MASTER GLAZIERS KARATE INTERNATIONAL INC, 10KSB, 1998-04-15

MASTER GLAZIERS KARATE INTERNATIONAL INC
10KSB, 1998-04-15
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, 1997

[ ] 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. 0-23236-NY

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

Delaware 22-3234110 (State of or o(IRS Employer ion of
incorporatiIdentification No.)

377 Hoes Lane
Piscataway, New Jersey 08854
(Address of Pr(Zip Code)ecutive Offices)

Registrant's telephone number, including area code: (732) 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 $751,909.

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, 1998, was approximately $4,070,002.

Number of shares outstanding of the issuer's common stock, as of March 31,
1998, was 4,070,002.

DOCUMENTS INCORPORATED BY REFERENCE: None.

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PART I

Item 1. BUSINESS.

General

Master Glazier's Karate International, Inc., a Delaware corporation
incorporated on March 22, 1993 (the"Company") manages and operates two (2)
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.

Until March 1997, 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
the 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
1996 and 1995, the Company recorded net losses of $1,252,790 and $882,960,
respectively. The Company also incurred a net loss of $1,676,235 for the year
ended December 31, 1997. 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 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."

The Company's executive offices are located at 377 Hoes Lane, Piscataway,
New Jersey, telephone number (732) 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),

<PAGE>

and (b) contracts, agreements and commitments specified in the Purchase
Agreements, including, 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 which expired in March 1998, the Company remained 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 two (2) remaining Karate Centers
in the future.

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

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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.

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). 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 January 1998,
the Bureau of Consumer Protection in the Commonwealth of Pennsylvania served a
subpoena on the Company in relation to five (5) consumer complaints relating to
no more than $15,000 of membership fees in the aggregate (the "Consumer
Complaints") which the Bureau of Consumer Protection alleged the Company had not
responded to expeditiously. In February 1998, Company counsel met with the
Attorney General in the Commonwealth of Pennsylvania and the Company and the
Attorney General reached prospective terms of an agreement relating to the
Consumer Complaints and the issue of the posting of bonds. In the event that the
terms are agreed to by the Company and the Attorney General, the Company will
respond to the Consumer Complaints and, without admission of any liability, will
post a bond in an amount to be agreed with respect to future membership fees. In
addition, the Company will pay the Attorney General's costs in an amount of no
more than $5,000. This agreement is not binding until the full terms are agreed
upon by the Company and the Attorney General.

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

<PAGE>

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.

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 believes that its

<PAGE>

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, 1998, 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.

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 April 1997, HBO showcased
the world premiere of HEP II's Skeletons starring Ron Silver and James Coburn.

During the fourth quarter of 1997, the Company wrote down its investment of
$1,208,000 in HEP II, L.P. to their estimated realizable value of $-0- due to
the noncompliance of the general partner with the terms of the limited
partnership agreement. The absence of quarterly interest payments in accordance
with the partnership agreement and partnership distributions from revenues
generated from motion pictures raised uncertainty to the recoverability of its
investment. As a result, a $1,208,000 impairment was recorded in the
consolidated statements of operations. Item 2. PROPERTIES

The Company maintains its principal executive offices at 377 Hoes Lane, NJ
08854 and its telephone number is (732) 981-0077.

The Company operated Karate Centers during 1997 at each of the following
locations, subject to the Sales Transaction:

<PAGE>

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 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. 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.

d. 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.

Item 3. LEGAL PROCEEDINGS.

There is no material litigation pending against the Company.

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

No matters were submitted to the Company's security holders during the
last quarter of its fiscal year ended December 31, 1997.

<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 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

Fiscal Year 1997 High Low
First Quarter $ 15/32 $ 7/16
Second Quarter $2 $ 13/16
Third Quarter $1-13/16 $1- 3/4
Fourth Quarter $ 2 $1

The Class A and Class B Warrants were listed on The Nasdaq SmallCap Market
on October 15, 1993 until November 1996 and, since then, have been traded on the
OTC Bulletin Board. The high and low prices as reported by the NASDAQ System
were as follows:

Class A WarrantsClass B Warrant
High Low High Low
Fiscal Year 1996

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

Fiscal Year 1997
First Quarter $* $* $* $*
Second Quarter $* $* $* $*
Third Quarter $* $* $* $*
Fourth Quarter $* $* $* $*
- -----------------
*Indicates security was not traded during this quarter.

On March 31, 1998, the closing price as reported by The Nasdaq SmallCap
Market was $1.00 per share. As of March 31, 1998 there were 4,070,002 shares of
post-split Common Stock outstanding, held of record by approximately 36 record
holders and 584 beneficial owners.

<PAGE>

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

For the Years Ended December 31, 1997 and December 31, 1996

The Company had sales for the year ended December 31, 1997 and December 31, 1996
of $751,909 and $1,474,629, respectively. Sales of $695,980 and $1,282,920 for
1997 and 1996, respectively, were derived predominantly from membership tuition
sold in two of the Company's karate centers in 1997 and seven centers in 1996.
The amount of other goods sold was $55,929 and $191,709 for 1997 and 1996,
respectively.

The 49% decrease in sales of $722,720 was primarily attributable to the sale of
the Hackensack, Ramsey, Paramus, Great Neck and Hicksville karate centers. Total
sales for the two remaining centers remained relatively constant from 1996 to
1997.

The net [loss] for the years ended December 31, 1997 and December 31, 1996 were
$1,676,235 and $1,252,790, respectively. The increase in the net [loss] can be
attributed mainly to the $1,208,000 write down of the investment in the limited
partnership offset by the decrease in the net operating losses of the five sold
karate centers, which were not operating at a profit.

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

December 31,
1 9 9 7 1 9 9 6

Professional Fees $ 102,774 $ 153,390
Salaries and Payroll Taxes 681,165 1,042,500
Rent 157,844 593,142
Advertising and Promotional 45,074 177,346
Utilities 13,353 62,522
Office Expense and Other Expenses 274,964 721,206
---------- -----------

Totals $1,275,174 $ 2,750,106
------ ========== ===========

The following decreases in the above components are primarily attributable to
the sale of the five karate centers: advertising and promotional expenses,
$132,272, 75%; rent, $435,298, 73%; utilities, $49,169, 79%; office expense and
other expenses $446,242, 62%.

Professional fees decreased $50,616 due to additional legal and accounting fees
incurred in 1996 associated with the sale of the Company's assets and in
connection with the preparation of the Company's annual meeting and proxy.

The decrease in salaries and payroll of $361,335 taxes during the year ended
December 31, 1997 resulted from the decrease of staff due to the sale of five
karate centers and was offset by the increase in officer's compensation pursuant
to the employment agreement.

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 for 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

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consists almost entirely of leasehold improvements for the five centers. The
sale of the assets were approved by the Company's stockholders on March 25,
1997. 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 49.50% 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. During
1997, there were no partnership distributions received.

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.

On June 20, 1997, the Company issued 10,000,000 shares [2,000,000 shares
subsequent to a 1 for 5 Reverse Stock Split] of common stock to the President of
the Company and other subscribers for $1,000 and recorded cash in escrow of $933
and a stock subscription receivable of $67.

Liquidity and Capital Resources

Cash and cash equivalents increased $476,390 for the year ended December 31,
1997 and decreased $1,394,885 for the year ended December 31, 1996. Cash and
cash equivalents recognized from operations for the year ended December 31, 1997
was $662,426. For the year ended December 31, 1996, approximately $919,000 of
cash and cash equivalents were utilized from operations.

Net cash and cash equivalents applied to investing activities was $142,247 and
$468,349 for December 31, 1997 and 1996, respectively. During 1997, the Company
purchased property and equipment of approximately $13,000 and marketable
securities of approximately $398,500. Also during the year, the Company received
proceeds from the sale of marketable securities of $201,518. 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 of $1,478,000
from the sale of securities and a partnership distribution of $292,000.

<PAGE>

The Company anticipates using the proceeds from the Asset Purchase Agreements 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 two remaining karate centers in
the future.

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.

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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, 1997........... F-3.... F-4

Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996................................... F-5....

Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1996............................. F-6....

Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 .................................. F-7.... F-8

Notes to Consolidated Financial Statements................... F-9.... F-18

. . . . . . . . . .

F-1

<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, 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1997. 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, 1997, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.

MOORE STEPHENS, P. C.
Certified Public Accountants.

Cranford, New Jersey
April 10, 1998

F-2

<PAGE>

<TABLE>

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

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
- ------------------------------------------------------------------------------

Assets:
Current Assets:
<S> <C>
Cash and Cash Equivalents $ 1,809,166
Cash Held in Escrow 933
Marketable Securities 191,000
Accounts Receivable - Net 14,497
Inventory 12,330
Prepaid Expenses and Miscellaneous Receivables 8,240
Notes Receivable - Current Portion 112,000
Accrued Interest 7,703
-----------

Total Current Assets 2,155,869
-----------
Property and Equipment:
Office Equipment 63,567
Furniture and Fixtures 84,254
Leasehold Improvements 100,210
Vehicles 32,558
-----------

Total - At Cost 280,589
Less: Accumulated Depreciation 172,133

Property and Equipment - Net 108,456
-----------

Other Assets:
Security Deposits 53,456
Notes Receivable - Long-Term 93,334
-----------

Total Other Assets 146,790
-----------
Total Assets $ 2,411,115
===========

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

</TABLE>

F-3

<PAGE>

<TABLE>

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

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
- ------------------------------------------------------------------------------

Liabilities and Stockholders' Equity:
Current Liabilities:
<S> <C>
Accounts Payable and Accrued Expenses $ 157,126
Deferred Revenue 194,034
-----------

Total Current Liabilities 351,160
-----------
Deferred Revenue 68,559
-----------
Commitments and Contingencies --
-----------
Stockholders' Equity:
Preferred Stock, No Par Value; 1,000,000 Shares Authorized --

Common Stock, $.0001 Par Value 40,000,000 Shares
Authorized, 4,070,002 Issued and Outstanding 407

Paid-in Capital 8,237,831

Unrealized Holding Loss (7,500)

Accumulated Deficit (6,239,342)
-----------
Total Stockholders' Equity 1,991,396
-----------
Total Liabilities and Stockholders' Equity $ 2,411,115
===========

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
</TABLE>

F-4

<PAGE>

<TABLE>

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

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

Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------

<S> <C> <C>
Net Sales $ 751,909 $ 1,474,629
----------- -----------

Costs and Expenses:
Costs of Accessories Sold 65,455 158,365
Salaries and Payroll Taxes 681,165 1,042,500
Rent Expense 157,844 593,142
Other General and Administrative Expenses 436,165 1,114,464
----------- -----------

Total Costs and Expenses 1,340,629 2,908,471
----------- -----------

Loss from Operations (588,720) (1,433,842)
----------- -----------

Other Income [Expense]:
Interest Income 95,873 167,521
Gain on Sale of Securities 1,518 438,527
Loss on Sale of Assets 23,094 (424,996)
Loss on Investment in Limited Partnership (1,208,000) --
----------- -----------

Other [Expense] Income - Net (1,087,515) 181,052
----------- -----------

Net Loss $(1,676,235) $(1,252,790)
=========== ===========

Net Loss Per Share $ (0.54) $ (1.16)
=========== ===========

Weighted Average Shares Outstanding 3,133,014 1,083,699
=========== ===========

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
</TABLE>

F-5

<PAGE>

<TABLE>

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

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

Preferred Stock Common Stock Unrealized Total
Number of Number of Paid-in Accumulated Holding Stockholders'
Shares Amount Shares Amount Capital Deficit Gain [Loss] Equity

<S> <C> <C> <C> <C> <C> <C> <C> <C>
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

Exercise of Stock Options -- -- 2,000,002 200 800 -- -- 1,000

Stock Issuance Costs -- -- -- -- (43,789) -- -- (43,789)

Net Loss for the year ended
December 31, 1997 -- -- -- -- -- (1,676,235) -- (1,676,235)

Unrealized Holding Loss on
Marketable Securities -- -- -- -- -- -- (7,500) (7,500)
------ ------- --------- ------ ------- -------- -------- -----------

Balance - December 31, 1997 -- $ -- 4,070,002 $ 407 $8,237,831 $(6,239,342) $(7,500) $(1,991,396)
====== ======= ========= ====== ========== =========== ======= ===========

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
</TABLE>

F-6

<PAGE>

<TABLE>

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

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

Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
Operating Activities:
<S> <C> <C>
Net Loss $(1,676,235) $(1,252,790)
----------- -----------
Adjustments to Reconcile Net Loss to Net
Cash Used for Operating Activities:
Depreciation and Amortization 29,176 145,998
Provision For Doubtful Accounts (12,455) 10,140
Gain on Sale of Securities Available for Sale (1,518) (438,527)
[Gain] Loss on Sale of Assets (1,835) 424,996
Loss on Investment in Limited Partnership 1,208,000 --

Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 75,741 (28,640)
Accrued Interest Receivable (7,703) --
Inventory 29,258 15,439
Prepaid Expenses 8,001 22,546
Miscellaneous Receivable -- 17,299
Cash Held in Escrow 1,125,000 --

[Decrease] Increase in:
Accounts Payable and Accrued Expenses (18,817) (62,428)
Deferred Revenue (94,187) 227,021
----------- -----------

Total Adjustments 2,338,661 333,844
----------- -----------

Net Cash - Operating Activities 662,426 (918,946)
----------- -----------

Investing Activities:
Purchase of Property and Equipment (12,568) (302,286)
Proceeds from Sale of Property and Equipment 7,000 --
Payments Received on Notes Receivable 74,666 --
Investment in Limited Partnership -- (1,500,000)
Security Deposits (14,363) (11,940)
Start-Up Costs -- 2,955
Purchase of Securities Available for Sale (398,500) (426,750)
Proceeds From Sales of Securities Available for Sale 201,518 1,477,582
Partnership Distribution -- 292,000
----------- -----------

Net Cash - Investing Activities (142,247) (468,439)
----------- -----------

Financing Activities:
Stock Issuance Costs (43,789) (7,500)
----------- -----------

Net Increase [Decrease] in Cash and Cash Equivalents 476,390 (1,394,885)

Cash and Cash Equivalents - Beginning of Years 1,332,776 2,727,661
----------- -----------

Cash and Cash Equivalents - End of Years $ 1,809,166 $ 1,332,776
=========== ===========

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

</TABLE>
F-7

<PAGE>

<TABLE>

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

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

Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
Supplemental Disclosures of Cash Flow Information:
<S> <C> <C>
Cash paid during the years for:
Taxes $ -- $ --
Interest $ -- $ --
</TABLE>

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.

During June 1997, the Company issued 10,000,000 shares [2,000,000 shares
subsequent to a 1 for 5 Reverse Stock Split] of common stock for $1,000 and
recorded cash in escrow of $933 and a stock subscription receivable of $67.

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

F-8

<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 Pennsylvania through its several wholly-owned
subsidiaries. At December 31, 1997, 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 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. The average length of the customers contract for most
belt courses is primarily 10-20 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, 1997 was $6,509.

[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 potential common stock would be anti-dilutive.

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share"; which is effective
for financial statements issued for periods ending after December 15, 1997.
Accordingly, earnings per share data in the financial statements for the year
ended December 31, 1997, have been calculated in accordance with SFAS No. 128.
Prior periods earnings per share data have been recalculated as necessary to
conform prior years data to SFAS No.
128.

SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with a new basic
earnings per share representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period. SFAS No.
128 also requires a dual presentation of basic and diluted earnings per share on
the face of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.

F-9

<PAGE>

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

[2] Summary of Significant Accounting Policies [Continued]

[E] Net [Loss] Per Share [Continued] -The computation of diluted earnings per
share does not assume conversion, exercise, or contingent issuance of securities
that would have an antidilutive effect on earnings per share (i.e., increasing
earnings per share or reducing loss per share). The dilutive effect of
outstanding options and warrants and their equivalents are reflected in dilutive
earnings per share by the application of the treasury stock method which
recognizes the use of proceeds that could be obtained upon exercise of options
and warrants in computing diluted earnings per share. It assumes that any
proceeds would be used to purchase common stock at the average market price
during the period. Options and warrants will have a dilutive effect only when
the average market price of the common stock during the period exceeds the
exercise price of the options or warrants. The Company's options were not
included in the computation of diluted earnings per share because to do so would
have been antidilutive for the periods presented; however, such options could
potentially dilute basic earnings per share in the future.

[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, 1997 and 1996 was $29,176
and $145,998, 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 $1,797,000 of cash equivalents
at December 31, 1997.

[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.
Actual results could differ from those estimates.

[I] Advertising Costs - Advertising costs are expensed as incurred. Advertising
expense amounted to $45,074 and $171,121 for the years ended December 31, 1997
and 1996, 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. At December 31, 1997, the Company had no cash subject to such
risk. The Company does not require collateral or other security to support
financial instruments subject to credit risk.

[K] Sales Returns - Under Pennsylvania 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.

F-10

<PAGE>

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

[2] Summary of Significant Accounting Policies [Continued]

[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.

[3] 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.

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, 1997 and 1996, sales proceeds and gross
realized gains and losses on securities classified as available for sale were:

1 9 9 7 1 9 9 6
------- -------

Sales Proceeds $ 201,518 $1,477,582
Gross Realized Losses $ -- $ 9,832
Gross Realized Gains $ 1,518 $ 448,359

The net realized gains of $1,518 and $438,527 are shown on the Statements of
Operations for the years ended December 31, 1997 and 1996, respectively.

During 1997, there was a $7,500 decrease in the unrealized holding loss which is
reflected on the Statements of Stockholders' Equity.

[4] Notes Receivable

Notes receivable at December 31, 1997 amount to $205,334 of which $112,000 is
classified as current and $93,334 as noncurrent. The notes consist of three
promissory notes that the Company received pursuant to the Asset Purchase
Agreements [See Note 15] 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. During the year ended December 31,
1997, the Company received eight payments aggregating $74,667.

[5] Deferred Revenue

Deferred revenue consists of prepaid memberships.

F-11

<PAGE>

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

[6] 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 $157,844 and
$593,142 for the years ended December 31, 1997 and 1996, respectively. The
Company also leases an automobile which expires in 2000 and is classified as an
operating lease.

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

December 31,
1998 $ 160,765
1999 136,226
2000 113,201
2001 100,920
2002 72,050
Thereafter 119,000
----------

Total Minimum Payments Required $ 702,162

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 15].

[7] 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, 1997:

Carrying Fair
Amount Value

Notes Receivable $ 205,334 $ 188,195
========= ==========

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.

F-12

<PAGE>

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

[8] Income Taxes

Income taxes have been recorded under SFAS No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss carryforwards.

The tax effects of significant items comprising the Company's net deferred tax
assets as of December 31, 1997 are as follows:

Deferred Tax Assets:
Net Operating Loss Carryforwards $1,330,536

Valuation Allowance for Deferred Tax Asset 1,330,536
----------

Net $ --
--- ==========

The valuation allowance of $1,330,536 represents an increase of $134,113 over
the preceding year. Net operating loss carryforwards of $3,913,342 expire as
follows:

Years ended
2005 $ 2,350
2006 2,730
2007 243,485
2008 1,307,938
2009 963,377
2010 999,011
2011 394,451
----------

Total $3,913,342

A reconciliation between statutory federal income tax and the effective rate of
income tax expense for each of the two years during the period ended December
31, 1997 follows:

1 9 9 7 1 9 9 6
------- -------

Statutory Federal Income Tax Rate (34)% (34)%
Change in Valuation Allowance 34% 34%
------- -------

Effective Income Tax Rate -- --
------------------------- ======= =======

[9] 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 for the year ended December
31, 1996.

F-13

<PAGE>

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

[9] Related Parties [Continued]

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.

Accrued expenses includes approximately $35,000 of accrued salary due to the
President of the Company.

[10] 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 $380,666 and
$330,395 for the years ended December 31, 1997 and 1996, 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.

[11] 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. In February 1996, the
Company sold the shares resulting in a realized gain of $448,359.

[12] 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.

F-14

<PAGE>

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

[12] Investment in Limited Partnership [Continued]

The following is an unaudited summary of HEP II, L.P. financial statements as of
July 31, 1997 [latest available information] and December 31, 1996:

July 31, December 31,
1 9 9 7 1 9 9 6

Current Assets $ -- $ 10,839
Other Assets 2,527,055 4,451,263
---------- ----------

Total Assets $2,527,055 $4,462,102
------------ ========== ==========

Total Liabilities $ 286,096 $ 545,360
Partners' Capital 2,240,959 3,916,742
---------- -----------

Totals Liabilities and Partners' Capita$2,527,055 $4,462,102

Film Revenue $1,416,540 $1,818,000
------------ ========== ==========

Net Loss $ (548,639) $ (474,123)
-------- ========== ==========

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

For the years ended December 31,1997 and 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 both periods.

[13] 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. The options were
exercised on June 20, 1997.

[C] Reverse Stock Split - On March 25, 1997, the Company's stockholders approved
a one for five reverse stock split of its common stock. All share data have been
retroactively adjusted.

[D] Authorized Shares - On March 25, 1997, the Company's stockholders approved
an amendment to 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.

F-15

<PAGE>

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

[14] 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.

The stock options issued in 1996 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, 1997 and 1996 for the
years then ended is as follows:
Weighted
Weighted Average
Average ExercisableRemaining
CommonExercise Prices Stock Contractual
Shares Per Share Options Life

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

Options Granted -- -- --
Options Exercised -- -- -- --
Options Canceled -- -- -- --
------- ------- ---------

Options Outstanding -
December 31, 1997 1,132,000 $ .32 $1,132,000 3 Years
- -------------------------------- ========= ======== ==========

The exercise prices of the options outstanding at December 31, 1997 range
between $.30 and $.84.

No compensation cost was recognized in income during the years ended December
31, 1997 and 1996.

F-16

<PAGE>

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

[14] 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 7 1 9 9 6
------- -------
Net Loss Income:
As Reported $ (383,675) $(1,252,790)
========== ===========

Pro Forma $ (383,675) $(1,298,193)
========== ===========

Loss Per Share:
As Reported $ (.12) $ (1.16)
========== ===========

Pro Forma $ (.12) $ (1.20)
========== ===========

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

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

1997 -- -- -- N/A
1996 6.31% 5 Years 125% N/A

[15] 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.

[16] New Authoritative Pronouncements

The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Earlier application is
permitted. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. Management is in the process of
determining its preferred format. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.

F-17

<PAGE>

MASTER GLAZIER'S KARATE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------

[16] New Authoritative Pronouncements [Continued]

The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating segments
are reported in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. Management is in the process of evaluating
the disclosure requirements. SFAS No. 131 is not expected to have a material
impact on the Company.

In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.

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

F-18

<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

Richard A. Schechtman 35 Director

Marc Zwetchenbaum 40 Director

Lawrence D. Bruch 35 Director

Joseph Drapkin 36 Director
- ----------------------

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.

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.

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. Zwetchenbaum 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
Zwentchenbaum, 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.

LAWRENCE D. BRUCH has been a director of Master Glazier's Karate
International, Inc. (the "Company") since February 1998. Mr. Bruch is currently
the President of Scene Saver USA, Inc., a computer company specializing in
scenic screen savers. From 1987 until 1992, Mr. Bruch was the Chairman of the
Board and President of Infopro Incorporated, a management information systems
(MIS) consulting firm. Mr. Bruch graduated from Syracuse University in 1985, and
thereafter, worked for the Micro Computer Resource Center of American Express.

JOSEPH DRAPKIN has been a director of Master Glazier's Karate
International, Inc. (the "Company") since February 1998. Since 1994, Mr. Drapkin
has been the President of A.M.A

<PAGE>

Management, Inc., a company involved in the business and real estate
management in the Bethesda, MD area. Additionally, in October 1994 Mr. Drapkin
co-founded the Bethesda Martial Arts Academy. From 1991 through 1994, Mr.
Drapkin represented various Fortune 500 corporations in Kuwait following the
Gulf War. Mr. Drapkin attended American University from 1979 until 1983.

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, 1997, all Section 16(a)filing requirement applicable to its
officers, directors and greater than ten percent beneficial owners were
satisfied.

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.

<TABLE>

SUMMARY COMPENSATION TABLE

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)

Mark Glazier, President
<S> <C> <C> <C>
and Chairman of the Board 1997 $ 380,666
1996 $ 330,395

1995 $ 284,549 1,000,000

All Executive Officers
as a Group (1 person) 1997
1996 $ 330,395
1995 $ 284,549 1,000,000
</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

<PAGE>

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 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, 1998 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) 2,050,200 (4) 48.0
c/o Master Glazier's
Karate International, Inc.
377 Hoes Lane
Piscataway, NJ 08854

Fair Lane, LLC 900,000 22.1
6900 N. Andrews Avenue
Suite 500
Fort Lauderdale, FL 33309

Richard A. Schectman(5) 15,000(6) *
c/o Master Glazier's
Karate International, Inc.
377 Hoes Lane
Piscataway, NJ 08854

Marc Zwetchenbaum(5) 0 0.0
c/o Master Glazier's
Karate International, Inc.
377 Hoes Lane
Piscataway, NJ 08854

Lawrence D. Bruch(5) 0 0.0
c/o Master Glazier's
Karate International, Inc.
377 Hoes Lane
Piscataway, NJ 08854

Joseph Drapkin(5) 0 0.0
c/o Master Glazier's
Karate International, Inc.
377 Hoes Lane
Piscataway, NJ 08854

Directors and Officers 2,065,200(4)(6) 48.2
as a Group (5 persons)

* Indicates beneficial ownership of less than 1%.
(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 4,070,002 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 200,000 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. See "Certain Transactions".
(5) Director.
(6) Includes 15,000 shares of Common Stock issuable to Mr. Schechtman upon the
exercise of an option held by him at an exercise price of $0.38 per share.

<PAGE>

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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 June 30, 1997, the Preferred Stockholders exercised all of the Investor
Options, resulting in the issuance of an aggregate of 2,000,000 post-reverse
split shares of Common Stock for the aggregate exercise price of $1,000.

<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 7:

Independent Auditor's Report F-2

Consolidated Balance Sheet as of December 31, 1997 F-3 - F-4

Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 F-5

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1996 F-6

Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-7 - F-8

Notes to Financial Statements F-9 - F-18

(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.

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.

<PAGE>

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.

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.

<PAGE>

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.

- -----

* 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, 1998
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, 1998
- --------------------------- Officer and Director
Mark Glazier

/s/ Richard Schechtman Director April 15, 1998
- ---------------------------
Richard Schechtman

/s/ Marc Zwetchenbaum Director April 15, 1998
- ---------------------------
Marc Zwetchenbaum

/s/ Joseph Drapkin Director April 15, 1998
- ---------------------------
Joseph Drapkin

/s/ Lawrence Bruch Director April 15, 1998
- ----------------------------
Lawrence Bruch

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data esxtracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 1,809,166
<SECURITIES> 191,000
<RECEIVABLES> 14,497
<ALLOWANCES> 0
<INVENTORY> 12,330
<CURRENT-ASSETS> 2,155,869
<PP&E> 280,589
<DEPRECIATION> 172,133
<TOTAL-ASSETS> 2,411,115
<CURRENT-LIABILITIES> 351,160
<BONDS> 0
0
0
<COMMON> 407
<OTHER-SE> 1,990,989
<TOTAL-LIABILITY-AND-EQUITY> 2,411,115
<SALES> 751,909
<TOTAL-REVENUES> 751,909
<CGS> 65,455
<TOTAL-COSTS> 1,275,174
<OTHER-EXPENSES> 95,873
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,676,235)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,676,235)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,676,235)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)

</TABLE>