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.
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(Name of small business issuer in its charter)
Colorado 84-1139159
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7808 Cherry Creek South Drive, Unit 301, Denver, Colorado 80231
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(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
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None None
Securities registered under Section 12(g) of the Exchange Act:
$0.001 Par Value Common Stock
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(Title of Class)
Redeemable Stock Purchase Warrants
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(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]
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LASER STORM, INC.
1996 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE NUMBER
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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
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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
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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
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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
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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
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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.
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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.
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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
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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.
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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
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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
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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
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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.
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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
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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.
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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,
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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
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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.
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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
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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
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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.
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(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.
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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.
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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
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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,
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Officer
and/or
Names of Executive Director
Officers and Directors Age Since Position
- ---------------------- --- -------- --------
<S> <C> <C> <C>
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
- ------------------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
the other most highly compensated executive officers of the Company whose annual
salary and bonus from the Company exceeded $100,000 for the fiscal year ended
December 31, 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
--------------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Positions at 12/31/96 Year Salary Bonus Compensation Options Compensation
- ---------------------------------------- ---------- ------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Cooney............................ 1996...$ 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
- ------------------
</TABLE>
(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
<PAGE>
(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
<TABLE>
<CAPTION>
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
------------------------------------ -----------------------------
<S> <C> <C>
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-
- ----------------------
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Amount and Nature of Percent of
or Name of Officer or Director Beneficial Ownership(1) Class(2)
- ------------------------------------ ----------------------- ---------
<S> <C> <C>
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
- -----------------
</TABLE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/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
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
LASER STORM, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<S> <C>
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
===========
</TABLE>
See accompanying notes to these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
LASER STORM, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------
1995 1996
---- ----
<S> <C> <C>
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
================== ================
</TABLE>
See accompanying notes to these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
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
------ ------ ------ ------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- -----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See accompanying notes to these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
LASER STORM, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1995 1996
---- ----
<S> <C> <C>
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
<PAGE>
LASER STORM, INC.
STATEMENTS OF CASH FLOWS
(continued)
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1995 1996
---- ----
<S> <C> <C>
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 $-
======== ========
</TABLE>
See accompanying notes to these financial statements.
F-7
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1996
---- ----
<S> <C> <C>
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) $ --
======== ========
</TABLE>
F-12
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1996
------------------------------- -------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- --------- --------- --------
<S> <C> <C> <C> <C>
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
======= =======
</TABLE>
F-16
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ending December 31,
Exercise Price -------------------------------------------------
Per Share 2000 2001 2002 2003 Total
-------------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
$.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
======= ======= ======= ======= =======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1996
--------------------- ----------------------
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- -------- --------- --------
<S> <C> <C> <C>
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
======== =========
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1995 1996
---- ----
<S> <C> <C>
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)
</TABLE>
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
<PAGE>
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
<PAGE>
LASER STORM, INC.
NOTES TO FINANCIAL STATEMENTS
F21
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description and Method of Filing Page No.
- ---------- -------------------------------- -------
<S> <C> <C>
(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.*
<PAGE>
<CAPTION>
Exhibit No. Description and Method of Filing Page No.
- ---------- -------------------------------- -------
<S> <C> <C>
(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
<PAGE>
<CAPTION>
Exhibit No. Description and Method of Filing Page No.
- ---------- -------------------------------- -------
<S> <C> <C>
(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
</TABLE>
* 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.
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
LASER STORM, INC., NAMCO CYBERTAINMENT, INC.,
a Colorado Corporation a Delaware Corporation
By: By:
------------------------ ---------------------------
Its: Its:
------------------------ --------------------------
Date: Date:
<PAGE>
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:
---------------------- -----------------------
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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:
---------------------- --------------------------
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
<PAGE>
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
---- -----
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.
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
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