-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OZzQYvIlNiUtPOW02xFx+EdXY7Qagkt08LUOW/F/u5yPEHtP3TyD74k746MTjvod KcGI9JWohbaEmJx7isXqqw== 0000944209-00-000439.txt : 20000329 0000944209-00-000439.hdr.sgml : 20000329 ACCESSION NUMBER: 0000944209-00-000439 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED LEISURE CORP CENTRAL INDEX KEY: 0000059684 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] IRS NUMBER: 132652243 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-06106 FILM NUMBER: 581110 BUSINESS ADDRESS: STREET 1: 18081 MAGNOLIA AVENUE CITY: FOUNTAIN VALLEY STATE: CA ZIP: 92708 BUSINESS PHONE: 7143788761 MAIL ADDRESS: STREET 1: 18081 MAGNOLIA AVENUE CITY: FOUTAIN VALLEY STATE: CA ZIP: 92708 FORMER COMPANY: FORMER CONFORMED NAME: LION COUNTRY SAFARI INC DATE OF NAME CHANGE: 19870330 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL LEISURE INC DATE OF NAME CHANGE: 19720407 10KSB40 1 FORM 10KSB405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- ANNUAL REPORT ON FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission file number 0-6106 UNITED LEISURE CORPORATION (Exact name of registrant as specified in it charter) Delaware 13-2652243 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
1990 Westwood Blvd., Los Angeles, CA 90025 Issuer telephone number, including area code: (310) 441-0900 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The Issuer's revenues for the most recent fiscal year were $1,377,770. The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant on March 17, 2000, based on the average closing bid and asked price of the Common Stock as quoted on the OTC Bulletin Board on such date, was approximately $140,376,888. The number of shares of the Registrant's Common Stock outstanding as of March 17, 2000 was 18,815,868 shares. DOCUMENTS INCORPORATED BY REFERENCE Transitional Small Business Disclosure Format (Check One): Yes _____; No --- X - ----- =============================================================================== UNITED LEISURE CORPORATION ANNUAL REPORT ON FORM 10-KSB INDEX
Page ----- PART I Item 1. Business...................................................................... 3 Item 2. Description of Property....................................................... 11 Item 3. Legal Proceedings............................................................. 11 Item 4. Submission of Matters to a Vote of Security Holders........................... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 12 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 12 Item 7. Financial Statements.......................................................... 14 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial 14 Disclosure.................................................................... PART III Item 9. Directors and Executive Officers of the Registrant............................ 14 Item 10. Executive Compensation........................................................ 16 Item 11. Security Ownership of Certain Beneficial Owners and Management................ 18 Item 12. Certain Relationships and Related Transactions................................ 20 Item 13. Exhibits and Reports on Form 8-K.............................................. 21 Signatures........................................................................................ 24
-2- PART I This Annual Report on Form 10-KSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Exchange Act of 1934, as amended. These include, among others, the statements about United Leisure's plans and strategies under the headings "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although United Leisure believes that its plans, intentions and expectations reflected in or suggested by such forward looking statements are reasonable, it cannot assure that such plans, intentions or expectations will be achieved. Actual results may differ materially from the forward-looking statements made in this Annual Report on Form 10-KSB. ITEM 1. BUSINESS General United Leisure Corporation ("United Leisure") has business activities in two areas. First, we operate children's indoor learning centers. This is becoming a smaller part of our operations. Second, through our wholly owned subsidiary United Internet Technologies, Inc. ("United Internet Technologies"), we develop proprietary solutions for enhancing the Internet properties of partners and clients in entertainment, e-commerce and other industries. This is a growing area of activity for us. Our solutions allow businesses to provide superior video functionality in combination with the Internet, provide a unique experience to consumers, help drive greater volumes of traffic to their Web sites and ultimately create greater value. The solutions that we have offered to date include: . Parallel Addressing Video Technology; . Dynamic Integrated Video Overlay; and . Innovative Web design solutions. United Internet Technologies has the capability to provide a turn-key and end-to-end solution. Our capabilities include: . Concept and business model development; . Branding; . Content production; . Video development; and . CD distribution. We have developed solutions for the following partners and clients: . NBC; . World Championship Wrestling, Inc.; . Genisys Reservation Systems, Inc., also known as Netcruise.com; and . Teen People. We also have investments in two affiliated companies. These investments consist of: . Grand Havana Enterprises, Inc. , which owns and operates private membership restaurants and cigar clubs; . HEP II L.P., which is in the motion picture production business. United Leisure was incorporated under the laws of the State of Delaware in May 1969 under the name "Lion Country Safari, Inc." Lion Country Safari was formed to develop and operate a chain of African wildlife preserve and theme amusement parks. Our principal executive offices are located at 1990 Westwood Boulevard, Los Angeles, California 90025 and our telephone number is (310) 441-0900. References to United Leisure herein include United Leisure Corporation and its consolidated subsidiaries, unless the context otherwise requires. -3- Background Before February 1997, our primary business was to develop and manage facilities for children's recreational activities. In connection with our decision to reorient our business to develop solutions for enhancing Internet properties, we closed most of our children's facilities. In August 1999, we sold real property located in El Cajon, California that had been used for children's recreational activities. In October 1999, we sold our real estate holdings in Las Vegas. Industry Background Currently there are several technologies and methods to communicate and retrieve various types of information from Internet resources. The format for retrieving much of this information is satisfactory, but the length of time that it takes to transfer some audio and video content is inconvenient or unacceptable to many users. Originally, users were required to download audio and video content in its entirety before they could view or listen to the content. The length of time it took to accomplish this varied depending on the transmission speed of the user's modems as well as other factors. In addition, the downloaded files took up a lot of space on the user's hard disk drive. The development of streaming technology overcame some of these limitations. This technology allows the user to begin watching or listening to the content while it is being transmitted. To take advantage of streaming technology, the user must have a multimedia computer with certain microprocessor requirements, at least a 28.8 kbps modem and streaming media software. The streaming media software, such as RealNetwork's RealPlayer and Microsoft Windows Media Player, can be downloaded from the Internet free of charge. Despite these improvements, there are significant limitations with streaming technology, especialy with respect to the quality of the video images. Streaming technology is limited by available bandwidth. For example, a video streaming at 28.8 kbps will produce a jumpy or choppy video that the viewer perceives as less than full motion. In addition, streaming video is displayed in a small window on the viewer's computer screen and enlarging the image further reduces its quality. Internet congestion or losses in Internet connection may also interrupt audio and video streams. These factors can result in an unsatisfying experience for users of streaming technology. Increased transmission speeds will enhance the quality of the technology but industry analysts disagree as to the time frame in which transmission speeds sufficient to overcome the current limitations will be in use. -4- Our Solutions We believe that current streaming technology delivers an unsatisfying video experience because the video is limited in motion, has poor resolution, has a small viewing window and is relatively unstable. We developed our technology to permit Web site design that will integrate video in innovative ways without sacrificing quality or requiring large amounts of bandwidth. In 1998, we spent approximately $168,000 for research and development of our Internet technology. In 1999, we spent approximately $782,000 on research and development. These expenditures are included in our direct operating expenses. To date, we have developed the following solutions for audio and video delivery: Parallel Addressing Video This technology, which is not a broadcast, downloaded or streaming technology, uses pre-recorded audio and video that is distributed to the user on a CD-ROM or DVD-ROM. The technology equips Websites with software that allow the Web site to interact with a user's Internet browser and activate the CD-ROM or DVD-ROM. The result is a 30 frame-per-second broadcast quality, full-motion, full-screen video and audio on the user's computer, while the user is connected to the Internet. Unlike traditional CD-ROM or DVD-ROM multimedia products, such as interactive encyclopedias or magazines, which are completely controlled by the user from their computer, with our technology the display of the content is completely controlled from the Web site. Various security techniques allow the creator of the pre-recorded material to control when and how much of the material is available to the user. For example, a Web site administrator could pre-record more video than would be available on the Web site at any one time, distribute it on a CD-ROM or DVD-ROM and make it accessible by the user either in a time-released fashion or with proprietary security codes. The user's video player communicates with the Web server which creates a secure encryption key to unlock the video. Security and time-control functions exist on both the Web site and the distributed medium that allow the video to be delivered to the user in the manner that the content provider desires. Encryption keys also allow the owners of the Web sites to protect against unauthorized use or distribution of their video content. In addition, Parallel Addressing Video technology permits all information other than the actual pre-recorded material to be changed on the Web site. This results in a more diverse interactive experience that can change as frequently as the Web site administrator desires. As a result, the Web site content remains current and the context in which the material is viewed can be updated to maintain the user's interest. Dynamic Integrated Video Overlay This technology enhances our Parallel Addressing Video technology by allowing video that is distributed and controlled through Parallel Addressing Video technology to be integrated within a Web page. This allows special effects and videoactive interface design using a combination of video and fixed Web design tools and technologies. These innovations do not currently exist in other video formats. Combining these innovations with full motion 30 frame-per-second broadcast quality video results in a more multimedia enhanced Web page than those using traditional static elements and streaming video. For example, using Dynamic Integrated Video Overlay technology, a host can appear in full motion video on the Web page to educate or entertain the user. This technology allows the host to appear as an actual part of the video although two different sources are involved. Dynamic Integrated Video Overlay technology also provides functions that allow video to be combined seamlessly within the user's own Web browser software. Like Parallel Addressing Video, Dynamic Integrated Video Overlay technology is designed to work with popular browsers from both Netscape Communication Corporation and Microsoft Corporation. -5- Vector Image Mapping We are developing a media player to incorporate additional functions and features. This includes new technology called Vector Image Mapping. This technology will enable a user to click on selected pixels within a video to create an interactive experience with that image. Applications Television. In July 1999, we entered into a Master Development Agreement with the National Broadcasting Company. We mastered, reproduced and distributed 1 million CD-ROMs showcasing NBC's fall 1999 season incorporating an interactive game/contest. The CD-ROMs used our Parallel Addressing Video and Dynamic Integrated Video Overlay technologies linked to a special NBC Web site. They were distributed free in newspapers in September 1999 in six major metropolitan areas. We received a fixed fee of $100,000 for delivery of the CD-ROMs. Users who received a copy of the NBC disc could access the special NBC Web site and activate encrypted video to play excerpts from seven returning NBC television shows and seven new shows in the fall 1999 lineup. Users were also able to play an interactive game and participate in a contest where the first prize winner would win a spot on an NBC television show. Wrestling. In February 1999, we entered into a license agreement with World Championship Wrestling. Under the agreement, we granted WCW a non- exclusive license to use our Parallel Addressing Video and Dynamic Integrated Video Overlay technologies in connection with their Web site. The agreement provided that WCW would pay certain royalties to us based upon gross revenues from (1) banner or similar advertisements and/or sponsorships contained on or accessed through use of the CD-ROMs or other discs and (2) from full-screen, full motion trailers and/or other full-screen or full motion video and/or audio/visual advertisements that are not standard in the Internet industry and are contained on or accessed through use of the CD-ROMs or other discs. -6- WCW also paid us a non-refundable advance against these royalties of $200,000. In August 1999, we received video content from WCW to produce a master CD- ROM containing wrestling video for use in conjunction with WCW's Web site. We produced and distributed approximately 750,000 discs in the first run. WCW began marketing CD-ROMs containing our technologies in October 1999 through four avenues: . WCW's Web site at www.wcw.com; . WCW television broadcasts, which consist of seven prime time hours per week in major markets; . Live events, at which WCW had an estimated total attendance of approximately 2 million people for 1999; and . Inserts in wrestling magazines. Travel. We developed an application of our Parallel Addressing Video technology called Netcruise(C) that allows anyone to book travel, including cruises, hotels, car rental and airline tickets from a one-stop shopping Web site at netcruise.com. In July 1998, we licensed Netcruise(C), together with all other travel-related applications of our Parallel Addressing Video technology, to a wholly owned subsidiary of Genisys Travel Reservations, Inc. The CD-ROMs and DVD-ROMs that Genisys distributes will contain full motion video and virtual tours of approximately seven cruise lines and approximately thirteen travel destinations. For example, a user can view staterooms, dining rooms, entertainment venues, casinos and other areas of a ship before booking a cruise. The Netcruise(C) software has full motion video and live vocal interaction and is updated with online information. The Netcruise(C) product will allow individuals to book every aspect of their own vacation at one time, as well as to book travel for others. The Genisys Web site will walk users through the process of booking and/or selling any travel arrangements. In June 1998, our wholly owned subsidiary, United Internet Technologies, Inc., granted to NetCruise Interactive, Inc., a wholly owned subsidiary of Genisys, an exclusive, worldwide and perpetual license for travel related applications of certain interactive technology. In addition, we sold Genisys certain intellectual property and computer equipment. As consideration for the sale, we received (1) 2,000,000 shares of common stock of Genisys, (2) a warrant to purchase up to 800,000 shares of Genisys common stock at $2.50 per share if the total pretax profits of NetCruise for the years 1999, 2000 and 2001 equal or exceed $5,000,000 and (3) a warrant to purchase up to 800,000 shares of Genisys common stock at $6.00 per share if the total pretax profits of NetCruise for the years 1999, 2000,and 2001 equal or exceed $10,000,000. In October 1999, United Internet, Genisys and certain of Genisys' principal stockholders entered into an agreement to restructure the transaction. Under the terms of this agreement, United Internet returned to Genisys (1) 1,100,000 shares of Genisys common stock and (2) the warrants. Genisys agreed to issue to United Internet 1,100,000 shares of Genisys Convertible Series B Preferred Stock, par value $.0001 per share, which, among other things, are automatically convertible into 1,100,000 shares of Genysis common stock upon Genisys' obtaining stockholder approval as required by Nasdaq Rule 4460. In addition, upon obtaining stockholder approval, Genisys agreed to reissue the warrants to United Internet. The Genisys preferred shares have a mandatory dividend of $275,000 payable on September 30, 1999, and a mandatory quarterly dividend of $68,750 beginning December 31, 1999. The Genisys preferred shares are non-voting, unless voting is required by New Jersey law. The Genisys preferred shares also carry a mandatory liquidation preference of $2,750,000 plus all accrued and unpaid dividends. Marketing In June 1999, we entered into a marketing agreement with AT&T Corp. Under the agreement, AT&T granted us a non-exclusive license to distribute software of AT&T's Internet service provider service. We must distribute one million CD- ROMs or other products that combine or bundle AT&T's software with other material that we place on the discs. The agreement has a one-year term. The distributed material must meet certain technical and other specifications established by AT&T and must be tested by AT&T before distribution. The agreement provides that AT&T will pay us $20 for each person that switches to AT&T's Internet service provider as a result of using the AT&T software on one of our distributed CD-ROMs, provided that the user pays AT&T at least $19.95 during the first three months after registering for the service. We received no advance payment from AT&T under this agreement. AT&T provides technical support and customer care services for users of their service and we provide all technical support and customer care services for users of the bundled material contained on the distributed discs. AT&T has the right to approve any bundled product that contains their software. In July 1999, we entered into a distribution agreement with Earthlink Network, Inc. to market Earthlink's Internet service provider software on discs produced using our technology. Earthlink pays us a fixed amount for each new customer that subscribes to Earthlink in connection with using any of our discs for various services or products. The amount varies from $20 to $50 per customer depending on the number of subscribers and is cumulative from one project -7- to the next. In addition, Earthlink paid a $40,000 nonrefundable advance against these payments. The term of the agreement is for one year with automatic renewal unless terminated by either party upon 30 to 90 days notice prior to the end of each one-year term. Our first distribution in connection with the Earthlink agreement was made in conjunction with the distribution of the NBC preview CD-ROMs in September 1999. These CD-ROMs contained Earthlink software and gave the user's the option to subscribe to Earthlink services. Under our agreement with NBC, we share the revenue equally with NBC after we each recoup the pro rata share of our investment. In November 1999, we entered into an agreement with Teen People Magazine to design and produce a 12-page "magalog" of Nordstrom fashions, accessories and beauty products and an interactive CD-ROM. The mini-catalog will serve as a self-mailer for the CD-ROM. In addition, we will include Internet Service Provider software as part of the package. Approximately 600,000 CD-ROMs were distributed in March 2000. We received revenues of approximately $700,000 in the first quarter of 2000 in connection with this agreement. In February 2000, we entered into an agreement with Liquid Audio, Inc. under which Liquid Audio granted us a limited, non-exclusive, worldwide, royalty-free license to reproduce, market and distribute Liquid Audio products along with the distribution of our proprietary software. The agreement continues until terminated upon 30 days written notice by either party. -8- Children's Recreational Activities We have closed most of our children's recreational facilities. In 1999, our children's recreational activities consisted of three Planet Kids operations, which are indoor multimedia interactive play learning centers for children. Each Planet Kids facility provides interactive multimedia educational games, exercise playgrounds, education computers, party facilities and other indoor activities to children ages three to thirteen. The first Planet Kids facility opened in Laguna Hills, California in July 1995 and the second facility opened in Orange, California in December 1995. A third Planet Kids facility opened in Fountain Valley, California in September 1996. See Part II, Item 6, "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Financial Statements - Note 3 to Notes to Consolidated Financial Statements." Patents and Trademarks In November 1999, we were issued a utility patent for our Parallel Adressing Video and Dynamic Intergrated Overlay Video technologies. In May 1999, we filed a patent application relating to our Dynamic Intergrated Overlay Video enhancements. We do not know if this patent will be issued, or if issued, how broad it will be. We do not believe that the failure to receive a patent for our enhancement technology will critically impair the value of our Dynamic Intergrated Overlay Video technology. We cannot be sure that any current or future patents will provide protection from infringement. Our patent applications may also be challenged. If challenged, we may not have adequate resources to enforce or defend our rights. In June 1999, we were sued for patent infringement by a company that claims to have a patent for technology similar to ours. See "Legal Proceedings." -9- Competition There is significant competition in the evolving market for delivery of video content on the Internet. We have approached the delivery using different technology than that of our competitors. Our competitors, however, have substantially greater financial, marketing, personnel and other resources than we do. There is also significant competition for content development and broadcasting on the Internet. Our largest competitors in this area are broadcast.com and RealNetworks, Inc. These and other competitors in the content development and broadcast area, also have greater resources than we do. We expect competition in this area to remain strong and to increase further. Government Regulation Although there are currently few laws and regulations that apply directly to the Internet, it is likely that new laws and regulations will be enacted in the United States and elsewhere covering a wide range of Internet-related issues. These could enclose broadcast license fees, music licensing, copyrights, privacy, pricing, sales tax and characteristics and quality of Internet services. It is also possible that laws could be passed that would apply to us in the areas of content, network security, encryption, privacy protection, electronic authentification or digital signatures, illegal or harmful content, access charges and re-transmission activities. If certain laws or regulations apply to the type of service we provide, we could be exposed to significant liabilities in connection with the content on our Web sites. We could also have liability for the content on the Web sites of our licensees. If restrictive laws or regulations are adopted, it could also slow Internet growth and increase our cost of doing business. There are also uncertainties about how existing laws in other areas apply to the Internet. Some of these laws deal with issues like property ownership, libel, taxatioon, defamation and personal privacy. The majority of these laws were adopted before the widespread use of the Internet and do not address the unique nature of the Internet and related technologies. In 1996, Congress enacted the Communications Decency Act of 1996. Although the Supreme Court ruled that sections of this legislation that would have imposed criminal penalties for the distribution of indecent material to minors over the Internet were unconstitutional, it is possible that similar legislation could be adopted and upheld in the future. Even though we do not distribute content that the Communications Decency Act would consider illegal, it is not possible to predict how any future laws or regulations regarding indecency would be interpreted. If Internet growth is slowed as a result of restrictive legislation, the demand for our technology could be adversely impacted. We do not require our licensees to indemnify us against these potential liabilities, nor do we have insurance to cover such liabilities. If we are considered to be a distributor of Internet content, we could face potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims. These types of lawsuits have been brought against Internet content distributors. In addition, we could be liable for the broadcast content or unauthorized duplication of broadcast content. We do not require our licensees to indemnify us against these potential liabilities, nor do we have insurance to cover such liabilities. -10- Employees As of March 17, 2000, we had 19 employees, including 14 full-time and 5 part-time employees. In addition, we had 8 full-time consultants. None of our employees are covered by a collective bargaining agreement. We believe that our relations with our employees are good. ITEM 2. DESCRIPTION OF PROPERTY. United Leisure maintains its principal executive offices in approximately 6,000 square feet of leased office space in Los Angeles under a lease with a term that expires in January 2004. The lease was entered into with 1990 Westwood Boulevard, Inc. which is owned 65% by Harry Shuster, the former Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and a current principal stockholder of United Leisure. United Leisure believes that the rent and other terms of the lease are no more favorable to the lessor than could have been obtained in a similar building in the same area from an unrelated lessor. See Item 12, "Certain Relationships and Related Transactions." United Leisure believes that its existing leased properties are adequate for its current needs. United Leisure also believes that all of the properties are adequately covered by insurance. ITEM 3. LEGAL PROCEEDINGS. In June 1999, we were sued by Hyperlock Technologies, Inc. In the United States District Court for the Northern District of Illinois, Eastern Division. Hyperlock alleges that we have infringed United States Patent No. 5,892,825 entitled "Method of Secure Server Control of Local Media via a Trigger Through a Netword for Instant Local Access of Encrypted Data on Local Media." In October 1999, Hyperlock amended its complaint to allege the infringement of an additional patent. Hyperlock is seeking an injunction against us and unspecified damages. Hyperlock also seeks treble damages, court costs and reasonable attorneys' fees and other relief that the court deems just and proper. In February 2000, we filed an action in California alleging that certain Hyperlock products infringe our Patent No. 5,996,000. Also in February 2000, Hyperlock filed a declaratory judgment action in Illinois alleging non- infringement, invalidity and unenforceability of our patent. Hyperlock also seeks to have the California case reassigned to thejudge who is presiding over the Illinois case. We have filed a motion to oppose the reassignment. Based on a review of Hyperlock's patent, we believe that Hyperlock's suit is without merit. We do not believe that we have committed any acts of infringement and we intend to vigorously defend this suit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. -11- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock is traded on the Over the Counter Bulletin Board (the "OTC Bulletin Board") under the symbol "UTDL." The common stock was traded on the Nasdaq SmallCap Market from November 1994 through December 1, 1998, when it was delisted for failure to meet the minimum bid requirements. The following table sets forth the high and low bid prices of the common stock for the quarters indicated as quoted on the OTC Bulletin Board. On March 1, 2000 we submitted an application to The Nasdaq Stock Market for listing on The Nasdaq National Market. Although we believe that we currently meet all the criteria for listing on the Nasdaq National Market, our application may be denied. In addition, even if we qualify for listing now, we could be delisted in the future if we fail to meet the requirements for continued listing. This could result in our being listed on the Nasdaq SmallCap Market or OTC Bulletin Board.
1998 1999 -------------------------- -------------------------- High Low High Low ---- --- ---- --- First Quarter $ .375 $ .25 $1.9062 $ .2188 Second Quarter .25 .1562 4.875 1.375 Third Quarter .3125 .1875 3.375 1.4688 Fourth Quarter .25 .1562 3.2812 1.25
The above quotations represent prices between dealers without adjustments for retail markups, markdowns or commissions and may not represent actual transactions. As of March 17, 2000, there were approximately 2,365 holders of record of United Leisure common stock. We have never declared or paid any cash dividends on our capital stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to retain future earnings to finance our operations and fund the growth of our business. Any payment of future dividends will be at the discretion of the Board of Directors of United Leisure and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions in respect to the payment of dividends and other factors that our Board of Directors deems relevant. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Fiscal Year Ended December 31, 1999 Compared to Fiscal Year Ended December 31, 1998 Net Revenues. For the fiscal year ended December 31, 1999, we had revenues of $1,377,770 compared to revenues of $2,443,601 for the fiscal year ended December 31, 1998, a decrease of $1,065,831 or approximately 44%. The decrease in revenues for fiscal 1999 compared to fiscal 1998 is primarily due to reduced revenues from our children's recreational activities. Operating Expenses. Total costs and expenses increased to $3,087,736 for the fiscal year ended December 31, 1999 from $2,526,007 for the fiscal year ended December 31, 1998, an increase of $561,729 or approximately 22%. The increase is mainly due to increases associated with United Internet Technologies, including salaries and consulting fees in connection with developing and promoting our technology. This increase was partially offset by decreased expenses for personnel at our children's recreational facilities. Selling, general and administrative expenses were $2,227,079 for the year ended December 31, 1999 compared to $1,133,405 for the year ended December 31, 1998, an increase of $895,674 or approximately 67%. Depreciation and amortization for the year ended December 31, 1999 was $128,019 compared to $171,623 for the year ended December 31, 1998, a decrease of $43,604 or approximately 25%. For the year ended December 31, 1999, we had a net loss of $4,181,747 or $(0.27) per share, compared with a net loss of $514,839 or $(0.04) per share for the year ended December 31, 1998. The net loss for the year ended December 31, 1999 is primarily attributable to an increase in expenses in connection with our Internet business, partially offset by the sale of real estate holdings. -12- Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31, 1997 Net Revenues. Total revenues for the fiscal year ended December 31, 1998, were $2,443,601 compared to revenues of $2,899,141 in the fiscal year ended December 31, 1997, a decrease of $445,540 or approximately 15.4%. The decrease in revenues is primarily due to reduced revenues from our children's recreational activities. Revenues from children's activities decreased to $2,032,784 for the fiscal year ended December 31, 1998 from $2,802,342 for the fiscal year ended December 31, 1997, a decrease of $769,558 or approximately 27.4%. This was due primarily to decreased attendance at our children's facilities partially offset by revenues from the licensing of our proprietary Internet technology of $410,817. Operating expenses. Total cost and expenses, excluding impairment losses, decreased to $4,029,035 for the fiscal year ended December 31, 1998 from $5,825,624 for the fiscal year ended December 31, 1997, a decrease of 1,796,058 or approximately 30.8%. This decrease was due primarily to decreases in occupancy expenses and selling, general and administrative expenses associated with terminating our ground lease operations in February 1997. In addition, depreciation and amortization for the fiscal year ended December 31, 1998 was $171,623 for the fiscal year ended December 31, 1998 compared to $747,282 for the fiscal year ended December 31, 1997, a decrease of 575,659 or approximately 77%. This decrease was the result of an impairment loss of $3,862,554 taken in the fiscal year ended December 31, 1997. For the fiscal year ended December 31, 1998, we had net loss of $514,839 or ($0.04) per share compared to $7,313,545 or ($0.59) per share for the fiscal year ended December 31, 1997. The net loss in 1997 was primarily attributable to the impairment losses in the amount of $3,862,554 related to our Planet Kids operations and legal expenses in connection with litigation. In addition, we received only two months of revenues from our ground lease prior to its expiration in February 1997. We incurred legal expenses of $603,183 in the fiscal year ended December 31, 1998 compared to $716,291 in the fiscal year ended December 31, 1997. In addition, we wrote down $1,464,262 of various investments and equity in net losses of investees of $475,881 in the fiscal year ended December 31, 1998. This was offset by an extraordinary gain of $4,043,020 as settlement in connection with certain litigation. Liquidity and Capital Resources We have experienced operating losses in recent years. For the year ended December 31, 1999, we had cash and cash equivalents of $1,198,059 and an accumulated deficit of $24,620,392. Our future capital requirements will depend on various factors including: 1. The number of applications using our technology and solutions that we decide to develop; 2. United Internet Technologies' need to hire additional technical and marketing personnel; and 3. The length of time that it takes us to restructure and dispose of our remaining children's recreational facilities and the manner of disposition. Effective at the close of business on December 31, 1998, our common stock was delisted from The Nasdaq Stock Market because it did not meet the minimum bid requirement for continued listing on the Nasdaq SmallCap Market. Our common stock is now listed on the OTC Bulletin Board which may make it more difficult for us to offer and sell our securities to prospective investors. In March 2000, we submitted an application to The Nasdaq Stock Market for listing on the Nasdaq National Market. See "Market for Registrant's Common Equity and Related Stockholder Matters." If we are unable to raise additional funds, when needed, through the private placement of our securities, we may seek financing from affiliated or unaffiliated third parties. Such financing, however, may not be available when and if -13- it is needed, or if available, it may not be available on acceptable terms. If we are unable to sell our securities or obtain financing to meet our working capital needs and to repay indebtedness as it becomes due, we may have to consider such alternatives as selling or pledging portions of our assets, among other possibilities, in order to meet such obligations. As of December 31, 1999, investments in and loans to affiliated companies, Grand Havana and HEP II, L.P., totaled approximately $981,000 or approximately 27% of total assets. In addition, at December 31, 1999, we had a net receivable from Harry Shuster, former President and CEO of United Leisure, of approximately $81,027. See "Certain Relationships and Related Transactions." Although we believe that our current cash and income investments, repayment of amounts previously advanced by us to Grand Havana, proceeds from the sale of our property in El Cajon, California and Las Vegas and the proceeds from our private placement in the first quarter of 2000 will provide us with sufficient funds to meet our anticipated working capital and capital expenditures needs for at least the next 12 months, this may not be the case. We intend to expand the development and marketing capabilities for our technology. While the continued development of some applications can be funded from internal sources, more aggressive development and marketing may require additional financing from either public or private sources. To accomplish this, we may raise additional capital by borrowing money or through a public or private sale of debt or equity securities. We may not be able to acquire additional financing on favorable terms, or at all. Recent Developments In January 2000 we completed a private placement of our securities in which we issued an aggregate of 2,240,000 shares of common stock to six investors for a total of $5.6 million. We intend to use the proceeds for the operations of our wholly owned subsidiary, United Internet Technologies. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplemental data required by this Item 7 follow the index to financial statements appearing at Item 14 of this Form 10- KSB. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. Directors and Executive Officers Set forth in the table below are the names, ages and positions of the current directors and executive officers of United Leisure. Ages are shown as of December 31, 1999. Directors hold office until the next annual meeting of stockholders and until their successors are elected and qualified. Executive officers are elected by and serve at the discretion of the United Leisure Board. None of the executive officers has any family relationship to any director or any other executive officer of United Leisure.
Positions Currently Held Name Age With United Leisure Director Since - ---- --- -------------------------------------------- -------------- Brian Shuster 41 Chief Executive Officer, President, 1996 Chairman of the Board and Director Julie Lepere 39 Secretary - -
-14- Alvin Cassell 85 Director 1969 J. Brooke Johnston, Jr. 59 Director 1996 Alvin Alexander 70 Director 1975
Set forth below is a brief description of the business experience for the previous five years of all current directors and executive officers of United Leisure. Brian Shuster has served as a director of United Leisure since May 1996 and as Chief Executive Officer and President of United Leisure since May 1999. From March 1997 to May 1999, he also served as Executive Vice President of United Leisure. From July 1998 through August 1999, Mr. Shuster also served as a director of Genisys Reservation Systems, Inc. From 1993 through 1995, Mr. Shuster served as President of Beverly Hills Producers Group, an independent motion picture production company. Julie Lepere has served as Secretary of United Leisure since May 1999. Prior to that, since 1984, Ms. Lepere served as assistant to our Vice President and Controller. In addition, Ms. Lepere served as administration director for our children's recreational facilities from 1984 through 1988. Alvin Cassell has served as a director of United Leisure since March 1969. Mr. Cassell is of counsel to the law firm of Broad and Cassell, Miami, Florida. He has been engaged in a general civil law practice for more than 60 years. Mr. Cassell is also a director of Grand Havana Enterprises, Inc., one of our affiliates. J. Brooke Johnston, Jr. has served as a director of United Leisure since May 1996. Mr. Johnston is a partner of the law firm of Baker, Johnston & Wilson, LLP, in Birmingham, Alabama. He was Senior Vice President and General Counsel for Med Partners, Birmingham, Alabama from April 1996 until July 1998. Prior to that, Mr. Johnston was a senior principal of the law firm of Haskell, Slaughter, Young & Johnston, a professional association, in Birmingham, Alabama, where he practiced securities law for over 17 years. Mr. Johnston is also a director of Grand Havana Enterprises, Inc. Alvin Alexander has served as a director of United Leisure since 1975. Mr. Alexander has served as President of Skip Alexander Productions, which develops games shows and other television properties, for over five years. Significant Employees The following individuals are significant employees of our subsidiary, United Internet Technologies: Jay Dunn, 34, has served as Creative Director of Motion Graphics Programming since October 1998. From 1997 through October 1998, Mr. Dunn designed motion graphic videos for the "Eyes of the Nation" project for the Library of Congress. From 1992 through 1997, he was a freelance computer motion graphics consultant. Mr. Dunn studied computer arts and sciences at Ohio State University. From 1983 through 1989, Mr. Dunn served in the United States Navy, performing the duties of electronics technician and nuclear reactor operation. Robert Eady, 27, has served as Senior Programming Consultant since September 1997, supervising the creation and implementation of applications of our technology and providing other software design and operations services. From February 1996 through August 1997, he served as Manager of Internet Product/Service Development for Positive Developments Limited, an Internet and commercial software firm. From May 1994 through December 1995, he was a Computer Services Administrator in the Planning & New Programs Department of Cognos Corporation. From September 1993 through March 1994, he was the principal consultant for Eady & Associates, providing computer communications and software consulting services. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who beneficially own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and beneficial owners of more -15- than 10% of our Common Stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file. Based solely on review of the copies of such forms furnished to us, or written representations that no reports on Form 5 were required, we believe that for the period through December 31, 1999, all officers, directors and greater-than-10% beneficial owners complied with all Section 16(a) filing requirements applicable to them. ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth all compensation received for services rendered to United Leisure in all capacities for the three fiscal years ended December 31, 1999 by our Chief Executive Officer during fiscal 1999 and the most highly compensated executive officers at the end of fiscal 1999. SUMMARY COMPENSATION TABLE
Annual Long Term Compensation Compensation ---------------------- ------------ Name and Principal Positions Year Salary Securities and Underlying Options - ---------------------------- ---- ------ --------------------------------- Harry Shuster(1) 1999 $330,703 2,606,950(2) Chairman of the Board, 1998 300,663 President, Chief Executive Officer and Chief 1997 273,330 Financial Officer Brian Shuster(3) 1999 $240,000 300,000 Chairman of the Board, 1998 - - President, Chief Executive Officer, Chief 1997 - - Financial Officer and Executive Vice President - ------------
(1) Effective May 24, 1999, Harry Shuster resigned as a director and from all positions as an officer. (2) Of this amount, an option to purchase 2,100,000 shares was granted to Harry Shuster in connection with a guaranty by Harry Shuster to collateralize certain of our corporate debt. See "Certain Relationships and Related Transactions." (3) Effective May 24, 1999, Brian Shuster was appointed to serve as Chairman of the Board, Chief Executive Officer, President and Chief Financial Officer. Directors receive no cash compensation for their services to the Company as directors, but are reimbursed for expenses actually incurred in connection with attending meetings of the Board of Directors. Stock Option Grants This table shows information regarding stock option grants made to each of our Named Executive Officers who received options during the fiscal year ended December 31, 1999. All of the option were issued at not less than the fair market value of our common stock on the date of the grant and are 100% vested. OPTION/SAR GRANTS IN LAST FISCAL YEARS
Percent of Total Number of Options/SARS Securities Granted to UnderlyingOptions/ Employees in Fiscal Exercise Price Name SARs Granted (3) Year ($/sh) Expiration ================================================================================================================== Brian Shuster 100,000 26.7% $.23 January 1, 2004 200,000 51.7% $.35 February 1, 2004
-16- This table shows information regarding unexercised options held by our Named Executive Officers. No options were exercised during the fiscal year ended December 31, 1999. AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
Number of Unexercised Options at Value of Unexercised In The Money Options December 31, 1999 at December 31, 1999(1) Name Exercisable Unexercisable Exercisable Unexercisable ============================================================================================================= Brian Shuster 650,000 -- $1,919,000 -- - ------------
(1) Represents the difference between market price or our common stock and the respective exercise prices of the options at December 31, 1999. Actual values which may be realized, if any, upon any exercise of these options will be based on the market price of our common stock at the time of any exercise and are therefore dependent upon future performance of our common stock. Consulting and Employment Agreements United Internet Technologies and Brian Shuster entered into a five-year employment agreement dated as of January 1, 1999. Under this employment agreement, Mr. Shuster is employed as the President of United Internet Technologies at an initial base salary of $240,000 per year. United Internet Technologies may offset up to $5,000 per month of Mr. Shuster's base salary from payment he receives under his oral consulting arrangement. See "Certain Relationships and Related Transactions." The employment agreement provides for annual 10% increases in Mr. Shuster's base salary. The employment agreement is automatically extended for one-year unless either party provides written notice of termination at least 60 days before the end of the first year of the current five-year period. The employment agreement also provides that any inventions developed by Mr. Shuster during his employment by United Internet Technologies that relate to the business of United Internet Technologies , will remain United Internet Technologies' property. The employment agreement also contains a confidentiality provision. Mr. Shuster is permitted to engage in outside business activities to the extent that these obligations do not interfere with his duties to United Internet Technologies. Prior to becoming President and Chief Executive Officer of our company in May 1999, Brian Shuster provided certain consulting services to us and received $5,000 per month in consulting fees. The consulting agreement is an oral arrangement, which may be terminated by either party upon 30 days notice. Amounts received by Brian Shuster under this arrangement up to $5,000 per month are credited against payment made to him under his employment agreement with United Internet Technologies. We entered into a consulting agreement with Harry Shuster in June 1994. Under this agreement, Harry Shuster served as President, Chief Executive Officer and a director. In 1998, we accrued base compensation to Mr. Shuster of $300,663. In June 1999, the consulting agreement was amended to provide that Mr. Shuster will be paid $5,000 per month and the balance of his compensation will be applied to offset amounts that he owes to United Leisure. The agreement terminates upon Mr. Shuster's death or breach of the agreement. -17- We entered into a consulting agreement with C4 Design, a division of 1150250 Inc., in September 1998. Under this consulting agreement, C2 has made the services of Robert Eady available to United Internet Technologies for a five-year period, beginning September 1, 1998. Mr. Eady's responsibilities include planning, implementing and configuring real-time interactive software andhardware systems for Internet applications and other functions associated with the development of applications of our technology. Mr. Eady receives $75,000 per year for the first year of the consulting agreement, with annual increases of 10% effective on each anniversary date of the consulting agreement. The consulting agreement also provides that any inventions developed by Robert Eady during his work for United Internet Technologies which relate to the business of United Internet Technologies, will remain United Internet Technologies' property. The consulting agreement also contains a confidentiality provision. Stock Options On December 31, 1999, there were outstanding presently exercisable non- qualified stock options to purchase a total of 900,000 shares of our common stock held by our officers and directors. Of this amount, 650,000 were held by Brian Shuster, our Chairman of the Board, President and Chief Executive Officer, and the balance were held by the other directors of our company, at option prices ranging from $.25 to $1.75 per share. See "Security Ownership of Certain Beneficial Owners and Management." All non-qualified stock options that we have issued to our directors and executive officers are in substantially the same form. All options have a term which expires on December 31, 2000, except for options granted during 1998, which have a term of five years from date of grant (expiring in September 2003), and are immediately exercisable as to all of the shares of our common stock covered by the option. The option price is the fair market value of our common stock as of the date of grant. Each option terminates at the end of 90 days following termination of association with or employment by us for any reason other than death, or at the end of one year in the event termination is caused by death. In addition to the non-qualified stock options held by our directors and executive officers on December 31, 1999, there were outstanding non-qualified options to purchase a total of 560,000 shares of our common stock held by third parties. All of these non-qualified options are in substantially the same form as those issued to our directors and executive officers, except that generally they are not terminable until they expire. These options have exercise prices ranging from $.23 to $1.75 and expire from December 31, 2002 through September 29, 2003. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of United Leisure common stock as of December 31, 1999, (a) by each person who is known by United Leisure to own beneficially more than 5% of the its common stock, (b) by each of United Leisure's directors and (c) by all officers and directors of United Leisure as a group:
Percentage Name and Address Number of Shares Ownership of Beneficial Owner(1) Beneficially Owned (2)(3) of Class(3) - ------------------------ -------------------------- ----------- Brian Shuster 1,050,300 (4) 5.4% Alvin Cassell 260,100 (5) * J. Brooke Johnston, Jr. 105,000 (6) * Alvin Alexander 10,000 * Harry Shuster 5,879,933 (7) * Klaus Helbert (8) 1,861,000 (9) 9.9% Bural, Inc. (10) 1,375,000 (11) 7.3% Wolfgang Biehler (12) 1,299,000 (13) 6.9% Rainer Umbach (14) 1,299,000 (13) 6.9% All officers and directors 1,353,121 6.9% as a group (4 people) - ------------
-18- *1ess than 1% (1) Each person's address is c/o United Leisure, 1990 Westwood Boulevard, Los Angeles, California 90025, unless otherwise noted. (2) Unless otherwise indicated, United Leisure believes that all persons named in the table have sole voting and investment power with respect to the shares of common stock beneficially owned by them. (3) A person is deemed to be the beneficial owner of Common stock that can be acquired by such person within 60 days of the date hereof upon the exercise of warrants or stock options. Except as otherwise specified, each beneficial owner's percentage ownership is determined by assuming that warrants and stock options that are held by such person (but not those held by any other person) and that are exercisable within 60 days from the date hereof, have been exercised. (4) Includes 80,000 shares held by Brian Shuster as trustee of each of Bennett Shuster Trust, Bentley Shuster Trust and Blake Shuster Trust and 300 shares held by Nita Shuster and Brian Shuster. Also includes an option to purchase 650,000 shares of common stock. (5) Includes 110,100 shares of common stock held by Koorn N.V., a Netherlands Antilles corporation of which Mr. Cassell is a managing director and of which he may deemed to be the beneficial owner. Also includes options to purchase 150,000 shares of common stock. See footnote 7. (6) Includes an option to purchase 100,000 shares of common held by a law firm in which Mr. Johnston was a partner, Mr. Johnston disclaims beneficial ownership as to 50,000 of these shares. (7) Includes 111,000 shares of common stock held by Koorn N.V., all of whose capital stock is owned by Mr. Shuster. Also includes 125,000 shares of common stock held by the Harry and Nita Shuster Charitable Foundation and 300 shares owned by Nita Shuster, the spouse of Harry Shuster. Does not include 10,000 shares owned by Bardene Shuster, 300 shares owned by Nita Shuster and Bardene Anne Shuster, 300 shares owned by Nita Shuster and Brian Shuster, and 300 shares owned by Nita Shuster and Stanley Shuster, of which Mr. Shuster disclaims beneficial ownership. Also includes options to purchase 2,606,950 shares of our common stock and 3,037,583 shares of our common stock owned directly by Mr. Shuster. Also does not include an aggregate of 480,000 shares of our common stock owned by trusts of which Mr. Shuster's adult children are the beneficial owners. Until May 24, 1999, Mr. Shuster served as Chairman of the Board, President, Chief Executive Officer and a director of United Leisure. (8) Mr. Helbert's address is Postfach 3012, 6519 Wiesbaden, Germany. (9) Includes warrants to purchase 112,000 shares of common stock. (10) Bural, Inc.'s address is c/o Dr. Hans Urlich Stucki, Talacker 50, 8001 Zurich, Switzerland. (11) Includes warrants to purchase 200,000 shares of common stock. (12) Mr. Biehler's address is Am Ohlendortum 31, 22149 Hamburg Germany. (13) Includes warrants to purchase 475,000 shares of common stock. (14) Mr. Umbach's address is Alter Landstr. 272, Hamburg 22391 Germany. -19- ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Transactions with Harry Shuster. In prior years, Harry Shuster advanced working capital to us at the prime rate plus 3%. These advances were secured by our rights under various sublease arrangements in connection with our children's recreation activities. In June 1995, Mr. Shuster converted advances in the amount of $649,800, excluding accrued interest of $789,649, into equity, by exercising options to purchase 755,550 shares of our common stock. Mr. Shuster has deferred payment of certain of the interest due to him under this loan arrangement and certain amounts due to him under his consulting agreement. We have also advanced money to Mr. Shuster from time to time. At December 31, 1999, we had a net receivable from Mr. Shuster of approximately $81,000. From October 1, 1997 through May 31, 1999, we accrued rent, including homeowner association dues, payable to Harry Shuster in the amount of $49,551, for an apartment which he owns and which he and Brian Shuster use while in New York City on company business. Since June 1, 1999, we have accrued rent and homeowner association dues in the amount of $300 per day for each day of use by Harry Shuster or Brian Shuster. We believe that this rent is at least as favorable as the cost of comparable housing over the significant period of time that Messrs. Shuster have been in New York City on business. Lease of Office Premises. On January 1, 1999, we entered into a five-year lease with 1990 Westwood Boulevard, Inc. This agreement was amended on May 1, 1999 and covers approximately 6,000 square feet of office space for our principal executive offices. The lease provides for rent of $10,500 per month. 1990 Westwood Boulevard, Inc. is presently owned 65% by Harry Shuster, our former Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer, and a principal stockholder of United Leisure. We believe that the rent and other terms of the lease are no more favorable to the lessor than could have been obtained in a similar building in the same area from an unrelated lessor. Transactions With Grand Havana. On September 30, 1998, in replacement of a previous loan to Grand Havana, United Leisure agreed to make a new installment loan to Grand Havana of up to $1,250,000, for which Grand Havana executed and delivered a secured promissory note. The promissory note is secured by a first lien on the assets of Grand Havana. The initial loan advance under the promissory note was $607,154, which represents the principal amount due under the previous note of $536,000, together with accrued interest of $71,154. The promissory note was due and payable on March 31, 1999, which due date was first extended to April 30, 2000. As of December 31, 1999, we held 966,666 shares of Grand Havana's common stock. Transactions With HEP II, L.P. In April 1996, we acquired 50% of the limited partnership interests in HEP II, L.P. The general partner of HEP II is United Film Distributors, Inc. of which Harry Shuster, the former Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer, and director of United Leisure is the Chairman of the Board. Harry Shuster's son, Brian Shuster, is the President of United Film Distributor. At December 31, 1999, we had a $100,000 investment in HEP II, L.P. -20- ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. --------
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 Asset Purchase Agreement dated June 30, 1998 by and among United Leisure Interactive, Inc., Net Cruise Interactive, Inc., Genysis Reservation Systems, Inc. and United Leisure Corporation (incorporated by reference to Exhibit 2.1 of United Leisure's Current Report on From 8-K dated July 23, 1998, as amended by United Leisure's Amendment No. 1 to Current Report on Form 8-K dated November 4, 1998 (the "Form 8-K/A")). 2.2 Agreement date October 27, 1998 by and among United Internet Technologies, Inc. Genisys Reservation Systems, Inc. Warren D. Bagatelle, Loeb Holding Corporation, Loeb Partners Group. HSB Capital, David W. Sass, Mark A Kenny, Hohn H. Wasko, Hoan E. Wasko, Lawrence E. Burk and S. Charels Tubak (incorporated by reference to Exhibit 2.2 of the Form 8-K/A). 3.1 Restated Certificate of Incorporation of United Leisure (incorporated by reference to Exhibit 3.1 of United Leisure's Form SB-2 (File No. 33-81074 (the "SB-2")). 3.2 Bylaws of United Leisure (incorporated by reference to Exhibit 3.2 of the SB-2). 4.1 Warrant Agreement, dated November 18, 1994 between United Leisure and OTR, Inc. (incorporated by reference to Exhibit 4.1 of the SB-2). 4.2 Form of Warrant to Purchase Common Stock in connection with 12% Promissory Note unit private placement and Bankruptcy Court deposit (incorporated by reference to Exhibit 4.3 of the SB-2). 10.1 Stock Option Agreement dated December 7, 1990, between United Leisure and Haskell Slaughter Young & Johnston, Professional Association, (incorporated by reference to Exhibit 10.5 of the SB-2). 10.2 Stock Option Agreement dated December 7, 1990, between United Leisure and Alvin Cassel (incorporated by reference to Exhibit 10.6 of the SB-2.) 10.3 Stock Option Agreement dated April 22, 1988, between United Leisure and Alvin Cassel as extended by Extension of Option Agreement, dated April 20, 1993, between United Leisure and Alvin Cassel. (incorporated by reference to Exhibit 10.10 of the SB-2). 10.4 Stock Option Agreement dated October 7, 1988, between United Leisure and Harry Shuster as extended by Extension of Option Agreement, dated April 20, 1993 between United Leisure and Harry Shuster (incorporated by reference to Exhibit 10.12 of the SB-2). 10.5 Stock Option Agreement dated November 17, 1988, between United Leisure and Harry Shuster as extended by Extension of Option Agreement, dated April 20, 1993 between United Leisure and Harry Shuster (incorporated by reference to Exhibit 10.13 of the SB-2). 10.6 Stock Option Agreement dated December 5, 1988, between United Leisure and Harry Shuster as extended by Extension of Option Agreement, dated April 20, 1993 between United Leisure and Harry Shuster (incorporated by reference to Exhibit 10.14 of the SB-2). 10.7 Stock Option Agreement dated July 24, 1987, between United Leisure and Harry Shuster as extended by Extension of Option Agreement, dated April 20, 1993 between United Leisure and Harry Shuster (incorporated by reference to Exhibit 10.16 of the SB-2). 10.8 Option Agreement dated as of April 22, 1988, between United Leisure and Haskell Slaughter Young & Johnston covering United Leisure, Extension of Option Agreement, dated April 20, 1993 between United Leisure and Haskell Slaughter Young & Johnston, Professional Association (incorporated by reference to Exhibit 10.17 of the SB-2). 10.9 Promissory Note dated June 1, 1985, by Lion County Safari Inc. in the principal amount of $973,927 drawn to the order of Harry Shuster (incorporated by reference to Exhibit 10.23 of the SB-2). 10.10 Stock Option Agreement, dated February 22, 1989, between United Leisure and Tactron Liquidating Trust (incorporated by reference to Exhibit 10.27 of the SB-2).
-21- 10.11 Stock Option Agreement, dated February 22, 1989, between United Leisure and Lindsey & Associates, Inc. (incorporated by reference to Exhibit 10.28 of the SB-2). 10.12 Form of Indemnity Agreement entered into by United Leisure with each of its directors (incorporated by reference to Exhibit 10.35 of the SB-2). 10.13 Stock Option Agreement, dated September 23, 1993, between United Leisure and Alvin Cassel (incorporated by reference to Exhibit 10.41 of the SB-2). 10.14 Standard Retail/Office Complex Lease dated October 12, 1994, between PSA Properties and Planet Kids, Inc., (incorporated by reference to Exhibit 10.32 of United Leisure's Amendment No. I to Annual Report on Form 10K-SB for the fiscal year ended December 31, 1995 (the "1995 10-KSB")). 10.15 Commercial Lease among Eastrich Multiple Investor Fund, L.P., Midland Loan Services, L.P. et al., and Planet Kids, Inc., effective August 9, 1995 and Rider thereto (incorporated by reference to Exhibit 10.33 of the 1995 10-KSB). 10.16 Lease dated June 29, 1995, between Magnolia Square and Planet Kids, Inc. and Addendum thereto (incorporated by reference to Exhibit 10.34 of the 1995 10-KSB). 10.17 Territory Rights Agreement between Planet Kids, Inc., and PT Planet Kidsindo (incorporated by reference to Exhibit 10.35 of the 1995 10-KSB). 10.18 Financing Agreement dated as of February 12, 1997, between United Leisure and Grand Havana Restaurants, Inc. (incorporated by reference to Exhibit 10.36 of United Leisure's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 (the "1996 10-KSB")). 10.19 Financing Agreement dated as of September 10, 1996, between United Leisure and Grand Havana Enterprises, Inc. (incorporated by reference to Exhibit 10.37 the 1996 10-KSB). 10.20 Option Agreement dated as of September 22, 1998, between United Leisure and Brian Shuster (incorporated by reference to Exhibit 10.45 of the United Leisure's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1998 (the "September 30, 1998 10-QSB")). 10.21 Option Agreement dated as of September 30, 1998, by and between United Leisure and Brian Shuster (incorporated by reference to Exhibit 10.46 of the September 30, 1998 10-QSB). 10.22 Option Agreement dated as of January 4, 1999 between United Leisure and Brian Shuster (incorporated by reference to Exhibit 10.49 of United Leisure's Quarterly Report on Form 10-QSB for the period ended June 30, 1999 (the "June 30, 1999 10-QSB")). 10.23 Option Agreement dated as of January 4, 1999, between United Leisure and Alvin Cassel (incorporated by reference to Exhibit 10.50 of the June 30, 1999 10-QSB). 10.24 Option Agreement dated as of January 4, 1999 between United Leisure and J. Brooke Johnston (incorporated by reference to Exhibit 10.51 of the June 30, 1999 10-QSB). 10.25 Option Agreement dated as of February 1, 1999, between United Leisure and Brian Shuster (incorporated by reference to Exhibit 10.52 of the June 30, 1999 10-QSB). 10.26 Employment Agreement dated as of January 1, 1999 between United Leisure and Brian Shuster, together with supplemental agreement between the Company, United Internet Technologies, Inc. and Brian Shuster (incorporated by reference to Exhibit 10.53 of the June 30, 1999 10-QSB). 10.27 Consulting Agreement dated as of January 1, 1999, between United Internet Technologies and Harry Shuster (incorporated by reference to Exhibit 10.54 of the June 30, 1999 10-QSB). 10.28 Agreement dated as of July 21, 1999 between United Leisure and Media Group, Inc. (incorporated by reference to Exhibit 10.55 of the June 30, 1999 10-QSB). 10.29 Purchase Agreement and Escrow Instructions dated as of June 10, 1999, between United Leisure and Shih Ching Chiang, as amended on August 7, 1999 (incorporated by reference to Exhibit 10.1 of United Leisure's Current Report on Form 8-K dated August 23, 1999).
-22- 10.30 Total Access Software Distribution Agreement between Earthlink Network, Inc. and United Internet Technologies, Inc. together with related letter agreement dated July 21, 1999 (incorporated by reference to Exhibit 10.42 of United Leisure's Registration Statement on Form SB-2 (File no. 333-86335) filed with the Commission on September 1, 1999 (the "1999 SB-2")). 10.31+ Agreement dated as of June 1, 1999 between United Leisure Corporation and Harry Shuster, amending Amended and Restated Consulting Agreement dated as of June 1, 1994 (incorporated by reference to Exhibit 10.33 of the 1999 SB-2). 10.32* Software License and Distribution Agreement dated June 15, 1999 between United Internet Technologies and AT&T Corp. 10.33* Letter Agreement dated November 19, 1999 between United Internet Technologies and Teen People Magazine. 10.34* Distribution Agreement dated February 2, 2000 between United Internet Technologies and Liquid Audio, Inc. 21.1* Subsidiaries of United Leisure 23.1* Consent of Hollander, Lumer & Co., LLP 27.1* Financial Data Schedule
* Filed herewith. + Management contract or compensatory plan required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission. (b) Reports on Form 8-K. ------------------- None. -23- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1943, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED LEISURE CORPORATION By:/s/BRIAN SHUSTER ---------------- Brian Shuster President, Chief Executive Officer and Director Date: March 27, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ BRIAN SHUSTER Chairman of the Board, President, Chief Executive Officer ---------------------------------------- Brian Shuster Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ ALVIN CASSEL ----------------------------------------- Alvin Cassel Director /s/ J. BROOKE JOHNSTON, JR. ----------------------------------------- J. Brooke Johnston, Jr. Director /s/ ALVIN ALEXANDER ----------------------------------------- Alvin Alexander Director
-24- UNITED LEISURE CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Auditors F-1 Consolidated Balance Sheets at December 31, 1999 and 1998 F-2 Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 1999 and 1998 F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999 and 1998 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 F-5 Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders United Leisure Corporation We have audited the accompanying consolidated balance sheets of United Leisure Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Leisure Corporation and subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. HOLLANDER, LUMER & CO. LLP Los Angeles, California March 17, 2000 F-1 UNITED LEISURE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998
1999 1998 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,998,059 $ 799,369 Receivables 88,540 53,153 Deferred production cost 115,027 - Prepaid expenses and other current assets 75,208 78,082 ------------ ------------ TOTAL CURRENT ASSETS 2,276,834 930,604 ------------ ------------ PROPERTY AND EQUIPMENT, NET 181,765 384,984 ------------ ------------ INVESTMENTS Investment in United Hotel at equity - related party - 3,432,452 Investment in HEP II at equity - related party 100,000 700,000 Investment in Genisys at equity - related party - 210,133 Investment in Grand Havana at fair value - related party 101,500 38,667 ------------ ------------ TOTAL INVESTMENTS 201,500 4,381,252 ------------ ------------ OTHER ASSETS Loan receivable from Grand Havana - related party 779,680 619,298 Due from former officer 81,027 332,627 Assets held for sale - 1,663,857 Deposits and other assets 61,689 78,929 ------------ ------------ 922,396 2,694,711 ------------ ------------ $ 3,582,495 $ 8,391,551 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ - $ 1,900,000 Accrued interest - 406,808 Accounts payable and accrued expenses 751,976 478,785 Due to related parties 95,387 107,535 Deferred revenues 235,923 28,060 Deposits and other 2,612 5,652 ------------ ------------ TOTAL CURRENT LIABILITIES 1,085,898 2,926,840 LONG-TERM DEBT - 842,000 COMMON STOCK SUBJECT TO REPURCHASE - 150,001 shares - 78,000 STOCKHOLDERS' EQUITY Preferred stock, $100 par value; authorized - 100,000 shares; issued and outstanding - none - - Common stock, $.01 par value; authorized - 30,000,000 shares; issued and outstanding - 16,146,868 shares in 1999 and 13,918,849 shares in 1998 161,468 139,188 Additional paid-in capital 26,892,688 24,844,168 Accumulated deficit (24,620,392) (20,438,645) Accumulated other comprehensive income - unrealized gain on investment 62,833 - ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 2,496,597 4,544,711 ------------ ------------ $ 3,582,495 $ 8,391,551 ============ ============
See accompanying Notes to Consolidated Financial Statements. F-2 UNITED LEISURE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998 ------------ ------------ REVENUE Licensing fees $ 240,000 $ 410,817 Children's recreational activities 1,137,770 2,032,784 ------------ ------------ TOTAL REVENUE 1,377,770 2,443,601 ------------ ------------ COSTS AND EXPENSES Direct operating expenses 3,087,736 2,526,007 Selling, general and administrative expenses 2,227,079 1,331,405 Depreciation and amortization 128,019 171,623 ------------ ------------ 5,442,834 4,029,035 ------------ ------------ LOSS BEFORE OTHER INCOME (EXPENSE) (4,065,064) (1,585,434) OTHER INCOME (EXPENSE) Litigation settlement (255,333) 4,043,020 Legal (costs) recoveries 12,544 (603,183) Equity in net income (loss) of United Hotel (133,932) (226,348) Equity in net loss of Genisys (210,133) (249,533) Realized loss from write-down of investment in HEP II (600,000) (420,500) Realized loss from write-down of investment in Grand Havana - (1,043,764) Realized gain from investment in United Hotel 1,869,584 - Interest income 178,516 158,916 Interest expense (422,049) (697,047) Other, net (555,880) 109,034 ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (116,683) 1,070,595 ------------ ------------ NET LOSS (4,181,747) (514,839) OTHER COMPREHENSIVE LOSS Unrealized holding gain (loss) on securities arising during the period 62,833 (301,358) Less: reclassification adjustment for loss realized in net loss - 1,043,764 ------------ ------------ 62,833 742,406 ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ (4,118,914) $ 227,567 ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 15,558,608 13,502,182 ============ ============ LOSS PER SHARE $ (0.27) $ (0.04) ============ ============
See accompanying Notes to Consolidated Financial Statements. F-3 UNITED LEISURE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999 AND 1998
Common Stock Accumulated ---------------------- Additional Other Number of Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Income (Loss) Total ---------- --------- ----------- ------------ ------------- ----------- Balance, December 31, 1998 12,618,849 $ 126,188 $24,587,188 $(19,923,806) $ (742,406) $ 4,047,164 Issuance of common stock for services 100,000 1,000 30,300 31,300 Sale of common stock 1,200,000 12,000 217,680 229,680 Fair value of options and warrants issued to non-employees 45,000 45,000 Accretion in the carrying amount of common stock subject to repurchase (36,000) (36,000) Realized loss on investment 742,406 742,406 Net loss (514,839) (514,839) ---------- --------- ----------- ------------ ------------ ----------- Balance December 31, 1998 13,918,849 $ 139,188 $24,844,168 $(20,438,645) $ - $ 4,544,711 ---------- --------- ----------- ------------ ------------ ----------- Cashless warrants exercise 858,018 8,580 (8,580) - Sale of common stock 750,000 7,500 1,492,500 1,500,000 Exercise of stock option 470,000 4,700 181,600 186,300 Fair value of options or warrants issued Non-employees 306,500 306,500 Expiration of put option 150,001 1,500 76,500 78,000 Unrealized gain on investment 62,833 62,833 Net loss (4,181,747) (4,181,747) Balance, December 31, 1999 ---------- --------- ----------- ------------ ------------ ----------- 16,146,868 $ 161,468 $26,892,688 $(24,620,392) $ 62,833 $ 2,496,597 ========== ========= =========== ============ ============ ===========
See accompanying Notes to Consolidated Financial Statements. F-4 UNITED LEISURE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (4,181,747) $ (514,839) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 128,019 171,623 Loss on termination of lease 45,333 - Issuance of common stock for services - 73,300 Fair value of options granted to non-employees 306,500 45,000 Write-down of investment in Grand Havana - 1,043,764 Write-down of investment in HEP II 600,000 420,500 Realized gain on investment in United Hotel (1,869,584) - Loss on sale of assets 705,265 - Licensing fees - (410,817) Equity in net loss of United Hotel 133,932 226,348 Equity in net loss of Genisys 210,133 249,533 Accrual of interest income from related parties (85,382) (144,468) Changes in operating assets and liabilities: Receivables (35,387) (31,421) Deferred production costs (115,027) - Prepaid expenses and other current assets 2,874 (18,392) Deposits and other assets 17,240 3,114 Accrued interest (406,808) 262,835 Accounts payable and accrued expenses 273,191 (764,281) Due to related parties (12,148) 215,588 Deposits and other liabilities (3,040) (37,774) Deferred revenues 207,863 (4,650) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (4,078,773) 784,963 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (99,341) (96,744) Investment in United Hotel 5,168,104 (25,000) Loans receivable from Grand Havana (75,000) 114,000 Advances to related party 251,600 (335,300) Collections from disposition of assets held for sale and fixed assets 1,087,800 - ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 6,333,163 (343,044) ------------ ------------
See accompanying Notes to Consolidated Financial Statements. F-5
1999 1998 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Sale of common stock $ 1,500,000 $ 229,680 Payment on notes payable (1,900,000) (25,000) Payment on long term debt (842,000) - Common stock issued for warrants and options exercised 186,300 - ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES (1,055,700) 204,680 ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS 1,198,690 646,599 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 799,369 152,770 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,998,059 $ 799,369 ============ ============ CASH PAID FOR: Interest $ 406,808 $ 121,975 ============ ============ SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES Cashless warrant excercise $ 8,580 $ - Issuance common stock for services - 31,300 Fair value of options and warrrants to non-employees 306,500 45,000 Investment in Genisys for licensing fees - 410,817 Reclassification of property and equipment to assets held for sale - 1,663,857 Expiration of put option 78,000 - Issuance common stock subject to repurchase - 42,000 Accretion in the carrying amount of common stock subject to repurchase - 36,000
See accompanying Notes to Consolidated Financial Statements. F-6 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Description of Business - Through its wholly owned subsidiary, United Internet Technologies, Inc., the Company is in the business of developing and licensing its Internet video technology for various applications ("Technology"). The Technology, which equips sites on the World Wide Web ("Web") with software, provides a means of linking a full-motion video on CD-ROM located on the user's personal computer to the Web sites. The display of the content of the CD-ROM is completely controlled by the remote Web server. The Company's other business consists of children's recreational activities and investments in affiliated companies. Principles of Consolidation - The consolidated financial statements include the accounts of United Leisure Corporation and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Investments - Investments in 20 percent to 50 percent owned limited partnership and limited liability company are carried at equity. Investment in less than 20% owned partnership is carried at cost less distributions. Investments in available for sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of stockholders' equity. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash and cash equivalents - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Fair Value of Financial Instruments - The Company's financial instruments consists of cash equivalents, receivables, accounts payable, accrued expenses, notes payable and due to related parties. The fair values of the Company's financial instruments approximate the carrying value of the instruments. Concentration of Risk - The Company invests its excess cash in certificates of deposit and money market funds, which, at times, may exceed federally insured limits. The Company maintains its accounts with financial institutions with high credit ratings. Property and Equipment - Property and equipment is recorded at cost and depreciation is computed on the straight-line method based upon the estimated useful life of the related asset as follows: Buildings and improvements............................ 3-27 years Machinery, equipment and vehicles..................... 4-10 years Furniture, fixtures and office equipment.............. 5-10 years Computers............................................. 6 years Signs................................................. 10 years Property and equipment are reviewed for impairment whenever events or circumstances indicate that the asset's undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated as the present value of expected future cash flows. F-7 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Capitalized Technology Costs - The Company capitalizes certain costs incurred to internally develop its Technology, which is licensed to third parties. Capitalization of internally developed Technology begins upon the establishment of technological feasibility. Costs incurred prior to the establishment of technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed all activities that are necessary to establish that the product can be produced to meet specifications. Revenue Recognition - The Company is engaged as a provider of consultancy services and as a licensor of its Technology. Generally, revenue is recognized upon delivery of the Technology. For arrangements to deliver the Technology that requires significant modification or customization, revenue is recognized on the percentage-of-completion method. Deferred Production Cost - All expenses incurred to modify and customize its Technology are deferred and charged against revenue when earned. Stock-Based Compensation -The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related interpretations, under which no compensation cost related to stock options has been recognized as the exercise price of each option at the date of grant was equal to the fair value of the underlying common stock. Earnings per Share -Basic Earning Per Share (EPS) is calculated by dividing income available to common stockholders (the "numerator") by the weighted- average number of common shares outstanding (the "denominator") during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares (that is, securities such as options, warrants, convertible securities, or contingent stock agreements) had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back (a) any convertible preferred dividends and (b) the after-tax amount of interest recognized in the period associated with any convertible debt. The computation of diluted EPS shall not assume conversion, exercise, or contingent issuance of securities that would have an antidilutive effect on EPS. Comprehensive Income - Components of comprehensive income (loss) for the Company include net income (loss) and changes in the value of available-for-sale securities. Segment Information - The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", ("SFAS No. 131") issued by the FASB. SFAS No. 131 requires that public companies report certain information about operating segments, products, services and geographical areas in which they operate and their major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information, as presented in Note 3. Income Taxes - The Company utilizes the asset and liability method for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Start-up Costs - Costs of start-up activities, including organization costs, should be expensed as incurred. Reclassifications - Certain 1998 amounts in direct operating expenses have been reclassified to selling, general and administrative expenses to conform with 1999 presentation. F-8 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. Disclosure of Certain Significant Risks and Uncertainties Limited Operating History- Through its wholly owned subsidiary, the Company's primary business is developing and licensing proprietary interactive Internet technology. This business started in 1998 and as such the Company is subject to various risks and uncertainties frequently encountered by companies in the early stage of development. Such risks and uncertainties include, but are not limited to, its limited operating history, an evolving and unpredictable developing Internet technology, and increasing number of competitors. Possibly a Securities Law Violation - On February 10, 2000, the Company filed a registration statement for the shares of common stock to be issued for the exercising of warrants. According to their terms, the warrants became exercisable on November 10, 1995, although under the warrant agreement the Company was not obligated to deliver the common stock pursuant to an exercise unless a registration statement was effective. Due to the fact that the price of the Company common stock in the public market has, until January 14, 2000, been below the exercise price of the warrants, such registration was delayed. The Company has been advised by the Securities Exchange Commission ("SEC") that it is its position that the registration statement should have been filed by November 10, 1995 and by failing to do so the Company has been conducting an unregistered offering (but not sale) of common stock in violation of Section 5 of Securities Act of 1933. That position could provide the basis for an action against the Company by the SEC, possibly resulting in fines and other sanctions. That position could also give rise to actions by the shareholders for violation of Section 5, although because the Company has not yet issued common stock in exercise of the warrants (and will not do so until a registration statement is declared effective), it is impossible to determine what damages, if any, the Company may be liable for. 3. Segment Information The Company operates in two business segments: developing and licensing Internet video technology and children's recreational activities. Children's recreational activities consist of summer day camps and children's play-learning centers known as Planet Kids. Segment operating income (loss) is total segment revenue reduced by operating expenses identifiable to with that business segment. Corporate includes general corporate administrative costs. The Company evaluates performance and allocates resources based on operating income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. There are no intersegment sales.
INTERNET CHILDREN'S CONSOLIDATED 1999 RECREATIONAL - ---- -------------- -------------- ---------------- Revenue $ 240,000 $ 1,137,770 $ 1,377,770 Loss from operations (2,618,468) (1,310,495) (3,928,963) Assets 412,863 156,450 569,313 1998 - ---- Revenue 410,817 2,032,784 2,443,601 Income (loss) from operations 19,043 (555,550) (536,507) Assets 285,613 2,113,348 2,398,961
Reconciliation from the segment information to the consolidated balances for loss from operations and assets is set forth below: F-9 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1999 1998 -------------- -------------- Segment loss from operations $ (3,928,963) $ (536,507) Selling, general & administrative expense (1,016,921) (1,036,081) Depreciation and amortization (9,612) (9,612) Other income 773,749 1,067,361 -------------- -------------- Consolidated net loss $ (4,181,747) $ (514,839) ============== ============== Segment asset $ 569,313 $ 2,398,961 Cash and cash equivalent 1,908,325 733,423 Receivables - 48,890 Prepaid expense 27,158 39,244 Property and equipment 28,384 37,167 Investments 201,500 4,171,119 Other assets 847,815 962,747 -------------- -------------- Consolidated total assets $ 3,582,495 $ 8,391,551 ============== ==============
4. Property and Equipment Property and equipment consisted of the following at December 31, 1999 and 1998:
1999 1998 -------------- -------------- Buildings and improvements $ 30,765 $ 328,233 Machinery, equipment and vehicles 44,993 98,184 Furniture, fixtures and office equipment 25,728 17,508 Computers 145,487 111,136 Signs and other 296 296 -------------- -------------- 247,269 555,357 Less accumulated depreciation and amortization (65,504) (170,373) -------------- -------------- $ 181,765 $ 384,984 ============== ==============
The Company's Planet Kids play-learning centers has generated increasing operating cash flow losses since its opening in 1995. These circumstances indicated that the carrying amounts related to these play-learning centers might not be recoverable. Accordingly, management reviewed the property and equipment related to these play-learning centers for recoverability in accordance with SFAS No. 121 and determined that these assets were impaired. For each play- learning center, the Company determined impairment by computing the sum of the estimated future operating cash flows (undiscounted and without interest charges) and comparing that result to its carrying value. If such sum was less than the carrying value of the play-learning center's assets, an impairment condition was considered to exist and an impairment loss was recognized. The impairment loss was measured as the amount by which the carrying amount exceeded the fair value of the play-learning center's assets. The estimate of fair value was determined using the present values of each play-learning center's estimated future operating cash flows. The Company recognized impairment losses in the fourth quarter of 1997 of $3,862,554. Management's judgment is necessary to estimate future operating cash flows. Accordingly, actual results could vary from such estimates. F-10 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In 1998, the Company decided that Frasier's Frontier amusement park in San Diego County did not meet the Company's long-term strategic goals. The amusement park was closed in spring 1998 and the Company sold the facility in 1999. The assets of this amusement park include land, buildings and leasehold improvements, machinery and equipment, vehicles, furniture and fixtures, computers, and rides. The carrying value of these assets of $1,663,857 was reclassified as assets held for sale at December 31, 1998. In August 1999, the Company sold the asset for $975,000. 5. Investments Investment in The Splash - The Company has a 3.12% interest in The Splash, a California limited partnership organized for the purpose of developing and operating a water park on a parcel of property previously subleased from the Company. At December 31, 1999 and 1998, the carrying value of the Company's investment, net of distributions, was $0. During 1999 and 1998, the Company received distributions of $59,550 and $48,723, respectively, which were included in other income in the accompanying statements of operations. Investment in United Hotel - In January 1997, the Company and two unrelated California limited liability companies formed United Hotel & Casino, LLC ("United Hotel"), organized under the laws of the State of Delaware. On July 29, 1997, United Hotel acquired the a real property commonly known as The Silver City/Las Vegas Plaza Shopping Center ("Las Vegas Property") in Las Vegas, Nevada. The aggregate purchase price was approximately $23,200,000. In 1999, the Company sold its investment in United Hotel and recognized $1,869,584 net realized distribution from this investment. Investment in HEP II - On April 23, 1996, the Company acquired 50% of the limited partnership interests for an initial investment of $1,500,000 in HEP II, a California limited partnership, engaged in the motion picture production business. The Company received capital distributions of $379,500 from HEP II in 1996. In 1999 the management reviewed the investment in HEP II for recoverability in accordance with SFAS No. 121 and determined that this investment was impaired. The Company determined impairment by computing the sum of the estimated future cash flows (undiscounted and without interest charges) and comparing that result to its carrying value. The Company recognized impairment losses in the fourth quarter of 1999 of $600,000. The impairment loss was based on the management's judgment of the estimated future cash flows of $100,000. Accordingly, actual results could vary from such estimates. During the year ended December 31, 1998, the Company realized a loss from the write-down of the investment of $420,500. As of December 31, 1999 and 1998, the balance of the Company's investment in HEP II was $100,000 and $700,000, respectively. Investment in Genisys - As of June 30, 1998, the Company's wholly owned subsidiary, United Internet Technologies, Inc. ("United Internet") granted to NetCruise Interactive, Inc. ("NetCruise"), a wholly owned subsidiary of Genisys Reservation Systems, Inc. ("Genisys"), an exclusive and worldwide and perpetual license for travel related applications of certain interactive technology. In addition, the Company sold certain related intellectual properties and computer equipment. As consideration for the sale, United Internet received (i) 2,000,000 of unregistered shares of common stock of Genisys, (ii) a warrant to purchase up to 800,000 shares of Genisys common stock at $2.50 per share if the total pretax profits of NetCruise for the years 1999, 2000 and 2001 equal or exceed $5,000,000 and (iii) a warrant to purchase up to 800,000 shares of Genisys common stock at $6.00 per share if the total pretax profits of NetCruise for the years 1999, 2000, and 2001 equal or exceed $10,000,000. For accounting purposes, the Company and Genisys had taken the position that the transaction was completed based on its original terms on June 30, 1998, and as such, United Internet's investment in Genisys common stock was accounted for under the equity method effective June 30, 1998 resulting to a recognition F-11 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED of licensing fees of $410,817. United Internet's investment represents 29% of the outstanding common stock of Genisys at December 31, 1998. Equity in net loss of Genisys for the year ended December 31, 1998 was $249,533. The Company's equity in net assets, as adjusted to eliminate the write-up of the transferred assets and Technology, was $210,133 at December 31, 1998. In the first quarter of 1999, the Company wrote-down the investment in Genisys to $0. 6. Investment in and Loan Receivable from Grand Havana As of December 31, 1999, the Company had 966,666 shares (approximately 7% of the issued and outstanding common stock) of Grand Havana's restricted common stock. The Company accounted for this investment as available for sale security. At December 31, 1998, the quoted market value of the Company's investment in Grand Havana was $38,667. Because Management of the Company does not believe that it will recover the original cost of its investment in Grand Havana, the Company has recognized a permanent impairment loss on this investment in the amount of $1,043,764 during the year ended December 31, 1998. At December 31, 1999, the quoted market value of the Company's investment in Grand Havana was $101,500. The Company recorded changes of the market value in other comprehensive income. The valuation represents a mathematical calculation based on the closing quotation published by OTC Bulletin Board and is not necessarily indicative of the amounts that could be realized upon sale. The Company has entered into a number of financing agreements with Grand Havana over the past years. In February 1997, the Company agreed to make a loan available at an interest rate of 8% per annum on any outstanding principal amount, in return for receiving 75,000 shares of Grand Havana Common stock. The Company received an additional 25,000 shares of Grand Havana stock in return for extending this loan facility. On September 30, 1998, the Company extended an installment loan to Grand Havana in the amount of up to $1,250,000, by way of a Secured Promissory Note, which bears an interest of 8% per annum and is due and payable on April 30, 2000. The total loan advance in 1998 was $607,154. During 1999, the Company advanced additional $75,000. Brian Shuster, the Chairman of the Board and Chief Executive Officer of the Company, is the brother of Stanley Shuster, the Chairman of the Board and Chief Executive Officer of Grand Havana. 7. Due from Former Officer As of December 31, 1999, the Company had a net receivable from Harry Shuster, former President and Chief Executive Officer of the Company, of $81,027, compared with a net receivable of $322,627 in 1998. 8. Note Payable In connection with the acquisition of the Las Vegas Property, Westminster Capital, Inc ("Westminster") made a loan of $1,900,000 to the Company. In 1999 the Company used its distribution from its investment in United Hotel, as a result of the sale of its property in Las Vegas, to repay the note payable to Westminster Capital, Inc. 9. Long-Term Debt Long-term debt at December 31, 1998 consists of a note payable dated April 5, 1995, with a payable interest only at 12%, and a purchase money loan dated April 5, 1995, with a payable interest only at 9.67%. Both were secured by deed of trust on real property located in San Diego County, California. In 1999, the Company used the proceeds from the sale of this property to pay off this debt. F-12 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. Due to Related Parties Due to related parties at December 31, 1999 and 1998 consisted of the following:
1999 1998 -------------- -------------- Due to Brian Shuster $ 65,000 $ 60,000 Due to Grand Havana 81,774 51,358 -------------- -------------- 146,774 111,358 Due from United Hotel - 2,179 Due from 1990 Westwood Blvd. 31,387 - Due from a consultant 20,000 Due from Genisys - 1,644 -------------- -------------- $ 95,387 $ 107,535 ============== ==============
11. Common Stock Subject to Repurchase In August 1998, the Company agreed to issue 150,001 shares of common stock with a total fair value of $42,000 as payment of legal fees. These shares were issued in October 1998. The Company agreed to repurchase the shares, one year from August 1998, at such stockholders' election, at a cash price of $1.00 per share. Staff Accounting Bulletin No. 64 describes the Securities and Exchange Commission staff's policy on accounting for mandatorily redeemable stock. It requires that stocks that are subject to "put rights" on redemption outside of the Company's control should be presented separately from common stock which is not subject to "put rights" in order to distinguish it from permanent capital of the Company. Further, such accounting standards require the Company to present such shares on the balance sheet at its fair value at the date of issuance. If that amount is less than the amount which would be paid if repurchased, the carrying amount should be increased periodically to equal the repurchase price. The periodic accretions in the carrying amount is determined using the interest method. The accretion of $36,000 in the repurchase price was charged to additional paid-in capital in 1998 and has been deducted from earnings available for common stockholders in the computation of earnings per share. When the repurchase requirements lapsed in 1999, the accretion in the carrying amount of common stock subject to repurchase was reversed from additional paid-in capital and the stock were recorded as equity. 12. Stockholders' Equity On February 2, 1998, in consideration for certain financial advisory services, the Company issued 100,000 shares of Common Stock to Transit Securities, Inc., which shares were valued at $31,300 or $0.313 per share. In April 1998, the Company sold 10 Units at $26,400 per Unit in an offering of securities exempt from registration under the Securities Act of 1933. Each Unit consists of 120,000 shares of common stock and warrants to purchase 60,000 shares at $0.27 per share. The Company received net proceeds of $229,680 from this offering and issued 1,200,000 shares of common stock and warrants to purchase 600,000 shares of common stock. The warrants expire on April 2, 2003. F-13 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In June 1998, the Company issued stock purchase warrants (the "Warrants") to Sands Brothers & Co., Ltd. ("Sands Brothers"). The Warrants are for 250,000 shares of the Company's Common Stock at an exercise price of $.25 per share. The Warrants are exercisable at any time commencing June 25, 1998 until June 25, 2003. The Company may redeem the Warrants for $.10 per Warrant under certain circumstances, including (i) the Company has an effective Registration Statement covering the shares of the Company's common stock issuable upon exercise of the Warrants, and (ii) the Company's common stock has been trading at or above $2.50 per share for the previous thirty business days. The holder of the Warrants has registration rights with respect to the shares of common stock issuable upon exercise of the Warrants for five years commencing June 25, 1998, and one "demand" registration right with respect thereto. The Warrants have anti- dilution protection. The Warrants were issued in connection with financial advisory services being rendered to the Company by Sands Brothers. The Company received no proceeds from this issuance. In September 1998, the Company granted option to Brian Shuster to purchase 300,000 shares of the Company's common stock at $0.25 per share. This option is exercisable immediately upon grant and expires on September 21, 2003. In September 1998, the Company as consideration for guaranteeing the loan also granted option to Harry Shuster to purchase 2,100,000 shares at $0.625 per share. This option is exercisable immediately upon grant and expires on September 29, 2003. On January 4, 1999, the Company granted stock options to the Company's general outside counsel, Richman, Lawrence, Mann, Chizever & Phillips, a Professional Corporation ("Richman, Lawrence"), to purchase 200,000 shares of the Company's common stock at $.23 per share. The shareholders of Richman, Lawrence exercised the options effective the same day for total exercise price of $46,000. On January 4, 1999, the Company issued stock options to purchase shares of the Company's common stock to the following: 100,000 to two outside directors, 100,000 to Brian Shuster, an employee-director, 210,000 to certain employees and 165,000 to certain consultants. All such options are exercisable at $.23 per share. The options granted to the directors vest immediately and the options granted to the employees vest on varying terms ranging from immediately to five years. On February 1, 1999, the Company issued a stock option to Brian Shuster to purchase 200,000 shares of the Company's common stock. The option is exercisable at $.35 per share and vests immediately. In March 1999, the Company issued 150,000 shares of common stock to Westminster Capital, Inc., upon the exercise of a stock purchase warrant for 150,000 shares of the Company's common stock at $.40 per share for gross proceeds of $60,000. In March 1999, the Company issued 100,000 shares of common stock to Whale Securities Co., L.P., upon the exercise of a stock purchase warrant for 100,000 shares of the Company's common stock at $.75 per share for gross proceeds of $75,000. On April 13, 1999, the Company and Strata Equities Limited ("Strata") amended the Warrant Agreement dated April 2, 1998 relating to the issuance of a stock purchase warrant (the "Warrant") for 600,000 shares of the Company's common stock at $.27 per share, to permit a cashless exercise of the Warrant, and Strata exercised the Warrant on a cashless basis. Based on an intraday trading price of $4.60 per share of the Company's common stock on April 13, 1999, the Company issued to Strata 564,783 shares of the Company's common stock. The Company received no proceeds from the issuance, as a result of the cashless exercise. F-14 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED On April 29, 1999, the Company sold 500,000 shares of common stock to one individual, at a purchase price of $2.00 per share for gross proceeds of $1,000,000. In April 1999, the Company issued 82,222 shares of common stock to an investment banker for consulting services upon the cashless exercise of a stock purchase warrant for 100,000 shares of the Company's common stock at $.75 per share. The Company received no proceeds from the issuance, as a result of the cashless exercise. In April 1999, the Company issued 10,000 shares of common stock to Alvin Alexander, a director of the Company, upon the exercise of a stock option at an exercise price of $.30 per share for gross proceeds of $3,000. In April 1999, the Company granted options to Richard Ames, a consultant to the Company, to purchase 100,000 shares of the Company's common stock at $1.75 per share. The option is exercisable immediately upon grant and expires on January 3, 2004. On May 26, 1999, the Company granted options to Julie Lepere, Secretary of the Company, to purchase an aggregate of 16,000 shares of the Company's common stock, at various exercise prices and subject to vesting, as follows: (i) $1.00 per share as to 5,000 shares, which are immediately exercisable; (ii) $2.25 per share as to 6,500 shares, which are exercisable at any time after May 26,2000 and on or before May 26, 2001; (iii) $1.50 per share as to 4,500 shares, which are exercisable at any time after May 26, 2001 and on or before May 26, 2002; Provided, however, that in the event the employee's employment with the Company is terminated prior to May 26, 2002, the vested portions of the options become non-exercisable six months after such termination. On May 26, 1999, the Company granted an option to purchase 100,000 shares of the Company's common stock to Lou Pitt, a consultant to the Company, at an exercise price of $1.00 per share. The option is exercisable immediately upon grant and expires on May 26, 2002. On June 24, 1999, the Company sold 250,000 shares of common stock at a purchase price of $2.00 per share for gross proceeds of $500,000 to the same individual who had purchased 500,000 shares of the Company's common stock on April 29, 1999. In June 1999, the Company issued 10,000 shares of its common stock to Shannon Taylor, a consultant to the Company, in connection with her exercise of options which were granted on January 4, 1999. Proceeds to the Company in connection with such exercise were $2,300. On July 16, 1999, the Company granted an option to purchase 10,000 shares of the Company's common stock to James Orr, a consultant to the Company, at an exercise price of $1.00 per share. On the date of such grant, the closing bid price of the Company's common stock as quoted on the OTC Bulletin Board was $3.1875. The option is exercisable immediately upon grant and expires on July 16, 2000. On July 21, 1999, the Company and Media Group, Inc. ("MGI") entered into an agreement (the "MGI Agreement") for the duplication of one million CD-ROM shrink-wrapped packages for NBC. The total order is $380,000. Pursuant to the MGI Agreement, the Company made a payment of $95,000 to MGI and delivered 150,000 shares of its common stock (the "MGI Shares"). The Company recorded a liability on its books for the remaining outstanding balance of $285,000. The Company further agreed to include the MGI Shares in a registration statement which the Company filed with the Securities and Exchange Commission on September 1, 1999 for the benefit of certain selling stockholders (the "Selling Stockholders' Registration Statement"). The Company has agreed to make further F-15 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED payments to MGI under the MGI Agreement until the full $380,000 is paid. The Company has the right to have the MGI Shares returned to the Company and to pay the $380,000 in full. If the Company does not so elect, MGI has the right to (i) put the MGI Shares to the Company and the Company will pay the balance then due under the MGI Agreement, or (ii) retain the MGI Shares and sell them pursuant to the prospectus forming a part of the Selling Stockholders' Registration Statement, in which case any amounts received by MGI over the balance due at that time shall be refunded to the Company. The Company has further agreed to pay to MGI any shortfall between the net proceeds of any sale of the MGI Shares and the balance owing under the MGI Agreement. There were no proceeds to the Company in connection with this issuance. In February 2000, the Company paid off the balance and cancelled this issuance. These shares of common stock were not included in the calculation of earnings per share. In September 1999, the Company issued 211,013 shares of common stock upon the cashless exercise of a stock purchase warrants for 250,000 shares of the Company's common stock. The Company received no proceeds from the issuance, as a result of the cashless exercise. In November 1999, the Company granted warrants to Michael Peshey to purchase 50,000 shares of the Company's common stock at $1.50 per share. This warrant is exercisable immediately upon grant and expires on November 2000. In December 1999, the Company granted options to Alvin Cassel, a director of the Company, to purchase 50,000 shares of the Company's common stock at $1.75 per share. The option is exercisable immediately upon grant and expires on December 16, 2001. Each of the foregoing offerings (i) was made directly by the officers and directors of the Company and no underwriting discounts or commissions were paid, and (ii) was exempt from the registration provisions of the Securities Act pursuant to Section 4(2) thereof, for transactions by an issuer not involving any public offering. The following non-qualified stock options granted by the Company were outstanding at December 31, 1999:
Exercise Number of Price per Shares Share Date of Grant Date of Expiration --------- --------- ------------------ ------------------- 15,000 $ 0.68 January 20, 1987 December 31, 2002 356,950 1.00 July 24, 1987 December 31, 2002 80,000 0.30 April 22, 1988 December 31, 2002 75,500 1.33 October 7, 1988 December 31, 2002 37,500 1.25 November 17, 1988 December 31, 2002 37,500 1.38 December 5, 1988 December 31, 2002 70,000 0.75 December 7, 1990 December 31, 2002 60,000 1.00 September 23, 1993 December 31, 2002 125,000 0.31 July 3, 1997 December 31, 2002 300,000 0.25 September 22, 1998 September 21, 2003 2,100,000 0.625 September 30, 1998 September 29, 2003 565,000 0.23 January 4, 1999 Various 200,000 0.35 February 1, 1999 Immediate 100,000 1.75 April 8, 1999 January 3, 2004 100,000 1.00 May 26, 1999 May 26, 2002 16,000 Various May 26, 1999 May 26, 2002 10,000 1.00 July 16, 1999 July 16, 2000 50,000 1.75 December 16, 1999 December 16, 2001 --------- 4,297,950 =========
F-16 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED The following table summarizes the activity of common shares under stock options for the years ended December 31, 1998 and 1999:
1999 1998 ----------- ----------- Balance - beginning of year 3,266,950 866,950 Options granted 1,251,000 2,400,000 Options exercised (220,000) - ----------- ----------- Balance - end of year 4,297,950 3,266,950 =========== ===========
The stock options of 725,000 granted to non-employee during 1999 were valued using the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123. Compensation expense recognized amounted to $306,500 in 1999. The fair value of the options granted during 1999 is estimated on the date of the grant using the Black-Scholes pricing model with the following weighted average assumptions: dividend yield of 0%, volatility of 100%, risk-free interest rate of 5.5% and an expected life of 5 years. The Company applies APB No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation expense has been recognized for its stock options. Had compensation cost for the Company's stock options been determined based upon the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123, the Company's net loss and loss per share would have been increased by approximately $48,065, or $0.03 per share for 1999. The fair value of the options granted during 1999 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield 0%, volatility of 100%, risk-free interest rate of 5.5% and an expected life of 5 years. Option valuation models require the input of highly subjective assumptions. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its stock options. In November, 1999, 430,000 warrants were expired. At December 31, 1999, the following warrants were outstanding:
Exercise Number of Price per Shares Share Date of Grant Date of Expiration ---------- --------- ----------------- -------------------- 4,945,000 $4.00 November 10, 1994 November 9, 2000/1/ 50,000 1.50 November 24, 1999 November 24, 2000 --------- 4,995,000 =========
/1/ Original date of expiration was November 9, 1999, which was subsequently extended. F-17 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED Computation of Loss Per Share for the year ended December 31, 1998:
Income Shares Per Share (Numerator) (Denominator) Amount ----------- --------------- ----------- Basic loss per share: Net loss $(514,839) 13,502,182 $ (0.04) Less: accretion in the carrying amount of common stock subject to Repurchase (36,000) - - --------- ---------- -------- Net loss attributable to common Stockholders $(550,839) 13,502,182 $ (0.04) ========= ========== ========
Outstanding options and warrants to purchase shares at December 31, 1999 were not included in the computation of diluted loss per common share because the effect would be antidilutive. 13. Legal Proceedings In September 1998, the Company and its subsidiary, Lion Country Safari, Inc. - California, and The Irvine Company settled their long-standing litigations and have dismissed all superior court and appellate court actions pending between them, i.e. The Splash v. The Irvine Company, et al. (Case No. 491202), Lion Country Safari, Inc. - California v. The Irvine Company (OCSC Case No. 743669), Lion Country Safari, Inc. - California v. The Irvine Company (OCSC Case No. 775923) and The Irvine Company v. Lion Country Safari, Inc. - California (OCSC Case No. 776187). Pursuant to the terms of the settlement agreement between the parties, The Irvine Company paid the Company $4,000,000 without admitting any liability on the part of The Irvine Company. On November 12, 1996, Irvine Meadows, a former sublessee and the operator of the Irvine Meadows Amphitheater, sued the Company and Harry Shuster (OCSC Case No. 771509). The plaintiffs sought an injunction preventing the Company from removing certain improvements from the property at the expiration of the lease. On January 3, 1997, Irvine Medows filed a first amended complaint and sought an injunction a declaratory relief but no money damages. On February 19, 1997, the trial judge granted Irvine Medows' request for an injunction and barred the Company from removing the leasehold improvements from the property. The plaintiffs won the suit on a motion for summary judgment in May 1998. The Company appealed the decision of the court. On October 27, 1998, the plaintiffs were awarded costs in the amount of approximately $545,000. The Company also appealed this award. On May 7, 1999, the Company settled this litigation. The Company agreed to dismiss with prejudice the appeal of the trial court's judgment. The Company also agreed to pay the plaintiffs not less than $225,000 in principal amount, plus 6% interest compounded daily, in installments. Of this amount, the Company's litigation counsel agreed to contribute approximately $40,000. Concurrently with the signing of the settlement agreement, $26,316 was paid, which includes principal of $25,000. As of end of 1999, the Company has paid off the balance. In June, 1999, the Company was sued by Hyperlock Technologies, Inc. ("Hyperlock") in the United States District Court for the Northern District of Illinois, Eastern Division. Hyperlock alleges that the Company has infringed United States Patent No. 5,892,825, (the "825 patent") entitled, "Method of Secure Server Control of Local Media Via a Trigger Through a Network for Instant F-18 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED Local Access of Encrypted Data on Local Media." On October 14, 1999, Hyperlock amended its complaint to allege the infringement of an additional patent. Hyperlock is seeking an injunction against the Company and unspecified damages. Hyperlock also seeks treble damages, court costs and reasonable attorneys' fees and other relief as the court may deem to be just and proper. In February 2000, the Company filed a declaratory judgment action in Illinois alleging non- infringement, invalibility and unenforceability of our patent. Hyperlock also seeks to have the California case reassigned to the judge who is presiding over the Illinois case. The Company has filed a motion to oppose the reassignment. Based on a review of the "825 patent", the Company believes that the suit is without merit. The Company believes that it has not committed any acts of infringement, and intends to defend this suit vigorously. Due to the inherent uncertainties regarding litigation, the Company can make no prediction about the outcome of the litigation. 14. Commitments and Contingencies Consulting Agreement - As of June 1, 1999, the Company and Harry Shuster entered into an amended and restated Consulting Agreement updating an arrangement originally effective as of September 1, 1984, which was subsequently amended on June 1, 1994 ("the Consulting Agreement"). The Consulting Agreement provides that Harry Shuster will relinquish the titles of Chairman of the Board, President, and Chief Executive Officer, effective May 24, 1999. Harry Shuster shall continue to render consulting services to the Company and its affiliates in connection with its non-Internet business as requested by the President of the Company or the Company's Board of Directors. The Consulting Agreement provides that Harry Shuster, as a consultant, will be paid $5,000 per month by the Company and be given either the use of a company car or $300 per month car allowance in carrying out his duties for the Company. For any given year of the term of the Consulting Agreement, the balance of the then-current Gross Compensation shall be applied by the Company, on a monthly basis, to reduce the net amount owed by Consultant to the Company, including interest (the "Company Receivable"), which on June 1, 1999 is acknowledged by the parties to be $420,263. After the Company Receivable has been reduced to zero, the entire amount of the Gross Compensation shall be paid to Harry in accordance with the terms of the consulting agreement. In addition, the consulting agreement provides for certain disability benefits for a period of up to three years. The consulting agreement provides for automatic one-year renewals for each contract year that ends without termination of the consulting agreement by either party. During 1999 and 1998, the Company incurred consulting fees pursuant to this agreement in the amount of $330,730 and $300,663, respectively. United Internet Technologies ("UIT") and Brian Shuster have entered into an Employment Agreement dated as of January 1, 1999 ("the Employment Agreement"), pursuant to the terms of which Brian Shuster is employed as President of UIT at an initial base salary of $240,000 per year. The Employment Agreement provides for annual 10% increases in Brian Shuster's base salary. The Employment Agreement provides for a rolling five-year term. This is accomplished by extending the initial five-year term of the Employment Agreement automatically for successive one-year periods unless written notice of termination is given at least 60 days prior to the end of the completion of the first year of the then- current five-year period. The Employment Agreement also provides that any inventions developed by Brian Shuster during his employment by UIT and which relate to the business of UIT, will remain property of UIT. The Employment Agreement also contains a confidentiality provision to protect UIT's trade secrets and other confidential information. Brian Shuster is permitted to engage in outside business activities to the extent that such obligations do not interfere with his duties to UIT. In addition, the Company and UIT have entered into an agreement dated as of January 1, 1999, pursuant to which UIT has agreed to make available the services of Brian Shuster to consult for the Company on a variety of matters. The Company has agreed to pay UIT $5,000 per month for making available to Brian Shuster's F-19 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED services under this agreement; Brian Shuster will receive no payments under this agreement. Brian Shuster has also agreed that UIT may credit against his salary any amounts he actually receives from Genisys pursuant to the Genisys Agreement for consulting services. Lease Arrangements - At December 31, 1999, minimum annual rentals under non-cancelable leases and minimum sub-lease income are as follows:
Year Ending December 31, Leases Subleases ------------ -------- --------- 2000 $ 504,174 $33,648 2001 545,482 1,676 2002 518,118 - 2003 467,339 - 2004 467,339 - Thereafter 331,266 - ---------- ------- Total $2,833,718 $35,324 ========== =======
Rent expense, net of sublease income of $44,830 in 1999 and $38,015 in 1998, was $619,580 in 1999 and $616,790 in 1998. The Company leases certain of its office space on a month-to-month basis from a corporation of which Harry Shuster, is an officer and a principal stockholder. The Company paid or accrued rent to this corporation of $81,860 in 1999 and $43,624 in 1998. The Company has paid rental, including homeowners association dues to Harry Shuster for an apartment which he owns and which he and Brian Shuster use while they are in New York City on business. In 1999 and 1998 the Company paid $25,114 and $26,850, respectively. 15. Income Taxes At December 31, 1999, the Company had net operating loss carryforwards for federal tax purposes expiring as follows:
Year Expires Amount ------------ ------ 2000 $1,562,000 2001 808,000 2002 282,000 2005 111,000 2007 19,000 2008 523,000 2010 655,000 2011 427,000 2012 2,900,000 ---------- $7,287,000 ==========
F-20 UNITED LEISURE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATTED FINANCIAL STATEMENTS, CONTINUED The components of deferred taxes were as follows at December 31, 1999 and 1998:
1999 1998 ----------- ----------- Deferred tax assets: Net operating loss carryforwards $ 2,369,000 $ 2,802,000 Impairment losses 747,000 2,209,000 Non-cash compensation 307,000 102,000 State income taxes 2,000 2,000 Partnership interests 193,000 195,000 Valuation allowance (3,403,000) (5,205,000) ----------- ----------- Total deferred tax assets 215,000 105,000 Deferred tax liability: Depreciation 215,000 105,000 ----------- ----------- Net deferred taxes $ - $ - =========== ===========
Subsequent Events In January 2000, the Company has completed a $5.6 million private placement of its common stock. The proceeds from this private placement will be used to finance the operation of UIT. In March 2000, the Company filed an application with NASDAQ Stock Market to have its common stock listed for trading on the NASDAQ National Market. F-21 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 Asset Purchase Agreement dated June 30, 1998 by and among United Leisure Interactive, Inc., Net Cruise Interactive, Inc., Genysis Reservation Systems, Inc. and United Leisure Corporation (incorporated by reference to Exhibit 2.1 of United Leisure's Current Report on From 8-K dated July 23, 1998, as amended by United Leisure's Amendment No. 1 to Current Report on Form 8-K dated November 4, 1998 (the "Form 8-K/A")). 2.2 Agreement date October 27, 1998 by and among United Internet Technologies, Inc. Genisys Reservation Systems, Inc. Warren D. Bagatelle, Loeb Holding Corporation, Loeb Partners Group. HSB Capital, David W. Sass, Mark A Kenny, Hohn H. Wasko, Hoan E. Wasko, Lawrence E. Burk and S. Charels Tubak (incorporated by reference to Exhibit 2.2 of the Form 8-K/A). 3.1 Restated Certificate of Incorporation of United Leisure (incorporated by reference to Exhibit 3.1 of United Leisure's Form SB-2 (File No. 33-81074 (the "SB-2")). 3.2 Bylaws of United Leisure (incorporated by reference to Exhibit 3.2 of the SB-2). 4.1 Warrant Agreement, dated November 18, 1994 between United Leisure and OTR, Inc. (incorporated by reference to Exhibit 4.1 of the SB-2). 4.2 Form of Warrant to Purchase Common Stock in connection with 12% Promissory Note unit private placement and Bankruptcy Court deposit (incorporated by reference to Exhibit 4.3 of the SB-2). 10.1 Stock Option Agreement dated December 7, 1990, between United Leisure and Haskell Slaughter Young & Johnston, Professional Association, (incorporated by reference to Exhibit 10.5 of the SB-2). 10.2 Stock Option Agreement dated December 7, 1990, between United Leisure and Alvin Cassel (incorporated by reference to Exhibit 10.6 of the SB-2.) 10.3 Stock Option Agreement dated April 22, 1988, between United Leisure and Alvin Cassel as extended by Extension of Option Agreement, dated April 20, 1993, between United Leisure and Alvin Cassel. (incorporated by reference to Exhibit 10.10 of the SB-2). 10.4 Stock Option Agreement dated October 7, 1988, between United Leisure and Harry Shuster as extended by Extension of Option Agreement, dated April 20, 1993 between United Leisure and Harry Shuster (incorporated by reference to Exhibit 10.12 of the SB-2). 10.5 Stock Option Agreement dated November 17, 1988, between United Leisure and Harry Shuster as extended by Extension of Option Agreement, dated April 20, 1993 between United Leisure and Harry Shuster (incorporated by reference to Exhibit 10.13 of the SB-2). 10.6 Stock Option Agreement dated December 5, 1988, between United Leisure and Harry Shuster as extended by Extension of Option Agreement, dated April 20, 1993 between United Leisure and Harry Shuster (incorporated by reference to Exhibit 10.14 of the SB-2). 10.7 Stock Option Agreement dated July 24, 1987, between United Leisure and Harry Shuster as extended by Extension of Option Agreement, dated April 20, 1993 between United Leisure and Harry Shuster (incorporated by reference to Exhibit 10.16 of the SB-2). 10.8 Option Agreement dated as of April 22, 1988, between United Leisure and Haskell Slaughter Young & Johnston covering United Leisure, Extension of Option Agreement, dated April 20, 1993 between United Leisure and Haskell Slaughter Young & Johnston, Professional Association (incorporated by reference to Exhibit 10.17 of the SB-2). 10.9 Promissory Note dated June 1, 1985, by Lion County Safari Inc. in the principal amount of $973,927 drawn to the order of Harry Shuster (incorporated by reference to Exhibit 10.23 of the SB-2). 10.10 Stock Option Agreement, dated February 22, 1989, between United Leisure and Tactron Liquidating Trust (incorporated by reference to Exhibit 10.27 of the SB-2). 10.11 Stock Option Agreement, dated February 22, 1989, between United Leisure and Lindsey & Associates, Inc. (incorporated by reference to Exhibit 10.28 of the SB-2). 10.12 Form of Indemnity Agreement entered into by United Leisure with each of its directors (incorporated by reference to Exhibit 10.35 of the SB-2). 10.13 Stock Option Agreement, dated September 23, 1993, between United Leisure and Alvin Cassel (incorporated by reference to Exhibit 10.41 of the SB-2). 10.14 Standard Retail/Office Complex Lease dated October 12, 1994, between PSA Properties and Planet Kids, Inc., (incorporated by reference to Exhibit 10.32 of United Leisure's Amendment No. I to Annual Report on Form 10K-SB for the fiscal year ended December 31, 1995 (the "1995 10-KSB")). 10.15 Commercial Lease among Eastrich Multiple Investor Fund, L.P., Midland Loan Services, L.P. et al., and Planet Kids, Inc., effective August 9, 1995 and Rider thereto (incorporated by reference to Exhibit 10.33 of the 1995 10-KSB). 10.16 Lease dated June 29, 1995, between Magnolia Square and Planet Kids, Inc. and Addendum thereto (incorporated by reference to Exhibit 10.34 of the 1995 10-KSB). 10.17 Territory Rights Agreement between Planet Kids, Inc., and PT Planet Kidsindo (incorporated by reference to Exhibit 10.35 of the 1995 10-KSB). 10.18 Financing Agreement dated as of February 12, 1997, between United Leisure and Grand Havana Restaurants, Inc. (incorporated by reference to Exhibit 10.36 of United Leisure's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 (the "1996 10-KSB")). 10.19 Financing Agreement dated as of September 10, 1996, between United Leisure and Grand Havana Enterprises, Inc. (incorporated by reference to Exhibit 10.37 the 1996 10-KSB). 10.20 Option Agreement dated as of September 22, 1998, between United Leisure and Brian Shuster (incorporated by reference to Exhibit 10.45 of the United Leisure's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1998 (the "September 30, 1998 10-QSB")). 10.21 Option Agreement dated as of September 30, 1998, by and between United Leisure and Brian Shuster (incorporated by reference to Exhibit 10.46 of the September 30, 1998 10-QSB). 10.22 Option Agreement dated as of January 4, 1999 between United Leisure and Brian Shuster (incorporated by reference to Exhibit 10.49 of United Leisure's Quarterly Report on Form 10-QSB for the period ended June 30, 1999 (the "June 30, 1999 10-QSB")). 10.23 Option Agreement dated as of January 4, 1999, between United Leisure and Alvin Cassel (incorporated by reference to Exhibit 10.50 of the June 30, 1999 10-QSB). 10.24 Option Agreement dated as of January 4, 1999 between United Leisure and J. Brooke Johnston (incorporated by reference to Exhibit 10.51 of the June 30, 1999 10-QSB). 10.25 Option Agreement dated as of February 1, 1999, between United Leisure and Brian Shuster (incorporated by reference to Exhibit 10.52 of the June 30, 1999 10-QSB). 10.26 Employment Agreement dated as of January 1, 1999 between United Leisure and Brian Shuster, together with supplemental agreement between the Company, United Internet Technologies, Inc. and Brian Shuster (incorporated by reference to Exhibit 10.53 of the June 30, 1999 10-QSB). 10.27 Consulting Agreement dated as of January 1, 1999, between United Internet Technologies and Harry Shuster (incorporated by reference to Exhibit 10.54 of the June 30, 1999 10-QSB). 10.28 Agreement dated as of July 21, 1999 between United Leisure and Media Group, Inc. (incorporated by reference to Exhibit 10.55 of the June 30, 1999 10-QSB). 10.29 Purchase Agreement and Escrow Instructions dated as of June 10, 1999, between United Leisure and Shih Ching Chiang, as amended on August 7, 1999 (incorporated by reference to Exhibit 10.1 of United Leisure's Current Report on Form 8-K dated August 23, 1999). 10.30 Total Access Software Distribution Agreement between Earthlink Network, Inc. and United Internet Technologies, Inc. together with related letter agreement dated July 21, 1999 (incorporated by reference to Exhibit 10.42 of United Leisure's Registration Statement on Form SB-2 (File no. 333-86335) filed with the Commission on September 1, 1999 (the "1999 SB-2")). 10.31+ Agreement dated as of June 1, 1999 between United Leisure Corporation and Harry Shuster, amending Amended and Restated Consulting Agreement dated as of June 1, 1994 (incorporated by reference to Exhibit 10.33 of the 1999 SB-2). 10.32* Software License and Distribution Agreement dated June 15, 1999 between United Internet Technologies and AT&T Corp. 10.33* Letter Agreement dated November 19, 1999 between United Internet Technologies and Teen People Magazine. 10.34* Distribution Agreement dated February 2, 2000 between United Internet Technologies and Liquid Audio, Inc. 21.1* Subsidiaries of United Leisure 23.1* Consent of Hollander, Lumer & Co., LLP 27.1* Financial Data Schedule
* Filed herewith. + Management contract or compensatory plan required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission. EX-10.32 2 SOFTWARE LICENSE & DISTRIBUTION AGREEMENT UIT-PPO-RJS-June 17, 1999 Exhibit 10.32 SOFTWARE LICENSE AND DISTRIBUTION AGREEMENT between UNITED INTERNET TECHNOLOGIES, INC. and AT&T CORP. dated as of June 15, 1999 ------- AT&T/UIT - Confidential TABLE OF CONTENTS 1 BACKGROUND 2 DEFINITIONS 3 GRANT OF LICENSES AND RIGHTS 4 MARKETING, DISTRIBUTION AND CUSTOMER CARE 5 PRODUCT DELIVERABLES AND UPDATES 6 PAYMENTS 7 TRADEMARKS, SERVICE MARKS AND TRADE NAMES 8 PROPRIETARY RIGHTS 9 CONFIDENTIAL INFORMATION AND DISCLOSURE 10 REPRESENTATIONS AND WARRANTIES 11 INDEMNIFICATION 12 LIMITATION OF LIABILITY 13 TERM AND TERMINATION 14 GENERAL PROVISIONS Attachment A - UIT Products Attachment B - Prominent Placement Technical Requirements AT&T/UIT - Confidential SOFTWARE LICENSE AND DISTRIBUTION AGREEMENT In this Software License and Distribution Agreement ("Agreement") United Internet Technologies, Inc. ("UIT"), with offices at 1990 Westwood Blvd., Penthouse Floor, Los Angeles, California 90026, and AT&T Corp, on behalf of itself and its Affiliates ("AT&T"), with offices at 295 North Maple Avenue, Basking Ridge, New Jersey 07920, agree as follows: 1. BACKGROUND AT&T provides an internet service called AT&T WorldNet/R/ Service which is accessed using AT&T-provided client software. UIT develops, manufactures and markets enhanced Internet content and Internet video technologies. On the terms of this Agreement, UIT will distribute AT&T WorldNet Service Software in conjunction with certain of its own products. 2. DEFINITIONS As used in this Agreement "Affiliate" means a corporation or other entity that controls, is controlled by --------- or is under common control with another corporation or entity, where "control" means the direct or indirect ownership or control of more that 50% of the stock or other equity interest entitled to vote for the election of directors or equivalent governing body. "AT&T Mark" means a trademark, service mark, logo, trade name, or other insignia --------- or symbol owned by AT&T and used in connection with the Service, including but not limited to the AT&T WORLDNET mark. "AT&T WorldNet Software" means the executable version (but not the source code ---------------------- version) of the client software used for access to the Service) "Content" means AT&T approved marketing language about AT&T WorldNet Services, ------- AT&T WorldNet Software or any other related offering provided by AT&T. "Delivered Member" means a person or entity who (i) has registered, and has ---------------- been billed, for the Service using a Bundled UIT Product (a "UIT Member"); (ii) ------------- has provided a unique identifying affinity code to identify the person or entity as a UIT Member in the course of registering for the Service; and (iii) has paid at least $19.95 of Member Revenue to AT&T using the Service during the first three months after registering for the Service. "Derivative Work" means a revision, modification, translation, abridgment, --------------- condensation or expansion of the AT&T WorldNet Software or any form in which the AT&T WorldNet Software or any form in which the AT&T WorldNet Software may be recast, transferred, transformed, or adapted, which, if prepared without the consent of AT&T would be a copyright infringement. "Developer Marks" means a trademark, service mark, logo, trade name, or other --------------- insignia or symbol owned by an entity and used in connection with a UIT Product for which such entity has developed, in whole or in part, a substantial portion of such UIT Product. "Distributor" means any third party that acquires possession of a UIT Product ----------- from UIT and distributes such UIT Product on tangible media, along with an End User License Agreement. "Documentation" means those software user manuals, reference manuals and ------------- installation guides, or portions thereof, and any other marketing collateral material made generally available in connection with Bundled UIT Products of the Service, as the same may be updated from time to time. "AT&T Documentation" ------------------ refers only to Documentation made available in connection with the AT&T WorldNet Software of the Service, and "UIT Documentation" refers only to Documentation ----------------- made available in connection with the Bundled UIT Products. "Effective Date" means the date last set forth on the signature page of this -------------- Agreement. "End User" means any third party licensed by UIT or a Distributor to use the -------- AT&T WorldNet Software. "Information" means information of any type, including descriptions of all ----------- inventions, creations, ideas, know-now, specifications, designs, software, simulations, test results, reports, drawings, manufacturing processes, algorithms, improvements, and other developments, whether or not fixed in a tangible, reproducible medium, and whether or not protected or protectible by patents, copyrights, mask work rights, trade secret rights, or other intellectual property rights. "Member Revenue" means any revenue derived from the Service that is received by -------------- AT&T or an Affiliate, as the case may be, from a Delivered Member, less rebates and refunds, and less any federal, state or local taxes based on such fees (except taxes based on AT&Ts net income). In no event shall Member Revenue be deemed to include unbundled charges for transport, tariffed services not bundled with the Service, or value added internet-related services (e.g. hosting security, directory, content services, products, etc.). "On-line Service Provider" means any entity that markets, offers or provides ------------------------ on-line computer services or any other form of interactive services (whether or not such services include or offer access to the Internet), Internet access services or communications services (including local exchange, interexchange or international communications services), other than AT&T. "Prominent Placement" means that the AT&T WorldNet Software is (1) the exclusive ------------------- Internet Service Provider or On-Line Service Provider on the integrated UIT Bundled Products and (2) integrated with the UIT Bundled Product in the prescribed manner described in Attachment B. "Quarterly Report" means a list containing all UIT Product titles and the total ---------------- volume of UIT Products distributed in any given calendar quarter integrated with AT&T WorldNet Software, provided and signed by a duly authorized UIT representative. "Scheduled Update" means an Update to the UIT Bundled CD-ROM which UIT shall use ---------------- reasonable efforts to cause to occur at least once every twelve (12) months. "Service" means the standard AT&T WorldNet Services provided by AT&T that has ------- dial-up Internet access. "Term" means the period of time from the Effective Date through the termination ---- of this Agreement as provided in Section 13. "Territory" means (1) the continental United States, Alaska, Hawaii, the U.S. --------- Virgin Islands and Puerto Rico, and (2) any other territory agreed to by the parties in writing pursuant to such additional terms as may also be agreed upon in writing with reference to this Agreement. "Third Party Mark" means a trademark, service mark, logo, trade name, or other ---------------- insignia or symbol owned by an individual or entity other than UIT, AT&T or their respective Affiliates. "UIT Mark" means a trademark, service mark, logo, trade name, or other insignia -------- or symbol owned by UIT and used in connection with UIT Products, including but not limited to UIT and the UIT logo. 2 "UIT Products" means collectively Bundled UIT Products and Unbundled UIT ------------ Products. "Bundled UIT Product" means a product listed in Attachment A together ------------------- with its Documentation bundled with AT&T WorldNet Software. "Unbundled UIT ------------- Product" means a product listed in Attachment A that is not bundled with AT&T WorldNet Software. "Updates" means updates, revisions or other modifications or enhancements to the ------- AT&T Worldnet Software or UIT Products. "Virus" means a time bomb, worm, virus, lock, drop-dead device, trojan horses ----- or other similar component of software or electronically stored or transmitted information that, contrary to the expectation of a user of that software or information, is intended in any manner to (i) damage, destroy, alter, or adversely affect the operation of software, firmware, or hardware, (ii) reveal, damage, destroy, or alter any data or other information or (iii) permit unauthorized access. 3. GRANT OF LICENSES AND RIGHTS 3.1 Software License, Beginning on the Effective Date, AT&T grants to UIT a ---------------- nonexclusive, nontransferable license to reproduce and Distribute the AT&T WorldNet Software to Distributors and End Users throughout the Territory subject to the following: 3.1.1 UIT may reproduce and distribute the AT&T WorldNet Software only as a component of a Bundled UIT Product for use in conjunction with the Service within the United States. 3.1.2 UIT and its Distributors may not transmit the AT&T WorldNet Software to any third party electronically. 3.1.3 UIT and its Distributors are expressly prohibited from (i) modifying the AT&T WorldNet Software in any way except as provided in Section 4.8; and from (ii) marketing or distributing of the AT&T WorldNet Software or Updates thereto other than as a component of a Bundled UIT Product. 3.1.4 UIT, itself or through any Distributor, shall have the right to grant to End Users the right to use the AT&T Worldnet Software as a component of a Bundled UIT Product for use in conjunction with the Service within the United States. 3.1.5 This license grant is conditional upon marketing and bundling the AT&T WorldNet Software as required herein and all other terms and conditions of this Agreement. 3.2 Exclusivity. AT&T WorldNet Software shall be the exclusive Internet ----------- Service Provider or On-Line Service provider on the Bundled UIT Products listed on Attachment A. AT&T reserves the right to grant the rights granted herein to others. 3.3 Source Code Restrictions. UIT agrees (i) not to decompile, disassemble, or ------------------------ otherwise determine or attempt to determine source code for the executable code of the AT&T WorldNet Software or any other software included in the Service or to create any Derivative Works based upon the AT&T WorldNet Software, the Service or AT&T Documentation (except as may be expressly authorized in this Agreement), (ii) that it will prohibit UIT Distributors from any of the foregoing actions and (iii) not to authorize anyone else to do so. UIT agrees that no software included in the Bundled UIT Product shall rely upon, cooperate with, or share in any way any component of, or the entirety of, the AT&T WorldNet Software or the Service without the prior written consent of AT&T or except as provided in Section 4.8 3.4 Bundled Products. Commencing on the Effective Date and throughout the ---------------- remainder of the Term of this Agreement, UIT shall not market, distribute, or offer for sale within the Territory any UIT Product listed on Attachment A including any successor products or versions thereof, without bundling the AT&T 3 WorldNet Software. UIT shall send a Quarterly Report to the AT&T Relationship Manager within 30 days following the end of each calendar quarter. During the Term, UIT shall distribute a minimum of one million (1,000,000) Bundled UIT Products. In accordance with the Terms of this Agreement. Nothwithstanding the foregoing, nothing herein shall be construed to require UIT to destroy any inventory which is not in compliance with the obligations set forth herein and which is in existence before the Effective Date. 4. MARKETING, DISTRIBUTION, AND CUSTOMER CARE 4.1 Service Collateral. UIT shall insert AT&T Documentation or include an ------------------ on-line read me file which will be activated prior to the AT&T WorldNet Software being installed, as AT&T shall specify from time to time, with all Bundled UIT Products sold or offered for sale. 4.2 Reproduction of Inserts. For each different Bundled UIT Product ----------------------- 4.2.1 AT&T shall provide UIT with Content. UIT shall use the Content to prepare inserts or an on-line read me file in the Bundled UIT Products, at UIT's expense, for inclusion with the Bundled UIT Product. The on-line read me file will be activated prior to the AT&T WorldNet Software being installed. UIT shall supply AT&T with a master copy of such inserts or on-line read me file. 4.2.2 AT&T may request UIT to revise the inserts or on-line read me file at any time provided AT&T gives UIT 30 days notice prior to such revision appearing in the next Scheduled Update of the Bundled UIT Product. 4.2.3 If UIT wishes to modify the inserts or an on-line read me file in any way, such a modification must be reviewed and approved in writing by AT&T before an initial run of actual copies of such modified Inserts or an on-line read me file. If AT&T has not approved such modified insert or an on-line read me file and UIT prepares such inserts or an on-line read me file, UIT shall be liable to AT&T for any damages, claims, etc., which may result from such modified inserts or an on-line read me file. 4.3 Required Product Packaging. UIT shall be required to identify the AT&T -------------------------- WorldNet Software and the Service on its product packaging as follows: 4.3.1 the AT&T WorldNet mark, solely as depicted in an AT&T approved representation to be provided by AT&T, must appear on the outside of the Bundled UIT Product package, such depiction may be via a sticker; 4.3.2 the AT&T WorldNet mark, solely as depicted in an AT&T approved representation to be provided by AT&T, must appear in the operating system program group or desk top; 4.3.3 the AT&T WorldNet mark must not appear any less prominently than any other Third Party Mark (excepting Developer Marks) used on the Bundled UIT Product or its packaging; and 4.3.4 the Bundled UIT Product package and documentation must state that the AT&T WorldNet Service is only available in the United States as of the Effective Date. 4.4 Customer Care. AT&T will provide all technical support and customer ------------- care functions for End Users of the Service and the AT&T WorldNet Software and UIT will provide all technical support and customer care for users of Bundled UIT Products. 4.5 Public Announcements and Promotional Materials. AT&T and UIT shall ---------------------------------------------- cooperate so that each party may issue press releases concerning this Agreement, provided that each party must approve any 4 AT&T/UIT-Confidential press release prior to its release. The parties shall cooperate in their development of marketing and sales materials used to promote the distribution of Bundled UIT Products. 4.6 Terms Relating to Distribution. UIT agrees to comply with and shall ------------------------------ require its Distributors to comply with all applicable laws, rules and regulations to preclude the acquisition of unlimited rights to technical data, software and documentation provided with the Service to a governmental agency, and ensure the inclusion of the appropriate "Restricted Right" or "Limited Rights" notices required by the U.S. Government agencies. UIT acknowledges that this Agreement grants distribution rights only within the Territory. UIT acknowledges that the Service is only provided within the United States. 4.7 No Modification of End User Agreements. UIT and its Distributors shall -------------------------------------- not remove, alter or otherwise interfere with the distribution and delivery of any End User license agreements packaged, distributed, or otherwise associated with the AT&T WorldNet Software and/or Service. 4.8 Icon Development. AT&T permits UIT to develop a UIT Icon to appear in ---------------- UIT's desktop application software which will take an End User directly to UIT's home page using the Service. Such Icon shall be labeled "UIT Home Page" and shall solely be promoted and used by UIT to enable End Users to gain "one- button" access to UIT's home page. In no event shall UIT be permitted to market, promote or label such Icon as a means for obtaining Internet access generally or in association with the AT&T brand or the AT&T globe. Nothing herein shall be deemed to authorize UIT to make any Derivative Works of the AT&T WorldNet Software or the Service. 5. PRODUCT DELIVERABLES AND UPDATES 5.1 Delivery of Software and Updates. Promptly after the Effective Date, -------------------------------- AT&T shall provide UIT with access to the AT&T proprietary alliance marketing site to enable UIT to download the AT&T WorldNet software and any Updates to the AT&T WorldNet Software. 5.2 Integration Development. Commencing on the Effective Date of this ----------------------- Agreement and throughout its Term, UIT agrees to develop, test and integrate the AT&T WorldNet Software as a component of each different Bundled UIT Product to enable users of Bundled UIT Products to access and register for the Service using the AT&T WorldNet Software. 5.3 Requirement for Testing (AT&T WorldNet Software). Within 60 days of ----------------------------------------------- execution of this Agreement UIT shall cause each Bundled UIT Product listed in Attachment A to be bundled with AT&T WorldNet Software and comply in all respects with the AT&T WorldNet Service Integration Check-List. 5.4 Requirement for Testing (UIT Updates). On the date on which UIT makes ------------------------------------- any Update to a Bundled UIT Product generally available to customers, UIT shall cause each Bundled UIT Product generally available to customers. UIT shall cause each Bundled UIT Product to which the Update pertains to comply in all respects with the AT&T WorldNet Service Integration Check-List. 5.5 AT&T Testing. AT&T will test the Bundled UIT Products for compliance with ------------ the AT&T WorldNet Service Integration Check-List. UIT shall send Bundled UIT Product to be tested to: Brian Curtin c/o On Demand Solutions, 30A Upton Drive, Wilmington, Massachusetts, 01887, Voice 978-658-7709 x326 Fax: 978-658-7721, e-mail: Brian@o-ds.com. UIT Shall send all associated marketing, Insert, packaging, etc. to: Sharon Love c/o, AT&T WorldNet Service, 295 N. Maple Avenue- Rm. 224F3F, Basking Ridge, NJ 07920, Voice: 908-221-6811, FAX: 908-630-1100, E- mail: smlove@att.net. Within five (5) business days of receipt of the Bundled UIT Product, appropriate documentation and completed AT&T WorldNet Service Integration Check-List, AT&T will provide the test results. If a Bundled UIT Product fails to satisfy the applicable certification and testing requirements, AT&T will specify the reason for the failure. UIT shall use all commercially reasonable efforts to cause any Bundled UIT Product which fails AT&T random testing to comply with the AT&T WorldNet Service Integration Check-List, and UIT shall promptly re-submit such failed Bundled UIT Product for re-testing. Compatibility certification shall be valid only for the specific version of a Bundled UIT Product and the specific version of the AT&T WorldNet Software for which such Bundled UIT Product was tested. 5.6 AT&T WorldNet Software Updates. AT&T shall provide UIT with notification ------------------------------ that Updates to the AT&T WorldNet software are available on the AT&T proprietary marketing site. All Updates to the AT&T WorldNet Software shall be incorporated into the next Scheduled Update to the Bundled UIT Product(s). Subject to UIT's right to exhaust all of its existing inventory pursuant to Section 5.8, (i) UIT's rights under Section 3.1 for each of the Bundled UIT Products shall be void; and (ii) UIT must remove any AT&T Mark from all product packaging, labeling, advertising and marketing materials for each of the Bundled UIT Products, unless and until the Bundled UIT Product(s) incorporating any and all Updates have successfully completed the AT&T WorldNet Service Integration Check- List. 5.7 UIT Product Updates. Upon the release of general availability of an Update ------------------- to a Bundled UIT Product, UIT must incorporate the most updated version of the AT&T WorldNet Software into any Bundled UIT Product to which such Update pertains. 5.8 Exhaustion of Inventory. Upon notification by AT&T of any Update to the ----------------------- AT&T WorldNet Software to UIT, UIT shall no longer be permitted to reproduce or distribute pursuant to Section 3.1 versions of any Bundled UIT Product not bundled with the most current Update ("Outdated Product") which is not incorporated into the next Scheduled Update of a Bundled UIT Product, except that UIT shall be permitted to exhaust existing inventory of Outdated Product for a period of 180 days following the general release of the next Scheduled Update of a Bundled UIT Product. The parties will discuss how to handle any inventory that may exist after such period. 5.9 Internal Use. UIT grants to AT&T a royalty-free, nonexclusive license ------------ during the Term of this Agreement to use internally, solely for purposes of marketing, promotion, demonstration, testing and technical support, at least 20 samples of each different Bundled UIT Product, or such number of copies as the parties shall mutually agree upon. All such copies of Bundled UIT Products shall contain all appropriate and customary proprietary rights notices provided by UIT with such Bundled UIT Products. The license granted under this Section 5.9 expressly excludes the right to distribute Bundled UIT Products. Nothing in this Agreement shall be construed as giving AT&T any right to manufacture or otherwise make or distribute copies of Bundled UIT Products. 5.10 Updates/Service Changes. Nothing in this Agreement shall limit AT&T's ----------------------- right to change the functionality or pricing of the Service or AT&T's and its suppliers' rights to change the functionality of the AT&T WorldNet Software at any time. AT&T's or its suppliers' exercise of such rights shall not be grounds for termination of this Agreement by UIT, provided that the exercise of such rights does not adversely impact the compatibility of the AT&T WorldNet Software and the Bundled UIT Products. 6. PAYMENTS 6.1 Accrual of Payments for Prominent Placement. On the date an individual ------------------------------------------- becomes a Delivered Member through Prominent Placement in accordance with Section 3.4 on Bundled UIT Products and for a period of 90 days after termination of this agreement, provided termination is not a result of a material breach by UIT, a credit of $20.00 shall accrue to UIT. Within forty-five (45) days following the end of each calendar quarter, AT&T shall provide to UIT a quarterly report specifying the amounts of credits accrued for new Prominent Placement Delivered Members during that quarter. 6.2 Payments. Accrued payments under Section 6.1 shall be paid to UIT within -------- forty-five (45) days following the end of each calendar quarter. All payments shall be sent to the address set forth in the introductory paragraph to this Agreement, Attention: Brian Shuster. 6.3 Taxes. Each party agrees to pay for any taxes, charges or fees arising out ----- of its obligations or acts hereunder. 6 6.4 Audit. UIT shall have the right to have its representative examine ----- AT&T's records concerning Delivered Members and payments accrued to UIT during normal business hours and upon not less than ten (10) days prior written notice. Promp adjustment shall be made to compensate for any errors or omissions disclosed by such examination. 7. TRADEMARKS AND TRADE NAMES 7.1 License to AT&T Marks. Commencing on the Effective Date and subject to --------------------- the terms and conditions of Agreement, UIT is hereby granted for the remainder of the Term of this Agreement a nontransferable, nonexclusive, royalty-free restricted license extending to the Territory to market each version of each of the Bundled UIT Products as including the AT&T WorldNet Software and otherwise solely use on the Bundled UIT Products and in advertising and marketing materials thereof any AT&T Marks provided by AT&T to UIT expressly for use with Bundled UIT Products which are distributed by UIT or its Distributors in connection with this Agreement, provided that AT&T shall have given UIT written confirmation that UIT has, in form, met the requirements set forth in the AT&T Trademark/Service mark guidelines with respect to such version of the Bundled UIT Product, and provided further that such grant shall be conditioned on and subject to UIT's compliance with the requirements of Section 5 at all times. All such usage of AT&T Marks shall inure solely to the benefit of AT&T and shall not create any rights, title or interest for UIT in and to the AT&T Marks. All such usage of the AT&T Marks shall contain a notice in the following form, AT&T WorldNet(R) Service is a registered trademark of AT&T. UIT may use Third Party Marks on the Bundled UIT Products and in advertising and marketing materials thereof in connection with the permitted marketing and distribution of UIT Products under this Agreement, provided that the AT&T Marks are used at least as prominently as the Third Party Marks of any service provider or product manufacturer other than UIT, excepting Developer Marks, whose goods or services are bundled with or packaged with UIT. Upon AT&T's request from time to time UIT agrees to provide AT&T with copies of UIT Products bearing AT&T Marks so that AT&T can verify their adequate quality. UIT shall suspend use of AT&T Marks if such quality is reasonably deemed inferior by AT&T until UIT has taken such steps as AT&T may reasonably require to solve the quality deficiencies, but any such suspension of AT&T Marks usage will not result in suspension of the license to use, reproduce and distribute the AT&T WorldNet Software granted to UIT hereunder provided that UIT is diligently taking the required steps to solve the quality deficiencies. 7.2 License to UIT Marks. Commencing on the Effective Date and subject to -------------------- the terms and conditions of this Agreement, UIT hereby grants to AT&T for the Term of this Agreement a nontransferable, nonexclusive, royalty-free, restricted license extending to the Territory to use the UIT Marks solely to promote, advertise, and market the Service and the Bundled UIT Products and in advertising and marketing materials thereof and on promotional, advertising, and marketing materials in connection with the Service. AT&T shall use such UIT Marks in accordance with the guidelines provided to AT&T by UIT. All such usage of UIT Marks shall be subject to UIT's prior written approvals, shall inure solely to the benefit of UIT and shall not create any rights, title or interest for AT&T in and to the UIT Marks. AT&T agrees to cooperate with UIT in facilitating UIT's monitoring and control of the use of the UIT Marks and to supply UIT with samples of use of the UIT Marks. Except for the UIT Marks, AT&T will be the owner of all marks used solely to distribute, promote, advertise and market the Service and the goodwill related thereto and all uses thereof shall inure solely to the benefit of AT&T. 8. PROPRIETARY RIGHTS 8.1 AT&T Proprietary Rights. Title to and ownership of all copies of AT&T ----------------------- WorldNet Software and AT&T Documentation, whether in machine-readable or printed form, and including, without limitation, Derivative Works, compilations, or collective works thereof prepared by AT&T and all related technical know-how and all rights therein (including without limitation rights in patents, copyrights, and trade secrets applicable thereto), are and shall remain the exclusive property of AT&T and its suppliers. UIT shall not take any action to jeopardize, limit or interfere in any manner with AT&T's ownership of and rights with 7 AT&T/UIT-Confidential respect to the AT&T WorldNet Software and AT&T Documentation. UIT shall have only those rights in or to the AT&T WorldNet Software and AT&T Documentation granted to it pursuant to this Agreement. Nothing herein shall be deemed to affect UIT's ownership of or rights in or to any information developed or owned by, or made available by third parties to, UIT. 8.2 UIT Proprietary Rights. Title to and ownership of all copies of UIT --------------------- Product and UIT Documentation, whether in machine-readable or printed form, and including, without limitation, Derivative Works, compilations, or collective works thereof prepared by UIT and all related technical know-how and all rights therein (including without limitation rights in patents, copyrights, and trade secrets applicable thereto), are and shall remain the exclusive property of UIT and its suppliers. AT&T shall not take any action to jeopardize, limit or interfere in any manner with UIT's ownership of and rights with respect to the UIT Product and UIT Documentation. AT&T shall have only those rights in or to the UIT Product and UIt Documentation granted to it pursuant to this Agreement. Nothing herein shall be deemed to affect AT&T's ownership of or rights in or to any information developed or owned by, or made available by third parties to, AT&T. 8.3 Proprietary Notices. ------------------- 8.3.1 NO Alteration of Notices. UIT and its employees and agents ------------------------ shall not remove or alter any proper trademark, service mark, trade name, copyright, or other proprietary notices appearing on or in copies of AT&T WorldNet Software and AT&T Documentation delivered to UIT by AT&T and shall use the same notices in and on copies of UIT Products and AT&T Documentation made pursuant to Section 3.1 as are contained in and on such copies of the AT&T WorldNet Software and AT&T Documentation. 8.3.2 Notice. Each portion of the AT&T WorldNet Software and AT&T ------ Documentation reproduced by UIT or its Distributors shall include the intellectual property notice or notices appearing in or on the corresponding portion of such materials as delivered by AT&T hereunder. UIT further agrees that, to the extent that UIT prepares any Derivative Works of UIT Products Incorporating, in whole or in part, the AT&T WorldNet Software as permitted by this Agreement it will include an appropriate copyright notice of AT&T. 9. CONFIDENTIAL INFORMATION AND DISCLOSURE 9.1 Confidential Information. Each party agrees to maintain all Confidential ------------------------ Information in confidence to the same extent that it protects its own similar Confidential Information and to use such Confidential Information only as permitted under this Agreement. For purposes of this Agreement "Confidential Information" shall mean confidential or proprietary technical or business Information, Including this Agreement, given by the discloser of the Information to the recipient of the Information. All Information which is disclosed by one party to the other in connection with this Agreement or received from the proprietary Alliance member website (whether orally, in writing or by any other means or media) shall automatically be deemed proprietary to the discloser of the Information and subject to this Agreement, unless otherwise confirmed in writing by the discloser of the Information. Each party agrees to take all reasonable precautions to prevent any unauthorized disclosure or use of Confidential Information Including, without limitation, disclosing Confidential Information only to its employees and in the case of AT&T its Affiliates and in the case of UIT its Distributors (a) with a need to know to further permitted uses of such Information and (b) who are parties to appropriate agreements sufficient to comply with this Section 9, and (o) who are Informed of the nondisclosure/non-use obligations imposed by this Section 9, and both parties shall take appropriate steps to implement and enforce such non-disclosure/non- use obligations. The foregoing restrictions on disclosure and use shall survive for 3 years following termination of this Agreement but shall not apply with respect to any Confidential Information which (i) was or becomes publicly known through no fault of the receiving party: (ii) was rightfully known or becomes rightfully known to the receiving party without confidential or proprietary restriction from a source other than the disclosing party; (iii) is independently developed by the receiving party without the participation of Individuals who have had access to the Confidential Information; (iv) is approved by the disclosing party. 8 AT&T/UIT-Confidential for disclosure without restriction in a written document which is signed by a duly authorized officer of such disclosing party; and (v) the receiving party is legally compelled to disclose; provided, however, that prior to any such compelled disclosure, the receiving party will (a) assert the privileged and confidential nature of the Confidential Information against the third party seeking disclosure and (b) cooperate fully with the disclosing party in protecting against any such disclosure and/or obtaining a protective order narrowing the scope of such disclosure and/or use of the Confidential Information. In the event that such protection against disclosure is not obtained, the receiving party will be entitled to disclose the Confidential Information, but only as and to the extent necessary to legally comply with such compelled disclosure. 9.2 Member Information. UIT agrees that all information concerning ------------------ customers who subscribe to the Service (including quantities or percentages of such Members who sign up through UIT Products) is the Confidential Information of AT&T. AT&T shall include in its quarterly reports pursuant to Section 6 the number of Delivered Members registered for the Service during the quarter in connection with which the quarterly report is issued. 10. REPRESENTATIONS AND WARRANTIES 10.1 No Warranty. EXCEPT AS MAY BE PROVIDED IN THE AT&T MEMBER AGREEMENT ----------- OR ANY END USER LICENSE AGREEMENT ASSOCIATED WITH THE AT&T WORLDNET SOFTWARE, AT&T MAKES NO REPRESENTATIONS OR WARRANTY OF ANY KIND WHETHER EXPRESS OR IMPLIED (EITHER IN FACT OR BY OPERATION OF LAW) WITH RESPECT TO THE AT&T WORLDNET SOFTWARE OR ANY OTHER PRODUCT OR SERVICE RELATED THERETO. AT&T EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. AT&T DOES NOT WARRANT, FOR EXAMPLE, THAT THE AT&T WORLDNET SOFTWARE OR ANY OTHER PRODUCT OR SERVICE RELATED THERETO IS ERROR-FREE OR THAT OPERATION OF THE AT&T WORLDNET SOFTWARE OR ANY PRODUCTS OR SERVICES RELATED THERETO WILL BE SECURE OR UNINTERRUPTED. THERE IS ALSO NO IMPLIED WARRANTY OF NONINFRINGEMENT: THE SOLE REMEDY FOR INFRINGEMENT IS PROVIDED IN SECTION 11. 10.2 Netscape Representations and Warranties. UIT acknowledges that (i) the --------------------------------------- AT&T WorldNet Software contains, as critical component thereof, a Netscape Navigator(TM) brand browser; (ii) representations and warranties are made by Netscape Communications Corp. ("Netscape") to AT&T in an agreement between Netscape and AT&T (the "AT&T/Netscape Agreement"); and (iii) AT&T has the right to fulfill any and all of its obligations to UIT under this Agreement by exercising its right under the AT&T/Netscape Agreement and securing performance of such obligations by Netscape. 10.3 Microsoft Representations and Warranties. UIT acknowledges that (i) the ---------------------------------------- AT&T WorldNet Software contains, as a critical component thereof, an Internet Explorer(TM) brand browser; (ii) representations and warranties are made by Microsoft Communications Corp. ("Microsoft") to AT&T in an agreement between Microsoft and AT&T (the "AT&T/Microsoft Agreement"); and (iii) AT&T has the right to fulfill any and all of its obligations to UIT under this Agreement by exercising its rights under the AT&T/Microsoft Agreement and securing performances of such obligations by Microsoft. 10.4 UIT Representations and Warranties. UIT warrants and represents to AT&T ----------------------------------- that: (i) UIT owns or has licensed, and will own or have licensed, the UIT Products and UIT Marks and all necessary Intellectual Property right therein, and has and will have the full power and authority to license and deliver copies of the UIT Products and, to UIT's knowledge, UIT Products do not contain Viruses. 9 AT&T/UIT-Confidential 10.5 Testing Representations Warranties. UIT represents and warrants that the ---------------------------------- Bundled UIT Product referenced in such notice: (i) is ready for release for general distribution; (ii) has been adequately and extensively tested; (iii) has been fixed to correct any major errors affecting its functionality which have been detected by UIT or its customers; (iv) is subject to ongoing support, error detection and correction; and (v) complies in all respects with the AT&T WorldNet Service Integration Check-List. AT&T shall have the right, but not the obligation, to participate in any such testing with UIT. 11. INDEMNIFICATION. 11.1 AT&T Indemnity. -------------- 11.1.1 Obligation. AT&T shall defend, indemnify and hold harmless UIT and ---------- its directors, officers, agents, employees and representatives, in any third party action for infringement by, or alleged infringement by, the AT&T WorldNet Software of any U.S. trademark or service mark, or any U.S. patent issued as of the Effective Date, any U.S. patent issued after the Effective Date or any copyright, or misappropriation of any trade secret by the AT&T WorldNet Software, and to pay any final judgments awarded or settlements entered into in any such action. UIT agrees that it shall notify AT&T of all threats, claims and proceedings related to any such suit promptly after such threat, claim or proceeding comes to the attention of UIT. AT&T shall have sole control of the defense and/or settlement of any such suit, and UIT shall furnish to AT&T, upon request, Information available to UIT for such defense, and shall provide AT&T with such assistance in defending such suits as is requested by AT&T. 11.1.2 Options. If UIT's use of the AT&T WorldNet Software under the ------- terms of this Agreement is, or in AT&T's opinion is likely to be, enjoined due to the type of infringement or misappropriation specified above, then AT&T may, at its sole option and expense, either (i) procure for UIT the right to continue using such the AT&T WorldNet Software under the terms of this Agreement, or (ii) modify the AT&T WorldNet Software so that it is noninfringing and substantially equivalent in function to the enjoined AT&T WorldNet Software. 11.1.3. Exceptions. The foregoing obligation of AT&T does not apply (i) ---------- with respect to versions of the AT&T WorldNet Software or portions or components thereof; (a) which are modified after shipment, if the alleged infringement relates to such modification, and if such modification was not authorized, expressly permitted or performed by AT&T; (b) which are combined with other products, processes or materials, if the alleged infringement relates to such combination and if AT&T did not authorize or expressly permit the combination; or (c) where UIT's use of the AT&T WorldNet Software is incident to an infringement not resulting primarily from the AT&T WorldNet Software or is not in accordance with the license granted under this Agreement or (ii) for use or distribution of AT&T WorldNet Software or the Service or the use of any AT&T Marks by UIT, outside the Territory or otherwise not in accordance with the terms and conditions of this Agreement. 11.1.4 Netscape Indemnity. UIT acknowledges that (i) the AT&T WorldNet ------------------ Software contains, as a critical component thereof, a Netscape NavigatorTM Internet browser; (ii) certain indemnity obligations are made by Netscape to AT&T in the AT&T/Netscape Agreement; and (iii) AT&T has the right to fulfill any and all of its indemnity obligations to UIT under this Agreement by exercising its rights under the AT&T/Netscape Agreement and securing performance by Netscape. 11.1.5 Microsoft Indemnity. UIT acknowledges that (i) the AT&T WorldNet ------------------- Software contains, as a critical component thereof, an Internet ExplorerTM Internet browser; (ii) certain indemnity obligations are made by Microsoft to AT&T in the AT&T/Microsoft Agreement; and (iii) AT&T has the right to fulfill any and all of its indemnity obligations to UIT under this Agreement by exercising its rights under the AT&T/Microsoft Agreement and securing performance by Microsoft. 11.1.6 Sole Liability. THE FOREGOING IS UIT'S SOLE AND EXCLUSIVE REMEDY -------------- WITH RESPECT TO INFRINGEMENT OR ALLEGED INFRINGEMENT OF ANY INTELLECTUAL PROPERTY. 10 AT&T/UIT-Confidential RIGHTS BY THE AT&T WORLDNET SOFTWARE, THE SERVICE OR ANY AT&T MARKS, WHETHER UNDER THEORY OR INDEMNITY, WARRANTY OR OTHERWISE. 11.2 UIT Indemnity. ------------- 11.2.1 Obligation. UIT shall defend, Indemnify and hold harmless AT&T, ---------- its Affiliates, and their respective directors, officers, agents, employees and representatives, in any third party action for infringement by, or alleged infringement by, UIT Products, UIT Marks, or any modification of the AT&T WorldNet Software by UIT (when the Infringement or alleged infringement would not be present in the AT&T WorldNet Software standing alone, as provided by AT&T), of any U.S. Third Party Mark, or any U.S. patent issued as of the Effective Date, any U.S. patent issued after the Effective Date or any copyright, or misappropriation of any trade secret by the UIT Products, and any action by any party based on a claim related to (i) defective disks or defective duplication in copies of UIT Products distributed by UIT, or (ii) the UIT Website or the use thereof and to pay any final judgements awarded or settlements entered into in any such action, AT&T agrees that it shall notify UIT of all threats, claims and proceedings related to any such suit promptly after such threat, claim or proceeding comes to the attention of AT&T. UIT shall have sole control of the defense and/or settlement of any such suit, and AT&T shall furnish to UIT upon request, information available to AT&T for such defense, and shall provide UIT with reasonable assistance. 11.2.2 Sole Liability. THE FOREGOING IS AT&TS SOLE AND EXCLUSIVE REMEDY -------------- WITH RESPECT TO INFRINGEMENT OR ALLEGED INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS BY OR RELATED TO THE UIT PRODUCTS, THE UIT MARKS, OR ANY MODIFICATION OF THE AT&T WORLDNET SOFTWARE BY UIT AND ANY PRODUCTS OR SERVICES RELATED THERETO, WHETHER UNDER THEORY OF INDEMNITY, WARRANTY OR OTHERWISE. 12. LIMITATION OF LIABILITY IN NO EVENT SHALL EITHER PARTY (OR ITS RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, SUPPLIERS, AGENTS, REPRESENTATIVES, DISTRIBUTORS OR AT&T AFFILIATES) BE LIABLE FOR ANY LOSS OF PROFITS, LOSS OF BUSINESS, LOSS OF USE OR DATA, INTERRUPTION OF BUSINESS, OR FOR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES (AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY), OR FOR ANY CLAIM AGAINST THE OTHER PARTY BY ANY THIRD PARTY, EXCEPT AS PROVIDED IN SECTION 11 ENTITLED "INDEMNIFICATION." IN NO EVENT WILL EITHER PARTY (OR ITS RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, SUPPLIERS, AGENTS, REPRESENTATIVES, DISTRIBUTORS OR AT&T AFFILIATES) BE LIABLE FOR (a) ANY REPRESENTATION OR WARRANTY MADE TO ANY THIRD PARTY BY THE OTHER PARTY (OR ITS RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, SUPPLIERS, AGENTS, REPRESENTATIVES OR DISTRIBUTORS): (b) IN THE CASE OF AT&T. (i) FAILURE OF THE AT&T WORLDNET SOFTWARE OR ANY PRODUCTS OR SERVICES RELATED THERETO TO PERFORM AS SPECIFIED HEREIN EXCEPT AS, AND TO THE EXTENT, OTHERWISE EXPRESSLY PROVIDED HEREIN, (ii) FAILURE OF THE AT&T WORLDNET SOFTWARE AND ANY PRODUCTS OR SERVICES RELATED THERETO TO PROVIDE SECURITY, OR (iii) ANY USE OF THE AT&T WORLDNET SOFTWARE OR ANY PRODUCTS OR SERVICES RELATED THERETO OR THE DOCUMENTATION FOR SAME OR THE RESULTS OR INFORMATION OBTAINED OR DECISIONS MADE BY END USERS OF THE AT&T WORLDNET SOFTWARE OR ANY PRODUCTS OR SERVICES RELATED THERETO OR THE DOCUMENTATION FOR SAME. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, EACH PARTY'S ENTIRE LIABILITY TO THE OTHER PARTY FOR DAMAGES CONCERNING PERFORMANCE OR NONPERFORMANCE BY SUCH PARTY OR IN ANY WAY RELATED TO THE SUBJECT MATTER OF THIS AGREEMENT, AND REGARDLESS OF WHETHER THE CLAIM FOR SUCH DAMAGES IS BASED IN CONTRACT OR IN TORT (INCLUDING NEGLIGENCE), SHALL NOT EXCEED AN AMOUNT EQUAL TO THE AMOUNT PAID (AND 11 OBLIGATED TO BE PAID) BY AT&T UNDER THIS AGREEMENT, NOTHING IN THIS SECTION 12 SHALL BE DEEMED TO LIMIT OR EXPAND EITHER PARTY'S RIGHTS OR LIABILITY (I) UNDER SECTION 11, (II) FOR INTELLECTUAL PROPERTY INFRINGEMENT OR MISAPPROPRIATION OF TRADE SECRETS BY EITHER PARTY OR (III) FOR BREACH OF SECTION 9 BY EITHER PARTY. IN ADDITION, THE FOREGOING PROVISIONS OF THIS SECTION 12 WILL NOT AFFECT EITHER PARTY'S LIABILITY, IF ANY, WITH RESPECT TO CONTRIBUTION OR INDEMNITY FOR THIRD PARTY CLAIMS FOR PERSONAL INJURY, DEATH, OR PHYSICAL DAMAGE TO PROPERTY. 13. TERM AND TERMINATION 13.1 Term. Unless sooner terminated under the provisions of this Section 13, or ---- otherwise rightfully terminated, this Agreement shall remain in effect for a period of one (1) year from the Effective Date. 13.2 Termination for Default. If either party defaults in any of its ----------------------- obligations under this Agreement, the non-defaulting party, at its option, shall have the right to terminate this Agreement by written notice unless, within 30 calendar days after receipt of written notice of such default, the defaulting party remedies the default, or, in the case of a default which cannot with due diligence be cured within a period of 30 calendar days, the defaulting party institutes within the 30 calendar days steps necessary to remedy the default and thereafter diligently prosecutes the same to completion. 13.3 Termination of Browser or Service. AT&T may terminate this Agreement on 60 --------------------------------- days' notice in the event AT&T determines to terminate all or a substantial part of the Service. 13.4 Effect on Rights. ---------------- 13.4.1 Termination of this Agreement by either party shall not act as a waiver of any breach of this Agreement and shall not act as a release of either party from any liability for breach of such party's obligations under this Agreement. 13.4.2 Except as specified in Sections 13.5 and 13.6 below, upon termination or expiration of this Agreement, all licenses for AT&T WorldNet Software and its Documentation granted under this Agreement shall terminate. 13.4.3 Except where otherwise specified, the rights and remedies granted to a party under this Agreement are cumulative and in addition to, and not in lieu of, any other rights or remedies which the party may possess at law or in equity, including without limitation rights or remedies under applicable patent, copyright trade secrets, or propriety rights laws, rules or regulations. 13.5 Effect of Termination. Within 30 calendar days after termination of this --------------------- Agreement, each party shall, on request by the other party, either deliver to the other party or destroy all copies of the requesting party's Confidential Information, including (in the case of UIT) AT&T WorldNet Software and Documentation (except as provided in Section 13.6) and any other materials provided by the requesting party to the other party hereunder in its possession or under its control, and shall furnish to the requesting party a certificate signed by an officer of the other party certifying that, to the best of its knowledge, such delivery or destruction has been fully effected. Notwithstanding the foregoing, and provided UIT fulfills its obligations specified in this Agreement with respect to such items, UIT may continue to use and retain copies of the AT&T WorldNet Software and Documentation to the extent, but only to the extent, necessary to support and maintain UIT Products rightfully distributed to Ender Users by UIT prior to termination of this Agreement and UIT may exhaust its existing inventory in accordance with Section 5.8. 13.6 Continuing Obligations. ---------------------- 13.6.1 Other Continuing Obligations. In addition to the foregoing, all ---------------------------- other respective rights and obligations of AT&T and UIT which by their nature survive termination of this Agreement (including without 12 UIT-PPO-RJS-June 17, 1999 limitation under the provisions of Sections 3.3, 4.7, 6, 8, 9, 10, 11, 12 and 14) shall survive termination of this Agreement. 13.6.2 Injunctive Relief. Consistent with the protection of the rights ------------------ of the party seeking injunctive relief as permitted hereunder, any injunctive relief sought by either party to enforce the obligations of the other party under this Agreement shall be structured, to the greatest extent possible, in a manner that will maintain the business operations of the party on which any such relief is imposed. 14. GENERAL PROVISIONS 14.1 Notices. Any notice required or permitted hereunder shall be in writing -------- and shall be deemed to be properly given upon the earlier of (a) actual receipt by the addressee or (b) five business days after deposit in the U.S. mail, postage prepaid, when mailed by registered or certified U.S. mail, return receipt requested, or two (2) business days after being sent via overnight courier to the respective parties at the addresses first set forth above or to such other person or address as the parties may from time to time designate in a writing delivered pursuant to this Section 14.1. Notices to AT&T shall be sent to the address set forth in the introductory paragraph to this Agreement, attention: Vice President, Law-Consumer Marketing Division. Notices at UIT shall be sent to the address set forth in the introductory paragraph to this Agreement, attention: Brian Shuster. 14.2 Waiver and Amendment. The waiver by either party of a breach of or a --------------------- default under any provision of this Agreement, shall not be construed as a waiver of any subsequent breach of the same or any other provision of the Agreement, nor shall any delay or omission on the part of either party to exercise or avail itself of any right or remedy that it has or may have hereunder operate as a waiver of any right or remedy. No amendment or modification of any provision of this Agreement shall be effective unless in writing and signed by a duly authorized signatory of AT&T and UIT. 14.3 Assignment. ----------- 14.3.1 No Assignment. Except as expressly provided herein, neither party -------------- may assign this Agreement without the prior written consent of the other party provided that either party may assign this agreement to any person or entity that acquires all or substantially all of that party's business. Such consent shall be in the sole discretion of the party requested to give consent. Any attempt to sublicense, assign or transfer (except as expressly provided herein) any of the rights, duties or obligations under this Agreement in derogation hereof shall be null and void. 14.3.2 AT&T Restructuring. By the provision of notice in accordance with ------------------- this Agreement, AT&T shall have the right to assign this Agreement and to assign its rights and delegate its obligations and liabilities under this Agreement either in whole or in part (an "Assignment") to any entity that is, or that was immediately preceding such Assignment (i) a current or former subsidiary, business unit, or division of AT&T; or (ii) an entity in which AT&T had an ownership interest. The notice of Assignment shall state the effective date thereof. Upon the effective date and to the extent of the Assignment, AT&T shall be released and discharged from all obligations and liabilities under this Agreement. Such Assignment, release and discharge shall be complete and shall not be altered by the termination of the affiliation between AT&T and the entity assigned rights or delegated obligations and liabilities under this Agreement. 14.4 Governing Law; Dispute Resolution. This Agreement and all disputes ---------------------------------- hereunder shall be governed by the substantive law of the State of New York, without regard to the conflicts of law provisions therein, and the parties hereby expressly consent to be subject to the jurisdiction of the courts of the State of New York. In the event of a dispute regarding any matter under this Agreement which cannot be resolved by the parties, the dispute shall be referred to a Vice President of AT&T and a Vice President of UIT, who will attempt to resolve the dispute within 10 business days of such referral date. If such officers resolve the dispute they shall set forth in writing the resolution. If such officers are unable to resolve the dispute within such 10 business day period, the parties shall further seek to resolve the dispute pursuant 13 AT&T/UIT - Confidential UIT-PPO-RJS-June 17, 1999 to arbitration as set forth below. All disputes hereunder which cannot be amicably resolved by the parties as described above, except those solely concerned with AT&T's intellectual property rights in the AT&T WorldNet Software or UIT's intellectual property rights in the Bundled UIT Product shall be settled exclusively by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be held in New York City, New York and shall be conducted by a single arbitrator who shall be a lawyer familiar with computer software development and license agreements. The decision of the arbitrator shall be final and binding upon the parties and may be enforced by either party in any court of competent jurisdiction. Each party shall bear the cost of preparing and presenting its case. The costs of the arbitration, including the fees and expenses of the arbitrator, will be shared equally by the parties unless the award otherwise provides. This provision shall not be construed to prohibit either party from seeking preliminary or permanent injunctive relief in any court of competent jurisdiction to the extent not prohibited by this Agreement. 14.5 Regulatory Compliance. The parties recognize that the Service may be ---------------------- subject to regulation by the Federal Communications Commission and/or state regulatory agencies. If any applicable regulation, whether now existing and hereafter enacted, requires a modification of this Agreement or the waiver of any right hereunder in order to market and offer UIT Products, and/or the Service as contemplated hereunder, the parties agree to take such reasonable actions as are required under the circumstances in order to accomplish the purposes of this Agreement. Each party shall comply with all requirements of applicable laws, ordinances, administrative rules and regulations in the performance of this Agreement, and shall take prompt action to remove or remedy any violation that occurs or is discovered during the Term of this Agreement. 14.6 RELATIONSHIP OF THE PARTIES. NO AGENCY, PARTNERSHIP, FRANCHISE, JOINT ---------------------------- VENTURE OR EMPLOYMENT IS CREATED AS A RESULT OF THIS AGREEMENT AND NEITHER UIT NOR ITS AGENTS HAVE ANY AUTHORITY OF ANY KIND TO BIND AT&T IN ANY RESPECT WHATSOEVER. 14.7 Severability. If the application of any provision or provisions of this ------------- Agreement to any particular facts of circumstances shall be held to be invalid or unenforceable by any court of competent jurisdiction, than (a) the validity and enforceability of such provision or provisions as applied to any other particular facts or circumstances and the validity of other provisions of this Agreement shall not in any way be affected or impaired thereby and (b) such provision or provisions shall be reformed without further action by the parties hereto to and only to the extent necessary to make such provision or provisions valid and enforceable when applied to such particular facts and circumstances. 14.8 Force Majeure. Either party shall be excused from any delay or failure in -------------- performance hereunder caused by reason of any occurrence or contingency beyond its reasonable control, including but not limited to, acts of God, earthquake, labor disputes and strikes, riots, war, novelty of product manufacture or other unanticipated product development problems, and governmental requirements. The obligations and rights of the party so excused shall be extended on a day-to-day basis for the period of time equal to that of the underlying cause of the delay. 14.9 Expenses. Each party shall bear its own costs and expenses in connection --------- with this Agreement, except as expressly provided herein. 14.10 Compliance with all Laws. Each party shall comply fully with all require ------------------------ ments of applicable laws, ordinances, administrative rules and regulations, including but not limited to those relating to the export of technical data, those of the United States Departments of State and Commerce and other applicable governmental agencies, and each party acknowledges that by virtue of certain security technology embedded in the AT&T WorldNet Software, the export of such software may not be legal. Further, each party agrees to comply with and require its Distributors to comply with rules and regulations to preclude the acquisition of unlimited rights to technical data, software and documentation provided with the AT&T 14 AT&T/UIT - Confidential WorldNet Software and Bundled UIT Products to a governmental agency, and ensure the inclusion of appropriate "Restricted Rights" or "Limited Rights" notices required by the U.S. government agencies. 14.11 Entire Agreement. This Agreement, including the Attachments hereto, ----------------- constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all proposals or prior agreements whether oral or written, and all communications between the parties relating to the subject matter of this Agreement and all past courses of dealing or industry custom. The terms and conditions of this Agreement shall prevail, notwithstanding any variance with any purchase order or other written instrument submitted by UIT, unless specifically agreed in writing by AT&T. AUTHORIZED SIGNATURES In order to bind the parties to this Agreement, their duly authorized representatives have signed their names below on the dates indicated. This Agreement shall be binding on both parties when signed on behalf of each party and delivered to the other party (which delivery may be accomplished by facsimile transmission of the signature pages hereto). UNITED INTERNET TECHNOLOGIES, INC. AT&T CORP. By: /s/ Brian Shuster By: /s/ Dean Colantino -------------------------- -------------------------- Brian Shuster Dean Colantino Title: President Title: Director of Sales AT&T -------------------------- WorldNet Service --------------------------- Date: June 15-99 Date: 6/29/99 -------------------------- -------------------------- Attachment A - UIT Products PlanetKids 15 AT&T/UIT - Confidential Attachment B AT&T has created the concept of "Prominent Placement". Prominent Placement is when the AT&T WorldNet Software is integrated in a prescribed manner. This document outlines the rules for achieving this preferred status. PROMINENT PLACEMENT PROFILE The following is a list of required actions the vendor must take to achieve Prominent Placement. . Install AT&T WorldNet(R) Service during your product installation Use supplied logo files for your splash screens, give it adequate visibility, and allow the user to install AT&T WorldNet Service software during your product install. Remember that our install might want the user to re-boot, so plan on making it install last. . Embed the Registration Code This feature will auto-populate (invisible to the user) the registration code filed during registration. To embed the registration code, add the two lines indicated below in the mediaxx.ini file. This file will actually be called media95.ini or media31.ini for Win95 or Win3x installations respectively. This will allow auto-population of the registration code during registration. Note that it's just one registration code. If you were given a pair of codes (AT&T LD, and other LD Company), use the AT&T LD code pair. Note - after 5/1/97, we will only be issuing one code. Here is what you need to add (if they don't already exist) to the end of Media(31/95).ini file, replacing "XXXXXXXXX" with your assigned 9 character registration code: [Registration Server] RegCodesXXXXXXXXX . Create an icon in the program group that points to the AT&T WorldNet Service software install program on you CD. For Windows-95, also create a menu item under your heading. This will allow the user to subscribe later on, if they didn't want to during the initial install. If not done, the user would have to re-install your program in order to install AT&T WorldNet Service software. The icon must be the standard AT&T WorldNet shortcut icon, and the caption should say "install AT&T WorldNet(R) Service" . Incorporate the electronic Marketing insert An electronic marketing insert is required for this program. If does come in two formats; paper and electronic. The marketing insert contains AT&T WorldNet Service warrantee information, your registration code, LD switch information, and simple user installation instructions. You must give the user the option to view it BEFORE starting the AT&T WorldNet install. It is possible that this "readme" file is already a part of AT&T WorldNets install (since we are working on it now). Please verify if it's been done before doing it again. 16 AT&T/UIT - Confidential EX-10.33 3 AGREEMENT TEEN PEOPLE MAGAZINE Exhibit 10.33 November 19, 1999 Lauren Renaud Teen People Magazine Rockefeller Center New York, NY 11020-1393 Re: Nordstrom CD-Rom Promotion Dear Lauren: As per our various conversations this document serves to bullet point the parameters of the project and set forth a preliminary schedule for a firm March 9th 2000 completion. 1. We will create from start to completion all the elements requested by Teen People based on Attachment "A" (2 pages). 2. Timeline based on attached Schedule B. 3. UIT will assign 2 project coordinators. Larry Deleon from United Internet Technologies and Liz Kieman as an outside consultant recommended by TEEN PEOPLE who will have day-to-day contact and reporting responsibility to TEEN PEOPLE, NORDSTROM and UIT on the project. Please review the attached preliminary schedule timeline and the attached spec breakdown of the project. The schedule is only a first pass, and will be adjusted over the next week as we begin the pre-production phase. Please sign the attached pages as an indication of your approval so that we can start moving forward. Because of all the holidays, the only way to meet the deadline with a level of comfort is to start by this Monday. Sincerely, /s/ Brian Shuster President 1995 Westwood Blvd. Penthouse Floor Los Angeles, CA 90025 Phone: (310)441-0800 Fax: (310) 474-7466 ATTACHMENT "A" SPECS (2 PAGES) United Internet Technologies will create, design and implement to completion the following specifics requested by Teen People: a. Design, creation and production of a 12-page "mini-magalog". The magalog will be a 4-color catalog of merchandise with TEEN PEOPLE supplied advertorial copy, appropriate for NORDSTROM target audience. The magalog will also act as a self-mailer for the CD-ROM. b. Printing of 500,000 magalog pieces. We have estimated a 5-1/2 x 7- 1/2 piece with card stock covers and inside pages. c. Third class postage and fulfillment to client supplied mail list. d. Although the primary responsibility for casting the project will be with TP, UIT will assist in casting and will also provide a facility to cast from. All casting will be done in Los Angeles. TP will pay all talent directly. e. Fashion/advertorial photography sheet of 65 original shots on location and in studio here in Los Angeles. f. We will design and produce the interactive CD-ROM based on the template you supplied. g. Links will be provided to the NORDSTROM web site. The content of the CD-ROM will include the copy and merchandise provided for the magalog, plus additional video and audio assets, provided by client. In no case, shall the overall content exceed that of the previous BP magalog. Should this occur, additional cost will be applied. Any such costs will be presented prior to expense. h. One day of blue screen video production for host talent on a sound stage. The resulting footage will be composited over interactive graphic backgrounds. The edited footage will not exceed 15 minutes in length. The overall total running time of all video on the CD-ROM will not exceed 45 minutes. i. Production schedule based on pre-production beginning Monday November 22nd. j. UIT will require that the CD-ROM carry UIT credit information page and that TEEN PEOPLE/NORDSTROM will authorize UIT to announce publicly its production involvement in creating the project for client. All such announcements are subject to the prior approval of both NORDSTROM and Teen People. k. UIT will bundle an Internet Service Provider software package as a consumer option. Revenues derived from such bundling shall accrue to United Internet Technology. l. Client shall have the option of AT&T, Earthlink or America Online. TEEN PEOPLE/NORDSTROM will supply the following: a. All approvals on a timely manner b. All talent cost including actors for all shoots, talent and any talent travel for video. c. All camera-ready wardrobe, product and featured accessories and logo art. d. Broadcast clubs of television previews, movie trailers and CD audio clips including necessary clearances. e. Copy for advertorial tips for CD and magalog, and client approved copy for product descriptions. This copy will be written and advertised by client to requirements for magalog. f. Mail list (format to be decided) EX-10.34 4 DISTRIBUTION AGREEMENT PLAYER PRODUCTS Exhibit 10.34 DISTRIBUTION AGREEMENT FOR PLAYER PRODUCTS This Distribution Agreement (the "Agreement") is made as of February 2, 2000 (the "Effective Date") by and between Liquid Audio, Inc. (Liquid Audio"), and United Internet Technologies ("United Internet Technologies") a Delaware corporation doing business at 1990 Westwood Blvd, Los Angeles, California 90025 ("Distributor"). The parties agree as follows: 1. DEFINITIONS. (a) "Bundle" means the combination of the Liquid Audio Products and the Distributor Products as packaged together or otherwise combined by Distributor for distribution where such Liquid Audio Products are included on a tangible medium. (b) "Distributor Products" means the Distributor products, as amended from time to time specified in the Distributor Products Attachment attached as Exhibit B hereto subject to amendment. - --------- (c) "End User Agreement" means Liquid Audio's standard end user agreement for the Liquid Audio Products, in such form as Liquid Audio may determine from time to time in its sole discretion. The End User Agreement is incorporated by Liquid Audio into the Liquid Audio Products and is displayed to an end user when such end user downloads or installs the Liquid Audio Products. (d) "Liquid Audio Products" means object code versions of those Liquid Audio products listed in the Liquid Audio Products Attachment attached as Exhibit A hereto and those additional Liquid Audio products, if any, that may - --------- from time to time be added by mutual written agreement of the parties, and all associated Liquid Audio end-user documentation and manuals. Any modifications, additions, or adaptations to the Liquid Audio Products that are made available to Distributor by Liquid Audio, if any, in order to customize the Liquid Audio Products for use with the Distributor Products or for any other reason will be considered part of the "Liquid Audio Products." 2. DISTRIBUTION. (a) Subject to the terms of this Agreement, Liquid Audio grants to Distributor a limited, non-exclusive, worldwide, royalty-free, non-transferable license to reproduce, market and distribute the Liquid Audio Products solely as part of the Bundle. (b) Distributor will reproduce, market and distribute all Bundles accurately and in a manner that is consistent with the "Summary of Requirements for Use of Dolby Marks" attached as Exhibit C hereto (the "Summary --------- Requirements"), and to the extent not in conflict with the Summary Requirements, consistent with the quality standards Distributor uses for its own products. Distributor will provide Liquid Audio with five (5) units of each version of the Bundle. (c) Except as specified in subsection (a) above, Distributor will have no right to make, distribute or promote any copies of the Liquid Audio Products or any portion of them, nor, except as required by law, any right to modify, decompile, recompile, disassemble, reverse engineer, or make or distribute any other form of, or derivative work from, the Liquid Audio Products, or authorize or assist any third party to do any of the foregoing. Distributor will not use the Liquid Audio Products to provide service bureau, time sharing or other computer services to third parties. All rights not expressly granted to Distributor in this Agreement are retained by Liquid Audio and its licensors. 1 (d) Distributor will submit quarterly reports to Liquid Audio fully documenting the sales and distribution of all Bundles. Distributor shall refer to Liquid Audio all inquiries and requests for additional information regarding Liquid Audio products. (e) All licenses of the Liquid Audio Products to Distributor's customers shall be subject to an End User Agreement and shall run directly from Liquid Audio to such customers. (f) Distributor may appoint sub-distributors upon providing reasonable advance written notice to Liquid Audio. Each sub-distributor (a "Sub-Distributor") shall execute an agreement with Distributor that includes terms and conditions at least as protective of Liquid Audio's, and its licensors', rights in the Liquid Audio Products and in all related intellectual property, as the terms and conditions of this Agreement. (g) Distributor shall provide Liquid Audio with samples of all advertising and promotional materials and documentation to the extent that they relate to the Liquid Audio Products, and prior to any use, Distributor must request Liquid Audio's written approval of all such materials and documentation and Liquid Audio must provide such approval or denial within 48 hours. If Liquid Audio does not provide such written approval or denial within 48 hours from the time request is received by Liquid Audio, approval shall be deemed made by Liquid Audio. 3. INTERNET MARKETING. All marketing of the Liquid Audio Products by Distributor over the Internet shall be accomplished by means of Distributor providing its customers with access to a World Wide Web page containing a hypertext link pointing to a URL address specified by Liquid Audio. The address will specify a web page which will allow such customers to download the Liquid Audio Products in accordance with Liquid Audio's then-current terms and procedures. 4. DELIVERY OF LIQUID AUDIO PRODUCTS. Liquid Audio will deliver to Distributor a master copy of the Liquid Audio Products within ten (10) days of the Effective Date of this Agreement. 5. WARRANTIES; SUPPORT AND SERVICES. (a) Liquid Audio will warrant the Liquid Audio Products directly to Distributor's end user customers in accordance with the terms and conditions of the End User Agreement. (b) THE WARRANTIES OF LIQUID AUDIO IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. (c) Subject to payment by Distributor's end user customers of Liquid Audio's then-current maintenance and support fees, Liquid Audio will provide Distriubutor's end user customers of the Bundle with the same level and extent of service and support that Liquid Audio generally provides to its other end user customers of the Liquid Audio Products. 6. COPYRIGHT NOTICES/TRADEMARKS. Subject to the terms of this Agreement, Liquid Audio grants to Distributor a non-exclusive, non-transferable, worldwide license to use the Liquid Audio trademarks set forth on the Liquid Audio Products Attachment (the "Trademarks") and to use the Dolby Marks, as defined in the Summary Requirements attached hereto, solely in connection with marketing and distribution of the Bundle and the marketing of Liquid Audio products on the Internet. Distributor agrees to prominently incorporate the Trademarks on the packaging and on all promotional materials and documentation for the Liquid Audio Products. Distributor's use of the Trademarks under this Agreement will be subject to Liquid Audio's then current trademark usage guidelines. Distributor will not seek to register the Trademarks in any jurisdiction. Distributor will at all times comply with the terms of the Summary Requirements. 7. TERM. This Agreement will commence on the Effective Date and will continue in effect unless earlier terminated by the parties as provided herein. 8. PROPRIETARY RIGHTS AND CONFIDENTIALITY. (a) Distributor will at all times respect, protect, and not infringe upon Liquid Audio's or its licensor's patents, copyrights, trade secrets, trademarks, or other proprietary rights. Distributor will not obscure, and will accurately reproduce any serial numbers or patent, trademark or copyright notices, on and in the Liquid Audio Products. Distributor will not include trade names or trademarks of Liquid Audio in any trade name under which such party does business. (b) Distributor acknowledges that the Liquid Audio Products contain proprietary trade secrets and confidential information (collectively, "Confidential Information"). Distributor agrees that: (i) it will not disclose to any third party or use any Confidential Information except as expressly permitted in this Agreement, and (ii) it will take all reasonable measures to maintain the confidentiality of all Confidential Information in its possession or control, which will in no event be less than the measures it uses to maintain the confidentiality of its own information of similar importance. Confidential Information will not include information that (i): is in or enters the public domain without breach of this Agreement; (ii) the Distributor lawfully receives from a third party without restriction on disclosure and without breach of a nondisclosure obligation; or (iii) the Distributor develops independently based on its written records. Distributor acknowledges that any breach of this Section 8(b) would cause irreparable harm to Liquid Audio, and that without limiting Liquid Audio's remedies hereunder, in such event Liquid Audio shall be entitled to injunctive and other appropriate equitable relief. 9. RELATIONSHIP OF THE PARTIES. The relationship between Distributor and Liquid Audio will be that of licensor and licensee, as independent contractors. Nothing contained in this Agreement will constitute Distributor the partner, broker, employee or agent of or for Liquid Audio. Neither party hereto will have any right to make any warranties or to incur any liabilities or obligations on behalf of or binding upon the other party, or the other party's licensors. 10. REPRESENTATIONS AND WARRANTIES. (a) Liquid Audio represents and warrants that (i) it has all necessary corporate right, power and authority to enter into this Agreement and perform its obligations hereunder; (ii) this Agreement is valid, binding and enforceable against Liquid Audio; and (iii) the Liquid Audio Products do not infringe or violate any copyright or trade secret of any third party. 11. INTELLECTUAL PROPERTY INDEMNIFICATION. (a) Liquid Audio will defend, hold harmless and indemnify Distributor from and against all third party claims, damages, costs, or expenses (including reasonable attorneys' fees) suffered or incurred by Distributor in connection with a breach of Liquid Audio's representations and warranties set forth in Section 10(a) above ("Warranty Claims"), provided that Distributor will promptly notify Liquid Audio of any Warranty Claims, will cooperate with Liquid Audio in good faith in the defense of such claims, and will permit Liquid Audio to have sole control of the defense of any Warranty Claims. (b) If Distributor's use of any of the Liquid Audio Products under the terms of this Agreement is, or in Liquid Audio's option, is likely to be, enjoined in connection with a Warranty Claim, then Liquid Audio may, at its sole option and expense, either: (1) procure for Distributor the right to continue using such products under the terms of this Agreement; or (ii) replace or modify such products so that they are noninfringing and substantially equivalent in function to the enjoined products; or (iii) if options (i) and (ii) above cannot be accomplished despite the reasonable efforts of Liquid Audio, then Liquid Audio may terminate Distributor's rights, and Liquid Audio's obligations, under this Agreement with respect to such products. (c) Liquid Audio will have no obligations under this Section with respect to infringement or misappropriation arising from: (i) modifications to products that were not authorized by Liquid Audio (ii) product specifications requested by Distributor, or (iii) the use of products in combination with products not provided by Liquid Audio. (d) THE FOREGOING ARE LIQUID AUDIO'S SOLE AND EXCLUSIVE OBLIGATIONS AND DISTRIBUTOR'S SOLE AND EXCLUSIVE REMEDIES WITH RESPECT TO INFRINGEMENT OR MISAPPROPRIATION OF INTELLECTUAL PROPERTY RIGHTS. 12. LIMITATIONS OF LIABILITY AND REMEDIES. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES OR LOST PROFITS OR LOST SAVINGS SUFFERED BY THE OTHER PARTY, ITS CUSTOMERS, AFFILIATES, OR CONTRACTORS, OR ANY OTHER PERSON OR ENTITY, EVEN IF SUCH PARTY OR ITS AGENTS ARE MADE AWARE OF THE POSSIBILITY OF SUCH DAMAGES. 13. INDEMNIFICATION. With the exception of claims indemnified by Liquid Audio in accordance with Section 11 above, Distributor shall defend, indemnify and hold harmless Liquid Audio from and against all claims, damages, costs or expenses (including reasonable attorney's fees) suffered or incurred by Liquid Audio as a result of Distributor's, or its Sub-Distributor's, acts or omissions when performing under this Agreement. Distributor may not enter into any settlement agreement on behalf of Liquid Audio without Liquid Audio's prior written consent. 14. ASSIGNMENT AND SUBLICENSE. This Agreement will bind each party and its successors and permitted assigns but will not be assignable or delegable by such party except with the other party's prior written consent. Any such purported assignment or delegation in contravention of the foregoing will be void. Any merger, sale of all or substantially all assets or business, or transfer of control of either party will not constitute an assignment requiring the consent of the other party. 15. DEFAULT AND TERMINATION. Either party may terminate this Agreement for any reason upon providing thirty (30) days written notice to the other party. This Agreement may be terminated by a party if the other party materially fails to perform or comply with this Agreement or any provision hereof. Termination will be effective thirty (30) days after notice of termination to the defaulting party if the applicable event(s) of default has not been cured within such thirty (30) day period. 16. OBLIGATION UPON TERMINATION (a) Within thirty (30) days of the termination or expiration of this Agreement, Distributor will return to Liquid Audio or destroy, and remove from its computer systems, all copies of Liquid Audio Products, and all materials containing trade secrets or Confidential Information of Liquid Audio (as specified in Section 8(c)), except pursuant to subsection (b) below. (b) From and after termination or expiration, Distributor will not use internally nor employ any Liquid Audio Product as part or portion of any product that Distributor may use, sell, assign, lease, license, or transfer to third parties, except that for a period of one hundred twenty (120) days after the Effective Date of any such termination or expiration, Distributor shall retain the right to dispose of Liquid Audio Products as part of the Bundles remaining in its inventory prior to the date of such termination or expiration in accordance with the terms of this Agreement. Except for such limited disposal right all licenses granted hereunder shall immediately terminate upon any termination or expiration of this Agreement. Distributor shall have no such disposal right in the event that this Agreement is terminated by Liquid Audio as a result of a breach by Distributor. (c) No termination or expiration hereof for any reason will lessen or affect the obligations of each party under provisions hereof which by their terms continue after the termination or expiration of this Agreement (including Sections 8 through 17), and all such provisions and obligations will fully survive and continue thereafter. 17. MISCELLANEOUS Distributor shall ensure that the export of all Liquid Audio Products is in compliance with the export control laws of the United States and all other nations and territories. All notices, authorizations, and requests in connection with this Agreement will be deemed given on the earlier of: (i) actual receipt; (ii) the third day following deposit in the U.S. mails, postage prepaid, certified or registered, return receipt requested; or (iii) the business day after they are sent by overnight courier or national express mail, charges prepaid, with a confirming fax, to the address first specified above. This Agreement will be governed by and construed in accordance with the laws of the State of California, except for its conflict of laws rules. If any provision of this Agreement is determined to be invalid or unenforceable to any extent when applied to any person or circumstance, the remainder of this Agreement and the application of such provision to other persons or circumstances or to another extent will not be affected and will remain in full force. If either party employs attorneys to litigate any rights arising out of or relating to this Agreement, the prevailing party will be entitled to recover its reasonable attorneys' fees, costs and other expenses. No waiver of any breach of any provision of this Agreement will constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof, and no waiver will be effective unless made in writing and signed by an authorized representative of the waiving party. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements or communications regarding such subject matter. This Agreement may not be modified except by a written agreement signed on behalf of the parties. This Agreement may be signed in counterparts. IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. United Internet Technologies, Inc. LIQUID AUDIO, INC. By: /s/ Christopher Riley By: ----------------------------- ------------------ Name: Christopher Riley Name: ----------------------------- ------------------ Title: CFO Title: ----------------------------- ------------------ 5 EXHIBIT B Distributor Products Attachment Project 1: TITLE: BP.-ROM SPRING 2000 - ----- DESCRIPTION: - ----------- Interactive CD-Rom for Nordstrom Stores and Teen People Magazine. This CD-ROM release is a "magalog" (magazine-catalog) of Nordstrom junior department fashion from its BP department (formerly known as Brass Plum). Teen People Magazine is a co-branded sponsor supplying editorial content and promotional content from music labels, television networks and movie studios. BP.ROM is targeted to Nordstrom cardholder customers who shop at BP, and Teen People subscribers in the Nordstrom markets. 600,000 CDs are being direct mailed to this list the week of March 6, 2000, with an additional 15,000 disks sent to all 72 Nordstrom stores for distribution in the BP department. The promotion also receives in-store video promotion. BP.ROM also contains a bundled subscriber offer for America Online service. EX-21.1 5 SUBSIDIARIES OF UNITED LEISURE EXHIBIT 21.1 SUBSIDIARIES OF UNITED LEISURE CORPORATION ------------------------------------------ Set forth below is a list of all subsidiaries of United Leisure Corporation, indicating their jurisdictions of incorporation. Name Jurisdiction of Incorporation ---- ----------------------------- Camp Frasier, Inc. California LCS Tours, Inc. Delaware Lion Country Safari, Inc. -- California Florida Planet Kids, Inc. California Planet Kids Learning Centers, Inc. Delaware United Internet Technologies, Inc. Delaware EX-23.1 6 CONSENT OF HOLLANDER, LUMER & CO., LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in Registration Statement No.333-30128 of United Leisure Corporation on Form S-3 of our report dated March 17, 2000 appearing in this Annual Report on Form 10-KSB of United Leisure Corporation for the year ended December 31, 1999. /s/ Hollander, Lumer & Co. LLP ------------------------------ Hollander, Lumer & Co. LLP Los Angeles, California March 27, 2000 EX-27.1 7 ARTICLES 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1,998,059 0 88,540 0 0 2,276,834 181,765 0 3,582,495 1,085,898 0 0 0 161,468 2,335,129 3,582,495 1,377,770 1,377,770 3,087,736 5,442,834 (305,366) 0 422,049 (4,181,747) 0 (4,181,747) 0 0 0 (4,181,747) (0.27) (0.27)
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