of $29,342.

[11] Employment Agreement

On March 30, 1993, the Company entered into an employment agreement for a five
[5] year term with Mark Glazier, President of the Company. Pursuant to the
employment agreement, Mr. Glazier, received annual compensation of $330,395 and
$284,549 for the years ended December 31, 1996 and 1995, respectively.

In addition, Mr. Glazier will have the option during the employment term to
purchase up to 20% of the Company's common stock at $ .50 per share as long as
the Company achieves certain pretax earnings commencing at $500,000 during any
fiscal year.

F-11

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------

[12] Joint Venture

On June 1, 1995 pursuant to a termination agreement, the Company terminated it's
joint venture agreement with Planet Kids Learning Centers. In connection with
such termination, the Company received it's original $500,000 investment and
$500,000 loan plus accrued interest. In addition, the Company was granted an
option to purchase up to 150,000 shares of common stock of United Leisure
Corporation [the parent company of Planet Kids Learning Centers] at $.01 per
share, during any time until May 31, 2000. In return for the option the Company
agreed to perform consulting services from June 1, 1995 through May 31, 1996.
During November 1995, the Company fully exercised it's option and purchased
150,000 shares of United Leisure Corporation for $1,500. The fair value of the
common shares was $337,500 at December 31, 1995. In February 1996, the Company
sold the shares resulting in a realized gain of $448,359.

[13] Investment in Limited Partnership

On March 4, 1996, the Company entered into a limited partnership agreement with
HEP II, L.P. a limited partnership, to license ancillary rights to motion
pictures. The Company has a 49.50% interest in HEP II and does not have any
personal liability to any of the partners, creditors or debts of the
partnership. The Company contributed $1,500,000 to the capital of the
partnership and will receive interest at 7% to be paid quarterly. During 1996,
the Company earned interest of $87,500 on their capital contribution and
received a partnership distribution of $292,000.

The following is an unaudited summary of HEP II, L.P. financial statements as of
December 31, 1996:

Current Assets $ 10,839
Other Assets 4,451,263
----------------

Total Assets $ 4,462,102
------------ ================

Total Liabilities $ 545,360

Partners' Capital 3,916,742

Totals Liabilities and Partners' Capital $ 4,462,102
---------------------------------------- ================

Film Revenue $ 1,818,000
------------ ================

Net Loss $ (474,123)
-------- ================

Master Glazier's Karate International, Inc.
-------------------------------------------
Share of Partnership Loss $ --
------------------------- ================

For the year ended December 31, 1996, the general partner waived the allocation
of the net loss to the limited partners and agreed to absorb HEP II, L.P.'s
entire loss incurred for the year ended December 31, 1996.

F-12

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------

[14] Stockholders' Equity

[A] Preferred Stock Subscription Agreements - On October 18, 1996, the Company
entered into convertible preferred stock subscription agreements with the
President of the Company and other subscribers pursuant to which an aggregate of
750,000 shares of the Company's preferred stock was sold for $1.20 per share.
The shares of preferred stock were convertible at any time after April 18, 1997
into 20 shares of the Company's common stock [15,000,000 shares in total] so
long as the Company amended its Certificate of Incorporation to authorize a
sufficient number of shares of common stock. Each share of preferred stock had
10 votes per share on matters presented to the shareholders for a vote.

[B] Stock Exchange Agreement - On December 26, 1996, the Company entered into a
Stock Exchange Agreement with the President of the Company and other subscribers
pursuant to which the preferred stockholders exchanged an aggregate of 750,000
shares of the Company's preferred stock for 5,000,000 shares of common stock of
the Company, par value $.0001 per share and 10,000,000 options each exercisable
to purchase one share of common stock. The options become exercisable on April
17, 1997 at an exercise price of $.0001 per share so long as not less than
30,000,000 shares of common stock are authorized for issuance [See Note 17].

[15] Stock Options and Warrants

In 1995, the Company adopted, by action of the Board of Directors and
Stockholders, the 1995 Stock Plan [the "Plan"]. The Plan will terminate on
November 15, 2009.

The Plan is authorized to grant options, or other equity based incentives for
1,000,000 shares of common stock. If shares subject to an option under the Plan
cease to be subject to such options, or if shares awarded under the Plan are
forfeited or otherwise terminated, such shares will again be available for
future issuance under the Plan.

Awards under the Plan may be made to key employees, executive officers, and its
subsidiaries and affiliates. During any calendar year, no participant may be
granted more than 75,000 shares. The Plan imposes no limit on the number of
executive officers and other employees to whom awards may be made.

The following types of awards can be granted under the Plan: incentive or
non-qualified stock options; stock appreciation rights; restricted stock;
deferred stock, stock purchase rights and/or other stock-based awards.

On May 16, 1995, the Company granted an officer of the Company an option to
purchase from the Company at any time commencing on this date through May 16,
2000, 1,000,000 shares of common stock at an exercise price of $.30 per share.

On July 10, 1995, the Company granted an employee of the Company an option to
purchase from the Company on the fifth anniversary of this date through July 10,
2005, 10,000 shares of common stock at an exercise price of $.26 per share. The
options terminate on the earlier of July 12, 2005 or the date that employment
ceases. The options were terminated during 1996.

On March 21, 1996, the Company granted incentive stock options to an employee to
purchase on the fifth anniversary of this date through March 21, 2006, 2,000
shares of common stock at an exercise price of $.84 per share. The options
terminate on the earlier of March 21, 2006 or the date that employment ceases.

F-13

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------

[15] Stock Plan [Continued]

On October 21, 1996, the Company granted to a director of the Company options to
purchase 75,000 shares of common stock at an exercise price of $.38 per share,
commencing April 21, 1997 through April 21, 2006.

On October 28, 1996, the Company granted incentive stock options to an employee
to purchase at any time commencing on April 28, 1997 through April 28, 2002,
50,000 shares of common stock at an exercise price of $.53 per share.

On October 28, 1996, the Company granted incentive stock options to an employee
to purchase at any time commencing on April 28, 1997 through April 28, 2002,

5,000 shares of common stock at an exercise price of $.53 per share.

The stock options issued in 1996 and 1995 became fully vested at issuance and
were issued at the fair market value of the underlying stock on the grant date.

As of December 31, 1996, approximately 2,250,000 Class A Warrants were
outstanding, which entitle the holders to acquire shares of common stock at
$4.75 per share for a period expiring in October 1998. The warrants were issued
in 1993 as part of the initial public offering.

As of December 31, 1996, approximately 2,250,000 Class B Warrants were
outstanding, which entitle the holders to acquire shares of common stock at
$5.50 per share for a period expiring in October 1998.

The warrants were issued in 1993 as part of the initial public offering.

Information pertaining to stock options as of December 31, 1996 and 1995 for the
years then ended is as follows:

<TABLE>
<CAPTION>
Weighted
Average
Remaining
Weighted Contractual
Average Exercisable Life
Common Exercise Prices Stock of Options
Shares Per Share Options Outstanding
------ --------- ------- -----------
<S> <C> <C> <C> <C>

Options Outstanding - January 1, 1995 -- $ -- -- --
Options Granted 1,010,000 .30 1,000,000 4 Years
Options Exercised -- -- -- --
Options Canceled -- -- -- --
--------- -------- -----------

Options Outstanding - December 31, 1995 1,010,000 .30 1,000,000 4 Years

Options Granted 2,000 .84 2,000 9 Years
Options Granted 130,000 .44 130,000 5 Years
Options Exercised -- -- -- --
Options Canceled 10,000 .26 -- --
---------- -------- -----------

Options Outstanding - December 31, 1996 1,132,000 $ .32 $ 1,132,000 4 Years
--------------------------------------- ========== ======== ===========
</TABLE>

The exercise prices of the options outstanding at December 31, 1996 range
between $.30 and $.84.

No compensation cost was recognized in income during the years ended December
31, 1996 and 1995.

F-14

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------

[15] Stock Plan [Continued]

Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123, net income and earnings per share would have been as follows:

Years ended
December 31,
------------
1 9 9 6 1 9 9 5
------- -------
Net Loss Income:
As Reported $ (1,252,790) $ (882,860)
============ =============

Pro Forma $ (1,298,193) $ (1,149,129)
============ =============

Loss Earnings Per Share:
As Reported $ (1.16) $ (.83)
============ =============

Pro Forma $ (1.20) $ (1.07)
============ =============

At the grant dates, the weighted average fair value of the above options were
$.45 and $.30 during 1996 and 1995, respectively.

The fair value used in the pro forma data was estimated by using an option
pricing model which took into account as of the grant date, the exercise price
and the expected life of the option, the current price of the underlying stock
and its expected volatility, expected dividends on the stock and the risk-free
interest rate for the expected term of the option. The following is the average
of the data used for the following items.

Risk-Free Expected Expected Expected
Interest Rate Life Volatility Dividends
------------- ---- ---------- ---------

1996 6.31% 5 Years 125% N/A
1995 6.04% 4 Years 128% N/A

[16] Asset Purchase Agreements

During December 1996, the Company entered into Asset Purchase Agreements,
whereby the Company sold substantially all of the assets of five of its karate

centers located in New Jersey and New York to Tiger Shulmann's Karate ["TSK"]
subject to certain conditions. In consideration for the purchase of the assets,
TSK paid the Company an aggregate of $505,000 at closing, consisting of $225,000
in cash, and an aggregate of $280,000 in three promissory notes. The Company
recognized an approximate $383,000 loss on the sale of assets pertaining to this
transaction.

[17] Subsequent Events

On March 25, 1997, the Company's stockholders approved: (i) the sale of five of
its karate centers, (ii) a one for five reverse stock split of its common stock,
and (iii) amended the Company's articles of incorporation to increase the number
of authorized shares of the Company's common stock from 15,000,000 to 40,000,000
shares. The financial statements have been adjusted to reflect the effect of the
reverse stock split and increase in authorized common shares.

F-15

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------

[18] New Authoritative Accounting Pronouncements

The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB deferred some
provisions of SFAS No. 125, which are not expected to be relevant to the
Company.

The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 128, "Earnings per Share," and SFAS
No. 129, "Disclosure of Information about Capital Structure," in February 1997.

SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to

determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.

SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.

. . . . . . . . . . . . . .

F-16