-----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, VwRxXegIFHg+oEck+/0g84RlBPsgn+DY0pf3unJ492S/SssQG3XNTHKlicS/wbXV x/L8z/2ax+QRRTDuvsFAMQ== 0001021890-97-000120.txt : 19970418 0001021890-97-000120.hdr.sgml : 19970418 ACCESSION NUMBER: 0001021890-97-000120 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970417 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28254 FILM NUMBER: 97582456 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 10KSB 1 ANNUAL REPORT ON FORM 10-KSB--DECEMBER 31, 1996 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 0-28254 ---------------- ---------------- LASER STORM, INC. -------------------------------------------- (Name of small business issuer in its charter) Colorado 84-1139159 ------------------------------ ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7808 Cherry Creek South Drive, Unit 301, Denver, Colorado 80231 - --------------------------------------------------------- --------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (303) 751-8545 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered under Section 12(g) of the Exchange Act: $0.001 Par Value Common Stock ---------------------------- (Title of Class) Redeemable Stock Purchase Warrants ---------------------------------- (Title of Class) Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.YES [X] NO [ ] Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10- KSB. YES [ ] NO [X] The Issuer's revenues for its most recent fiscal year were $5,898,211. The aggregate market value of the voting stock held by non-affiliates of the Issuer as of March 31, 1997 was approximately $1,059,428. Check whether the Issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. YES [ ] NO [X] (The Issuer was not subject to the Exchange Act Reporting Requirements at the time of the Issuer's filing under the Bankruptcy Act.) As of March 31, 1997 the Issuer had 3,824,836 outstanding shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE: None. Transitional Small Business Disclosure Format: YES [ ] NO [X] LASER STORM, INC. 1996 FORM 10-KSB ANNUAL REPORT TABLE OF CONTENTS PART I PAGE NUMBER - ------ ----------- Item 1. Description of Business Item 2. Description of Property Item 3. Legal Proceedings Item 4. Submission of Matters to Vote of Security Holders PART II - ------- Item 5. Market for Common Equity and Related Stockholder Matters Item 6. Management's Discussion and Analysis or Plan of Operation Item 7. Financial Statements Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures PART III - -------- Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act Item 10. Executive Compensation Item 11. Security Ownership of Certain Beneficial Owners and Management Item 12. Certain Relationships and Related Transactions Item 13. Exhibits and Reports on Form 8-K Signatures PART I ITEM 1. DESCRIPTION OF BUSINESS General Laser Storm, Inc. (the "Company") designs and manufactures interactive laser tag game systems which the Company markets under the trademark Laser Storm(R). The 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 and fixed 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 five different, themed game systems: Galaxy 2000(TM), Galactic Marauders(TM), Circuit Commandos(TM), STARGATE and Marvel Comics' X-Men. The Company recently obtained a license to utilize the comic book characters owned by Marvel Characters, Inc. as part of a themed game system which the Company introduced and began 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 December 1996, the Company has sold a total of approximately 190 Laser Storm(R) game systems, of which 161 were sold in the United States and 29 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 five 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. 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 and the availability of financing. The Company was incorporated in Colorado in 1990 under the name "The Crimsom 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." 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. In April 1996, the Company completed an initial public offering of 1,495,000 Units from which the Company realized net proceeds of approximately $4,700,000. Each Unit consisted of one share of Common Stock and one Warrant to purchase one share of Common Stock initially at $4.00 per share. The Company expects that after March 31, 1997, the exercise price will be reduced to $1.00 per share pursuant to the terms of the Warrants. 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 five different themes, each with numerous configurations. These games are played in themed arenas, which contain special effects, including colored, movable or fixed 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 or vest 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. All Laser Storm(R) game systems are designed to emphasize teamwork. Each team has a mission to accomplish during the game. Players are instructed by an operator or watch a pre-game video which set the stage for the game, give a brief introduction to the theme and explain 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 2 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 five totally different interactive game themes for use with the Laser Storm(R) game system. 1. Galaxy 2000(TM). 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). 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 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). 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 intends to add new variations or enhancements to keep the game exciting even for the most avid repeat players. 3 5. Marvel Comics' X-Men Laser Tag. Themes based on the Marvel Comics' X-Men comic books and the Marvel Comics' X-Men animated series are being used by the Company to develop Marvel Comics' X-Men games which offer players the chance to train alongside superheroes Wolverine, Rogue, Cyclops, and Storm. The games take place inside Marvel Characters, Inc.'s ("Marvel") well known "Danger Room." From the moment players enter a Marvel Comics' 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 has been carefully designed to support a seamless, fantasy based theme. The actual "Danger Room" game introduces new game play features. The Company is producing four different scorecards for Marvel Comics' 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 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 trademarked 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 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 does not believe, but cannot assume, that Marvel's recent filing for reorganization under Chapter 11 of the United States Bankruptcy Code will have any effect on the Company's license from Marvel. 4 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 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 Korea and has applied to register the trademark in Japan. The 5 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. 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 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 Although the Company has sold a number of Laser Storm(R) game systems outside of the United States, the Company has recently determined to focus its marketing efforts more in the United States in order to increase its efforts to open additional Company owned Laser Storm(R) game facilities. Therefore, the Company is not currently actively marketing its Laser Storm(R) game systems in foreign countries. However, the Company will affirmatively respond to any inquiries from prospective customers in foreign countries. The Company has an exclusive agreement with Target Technology P.T.E., Ltd. ("Target"), a Singapore Company, pursuant to which the Company has authorized Target to sell Laser Storm(R) equipment in Singapore and Malaysia until July 2000. The Company has sold three game systems to Target to date. There are no assurances Target will purchase any additional Laser Storm(R) game systems pursuant to the agreement. 6 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 not purchased any, 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. 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 December 1996, the Company has sold and shipped approximately 190 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 delivery and upon installation, respectively. For a limited time in 1996, the Company provided an alternative to the buyers 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 24 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 7 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 usually installs the system for a fee 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 from $0.10 to $0.15 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 77% of the Laser Storm(R) operators have acquired the entire system. Domestic Sales. Since inception in March 1990 through December 1996, the Company has sold and shipped 161 Laser Storm(R) game systems for operation in 43 states. International Sales. Since inception in March 1990 through December 1996, the Company has sold and shipped 29 Laser Storm(R) game systems for use outside of the United States. 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 and the availability of financing. 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 will vary from approximately $100,000 to $500,000 based primarily on the location and size of the facility. As of March 28, 1997, the Company owned and operated five Laser Storm(R) game facilities. One of the five 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 8 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 six Laser Storm(R) game facilities that will be owned and operated by the Company. All six 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. 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 possible 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 ongoing 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: 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 facility affords 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 9 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 entered into a verbal agreement whereby 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. This revenue share agreement was renewed in 1996. 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 Planet 4 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: In November 1996, the Company finalized an agreement 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 square feet in a Harrah's Casino in Vicksburg, Mississippi. 10 The Company supplied all equipment, service, repair and warranty work for the Laser Storm(R) game system. 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. Harrah's St. Louis, Missouri: In February 1997, the Company negotiated an agreement with Harrah's Maryland Heights Operating Company to provide a Laser Storm(R) game system for a new location in Maryland Heights, Missouri, a suburb of St. Louis. The 50/50 revenue share agreement required the Company to provide and install an 18 player Galaxy Laser Storm(R) game system for a 1,200 square foot arena. The agreement will provide for Planet 4 Kidz to operate the arena on behalf of Harrah's Maryland Heights Operating Company and the Company. The term of the agreement will be for two years, with annual renewals thereafter. Mexico City Revenue Share: In March 1997, the Company entered into a revenue share agreement with D.I.F.A.D.I.S.A. de C.V., a Mexican corporation ("DIFADISA"). The agreement provides for DIFADISA to operate a Laser Storm(R) game system within DIFADISA's family entertainment center in Mexico City. The Company supplied all equipment, service, repair and warranty work for the Laser Storm(R) game system. A 38-player Circuit Commando system was installed in approximately 2,780 square feet of playing space. The agreement provides the Company a base revenue of $1.00 which is paid on a per play rate basis and adjusts downward every 100,000 plays. The agreement is for a three-year term with annual renewals thereafter. Marketing and 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. Print. The Company advertises in industry-specific magazines and trade publications to generate leads for direct sales. All advertisements 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. 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 11 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 meeting with potential operators and to demonstrate the Company's products. 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. The Company 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 consider 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 to 72 months. Lease terms and dollar amounts will vary based on the creditworthiness of the applicant and no assurance can be given that any applicant will be approved. 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. 12 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. 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 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 more difficult to modify. There is no assurance that the Company will be able to sustain a competitive position for its products. Manufacturing; Customer Service The Company typically manufactures and builds game systems to order and generally maintains an inventory of raw materials, finished goods and product held for replacement which totalled approximately $977,896 at December 31, 1996. During 1996, the Company increased its inventories in anticipation of opening additional Company owned and operated Laser Storm(R) game facilities. 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. 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 per play charge of from $0.10 to $0.15. The Company offers a 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, 13 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 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. The Department of Corporations of the State of California ("Department") has reviewed 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"). No formal determination was issued by the Department after such review. The Company then sought an interpretive opinion pursuant to Section 31510 of the Act as to whether proposed future sales by the Company of Laser Storm (R) game systems in California would constitute the sale of "franchises" under the Act. The Department declined to issue an interpretive opinion because the response might impact a past transaction. The Department did offer the Company informal guidance as to whether the sale of Laser Storm(R) game systems in California would constitute the sale of "franchises" under the 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 14 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 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. 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." As of December 31, 1996, there were 11 Laser Storm(R) game systems that had been sold in California. Research and Development During the two fiscal years ended December 31, 1996, and 1995, the Company spent an estimated $321,000 and $140,000, respectively, on research and product development. None of the cost of such research and development is borne by the Company's customers. Environmental Laws Compliance with federal, state and local environmental laws does not have a measurable cost or effect on the Company's business. 15 Financial Public Relations The Company has entered into an agreement with Michelson Group, Inc. ("Michelson") pursuant to which Michelson is to provide financial public relations to the Company. The agreement is to be in effect until October 28, 1997. The Company pays Michelson monthly fees of $6,000 and has granted Michelson an option to purchase 100,000 shares of the Company's Common Stock at a price of $2.25 per share. Employees As of March 28, 1997, the Company had 45 full-time employees and 42 part-time employees. The Company's employees are not unionized. ITEM 2. DESCRIPTION OF PROPERTY 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. The Company also leases space for the Company owned Laser Storm(R) game facilities. See Note 7 of Notes to Financial Statements. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's shareholders during the quarter ended December 31, 1996. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information. The Company's Common Stock has been quoted on the 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 16 were $3.50 and $2.13, respectively. For the period from October 1, 1996, to December 31, 1996, the high and low bid prices of the Common Stock were $2.875 and $0.625, respectively. Holders. As of February 28, 1997, the Company had 53 holders of record of the Company's Common Stock. Dividends. 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. The following is information with respect to all unregistered securities sold by the Company within the past three years: (a) Since the inception of the Company, the Company has issued 1,601,250 shares of Company's Common Stock to nine persons who at the time were either officers, directors and/or employees of the Company. 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 Company because of their relationships to the Company 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, Company 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 Company 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 17 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 Company issued one accredited person an option to purchase 50,000 shares of the Company's Common Stock as a part of the compensation payable to the person pursuant to a consulting agreement between the Company 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 Company because of his relationship with the Company 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 Company has issued stock options to the Company's employees and non-employee directors to purchase shares of Company's Common Stock. No consideration was paid by the employees or directors for such options and Company does not consider that any sales occurred as a result of the issuances of such options. (e) In February 1996, Company 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 Company 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 Company agreed to issue one corporation an option to purchase 175,000 shares of the Company'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 Company. Company 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. 18 (g) In July 1996, Company issued 32,500 shares of Company's Common Stock to one person in connection with the purchase by the Company 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 Company, 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) In October 1996, Company issued an option to purchase 100,000 shares of Company's Common Stock to one corporation pursuant to a financial public relations agreement. 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 Company believes the corporation did not need the protection afforded by the Securities Act. No underwriters were involved in connection with the issuance of the option. (i) In November 1996, Company issued 35,625 shares of Company's Common Stock to one person in connection with the purchase by the Company of the assets of Ridgeworld North, Inc. The shares were 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 purchaser had full information available to it concerning the Company, 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 35,625 shares of Common Stock. (j) Between July and December 1996, four employees of the Company exercised stock options to purchase 30,500 shares of the Company's Common Stock. The shares were 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 purchasers had full information available to them concerning the Company, 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 issuance of the 30,500 shares of Common Stock. (k) The Company 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 (j). Other exemptions from registration may have been available with respect to some or all of such issuances. The Company reserves the right to assert in the future any or all other exemptions from registration which were available with respect to such issuances. 19 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Liquidity and Capital Resources The Company's operations used cash flow of $4,023,153 for the year ended December 31, 1996, and used cash flow of $104,404 for the year ended December 31, 1995. Cash flow was used during 1996 to fund the loss of $2,745,866 which occurred primarily in the fourth quarter. The operating loss in 1996 negatively impacted the Company's liquidity position, however the Company does still maintain over $750,000 in working capital and over $3,300,000 in stockholders equity. A large portion of the loss in 1996 was the result of some non-recurring issues such as: the development and introduction of a new themed game ($460,000), the investigation of potential acquisitions ($250,000), severance and termination costs ($249,000) and bad debts associated with the return of equipment from a single independent operator ($120,000). Additionally, the Company incurred over $550,000 in costs associated with identifying and opening Company-owned and operated facilities, several of which will open in 1997. A substantial portion of these costs are not necessarily recurring in 1997. To address the losses in 1996 the Company reduced its corporate headcount by approximately 50%. Annualized salaries were reduced by approximately $1 million and the non-recurring costs discussed above are not planned for in 1997. The Company is pursuing financial alternatives to assist in its working capital needs as well as capital that will be required to open additional Company-owned facilities. If such financing does not occur, management believes it will still have adequate cash flow to sustain operations through 1997, but will not be able to realize its objectives of diversifying more into Company-owned and operated facilities. The Company funded $1,408,110 in sales made through an extended term financing program offered beginning in the second quarter of 1996. In October 1996, the Company entered into an agreement with a financial institution which purchases certain notes receivable under the Company's extended terms program. The financial institution determines the credit worthiness of the customer and then, if appropriate, purchases the receivables at a price which results in a fixed yield (14% as of December 31, 1996). As of December 31, 1996, the Company had sold a principal amount of $116,918 of these notes to this financial institution and had a principal amount of $1,169,745 of these notes that remained unsold. As of December 31, 1996, the Company does not have the working capital to internally finance future sales through this type of financing. However, the Company has been able to establish alliances with external financial institutions in order to make financing options available to it's customers. The Company also increased its inventory by $535,351 in anticipation of stronger sales and the opening of Company-owned and operated facilities. While 1996 sales were not as strong as originally expected, this inventory is available for future sales and will help cash flows in 1997. 20 Capital expenditures for the year ended December 31, 1996 were $1,763,117 compared to $194,858 for the year ended December 31, 1995. The Company opened four Company-owned and operated facilities in 1996. The capital requirements necessary to acquire and open the four facilities was approximately $1,300,000. The Company also purchased and upgraded a trade show booth for $207,000. The booth was used to present the new Marvel Comics X-Men laser tag arena at the IAAPA show in November 1996 and maybe used for future trade shows. Additionally the Company purchased $175,000 of office furniture and equipment to accommodate the corporate staff increases and incurred $82,000 in leasehold improvements for the new facility which the Company moved into in February 1996. Financing activities provided $5,982,176 of cash flow for the year ended December 31, 1996 and provided $377,022 of cash flow for the year ended December 31, 1995. In February 1996, the Company completed the sale of 200,000 shares of Series B 12% Convertible Cumulative Preferred Stock and received proceeds of $900,000. In April 1996, the Company completed the public sale of 1,495,000 units at $4.00 per unit. Each unit sold consisted of one share of common stock and one warrant. Proceeds from the sale were $5,202,600. Offering costs associated with common and preferred stock financings were $320,362 in 1996 and $311,211 in 1995. The Company also entered into a $200,000 capital lease arrangement to assist in the financing of one of its Company-owned facilities that opened in November 1996. The Company will require additional capital to finance future Laser Storm(R) game facilities. 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, warehouse 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. With the restructuring that took place during the fourth quarter of 1996 the Company feels it has the capacity available to which it may be able to sublease part of its corporate headquarters without compromising administrative or operating functions. The Company has employment agreements with two of the Company's executive officers which provide aggregate annual compensation of $300,000 in 1997 and $225,000 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 21 with the Company's chief executive officer and for a six-month period for the president. The Company entered into the employment agreements with the two executives to formalize their employment status at existing salary levels. In July 1996, the Company purchased an existing Laser Storm(R) 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 Company registered the 32,500 shares for resale. The seller has until May 2, 1997 to sell the shares. If by May 2, 1997 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 sales of the shares shall be applied first to retiring the loan. In November 1996, the Company purchased an existing Laser Storm(R) game center located in Coral Springs, Florida from unaffiliated persons. The total consideration was $300,000, which was paid at closing by paying $142,500 in cash, the cancellation of a $15,000 receivable and by paying the balance of $142,500 by issuing 35,625 shares of the Company's common stock. Pursuant to the terms of the asset purchase agreement, the Company registered the 35,625 shares for resale. The seller has until June 1, 1997 to sell the shares. If by June 1, 1997 the seller has sold the shares for less than $142,500, the Company will immediately pay the seller the difference between the sales price of the shares and $142,500. Any remaining shares will be returned to the Company. If the sales price is more than $142,500, the Company has no further obligation to the seller and the seller is entitled to retain any excess shares or purchase price. As of March 31, 1997, the closing price of the Company's common stock was $0.44 per share. Based upon this price the Company is expecting to pay approximately $195,000 to satisfy the agreements on both the Longmont and Coral Springs agreements. 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 or fixed barriers, 22 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. Utilizing part of the proceeds from the initial public offering in April, 1996, the Company intended to either acquire existing and/or open new Laser Storm(R) game facilities. As of December 31, 1996, the Company had acquired two facilities and opened two new facilities. Revenues from the Company owned and operated facilities for 1996 were $268,129. Additionally, the Company had revenues of $144,426 from its revenue sharing arrangements. 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 7% 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 for the year ending December 31, 1997. The Company also provides its customers with a 90-day material defects warranty on all system components. 1996 compared to 1995 Net Sales from Laser Storm(R) Game Systems and Related Revenues Net sales from laser tag game systems and related revenues for the year ended December 31, 1996 increased by 1.5% to $5,487,899, as compared to $5,408,745 for the year ended December 31, 1995. The marginal increase was primarily due to increases in warranty sales. The Company offers a warranty program to its customers whereby the customer is charged a fee based upon the number of games played per month. The number of customers participating in this program increased from 64 at December 31, 1995 to 115 at December 31, 1996. The increase in the number of participating customers is the result of additional system sales made during 1996 and efforts to convert existing customers to this program. The number of systems sold in 1996 declined approximately 17.2% compared to 1995, however revenues from the sales were only 0.6% lower than the revenues from system sales in 1995. The primary reason for revenues being marginally lower on 17.2% fewer number of systems sold was the average system sales price increased from $80,000 in 1995 to $96,000 in 1996. The increase in the average system sales price resulted from more customers purchasing the themed arenas offered by the Company. The Company has developed five themes through the efforts of its design and marketing staff as well as through the acquisition of two intellectual property rights. A specific breakdown of net sales is as follows: 23 December 31, ------------- 1995 1996 ---- ---- System and Arena Sales $5,107,258 $5,078,832 Warranty Sales 285,983 386,407 Accessories Sales 15,504 22,660 --------- --------- Net Sales $5,408,745 $5,487,899 The Company introduced a financing program during the quarter ended June 30, 1996 which accounted for 38.5% of net sales for the year ended December 31, 1996. This program required a 30-40% down payment with the balance financed over 24 months. The Company believes this program was a necessity to meet the increased pressure from the growing number of competitors offering aggressive sales and financing programs. System sales are cyclical during the calendar year, with most sales typically occurring in the third quarter, and the least number of sales usually occurring in the first 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 1996 sales were $2,160,777, representing 39.4% of net sales for the year ended December 31, 1996. This compares to third quarter 1995 sales of $1,856,088, representing 33.8% of net sales for the year ended December 31, 1995. Fourth quarter 1996 sales were only $525,710, representing 9.6% of net sales for the year ended December 31, 1996. This compares to the fourth quarter 1995 sales of $1,394,362, representing 25.8% of net sales for the year ended December 31, 1995. Management believes that there has been a decline in capital purchasing within the family entertainment center industry. Management also believes that the decline began in the middle of 1996, which necessitated the attractive financing packages offered by the Company during the second and third quarters. Net sales during the fourth quarter of 1996 were at the lowest level in over two years and came after a record setting third quarter of $2,160,777. Net Sales from Retail Operations The Company opened four Company-owned Laser Storm(R) game facilities during 1996 and is currently involved in seven revenue participation facilities. Net sales from retail operations for the year ended December 31, 1996 increased to $410,312 compared to $68,404 for the year ended December 31, 1995. This increase is primarily the result of the sales generated by the four new Company-owned facilities. Subsequent to year end the Company opened one additional facility and management expects to open six more facilities by the end of the second quarter. The Company will require additional capital to finance the costs of opening these and future facilities. A specific breakdown of net sales from retail operations is as follows: 24 Year Ended December 31, ----------------------- 1995 1996 ---- ---- Company-owned Laser Storm(R) $ -- $268,129 Game Facilities Revenue Participation Facilities 68,404 142,183 ------- ------- Net Sales $68,404 $410,312 Net sales from the revenue participation facilities increased 107.9% primarily as a result of the Funplex revenue share facility which is also operated by the Company. The Funplex facility, which is located in the Denver, Colorado metropolitan area, opened in November 1995 and represents approximately 50% of the total sales generated by all seven of the revenue participation facilities in 1996. Gross Profit from Laser Storm(R) Game Systems and Related Revenue Gross profit from laser tag game systems and related revenue for the year ended December 31, 1996 decreased 2.4% to $3,010,484 as compared to gross profit of $3,085,274 for the year ended December 31, 1995. Gross profit as a percentage of net sales decreased 2.1% during the year ended December 31, 1996 to 54.9% compared to 57.0% for the year ended December 31, 1995. The decrease in the gross profit percentage in 1996 is the result of selling three "hardwall" arenas which have lower margins. The hardwall arenas have lower margins because they are manufactured by an independent vendor, rather than by the Company. The hardwall arena is considered a turnkey opportunity for the customer in that it includes the normal themed barriers and other game components as well as carpet, sales counters and sign packages. Without the impact of the hardwall arenas, the Company would have realized a slight improvement in its gross profit percentage. This slight improvement would have been primarily the result of the Company having realized some efficiencies from improved purchasing management and improved assembly processes. Gross Profit from Retail Operations Gross profit from retail operations for the year ended December 31,1996 increased to $258,651 compared to $39,269 for the year ended December 31, 1995. The increased gross profit in 1996 is the result of opening the four Company-owned Laser Storm(R) game facilities. Two of the four facilities were opened in late July 1996 and the other two in November of 1996. The Company-owned facility sales and operating expense results were in line with management's estimates for the facilities. 25 General and Administrative Expenses General and administrative expenses ("GA expense") increased by 130.8% to $3,515,768 for the year ended December 31, 1996 compared to $1,523,038 for the year ended December 31, 1995. As a percentage of net revenues (net sales from laser tag game systems and related revenues plus net sales from retail operations) GA expenses increased to 59.6% in 1996 compared to 27.8% in 1995. The increased GA expenses are the result of increased costs associated with the following items: Diversification of the business; Travel and professional fees related to the investigation of potential acquisitions; Public company reporting requirements; Facility expansion; Executive personnel additions; Increased bad debts provision. The Company had previously recognized the attractiveness of the recurring revenues and profitability generated by its independent operators. However, prior to the public offering in April of 1996, the Company did not have the financial resources to open and operate the facilities. Subsequent to the public offering the Company has acquired or opened five facilities. During the year ended December 31, 1996, the Company incurred approximately $550,000 in staffing, travel and set up costs in identifying and opening the Company-owned and operated facilities. During the latter half of 1996 the Company entered into discussions with two potential acquisition candidates which would have allowed for the Company to acquire a large Family Entertainment Center ("FEC") and a competitor within the laser tag industry. The acquisition of the FEC would have fit into the long term plan of opening Company-owned facilities and the acquisition of the competitor would have allowed for enhanced technology and diversification of the Laser Storm(R) products. The Company incurred approximately $250,000 in legal fees, accounting fees, travel expenses and other professional costs in connection with the two acquisitions. Letters of intent were drafted and due diligence efforts were nearly completed on both acquisitions. In December 1996, the Company decided to withdraw its offers when the Company's common stock price declined from $1.88 per share to $1.00 per share. The Company was notified in December that the underwriter of its public offering and its primary market maker in its common stock was discontinuing making a market in the Company's common stock in connection with the closing of an office of the market maker. The Company incurred increased professional fees, investor relations costs, insurance costs and outside board member fees as a result of its public offering in April of 1996. The public reporting requirements required additional accounting and legal fees to be incurred. The Company also hired an investor relations firm to assist in establishing and maintaining adequate communications to its shareholders. The above costs were approximately $270,000 higher in 1996 than in 1995. 26 The Company moved into a new facility in February 1996. The rent costs for the new facility along with the associated costs of utilities, telephone, repairs, maintenance and other costs increased by approximately $300,000 in 1996. The Company moved from a 17,500 square foot facility into the current facility which has approximately 26,350 square feet. The increased space has been utilized to allow for more efficient production and warehousing efforts as well as office space for the additional staffing required to support opening Company-owned and operated facilities. Executive compensation in 1996 increased by approximately $226,000 with the addition of a Vice President of Retail Operations and a Vice President of Marketing and Product Development in December of 1995. Additionally the Company hired a Vice President of Real Estate and Construction in October of 1996. All three of these positions were eliminated during a staff restructuring that began in December 1996. The Company increased its provision for bad debts during 1996 by approximately $193,000. A portion of the 1996 bad debts provision resulted from notification by a customer of the return of equipment as a result of the customer's inability to place the equipment in an acceptable location. Additionally, the Company had a number of smaller receivables which were determined to be uncollectible and were written off in 1996. Selling and Marketing Expenses Selling and marketing expenses ("SM expenses") increased $809,309 or 98.6% to $1,629,780 for the year ended December 31, 1996, compared to $820,471 for the year ended December 31, 1995. The primary reason for the increase was the marketing of the Company's newest themed arena, Marvel Comics X-Men laser tag. In July 1996, the Company entered into a license agreement with Marvel Characters, Inc. to utilize the characters of the popular comic book and cartoon series X-Men. The Company increased its marketing, advertising and trade show expenditures by over $350,000 in order to present the X-Men arena and game at the International Association of Amusement Parks and Attractions ("IAAPA") show in November 1996. While the presentation and game were well received by game players, many of the independent operators considered the Company's proposed selling price to be too high. Rather than sacrifice a portion of the gross margin for this product, the Company has decided to initially utilize this licensed theme in its Company-owned facilities rather than sell it to the independent operators. Management believes the well known recognition of the Marvel Comics X-Men characters and the new game features which were developed for the X-Men laser tag theme, will help the Company-owned facilities establish a separate identity from the Company's independent licensed operators. The first X-Men laser tag facility owned and operated by the Company is expected to open in May 1997. The Company also increased its marketing staff expenditures by over $200,000 in an effort to support the introduction of the X-Men game as well as to support the rollout of Company-owned facilities. Additionally, the Company's sales department salaries increased by approximately $190,000. The increase was 27 the result of adding additional sales and sales support staff With the increased number of competitors entering the market place, it was felt the Company needed to increase its sales presence with the independent operators.. Severance and Termination Costs Late in the fourth quarter of 1996 the Company recognized that there was going to be a significant decline in sales. Accordingly, management decided to reduce the Company's workforce. In December 1996, the Company concluded its internal evaluation of its corporate overhead requirements and reduced its staff by approximately 25% and again in February 1997 by approximately another 25%. As a result of these staff reductions the Company terminated the employment contracts with three of its executive officers. These individuals had employment contracts with the Company which allowed for six month severance packages. The Company accrued approximately $195,000 in severance and termination costs for these three agreements during the fourth quarter of 1996. In accordance with the terms of the three employment agreements, $115,000 in compensation will be paid to two of the executives by June 30, 1997, and $50,000 in compensation will be paid to the third executive by July 31,1997. Product Development Costs Product development costs increased by 129.1% to $320,671 for the year ended December 31, 1996, compared to $139,979 for the year ended December 31, 1995. As a percentage of net revenues, product development costs increased to 5.4% for the year ended December 31, 1996 compared to 2.6% for the year ended December 31, 1995. These increases are primarily the result of staffing and design consulting fees incurred to develop the new game features for the Marvel Comics X-Men laser tag game as well as to enhance the Company's current electronics platform. Contingent Settlements In December 1995, the Company was served with two lawsuits. The Company's legal counsel was retained and believed the Company had a defendable position; however, 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. Operating Income (Loss) The Company incurred an operating loss of $2,743,561 for the year ended December 31, 1996 compared to operating income of $254,872 for the year ended December 31, 1995. Most of the loss incurred during 1996 occurred during the fourth quarter. The decline in sales and many of the GA and SM expenditures that occurred during the fourth quarter resulted in a $2,624,228 loss for the 28 quarter. Management responded to the fourth quarter performance by reducing its corporate overhead beginning in December 1996. As a result of the unpredictable nature of the system sales cycle and the recurring revenue opportunity presented by opening Company-owned facilities, management feels the Company must continue to move in the direction of becoming primarily a facility owner and operator. Subject to obtaining sufficient financing, delays that may be encountered in obtaining suitable locations and in construction, management is planning to open up to 22 new Company-owned and operated facilities during 1997. Depreciation and Amortization Depreciation and amortization increased from $116,183 for the year ended December 31, 1995 to $297,709 for the year ended December 31, 1996. The increase is primarily the result of the capital expenditures made related to the opening and acquisition of the four Company-owned and operated facilities. Loss on Disposal of Equipment The Company recognized a loss of $86,934 in 1996 on the disposal of two inflatable arenas. One of the arenas had been used in a revenue sharing facility and the other used as demonstration equipment for trade shows. Interest Income Interest income increased from $2,282 for the year ended December 31, 1995 to $97,202 for the year ended December 31, 1996. The increase was primarily the result of interest income earned on the investment of funds generated from the public offering in April 1996. The foregoing discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created thereby. These statements include the plans and objectives of management for future operations. Such statements are dependent on certain risks and uncertainties including such factors among others as, construction delays that may be encountered in opening new stores, market or customer acceptance, market demand, entertainment product introductions, competition, pricing, changing regulatory environment, changing economic conditions, risks in new product and service development, the effect of the Company's accounting policies and other risk factors. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there 29 can be no assurance that the forward-looking statements included in this Form 10-KSB will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. ITEM 7. FINANCIAL STATEMENTS The financial statements are attached following the Signature Page. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not Applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EX- CHANGE ACT 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................... 33 1990 Chairman of the Board, Chief Executive Officer and Director William R. Bauerle................. 46 1994 President, Chief Operating Officer, Secretary and Director John E. McNutt..................... 40 1996 Chief Financial Officer, Treasurer and Director Frank J. Ball...................... 42 1994 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 was the Treasurer of the Company 30 from October 1994 to February 1997. 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. John E. McNutt has been the Chief Financial Officer, Treasurer and a director of the Company since February 1997 and was Vice President of Finance from July 1996 to February 1997. 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. Frank J. Ball has been a director of the Company since October 1995 and was Vice President of Manufacturing of the Company from November 1996 to December 1996, Executive Vice President of the Company from November 1994 to October 1996 and General Counsel of the Company from inception of the Company until October 1996. From 1989 to the present, Mr. Ball has also been engaged 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 degrees in business administration and public administration, and a Juris Doctor degree from the University of Denver. 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 31 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. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and officers and persons who own more than 10% of a registered class of the Company's equity securities to file various reports with the Securities and Exchange Commission and the National Association of Securities Dealers concerning their holdings of, and transactions in, securities of the Company. Copies of these filings must be furnished to the Company. Based on a review of the copies of such forms furnished to the Company and written representations from the Company's officers and directors, the Company believes that all of the Company's officers and directors have made all filings required under Section 16(a) on a timely basis during the year ended December 31, 1996, except for James E. Johnson, a former officer of the Company who was late in filing his Form 3. ITEM 10. 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, 1996, 1995 and 1994, of those persons who were, at December 31, 1996 (i) the chief executive officer and (ii) 32 the other most highly compensated executive officers of the Company whose annual salary and bonus from the Company exceeded $100,000 for the fiscal year ended December 31, 1996.
Summary Compensation Table Long Term Annual Compensation Compensation --------------------------------- ------------ Securities Name and Principal Other Annual Underlying All Other Positions at 12/31/96 Year Salary Bonus Compensation Options Compensation - ---------------------------------------- ---------- ------- -------- ------------ ---------- ------------ Robert J. Cooney............................ 1996...$ 150,000 - 0 - $28,942(1) -0- None Chairman of the Board and 1995...$ 150,000 - 0 - $24,335(1) -0- None Chief Executive Officer 1994...$ 97,500 - 0 - $ 3,883(1) -0- None William R. Bauerle.......................... 1996...$ 150,000 -0- $26,681(2) -0- -0- President and Secretary 1995...$ 150,000 -0- $21,099(2) 75,000 -0- 1994...$ 71,250 -0- $ 2,934(2) 75,000 $21,727(3) Eric B. Schwartzman......................... 1996...$ 100,000 -0- $11,294 -0- -0- Vice President of Marketing 1995...$ -0- -0- -0- 75,000 -0- and Product Development until January 1997 1994...$ -0- -0- -0- -0- -0- Frank J. Ball............................... 1996...$ 120,000 -0- $12,016 -0- $15,238(6) Vice President of Manufacturing, 1995...$ 45,411 -0- $ 5,685(5) -0- $14,020(6) Executive Vice President, 1994...$ -0- -0- -0- -0- $14,000(6) Operations and General Counsel until December 1996, October 1996 and October 1996, respectively, and Director Michael D. Kessler.......................... 1996...$ 110,000 -0- $43,571(7) -0- -0- Vice President of Retail 1995...$ 13,749 -0- -0- 75,000 -0- Operations until December 1994...$ -0- -0- -0- -0- -0- 1996 - ------------------
(1) Includes amounts paid by the Company for automobile expenses ($12,159 in 1996, $8,988 in 1995 and $3,218 in 1994), health club dues ($1,490 in 1996, $1,559 in 1995 and $665 in 1994), life insurance premiums advanced on behalf of Mr. Cooney ($12,110 in 1996 and $12,111 in 1995) and disability insurance premiums ($3,183 in 1996 and $1,677 in 1995). Does not include any value that may have been realized by Mr. Cooney when he used whatever equity there was in a Company automobile as a down payment on a personal automobile. The Company estimates the amount of the equity to be less than $5,000. (2) Includes amounts paid by the Company for automobile expenses ($11,637 in 1996 and $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 1996, $11,635 in 1995 and $1,939 in 1994) and disability insurance premiums ($3,407 in 1996, $2,010 in 1995 and $335 in 1994). 33 (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 ($11,244 in 1996). (5) Includes amounts paid by the Company for automobile expenses ($10,526 in 1996 and $4,605 in 1995), health club dues ($1,490 in 1996 and $1,080 in 1995). (6) Represents amounts paid in legal fees for services rendered by the law firm owned by Mr. Ball. (7) Includes amounts paid by the Company for automobile expenses ($8,742 in 1996, health club dues ($1,320 in 1996) and a commission ($33,509 in 1996). Option Grants in the Last Fiscal Year No options were granted by the Company to Robert J. Cooney, William R. Bauerle, Eric B. Schwartzman, Frank J. Ball or Michael D. Kessler during the Company's fiscal year ended December 31, 1996. Value of Options at December 31, 1996
Aggregate Fiscal Year End Option Values ------------------------------------------------------------------------- Number of Securities Underlying Un- Value of Unexercised In-the- exercised Options at Fiscal Year End Money Options at Fiscal Year Exercisable/Unexercisable End Exercisable/Unexercisable ------------------------------------ ----------------------------- Robert J. Cooney............... -0- -0- William R. Bauerle............. 50,000/25,000 $40,000/$20,000(1) Eric B. Schwartzman............ 25,000/50,000 -0- Frank J. Ball.................. -0- -0- Michael D. Kessler............. 25,000/50,000 -0- - ----------------------
(1) The value is based on the closing sale price of $1.00 of the Company's Common Stock on December 31, 1996 minus the exercise price of the options. No options to purchase the Company's Common Stock were exercised by Messrs. Cooney, Bauerle, Schwartzman, Ball or Kessler during the Company's fiscal year ended December 31, 1996. Until December 31, 1997, the Company has agreed with Laidlaw that the Company will not increase, without shareholder approval, the compensation of Messrs. Cooney and Bauerle 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. 34 Employment Agreements Messrs. Cooney and Bauerle have employment agreements 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. Effective February 1, 1997, Mr. Cooney temporarily reduced his annual salary to $100,000. The amount not being paid is being accrued by the Company for later payment. 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. Effective February 1, 1997, Mr. Bauerle temporarily reduced his annual salary to $100,000. The amount not being paid is being accrued by the Company for later payment. 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. McNutt does not have an employment agreement with the Company. Mr. McNutt receives a salary of $78,000 annually, and was granted options to purchase 75,000 shares of the Company's Common Stock at an exercise price of $2.25 per share. The options vest 25,000 on August 15, 1997, 25,000 on August 15, 1998, and 25,000 on August 15, 1999, and expire on August 15, 2002, August 15, 2003, and August 15, 2004, respectively. Each executive officer also receives a $725 per month vehicle allowance and is reimbursed for all other business related expenses. Termination Arrangements with Former Officers Frank J. Ball, the former Executive Vice President and General Counsel of the Company and a Director of the Company had an employment agreement with the Company that was terminated on December 6, 1996. As a result, the Company must pay Mr. Ball his salary and benefits through June 1997. Michael D. Kessler, the former Vice President of Retail Operations of the Company, had an employment agreement with the Company that was terminated on December 6, 1996. As a result, the Company must pay Mr. Kessler his salary and benefits through June 1997. Eric B. Schwartzman, the former Vice President of Marketing and Product Development, had an employment agreement with the Company that was terminated on 35 January 16, 1997. As a result, the Company must pay Mr. Schwartzman his salary and benefits through July, 1997. Amended Stock Incentive Plan The Company has adopted an 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 30,500 shares have been exercised and options relating to 257,580 shares were outstanding at December 31, 1996. The options vest in equal annual installments over a three-year period from their respective dates of grant. The options are exercisable at $0.20 per share for 135,500 shares, $2.00 per share for 28,500 shares, $4.00 per share for 43,500 shares and $2.25 per share for 50,000 shares. 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. 1996 Incentive and Nonstatutory Stock Option Plan The Company has adopted, subject to shareholder approval, the 1996 Incentive and Nonstatutory Stock Option Plan ("1996 Plan") which authorizes the Company to grant incentive stock options within the meaning of Section 422 of 36 the Internal Revenue Code of 1986, as amended, and to grant nonstatutory stock options. The 1996 Plan relates to a total of 1,000,000 shares of common stock. No shares have been exercised and options relating to 25,000 shares are outstanding, all of which were granted to John E. McNutt, an officer of the Company. The options vest in 1999. The outstanding incentive stock options must be exercised within five years from the date of vesting and no later than three months after the 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 per share exercise price for the shares to be issued pursuant to exercise of an option is determined by the board of directors. However, the 1996 Plan requires that the exercise prices of incentive stock 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 common stock, then the exercise price of an incentive stock 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 options may be granted to any person selected by the board. Incentive stock options may be granted only to employees. The 1996 Plan is to be administered by the Company's board of directors or a committee of two or more non-employee directors which determines the terms of the options granted, including the exercise price, number of shares of common stock subject to the option, and the terms and conditions of exercise. No incentive stock option granted under the 1996 Plan is transferable by the optionee other than by will or the laws of descent and distribution. Each option is exercisable during the lifetime of the optionee only by such optionee. Compensation of Directors During 1996, the Company paid to each of Harrison A. Price, a former director of the Company, and Harold Skripsky, a current director of the Company, $20,000 per year. In 1997, the Company will pay $5,000 per quarter to Harold Skripsky. In 1995, the Company also granted to each of Harrison A. Price and Harold Skripsky an option to purchase 50,000 shares of Common Stock at $4.00 per share. One-half of each option vested in October 1995, one quarter of each option vested in October 1996 and one quarter of Harold Skripsky's option will vest in October 1997. One quarter of Harrison A. Price's option (i.e., 12,500 shares) terminated when he resigned as a director of the Company in March 1997. The options must be exercised within five (5) years from the date of vesting. The options were not granted under the Plan or the 1996 Plan. 37 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock, outstanding as of March 15, 1997, 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 John E. McNutt......................................... 75,000(4) 1.9% 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 Frank J. Ball.......................................... 76,250 2.0% 216 16th Street, Suite 800 Denver, Colorado 80202 Harold Skripsky........................................ 50,000(5) 1.3% 1103 South Main Street Lombard Pines Plaza Lombard, Illinois 60148 All Officers and Directors as a Group (5 1,114,300(6) 27.7% Persons)............................................... Edward J. Bonis........................................ 411,750 10.2% 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 - -----------------
(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. 38 (3) Includes 75,000 shares of Common Stock underlying stock options, 50,000 shares of which are currently exercisable and the balance of which become exercisable in December 1997. (4) Consists of 75,000 shares of Common Stock underlying stock options, none of which are exercisable until August 1997. (5) Consists of 50,000 shares of Common Stock underlying a stock option, 37,500 of which are currently exercisable and 12,500 of which are not exercisable until October 1997. (6) Includes 250,000 shares of Common Stock underlying the outstanding stock options described above. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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. Robert J. Cooney also has personally guaranteed an equipment lease for Laser Storm of Arapahoe Village, Inc., a wholly owned subsidiary of the Company that owns and operates a Laser Storm(R) game system. The lease is for a term of 36 months and requires monthly rental payments of approximately $4,929. 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. 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. 39 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: Exhibit No. Description and Method of Filing (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 Amend ments of Registrant filed on February 13, 1996.* (4.5) Warrant Agreement between Registrant and American Securities Transfer Incorporated, as Warrant Agent.* (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.* (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.* 40 (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) Agreement dated January 27, 1994 between Registrant and Sports and Games.* (10.13) Agreement dated August 8, 1995 between Registrant and Fun City Amusement Centers, Inc.* (10.14) Agreement dated effective July 1, 1995 between Registrant and Santa's Village, Ltd.* (10.15) Sales Agreement dated in August 1995 between Registrant and TAMS Stationers.* (10.16) Options Granted to Harrison A. Price and Harold Skripsky.* (10.17) Lease Agreement dated October 19, 1995, between Registrant and Funplex Partnership.* (10.18) Employment Agreement dated effective December 1, 1995, between Registrant and Michael D. Kessler.* (10.19) Employment Agreement dated effective December 16, 1995, between Registrant and Eric Schwartzman.* (10.20) Options granted to Michael D. Kessler and Eric Schwartzman.* (10.21) Agreement dated February 8, 1996, between Registrant and Tunica Partners II, LP.* (10.22) Addendum dated March 27, 1996, to the Employment Agreement dated effective September 13, 1995, between Registrant and Robert S. Scholz.* (10.23) License Agreement dated August 1, 1996, between Marvel Characters, Inc. and Registrant.**/*** (10.24) Amendment dated August 15, 1996, to Amended Stock Incentive Plan.** (10.25) Asset Purchase Agreement dated July 23, 1996 among Registrant, Laser Storm of Longmont, Inc. and Kevin J. Barker.**/**** (10.26) Asset Purchase Agreement dated November 1, 1996 between Registrant and Ridgeworld North, Inc.**/**** (10.27) 1996 Incentive and Nonstatutory Stock Option Plan.** 41 (10.28) Agreement between NAMCO CYBERTAINMENT INC. and Registrant and Amendment thereto. (10.29) User Agreement between Harrah's Vicksburg Corporation and Registrant. (10.30) User Agreement between D.I.F.A.D.I.S.A. de C.V. and Registrant. (21) List of Subsidiaries. (23) Consent of HEIN + ASSOCIATES LLP. (27) Financial Data Schedule. * Incorporated by reference to the exhibits filed as a part of Registration Statement No. 33-98578. ** Incorporated by reference to the exhibits filed as a part of Registration Statement No. 333-14525. *** Confidential treatment granted in a separate filing. **** Certain of the Schedules and Exhibits to the Asset Purchase Agreements have been omitted and will be provided to the United States Securities and Exchange Commission upon request. (b) The Company filed no Current Reports on Form 8-K during the fiscal quarter ended December 31, 1996. 42 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LASER STORM, INC. Dated: April 14, 1997 By: /s/ Robert J. Cooney -------------------- Robert J. Cooney, Chairman of the Board In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/Robert J. Cooney Principal Executive April 14, 1997 - ---------------------------------------- Officer and Robert J. Cooney Director /s/William R. Bauerle Director April 14, 1997 - ---------------------------------------- William R. Bauerle /s/John E. McNutt Principal Financial April 14, 1997 - ---------------------------------------- Officer, Principal John E. McNutt Accounting Officer and Director /s/Frank J. Ball Director April 14, 1997 - ---------------------------------------- Frank J. Ball /s/Harold Skripsky Director April 14, 1997 - ---------------------------------------- Harold Skripsky
LASER STORM, INC. INDEX TO FINANCIAL STATEMENTS PAGE ---- Independent Auditor's Report ............................................... F-2 Balance Sheet - December 31, 1996 .......................................... F-3 Statements of Operations - For the Years Ended December 31, 1995 and 1996 .............................................................. F-4 Statements of Changes in Stockholders' Equity - For the Years Ended December 31, 1995 and 1996 ........................................ F-5 Statements of Cash Flows - For the Years Ended December 31, 1995 and 1996 .............................................................. F-6 Notes to Financial Statements .............................................. F-8 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, 1996 and the related statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 1995 and 1996. 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, 1996, and the results of its operations and its cash flows for the years ended December 31, 1995 and 1996, in conformity with generally accepted accounting principles. /s/ HEIN & ASSOCIATES LLP HEIN + ASSOCIATES LLP Denver, Colorado March 21, 1997 F-2
LASER STORM, INC. BALANCE SHEET DECEMBER 31, 1996 ASSETS CURRENT ASSETS: Cash ............................................................................ $ 272,633 Receivables - net of allowance for doubtful accounts of $170,000: Trade notes, current portion ................................................ 535,256 Trade accounts .............................................................. 433,463 Landlord reimbursement and other ............................................ 132,235 Income taxes ................................................................ 56,000 Inventories ..................................................................... 977,896 Prepaid expenses and other ...................................................... 97,172 ----------- Total current assets .................................................... 2,504,655 ----------- PROPERTY AND EQUIPMENT, net: Laser game systems and facilities ............................................... 1,339,081 Other ........................................................................... 546,805 ----------- 1,885,886 ----------- OTHER ASSETS: Trade notes receivable, less current portion .................................... 514,489 License and design costs, net of accumulated amortization of $50,958 ............ 191,731 Goodwill, net of accumulated amortization of $2,917 ............................. 172,083 Deposits and other .............................................................. 77,505 Software development, net of accumulated amortization of $105,298 ............... 54,792 ----------- Total other assets ...................................................... 1,010,600 ----------- TOTAL ASSETS ........................................................................ $ 5,401,141 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of capital lease obligations ................................. $ 69,034 Accounts payable ................................................................ 783,998 Accrued expenses and other ...................................................... 172,337 Accrued compensation ............................................................ 161,574 Accrued severance costs ......................................................... 195,441 Customer deposits and deferred revenue .......................................... 171,770 Acquisition costs payable ....................................................... 195,000 ----------- Total current liabilities ............................................... 1,749,154 CAPITAL LEASE OBLIGATIONS, less current maturities .................................. 143,885 DEFERRED LEASE INDUCEMENTS .......................................................... 158,143 COMMITMENTS AND CONTINGENCIES (NOTES 2, 3, 7, AND 8) STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value; 2,000,000 shares authorized, no shares issued ............................................................ -- Common stock, $.001 par value; 20,000,000 shares authorized; 3,824,836 shares issued and outstanding ..................................... 3,825 Additional paid in capital ...................................................... 6,256,174 Accumulated deficit ............................................................. (2,910,040) ----------- Total stockholders' equity .............................................. 3,349,959 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................................... $ 5,401,141 ===========
See accompanying notes to these financial statements. F-3
LASER STORM, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 1995 1996 ---- ---- LASER SYSTEMS AND RELATED REVENUE: Net sales ....................................................... $ 5,408,745 $ 5,487,899 Cost of sales ................................................... 2,323,471 2,477,415 ------------------ ---------------- Gross profit ............................................... 3,085,274 3,010,484 ------------------ ---------------- RETAIL OPERATIONS: Net sales ....................................................... 68,404 410,312 Cost of sales ................................................... 29,135 151,661 ------------------ ---------------- Gross profit ............................................... 39,269 258,651 ------------------ ---------------- EXPENSES: General and administrative ...................................... 1,523,038 3,515,768 Selling and marketing ........................................... 820,471 1,629,780 Severance and termination costs ................................. -- 248,768 Depreciation and amortization ................................... 116,183 297,709 Product development ............................................. 139,979 320,671 Contingent settlements .......................................... 270,000 -- ------------------ ---------------- Total expenses ............................................. 2,869,671 6,012,696 ------------------ ---------------- OPERATING INCOME (LOSS) ............................................. 254,872 (2,743,561) OTHER INCOME (EXPENSE): Interest income ................................................. 2,282 97,202 Interest expense ................................................ (9,252) (12,573) Loss on disposal of equipment ................................... (16,054) (86,934) ------------------ ---------------- INCOME (LOSS) BEFORE INCOME TAXES ................................... 231,848 (2,745,866) Income tax expense .............................................. (9,000) -- ------------------ ---------------- NET INCOME (LOSS) ................................................... $ 222,848 $ (2,745,866) ================== ================ NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS ................. $ 204,848 $ (2,791,756) ================== ================ NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS ............................................... $ .10 $ (.86) ================== ================ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .......................... 2,033,000 3,244,000 ================== ================
See accompanying notes to these financial statements. F-4
LASER STORM, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 PREFERRED STOCK COMMON STOCK Shares Amount Shares Amount ------ ------ ------ ------ BALANCES, January 1, 1995 .................................... -- $ -- 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 Private placement of Series B 12% Convertible Cumulative Preferred Stock, net of offering costs ............ 200,000 200 -- -- Public Offering of 1,495,000 units, net of offering costs -- -- 1,495,000 1,495 Conversion of Series A and B 12% Convertible Cumulative Preferred Stock ................................... (340,000) (340) 629,961 630 Issuance of common stock for: Exercise of employee stock options ................ -- -- 30,500 31 Acquisition of Laser Storm game centers ........... -- -- 68,125 68 Fair value of options granted for consulting services ... -- -- -- -- Net loss ................................................ -- -- -- -- ----------- ----------- ----------- ----------- BALANCES, December 31, 1996 .................................. -- $ -- 3,824,836 $ 3,825 =========== =========== =========== =========== ADDITIONAL PAID-IN ACCUMULATED CAPITAL DEFICIT TOTAL ---------- ----------- ----- BALANCES, January 1, 1995 .................................... $ 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 Private placement of Series B 12% Convertible Cumulative Preferred Stock, net of offering costs ............ 889,985 -- 890,185 Public Offering of 1,495,000 units, net of offering costs 4,706,471 -- 4,707,966 Conversion of Series A and B 12% Convertible Cumulative . Preferred Stock ................................... (290) -- -- Issuance of common stock for: Exercise of employee stock options ................ 19,820 -- 19,851 Acquisition of Laser Storm game centers ........... 31,052 -- 31,120 Fair value of options granted for consulting services ... 34,000 -- 34,000 Net loss ................................................ -- (2,745,866) (2,745,866) ----------- ----------- ----------- BALANCES, December 31, 1996 .................................. $ 6,256,174 $(2,910,040) $ 3,349,959 =========== =========== ===========
See accompanying notes to these financial statements. F-5
LASER STORM, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, ------------------------ 1995 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .................................................................. $ 222,848 $(2,745,866) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization ................................................ 116,183 297,709 Loss on disposals of equipment ............................................... 16,054 86,934 Notes receivable for sale of Laser Systems ................................... -- (1,408,110) Provision for bad debts ...................................................... 21,540 193,280 Deferred income taxes ........................................................ (51,000) 51,000 Fair value of options granted for consulting services ........................ -- 34,000 Changes in operating assets and liabilities: (Increase) decrease in: Receivables ................................................................ (362,288) (81,029) Inventories ................................................................ (80,410) (535,351) Prepaid expenses and other ................................................. (87,032) (155,948) Increase (decrease) in: Accounts payable ........................................................... 139,516 175,372 Accrued expenses ........................................................... 146,266 219,749 Customer deposits and deferred revenue ..................................... (456,081) (43,035) Contingent settlements ..................................................... 270,000 (270,000) Deferred lease inducements ................................................. -- 158,142 ----------- ----------- Net cash used in operating activities ........................................ (104,404) (4,023,153) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of notes receivable ............................................. -- 107,432 Principal payments collected on notes receivable ................................... -- 117,010 Proceeds from sale of equipment .................................................... -- 10,000 Capital expenditures for property and equipment .................................... (194,858) (1,763,117) Software development costs ......................................................... (31,015) -- License and design costs ........................................................... (52,500) (168,188) ----------- ----------- Net cash used in investing activities ........................................ (278,373) (1,696,863) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of 12% Convertible Cumulative Preferred Stock ................... 700,000 900,000 Proceeds from public offering of 1,495,000 units ................................... -- 5,202,600 Proceeds from exercise of employee stock options ................................... -- 19,851 Proceeds from capital lease ........................................................ -- 200,000 Offering costs ..................................................................... (311,211) (320,362) Principal payments on capital lease obligations .................................... (11,767) (19,913) ----------- ----------- Net cash provided by financing activities .................................... 377,022 5,982,176 ----------- ----------- See accompanying notes to these financial statements. F-6 LASER STORM, INC. STATEMENTS OF CASH FLOWS (continued) FOR THE YEARS ENDED DECEMBER 31, --------------------------- 1995 1996 ---- ---- INCREASE (DECREASE) IN CASH .............................................................. (5,755) 262,160 CASH, at beginning of year ............................................................... 16,228 10,473 -------- -------- CASH, at end of year ..................................................................... $ 10,473 $272,633 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest ............................................................. $ 9,252 $ 12,573 ======== ======== Cash paid for income taxes ......................................................... $- $ 64,744 ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition costs payable for Laser Storm game centers ............................. $- $195,000 ======== ======== Acquisition of Laser Storm game centers for common stock ........................... $- $ 31,120 ======== ======== Offering costs paid from proceeds of offerings ..................................... $- $877,400 ======== ======== Capital lease obligations for equipment ............................................ $ 30,025 $- ======== ========
See accompanying notes to these financial statements. F-7 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Nature of Operations - Laser Storm, Inc. (the "Company") was incorporated in Colorado in 1990. 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. The Company also owns and operates Laser Systems at various retail locations in the United States. 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. Notes Receivable - Notes receivable are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Notes are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Periodic loan loss evaluations take into consideration such factors as changes in the nature of the volume of the loan portfolio, overall portfolio quality, past loan loss experience, review of any specific problem loans, and current economic conditions that may affect the borrower's ability to pay. Inventories - Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market, and consist of the following at December 31, 1996: Raw materials $548,993 Finished goods 458,024 Product held for replacement 170,879 -------- Total inventory 1,177,896 Less inventory designated for retail operations (Note 4) (200,000) -------- $977,896 ======= 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 of $10,500 for the estimated cost to refurbish. F-8 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS Property and Equipment - Property and equipment is stated at cost. Leasehold improvements are amortized over the lesser of the estimated life of the asset or the term of the lease. Depreciation is calculated using declining balance and straight-line methods over the estimated useful lives of the respective assets as follows: Years ----- Leasehold improvements 5-10 Trade show demonstration equipment 2-5 Office furniture and equipment 3-7 Laser Systems and arenas 3-5 Tooling equipment and other 1-5 Restaurant and retail equipment 3-5 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. Impairment of Long-Lived Assets - In the event that facts and circumstances indicate that the cost of property and equipment or other long-lived assets may be impaired, an evaluation of recoverability of net carrying costs will be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset will be compared to the asset's carrying amount to determine if a write-down to estimated fair value is required. 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. 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 substantial deposit. 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, 1996, the Company's investment in these ventures amounted to $63,000 which is included in property and equipment. Revenue participation is recognized as earned; however, through December 31, 1996, 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. F-9 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS Research and Development Costs - Research and 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. Design costs relate to artistic development of graphics which are used in the arenas. These costs are being amortized over one to two years utilizing the straight-line method. Goodwill relates to the acquisition of a retail facility and is being amortized over 10 years utilizing the straight-line method. Amortization expense related to intangible assets amounted to approximately $35,000 and $82,000 for the years ended December 31, 1995 and 1996, respectively. Deferred Lease Inducements - In connection with an operating lease entered into during 1996, the landlord agreed to reimburse a portion of the Company's leasehold improvement costs as an inducement to enter into the lease. Additionally, some of the Company's other operating lease agreements provide for non-level rental payments over the term of the leases. These rental inducements are recognized and amortized in a manner which results in an equal monthly rental charge over the respective term of each lease. Net Income (Loss) Per Share - Net income (loss) per common share was computed by dividing the net income (loss) applicable to common stockholders (which includes accrued but unpaid preferred dividends) by the weighted average number of common shares outstanding during the year. For 1996, all common stock equivalents were excluded from the computation because their effect was anti-dilutive. Net income per common share for 1995 was computed based on common stock outstanding and common stock equivalents. For common stock and common stock equivalents, including the preferred stock discussed in Note 9 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 (using the treasury stock method) as if they were outstanding for the full year ended December 31, 1995. Stock-Based Compensation - The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company's common stock at the measurement date (generally, the date of grant) over the amount an employee must pay to acquire the stock. In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation" (FAS 123). FAS 123 requires that options, warrants, and similar instruments which F-10 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS are granted to non-employees for goods and services be recorded at fair value on the grant date. Fair value is generally determined under an option pricing model using the criteria set forth in FAS 123. 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 assumptions affecting the fair value of stock options and warrants. Significant Concentrations - The Company's sales are generally higher dollar value items with no major concentrations among customer groups. At December 31, 1996, the Company, however, had a trade note receivable of approximately $226,000, which was due from a single customer. Reclassifications - Certain reclassifications have been made to the 1995 financial statements to conform to the presentation in 1996. The reclassifications had no effect on the 1995 net income. 2. LIQUIDITY: The Company incurred a loss from operations in 1996 in excess of $2.7 million and used cash in operating activities of approximately $4 million. This use of working capital has adversely impacted the Company's liquidity. Furthermore, management expects the Company will incur additional operating losses of approximately $350,000 (unaudited) for the first quarter of 1997, of which approximately $165,000 (unaudited) is non-cash depreciation and amortization expenses. To implement the Company's plan of opening new company-owned Laser Storm game facilities, additional financing will be required. If significant additional losses are incurred, or if cash is invested in facilities which do not provide adequate returns, it would adversely impact the Company's liquidity position and possibly its ability to continue future operations. As of December 31, 1996, the Company has working capital of approximately $750,000 and stockholders' equity of over $3.3 million. Furthermore, the Company's assets are generally unencumbered of debt. In late 1996 and early 1997, the Company has taken actions to reduce its overhead, including significant reductions in personnel. Management also believes many of the expenses incurred in 1996 will not recur in 1997. The Company is pursuing additional capital for financing future growth, however, there are currently no definitive arrangements. The Company will continue to evaluate its liquidity position and may take other actions as deemed appropriate by management, which could ultimately impact future operations. However, management believes the actions taken will enable the Company to continue operations through the forthcoming year. F-10 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS 3. NOTES RECEIVABLE: During 1996, the Company began offering a financing program to its customers for sales of systems and arenas. Under this program, the customer was required to make an advance deposit which averaged approximately 33% of the purchase price and the balance was financed over 24 months with interest at 9% to 11%. The notes receivable are unsecured. During the fourth quarter of 1996, management decided to cease offering this financing alternative to the Company's customers. In the fourth quarter of 1996, the Company entered into an agreement with a financial institution to sell some of the notes receivable. If the financial institution is unsuccessful in collecting the receivables, the Company is required to pay the deficiency. At December 31, 1996, the outstanding principal balance for which the Company is contingently liable amounted to approximately $100,000. At December 31, 1996, $535,256 of the notes receivable are classified as a current asset and the remaining $514,489 are included in long-term assets. 4. PROPERTY AND EQUIPMENT: At December 31, 1996, laser game systems and facilities consist of the following: Leasehold improvements $388,120 Laser Systems and arenas 801,136 Restaurant and retail equipment 62,630 Uninstalled laser systems and arenas 200,000 --------- Total laser game systems and facilities 1,451,886 Less accumulated depreciation and amortization (112,805) --------- $1,339,081 ========= At December 31, 1996, management estimates that approximately $200,000 of the Company's inventory of laser systems and arenas will be utilized at retail laser facilities which are expected to be opened during 1997. Accordingly, this amount was reclassified from inventory and will be depreciated when the retail facilities are opened. At December 31, 1996, other property and equipment consists of the following: Leasehold improvements $68,662 Trade show demonstration equipment 304,871 Office furniture and equipment 290,781 Tooling equipment and other 84,810 ------- Total property and equipment 749,124 Less accumulated depreciation (202,319) ------- $546,805 ======= F-11 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS Depreciation expense was approximately $81,000 and $216,000 for the years ended December 31, 1995 and 1996, respectively. 5. CAPITAL LEASE OBLIGATIONS: In December 1996, the Company entered into sale/leaseback arrangements for certain laser systems, arenas, and restaurant equipment that were acquired in 1996, resulting in total proceeds of $200,000. No gain or loss was recognized on the transaction and the lease is being accounted for as a capital lease, since the Company can acquire the equipment for nominal consideration at the end of the lease term. The leases provide for monthly payments of $7,349 through October 1999. At December 31, 1996, equipment under all capital leases is recorded at a cost of approximately $252,000 with accumulated amortization of $20,700. The following is a schedule of future minimum lease payments under capital leases at December 31, 1996: Future minimum lease payments $278,605 Less amount representing interest (49,540) Less amount representing taxes (16,146) ------- Present value of net minimum lease payments 212,919 Less current portion (69,034) ------- $143,885 ======== 6. 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, --------------------------- 1995 1996 ---- ---- Computed tax benefit (expense) at the expected statutory rate $(78,800) $934,000 Increase (reduction) in income taxes resulting from: State income taxes, net of Federal benefit (7,000) 91,000 Nondeductible expenses (14,700) (18,000) Reduction in valuation allowance due to utilization of net operating loss carryovers 91,500 -- Increase in valuation allowance - (1,007,000) -------- --------- $ (9,000) $ -- ======== ========
F-12 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS The components of the Company's provision for income taxes consist of the following: YEARS ENDED DECEMBER 31, --------------------------- 1995 1996 ---- ---- Current benefit (provision) $ (60,000) $ 56,000 Deferred benefit (expense) 51,000 (56,000) -------- -------- Total $ (9,000) $ -- ======== ======== At December 31, 1996, tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below: Deferred Tax Assets: Net operating loss carryforwards .................. $ 875,000 Accounts receivable ............................... 63,000 Accrued vacation and warranty ..................... 21,000 Accrued severance costs ........................... 73,000 Other ............................................. 4,000 ---------- Total ......................................... 1,036,000 Less valuation allowance .......................... (1,007,000) --------- 29,000 --------- Deferred tax liabilities: Property and equipment ............................ (8,000) Software development costs ........................ (21,000) --------- Net long-term asset ........................... $ -- ========= At December 31, 1996, the Company has a net operating loss carryforward for income taxes of approximately $2.3 million which expires in 2011. 7. COMMITMENTS: Operating Leases - The Company leases office space, retail facilities, equipment and warehouse facilities under noncancellable operating leases. Total rental expense was approximately $87,000 and $361,000 for the years ended December 31, 1995 and 1996, 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 under two leases, which amount to approximately $1,170,000 as of December 31, 1996. F-13 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS As of December 31, 1996, the total minimum cash payments under all operating leases are as follows: YEARS ENDING DECEMBER 31, ------------------------ 1997 $ 632,000 1998 703,000 1999 872,000 2000 889,000 2001 840,000 After 2001 2,545,000 --------- $6,481,000 ========= The rental commitment amounts shown above excludes an aggregate commitment of $600,000 related to a five-year lease entered into in January 1997. Royalty Arrangements - The Company has entered into arrangements whereby the Company has obtained the rights to utilize certain names, logos, and characters which are protected by trademarks and copyrights. The Company has paid non-refundable minimum royalties of $110,000 through December 31, 1996 and the Company is required to make additional non-refundable payments of $120,000 in 1997 and $120,000 in 1998. The agreements provide that the Company is required to pay royalties ranging from 2% to 5% of gross revenues related to the licensed property. The Company is required to make additional payments to the extent that actual royalties exceed the amounts prepaid for minimum royalties. At December 31, 1996, approximately $60,000 of advance royalties are included in prepaid expenses in the accompanying balance sheet. Employment Agreements - The Company has entered into employment agreements with two of the Company's executive officers which provide for aggregate annual compensation of $300,000 in 1997, and $225,000 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, and the president is entitled to receive his respective salary for six months. During 1996, the Company terminated employment agreements with four executive officers of the Company. At December 31, 1996, the Company accrued the remaining obligations under these agreements of $195,441. Consulting Arrangement - In October 1996, the Company entered into a consulting agreement with an entity that specializes in financial public relations services. The agreement is in effect for one year and provides for monthly payments of $6,000. As additional consideration for the consulting services, the Company granted an option to the consultant for 100,000 shares of the Company's common stock at an exercise price of $2.25 per share. Options for 25,000 shares are exercisable at December 31, 1996, and options for the remaining 75,000 shares will become exercisable through August 1, 1997. If not previously exercised, the options expire in F-14 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS October 1999. The estimated fair value of the options amounted to $65,000, of which $34,000 was recognized in 1996 and the remaining $31,000 will be recognized in 1997 as vesting occurs. 8. CONTINGENCIES: For the year ended December 31, 1995, the Company recognized a provision of $270,000 for legal contingencies. 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. In 1996, the Company paid the Manufacturer $100,000 out of the proceeds of its public 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 $35,000 of inventory. 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. 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. 9. EQUITY FINANCING ARRANGEMENTS: 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. 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 were voting and convertible into units (as discussed below). 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) and the Company completed the sale of all F-15 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS October 1999. The estimated fair value of the options 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. The Series B Preferred Stock has similar rights and preferences as the Series A Preferred Stock. Upon completion of the Company's public offering in April 1996, all of the holders of Series A and Series B Preferred Stock elected to convert their shares (including accumulated dividends of approximately $64,000) into 629,961 units. Public Offering - In April 1996, the Company completed a public offering of 1,300,000 units at $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 for the four fiscal quarters ending March 31, 1997, then the exercise price per share will be reduced. Based on losses incurred by the Company, the exercise price of the warrants will be $1.00 per share. The underwriter received a warrant, exercisable for 130,000 units at $5.00 per unit for a period of four years, beginning one year after the offering, to purchase 130,000 units. 10. STOCK-BASED COMPENSATION: Stock Option Plan - The Company's shareholders have approved a stock option plan that authorizes an aggregate of 300,000 shares for stock options that may be granted to officers, directors, and employees. The plan permits the issuance of incentive options and provides for a minimum exercise price equal to 100% of the fair market value of the Company's common stock on the date of grant. The maximum term of options granted under the plan is 10 years and options granted to employees expire three months after the termination of employment. None of the options may be exercised during the first six months of the option term. No options may be granted after 10 years from the adoption date of the plan. The following is a summary of activity under this stock option plans for the years ended December 31, 1995 and 1996:
1995 1996 ------------------------------- ------------------------- Weighted Weighted Average Average Number Exercise Number Exercise of Shares Price of Shares Price --------- --------- --------- -------- Outstanding, beginning of year 141,000 $.20 300,000 $1.21 Canceled - - (62,000) 1.38 Exercised - - (30,500) .65 Granted 159,000 2.11 50,000 2.25 ------- ------- Outstanding, end of year 300,000 1.21 257,500 1.44 ======= =======
F-16 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS For all options granted during 1996, the weighted average market price of the Company's common stock on the grant date was equal to the weighted average exercise price. For options granted in 1995, the approximate market value of the common stock on the grant date was equal to the exercise price for 103,500 shares. For options granted for the remaining 55,500 shares in 1995, the approximate market price on the grant date was $2.80 per share compared to the exercise price of $4.00 per share. At December 31, 1996, options for 120,000 shares were exercisable at a weighted average exercise price of $1.04 per share. Options for 96,000 shares at a weighted average exercise price of $1.49 per share will vest in 1997, and options for 41,500 shares at a weighted average exercise price of $2.49 per share will vest in 1998. If not previously exercised, options outstanding at December 31, 1996, will expire as follows:
Year Ending December 31, Exercise Price ------------------------------------------------- Per Share 2000 2001 2002 2003 Total -------------- ---- ---- ---- ---- ----- $.20 43,833 45,833 45,834 - 135,500 2.00 - 9,500 9,500 9,500 28,500 2.25 - - 25,000 25,000 50,000 4.00 7,500 14,500 14,500 7,000 43,500 ------- ------- ------- ------- ------- 51,333 69,833 94,834 41,500 257,500 ======= ======= ======= ======= =======
Non-Qualified Options - In October through December 1995, the Board of Directors approved the grant of non-qualified options to certain officers and directors of the Company for an aggregate of 250,000 shares at an exercise price of $4.00 per share. At December 31, 1996, options for 125,000 shares were exercisable and options for 75,000 and 50,000 shares vest in 1997 and 1998, respectively. During 1997, options for 162,500 shares were canceled due to termination of employment. If not previously exercised, options for the remaining 87,500 shares expire for 50,000, 25,000 and 12,500 shares during the years ending December 31, 2000, 2001, and 2002, respectively. Options Subject to Shareholder Approval - In November 1996, the Board of Directors approved the 1996 Incentive and Nonstatutory Stock Option Plan which reserves 1,000,000 shares of common stock for options which may be granted to officers, directors, employees, and consultants. The adoption of this plan is contingent upon obtaining approval of the Company's shareholders by October 1997. Accordingly, incentive options granted pursuant to this plan are not considered to be granted for accounting purposes until shareholder approval is obtained. In November 1996, inventive options were granted to officers for 100,000 shares at an exercise price of $2.25 per share. Options for 75,000 shares were canceled in December 1996 due to termination of employment. If the plan is approved by the shareholders, incentive options for 25,000 shares will vest in 1999 and expire in 2004. If shareholders do not approve the new plan, the option for 25,000 shares will have the same terms but will be granted as a non-qualified stock option. F-17 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS Warrants and Options Granted to Non-Employees - The Company has also granted warrants and options to purchase common stock to non-employees which are summarized as follows for the years ended December 31, 1995 and 1996:
1995 1996 --------------------- ---------------------- Number Exercise Number Exercise of Shares Price of Shares Price --------- -------- --------- -------- Outstanding, beginning of year ................... -- $- 50,000 $ .75 Granted to: Consultants for services ............. 50,000 .75 100,000 2.25 Manufacturer (Note 8) ................ -- -- 175,000 1.75 Investors in public offering ......... -- -- 1,495,000 1.00 Issued to former holders of preferred stock upon conversion ...................... -- -- 629,961 1.00 -------- --------- Outstanding, end of year ......................... 50,000 .75 2,449,961 1.26 ======== =========
Additionally, as discussed in Note 9, the Company granted a warrant to the underwriter of the Company's public offering for 130,000 units. This warrant is excluded from the table above. For stock options granted to consultants for services in 1995 and 1996, the exercise prices were equal to the estimated market value of the Company's common stock on the date of grant. For the 1996 grant of 175,000 shares to the manufacturer, the market price of the common stock was $2.80 per share compared to the exercise price of $4.00 per share. All of the warrants and options granted to non-employees were exercisable at December 31, 1996. If not previously exercised, warrants and options outstanding at December 31, 1996, will expire as follows: Number Exercise Year Ending December 31, of Shares Price ------------------------ --------- -------- 1997 50,000 $ .75 1999 100,000 2.25 2001 2,124,961 1.00 2001 175,000 4.00 --------- Total 2,449,961 1.26 ========= During the year ended December 31, 1996, the Company granted an option for 100,000 shares for consulting services. The estimated fair value of this option was determined using the Black-Scholes option pricing model, which resulted in compensation cost of $65,000, of which $34,000 was recognized in 1996 and the remaining $31,000 will be recognized in 1997 F-18 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS as vesting occurs. Significant assumptions included a risk-free interest rate of 6.0%, expected volatility of 75%, and that no dividends would be declared during the expected term of the options. The weighted average contractual term of the options was 3 years compared to a weighted average expected term of 1.4 years. Pro Forma Stock-Based Compensation Disclosures - The Company applies APB Opinion 25 and related interpretations in accounting for stock options which are granted to employees. Accordingly, no compensation cost has been recognized for grants of options to employees since the exercise prices were not less than the fair value of the Company's common stock on the grant dates. Had compensation cost been determined based on the fair value at the grant dates consistent with the method of FAS 123, the Company's net income (loss) and earnings per share would have been changed to the pro forma amounts indicated below.
Year Ended December 31, ---------------------- 1995 1996 ---- ---- Net income (loss) applicable to common stockholders: As reported ................................... $ 204,848 $ (2,791,756) Pro forma ..................................... 198,000 (2,813,000) Net income (loss) per common share: As reported ................................... $ .10 $ (.86) Pro forma ..................................... .10 (.87)
Fair value of options granted in 1995 was determined using the minimum value method (which assumes no volatility) since the Company was not publicly-held in 1995. Additionally, since options granted to employees vest over several years and the Company typically makes grants each year, the pro forma disclosures during the initial phase-in period for FAS 123 are not representative of the impact expected in future years. The fair value of each employee option granted in 1995 and 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Year Ended December 31, ---------------------- 1995 1996 ---- ---- Expected volatility ..................... 0% 75% Risk-free interest rate ................. 6.8% 6.5% Expected dividends ...................... -- -- Expected terms (in years) ............... 4.0 3.5 11. FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107 requires that the Company disclose the fair value of financial instruments at December 31, 1996. Management's best estimate is that the carrying amount of cash, receivables, accounts payable and accrued expenses approximates fair F-19 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS value due to the short maturity of these instruments. Management estimates that fair value is approximately equal to the carrying value of capital lease obligations since market interest rates have not changed significantly since the leases were executed. Management estimates that the fair value of notes receivable is approximately $950,000 at December 31, 1996, compared to the net carrying value of approximately $1,050,000. Fair value of the notes receivable was determined by management based on recent negotiations to sell some of the receivables to financial institutions. F-20 LASER STORM, INC. NOTES TO FINANCIAL STATEMENTS F21 EXHIBIT INDEX
Exhibit No. Description and Method of Filing Page No. - ---------- -------------------------------- ------- (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 N/A Transfer Incorporated, as Warrant Agent.* (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 N/A A. Trescott and addenda thereto dated June 22, 1995, October 13, 1995, and November 6, 1995.* Exhibit No. Description and Method of Filing Page No. - ---------- -------------------------------- ------- (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) Agreement dated January 27, 1994 between Registrant and Sports and N/A Games.* (10.13) Agreement dated August 8, 1995 between Registrant and Fun City N/A Amusement Centers, Inc.* (10.14) Agreement dated effective July 1, 1995 between Registrant and N/A Santa's Village, Ltd.* (10.15) Sales Agreement dated in August 1995 between Registrant and TAMS N/A Stationers.* (10.16) Options Granted to Harrison A. Price and Harold Skripsky.* N/A (10.17) Lease Agreement dated October 19, 1995, between Registrant and N/A Funplex Partnership.* (10.18) Employment Agreement dated effective December 1, 1995, between N/A Registrant and Michael D. Kessler.* (10.19) Employment Agreement dated effective December 16, 1995, between N/A Registrant and Eric Schwartzman.* (10.20) Options granted to Michael D. Kessler and Eric Schwartzman.* N/A (10.21) Agreement dated February 8, 1996, between Registrant and Tunica N/A Partners II, LP.* (10.22) Addendum dated March 27, 1996, to the Employment Agreement N/A dated effective September 13, 1995, between Registrant and Robert S. Scholz.* (10.23) License Agreement dated August 1, 1996, between Marvel Characters, N/A Inc. and Registrant.**/*** (10.24) Amendment dated August 15, 1996, to Amended Stock Incentive N/A Plan.** (10.25) Asset Purchase Agreement dated July 23, 1996 among Registrant, N/A Laser Storm of Longmont, Inc. and Kevin J. Barker.**/**** (10.26) Asset Purchase Agreement dated November 1, 1996 between Regis- N/A trant and Ridgeworld North, Inc.**/**** (10.27) 1996 Incentive and Nonstatutory Stock Option Plan.** N/A Exhibit No. Description and Method of Filing Page No. - ---------- -------------------------------- ------- (10.28) Agreement between NAMCO CYBERTAINMENT INC. and Regis- trant and Amendment thereto. (10.29) User Agreement between Harrah's Vicksburg Corporation and Regis- trant. (10.30) User Agreement between D.I.F.A.D.I.S.A. de C.V. and Registrant. (21) List of Subsidiaries. (23) Consent of HEIN + ASSOCIATES LLP. (27) Financial Data Schedule
* Incorporated by reference to the exhibits filed as a part of Registration Statement No. 33-98578. ** Incorporated by reference to the exhibits filed as a part of Registration Statement No. 333-14525. *** Confidential treatment granted in a separate filing. **** Certain of the Schedules and Exhibits to the Asset Purchase Agreements have been omitted and will be provided to the United States Securities and Exchange Commission upon request. EX-10.28 2 AGREEMENT--NAMCO CYBERTAINMENT, INC. AGREEMENT THIS AGREEMENT is by and between, NAMCO CYBERTAINMENT, INC., ("NAMCO"), a Delaware Corporation, and Laser Storm, Inc., a Colorado Corporation ("LSI"). 1. Definitions. "Premises" means the entire entertainment and amusement area leased by NAMCO at the ----------------- located at ----------------, -------------------, - -----, ------. "Location" means the part of the Premises where the LSI lobby, counter, ready-rooms and arena are located. "Equipment" means all LSI system components, products and arena installed at the location in the Premises. "Gross Sales" all ticket sales originating from the location. "Adjusted Gross Sales" is Gross Sales less any and all sales, use or other taxes imposed by Federal, State and Local governments, or any subdivision thereof, and less 2% royalty for the Stargate theme. The royalty will be calculated on Gross Sales before any reduction. 2. Premises. The premises consists of --------- square feet of the Premises designated for the Laser Storm arena, --------- square feet designated for the lobby, counter and ready-rooms. The exact square footage may vary as agreed by the parties. Namco will be responsible for all rents to the owner of the property. LSI has no property interest in the subject property or the Premises nor responsibility for rents due to the owner of the property. 3. Build-out. LSI will be responsible for the demolition (if any), construction of demising walls, sales counter and basic finish treatments, including paint and carpet for the location. The cost of build-out will be initially borne by LSI. Upon completion of the build-out, NAMCO will reimburse LIS for the cost of the build-out up to $40,000.00. LSI will pay back to NAMCO, in full, without interest, the build-out allowance by the end of the first year of this Agreement (from the commencement date). Any rent received over the $50,000.00 minimum guarantee rent will be attributed to the pay off of the build-out debt. All fixtures installed as part of LSI's build-out of the premises, including but not limited to the sales counter, carpet, all components associated with the arena, all support structures for the arena, cash registers, office equipment, merchandise and vending machines, shall remain the property of LSI and may be removed by LSI at the termination of this Agreement for any extension thereof. 4. Term. a. The "Commencement Date" of the term of this Agreement shall be December 1, 1996, but in no event shall the Commencement Date be later than March 1, 1997. b. The term of this Agreement shall be for a period of three (3) full years beginning with the Commencement Date and ending on the last day of the month following completio9n of the third year. So long as the adjusted gross sales are $300,000 or more for the third year, LSI has the option to renew this Agreement once for a three year extension pursuant to its terms. If however, adjusted gross sales is less than $300,000, then the option for three years can be exercised only by agreement of the parties. 5. Rent. As for the Location, LSI will pay to NAMCO 25% for the first $250,000 of Adjusted Gross Sales and 35% of Adjusted Gross Sales in excess of $250,000. This amount has no upward limit, but LIS will pay a minimum of $50,000.00 in rent for each of the first three years of this Agreement. In the first year of the agreement, any rent paid over the $50,000.00 minimum will be credited against the build-out allowance owed to NAMCO, as provided for in this Agreement. For example, of the cost of building out the space is $37,000 and LSI pays $70,000 in rent, pursuant to this paragraph, then LSI will owe NAMCO at the end of the first year $17,000.00 to pay in-full the build-out allowance. Payments will be by the 15th of each month, the amount based on the previous months Adjusted Gross Sales. 6. Advertising Budget. Advertising after the first twelve (12) months from the commencement date, LSI will rebate to NAMCO 25% of any funds not expended under the advertising and marketing line item budget projection of ten (10)% of gross sales. 7. Reporting of Adjusted Gross Sales. a. On or before the 15th day following the end of each month, LSI shall submit a written statement showing accurately and in detail the amount of the Adjusted Gross Sales during the preceding monthly period. b. LSI agrees to keep at LSI's principal office accurate and adequate books and records using generally accepted accounting principles to record and report Adjusted Gross sales of LSI. 8. Equipment. LSI will install a 48 player system and a Stargate themed arena. 9. LSI Covenants and Agrees to: a. Operate the Premises as a themed interactive laser tag game b. Operate the Premises during the normal business hours as determined by NAMCO. c. Be solely responsible for the operation of the Location and Equipment; shall provide management and other personnel at its sole cost and expense; keep the Equipment and location in good condition and good working order. c. Promptly pay all personal property taxes and similar assessments attributable thereto; all sales, gross receipts, or other taxes assessed on the Adjusted Gross Sales; and necessary licenses and fees to operate the Location and/or Equipment. LSI agrees to hold NAMCO harmless from any loss, damage, cost or expense for failure to pay such taxes and other expenses. e. Obtain and keep in full force during the term a broad form of comprehensive general liability insurance with respect to the operation of the location and Equipment thereon. The coverages shall include activities and operation conducted by the LSI and any other person performing work on behalf of LSI. The minimum limits of liabi8lity shall not be less than One Million Dollars ($1,000,000) for each occurrence of bodily injury and property damage or such higher limits as may be reasonably necessary. In addition, LSI shall maintain worker's compensation insurance for all of LSI's employees working on the location in amounts sufficient to comply with applicable laws and regulation. To the extent LSI is to provide insurance, NAMCO shall be named as an additional insured. 10. NAMCO Covenants and Agrees to: a. Continue to operate the Premises and provide entertainment facilities to the public as long as NAMCO holds a lease on the Premises. b. Pay all property taxes and similar assessments on the Premises and shall indemnify and hold LSI harmless from any loss, damage, cost or expense for failure to pay such taxes and other assessments. c. Provide, at its sole cost and expense, heating and air conditioning, electricity, water and utilities necessary to operate Premises, and sprinkler system as required by law or ordinance. d. Provide floor plans of the Premises and Location. From this floor plan LSI will prepare a construction plan and build the Location. 11. Indemnification. LSI shall indemnify and hold NAMCO harmless for all losses, claims, demands, damages, liability or expenses resulting from any injury or death of any person or any loss or damage to any property caused by or resulting from any acts or omissions of any officer, employee, agent, contractor, licensee, guest, invitee, or visitor of LSI in or about the Location. NAMCO shall indemnify and hold LSI harmless from all losses, claims, demands, damages, liability or expenses resulting from any injury or death of any person or any loss or damage or any property caused by or resulting from any acts or omissions of any officer, employee, agent, contractor, licensee, guest, invitee, or visitor of Namco in or about the Premises. 12. Damages. a. In the event that the location is partially damaged during the Term by fire or other casualty, then NAMCO shall proceed to repair such damages and restore the facility to substantially the same condition at the time of such damage. If the Location is closed, then the monies due as shall be abated, pro-rata, from the date of the damage until the facility has been restore. If the Location is open, then the monies due as rent as shall be reduced proportionately to the loss of the average daily adjusted gross sales for that year of the agreement, the deadline for such repayment will be extended by the number of days the location is damaged regardless of whether or not the location is closed or remains open. b. In the event that the Location is substantially damaged or destroyed by fire or other casualty, then all rents and build-out allowance (if in the first year) will be abated and LIS shall not open for business. The Agreement shall stay in full force and effect and LSI shall re-open for business when the facility has been restore or rebuilt. NAMCO may elect not to rebuild or restore the facility and terminate this Agreement by giving notice to LSI within a reasonable time. 13. Failure, Stoppage or Interruption of Service. Any failure by NAMCO, for any reason whatsoever, to open, or keep open, the Location for business, or provide the utilities and services as stated herein, shall be deemed a default of this Agreement and all monies due shall be abated until the Premises/Location re-opens for business or said services have been restored. 14. Default. Any one of the following shall be deemed to be an "Event of Default"" a. Failure on the part of LSI to make payment of any monetary amount due under this Agreement within (10) days after NAMCO has sent to LIS notice of such default. b. Failure on the part of LSI to open for business, except as a result of unavoidable casualty; failure to perform any other covenants or agreements under this Agreement; or abandonment of the location. NAMCO shall give LSI written notice of such breach of this Agreement and LSI shall have ten (30) days to cure any such breach, which, if not cured, shall be deemed a default by LSI. c. Failure on the part of NAMCO to open the Premises for business or provide to LSI utilities and services as specified in Section 9 except as the result of unavoidable casualty; or failure to perform any other covenants or agreements under this Agreement. LSI shall give NAMCO written notice of such breach of this Agreement and NAMCO shall have ten (30) days to cure any such breach, which if not cured, shall be deemed a default by NAMCO. d. Should any Event of Default by NAMCO occur, then LSI, in addition to any remedies under applicable statues or law, shall have the right to terminate this Agreement by giving 30 days written notice to NAMCO and shall remove its Equipment, fixtures and personal property and immediately vacate the Location. 15. Assignment. LSI shall have the right to assign or transfer this Agreement upon the consent of NAMCO, which shall not be unreasonably withheld, in relation to LSI's merger or consolidation with a Parent, subsidiary or affiliated corporation. Any such assignment or transfer shall not relieve LSI as primary obligor from its obligations hereunder. 16. Miscellaneous. a. The parties shall not violate any laws, ordinance, notices, orders, rules, regulations or requirements promulgated by any governmental authority in its use of the Location. b. NAMCO and LSI shall cooperate in their respected operations to maximize and insure the operations of the other. Without limitation, such cooperation shall include joint personnel training sessions, joint operational meetings, joint advertising, and cross-use of NAMCO and LSI facilities. c. LSI shall participate with NAMCO in promotional activities, group sales, birthday parties and other events to customers, providing free coupons or discounted tokens. Notice. Whenever by the terms of this Agreement notice, demand or other communication shall or may be given either to NAMCO or to LSI, the same shall be in writing and shall be sent by registered or certified mail, or shall be delivered by private express carrier. All such notices shall be effective upon delivery, attempted delivery or refusal, whichever shall first occur at the address to which the same were sent. The terms of this agreement will be subordinate to the existing ANMCO lease in this location. LASER STORM, INC., NAMCO CYBERTAINMENT, INC., a Colorado Corporation a Delaware Corporation By: By: ------------------------ --------------------------- Its: Its: ------------------------ -------------------------- Date: Date: AMENDMENT This agreement hereby amends the previously executed Letter of Understanding dated May 31, 1996 and six subsequent location Agreements dated October 21, 1996, together known as "Agreements", by and between Laser Storm, Inc. ("LSI") and Namco Cybertainment, Inc. ("NAMCO"). 1. Definitions. "Premises" shall be amended by the attachment made hereto. This attachment amends the pending Agreements dated October 21, 1996 as referenced above. 4. Term. Commencement Date. Commencement date is hereby amended to no later than August 1, 1997 unless otherwise agreed by both parties. 8. Equipment. LSI will install its laser tag game equipment as is appropriate for the size of each location's allocated space. LSI will provide no less than one (1) player unit per 100 square feet of arena playing area. LSI will provide an appropriate theme for each location and will be at LSI's sole discretion. This Amendment, where amended, supersedes all previously executed Agreements as indicated above. All other portions of the Agreements remain unchanged unless further agreed to in writing by both LSI and NAMCO. Accepted: Laser Storm, Inc., Namco Cybertainment, Inc., A Colorado Corporation a Delaware Corporation By: By: ----------------------- ------------------------ Its: Its: ---------------------- ----------------------- Date: Date: ---------------------- ----------------------- EX-10.29 3 USER AGREEMENT--HARRAH'S VICKSBURG CORP. LASER STORM, INC. 7700 Cherry Creek South Drive, Unit 1 Denver, Colorado 80231 (303) 751-8545 USER AGREEMENT GENERAL TERMS AND CONDITIONS 1. Contract. This Contract of Use ("Contract" or "User Agreement"), consisting of these General Terms and Conditions, the Acknowledgment, and any Schedule attached hereto, is between Laser Storm, Inc., ("Company") and Harrah's Vicksburg Corporation ("User" or "Harrah's)) agreeing to use from the Company the Laser Storm(R) Components covered by this Users Agreement (the "Components"). 1.a. Harrah's has designated The Planet Kidz, Inc. ("Manager") as the representative of User for purposes of administering the Agreement. Unless otherwise notified by Harrah's or unless otherwise stated herein, Company will deal with Manager for all contract administration purposes. Harrah's retains the right, upon notice to Company, to exercise any rights or remedies under the User Agreement on behalf of Harrah's Vicksburg Corporation and also to designate another entity as Manager. 2. Per Use Price & Reporting. The Company agrees to allow the User to use and User agrees to use the Components and Licenses set forth in the attached Schedules, which are incorporated herein. It is agreed that the Company will receive 50% of the gross revenues as defined herein, from the use of the Laser Storm(R) Components; Manager will receive 25%; User will receive 25%. Gross revenues shall be defined as the price paid by the customer less any sales/use taxes or other taxes charged against the price paid by the customer. Manager shall be responsible to collect and pay all applicable sales taxes. Use is computed by using tally counters on the Energy Pods. Each time a player activates his or her phaser to start a game, the counters increase by one and the per play price is accrued. Payments shall be paid in arrears in monthly installments based upon the number of player activations, adjusted for any discounts or price increases, utilized in the previous month of operation. Manager must complete the player activation worksheet, and submit the worksheet and the monthly payment so that the Company receives both by the 5th day of each month. The Per Use fee is based on 50% of the price per game. If the price per game is increased the Per Use price shall be increased proportionately on the first month following the price increase. 2a. Pricing. Standard price per play shall be a maximum of $5.00 per play per person. Maximum price may be adjusted from time to time as agreed upon between User, Company and Manager. Special events, promotions and guest and employee discounts shall be determined at the discretion of User and Manager. Company recommends that the minimum amount charged per play shall not fall below $2.50 per play. Reporting shall be provided in detail to Company by Manager on a bi-monthly basis with payments of revenue at least monthly. Reports shall consist of a standard detailed document showing all ticket sales, both gross and net of taxes, number of free plays and amount charged for each play. Any discounts, refunds, coupons and/or specials shall also be detailed in a sales report for each reporting period. Merchandise sales shall be reported in like manner. Manager shall also provide a quarterly and annual sales summary to Company. 2b. Equipment Audit. Company reserves the right to require the Manager to send in its existing Energy Pods in exchange for replacement Energy Pods, for the express purpose of auditing the Energy Pod counters, "Equipment Audit". In the event of any discrepancy, User shall pay to the Company any amounts due and owing as of this Equipment Audit date plus a 10% penalty based upon the actual number of player activations. Manager shall keep a log of all non-play usage such as error restarts, employee training, testing or no-charge promotional use. Each entry in the log must be approved by Manager in order to be deducted from actual number of player authorizations. The average number of free plays should not exceed 5% of the total monthly usage. Upon Equipment Audit, any additional amounts due shall be paid within 30 days of said audit. Company User 1 ---- ----- 2c. Financial Audit. Manager shall keep accurate and complete records in accordance with the accounting standards and procedures presently utilized by Manager so that all receipts from the sale of tickets, together with the sales of merchandise on a daily basis by Company. Company shall have the right at any reasonable time to inspect any such record of Manager, including but not limited to all checks, bills, vouchers, invoices, statements, cash receipts, correspondence, and all other records in connection with the management of the laser tag facility. Company shall further have the right to cause an audit to be made of all account books and records connected with the management of the laser tag facility on an annual basis, fees for which will be equally shared by Manager and Company. In the event of an audit, should a discrepancy of more than 2% be found, the cost of said audit will be borne by Manager. The Company reserves the right to terminate the Agreement if the additional amounts due (pursuant to audit) are not paid on the specified dates due. If User/Manager does not comply with the Service Procedures stated herein, Company reserves the right to terminate the Agreement upon 30 days prior written notice with right to cure during such period. Should there be no cure, Company may cease components service, hold all existing components of User, and pursue collection, pursuant to paragraph 12 of the User Agreement. If User returns components which have damage beyond normal operational wear, Company will send written notice to Manager noting such damage, pursuant to paragraph 10 of the User Agreement. Company reserves the right to refuse refurbishment of any component deemed abused. 3. Equipment. Company warrants that the Laser Storm Components (Components) are safe and will not cause injury if used according to Company's written instructions. Company will provide instructions to Manager to be given to customers as to proper use. Manager shall train and properly supervise customers as to the proper treatment of equipment to avoid any unnecessary abuse or misuse. Components supplied to User are described in Schedule A. 4. Delivery. Delivery shall be made in accordance with the attached Schedule A. Shipment shall be by any reasonable means chosen by the Company, and approved by the User. The Company shall notify User of the shipment date and method of shipment. The Company shall not be responsible for any delay or failure of delivery resulting from any act of God, labor dispute, fire or other casualty, international or domestic conflict, difficulty in obtaining materials, labor or transportation, energy shortage, delay in shipment by the Company 's suppliers, or any other cause beyond Company's reasonable control. User's request for delivery of components in less than 60 days will be considered a rush order. Upon such request, User agrees to pay all reasonable rush charges incurred on each order. 5. Installation and Site Requirements. The User agrees to prepare and maintain the installation site of the Components in accordance with mutually-agreed-upon specifications as enumerated in Schedule B. Said specifications, installation date, and location are detailed in Schedule B, attached hereto and incorporated herein. The Company's authorized representative will install the Laser Storm(R) Components in a professional and workmanlike manner with as little disruption to the User's business as possible. 6. Change Orders. User shall have the right to make additions (but not deletions) to Schedule A. 6a. The User understands the Laser Storm Components will be manufactured pursuant to User's configuration as detailed in Schedules A and B and under no circumstances may the User exclude any component listed therein or decrease the size of the original order. 6b. Scheduled delivery and installation of the Components is specified in Schedule A. Pursuant to paragraph 5 above and Schedule B, the User agrees the installation site for the Components will be prepared and the requirements met in advance of said scheduled delivery date as agreed upon between the Company and the User. In the event scheduled delivery date is postponed by the User for any reason, including nonpayment of any payment due or pursuant to Schedule A, the User agrees to pay the Company an installation delay charge of $200.00 per month. Said installation delay charge shall be paid by the User beginning 30 days after the original installation date as specified in Schedule A and Company User 2 ---- ----- continuing on the monthly anniversary date of the scheduled delivery date, until all installation delay charges are paid in full. Said Installation delay charge shall not be prorated and shall be paid in full prior to rescheduling of the delivery and installation by the Company. Rescheduling shall be solely at the discretion of the Company. 6c. The User agrees that any changes to the installation site specifications and requirements (pursuant to Schedule A) must be provided to the Company not less than forty-five (45) days prior to the installation date specified in Schedule B. The User further agrees that in the event the installation site is not prepared to specifications upon arrival of the Company's installation personnel, the Company shall remove its personnel and Components until such time as the installation site is properly prepared as is mutually agreeable between the User and Company and the User agrees to pay a delivery cancellation charge of $200.00 per occurrence. Upon the User's notice to the Company that the site specifications and requirements have been met, and upon payment of any installation delay charges as set forth in paragraph 6.b. above, and upon payment of a delivery cancellation charge of $1,000.00 per occurrence, the Company shall reschedule the installation of the Laser Storm(R) Components. 7. Permits and Licenses. The User shall apply for and obtain all necessary building and other governmental permits and licenses which may be required in connection with the installation of the Components used hereunder. User shall subsequently comply with and conform to all laws, ordinances, and governmental regulations relating to the use of the Components. 8. License for Use of Name, Intellectual Property, and Software. User further acknowledges that User is receiving a license for the use of the name "Laser Storm" and any other service marks, trademarks, tradenames or other intellectual property used in describing and defining said components. User is also receiving a license for the use of the software that operates the purchased component. This license shall remain the property of Company and User agrees to abide by the License agreement attached hereto as Schedule D, including the agreement concerning the use of said property restricted to the specific site identified in Schedule B. 9. Indemnification. Both parties understand that this agreement is a User Agreement and Company is in no way acting to participate in the business being operated by User, whether as an owner, shareholder, partner, joint venture, member, franchiser, or in any other respect. User agrees that by using the name of Laser Storm(R), together with the software, and any other name or mark owned by Company and permitted for use by User, User will indemnify and hold Company harmless from any claims, suits, actions, or other disputes that arise from User's operation of its business. This includes, specifically, the obligation for user to pay for the Company to provide legal defense and for any costs, fees, or expenses of any form incurred by Company as a result of any action brought based upon the operations of User's business. This clause does not apply to the use of the Components and use of the License rights herein. Company will indemnify and hold harmless User, Harrah's and Manager (and their respective subsidiaries, affiliates, partner-owners and employees) from any damages, losses or expenses (including reasonable attorneys fees) arising out of any injury resulting from a defect in the Components, from Company's failure to properly maintain the Components, or from the use of the Components (except if the Components are not used according to Company's written instructions). This paragraph prevails over any inconsistent provision in the User Agreement and will survive the termination of the User Agreement. 10. Service Procedures. The Company will maintain, service and make any necessary installations or repairs in connection with the said components, at its own expense. The Company is required to keep the Laser Storm Components in working condition, however the following is expressly excluded: Plastic phaser shells, headsets, or controller housings damaged by abuse, carelessness or misuse, including but not limited to being stepped on, dropped, kicked or in any other way abused or used for any purpose which it is not intended; Connecting Company User 3 ---- ----- cords which have been cut, torn, pinched or otherwise mutilated, apart from normal wear and tear; batteries or battery chargers which have been intentionally shorted out or have been handled in any way inconsistent with operating instructions; Any units which have been opened, altered, modified or repaired by anyone other than an authorized Laser Storm(R) technician; and any other damage which is the result of abuse, misuse, or use inconsistent with the instructions in the Laser Storm(R) operations manual provided under separate cover. 10a. In the event of a component failure the User shall first call Company's Customer Service department for evaluation, then, if instructed, return the component by overnight mail to the Company in accordance with the Service Repair instructions outlined in Schedule C. The Company shall repair or replace, at the Company's option, the Component at no charge to the User and return the Component to the User via overnight delivery to the User, subject to parts availability. No component which has been abused, or altered, or repaired by other than an authorized representative of the Company shall be repaired at the Company's expense. Neither Harrah's, User or Manager will be responsible for damage to the Components caused by normal wear and tear or by customers' use or misuse since it is presumed that damage caused by customers is covered by Company's warranty or insurance. Manager shall train and properly supervise customers as to the proper treatment of equipment to avoid any unnecessary abuse or misuse. 10b. User shall pay the electricity used in the operation of said component. 10c. The User shall apply for an obtain all necessary building and other governmental permits and licenses which may be required in connection with the installation of the Component used hereunder. User shall subsequently comply with and conform to all laws, ordinances, and governmental regulations relating to the use of the Components. 10d. User/Manager shall use all best efforts to take care of components, protect said components from any vandalism or other physical abuse that may damage component. All losses and damages caused by the negligence of User shall be born by User. This shall also be deemed to include stolen or destroyed components. Same components shall be paid to Company by User at the then existing retail price of same components. 10e. User/Manager shall provide to Company written request for the removal of any unit. To avoid possible conflicts as relates to existing territorial agreements with Company's other customers, unit shall not be moved without the prior written consent of the Company which will not be unreasonably withheld. 11. Professional Management. User shall contract with professional management team capable of operating and promoting Laser Storm Components. Manager shall operate and maintain all Components, inventory, equipment, designated laser tag area, supplies and materials used in connection therewith, in a manner calculated to enhance the reputation of the facility with its customers. Manager agrees to use its best efforts in managing said facility in order to provide the maximum economic return consistent with professional management standards. Manager shall have full power and authority to manage the facility and shall be responsible for directing its supervisors and employees as to the manner and means of accomplishing the work required to be performed. Performance criteria on the part of Manager shall be consistent User's and Company's standards. Performance criteria is defined as properly managing and promoting the facility to ensure facility runs at its full potential during normal operating hours. User/Manager shall provide a professional, clean, safe, and fun environment. Staff shall also be of the same professional caliber. Planet Kidz, Inc. has been hereby accepted and approved by the Company as User's designated manager. 12. Remedies. That User will keep the components, or additional or replacement components, insured at component cost as noted on Schedule A for the benefit of the Company, including but not limited to, fire, vandalism, pilferage, theft, burglary, negligent breakage, and explosion. Replacement cost shall be used in the event of a claim. User shall include Company as an additional insured as respects such component on policies of insurance covering User's premises. Company shall include User as an additional insured as respects Company User 4 ---- ----- such component on policies of insurance covering components under this Agreement. Company will maintain for the term of the Agreement commercial general liability insurance with a limit of not less than $2,000,000 per occurrence. User, Harrah's and Manager shall be named as additional insureds on this policy. Prior to installation of Components, Company will provide User with a properly executed original certificate of insurance which will evidence the Company's general liability insurance coverage and the certificate will provide that the insurance will not be cancelled or lapse except on 30 days prior written notice to Harrah's Risk Management Division, 1023 Cherry Road, Memphis, TN 38117. User shall provide Company proof of general liability insurance with a limit of not less than $2,000,000 per occurrence. Company shall be named as an additional insured on this policy. User shall furnish Company with copies of policies evidencing said insurance by the first day of operation. User will provide Company with a properly executed original certificate of insurance which will evidence the Company's general liability insurance coverage and the certificate will provide that the insurance will not be cancelled or lapse except on 30 days prior written notice to Laser Storm, Inc., 7700 Cherry Creek South Drive, Unit 1, Denver, CO 80231. Subject to Paragraph 9, the Company's liability, whether in contract or in tort, arising out of warranties, representations, instructions or defects of any nature shall be limited to repairing or replacing, as the Company may elect, any Components of the Company's manufacture which are returned, with transportation charges paid, to and from the Company by the User and as to which examination discloses to the Company's satisfaction any defect in material or workmanship. User shall bear all expenses of shipping any such part to and from the Company's place of business. Once the Company provides the Laser Storm Components at no up-front cost to the User, the Company has fulfilled its obligation to the User and as such, no default on the part of the Company can be had. Any failure on the part of the Company to provide additional replacement Components cannot trigger any breach or default provision on the part of the Company. In no event shall the Company be liable for any lost profits, compensatory incidental or consequential damages. User agrees to pay all costs, including reasonable attorney fees and costs of litigation, which may be incurred by the Company to collect amounts owed by the User or to enforce any other rights of the Company. User will have the same rights as Company when enforcing User's rights. 12.a. Should there be an unjustified termination (termination without cause) of this Agreement by the User, the User agrees to pay to the Company $25,000.00 for termination in months 1 through 12; $12,500.00 months 13 through 24; and $5,000 months 25 through 36. There will be no compensation for termination after the 36th month. It is agreed that this sum is not a penalty or a forfeiture, but a reasonable amount at which damages shall be liquidated in the event of unjustified termination by the User, and is being agreed to due to the difficulty in ascertaining damages upon breach by the User. Court costs, reasonable attorney fees, interest and other court relief shall be awarded to the Company upon court action for breach hereof, or other necessary court action to enforce the terms hereof. User will have the same rights. 12.b. If either party does not comply with the Agreement, then the other party may give written notice of the non-compliance to the non-complying party. If the non-compliance is not cured (or prompt action is not commenced to cure the non-compliance) within 30 days of receiving such notice, then the party that gave the notice will have the right to terminate the Agreement upon ten days' written notice. Written notice shall be given to each party either by fax, overnight delivery or express mail to the address indicated on this Agreement. 12.c. In addition to the other termination provisions of this Agreement, User or Company may terminate the Agreement at any time upon six months prior written notice to the other party. Termination without cause will invoke 12.a. above. It is further agreed this Agreement will terminate without penalty or damages if the Casino closes its business or if there is substantial damage to the Casino causing the Casino to be closed for a period longer than three months. Company will have a period of 30 days after the termination date or expiration of the Agreement to remove the Components. If not removed within such period of time, User or Harrah's may remove the Components and may store them or ship them to Company, as agreed by the Company, at reasonable expense to the Company. Company User 5 ---- ----- 13. Term. The term of this Agreement shall be three years from February 15, 1996, with annual renewals thereafter to be mutually agreed upon. The three-year term of this Agreement will commence when the Components are fully installed and are ready for customer use. The Components will be located in the area designated by Harrah's. Both parties will use their best efforts to commence this Agreement when the childcare facility at the Casino opens for business. User may renew the Agreement on a year to year basis upon expiration of the three year term of this Agreement by giving written notice of renewal at least 30 days prior to the beginning of each one year renewal. 14. Binding Nature. This agreement shall be binding upon both parties hereto, their respective heirs, executors, administrators, successors, assigns and transferees. 15. Ownership. Ownership, all components shall remain at all times the property of Company, subject to use by User as herein set out. There shall be no buy out option for components under this Agreement. 16. Safety and Environmental Standards. The Company shall not be responsible for the compliance of the Components with any federal, state, or local safety regulations or environmental standards. 17. Miscellaneous Matters. 17.a. It is understood that Harrah's has a 100% satisfaction guarantee for customers. If a customer invokes the guarantee, this may require that the customer not be charged with a player activation or that the customer receive his/her money back. Manager or Harrah's will make this decision. No payment will be due to Company if a non-charge or refund occurs because of the 100% guarantee. 17.b. All advertising shall be done by User and/or Manager. All advertising copy must be reviewed and approved by Company in advance in order to abide by contractual obligations on the part of the Company regarding royalties, rights and restrictions. Company shall make every effort to respond within 72 hours regarding approval or any concerns relating to any licensing issues or inappropriate ad materials. 17.c. User agrees to maintain the "shell" of the laser tag area including, vacuuming, carpet cleaning, painting and any other reasonable and standard maintenance items requested by Manager. 17.d. This Agreement is subject to the Mississippi Riverboat Gaming Control Act and any events, acts or requirements arising under such acts. In the event Company fails to respond to, or to cooperate with, a suitability investigation or if Company or any of its officers or affiliates is found unsuitable under such Act, then this Agreement is subject to immediate termination upon notice to Company. 17.e. Agreement to Perform Necessary Acts. Each party to this User Agreement agrees to perform any further acts and execute and deliver any documents that maybe reasonably necessary to carry out the provisions of this User Agreement. 17.f. Amendments and Waivers. The provisions of this User Agreement may be waived, altered, amended, or repealed, in whole or in part, only on the written consent of all parties hereto. Waiver of any right, power, or duty by any party hereunder shall not operate or be construed as a waiver as to any subsequent occurrence or circumstance. 17.g. Successors and Assigns. This User Agreement, Schedules, and/or Addendums shall be binding on, and shall inure to the benefit of, the parties to it and their respective heirs, estates, personal representatives, legal representatives, successors, and assigns. 17.h. Validity of Agreement. It is intended that each sentence of this User Agreement shall be viewed as separate and divisible, and in the event that any sentence shall be held to be invalid, the remaining sentences shall continue to be in full force and effect. Company User 1 ---- ----- 17.i. Enforcement Expenses. In the event of a breach of this User Agreement by either party, the other party shall be entitled to recover any and all collection costs, execution costs, court costs, professional fees, and attorney fees incurred in seeking or obtaining said remedy. 17.j. Notices. Any and all notices to be given pursuant to or under this User Agreement shall be sent to the Company, User and Manager as is appropriate. Company and User's notices shall be directed to the addresses shown below and shall be sent United States Mail, postage prepaid. Manager's notices shall be directed to the attention of Judy Hall c/o Planet Kidz, Inc., 315 Meadowcreek Pl., Jackson, MS 39211. 17.k. Entirety of Agreement. This User Agreement and its attached Schedules and Addendum constitute the entire agreement between the parties pertaining to the subject matter contained in it, and supersede all prior and contemporaneous agreements, representations, warranties, and understandings of the parties. No supplement, modification, or amendment of this User Agreement shall be binding unless executed in writing by all the parties hereto. No waiver of any of the provisions of this User Agreement shall be deemed, or shall constitute a waiver of any other provision, whether similar or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless it is in writing signed by the party making the waiver. 18. Failure of Terms. The failure to require a strict compliance or performance of any one or more terms of this User Agreement on one or more occasions shall not be deemed a waiver of that or any other term or condition on that or any other occasion. Any waiver of a right or remedy under this User Agreement must be contained in a writing signed by the Company or User. 19. Assent to Terms. The confirmation and acceptance embodied in this Use Agreement is expressly made conditional on User's assent to all terms written hereof, even though such terms may add to or differ from any verbal terms. The parties hereto, intending to be bound, have signed this User Agreement. COMPANY: USER: Company User 6 ---- ----- LASER STORM, INC. HARRAH'S VICKSBURG CORPORATION By: Date By: Date -------------------- -------- -------------------- ---- Address: Address: 7700 Cherry Creek South Drive, Unit 1 1310 Mulberry Street Denver, Colorado 80231 Vicksburg, MS 39180 Telephone: (303) 751-8545 Telephone: (601) 636-3423 Facsimile: (303) 751-8546 Facsimile: (601) 630-2194 THE FOLLOWING PARTS CONSTITUTES THIS TOTAL AGREEMENT: ----- User Agreement ----- Schedule A (Component Description and Delivery Dates) ----- Schedule B (Site Location, Installation Date, and Installation Plan) ----- Schedule C (Service Procedures) ----- Schedule D (License and Software Specific Site Agreement) ----- Schedule E (Nondisclosure) Company User 7 ---- ----- SCHEDULE A COMPONENT DESCRIPTION AND INSTALLATION DATES LASER STORM(R) COMPONENTS: 18 Phasers 18 Controllers 18 Vests with Components 18 Battery Packs 36 Connecting Cords 6 Pods with bracket, connecting cables and power supplies 1 Double sided scoreboard with power supply and mounting hardware 1 StormTrak(TM) Scoring System (Optional) Consisting of: One 486SX 25 Computer, one Color Monitor, Keyboard, Mouse, Printer, & Custom Software, one Box Scorecards ARENA: Square foot playing area: 1000 SF +/- Arena type: Galaxy Modular polypropylene Laser Storm Blast Barriers with Polyethylene foam molding and nylon webbing suspension straps Wall Barriers Cable Grid System Pod Housings - 4 Wildfire floods, strobes Basic Lighting Basic Sound F-100 high capacity theatrical fog machine LIGHTING: Basic lighting system, includes Robo Scans, Police Beacons, Black Lights & Strobes SOUND: Professional audio system includes speakers, amplifier, mixer, equalizer, CD or tape player and racks. MISCELLANEOUS: Vest racks DELIVERY TERMS: Late January - Soft Opening scheduled for approximately February 15, 1996 Company User ---- ----- SCHEDULE B SITE LOCATION, AND INSTALLATION PLAN User: Harrah's Vicksburg Corporation - Harrah's Vicksburg Casino Site Location: Harrah's Vicksburg Casino, Vicksburg, MS 39180 Company does not have any software licensees within a five mile radius and will not enter into a Software License Agreement with a third party within that radius. On Site Telephone: 601-636-3423 Off Site Telephone: Planet Kidz, attn: Judy Hall 601-956-2912 Site Directions/Notes: Harrah's Casino - Vicksburg, MS - Planet Kidz Installation Date: Soft opening scheduled for February 15, 1996 Company User ---- ----- SCHEDULE C WARRANTY PROCEDURES BUILT TO BLAST WARRANTY PROCEDURES The calculation of Built to Blast warranty, provided by Company iscomputed by using tally counters on the Energy Pods or remote access on the computer system. Each time a player activates his or her phaser to start a game, the counters increase by one and the appropriate charge is accrued. User/Manager must complete the provided player activation worksheet, and submit the worksheet and the monthly payment so that the Company receives both by the 5th day of each month. Player activation worksheet and instructions will be provided at the time of installation and/or training. The Company reserves the right to audit the Energy Pod tally counters of the User at any time to verify the number of player activations as disclosed by User. Company also reserves the right to require the User to send to the Company its existing Energy Pods in exchange for replacement Energy Pods, for the express purpose of auditing the Energy Pod counters. Computer systems can be audited remotely. In the event of any discrepancy, tampering with the Energy Pod counters, or circumvention of their function, User shall pay to the Company any amounts due and owing as of the audit date plus a 10% penalty based upon the actual number of player activations. Upon audit, any additional amounts due shall be paid within fifteen (30) days of said audit. See User Agreement. Upon use of system, User will receive a spare components kit valued at $180.00 for a 12 player system, $360.00 for a 24 player system, $540.00 for a 36 player system and $720.00 for a 48 player system. As long as the failed Components are returned to us once User has replaced them from the spare Components kit, the Company will continue to replace the used-up Components in that Kit. If failed Components are not returned, User is responsible for replacing Components kit at prices listed under Warranty Policies. If User does not comply with the Warranty Procedures stated herein, Company reserves the right to cure in accoradance with paragraphs 10 and 12 of the User Agreement If User returns equipment which has been damaged beyond normal operational wear, Company will send written notice to User noting such damage. Company User ---- ----- SCHEDULE D LICENSE AND SOFTWARE SPECIFIC SITE AGREEMENT NOTE: Please read this license agreement carefully as it places certain limitations on User's ability to use the software, trademarks, trade names, and other intellectual property that will be included with User's Laser Storm(R) components and which may be required for the operation of User's system. This Schedule D shall expressly modify the User's Agreement entered into on this ___________ day of _______, 199___, by and between _______________________________ (User) and Laser Storm, Inc., a Colorado corporation, (hereinafter Company). WHEREAS, User has executed an agreement to purchase from Company certain Laser Storm(R) System Components described in that contract; WHEREAS, said sale includes the provision of a License to use certain software, tradenames, trademarks and other intellectual property that shall remain the property of Company; WHEREAS, said sale includes restrictions and burdens as well as benefits, and User understands that the same is anticipated and agreed to within the purchase price for the Laser Storm(R) System Components and that if User were not willing to agree to the terms of this license, the purchase price for the accompanying Components would be substantially greater than that negotiated by these parties. NOW THEREFORE, in consideration of the mutual terms, conditions and covenants hereinafter set forth, the parties hereto agree as follows: 1. License For Use of Software. Company hereby provides User with the non-exclusive right to use the software that has been developed for the operation of the Laser Storm(R) System. USER MAY NOT USE, COPY, MODIFY, UPGRADE, SERVICE, ALTER, OR TRANSFER THIS SOFTWARE OR ITS CORRESPONDING DOCUMENTATION AND MANUALS EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT. In addition, subject to the terms and conditions contained herein, Company hereby provides User with a license to utilize the name "Laser Storm(R)i. 2. Terms of License. This license is effective in perpetuity provided that User is not in default of the terms of this license and provided that User's system with which this software was provided is still in operation in the manner intended at the Site in Schedule B of the Sales Agreement. 3. Restricted to Purchased System. This program and License may only be used with the Laser StormTM component which is the subject of this Agreement. In the event that additional components are purchased, User will be provided with new software for the additional components. User may not transfer this software for use with any other components other than the components with which it was sold. Violation of this paragraph will result in the termination of User's License. 4. Restricted to Specific Site. 4.a. User acknowledges that an integral part of Company's willingness to provide a license for the use of said software and other intellectual property is User's agreement that the license shall be limited to the specific site pursuant to Schedule B of the Sales Agreement. User also acknowledges that this restriction serves as a detriment to User in that it will prohibit User from exercising this License outside of the site pursuant to Schedule B of the Sales Agreement. 4.b. The specific site listed in Schedule B of the Sales Agreement may not be modified, amended, changed, altered, substituted, enlarged, or condensed without the express written permission of the User and Company. 5. Upgrades. As a licensee, Company will provide User with information concerning any upgrades that may be available to the software for User's system. If an upgrade is available, is operational with User' system, and User is not in default of the Sales Agreement or attached Schedules, User will have the right to purchase any available upgrades at the effective published price. Company does not warrant that any particular upgrades will be made, the date by which such upgrades may be available, or that any particular upgrade will work and be operational with any particular previous systems. Company User ---- ----- 6. Non-transferable. As a protection to all parties, this License shall not be transferable in any manner by User without the express written consent of the Company except to a successor to User who acquires the business where the Components are used. 7. Ownership by Company. User agrees and understands that the software, tradenames, trademarks, and other intellectual property licensed herein is the sole and exclusive property of Company. 8. Operations by User. The parties understand that the manner in which User operates its business using this License has a bearing upon the reputation and credibility of the Company. Company shall have the right to terminate this License at any time that User fails to operate in a manner which will damage Company's image. Furthermore, User must operate within the following guidelines: 8.a. User shall comply with all federal, state, and local regulations regarding safety and the operation of laser tag arenas except where Company has responsibility or fault. 8.b. User shall keep appropriate liability insurance in place at all times while operating this software except as otherwise agreed. 8.c. User shall properly maintain the Laser Storm(R) Components and software at all times. 8.d. User shall not attempt to operate said Components using software or electronic equipment provided by any person other than the Company or through Company's designated and approved manufacturers or vendors. 8.e. User shall not move or relocate said Components or software from its specific site without the written approval of the Company. 9. Survival of Sale. Although this License Agreement is incorporated into the Sales Agreement between User and the Company, the terms and conditions contained herein shall survive the sale and any closing thereof and shall remain valid and enforceable during the full term described herein. 10. Default. In the event of default in the performance of the terms or conditions contained here, the Company shall be specifically permitted to temporarily withdraw and terminate this license until further order by a court of appropriate jurisdiction. Said termination shall commence 30 days after such time as notice shall be given to User of said termination by registered or certified mail unless default is cured. Either party may then request that a court, pursuant to paragraph 12 below, either law or in equity, enter such orders, restraining orders, mandamus orders, or orders to specifically perform the terms and conditions herein as shall be appropriate. The prevailing party shall be entitled to an award of its costs and attorney fees incurred in enforcing the same. 11. Warranty. The warranties applicable to the sale of the Components and the software, as set forth in the Sales Agreement between these parties, shall also apply within this License. Company shall have no obligation other than to ensure that said software will effectively operate the System Components in the manner originally intended and Company provides no warranty concerning future upgrades or changes to the same. 12. Miscellaneous Matters. 12.a. Agreement to Perform Necessary Acts. Each party to this License agrees to perform any further acts and execute and deliver any documents that may be necessary to carry out the provisions of this License. 12.b. Amendments and Waivers. The provisions of this License may be waived, altered, amended, or repealed, in whole or in part, only on the written consent of all parties hereto. Waiver of any right, power, or duty by any party thereunder shall not operate or be construed as a waiver as to any subsequent occurrence or circumstance. Company User ---- ----- 12.c. Successors and Assigns. This License shall be binding on, and shall inure to the benefit of, the parties to it and their respective heirs, estates, personal representatives, legal representatives, successors, and assigns. 12.d. Validity of Agreement. It is intended that each sentence of this License shall be viewed as separate and divisible, and in the event that any sentence shall be held to be invalid, the remaining sentences shall continue to be in full force and effect. 12.e. Enforcement Expenses. In the event of a breach of this License by any party, the non-breaching party shall be entitled to recover any and all collection costs, execution costs, sales costs, court costs, professional fees, and attorney fees incurred in seeking or obtaining said remedy. 12.f. Notices. Any and all notices to be given pursuant to or under this License shall be sent to the Company or User at the address noted below, and shall be sent Certified Mail, Return Receipt Requested. 12.g. Failure of Terms. The failure to require strict compliance or performance of any one or more terms of this License one or more occasions shall not be deemed a waiver of that or any other term or condition on that or any other occasion. Any waiver of a right or remedy under this License must be contained in a writing signed by the waiving party. The parties hereto, intending to be bound, have signed this License and Software Specific Site Agreement as of the date and year first above written. LASER STORM, INC. HARRAH'S VICKSBURG CORPORATION By: Date By: Date -------------------- -------- -------------------- ---- Address: Address: 7700 Cherry Creek South Drive, Unit 1 1310 Mulberry Street Denver, Colorado 80231 Vicksburg, MS 39180 Telephone: (303) 751-8545 Telephone: (601) 636-3423 Facsimile: (303) 751-8546 Facsimile: (601) 630-2194 Company User ---- ----- SCHEDULE E NONDISCLOSURE AGREEMENT This Agreement entered into on this ____ day of _______________, 199_____ by and between ______________________, a ____________ corporation (hereinafter User); and Laser Storm, Inc., a Colorado corporation (hereinafter Company). WHEREAS, the parties desire for their mutual benefit, and to facilitate the sale of the Laser Storm(R)Components, to advise, inform and provide each to the other certain data and information relating to the Laser Storm(R)Components and their respective business practices, portions of which are proprietary and confidential in nature and constitute trade secrets; WHEREAS, the parties desire to protect the confidentiality of their respective information, which may be communicated by the spoken word or fixed or recorded in the form of writings, graphic illustrations, diagrams, schematic drawings, electrical transcriptions, models, prototypes, demonstration units or encoded data in various formats including microelectronic devices and analog and digital electronic or magnetic recordings; and WHEREAS, the parties wish to protect this information from being used by the other party in direct competition with each other and to protect this information from being disseminated to unauthorized third persons; NOW THEREFORE, the parties covenant and agree as follows: 1. Confidential Information.++Each party hereto (hereinafter the Recipient) acknowledges that any and all information that the other party (hereinafter the Discloser) has or will disclose to Recipient with respect to the business of the Discloser, including, but not limited to trade secrets, trademarks, proprietary marks, computer programs and other software, flow charts, plans, methods, data, processes, marketing strategies, techniques, identification schemes, know-how and financial condition of the Discloser of any kind or nature ("Confidential Information"), is confiden tial, proprietary, nonpublic information of the Discloser. Confidential Information shall include all information given by the Discloser to the Recipient whether or not it is entitled to protection under statutory or common law, including laws concerning copyrights, patents, trademarks, servicemarks or similar laws or regulations unless such information is or shall become, through no act of the Recipient which violates any provision of this Agreement, (i) in the public domain, (ii) available from a third party, or (iii) information that the Recipient has prior or independent knowledge thereof. 2. Restriction on Disclosure and Use.++Recipient acknowledges that all Confidential Information is proprietary information of the Discloser and, without the prior written consent of the Discloser, agrees that it will not disclose any Confidential Information directly or indirectly to any person other than those key employees of Recipient whom the disclosure thereof is required for the purposes of the Sales Agreement. Recipient further agrees that it will not utilize or otherwise incorporate or use any such Confidential Information in any of its or any subsidiary or affiliated company's business, regardless if such subsidiary or affiliated company is presently in existence or hereafter formed, except as is permitted by this Agreement. 3. Restriction on Decompiling. User shall not modify, adapt, translate, decompile, disassemble or reverse engineer components of the Systems or Software nor authorize others to do the same. In addition, User shall not replicate, produce, distribute, or manufacture any System or system components or the Software that are available for purchase from Company, nor shall it obtain system parts or components from any entity other than the Company without the prior written authorization of the Company. 4. Key Employee Agreements.++Recipient shall use its best efforts to cause each director, officer and key employee of Recipient to whom the Discloser's Confidential Information covered by this Agreement is disclosed, to abide by confidentiality obligations established by Harrah's Vicksburg Corporation. Company User ---- ----- 5. Independent Knowledge. A party claiming independent or prior knowledge of information shall, upon request, promptly prepare and deliver to the other a writing describing with particularity the nature of the Confidential Information and the source of its prior or independent knowledge. 6. Term. The term of this Agreement shall begin upon execution of this Agreement and shall end upon the later of the expiration of the term(s) of all agreements between the parties or the complete discontinuation of the marketing by Company of all equipment of the type owned by User. Notwithstanding the expiration of the term, the parties agree to use reasonable efforts to continue to perform the terms of this Agreement as long as Confidential Information is of value to the Discloser thereof. 7. Agreements. This Agreement is entered into to protect the confidentiality of the Confidential Information and not to authorize any particular use of the Confidential Information. Uses of the Confidential Information shall be governed by other separate written agreements and licenses between the parties. 8. Default.++The Recipient acknowledges that any disclosure or unauthorized use of the Disclosure's Confidential Information will cause the Discloser irreparable harm, for which an adequate remedy at law will not exist and, that upon breach of this Agreement by the Recipient, the Discloser may seek and receive an immediate injunction, restraining order or preliminary injunction against the Recipient to further prevent the breach of this Agreement, in addition to any other remedy to which the Discloser would be entitled as a result of the breach of this Agreement by the Recipient. The prevailing party shall be entitled to an award of its costs and attorney fees incurred in enforcing this Agreement. 9. Return of Confidential Information.++Upon the termination of this Agreement, whether for cause or otherwise, the Recipient shall immediately return to the Discloser all Confidential Information in written or other media form, including all computer programs and other software, and the Recipient shall certify in writing that it has not kept any copies thereof. 10. Jurisdiction. This Agreement shall be governed by and interpreted under the laws of the State of Colorado and jurisdiction for any dispute shall be in the City and County of Denver, State of Colorado. 11. Survival of Sale. Although this Agreement is incorporated into the Sales Agreement between User and the Company, the terms and conditions contained herein shall survive the sale and any closing thereof and shall remain valid and enforceable during the full term described herein. 12. Miscellaneous Matters. 12.a. Agreement to Perform Necessary Acts. Each party to this Agreement agrees to perform any further acts and execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement. 12.b. Amendments and Waivers. The provisions of this Agreement may be waived, altered, amended, or repealed, in whole or in part, only by the written consent of all parties hereto. Waiver of any right, power, or duty by any party hereunder shall not operate or be construed as a waiver as to any subsequent occurrence or circumstance. 12.c. Successors and Assigns. This Agreement shall be binding on, and shall inure to the benefit of, the parties to it and their respective heirs, estates, personal representatives, legal representatives, successors and assigns. 12.d. Validity of Agreement. It is intended that each provision of this Agreement shall be viewed as separate and divisible, and in the event that any provision shall be held to be invalid, the remaining provisions shall continue to be in full force and effect. 12.e. Notices. Any and all notices to be given pursuant to or under this Agreement shall be given in accordance with the Sales Agreement. Company User ---- ----- 12.f. Definitions. All capitalized terms not defined herein shall have the meaning ascribed to them in the User's Agreement. In witness whereof, the parties hereto, intending to be bound, have signed this Agreement as of the date and year first above written. LASER STORM, INC. HARRAH'S VICKSBURG CORPORATION By: By: ----------------------- --------------------------- Title: Title: -------------------- ------------------------ Date: Date: ---------------------- -------------------------- EX-10.30 4 USER AGREEMENT--D.I.F.A.D.I.S.A. DE C.V. LASER STORM, INC. 7808 Cherry Creek South Drive, Unit 301 Denver, Colorado 80231 (303) 751-8545 USER AGREEMENT GENERAL TERMS AND CONDITIONS 1. Contract. This Contract of Use ("Contract" or "User Agreement"), consisting of these General Terms and Conditions, the Acknowledgment, and any Schedule attached hereto, is between Laser Storm, Inc., ("Company") and D.I.F.A.D.I. S.A. de C.V., a Mexican Corporation ("User") agreeing to use from the Company the Laser Storm(R) Components covered by this Users Agreement (the "Components"). 2. Per Use Price & Reporting. The Company agrees to allow the User to use and User agrees to use the Components and Licenses set forth in the attached Schedules, which are incorporated herein. It is agreed that the Company will receive an adjusted rate per the Schedule detailed in Addendum I. User shall be responsible to collect and pay all applicable sales taxes. Play or Use is computed by using tally counters on the Energy Pods. Each time a player activates his or her phaser to start a game, the counters increase by one and the per play price is accrued. Payments shall be paid in arrears in monthly installments based upon the number of player activations, adjusted for any discounts or price increases, utilized in the previous month of operation. User must complete the player activation worksheet, and submit the worksheet and the monthly payment so that the Company receives both by the 5th day of each month. 2a. Reporting. Reporting shall be provided in detail to Company by User on a monthly basis with payments of revenue at least monthly. Reports shall consist of a standard detailed document showing all ticket sales, both gross and net of taxes, number of free plays and amount charged for each play. Any discounts, refunds, coupons and/or specials shall also be detailed in a sales report for each reporting period. Merchandise sales shall be reported in like manner. User shall also provide a quarterly and annual sales summary to Company. 2b. Equipment Audit. Company reserves the right to require the User to send in its existing Energy Pods in exchange for replacement Energy Pods, for the express purpose of auditing the Energy Pod counters, "Equipment Audit". In the event of any discrepancy, User shall pay to the Company any amounts due and owing as of this Equipment Audit date plus a 10% penalty based upon the actual number of player activations. User shall keep a log of all non-play usage such as error restarts, employee training, testing or no-charge promotional use. Each entry in the log must be approved by User in order to be deducted from actual number of player authorizations. The average number of free plays should not exceed 5% of the total monthly usage. Upon Equipment Audit, any additional amounts due shall be paid within 30 days of said audit. 2c. Financial Audit. User shall keep accurate and complete records in accordance with the accounting standards and procedures presently utilized by User so that all receipts from the sale of tickets, together with the sales of merchandise are on a daily basis by Company. Company shall have the right at any reasonable time to inspect any such record of User, including but not limited to all checks, bills, vouchers, invoices, statements, cash receipts, number of plays, correspondence, and all other records in connection with the management of the laser tag facility. Company shall further have the right to cause an audit to be made of all account books and records connected with the management of the laser tag facility on an annual basis, fees for which will be equally shared by User and Company. In the event of an audit, should a discrepancy of more than 2% be found, the cost of said audit will be borne by User. The Company reserves the right to terminate the Agreement if the additional amounts due (pursuant to audit) are not paid on the specified dates due. If User does not comply with the Service Procedures stated herein, Company reserves the right to terminate the Agreement upon 30 days prior written notice with right to cure Company User ---- ----- during such period. Should there be no cure, Company may cease components service, hold all existing components of User, and pursue collection, pursuant to paragraph 12 of the User Agreement. If User returns components which have damage beyond normal operational wear, Company will send written notice to User noting such damage, pursuant to paragraph 10 of the User Agreement. Company reserves the right to refuse refurbishment of any component deemed abused. 3. Equipment. Company warrants that the Laser Storm Components (Components) are safe and will not cause injury if used according to Company's written instructions. Company will provide instructions to User to be given to customers as to proper use. User shall train and properly supervise customers as to the proper treatment of equipment to avoid any unnecessary abuse or misuse. Components supplied to User are described in Schedule A. 4. Delivery. Delivery shall be made in accordance with the attached Schedule A. Shipment shall be by any reasonable means chosen by the Company, and approved by the User. The Company shall notify User of the shipment date and method of shipment. The Company shall not be responsible for any delay or failure of delivery resulting from any act of God, labor dispute, fire or other casualty, international or domestic conflict, difficulty in obtaining materials, labor or transportation, energy shortage, delay in shipment by the Company 's suppliers, or any other cause beyond Company's reasonable control. User's request for delivery of components in less than 60 days will be considered a rush order. Upon such request, User agrees to pay all reasonable rush charges incurred on each order. 5. Installation and Site Requirements. The User agrees to prepare and maintain the installation site of the Components in accordance with mutually-agreed-upon specifications as provided in detail by Company. Said specifications, installation date, and location are detailed in Schedule B, attached hereto and incorporated herein. The Company's authorized representative will install the Laser Storm(R) Components in a professional and workmanlike manner with as little disruption to the User's business as possible. 6. Change Orders. User shall have the right to make additions (but not deletions) to Schedule A. 6a. The User understands the Laser Storm Components will be manufactured pursuant to User's configuration as detailed in Schedules A and B and under no circumstances may the User exclude any component listed therein or decrease the size of the original order. 6b. Scheduled delivery and installation of the Components is specified in Schedule A. Pursuant to paragraph 5 above and Schedule B, the User agrees the installation site for the Components will be prepared and the requirements met in advance of said scheduled delivery date as agreed upon between the Company and the User. In the event scheduled delivery date is postponed by the User for any reason, including nonpayment of any payment due or pursuant to Schedule A, the User agrees to pay the Company an installation delay charge of $1,000.00 per month. Said installation delay charge shall be paid by the User beginning 30 days after the original installation date as specified in Schedule A and continuing on the monthly anniversary date of the scheduled delivery date, until all installation delay charges are paid in full. Said Installation delay charge shall not be prorated and shall be paid in full prior to rescheduling of the delivery and installation by the Company. Rescheduling shall be solely at the discretion of the Company. 6c. The User agrees that any changes to the installation site specifications and requirements (pursuant to Schedule A) must be provided to the Company not less than forty-five (45) days prior to the installation date specified in Schedule B. The User further agrees that in the event the installation site is not prepared to specifications upon arrival of the Company's installation personnel, the Company shall remove its personnel and Components until such time as the installation site is properly prepared as is mutually agreeable between the User and Company and the User agrees to pay a delivery cancellation charge of $500.00 per occurrence. Upon the User's notice to the Company that the site specifications and requirements have been met, and upon payment of any installation delay charges as set forth in paragraph 6.b. above, and upon payment of a delivery cancellation charge of $1,000.00 per occurrence, the Company shall reschedule the installation of the Laser Storm(R) Components. Company User ---- ----- 7. Permits and Licenses. The User shall apply for and obtain all necessary building and other governmental permits and licenses which may be required in connection with the installation of the Components used hereunder. User shall subsequently comply with and conform to all laws, ordinances, and governmental regulations relating to the use of the Components. 8. License for Use of Name, Intellectual Property, and Software. User further acknowledges that User is receiving a license for the use of the name "Laser Storm" and any other service marks, trademarks, tradenames or other intellectual property used in describing and defining said components. User is also receiving a license for the use of the software that operates the purchased component. This license shall remain the property of Company and User agrees to abide by the License agreement attached hereto as Schedule D, including the agreement concerning the use of said property restricted to the specific site identified in Schedule B. 9. Indemnification. Both parties understand that this agreement is a User Agreement and Company is in no way acting to participate in the business being operated by User, whether as an owner, shareholder, partner, joint venture, member, franchiser, or in any other respect. User agrees that by using the name of Laser Storm(R), together with the software, and any other name or mark owned by Company and permitted for use by User, User will indemnify and hold Company harmless from any claims, suits, actions, or other disputes that arise from User's operation of its business. This includes, specifically, the obligation for user to pay for the Company to provide legal defense and for any costs, fees, or expenses of any form incurred by Company as a result of any action brought based upon the operations of User's business. This clause does not apply to the use of the Components and use of the License rights herein. Company will indemnify and hold harmless User and User (and their respective subsidiaries, affiliates, partner-owners and employees) from any damages, losses or expenses (including reasonable attorneys fees) arising out of any injury resulting from a defect in the Components, from Company's failure to properly maintain the Components, or from the use of the Components (except if the Components are not used according to Company's written instructions). This paragraph prevails over any inconsistent provision in the User Agreement and will survive the termination of the User Agreement. 10. Service Procedures. The Company will maintain, service and make any necessary installations or repairs in connection with the said components, at its own expense. The Company is required to keep the Laser Storm Components in working condition, however the following is expressly excluded: Plastic phaser shells, headsets, or controller housings damaged by abuse, carelessness or misuse, including but not limited to being stepped on, dropped, kicked or in any other way abused or used for any purpose which it is not intended; Connecting cords which have been cut, torn, pinched or otherwise mutilated, apart from normal wear and tear; batteries or battery chargers which have been intentionally shorted out or have been handled in any way inconsistent with operating instructions; Any units which have been opened, altered, modified or repaired by anyone other than an authorized Laser Storm(R) technician; and any other damage which is the result of abuse, misuse, or use inconsistent with the instructions in the Laser Storm(R) operations manual provided under separate cover. 10a. In the event of a component failure the User shall first call Company's Customer Service department for evaluation, then, if instructed, return the component by overnight mail to the Company in accordance with the Service Repair instructions outlined in the Operations Manual provided at installation. The Company shall repair or replace, at the Company's option, the Component at no charge to the User and return the Component to the User via overnight delivery, subject to parts availability. No component which has been abused, or altered, or repaired by other than an authorized representative of the Company shall be repaired at the Company's expense. User will not be responsible for damage to the Components caused by normal wear and tear or by customers' use. User shall train and properly supervise customers as to the proper treatment of equipment to avoid any unnecessary abuse or misuse. 10b. User shall pay the electricity used in the operation of said Component. Company User ---- ----- 10c. The User shall apply for an obtain all necessary building and other governmental permits and licenses which may be required in connection with the installation of the Component used hereunder. User shall subsequently comply with and conform to all laws, ordinances, and governmental regulations relating to the use of the Components. 10d. User shall use all best efforts to take care of components, protect said components from any vandalism or other physical abuse that may damage component. All losses and damages caused by the negligence of User shall be born by User. This shall also be deemed to include stolen or destroyed components. Same components shall be paid to Company by User at the then existing retail price of same components. 10e. User shall provide to Company written request for the removal of any unit. To avoid possible conflicts as relates to existing territorial agreements with Company's other customers, unit shall not be moved without the prior written consent of the Company which will not be unreasonably withheld. 11. Professional Management. User shall provide professional management capable of operating and promoting Laser Storm Components. User shall operate and maintain all Components, inventory, equipment, designated laser tag area, supplies and materials used in connection therewith, in a manner calculated to enhance the reputation of the facility with its customers. User agrees to use its best efforts in managing said facility in order to provide the maximum economic return consistent with professional management standards. User shall have full power and authority to manage the facility and shall be responsible for directing its supervisors and employees as to the manner and means of accomplishing the work required to be performed. Performance criteria on the part of User shall be consistent User's and Company's standards. Performance criteria is defined as properly managing and promoting the facility to ensure facility runs at its full potential during normal operating hours. User shall provide a professional, clean, safe, and fun environment. Staff shall also be of the same professional caliber. 12. Remedies. That User will keep the components, or additional or replacement components, insured at component cost as noted on Schedule A for the benefit of the Company, including but not limited to, fire, vandalism, pilferage, theft, burglary, negligent breakage, and explosion. Replacement cost shall be used in the event of a claim. User shall include Company as an additional insured as respects such component on policies of insurance covering User's premises. Company shall include User as an additional insured as respects such component on policies of insurance covering components under this Agreement. Company will maintain for the term of the Agreement commercial general liability insurance with a limit of not less than $2,000,000 per occurrence. User, and User shall be named as additional insured on this policy. Prior to installation of Components, Company will provide User with a properly executed original certificate of insurance which will evidence the Company's general liability insurance coverage and the certificate will provide that the insurance will not be cancelled or lapse except on 30 days prior written notice to D.I.F.A.D.I. S.A. de C.V. User shall provide Company proof of general liability insurance with a limit of not less than $2,000,000 per occurrence. Company shall be named as an additional insured on this policy. User shall furnish Company with copies of policies evidencing said insurance by the first day of operation. User will provide Company with a properly executed original certificate of insurance which will evidence the Company's general liability insurance coverage and the certificate will provide that the insurance will not be cancelled or lapse except on 30 days prior written notice to Laser Storm, Inc., 7808 Cherry Creek South Drive, Unit 301, Denver, CO 80231. Subject to Paragraph 9, the Company's liability, whether in contract or in tort, arising out of warranties, representations, instructions or defects of any nature shall be limited to repairing or replacing, as the Company may elect, any Components of the Company's manufacture which are returned, with transportation charges paid, to and from the Company by the User and as to which examination discloses to the Company's satisfaction any defect in material or workmanship. User shall bear all expenses of shipping any such part to and from the Company's place of business. Once the Company provides the Laser Storm Components at no up-front cost to the User, the Company has fulfilled its obligation to the User and as such, no default on the part of the Company can be had. Any failure on the part Company User ---- ----- of the Company to provide additional replacement Components cannot trigger any breach or default provision on the part of the Company. In no event shall the Company be liable for any lost profits, compensatory incidental or consequential damages. User agrees to pay all costs, including reasonable attorney fees and costs of litigation, which may be incurred by the Company to collect amounts owed by the User or to enforce any other rights of the Company. User will have the same rights as Company when enforcing User's rights. 12.a. If either party does not comply with the Agreement, then the other party may give written notice of the non-compliance to the non-complying party. If the non-compliance is not cured (or prompt action is not commenced to cure the non-compliance) within 30 days of receiving such notice, then the party that gave the notice will have the right to terminate the Agreement upon ten days' written notice. Written notice shall be given to each party either by fax, overnight delivery or express mail to the address indicated on this Agreement. 12.b. It is further agreed this Agreement will terminate without penalty or damages if the location closes its business or if there is substantial damage to the location causing the location to be closed for a period longer than three months. Company will have a period of 30 days after the termination date or expiration of the Agreement to remove the Components. If not removed within such period of time, User may remove the Components and may store them or ship them to Company, as agreed by the Company, at reasonable expense to the User. 13. Term. The term of this Agreement shall be three years from a mutually agreed upon opening date, with annual renewals thereafter to be mutually agreed upon. The three-year term of this Agreement will commence when the Components are fully installed and are ready for customer use. The Components will be located in the area designated by D.I.F.A.D.I. S.A. de C.V. Both parties will use their best efforts to commence this Agreement when the facility opens for business. User may renew the Agreement on a year to year basis upon expiration of the three year term of this Agreement by giving written notice of renewal at least 30 days prior to the beginning of each one year renewal. 14. Binding Nature. This agreement shall be binding upon both parties hereto, their respective heirs, executors, administrators, successors, assigns and transferees. 15. Ownership. All components shall remain at all times the property of Company, subject to use by User as herein set out. Title shall pass to User upon final payment as noted in Addendum I. 16. Safety and Environmental Standards. The Company shall not be responsible for the compliance of the Components with any governmental, federal, state, or local safety regulations or environmental standards. 17. Miscellaneous Matters. 17.a. All advertising shall be done by User. All Laser Storm, Inc. related advertising copy must be reviewed and approved by Company in advance in order to abide by contractual obligations on the part of the Company regarding certain royalties, rights and restrictions. Company shall make every effort to respond within 72 hours regarding approval or any concerns relating to any licensing issues or inappropriate ad materials. 17.b. User agrees to maintain the laser tag area including, vacuuming, carpet cleaning, painting and any other reasonable and standard maintenance items to keep a good appearance. 17.c. Agreement to Perform Necessary Acts. Each party to this User Agreement agrees to perform any further acts and execute and deliver any documents that maybe reasonably necessary to carry out the provisions of this User Agreement. 17.d. Amendments and Waivers. The provisions of this User Agreement may be waived, altered, amended, or repealed, in whole or in part, only on the written consent of all parties hereto. Waiver of any right, power, or duty by any party hereunder shall not operate or be construed as a waiver as to any subsequent occurrence or circumstance. Company User ---- ----- 17.e. Successors and Assigns. This User Agreement, Schedules, and/or Addendum's shall be binding on, and shall inure to the benefit of, the parties to it and their respective heirs, estates, personal representatives, legal representatives, successors, and assigns. 17.f. Validity of Agreement. It is intended that each sentence of this User Agreement shall be viewed as separate and divisible, and in the event that any sentence shall be held to be invalid, the remaining sentences shall continue to be in full force and effect. 17.g. Enforcement Expenses. In the event of a breach of this User Agreement by either party, the other party shall be entitled to recover any and all collection costs, execution costs, court costs, professional fees, and attorney fees incurred in seeking or obtaining said remedy. 17.h. Notices. Any and all notices to be given pursuant to or under this User Agreement shall be sent to the Company, User and User as is appropriate. Company and User's notices shall be directed to the addresses shown below and shall be sent via fax or overnight Federal Express. User's notices shall be directed to the attention Ernesto Felix-Diaz D.I.F.A.D.I. S.A. de C.V San Andres Atoto #4 Naucalplan, Edo. De Mexico Mexico, 53370 Fax# 011-525-358-7584. 17.i. Entirety of Agreement. This User Agreement and its attached Schedules and Addendum constitute the entire agreement between the parties pertaining to the subject matter contained in it, and supersede all prior and contemporaneous agreements, representations, warranties, and understandings of the parties. No supplement, modification, or amendment of this User Agreement shall be binding unless executed in writing by all the parties hereto. No waiver of any of the provisions of this User Agreement shall be deemed, or shall constitute a waiver of any other provision, whether similar or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless it is in writing signed by the party making the waiver. 18. Failure of Terms. The failure to require a strict compliance or performance of any one or more terms of this User Agreement on one or more occasions shall not be deemed a waiver of that or any other term or condition on that or any other occasion. Any waiver of a right or remedy under this User Agreement must be contained in a writing signed by the Company or User. 19. Assent to Terms. The confirmation and acceptance embodied in this Use Agreement is expressly made conditional on User's assent to all terms written hereof, even though such terms may add to or differ from any verbal terms. The parties hereto, intending to be bound, have signed this User Agreement. COMPANY: USER: LASER STORM, INC. D.I.F.A.D.I. S.A. de C.V. By: Date By: Date -------------------- -------- -------------------- ---- Address: Address: 7700 Cherry Creek South Drive, Unit 1 San Andres Atoto #4 Denver, Colorado 80231 Naucalplan, Edo. De Mexico Mexico Telephone: (303) 751-8545 Telephone: 011-525-359-3810/11/12 Facsimile: (303) 751-8546 Facsimile: 011-525-358-7584 THE FOLLOWING PARTS CONSTITUTES THIS TOTAL AGREEMENT: ----- User Agreement ----- Schedule A (Component Description and Delivery Dates) ----- Schedule B (Site Location, Installation Date, and Installation Plan) ----- Schedule C (Service Procedures) ----- Schedule D (License and Software Specific Site Agreement) ----- Schedule E (Nondisclosure) ----- Addendum I (Revenue Participation Schedule) Company User ---- ----- SCHEDULE A COMPONENT DESCRIPTION AND INSTALLATION DATES LASER STORM(R) COMPONENTS: 36 Phasers 36 Controllers 36 Vests with Components 36 Battery Packs 72 Connecting Cords 6 Pods with bracket, connecting cables and power supplies 1 Double sided scoreboard with power supply and mounting hardware 1 StormTrak(TM) Scoring System Consisting of: One 486SX 25 Computer, one Color Monitor, Keyboard, Mouse, Printer, & Custom 3.1 Software, one Box Scorecards ARENA: Square foot playing area: 2780 SF +/- Arena type: Circuit Commandos Modular polypropylene Laser Storm Blast Barriers with Polyethylene foam molding and nylon webbing suspension straps Wall Barriers Cable Grid System Pod Housings - 4 Basic Lighting Basic Sound F-100 high capacity theatrical fog machine LIGHTING: Basic lighting system includes Standard Circuit Commandos Lighting Package SOUND: Basic audio system includes speakers, amplifier, mixer, equalizer, CD and racks. MISCELLANEOUS: Vest racks SHIPPING TERMS: The Company will ship to Laredo, Texas by March 7, 1997. Installation will be approximately one week prior to soft opening or as space becomes available for installation from User. Company User ---- ----- SCHEDULE B SITE LOCATION, AND INSTALLATION PLAN User: D.I.F.A.D.I. S.A. de C.V. Site Location: ----------------------------------------------------------- Company does not have any software licensees within a five-mile radius and will not enter into a Software License Agreement with a third party within that radius. On Site Telephone: TBD Off Site Telephone: ----------------------------------- Site Directions/Notes: ----------------------------------- Installation Date: Soft opening scheduled for March 1997 Company User ---- ----- SCHEDULE C WARRANTY PROCEDURES BUILT TO BLAST WARRANTY PROCEDURES The calculation of Built to Blast warranty, provided by Company is computed by using tally counters on the Energy Pods or remote access on the computer system. Each time a player activates his or her phaser to start a game, the counters increase by one and the appropriate charge is accrued. User must complete the provided player activation worksheet, and submit the worksheet and the monthly payment so that the Company receives both by the 10th day of each month. Player activation worksheet and instructions will be provided at the time of installation and/or training. The Company reserves the right to audit the Energy Pod tally counters of the User at any time to verify the number of player activations as disclosed by User. Company also reserves the right to require the User to send to the Company its existing Energy Pods in exchange for replacement Energy Pods, for the express purpose of auditing the Energy Pod counters. Computer systems can be audited remotely. In the event of any discrepancy, tampering with the Energy Pod counters, or circumvention of their function, User shall pay to the Company any amounts due and owing as of the audit date plus a 7% penalty based upon the actual number of player activations. Upon audit, any additional amounts due shall be paid within fifteen (30) days of said audit. See User Agreement. Upon use of system, User will receive a spare components kit valued at $180.00 for a 12 player system, $360.00 for a 24 player system, $540.00 for a 36 player system and $720.00 for a 48 player system. As long as the failed Components are returned to us once User has replaced them from the spare Components kit, the Company will continue to replace the used-up Components in that Kit. If failed Components are not returned, User is responsible for replacing Components kit at prices listed under Warranty Policies. If User does not comply with the Warranty Procedures stated herein, Company reserves the right to cure in accordance with paragraphs 10 and 12 of the User Agreement If User returns equipment that has been damaged beyond normal operational wear, Company will send written notice to User noting such damage. Company will then replace such equipment with warranty repair equipment in accordance to Company's standard replacement policy. User pays for expense of shipping components for repair to Company. Company pays for expense of shipping repaired or replaced components back to User. Company User ---- ----- SCHEDULE D LICENSE AND SOFTWARE SPECIFIC SITE AGREEMENT NOTE: Please read this license agreement carefully as it places certain limitations on User's ability to use the software, trademarks, trade names, and other intellectual property that will be included with User's Laser Storm(R) components and which may be required for the operation of User's system. This Schedule D shall expressly modify the User's Agreement entered into on this ___________ day of _______, 199___, by and between D.I.F.A.D.I. S.A. de C.V., a Mexican Corporation ("User") and Laser Storm, Inc., a Colorado corporation, (hereinafter "Company"). WHEREAS, User has executed an agreement to revenue share with Company certain Laser Storm(R) System Components described in that contract; WHEREAS, said sale includes the provision of a License to use certain software, tradenames, trademarks and other intellectual property that shall remain the property of Company; WHEREAS, said revenue share includes restrictions and burdens as well as benefits, and User understands that the same is anticipated and agreed to within the User Agreement for the Laser Storm(R) System Components and that if User were not willing to agree to the terms of this license, the User Agreement for the accompanying Components would be substantially greater than that negotiated by these parties. NOW THEREFORE, in consideration of the mutual terms, conditions and covenants hereinafter set forth, the parties hereto agree as follows: 1. License For Use of Software. Company hereby provides User with the non-exclusive right to use the software that has been developed for the operation of the Laser Storm(R) System. USER MAY NOT USE, COPY, MODIFY, UPGRADE, SERVICE, ALTER, OR TRANSFER THIS SOFTWARE OR ITS CORRESPONDING DOCUMENTATION AND MANUALS EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT. In addition, subject to the terms and conditions contained herein, Company hereby provides User with a license to utilize the name "Laser Storm(R). 2. Terms of License. This license is effective in perpetuity provided that User is not in default of the terms of this license and provided that User's system with which this software was provided is still in operation in the manner intended at the Site in Schedule B of the User Agreement. 3. Restricted to use of System. This program and License may only be used with the Laser StormTM component which is the subject of this Agreement. User may not transfer this software for use with any other components other than the components with which it is used under this Agreement. Violation of this paragraph will result in the termination of User's License. 4. Restricted to Specific Site. 4.a. User acknowledges that an integral part of Company's willingness to provide a license for the use of said software and other intellectual property is User's agreement that the license shall be limited to the specific site pursuant to Schedule B of the User Agreement. User also acknowledges that this restriction serves as a detriment to User in that it will prohibit User from exercising this License outside of the site pursuant to Schedule B of the User Agreement. 4.b. The specific site listed in Schedule B of the User Agreement may not be modified, amended, changed, altered, substituted, enlarged, or condensed without the express written permission of the User and Company. 5. Upgrades. As a licensee, Company will provide User with information concerning any upgrades that may be available to the software for User's system. If an appropriate component upgrade is available and User is not in default of the User Agreement or attached Schedules, appropriate component upgrades will be provided by Company at domestic pricing. Company does not warrant that any particular upgrades will be made, the date by which such upgrades may be available, or that any particular upgrade will work and be operational with any particular previous systems. Company User ---- ----- 6. Non-transferable. As a protection to all parties, this License shall not be transferable in any manner by User without the express written consent of the Company except to a successor to User who acquires the business where the Components are used. 7. Ownership by Company. User agrees and understands that the software, tradenames, trademarks, and other intellectual property licensed herein are the sole and exclusive property of Company. 8. Operations by User. The parties understand that the manner in which User operates its business using this License has a bearing upon the reputation and credibility of the Company. Company shall have the right to terminate this License at any time that User fails to operate in a manner which will damage Company's image. Furthermore, User must operate within the following guidelines: 8.a. User shall comply with all federal, state, and local regulations regarding safety and the operation of laser tag arenas except where Company has responsibility or fault. 8.b. User shall keep appropriate liability insurance in place at all times while operating this software except as otherwise agreed. 8.c. User shall properly maintain the Laser Storm(R) Components and software at all times. 8.d. User shall not attempt to operate said Components using software or electronic equipment provided by any person other than the Company or through Company's designated and approved manufacturers or vendors. 8.e. User shall not move or relocate said Components or software from its specific site without the written approval of the Company. 9. Survival of Sale. Although this License Agreement is incorporated into the User Agreement between User and the Company, the terms and conditions contained herein shall survive the sale and any closing thereof and shall remain valid and enforceable during the full term described herein. 10. Default. In the event of default in the performance of the terms or conditions contained here, the Company shall be specifically permitted to temporarily withdraw and terminate this license until further order by a court of appropriate jurisdiction. Said termination shall commence 30 days after such time as notice shall be given to User of said termination by registered or certified mail unless default is cured. Either party may then request that a court, pursuant to paragraph 12 below, either law or in equity, enter such orders, restraining orders, mandamus orders, or orders to specifically perform the terms and conditions herein as shall be appropriate. The prevailing party shall be entitled to an award of its costs and attorney fees incurred in enforcing the same. 11. Warranty. The warranties applicable to the sale of the Components and the software, as set forth in the User Agreement between these parties, shall also apply within this License. Company shall have no obligation other than to ensure that said software will effectively operate the System Components in the manner originally intended and Company provides no warranty concerning future upgrades or changes to the same. 12. Miscellaneous Matters. 12.a. Agreement to Perform Necessary Acts. Each party to this License agrees to perform any further acts and execute and deliver any documents that may be necessary to carry out the provisions of this License. 12.b. Amendments and Waivers. The provisions of this License may be waived, altered, amended, or repealed, in whole or in part, only on the written consent of all parties hereto. Waiver of any right, power, or duty by any party thereunder shall not operate or be construed as a waiver as to any subsequent occurrence or circumstance. 12.c. Successors and Assigns. This License shall be binding on, and shall inure to the benefit of, the parties to it and their respective heirs, estates, personal representatives, legal representatives, successors, and assigns. Company User ---- ----- 12.d. Validity of Agreement. It is intended that each sentence of this License shall be viewed as separate and divisible, and in the event that any sentence shall be held to be invalid, the remaining sentences shall continue to be in full force and effect. 12.e. Enforcement Expenses. In the event of a breach of this License by any party, the non-breaching party shall be entitled to recover any and all collection costs, execution costs, sales costs, court costs, professional fees, and attorney fees incurred in seeking or obtaining said remedy. 12.f. Notices. Any and all notices to be given pursuant to or under this License shall be sent to the Company or User at the address noted below, and shall be sent via fax and Federal Express. 12.g. Failure of Terms. The failure to require strict compliance or performance of any one or more terms of this License one or more occasions shall not be deemed a waiver of that or any other term or condition on that or any other occasion. Any waiver of a right or remedy under this License must be contained in writing signed by the waiving party. The parties hereto, intending to be bound, have signed this License and Software Specific Site Agreement as of the date and year first above written. COMPANY: USER: LASER STORM, INC. D.I.F.A.D.I. S.A. de C.V. By: Date By: Date -------------------- -------- -------------------- ---- Address: Address: 7700 Cherry Creek South Drive, Unit 1 San Andres Atoto #4 Denver, Colorado 80231 Naucalplan, Edo. De Mexico Mexico Telephone: (303) 751-8545 Telephone: 011-525-359-3810/11/12 Facsimile: (303) 751-8546 Facsimile: 011-525-358-7584 Company User ---- ----- EX-21 5 LIST OF SUBSIDIARIES LIST OF SUBSIDIARIES State or Other Jurisdiction of Name Under Which Subsidiary Organization Business Done - ---------- --------------- ---------------- Laser Storm of Arapahoe Colorado Laser Storm of Arapahoe Village, Inc. Village, Inc. EX-23 6 CONSENT OF HEIN + ASSOCIATES, LLP INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in the registration statement of Laser Storm, Inc. on Form S-8 (SEC File No. 333-03729) of our report dated March 21, 1997, on our audits of the financial statements of Laser Storm, Inc., as of December 31, 1996, and for the years ended December 31, 1995 and 1996, which report is included in this Annual Report on Form 10-KSB. /s/ Hein & Associates LLP HEIN + ASSOCIATIONS LLP Denver, Colorado April 9, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 272,633 0 1,653,208 170,000 977,896 2,504,655 2,201,010 315,124 5,401,141 1,749,154 0 0 0 3,825 3,346,134 5,401,141 5,487,899 5,898,211 2,477,415 2,629,076 6,012,696 227,206 12,573 (2,745,866) 0 (2,745,866) 0 0 0 (2,745,866) (.86) 0
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