-----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, Bf+Qf6frrHX6j49BvlrSZgXQ5+ShY2buZCxyKIZxdLlyr1A0EEiYEEGAn6JfCxVQ WKpUAHjoN46oydk+zljKgw== 0001021890-96-000012.txt : 19961023 0001021890-96-000012.hdr.sgml : 19961022 ACCESSION NUMBER: 0001021890-96-000012 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 6 REFERENCES 429: 033-98578 FILED AS OF DATE: 19961021 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LASER STORM INC CENTRAL INDEX KEY: 0001001879 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 841139159 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-14525 FILM NUMBER: 96645837 BUSINESS ADDRESS: STREET 1: 7700 CHERRY CREEK SO DR STREET 2: UNIT 301 CITY: DENVER STATE: CO ZIP: 80231 BUSINESS PHONE: 3037518545 MAIL ADDRESS: STREET 1: 7700 CHERRY CREEK S DR STREET 2: UNIT 301 CITY: DENVER STATE: CO ZIP: 80231 SB-2 1 REGISTRATION STATEMENT ON FORM SB-2 As Filed with the Securities and Exchange Commission on October 21, 1996 Registration No. 333- -------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM SB-2 REGISTRATION STATEMENT* UNDER THE SECURITIES ACT OF 1933 ------------------------- LASER STORM INC. -------------------------------------------- (Name of small business issuer in its charter) Colorado 9504 84-1139159 --------------------- -------------------------- ------------------ (State or jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification No.) organization) Robert J. Cooney 7808 Cherry Creek South Drive, 7808 Cherry Creek South Drive, Unit 301 Unit 301 Denver, Colorado 80231 Denver, Colorado 80231 (303) 751-8545 (303) 751-8545 ------------------------------- ----------------------------------- (Address and telephone number of (Name, address and telephone number principal executive offices and of agent for service) address of principal place of business) With Copies to: Thomas S. Smith, Esq. Smith, McCullough & Ferguson, P.C. 1610 Wynkoop Street, Suite 300 Denver, Colorado 80202 (303) 892-6000 Approximate date of proposed sale to the public: As soon as practicable following the date on which the Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the Prospectus is expected to be made pursuant to Rule 434 under the Securities Act, please check the following box. [ ] *Pursuant to Rule 429 adopted under the Securities Act of 1933, this Registration Statement also constitutes Post-Effective Amendment No. 1 to Registration Statement No. 33-98578.
CALCULATION OF REGISTRATION FEE Proposed Proposed Maximum Maximum Amount of Title of Each Class of Amount to be Offering Price Aggregate Registration Securities To Be Registered(1) Registered Per Share(2) Offering Price Fee(2) - ------------------------------ ------------ -------------- ---------------- ------------ Common Stock, $0.001 par value.......... 32,500 Shares $2.3125 $75,156.25 $100 Total ..................... $100
(1) Does not include the Units, shares of Common Stock and Warrants previously registered pursuant to Registration Statement No. 33-98578. (2) In accordance with Rule 457(c) under the Securities Act of 1933, as amended, the registration fee is the minimum fee based on the average of the high and low prices of the Registrant's Common Stock reported on the Nasdaq Small-Cap Market on October 15, 1996. The Registrant hereby deregisters 71,929 Units and 71,929 shares of Common Stock which were registered pursuant to Registration Statement No. 33-98578, for issuance based upon an estimated amount of dividends which could be converted into Units upon conversion of outstanding Series A and Series B 12% Convertible Preferred Stock. After the conversion of all outstanding Series A and Series B 12% Convertible Stock, together with the actual accrued and unpaid dividends thereon, which were converted into Units at the close of the Company's public offering on April 26, 1996, there remained 71,929 Units and 71,929 shares of Common Stock which had been registered but were not necessary to be issued upon such conversion. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ii LASER STORM, INC. Cross Reference Sheet PART I INFORMATION REQUIRED IN THE PROSPECTUS
Item Number Form SB-2 Item Number Caption or Location in Prospectus - ------ --------------------- --------------------------------- 1. Front of Registration Statement and Outside Front of Registration Statement and Outside Front Cover of Prospectus Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages of of Prospectus Prospectus 3. Summary Information and Risk Factors Prospectus Summary and Risk Factors 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Risk Factors 6. Dilution Not Applicable 7. Selling Security Holders Selling Security Holders 8. Plan of Distribution Plan of Distribution 9. Legal Proceedings Litigation 10. Directors, Executive Officers, Promoters and Management Control Persons 11. Security Ownership of Certain Beneficial Principal Shareholders Owners and Management 12. Description of Securities Description of Securities 13. Interests of Named Experts and Counsel Not Applicable 14. Disclosure of Commission Position on Not Applicable Indemnification for Securities Act Liabilities 15. Organization Within Last Five Years Not Applicable 16. Description of Business Business 17. Management's Discussion and Analysis or Management's Discussion and Analysis or Plan Plan of Operation of Operations 18. Description of Property Business 19. Certain Relationships and Related Certain Transactions Transactions 20. Market for Common Equity and Related Outside Front Cover Page of Prospectus, Risk Stockholder Matters Factors, Dividend Policy 21. Executive Compensation Management 22. Financial Statements Financial Statements 23. Changes In and Disagreements With Not Applicable Accountants on Accounting and Financial Disclosure
iii PROSPECTUS 2,382,571 Shares of Common Stock and 629,961 Units Consisting of 629,961 Shares of Common Stock and 629,961 Warrants -------------------------------- This Prospectus relates to (i) the issuance of 1,495,000 shares of the Company's Common Stock upon the exercise of redeemable Common Stock Purchase Warrants (the "Warrants") issued in the public offering of Laser Storm, Inc. ("Company") in April 1996, (ii) the resale by the holders (the "Selling Security Holders") named herein, for their own accounts, of up to 629,961 Units of the Company, each Unit consisting of one share of Common Stock and one Warrant, and (iii) up to an additional 887,571 shares of Common Stock (hereinafter sometimes collectively referred to as the "Securities"). Of the additional 887,571 shares of Common Stock, 225,000 shares of Common Stock are issuable upon exercise of options held by two persons, 630,071 shares of Common Stock are issuable upon exercise of the Warrants contained in the Units, and 32,500 shares of Common Stock are currently outstanding. The Securities are not being underwritten in this offering, and the Company will not receive any proceeds from their sale, although the Company will receive up to approximately $737,500 upon exercise of the options and up to $10,624,805 upon exercise of the Warrants, of which there is no assurance. However, the holders of the options and Warrants will have to exercise them in order to sell the underlying shares of Common Stock. Brokers and dealers who propose to effect transactions in the Securities should assure themselves of the existence of appropriate exemptions from the securities registration requirements of the blue sky or securities laws of the applicable jurisdictions or effectuate such registrations in connection with any offers or sales of the Securities. AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE DISCUSSION UNDER "RISK FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1996. -------------- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. The Company Laser Storm, Inc. (the "Company") designs and manufactures interactive laser tag game systems which the Company markets under the trademark Laser Storm(R). The Company currently markets Laser Storm(R) game systems which are computer controlled, are capable of being varied to fit individual operator needs and customer demands and are designed to incorporate a themed adventure within an interactive environment emphasizing team play. Each game system is comprised of blasters, controllers, adjustable vests, headsets and targets, and may include themed arenas with special effects such as moveable colored barriers, fog, sound, specialty lighting effects, software developed by the Company and other elements. The Company's game equipment is designed to be lightweight and easy for all ages to use. The Company currently markets four different, themed game systems: Galaxy 2000(TM), Galactic Marauders(TM), Circuit Commandos(TM), and STARGATE. The Company recently has obtained a license to utilize cartoon characters owned by Marvel Characters, Inc. as part of a themed game system which the Company plans to introduce and begin to market in November 1996. See "Business--Products." In November 1995, at the International Association of Amusement Parks and Attractions (IAAPA) annual convention in New Orleans, Louisiana, the Company was awarded a First Place Best New Product award, in the category of Family Entertainment Center Ride/Attraction for the Company's STARGATE themed game system. Games typically are played in arenas ranging in size from 1,000 square feet to 4,000 square feet. Additional space is required for support, retail sales and administration. Operators of Laser Storm(R) game systems generally charge admissions ranging from $3.00 to $7.00, and game durations can be programmed to vary from one minute to 40 minutes, but typically last 10 minutes. The Company has been developing and producing state-of-the-art themed laser tag game systems and, since its inception in March 1990 through August 1996, the Company has sold and shipped a total of approximately 180 Laser Storm(R) game systems of which 156 were sold in 42 states in the United States and of which 24 were sold for use outside of the United States. Although since its inception the Company has been engaged principally in developing, marketing and selling Laser Storm(R) game systems to independent operators, the Company also owns and operates two Laser Storm(R) game facilities and has entered into revenue sharing arrangements that are still in effect for seven Laser Storm(R) game facilities. The Company intends to increase the number of facilities in which it will have an ownership interest, or in which it will participate under a revenue sharing arrangement. The Company anticipates that the average cost of a Company-owned Laser Storm(R) facility may vary from approximately $100,000 to $500,000 based primarily on the location and size of the facility. The actual number of new Laser Storm(R) game facilities that the Company will be able to acquire and open also will depend on the percentage interest the Company will have in each facility. No assurance can be given that the Company will be successful in its plans to acquire, open and operate additional Laser Storm(R) game facilities. See "Risk Factors." Because of substantially greater than expected expenditures incurred by the Company in connection with the development of an earlier version of a laser tag game system, the Company elected in November 1992 to file for reorganization under Chapter 11 of the United States Bankruptcy Code. In November 1993, the Company's Plan of Reorganization was confirmed, and, in November 1994, the court ordered the proceedings to be closed. The Company was incorporated under the laws of the state of Colorado in March 1990 under the name "The Crimson Corporation--a Holding Company" and, in November 1994, changed its name to "Laser Storm, Inc." 2 In April 1996, the Company completed an initial public offering of 1,495,000 Units from which the Company realized net proceeds of approximately $4,200,000. Each Unit contained one share of Common Stock and one Warrant to purchase one share of Common Stock initially at $5.00 per share. See "Management's Discussion and Analysis or Plan of Operations." The Units were initially, but are no longer, quoted on the Nasdaq Small-Cap Market. The Common Stock and Warrants are currently quoted separately. The Company's executive offices are located at 7808 Cherry Creek South Drive, Unit 301, Denver, Colorado 80231 and its telephone number is (303) 751-8545. 3 This Offering
Securities Offered by the Company.................... 1,495,000 shares of Common Stock issuable upon exercise of Warrants. Securities Offered for the Accounts of Selling Security Holders............ 887,571 shares of Common Stock and 629,961 Units consisting of 629,961 shares of Common Stock and Warrants. Use of proceeds...................................... The Company will not receive any proceeds from the sale of the Securities. Any proceeds which the Company may receive upon exercise of the Warrants or options will be used for general corporate purposes. Risk Factors ........................................ An investment in the Units and Common Stock involves a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. Prospective investors should review carefully the entire Prospectus and should consider, among other things, the matters described in "Risk Factors." NASDAQ trading symbols .............................. Common Stock: LAZR Warrants: LAZRW The Units are no longer quoted on the Nasdaq Small-Cap Market. - -------------------
4 Summary Financial Information (Dollars in thousands, except per share data) The following summary financial data for the periods set forth below have been derived from the Company's financial statements included elsewhere in this Prospectus. The summary financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition or Plan of Operations and the Financial Statements and the related Notes thereto included elsewhere in this Prospectus. The data for the six months ended June 30, 1995 and 1996 and as of June 30, 1996, is derived from unaudited financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of financial position, results of operations and cash flows for the unaudited periods have been made.
Fiscal Year Ended Six Months Ended December 31, June 30, ---------------------- -------------------- 1994 1995 1995 1996 ------ ------ ------ ----- Statement of Operations Data: Revenue ............................................................. $ 2,787 $ 5,478 $ 2,169 $ 2,879 Costs and expenses .................................................. 3,004 5,255 2,120 3,028 Net income (loss)(1) ................................................ (217) 223 47 (72) Net income (loss) applicable to common shareholders ................. (217) 205 47 (118) Earnings per share applicable to common sharehold rs ................ N/A .10 .02 (.05) Net cash provided by (used in) operating activities ................. 300 (104) 223 (1,812) December 31, 1995 June 30, 1996 ------------ ------------- Balance Sheet Data: Total assets.......................................................... $ 2,023 $ 6,804 Total liabilities..................................................... 1,610 850 Shareholders' equity.................................................. 413 5,954
- ----------------------- (1) Operating income for the year ended December 31, 1995, has been reduced by approximately $270,000 that the Company accrued for a judgment and for contingent settlements of two other lawsuits. See Financial Statements. 5 RISK FACTORS An investment in the Securities is speculative in nature and involves a high degree of risk. In analyzing the offering, prospective investors should carefully consider the following risk factors, among others, which relate to this offering. Limited Operating History, Erratic Profit History, Financial Status and Operating Deficits. The Company commenced operations in March 1990. The Company had a net loss of approximately $217,000 in 1994 and earned net income of $223,000 in 1995. For the six months ended June 30, 1996, the Company's net loss was $72,000 compared with net income of $47,000 for the six months ended June 30, 1995. There are no assurances that the Company's activities will be successful or result in profits to the Company in the future. While management will endeavor to operate the Company in accordance with the objectives set forth in this Prospectus, no assurance can be given that such objectives will in fact be met or that sufficient capital will be available to accomplish such objectives. There is no assurance that additional capital will be available when needed in the future. See "Management's Discussion and Analysis or Plan of Operations." Seasonality. The Company has historically experienced and might continue to experience seasonal fluctuations in its sales of Laser Storm(R) game systems, with the most system sales typically occurring in the third calendar quarter and the least number of system sales typically occurring in the first calendar quarter. Management believes that the increased sales during the third calendar quarter are primarily attributable to customers' desires to upgrade their indoor entertainment facilities prior to the Thanksgiving and Christmas holiday season. As a result of cyclical sales, the Company's operating results could fluctuate widely from quarter to quarter and investors should put more emphasis on the Company's results for a fiscal year rather than on the Company's quarterly results. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of factors including the timing of new facility openings, revenue contributed by new facilities and increased operational and management costs relating to such new facilities. No assurance can be given that the Company will achieve consistent results on a quarterly or annual basis. Dependence Upon Management. The Company is greatly dependent on Robert J. Cooney, the Company's Chief Executive Officer, and William R. Bauerle, the Company's President, for strategic planning and its day-to-day operations. The loss of the services of either Mr. Cooney or Mr. Bauerle would likely have a significant adverse effect on the Company's business. The Company has obtained key man life insurance in the amounts of $2,000,000 each on the lives of Messrs. Cooney and Bauerle. Limited Experience in Owning and Operating Laser Storm(R) Game Facilities. The Company allocated approximately $2,800,000 of the net proceeds from its April 1996 public offering to pay the costs of acquiring existing and opening new Laser Storm(R) game facilities in which the Company will have an interest either as the owner and operator or as a participant under a revenue sharing arrangement. In July 1996 the Company acquired an existing Laser Storm(R) game facility from a nonaffiliated person for a total of $30,000 cash and 32,500 shares of the Company's Common Stock and in July 1996 the Company opened another Laser Storm(R) game facility. To date, the Company has had limited experience in owning and operating any such facilities. The Company's ownership and operation of Laser Storm(R) game facilities, as is contemplated, will require significant additional time by management of the Company and will require the Company to hire additional staff. No assurances can be given that the Company will be able to operate Laser Storm(R) game facilities at a profit. Control by Principal Shareholders. The officers and directors of the Company own approximately 26% of the outstanding shares of Common Stock. Accordingly, they are likely to continue to exercise substantial influence or control over the Company's affairs, business and election of members of the Company's board of directors. See "Principal Shareholders" and "Description of Securities." 6 Competition. Currently, the Company faces substantial competition, primarily from two other persons, for sales of systems and equipment, locations for game centers and customers. Management of the Company believes that the laser game industry is in its infancy and the Company expects additional competitors to enter the industry in the next several years. The Company expects to continue to enhance its Laser Storm(R) game systems and also intends to develop Laser Storm(R) game facilities in which the Company will have an interest, but no assurances can be given that the game enhancements or facilities will be or remain competitive with present or future products of others or facilities operated by others. See "Use of Proceeds." Uninsured Risks. Although the Company carries general liability insurance which it deems adequate for current operations, the Company's insurance may not fully cover certain risks and the occurrence of a significant event not fully insured could have a material adverse affect on the Company's financial position. Possibility that the Company is Subject to Laws Governing Sales of Franchises or Business Opportunities. Various state and federal laws define and govern the sale of "franchises" and "business opportunities." These laws require, among other things, that sellers of franchises and business opportunities register the offering of such sales with governmental authorities and provide prescribed disclosure documents to potential purchasers. Management believes that the Company's activities are not subject to such laws. If the Company's activities are deemed to involve the sale of "franchises" or "business opportunities," franchise laws permit customers who have been sold franchises in violation of such laws recourse against the franchisor, including rescission of the purchase agreements with the Company. In addition, the Company would be subject to potential government actions against the Company for violation of franchise or business opportunities laws which could result in fines, penalties, injunctions, or a combination of these, being levied against the Company. To date, the Company has received no complaints from its customers and, except as described below, no regulatory authority has notified the Company that such authority believes sales of Laser Storm(R) systems are sales of franchises or business opportunities. If a determination were made that franchise or business opportunity laws and regulations are applicable to the Company and customers or governmental regulators were successful in prosecuting actions against the Company, there could be a material adverse effect on the Company selling its Laser Storm(R) game systems in a particular market or in general and, depending upon the remedies imposed against the Company, there could be a material adverse effect on the Company's business, operating results and financial condition. Representatives of the Department of Corporations of the State of California ("Department") have advised the Company that the Department is reviewing the issue as to whether or not the prior sales by the Company of Laser Storm(R) game systems in California may have involved the sale of "franchises" under the California Franchise Investment Law ("Act"). Until the matter can be resolved with the Department or through administrative or legal proceedings, the Company will prohibit future purchasers of Laser Storm(R) game systems in California from using the Company's trademark in connection with the Company's game systems. Although the Company can provide no assurances in this regard, the Company does not believe that prohibiting future purchasers from using the Company's trademarks in California will limit future sales by the Company of the Company's game systems in California. To date, the Department has not indicated to the Company what, if any, action the Department will take against the Company if the Department determines the Company's prior sales in California involved the sale of "franchises" under the Act. Such actions may include instituting proceedings to enjoin the Company from violating the Act or to force the Company to comply with the Act, to seek restitution or disgorgement or damages on behalf of any persons that the Department may deem to have been injured by the Company's sales or to seek penalties, including a penalty of up to $2,500 for each violation of the Act. If persons who purchased the Company's Laser Storm(R) game systems in California believe that the sale to them by the Company violated the Act, such persons may be able to sue the Company for damages caused thereby or for rescission, if they believe the violation was willful. In such event, the Company may have the right to offset any such claim by the amount of any income realized by such persons from their operation of the game systems. At this time, the Company has not been threatened with any suit for violation of the Act by any person who purchased the Company's Laser Storm(R) game systems. There are no assurances that the Company will not be threatened with such suits in the future. If a claim for damages or rescission were brought against the Company or if the Company deemed it otherwise appropriate to offer rescission to previous purchasers of the Company's Laser Storm(R) game systems in California, the Company may use a portion of the cash at that time available to the Company to consummate such purchases. Upon making any such purchase, the Company would either continue to operate the Laser Storm(R) game facility or utilize the equipment to open a new Laser Storm(R) game facility. See "Use of Proceeds." 7 No assurance can be given that other jurisdictions will not review the Company's activities to determine whether or not they deem such activities to involve the sale of "franchises" or "business opportunities." Any such review could cause the Company to change the Company's sales practices. Lack of License Agreements in Early Sales. In connection with the sales of approximately 14 Laser Storm(R) game systems sold by the Company in the past, the Company did not enter into license agreements with the purchasers of the systems permitting the use of the Laser Storm(R) name. It is possible that such purchasers could move their Laser Storm(R) game systems into areas where other purchasers of Laser Storm(R) game systems are operating their systems under written license agreements with the Company. In such event, a dispute could arise as to whether or not the Company granted a purchaser who executed a license agreement an exclusive right to use the Laser Storm(R) game system and name in the area. In order to remedy this possible problem, the Company is attempting to have each non-licensed purchaser of Laser Storm(R) game systems execute an appropriate license agreement in connection with purchases by such persons of additional equipment from the Company and in connection with extensions of warranty agreements between such persons and the Company. There are no assurances that the Company will be successful in its efforts to have all non-licensed purchasers execute such agreements. Intellectual Property. The Company attempts to protect its trademarks, trade secrets, proprietary software and other intellectual property by the use of the trademark and copyright laws, through license agreements with customers and by use of confidentiality agreements with certain suppliers, employees and consultants. There can be no assurance that these measures will be successful in protecting the Company's trade secrets, proprietary software and know how, or that the trademarks will afford the Company with any competitive advantages. The Company has registered Laser Storm(R) as a trademark in the United States and has applied to register the trademark in Japan and South Korea. The Company intends to apply to register the trademark in other countries. The Company does not currently hold any patents but may apply for patents in the future where applicable. Public Market; Units Not Quoted. The Company's Common Stock and Warrants have been listed for quotation on the Nasdaq Small-Cap Market under the symbols LAZR and LAZRW, respectively, since April 1996. The Units were formerly quoted under the symbol LAZRU but are no longer quoted. Accordingly, purchasers of Units offered hereby will have to trade separately the Common Stock and Warrants which comprised the Units. No assurance can be given that a public market for any of the Company's securities will be sustained. Maintenance Criteria for Nasdaq Securities. The National Association of Securities Dealers, Inc. (the "NASD"), which administers the Nasdaq Small-Cap Market, has established criteria for continued eligibility on the Nasdaq Small-Cap Market. In order to continue to be included on the Nasdaq Small-Cap Market, the Company must maintain $2 million in total assets, a $200,000 market value of its public float and $1 million in total capital and surplus. In addition, continued inclusion requires two market-makers, at least 300 holders of the Common Stock and a minimum bid price of the Common Stock of $1 per share; provided, however, that if the Company's Common Stock falls below such minimum bid price, it will remain eligible for continued inclusion on the Nasdaq Small-Cap Market if the market value of the public float is at least $1 million and the Company has $2 million in capital and surplus. The Company's failure to meet these maintenance criteria in the future may result in the discontinuance of the inclusion of its securities on the Nasdaq Small-Cap Market. In such event, trading, if any, in the securities may then continue to be conducted in the non-Nasdaq over-the-counter market in what are commonly referred to as the electronic bulletin board and the "pink sheets." As a result, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the market value of the securities. In addition, the Company would be subject to a rule promulgated by the Securities and Exchange Commission (the "Commission") that, if the Company fails to meet criteria set forth in such rule, imposes various sales practice requirements on broker-dealers who sell securities 8 governed by the rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transactions prior to sale. Consequently, the rule may have an adverse effect on the ability of broker-dealers to sell the Company's securities, which may affect the ability of purchasers to sell the Company's securities in the secondary market. Disclosure Related to Penny Stocks. The Commission has adopted rules that define a "penny stock." In the event that any of the Company's securities are characterized in the future as a penny stock, broker-dealers dealing in the securities will be subject to the disclosure rules for transactions involving penny stocks which require broker-dealers among other things to (i) determine the suitability of purchasers of the securities, and obtain the written consent of purchasers to purchase such securities and (ii) disclose the best (inside) bid and offer prices for such securities and the price at which the broker-dealers last purchased or sold the securities. The additional burdens imposed upon broker-dealers may discourage them from effecting transactions in penny stocks, which could reduce the liquidity of the securities offered hereby. Shares Eligible for Future Sale. Certain factors, such as sales of Common Stock into the market by existing shareholders and market conditions generally, could cause the market prices of the Common Stock and Warrants to fluctuate substantially and could have a material adverse effect on the market prices of the Common Stock and Warrants. The Company's principal shareholders, directors and officers and a consultant have agreed not to sell any Common Stock until October 23, 1997 without the prior written consent of Laidlaw Equities, Inc. ("Laidlaw"), the representative of the underwriters of the Company's initial public offering which was completed in April 1996. Subject to certain limitations, additional shares of Common Stock could be sold in the public market upon the exercise of outstanding Warrants and options. Possible Issuance of Additional Shares of Common Stock Without Shareholder Approval. The Company has an aggregate of approximately 3,821,211 shares of Common Stock outstanding and 2,550,000 shares of Common Stock reserved for issuance upon exercise or conversion of outstanding options and warrants leaving 13,628,789 shares of Common Stock authorized but unissued and not reserved for specific purposes. The issuance of additional shares could result in the dilution of the voting power of the Common Stock. Under Colorado law, all of any such additional shares may be issued without any action or approval by the Company's shareholders. Any shares of Common Stock issued in the future would further dilute the percentage ownership of the Company held by the current shareholders. See "Description of Securities." Unissued Preferred Stock. The Company's Restated Articles of Incorporation, as amended, authorize issuance of 2,000,000 shares of preferred stock. See "Description of Securities." Previously, the Company issued an aggregate of 340,000 shares of preferred stock in two series, both of which were converted into Units in April 1996. Such Units are included in the Securities offered hereby. The unissued shares of preferred stock may be issued from time to time in one or more series as may be determined by the Board of Directors without shareholder approval. Further, the voting powers and preferences, the relative rights of each such series, and the qualifications, limitations and restrictions of the unissued shares of preferred stock may be established by the Board of Directors without shareholder approval. Any further issuance of preferred stock could adversely affect the rights of the holders of Common Stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. The issuance of preferred stock could be used to discourage or prevent efforts to acquire control of the Company through acquisition of shares of Common Stock. Although the Company has no present intention to issue any additional shares of its preferred stock, no assurance can be given that the Company will not do so in the future. The Company has paid no dividends on its Common Stock and does not anticipate paying such dividends in the foreseeable future. The Company expects that all of its income in the foreseeable future will be retained for the development and expansion of its business. See "Dividend Policy." 9 Market Overhang From Warrants and Options. In addition to the Warrants included in the Units offered hereby, the Company has outstanding Warrants and options to purchase 2,550,000 shares of Common Stock, including 1,495,000 Warrants contained in the Units sold in the April 1996 public offering, 775,000 shares of Common Stock issuable upon exercise of certain incentive and other options granted to employees, non-employee directors, a consultant and a previous manufacturer for the Company and 130,000 shares of Common Stock and Warrants to purchase 130,000 shares of Common Stock underlying the Unit Purchase Option granted to Laidlaw in connection with the initial public offering. During the terms of the Warrants and options, the holders thereof are given the opportunity to profit from a rise in the market price of the Common Stock and/or Warrants. Moreover, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected since the holders of the outstanding Warrants and options can be expected to exercise them, to the extent they are able to, at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the Warrants and options. Furthermore, sales of shares of Common Stock held by or issuable to the Warrant and option holders, or merely the potential of such sales, could have an adverse effect on the market price of the Company's Common Stock. Risk of Redemption of Warrants. Commencing 30 days after the Company publicly reports its audited financial results for the year ending December 31, 1996, and unaudited financial results for the quarter ending March 31, 1997, the Warrants may be redeemed by the Company at a redemption price of $0.05 per Warrant upon 30 days' written notice any time after the closing price (as defined herein) of the Common Stock exceeds $7.00 per Unit for 30 consecutive trading days (or 175% of the adjusted exercise price of the Warrants if the exercise price of the Warrants is reduced because the Company does not achieve audited net after tax earnings of at least $0.40 per share of Common Stock for the four fiscal quarters ending March 31, 1997). Redemption of the Warrants could force the holders to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, to sell the Warrants at the then current market price when they might otherwise wish to hold the Warrants, or to accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "Description of Securities--Warrants." Effective Federal and State Registrations Required to Exercise Warrants; Possible Redemption of Warrants. Purchasers of Securities offered hereby will be able to exercise the Warrants only if a registration statement covering the Common Stock underlying the Warrants is then in effect under the Securities Act of 1933, as amended (the "Securities Act"), and only if such Common Stock is qualified for sale or exempt from qualification under applicable securities laws of the states in which the holders of the Warrants reside. Although the Company will use its best efforts (i) to maintain the effectiveness of a registration statement covering the Common Stock underlying the Warrants pursuant to the Securities Act and (ii) to maintain the registration of such Common Stock under the securities laws of the states in which the Company initially qualified the Units for sale in the public offering, there can be no assurance that the Company will be able to do so. The Company will not be able to issue shares of Common Stock to those persons desiring to exercise the Warrants if a registration statement is not effective under the Securities Act or if the Common Stock underlying the Warrants is not qualified or exempt from qualification in the state where the holders of the Warrants reside. In such a case, the holders of the Warrants could lose the benefit of owning the Warrants unless they are able to resell the Warrants. See "Description of Securities--Warrants." Limitations on Director Liability. The Company's Restated Articles of Incorporation with Amendments, as amended, ("Restated Articles of Incorporation") provide, as permitted by Colorado law, that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on behalf of the Company against a director. In addition, the Company's Restated Articles of Incorporation and bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Colorado law. See "Description of Securities." 10 USE OF PROCEEDS The Company will receive no proceeds from the sale of the Securities offered hereby. The Company has allocated the net proceeds, if any, from exercise of the Warrants and options for general corporate purposes. Pending use of the proceeds, the Company may invest the funds in short-term money market, government and federal agency obligations, bank certificates of deposit and savings deposits. It is uncertain when, if at all, the Company will receive proceeds from exercise of the Warrants or options. See "Selling Security Holders," "Description of Securities" and "Plan of Distribution." MARKET PRICES OF COMMON EQUITY, DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS Market Information. The Company's Common Stock has been quoted on Nasdaq Small-Cap Market under the symbol LAZR, only since April 23, 1996. For the period from April 23, 1996 to June 30, 1996, the high and low bid prices of the Common Stock were $4.25 and $2.91, respectively. For the period from July 1, 1996, to September 30, 1996, the high and low bid prices of the Common Stock were $3.50 and $2.13, respectively. Dividend Policy. To date, the Company has neither declared nor paid any dividends on its Common Stock, nor does the Company anticipate that dividends will be paid on its Common Stock in the foreseeable future. The Company's board of directors presently intends to cause the Company to follow a policy of retaining earnings, if any, for the purpose of expanding the business of the Company. Any future determination to pay dividends on the Common Stock will depend on the Company's results of operations, financial condition and capital requirements. No assurance can be given that any holder of Common Stock will receive any cash, stock or other dividends in respect of the holder's shares of Common Stock. Stockholders. As of October 15, 1996, the Company had 36 holders of record of the Company's Common Stock. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS Results of Operations Overview The Company's primary source of revenue has been from the sale of Laser Storm(R) game systems, including arenas. The Company's systems consist of an "electronics platform" comprised of various components, including blasters, controllers, headsets, targets, infrared data links and a computer with operating software. The arenas consist of themed, moveable barriers, props and, in most cases, lighting and sound packages. The Company contracts third-party manufacturers to assemble the system electronics and incurs labor costs mainly upon final configuration of the systems and system software. With the exception of turn key arenas, which are provided by a third-party manufacturer, the arena components are final assembled by the Company. The Company has a warranty program under a renewable annual contract whereby customers pay a monthly usage fee. Historically, the Company's total revenue under this program has not been significant (i.e., less than 5% of total revenue). The Company has incurred a marginal financial loss from this program, but believes it is beneficial for continuing customer satisfaction. Management has recently implemented a program of increasing fees charged for warranty work and believes that the program will result in less of a loss or break-even for the year ending December 31, 1996. The Company also provides its customers with a 90-day material defects warranty on all system components. Through June 30, 1996, the Company derived less than 2% of total revenues from the operation of Company-owned Laser Storm(R) game facilities and Laser Storm(R) game facilities for which the Company has a revenue participation arrangement. The Company intends to expand the number of both of these types of facilities, and, therefore, proportionately increase both the percentages of revenues derived from Laser Storm(R) game facility operations, as well as the associated costs to manage and operate the facilities. Six Months Ended June 30, 1996 compared to Six Months Ended June 30, 1995 Net revenues for the six months ended June 30, 1996 increased 33% to $2,879,389, as compared to $2,169,436 for the six months ended June 30, 1995. The increase was lower than that achieved during the second quarter as a result of the cyclical nature of the business whereby the first quarter is historically the lowest sales quarter of the year. Additionally, the Company's senior management was focused on completing the public offering which was completed on April 23, 1996 and opening Company-owned and Company-operated facilities. A specific breakdown of revenues is as follows: Six Months Ended June 30, ------------------------- 1996 1995 ---- ---- System Sales ........ $1,491,039 $1,359,762 Upgrade Sales ....... 106,944 _ _ Arena Sales ......... 660,295 352,476 Warranty Sales ...... 178,242 101,939 Accessories Sales ... 442,869 355,259 ---------- ---------- Net Revenues ... $2,879,389 $2,169,436 ========== ========== Gross profit for the six months ended June 30, 1996, increased by 52% to $1,745,840 as compared to gross profit of $1,145,477 for the six months ended June 30, 1995. Gross profit as a percent of net revenues increased from 53% to 61% for the six months ended June 30, 1995, and 1996, respectively. The increase in the gross profit percentage is the result of the sales price increases on systems and arenas and lower direct material and labor costs. The lower direct material costs is the result of efficiencies realized from increased volumes and 12 improved purchasing management. The Company has expanded its vendor base and improved its vendor selection processes in order to ensure that the Company receives the most competitive prices on its materials. The lower direct labor costs are the result of efficiencies being realized from increased volumes as well as improvements in the assembly processes. Selling, general and administrative expenses ("SGA expenses") increased $716,611 or 74% to $1,687,353 for the six months ended June 30, 1996, compared to $970,742 for the six months ended June 30, 1995. "SGA expenses" as a percent of net revenues increased from 45% to 59% for the six month periods ended June 30, 1995 and 1996, respectively. The increases are primarily the result of additions to administrative and sales staffs to accelerate the opening of Company-owned and Company operated facilities and as a result of the Company becoming a publicly-held company. During the six months ended June 30, 1996, the Company increased its sales and marketing efforts associated with opening Company-owned and Company operated facilities by approximately $300,000. The Company believes that it is now positioned to meet its objectives of opening future Company- owned and Company operated facilities. As of June 30, 1996 there were no associated revenues generated from these recent efforts. Additionally, the Company incurred approximately $250,000 in expenditures related to becoming a public company and moving into a new facility which meets its capacity requirements for the foreseeable future. Product development expenses increased 22% to $101,433 for the six months ended June 30, 1996 compared to $83,161 for the six months ended June 30, 1995. The Company is planning to continue to increase its investment in the design and development of interactive laser tag game systems. The Company generated interest income of $33,014 for the six months ended June 30, 1996 compared to interest expense of $1,166 for the six months ended June 30, 1995. Pending using the proceeds for the capital requirements associated with opening new Company-owned and Company operated facilities, the proceeds from the public offering in April 1996 are being invested in short term, interest bearing investment grade securities. The Company incurred a $148,259 operating loss during the six months ended June 30, 1996 compared to operating income of $48,211 for the six months ended June 30, 1995. The operating loss for the six months ended June 30, 1996 is the result of additional "SGA expenses" incurred in establishing Company-owned and Company operated facilities and the cost of the Company being a publicly-held company. The Company realized an income tax benefit of $43,000 during the six months ended June 30, 1996. The results for 1995 reflect no tax provision as a result of the full utilization of net operating loss carryovers from prior years. 1995 compared to 1994 Net revenues are sales, net of discounts, for Laser Storm(R) game systems and are recognized upon shipment of an order to a customer. The Company recognizes warranty revenues in the month during which they are earned. Net revenues for the year ended December 31, 1995, increased by 97% to $5,477,540, as compared to $2,786,850 for the year ended December 31, 1994. The increase was primarily due to more system sales to new customers resulting from increased marketing and was enhanced by expanded capacity of third-party manufacturers to produce systems. Also, as more customers have purchased arenas and computers with the purchase of their Laser Storm(R) game systems, the average sales price has risen to $80,000 per system for the year ended December 31, 1995, from $52,000 per system for the year ended December 31, 1994. Arena sales as a percentage of total sales has risen from 18% in 1994 to 24% in 1995. Management believes that arena sales, as a percentage of total sales, will increase in future years but that the increase will be incrementally less than the increase experienced in 1995. A specific breakdown of sales is as follows: 13 December 31, ----------------------- 1994 1995 ----------- ---------- System Sales ........... $2,150,023 $3,771,439 Arena Sales ............ 507,054 1,335,819 Warranty Sales ......... 102,108 285,983 Miscellaneous Sales .... 27,665 84,299 ---------- ---------- Net Revenues ... $2,786,850 $5,477,540 ========== ========== System sales are cyclical during the calendar (and fiscal) year, with most system sales typically occurring in the third calendar quarter, and the least number of system sales typically occurring in the first calendar quarter. Management believes that the increased sales during the third quarter are primarily attributable to desires of customers to upgrade their indoor entertainment facilities prior to the Thanksgiving and Christmas holiday seasons. Third quarter 1995 sales were $1,738,169, representing 31.7% of net revenues for the year ended December 31, 1995. This compares to third quarter 1994 sales of $1,033,617, representing 37.1% of net revenues for the year ended December 31, 1994. Gross profit equals net revenues less cost of goods sold, which consists primarily of material and direct labor costs. Gross profit for the year ended December 31, 1995, increased 121% to $3,124,934, as compared to gross profit of $1,411,482 for the year ended December 31, 1994. Gross profit as a percentage of net revenues increased slightly during the year ended December 31, 1995, to 57%, compared to 51% for the year ended December 31, 1994. The increase in the gross profit percentage in 1995 reflects a decrease in direct materials cost which is somewhat offset by an increase in direct labor costs. The increase in direct labor costs has two components. First, systems labor costs increased in 1995 because the manufacturer used by the Company in 1994 provided a turn-key system that required little additional set-up and configuration by the Company; whereas, in 1995, the Company used multiple manufacturers to assemble the system electronics, resulting in the Company incurring additional labor costs to set up the systems. Second, arena sales have increased as a percentage of total sales and the Company incurs higher labor costs associated with arenas than with systems. Therefore, direct labor costs as a percentage of net revenues tend to be higher. As indicated, the increase in direct labor costs has been offset by a decrease in material costs, particularly system material costs. The decrease in system material costs is also directly attributable to the aforementioned change in the third-party manufacturer. With the change from a single turn-key manufacturer used in 1994 to multiple subcontracted system assemblers used in 1995, the Company was able to make its own material purchases and thereby reduce material costs. Selling, general and administrative expenses ("SGA expenses") increased by 60% to $2,366,924 for the year ended December 31, 1995, compared to $1,482,106 for the year ended December 31, 1994. However, as a percentage of net revenues, SGA expenses fell to 43% in 1995 from 53% in 1994. A substantial portion of the percentage drop in SGA expenses came from a smaller percentage increase in the amounts expended for marketing and advertising in 1995. With the exception of small increases in general and administrative salaries and insurance costs, management has been able to maintain or reduce SGA expenses as a percentage of net revenues. The increase in salaries reflects additions to the administrative staff in anticipation of diversifying its business to include more Company operated Laser Storm(R) game facilities and becoming a publicly-held company. Product development costs increased by 42% to $139,979 for the year ended December 31, 1995, compared to $98,593 for the year ended December 31, 1994. However, product development remained as a relatively constant 3% of net revenues for both periods. Product development costs for systems and arena theming are expensed in the period in which they are incurred. 14 In December 1995, the Company was served with two lawsuits. To avoid extensive litigation, the Company entered into settlement agreements with both parties. Also, in January 1996, a court ruled that the Company must pay a former employee approximately $90,000. Therefore, at December 31, 1995 the Company accrued a total of $270,000 in connection with the settlements and the court ruling. The Company paid a total of $242,500 to settle these matters in the second quarter of 1996. With slightly higher gross profit margins for the years ended December 31, 1995 and 1994, the realization of $231,848 in operating income for the year ended December 31, 1995, compared to the realization of an operating loss of $216,783 for the year ended December 31, 1994, occurred primarily as a result of the higher 1995 sales levels, lower direct materials costs and a slower growth in SGA expenses. Because of net operating loss carryovers from 1990 through 1992 and the operating loss incurred throughout 1994, the Company did not incur an income tax liability for the year ended December 31, 1994. The income tax liability for the year ended December 31, 1995 gives effect to the application of the net operating loss carryovers, thereby yielding an effective income tax rate (federal and state) of 4%. As of December 31, 1995, the Company has a net current deferred tax asset of $111,000, which is principally the result of contingent settlements being deducted for financial statement purposes, but which cannot be deducted for tax reporting purposes. The Company also has a long term deferred tax liability of $60,000, plus a current income tax liability of $60,000. Accordingly, the Company believes that the deferred tax asset of $111,000 is fully realizable in the future. Liquidity and Capital Resources The Company's operations used cash flow of $1,811,980 for the six months ended June 30 1996, but provided cash flow of $222,692 for the same period ending June 30, 1995. Cash flow was used during the first six months of 1996 to fund sales made through both the new extended term financing program being offered by the Company ($620,273) and the increase in accounts receivable ($226,513). Additionally, payments were made on both accounts payable ($464,799), which had become aged when cash was being conserved until the Company's public offering was completed; and to settle the contingent liabilities ($242,500) the Company had incurred during 1995. The Company is pursuing an opportunity to sell the total receivables associated with the extended term financing to an independent third party leasing company. Capital expenditures for the six months ended June 30, 1996 were $251,760 compared to $34,609 for the six months ended June 30, 1995. The Company is funding the up-front capital requirements associated with opening Company owned facilities and facilities for which the Company has a revenue sharing arrangement. Additionally, the Company purchased new trade show equipment and made leasehold improvements in its new office and assembly space. Financing activities provided $5,882,145 of cash flow for the six months ended June 30, 1996 as compared to a use of cash of $13,971 for the six months ended June 30, 1995. In February 1996, the Company completed the sale of 200,000 shares of Series B Preferred Stock and received net proceeds of approximately $890,000. In April 1996, the Company completed the sale of 1,495,000 units at $4.00 per unit. Each unit sold consisted of one share of common stock and one warrant. Net proceeds from the sale were approximately $4,700,000. The Series A Preferred Stock and Series B Preferred Stock were converted by the holders into Units, consisting of one share of Common Stock and one Warrant, at $2.80 per share at the close of the Company's public offering in April 1996. The Units comprise a portion of the Securities offered hereby. The Company used the net proceeds from the private placements of Preferred Stock to pay license fees, to acquire and produce inventory, to participate in revenue sharing facilities, to pay for a portion of the expenses of the offering of the Units and for working capital. The proceeds from the public offering were primarily allocated toward costs of opening new Company owned Laser Storm(R) game facilities, in which the Company will have an interest, for intellectual property, licensing and product development, and for working capital for anticipated growth. 15 The expansion by the Company into operating Laser Storm(R) game facilities should augment revenue growth from the sale of Laser Storm(R) game systems. Unlike cash flow from existing manufacturing operations whereby, as previously discussed, the Company generally receives a substantial cash deposit prior to shipment, the Company-owned and revenue participation Laser Storm(R) game system facilities place substantial up-front capital requirements on the Company. The Company is using a portion of the offering proceeds from the April 1996 offering to fund the up-front capital requirements associated with opening Company-owned Laser Storm(R) game facilities and Laser Storm(R) game facilities for which the Company has a revenue participation arrangement. Continuing expansion of the number of these Laser Storm(R) game facilities will be determined based on the remaining capital available from the offering and cash flows generated from ongoing operations, including from future sales of Laser Storm(R) game systems and from the operation of and participation in Laser Storm(R) game facilities. The Company will adjust the number, size and type of each of the Laser Storm(R) game facilities as management assesses facility performance and capital availability. Management of the Company believes that the capital provided by the offering is enabling the Company to make the transition from a manufacturer to both an operator of Laser Storm(R) game facilities and a manufacturer. Management believes that the current cash flows of the Company when combined with the proceeds from the April public offering will support the current operations of the Company as well as provide necessary working capital. The Company may require additional capital to finance enhancements to, and expansions of, its manufacturing capacity and future Laser Storm(R) game facilities. Management believes that the need for working capital will continue to grow at a rate generally consistent with the growth of the Company's operations. Although no assurance can be given that financing will be available on terms acceptable to the Company, the Company may seek additional funds, from time to time, through public or private debt or equity offerings, bank borrowings or leasing arrangements. The Company has entered into the following financial commitments in anticipation of continued growth from ongoing operations and in Company-owned and revenue participation Laser Storm(R) game facilities: In 1995, the Company entered into a ten-year lease for new office and assembly space, the term of which began in March 1996. Annual commitments under the lease will be approximately $248,000, with periodic escalation beginning in 1999. This annual commitment was made to accommodate the Company's continued growth. The Company has entered into employment agreements with five of the Company's executive officers which provide aggregate annual compensation of approximately $630,000 until December 1998. The agreements may be terminated by the Company without cause upon 30 days' notice. In the event of a termination without cause, the Company would be required to pay 100% of the remaining payments until expiration of the agreement with the Company's chief executive officer and the other four officers are entitled to receive their respective salaries for a three- to six-month period. The Company entered into the employment agreements with three of the executives to formalize their employment status at existing salary levels. Accordingly, the employment agreements will not result in a significant change in the Company's business. The other two agreements were added in December 1995 upon the hiring of new key employees. In July 1996, the Company purchased an existing Laser Storm game center located in Longmont, Colorado from unaffiliated persons. The total consideration was $160,000, which was paid at closing by paying $30,000 in cash and by paying the balance of $130,000 by issuing 32,500 shares of the Company's common stock to one of the sellers. Pursuant to the terms of the purchase agreement, the 16 Company is registering the 32,500 shares for resale. The seller has 90 days from the date hereof to sell the shares. If at the end of the 90 day period the seller has sold all or a portion of the shares for less than $130,000, the Company will immediately pay the seller the difference between the sales price of the shares and $130,000. Any remaining shares will be returned to the Company. If the sales price of the shares sold is more than $130,000, the Company has no further obligation to the seller and the seller is entitled to retain any unsold shares. In connection with the purchase, the Company also loaned the seller approximately $46,380 to pay seller's bank loan. The loan is evidenced by a promissory note and is secured by a first in priority interest in the shares. All proceeds from the sale of the shares shall be applied first to retiring the loan. BUSINESS Laser Storm, Inc. (the "Company") designs and manufactures interactive laser tag game systems which the Company markets under the trademark Laser Storm(R). The Company currently markets Laser Storm(R) game systems which are computer controlled, are capable of being varied to fit individual operator needs and customer demands and are designed to incorporate a themed adventure within an interactive environment emphasizing team play. Each game system is comprised of blasters, controllers, adjustable vests, headsets and targets, and may include themed arenas with special effects such as moveable colored barriers, fog, sound, specialty lighting effects, software developed by the Company and other elements. The Company's game equipment is designed to be lightweight and easy for all ages to use. The Company currently markets four different, themed game systems: Galaxy 2000(TM), Galactic Marauders(TM), Circuit Commandos(TM), and STARGATE. The Company recently obtained a license to utilize the cartoon characters owned by Marvel Characters, Inc. as part of a themed game system which the Company plans to introduce and begin to market in November 1996. Games typically are played in arenas ranging in size from 1,000 square feet to 4,000 square feet. Additional space is required for support, retail sales and administration. Operators of Laser Storm(R) game systems generally charge admissions ranging from $3.00 to $7.00 and game durations can be programmed to vary from one minute to 40 minutes but typically last 10 minutes. The Company has been developing and producing state-of-the-art themed laser tag game systems and, since its inception in March 1990 through August 1996, the Company has sold a total of approximately 180 Laser Storm(R) game systems, of which 156 were sold in the United States and of which 24 were sold for use outside of the United States. Although since its inception the Company has been engaged principally in developing, marketing and selling Laser Storm(R) game systems to independent operators, the Company also owns and operates two Laser Storm(R) game facilities and has entered into revenue-sharing arrangements that are still in effect for seven Laser Storm(R) game facilities. The Company intends to increase the number of facilities in which it will have an ownership interest and approximately $2,800,000 of the net proceeds from the public offering were allocated to pay the costs of acquiring existing and opening new Laser Storm(R) game facilities which will be either owned and operated by the Company or in which the Company will participate under a revenue-sharing arrangement. The Company anticipates that the cost of a Company-owned Laser Storm(R) facility will be approximately $250,000. However, the Company estimates that the actual cost of any Company-owned facility will vary from approximately $100,000 to $500,000 based primarily on the location and size of the facility. The actual number of new Laser Storm(R) game facilities that the Company will be able to acquire and open will depend on the percentage interest the Company will have in each facility. The Company was incorporated under the laws of the state of Colorado in March 1990 under the name "The Crimson Corporation--a Holding Company" and conducted business under the names "Space Sport, Ltd." and "Laser Storm." In November 1994, the Company changed its name to "Laser Storm, Inc." 17 Products The Laser Storm(R) interactive game system uses proprietary custom software developed by the Company and is designed to allow operators to set up live action themed, tag-type games staged between or among teams of opponents. The Company has developed and currently markets game systems embodying four different themes, each with numerous configurations. These games are played in themed arenas, which contain special effects, including colored, movable barriers, fog, sound, lighting and other decorative elements. The equipment is designed to be lightweight and easy to use for all ages. The arenas are flexible, easily reconfigured, safe and may accommodate 2 to 48 players. The Laser Storm(R) player unit includes a blaster which emits simulated laser beams from a solid-state light source. Unlike an actual laser, the beam will project, in tight disbursement, a harmless colored light for up to 100 feet. The blaster is attached to a belt that contains a battery pack and electronics and a lightweight headset that is similar to a set of headphones. All of the equipment weighs under three pounds. The unit is designed for use by persons three years of age and older. The battery pack utilizes a velcro fastener which may be adjusted to fit almost any customer. The compact blaster and unique thumb trigger accommodate a variety of hand sizes. The Company has recently developed and introduced a new vest for its player units. The adjustable, lightweight, nylon vest contains the electronic components that are powered by quick charging nickel cadmium batteries. Because of new wiring harnesses, this system variation is expected to decrease maintenance requirements, as well as support the Company's goal of having one of the most flexible, dependable and cost effective laser game systems generally available in the marketplace. These vests were first used at a facility which opened in Irvine, California in July 1995. All Laser Storm(R) game systems are designed to emphasize teamwork. Each team has a mission to accomplish during the game. Players watch a pre-game video which sets the stage for the game, gives a brief introduction to the theme and explains the mission's parameters. A computer controls the play of the game. An operator can change the game configuration easily before each game, making every game a different experience. Game components, such as duration, points per player hit, points per target hit and target duration, can be varied by the operator with the click of a mouse. During the game, players can keep track of the score by watching a scoreboard in the center of the arena. A database keeps track of the number of times each player's blaster achieves the activation of another player's unit. At the end of the game, each player receives an individualized, computer generated scorecard, showing details of the mission, as well as each player's performance. Games typically last approximately 10 minutes, though the time of each game may be programmed to last from one minute to 40 minutes. Charges per play generally range from approximately $3.00 to $7.00. Efficient operators with sufficient working equipment can run up to six 10-minute games per hour. The Company presently offers four totally different interactive game themes for use with the Laser Storm(R) game system. 1. Galaxy 2000(TM) is a high-tech version of dodge ball, where two teams blast for control of the "neutral zone." This is the oldest and one of the most popular of the current games. 2. Galactic Marauders(TM) is a series of games based on the story of evil estranged twin brothers, Ick and Yuck DuVraggo, who are battling over the rights to control the "Milky Main" in deep space. The first game in the Galactic Marauders(TM) series is staged in the DNA laboratory of the fictional Minerex Corporation, where Dr. Carl Sterling first created raw DNA strands. Each team's 18 mission is for its leader to capture as much DNA as possible in order to create either Northern Monsters or Southern Zombies. With the help of these hideous creatures, each team hopes to mine the riches of its home planet, thus giving it the ultimate ability to rule the galaxy. 3. Circuit Commandos(TM) is the themed adventure involving a crack team of computer experts whose assigned mission is to blast a virus, created by a team of brilliant hackers, out of the "International Economic Computer Network." Players go through a simulated miniaturization chamber and then enter an arena, which is designed to look like the inside of a huge computer. Each team's immediate objective is to capture as many computer chips as possible in the correct sequence, thus activating the microprocessor. The first team to activate and destroy the microprocessor wins the game. The Company is developing variations of this theme to accommodate different levels of special effects sophistication and facility cost. 4. STARGATE. Themes from the motion picture "STARGATE" have been incorporated into a series of games designed to be progressively more challenging. Players are briefed in a central control room in advance of commencing play and then are sent through a mysterious Stargate to a distant galaxy on an exploratory mission to find seven symbols and save the planet from extinction. The players are instructed that hostile forces may be encountered, but not to fire upon them unless they feel threatened. The story progresses as new targets and diversions are introduced. The arena is designed to resemble the inner sanctum of an ancient pyramid with exotic, fluorescent hieroglyphics, Anubis targets, Horace targets that shoot back, and other special effects. Management proposes to add new variations or enhancements to keep the game exciting even for the most avid repeat players. 5. X-MEN Laser Tag. Themes based on the X-MEN comic books and the X-MEN animated series are being used by the Company to develop X-MEN games which will offer players the chance to train alongside superheroes Wolverine, Rogue, Cyclops, and Storm. The games will take place inside Marvel Characters, Inc.'s ("Marvel") well known "Danger Room." From the moment players enter an X-MEN game center they will be escaping into a fantasy based experience. Every aspect of the facility from staff uniforms to the "Danger Room" itself will be carefully designed to support a seamless, fantasy based theme. The actual "Danger Room" game will introduce new game play features. The Company is producing four different scorecards for X-MEN games featuring original artwork from Marvel artists. With the help of Marvel's illustration team, each scorecard will feature a different, unique character rendering to encourage collecting. The strategy is to entice players to return to play again and to collect all four scorecards. The Company currently intends to release additional new games each year for at least the next several years for use with the Laser Storm(R) game system in order to attract different age groups, provide updated, fresh facilities and encourage repeat business. The Company obtained its license to utilize themes and develop and market merchandise based on the motion picture STARGATE in October 1995. The term of the license continues until August 17, 1997, after which date no new licensed articles may be manufactured, sold or distributed by the Company. However, the Company may continue to use and operate the licensed articles through August 1, 2000. The Company is required to pay the licensor a royalty on gross ticket sales for all locations using the licensed articles. Credited against the royalty is an amount of $50,000 which has been paid by the Company as an advance royalty. The Company has obtained a license from Marvel granting the Company the exclusive right to use trade- marked cartoon characters owned by Marvel through February 1, 2000, solely upon and in connection with the Company's licensee-owned and sublicensee-owned laser tag facilities in the United States and Canada. Marvel reserves the right to approve the site location of each Laser Storm facility, which facilities may not be located within 60 miles of any Marvel themed amusement park. The Company must pay royalties to Marvel of a percentage of gross revenues. The term of the Marvel license agreement may be extended for successive one year periods through December 31, 2003 provided that 19 no breach has occurred and provided that a minimum amount of royalties have been paid in the preceding term. The term for Laser Storm(R) game facilities sublicensed (rather than owned by Laser Storm) is limited to three years from the date of original purchase. The Company believes that the acquisition of property licenses embodying science fiction, fantasy and other creative themes is a major step in differentiating the Company from its competitors. No assurance can be given that the Company will be successful in licensing additional properties or themes. The Company has designed a line of clothing (currently consisting of shirts and hats), which uses colors and themes from Laser Storm(R) game systems and which is being sold by the Company to facility operators. Laser Storm-Wear(TM) clothing matches the color patterns of the arena barriers, making the wearer nearly invisible in a theme-related arena. The Company also markets mugs and watches, and expects that additional merchandise offerings in the near future may include posters and collectibles. Product Development The Company continuously designs and develops new and modified equipment, computer software and hardware, game themes and related accessories and merchandise, and applications for the software. Such developments have included alphanumeric scoreboards with messaging capabilities, new targets with individual programmability, updated infrared and audio transmissions, new color optics for use in LED beams emitted by the blasters which help differentiate team members and merchandise for retail sales. There is no assurance that the products and promotions currently in development will lead to final products or that any such products or promotions will be commercially viable or profitable to the Company. Intellectual Property The Laser Storm(R) game system is an interactive experience. Game play involves interacting with both the player's own team members and those of the opposing team. Through a computer tracking system developed by the Company, a playability log unfolds over the course of the game which is recorded and logged by the software. Upon exiting the arena, each player receives a computer generated score card quantifying the player's achievements. In this instance, the software helps conclude the activity by giving players the opportunity to take a tangible piece of their game experience home. The software controls the Laser Storm(R) game systems. Accordingly, the systems can be altered with relatively simple software adjustments. The Company continuously makes system enhancements that make the games that much more interactive. The Company's current operating software is proprietary, functioning only with the Company's hardware system. While the software controls the game, players interface with the software through unique infrared communications platforms made up of individual player units. Without these blasters, the software itself is useless. Nevertheless, when the two are coupled and set inside a themed arena environment, an interactive entertainment experience is created. While the software is a critical element of the game mix, the management of the Company believes that the software has little utility separated from the laser tag game environment. The Company attempts to protect its trademarks, trade secrets and other intellectual property by the use of the trademark and copyright laws, through license agreements with customers and by use of confidentiality agreements with certain suppliers, employees and consultants. There can be no assurance that these measures will be successful in protecting the Company's trade secrets and know how, or that the trademarks will afford the Company with any competitive advantages. The Company has registered Laser Storm(R) as a trademark in the United States and has applied to register the trademark in Japan and South Korea. The Company also intends to apply to register the trademark in other countries. Currently, the Company does not hold any patents but may apply for patents in the future where applicable. 20 Markets Domestic Laser Storm(R) game facilities attract a wide demographic range of customers. Customer demographics by age and gender vary depending on location selection, advertising, facility activities, operations hours and game themes. The Company has not developed any accurate data on the game users and relies entirely on anecdotal verbal remarks from operators regarding customer demographics. Based upon this information supplied by the Company's operators, the Company estimates that the Laser Storm(R) game system users are one-third aged 12 and under, one-third aged 13 to 17, and one-third age 18 and over. However, two of the owners of indoor playground facilities which cater to a younger age group and which have Laser Storm(R) game systems, have indicated to the Company that they estimate that approximately 80% of their customer base is in the age 12 and under category and the remaining 20% are parents. Conversely, another owner of a Laser Storm(R) game system has estimated to the Company that 80% of its customer base is in the age 16 and over category. The Company is unaware of any independent information available to support the Company's estimates. Laser Storm(R) game systems are currently located in amusement parks, family entertainment centers, skating rinks, movie theaters, shopping malls and bowling centers. The Company believes that there are numerous similar locations available where Laser Storm(R) game systems could be installed, such as cruise ships, hotels and casinos. The Company currently bases its marketing plan on the placement of not more than one facility per five mile radius or 200,000 population base, depending on population density. International Substantial financial and manpower costs are associated with opening new markets, especially international markets. Although it plans to enter additional foreign markets over the next three years, management's current international focus is on Southeast Asia and the larger countries of South America, which the management of the Company believes are economically developed and demographically compatible world markets. The Company views these markets as suitable for immediate introduction of entertainment industries. However, management believes that expansion must be attained within two to three years to achieve a viable competitive position. The Company has received a number of inquiries from Europe. To date the Company has made no sales in Europe, although it is continuing to respond to inquiries received. There is no assurance that the Company will be successful in any foreign market. The Company has entered into an agreement with Cyber Amusement Co., Ltd. ("Cyber") whereby the Company has appointed Cyber as the sole and exclusive distributor and licensee for the Company's Laser Storm(R) game systems in the country of Thailand. Cyber has agreed to purchase five or more Laser Storm(R) game systems by January 31, 1999. The agreement is in effect through January 1999 and can be renewed annually thereafter by Cyber. The Company does not have Cyber financial information and there are no assurances that Cyber has the financial capability to purchase any Laser Storm(R) game systems from the Company. To date, Cyber has purchased no, and there are no assurances that Cyber will purchase any, Laser Storm(R) game systems pursuant to the agreement. The Company has entered into an non-exclusive letter agreement with a company to market the Company's Laser Storm(R) game systems throughout Central and South America on a commission basis. The agreement is for an initial period of one year commencing July 24, 1996, and is renewed automatically unless either party provides 60 days notice of cancellation. As of the date hereof, no sales have been made pursuant to the letter agreement. 21 Sales and Facilities Operations The Company's business plan currently contemplates three types of Laser Storm(R) game facilities: 1) those owned by independent owner/operators to whom the Company sells Laser Storm(R) game systems and arenas; 2) Company-owned facilities; and 3) revenue-sharing facilities in which the Company provides equipment at little or no charge and shares the revenue with the facility operator. Each of these formats has various advantages and each requires a somewhat different marketing strategy. The Company believes that it must integrate all three sales approaches in its marketing plan to pursue profitable growth. Sales Since its inception in March 1990 through August 1996, the Company has sold and shipped approximately 180 Laser Storm(R) systems worldwide. For most sales of its systems, the Company utilizes agreements which contain provisions relating to site protection, change orders, warranty, liability and responsibilities of ownership. The Company usually requires the buyer to pay 50% of the purchase price to the Company upon signing the sales agreement, with the balance to be paid in two equal installments 60 days prior to installation and upon delivery, respectively. As an alternative, the Company requires the buyer to make an advance deposit ranging from 30% to 40% of the purchase price to the Company upon signing the sales agreement, with the balance to be paid over a period ranging from 24 to 36 months. These payment schedules relieve the Company of most out of pocket manufacturing expenditures, since the cost of manufacturing is covered in the initial deposit. In connection with each sale the Company generally grants a license to the operator to use the Laser Storm(R) trademark and computer software in connection with the operation of the facility for so long as the operator maintains the Laser Storm(R) game system at the original site. Under these agreements, if an operator moves a system without Company approval, which will not be unreasonably withheld, the license to use the software and trademark ceases. The Company installs the system and provides initial training on its proper use. The Company also services the system under warranty against material defects. The warranty is typically 90 days, however, most customers purchasing systems also participate voluntarily in the Company's warranty program under renewable annual contracts for a current charge of about $0.12 per play. The Company also sells to operators merchandise, such as T-shirts and hats, containing the Company's logos, as well as operating supplies, including fog fluid and scorecards. Although the Company does not require its operators to purchase arenas (the themed, moveable barriers, props and, in some cases, lighting and sound packages, all of which together create the theme atmosphere) at operators' facilities, approximately 70% of the Laser Storm(R) operators have acquired the entire system. Domestic Sales. Since inception in March 1990 through August 1996, the Company has sold and shipped 156 Laser Storm(R) game systems for operation in 42 states. International Sales. Sales and operations in foreign countries are expected to extend the product life cycle of the Company's themes as well as provide a much larger market base. Inquiries regarding the possible purchase of Laser Storm(R) game systems have been received from numerous countries and the Company is conducting preliminary discussions with distributors in a number of these countries. No assurances can be given, however, that these discussions will result in the sales of any systems or related merchandise. Although the Company's current intent is to establish sales in one new country each quarter for the foreseeable future, no assurance can be given that the Company will be successful in meeting this goal. Since inception in March 1990 through August 1996, the Company has sold and shipped 24 Laser Storm(R) game systems for use outside of the United States. 22 Company-Owned Facilities The Company intends to acquire existing and open new Laser Storm(R) game facilities which will be owned and operated by the Company or in which the Company will participate under a revenue-sharing arrangement. The actual number of such facilities that the Company will be able to acquire and develop will vary depending principally on factors such as the percentage interest the Company will have in each facility, the location of each facility and the size of each facility. The Company-owned Laser Storm(R) game facilities usually will be entertainment centers that feature at least one Laser Storm(R) arena and may include any combination of video, arcade, food and party rooms and a retail-style store featuring licensed Laser Storm(R) merchandise and related items. The Company anticipates that the cost for furniture, fixtures and equipment of a typical Company-owned Laser Storm(R) game facility will be approximately $250,000. However, the Company estimates that the actual cost of any Company-owned facility, however, will vary from approximately $100,000 to $500,000 based primarily on the location and size of the facility. As of the date hereof, the Company owns and operates two Laser Storm(R) game facilities. One of the two Laser Storm(R) game facilities is a 48-player facility, featuring a STARGATE theme, in an entertainment and amusement area leased by Namco Cybertainment, Inc. ("Namco"), which operates over 500 family entertainment centers in the United States. The Company pays Namco a percentage of the Company's adjusted gross sales (with a specified minimum) from the facility. In addition, the Company has entered into agreements and/or leases for an additional eight Laser Storm(R) game facilities that will be owned and operated by the Company. Five of the eight Laser Storm(R) game facilities will be in entertainment and amusement areas leased or owned by Namco. The Company will pay Namco a percentage of the Company's adjusted gross sales (with specified minimums) from such facilities. No assurance can be given that the Company will be successful in its plans to acquire, open and operate any additional facilities. See "Risk Factors." Revenue Participation Facilities The Company intends to enter into agreements with certain operators whereby the Company will provide equipment at minimal or no cost to the operators who will operate Laser Storm(R) game facilities and share the gross revenue with the Company. The Company will evaluate the quality of the location, commitment and stability of the operator and the return on investment, among other factors, to determine whether to enter into such an arrangement. The Company is currently pursuing revenue sharing ventures for several reasons: 1) the on-going annual gross revenue stream participation from such facilities historically has exceeded the profits involved in system sales, 2) the Company believes it needs to have greater involvement in operations than it currently has through systems sales if it is to manage its corporate image and accelerate revenue growth, and 3) management believes there are family entertainment centers, bowling centers and skating rinks whose owners may be interested in adding a Laser Storm(R) game facility to their operations if those owners have little risk, minimal or no outlay of capital and limited managerial oversight. As of the date hereof, the Company is involved in the following revenue-sharing arrangements: Laser Storm Waikiki Limited Liability Company: The Company has entered into an agreement with Laser Storm Waikiki Limited Liability Company ("LLC"), pursuant to which the Company installed a system in Honolulu, Hawaii, at a facility which is owned and operated by an unaffiliated entity. The members of the LLC are the Company and Teraji Entertainment, Inc., an entity unaffiliated with the Company. Teraji Entertainment, Inc. and the Company have orally agreed to share equally revenues net of the LLC's expenses. The facility began operations in December 1994, and the operator pays $1.00 per play to the LLC. The facility accommodates a 48- player system in a 2,300 square foot arena. The equipment is owned by the LLC. 23 Sports and Games: In March 1994, the Company entered into an agreement with Sports and Games ("S&G") in East Hanover, New Jersey. Under the terms of this agreement S&G must pay 25% of gross revenues to the Company. The agreement allows S&G to purchase the system from the Company for a purchase price that declines over a 48 month period. The indoor Laser Storm(R) game facility, based on the Galaxy 2000(TM) theme, opened in March 1994 and accommodates up to 36 players at one time. Funplex Center: The Company owns a 50% interest in Laser Hall L.L.C. which was formed in September 1995, as a Colorado limited liability company, to renovate and operate an approximately 2,700 square foot Laser Storm(R) game facility within FunPlex Center, a 144,000 square foot amusement center, in Littleton, Colorado. The Company sold Laser Hall L.L.C. the equipment for the FunPlex facility at the Company's cost. The balance of Laser Hall L.L.C. membership interests are owned by unaffiliated parties. The Company, on behalf of Laser Hall L.L.C., agreed with the owners of Funplex Center, in which a Laser Storm(R) game system has operated since March 1990, to renovate that facility. The Company anticipates that this agreement will afford a local showcase for the Company's product which will provide an ongoing revenue source; and will provide a location where new products and merchandise can be test marketed in a Company- controlled, fully operational environment. Laser Hall L.L.C. owns the system, and pays a space rental fee to Funplex Center. The Company provides all facility upgrades, as well as the equipment and operational personnel. The newly renovated facility opened in November 1995. Fun City Amusement Centers, Inc. ("Fun City"): The Company has entered into an agreement with Fun City, a 150,000 square foot indoor family entertainment center in North York, Ontario, Canada, a Northern suburb of Toronto, which currently operates a 24-player Laser Storm(R) game system in a 2,500 square foot arena. Facility attractions include an indoor, electric go-cart track, major arcade area and multiple party rooms and concession facilities. The agreement provides for the participation by the Company in revenue from operations and requires that Fun City pay to the Company a per-person-per-game use fee based on 45% of the price per game, currently $2.68 Canadian, exclusive of any sales, use or other taxes that may be imposed upon each use. Payments are made to the Company monthly based on the number of player activations utilized in the previous month of operation. Fun City paid $24,250 to the Company as a prepayment under the revenue sharing agreement. These fees are to be recovered by Fun City before the Company participates in revenues from operations. The Company provided and retains ownership of the equipment. M. W. Recreation Corporation ("Fun Machine"): In November 1995, the Company installed a Circuit Commando(TM) inflatable unit for a Fun Machine location on a revenue share basis. The term of the revenue share is for a period of 12 months, renewable annually and the Company is to receive 50% of the gross revenues realized from the unit. In exchange for the use of the inflatable unit, the Company agreed to pay the manufacturer 30% of the payments received by the Company which result from the use of the unit. The inflatable unit is included in a full service Fun Machine amusement center located in Longwood, Florida. Tunica Partners II, LP ("Harrah's"): In February 1996, the Company entered into an agreement with Tunica Partners II, LP ("Tunica Partners") that owns the casino business which is managed for Tunica Partners by Harrah's Tunica Corporation ("Harrah's"). Pursuant to the agreement, the Company installed a STARGATE Laser Storm(R) game system in approximately 2,400 square feet of space in a new arcade and child care facility operated for Tunica Partners by The Planet Kidz, Inc. ("Planet Kidz") in the Harrah's Casino in Tunica, Mississippi. The Company supplied all equipment, service, repair and warranty work for the game system for which the Company is to receive 50% of the revenue (less any taxes) received from the operation of the game system. The Laser Storm(R) game system opened in April 1996. Harrah's Vicksburg: The Company has negotiated an agreement (which has not been completely executed) pursuant to which the Company provided the equipment, service, repair and warranty work for a Galaxy 2000(TM) Laser Storm(R) game system in approximately 1,000 of square feet in a Harrah's Casino in Vicksburg, 24 Mississippi. The Company receives 50% of the gross revenue (excluding taxes) from the operation of the Laser Storm(R) game system, which opened in February 1996. Marketing/Sales The Company employs a variety of marketing techniques, including placing advertisements in trade and business publications, attending trade shows, telemarketing, conducting direct mail efforts and buying TV commercial time. Print. The Company advertises in industry-specific magazines and trade publications to generate leads for direct sales. All advertisements will emphasize new themes and games as they become available, as management believes these new themes and games are the basis for the Company's competitive strength. Trade Shows. In 1995 and 1996 the Company attended and exhibited at major trade shows worldwide. The Company plans to continue to exhibit at selected trade shows in the United States, Asia, Europe, South America and Mexico. This marketing strategy will primarily support direct sales and revenue participation efforts. Trade shows constitute the primary source of leads for sales of Laser Storm(R) game systems. The Company's ability to demonstrate its thematic games will be a primary consideration in selecting shows. In November 1995, at the International Association of Amusement Parks and Attractions (IAAPA) annual convention in New Orleans, Louisiana, the Company was awarded a First Place Best New Product award, in the category of Family Entertainment Center Ride/Attraction for the Company's STARGATE themed game system. Telemarketing. The Company's telemarketing activities consist of responding to inquiries and contacting potential customers from names obtained at trade shows. The Company also utilizes various other lists acquired from industry organizations and developed by others for its telemarketing activities. These activities are conducted by the Company's sales and marketing personnel. Direct Mail. Management believes that direct mail efforts support sales of systems and promote revenue participation activities, as direct mail may be aimed at highly focused target markets. The Company utilizes a number of mailing lists from different amusement industry sources. The Company also has special lists prepared from time to time for certain promotions or to target specific markets. The Company plans to make additional mailings to very specific markets such as to military entertainment service buyers. It is also planned that sales letters will be sent out in locations where the Company is participating in trade shows to encourage meetings with potential operators and to demonstrate the Company's products. [STILL TRUE?] Public Relations. To enhance name and brand recognition, engender customer loyalty and quickly disseminate news of product development and offerings, the Company has employed a public relations firm which will be responsible for generating stories in print and broadcast media about the Company and its Laser Storm(R) game systems. The Company has sales video tapes which contain information on the Company's thematic games (Circuit Commandos(TM) and STARGATE), professional exit interviews, owner/operator sound bytes, entertainment statistics and imagery that are intended to appeal to landlords, entrepreneurs, potential operators and the general public and is also preparing a television commercial which will feature the reactions of families exiting a typical Laser Storm(R) game facility intercut with flash cuts of family play. Credit. Within the past 18 months, the Company has established arrangements with various leasing companies to provide lease financing for the Company's customers. All require an advance payment and can finance leases in principal amounts ranging between $10,000 and $150,000, with terms varying from 24-72 months. Lease rates and dollar amounts will vary based on the creditworthiness of the applicant and no assurance can be given that all applicants will be approved. 25 The Company purchases or prepares family entertainment center mailing lists which will be used to believed to offer both a competitive advantage and a means to accelerate system payment. Competition In general, the Company faces competition from numerous other companies in the entertainment and amusement industry and more specifically from other providers of laser tag game systems. The Company believes that its two principal competitors are Q-Zar and P&C Micros, and that there are at least 12 additional smaller competitors. The Company has not conducted any formal studies or surveys, and does not have any reliable independent support from third parties for the following estimates of its market share and competitive position. The method the Company used in making such estimates was based strictly on anecdotal accounts, and the actual numbers could vary significantly from the estimates. As qualified by the foregoing, and based on conversations with the owners of the Company's laser tag games and on conversations with competitors of the Company, the Company estimates that it currently has over 50% of the market in the United States for sales of laser tag game systems, based upon the number of systems the management of the Company believes are in operation. The Company estimates that Q-Zar has about 20% of the United States market share and five other small competitors share the remainder of the United States market. Other small competitors either operate outside the United States or do not have, to the Company's knowledge, any sites in operation. While the Company believes that it has more than three times as many systems in operation in the United States as Q-Zar, Q-Zar has more systems installed worldwide than the Company. The Company believes that its current success has been due to an emphasis on thematic game environments and the simplicity of its electronics, which are combined to provide games that are exciting and fun to play, yet challenging. To management's knowledge, only two of the Company's competitors, Q-Zar and P&C Micros, have any currently appreciable market influence or market share. Because the laser tag game market is in its infancy and growing, management anticipates that additional competitors are likely to enter the market. To remain competitive, the Company intends to offer enhanced products (price competitive, thematically unique) and to expedite its domestic and international sales growth to enter and expand in markets as quickly as possible within the limits of economic and personnel resources. The Company believes that the games its competitors produce generally are more complicated to play than Laser Storm(R) games, are more costly and complex to maintain and are far less capable of being easily modified. There is no assurance that the Company will be able to sustain a competitive position for its products. Manufacturing; Customer Service Although the Company's game systems are manufactured and built to order, the Company generally maintains an inventory of raw materials, finished goods and product held for replacement which totalled approximately $663,000 at September 30, 1996. The Company currently outsources the fabrication of the game system components to multiple vendors. Virtually every component is either multi-sourced or has multiple sources available. The exception involves plastic blaster shells and plastic headset parts, which are fabricated from injection molds. While there are any number of injection molders available, the Company only has one multi-cavity mold for each of these components. Therefore, the Company only uses one source of supply at a time for components using plastic shells. Upon receipt of the components from various vendors, Company personnel configure the "systems" to suit each customer's needs. Currently, the Company offers system configurations ranging in size from 12- to 48-player units which can accommodate a variety of peripheral components such as target pods. 26 With the exception of turn key arenas which are provided by a third party manufacturer, arena barriers are printed by outside vendors, then cut and assembled in the Company's Denver facility. The Company provides CAD/CAM generated three dimensional renderings of proposed arena layouts to the facility operator, and, once approved, the facility is constructed by the owner/operator. After construction, the Company personnel install the game system components at the facility site for a moderate installation charge which covers the Company's costs. The Company currently provides annual maintenance contracts for a $.12 per play charge after the initial 90-day factory warranty period and assesses surcharges for obvious abuses of equipment. The Company believes it excels in the areas of customer service and warranty repair, offering 24-hour customer service access and overnight advanced shipment to replace failed components. The Company strives to assure its operators that it will keep all equipment serviceable and has generated a database program capable of tracking each facility operator and the operator's repair history. This information is intended to direct research efforts to replace parts that commonly fail and to forecast the Company's parts and warranty service requirements. One of the facts learned by reviewing operator service reports was a high rate of "No Problem Found" ("NPF") components. In an effort to eliminate NPF returns, management has increased both its customer service and installation training and now is charging customers for NPF returns. Management believes that these efforts will allow most NPF problems to be resolved by the operator. Customer service representatives are also encouraged to provide operators with marketing information, such as industry trends and operations techniques, and to apprise operators of new Company product offerings. Governmental Regulation Various state and federal laws define and govern the sale of "franchises" and "business opportunities." These laws require, among other things, that sellers of franchises and business opportunities register the offering of such sales and provide prescribed written disclosures to potential purchasers. State franchise laws provide customers who have been sold franchises in violation of such laws recourse against the franchisor, including rescission of the purchase agreements with the franchisor. In addition, federal and state laws prescribe remedies against sellers of franchises and business opportunities, consisting of fines, penalties, injunctions, or a combination of these, being levied against the sellers of franchises and business opportunities. Management believes that the Company sales of Laser Storm(R) game systems are not subject to such laws. If a determination were made that franchise or business opportunity laws and regulations are applicable to the Company and customers or governmental regulators were successful in prosecuting actions against the Company, there could be a material adverse effect on the Company selling its Laser Storm(R) game systems in a particular market or in general and, depending upon the remedies imposed against the Company, there could be a material adverse effect on the Company's business, operating results and financial condition. Representatives of the Department of Corporations of the State of California ("Department") have advised the Company that the Department is reviewing the issue as to whether or not the prior sales by the Company of Laser Storm(R) game systems in California may have involved the sale of "franchises" under the California Franchise Investment Law ("Act"). Until the matter can be resolved with the Department or through administrative or legal proceedings, the Company will prohibit future purchasers of Laser Storm(R) game systems in California from using the Company's trademark in connection with the Company's game systems or the purchasers' operation of the Company's game systems. Although the Company can provide no assurances in this regard, the Company does not believe that prohibiting future purchasers from using the Company's trademarks in California will limit future sales by the Company of the Company's game systems in California. To date, the Department has not indicated to the Company what, if any, action the Department will take against the Company if the Department determines the Company's prior sales in California involved the sale of "franchises" under 27 the Act. Such actions may include instituting proceedings to enjoin the Company from violating the Act or to force the Company to comply with the Act, to seek restitution or disgorgement or damages on behalf of any persons that the Department may deem to have been injured by the Company's sales or to seek penalties, including a penalty of up to $2,500 for each violation of the Act. If persons who purchased the Company's Laser Storm(R) game systems in California believe that the sale to them by the Company violated the Act, such persons may be able to sue the Company for damages caused thereby or for rescission, if they believe the violation was willful. In such event, the Company may have the right to offset any such claim by the amount of any income realized by such persons from their operation of the game systems. At this time, the Company has not been threatened with any suit for violation of the Act by any person who purchased the Company's Laser Storm(R) game systems. There are no assurances that the Company will not be threatened with such suits in the future. If a claim for damages or rescission were brought against the Company or if the Company deemed it otherwise appropriate to offer rescission to previous purchasers of the Company's Laser Storm(R) game systems in California, the Company. Upon making any such purchase, the Company would either continue to operate the Laser Storm(R) game facility or utilize the equipment to open a new Laser Storm(R) game facility. No assurance can be given that other jurisdictions will not review the Company's activities to determine whether or not they deem such activities to involve the sale of "franchises" or "business opportunities." Bankruptcy Filing Because of substantially greater than expected expenditures incurred by the Company in connection with the development of an earlier version of a laser tag game system, the Company elected in November 1992 to file for reorganization under Chapter 11 of the United States Bankruptcy Code. In November 1993, the Company's Plan of Reorganization was confirmed, and, in November 1994, the court ordered the proceedings to be closed. Robert J. Cooney, who is the chairman of the Board and Chief Executive Officer of the Company, was an executive officer of the Company at the time of the bankruptcy filing. Consultant The Company has entered into an agreement with Bertrand T. Ungar ("Consultant") pursuant to which the Consultant is to provide the Company with up to 20 hours per week of assistance in developing and implementing a business expansion plan for Laser Storm(R) game facilities, in seeking and obtaining product licenses and in developing and implementing a plan for the development and distribution of products for the Company. The agreement is to be in effect until February 28, 1997 and the Company is to pay the Consultant an aggregate fee of $187,500 in 17 equal monthly installments of $10,500 and a final installment of $9,000. The first installment was due and payable on October 1, 1995 and the Consultant has been paid $157,500 to date. The Consultant was also granted an option to purchase 50,000 shares of the Company's Common Stock at a price of $0.75 per share. Further, the Consultant has the right to purchase Laser Storm(R) game systems from the Company on the most favorable terms and conditions then being offered by the Company. Employees As of August 31, 1996, the Company had 76 full-time employees and 1 part-time employee. The Company's employees are not unionized. Office and Warehouse Facilities The Company leases approximately 26,350 square feet of office and warehouse space pursuant to a lease which expires on January 31, 2006. The lease requires base rental payments of $20,645 per month for the first 36 months with increases thereafter tied to the Consumer Price Index. Robert J. Cooney, the Company's Chairman of the Board and Chief Executive Officer, has individually guaranteed the obligations of the Company under the new lease until December 31, 2000. 28 MANAGEMENT The following table sets forth the names and ages of the current directors and executive officers of the Company, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. Each director serves a one year term and until the director's successor is elected or until the director's death, resignation or removal.
Officer and/or Names of Executive Director Officers and Directors Age Since Position - ---------------------- --- --------- -------- Robert J. Cooney..................... 32 1990 Chairman of the Board, Chief Executive Officer, Treasurer and Director William R. Bauerle................... 46 1994 President, Chief Operating Officer, Secretary and Director Frank J. Ball........................ 42 1994 Executive Vice President, Operations; Corporate Counsel and Director James E. Johnson..................... 42 1996 Vice President of Real Estate and Construction Michael D. Kessler................... 38 1995 Vice President of Retail Operations John E. McNutt....................... 40 1996 Vice President Finance Eric B. Schwartzman.................. 30 1995 Vice President of Marketing and Product Development Harrison A. Price.................... 75 1995 Director Harold Skripsky...................... 48 1995 Director - ------------------
Robert J. Cooney has been the Chairman of the Board and Chief Executive Officer of the Company since March 1990, and the Treasurer of the Company since October 1994. Mr. Cooney was President of the Company from February 1992 to April 1994. From September 1989 to March 1990, Mr. Cooney was a Manager with NBSI Capital Corp., a company which had developed a rudimentary laser tag game. William R. Bauerle has been the President and the Chief Operating Officer of the Company since April 1994 and a director and the Secretary of the Company since July 1994. From 1985 to 1994, Mr. Bauerle was President and Director of Asset Development Corporation, a software development and business consulting firm. From 1989 to 1991, Mr. Bauerle was the Executive Vice President and, from 1990 to 1991 was a director, of Analytical Development Corporation, a company which provides a wide range of analytical services to the chemical industry. Mr. Bauerle received a bachelor's degree in business administration from the University of Notre Dame with a major in marketing research. Frank J. Ball has been General Counsel of the Company since inception of the Company, has been the Executive Vice President of the Company since November 28, 1994 and has been a director of the Company since October 1995. From 1989 to the present, Mr. Ball has been engaged (currently on a part-time basis) in the private practice of law focusing on trial work regarding domestic relations, criminal and commercial litigation. Mr. Ball received a bachelor's degree in marketing and organizational management from the University of Colorado, masters 29 degrees in business administration and public administration, and a Juris Doctor degree from the University of Denver. James E. Johnson has been the Vice President of Real Estate and Construction of the Company since October 1996. From February 1995 to October 1996, Mr. Johnson was Vice President of Grease Monkey International, Inc., an owner, operator and franchisor of quick service automotive lubrication centers. From September 1993 to February 1995, Mr. Johnson was National Director Real Estate for Grease Monkey International, Inc. From August 1990 to December 1993, Mr. Johnson was President and Chief Executive Officer of SRTI, a national environmental soil remediation company. Mr. Johnson received a degree in business administration/psychology from the University of Northern Colorado. Michael D. Kessler has been the Vice President of Retail Operations of the Company since December 1995. From 1988 to December 1995, Mr. Kessler was Vice President and General Manager of Grupo O.N.E.S.A. (Operadora Nacional de Espectaculos, S.A. de C.V.), Mexico City, Mexico, a private group which operates family amusement centers throughout Mexico and the United States. As Vice President he was responsible for concept development, market feasibility studies, design, construction and staffing of family amusement centers. During his tenure, he increased the number of Grupo O.N.E.S.A.'s centers by 18 to a total of 49. He was responsible for the creation of Grupo O.N.E.S.A.'s Coney Island concept which generated approximately 47% of the gross revenues of Grupo O.N.E.S.A. in 1995. He also oversaw the design and construction of Perimagico, an 80,000 square foot indoor amusement park. From 1980 to 1988, Mr. Kessler was General Partner and General Manager for several restaurant companies, including Bennigans, Wendy's and On The Border, the latter of which he co-founded in 1983. Mr. Kessler received a bachelor of arts degree in business management from Southern Methodist University. John E. McNutt has been the Company's Vice President of Finance since July 1996. From 1981 to July 1996 Mr. McNutt was associated with CAIRE, Inc., formerly Mountain Medical Equipment, Inc., a manufacturer and seller of home health care respiratory equipment, where Mr. McNutt served in various capacities including corporate controller and Vice President of a subsidiary, Mountain Medical Leasing Co. From 1979 to 1991 Mr. McNutt was a staff accountant with Dewey A. Rippy, CPA. Mr. McNutt is a certified public accountant with over 15 years experience in corporate and manufacturing accounting and finance including public accounting. His responsibilities have included designing and implementation of manufacturing accounting systems, development of budgeting and forecasting systems, corporate taxation, directing external audits and financial reporting to the Securities and Exchange Commission. Mr. McNutt received a bachelor of science degree in business administration, accounting from Colorado State University. Eric B. Schwartzman has been the Vice President of Marketing and Product Development of the Company since December 1995. Since 1989, Mr. Schwartzman has been involved in the entertainment industry engaged in overseeing product development management, sales and marketing, advertising and publicity, with respect to themed attractions, location based entertainment, live venues and motion picture effects. From January 1991 to December 1995, Mr. Schwartzman was Chief Creative Officer for Wildfire, Inc., a company which produces and oversees development of entertainment activities, including immersive environments, live venues, motion picture and themed attractions. At Wildfire, Inc., Mr. Schwartzman was involved in development of various entertainment attractions and motion simulator rides and dark rides, including the Cinema Ride at Caesar's Palace in Las Vegas, Nevada, the Indiana Jones and Roger Rabbit cartoon spin dark rides at Disneyland, special effects for the "Demolition Man" motion picture produced by Warner Brothers, live venue entertainment for the Michael Jackson Tour 1993 and the Mighty Ducks hockey team, as well as the Circuit Commandos(TM) interactive laser tag game for the Company. He has been a contributing editor for Leisure Management magazine and has published several articles on entertainment and entertainment production. He has been a director, screen writer and writer for film and television, including "Rock the Vote" public service announcements for MTV; "Wheels for Peace," a documentary film in Russia, and "Innerbeauty," adaptation of a short story produced by actress Talia Shire. Mr. Schwartzman received a bachelor of arts degree in film production from San Francisco State University, cum laude. 30 Harrison A. ("Buzz") Price has been a director of the Company since October 1995. Since 1978 Mr. Price has been the Chairman and the President of Harrison Price Company, which is engaged in amusement attraction and entertainment planning and which focuses, among other attractions, on themed amusement parks, museums, family entertainment centers and performance and sports facilities. Mr. Price has conducted site location and economic feasibility studies for Disneyland and Disney World. Harrison Price Company has directed site selection and feasibility studies for other Walt Disney Productions projects and conducted studies for the Six Flags theme parks, several winter resorts, aquariums, Sea World parks and hotels and conference centers. From 1973 to 1978 Mr. Price was the Senior Vice President--Marketing and then the Chairman of Planning Research Corporation. From 1958 to 1973, Mr. Price was a founder and President of Economics Research Associates. He previously served as general manager of Defense Plants Division, Harvey Aluminum, and was a research economist and the manager for the Southern California Division of Stanford Research Institute. Mr. Price currently is a director of Electronics Scales International, a privately held corporation. He is a trustee of the California Institute of the Arts. Mr. Price received a bachelor of science degree from the California Institute of Technology and a masters degree in business administration from Stanford University. Harold Skripsky has been a director of the Company since October 1995. Mr. Skripsky has been engaged in the restaurant and entertainment business since 1973. Since February 1996, Mr. Skripsky has been the owner and operator of The Enchanted Castle, a theme oriented restaurant and entertainment center which he co-founded and owned from 1981 to 1993. In 1993, Mr. Skripsky sold the Enchanted Castle to Discovery Zone. From 1993 to February 1996, Mr. Skripsky was Vice President of Operations for the Family Entertainment Center Division of Discovery Zone where he has headed special projects and new concepts for the Discovery Zone Fun Centers and corporate operations. Discovery Zone filed for reorganization under Chapter 11 of the United States Bankruptcy Code in March 1996. From 1981 to 1992, Mr. Skripsky was engaged in the development, ownership and operation of family style restaurants, including the development and opening of the Enchanted Castle, a theme-oriented restaurant and entertainment center. In 1993 Mr. Skripsky expanded Enchanted Castle and included a 32-player live action laser game from Q-Zar. Mr. Skripsky is a director for the International Family Entertainment Center Association and is a member of a number of other industry organizations. He received his bachelor of science in business and marketing from Northwest Missouri State University. There are no family relationships among any of the officers or directors of the Company. The Company has purchased insurance in the amounts of $1,000,000 and $532,258 on the lives of Robert J. Cooney and William R. Bauerle, respectively. At death or surrender of the policies, the Company will recover its cumulative share of the premiums paid for the cash values (in the case of surrender) or the death benefit (in the case of death). The employees or their beneficiaries are entitled to receive cash values in excess of the cumulative premiums (in the case of policy surrender) or the death benefit in excess of cumulative premiums. The Company has also obtained key man life insurance in the amounts of $2,000,000 each on the lives of Messrs. Cooney and Bauerle, respectively. The Company is the sole beneficiary of this insurance. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid by the Company for services rendered in all capacities to the Company for the fiscal years ended December 31, 1995, 1994 and 1993, of those persons who were, at December 31, 1995 (i) the chief executive officer and (ii) the other most highly compensated executive officers of the Company whose annual salary and bonus from the Company exceeded $100,000 for the fiscal year ended December 31, 1995. 31
Summary Compensation Table Long Term Annual Compensation Compensation ------------------------------- ------------ Securities Name and Principal Other Annual Underlying All Other Positions at 12/31/94 Year Salary Bonus Compensation(1) Options Compensation - --------------------- ---- ------ ----- -------------- ----------- ------------ Robert J. Cooney..................... 1995....$ 150,000 - 0 - $ 24,335 -0- None Chairman of the Board and 1994....$ 97,500 - 0 - $ 3,883 -0- None Chief Executive Officer 1993....$ 40,377 - 0 - $ 3,062 -0- None William R. Bauerle................... 1995....$ 150,000 -0- $21,099(2) 75,000 -0- President and Secretary 1994....$ 71,250 -0- $ 2,934(2) -0- $21,727(3) 1993....$ -0- -0- -0- -0- -0- Frank J. Ball........................ 1995....$ 95,411 -0- $ 4,605(4) -0- $14,020(5) Executive Vice President, Operations 1994....$ -0- -0- -0- -0- 14,000(5) and Corporate Counsel 1993....$ -0- -0- -0- -0- -0- - ------------------
(1) Includes amounts paid by the Company for automobile expenses ($8,988 in 1995, $3,218 in 1994 and $3,062 in 1993), health club dues ($1,559 in 1995, and $665 in 1994), life insurance premiums advanced on behalf of Mr. Cooney ($12,111 in 1995) and disability insurance premiums ($1,677 in 1995). (2) Includes amounts paid by the Company for automobile expenses ($7,204 in 1995), health club dues ($250 in 1995 and $660 in 1994), life insurance premiums advanced on behalf of Mr. Bauerle ($11,635 in 1995 and $1,939 in 1994) and disability insurance premiums ($2,010 in 1995 and $335 in 1994). (3) Represents consulting fees paid to a corporation owned by Mr. Bauerle prior to Mr. Bauerle becoming an employee of the Company. (4) Includes amounts paid by the Company for automobile expenses ($4,605 in 1995). (5) Represents amounts paid in legal fees for services rendered by the law firm owned by Mr. Ball. Value of Options at December 31, 1995
Aggregate Fiscal Year End Option Values ------------------------------------------------------------- Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at Fiscal Year End at Fiscal Year End Exercisable/Unexercisable Exercisable/Unexercisable -------------------------- ------------------------- Robert J. Cooney............... - 0 - - 0 - William R. Bauerle............. 25,000/50,000 $95,000/$190,000(1) Frank J. Ball.................. - 0 - - 0 - - ----------------------
(1) The value is based on the $4.00 offering price of the Units offered in the public offering minus the exercise price of the options. No options to purchase the Company's Common Stock were exercised by Messrs. Cooney, Bauerle or Ball during the Company's fiscal year ended December 31, 1995. 32 Messrs. Cooney, Bauerle and Ball each have employment agreements with the Company pursuant to which each will be paid compensation in excess of $100,000 for 1995 and subsequent years while the employment agreements are in effect. See "Employment Agreements" below. Until December 31, 1997, the Company has agreed with Laidlaw that the Company will not increase, without shareholder approval, the compensation of Messrs. Cooney, Bauerle, Ball, Kessler and Schwartzman by more than an aggregate of 15% per annum above current levels. Subject to the foregoing limitations, the Company may reserve up to 10% of net pre-tax profits over $1,000,000 for bonuses to Company executives and employees. Option Grants in the Last Fiscal Year No options were granted by the Company to Robert J. Cooney, William R. Bauerle or Frank J. Ball during the Company's fiscal year ended December 31, 1995, and Robert J. Cooney and Frank J. Ball currently own no options to purchase the Company's Common Stock and owned no options to purchase the Company's Common Stock at December 31, 1995. Employment Agreements With the exception of Messrs. Johnson and McNutt, each of the Company's executive officers has an employment agreement with the Company. Each employment agreement contains provisions that the employee will not disclose Company confidential information and will not compete with the Company for 24 months after termination of their agreements. Mr. Cooney's agreement was effective October 1, 1994, extends through September 10, 1998 and provides for an annual salary of $150,000. The Company may terminate the agreement with or without cause. If the Company terminates Mr. Cooney's agreement without cause, the Company must continue to pay Mr. Cooney his salary until September 10, 1998. Mr. Bauerle's agreement was effective October 1, 1994, extends through September 10, 1998 and provides for an annual salary of $150,000. The Company may terminate the agreement with or without cause. If the Company terminates Mr. Bauerle's agreement without cause, the Company must pay Mr. Bauerle his salary for six months after the termination. Mr. Ball's agreement was effective September 13, 1995, extends through September 12, 1998 and provides for an annual salary of $120,000. The Company may terminate the agreement with or without cause. If the Company terminates his agreement without cause, the Company must pay Mr. Ball his salary for six months after the termination. Pursuant to a prior employment agreement dated November 28, 1994, Mr. Ball was issued 76,250 shares of the Company's Common Stock. Mr. Johnson receives a salary of $100,000 annually and will be granted options to purchase 75,000 shares of the Company's Common Stock. The options will vest over a three year period commencing one year from their date of grant. Mr. Johnson will receive a bonus based on Company owned Laser Storm(R) game facilities opened. Mr. Kessler's employment agreement was effective December 1, 1995 and extends through December 1, 1998, and provides for an annual salary of $110,000. The Company also paid $10,000 in moving expenses on behalf of Mr. Kessler to relocate his residence to Colorado from Mexico. The Company may terminate the agreement with or without cause. If the Company terminates Mr. Kessler's agreement without cause, the Company must continue to pay Mr. Kessler his salary for six months after the termination. In addition, separate from Mr. Kessler's employment agreement, the Company will pay Mr. Kessler a commission of 5% of net sales of Laser Storm(R) game systems sold in Mexico and Guatemala through Mr. Kessler's efforts. 33 Mr. Schwartzman's employment agreement was effective December 16, 1995, extends through December 16, 1998, and provides for an annual salary of $100,000. The Company may terminate the agreement with or without cause. If the Company terminates his agreement without cause, the Company must pay to Mr. Schwartzman his salary for six months after the termination. Mr. McNutt receives a salary of $78,000 annually, and was granted options to purchase 50,000 shares of the Company's Common Stock at an exercise price of $2.25 per share. The options vest one-half on August 15, 1997 and one-half on August 15, 1998, and expire on August 15, 2002, and August 15, 2003, respectively. Each executive officer also receives a $725 per month vehicle allowance and is reimbursed for all other business-related expenses. Stock Incentive Plan The Company has adopted the Amended Stock Incentive Plan ("Plan") which authorizes the Company to grant incentive stock options within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended, to grant nonstatutory stock options and to make restricted stock grants. The Plan relates to a total of 300,000 shares of Common Stock. Options relating to 27,500 shares have been exercised and options relating to 263,500 shares are outstanding. The options vest in three equal annual installments over a three-year period from their respective dates of grant. The options are exercisable at $0.20 per share for 138,500 shares, $2.00 per share for 28,500 shares, $4.00 per share for 46,500 shares and $2.25 per share for 50,000 shares. Of the outstanding options, granted under the Plan, current executive officers have been granted options to purchase 125,000 shares of Common Stock and other employees have been granted options to purchase 166,000 shares of Common Stock. See "Principal Shareholders." The outstanding options must be exercised within five years from the date of vesting and no later than three months after termination of employment, except that any optionee who is unable to continue employment due to total and permanent disability may exercise such options within one year of termination and the options of an optionee who is employed or disabled and who dies must be exercised within one year after the date of death. The Plan requires that the exercise prices of options granted must be at least equal to the fair market value of a share of Common Stock on the date of grant, provided that if an employee owns more than 10% of the Company's outstanding Common Stock then the exercise price of an incentive option must be at least 110% of the fair market value of a share of the Company's Common Stock on the date of grant, and the maximum term of such option may be no longer than five years. The aggregate fair market value of Common Stock, determined at the time the option is granted, for which incentive stock options become exercisable by an employee during any calendar year is limited to $100,000. The Plan is to be administered by the Company's Board of Directors or a committee thereof which determines the terms of options granted, including the exercise price, the number of shares of Common Stock subject to the option, and the terms and conditions of exercise. No option granted under the Plan is transferrable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable during the lifetime of the optionee only by such optionee. Restricted stock grants to employees may also be made under the Plan on such terms and conditions as the Board of Directors or committee determines. Compensation of Directors The Company compensates its non-employee directors $20,000 per year, payable in quarterly installments, and has granted each non-employee director an option to purchase 50,000 shares of Common Stock at $4.00 per share. One-half of each option vested in October 1995 and one quarter of each option will vest in October 1996 and in October 1997. The option must be exercised within five (5) years from the date of vesting. The options were not granted under the Amended Stock Incentive Plan. 34 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock, outstanding as of October 15, 1996, by (i) each person who is known to the Company to own beneficially more than 5% of the outstanding Common Stock with the address of each such person, (ii) each of the Company's directors and officers, and (iii) all of the Company's officers and directors as a group.
Name and Address of Beneficial Owner Amount and Nature of Percent of or Name of Officer or Director Beneficial Ownership(1) Class(2) - ------------------------------------ ---------------------- ---------- Robert J. Cooney ............................................................... 841,800 22.0% 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 William R. Bauerle ............................................................. 151,250(3) 3.9% 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 Frank J. Ball .................................................................. 76,250 2.0% 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 James E. Johnson ............................................................... 0(4) .0% 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 2.0% Michael D. Kessler ............................................................. 75,000(5) 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 8 231 John E. McNutt ................................................................. 50,000(6) 1.3% 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 Eric B. Schwartzman ............................................................ 75,000(7) 2.0% 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 Harrison A. Price .............................................................. 50,000(8) 1.3% 222 West 6th Street, Suite 1000 San Pedro, California 90731 Harold Skripsky ................................................................ 50,000(9) 1.3% 1103 South Main Street Lombard Pines Plaza Lombard, Illinois 60148 All Officers and Directors as a Group (8 Persons) .............................. 1,369,300(10) 33.3% Edward J. Bonis ................................................................ 411,750 10.8% 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 - ------------------------
35 (1) The beneficial owners listed have sole voting and investment power with respect to the shares of Common Stock. (2) Assumes the stock option of each person who has a stock option is exercised whether or not the stock option is vested. (3) Includes 75,000 shares of Common Stock underlying stock options. (4) The Company has agreed to grant Mr. Johnson an option to purchase 75,000 shares at such time as the Company adopts a new option plan. (5) Consists of 75,000 shares of Common Stock underlying stock options. (6) Consists of 50,000 shares of Common Stock underlying stock options. Does not include an additional 25,000 shares of Common Stock underlying a stock option that the Company has agreed to grant to Mr. McNutt at such time as the Company adopts a new option plan. (7) Consists of 75,000 shares of Common Stock underlying stock options. (8) Consists of 50,000 shares of Common Stock underlying stock options. (9) Consists of 50,000 shares of Common Stock underlying stock options. (10) Includes 375,000 shares of Common Stock underlying the outstanding stock options described above. CERTAIN TRANSACTIONS Robert J. Cooney, the Company's Chairman of the Board and Chief Executive Officer, has individually guaranteed, until December 31, 2000, the obligations of the Company under the lease for the Company's facilities. The lease expires on January 31, 2006 and requires base rental rate payments of $20,645 per month for the first 36 months with increased rentals thereafter tied to the Consumer Price Index. See "Business--Office and Warehouse Facilities." Harold Skripsky, a director of the Company since October 1995, was Vice President of Operations for the Family Entertainment Center Division of Discovery Zone from 1993 to February 1996. Discovery Zone purchased six Laser Storm(R) systems from the Company during the summer of 1994 and may purchase additional systems in the future, although there currently is no agreement for any such purchases. The sales to Discovery Zone were, and it is anticipated that future sales, if any, will be, made on terms which are the same as comparable to those offered to other customers. Discovery Zone filed for reorganization under Chapter 11 of the United States Bankruptcy Code in March 1996. The Company has made no determination what effect, if any, the reorganization will have on any future purchases by Discovery Zone. 36 DESCRIPTION OF SECURITIES Authorized Stock The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, $0.001 par value per share, and 2,000,000 shares of preferred stock, $0.001 par value per share. All of the issued and outstanding capital stock of the Company is fully paid and nonassessable. The following summary descriptions of the Company's preferred stock and Common Stock are qualified in their entirety by reference to the Company's Restated Articles of Incorporation, which were filed as exhibits to the Registration Statement of which this Prospectus is a part and which are available from the Company upon request. See "Additional Information." Common Stock As of October 15, 1996, there were 3,821,211 shares of Common Stock outstanding, held of record by 36 shareholders. The holders of Common Stock are entitled to receive ratable dividends when and as declared by the Board of Directors from funds legally available therefor and to one vote for each share held of record on each matter submitted to a vote of shareholders. In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payments to creditors and other payments required by law. Holders of Common Stock have no preemptive rights and no rights to convert their Common Stock into any other securities. The outstanding shares of Common Stock are fully paid and nonassessable. Warrants Unless previously redeemed, each Warrant entitles the registered holder thereof to purchase one share of Common Stock at any time until April 23, 2001, at $5.00 per share, subject to adjustment in certain circumstances. The exercise price of the Warrants will be reduced by $0.20 per share for every $0.01 that the Company's reported audited net after tax earnings per share for the Company's four fiscal quarters ending March 31, 1997, are less than $0.40 (but in no event will the exercise price be reduced to less than $1.00 per share). The following table shows, by way of example only, the exercise price as adjusted for earnings of less than $0.40 per share. Adjusted Exercise Earnings Per Share Price Per Share - ------------------ ----------------- $0.40 or greater............................. $5.00 $0.39........................................ $4.80 $0.38........................................ $4.60 $0.37........................................ $4.40 $0.36........................................ $4.20 $0.35........................................ $4.00 $0.34........................................ $3.80 $0.33........................................ $3.60 $0.32........................................ $3.40 $0.31........................................ $3.20 $0.30........................................ $3.00 $0.29........................................ $2.80 $0.28........................................ $2.60 $0.27........................................ $2.40 $0.26........................................ $2.20 $0.25........................................ $2.00 $0.24........................................ $1.80 37 Adjusted Exercise Earnings Per Share Price Per Share - ------------------ ----------------- $0.23........................................ $1.60 $0.22........................................ $1.40 $0.21........................................ $1.20 $0.20 or less................................ $1.00 For purposes of computing earnings per share for the determination of the exercise price of the Warrants, the computation will be made using fully diluted audited net after tax earnings per share based on the weighted average number of shares outstanding for the Company's four fiscal quarters ending March 31, 1997 (using the treasury stock method). The dilutive effect of the Warrants on the earnings per share computation will be computed using the $5.00 per unit. Should the Company's audited net after tax earnings for the four fiscal quarters ending March 31, 1997 be less than $0.40 per share, the weighted average number of shares outstanding will not be recomputed to give effect to the adjustments to the exercise price of the Warrants. Commencing on a date that is 30 days after the date the Company publicly reports its audited financial results for the year ending December 31, 1996 and unaudited financial results for the quarter ending March 31, 1997, the Company may redeem the Warrants at $0.05 per Warrant upon 30 days' prior written notice any time after a period of 30 consecutive trading days that the closing price of the Common Stock exceeds $7.00 per share (or if the exercise price of the Warrants is adjusted because of the earnings per share for the four fiscal quarters ending March 31, 1997, the exercise price will be 175% of such adjusted price). For these purposes, the closing price of the Common Stock will be determined by the closing bid price, as reported by NASDAQ, or, if the Common Stock is listed on a national stock exchange or on the Nasdaq National Market System, the closing price will be determined by the closing sale price on the primary exchange on which the Common Stock is traded or on the Nasdaq National Market System, if such shares are not listed on a national stock exchange. The Warrants have been issued in registered form pursuant to the terms of a Warrant Agreement dated as of April 23, 1996 (the "Warrant Agreement") between the Company and American Securities Transfer & Trust, Inc., Denver, Colorado, as Warrant Agent. Reference is made to said Warrant Agreement (which has been filed as an Exhibit to the Registration Statement of which this Prospectus is a part) for a complete description of the terms and conditions thereof. The description herein is qualified in its entirety by reference to the Warrant Agreement. The exercise prices and number of shares of Common Stock or other securities issuable on exercise of the Warrants are also subject to adjustment in certain circumstances, including in the event of a stock dividend, stock split, recapitalization, reorganization, merger or consolidation of the Company or certain sales of the Company's Common Stock below the then current market price. However, the Warrants are not subject to adjustment for issuances of Common Stock upon exercise of outstanding options, or options to be granted pursuant to the Company's Amended Stock Incentive Plan. The Warrants may be exercised upon surrender of the Warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the Warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price (by certified check payable to the Company) to the Warrant Agent for the number of warrants being exercised. The Warrant holders do not have the rights or privileges of holders of Common Stock. Limitation of Directors' Liability. The Company's Restated Articles of Incorporation eliminate, subject to certain exceptions, the personal liability of directors to the Company or its shareholders from monetary damages for breach of fiduciary duty by such directors. The Company's Restated Articles of Incorporation do not provide for the elimination of or any limitation on the personal liability of directors for (i) any breach of the director's duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful corporate distributions, or (iv) any transaction from which 38 such director derives an improper personal benefit. This provision of the Restated Articles of Incorporation will limit the remedies available to a shareholder who is dissatisfied with a decision of the Board of Directors protected by this provision; such shareholder's only remedy may be to bring a suit to prevent the action of the Board. This remedy may not be effective in many situations because shareholders are often unaware of a transaction or event prior to Board action in respect of such transaction or event. In these cases, the shareholders and the Company could be injured by a Board's decision and have no effective remedy. The Company's Restated Articles of Incorporation provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Colorado law. Insofar as the indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefor, unenforceable. Transfer Agent, Registrar and Warrant Agent American Securities Transfer & Trust, Incorporated, Denver, Colorado, is the transfer agent and registrar for the Common Stock and warrant agent for the Warrants. SELLING SECURITY HOLDERS The following table sets forth certain information regarding the Units and shares of Common Stock owned by the Selling Security Holders. As of the date hereof, all or a part of the Units shown as being offered by the Selling Security Holders could already have been sold. The Selling Security Holders are not required, and may choose not, to sell any of their Units or shares of Common Stock.
Units or Shares Units or Shares Owned Prior Units or Shares Owned After Name of Selling Security Holder to Offering Being Offered Offering - ------------------------------- --------------- --------------- -------------- Gregory J. Ashwill....................................... 1,899 1,899 --0-- Mitchel R. Ashwill....................................... 3,801 3,801 --0-- Philip R. Beuth.......................................... 9,500 9,500 --0-- William F. Coffin Corporation Defined Benefit Plan............................................ 5,700 5,700 --0-- Martin W. Greenwald...................................... 3,794 3,794 --0-- Michael J. Heller........................................ 3,800 3,800 --0-- Mitchell Knapp........................................... 28,019 28,019 --0-- Larry Kupferberg......................................... 28,019 28,019 --0-- Chin-Wen Lai............................................. 93,181 93,181 --0-- Michael Miller........................................... 56,363 56,363 --0-- OK Associates Pension Trust.............................. 17,075 17,075 --0-- Lynne Carole Pearse...................................... 3,794 3,794 --0-- RehCam Investments L.P................................... 7,598 7,598 --0-- Tryon N. Sisson.......................................... 18,972 18,972 --0-- Chen-Ya Lin Tsou and Tien-Tseng Tsou..................... 74,833 74,833 --0-- Universal Partners, L.P.................................. 19,001 19,001 --0-- Aarnel Funding Corp. Pension Plan........................ 36,418 36,418 --0-- Chaim Drizin............................................. 9,095 9,095 --0-- Allan R. Lyons........................................... 9,095 9,095 --0-- Steven Gryczman.......................................... 9,095 9,095 --0-- Warren Gilbert........................................... 27,314 27,314 --0-- Stanley Snyder........................................... 27,287 27,287 --0-- 39 Units or Shares Units or Shares Owned Prior Units or Shares Owned After Name of Selling Security Holder to Offering Being Offered Offering - ------------------------------- --------------- --------------- -------------- Abe New.................................................. 9,095 9,095 --0-- Stanley Kaplan........................................... 9,090 9,090 --0-- Janice Halle-Nesses...................................... 36,383 36,383 --0-- Hung Ming Chen........................................... 21,851 21,851 --0-- Ross Asset Management Limited............................ 9,095 9,095 --0-- Ralph H. Grills, Jr...................................... 3,636 3,636 --0-- Greg Simonds............................................. 1,818 1,818 --0-- Greg Skufca.............................................. 1,818 1,818 --0-- R. Andrew Girardot, Jr................................... 3,636 3,636 --0-- I.A.C.................................................... 3,636 3,636 --0-- Thomas G. Williams IRA................................... 7,272 7,272 --0-- Arthur W. Zarlengo....................................... 3,636 3,636 --0-- Gordon E. Beckstead Asso., Inc. Pension Trust............ 3,636 3,636 --0-- R. Gerald Hughes......................................... 3,636 3,636 --0-- G. A. Partnership........................................ 7,272 7,272 --0-- Russell Casement, DDS, PC Employee Profit Sharing Plan............................................ 7,272 7,272 --0-- Charles R. Harrison...................................... 3,636 3,636 --0-- RELA, Inc................................................ 175,000(1) 175,000 --0-- Bertrand T. Ungar........................................ 50,000(2) 50,000 --0-- Laser Storm of Longmont.................................. 32,500(3) 32,500 --0-- --------- --------- Totals................................................. 887,571 887,571 --0-- - -----------------
(1) Consists of shares underlying a presently exercisable option. (2) Consists of shares underlying a presently exercisable option. Mr. Ungar has agreed not to sell any shares issued upon exercise of his option until October 26, 1997 without the prior written consent of Laidlaw. See "Business--Consulting Agreement." (3) Consists of outstanding shares. PLAN OF DISTRIBUTION Sales of the Securities may be made pursuant to this Prospectus and pursuant to Rule 144 adopted under the Securities Act of 1933, as amended. It is anticipated that the per share selling price for the Securities will be at or between the "bid" and "asked" prices of the Company's Common Stock and Warrants, respectively, as quoted in the over-the-counter market immediately preceding the sale. Expenses of any such sale will be borne by the buyer and seller as they may agree. The Selling Security Holders may effect transactions in their Securities by selling their securities directly to purchasers, through broker-dealers acting as agents for the Selling Security Holders or to broker-dealers who may purchase the Selling Security Holders' Securities as principals and thereafter sell such securities from time to time in the over-the-counter market, in negotiated transactions, or otherwise. Such broker-dealers, if any, may receive compensation in the form of discounts, concessions or commissions from the Selling Security Holders and or the purchasers for whom such broker-dealers may act as agents or to whom they may sell as principals or both. 40 The sale of the Securities may be effected from time to time in transactions (which may include block transactions by or for the account of the Selling Security Holders) in the over-the-counter market or in negotiated transactions, through a combination of such methods of sale or otherwise. Sales may be made at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. If any Selling Security Holder sells any Securities pursuant to this Prospectus at a fixed price or at a negotiated price which is, in either case, other than the prevailing market price, or in a block transaction to a purchaser who resells, or if any Selling Security Holder pays compensation to a broker-dealer that is other than the usual and customary discounts, concessions or commissions, or if there are any arrangements either individually or in the aggregate that would constitute a distribution of the Securities, a post-effective amendment to the Registration Statement of which this Prospectus is a part may need to be filed and declared effective by the Securities and Exchange Commission ("SEC") before such Selling Security Holder could make such sale, pay such compensation or make such a distribution. LEGAL MATTERS The validity of the issuance of 32,500 of the shares of Common Stock being offered hereby by Laser Storm of Longmont and the validity of the remaining shares of Common Stock being offered hereby have been passed upon for the Company by Smith, McCullough & Ferguson, P.C., and by Hopper and Kanouff, P.C., Denver, Colorado, respectively. EXPERTS The balance sheet of the Company as of December 31, 1995 and the statements of operations, shareholders' equity and cash flows for the fiscal years ended December 31, 1995 and 1994 have been included herein in reliance upon the report of HEIN + ASSOCIATES LLP, independent certified public accountants, given upon the authority of that firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the SEC a registration statement ("Registration Statement") under the Securities Act of 1933, as amended ("1933 Act") with respect to the Securities offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain items of which are omitted in accordance with the rules and regulations of the SEC. For further information with respect to the Company and the securities offered hereby, reference is hereby made to the Registration Statement and such exhibits and schedules thereto, which may be examined at the SEC's offices without charge, or copies of which may be obtained from the SEC upon payment of the prescribed fees. Statements made in this Prospectus as to the contents of any contract, agreement or document are not necessarily complete, and in each instance reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement, and each such statement is qualified in its entirety by such reference. The Company is a reporting company registered under the Securities Exchange Act of 1934, as amended ("1934 Act") and in accordance therewith files reports and other information with the SEC. All of such reports and other information may be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at regional offices of the SEC located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of such site is http://www.sec.gov. The Company intends to furnish its shareholders with annual reports containing audited financial statements and, upon request, quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. 41 LASER STORM, INC. INDEX TO FINANCIAL STATEMENTS PAGE Independent Auditor's Report................................................F-2 Balance Sheet - December 31, 1995...........................................F-3 Statements of Operations - For the Years Ended December 31, 1994 and 1995 ............................................F-4 Statements of Changes in Stockholders' Equity - For the Years Ended December 31, 1994 and 1995 ............................................F-5 Statements of Cash Flows - For the Years Ended December 31, 1994 and 1995 ............................................F-6 Notes to Financial Statements...............................................F-7 Unaudited Condensed Balance Sheet - June 30, 1996 ..........................F-18 Unaudited Condensed Statements of Operations - Six Months Ended June 30, 1996 and 1995 ................................................F-20 Unaudited Condensed Statement of Changes in Stockholders' Equity - Six Months Ended June 30, 1996 ........................................F-21 Unaudited Condensed Statements of Cash Flows - Six Months Ended June 30, 1996 and 1995 ................................................F-22 Notes to Condensed Financial Statements - ..................................F-23 F-1 INDEPENDENT AUDITOR'S REPORT Board of Directors Laser Storm, Inc. Denver, Colorado We have audited the accompanying balance sheet of Laser Storm, Inc. as of December 31, 1995 and the related statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 1994 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 misstatement. 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 financial statements referred to above present fairly, in all material respects, the financial position of Laser Storm, Inc. as of December 31, 1995, and the results of its operations and its cash flows for the years ended December 31, 1994 and 1995, in conformity with generally accepted accounting principles. /s/ Hein + Associates LLP HEIN + ASSOCIATES LLP Denver, Colorado February 9, 1996, except for Note 8, for which the date is February 29, 1996 F-2 LASER STORM, INC. BALANCE SHEET DECEMBER 31, 1995
DECEMBER 31, 1995 ----------- ASSETS CURRENT ASSETS: Cash ................................................................... $ 10,473 Accounts receivable - trade, net of allowance for doubtful accounts of $30,000 ........................................ 613,949 Inventories ............................................................ 442,545 Deferred income taxes .................................................. 111,000 Prepaid expenses and other ............................................. 57,524 ---------- Total current assets ........................................... 1,235,491 ---------- PROPERTY AND EQUIPMENT, net ................................................ 337,602 OTHER ASSETS: Deferred offering costs ................................................ 277,929 Software development, net of accumulated amortization of $71,554 ....... 88,536 License fees, net of accumulated amortization of $5,833 ................ 53,667 Deposits and other ..................................................... 29,473 ---------- Total other assets ............................................. 449,605 ---------- TOTAL ASSETS ............................................................... $ 2,022,698 ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ....................................................... $ 722,755 Accrued expenses ....................................................... 104,019 Accrued compensation ................................................... 127,238 Income taxes payable ................................................... 60,000 Current maturities of long-term debt ................................... 20,294 Customer deposits and deferred revenue ................................. 214,805 Contingent settlements ................................................. 270,000 ---------- Total current liabilities ...................................... 1,519,111 LONG-TERM DEBT, less current maturities .................................... 30,884 DEFERRED INCOME TAXES ...................................................... 60,000 COMMITMENTS AND CONTINGENCIES (NOTES 5, 6, AND 7) STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value; 2,000,000 shares authorized: Series A 12% Convertible Cumulative Preferred Stock, 140,000 shares issued and outstanding, liquidation preference of $718,000 .................................................. 140 Series B 12% Convertible Cumulative Preferred Stock, no shares authorized at December 31, 1995 ................................ -- Common stock, $.001 par value; 20,000,000 shares authorized; 1,601,250 shares issued and outstanding ............................ 1,601 Additional paid in capital ............................................. 575,136 Accumulated deficit .................................................... (164,174) ---------- Total stockholders' equity ..................................... 412,703 ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $ 2,022,698 ==========
See accompanying notes to these financial statements. F-3 LASER STORM, INC. STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1994 1995 ---- ---- NET REVENUES ........................................................ $ 2,786,850 $ 5,477,540 COST OF GOODS SOLD .................................................. 1,375,368 2,352,606 ------------------ ---------------- GROSS PROFIT .................................................... 1,411,482 3,124,934 EXPENSES: General and administrative ...................................... 895,673 1,546,453 Selling and marketing ........................................... 586,433 820,471 Depreciation and amortization ................................... 47,566 116,183 Product development ............................................. 98,593 139,979 Contingent settlements .......................................... -- 270,000 ------------------ ---------------- Total expenses ............................................. 1,628,265 2,893,086 ------------------ ---------------- OPERATING INCOME (LOSS) ............................................. (216,783) 231,848 Income tax expense .............................................. -- (9,000) ------------------ ---------------- NET INCOME (LOSS) ................................................... $ (216,783) $ 222,848 ================== ================ NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS ................. $ (216,783) $ 204,848 ================== ================ PRO FORMA NET INCOME PER SHARE APPLICABLE TO COMMON STOCKHOLDERS ............................................... $ .10 ================ PRO FORMA COMMON SHARES OUTSTANDING 2,033,000 ================
See accompanying notes to these financial statements. F-4
LASER STORM, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 PREFERRED STOCK COMMON STOCK ------------------------ ---------------------- Shares Amount Shares Amount ------------ --------- ---------- -------- BALANCES, January 1, 1994 ...................................... -- $ -- 305,000 $ 305 Issuance of common stock for services ..................... -- -- 1,296,250 1,296 Net loss .................................................. -- -- -- -- ------------ -------- ---------- ---------- BALANCES, December 31, 1994 .................................... -- -- 1,601,250 1,601 Private placement of Series A 12% Convertible Cumulative Preferred Stock .......................... 140,000 140 -- -- Offering costs related to private placement ............... -- -- -- -- Net income ................................................ -- -- -- -- ------------ -------- ---------- --------- BALANCES, December 31, 1995 .................................... 140,000 $ 140 1,601,250 $1,601 ============ ======== ========== ======== Additional Paid-In Accumulated Capital Deficit Total --------- ----------- --------- BALANCES, January 1, 1994 ....................................... $ -- $(170,239) $(169,934) Issuance of common stock for services ...................... 18,529 -- 19,825 Net loss ................................................... -- (216,783) (216,783) --------- --------- --------- BALANCES, December 31, 1994 ..................................... 18,529 (387,022) (366,892) Private placement of Series A 12% Convertible Cumulative Preferred Stock ........................... 699,860 -- 700,000 Offering costs related to private placement ................ (143,253) -- (143,253) Net income ................................................. -- 222,848 222,848 --------- --------- --------- BALANCES, December 31, 1995 ..................................... $ 575,136 $(164,174) $ 412,703 ========= ========= =========
See accompanying notes to these financial statements. F-5 LASER STORM, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------- 1994 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .................................................... $ (216,783) $ 222,848 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization .................................. 47,566 116,183 Loss on asset disposition ...................................... 7,111 16,054 Provision for bad debts ........................................ 7,877 21,540 Issuance of common stock for services .......................... 19,825 -- Deferred income taxes .......................................... -- (51,000) Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable ....................................... (185,372) (362,288) Inventories ............................................... (281,349) (80,410) Other ..................................................... 71,813 (87,032) Increase (decrease) in: Accounts payable .......................................... 313,212 139,516 Accrued expenses .......................................... 106,729 146,266 Customer deposits and deferred revenue .................... 409,553 (456,081) Contingent settlements .................................... -- 270,000 -------------- --------- Net cash provided by (used in) operating activities ............ 300,182 (104,404) -------------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment ...................... (99,389) (194,858) Software development costs ........................................... (71,443) (31,015) License costs ........................................................ -- (52,500) -------------- --------- Net cash used in investing activities .......................... (170,832) (278,373) -------------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of Series A 12% Convertible Cumulative Preferred Stock ........................................ -- 700,000 Deferred offering costs .............................................. (16,128) (311,211) Principal payments on notes payable .................................. (148,384) (11,767) -------------- --------- Net cash provided by (used in) financing activities ............ (164,512) 377,022 -------------- --------- DECREASE IN CASH ........................................................... (35,162) (5,755) CASH, at beginning of year ................................................. 51,390 16,228 -------------- --------- CASH, at end of year ....................................................... $ 16,228 $ 10,473 ============== ========= SUPPLEMENTAL CASH FLOW INFORMATION - Cash paid for interest ............................................... $ 3,396 $ 9,252 ============== ========= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES - Debt incurred for purchase of equipment .............................. $ -- $ 30,025 ============== =========
See accompanying notes to these financial statements. F-6 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Nature of Operations - The Company was incorporated in Colorado in 1990 under the name "The Crimson Corporation - a Holding Company." In November 1994, the Company changed its name to "Laser Storm, Inc." In November 1992, the Company filed for reorganization under Chapter 11 of the United States Bankruptcy Code. In November 1993, the Company's Plan of Reorganization was confirmed by the Bankruptcy Court. In November 1994, the Court ordered the proceedings to be closed. The confirmed plan provided for the payment of $26,000 in settlement of $172,000 of trade payables. The bankruptcy proceeding did not result in an alteration of the relative ownership interests of the Company. The Company has developed interactive laser tag game systems ("Laser Systems") which it sells primarily to independent operators generally throughout the United States. The Company's revenues are predominantly derived from the sale of Laser Systems and arenas. The games are played between teams of opponents in themed arenas utilizing special effects for sound, lighting, barriers, and other decorative elements. Inventories - Inventories are stated at the lower of cost or market, determined by the first-in, first-out method and consist of the following at December 31, 1995: Raw materials ................... $225,702 Finished goods .................. 124,649 Product held for replacement ..... 92,194 -------- Total inventory ......... $442,545 ======== Product held for replacement is used to replace components of the Laser Systems received under the Company's warranty program. These components are stated net of a reserve for the estimated cost to refurbish. Property and Equipment - Property and equipment is stated at cost. Depreciation is calculated using declining balance and straight-line methods over the estimated useful lives of the respective assets as follows: Years ----- Trade show demonstration equipment ..... 2-5 Office furniture and equipment ........ 3-7 Laser Systems and arenas .............. 3-5 Tooling equipment and other ........... 1-5 The cost of normal maintenance and repairs is charged to operating expenses as incurred. Material expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of properties sold, or otherwise disposed of, and the related accumulated depreciation are removed from the accounts, and any gains or losses are reflected in current operations. F-7 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS Deferred Offering Costs - Deferred offering costs represent costs incurred in connection with the proposed public offering of the Company's units. Such costs will be offset against the proceeds if the offering is successful, or expensed to operations if the offering is unsuccessful. Income Taxes - Income taxes are provided for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of the Company's assets and liabilities. Financial Instruments - Statement of Financial Accounting Standards No. 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, management's best estimate is that the carrying amount of cash, receivables, notes payable, accounts payable, and accrued expenses approximates fair value due to the short maturity or the immaterial difference between fair value and carrying value for these instruments. Revenue Recognition - The Company generally recognizes sales of Laser Systems and arenas upon shipment to the customer if there are no unresolved conditions related to the sale. Prior to shipment, the Company generally collects a deposit of approximately 50% of the purchase price. Revenue Participation Interests - The Company has an interest in certain revenue participation arrangements whereby it will receive a continuing revenue interest from Laser System operations. At December 31, 1995, the Company's investment in these ventures amounted to $84,543 which is included in property and equipment. Revenue participation is recognized as earned; however, through December 31, 1995, such revenue was not significant in relation to net sales. Warranty - The Company generally provides a 90-day warranty on all sales of Laser Systems. In addition, the Company has a warranty program under renewable annual contracts whereby customers pay a monthly usage fee. Such fees are recognized in the month in which they are earned. Product Development Costs - Product development costs are charged to operations in the period incurred. Intangible Assets - The Company capitalizes computer software development costs to develop and update software for which technological feasibility has been established. This software is an integral component in the Company's Laser Systems and is not sold separately. These costs are capitalized and amortized over an estimated useful life of five years. License fees relate to the purchase of rights which permit the Company to utilize a specific theme for the development of arenas. Such costs are being amortized over three years utilizing the straight-line method. Amortization expense was approximately $21,000 and $35,000 for the years ended December 31, 1994 and 1995, respectively. F-8 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS Pro Forma Net Income Per Share - Pro forma net income per share is computed based on common stock outstanding and common stock equivalents. For common stock and common stock equivalents, including the preferred stock discussed in Notes 7 and 8 issued at prices below the $4.00 per unit price, for the Company's public offering, the Company included such stock and equivalents in the weighted average calculation as if they were outstanding for the full year ended December 31, 1995 (using the treasury stock method). Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. The actual results could differ from those estimates. The Company's financial statements are based on a number of significant estimates, including the allowance for doubtful accounts, possible technological obsolescence of inventories, realizability of intangible assets, the estimated useful lives selected for property and equipment, warranty reserve, and contingent liability settlements. As discussed in Note 6, the settlements which were reached in February 1996 are contingent upon the completion of the Company's initial public offering and, if the offering is not successful, the parties can refile their claims. If this occurs, the actual amount could vary from the amount recorded. Additionally, if the Company's appeal is successful in the wrongful termination case, the estimated cost of this contingency will be reversed. For these reasons, management believes that it is reasonably possible that its estimates for contingent liabilities could materially change within the next year. As discussed in Note 5, the Company entered into a five-year lease agreement in connection with a revenue participation arrangement. The lease provides for minimum annual payments of $50,000 through November 2000. If this venture's cash flow is inadequate to meet this obligation, the Company will be required to provide any necessary funding to the extent of this commitment. Management presently believes that it is unlikely the Company will be required to provide such funding. Significant Concentrations - The Company's sales are generally higher dollar value items with no major concentrations among customer groups. At December 31, 1995, the Company, however, had a trade receivable of approximately $102,000, which was due from a single customer. The Company's letter of intent for its initial public offering is with an investment banking firm that was also responsible for the sale of preferred stock in the private placements discussed in Notes 7 and 8. Impact of Recently Issued Accounting Standards - In March 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Impairment of Long-Lived Assets." This new standard is effective for years beginning after December 15, 1995, and would change the Company's method of determining impairment of long-lived assets. Although the Company has not performed a detailed analysis of the impact of this new standard on the Company's financial statements, the Company does not believe that adoption of the new standard will have a material effect on the financial statements. F-9 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation" (FAS 123). The new statement is effective for fiscal years beginning after December 15, 1995. FAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value. Companies that do not adopt the fair value accounting rules must disclose the impact of adopting the new method in the notes to the financial statements. Transactions in equity instruments with non-employees for goods or services must be accounted for on the fair value method. The Company currently does not intend to adopt the fair value accounting prescribed by FAS 123, and will be subject only to the disclosure requirements prescribed by FAS 123. 2. PROPERTY AND EQUIPMENT: At December 31, 1995, property and equipment consists of the following: Trade show demonstration equipment ....... $ 181,566 Office furniture and equipment ........... 115,939 Laser Systems and arenas ................. 84,543 Tooling equipment and other .............. 66,129 --------- Total property and equipment .. 448,177 Less accumulated depreciation ............ (110,575) --------- Net property and equipment .... $ 337,602 ========= Depreciation expense amounted to approximately $27,000 and $81,000 for the years ended December 31, 1994 and 1995, respectively. 3. LONG-TERM DEBT: At December 31, 1995, long-term debt consists of the following: Notes payable, interest at 7%, monthly payments of $662 including interest, due October 1999, unsecured ........ $ 24,757 Contract payable, interest at 36%, monthly payments of $1,781 including interest, due August 1997 ............. 26,421 -------- Total long-term debt ............................ 51,178 Less current maturities ................................ (20,294) -------- Long-term debt, less current maturities ......... $ 30,884 ======== F-10 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS Aggregate maturities required on long-term debt at December 31, 1995, are due as follows: YEARS ENDING DECEMBER 31, ------------------------ 1996 ............................. $20,294 1997 ............................. 19,410 1998 ............................. 7,370 1999 ............................. 4,104 ------- $51,178 ======= 4. INCOME TAXES: A reconciliation of the income tax benefit (expense) at the statutory rate to income tax benefit (expense) from continuing operations at the Company's effective rate is as follows: YEARS ENDED DECEMBER 31, ------------------ 1994 1995 ---- ---- Computed tax benefit (expense) at the expected statutory rate .................................... $ 17,700 $(78,800) Increase (reduction) in income taxes resulting from: State income taxes, net of Federal benefit ..... 1,600 (7,000) Nondeductible expenses ......................... -- (14,700) Reduction in valuation allowance due to utilization of net operating loss carryovers . -- 91,500 Decrease (increase) in valuation allowance ..... (19,300) -- -------- -------- $ -- $ (9,000) ======== ======== The components of the Company's provision for income taxes consist of the following: YEARS ENDED DECEMBER 31, ----------------------- 1994 1995 ---- ---- Current provision .................. $ -- $(60,000) Deferred benefit ................... -- 51,000 ------- ------- Total .......................... $ -- $ (9,000) ======= ======== F-11 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below: DECEMBER 31, 1995 ----------- Deferred Tax Assets: Contingent settlements ........................ $ 76,200 Accounts receivable ........................... 10,900 Accrued vacation and warranty ................. 19,800 Other ......................................... 4,100 --------- Deferred tax asset, current ............... $ 111,000 ========= Deferred Tax Liabilities: Software development costs .................... $ (32,800) Property and equipment ........................ (27,200) --------- Deferred tax liability, long-term ......... $ (60,000) ========= 5. COMMITMENTS: Office Lease - The Company leases office space, equipment and warehouse facilities under noncancellable operating leases. Total rental expense was approximately $58,000 and $87,000 for the years ended December 31, 1994 and 1995, respectively. In 1995, the Company entered into a new ten-year lease which commenced in February 1996. An officer of the Company has personally guaranteed the Company's obligations for approximately the first five years under this lease. As of December 31, 1995, the total minimum rental commitments under all operating leases, including the new lease, are as follows: YEARS ENDING DECEMBER 31, ------------------------ 1996 ......................... $292,000 1997 ......................... 306,000 1998 ......................... 306,000 1999 ......................... 333,000 2000 ......................... 329,000 After 2000 ...................... 1,596,000 --------- $3,162,000 ========= The rental commitment amounts shown above include $50,000 per year through November 2000 in connection with a lease, which the Company entered into with respect to a revenue participation arrangement. F-12 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS Royalty Arrangements - In October 1995, the Company entered into a license agreement to utilize the name, logo, and characters from the motion picture STARGATE. The Company agreed to pay a royalty based on revenues derived from the STARGATE Laser Systems. The Company is required to pay $50,000 of advance royalties which will offset royalties otherwise payable under the license agreement. At December 31, 1995, the Company had paid advance royalties of $25,000. Employment Agreements - The Company has entered into employment agreements with six of the Company's executive officers which provide for aggregate annual compensation of $708,000 in 1996, $708,000 in 1997, and $580,000 in 1998. The agreements may be terminated by the Company without cause upon 30 days' notice. In the event of a termination without cause, the Company would be required to pay 100% of the remaining payments until expiration of the agreement with the Company's chief executive officer. The president and the other four officers are entitled to receive their respective salaries for three to six-month periods. Consulting Agreement - In August 1995, the Company entered into an agreement with a consultant to assist management with business expansion plans and product distribution and licensing arrangements. The agreement provides for 17 monthly payments of $10,500 commencing on October 1, 1995 and a final payment of $9,000 on March 1, 1997. Additionally, the Company agreed to grant the consultant an option to purchase 50,000 shares of the Company's common stock for $.75 per share. If not previously exercised, this option will expire on February 28, 1997. Liquidity - The Company has experienced liquidity problems in the past and at December 31, 1995, had a working capital deficit of $283,620 and an accumulated deficit of $164,174. Additionally, as discussed in Note 1, the Company emerged from bankruptcy in November 1994. As reflected in the Company's financial statements, the Company's sales have increased during the year ended December 31, 1995, which has also resulted in improved financial performance. As discussed further in Note 8, the Company obtained additional capital of approximately $890,000 through a private placement of Series B 12% Convertible Cumulative Preferred Stock, which was completed in February 1996. Additionally, the Company is in the process of undertaking a proposed public offering of units consisting of common stock and warrants. 6. CONTINGENCIES: The Company has accrued $270,000 for legal contingencies during the year ended December 31, 1995. A discussion of the underlying legal proceedings and settlements is presented below. In December 1995, the Company was served with a lawsuit that was filed by a previous manufacturer (the "Manufacturer") of the Company's laser tag system alleging, among other things, past due royalties. The Company believes prior royalty arrangements with the Manufacturer were terminated as part of its Plan of Reorganization. However, to avoid extensive litigation, the Company entered into a settlement agreement with the Manufacturer pursuant to which the Manufacturer agreed to dismiss its complaint without prejudice, and the Company agreed to dismiss its counterclaims against the Manufacturer without prejudice. The Company agreed to pay the Manufacturer $100,000 out of the proceeds of the public F-13 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS offering of the Company's units, granted the Manufacturer a five-year option to purchase 175,000 shares of the Company's common stock at $4.00 per share, and agreed to purchase certain inventory (at cost) from the Manufacturer for $35,000. In 1995, the Company has accrued a liability to cover the settlement. In November 1994, the Company entered into an agreement with a consulting firm (the "Consultant") which agreed to provide consulting services to the Company for the six-month period ended April 30, 1995, for a fee of $10,000 per month. The Company made one payment in November 1994 conditioned on the Consultant providing the Company with a letter of intent for a public offering. The Consultant never provided such letter of intent and the Company made no further payments. In December 1995, the Consultant filed a lawsuit against the Company. In February 1996, the Company entered into a settlement agreement with the Consultant pursuant to which the Consultant agreed to dismiss its complaint without prejudice and the Company agreed to pay the Consultant $60,000 out of the proceeds of the Company's public offering and agreed that the Consultant would have the right to purchase 100,000 units in the public offering at the public offering price. The Company accrued this settlement in the financial statements as of December 31, 1995. During 1995, an employee was terminated and a lawsuit was filed alleging wrongful termination. In January 1996, a court ruled that the Company must pay the former employee $90,000 plus interest, attorney's fees, and other costs of litigation. As of December 31, 1995, the Company accrued a liability for this judgment, even though the Company has appealed the court's decision. 7. STOCKHOLDERS' EQUITY: Stock Split - On November 1, 1994, the Company effected a 3.05 for one stock split and changed the no par value common stock to common stock with a par value of $.001. Accordingly, all share and per share amounts in the accompanying financial statements have been retroactively restated to give effect to the stock split. Stock Issuances - During 1994, the Company issued a total of 1,296,250 shares of common stock for services performed by officers and directors of the Company. These shares were valued by the Company's Board of Directors based on their estimate of the value of the common stock at the time the shares were issued. Stock Options - The Company has adopted an Amended Stock Incentive Plan which reserves 300,000 shares of the Company's common stock for grants to employees. The exercise price for options granted under the Plan will not be less than 100% of the fair value of the Company's common stock on the date of grant and the exercise period cannot exceed ten years. In December 1994, the Company granted options for 141,000 shares of common stock which are exercisable for $.20 per share. In June 1995, the Company granted additional options for 75,000 shares of common stock which are exercisable for $.75 per share. The Company's Board of Directors valued thee options at fair value of the underlying common stock on the issuance date. Although there was no market for the underlying shares, the $.75 F-14 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS option valuation gives effect to the Company's improving earnings; however, a negative net worth, a working capital deficit and continued earnings inconsistencies were also factors considered in determining the fair value of the common stock. In August 1995, the Company granted options for an additional 28,500 shares of common stock which are exercisable for $2.00 per share. In addition to improved earnings the Company's Board of Directors also considered the discussions with the underwriter, which began in August 1995 and included discussions related to the structure of the possible sale of convertible preferred stock (see "Preferred Stock" below), as factors affecting the fair value of the underlying common stock for the $2.00 options. The Company has granted options under the Plan as follows: Number of Shares Vesting In: Number Exercise ----------------------------------- Grant Date of Shares Price 1995 1996 1997 1998 ----------------- --------- --------- ------- ------- ------- ------ December 1994 .... 141,000 $ .20 47,000 47,000 47,000 -- June 1995 ........ 75,000 .75 25,000 25,000 25,000 -- August 1995 ...... 28,500 2.00 -- 9,500 9,500 9,500 November 1995 .... 55,500 10,100 18,500 18,500 8,400 -------- ------- ------- ------- ------- ------ Total ......... 300,000 82,100 100,000 100,000 17,900 ======== ======= ====== ======= ======= ====== The options granted in November 1995 are exercisable $4.00 per share. Through December 31, 1995, none of the options have been exercised. If not previously exercised, all of the options expire five years after the date on which vesting occurs. Subsequent to year-end, options for 5,100 shares were forfeited when two employees terminated. In October through December 1995, the Company's Board of Directors approved the grant of non-qualified options to certain officers and directors of the Company for a total of 250,000 shares. The exercise price for these options will be equal to the initial public offering price for the Company's units. These options vest as follows: YEAR ENDING DECEMBER 31, ----------------------- 1995 ...................... 50,000 1996 ...................... 75,000 1997 ...................... 75,000 1998 ...................... 50,000 ------- 250,000 ======= As discussed in Notes 5 and 6, the Company granted nonqualified options for 50,000 and 175,000 shares to a consultant and the Manufacturer. Preferred Stock - In September 1995, the Company's Board of Directors and shareholders approved the authorization of 2,000,000 shares of preferred stock which may be issued in series with such rights and preferences as determined by the Company's Board of Directors. F-15 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS The Board of Directors has designated 140,000 shares as Series A 12% Convertible Cumulative Preferred Stock ("Series A Preferred Stock"). In October 1995, the Company sold 140,000 shares of Series A Preferred Stock for $5.00 per share. These shares of Series A Preferred Stock are voting and convertible into units (as discussed below) at 70% of the unit price, if converted at the time of the public offering, or common stock at 70% of the market price of the Company's publicly traded common stock, if converted at a subsequent date. The Company paid a 10% commission and a 3% non-accountable expense allowance related to this offering. The Series A Preferred Stock has a liquidation preference of $700,000, plus accrued but unpaid dividends. As of December 31, 1995, accumulated dividends were $18,000. The dividend rate of Series A Preferred Stock shall be increased from $.60 to $.75 per share as of October 15, 1996, a one-for-five stock dividend of the Series A Preferred Stock will be paid on October 15, 1996 and a sinking fund equal to 2% of the Company's net revenues will be established to redeem the Series A Preferred stock, plus accrued but unpaid dividends, beginning on October 15, 1996, if by October 15, 1996, the Company has not completed one of the following: the effectiveness of a registration statement under the Securities Act of 1933 for the offering of the Company's common stock, the merger with a public company, the filing of a Form 10 under the Securities Exchange Act of 1934, or the preparation and dissemination of the information required by Rule 15c2-11 under the Securities Exchange Act of 1934 so as to permit a trading market for the common stock of the Company. The Company may redeem the Series A Preferred Stock after October 15, 1996, at a price of $6.25 per share plus accrued and unpaid dividends. Also see Note 8 regarding a Series B Preferred Stock offering after year-end. Proposed Public Offering - The Company has entered into a letter of intent (LOI) with an underwriter for the proposed sale of 1,300,000 units at a price which may range between $4.00 to $5.00 per unit. Each unit will consist of one share of common stock and one warrant. The warrants will be exercisable for a period of five years and will entitle the holder to purchase one share of common stock at an exercise price of 125% of the initial unit offering price. However, if the Company does not report net after tax earnings of at least $.40 per share (target earnings) for the four fiscal quarters ending March 31, 1997, then the exercise price per share will be reduced by $.20 for each $.01 shortfall from the target earnings, but such exercise price will not be reduced below $1.00 per share. The warrants are redeemable by the Company under certain circumstances at $.05 per warrant provided that for at least 30 consecutive trading days the market price of the Company's common stock is at least 175% of the initial unit offering price. In connection with the offering, the underwriter will receive a 10% discount, a 3% nonaccountable expense allowance ($45,000 of which will be prepaid on an accountable basis), and a 4% commission on proceeds received from the exercise of warrants solicited by the underwriter. The underwriter will also receive a warrant, exercisable for 130,000 units at 125% of the initial offering price per unit for a period of four years, beginning one year after the offering, to purchase 130,000 units. The LOI is subject to cancellation and/or change. F-16 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS 8. SUBSEQUENT EVENTS: In February 1996, the Board of Directors designated 200,000 shares of preferred stock as Series B 12% Cumulative Convertible Preferred Stock ("Series B Preferred Stock"). On February 29, 1996, the Company completed the sale of all 200,000 shares of Series B Preferred Stock for $5.00 per share. After payment of commissions, the Company received net proceeds of $900,000. Other costs of this offering are estimated to be approximately $10,000. The Series B Preferred Stock has similar rights and preferences as the Series A Preferred Stock except the Company can redeem the Series B Preferred Stock at any time after February 15, 1997. Additionally, the increase in the dividend rate from $.60 to $.75 per share does not occur until February 15, 1997, and the sinking fund is not required until February 15, 1997. F-17 LASER STORM, INC. UNAUDITED CONDENSED BALANCE SHEET June 30, 1996
ASSETS CURRENT ASSETS: Cash and cash equivalents .............................. $3,803,878 Accounts receivable-trade, net ......................... 824,029 Notes receivable, current .............................. 271,589 Inventories ............................................ 456,487 Deferred income taxes .................................. 145,000 Prepaid expenses and other ............................. 248,096 ---------- Total current assets ......................... 5,749,079 ---------- PROPERTY AND EQUIPMENT, net ............................... 540,033 ---------- OTHER ASSETS: Deferred offering costs ............................... -- Software development, net ............................. 72,527 License fees, net ..................................... 50,066 Notes receivable, non-current ......................... 348,684 Deposits and other .................................... 43,128 ---------- Total other assets ........................... 514,405 ---------- TOTAL ASSETS .............................................. $6,803,517 ========== See Accompanying Notes to Condensed Financial Statements. F-18 LASER STORM, INC. UNAUDITED CONDENSED BALANCE SHEET, Continued June 30, 1996 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ....................................... $ 251,966 Accrued expenses ....................................... 171,597 Accrued compensation ................................... 172,597 Income taxes payable ................................... 10,000 Current maturities of long-term debt ................... 7,940 Customer deposits and deferred revenue ................. 150,507 Contingent settlements ................................. -- ----------- Total current liabilities .................... 764,607 LONG TERM DEBT, less current maturities ................... 33,942 DEFERRED INCOME TAXES ..................................... 51,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value; 2,000,000 shares authorized: Series A 12% Convertible Cumulative Preferred Stock, no shares issued .................................... -- Series B 12% Convertible Cumulative Preferred Stock, no shares issued .................................... -- Common Stock, $.001 par value; 20,000,000 shares authorized; 3,726,211 shares issued and outstanding ......... 3,726 Additional paid in capital ............................. 6,186,662 Accumulated deficit .................................... (236,420) ----------- Total stockholders' equity .................. 5,953,968 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................ $ 6,803,517 ===========
See Accompanying Notes to Condensed Financial Statements. F-19 LASER STORM, INC. UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Six Months Ended June 30, ---------------------------- 1996 1995 ---- ---- NET REVENUES ......................... $ 2,879,389 $ 2,169,436 COST OF GOODS SOLD ................... 1,133,549 1,023,959 ----------- ----------- GROSS PROFIT ............ 1,745,840 1,145,477 EXPENSES: General and administrative ........ 1,059,719 617,705 Selling and marketing ............. 627,634 353,037 Depreciation and amortization ..... 105,313 43,363 Product development ............... 101,433 83,161 ----------- ----------- Total expenses .......... 1,894,099 1,097,266 ----------- ----------- OPERATING INCOME (LOSS) .............. (148,259) 48,211 Interest income (expense) ......... 33,013 (1,166) ----------- ----------- INCOME BEFORE TAXES .................. (115,246) 47,045 Income tax (expense) benefit ...... 43,000 -- ----------- ----------- NET INCOME (LOSS) .................... (72,246) 47,045 Accrued preferred dividends ....... (45,891) -- ----------- ----------- INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS ............... $ (118,135) $ 47,045 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ....................... 2,395,000 2,033,000 =========== =========== EARNINGS PER SHARE APPLICABLE TO COMMON SHAREHOLDERS ............... $ (0.05) $ 0.02 =========== ===========
See Accompanying Notes to Condensed Financial Statements. F-20
LASER STORM, INC. UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 1996 Preferred Stock Common Stock ------------------------ ------------------------- Shares Amount Shares Amount BALANCES, December 31, 1995 ................ 140,000 $ 140 1,601,250 $ 1,601 Private placement of Series B 12% Convertible Cumulative Preferred Stock ................................. 200,000 200 -- -- Offering costs related to private placement ............................ -- -- -- -- Public offering of 1,495,000 units ...... -- -- 1,495,000 1,495 Offering costs related to public offering -- -- -- -- Conversion of Series A and B 12 % Convertible Cumulative Preferred Stock (340,000) (340) 629,961 630 Net loss ................................ -- -- -- -- ----------- ----------- ----------- ----------- BALANCES, June 30, 1996 .................... -- $ -- 3,726,211 $ 3,726 =========== =========== =========== =========== Additional Paid-In Accumulated Capital Deficit Total ------------ ----------- --------- BALANCES, December 31, 1995 ................ $ 575,136 $ (164,174) $ 412,703 Private placement of Series B 12% Convertible Cumulative Preferred Stock ................................. 999,800 -- 1,000,000 Offering costs related to private placement ............................ (109,815) -- (109,815) Public offering of 1,495,000 units ...... 5,978,505 -- 5,980,000 Offering costs related to public offering ............................. (1,256,474) -- (1,256,474) Conversion of Series A and B 12 % Convertible Cumulative Preferred Stock (490) -- (200) Net loss ................................ -- (72,246) (72,246) ----------- ----------- ----------- BALANCES, June 30, 1996 .................... $ 6,186,662 $ (236,420) $ 5,953,968 =========== =========== ===========
See Accompanying Notes to Condensed Financial Statements. F-21
LASER STORM, INC. UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS Six Months Ended June 30, ------------------------------------- 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................................. $ (72,246) $ 47,045 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization .............................................. 105,314 43,364 Loss on asset disposition .................................................. (11,375) -- Provision for bad debts .................................................... 10,000 -- Deferred income taxes ...................................................... (43,000) -- Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable ................................................. (226,513) 139,074 Notes receivable .................................................... (620,273) -- Inventories ......................................................... (13,942) 214,628 Other ............................................................... (203,792) (51,661) Increase (decrease) in: Accounts payable .................................................... (464,799) (11,810) Accrued expenses .................................................... 112,945 12,014 Income taxes payable ................................................ (50,000) -- Customer deposits and deferred revenue .............................. (64,299) (169,962) Contingent settlements .............................................. (270,000) -- ----------- ----------- Net cash provided by (used in) operating activities ........................... (1,811,980) 222,692 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment ............................... (251,760) (34,609) Software development costs .................................................... -- (15,251) License costs ................................................................. (25,000) -- ----------- ----------- Net cash used in investing activities .............................. (276,760) (49,860) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of Series B 12% Convertible Cumulative Preferred Stock ................................................. 889,985 -- Proceeds from sale of Common Stock ............................................ 5,202,600 -- Deferred offering costs ....................................................... (201,145) (10,000) Principal payments on notes payable ........................................... (9,295) (3,971) ----------- ----------- Net cash provided by (used in) financing activities ............................................... 5,882,145 (13,971) ----------- ----------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS ...................................... 3,793,405 158,861 CASH AND EQUIVALENTS, at beginning of period ..................................... 10,473 16,228 ----------- ----------- CASH AND EQUIVALENTS, at end of period ........................................... $ 3,803,878 $ 175,089 =========== ===========
See Accompanying Notes to Condensed Financial Statements. F-22 LASER STORM, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Interim Financial Statements: In the opinion of management of the Company, the accompanying unaudited financial statements include all adjustments necessary, all of which were of a normal recurring nature, to make the financial statements not misleading. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed financial statements should be read in conjunction with the financial statements and related notes for the fiscal year ended December 31, 1995 contained in the Company's definitive prospectus dated April 23, 1996. The results of operations for the six months ended June 30, 1996, are not necessarily indicative of the results to be expected for the full year. 2. Public Offering: In April 1996, the Company completed a public offering of 1,495,000 units at a price of $4.00 per unit. Each unit consists of one share of common stock and one warrant. The warrants are exercisable for a period of five years and entitle the holder to purchase one share of common stock at an exercise price of $5.00 per share. However, if the Company does not report net after tax earnings of at least $.40 per share (target earnings) for the four fiscal quarters ending March 31, 1997, then the exercise price per share will be reduced by $.20 for each $.01 shortfall from the target earnings, but such exercise price will not be reduced below $1.00 per share. The warrants are redeemable by the Company under certain circumstances at $.05 per warrant provided that for at least 30 consecutive trading days the market price of the Company's common stock is at least $7.00 per share. In connection with the offering, the underwriters received a 10% discount and a 3% nonaccountable expense allowance and, subject to certain limitations, the representative of the underwriters will receive a 4% commission on proceeds received from the exercise of warrants solicited by the representative of the underwriters. The representative of the underwriters also received a warrant, exercisable for 130,000 units at $5.40 per unit for a period of four years, beginning on April 23, 1997. Net proceeds from the public offering were $4,723,526, after paying the aforementioned discounts and expenses to the underwriters and other offering costs totaling $479,074. Also in April 1996, an additional 629,961 units were issued as a result of the conversion of 140,000 shares of Series A 12% Convertible Cumulative Preferred Stock and 200,000 shares of Series B 12% Convertible Cumulative Preferred Stock. F-23 LASER STORM, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 3. Notes Receivable: During the six months ended June 30, 1996, the Company began offering a financing program to its customers for sales of its systems and arenas. The program generally requires an advance deposit ranging from 30% to 40% of the purchase price. The balance plus interest at a rate ranging from 8.5% to 9.9% is payable over a period ranging from 24 to 36 months. Sales under this program for the six months ended June 30, 1996, were $941,554 and the amount financed was $620,273. 4. Earning Per Share For the six months ended June 30, 1995, the calculation of weighted average shares outstanding includes all common stock options and the Series A and Series B preferred stock, which were issued prior to the Company's initial public offering at prices below the $4.00 per unit offering price. Such preferred stock and options to purchase common stock are included in the calculation for the entire six months ended June 30, 1995 and from January 1, 1996 through April 23, 1996, using the treasury stock method based on the $4.00 per unit offering price. For the six months ended June 30, 1996, common stock equivalents are excluded from the weighted average shares since they are anti-dilutive. 5. Concentration of Credit Risk At June 30, 1996, cash and equivalents includes an investment in a single U.S. Treasury Bill with an amortized cost of $1,987,000. The Company also had investments in commercial paper issued by major U. S. corporations of approximately $995,000 and $648,000. 6. Subsequent Event In July 1996 the Company purchased an existing Laser Storm game center located in Longmont, Colorado from unaffiliated persons. The total consideration was $160,000, which was paid at closing by paying $30,000 in cash and by paying the balance of $130,000 by issuing 32,500 shares of the Company's common stock to one of the sellers. Pursuant to the terms of the asset purchase agreement, the Company is registering the 32,500 shares for resale. The seller has 90 days from the date of the prospectus to sell the shares. If the seller has sold the shares for less than $130,000, the Company will immediately pay the seller the difference between the sales price of the shares and $130,000. Any remaining shares will be returned to the Company. If the sales price is more than $130,000, the Company has no further obligation to the seller and the seller is entitled to retain any excess shares or purchase price. In connection with the purchase, the Company also loaned the seller approximately $46,380 to pay the seller's bank loan. The loan is evidenced by a promissory note and is secured by a first in priority interest in the shares. All proceeds from the sale of the shares shall be applied first to retiring the loan. F-24 - ------------------------------------------------------------------------------- 2,382,571 Shares and 629,961 Units No person has been authorized to give any information or to make any representation in connection with LASER STORM INC. the offering being made hereby not contained in this Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized. This Prospectus does not constitute an offer to sell or The Units Consist of 629,961 solicitation of an offer to buy any Shares of Common Stock and of the securities offered hereby in 629,961 Warrants any jurisdiction in which it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this Prospectus nor any sale made ------------- hereunder shall under any circumstances create an implication PROSPECTUS that information contained herein ------------- is correct as of any time subsequent to the date hereof. ------------------------- PROSPECTUS SUMMARY ..................... 2 RISK FACTORS ........................... 6 _________, 1996 USE OF PROCEEDS ........................ 11 MARKET PRICES OF COMMON EQUITY, DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS .................. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS ................ 12 BUSINESS ............................... 17 MANAGEMENT ............................. 29 EXECUTIVE COMPENSATION ................. 31 PRINCIPAL SHAREHOLDERS ................. 35 CERTAIN TRANSACTIONS ................... 36 DESCRIPTION OF SECURITIES .............. 37 SELLING SECURITY HOLDERS ............... 39 PLAN OF DISTRIBUTION ................... 40 LEGAL MATTERS .......................... 41 EXPERTS ................................ 41 ADDITIONAL INFORMATION ................. 41 FINANCIAL STATEMENTS ................... F-1 - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers. The statutes, charter provisions, bylaws, contracts, or other arrangements under which any controlling person, director, or officer of the Registrant is insured or indemnified in any manner against liability which he or she may incur in his or her capacity as such are as follows: (a) Sections 7-109-102 to 7-109-110, inclusive, of the Colorado Business Corporation Act give Colorado corporations powers to indemnify their directors, officers, employees, fiduciaries and agents against liability incurred in any proceeding to which they are made parties by reason of being or having served in such capacities, subject to specified conditions and exclusions; authorize the payment for or reimbursement of reasonable expenses incurred by such persons in such proceedings; mandate indemnification of directors and officers who are successful on the merits; and permit corporations to obtain directors' and officers' liability insurance. (b) Article VI of Registrant's Restated Articles of Incorporation with Amendments, as amended, provides with respect to indemnification that a director of the corporation shall not be personally liable to the corporation or to its shareholders for monetary damages for breach of fiduciary duty as a director; except that this provision shall not eliminate or limit the liability of a director to the corporation or to its shareholders for monetary damages otherwise existing for (i) any breach of the director's duty of loyalty to the corporation or to its shareholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) acts specified in Section 7-108-403 of the Colorado Business Corporation Act, as it may be amended from time to time; or (iv) any transaction from which the director directly or indirectly derived any improper personal benefit. If the Colorado Business Corporation Act is amended to eliminate or limit further the liability of a director, then, in addition to the elimination and limitation of liability provided by the preceding sentence, the liability of each director shall be eliminated or limited to the fullest extent permitted by the Colorado Business Corporation Act as so amended. Paragraph 3 of Article VII of Registrant's Restated Articles of Incorporation With Amendments provides that Registrant shall indemnify to the maximum extent permitted by law in effect from time to time, any person who is or was a director, officer, agent, fiduciary or employee of the corporation against any claim, liability or expense arising against or incurred by such person made party to a proceeding because he is or was a director, officer, agent, fiduciary or employee of the corporation or because he is or was serving another entity as a director, officer, partner, trustee, employee, fiduciary or agent at the corporation's request. The corporation shall further have the authority to the maximum extent permitted by law to purchase and maintain insurance providing such indemnification. (c) Article VI of the Registrant's Bylaws provides that Registrant shall indemnify any director, officer, employee, fiduciary or agent of Registrant or one who is or was serving at the request of Registrant in a like capacity for any corporation, partnership, joint venture, trust, unincorporated association, limited liability company, or other enterprise or employee benefit plan who is, was or threatened to be made, a party to any threatened, pending or completed action, suit or proceeding by reason of serving in such capacity, against reasonably incurred expenses, judgments, penalties, fines and settlements reasonably incurred, if he conducted himself in good faith and that he reasonably believed (i) in the case of conduct in his official capacity with the corporation, that his conduct was in the corporation's best interests, or (ii) in all other cases (except criminal cases), that his conduct was at least not opposed to the corporation's best interests, or (iii) in the case of any criminal proceeding, that he had no reasonable cause to believe his conduct was unlawful; or who was wholly successful in defense of the action, suit or proceeding to which he was entitled to indemnification. Article VII of the Registrant's Bylaws permits Registrant to obtain insurance against any liability asserted against or incurred by any director, officer, employee, fiduciary or agent of Registrant arising out of the service of such persons in such capacity. II-1 (d) The Registrant has obtained a $1,500,000 Directors' and Officers' Liability Insurance policy which, in general, provides that the insurance carrier will pay on behalf of the Registrant's directors or officers, or will reimburse the Registrant for amounts it pays under indemnity provisions to its directors and officers, for damages, settlements and costs of defense which the directors or officers are legally obligated to pay for any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by the directors or officers in the discharge of their duties solely in their capacities as directors or officers of the Registrant, its subsidiaries and certain joint ventures. Excluded are amounts the directors or officers are required to pay for criminal or civil fines or penalties imposed by law, punitive or exemplary damages or the two-thirds portion of any treble damage award, taxes, or any matter which may be deemed uninsurable under the law pursuant to which the insurance policy is construed. Also excluded are amounts paid for claims which arise out of such things as the directors or officers realizing illegal profits, having to return nonapproved remuneration, committing fraudulent criminal or dishonest acts, various torts, being liable for seepage, pollution or contamination and being subject to claims by the Company or its affiliates. Item 25. Other Expenses of Issuance and Distribution. Expenses (none of which will be paid or reimbursed by the Selling Shareholders to the Registrant) payable in connection with the issuance and distribution of the securities being registered hereby are as follows: Securities and Exchange Commission Registration Fee $ 100 Accounting Fees and Expenses ...................... 5,000* Legal Fees and Expenses ........................... 7,500* Printing, Freight and Engraving ................... 1,000* Miscellaneous ..................................... 1,400* ------- Total ...................................... $15,000 - ------------------ * Estimated Item 26. Recent Sales of Unregistered Securities. The following is information with respect to all unregistered securities sold by the Registrant within the past three years: (a) Since the inception of the Registrant, the Registrant has issued 1,601,250 shares of Registrant's Common Stock to nine persons who at the time were either officers, directors and/or employees of the Registrant. The shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended ("Securities Act"). The facts relied upon for such exemption are that the purchasers had full information available to them concerning the Registrant because of their relationships to the Registrant and did not need the protection afforded by the registration provisions of the Securities Act and the certificates representing the shares of Common Stock issued have an appropriate restrictive legend under the Securities Act typed thereon and are restricted from transfer. No underwriters were involved in connection with the issuances of the 1,601,250 shares of Common Stock. (b) In October 1995, Registrant completed a private placement of 140,000 shares of Series A 12% Convertible Cumulative Preferred Stock ("Series A Stock") for a total offering price of $700,000. The Series A Stock was sold in reliance upon the exemption from registration provided by Section 4(6) of the Securities Act and Regulation D promulgated thereunder. The facts relied upon for such exemption are that the 16 purchasers represented that they acquired the securities for their own accounts for investment purposes only and not with the present intent of distributing or reselling the Series A Stock and that they were accredited investors as such term is defined in Regulation D and a Form D was timely filed. The Series A Stock certificates had an appropriate restrictive legend under the Securities Act typed thereon and were restricted from transfer. The firm of Laidlaw Equities, Inc. sold the Series A Stock as agent for the Registrant and was paid a commission of $70,000 and a nonaccountable expense allowance of $21,000. In April 1996, all Series A Stock was converted into II-2 shares of Common Stock and Warrants to purchase shares of Common Stock. Such issuances were made by the Company in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act. (c) Effective August 9, 1995, the Registrant issued one accredited person an option to purchase 50,000 shares of the Registrant's Common Stock as a part of the compensation payable to the person pursuant to a consulting agreement between the Registrant and the person. The option was issued in reliance upon the exemption from Registration provided by Section 4(2) of the Securities Act. The facts relied upon for such exemption are that the person had full information available to him concerning the Registrant because of his relationship with the Registrant and did not need the protection afforded by the registration provisions of the Securities Act. Further, the option is nontransferable other than pursuant to the laws of descent and distribution. No underwriters were involved in connection with the issuance of the option. (d) The Registrant has issued stock options to the Registrant's employees and non-employee directors to purchase shares of Registrant's Common Stock. No consideration was paid by the employees or directors for such options and Registrant does not consider that any sales occurred as a result of the issuances of such options. (e) In February 1996, Registrant completed a private placement of 200,000 shares of Series B 12% Convertible Cumulative Preferred Stock ("Series B Stock") for a total offering price of $1,000,000. The Series B Stock was sold in reliance upon the exemption from registration provided by Section 3(b) of the Securities Act and Rule 504 of Regulation D promulgated thereunder. The facts relied upon for such exemption are that the 26 purchasers represented that they acquired the securities for their own accounts for investment purposes only and not with the present intent of distributing or reselling the Series B Stock and that they were accredited investors as such term is defined in Regulation D and a Form D was timely filed. The Series B Stock certificates had an appropriate restrictive legend under the Securities Act typed thereon and were restricted from transfer. The firms of Laidlaw Equities Inc. and Rocky Mountain Securities and Investments, Inc. sold the Series B Stock as agents for the Registrant and were paid commissions of $86,000 and $14,000, respectively. In April 1996, all Series B Stock was converted into shares of Common Stock and Warrants to purchase shares of Common Stock. Such issuances were made by the Company in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act. (f) Effective February 9, 1996, the Registrant agreed to issue one corporation an option to purchase 175,000 shares of the Registrant's Common Stock as a part of an agreement to settle a lawsuit. The option was issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. The facts relied upon for such exemption are that the corporation represented that it was an accredited investor and did not desire any further information concerning the Registrant. Registrant believes the corporation did not need the protection afforded by the registration provisions of the Securities Act. No underwriters were involved in connection with the issuance of the option. (g) In July 1996, Registrant issued 32,500 shares of Registrant's Common Stock to one person in connection with the purchase by Registrant of the assets of Laser Storm of Longmont, Inc. The shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act and the facts relied upon for such exemption are that the purchaser had full information available to him concerning the Registrant, did not need the protection afforded by the registration provisions of the Securities Act and the certificate representing the shares of Common Stock issued has an appropriate restrictive legend under the Securities Act typed thereon and is restricted from transfer. No underwriters were involved in connection with the issuance of the 32,500 shares of Common Stock. (h) The Registrant has stated one exemption from registration relied upon in each of the issuances of unregistered securities described in paragraphs (a) through (c) and (e) through (g). Other exemptions from registration may have been available with respect to some or all of such issuances. The Registrant reserves the right to assert in the future any or all other exemptions from registration which were available with respect to such issuances. II-3 Item 27. Exhibits. The following is a list of all exhibits filed as part of this Registration Statement. The exhibit numbers for previously filed exhibits correspond to the Exhibit List in Registration Statement No. 33-98578 to which such exhibits are incorporated by reference. Exhibit No. Description and Method of Filing - ---------- -------------------------------- (1.4) Laidlaw Equities, Inc. Unit Purchase Option.* (3.1) Restated Articles of Incorporation With Amendments of Registrant.* (3.2) Articles of Amendment to Restated Articles of Incorporation With Amendments of Registrant filed on September 27, 1995.* (3.3) Articles of Amendment to Restated Articles of Incorporation With Amendments of Registrant filed on October 3, 1995.* (3.4) Bylaws of Registrant.* (3.5) Certificate of Correction to the Articles of Amendment to Restated Articles of Incorporation With Amendments of Registrant filed on January 29, 1996.* (3.6) Articles of Amendment to Restated Articles of Incorporation With Amendments of Registrant filed on February 13, 1996.* (4.5) Warrant Agreement between Registrant and American Securities Transfer Incorporated, as Warrant Agent.* (5.1) Opinion dated March 5, 1996, of Hopper and Kanouff P.C. regarding legality of the securities being registered.* (5.2) Opinion dated March 5, 1996, of Hopper and Kanouff, P.C. regarding liquidation preference.* (5.3) Opinion of Smith, McCullough & Ferguson, P.C. regarding legality of securities being registered.** (10.1) Employment Agreement dated effective October 1, 1994, between Registrant and Robert J. Cooney and amendments thereto dated October 4, 1995 and October 6, 1995.* (10.2) Employment Agreement dated effective October 1, 1994, between Registrant and William R. Bauerle and amendments thereto dated October 4, 1995 and October 6, 1995.* (10.3) Employment Agreement dated effective September 13, 1995, between Registrant and Frank J. Ball and amendment thereto dated October 6, 1995.* (10.4) Employment Agreement dated effective September 13, 1995, between Registrant and Robert S. Scholz and amendment thereto dated October 6, 1995.* (10.5) Amended Stock Incentive Plan.* (10.6) Forms of Option Granted to Employees.* (10.7) Agreement between Registrant and Bertrand T. Ungar.* II-4 (10.8) Agreement dated July 17, 1995, among Registrant, Creative Licensing Corporation and Le Studio Canal + (U.S.).* (10.9) Lease Agreement dated May 10, 1995, between Registrant and Dennis A. Trescott and addenda thereto dated June 22, 1995, October 13, 1995, and November 6, 1995.* (10.10) Exclusive Agreement dated July 10, 1995, between Registrant and Target Technology Pte., Ltd.* (10.11) Articles of Organization of Laser Hall L.L.C. and Laser Hall L.L.C. Operating Agreement.* (10.12) Articles of Organization of Laserstorm Waikiki Limited Liability Company.* (10.13) Agreement dated January 27, 1994 between Registrant and Sports and Games.* (10.14) Agreement dated August 8, 1995 between Registrant and Fun City Amusement Centers, Inc.* (10.15) Agreement dated effective July 1, 1995 between Registrant and Santa's Village, Ltd.* (10.16) Sales Agreement dated in August 1995 between Registrant and TAMS Stationers.* (10.17) Options Granted to Harrison A. Price and Harold Skripsky.* (10.18) Lease Agreement dated October 19, 1995, between Registrant and Funplex Partnership.* (10.19) Employment Agreement dated effective December 1, 1995, between Registrant and Michael D. Kessler.* (10.20) Employment Agreement dated effective December 16, 1995, between Registrant and Eric Schwartzman.* (10.21) Options granted to Michael D. Kessler and Eric Schwartzman.* (10.22) Agreement dated February 8, 1996, between Registrant and Tunica Partners II, LP.* (10.23) Addendum dated March 27, 1996, to the Employment Agreement dated effective September 13, 1995, between Registrant and Robert S. Scholz.* (10.24) License Agreement dated August 1, 1996, between Marvel Characters, Inc. and Registrant.*** (10.25) Amendment dated August 15, 1996, to Amended Stock Incentive Plan. (10.26) Asset Purchase Agreement dated July 23, 1996, among Registrant, Laser Storm of Longmont, Inc. and Kevin J. Barker.**** (23.1) Consent of HEIN + ASSOCIATES, LLP, Independent Certified Public Accountants. (23.2) Consent dated March 5, 1996 of Hopper and Kanouff, P.C.* (23.3) Consent of Smith, McCullough & Ferguson, P.C.** (24) Power of Attorney. ------------------ * Incorporated by reference to the same exhibit number of Registration Statement 33-98578. ** To be filed by amendment. *** Confidential treatment being requested in a separate filing. **** Certain of the Schedules and Exhibits to the Asset Purchase Agreement have been omitted and will be provided to the United States Securities and Exchange Commission upon request. II-5 Item 28. Undertakings The undersigned Registrant hereby undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its legal counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City and County of Denver, State of Colorado on October 18, 1996. LASER STORM, INC. By: /s/ Robert J. Cooney --------------------------------------------- Robert J. Cooney, Chief Executive Officer, Principal Financial Officer and Treasurer By: /s/ John E. McNutt -------------------------------------------- John E. McNutt, Vice President Finance, Principal Accounting Officer In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates stated: Signature Title Date - ---------- ----- ---- Robert J. Cooney Director October 18, 1996 William R. Bauerle Director October 18, 1996 Frank J. Ball Director October 18, 1996 Harrison A. Price Director October 18, 1996 Harold Skripsky Director October 18, 1996 *By /s/ Robert J. Cooney October 18, 1996 ----------------------------------- Robert J. Cooney, Power of Attorney II-7 EXHIBIT INDEX
Exhibit No. Description and Method of Filing Page No. - ------- -------------------------------- ------- (1.4) Laidlaw Equities, Inc. Unit Purchase Option.* N/A (3.1) Restated Articles of Incorporation With Amendments of Registrant.* N/A (3.2) Articles of Amendment to Restated Articles of Incorporation With N/A Amendments of Registrant filed on September 27, 1995.* (3.3) Articles of Amendment to Restated Articles of Incorporation With N/A Amendments of Registrant filed on October 3, 1995.* (3.4) Bylaws of Registrant.* N/A (3.5) Certificate of Correction to the Articles of Amendment to Restated N/A Articles of Incorporation With Amendments of Registrant filed on January 29, 1996.* (3.6) Articles of Amendment to Restated Articles of Incorporation With N/A Amendments of Registrant filed on February 13, 1996.* (4.5) Warrant Agreement between Registrant and American Securities Transfer N/A Incorporated, as Warrant Agent.* (5.1) Opinion dated March 5, 1996, of Hopper and Kanouff P.C. regarding N/A legality of the securities being registered.* (5.2) Opinion dated March 5, 1996, of Hopper and Kanouff, P.C. regarding N/A liquidation preference.* (5.3) Opinion of Smith, McCullough & Ferguson, P.C. regarding legality of N/A securities being registered.** (10.1) Employment Agreement dated effective October 1, 1994, between N/A Registrant and Robert J. Cooney and amendments thereto dated October 4, 1995 and October 6, 1995.* (10.2) Employment Agreement dated effective October 1, 1994, between N/A Registrant and William R. Bauerle and amendments thereto dated October 4, 1995 and October 6, 1995.* (10.3) Employment Agreement dated effective September 13, 1995, between N/A Registrant and Frank J. Ball and amendment thereto dated October 6, 1995.* (10.4) Employment Agreement dated effective September 13, 1995, between N/A Registrant and Robert S. Scholz and amendment thereto dated October 6, 1995.* (10.5) Amended Stock Incentive Plan.* N/A (10.6) Forms of Option Granted to Employees.* N/A (10.7) Agreement between Registrant and Bertrand T. Ungar.* N/A (10.8) Agreement dated July 17, 1995, among Registrant, Creative Licensing N/A Corporation and Le Studio Canal + (U.S.).* (10.9) Lease Agreement dated May 10, 1995, between Registrant and Dennis A. N/A Trescott and addenda thereto dated June 22, 1995, October 13, 1995, and November 6, 1995.* (10.10) Exclusive Agreement dated July 10, 1995, between Registrant and N/A Target Technology Pte., Ltd.* (10.11) Articles of Organization of Laser Hall L.L.C. and Laser Hall L.L.C. N/A Operating Agreement.* (10.12) Articles of Organization of Laserstorm Waikiki Limited Liability N/A Company.* (10.13) Agreement dated January 27, 1994 between Registrant and Sports and N/A Games.* (10.14) Agreement dated August 8, 1995 between Registrant and Fun City N/A Amusement Centers, Inc.* (10.15) Agreement dated effective July 1, 1995 between Registrant and N/A Santa's Village, Ltd.* (10.16) Sales Agreement dated in August 1995 between Registrant and TAMS N/A Stationers.* (10.17) Options Granted to Harrison A. Price and Harold Skripsky.* N/A (10.18) Lease Agreement dated October 19, 1995, between Registrant and N/A Funplex Partnership.* (10.19) Employment Agreement dated effective December 1, 1995, between N/A Registrant and Michael D. Kessler.* (10.20) Employment Agreement dated effective December 16, 1995, between N/A Registrant and Eric Schwartzman.* (10.21) Options granted to Michael D. Kessler and Eric Schwartzman.* N/A (10.22) Agreement dated February 8, 1996, between Registrant and Tunica N/A Partners II, LP.* (10.23) Addendum dated March 27, 1996, to the Employment Agreement dated N/A effective September 13, 1995, between Registrant and Robert S. Scholz.* (10.24) License Agreement dated August 1, 1996, between Marvel Characters, Inc. and Registrant.*** (10.25) Amendment dated August 15, 1996, to Amended Stock Incentive Plan. (10.26) Asset Purchase Agreement dated July 23, 1996, among Registrant, Laser Storm of Longmont, Inc. and Kevin J. Barker.**** (23.1) Consent of HEIN + ASSOCIATES, LLP, Independent Certified Public Accountants. (23.2) Consent dated March 5, 1996 of Hopper and Kanouff, P.C.* N/A (23.3) Consent of Smith, McCullough & Ferguson, P.C.** N/A (24) Power of Attorney. ------------------
* Incorporated by reference to the same exhibit number of Registration Statement 33-98578. ** To be filed by amendment. *** Confidential treatment being requested in a separate filing. **** Certain of the Schedules and Exhibits to the Asset Purchase Agreement have been omitted and will be provided to the United States Securities and Exchange Commission upon request. EX-1 2 EXHIBIT 10.24--MARVEL REDACTED LICENSE AGREEMENT LICENSE AGREEMENT D96054R License Agreement (this "Agreement"), when executed by both parties, is effective as of the 1st day of August, 1996, by and between Marvel Characters, Inc., a Delaware corporation with an office at 26707 West Agoura Road, Calabasas, California 91302 ("Marvel"), and the party identified below ("Licensee"). 1. BASIC INFORMATION AND TERMS The following information and terms appear for ease of reference in this Section 1 and are set forth in greater detail in the indicated sections of this Agreement which follow. This Section 1 is not itself a contract, but only a part of this Agreement. Licensee: Laser Storm Inc. 7808 Cherry Creek South Drive Denver, CO 80231 Characters: The following characters as they appear in Marvel's comic book publications limited to: X-Men (01XM), Beast (01BE), Cyclops (01CC), Gambit (01GM), Archangel (01AA), Jean Grey (01JG), Professor X (01PX), Psylocke (01PE), Rogue (01RO), Storm (01ST), Wolverine (01WV), Iceman (01IC), Bishop (02BS), Cannonball (01CN). Friends: Starjammers (02SJ), Hepzibah (01HP), Raza (01RA), Nereel (02NR), Corsair (01CS), Ch'od (01CD), Princess Lilandra (01PR). Enemies: Apocalypse (01AP), Avalanche (01AE), Blob (01BL), Gladiator (02GL), Imperial Guard (02IM), Juggernaut (01JU), Magneto (01MG), Mojo (01MJ), Mr. Sinister (03MS), Omega Red (03OR), Pyro (01PY), Sauron (02SA), Sebastian Shaw (07SS), Sentinels (02SE), Spiral (01SL), Hellfire Club (02HF), Exodus (05EX), Acolytes (02AC), Holocaust (02HL), Brood (02BR), Brood Queen (04BR), Arcade (01AC), Phantasia (02PH), Commando (02CM), Toad (01T0), Lady Deathstrike (05LD), Cyber (03CY). Additional characters may be added to and deleted from this Agreement as each comic book series develops and warrants, subject to Marvel's prior written approval. #2 Licensed Rights: Listed on Exhibit A #3(a) Territory: Licensee-owned and sublicensee-owned (subject to Marvel's approval as specified in Section 21(f) hereof) entertainment centers located in The United States of America, its territories and possessions and Canada. #3(b) Laser Storm Inc. -1- (Rev. 8/29/96) 7/19/96:av Commencement Date: August 1, 1996 Expiration Date: February 1, 2000 #3(c) Notwithstanding the foregoing, the term for any entertainment centers not owned by Licensee but rather sublicensed in accordance with Section 21(f) hereof shall be three (3) years from the date of original purchase. Royalty Rate: #5(a) Calendar Period for royalty payments: Quarterly #5(a) Royalty Report due with payment 30 days after end of Calendar Period. #5(a),(d) Minimum Royalty Guarantee: payable as follows: #5(b) Advance: payable upon signing. #5(b) Remaining Balance: , payable on or before; , payable on or before; , payable on or before; and , payable on or before. Currency for all payments: United States Dollars #5(c) Royalty Reports and payments sent to: Accounts Receivable, Marvel Characters, Inc., 26707 West Agoura Road, Calabasas, California 91302 with a copy of reports to: Accounts Receivable, Marvel Entertainment Group, Inc., 387 Park Avenue So., New York, NY 10016 ("Marvel's New York Office") #5(d) Examination/Audit Fee: $500.00 per diem. Examination/Audit Maximum: $2,500.00 #5(e) Trademark and Copyright Notices: [Name(s) of character(s)] and Copyright (C) [year of first the distinctive likeness(es) publication of Marvel material thereof are Trademarks of by Licensee, in Arabic numerals] Marvel Characters, Inc. Marvel Characters, Inc. and are used with permission. All Rights Reserved. #7(b),(h) Notice of Supervision: This [identify the Licensed Article] is produced under license from Marvel Characters, Inc. #7(c) Product Development/Submission Date: November 1, 1996 #8(a) Laser Storm Inc. -2- (Rev. 8/29/96) 7/19/96:av Submission to Marvel for approval: One (1) sample of each item comprising the Licensed Rights upon completion of first production and each different piece of Associated Material therefor prior to sale or publication. One (1) sample of each item comprising the finished Licensed Rights and each different piece of Associated Material annually thereafter. #9(a) Insurance: A Combined Single Limit of $3,000,000 per occurrence. #10(e) 2. RECITALS (a) Marvel has rights in and to the names, characters, stories, storylines, plots, dialogue, incidents, language, artwork, symbols, designs, depictions, likenesses, formats, poses, concepts, themes and graphic, photographic and other visual representations of, relating to and associated with the Characters identified in Section 1 hereof (which names, characters, etc. and/or each of the individual components thereof shall hereinafter be referred to as the "Property"), said Property being known and recognized by the general public and associated in the public mind with Marvel. (b) Licensee desires to utilize the Property in the manner hereinafter described. 3. GRANT OF LICENSE (a) Licensed Rights. Upon the terms and conditions and with the limitations and exceptions hereinafter set forth, Marvel hereby grants to Licensee and Licensee hereby accepts the exclusive license right during the initial term hereof to utilize the Property but solely upon and in connection with the entertainment centers identified on Exhibit A. Upon the terms and conditions and with the limitations and exceptions hereinafter set forth, Marvel hereby grants to Licensee and Licensee hereby accepts the non-exclusive license right during any Extension Period(s) hereof to utilize the Property but solely upon and in connection with the entertainment centers identified on Exhibit A. The articles, products and/or services identified on Exhibit A collectively referred to as "Licensed Articles." (b) Territory. The license hereby granted extends only to the Territory identified in Section 1. Licensee expressly acknowledges and agrees that it is not licensed or authorized to use the Property, directly or indirectly, in any other area, and that it is not licensed to and will not knowingly sell the Licensed Rights to persons who intend or are likely to exploit them in any other area, to the extent this provision is permitted by the applicable law at the time of such use, license or sale. (c) Term. The license hereby granted shall commence on the Commencement Date and terminate automatically on the Expiration Date set forth in Section 1, or the expiration of any renewal as provided herein, unless sooner terminated in accordance with the provisions hereof. In the event Licensee commences any activities in connection with the Property prior to the Commencement Date, all provisions of this Agreement for the benefit and protection of Marvel shall apply in full to such activities. Laser Storm Inc. -3- (Rev. 8/29/96) 7/19/96:av Provided Licensee is not in breach of any of the provisions of this Agreement and provided that Licensee has paid Marvel no less than Three Hundred Thousand Dollars ($300,000.00) in earned royalties during initial term of this Agreement, and provided further that Licensee gives written notice to Marvel of its desire to extend this Agreement within five (5) months prior to expiration of this Agreement, then this Agreement shall be extended for a one (1) year period ("Extension Period"). Thereafter, this Agreement shall be extended for successive one (1) year periods (each the "Extended Period") terminating December 31, 2003 provided during the preceding twelve (12) month period Licensee is not in breach of this Agreement and Licensee has paid Marvel no less than Three Hundred Thousand Dollars ($300,000.00) in earned royalties and provided further that Licensee gives written notice to Marvel of its desire to extend this Agreement within five (5) months prior to expiration of the initial term of this Agreement or, if any, the Extension Period in effect. Notwithstanding the foregoing, if Licensee has not paid Marvel the sum of Three Hundred Thousand Dollars ($300,000.00)in earned royalties during the initial term of this Agreement or any Extension Period, the Extension Period will not become effective and this License shall be terminated as of the expiration of the initial term of this Agreement or, if any, the Extension Period in effect. (d) Scope of License. Notwithstanding anything contained herein to the contrary, nothing in this Agreement shall be construed to prevent Marvel from granting any other licenses for the use of the Property or from utilizing the Property in any manner whatsoever, except that Marvel agrees that (except as provided herein), it will grant no other licenses for the Territory to which this license extends during the initial term of this license for the use of the Property, (other than solely for manufacturing for sale outside the Territory), in connection with the Licensed Articles without the prior written consent of Licensee. It is further understood and agreed that, in accordance with its practice, Marvel may have previously granted and may continue to grant permissions to others to use the property or portions thereof in connection with the Articles for noncommercial, educational or experimental purposes. Moreover, it is further understood that, under prior terminated license agreements relating to the use of the Property for the Articles in the Territory, Marvel reserves the right to have granted to expired or terminated licensees rights similar to those set forth in #16(e) hereof to dispose of Articles on hand or in process within the Territory during the first sixty (60) days of the term hereof. It is also agreed and understood that nothing in this Agreement shall be construed to prevent Marvel from granting any other licenses for the use of the Property, in connection with the Licensed Rights, for the Territory to which this license extends, during the Extension Period(s) of this license or from utilizing the Property in any manner whatsoever. Licensee hereby acknowledges that the aforesaid licenses do not conflict with or derogate from any rights being granted to Licensee hereunder. 4. RESERVATION OF RIGHTS (a) General. Marvel hereby reserves all rights not herein specifically granted to Licensee, including but not limited to all rights with respect to Laser Storm Inc. -4- (Rev. 8/29/96) 7/19/96:av the Licensed Rights for any and all channels of trade, modes of distribution and/or delivery, including but not limited to premiums or giveaways, direct mail, electronic shopping (e.g., "QVC"), Marvel's Direct Sales Marketplace (as defined in Section 13) and vending machines and for sale at commercial venues presenting a live stage show based upon the Property such as an arena show or a touring mall show. As between the parties, such reserved rights are the sole and exclusive property of, and may be used or exercised solely by, Marvel. Any use or license by Marvel of such reserved rights, in any manner whatsoever, shall not be deemed unfair competition with, interference with, breach of or infringement of any of Licensee's rights hereunder. It is also understood that Marvel is not required to itself continue the production of the Property or any part thereof. (b) Television, etc. Except only for the visual reproduction or presentation of the actual Licensed Rights licensed hereunder or of the actual packaging therefor or as may be expressly provided in this Agreement, Licensee shall not use the Property or Licensed Articles identified with the Property on or in connection with any manner of television, radio, motion picture, filmstrip, sound and/or visual recording or transmission device or media, or anything similar to the foregoing now known or hereafter developed without Marvel's prior written approval. The name and/or likeness of any performer portraying any character included within the Property on radio, television, or in any other media or form shall not be deemed to be included in the Property, and the use thereof is not licensed. 5. ROYALTIES, PAYMENTS, REPORTS AND RECORDS (a) Royalties. Licensee agrees to pay Marvel royalties at the Royalty Rate identified in Section 1. Royalties shall be calculated by applying the Royalty Rate to Licensee's Gross Revenues. Gross Revenues shall mean the total amount of money received by Licensee, its agents, affiliates, associates, subsidiaries or other related persons or companies ("Related Entities") from admission tickets to the entertainment centers or other exploitation of the Licensed Rights or from any use of the Property permitted hereunder. No set-offs or deductions of any kind may be taken in the determination of Gross Revenues or the royalties due Marvel hereunder,except that Licensee may deduct any federal, state or local taxes imposed on the sale of an admission ticket, provided Licensee supplies Marvel with documentation of having paid such taxes. Royalties as specified herein shall become due on the last day of each Calendar Period specified in Section 1, for all Gross Revenues accruing in that Calendar Period and shall be paid not later than the number of days thereafter specified in Section 1, accompanied by the Royalty Report required herein. Gross Revenues shall be deemed accrued for all purposes hereunder no later than Licensee's receipt of such monies. (b) Advance and Minimum Royalty Guarantee. Licensee agrees to pay Marvel the Minimum Royalty Guarantee specified in Section 1 as a minimum guarantee against royalties to be paid Marvel during the Term of this license. As the first installment of the Minimum Royalty Guarantee, upon the signing hereof, Licensee shall pay Marvel the Advance specified in Section 1. Any unpaid balance of said Minimum Royalty Guarantee shall be paid to Marvel as provided in Section 1. No part of the Advance or Minimum Royalty Guarantee shall in any event be repayable to Licensee. Laser Storm Inc. -5- (Rev. 8/29/96) 7/19/96:av (c) Currency and Taxes. All payments to Marvel shall be made in the currency set forth in Section 1, which amounts shall be computed at the exchange rate existing at noon on the last business day preceding the day payment is due to be made hereunder. If payment is late, Marvel has the option to require that payment be made at the exchange rate existing on the day preceding payment. All taxes, levies, charges or duties imposed on license rights, artwork or similar material, or payments therefor, shall be paid by Licensee and no deductions for such taxes, levies, charges or duties shall be made from amounts owed Marvel hereunder, it being the intent hereof that all royalties payable to Marvel be free and clear of any taxes, levies, charges or duties of any kind whatsoever. (d) Royalty Reports. For each Calendar Period specified in Section 1, commencing with the end of the Calendar Period following the Commencement Date of this license and continuing until a final certification of wind-up is delivered, Licensee shall furnish Marvel with a detailed Royalty Report certified to be accurate by an authorized officer of Licensee, showing all information called for by the statement form annexed hereto as Exhibit B (whether or not there has been any actual exploitation of said Licensed Rights), additional copies of which may be obtained from Marvel. Each such Royalty Report shall be furnished to Marvel to the attention of the persons designated in Section 1, within the time specified in Section 1 after the end of the Calendar Period for which such Royalty Report is made, and shall be accompanied by payment to Marvel of any and all monies due Marvel and by Licensee's most current admission price for the Licensed Rights. Such Royalty Report shall be furnished to Marvel whether or not there are any Gross Revenues during the preceding Calendar Period, and whether or not any monies are then due Marvel. The failure or refusal of Licensee to timely furnish any such Royalty Report or payment shall be deemed a substantial and material breach of this Agreement and shall entitle Marvel to terminate this license as set forth in Section 15(a) hereof. The receipt or acceptance by Marvel of any of the Royalty Reports furnished pursuant to this Agreement or of any payments made hereunder (or the cashing of any checks paid hereunder) shall not preclude Marvel from questioning its accuracy at any time, and in the event that any inconsistencies or mistakes are discovered in such Royalty Reports or payments, they shall immediately be rectified and the appropriate payment made by Licensee, together with interest on any overdue payments at the rate specified in Section 17(c) hereof. (e) Records. Licensee shall maintain at its expense, detailed, accurate, full and complete records and books of account covering all transactions by it relating to this Agreement, and Marvel and its duly authorized representatives shall have the right, at least twice during each calendar year during normal business hours, to examine and/or audit such records and books of account and all other documents and materials in the possession or under the control of Licensee relating or pertaining to the subject matter or provisions of this Agreement and to make copies and/or extracts therefrom. In the event that Marvel's duly authorized representatives shall discover a deficiency for any accounting period of five percent (5%) or more by any such examination and/or audit, Licensee shall pay to Marvel the cost of such examination and/or audit. The Examination Audit Fee per diem shall be as set forth in Section 1. In no event, however, shall Licensee be charged for any individual examination in excess of the Examination Audit Maximum set forth in Section 1. Upon Marvel's demand, Licensee shall at its own expense furnish Marvel with a detailed report by an independent certified public accountant on Laser Storm Inc. -6- (Rev. 8/29/96) 7/19/96:av the accuracy and preparation of the aforesaid Royalty Reports. Licensee shall keep all such books of account and records available to Marvel for at least two (2) years after the termination or expiration of this license. If Licensee fails to keep and disclose such records, Marvel shall have the right to estimate, and have payment for, such additional royalty as may be indicated owing by such trade information as may be available. 6. MARVEL'S TITLE AND GOODWILL (a) General. Licensee acknowledges that Marvel is the owner of all right, title and interest in and to the Property, and further acknowledges the great value of the goodwill associated with the Property and that the Property has acquired secondary meaning in the mind of the public and that the trademarks and copyrights included in the Property, and the registrations therefor, are valid and subsisting, and further agrees that it shall not during the Term of this license or at any time thereafter dispute or contest directly or indirectly, or do or cause to be done any act which in any way contests, impairs or tends to impair Marvel's exclusive rights and title to the Property, as well as any properties owned by Marvel which are not licensed hereunder, or the validity thereof or the validity of this Agreement, and shall not assist others in so doing. (b) Representations of Ownership, etc. Licensee shall not in any manner represent that it has any ownership in the Property, or in any properties owned by Marvel which are not licensed hereunder, or in any trademarks or copyrights included in the Property (or registrations therefor), but may, only during the Term of this license, and only if Licensee has complied with all laws and registration requirements within the Territory for so doing, represent that it is a "licensee" or "official licensee" hereunder. Licensee shall not register or attempt to register any copyright or trademark in the Property, or in any properties owned by Marvel which are not licensed hereunder, in its own name or that of any third party, nor shall it assist any third party in doing so. (c) Use for Benefit of Marvel. Licensee agrees that any and all uses and sales by Licensee of the Property under this Agreement shall inure to the benefit of Marvel and that neither such uses or sales nor anything contained in this Agreement shall give or assign Licensee or any other person or entity any right, title or interest in the Property, or in any properties owned by Marvel which are not licensed hereunder, except the right to use the Property specifically in accordance with the provisions of this Agreement. 7. PROTECTION OF RIGHTS-INCLUDING COPYRIGHTS AND TRADEMARKS (a) General. Licensee shall cooperate fully and in good faith with Marvel for the purpose of Marvel's securing and preserving Marvel's (or any grantor of Marvel's) rights in and to the Property. Upon creation of Licensed Rights embodying the Property, Licensee shall be deemed to have automatically assigned to Marvel all copyrights in the Property (and all adaptations, compilations, modifications, translations and versions thereof) embodied in the Licensed Rights. In addition, Licensee shall execute any instruments requested by Marvel to accomplish or confirm the foregoing and hereby irrevocably appoints Marvel as its attorney-in-fact to execute such instruments if Licensee does not do so. Any such assignment shall be without other consideration than the mutual covenants and considerations of this Agreement. Laser Storm Inc. -7- (Rev. 8/29/96) 7/19/96:av (b) Trademarks. Licensee acknowledges and agrees that the names, characters, symbols, designs, likenesses, and visual representations, among other things, comprising the Property are owned by Marvel, and that it shall cause to appear on everything which uses, bears or displays the Property or any part thereof, including all items comprising the Licensed Rights, tags, labels and the advertising, promotional, packaging and display material therefor, a notice proclaiming and identifying the relevant portions of the Property appearing therein as properties of Marvel, as, for example, by labeling each name and character likeness with the notice specified in Section 1, or otherwise as Marvel may deem appropriate. (c) Notice of Supervision. Every item comprising the Licensed Rights and all advertising, promotional, packaging and display material therefor shall also bear the notice of supervision specified in Section 1 (or an equivalent if given prior written approval by Marvel) in order to notify the public that Marvel's standards are maintained. (d) Reference to Source. It is agreed that all trademarks and other references used by Licensee in connection with the Licensed Rights which might suggest that they are indicias of source, shall, with all of the goodwill relating thereto, inure to the benefit of and be the sole property of Marvel, except only that Licensee may use a house mark upon the items comprising the Licensed Rights without being deemed to have assigned it to Marvel, provided it fairly appears only as Licensee's house mark. (e) Confusing Use. Licensee shall not use, and shall use its best efforts to keep others from using, the Property in any manner likely to cause confusion or doubt in the mind of the public as to the ownership and control thereof or in any manner that does not make clear that the Property is owned and controlled exclusively by Marvel. In addition, Licensee shall not use or co-mingle with the Property, and shall use its best efforts to keep others from using or co-mingling with the Property, any other trademarks, characters or properties, whether owned by Licensee or another, so as to suggest that such other trademarks, etc. may have been created or may be owned, controlled, licensed or approved by Marvel or that they are in any way related to the Property or Marvel unless approved in writing by Marvel. (f) Registration. Licensee agrees to fully cooperate with and assist Marvel in the prosecution of any copyright, trademark or service mark applications concerning the Property that Marvel may desire to file, and for that purpose, Licensee shall, upon request, supply to Marvel enough samples of the items comprising the Licensed Rights or other material as may be required in connection with any such application. Furthermore, Licensee shall execute any instrument Marvel shall reasonably deem necessary or desirable to record or cancel Licensee as a registered user of the trademarks of Marvel included in the Property, it being understood and agreed that Licensee's right to use the Property and the trademarks included therein in any country for which the filing of a registered user application is required, or is requested by Marvel, shall commence only upon the filing of such registered user application, but shall continue only so long as this license remains in effect. (g) Customer Complaints. Licensee shall, in connection with its duty to use the Property so as to promote the continuing goodwill thereof, give immediate attention and take necessary action to satisfy all legitimate customer complaints brought against Licensee in connection with the Licensed Rights or Laser Storm Inc. -8- (Rev. 8/29/96) 7/19/96:av other materials using the Property. Licensee shall give Marvel immediate notice of all material complaints that might affect the good standing of the Property or the reputation of Marvel and also of all complaints that might result in legal action between Marvel and any third party, and cooperate with Marvel upon request to achieve as good a reputation and press for the Property as possible. (h) Copyright Notice. It is a condition of this license that prior to public distribution, Licensee shall cause to appear the copyright notice specified in Section 1 on all items comprising the Licensed Rights, tags, labels and the advertising, promotional, packaging and display materials therefor, or otherwise as Marvel may instruct in writing or approve upon request. (i) Secure Copyrights, etc. Marvel may secure, in its name (or the name of another, including Licensee, if desired by Marvel), to the fullest extent possible, the copyrights in the Property and the registrations, renewals and extensions thereof, embodied in the Licensed Rights, including all adaptations, translations, modifications and versions of the Property. It is also a condition of this license that the Licensed Rights and other materials produced under this Agreement shall be produced as works made for hire for Marvel. (j) Claims by Licensee. Licensee shall not commence any court or administrative action against Marvel or against any other licensee of Marvel under the Property without giving Marvel thirty (30) days prior written notice and an opportunity by Marvel and/or such licensee to cure or correct the matter giving rise to the proposed action during said thirty (30) day period. In the event of any such action, Licensee shall give Marvel at least fifteen (15) days prior written notice before seeking any interim injunctive relief or restraining order. 8. QUALITY OF MERCHANDISE AND SERVICES; LICENSEE NAME ON LICENSED RIGHTS (a) Prior to the Product Development/Submission Date provided in Section 1, Licensee agrees to send representatives responsible for product development and marketing to Marvel to attend an initial product development and marketing meeting at a date and time to be specified by Marvel. (b) Licensee agrees that the Licensed Rights shall be of a high standard and of such style, appearance and quality as shall, in the judgment of Marvel, be adequate and suited to their exploitation to the best advantage and to the protection and enhancement of the Property and the goodwill pertaining thereto; that the items comprising the Licensed Rights shall be manufactured, packaged, sold, distributed, advertised and serviced in accordance with all applicable laws; that the policy of sale, distribution, and/or exploitation by Licensee shall be of equivalent high standard and style; and that the same shall in no manner reflect adversely upon the Property or Marvel. Licensee further agrees that all rights granted herein shall be exploited and exercised so as not to interfere with, detract from, or alter the concepts used by Marvel or known to the public and that Licensee shall use its best efforts to preserve the concepts therein. Accordingly, Licensee further specifically covenants and agrees to keep Marvel informed of its plans for use of the Property, and to consult Marvel as the items comprising the Licensed Rights are being prepared, so that there will be full opportunity for Marvel to deter Licensee from any use Laser Storm Inc. -9- (Rev. 8/29/96) 7/19/96:av that would alter the successful concepts associated with the Property. Licensee will consult with Marvel at every stage in designing the items comprising the Licensed Rights regarding the utilization of the Characters and the Property and shall work with Marvel to obtain Marvel's creative input concerning the Characters and the Property and the overall look and direction of the Licensed Rights. In connection therewith, Licensee shall be faithful in the portrayal of the Characters to the basic conceptualization of the Characters and the Property. To this end, before the first display of any kind of the Licensed Rights or such other materials, but in no event later than the Product Development/Submission Date provided in Section 1, Licensee shall submit to Marvel, for written approval without charge, and in a form acceptable to Marvel, all rough designs, concepts and/or prototypes of each item, class, part or category of the Licensed Rights and/or with respect to any Character licensed hereunder. After such rough material has been approved by Marvel, and before any public display, Licensee shall further submit to Marvel, for written approval without charge, and in a form acceptable to Marvel, a pre-production sketch or model of each item, class, part or category of the Licensed Rights and/or with respect to any Character licensed hereunder. Any item submitted to Marvel shall be deemed disapproved unless the same shall be approved in writing within twenty (20) days of receipt of the item. Licensee's failure to comply with any of the provisions of this section shall be deemed a substantial and material breach of this Agreement and shall entitle Marvel to terminate this license as set forth in Section 15(e) hereof. (c) The Marvel Comic's logo and Licensee's name, trade name (or a trademark of Licensee which Licensee has advised Marvel in writing that it is using) shall appear on permanently affixed labeling on each item comprising the Licensed Rights and, if any item comprising the Licensed Rights are packaged or in a container, printed on such packaging or a container so that the public can identify the supplier of the Licensed Rights. Licensee shall advise Marvel in writing of all trade names or trademarks it is using on any item comprising the Licensed Rights under this license if such names or marks differ from your corporate name as indicated herein. 9. INSPECTION AND APPROVAL (a) Samples for Approval. The nature, quality, style and labeling of any item comprising the Licensed Rights and the packaging, labels, advertising and promotional material therefor shall have the prior written approval of Marvel. To this end, before the first sale, distribution, display or release of any kind or in any media of the Licensed Rights or such other materials, Licensee shall submit to Marvel, for Marvel's written approval without charge, the number of samples specified in Section 1 of each item comprising the Licensed Rights manufactured hereunder upon completion of the first production, and each different piece of advertising, promotional, packaging and label material ("Associated Material") therefor. Annually thereafter, Licensee shall submit to Marvel, free of cost, for Marvel's written approval, the number of samples specified in Section 1 of each of the items comprising the finished Licensed Rights and each different piece of Associated Material therefor. Any item submitted to Marvel shall be deemed disapproved unless the same shall be approved in writing within twenty (20) days of receipt of the samples. After samples have been approved pursuant to this section, Licensee shall not depart therefrom in any respect without Marvel's prior written consent. No approval of any submitted product or item by Marvel shall be construed to expand or enlarge Laser Storm Inc. -10- (Rev. 8/29/96) 7/19/96:av the scope of the license granted hereunder. Licensee shall use reasonable efforts to make such changes as are reasonably requested by Marvel after an inadvertent approval or a change of conditions. In the event that this license involves the manufacture and/or sale of a food or drink product or a product intended for human use in the manner of a soap, shampoo, or a similar product, then it is an essential condition of this license, and Licensee covenants and agrees, that there shall not be the slightest departure from the quality or the formula approved by Marvel without the written consent of Marvel obtained in advance. (b) Inspection. Marvel or its authorized agents or representatives shall have access to each entertainment center where Licensee has an owner interest at all reasonable times, upon reasonable notice, with the right to a full inspection of any exploitation of the Licensed Rights in order to satisfy itself that its standards are maintained. In addition, Marvel shall have the same right to a full inspection in each entertainment center operated by an authorized sublicensee, provided such rights were granted to Licensee under the sublicense agreement. Licensee shall use its best efforts to insure that such rights are included in each sublicense agreement entered into by Licensee. 10. INDEMNIFICATION, LITIGATION AND INSURANCE (a) In its use of the Property, or any element or portion thereof, under this Agreement, Licensee shall exercise reasonable care, and shall cooperate fully with Marvel, to avoid infringing any rights found to be owned by others in the Territory. Upon learning of the existence or possible existence of rights held by others which may be infringed by the use of any element or portion of the Property under this Agreement, Licensee shall promptly notify Marvel in writing. (b) Infringement. Licensee shall promptly notify Marvel, in writing, of any imitations or infringements of the Property or the rights licensed hereunder which may come to Licensee's attention. Marvel shall have the sole right to determine whether or not any demand, suit or other action shall be taken on account of or with reference to any such infringements or imitations, and Licensee shall not institute any suit or take any action on account of any such infringements or imitations without first obtaining the written consent of Marvel to do so. Marvel, if it so desires, may commence or prosecute any suits or make any such demands in its own name or in the name of Licensee or join Licensee as a party thereto. Licensee shall cooperate with Marvel and in any manner that Marvel may request in connection with any such demands, suits, claims or other actions. If Marvel elects not to sue, Licensee may request permission to bring suit and, with written permission, may bring suit at its own expense, provided Licensee indemnifies Marvel against any loss or damage, including any loss or damage to reputation or goodwill, and provided that trial counsel is approved by Marvel, keeps Marvel fully informed, and further provided that Marvel shall have the right to assume control of the litigation at any time, but is thereupon responsible for its own further litigation expense. Nothing herein shall be construed as imposing any obligation upon Marvel to take action against any alleged infringer, nor to relieve Licensee from full compliance with any of the terms of this Agreement in the event that Marvel does not take such action. Laser Storm Inc. -11- (Rev. 8/29/96) 7/19/96:av (c) Indemnification of Licensee. Marvel shall defend, indemnify and hold Licensee harmless of, from and against any charges, suits, damages, costs, expenses (including attorneys' fees), judgments, penalties, claims, liabilities or losses of any kind or nature whatsoever, which may be sustained or suffered by or secured against Licensee based upon or arising out of any actual or alleged trademark or copyright infringement arising solely out of the use by Licensee of the Property as authorized in this Agreement, provided that: prompt notice is given to Marvel of any such claims or suits and provided further that: Marvel shall have the option to undertake and conduct the defense and/or settlement of any such claims or suits and that Licensee cooperates with Marvel in the defense of any such claims or suits and Licensee acts to mitigate any damages, and that no settlement of any such claims or suits is made without the prior written consent of Marvel. Marvel does not warrant any present or future commercial value of the Property. (d) Indemnification of Marvel. Licensee shall defend, indemnify and hold Marvel, its parents, subsidiaries, associated and affiliated companies, harmless of, from and against any charges, suits, damages, costs, expenses (including attorneys' fees), judgments, penalties, claims, liabilities or losses of any kind or nature whatsoever, which may be sustained or suffered by or secured against Marvel in connection with the Licensed Rights, or based upon or arising out of any actual or alleged unauthorized use of any patent, trade secret, process, idea, method or device, or any copyright or trademark, other than under this license, or the packaging, distribution, promotion, sale or exploitation of the Licensed Rights, any actual or alleged defect in Licensee's use of the Licensed Rights or their packaging, whether latent or patent, including failure of Licensee's exploitation of said Licensed Rights or their packaging, distribution, promotion, sale or exploitation to meet any Federal, State or local laws or standards; or any other actual or alleged unauthorized action of Licensee, including a breach of any term of this Agreement. (e) Insurance. Licensee shall obtain at its own expense and maintain during the Term of this Agreement and for seven (7) years thereafter, general liability insurance including advertising, blanket contractual, product liability and completed operations liability coverages. In the event the Licensed Rights include books or other published materials or are of an electronic nature such as software, computer programs, etc., Licensee also shall obtain at its own expense and maintain during the Term of this Agreement and for seven (7) years thereafter (ten (10) years if the policy form is claims made) publishers liability insurance which provides coverage for claims arising out of the published material and shall include but not be limited to the allegations of defamation, copyright infringement, invasion of right of privacy, or other personal injury and breach of implied contract. All insurance must be provided by a recognized insurance company having a Best's Rating of no less than "A" providing adequate protection at least in the amounts specified in Section 1 for personal bodily injury and property damage for Marvel and also for Licensee. Said insurance shall be primary and non-contributory with respect to any insurance carried by Marvel. As proof of such insurance, a fully paid certificate of insurance naming Marvel, its parent, subsidiary, associated and affiliated companies as insured parties shall be submitted to Marvel's New York Office by Licensee before any of the Licensed Rights are exploited, displayed or sold, and at the latest within thirty (30) days after execution of this Agreement. Said insurance coverage shall be effective as of the date first written above. Any proposed change in the insurance policy(ies) affecting Marvel's coverage shall be submitted for review as to the policy compliance with Laser Storm Inc. -12- (Rev. 8/29/96) 7/19/96:av the terms and conditions of this Agreement, to Marvel's New York Office. Marvel shall be entitled, throughout the Term of this Agreement, to a copy of the prevailing policy(ies) of insurance, which shall be furnished to Marvel's New York Office by Licensee. The policy(ies) of insurance must be non-cancellable except after thirty (30) days prior written notice to Marvel's New York Office. As used in Section 10(b) and (d), "Marvel" shall also include the agents, employees, assignees and any sponsor of Marvel, any advertising agency, and their respective officers, directors, agents and employees. This provision shall survive the termination or expiration of this Agreement. 11. ARTWORK Marvel shall supply Licensee with reasonable amounts of artwork from the Marvel Style Guide depicting the Property for use in the development of the Licensed Rights upon reasonable request by Licensee. The cost of providing copies of such style guide artwork, and the cost of both producing and providing copies of artwork, other than style guide artwork, which is specifically requested by and specifically prepared for Licensee or the reproduction thereof shall be paid by Licensee upon invoicing therefor. Licensee understands that in the event any fees or royalties are due creators or artists as a result of certain artwork or storylines, Licensee shall be responsible for the payment of such fees and/or royalties upon invoicing therefor. Payment of artwork and any fees associated therewith shall not be credited against any guarantee or other amount due Marvel. In addition, Licensee may produce within the Territory, directly or through other persons approved by Marvel, any artwork Licensee needs in connection with this license and, subject to obtaining Marvel's approval pursuant to Section 9(a) hereof, may reproduce and use such artwork for the purposes set forth in, and subject to the limitations imposed by, this Agreement. No such artwork may be reproduced or used unless the notices required under Section 7 are included thereon. All artwork involving the Property, or any reproduction thereof, and all copyrights therein shall, notwithstanding its creation or use by Licensee or other persons for Licensee, be and remain solely the property of Marvel and Marvel shall be entitled to use the same and to license the use of the same by others. Any reproduction or use of such artwork shall be on a non-exclusive basis. Licensee shall obtain and promptly furnish to Marvel's New York Office on the form annexed hereto as Exhibit C, an agreement signed by each person who creates, prepares or produces for or on behalf of Licensee (whether as an employee, an independent contractor or otherwise) any artwork involving the Property or any reproduction thereof, stating that such artwork is a work made for hire for Licensee under the U.S. Copyright Laws and acknowledging that such person has no copyright or other rights of any kind in or to such artwork. Licensee shall be deemed to have automatically assigned to Marvel all copyrights in such artwork created by or for Licensee. Further, Licensee shall execute any instruments requested by Marvel to accomplish or confirm the foregoing assignment, and hereby irrevocably appoints Marvel as its attorney-in-fact to execute such instruments if Licensee does not do so. 12. PROMOTION (a) Marvel shall have the right, but shall not be under any obligation, to use the Property and/or the name of Licensee so as to give the Property, Licensee, Marvel and/or programs connected with the Property full and favorable prominence and publicity. If the Licensed Rights appear in film produced by or under authority of Marvel, there shall be no obligation by Marvel to discontinue use of such film or any part thereof at the expiration or termination of this license and such continued use shall in no way be construed as an extension of the Term hereof or of this license. Laser Storm Inc. -13- (Rev. 8/29/96) 7/19/96:av (b) Licensee shall purchase a minimum of three (3) full page advertising insertions in the Marvel Network during the initial term of this Agreement, and one (1) full page advertising insertion in the Marvel Network during each year of any Extension Period(s), for use in advertising the Licensed Rights. The cost for each advertising insertion shall be no greater than the lowest price offered to any other Marvel licensee. Licensee understands that the failure to purchase the requisite number of advertising pages shall be considered a material breach of this Agreement. 13. DISTRIBUTION AND ADVERTISING (a) Licensee shall diligently and continuously use its best efforts throughout the entire Territory licensed hereunder and during the entire Term of this license to operate and maintain in a first class manner consistent with the highest standards of the interactive entertainment center industry, to promote and expand its sales hereunder to achieve the highest Gross Revenues practicably obtainable and to compete with any similar businesses, products or services. (b) Licensee agrees to use its best efforts to purchase from other Marvel licensees, Marvel licensed product for resale in each laser tag venue, including arcade video games for placement in each laser tag venue. All such purchases shall be subject to Marvel's prior approval. All revenues derived by Licensee from such sales shall be on a royalty free basis. (c) Licensee shall commit a minimum of five percent (5%) of Licensee's gross revenues derived from the exploitation of the Licensed Rights for the purpose of establishing a fund for the promotion of the Licensed Rights during each year of the Term of this Agreement (the "Advertising and Promotion Commitment Fund"). The amount of the Advertising and Promotion Commitment Fund shall not be deducted from royalties owed Marvel. The Advertising and Promotion Commitment Fund shall be used solely for promoting the Licensed Rights. All such use shall be subject to the approval provisions set forth in Section 9(a). Any other materials for which Licensee desires to use the Fund must be first approved by Marvel in writing. Licensee shall be responsible for maintaining the Advertising and Promotion Commitment Fund. Licensee shall report its expenditures from the Advertising and Promotion Commitment Fund every twelve (12) months to Marvel's New York Office accompanied by supporting documentation. 14. SALE TO MARVEL (a) At Marvel's request, Licensee agrees to provide Marvel with at least one hundred (100) complimentary entrance passes to each of Licensee's Marvel licensed laser game venues. 15. TERMINATION (a) In the event of failure by Licensee to furnish the royalty payments and/or Royalty Reports required hereunder in accordance with Section 5 hereof within forty-five (45) days of their becoming due, or failure by Licensee to submit samples prior to production or exploitation of the Licensed Rights in Laser Storm Inc. -14- (Rev. 8/29/96) 7/19/96:av accordance with Section 9(a) hereof, or failure by Licensee to obtain Marvel's written approval of the samples submitted by Licensee in accordance with Section 9(a) hereof, this Agreement will automatically terminate with no prior notice to Licensee being required. (b) Change in Character of Licensee. It is understood that the grant of the license herein by Marvel is premised upon the present character and composition of Licensee's management and Licensee's general good standing and reputation in the business community, and is therefore personal to Licensee. In the event of the sale or transfer of a substantial portion of the assets of Licensee's business or of a change in the controlling interest in Licensee's business or of a merger or consolidation of Licensee's business with any other entity, or in the event of substantial change in the management of Licensee or of Licensee's property being expropriated, confiscated or nationalized by the government, or in the event of the de facto control of Licensee or of any its subdivisions or agencies being assumed by a government, or government agency or representative, Marvel may, at its option, terminate this license on thirty (30) days' written notice to Licensee. (c) Other Breach. If Licensee shall violate, breach or be in default of any of its covenants or obligations under this Agreement or shall use bad faith in carrying out the provisions of this Agreement, Marvel, in addition to all other rights, also shall have the right to terminate this license upon written notice, and such notice of termination shall become effective immediately upon receipt of such notice. (d) Other Licenses and Properties. Licensee acknowledges and agrees that if Licensee violates any of its obligations under this Agreement, Marvel shall have the right to terminate any other License Agreement with Licensee (or any affiliate or approved sublicensee of Licensee). In addition, Licensee acknowledges and agrees that if Licensee violates its obligations under any other License Agreement between Marvel and Licensee (or any affiliate or approved sublicensee of Licensee), or if Licensee (or any affiliate or approved sublicensee of Licensee) uses the Property or any part thereof beyond the scope of the license granted herein or uses any properties owned by Marvel which are not licensed to Licensee, Marvel shall have the right to terminate this License Agreement. In either event, Marvel's right to terminate shall be effective upon ten (10) days notice in writing and such notice shall become effective unless Licensee shall exercise best efforts to completely remedy the violation within the ten (10) day period and satisfy Marvel that such violation has been remedied or will be remedied within a time frame acceptable to Marvel. 16. OBLIGATIONS ON EXPIRATION OR TERMINATION (a) Reversion of Right. Immediately upon the expiration or termination of this license for any cause whatsoever, all the rights granted to Licensee hereunder shall cease and revert to Marvel, who shall be free to license others to use any or all of the rights granted herein effective on and after such date of expiration or termination. To this end, Licensee will be deemed to have automatically assigned to Marvel upon such expiration or termination, all copyrights, trademark and service mark rights, equities, good will, titles and other rights in or to the Property and all adaptations, compilations, modifications, translations and versions thereof, and (except for Licensee's house mark) all other trademarks and service marks used in connection therewith Laser Storm Inc. -15- (Rev. 8/29/96) 7/19/96:av connection therewith which have been or may be obtained by Licensee or which may vest in Licensee and which have not already been assigned to Marvel. Licensee shall upon the expiration or termination of this license execute any instruments requested by Marvel to accomplish or confirm the foregoing, and hereby irrevocably appoints Marvel as its attorney-in-fact to execute such instruments if Licensee does not do so. Any such assignment shall be without other consideration than the mutual covenants and considerations of this Agreement. In addition, upon and after such expiration or termination of this license for whatever reasons, Licensee will, except as specifically provided in Section 16(e) hereof, forthwith refrain from further use of the Property or Marvel's name, or any further reference to any of them, direct or indirect, or of anything deemed by Marvel to be similar to the Property. (b) Return of Artwork. Upon termination or expiration of this Agreement for any reason whatsoever, Licensee shall return to Marvel's New York Office all artwork, including but not limited to all reproductions and all artwork specially produced for Licensee by Marvel or others, whether or not paid for by Licensee. (c) No Release. The termination or expiration of this license shall not release any party of any obligation to pay any monies that became due or owing or arose out of any transaction prior to the date of termination or expiration, and all royalties on sales or shipments theretofore made shall become immediately due and payable with no part of the minimum royalty guarantee being repayable, and any balances of the minimum royalty guarantee owed to Marvel shall be immediately due and payable. (d) Inventory. Fifteen (15) days before the latter of expiration of this license or any sublicense and, in the event of its termination, fifteen (15) days after receipt of notice of termination or the happening of the event which terminates this license where no notice is required, a statement executed by an officer of Licensee certifying the number and description of any items comprising the Licensed Rights shall be furnished by Licensee to Marvel's New York Office. Marvel shall have the right to take a physical inventory to ascertain or verify such inventory and statement, and Licensee's failure to furnish such statement or the refusal by Licensee to submit to such physical inventory shall constitute a material breach of this Agreement. (e) Undisposed Licensed Articles. Upon expiration or termination of this license, title to all remaining items comprising the Licensed Rights, if any, and all tags, labels, packaging, advertising, promotional, and display materials therefor, and all molds, plates, engravings and/or mechanicals used to make any of the items comprising the Licensed Rights or any of the aforesaid materials, shall be deemed to have automatically vested in Marvel. Licensee shall immediately deliver such remaining materials and items to Marvel's New York Office at no expense to Marvel, and Marvel shall have the right to enter the business premises of Licensee and take possession of them or Licensee shall destroy such Licensed Rights, materials and items if so requested by Marvel, and shall furnish Marvel's New York Office with a certificate of destruction executed by an officer of Licensee. 17. REMEDIES (a) General. In addition to the right to terminate, Marvel may, upon any default by Licensee, take whatever action it deems reasonably necessary to protect its rights and interests hereunder, and termination of this license shall be without prejudice to any rights or remedies which Marvel may otherwise have against Licensee. Laser Storm Inc. -16- (Rev. 8/29/96) 7/19/96:av (b) Use after Termination, etc. Licensee acknowledges that its failure to cease the use of the Property or to cease use of the Licensed Rights at the termination or expiration of this license, except as expressly provided herein, will result in immediate and irreparable damage to Marvel and to the rights of any subsequent licensee. Licensee acknowledges and admits that there is no adequate remedy at law for such failure, and Licensee agrees that in the event of such failure, Marvel shall be entitled to injunctive relief and such other and further relief as any court with jurisdiction may deem just and proper. (c) Interest, Damages and Cost. In the event Licensee shall default in the payment of monies required to be paid to Marvel hereunder, in addition to any remedies which Marvel may have at law or in equity to recover any such monies as may be due and owing, Marvel shall be entitled to receive from Licensee interest on such monies as may be owing from the date of default at a rate equal to three percent (3%) above the prime lending rate charged by Marvel's bank in New York on the date of default. In the event either party commences legal action to enforce its rights hereunder and is successful in such an action, the losing party shall pay the prevailing party its costs and attorneys' fees in addition to any other damages or remedies to which the prevailing party may be entitled. 18. SUBCONTRACT MANUFACTURE Licensee may utilize a third party subcontract manufacturer approved in writing by Marvel in connection with the manufacture and production of the items comprising the Licensed Rights, provided that such subcontractor shall execute a letter in the form of Exhibit D attached hereto and by this reference made a part hereof. In such event, Licensee shall remain primarily obligated under all of the provisions of this Agreement. In no event shall any such subcontract manufacturer agreement include the right to grant any further sublicenses. 19. GRANT OF MARVEL SUPER-HEROES LICENSE (a) Subject to all of the other provisions and conditions of this Agreement, Marvel, as owner of the "Marvel Super-Heroes" trademark, hereby grants a non-exclusive license to Licensee to use the trademark "Marvel Super-Heroes" (and with prior written approval, the mark may be used in the "Marvel Super Heroes", "Marvel Superheroes", "Marvel Superhero" or "Marvel Super Hero" form) in connection with the Property and within the provisions, the Territory and terms of this Agreement, and Licensee agrees not to use the "Marvel Super-Heroes" or "Super-Heroes" mark except as so authorized. No additional royalty is payable by reason of this license of the "Marvel Super-Heroes" mark. It is understood that the license of the "Marvel Super-Heroes" mark provided by this section shall not include any license to use any other separately recognized name or trademark (whether or not used in conjunction with the "Marvel Super-Heroes" mark) which if licensed at all are licensed only as expressly provided by this Agreement. It is also understood that the license granted by this section shall be without warranty or representation of any kind, but shall be under all rights of Marvel to grant this license. Except as expressly provided herein, all other provisions, conditions and limitations of this Agreement shall remain in full force and effect and shall apply to the license of the "Marvel Super-Heroes" mark. Laser Storm Inc. -17- (Rev. 8/29/96) 7/19/96:av (b) The "Marvel Super-Heroes" mark shall be identified wherever it appears in connection with the Licensed Rights, or the advertisements or promotion thereof, with the following legend (or as Marvel otherwise expressly requests in writing): "Marvel Super-Heroes is a trademark owned by Marvel Characters, Inc. and is used with permission." 20. GRANT OF MARVEL SUPER-VILLAINS LICENSE (a) Subject to all of the other provisions and conditions of this Agreement, Marvel as owner of the "Marvel Super-Villains" trademark, hereby grants a non-exclusive license to Licensee to use the trademark "Marvel Super-Villains" (and with prior approval, the mark may be used in the "Marvel Super Villains", "Marvel Supervillains", "Marvel Super Villain", or "Marvel Super-Villain" form) in connection with the Property and within the provisions, the Territory and Term of this Agreement, and Licensee agrees not to use the "Marvel Super-Villains" or "Super-Villains" mark except as so authorized. No additional royalty is payable by reason of this license of the "Marvel Super-Villains" mark. It is understood that the license of the "Marvel Super-Villains" mark provided by this section shall not include any license to use any other separately recognized name or trademark (whether or not used in conjunction with the "Marvel Super-Villains" mark) which if licensed at all are licensed only as expressly provided by this Agreement. It is also understood that the license granted by this section shall be without warranty or representation of any kind, but shall be under all rights of Marvel to grant this license. Except as expressly provided in this section, all other provisions, conditions and limitations of this Agreement shall remain in full force and effect and shall apply to the license of the "Marvel Super-Villains" mark. (b) The "Marvel Super-Villains" mark shall be identified wherever it appears in connection with the Licensed Rights or services, or the advertisements or promotion thereof, with the following legend (or as Marvel otherwise expressly requests in writing): "Marvel Super-Villains is a trademark owned by Marvel Characters, Inc. and is used with permission." 21. GENERAL (a) Integrity of Agreement. This Agreement contains and embodies the entire agreement and understanding of the parties concerning the subject matter hereof. No warranties, representations, understandings, inducements, promises, guarantees, agreements or conditions, express or implied, not expressly contained herein, have been made or shall be enforceable by either party concerning the subject matter hereof or any relationship between the parties. Nothing contained herein shall be deemed an express or implied warranty on the part of Marvel that efforts to gain copyright, trademark or service mark registration will be successful, or that the Property has or will in the future have any commercial value, and it is understood that no liability shall attach to Marvel for any failure to secure such registration, nor shall there be any modification hereof for such reason. Laser Storm Inc. -18- (Rev. 8/29/96) 7/19/96:av (b) Relationship Between the Parties. The relationship between the parties hereto is that of licensor and licensee, and this Agreement is not to be construed as creating a partnership, joint venture, master-servant, principal-agent, or other relationship for any purpose whatsoever. Except as may be expressly provided herein, neither party may be held for the acts either of omission or commission of the other party, and neither party is authorized to or has the power to obligate or bind the other party by contract, agreement, warranty, representation or otherwise in any manner whatsoever. (c) Force Majeure. Licensee and Marvel shall be released from their obligations hereunder and this license shall terminate with respect to such territory, field or part thereof as to which governmental regulations or other causes arising out of a state of national emergency or war or causes beyond the control of the parties renders performance impossible and one party so informs the other in writing of such causes and its desire to be released. In such event, all royalties on sales theretofore made with respect to such territory, field or part and all guarantees, prorated until the time of termination, shall, become immediately due and payable and no part of any Advance or Minimum Royalty Guarantee shall be repayable. (d) Mailing Addresses. All notices, reports and statements to be given and all payments to be made hereunder, shall be given or made by first class, Registered or Certified mail at the respective addresses of the parties as set forth above, unless notification of a change of address is given in writing, and the date of mailing, as post-marked, shall be deemed the date the notice, report or statement is given. The mailing of a notice by Registered or Certified mail shall constitute notice hereunder even in the event of non-receipt or refusal to accept by addressee. (e) Survival and Separability. Notwithstanding anything to the contrary herein, all provisions hereof are hereby limited to the extent mandated by any applicable law or decisions. If any one or more paragraphs, clauses or other portions hereof should ever be determined to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction or be illegal, invalid or invalidated or unenforceable within any jurisdiction by reason of any existing law or statute, then to that extent and within the jurisdiction in which it is illegal, invalid or unenforceable it shall be limited, construed or severed and deleted herefrom, and the remaining extent and/or remaining portions hereof shall survive, remain in full force and effect and continue to be binding and shall not be affected except insofar as may be necessary to make sense hereof, and shall be interpreted to give effect to the intention of the parties insofar as that is possible. (f) Assignment or Sublicense. This Agreement and the license rights granted hereunder are personal to Licensee and shall not in any manner whatsoever be assigned, sublicensed, hypothecated, mortgaged, divided or otherwise encumbered by Licensee to or with any other person or entity without Marvel's prior written consent which it may withhold in its sole discretion but no such assignment by Licensee shall release Licensee from any of its obligations or liabilities hereunder. This Agreement and the provisions hereof shall be binding at all times upon and inure to the benefit of the parties hereto, their successors and permitted assigns. Any attempted assignment in violation of the provisions hereof shall be void ab initio and the assignee shall obtain no rights by reason thereof. Notwithstanding the foregoing, Marvel Laser Storm Inc. -19- (Rev. 8/29/96) 7/19/96:av acknowledges that Licensee intends to sublicense the Licensed Rights to third parties. Marvel shall have the absolute right of approval for all such third parties including the specific site location. Upon receipt of Marvel's approval, Licensee shall enter into a sublicense agreement with said third party. Said sublicense agreement shall be identical in content and form to this Agreement and shall be subject to Marvel's prior review and approval. (g) Construction and Jurisdiction. This Agreement shall be construed and interpreted in accordance with the laws of the State of New York applying to contracts fully executed and performed in New York. Licensee agrees to submit to jurisdiction in the courts (both Federal and State) of New York State for any action brought by Marvel or Licensee hereunder, to bring no action in any other Court, and Licensee further agrees to accept service of process by mail at its above written address, and Licensee also designates the Secretary of State of New York and the state of Licensee's incorporation to accept service of process by mail on behalf of Licensee. The titles and headings of the sections, subsections and other divisions of this Agreement are inserted merely for convenience and identification and shall not be used or relied upon in connection with the construction or interpretation of this Agreement. (h) No Waiver. None of the provisions hereof shall be deemed to be waived or modified, nor shall they be renewed, extended, altered, changed or modified in any respect except by an express agreement in writing duly executed by the party against whom enforcement of such waiver, modification, etc. is sought. The failure of either party hereto to object to the failure on the part of the other party to perform any of the terms, provisions or conditions hereof or to exercise any option herein given or to require performance on the part of the other party of any term, provision or condition hereof, or any delay in doing so, or any custom or practice of the parties at variance therewith, shall not constitute a waiver or modification hereof or of any subsequent breach or default of the same or a different nature, nor affect the validity of any part hereof, nor the right of either party thereafter to enforce the same, nor constitute a novation or laches. Laser Storm Inc. -20- (Rev. 8/29/96) 7/19/96:av ATTEST IN WITNESS WHEREOF, and intending to be legally bound thereby the parties hereto have caused this instrument to be duly executed as of the day and year first above written. MARVEL CHARACTERS, INC. By: Name: Title: LICENSEE: Laser Storm Inc. By: Name: Title: Attachments: Licensed Rights (Exhibit A) Royalty Report Form (Exhibit B) Work Made For Hire Letter Form (Exhibit C) Subcontract Manufacturer Letter Form (Exhibit D) Laser Storm Inc. -21- (Rev. 8/29/96) 7/19/96:av Exhibit A D96054R LICENSED RIGHTS Permanently installed, location based character-identified interactive laser tag game in Licensee-owned and sublicensee-owned (subject to Marvel's prior written approval) entertainment centers. Said entertainment centers shall be tentatively named the "Danger Room." Marvel shall have the absolute right of approval for the site location of each entertainment center. Each entertainment center shall be a themed arena based upon the Property. The game shall be played by the public for an admission fee. Game play shall include, but shall not be limited to, accessories such as character-identified power packs and laser guns. Licensee acknowledges and agrees that any such site location will not be within sixty (60) miles of any Marvel themed amusement park whether owned or operated by Marvel or by any third party. Laser Storm Inc. -22- (Rev. 8/29/96) 7/19/96:av
EXHIBIT B MARVEL CHARACTERS, INC. ROYALTY REPORT Contract #: D96054R Licensee Name: All Product Codes: Contact Person: Phone Number: All Character Codes: Fax Number: Period Covered: From: To: ROYALTY INFORMATION ==================================================================================================================================== Licensee Marvel All Characters & Product Units Unit Price Gross Royalty Royalty SKU # Job Jkt # Respective Codes Code Sold By Item Sales % Earned On SKU - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Total Royalties Earned Less Unrecouped Advance Balance Due Marvel Prepared By (please print) Check Enclosed For: $ PLEASE REMIT TO: Accounts Receivable Duplicate copy to: Accounts Receivable Marvel Characters, Inc. Marvel Entertainment Group Inc. 26707 West Agoura Road 387 Park Avenue South Calabasas, CA 91302 New York, NY 10016 Laser Storm Inc. -23- (Rev. 8/29/96) 7/19/96:av
Exhibit C D96054R AGREEMENT made this day of , 19 , between residing at (herein "Supplier") and Laser Storm Inc. residing at 7808 Cherry Creek South Drive, Denver, CO 80231 (herein "Licensee"). Licensee has been licensed by Marvel Characters, Inc. (herein "Marvel") to produce and/or market certain merchandise based upon and utilizing literary and/or artistic properties owned by Marvel. Supplier wishes to have Licensee order or commission either written material or art work as a contribution to a collective Work to be used by Licensee pursuant to the license from Marvel. Marvel has informed Licensee that Marvel will permit the preparation of such written material or art work only if it is commissioned on a work made-for-hire basis. THEREFORE, the parties agree as follows: In consideration of Licensee's commissioning and ordering from Supplier written material or art work and paying therefor, Supplier acknowledges, agrees and confirms that any and all work, writing, art work material or services, including all notes, sketches, drafts, etc. therefor (the "Work") which have been or are in the future created, prepared or performed by or on behalf of Supplier for Licensee involving, based upon, utilizing, derived from, incorporating or referring to any properties, characters or materials of Marvel have been and will be specially ordered or commissioned for use as a contribution to a collective work; that the Work was produced under the supervision and control and pursuant to the direction of Licensee; and that as such, the Work was and is expressly agreed to be considered a work made for hire pursuant to all copyright laws applicable to the Work. Supplier expressly grants to Licensee forever all worldwide rights of any kind and nature in and to the Work and agrees that as between Supplier and Licensee, Licensee is the sole and exclusive copyright proprietor thereof throughout the world. Supplier perpetually agrees (i) not to contest Licensee's or Marvel's exclusive, complete and unrestricted ownership in and to the Work, (ii) not to claim any ownership in the Work; (iii) not to use or exploit or claim the right to use or exploit the Work in any manner; and (iv) not to object to any exploitation or use of the Work or to any changes, modifications, or revisions to the Work made by or on behalf of Licensee or Marvel, and Supplier hereby waives any moral rights of any kind or nature in the Work. This Agreement shall be binding upon and inure to the benefit of the parties hereto and to the benefit of Marvel, and their respective heirs, successors, administrators and assigns. Laser Storm Inc. -24- (Rev. 8/29/96) 7/19/96:av In WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Supplier: Licensee: Laser Storm Inc. By: By: Name: Name: Title: Title: Date: Date: Laser Storm Inc. -25- (Rev. 8/29/96) 7/19/96:av Exhibit D D96054R Dated 19 Marvel Characters, Inc. c/o Marvel Entertainment Group, Inc. 387 Park Avenue South New York, NY 10016 This letter will serve as notice to you that pursuant to Section 18 of the License Agreement dated August 1, 1996 between you and Laser Storm Inc., we have been engaged as the subcontract manufacturer for Laser Storm Inc. in connection with the manufacture or developer of the Licensed Rights defined in the aforesaid License Agreement. We hereby acknowledge that we have received a copy and are cognizant of the terms and conditions set forth in said License Agreement and hereby agree to be bound by those provisions of said License Agreement which are applicable to our function as manufacturer or developers of the Licensed Rights, including but not limited to the right of Marvel, pursuant to Section 5(e) of the License Agreement, to examine our Books of Account Records with respect to the manufacture or development of the Licensed Rights. It is understood that this engagement as subcontract manufacturer is on a royalty-free basis, and that we have no right to sublicense or subcontract thereunder. EX-2 3 EXHIBIT 10.25--AMENDED STOCK INCENTIVE PLAN AMENDMENT TO AMENDED LASER STORM, INC. STOCK INCENTIVE PLAN 1. General. On August 15, 1996, amendments to Rule 16b-3 promulgated by the United States Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, became effective. As a result of such amendments, the Board of Directors of Laser Storm, Inc. ("Company") adopted an amendment to the Amended Stock Incentive Plan (the "Plan") of the Company. The purpose of this document is to set forth such amendment to the Plan. 2. Amendment to Plan. Effective August 15, 1996, the first paragraph of Section 4 of the Plan is amended so that the first paragraph of Section 4 of the Plan shall read in its entirety as follows: "4. Administration of the Plan. The Plan shall be administered by the Board of Directors or the Compensation Committee selected by the Board of Directors of the Company, or by any other committee selected by the Board of Directors by majority vote and composed of no fewer than two (2) members of such Board of Directors (the "Committee")." Except as set forth above, the Plan is in full force and effect without any amendments. LASER STORM, INC. Dated: August 15, 1996 By /s/ William R. Bauerle ------------------------------- William R. Bauerle, President EX-3 4 EXHIBIT 10.26--ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT ("Agreement") is made and entered into as of the _____ day of ____________, 1996 (the "Effective Date"), by and among LASER STORM, INC., a Colorado corporation ("Buyer"), LASER STORM OF LONGMONT, INC., a Colorado corporation ("Longmont"), CBS HOMES, INC., a Colorado corporation ("CBS") and KEVIN J. BARKER, an individual ("Barker") (Longmont, CBS and Barker shall be collectively referred to as "Seller"). RECITALS A. The Buyer designs, manufactures, operates and licenses to others to operate interactive "laser tag" games. The Seller and the Buyer currently are parties to a Sales Agreement dated November 20, 1995 ("Sales Agreement"), which includes licenses to use the Buyer's proprietary software. The Seller currently operates a laser tag game store (the "Store") at 700 Ken Pratt Boulevard, Suite 205, Longmont, Colorado 80501 ("Real Property"). Barker leases the Real Property under a Shopping Center Lease Agreement dated November 15, 1995 ("Lease") from Blackfox Parkway Associates, L.L.C., a Colorado limited liability company ("Lessor"). B. First Bank ("the Bank") has made a loan in the principal amount of $49,500 ("Loan") to Barker. The Loan obligations have been guaranteed by the SBA and the Bank and the SBA hold a perfected security interest in all of the improvements and personal property located on the Real Property. The Bank and the SBA have agreed to release their security interest in the improvements and personal property for certain consideration to be paid to them by Barker at the Closing, as described below. C. The Seller owns the improvements, subject to the Lease, and the personal property located on the Real Property. D. The Seller desires to sell to the Buyer and the Buyer desires to purchase from the Seller all of the improvements and personal property located on the Real Property and to purchase the Seller's leasehold interest in the Real Property in order to enable the Buyer to operate the Store, as defined below, all in accordance with this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises made herein and in consideration of the representations, warranties and covenants stated below, the parties, intending to be legally bound, agree as follows: ARTICLE 1. AGREEMENT TO SELL 1.1. Acquired Assets. The Seller agrees to sell and, at the Closing, will transfer and deliver to the Buyer all of the improvements and personal property owned by the Seller and located on the Real Property, including but not limited to the following, hereinafter referred to as the "Purchased Assets": a. All right, title and interest of the Seller in and to the improvements located on the Real Property, including but not limited to, the Store located thereon, subject to all rights of the Lessor to such assets in accordance with the Lease and the Assignment and Assumption Agreement. b. All furniture, fixtures, appliances, equipment, computerized cash registers, and supplies owned by the Seller and on hand at the Store as of the date hereof, all as set forth on the Schedule of Equipment attached hereto as Exhibit B and made a part hereof by reference (collectively, the "Equipment"); c. All inventory located at the Store on the date of closing and which shall be listed as the Schedule of Inventory at the time the inventory is taken and attached hereto as Exhibit C and made a part hereof (collectively, the "Inventory"); d. All right, title and interest of the Seller in or under the Lease and Assignment and Assumption Agreement, a copy of which is attached as Exhibit D and made a part hereof; and e. All right, title and interest of the Seller in or under all contracts, agreements, instruments, certificates, permits and licenses which relate to the Equipment, Inventory or Store, as set forth on the Schedule of Contracts attached hereto as Exhibit E and made a part hereof by reference (collectively, the "Contracts"). 1.2. Encumbrances. Subject to the SBA and the Bank releasing their security interest in the Purchased Assets, all of the Purchased Assets shall be sold, conveyed, transferred and assigned by the Seller to the Buyer at the Closing free and clear of all liens and encumbrances, except for any and all rights of the Lessor to the improvements at the end of the Lease pursuant to the terms of the Lease and Assignment and Assumption Agreement. 1.3. Liabilities Not Assumed. The Buyer shall not assume certain liabilities of Seller with regard to the Store, as set forth on the Schedule of Liabilities Not Assumed attached hereto as Exhibit F and made a part hereof by reference (collectively, the "Liabilities"). The Buyer shall not assume any other liabilities of the Seller, except as set forth in Exhibits B through E. 1.4. No Other Assets Transferred. Other than the assets described in Section 1.1 and Exhibits B through E, no other assets of the Seller shall be sold or assigned, including but not limited to, all accounts receivable which arise prior to the Closing. In the event the Buyer receives payment on any accounts receivable which arose prior to the Closing, it shall within five days thereafter remit said payment to the Seller. ARTICLE 2. PURCHASE AND PURCHASE PRICE 2.1. Agreement of Purchase. The Buyer hereby purchases, upon the terms and subject to the conditions of this Agreement, the Purchased Assets as described in Article 1 above and will pay to the Seller the Purchase Price, as defined below, in the manner and upon the terms hereinafter set forth. 2.2. Purchase Price. The total consideration ("Purchase Price") to be paid by Buyer to the Seller is $160,000, which shall include all of the Purchased Assets as defined in Section 1.1 above, including the cost of the Inventory as set forth on Exhibit C. 2.3. Payment of Purchase Price. The Buyer shall pay the Purchase Price as follows: a. $160,000 payable in $30,000.00 cash at time of closing and 32,500 shares ("Shares") of the Buyer's $0.001 par value common stock issued to one of the parties which comprise the Seller, in the Seller's discretion, at the Closing. The Buyer shall cause a registration statement to be filed with the Securities and Exchange Commission ("Commission") for the purpose of registering the Shares under the Securities Act of 1933 as amended (the "Act") within 90 days of the Closing Date, as defined below and bear the actual costs and expenses, including attorney's fees, associated with the filing and prosecution of such registration statement. The date on which the registration statement is declared effective by the Commission shall be referred to hereinafter as the "Registration Date;" and, b. Seller will have ninety (90) days from the effective date of the registration statement ("Registration Date") to sell the Shares through and at the direction of Laidlaw Equities, Inc. On the 91st day from the Registration Date, so long as Seller has followed all direction or obtained the consent of Laidlaw Equities, Inc. as to the selling of said shares, a transaction will occur whereby Seller will receive from Buyer no less and no more than the balance of the purchase price of $130,000.00 in immediately available funds in one of the following manners: 1. If, by the end of business on the 90th day, all of the Shares have been sold at the direction and/or consent of Laidlaw Equities, Inc., for an amount less than $4.00 per Share ($130,000.00), then Buyer shall pay to Seller, in immediately available funds, the difference between $130,000.00 and the price for which all Shares were sold. 2. If a portion of the Shares have been sold at the direction and/or consent of Laidlaw Equities, Inc. and the amount received for said shares is less than $130,000.00, then Buyer shall pay to Seller the difference between the price received and $130,000.00 and Seller shall return all right, title and interest in all remaining shares to Buyer. 3. If, at the end of the business day on the 90th day from the Registration Date, Seller has sold all, or a portion of said shares, at the direction and/or consent of Laidlaw Equities, Inc., for a sum equal to or greater than $130,000.00, Buyer will have no obligation to purchase shares from Seller nor to pay Seller any additional cash. If Seller retains ownership of any Shares, said shares will remain the property of Seller. 4. Buyer's agreement to reimburse Seller for the difference between the price sold and $4.00 per Share is strictly contingent upon Seller accepting all direction from Laidlaw Equities, Inc. with respect to whether or not to sell the shares within the first ninety (90) days from the Registration Date. If Seller acts in contradiction to the direction of Laidlaw Equities, Inc. or without Laidlaw Equities, Inc.'s consent, Buyer is released from all further obligations under Section 2.3 of the Asset Purchase Agreement. 5. If the 90th or 91st day falls on a weekend or a holiday when the market is closed, the next business day in which the shares can be traded will be considered the 90th or 91st day. 2.4. Loan. At the Closing, as defined below, the Buyer shall lend the Seller sufficient funds to pay the balance due ($46,380.13) under the Seller's Loan from the Bank. The Seller shall give the Buyer a promissory note, in the form attached hereto as Exhibit G for the amount loaned by the Buyer to the Seller at the Closing. The obligations evidenced by the promissory note from the Seller to the Buyer shall be secured by a first in priority security interest in the Shares and all proceeds from any sale of any amount of the shares will be first dedicated to retiring the loan until paid in full, as set forth in Exhibit H attached hereto. 2.5. The Closing. The Closing of the transaction contemplated by this Agreement (the "Closing") shall take place at the offices of the Buyer, commencing at 10:00 A.M., local time, on July 23, 1996, or such other business day following the satisfaction or waiver of all conditions to the obligations of the parties to consummate the transactions contemplated hereby as the parties may mutually determine (the "Closing Date"). 2.6. Deliveries at the Closing. At the Closing, the parties will deliver the following: a. The Seller shall deliver to the Buyer: i. a Bill of Sale for all of the Purchased Assets; ii. Assignments for the Lease and Contracts properly executed and acknowledged and Consents signed by the other parties thereto; iii. such other instruments of sale, transfer, conveyance and assignment as the Buyer reasonably may request; and iv. a promissory note for the amount of the loan from the Buyer to the Seller and a Pledge and Security Agreement providing a first in priority security interest in the Shares to secure the obligations evidenced by such promissory note. b. The Buyer shall deliver to the Seller: i. the Purchase Price as specified in Section 2.3 above; ii. An Assignment and Assumption Agreement for the obligations of the Lease properly executed and acknowledged in such form as the Seller shall reasonably request; and iii. funds sufficient to pay the balance of the Seller's loan from Bank. iv. A check payable to Seller for the pro-rated portion of the July 1996 rent, beginning on the day of closing, July 23, 1996 for the lease at Suite 205, 700 Ken Pratt Boulevard, Longmont, Colorado 80501. c. For this Asset Purchase Agreement to be binding and enforceable, the Seller must insure that the Bank and the SBA deliver to the Buyer evidence, satisfactory to Buyer, and its counsel, that all security interests held by the Bank and the SBA in the Purchased Assets have been removed. d. The Seller shall deliver to the Bank and the SBA sufficient funds to pay the total amount of principal and interest due under the terms of the Seller's loan from the Bank. ARTICLE 3. SELLER'S REPRESENTATIONS, WARRANTIES AND COVENANTS 3.1. Representations, Warranties and Covenants of Seller. The Seller hereby represents, warrants and covenants to the Buyer that the statements contained in this Article 3, will be performed and will be correct and complete as of the Closing Date. a. Organization of Longmont and CBS. Laser Storm of Longmont, Inc. and CBS Homes, Inc. are corporations duly organized, validly existing and in good standing under the laws of the State of Colorado. b. Authorization of Transaction. Each Seller has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder, except for (i) the assignment of the Lease, which requires the Lessor's consent, and (ii) the release of the SBA and the Bank's security interests in the Purchased Assets, the execution and delivery of which is pending and must be completed to Buyer's satisfaction. c. Title. The Seller has title to all of the Purchased Assets, subject only to the Lessor's rights to the improvements at the end of the Real Property Lease, and a perfected security interest in the Purchased Assets held jointly by the Bank and the SBA, the release of which is a condition precedent to the Buyer's obligations, as set forth in the Asset Purchase Agreement. The Seller has no knowledge of any other security interests or liens on the Purchased Assets. The Seller has no knowledge of any restriction on the transfer of the purchased Assets that would limit its right to transfer complete ownership in the Purchased Assets hereunder. d. Compliance With Law. The Seller has received no notice of any violation of any law, municipal ordinance or other governmental requirement affecting the Purchased Assets, and the Seller has no reason to believe that any authority contemplates issuing same, or that any violation exists. e. Litigation. Pending against CBS Homes, Inc. and/or Kevin Barker, individually, is a civil action in Boulder District Court relating to workmanship on a construction project. This claim is in no way related to the business of operating the subject laser tag game/store at Longmont, located at 700 Ken Pratt Boulevard, suite 205, Longmont, Colorado 80501, the Purchased Assets or this transaction. Seller shall indemnify and hold harmless buyer from any action or levy attempted on the Purchased Assets which are the subject of this Asset Purchase Agreement. No other litigation or proceeding is pending or threatened relating to the Seller or the Purchased Assets, or any part thereof. f. Latent Defects. Other than the structural damage to the grid system of the laser tag game facility, the Seller has no knowledge of any latent defects with respect to the Real Property. g. Payment of Taxes. The Seller and each of the entities and individuals comprising the Seller have, since November 20, 1995: i. timely filed all returns, schedules and declarations (including withholding and information returns) relating to all federal, state, local or foreign income, franchise, sales, use, excise, real and personal property, transfer, employment, social security, unemployment, withholding and other taxes, assessments, charges, fees or levies and any interest or penalties on any of the foregoing (collectively "Taxes"), required to be filed by any jurisdictions to which they are or have been subject, all of which Tax returns, schedules and declarations are complete, accurate and correct; ii. paid in full all Taxes required to be paid in respect of the periods covered by such returns and made any deposits of Tax required by such taxing authorities; iii. fully accrued on the Store's financial statements all Taxes for any prior period that are not yet due, the information set forth on such financial statements being accurate and correct; and iv. made timely payments of the Taxes required to be deducted and withheld from the wages paid to their respective employees or contractors. The Seller has made available and will upon request deliver to the Buyer true and complete copies of all Tax returns of the Store and any individual or entity owning an interest in the Store and all Tax returns filed with any federal or state taxing authority since November 20, 1995. Since November 20, 1995, the Seller has not been delinquent in the payment of any tax and there are no pending or threatened tax audits, investigations or claims for or relating to any liability in respect of taxes. h. Labor Matters. There are no controversies pending between the Seller and any of its respective employees who work at the Store. There are no employment agreements between the Seller and any of its employees who work at the Store and no employee of the Seller who is employed at the Store is represented by any labor union. i. Environmental Matters. None of the entities or individuals comprising the Seller or any real property, previously or currently owned by any of them, has been or is in violation of, or liable for remediation costs or any other damages or penalties under any Environmental Law; and to the best knowledge of the Seller, there are no actions, suits, demands, notices, claims, investigations or proceedings under any Environmental Law pending or threatened against the Seller or relating to any real property previously or currently owned or occupied by the Seller. For purposes of this Agreement, "Environmental Law" means any applicable federal, state or local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction, or agreement with any governmental entity related to (i) the protection, preservation or restoration of the environment and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances (as defined below). The term Environmental Law includes, without limitation: the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 USC ss.ss. 9601 et seq.; the Resource Conservation and Recovery Act, as amended, 42 USC ss.ss. 6901 et seq.; the Clean Air Act, as amended, 42 USC ss.ss. 7401 et seq.; the Federal Water Pollution Control Act, as amended, 33 USC ss.ss. 2151 et seq.; the Toxic Substances Control Act, as amended, 15 USC ss.ss. 2601 et seq.; the Emergency Planning and Community Right to Know Act, 42 USC ss.ss. 11001, et seq.; the Safe Drinking Water Act, 42 USC ss.ss. 300f, et seq.; all comparable state and local laws and any common law that may impose liability or obligations for injuries or damages due to or threatened as a result of the presence of or exposure to any hazardous substance. As used in this Agreement, "Hazardous Substance" means any substance presently or currently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated under any environmental law, whether by type or by quantity, including all material containing any such substance as a component. j. Termination of Sales Agreement. CBS and/or Seller has agreed to terminate the Sales Agreement, dated November 20, 1995, including all licenses contained in the Schedules and Addenda attached thereto, but excluding the Nondisclosure Agreement attached thereto as Schedule E, which remains in effect according to its terms. k. Restricted Use of Laser Storm of Longmont, Inc. Seller recognizes the business interest that Laser Storm, Inc. has in the name of "Laser Storm." Thus, Seller, agrees to limit its use of the corporate entity "Laser Storm of Longmont, Inc." to the completion of business at the Longmont store. Any further use of the business entity, "Laser Storm of Longmont, Inc." will be by written permission of Laser Storm, Inc. either through a future Sales Agreement or other document expressly granting Seller the right to use said corporate entity. l. Noncontravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby will (i) violate any statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which the Seller is subject or any provision of its Articles of Incorporation or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice that has not been given under any contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, security interest, or other arrangement to which the Seller is a party or by which it is bound or to which any of its assets is subject. 3.2. Securities Representations and Warranties. The party to whom the Shares are issued ("Party") hereby acknowledges, represents and warrants to, and agrees with, the Buyer as follows: a. The Party understands that the sale of the Shares is intended to be exempt from registration under the Securities Act of 1933, as amended ("Act"), by virtue of ss.ss. 4(2) and 4(6) of the Act and the provisions of Regulation D promul gated thereunder and, in accordance therewith and in furtherance thereof, the Party represents and warrants to and agrees with the Buyer as follows: i. The Party has received the Buyer's Prospectus dated April 23, 1996, relating to the Buyer's Units that were sold pursuant thereto (which document is herein referred to as the "Information Document") has carefully reviewed it and understands and has relied on the information contained therein relating to the Buyer and information otherwise provided to the Party in writing by the Buyer relating to this investment; ii. The Party understands that all documents, records and books pertaining to this investment (including, without limitation, the Information Document and the exhibits thereto) have been made available for inspection by the Party, the Party's attorney and/or ac countant; iii. The Party and/or the Party's advisor(s) have had a reasonable opportunity to ask questions of and receive answers from a person or persons acting on behalf of the Buyer concerning the offering of the Shares and all such questions have been answered to the full satisfaction of the Party; iv. No oral or written representations have been made or oral or written information furnished to the Party or the Party's advisor(s) in connection with the offering of the Shares which were in any way inconsistent with the information relating to the Buyer in the Information Document; v. The Party is not acquiring the Shares as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising, or any solicitation of a subscription by a person not previously known to the Party in connection with investments in securities generally; vi. If the Party is a natural person, the Party has reached the age of majority in the state in which the Party resides. The Party has adequate means of providing for the Party's current needs and personal contingencies, is able to bear the substantial economic risks of an invest ment in the Shares for an indefinite period of time, has no need for liquidity in such investment and, at the present time, could afford a complete loss of such investment; vii. The Party has or together with the Party's advisor(s) has such knowledge and experience in financial, tax and business matters so as to enable the Party to utilize the information made available to the Party in connection with the offering of the Shares in order to evaluate the merits and risks of an investment in the Shares and to make an informed investment decision with respect thereto; viii. The Party is acquiring the Shares solely for the Party's own account as principal, for investment purposes only and not with a view to the resale or distribution thereof, in whole or in part, and no other person has a direct or indirect beneficial interest in such Shares; ix. The Party will not sell or otherwise transfer the Shares, without registration under the Act or an exemption therefrom and fully understands and agrees that the Party must bear the economic risk of the Party's acquisition of the Shares for an indefinite period of time because, among other reasons, the Shares have not been registered under the Act or under the securities laws of any state and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless the Shares are subsequently registered under the Act and under the applicable securities laws of such states or unless an exemption from such registration is available; x. The Party understands that, except as described in this Agreement, the Buyer is under no obligation to register the Shares on the Party's behalf or to assist the Party in complying with any exemption from registration under the Act and even if the Shares are registered for resale in connection with the Buyer's covenant set forth in this Agreement, the Party agrees that the Party will not sell any of the Shares unless the Party sells them to or through Laidlaw Equities, Inc., 100 Wilshire Boulevard, Santa Monica, California 90401; xi. The Party understands that sales or transfers of the Shares are further restricted by certain state securities laws; and xii. The Party is an accredited investor because the undersigned is (check all that apply): (1) A natural person whose individual net worth, or joint net --- worth with his or her spouse, exceeds $1,000,000. (2) A natural person whose individual income was in excess of --- $200,000, or whose joint income with his or her spouse was in excess of $300,000, in each of the two most recent years, and who has a reasonable expectation of reaching the same income level for the current year. (3) A bank, insurance company, registered investment com pany, --- business development company, small business investment company or employee benefit plan. (4) A savings and loan association, credit union, or similar --- financial institution, or a registered broker or dealer. (5) A private business development company. --- (6) An organization described in Section 501(c)(3) of the --- Internal Revenue Code with assets in excess of $5,000,000. (7) A corporation, Massachusetts or similar business trust, or --- partnership with assets in excess of $5,000,000. (8) A trust with assets in excess of $5,000,000. --- (9) A director or executive officer of the Company. --- (10) An entity in which all of the equity owners are accredited --- investors as set forth above. (11) A revocable trust, such as an IRA, of which the settlor is --- an accredited investor as set forth above. b. The Party recognizes that the Buyer has a limited financial and operating history, and that his acquisition of the Shares involves some risks, including those set forth under the caption "Risk Factors" in the Information Document. c. If the Party is a corporation, partnership, trust or other entity, it is authorized and qualified to invest in the Shares offered by the Buyer, and the person signing this Agreement on behalf of such entity has been duly authorized by such entity to do so and appropriate documentation is attached hereto verifying such person's authority to sign this Agreement. 3.3. Indemnification. The Party agrees to indemnify and hold harmless the Buyer and its officers, directors and affiliates and each other person, if any, who controls any thereof, within the meaning of Section 15 of the Act, against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all expenses reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) arising out of or based upon any false representation or warranty or breach or failure by the Party to comply with any covenant or agreement made by the Party in this Article 3 or in any other document furnished by the Party to any of the foregoing in connection with the Party's acquisition of the Shares. ARTICLE 4. BUYER'S REPRESENTATIONS, WARRANTIES AND COVENANTS 4.1. Representations, Warranties and Covenants of Buyer. The Buyer represents, warrants and covenants to the Seller that the statements contained in this Article 4 will be performed, and will be correct and complete as of the Closing Date. a. Organization of the Buyer. The Buyer is a corporation formed under the laws of the State of Colorado. b. Authorization of Transaction. The Buyer has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of the Buyer, enforceable in accordance with its terms and conditions. c. Noncontravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby will (i) violate any statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which the Buyer is subject or any provision of its Articles of Incorporation or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice that has not been given under any contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, security interest, or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject. ARTICLE 5. CONDITIONS TO CLOSE 5.1. Conditions to Obligations of the Buyer. The obligation of the Buyer to consummate the transactions to be performed by the Buyer in connection with the Closing is subject to satisfaction of the following conditions: a. Representations and Warranties. The representations and warranties set forth in Article 3 above shall be true and correct in all material respects at and as of the Closing Date; b. No Litigation. No material action, suit or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency or any federal, state, local or foreign jurisdiction against any Seller other than that described in 3.1e. of this Asset Purchase Agreement; c. Release of Security Interest. The Buyer has executed a certified check, payable to First Bank, for the purposes of paying in-full, the business loan to Kevin Barker, loan number 951-4902, and has received in exchange a promissory note and Pledge and Security Agreement, giving Buyer a first priority security interest in the shares issued to Laser Storm of Longmont. Buyer, upon execution of said documents and the Asset Purchase Agreement, will present First Bank with the certified check and will receive in return a photocopy of the note, marked "paid" and the UCC 3 releasing the secured interests on the subject assets held for the benefit of First Bank and the Small Business Administration ("SBA"). First Bank, having been paid in-full for said Loan, will, as soon as practicable, take all actions necessary to release their security interests, liens and any other encumbrances of any kind on the Purchased Assets and it shall be the obligation of Seller to insure that First Bank does release all security interest that it or the U.S. Small Business Administration have in said assets; d. Additional Documents. The Seller shall have executed a promissory note in favor of the Buyer and shall have pledged a security interest in the Shares to the Buyer; e. Seller's Certificate. The Seller shall have delivered to the Buyer a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified in this Section 5.1 are satisfied in all respects; and f. Form of Documents Satisfactory. All actions to be taken by the Seller in connection with the consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to effect the transactions contemplated hereby will be satisfactory in form and sub stance to the Buyer and its counsel. The Buyer may, at its sole election, waive any conditions specified in this Section 5.1 if it executes a writing so stating at or prior to the Closing. 5.2. Conditions to Obligations of the Seller. The obligations to be performed by the Seller to consummate the transactions, in connection with the Closing, are subject to satisfaction of the following conditions: a. Representations and Warranties. The representations and warranties set forth in Article 4 above shall be true and correct in all material respects at and as of the Closing Date; b. Litigation. No material action, suit or proceeding shall be pending or threatened against Buyer before any court or quasi-judicial or adminis trative agency or any federal, state, local or foreign jurisdiction in which an unfavorable judgment, order, decree, stipulation, injunction, or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation and no such judgment, order, decree, stipula tion, injunction or charge shall be in effect; c. Buyer's Certificate. The Buyer shall have delivered to the Seller a certificate (without qualification as to knowledge or materiality or otherwise) to the effect that each of the conditions specified in this Section 5.2 are satisfied in all respects; d. Release of Security Interest. The Loan from the Bank, guaranteed by SBA, shall have been paid in-full and the Bank and the SBA will as soon as practicable after the Loan has been paid, take all actions necessary to release their security interests, liens and any other encumbrances of any kind on the Purchased Assets; and e. Form of Documents Satisfactory. All actions to be taken by the Buyer in connection with the consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to effect the transactions contemplated hereby will be satisfactory in form and substance to the Seller and its counsel. The Seller may, at its sole discretion, waive any conditions specified in this Section 5.2 if it executes a writing so stating at or prior to the Closing. ARTICLE 6. INDEMNIFICATION PROVISIONS 6.1. Indemnification of Seller. The Buyer agrees to indemnify the Seller from and against the entirety of any charges, complaints, actions, suits, damages, claims, costs, amounts paid in settlement, taxes, liens, expenses or fees, including all attorneys' fees and court costs, which the Seller may suffer resulting from, arising out of or relating to or caused by: a. The breach of any of the Buyer's representations, warranties and covenants contained in the Agreement; b. Any liability under the Lease or any Contract expressly assumed by the Buyer under this Agreement for which a claim is asserted against the Seller and the events on which the claim is based occurred after the Closing; and c. Any liability relating to environmental problems, hazards or liability on the Real Property for which a claim is asserted against the Seller and the events on which the claim is based occurred after the Closing. 6.2. Indemnification of Buyer. The Seller agrees to indemnify the Buyer from and against the entirety of any charges, complaints, actions, suits, damages, claims, costs, amounts paid in settlement, taxes, liens, expenses or fees, including all attorneys' fees and court costs, which the Buyer may suffer resulting from, arising out of or relating to or caused by: a. The breach of any of the Seller's representations, warranties and covenants contained in the Agreement; b. Any liability under any Contract or otherwise not expressly assumed by the Buyer under this Agreement for which a claim is asserted against the Buyer; and c. Any matter relating to environmental problems, hazards or liability on the Real Property the cause of which occurred prior to the Closing. 6.3. Other Indemnification Provisions. The foregoing indemnification provisions are in addition to, and not in derogation of, any statutory or common law remedy any party may have for breach of representation, warranty, covenant or contract. ARTICLE 7. MISCELLANEOUS 7.1. Survival. All of the representations, warranties and covenants of the Buyer and the Seller contained in this Agreement shall survive the Closing. 7.2. No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 7.3. Entire Agreement. This Agreement, including the Exhibits and documents referred to herein, constitutes the entire Agreement between the parties and supersedes any prior understandings, agreements or representations by or between the parties, written or oral, that may have related in any way to the subject matter hereof. 7.4. Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign this Agreement or any of its rights, interest or obligations hereunder without the prior written approval of the other party. 7.5. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 7.6. Headings. The Section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 7.7. Notices. All notices, requests, demands, claims or other communications shall be given in writing or by electronic facsimile. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given if it is sent by certified mail, return receipt requested, postage prepaid and addressed to the intended recipient as set forth below and a copy of the communication is sent by electronic facsimile to the FAX number shown: a. If to Buyer: Laser Storm, Inc. 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 Fax: (303) 751-1283 With a copy to: Hopper and Kanouff, P.C. 1610 Wynkoop Street, Suite 200 Denver, Colorado 80202 Attention: Thomas S. Smith, Esq. Fax: (303) 892-0457 b. If to Seller: Kevin J. Barker 2051 Emerald Drive Longmont, Colorado 80501 Fax: (303) 678-9998 Any party may change the address to which notices are to be delivered by giving the other party notice in a manner herein set forth. 7.8. Governing Law. This Agreement shall be governed and construed in accordance with the internal laws (and not the law of conflicts) of the state of Colorado. 7.9. Amendments and Waivers. No amendment of any provision of this Agreement will be valid unless the same shall be in writing and signed by the parties. No waiver by any party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 7.10. Severability. Any term or provision of this Agreement that is invalid or unenforceable under law in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reform the scope, duration or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closer to expressing the intentions of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of time within which judgment may be appealed. 7.11. Expenses. Each of the parties hereto will bear their own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby, except for those agreed to be borne by the Seller as set forth in Section 2.3(a) above. 7.12. Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party. The parties intend that each representation, warranty and covenant contained herein shall have independent significance. If any party has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the party has not breached shall not detract from or mitigate the fact that the party is in breach of the first representation, warranty or covenant. 7.13. Further Assurances. From time to time after the Closing, the Seller shall, if reasonably requested by the Buyer, make, execute and deliver to the Buyer such additional assignments, bills of sale, or other instruments of transfer as may be necessary or proper to transfer to the Buyer all of the Seller's right, title and interest in and to any of the Purchased Assets. The Buyer shall likewise execute and deliver to the Seller any instruments or documents necessary to carry out the intent and purposes of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LASER STORM, INC. By: /s/ William R. Bauerle ---------------------------------- Its: President LASER STORM OF LONGMONT, INC. By: /s/ Kevin J. Barker ----------------------------------- Its: President Taxpayer I.D. Number 84-1336063 CBS HOMES, INC. By: /s/ Kevin J. Barker ---------------------------------- Its: President Taxpayer I.D. Number /s/ Kevin J. Barker -------------------------------------- KEVIN J. BARKER, Individually Social Security Number Approved and Agreed to: Laidlaw Equities, Inc. By: ----------------------------------- Its: ----------------------------------- EXHIBIT G SECURED PROMISSORY NOTE U.S. $46,380.13 Denver, Colorado July 23, 1996 FOR VALUE RECEIVED, Kevin J. Barker, an individual, and Laser Storm of Longmont, Inc., a Colorado corporation (collectively "Maker") promise to pay to the order of Laser Storm, Inc., a Colorado corporation, having an address at 7808 Cherry Creek South Drive, Unit 301, Denver, Colorado 80231, or its successors or assigns (sometimes referred to herein as "Holder"), the principal sum of Forty-six thousand, three hundred-eighty Dollars and thirteen cents (U.S. $ 46,380.13) with interest from the date hereof, at the rate eight percent (8%) per annum ($10.165508 per day), amortized until 90 days after the Registration Date, as defined in the Asset Purchase Agreement, of the 32,500 shares of Laser Storm, Inc.'s $0.001 per value common stock issued to Maker and payable in one lump sum of principal and interest of Forty-eight thousand two hundred nine dollars and ninety-two cents ($ 48,209.92), with the final payment of the entire unpaid principal balance and all accrued and unpaid interest, if not sooner paid, due and payable on the 91st day after the Registration Date of said shares. All payments shall be payable to Holder at the address set forth above, or at such other place as Holder hereof may designate from time to time in writing. All payments shall be first applied to the payment of interest due hereunder, then to the payment of any other sums payable hereunder and finally to the principal amount then remaining unpaid. The indebtedness evidenced by this Note may be prepaid in whole or in part without notice, penalty or premium. If any payment due hereunder is not received by Holder on or before the 10th day after such payment is due, then Maker shall be deemed in default hereunder. This Note is secured by a first-in-priority perfected security interest in 32,500 shares ("Shares") of common stock of Laser Storm, Inc. issued to Maker and pledged in accordance with a Pledge and Security Agreement dated of even date herewith. All proceeds from a sale of said shares shall first be applied to the payment of this loan until paid in full. Any breach of said Pledge and Security Agreement shall constitute a default hereunder. In the event Maker shall default in any of the payments due hereunder or any other obligations owed to Holder or their successors or assigns, the full amount remaining unpaid hereunder, together with all accrued and unpaid default interest thereon shall, at the option of the Holder, be accelerated and become immediately due and payable. It is further agreed that any unpaid balance shall bear interest at the lesser of 18% per annum or the maximum rate permitted by the laws of the State of Colorado, from the date of default until paid in full. Maker, endorsers and other persons liable hereunder expressly grant to Holder the right to release or to agree not to sue any other person, or to suspend the right to enforce this Note against any such person or to otherwise discharge such person; and each such Maker, endorser or other persons liable hereunder agrees that the exercise of such rights by the Holder will have no effect upon the liability of any other person liable hereunder. Maker, endorsers or other persons liable hereunder, waive(s) delinquency in collection, demand for payment, presentment for payment, protest, notice of protest, notice of dishonor and all duties or obligations of Holder to effect, protect, perfect, retain or enforce any security for payment of this Note or to proceed against any collateral before otherwise enforcing this Note. This Note shall be the joint and several obligation of each person comprising the Maker, endorsers or other persons liable hereunder and shall be binding upon them, their personal representatives, heirs, successors and assigns. Furthermore, Maker, endorsers or other persons liable hereunder agree that the time for payment hereunder may be extended from time to time by Holder without in any way affecting the liability of the Maker, endorsers or other persons liable hereunder. Maker, endorsers and all other persons liable hereunder unconditionally guarantee(s) prompt satisfaction when due, whether by acceleration or otherwise, of the entire outstanding principal balance and all accrued and unpaid interest, and amounts of any additional advancements of this Note, and further agree(s) to immediately pay to Holder hereof, upon demand, all losses, costs and expenses (including attorneys' fees) incurred by Holder for collection and enforcement of this Note in the event of default or otherwise. Each individual executing this Note represents and warrants that he or she duly is authorized to execute and deliver this Note on behalf of the person or entity for which he or she is so executing and that this Note is binding upon the undersigned Maker in accordance with its terms, except to the extent that enforcement of remedies is limited by applicable bankruptcy, insolvency, and other laws affecting the enforcement of creditors' rights generally. This Note shall be interpreted and enforced in accordance with the laws of the State of Colorado. In the event of default, Maker consents to the enforcement of this Note in the District Court for the City and County of Denver, Colorado, and waives any rights to contest venue or jurisdiction of that court. MAKER: /s/ Kevin J. Barker --------------------------------- Kevin J. Barker, Individually LASER STORM OF LONGMONT, INC. By: /s/ Kevin J. Barker ------------------------------- Kevin J. Barker, President EXHIBIT H PLEDGE AND SECURITY AGREEMENT Debtor for good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, agrees as follows: 1. Definitions. The following terms used in this Security Agreement - Pledge are defined as follows: a. "Agreement" shall mean this Security Agreement - Pledge. b. "Pledgee" shall mean Laser Storm, Inc. c. "Debtor" shall mean Kevin J. Barker and Laser Storm of Longmont, Inc., collectively. d. "Collateral" shall mean: (1) 32,500 shares of the Pledgee's common stock evidenced by Stock Certificate No. 0242, and issued in the name of Laser Storm of Longmont; (2) and the proceeds, products and accessions of and to any of the foregoing and any substitution therefor or additions thereto. e. "Obligations" shall mean: (1) all obligations of Debtor to Pledgee as evidenced by that certain Promissory Note dated of even date herewith, in the principal amount of $46,380.13; and (2) all other obligations of Debtor to Pledgee, direct or indirect, absolute or contingent, now existing or hereafter arising, including the performance and observance of any term or condition of this Agree ment, and (3) all expenditures made or incurred by Pledgee to protect and maintain the Collateral and to enforce Pledgee's rights under this Agreement, as more fully set forth herein, including reasonable attorneys' fees. 2. Security Interest. Debtor hereby grants to Pledgee a security interest in the Collateral. The security interest is given to secure the payment and performance of the Obligations. 3. Warranties and Representations. Debtor warrants and represents to Pledgee: a. Debtor has title to the Collateral free and clear of all liens, security interests, restrictions, set offs, adverse claims, assessments, defaults, prepayments, defenses and conditions precedent; b. The Collateral is enforceable in accordance with its terms, is genuine and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated thereon have authority and capacity to contract and are bound as they appear to be; and c. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement. 4. Covenants of Debtor. a. Pledgee shall also have a security interest in all securities and other property, rights or interest of any description at any time issued or issuable as an addition to, in substitution or exchange for or with respect to the Collateral, including without limitation, shares issued as dividends or as a result of any reclassification, split-up or other corporate reorganization. Debtor shall hold in trust for and deliver promptly to Pledgee, in the exact form received, all such securities or other property which comes into the possession, custody or control of Debtor. Upon demand, Debtor shall execute, sign and endorse all proxies, applications, acceptances, stock powers, chattel paper documents, instruments and other evidences of payment or writings constituting or relating to any of the Collateral or any such other property. All assignments and endorsements by Debtor shall be in such form and substance as may be satisfactory to Pledgee, and Debtor hereby waives presentment, notice of dishonor, protest, demand and all other notices with respect thereto. b. Debtor shall not sell or assign any of the Collateral and shall keep it free of liens, security interests and adverse claims other than the security interest created by this Agreement and shall defend the Collateral against the claims and demands of all persons, and shall pay promptly all taxes and assessments with respect to the Collateral. c. At Pledgee's option, Pledgee may discharge taxes, liens, security interests and other claims against the Collateral and may pay for the maintenance, preservation and protection thereof, including costs and expenses incidental to any actions undertaken by Pledgee to protect the Collateral. Any such payments by Pledgee shall be indebtedness of Debtor to Pledgee, secured by the Collateral. 5. Rights of Pledgee. a. Pledgee shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Pledgee takes such action for that purpose as Debtor shall request, but failure to honor any such request shall not of itself be deemed a failure to exercise reasonable care. Pledgee shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties nor to protect, preserve or maintain any security interest given to secure the Collateral. b. In Pledgee's discretion and without notice to Debtor, Pledgee may take any one or more of the following actions, without liability except to account for property actually received by Pledgee: (1) After default, transfer to or register in Pledgee's name or the name of Pledgee's nominee any of the Collateral, with or without indication of the security interest herein created, and whether or not so transferred or registered, receive the income, dividends and other distributions thereon or hold them or apply them to the Obligations in any order of priority; (2) After default, exercise or cause to be exercised all voting and corporate powers with respect to any of the Collateral so registered or transferred, including all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to such Collateral, as if the absolute owner thereof; (3) Exchange any of the Collateral for other property upon a reorganization, recapitalization or other readjustment and, in connection therewith, deposit any of the Collateral with any committee or depository upon such terms as Pledgee may determine; (4) In Pledgee's name or in the name of Debtor demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral and, in connection therewith, endorse notes, checks, drafts, money orders, documents of title or other evidences of payment, shipment or storage in the name of Debtor; (5) Make any compromise or settlement deemed advisable with respect to any of the Collateral; (6) Renew, extend or otherwise change the terms and conditions of any of the Collateral or the Obligations; (7) Take or release any other collateral as security for any of the Collateral or the Obligations; (8) Add or release any guarantor, endorser, surety or other party to any of the Collateral or Obligations; and (9) Sue on, obtain judgment on or compromise on any of the Collateral. c. Pledgee shall be under no duty to exercise or to withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to Pledgee in this Agreement, and shall not be responsible for any failure to do so or delay in so doing. 6. Default. There shall be a default under this Agreement upon the happening of any of the following events or conditions: a. Default in the due payment, performance or observance of any of the Obligations; b. Any warranty, representation or statement of Debtor in this Agreement, or otherwise, made or furnished to Pledgee by or on behalf of Debtor, proves to have been false in any material respect when made or furnished; c. Any event which results in the acceleration of the indebtedness of Debtor to Pledgee; d. The seizure or taking of any Collateral by any governmental or similar authority or the issuance of a writ, order of attachment or garnishment with respect thereto; or e. Good faith belief by Pledgee that the Obligations are inadequately secured or that the prospect of payment, performance or observance of any of the Obligations is impaired. 7. Remedies. a. Upon the occurrence of any default Pledgee may without notice or demand declare any of the Obligations immediately due and payable and this Agreement in default and thereafter Pledgee shall have the remedies of a secured party under the Uniform Commercial Code as then in effect in Colorado, including without limitation, the right to take possession of any of the Collateral not then in Pledgee's possession. If notice is required by law, five days prior written notice of the time and place of any public sale or of the time after which any private sale or any other intended disposition thereof is to be made shall be reasonable notice to Debtor. No such notice is necessary if the Collateral is perishable, threatens to decline speedily in value or of a type customarily sold on a recognized market. The proceeds of any sale or other disposition of the Collateral may be applied to the Obligations in any order of priority. b. If Pledgee in good faith believes that the Securities Act of 1933, as amended, or any other state or federal law prohibits or restricts the customary manner of sale or distribution of any of the Collateral, Pledgee may sell such Collateral privately or in any other manner deemed advisable by Pledgee at such price or prices as Pledgee determines in Pledgee's sole discretion. Debtor recognizes that such prohibition or restriction may cause the Collateral to have less value than it otherwise would have and that, consequently, such sale or disposition by Pledgee may result in a lower sales price than if the sale were otherwise held. 8. General. a. No default shall be waived by Pledgee except in writing and no waiver of any payment or other right under this Agreement shall operate as a waiver of any other payment or right. b. Pledgee may assign, transfer or deliver any of the Collateral to any transferee of any of the Obligations and thereafter shall be fully discharged from all responsibility with respect to such Collateral. The transferor shall be vested with all the powers and rights of Pledgee hereunder with respect to such Collateral, but Pledgee shall retain all rights and powers hereunder with respect to any of the Collateral remaining. c. Any consent, notice or other communication required or contemplated by this Agreement shall be in writing. If intended for Debtor, it shall be deemed given if mailed, postage prepaid, to Debtor at the address given on the front page of this Agreement or at such other address given by notice herein provided. If intended for Pledgee, it shall be deemed given only if actually received by Pledgee. d. This Agreement shall be construed under and governed by the laws of Colorado. e. Unless the context otherwise requires, all terms used herein which are defined in the Uniform Commercial Code as in effect in Colorado shall have the meanings therein stated. f. All rights of Pledgee under this Agreement shall be cumulative and shall inure to the benefit of Pledgee's successors and assigns. All obligations of Debtor hereunder shall be binding upon the heirs, legal representatives, successors and assigns of the Debtor. Dated: 7/23/96 /s/ Kevin J. Barker --------------------------------- Kevin J. Barker, Individually LASER STORM OF LONGMONT, INC. /s/ Kevin J. Barker --------------------------------- Kevin J. Barker, President EX-4 5 EXHIBIT 23.1--CONSENT OF HEIN + ASSOCIATES LLP INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT'S CONSENT We consent to the use in the Registration Statement on Form SB-2 of Laser Storm, Inc. as filed on October 21, 1996 of our report dated February 9, 1996, accompanying the financial statements of Laser Storm, Inc. contained in such Registration Statement, and to the use of our name and the statements with respect to us, as appearing under the heading "Experts" in the Prospectus. /s/ Hein + Associates LLP HEIN + ASSOCIATES LLP Denver, Colorado October 16, 1996 EX-5 6 EXHIBIT 24--POWER OF ATTORNEY POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert J. Cooney and William R. Bauerle, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in his capacity as an officer, director, or both of Laser Storm, Inc., a Colorado corporation ("Company"), to sign the Company's Registration Statement on Form SB-2, and any and all amendments thereto (including post-effective amendments) and to file the same with the United States Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or agents or any of them, or their or his substitute or substitutes, may do or cause to be done by virtue hereof.
Signature Title Date - --------- ----- ---- /s/ Robert J. Cooney - ----------------------------- Chairman of the Board, Chief September 27, 1996 Robert J. Cooney Executive Officer, Treasurer and Director /s/ William R. Bauerle - ----------------------------- President, Chief Operating September 27, 1996 William R. Bauerle Officer, Secretary and Director /s/ Frank J. Ball - ---------------------------- Executive Vice President, September 27, 1996 Frank J. Ball Operations, General Counsel and Director /s/ Harrison A. Price - ---------------------------- Director September 27, 1996 Harrison A. Price /s/ Harold Skripsky - ---------------------------- Director September 27, 1996 Harold Skripsky
-----END PRIVACY-ENHANCED MESSAGE-----