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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 13E-4
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ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
(NAME OF ISSUER)
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
(NAME OF PERSON(S) FILING STATEMENT)
REDEEMABLE CLASS A COMMON STOCK
PURCHASE WARRANTS
(TITLE OF CLASS OF SECURITIES)
83083P118
(CUSIP NUMBER OF CLASS OF SECURITIES)
------------------------
ZALMAN SILBER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
350 FIFTH AVENUE
NEW YORK, NEW YORK 10118
(212) 564-2224
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE
NOTICE AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT)
------------------------
AUGUST 11, 1997
(DATE TENDER OFFER FIRST PUBLISHED,
SENT OR GIVEN TO SECURITY HOLDERS)
PAGE 1 OF [4] PAGES
EXHIBIT INDEX AT PAGE [3]
CALCULATION OF FILING FEE
Transaction Valuation Amount of Filing Fee:
$1,473,376.00 $295.00
1. In accordance with Rule 240.0-11(b)(2) and Rule 240.0-11(a)(4) under the
Securities Exchange Act of 1934, the filing fee was calculated based upon
the closing bid price of $2.625 per share of Common Stock on August 6, 1997,
multiplied by 561,286, the maximum number of shares of Common Stock sought
to be exchanged pursuant to the exchange offer.
/ / Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing.
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This Issuer Tender Offer Statement on Schedule 13E-4 (this 'Statement') is
being filed by Skyline Multimedia Entertainment, Inc. (the 'Company'), a New
York corporation, and relates to the offer by the Company to holders of its
outstanding Redeemable Class A Warrants (the 'Class A Warrants'), upon and
subject to the terms and conditions set forth in the Offering Circular, dated
August 11, 1997 (the 'Offering Circular'), being filed as Exhibit (a)(i) herein,
of one newly issued share of the Company's common stock, par value $.001 per
share (the 'Common Stock'), in exchange for each 3.5 outstanding Class A
Warrants (the 'Exchange Offer'). Capitalized terms used but not otherwise
defined herein have the meaning ascribed to such terms in the Offering Circular.
ITEM 1. SECURITY AND ISSUER.
(a) The issuer of the securities to which this Statement relates is the
Company. The principal executive offices of the Company are located at 350 Fifth
Avenue, New York, New York 10118.
(b) The information set forth in 'Summary' and 'The Exchange Offer' in the
Offering Circular is specifically incorporated herein by reference.
(c) The information set forth in 'Market and Trading Information' in the
Offering Circular is specifically incorporated herein by reference.
(d) This Statement is being filed by the Company.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in 'The Exchange Offer' in the Offering
Circular is specifically incorporated herein by reference.
(b) No funds are, or expect to be, borrowed for the purpose of the Exchange
Offer.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
(a)-(j) The information set forth in 'Background and Purposes of the
Exchange Offer; Certain Effects' in the Offering Circular is specifically
incorporated herein by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
The information set forth in 'Summary--Intention of Directors and Officers'
and 'Description of Securities' in the Offering Circular is specifically
incorporated herein by reference.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO
THE ISSUER'S SECURITIES.
The information set forth in 'Description of Securities' in the Offering
Circular is specifically incorporated herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in 'The Exchange Offer' in the Offering Circular
is specifically incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION.
(a)(l) The information set forth in the Company's 1996 Form 10-KSB,
attached as Exhibit A to the Offering Circular is specifically incorporated
herein by reference.
(a)(2) The information set forth in the Company's March 31,1997 Form
10-QSB, attached as Exhibit B to the Offering Circular is specifically
incorporated herein by reference
(a)(3) Not applicable.
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(a)(4) The information set forth under 'Pro Forma Unaudited Financial
Information' in the Offering Circular is specifically incorporated herein by
reference.
(b)(1)-(3) The information set forth under 'Pro Forma Unaudited Financial
Information' in the Offering Circular is specifically incorporated herein by
reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) The information set forth in 'Description of Securities' in the
Offering Circular is specifically incorporated herein by reference.
(b) Not applicable.
(c) The information set forth in 'Background and Purposes of the Exchange
Offer; Certain Effects' in the Offering Circular is specifically incorporated
herein by reference.
(d) None.
(e) Reference is made to the Offering Circular, which is specifically
incorporated herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a)(i) Offering Circular dated August 11, 1997
(a)(ii) Form of Letter of Transmittal
(a)(iii) Letter to Brokers, Securities Dealers, Commercial Banks, Trust
Companies and Other Nominees
(a)(iv) Letter to Clients
(a)(v) Form of Notice of Guaranteed Delivery
(a)(vi) Press release, dated July 2, 1997
(a)(vii) Press release, dated July 9, 1997
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
3
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, the
undersigned certifies that the information set forth in this statement is true,
complete and correct.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
By: /s/ ZALMAN SILBER
--------------------------------
Zalman Silber
President and Chief Executive
Officer
Dated: August 8, 1997
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OFFERING CIRCULAR
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
OFFER TO EXCHANGE
ONE SHARE OF COMMON STOCK
FOR
EACH 3.5 OUTSTANDING REDEEMABLE CLASS A WARRANTS
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON TUESDAY, SEPTEMBER 9, 1997, UNLESS EXTENDED.
THE EXCHANGE OFFER IS CONDITIONED ON, AMONG OTHER THINGS,
A MINIMUM OF 1,866,275 CLASS A WARRANTS BEING TENDERED PURSUANT
TO THIS EXCHANGE OFFER AND A MINIMUM OF
1,705,250 CLASS B WARRANTS BEING TENDERED PURSUANT TO A
CONCURRENT EXCHANGE OFFER. SEE 'THE EXCHANGE OFFER--CONDITIONS
TO THE EXCHANGE OFFER.'
------------------------
Skyline Multimedia Entertainment, Inc., a New York corporation (the
'Company'), hereby offers, upon the terms and subject to the conditions set
forth in this Offering Circular (the 'Offering Circular') and in the
accompanying Letter of Transmittal, to exchange one share (the 'Exchange
Consideration') of Common Stock, par value $.001 per share (the 'Common Stock'),
of the Company for each 3.5 outstanding Redeemable Class A Warrants (the 'Class
A Warrants'), of the Company (the 'Exchange Offer').
The expiration date of the Exchange Offer is 5:00 p.m., New York City time,
on September 9, 1997 (the 'Expiration Date'), unless the Expiration Date is
extended, in which case the Expiration Date will be the latest date and time to
which the Expiration Date is extended.
Concurrently herewith, the Company is also offering to the holders of
Redeemable Class B Warrants (the 'Class B Warrants,' and together with the Class
A Warrants, the 'Warrants'), the opportunity to exchange one share of Common
Stock for each seven Class B Warrants of the Company (the 'Class B Exchange
Offer'). The Exchange Offer and the Class B Exchange Offer are each conditioned
on receipt by the Company of at least 95% tenders of both outstanding Class A
Warrants and Class B Warrants.
The Warrants and the Common Stock are quoted on the Nasdaq Small-Cap Market
(the 'Nasdaq Stock Market'). On July 1, 1997 (or the most recent trading date
available), the date preceding the date of the Company's initial press release
relating to the Exchange Offer, the highest bid and closing prices of the Class
A Warrants and the Common Stock reported on the Nasdaq Stock Market were $0.562
and $0.625 per Warrant and $2.875 and $3.375 per share, respectively. No
assurance can be given as to the prices at which the Common Stock might be
traded, or the trading volume of the Common Stock, following the consummation of
the Exchange Offer. See 'Market and Trading Information.'
For the year ended June 30, 1996, on a pro forma basis, assuming the
Exchange Offer had been consummated on July 1, 1995 and all Warrants (including
the Class B Warrants) had been exchanged, earnings per share applicable to the
Common Stock would have decreased from $.37 per share to $.28 per share. See
'Pro Forma Unaudited Financial Information.'
As of the date of this Offering Circular, there are 1,964,500 Class A
Warrants outstanding. No members of management currently hold any Class A
Warrants, however, Jay Coleman, Chairman of the Board, and Zalman Silber, Chief
Executive Officer, of the Company, beneficially own 20,000 and 280,000 Class B
Warrants, respectively, representing approximately 16.7% of the outstanding
Class B Warrants. Messrs. Coleman and Silber have advised the Company that they
intend to tender all of their Class B Warrants pursuant to the Class B Exchange
Offer. See 'The Exchange Offer.'
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Tendering Warrantholders will not be obligated to pay transfer taxes or
exchange commissions in connection with the Exchange Offer. Tenders are
irrevocable, except that Class A Warrants tendered pursuant to the Exchange
Offer may be withdrawn prior to the Expiration Date, and unless theretofore
accepted for exchange, may be withdrawn after 5:00 p.m., New York City time, on
October 7, 1997.
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the 'Securities Act'), afforded by Section 3(a)(9) thereof. The Company
therefore will not pay any commission or other remuneration to any broker,
dealer, salesman or other person for soliciting tenders of the Class A Warrants.
Regular employees of the Company, who will not receive additional compensation
therefor, may provide information to holders of the Class A Warrants concerning
the Exchange Offer.
The Company has made no arrangements and has no understanding with any
independent dealer, salesman or other person regarding the solicitation of
tenders hereunder, and no person has been authorized by the Company to give any
information or to make any representation in connection with the Exchange Offer
other than those contained herein and, if given or made, such other information
or representations must not be relied upon as having been authorized. The
delivery of this Offering Circular shall not, under any circumstances, create
any implication that the information herein is correct as of any time subsequent
to the date hereof.
The Exchange Offer is not being made to, nor will the Company accept
tenders from, holders of the Class A Warrants in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE EXCHANGE OFFER. HOWEVER,
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO
WARRANTHOLDERS AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING THEIR CLASS A
WARRANTS. EACH WARRANTHOLDER MUST MAKE THE DECISION WHETHER TO TENDER CLASS A
WARRANTS AND, IF SO, HOW MANY CLASS A WARRANTS.
IN EVALUATING THE EXCHANGE OFFER, WARRANTHOLDERS ARE STRONGLY URGED TO READ AND
CONSIDER CAREFULLY THE FACTORS DESCRIBED UNDER 'RISK FACTORS' ON PAGE 9 BELOW.
THE SECURITIES TO BE ISSUED IN THE EXCHANGE OFFER HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING
CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Offering Circular is August 11, 1997.
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TABLE OF CONTENTS
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SUMMARY.................................................................................................... 5
The Company.............................................................................................. 5
Purposes and Effects of The Exchange Offer............................................................... 5
Certain Effects on Non-Tendering Holders................................................................. 5
No Recommendation By Board of Directors.................................................................. 5
Intention of Directors and Officers...................................................................... 5
Acceptance Not Mandatory................................................................................. 6
The Exchange Offer....................................................................................... 6
RISK FACTORS............................................................................................... 9
Limited Operating History................................................................................ 9
Losses Since Inception; Accumulated Deficit; Working Capital Deficiency.................................. 9
Restrictive Lease and License Terms...................................................................... 9
Substantial Capital Obligation and Fixed Costs........................................................... 10
Force Majeure............................................................................................ 10
Design, Construction and Operational Risks............................................................... 10
Substantial Level of Indebtedness........................................................................ 10
Dependence on Management................................................................................. 11
Dependence on Tourist Activity........................................................................... 11
Seasonality.............................................................................................. 11
Limited Number of Additional Locations; Need for Additional Financing; Possible Joint Ventures........... 11
Competition.............................................................................................. 11
Technological Changes.................................................................................... 12
Untested Marketing Strategy.............................................................................. 12
Possible Need for Co-Marketing Relationships With Tour Operators or Other Tourist Attractions............ 12
Regulatory Compliance.................................................................................... 12
Voting Rights; Effective Control by Principal Shareholder................................................ 12
Charge to Income in the Event of Release of Escrowed Shares; Debt Issuance Costs......................... 13
No Dividends............................................................................................. 13
Determination of Exchange Rate and Possible Volatility of Price of Common Stock.......................... 13
Potential Adverse Effect of Redemption of Class A Warrants Not Exchanged in the Exchange Offer........... 13
Nasdaq Listing; Trading Market for Warrants.............................................................. 13
Current Prospectus and State Registration Required to Exercise Class A Warrants.......................... 14
Possible Delisting of Securities from Nasdaq Systems; Disclosure Relating to Low-Priced Stocks........... 14
BACKGROUND AND PURPOSES OF THE EXCHANGE OFFER; CERTAIN EFFECTS............................................. 15
Purposes and Effects of the Exchange Offer............................................................... 15
Certain Effects on Non-Tendering Holders................................................................. 16
No Recommendation by Board of Directors.................................................................. 17
PRO FORMA UNAUDITED FINANCIAL INFORMATION.................................................................. 17
Market and Trading Information........................................................................... 18
THE EXCHANGE OFFER......................................................................................... 19
Description of the Warrants.............................................................................. 19
Effect of the Exchange Offer on the Warrantholders....................................................... 19
Terms of the Exchange Offer.............................................................................. 20
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Expiration Date; Extensions; Amendments.................................................................. 21
Procedure for Tendering Class A Warrants................................................................. 21
Guaranteed Delivery Procedures........................................................................... 22
Assistance............................................................................................... 23
Acceptance of Class A Warrants for Exchange.............................................................. 23
Withdrawal Rights........................................................................................ 23
Conditions to the Exchange Offer......................................................................... 24
Fractional Shares........................................................................................ 25
Solicitation of Warrant Holders.......................................................................... 25
Transfer Taxes........................................................................................... 25
Certain U.S. Federal Income Tax Considerations........................................................... 25
The Exchange Agent....................................................................................... 26
Warrant Transfer Agent................................................................................... 26
DESCRIPTION OF SECURITIES.................................................................................. 27
General.................................................................................................. 27
Common Stock............................................................................................. 27
Class A Common Stock..................................................................................... 27
Redeemable Warrants...................................................................................... 27
Preferred Stock.......................................................................................... 28
Underwriter's Unit Purchase Option....................................................................... 29
LEGAL MATTERS.............................................................................................. 29
EXPERTS.................................................................................................... 29
AVAILABLE INFORMATION...................................................................................... 29
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ 30
Company's 1996 Form 10-KSB..............................................................................Exhibit A
Company's March 31, 1997 Form 10-QSB....................................................................Exhibit B
Company's 1996 Proxy Statement..........................................................................Exhibit C
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SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, contained elsewhere or incorporated by
reference in this Offering Circular. Capitalized terms used and not defined in
this summary have the respective meanings ascribed to them elsewhere in this
Offering Circular. Each Warrantholder is urged to read this Offering Circular in
its entirety.
THE COMPANY
Skyline Multimedia Entertainment, Inc., a New York corporation (the
'Company'), is a holding company engaged in the development and operation of
state-of-the-art location-based entertainment attractions worldwide. New York
Skyline, Inc., a wholly-owned subsidiary, owns and operates New York Skyride,
the first flight simulator in the metropolitan New York area. The New York
Skyride is located in the Empire State building, New York's premier tourist
attraction. Through Skyline Virtual Realty, Inc., the Company also owns and
operates XS New York, New York City's first and only virtual reality
entertainment center, located in the heart of Times Square. The Company is also
currently engaged in the development of additional attractions to be located at
the Sydney Tower in Sydney, Australia and the Woodfield Mall outside of Chicago
in Schaumberg, Illinois.
The principal executive offices of the Company are located at 350 Fifth
Avenue, New York, New York 10118, telephone number (212) 564-2224.
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The purpose of the Exchange Offer is to eliminate or significantly reduce
the Class A Warrants (and, through the Class B Exchange Offer, the Class B
Warrants) outstanding because of the substantial market overhang and resulting
depressive effect on the market price of the Common Stock. The purpose of the
Exchange Offer is also to increase the number of shares of Common Stock
available for trading on the Nasdaq Stock Market, which the Company believes
will increase the liquidity of the Common Stock. The Exchange offer is also
intended to increase the liquidity of holders of Class A Warrants by offering
them the opportunity to exchange their Class A Warrants at a premium for shares
of Common Stock, which is a more liquid security. The Company believes that the
elimination or reduction in the number of outstanding Class A Warrants resulting
from the Exchange Offer will provide a number of benefits to the Company and
holders of Common Stock and Class A Warrants. See 'Background and Purposes of
the Exchange Offer; Certain Effects--Purposes and Effects of the Exchange
Offer.'
CERTAIN EFFECTS ON NON-TENDERING HOLDERS
The Class A Warrants are currently registered under the Exchange Act. Under
applicable law, if the Exchange Offer is consummated, the Company could apply to
the Commission to terminate the registration of the Class A Warrants under the
Exchange Act if they are not held by more than 300 holders of record. As of the
date of this Offering Circular, there are 25 record holders and approximately
400 beneficial holders of the Class A Warrants, and the Company believes that,
as a result of the consummation of the Exchange Offer, it will be permitted to
terminate the registration of the Class A Warrants.
NO RECOMMENDATION BY BOARD OF DIRECTORS
The Board of Directors of the Company has approved the Exchange Offer.
However, neither the Company nor its Board of Directors makes any recommendation
to Warrantholders as to whether to tender or refrain from tendering their Class
A Warrants. Each Warrantholder must make the decision whether to tender Class A
Warrants and, if so, how many Class A Warrants.
INTENTION OF DIRECTORS AND OFFICERS
Jay Coleman, Chairman of the Board, and Zalman Silber, President and Chief
Executive Officer of the Company, beneficially own 20,000 and 280,000 Class B
Warrants, respectively. Messrs. Coleman and Silber have advised the Company that
they intend to tender all of their Class B Warrants pursuant to the Class B
Exchange Offer. No other director or officer of the Company owns Class A or
Class B Warrants. See 'The Exchange Offer.'
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ACCEPTANCE NOT MANDATORY
Warrantholders are free to exchange or not exchange their Class A Warrants
for shares of Common Stock in the Exchange Offer and may tender all or some of
their Class A Warrants by properly completing and delivering the Letter of
Transmittal, together with their Class A Warrants, to the Exchange Agent.
THE EXCHANGE OFFER
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The Exchange Offer........................ One share of Common Stock in exchange for each 3.5 Class A Warrants
tendered.
Conditions to
Exchange Offer.......................... The Exchange Offer is conditioned on, among other things, a minimum
of 95% of each of the Class A Warrants and Class B Warrants
outstanding being tendered. See 'The Exchange Offer-- Conditions to
the Exchange' for a statement of the other conditions to the
Company's obligation to accept Class A Warrants tendered pursuant to
the Exchange Offer.
Fractional Shares......................... Tendering record holders of Class A Warrants that are accepted for
exchange will not receive fractional shares of Common Stock but
instead will receive a cash payment in lieu thereof equal to each
such holder's proportionate interest in the net proceeds (following
the deduction of applicable transaction costs) from the sale by the
Exchange Agent, on behalf of such holders, of shares of Common Stock
representing the aggregate of such fractional shares of Common Stock
reasonably promptly after the expiration of the Exchange Offer. See
'The Exchange Offer--Fractional Shares.'
Expiration Date........................... The 'Expiration Date' of the Exchange Offer will be 5:00 p.m., New
York City time, on Tuesday, September 9, 1997, unless the Exchange
Offer is extended, in which case the term 'Expiration Date' shall
mean 5:00 p.m., New York City time on the last date to which the
Exchange Offer is extended. See 'The Exchange Offer-- Expiration
Date; Extensions; Amendments.'
How to Tender in the
Exchange Offer.......................... A holder electing to tender Class A Warrants in the Exchange Offer
should either (i) complete and sign the Letter of Transmittal, have
the signatures thereon guaranteed, if required by Instruction 2
thereof, and mail or deliver the Letter of Transmittal with the Class
A Warrants and any other required documents to the Exchange Agent at
the address set forth on the back cover page of this Offering
Circular, or effect a tender of Class A Warrants pursuant to the
procedures for book-entry transfer as set forth under 'The Exchange
Offer--How to Tender in the Exchange Offer,' or (ii) request his
broker, dealer, commercial bank, trust company or other nominee to
effect the transaction for him. Holders will not be obligated to pay
any brokerage commissions in connection with the Exchange Offer.
Withdrawal Rights......................... Tendered Class A Warrants may be withdrawn at any time until the
Expiration Date and, if not otherwise accepted for exchange by the
Company, at any time after October 7 1997. See 'The Exchange
Offer--Withdrawal Rights.'
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Acceptance of Class A
Warrants and Delivery
of Common Stock......................... Subject to the satisfaction or waiver of all conditions of the
Exchange Offer, the Company will accept for exchange all Class A
Warrants validly tendered on or prior to the Expiration Date. The
Common Stock will be delivered in exchange for the Class A Warrants
accepted in the Exchange Offer promptly after acceptance on the
Expiration Date. See 'The Exchange Offer--Terms of the Exchange
Offer.'
Federal Income Tax
Considerations.......................... For a discussion of certain Federal income tax consequences of the
Exchange Offer to tendering holders and to the Company, see 'Certain
Federal Income Tax Considerations.' However, Warrantholders are urged
to consult with their own tax advisors as to the specific tax
consequences to them of the Exchange Offer.
Class B Exchange Offer.................... Concurrently herewith, the Company is also offering to the holders of
Redeemable Class B Warrants the opportunity to exchange one share of
Common Stock for each seven outstanding Class B Warrants of the
Company (the 'Class B Exchange Offer', and together with the Exchange
Offer, the 'Exchange Offers').
Common Stock.............................. There are 20,000,000 shares of Common Stock authorized for issuance
(including 1,000,000 shares of Class A Common Stock), of which
2,345,000 shares (including 960,000 shares of Class A Common Stock)
are issued and outstanding, and 1,090,909 shares are subject to
issuance upon conversion of preferred stock on the date of this
Offering Circular. In addition, options to acquire up to an
additional 2,365,656 shares of Common Stock upon the exercise of options
and warrants (not including the Class A and Class B Warrants and the
Underwriter's Unit Purchase Option (as hereinafter defined)) are
outstanding. The maximum number of shares of Common Stock offered for
exchange by the Company in the Exchange Offer and the Class B
Exchange Offer, an aggregate of 817,715 shares, represents
approximately 12.4% of the shares of Common Stock which would be
outstanding after giving effect to the issuance of the maximum number
of shares of Common Stock in the Exchange Offer and the Class B
Exchange Offer and assuming the exercise of all other options and
warrants (other than the Underwriter's Unit Purchase Option) and
conversion of the preferred stock. See 'Description of Securities.'
Market and
Trading Information..................... The outstanding Common Stock, Class A Warrants and Class B Warrants,
and the units (each unit consisting of one share of Common Stock, one
Class A Warrant and one Class B Warrant (the 'Units')), are quoted on
the Nasdaq Stock Market. The Common Stock issuable in the Exchange
Offer will be quoted on the Nasdaq Stock Market, subject to official
notice of issuance, under the symbol 'SKYL.' On July 1, 1997 (or the
most recent trading date available), the last trading day before the
announcement of the Exchange Offer, the closing bid quotation
reported on the Nasdaq Stock Market for the Common Stock, Class A
Warrants and Class B Warrants were $2.875, $0.562 and $0.25,
respectively. NO ASSURANCE CAN BE GIVEN CONCERNING THE PRICES AT
WHICH THE COMMON STOCK MIGHT BE TRADED OR THE TRADING
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VOLUME OF THE COMMON STOCK FOLLOWING THE CONSUMMATION OF THE EXCHANGE
OFFER.
Quotations on the Nasdaq Stock Market reflect interdealer prices,
without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions. WARRANTHOLDERS ARE URGED
TO OBTAIN CURRENT INFORMATION WITH RESPECT TO THE COMMON STOCK AND
THE CLASS A WARRANTS. See 'Market and Trading Information'.
Exchange Agent............................ Continental Stock Transfer & Trust Company is the exchange agent (the
'Exchange Agent') for the Exchange Offer.
Failure to Participate in
Exchange Offer.......................... The reduced amount of outstanding Class A Warrants as a result of the
Exchange Offer may limit the trading market for the Warrants, may
adversely effect their liquidity and market price and may terminate
their continued listing on the Nasdaq Stock Market. Holders of the
Class A Warrants who do not exchange their Class A Warrants for
shares of Common Stock in the Exchange Offer will be entitled to
receive shares of Common Stock upon exercise of the Company's Class A
Warrants upon the same terms and conditions as are currently
contained in the Class A Warrants. It is the Company's intention to
delist the Class A and Class B Warrants upon successful completion of
the Exchange Offer and the Class B Exchange Offer. See 'The Exchange
Offer--Effect of the Exchange Offer on the Warrantholders.'
Further Information....................... Requests for additional copies of this Offering Circular, the Letter
of Transmittal or any other documents furnished herewith should be
directed to the Exchange Agent at its address and telephone number
set forth on the back cover page of this Offering Circular. For
further information concerning the Exchange Offer, contact the
Exchange Agent or Steven Schwartz, Executive Vice President--Finance
and Chief Financial Officer, Skyline Multimedia Entertainment, Inc.,
350 Fifth Avenue, New York, NY 10118, telephone (212) 564-2224.
Use of Proceeds........................... There will be no cash proceeds to the Company from the Exchange
Offer.
Risk Factors.............................. Investment in the securities of the Company involves a high degree of
risk, including, but not limited to, risks resulting from the
Company's financial condition, technological changes in the Company's
industry, numerous competing entities in the Company's industry, and
the Company's growth strategy. See 'Risk Factors.'
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NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION THAT
WARRANTHOLDERS TENDER OR REFRAIN FROM TENDERING THEIR CLASS A WARRANTS, AND NO
ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION ON BEHALF OF THE
COMPANY. THIS IS A MATTER FOR EACH WARRANTHOLDER TO DETERMINE AFTER CONSULTATION
WITH HIS ADVISORS, INCLUDING TAX ADVISORS, ON THE BASIS OF HIS OWN FINANCIAL
POSITION AND REQUIREMENTS. SEE 'THE EXCHANGE OFFER-- CERTAIN U.S. FEDERAL INCOME
TAX CONSIDERATIONS.'
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RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk, including, but not necessarily limited to, the risk factors described
below. Each prospective investor should carefully consider the following risk
factors inherent in and affecting the business of the Company and the Exchange
Offer, in addition to the risks and other information described elsewhere in
this Offering Circular, before making an investment decision.
1. LIMITED OPERATING HISTORY. The Company was formed in 1993 and began full
operation of the New York Skyride in February 1995. The Company commenced
operations of XS New York in March 1997 and is currently developing attractions
in Sydney, Australia and the Woodfield Mall outside of Chicago in Schaumberg,
Illinois. Potential investors should be aware of the delays, expenses and
difficulties encountered in developing such attractions, including, but not
limited to, the lack of sufficient capital, expected initial operating losses
and unforeseeable problems that may be beyond the control of the Company. The
Company cannot predict whether its projects will be completed on the expected
dates, or when, if ever, such projects will commence operations and generate
revenues. While the Company hopes to develop and manage similar attractions in
other locations, the Company has no specific arrangements and no timetable
relating to such other locations. Additionally, there is no assurance the
Company's attractions will attain market acceptance. Because of the high cost of
developing and implementing these projects, if they do not prove to have a
satisfactory market appeal, the Company will not have sufficient resources to
explore or undertake alternative strategies that could prove more viable and the
Company may be forced to curtail operations.
2. LOSSES SINCE INCEPTION; ACCUMULATED DEFICIT; WORKING CAPITAL
DEFICIENCY. Although the Company has had profitable quarterly results, as of
March 31, 1997, the Company has incurred net losses aggregating approximately
($4,609,000), and the Company expects that losses will continue until such time
as its current projects are operational. The expenditures planned by the Company
can be expected to adversely affect its liquidity and profitability, since many
of such expenditures will be expensed as incurred, while revenues derived from
these activities may not be realized, if at all, for some time. There can be no
assurance that any individual project, or the Company, will ever achieve
profitable operations.
At March 31, 1997, the Company had a working capital deficiency of
($2,532,000) and an accumulated deficit since inception of ($4,609,000), which
amounts have increased since that date. Although the Company believes that it
will be able to fund its operations through existing cash flow and currently
available external sources of capital, there can be no assurance that such funds
will be sufficient or that the Company will have sufficient continuing revenues
to fund its operating requirements. In such event, the Company would seek
additional financing through bank borrowings, debt or equity financings or
otherwise. The Company is in the process of seeking such alternative sources of
capital, however, there can be no assurance that any such financing will be
available to the Company on acceptable terms, if at all.
3. RESTRICTIVE LEASE AND LICENSE TERMS. In 1993, the Company's subsidiary
signed a 20 year lease, as modified (the 'Lease'), with the Empire State
Building's landlord (the 'Landlord') for an 18,000 square foot location on the
second floor of that building for annual rental payments of $338,000 escalating
through the term of the Lease to $534,000 (with 21 months free rent during the
first three years of the Lease term). The Lease is not transferrable or
assignable without the written consent of the Landlord, and contains very
specific 'change of control' provisions which may limit the Company's options to
sell New York Skyride at some future date. The Lease requires the Company to
continue to comply with numerous ongoing requirements in addition to the
Company's timely payment of rent and other charges. The Company also signed a
lease for an additional 4,000 square feet on the third floor of the Empire State
Building above the initial location to accommodate a larger viewing screen for
New York Skyride. The lease for this area runs concurrently with, and includes
similar terms as, the Lease. Additionally, as part of the Lease modification,
the Company obtained an additional 35,000 square foot location adjacent to the
New York Skyride location. Although the Company is in the process of disposing
of this additional property, the Company currently remains obligated under the
lease therefor, which contains similar terms as in the Lease. There can be no
assurance that the Company will be able to dispose of, assign or cancel such
Lease or that the Company will have the resources to strictly comply with all of
the provisions of its various leases. The Company's failure or inability to
strictly comply with each provision of its leases could give rise to a default
under such lease (which might not be curable by the Company), which would permit
the
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Landlord to terminate such lease, evict the Company from the premises, and hold
the Company immediately liable for the full balance of all rental payments due
under such lease for the full remaining term of such lease. Similarly, the
Company is required to make annual payments under its license agreement (the
'License Agreement') with the Landlord over a term of 20 years, running
concurrently with the Lease, ranging from $100,000 to $225,000. The License
Agreement provides for the joint sale of tickets to the observation deck atop
the Empire State Building (the 'Observatory') and the New York Skyride by the
Landlord. A default under the License Agreement relating to the annual payments
to be made thereunder and certain costs and expenses to be paid by the Company,
will be deemed a default under the Lease. A default or possible default by the
Company under its various leases or the License Agreement would have a material
adverse effect on the Company's business and could force the Company to curtail
operations or to seek protection under the bankruptcy laws.
4. SUBSTANTIAL CAPITAL OBLIGATION AND FIXED COSTS. In addition to the
capital obligations under the leases and the License Agreement described above,
except for certain percentage rent obligations, substantially all of the
operating expenses at the Company's attractions (and at other locations the
Company might develop in the future) are expected to be relatively fixed,
regardless of the number of customers that visit such attractions or the amount
of revenues that are generated. Therefore, unless there is sufficient attendance
that generates enough revenues to cover these expenses, the Company will have
limited options to achieve a break-even or positive cash flow. In addition, over
the term of the Company's leases and its License Agreement at the Empire State
Building, while it is expected that the costs of operating the Company's
facilities will increase (due to increased annual license fees, escalation of
rent and energy costs, real estate increases, state or city sales taxes that
might be imposed on special use venues, insurance costs and employee salaries
and benefits), there is no assurance that the Company will be able to increase
attendance, raise prices or implement additional revenue generating strategies
that will be sufficient to counterbalance these increases in expenses. Further,
the Company's revenue from operating attractions such as New York Skyride is
limited by the capacity of the attraction, which can accommodate approximately
500 visitors per hour. While the Company does not anticipate maximum attendance
throughout the day, and while the Company has not yet experienced such a
situation, it is possible that the seating limitations of the simulators will
adversely affect the Company by not accommodating all of the potential customers
at particular 'peak' times.
5. FORCE MAJEURE. In the event that the Empire State Building or the other
locations of the Company's attractions are subject to fire, accident, general
mechanical or structural problems, or other unforeseen problems or incidents
that are beyond the Company's control and that affect its operation or use for a
brief or long period of time, the operation of such attraction and the Company
could be materially adversely affected. Additionally, the Company's business is
to some extent affected by adverse weather conditions in that attendance will
generally decrease on days of inclement weather. Prolonged periods of severe
weather patterns or other factors, such as fear of increased terrorist activity,
may have an adverse impact on the flow of people to such venues and,
accordingly, such decreased traffic may have an adverse effect on the Company's
business.
6. DESIGN, CONSTRUCTION AND OPERATIONAL RISKS. The viability of the
Company's projects is somewhat dependent on the successful integration of the
overall design (which, among other factors, must address issues such as appeal
to potential attendees, traffic patterns and waiting lines, and comfort and
safety matters) with the operational demands of large-scale simulators (and
related computer-controlled film projection technologies) and location-based
entertainment centers. There can be no assurance that construction problems will
not occur which could cause unexpected delays and expense to the Company. Also,
it is possible that technical problems will arise during the design or
installation phases of the simulators or with the related technologies, which
could also significantly delay the planned commencement of operations at the
site, or could adversely affect the business of the Company if such problems
occur after opening.
7. SUBSTANTIAL LEVEL OF INDEBTEDNESS. The Company has a substantial amount
of outstanding indebtedness. As of March 31, 1997, the Company had approximately
$7.2 million of debt. The Company's level of indebtedness could have important
consequences to the holders of the Common Stock, including the following: (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of the principal of and interest on its indebtedness and will not
be available for other purposes; (ii) the ability of the Company to obtain
financing in the future for working capital needs, capital expenditures,
acquisitions, investments, general corporate purposes or other purposes may be
materially limited or impaired; and (iii) the Company's level of indebtedness
may reduce the Company's flexibility to respond to changing business and
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economic conditions. Subject to certain limitations contained in its outstanding
debt instruments, the Company may not incur additional indebtedness to finance
working capital or capital expenditures, investments or acquisitions or for
other purposes. Substantially all of the Company's assets serves as collateral
security for the Company's indebtedness to its lenders.
8. DEPENDENCE ON MANAGEMENT. The Company is dependent on the ability, skill
and dedication of Zalman Silber, the Company's President and Chief Executive
Officer, Mark Messersmith, the Company's Executive Vice President--Operations
and Steven Schwartz, the Company's Executive Vice President--Finance and Chief
Financial Officer. In addition, there is a substantial risk that the Company's
attempt to develop and operate attractions at other sites around North America
or abroad will detract management from devoting necessary time and attention to
its current operations and projects. Alternatively, the Company's small
management team may not have the necessary time, experience or resources to
adequately develop and/or operate multiple locations, thereby limiting the
Company's growth potential.
9. DEPENDENCE ON TOURIST ACTIVITY. Because the Company's attractions are
intended primarily as tourist attractions, the number of visitors at a
particular site is expected to be related to the overall level of tourist
activity in the area where the attraction is located, which is, in part,
affected by cyclical national, international and regional economic conditions
which are beyond the control of the Company. A reduction in the number of
tourists to the areas where the Company's attractions are located will have a
negative impact upon the operations of the Company.
10. SEASONALITY. The Company anticipates that a portion of its business
will be seasonal, with operating results varying (possibly substantially) from
quarter to quarter, generally higher in the May-September and December holiday
periods in North American cities where the Company currently operates and the
reverse in Australia where the Company is expected to operate in 1998.
11. LIMITED NUMBER OF ADDITIONAL LOCATIONS; NEED FOR ADDITIONAL FINANCING;
POSSIBLE JOINT VENTURES. The Company's long term goal is to develop simulator
and other location-based entertainment attractions in other major cities in the
United States, and possibly other countries. There are, however, only a limited
number of locations in a small number of cities that are suitable for these
types of attractions, and there is no assurance that the Company could obtain a
lease at such locations and develop attractions at such locations. Also,
development of additional attractions will require the Company to obtain
financing for such ventures, and there can be no assurance that such financing
will be available, or available on terms and conditions that are acceptable to
the Company. Additionally, it is possible that the Company would find it
necessary to have one or more local partners involved in any additional
attractions it might attempt to develop, thereby further limiting the revenues
the Company could generate from such attractions at other locations.
12. COMPETITION. The Company's attempt to attract visitor revenue will face
significant competition from all of the other landmarks, tourist attractions,
museums and other entertainment and cultural attractions that exist in the area
where the Company's attractions are located. Many of these competing attractions
are considered 'must-see' attractions for tourists, and there can be no
assurance that the Company's attractions will compete effectively against such
must-see tourist destinations. The concept of a simulator attraction offering a
'helicopter flight' over a city or the interactive virtual reality entertainment
center are not proprietary to the Company, and the Company's consultants and
equipment suppliers are not prohibited from competing with the Company. The
Company is also aware that major multi-national entertainment companies have
plans for attractions at locations near the site of certain of the Company's
locations and that such attractions are likely to offer direct competition to
the Company. Additionally, a major entertainment complex is being developed at
Times Square which will include entertainment attractions from companies such as
Disney, American Cinema, Madame Tussaud and other large entertainment companies.
In September 1996, a simulator attraction opened in Times Square. Further, a
simulator attraction has opened in the World Trade Center Towers and a non-New
York related simulator began operating in October 1996 on the lower level of the
Empire State Building. The Company believes that the simulator attraction in the
Empire State Building will not have a material impact on the Company or the
operations of New York Skyride since such attraction is not a uniquely 'New
York' experience, has much less capacity than New York Skyride and is unable to
sell tickets jointly with the Observatory. There can be no assurance that other
simulator and entertainment attractions will not commence operations in the
areas where the Company's attractions are located. In almost every case, the
attractions or businesses that the Company will
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compete with are more established and well known and have substantially greater
financial, technical and marketing resources than the Company. Increased
competition may have the effect of forcing the Company to reduce its prices or
increase marketing expenditures in order to maintain existing levels of
attendance, which event will result in a reduction in revenues.
13. TECHNOLOGICAL CHANGES. Insofar as motion simulation technologies,
including show control systems (and related projection and audio technologies),
are subject to improvements and enhancements, it is possible that competitive
attractions will be able to offer a more technologically advanced 'experience'
to a customer than the experience offered by New York Skyride. Also, the Company
believes that a number of attractions, which include the simulator attraction
which opened in Times Square, utilizing so-called 'virtual reality' imaging
technologies, or large film format technologies with enhanced 3-dimensional
projection technologies, are likely to open in the New York area within the near
future. These attractions do not depend on motion simulators for their special
effects, and they are also likely to be developed and operated by companies that
have significantly greater financial, managerial and promotional experience and
resources than the Company. While these attractions may not offer a directly
competitive 'product' to New York Skyride (i.e., an aerial adventure in New York
City) or XS New York, their presence will certainly create significant
competition for the Company to attract visitors to New York Skyride and XS New
York. The Company will compete with these entities primarily on the basis of
location, uniqueness of product, marketing and price. The Company's inability to
maintain a technologically competitive experience either with respect to its
simulator attractions or its virtual reality entertainment centers will result
in a decrease in attendance, which will have an adverse impact on the Company's
operations.
14. UNTESTED MARKETING STRATEGY. A key element of the Company's success
will be its marketing and advertising strategy to establish the identity of the
Company's attractions. While the Company has a general budget to enable it to
design and carry-out this strategy, it is not certain that its marketing and
advertising efforts will be successful, or that this budget will, in fact, be
sufficient. The Company has not conducted any independent market research
studies to determine if there is any demand for its attractions, and is not
certain that its marketing and advertising efforts will be successful in
attracting customers.
15. POSSIBLE NEED FOR CO-MARKETING RELATIONSHIPS WITH TOUR OPERATORS OR
OTHER TOURIST ATTRACTIONS. It is also likely that the Company will find it
necessary to enter into one or more co-marketing arrangements or strategic
alliances with established tour operators, entertainment vendors or other
attractions in order to gain access to a sufficient, predictable flow of
customers. The Company has not entered into any discussions or negotiations with
respect to such co-marketing arrangements or strategic alliances, and it does
not know if it will be possible to enter into such arrangements or alliances.
Even if the Company were to enter into one or more of such arrangements, it is
possible that the increased number of customers resulting therefrom will be
offset by fees or other revenue-sharing arrangements that the Company will have
to enter into to develop such co-marketing opportunities or strategic alliances.
16. REGULATORY COMPLIANCE. While the Company believes it is aware of all of
the permits it is required to obtain and all of the governmental regulations it
is required to comply with, and believes that it can obtain such permits and
comply with all such regulations in the future, there can be no assurance that
this will be the case, that such compliance might not increase the expenses the
Company will incur or that such regulations will not be modified making it
increasingly difficult for the Company to operate its business as anticipated.
17. VOTING RIGHTS; EFFECTIVE CONTROL BY PRINCIPAL SHAREHOLDER. In addition
to the Common Stock, the Company has outstanding shares of Class A Common Stock.
The Common Stock and Class A Common Stock are identical in every respect, except
that on all matters with respect to which the Company's shareholders are
entitled to vote, each share of Common Stock is entitled to one vote and each
share of Class A Common Stock is entitled to five votes. Except as required by
law, the Common Stock and the Class A Common Stock vote together as a single
class. Mr. Zalman Silber, President and Chief Executive Officer of the Company
(the 'Principal Shareholder'), currently owns approximately 28% of the
outstanding capital stock of the Company (including the preferred stock) and 66%
of the combined voting power of the outstanding capital stock of the Company
(not including shares issuable upon exchange of Class B Warrants held by Mr.
Silber). Assuming the issuance of the maximum number of shares of Common Stock
pursuant to the Exchange Offers, Mr. Silber will own approximately 24% of the
outstanding capital stock of the Company and approximately 60% of the
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combined voting power of the outstanding capital stock of the Company. However,
certain of Mr. Silber's shares are subject to forfeiture in the event certain
earnings or per share market price targets are not achieved pursuant to an
escrow arrangement entered into with the underwriter of the Company's initial
public offering in 1994. See 'Description of Securities--Class A Common Stock.'
In the event such earnings or per share market price targets are not achieved,
the escrowed shares will be forfeited, and, assuming the issuance of the maximum
number of shares of Common Stock pursuant to the Exchange Offers, Mr. Silber
will own approximately 33% of the outstanding capital stock of the Company and
46% of the combined voting power of the outstanding capital stock of the Company
(inclusive of shares issuable upon exchange of Class B Warrants held by Mr.
Silber and exercise of options which will vest upon such forfeiture of the
escrowed shares).
As a result of his ownership of Class A Common Stock, Mr. Silber will have
the ability to significantly influence the election of the directors of the
Company and otherwise influence the affairs of the Company. See 'Description of
Securities--Class A Common Stock.' The disproportionate vote afforded the Class
A Common Stock could also serve to impede or discourage a potential acquiror of
the Company from seeking to acquire control of the Company through the purchase
of the Company's Common Stock, which could have a depressive effect on the price
of the Company's securities.
18. CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROWED SHARES; DEBT
ISSUANCE COSTS. In the event any shares are released from escrow to Mr. Silber,
compensation expense will be recorded for financial reporting purposes.
Therefore, in the event the Company attains any of the earnings or stock price
thresholds required for the release of such escrowed shares, such release will
be treated, for financial reporting purposes, as compensation expense of the
Company. Accordingly, the Company will, in the event of the release of the
escrowed shares, recognize during the period that the earnings or stock price
thresholds are met, what could be a substantial charge that would increase the
Company's loss or reduce or eliminate earnings, if any, at such time. The amount
of this charge will be equal to the difference between the fair value (aggregate
market price) of such shares at the time of the release from escrow and the
original value assigned to such shares. Although the amount of compensation
expense recognized by the Company will be a non-cash charge and will not affect
the Company's total shareholders' equity, it will not be deductible by the
Company and it may have a depressive effect on the market price of the Company's
securities. See 'Description of Securities--Class A Common Stock.'
19. NO DIVIDENDS. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash or other dividends in the
foreseeable future.
20. DETERMINATION OF EXCHANGE RATE AND POSSIBLE VOLATILITY OF PRICE OF
COMMON STOCK. The exchange rate has been determined by the Company based upon
recent market prices for shares of Common Stock and recent market prices for the
Class A Warrants, taking into consideration the exercise price and expiration
date of the Class A Warrants. The Exchange Rate does not necessarily have any
relationship to the Company's assets, book value, results of operations or any
other generally accepted criteria of value and should not be regarded as
indicative of the intrinsic or market value of the Class A Warrants or the
Common Stock. In addition, the trading prices of the Common Stock issued in
exchange for the Class A Warrants could be subject to wide fluctuations in
response to quarterly variations in operating results, announcements or material
business events by the Company or its competitors and other events or factors.
21. POTENTIAL ADVERSE EFFECT OF REDEMPTION OF CLASS A WARRANTS NOT
EXCHANGED IN THE EXCHANGE OFFER. Any Class A Warrants not exchanged hereby may
be redeemed by the Company, at a price of $.05 per Warrant, at any time they are
exercisable, subject to not less than 30 days prior written notice to the
holders thereof, provided that the closing bid price of the Common Stock shall
have averaged in excess of $9.30 per share for the 30 consecutive trading days
ending within 15 days of the date on which notice of redemption is given. Notice
of the redemption of the Class A Warrants could force the holders thereof to
exercise the Class A Warrants and pay the exercise price at a time when it may
be disadvantageous for them to do so; to sell the Class A Warrants at the then-
current market price when they might otherwise wish to hold the Class A
Warrants; or to accept the redemption price which is likely to be substantially
less than the market value of the Class A Warrants at the time of redemption.
See 'The Exchange Offer--Description of the Warrants.'
22. NASDAQ LISTING; TRADING MARKET FOR WARRANTS. Although the Company's
Common Stock is currently listed on the Nasdaq Stock Market, there is no
assurance that the Company meets or will continue to meet the
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listing requirements of the Nasdaq Stock Market. Although currently in
compliance with such listing criteria, it is possible that in the future, the
Company will be unable to maintain such listing standards and the Common Stock
may be delisted from the Nasdaq Stock Market. The National Association of
Securities Dealers, Inc. (the 'NASD'), the governing body of the Nasdaq Stock
Market, recently filed proposed rule changes with the Commission which, if
approved, would impose more stringent maintenance standards. See '--Possible
Delisting of Securities from Nasdaq Systems.' It is possible that in the future
the Company would be unable to meet the proposed listing standards or other rule
changes which the NASD may adopt.
To the extent Warrantholders participate in the Exchange Offer, the trading
market for, and liquidity of, the Class A Warrants which remain outstanding, if
any, could be reduced. Upon completion of the Exchange Offer, the Company
intends to delist the Class A Warrants from trading on the Nasdaq Stock Market
and deregister the Class A Warrants under the Exchange Act if it determines that
the Class A Warrants are held of record by fewer than 300 persons. Accordingly,
those Warrantholders who do not participate in the Exchange Offer may find it
difficult to dispose of such securities as a result of the illiquid market
therefor.
23. CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE CLASS A
WARRANTS. Warrantholders will be able to exercise the Class A Warrants only if a
current prospectus relating to the securities underlying the Class A Warrants is
then in effect and only if such securities are qualified for sale or exempt from
qualifications under the applicable securities laws of the states in which the
various holders of Class A Warrants reside. There can be no assurance that the
Company will be able to maintain the effectiveness of a current prospectus
covering the securities underlying the Class A Warrants. The Company will be
unable to issue Common Stock to those persons desiring to exercise their Class A
Warrants if a current prospectus covering the securities issuable upon the
exercise of the Class A Warrants is not kept effective or if such securities are
not qualified or exempt from qualification in the states in which the holders
of the Class A Warrants reside. A current prospectus covering the securities
issuable upon exercise of the Class A Warrants is currently not in effect.
24. POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEMS; DISCLOSURE
RELATING TO LOW-PRICED STOCKS. The Company's failure to meet the Nasdaq Stock
Market maintenance criteria in the future for any reason may result in the
discontinuance of the inclusion of the Company's securities on the Nasdaq Stock
Market. In order to remain quoted on the Nasdaq Stock Market, a company must
maintain $2,000,000 in total assets, a $200,000 market value of the public float
and $1,000,000 in total capital and surplus. In addition, continued inclusion
requires two market-makers and a minimum bid price of $1.00 per share; provided,
however, that if a company falls below such minimum bid price, it will remain
eligible for inclusion in the Nasdaq Stock Market if the market value of the
public float is at least $1,000,000 and the company has $2,000,000 in capital
and surplus. In such event, trading, if any, in the Company's securities may
then continue to be conducted on the OTC Electronic Bulletin Board or in the
non-NASDAQ over-the-counter market. As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of the Company's securities. In addition, the Company would be subject to Rule
15g-9 (the 'Rule') promulgated under the 1934 Act, which imposes various sales
practice requirements on broker dealers who sell securities governed by the Rule
to persons other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by the Rule, the broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, the
Rule may have an adverse effect on the ability of broker-dealers to sell the
Company's securities and may affect the ability of purchasers of the Company's
securities to sell such securities in the secondary market and otherwise affect
the trading market in the Company's securities.
Prospects for the continued listing of the Company could be affected by
changes in the rules governing the Nasdaq Stock Market. In April 1997, the NASD
filed a proposed rule change with the Commission which would, if adopted, impose
more stringent maintenance criteria on listed companies. To qualify for
continued inclusion in the Nasdaq Stock Market under the proposed rules, a
company would have to maintain (a) either $2,000,000 in net tangible assets
(total assets minus total liabilities and goodwill); market capitalization of
$35,000,000; or net income of $500,000 in two of the last three most recently
completed fiscal years; and (b) a market value of the public float of
$1,000,000. The proposed rule also would eliminate the current rule allowing
continued inclusion after a company's stock falls below the $1 per share minimum
bid as long as certain criteria are met. The Company offers no opinion as to
whether the NASD will adopt the foregoing proposed rule changes.
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The Commission has adopted rules that regulate broker-dealer practices in
connection with transactions in 'penny stocks.' Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
Stock Market system, provided that current price and volume information with
respect to transactions in that security is provided by the exchange or system).
The penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and the monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker-dealer and salesperson compensation information
must be given to the customer orally or in writing prior to effecting the
transaction and must be given to the customer in writing before or with the
customer's confirmation. These disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for a stock that
becomes subject to the penny stock rules. If the Company's securities become
subject to the penny stock rules, holders of the Company's securities may find
it more difficult to sell their securities.
BACKGROUND AND PURPOSES OF THE EXCHANGE OFFER; CERTAIN EFFECTS
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The purpose of the Exchange Offer is to eliminate or significantly reduce
the outstanding Class A Warrants because of the substantial market overhang and
depressive effect thereof on the price of the Common Stock. The purpose of the
Exchange Offer is also to increase the number of shares of Common Stock
available for trading on the Nasdaq Stock Market which the Company believes will
increase the liquidity of the Common Stock. The Exchange offer is also intended
to increase the liquidity of holders of Class A Warrants by offering them the
opportunity to exchange their Class A Warrants at a premium for shares of Common
Stock, which is a more liquid security.
Based on the closing bid price of $2.875 per share of Common Stock reported
on the Nasdaq Stock Market on July 1, 1997, the last trading day before the
announcement of the Exchange Offer, the Exchange Consideration offered in the
Exchange Offer represents premiums of 31% over the last sale price of $.625
(i.e., 3.5 Class A Warrants multiplied by $.625 equals $2.19 per share of Common
Stock) and approximately 275% over the current exercise price per share (i.e.,
$6.01). The Board determined to offer a premium price in the Exchange Offer in
order to provide an economic incentive to holders of the Class A Warrants to
exchange their shares. There can be no assurance concerning the prices at which
the Common Stock might be traded, or the trading volume of the Common Stock,
following the consummation of the Exchange Offer. See 'Market and Trading
Information.'
The Company believes that the elimination or reduction in the number of
outstanding Class A Warrants resulting from the Exchange Offer will provide a
number of benefits to the Company and holders of Common Stock and holders of
Class A Warrants, including the following:
1. Elimination of the Class A and Class B Warrants will decrease the
earnings/loss per share applicable to the Common Stock, but will also
decrease the book value per share applicable to the Common Stock. For the
year ended June 30, 1996, on a pro forma basis, assuming the Exchange Offer
and the Class B Exchange Offer had been consummated on July 1, 1995,
earnings per share applicable to the Common Stock would have decreased
between 19% and 24% (from $.37 per share to between $.28 and $.30 per
share), depending on the minimum and maximum number of shares exchanged for
Common Stock pursuant to the Exchange Offer and the Class B Exchange Offer.
The book value per share of Common Stock would have decreased from $2.48 to
between $1.93 and $1.95 per share (an 21% to 22% decrease) for the fiscal
year ended June 30, 1996. For the nine month period ended March 31, 1997,
the loss per share would have decreased from $(.86) to between $(.67) and
$(.68) per share (a 21% to 22% decrease) and the book value per share would
have increased from $1.69 to between $1.31 and $1.33 per share (an 21% to
22% decrease). See 'Pro Forma Unaudited Financial Information.'
15
<PAGE>
2. The issuance of Common Stock in the Exchange Offer will increase
the number of shares of Common Stock available for trading on the Nasdaq
Stock Market and the number of holders of Common Stock. A purpose of the
Exchange Offer is to increase the number of shares of Common Stock
available for trading on the Nasdaq Stock Market, or the public float,
which the Company believes will increase the liquidity of the Common Stock.
3. By offering holders of Class A Warrants the opportunity to exchange
their out-of-the-money Warrants for shares of Common Stock, the Company is
providing liquidity to the holders of the Class A Warrants for their
investment and an increased opportunity to exercise their Class A Warrants
for shares of Common Stock, which represents a more liquid investment than
the Class A Warrants.
4. By offering holders of Class A Warrants a common equity stake in
the Company, the Company is providing the holders with an opportunity to
participate in the potential long-term appreciation of the Company's
business, which the Company expects will be enhanced by the improvement in
its capital structure and increased financial flexibility as a result of
the consummation of the Exchange Offers. The holders of the Class A
Warrants will also gain voting rights by exchanging their Class A Warrants
for shares of Common Stock.
5. The consummation of the Exchange Offer will eliminate or
substantially reduce the number of outstanding Class A Warrants and,
depending on the number of Class A Warrants outstanding following the
consummation of the Exchange Offer, may enhance the Company's ability to
obtain equity capital as a result of elimination of the market overhang and
potential dilution created by the Warrants. See '--Certain Effects on
Non-Tendering Holders.'
The Company may, in the future, purchase Warrants in the open market, in
private transactions, through tender offers or otherwise. However, Rule 13e-4
under the Exchange Act prohibits the Company from making any purchases of shares
of Common Stock or Warrants until 10 business days after the Expiration Date,
other than pursuant to the Exchange Offer. Any purchases the Company may choose
to make may be on the same terms as, or on terms more or less favorable to
holders than, the terms of the Exchange Offer. Any possible future purchases by
the Company will depend on numerous factors, including the market price of the
Warrants, the results of the Exchange Offers, the Company's business and
financial condition and general economic and market conditions.
The maximum number of shares of Common Stock offered for exchange by the
Company in the Exchange Offer and the Class B Exchange Offer represents
approximately 19% of the shares of Common Stock which would be outstanding after
giving effect to the issuance of Common Stock in such Exchange Offers (not
including the exercise of all other outstanding options and warrants, but
assuming the conversion of the preferred stock).
Shares of Common Stock held by non-affiliates of the Company issued for
exchange in the Exchange Offer will be deemed freely tradeable following their
issuance.
CERTAIN EFFECTS ON NON-TENDERING HOLDERS
The Exchange Offers are intended to extinguish the Class A and Class B
Warrants through the issuance of Common Stock to reduce the future potential
dilutive impact on the Company's earnings per share of Common Stock that would
be caused by exercise of the Class A and Class B Warrants. In the absence of the
Exchange Offers, 6,330,744 shares of Common Stock could be issued if all of the
currently outstanding Class A and Class B Warrants held by Warrantholders were
exercised. Assuming 100% participation in the Exchange Offers, 817,715 shares of
Common Stock will be issued upon consummation of the Exchange Offers. It is
expected that the Class A and Class B Warrants will be delisted from the Nasdaq
Stock Market following the consummation of the Exchange Offers and that
remaining Warrantholders will find it increasingly difficult to dispose of such
securities.
16
<PAGE>
NO RECOMMENDATION BY BOARD OF DIRECTORS
The Board of Directors of the Company has approved the Exchange Offer.
However, neither the Company nor its Board of Directors makes any recommendation
to Warrantholders as to whether to tender or refrain from tendering their Class
A Warrants. Each Warrantholder must make the decision whether to tender Class A
Warrants and, if so, how many Class A Warrants.
PRO FORMA UNAUDITED FINANCIAL INFORMATION
The Pro Forma Unaudited Earnings Per Share and Book Value Per Share for the
years ended June 30, 1996 and 1995 and the nine months ended March 31, 1997 and
1996, are based on the historical financial statements of the Company and have
been prepared to give effect to the Exchange Offer as if it had been consummated
on July 1, 1995 with respect to the fiscal year comparison and July 1, 1996 with
respect to the nine month comparison. The information provided giving effect to
the Exchange Offer assumes that holders of Class A Warrants elect to exchange
all Class A Warrants into Common Stock. The Company's full audited financial
statements are incorporated herein by reference from the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1996 (the 'Company's Form
10-KSB'), attached as Exhibit A to this Offering Circular. The financial
statements from the Company's Quarterly Report on Form 10-QSB, for the quarter
ended March 31, 1997 (the 'Company's Form 10-QSB'), are incorporated by
reference and attached as Exhibit B to this Offering Circular). No other
financial information, except as set forth below, will be affected as a result
of the consummation of the Exchange Offer.
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS ENDED MARCH 31,
----------------------------------------- ----------------------------------------
1995 PRO FORMA 1996 PRO FORMA 1996 PRO FORMA 1997 PRO FORMA
------ --------- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings Per Share
Assuming Minimum Tender
(776,830 shares) (1)....... $(1.25) $ (.87) $ .37 $ .29 $ .18 $ .14 $(.86) $(.68)
Assuming Maximum Tender
(817,715 shares) (2)....... $(1.25) $ (.85) $ .37 $ .28 $ .18 $ .14 $(.86) $(.67)
Book Value Per Share
Assuming Minimum Tender
(776,830 shares) (1)....... $ 1.80 $ 1.25 $2.48 $1.95 $2.29 $1.80 $1.69 $1.33
Assuming Maximum Tender
(817,715 shares) (2)....... $ 1.80 $ 1.23 $2.48 $1.93 $2.29 $1.78 $1.69 $1.31
</TABLE>
NOTES TO PRO FORMA UNAUDITED FINANCIAL INFORMATION
(1) Assumes that holders of 95% of each of the Class A and Class B Warrants
outstanding elect to exchange their Warrants for Common Stock.
(2) Assumes that holders of 100% of each of the Class A and Class B Warrants
outstanding elect to exchange their Warrants for Common Stock.
17
<PAGE>
MARKET AND TRADING INFORMATION
The following table sets forth the high and low sale prices for the Units,
Common Stock, Class A Warrants and Class B Warrants for the fiscal periods
indicated as reported by Nasdaq. The quotations shown represent inter-dealer
prices without adjustment for retail mark-ups, mark-downs or commissions, and
may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
----------- ------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Units
1st Quarter.......................................................................... 6 5/8 3 3/8 6 1/8 4 1/4
2nd Quarter.......................................................................... 6 1/4 4 1/2 6 7/8 4 1/2
3rd Quarter.......................................................................... 8 4 1/2 6 1/2 4
4th Quarter.......................................................................... 6 7/6 3 1/2 5 3/4 3 3/4
Common Stock
1st Quarter.......................................................................... 5 1/8 2 3/4 4 1/2 2 3/4
2nd Quarter.......................................................................... 4 7/8 3 1/2 4 2 3/4
3rd Quarter.......................................................................... 5 3/4 3 7/8 4 7/8 3
4th Quarter.......................................................................... 4 3/8 2 7/8 4 1/8 2 1/2
Class A Warrants
1st Quarter.......................................................................... 1 1/4 3/4 1 1/8 3/4
2nd Quarter.......................................................................... 1 1/4 5/8 2 1/8 1 1/8
3rd Quarter.......................................................................... 2 1/16 5/8 1 3/4 3/4
4th Quarter.......................................................................... 1 9/16 5/16 1 1/8 5/8
Class B Warrants
1st Quarter.......................................................................... 3/4 1/4 1/2 1/4
2nd Quarter.......................................................................... 7/16 1/4 9/16 3/8
3rd Quarter.......................................................................... 3/14 3/8 7/8 9/16
4th Quarter.......................................................................... 7/16 17/64 5/8 3/8
</TABLE>
18
<PAGE>
THE EXCHANGE OFFER
DESCRIPTION OF THE WARRANTS
The Warrants were issued in registered form pursuant to an agreement, dated
February 14, 1994 (the 'Warrant Agreement'), between the Company, Continental
Stock Transfer & Trust Company (the 'Warrant Agent') and D.H. Blair Investment
Banking Corp. The following discussion of certain terms and provisions of the
Warrants is qualified in its entirety by reference to the detailed provisions of
the Warrant Agreement, the form of which has been filed as an exhibit to the
Company's Registration Statement on Form SB-2 dated February 14, 1994.
Each Class A Warrant entitles the registered holder thereof to purchase
1.106 shares of Common Stock (as adjusted) and one Class B Warrant from the
Company at a price of $6.01 per Class A Warrant, subject to further adjustment
in certain circumstances, at any time until February 13, 1999. Each Class B
Warrant entitles the registered holder thereof to purchase 1.106 shares of
Common Stock (as adjusted) from the Company at a price of $7.91 per Class B
Warrant, subject to further adjustment in certain circumstances, at any time
until February 13, 1999.
The Company may redeem the Warrants at $0.05 per Warrant, upon 30 days'
prior written notice, in the event the average closing bid price of the Common
Stock exceeds, in the case of the Class A Warrants, $9.30 per share or, in the
case of the Class B Warrants, $12.25 per share, subject to adjustments in the
event of stock splits or other similar events, for 30 consecutive trading days
ending within 15 days preceding the date of the notice of redemption. The
closing bid price of the Common Stock shall be the closing bid price as reported
by the Nasdaq Stock Exchange or such other national stock exchange, and if not
so reported, then the Warrants will not be redeemable. All of the Warrants of a
class must be redeemed if any of such class are redeemed.
The exercise prices and number of shares of Common Stock or other
securities issuable upon exercise of the Warrants are subject to adjustment in
certain circumstances, including in the event of a stock dividend, stock split,
recapitalization, reorganization, merger or consolidation of the Company and
certain sales of Common Stock below the then market price of the Common Stock.
However, the Warrants are not subject to adjustment for issuances of Common
Stock at a price below the exercise price of the Warrants or pursuant to
issuances under the Company's 1994 Stock Incentive Plan or the Company's
Non-employee Directors Stock Option Plan or upon exercise of any of the
Warrants.
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the Warrant Expiration Date at the offices of the Warrant Agent,
with the exercise form on the reverse side of the warrant certificate completed
and executed as indicated, accompanied by full payment of the exercise price (by
check payable to the Company) to the Warrant Agent for the number of Warrants
being exercised. Holders of the Warrants do not have the rights or privileges of
holders of Common Stock.
In order to comply with applicable laws in connection with the exercise of
the Warrants and the resale of the Common Stock issued upon such exercise, the
Warrants will be exercisable only if (i) at the time of exercise the Company has
an effective and current registration statement on file with the Commission
covering the shares of Common Stock issuable upon exercise of such Warrant and
(ii) such shares have been registered or qualified or deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of such Warrant. The Company does not maintain a current
prospectus relating to the Warrants, since the Warrants are not 'in-the-money.'
Accordingly, Warrantholders will not be able to exercise their Warrants until
such time as the Company complies with the registration provisions of the
federal and state securities laws.
No fractional shares will be issued upon exercise of the Warrants. In lieu
of the issuance of any fractional share which is otherwise issuable, the Company
will pay to such Warrantholder an amount in cash based on the market value of
the Common Stock on the last trading day prior to the exercise date.
EFFECT OF THE EXCHANGE OFFER ON THE WARRANTHOLDERS
Upon acceptance of the tendered Class A Warrants by the Company, the Class
A Warrantholders will receive one share of Common Stock for each 3.5 Class A
Warrants tendered. Warrantholders who do not participate in the Exchange Offer
will retain the right to purchase 1.106 shares of Common Stock and one Class B
Warrant at an exercise price of $6.01 per Class A Warrant, which price will
remain subject to the
19
<PAGE>
adjustment provisions of the Warrant Agreement. The Class A Warrants are subject
to redemption by the Company under certain circumstances. See '--Description of
the Warrants.' To the extent Warrantholders participate in the Exchange Offer,
the trading market for, and liquidity of, the Class A Warrants which remain
outstanding, if any, will likely be reduced. In addition, the Company intends to
delist the Class A Warrants from trading on the Nasdaq Stock Market and
deregister the Class A Warrants under the Exchange Act if it determines that the
Class A Warrants are held of record and beneficially by fewer than 300 persons.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Offering Circular and in the accompanying Letter of Transmittal
(the 'Letter of Transmittal'), to exchange one share of Common Stock for each
3.5 Class A Warrants tendered.
The Company will accept any Class A Warrants validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. Class
A Warrants which are not accepted for exchange will be returned as promptly as
practicable after the Expiration Date. Class A Warrantholders may tender all or
a portion of their Class A Warrants pursuant to the Exchange Offer.
If the Company should increase or decrease the number of shares of Common
Stock offered in exchange for the Class A Warrants in the Exchange Offer, such
changed consideration would be paid with regard to all Class A Warrants accepted
in the Exchange Offer. If the consideration is so changed, the Exchange Offer
will remain open at least ten business days from the date the Company first
gives notice, by public announcement or otherwise, of such increase or decrease.
As of August 1, 1997, 1,964,500 Class A Warrants were outstanding and there
were approximately 25 registered Class A Warrantholders. Only holders or owners
of Class A Warrants (or such Class A Warrantholder's legal representative or
attorney-in-fact) may participate in the Exchange Offer. There will be no fixed
record date for determining Warrantholders entitled to participate in the
Exchange Offer. The Company believes that, as of the date of this Offering
Circular, none of such holders is an affiliate (as defined in Rule 405 under the
Securities Act) of the Company, except that Zalman Silber and Jay Coleman own
280,000 and 20,000 Class B Warrants, respectively. Messrs. Silber and Coleman
have indicated that they will exchange their Class B Warrants pursuant to the
Class B Exchange Offer.
Warrantholders do not have any appraisal or dissenters' rights under the
Business Corporation Law of the State of New York or the Warrant Agreement in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the SEC thereunder.
The Company shall be deemed to have accepted validly tendered Class A
Warrants when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for tendering
Warrantholders for the purposes of receiving the Common Stock from the Company.
If any tendered Class A Warrants are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Class A Warrants will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Tendering Warrantholders will not be required to pay brokerage commissions
or fees with respect to the exchange of Class A Warrants for Common Stock
pursuant to the Exchange Offer. The Company will pay all charges and expenses in
connection with the Exchange Offer. The Company will also pay all transfer
taxes, if any, applicable to the transfer and exchange of Class A Warrants
pursuant to the Exchange Offer. If, however, Class A Warrants not exchanged are
to be delivered to, or are to be issued in the name of, any person other than
the registered Class A Warrantholder, or if tendered Class A Warrants are
recorded in the name of any person other than the person signing the Letter of
Transmittal, then the amount of such transfer taxes (whether imposed on the
registered Warrantholder or any other person) will be payable by the tendering
Warrantholder. See '--Transfer Taxes.'
Although the Company has no plan or intention to do so, it reserves the
right in its sole discretion to purchase or make offers for any Class A Warrants
that remain outstanding after the consummation of the Exchange Offer. The terms
of any such purchases or offers could differ from the terms of the Exchange
Offer.
20
<PAGE>
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term 'Expiration Date' shall mean 5:00 p.m., New York City time, on
September 9, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term 'Expiration Date' shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right in its sole discretion, (i) to delay
accepting any Warrants, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under 'Conditions of the Exchange Offer' shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (iv) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, termination or amendment will be followed as promptly as practicable
by a public announcement thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendments by means of a supplement to this Offering
Circular that will be distributed to the registered Warrantholders, and the
Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered Warrantholders, if the Exchange Offer would
otherwise expire during such five to ten business day period. If the Company
amends the terms of the Exchange Offer to improve the consideration for the
Class A Warrants, the Company will give such improved consideration to all
tendering Class A Warrantholders, including Class A Warrantholders who have
previously tendered Class A Warrants.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall not have an obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely public disclosure.
PROCEDURE FOR TENDERING CLASS A WARRANTS
The tender by a Warrantholder as set forth below and the acceptance thereof
by the Company will constitute a binding agreement between the tendering
Warrantholder and the Company upon the terms and subject to the conditions set
forth in this Offering Circular and in the accompanying Letter of Transmittal.
Except as set forth below, a Warrantholder who wishes to tender Class A Warrants
for exchange pursuant to the Exchange Offer must transmit such Class A Warrants,
together with a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to the
Exchange Agent at the address set forth herein on or prior to 5:00 p.m., New
York City time, on the Expiration Date.
THE METHOD OF DELIVERY OF CLASS A WARRANTS, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE WARRANTHOLDER. IF
SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED BE USED. INSTEAD OF DELIVERY BY MAIL, IT
IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
A signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, need not be guaranteed if the Class A Warrants surrendered for
exchange pursuant thereto (i) are tendered by a registered Warrantholder of the
Class A Warrants who has not completed either the box entitled 'Special Exchange
Instructions' or the box entitled 'Special Delivery Instructions' on the Letter
of Transmittal or (ii) are tendered by an Eligible Institution (as defined
below). In the event that a signature on a Letter of Transmittal or a notice of
withdrawal, as the case may be, is required to be guaranteed, such guarantee
must be by a firm which is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or is otherwise an 'eligible guarantor institution' within the meaning of
Rule 17Ad-15 under the Exchange Act (collectively, 'Eligible Institutions'). If
Class A Warrants are registered in the name of a person other than a signer of
the Letter of Transmittal, the Class A Warrants surrendered for exchange must
either (i) be endorsed by the registered holder,
21
<PAGE>
with the signature thereon guaranteed by an Eligible Institution or (ii) be
accompanied by a stock power, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered Warrantholder, with the
signature thereon guaranteed by an Eligible Institution. The term 'registered
Warrantholders' as used herein with respect to the Warrants means any person in
whose name the Class A Warrants are registered on the books of the registrar for
the Class A Warrants.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Class A Warrants tendered for exchange
will be determined by the Company in its sole, reasonable discretion, which
determination shall be final and binding. The Company reserves the absolute
right to reject any and all tenders of any particular Class A Warrants not
properly tendered or to reject any particular Class A Warrants which acceptance
might, in the judgment of the Company or its counsel, be unlawful. The Company
also reserves the absolute right to waive any defects or irregularities or
conditions of the Exchange Offer as to any particular Class A Warrants either
before or after the Expiration Date. The interpretation of the terms and
conditions of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of Class
A Warrants for exchange must be cured within such reasonable period of time as
the Company shall determine. The Company will use reasonable efforts to give
notification of defects or irregularities with respect to tenders of Class A
Warrants for exchange but shall not incur any liability for failure to give such
notification. Tenders of the Class A Warrants will not be deemed to have been
made until such irregularities have been cured or waived.
If any Letter of Transmittal, endorsement, stock power, power of attorney
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of such person's authority to so act
must be submitted.
Any beneficial owner whose Class A Warrants are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Class A Warrants in the Exchange Offer should contact such registered
Warrantholder promptly and instruct such registered Warrantholder to tender on
such beneficial owner's behalf. If such beneficial owner wishes to tender
directly, such beneficial owner must, prior to completing and executing the
Letter of Transmittal and tendering Class A Warrants, make appropriate
arrangements to register ownership of the Class A Warrants in such beneficial
owner's name. Beneficial owners should be aware that the transfer of registered
ownership may take considerable time.
GUARANTEED DELIVERY PROCEDURES
Warrantholders who wish to tender their Class A Warrants but whose Class A
Warrants are not immediately available or who cannot deliver their Class A
Warrants and Letter of Transmittal or any other documents required by the Letter
of Transmittal to the Exchange Agent prior to the Expiration Date must tender
their Class A Warrants according to the guaranteed delivery procedures set forth
in the Letter of Transmittal. Pursuant to such procedures: (i) such tender must
be made by or through an Eligible Institution and a Notice of Guaranteed
Delivery (as defined in the Letter of Transmittal) must be signed by such Class
A Warrantholder, (ii) prior to the Expiration Date, the Exchange Agent must have
received from the Warrantholder and the Eligible Institution a properly
completed and duly executed Letter of Transmittal and a Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Warrantholder, the certificate number or numbers of the
tendered Class A Warrants, stating that the tender is being made thereby and
guaranteeing that, within three business days after the date of delivery of the
Notice of Guaranteed Delivery, the tendered Class A Warrants and any other
required documents will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) such properly completed and executed documents
required by the Letter of Transmittal and the tendered Class A Warrants in
proper form for transfer must be received by the Exchange Agent within three
business days after the Expiration Date. Any Warrantholder who wishes to tender
Class A Warrants pursuant to the guaranteed delivery procedures described above
must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery
and Letter of Transmittal relating to such Class A Warrants prior to 5:00 p.m.,
New York City time, on the Expiration Date. Failure to complete the guaranteed
delivery outlined above will not, of itself, affect the validity or effect a
revocation of any Letter of Transmittal properly completed if executed by a
holder who attempted to use the guaranteed delivery process.
22
<PAGE>
ASSISTANCE
All tendered Class A Warrants, executed Letters of Transmittal and other
related documents should be directed to the Exchange Agent. Questions and
requests for assistance and requests for additional copies of this Offering
Circular, the Letter of Transmittal and other related documents should be
addressed to the Exchange Agent as follows:
<TABLE>
<S> <C>
By Registered or Certified By Fascimile:
Mail: (212) 509-5150
CONTINENTAL STOCK TRANSFER Confirmed by Telephone:
& TRUST COMPANY (212) 509-4000, ext. 535
2 Broadway (Originals of all documents submitted by fascimile should
New York, New York 10004 be sent promptly by hand, overnight courier, or registered
Attention: Reorganization or certified mail.)
Dept.
</TABLE>
ACCEPTANCE OF CLASS A WARRANTS FOR EXCHANGE
Upon satisfaction or waiver of all conditions to the Exchange Offer and
following the Expiration Date, the Company will promptly accept all Class A
Warrants properly tendered, and will immediately thereafter issue the
appropriate number of corresponding shares of Common Stock to eligible
Warrantholders. For purposes of the Exchange Offer, the Company shall be deemed
to have accepted Class A Warrants that are tendered for exchange when, and if,
the Company has given oral or written notice thereof to the Exchange Agent.
In all cases, issuances of Common Stock for Class A Warrants that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of such Class A Warrants, a properly
completed and duly executed Letter of Transmittal, and all other required
documents; provided, however, that the Company reserves the absolute right to
waive any defects or irregularities in the tender or conditions of the Exchange
Offer. If any tendered Class A Warrants are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer or if Class A Warrant
certificates are submitted for a greater number than the holder desires to
exchange, such unaccepted or nonexchanged Class A Warrants or substitute Class A
Warrants evidencing the unaccepted portion, as appropriate, will be returned
without expense to the tendering holder thereof as promptly as practicable after
the expiration or termination of the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of the Class A Warrants may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date and unless theretofore accepted
for exchange by the Company, may also be withdrawn after 5:00 p.m., New York
City time, on October 7, 1997.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth herein. Any such notice
of withdrawal must (i) specify the name of the person having deposited the Class
A Warrants to be withdrawn ('Depositor'), (ii) identify the Class A Warrants to
be withdrawn (including the Class A Warrant certificate number or numbers and
number of Class A Warrants), and (iii) be signed in the same manner required for
the Letter of Transmittal by which such Class A Warrants were tendered. All
questions as to the validity, form, and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. The Class A Warrants so withdrawn, if any,
will be deemed not to have been validly tendered for exchange for purposes of
the Exchange Offer. Any Class A Warrants which have been tendered for exchange
but which are withdrawn will be returned to the Warrantholder without cost to
such Warrantholder as soon as practicable after withdrawal. Class A Warrants
properly withdrawn may be re-tendered by following the procedures described
under '--Procedure for Tendering Class A Warrants' at any time on or prior to
the Expiration Date.
23
<PAGE>
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue the Common Stock in
exchange for, any Class A Warrants and may terminate or amend the Exchange Offer
if, any time before the Expiration Date, any of the following events shall
occur, which occurrence, in the sole judgment of the Company and regardless of
the circumstances (including any action by the Company) giving rise to any such
events, makes it inadvisable to proceed with the Exchange Offer:
(i) there shall be threatened, instituted, or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission (a) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (b) resulting in a material delay in the
ability of the Company to accept for exchange some or all of the Warrants
pursuant to either the Exchange Offer or the Class B Exchange Offer, or any
statute, rule, regulation, order or injunction shall be sought, proposed,
introduced, enacted, promulgated or deemed applicable to the Exchange Offer
or any of the transactions contemplated by the Exchange Offer by any
domestic or foreign government or governmental authority that, in the
reasonable judgment of the Company, might directly or indirectly result in
any of the consequences referred to in clauses (a) or (b) above, or would
otherwise in the reasonable judgment of the Company make it inadvisable to
proceed with the Exchange Offer;
(ii) there shall have occurred (a) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States or any limitation by any governmental agency or authority which
adversely affects the extension of credit or (b) a commencement of war,
armed hostilities or other similar international calamity directly or
indirectly involving the United States, or, in the case of any of the
foregoing existing at the time of the commencement of the Exchange Offer, a
material acceleration or worsening thereof;
(iii) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operation,
prospects, plans, strategies, development projects or existing or
contemplated financing arrangements of the Company that, in the reasonable
judgment of the Company, is or may be adverse to the Company, or the
Company shall have become aware of facts that, in the sole judgment of the
Company, have or may have adverse significance with respect to the value of
the Warrants or the Common Stock;
(iv) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby; or
(v) failure to obtain tenders for at least 95% of each of the Class A
and Class B Warrants outstanding.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Class A Warrants and
return all tendered Class A Warrants to the tendering holders, (ii) extend the
Exchange Offer and retain all Class A Warrants tendered prior to the Expiration
Date, subject, however, to the rights of holders to withdraw such Class A
Warrants (see '--Withdrawal Rights'), or (iii) waive such unsatisfied conditions
with respect to the Exchange Offer and accept all validly tendered Class A
Warrants which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a supplement to this Offering Circular that will be distributed to the
registered Warrantholders, and the Company will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
waiver and the manner of disclosure to the registered Warrantholders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
The Company expects that the foregoing conditions will be satisfied. The
foregoing conditions are for the sole benefit of the Company and may be asserted
by the Company regardless of the circumstances giving rise to any such condition
or may be waived by the Company in whole or in part at any time and from time to
time in its reasonable discretion. The failure by the Company at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. Any determination by the Company concerning
the events described above will be final and binding upon all parties.
24
<PAGE>
FRACTIONAL SHARES
No fractional shares of Common Stock will be issued as a result of the
Exchange Offer. Each holder of a fractional interest in shares of the Company's
Common Stock will be entitled to receive a cash payment in lieu of such
fractional amount based on the current market price of a share of Common Stock.
The current market price will be determined as follows: (i) if the shares of the
Company's Common Stock are listed on a national securities exchange or admitted
to unlisted trading privileges on such exchange or listed for trading on the
Nasdaq Stock Market, the current market price shall be the last reported sale
price of the shares of the Company's Common Stock on the last business day prior
to the date of exchange or, if no such sale is made on such day, the average of
the closing bid and asked prices for such day; or (ii) if the shares of Common
Stock are not so listed or admitted to trading and bid and asked prices are not
so reported, the current market price or current value shall be an amount
determined in a reasonable manner by the Board of Directors of the Company.
As soon as practicable after the determination of the amount of cash, if
any, to be paid to the holder of shares of Common Stock with respect to any
fractional share interests, the Exchange Agent shall distribute in cash the
amount payable to such fractional holder.
SOLICITATION OF WARRANT HOLDERS
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company will also pay brokers, dealers and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Offering Circular and related documents to the
beneficial owners of the Class A Warrants, and in handling or forwarding tenders
for their customers.
The cash expenses to be incurred by the Company in connection with the
Exchange Offer are estimated to be approximately $75,000, which include
registration fees, listing fees, fees to the Warrant Agent, accounting, legal
and printing fees, and associated expenses.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Warrants pursuant to the Exchange Offer. If, however, tendered Class A
Warrants are registered in the name of any person other than the person signing
the Letter of Transmittal or if a transfer tax is imposed for any reason other
than the exchange of Class A Warrants pursuant to the Exchange Offer, the amount
of any such transfer tax (whether imposed on the registered Warrantholder or any
other person) will be payable by the tendering holder. If satisfactory evidence
of payment of such transfer tax or exemption therefrom is not submitted, the
amount of such transfer tax will be billed directly to such tendering holder.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS INTENDED ONLY AS A GENERAL SUMMARY OF CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER AND DOES NOT
CONSIDER ALL POTENTIAL TAX EFFECTS OF THE EXCHANGE OFFER OR THE TAX CONSEQUENCES
TO A PARTICULAR WARRANTHOLDER IN LIGHT OF SUCH WARRANTHOLDER'S PERSONAL
CIRCUMSTANCES. THIS DISCUSSION ALSO DOES NOT ADDRESS THE U.S. FEDERAL INCOME TAX
CONSEQUENCES TO WARRANTHOLDERS (AND UNDERLYING COMMON STOCK) NOT HELD AS CAPITAL
ASSETS OR TO WARRANTHOLDERS SUBJECT TO SPECIAL TREATMENT, SUCH AS NON-U.S.
PERSONS, DEALERS IN SECURITIES, BANKS, INSURANCE COMPANIES, TAX-EXEMPT
ORGANIZATIONS, WARRANTHOLDERS OWNING AT LEAST 10% OF THE VOTING POWER OF THE
COMPANY AND WARRANTHOLDERS WHO ACQUIRED THEIR INTERESTS PURSUANT TO THE EXERCISE
OF OPTIONS OR SIMILAR DERIVATIVE SECURITIES OR OTHERWISE AS COMPENSATION, NOR
PROVIDE AN ANALYSIS OF ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCALITY, OR FOREIGN JURISDICTION. THIS DISCUSSION IS BASED ON CURRENT
PROVISIONS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
25
<PAGE>
'CODE'), CURRENT AND PROPOSED TREASURY REGULATIONS PROMULGATED THEREUNDER, AND
ADMINISTRATIVE AND JUDICIAL DECISIONS AS OF THE DATE HEREOF, ALL OF WHICH ARE
SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE BASIS. ACCORDINGLY, WARRANTHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE,
LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE EXCHANGE OFFER TO
THEM.
The exchange of Class A Warrants for shares of Common Stock will result in
the following federal income tax consequences to participating Warrantholders:
1. A participating Warrantholder will recognize gain or loss equal to
the excess of (a) the sum of the fair market value of the shares of Common
Stock received in the Exchange Offer and any cash received in lieu of a
fractional share of Common Stock over (b) the participating Warrantholder's
tax basis in the Warrants exchanged therefor;
2. Such gain or loss will be capital gain or loss and will generally
be a long term capital gain or loss if the Warrantholder has held the
Warrant for more than one year at the time of exchange. Pursuant to
recently enacted legislation, with respect to any capital asset sold or
exchanged after July 29, 1997 and which has been held for more than
eighteen months, capital gains will be subject to tax at a rate of twenty
percent. With respect to any capital asset sold or exchanged after that
date which has been held for more than twelve months but less than eighteen
months, capital gains will remain subject to tax at a rate of twenty-eight
percent;
3. The tax basis of the shares of Common Stock received in the
Exchange Offer will be equal to the fair market value of such shares of
Common Stock received in the Exchange Offer; and
4. The holding period for the shares of Common Stock received in the
Exchange Offer will commence on the day following the consummation of the
Exchange Offer.
THE EXCHANGE AGENT
Continental Stock Transfer & Trust Company has been appointed as Exchange
Agent for the Exchange Offer. All correspondence in connection with the Exchange
Offer and the Letters of Transmittal should be addressed to the Exchange Agent,
as follows:
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
Attention: Reorganization Department
WARRANT TRANSFER AGENT
The Class A Warrants were issued in registered form pursuant to the Warrant
Agreement. Continental Stock Transfer & Trust Company acts as Warrant Agent on
behalf of the Company.
26
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of an aggregate of
20,000,000 shares of Common Stock, par value $.001 per share, of which 1,000,000
shares have been designated Class A Common Stock, and 5,000,000 shares of
Preferred Stock, par value $.001 per share, of which 1,090,909 shares have been
designated Series A Convertible Participating Preferred Stock (the 'Series A
Preferred Stock')
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock, $.001
par value per share, of which 2,345,000 shares are currently outstanding
(including 960,000 shares of Class A Common Stock, 670,000 shares of which are
subject to forfeiture as described below). Other than Class A Common Stock,
holders of Common Stock are entitled to one vote for each share held of record
on all matters to be voted on by shareholders. There are no preemptive,
subscription, conversion or redemption rights pertaining to the Common Stock.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors from funds legally available therefor and to
share ratably in the assets of the Company available upon liquidation. The
holders of Common Stock do not have the right to cumulate their votes in the
election of directors and, accordingly, the holders of more than 50% of all of
the Common Stock outstanding are able to elect all directors.
CLASS A COMMON STOCK
The 960,000 shares of Common Stock held by Mr. Silber, the Company's
President, have been designated as Class A Common Stock and are identical to the
shares of Common Stock described above, except that such shares of Class A
Common Stock are entitled to five (5) votes per share on all matters to be voted
on by shareholders. The Class A Common Stock is convertible into Common Stock at
the option of the holder at any time and will automatically convert to Common
Stock upon the sale or transfer of such Class A Common Stock (other than the
sale or transfer to a member of Mr. Silber's immediate family, a trust for the
benefit of such member or whereby Mr. Silber retains the voting rights thereto)
or upon the death of Mr. Silber. 670,000 shares of Class A Common Stock are
subject to forfeiture in the event certain pre-tax earnings or per share market
price targets are not achieved.
The difference in voting rights increases the voting power of the holder of
Class A Common Stock (the 'Class A Shareholder') and accordingly has an
anti-takeover effect. The existence of the Class A Common Stock may make the
Company a less attractive target for a hostile takeover bid or render more
difficult or discourage a merger proposal, an unfriendly tender offer, a proxy
contest, or the removal of incumbent management, even if such transactions were
favored by the shareholders of the Company other than the Class A Shareholder.
Thus, the shareholders may be deprived of an opportunity to sell their shares at
a premium over prevailing market prices in the event of a hostile takeover bid.
Those seeking to acquire the Company through a business combination will be
compelled to consult first with the Class A Shareholder in order to negotiate
the terms of such business combination. Any such proposed business combination
will have to be approved by the Board of Directors, may be under the control of
the Class A Shareholder, and if shareholder approval were required, the approval
of the Class A Shareholder will be necessary before any such business
combination can be consummated.
REDEEMABLE WARRANTS
The Warrants were issued in registered form pursuant to the terms of the
Warrant Agreement. The following statements are brief summaries of certain
provisions of the Warrant Agreement. The Company believes that the following
describes the material terms of the Warrant Agreement, however, reference is
made to the Warrant Agreement (which has been filed as an exhibit to the
registration statement relating to the Company's initial public offering) for a
complete description of the terms and conditions thereof.
The Company has authorized the issuance of up to 6,330,744 Warrants to
purchase an aggregate of 6,330,744 shares of Common Stock and has reserved an
equivalent number of shares of Common Stock for issuance upon exercise of such
Warrants. There are currently issued and outstanding 1,964,500 Class A Warrants
27
<PAGE>
to purchase 2,172,737 shares of Common Stock and 3,759,500 Class B Warrants
(including Class B Warrants issuable upon exercise of Class A Warrants) to
purchase 4,158,007 shares of Common Stock.
Each Class A Warrant entitles the registered holder thereof to purchase
1.106 shares of Common Stock (as adjusted) and one Class B Warrant from the
Company at a price of $6.01 per Class A Warrant, subject to further adjustment
in certain circumstances, at any time until February 13, 1999. Each Class B
Warrant entitles the registered holder thereof to purchase 1.106 shares of
Common Stock (as adjusted) from the Company at a price of $7.91 per Class B
Warrant, subject to further adjustment in certain circumstances, at any time
until February 13, 1999.
The Company may redeem the Warrants at $0.05 per Warrant, upon 30 days'
prior written notice, in the event the average closing bid price of the Common
Stock exceeds, in the case of the Class A Warrants, $9.30 per share or, in the
case of the Class B Warrants, $12.25 per share, subject to adjustment in the
event of stock splits or other similar events, for 30 consecutive trading days
ending within 15 days preceding the date of the notice of redemption. The
closing bid price of the Common Stock shall be the closing bid price as reported
by the Nasdaq Stock Market or such other national stock exchange, and if not so
reported, then the Warrants will not be redeemable. All of the Warrants of a
class must be redeemed if any of such class are redeemed, except for the
Warrants underlying the Underwriter's Unit Purchase Option (described below).
The exercise prices and number of shares of Common Stock or other
securities issuable upon exercise of the Warrants are subject to adjustment in
certain circumstances, including in the event of a stock dividend, stock split,
recapitalization, reorganization, merger or consolidation of the Company and
certain sales of Common Stock below the then market price of the Common Stock.
However, the Warrants are not subject to adjustment for issuance of Common Stock
at a price below the exercise price of the Warrants or pursuant to issuances
under the Company's Stock Incentive Plan or the Stock Option Plan or upon
exercise of any of the Warrants.
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
check payable to the Company) to the Warrant Agent for the number of Warrants
being exercised. Holders of the Warrants do not have the rights or privileges of
holders of Common Stock.
In order to comply with applicable laws in connection with the exercise of
the Warrants and the resale of the Common Stock issued upon such exercise, the
Warrants will be exercisable only if (i) at the time of exercise the Company has
an effective and current registration statement on file with the Commission
covering the shares of Common Stock issuable upon exercise of such Warrant and
(ii) such shares have been registered or qualified or deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of such Warrant. The Company does not currently maintain
an effective registration statement, and, accordingly, the Warrantholders will
not be able to exercise their Warrants until such time as the Company amends the
registration statement covering the Warrants and takes appropriate action under
state laws.
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series. The
Board of Directors is authorized to determine the rights, preferences,
privileges and restrictions granted to, and imposed upon any such series. The
issuance of Preferred Stock could be used, under certain circumstances, as a
method of preventing a takeover of the Company and could permit the Board of
Directors, without any action of the holders of the Common Stock to issue
Preferred Stock which could have detrimental effect on the rights of holders of
the Common Stock, including loss of voting control. Anti-takeover provisions
that could be included in the Preferred Stock when issued may have a depressive
effect on the market price of the Company's securities and may limit
shareholders' ability to receive a premium on their shares of Common Stock by
discouraging takeover and tender offer bids.
On July 7, 1995, the Company simultaneously entered into and closed a Stock
Purchase Agreement (the 'Stock Purchase Agreement'), with Prospect Street NYC
Discovery Fund, L.P. ('Prospect Street') pursuant to which the Company sold to
Prospect Street 1,090,909 shares of Series A Preferred Stock of the Company for
a purchase price of $3,000,000. Pursuant to the Stock Purchase Agreement,
Prospect Street has designated two nominees to the Company's Board of Directors.
Additionally, in connection with the sale of the Series A
28
<PAGE>
Preferred Stock, the Company has agreed to certain covenants contained in the
Stock Purchase Agreement, which have the effect of restricting the Company's
ability to engage in extraordinary corporate transactions or transactions
involving expenditures in excess of $250,000 without the consent of Prospect
Street.
The Series A Preferred Stock is convertible into Common Stock of the
Company at any time on a share-for-share basis. The Series A Preferred Stock has
a liquidation preference equal to $2.75 per share, but does not pay any
dividends unless declared by the Board of Directors. The holders of the Series A
Preferred Stock are entitled to an aggregate of up to 24.9% of the outstanding
voting power of the Company on all matters which come before the shareholders.
Additionally, so long as 100,000 shares of Series A Preferred Stock remain
outstanding, the holders thereof will have the ability, in certain limited
circumstances, to elect a majority of the Board of Directors and obtain up to
50.1% of the outstanding voting power of the Company. The shares of Common Stock
underlying the Series A Preferred Stock is subject to a registration rights
agreement granting both demand and piggyback registration rights.
UNDERWRITER'S UNIT PURCHASE OPTION
The Company sold to the underwriter of its initial public offering ('IPO')
warrants to purchase from the Company an aggregate of 130,000 IPO Units, each
Unit consisting of one share of Common Stock, one Class A Warrant and one Class
B Warrant (the 'Underwriters Unit Purchase Option'), at $6.36 per Unit (as
adjusted). The Underwriter's Unit Purchase Option and the securities underlying
such option are subject to demand registration on two separate occasions at the
request of such underwriter (the first of which the Company shall bear all
expenses and the second of which the holders of such securities shall bear all
expenses) and 'piggyback' registration rights in the event the Company registers
any class of equity securities (other than securities registered on Form S-8,
Form S-4 or other similar registration form) until February 13, 2001.
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the shares
of Common Stock in exchange for the Class A Warrants, are being passed upon for
the Company by Proskauer Rose LLP, 1585 Broadway, New York, New York 10036.
EXPERTS
The consolidated financial statements of the Company as of June 30, 1996
and for the year then ended, have been incorporated herein by reference to the
Company's Form 10-KSB in reliance upon the report of Richard A. Eisner & Company
LLP, independent certified public accountants, given upon the authority of said
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'). In accordance with the
Exchange Act, the Company files proxy statements, reports and other information
with the Securities and Exchange Commission (the 'SEC'). This filed material can
be inspected and copied at the public reference facilities maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices in Chicago, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and in New York, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material may also be obtained by mail from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The SEC maintains a Web Site address which contains reports,
proxy and information statements and other information regarding the registrants
that file electronically with the SEC. The address of such site is
http://www.sec.gov.
The Company has filed with the SEC an Issuer Tender Offer Statement on
Schedule 13E-4 (together with any amendments thereto, the 'Tender Offer
Schedule') under the Exchange Act with respect to the Class A Warrants to be
exchanged for Common Stock. Copies of the Tender Offer Schedule are available
from the SEC upon payment of prescribed rates. Statements contained in this
Offering Circular relating to the contents of any
29
<PAGE>
contract or other document referred to herein are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Tender Offer Schedule or such other
document, each such statement being qualified in all respects by such reference.
The shares of Common Stock, the Class A Warrants and the Class B Warrants
are each listed on the Nasdaq Stock Market. Reports and other information
concerning the Company may be inspected at the Nasdaq Stock Market.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Form 10-KSB for the fiscal year ended June 30, 1996; the
Company's Form 10-QSB for the nine month period ended March 31, 1997; and the
Company's Proxy Statement dated October 26, 1996, attached hereto and previously
filed with the Commission by the Company pursuant to the Exchange Act are each
incorporated by reference in this Offering Circular and made a part hereof.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Offering
Circular of which it is a part to the extent that a statement contained herein
modifies, supersedes or replaces such statement. Any statements modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of the Offering Circular.
Facsimile copies of the Letter of Transmittal will be accepted. Letters of
Transmittal, Warrant certificates and any other required documents should be
sent by each holder or his broker, dealer, commercial bank, trust company or
other nominee to the Exchange Agent at the address set forth below:
The Exchange Agent for the Exchange Offer is:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C>
By Facsimile Transmission:
(For Eligible Institutions Only)
By Mail, Hand Delivery or Overnight Carrier: (212) 509-5150
Continental Stock Transfer & Trust Company Confirm Facsimile by Telephone:
Reorganization Department (For Confirmation Only)
2 Broadway
New York, NY 10004 (212) 509-4000 ext. 535
</TABLE>
30
<PAGE>
EXHIBIT A
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
- --------------------------------------------------------------------------------
FORM 10-QSB
Quarterly report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
- --------------------------------------------------------------------------------
For Quarter Ended: March 31, 1997
Commission File no. 0-23396
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
- --------------------------------------------------------------------------------
New York 11-3182335
(State of Incorporation) (IRS Employer Identification No.)
350 Fifth Avenue
New York, New York
10118
(Address of principal executive office)
(Zip code)
(212) 564-2224
Issuer's telephone number, including area code
- --------------------------------------------------------------------------------
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
issuer was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Common stock $.001 par value--2,345,500 shares outstanding as of May 13,
1997. Additionally, there were 1,090,909 shares of Series A Convertible
Participating Preferred Stock, $.001 par value, outstanding as of May 13, 1997.
Transitional Small Business Disclosure Format
Yes ___ No X
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Condensed consolidated financial statements
(unaudited)
Balance sheet as of March 31, 1997 3
Statements of operations for the three and nine months
ended March 31, 1997 and 1996 4
Statements of cash flows for the nine months
ended March 31, 1997 and 1996 5
Notes to financial statements 6
Item 2 Management Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION 15
SIGNATURES 16
INDEX TO EXHIBITS 17
2
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)
March 31, 1997
ASSETS
Current Assets
Cash $ 812,000
Inventory (Note 5) 167,000
Revenues receivable 312,000
Prepaid expenses and
other current assets 293,000
------------
Total Current Assets 1,584,000
Property, equipment and leasehold
improvements - net (Note 4) 11,897,000
Security deposits (Note 6) 911,000
Deferred project and leasing
costs (Note 4) 458,000
Due from officer (Note 11) 279,000
Certificate of deposit 206,000
Deferred financing costs -- net 460,000
Original issue discount costs (Note 7) 434,000
Other assets -- net 137,000
------------
Total Assets $ 16,366,000
============
LIABILITIES
Current Liabilities
Notes payable - current portion (Note 6) 647,000
Accounts payable 2,481,000
Accrued expenses and other current liabilities 457,000
Accrued payroll and payroll taxes 481,000
Deferred sponsorship income (Note 9) 50,000
------------
Total Current Liabilities 4,116,000
Notes payable - long term portion
(Notes 6 and 7) 6,526,000
Deferred rent payable (Note 8) 923,000
------------
Total Liabilities 11,565,000
============
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001 per share 1,000
Common stock, par value $.001 per share 2,000
Class A common stock, par value $.001 per share 1,000
Treasury Stock (601,000)
Additional paid in capital 10,007,000
Accumulated deficit (4,609,000)
------------
Total Stockholders' equity 4,801,000
------------
Total Liabilities and Stockholders' Equity $ 16,366,000
============
The accompanying notes are an integral part of these financial statements.
3
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
March 31 March 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Attraction sales (Note 13) $ 1,412,000 $ 896,000 $ 4,378,000 $ 3,362,000
Concession sales 270,000 209,000 917,000 766,000
Sponsorship income 88,000 86,000 261,000 239,000
----------- ----------- ----------- -----------
TOTAL REVENUES 1,770,000 1,191,000 5,556,000 4,367,000
----------- ----------- ----------- -----------
Operating Expenses:
Cost of merchandise sold 124,000 69,000 354,000 266,000
Selling, general and administrative 2,846,000 1,044,000 6,308,000 3,192,000
(Note 13)
Depreciation and amortization 381,000 126,000 674,000 369,000
----------- ----------- ----------- -----------
Total Operating Expenses 3,351,000 1,239,000 7,336,000 3,827,000
Income/(loss) from operations (1,581,000) (48,000) (1,780,000) 540,000
Net interest (expense)/income (192,000) 1,000 (266,000) -0-
----------- ----------- ----------- -----------
Income/(loss) before provision
for income taxes (1,773,000) (47,000) (2,046,000) 540,000
Income tax expense (benefit) (118,000) 5,000 61,000 35,000
(Note 3 )
Net deferred tax expense (Note 3) 1,179,000 -0- 340,000 -0-
----------- ----------- ----------- -----------
Net income/(loss) $(2,834,000) $ (52,000) $(2,447,000) $ 505,000
=========== =========== =========== ===========
Net income/(loss) per share
of common stock $ (1.02) $ (.02) $ (.86) $ .18
=========== =========== =========== ===========
Weighted average number of shares
(excludes 670,000 escrow shares) 2,781,000 2,876,000 2,845,000 2,852,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $(2,447,000) $ 505,000
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities:
Depreciation and amortization expense 675,000 369,000
Deferred income taxes 340,000 0
Issuance of warrants 331,000 0
Officer/stockholder advance on bonus granted 750,000 0
Changes in operating assets and liabilities:
(Increase) in inventory (37,000) (18,000)
(Increase) in prepaid and other assets (577,000) (156,000)
Increase/(decrease) in deferred sponsorship income (11,000) 39,000
Increase/(decrease) in accounts payable,
accrued expenses and deferred rent payable 3,067,000 (734,000)
----------- -----------
Net cash provided by operating activities 2,091,000 5,000
----------- -----------
Cash flows from investing activities:
(Increase) in security deposits (539,000) (192,000)
Acquisition of property, equipment and
leasehold improvements (5,511,000) (120,000)
Advances to officer/stockholder (1,370,000) 0
(Increase) in certificate of deposit (206,000) 0
Repayments from officer/stockholder 341,000 0
(Increase) in deferred project and leasing costs (228,000) 0
----------- -----------
Net cash (used in) investing activities (7,513,000) (312,000)
----------- -----------
Cash flows from financing activities:
Net proceeds from sale of preferred stock 0 2,833,000
Repayment of notes payable (590,000) (416,000)
Reduction of deferred private placement costs 0 62,000
Financing costs (937,000) 0
Purchase of treasury stock (601,000) 0
Issuance of warrants 434,000 0
Proceeds from notes payable 5,730,000 0
----------- -----------
Net cash provided by financing activities 4,036,000 2,479,000
----------- -----------
Net increase/(decrease) in cash (1,386,000) 2,172,000
Cash at beginning of period 2,198,000 144,000
----------- -----------
Cash at end of period $ 812,000 $ 2,316,000
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during period for:
Interest............... $ 214,000 $ 78,000
Taxes.................. $ 26,000 $ 61,000
Acquisition of Equipment Under Capital Lease....... $ 1,418,000 0
</TABLE>
5
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB and rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the full
fiscal year ended June 30, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended June 30, 1996.
2. Per Share Data
Net income/loss per share for each period is calculated by dividing net
income/loss for the period by the weighted average number of common shares
outstanding for each period, excluding shares held in escrow. The weighted
average number of common shares was calculated including the convertible
participating preferred stock as common stock equivalents.
3. Income Taxes
The principal components of Deferred Tax Assets, Liabilities, and the
Valuation Allowance are as follows:
March 31
--------
1997 1996
---------- ----------
Deferred Tax Assets:
Capitalization of start-up costs 479,000 760,000
Net operating loss carryforwards 2,056,000 490,000
---------- ----------
2,535,000 1,250,000
Valuation allowance (1,989,000) (1,250,000)
---------- ----------
546,000 -0-
Deferred Tax Liabilities:
Depreciation differences 546,000 -0-
---------- ----------
Net Deferred Tax Asset -0- -0-
========== ==========
The Company has provided a reserve of $1,989,000 against its deferred tax
asset due to uncertainty of the Company being able to use this benefit to offset
future taxable income. The Company will periodically evaluate the likelihood of
realizing such asset and will adjust such amount accordingly.
6
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
4. Property, equipment and leasehold improvements
(A) Property and equipment, including assets under capital leases are
recorded at cost and are depreciated on the straight-line method over the
estimated useful lives of the assets from three to twelve years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset. Property, equipment
and leasehold improvements at cost are summarized as follows:
Equipment and fixtures 1,917,000
Simulation equipment 2,626,000
Simulation film 1,059,000
Leasehold improvements 7,663,000
-----------
13,265,000
Less: Accumulated depreciation
and amortization (1,368,000)
-----------
Total 11,897,000
===========
(B) The Company has incurred leasing costs in connection with its XS New
York site and the Company's XS Chicago site. The Company is in the design phase
of XS Chicago and estimates that capital expenditures of approximately
$5,500,000 will be required to complete the project. The Company expects to
commence operations of the XS Chicago site during the Fall/Winter of 1997.
5. Inventory
Inventory consists of clothing, souvenirs and food sold at the Company's
various sites and is valued at the lower of cost (first-in, first-out) or
market.
6. Notes Payable
(A) During November 1996 the Company entered into a loan agreement with an
institutional lender to finance the an additional acquisition of the equipment
for its XS New York site. The Company received approximately $832,000 with
$495,000 held by the lender as security. Such security is to be released after
24 months subject to a satisfactory payment record by the Company. The amount
financed bears interest at 11 1/2% per annum compounded monthly and is to be
repaid in 48 monthly installments. The institutional lender obtained a first
security interest in the equipment and up to $750,000 of the loan is personally
guaranteed by the Company's president. In connection with this transaction, the
Company issued five year warrants to purchase 50,000 shares of the Company's
common stock at an exercise price of $6.00 per share.
(B) On December 31, 1996, the Company refinanced its existing equipment at
its New York Skyride location with aggregate proceeds of $1,500,000. The new
note bears interest at 11 1/2% per annum compounded monthly and is to be repaid
in 48 monthly installments secured by a first security interest in all of the
equipment at the New York Skyride location. Additionally, up to $250,000 of the
loan is personally guaranteed by the Company's president.
(C) During March 1997, the Company entered into a loan agreement with an
institutional lender to finance the acquisition of additional equipment for XS
New York. Pursuant to this transaction, in April 1997 the Company received
$205,000 with an additional $51,000 held by the lender as security. Such
security is to be released after 24 months subject to a satisfactory payment
record by the Company. The amounts financed bear interest at 11 1/2% per annum
compounded monthly and is to be repaid in 48 monthly installments. The
institutional lender obtained a first security interest in the equipment and up
to $ 125,000 of the loan is personally guaranteed by the Company's president.
7
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
7. Subordinated Note Payable
On October 23, 1996, the Company signed a letter of intent with an
institutional investor to provide $4,100,000 in senior unsecured subordinated
debt which accrues interest at an annual rate of 14% and requires the payment of
both principal and interest five years from the date of issuance. The amount of
the subordinated debt provided was subsequently increased to $4,450,000. In
connection with the subordinated debt, the lender received warrants to purchase
up to 434,146 shares of common stock at an exercise price of $4.25 per share. A
purchase price of $1.00 per warrant was allocated from the subordinated debt
proceeds received by the Company. On November 6, 1996, the Investor provided the
Company with a "bridge" loan of $1,500,000, at an annual interest rate of 14%
which was subsequently exchanged in December for a portion of the unsecured
subordinated debt. As of March 31, 1997, the Company received the full proceeds
under the agreement.
8. Deferred Rent Payable
The Company for financial accounting purposes spreads scheduled rent
increases and rent holidays over the terms of the respective leases using the
straight - line method.
9. Sponsorship Income
During the fiscal year ended June 30, 1995, the Company entered into two
sponsorship agreements, one with a major international electronics manufacturer,
appointing it the presenting sponsor of its New York facility, and one with a
major soft drink manufacturer. The agreements are for three and five year terms,
respectively, and provide for annual fees, capital improvements and cross
promotions for the Company. During the quarter ended December 31, 1995, the
Company entered into a three year sponsorship agreement with a major distributor
of photographic and magnetic imaging equipment. Sponsorship revenue under these
agreements aggregate approximately $1,300,000 over the respective terms. During
the quarters ended March 31, 1997 and 1996, the Company recognized as income
$88,000 and $86,000, respectively, which represent a portion of the capital
improvements and monetary fees received from these sponsors and approximately
$50,000 and $81,000, respectively, were deferred during such periods.
10. Preferred Stock
On July 7, 1995, the Company consummated a stock purchase agreement with
Prospect Street NYC Discovery Fund, L.P. ("Prospect Street"), a small business
investment company, pursuant to which the Company sold 1,090,909 shares of
Series A Convertible Participating Preferred Stock, par value $.001 per share
(the "Preferred Stock"), for $3,000,000. Net proceeds from such investment,
aggregated approximately $2,833,000. The Preferred Stock issued is convertible
into common stock of the Company at any time on a share-for-share basis.
Pursuant to the stock purchase agreement, the Preferred Stock and underlying
common stock into which it is convertible are subject to both demand and
piggyback registration rights beginning nine months from the date of issuance.
The Preferred Stock has a liquidation preference equal to $2.75 per share, or
$3,000,000, but does not pay any dividends unless declared by the Board of
Directors. The preferred stockholder is entitled to an aggregate of up to 24.9%
of the outstanding voting power of the company which can increase to 50.1% of
the voting power if, in the sole direction of such preferred stockholder, it
becomes reasonably necessary for the protection of its investment.
8
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
11. Due from Officer
During the nine months ended March 31, 1997, the Company advanced an
aggregate of $1,091,000 to its President, pursuant to several demand notes at an
annual interest rate of 8%. The Company has received payment of $341,000 against
these advances. In addition, a bonus to the President declared by the Board of
Directors of approximately $750,000 has been applied against these advances in
partial consideration for which the 10% pre-tax bonus pursuant to his employment
contract was canceled. As a result of this bonus, certain federal, state and
local withholding tax obligations were incurred aggregating $279,000, which
amount was accrued by the Company and was due from such officer as of March 31,
1997.
12. Recently Issued Accounting Standards
The Company has not elected to adopt early, the recently issued accounting
standard for stock based compensation (FAS 123). However, under FAS 123, the
warrants granted in connection with both the notes payable and subordinated
notes payable require valuation based on fair value. The fair value of the
484,146 warrants granted in connection with the above financings was calculated
using the Black-Scholes Pricing Model, which resulted in an aggregate valuation
of approximately $313,000. The value of these warrants are charged to interest
expense over the terms of the respective notes. During the quarter ended March
31, 1997, an aggregate of approximately $4,000 was charged to interest expense
as a result of the fair value calculation relating to the warrants described
above.
13. Revenue Sharing Agreements
The Company has been provided with certain equipment for use in its XS New York
facility in exchange for a percentage of the revenues generated therefrom.
Pursuant to such agreements approximately $198,000 was paid to vendors for the
quarter ended March 31, 1997, which amount is included in revenues and selling,
general and administrative expenses.
9
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operational Overview
From its inception until December 22, 1994, the Company's primary
activities consisted of developmental activities, including the preparation of
plans relating to the design of New York Skyride, the Company's first motion
simulator film-based attraction; negotiation of a lease and a license agreement
with the operators of the Empire State Building, the location of New York
Skyride; working with engineers, architects, contractors, designers, and other
parties in connection with the construction of New York Skyride; developing
software and video films in connection with New York Skyride; developing
marketing strategies; initiating marketing and corporate sponsorship activities;
selecting a management team; and obtaining financing.
On December 22, 1994, the Company commenced operations of New York Skyride
and began generating revenue from ticket sales to the attraction and the sale of
merchandise at its souvenir/concession area. New York Skyride was opened on a
preview basis until February 21, 1995, the date of its official Grand Opening.
During April 1996, the Company signed a 20 year renewable lease for an
additional 35,000 square feet of space within the Empire State Building adjacent
to and above the current location of New York Skyride. The Company had intended
to utilize the additional space to create a mixed use location-based
entertainment center. However, development plans for the additional space have
been deferred until such time as the XS New York project (described below) is
operating profitably and further assessment is made with respect to the cost and
funding of the XS Chicago and Sydney Skyride projects (described below). It is
likely, however, that the Company will be unable to develop the additional space
within the Empire State Building in the near term, in which event, the Company
will be forced to surrender this space to the Empire State Building or assign or
sublet such space. The Company is currently exploring its options with respect
to these alternatives, which in any event, will not have a material impact on
the Company.
On December 27, 1996, the Company commenced operations, through its
wholly-owned subsidiary, Skyline Virtual Reality, Inc., of an interactive
virtual reality entertainment center, XS New York, which is located in the heart
of Times Square in New York City. XS New York features state-of-the-art
entertainment technology, including the latest in virtual reality hardware and
software, simulation technology and interactive participation game experiences.
Additionally, the facility includes a "cybercafe" which offers light food and
refreshments and computer terminals which are linked to the World Wide Web and
the Internet. XS New York was opened on a preview basis until March 20, 1997,
the date of its official Grand Opening. Accordingly, revenues generated by XS
New York during the quarter are disproportionate to the expenses incurred to
commence operations and the normal overhead expenses attributable to such
operations during the quarter.
Historically, in the New York metropolitan area, the summer months, which
include significant tourist traffic, represents the busiest period of the year.
During each of the quarters ending March 31, 1997 and 1996, New York Skyride was
visited by approximately 125,000 customers. Additionally, the Times Square area,
where XS New York is located, is visited by approximately 20 to 30 million
tourists annually, a large percentage of which visit during the spring and
summer months and during the December holiday season.
Promoting New York Skyride and XS New York to tourist boards (such as the
New York Convention and Visitors Bureau), travel agents, managers of group
activities and visitors to New York City represents a primary focus of the
Company's marketing efforts for these attractions. Since tourists and visitors
are a primary target, special volume discounts are offered to groups such as
conventions and trade associations, as well as through travel
10
<PAGE>
agent packages. School groups are also a significant market for New York Skyride
and XS New York, and special programs are being implemented to target these
audiences, especially during the slower tourist periods in the fall and winter
months. Additionally, the marketing efforts have focused significant attention
on promoting New York Skyride and XS New York for birthday parties and special
events.
During September 1996, the Company entered into a 15 year lease for
approximately 21,000 square feet of space in the Woodfield Mall outside of
Chicago, in Schaumberg, Illinois. The Company, through a newly created
subsidiary, Skyline Chicago, Inc., plans to develop a state-of-the-art
interactive virtual reality entertainment center, XS Chicago, similar to the XS
New York project. The XS Chicago location will be situated near the Rainforest
Cafe, a successful themed restaurant, and other retail establishments that
attract tourists and regional area residents. The Woodfield Mall, one of the
largest and most heavily visited malls in the United States, boasts annual
attendance of approximately 20 million people. The Company expects to open its
XS Chicago facility during the Fall/Winter of 1997.
During December 1996, the Company signed a letter of intent to develop a
simulator attraction, similar to New York Skyride, to be located in the
Centrepoint Shopping Center which adjoins the world famous Sydney Tower (the
"Tower") in Sydney, Australia. Centrepoint is the leading shopping and tourist
attraction in Sydney, Australia, and will be the merchandising and promotional
center for the 2000 Olympics, which will take place in Sydney. The Tower alone
attracts approximately 1,300,000 visitors per year and an additional 20,000,000
people visit the adjoining shopping center annually. The letter of intent
provides for an eight year renewable lease (currently being negotiated) for
approximately 16,500 square feet of space located on the promenade level of the
Tower, which is the entry point to the Tower. The Company has negotiated for the
sale of a combined ticket to both the Tower and the Company's attraction. The
base rent ranges from $225,000 in Year 1 to $600,000 in Year 8. There is also a
provision for percentage rent of 6.5% of gross sales in excess of $7,000,000.
The Company also has a right of first refusal on certain additional space
located within the shopping center which may be used for development of an
"XS-type" attraction in the future.
The Company hopes to finalize lease documentation by June of 1997 and
expects to pattern the Tower project after New York Skyride, but with a uniquely
Australian theme. The Company anticipates that it will open its "Sydney Skyride"
during Spring 1998. There can be no assurance, however, that the Company will be
able to successfully finalize lease negotiations with the landlord of the Tower
and the Centrepoint Shopping Center, or if finalized, that it will be able to
arrange for adequate financing of these projects and complete construction of
the "Sydney Skyride" by the date anticipated, if at all.
The Company, through its subsidiary, Skyline Magic, Inc., entered into a
50/50 joint venture in order to produce and manage a "Broadway-style" show
featuring the talents of Joseph Gabriel, an internationally renowned magician.
The show, "Magic on Broadway", is currently showing at the Lambs Theater in New
York City which was initially expected to run until April 1997. The joint
venture has the option to extend the engagement on a weekly basis and is
currently evaluating the future of the show. According to the terms of the joint
venture, the Company's investment is limited to its initial contribution of
$250,000, which amount has previously been written-off. Additional obligations
that arise will be the responsibility of the joint venture partner.
The Company will continue to market and promote its various activities
through traditional print advertising in publications that go to New York City
tourists and others, as well as broaden its advertising and promotional programs
to the general public through local radio and newspaper advertising. The Company
is in the process of developing its marketing plans for its XS Chicago
attraction to be located in the Woodfield Mall and the Sydney Skyride and
expects to employ similar advertising and promotional programs throughout such
local areas and surrounding regions.
11
<PAGE>
Results of Operations
Revenues. Revenues generated during the three and nine months ended March
31, 1997, aggregated $1,770,000 and $5,556,000, respectively, compared to
$1,191,000 and $4,367,000, respectively, for the three and nine months ended
March 31, 1996. The increase in revenue for the three and nine months ended
March 31, 1997, from the prior year period is primarily due to the commencement
of operations from the Company's XS New York facility, which accounted for total
revenues of $905,000 during the quarter ended March 31, 1997. Additionally, the
Company experienced an increased average ticket price for New York Skyride and
higher attendance for the nine month period ended March 31, 1997.
Management expects to continue to supplement its primary revenue stream
from ticket sales for New York Skyride by soliciting corporate sponsorships from
a number of key consumer product companies. During the three and nine month
period ended March 31, 1997 the Company earned approximately $88,000 and
$261,000, respectively, in sponsorship income as a result of monthly fees and
capital improvements received from sponsors. Current agreements with the
Company's three sponsors are expected to provide annual sponsorship fees
aggregating approximately $1,300,000 during the five year duration of such
agreements which commenced November 1994. Approximately $812,000 of such income
has been received to date, of which $230,000 and $279,000, respectively, was
received during the nine month periods ended March 31, 1997 and 1996.
Additionally, management expects that these sponsorships will generate
additional revenue for the Company in the form of increased ticket sales through
joint marketing and promotional programs.
Operating Expenses. Operating expenses incurred during the three and nine
months ended March 31, 1997, aggregated $3,351,000 and $7,336,000, respectively,
compared to $1,239,000 and $3,827,000, respectively, for the three and nine
months ended March 31, 1996. The increase is due primarily to an increase of
approximately $400,000 in payroll and related expenses at New York Skyride for
both the three and nine months ended March 31, 1997, as well as certain start-up
expenses of approximately $1,540,000 relating to the opening of XS New York.
These XS New York related expenses include, among other things, payroll and
related expenses of approximately $1,128,000, real estate taxes of approximately
$65,000, consulting and promotional expenses of approximately $145,000, and an
allocation of corporate overhead and administrative expenses of approximately
$202,000. Additionally, the Company expended $250,000 in connection with its
involvement in "Magic on Broadway" during the nine month period ended March 31,
1997. Included in operating expenses for the quarter ended March 31, 1997 are
payments to vendors aggregating $198,000 in connection with revenue sharing
arrangements relating to use of such vendor's equipment at XS New York.
Net Income and Earnings Per Share. Net income/(loss) and earnings/(loss)
per share before deferred taxes were ($1,655,000) and ($.60), and ($2,107,000)
and ($.74), respectively, for the three and nine months ended March 31, 1997 as
compared to ($52,000) and ($.02), and $505,000 and $.18, respectively, for the
three and nine months ended March 31, 1996. The net loss before deferred
taxes of ($1,655,000) for the quarter ended March 31, 1997 included a loss of
approximately $1,052,000 related to certain start-up costs attributable to XS
New York (see "Operating Expenses" above) and a loss of approximately ($107,000)
from New York Skyride. During the quarter ended March 31, 1996, New York Skyride
operations incurred a loss of approximately ($48,000) with no deferred tax
benefit realized.
In addition to the net loss before deferred taxes, the Company incurred
losses and losses per share of ($1,179,000), and ($.42), respectively, and
($340,000) and ($.12), respectively, during the three months and nine months
ended March 31, 1997, as a result of an increase in reserve against the
Company's deferred tax asset for such periods. This resulted from the
uncertainty of the Company being able to use this benefit to offset future
taxable income. The Company will periodically evaluate the likelihood of
realizing such asset and the reserve will be adjusted accordingly. For the three
and nine months ended March 31, 1996 there was a provision for certain state and
local taxes of $5,000 and $35,000, respectively, with no benefit recognized for
net operating loss carryforwards.
12
<PAGE>
Working Capital. Working capital (deficiency) at March 31, 1997, was
approximately ($2,532,000) compared to working capital of approximately
$1,775,000 at March 31, 1996. The reduction in working capital is primarily the
result of the XS New York buildout of approximately $6,720,000, the operating
loss incurred during the nine month period of $2,107,000 and deferred project
leasing and financing costs aggregating $1,165,000 related to the Company's
capital investments in XS New York and XS Chicago as well as costs associated
with the Company's stock buy-back program of $601,000.
Liquidity and Capital Resources
On July 7, 1995, the Company consummated a private placement with Prospect
Street whereby 1,090,909 shares of Preferred Stock were sold for gross proceeds
of $2.75 per share, or $3,000,000. The Preferred Stock is convertible into
common stock of the Company at any time on a share-for-share basis. The holders
of the Preferred Stock are entitled to an aggregate of up to 24.9% of the
outstanding voting power of the Company on all matters which come before the
shareholders. Additionally, so long as 272,727 shares of Preferred Stock remain
outstanding, the holders thereof will have the ability to elect a majority of
the Board of Directors and obtain up to 50.1% of the outstanding voting power of
the Company in the event that the holders of the Preferred Stock determine in
good faith that such action is reasonably necessary for the protection of its
investment. The Preferred Stock and underlying Common Stock into which it is
convertible are subject to both demand and piggyback registration rights. Net
proceeds to the Company from such investment was $2,833,333.
The Company used a portion of the net proceeds of the Preferred Stock sale
to repay certain indebtedness in connection with the New York Skyride project
and used the balance of the proceeds for working capital, which included
expansion of the Company's business through developing attractions at new
locations, including the XS New York project.
As a result of the Company's development of XS New York, the Company
incurred capital expenditures of approximately $6,720,000 consisting of $799,000
in design and consulting fees, $4,224,000 in construction and theming, $258,000
for signage, and approximately $1,439,000 for equipment purchases. In order to
complete the construction of XS New York and provide additional working capital
for growth and expansion, the Company raised additional secured and unsecured
debt through its relationships with its institutional investors and lenders as
described below.
On October 23, 1996, the Company signed a letter of intent with Prospect
Street to obtain up to $4,100,000 in senior unsecured subordinated debt which
accrues interest at an annual rate of 14% and requires the payment of both
principal and interest 5 years from the date of issuance. The amount of the
subordinated debt was subsequently increased to $4,450,000. In connection with
the subordinated debt agreement, the lender received warrants to purchase up to
434,146 shares of common stock at an exercise price of $4.25 per share. A
purchase price of $1.00 per warrant was allocated from the subordinated debt
proceeds received by the Company. As part of this financing, on November 6,
1996, Prospect Street provided the Company with a bridge loan of $1,500,000, at
an annual interest rate of 14%, which bridge loan was exchanged for a portion of
the subordinated debt described above during December 1996. As of March 31,
1997, the Company received the total proceeds under the agreement.
During November 1996, an institutional lender agreed to finance the
acquisition of the equipment for the Company's XS New York site up to an
aggregate of $1,327,000. Pursuant to this transaction, the Company received
approximately $832,000 and an additional $495,000 is being held by the lender as
security. Such security is to be released after 24 months subject to a
satisfactory payment history by the Company. The lender has a first security
interest in all equipment financed and the Company's president has personally
guaranteed up to $750,000 of the loan amount. The amount financed will bear
annual interest at 11 1/2% and is to be repaid in 48 monthly installments. In
connection with this transaction, the Company issued warrants to purchase up to
50,000 shares of the Company's common stock at an exercise price of $6.00 per
share.
13
<PAGE>
During March 1997 the Company signed an agreement to finance the
acquisition of additional equipment for XS New York aggregating approximately
$256,000. The terms of the loan are the same as described in the previous
paragraph except that the security amount withheld by the lender is $51,000 and
the personal guarantee from the Company's president is $125,000.
During December 1996, the Company refinanced its existing equipment loan on
the equipment located at its New York Skyride location for aggregate proceeds of
$1,500,000 of which approximately $491,000 was applied to satisfy amounts due
under the original loan. The loan bears annual interest at 11 1/2% and is to be
repaid in 48 monthly installments and is secured by a first lien on all
equipment at New York Skyride. The Company's president has guaranteed up to
$250,000 of this loan.
Pursuant to the Company's stock buy-back program, approximately 110,000
shares were purchased by the Company for an aggregate of approximately $601,000.
Such shares have been placed in treasury.
The Company estimates the capital expenditures required to develop each of
the XS Chicago and Sydney Skyride facilities to be approximately $5,500,000.
These estimates include the construction of the facility, equipment hardware and
software, and design and theming costs. In order to develop these attractions
the Company will require additional debt or equity financing which the Company
is attempting to secure. However, there can be no assurance that such financing
will be available on terms acceptable to the Company, or at all, or that there
will not be construction or other delays affecting completion of these projects.
Further there can be no assurance that demands placed on the Company's financial
resources by multiple projects, or any one project in particular, will not
affect the Company's ability to successfully complete or finance one or more of
such projects, which would adversely affect the Company's expansion and planned
growth strategy. In this regard, the Company has deferred development plans for
the additional space at the Empire State Building site until such time as the XS
New York project is operating profitably and further assessments are made with
respect to the source of the funds to finance the XS Chicago and Sydney Skyride
projects. Accordingly, there can be no assurance that the additional space at
the Empire State Building will be successfully developed without a strategic
partner, or at all. The Company is reviewing its options with respect to this
space, including surrendering, subletting or assigning such space, none of which
actions are anticipated to have a material effect on the Company.
The Company's long term goal is to develop simulator and other
location-based entertainment attractions in other major cities in the United
States and other countries. There are, however, only a limited number of
locations in a small number of cities that are suitable for such attractions,
and there can be no assurance that the Company could obtain a lease at any such
locations or develop a successful attraction at such locations. Also,
development of additional attractions will require the Company to obtain
financing for such ventures, and there can be no assurance that such financing
will be available, or available on terms and conditions that are acceptable to
the Company. Additionally, it is possible that the Company would find it
necessary to have one or more local partners involved in any additional
attractions it might attempt to develop, further limiting the revenues that the
Company could generate from these locations.
The Company continually explores expansion opportunities both in the United
States and abroad. From time to time, the Company may be involved in
negotiations for additional sites or other entertainment-based projects.
However, current negotiations, if any, are too preliminary to warrant additional
disclosure at this time. The Company will keep investors informed as other
prospects mature.
Inflation
The Company believes that the impact of inflation on its operations since
its inception has not been material.
14
<PAGE>
Seasonality
The Company's business is seasonal in nature, based in part, on higher
volumes of tourists in the New York City Metropolitan area during the spring and
summer months and during the December holiday season. Similar seasonal trends
are anticipated for the XS Chicago location. The Sydney Skyride, located in the
southern hemisphere is much less seasonal and provides for a relatively constant
flow of traffic with its peak months being November - January, March and July.
The Company will direct a portion of its marketing and promotional efforts in
the New York City Metropolitan area to (i) attracting a larger percentage of the
Observatory traffic at the Empire State Building, thereby increasing volume to
New York Skyride and (ii) attracting visitors to XS New York, particularly
during non-peak seasons. In addition, the Company will employ similar
advertising and promotional programs, during these periods, throughout the
Chicago Metropolitan area and other surrounding regions for its XS Chicago site
upon commencement of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
period covered by this report.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index located at the end of this report.
(b) No reports of Form 8-K have been filed during the quarter.
15
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
By: /s/ Zalman Silber
-------------------------------
Zalman Silber
President and Chief Executive Officer
By: /s/ Steven Schwartz
-------------------------------
Steven Schwartz
Executive Vice President - Finance
Principal Financial and Accounting Officer
Dated: May 13, 1997
16
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation of Registrant. (1)
3.2 By-laws of Registrant. (1)
3.3 Certificate of Amendment of Certificate of Incorporation relating to
the issuance of the Preferred Stock. (2)
4.1 See Exhibits 3.1 and 3.2
10.1 The Company's 1994 Stock Incentive Plan for the Registrant. (as
amended and restated.) (9)
10.2 The Company's Stock Option Plan for Non-Employee Directors. (as
amended and restated.) (9)
10.3 Employment Agreement dated October 1, 1993 between the Registrant and
Zalman Silber. (1)
10.4 Lease Agreement dated February 26, 1993 between the Company and the
Empire State Building Company. (1)
10.5 License Agreement dated February 26, 1993 between the Company and the
Empire State Building Company. (1)
10.6 Purchase Agreement dated February 14, 1994 between the Company and
Interactive Simulations, Inc. (3)
10.7 Film Production Agreement dated April 7, 1994 between the Company and
the Empire Productions, Inc., and Chromavision Corp. (3)
10.8 Lease Agreement dated April 14, 1994 between the Company and the
Empire State Building Company relating to the Company's executive
offices. (3)
10.9 Lease Agreement dated February 8, 1994 between the Company and the
Empire State Building Company relating to additional space. (3)
10.10 Construction contract dated July 5, 1994 between the Company and
Signature Construction Group Inc. (4)
10.11 Loan and security agreement dated November 16, 1994 between the
Company and PhoenixCor, Inc. (5)
10.12 Employment Agreement dated August 13, 1994 between the Company and
Steven Schwartz. (5)
10.13 Sponsorship Agreement dated February 21, 1995 between the Company and
Dentsu USA, Inc. on behalf of JVC Company of America. (6)
17
<PAGE>
INDEX TO EXHIBITS (Continued)
Exhibit
Number Description
- ------ -----------
10.14 Stock Purchase Agreement, dated as of July 7, 1995, between the
Company and Prospect Street Fund. (2)
10.15 Registration Rights Agreement dated as of July 7, 1995, between the
Company and Prospect Street relating to the Common Stock issuable upon
conversion of the Preferred Stock. (2)
10.16 Guarantee of Zalman Silber, as of July 7, 1995, relating to the
guarantee of the Company's obligations under the Stock Purchase
Agreement. (2)
10.17 Stockholders' Agreement dated as of July 7, 1995, between Zalman
Silber and Prospect Street. (2)
10.18 Amendment to Employment Agreement dated June 29, 1995, between the
Company and Zalman Silber. (7)
10.19 Agreement dated March 16, 1995 by and between Skyline, PhoenixCor,
Inc., and Zalman Silber relating to the release of certain security
deposits, and the Rider dated March 16, 1995 to the Individual
Guaranty of Zalman Silber. (7)
10.20 Lease Agreement dated March 1996 between the Company and the Empire
State Building Company relating to additional space. (8)
10.21 Amendment, dated March 1996, to the Company's original lease and
licensing agreement with the Empire State Building Company. (8)
10.22 Lease Agreement dated March 1996, between the Company and One Times
Square Center Partners, L. P., for space located at 1457-1463
Broadway, New York, NY. (8)
10.23 Lease Agreement dated September 5, 1996, between the Company and
Woodfield Associates, for space located at the Woodfield Mall in
Schaumberg, Illinois. (9)
10.24 Letter of Intent relating to senior unsecured subordinated debt
financing dated October 23, 1996, between the Company and Prospect
Street. (10)
10.25 Note Purchase Agreement dated November 6, 1996, between the Company
and Prospect Street. (10)
10.26 Guarantee of Zalman Silber dated November 6, 1996 relating to the Note
Purchase Agreement. (10)
10.27 Senior Credit Agreement dated December 20, 1996, between the Company
and Prospect Street and Bank of New York as Trustee for the Employees
Retirement Plan of The Brooklyn Union Gas Company. (11)
18
<PAGE>
INDEX TO EXHIBITS (Continued)
Exhibit
Number Description
- ------ -----------
10.28 Subsidiary Guaranty Agreement dated December 20, 1996, between the
Company and Prospect Street. (11)
10.29 Indemnity, Subrogation and Contribution Agreement dated December 20,
1996, between the Company and Prospect Street. (11)
10.30 Amended and restated Registration Rights Agreement dated December 20,
1996, between the Company, Prospect Street, and Bank of New York as
Trustee for the Employees Retirement Plan of The Brooklyn Union Gas
Company. (11)
10.31 Senior Promissory Note dated December 20, 1996, between the Company
and Prospect Street. (11)
10.32 Senior Promissory Note dated December 20, 1996 between the Company and
Bank of New York as Trustee for the Employees Retirement Plan of The
Brooklyn Union Gas Company. (11)
10.33 Stock Purchase Warrant Agreements dated December 20, 1996, between the
Company, Prospect Street, and Bank of New York as Trustee for the
Employees Retirement Plan of The Brooklyn Union Gas Company. (11)
10.34 Loan and Security Agreement dated December 4, 1996, between the
Company and People's Bank. (11)
10.35 Loan and Security Agreement dated December 4, 1996, between the
Company and the Independent Resources Inc. (11)
10.36 Loan and Security Agreement dated December 4, 1996, between the
Company and the PhoenixCor, Inc. (11)
10.37 Guarantees of Zalman Silber dated December 4, 1996 relating to the
Loan and Security Agreements with People's Bank and PhoenixCor, Inc.
(11)
10.38 Senior Promissory Note dated February 18, 1997 between the Company and
Bank of New York, as Trustee for the Employees Retirement Plan of The
Brooklyn Union Gas Company.
10.39 Senior Promissory Note dated March 14, 1997 between the Company and
Prospect Street NYC Co-Investment Fund, L.P.
10.40 Senior Promissory Note dated March 21, 1997 between the Company and
Bank of New York, as Trustee for Brooklyn Union Gas Company
Non-Bargaining Health VEBA.
10.41 Stock Purchase Warrant Agreement dated February 18, 1997 between the
Company and Bank of New York, as Trustee for the Employee Retirement
Plan of The Brooklyn Union Gas Company.
19
<PAGE>
INDEX TO EXHIBITS (Continued)
Exhibit
Number Description
- ------ -----------
10.42 Stock Purchase Warrant Agreements dated March 14, 1997 between the
Company and Prospect Street NYC Co-Investment Fund, L.P.
10.43 Stock Purchase Warrant Agreement dated March 21, 1997 between the
Company and Bank of New York, as Trustee for Brooklyn Union Gas
Company Non-Bargaining Health VEBA.
21 Subsidiaries of the Company. (9)
27.1 Financial Data Schedule.
- ------------
(1) Previously filed as exhibit to Registration Statement on Form SB-2
(Commission File No. 33-73276) declared effective on February 14, 1994.
(2) Previously filed as an exhibit to the Company's current report on Form 8-K
filed on July 21, 1995.
(3) Previously filed as an exhibit to the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1994.
(4) Previously filed as an exhibit to the Company's quarterly report on Form
10-QSB for the quarter ended September 30, 1994.
(5) Previously filed as an exhibit to the Company's quarterly report on Form
10-QSB for the quarter ended December 31, 1994.
(6) Previously filed as an exhibit to the Company's quarterly report on Form
10-QSB for the quarter ended March 31, 1995.
(7) Previously filed as an exhibit to the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1995.
(8) Previously filed as an exhibit to the Company's quarterly report on Form
10-QSB for the quarter ended March 31, 1996.
(9) Previously filed as an exhibit to the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1996.
(10) Previously filed as an exhibit to the Company's quarterly report on Form
10-QSB for the quarter ended September 30, 1996.
(11) Previously filed as an exhibit to the Company's quarterly report on Form
10-QSB for the quarter ended December 31, 1996.
20
<PAGE>
EXHIBIT B
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996 Commission File No. 0-23396
Skyline Multimedia
Entertainment, Inc.
(Name of Small Business Issuer in Its Charter)
New York 11-3182335
------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
350 Fifth Avenue, New York, New York 10118
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 564-2224
--------------
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(h) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Units consisting of Common Stock, Class A Warrants and Class B Warrants
Common Stock, $.001 Par Value
Redeemable Class A Warrants
Redeemable Class B Warrants
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days:
Yes |X| No |_|
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
|X|
The Company's revenues for its most recent fiscal year were $5,978,000.
The aggregate market value of the voting stock held by non-affiliates of the
Company was $5,700,000 as of September 24, 1996 based on the average bid and
asked prices of such stock as of that date.
There were 2,455,000 shares of Common Stock, $.001 par value, outstanding as of
September 24, 1996. Additionally, there were 1,090,909 shares of Series A
convertible participating preferred stock, $.001 par value, outstanding as of
September 24, 1996.
- --------------------------------------------------------------------------------
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the annual meeting of shareholders to be filed with
the Securities and Exchange Commission within 120 days following the Company's
fiscal year ended June 30, 1996. Certain information to be included therein is
incorporated by reference into Part III hereof.
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS.
General
Skyline Multimedia Entertainment, Inc. (the "Company") is a holding company
incorporated under the laws of the State of New York on November 2, 1993, which
owns all of the outstanding stock of its operating subsidiaries, New York
Skyline, Inc. ("Skyline"), Skyline Virtual Reality, Inc. ("SVR"), Skyline
Chicago, Inc. ("SCI") and Skyline Magic, Inc. ("SMI"). The Company is engaged in
the development and operation of state-of-the-art simulator attractions and
high-technology and family entertainment at established tourist sites and other
popular locations primarily in the United States. The Company's operating
strategy is to capture a large portion of the existing tourist traffic at these
sites and to expand its operations throughout the world. All references to the
"Company" contained herein include Skyline, SVR, SCI and SMI, except where
specifically noted.
On December 22, 1994, the Company commenced operations of its first
attraction, New York Skyride, which is located in the Empire State Building in
New York City. New York Skyride is an exhilarating simulated "aerial tour" of
New York City in a futuristic "spacecopter". New York Skyride features two 40
passenger state-of-the-art flight simulators and related computer-controlled
film projection technologies to provide visitors with a complete "New York"
experience, including an extensive pre-show area featuring interactive
multimedia exhibits depicting the various tourist sites and attractions in and
around the New York Metropolitan area, and culminating in a seven and a half
minute aerial "adventure" in and around New York City. Passengers will not only
experience the sensations of an actual aerial flight, but will also experience
visual images projected on screens within the simulator that envelop the viewer
with a variety of sights and sounds. New York Skyride is intended to provide
visitors with a sensation of taking a "once in a lifetime" aerial flight around
New York City. The Company believes that New York Skyride is identified with the
focal point of the tourism industry in New York City and one of the world's most
famous "must-see" attractions.
During April 1996, through SVR, the Company signed a ten-year renewable
lease for approximately 13,000 square feet of space in the Business Improvement
District Entertainment Zone located at Times Square (Broadway and 42nd Street)
in New York City to develop "XS New York", a state-of-the-art entertainment
center featuring the latest in virtual reality, simulation and related
technologies. XS New York is anticipated to open by December 1996 and will
feature highly themed "environments" exhibiting futuristic graphics, lighting,
audio and visual displays and special effects. Visitors will experience a
professionally created facility that will include unique "Virtual Environments",
each highlighting innovative technologies that will offer an exhilarating
sensory and tactile encounter. In addition, the Company expects to include a
"Cybercafe" which will feature food, refreshments, souvenirs and high speed
computer terminals providing access to the World Wide Web and Internet.
In September 1996, the Company entered into a 15 year lease with the
operators of the Woodfield Mall located outside of Chicago in Schaumberg,
Illinois. The Woodfield Mall is one
2
<PAGE>
of the largest and most heavily visited malls in the United States, boasting
annual attendance in excess of 18 million. The Company, through SCI, intends to
develop an entertainment venue at this location similar to that of XS New York.
The Company is in the process of finalizing negotiations to create a 50/50
joint venture to produce and operate a "Broadway-style" magic show. The show,
called "Magic on Broadway", is currently being previewed at the Lambs Theatre in
the Broadway district in New York City. The show is expected to run initially
for seven months with options to extend and features the talents of magician
Joseph Gabriel.
The Company intends to use the expertise and experience which it gained
from the operation of New York Skyride to develop these and similar attractions
at other locations in the United States and abroad. However, there can be no
assurance that the Company will be successful in developing these attractions or
other attractions at additional locations.
The Company's revenues are generated primarily from ticket sales, with
additional revenues generated from the sale of food, beverages and souvenir
merchandise. The Company has entered into corporate sponsorship and advertising
arrangements with major international corporations which provide additional
revenue and marketing exposure.
The Company's principal executive office is located at the Empire State
Building, 350 Fifth Avenue, New York, New York 10118 and its telephone number is
(212) 564-2224.
The New York Skyride Experience
New York Skyride is an adventure that is directly related to the New York
City tourist experience. The Company believes that New York Skyride enhances a
visit to the Empire State Building and to New York City by providing an
exciting, bird's-eye view of the landmarks and sites that cannot be seen from
any other vantage point.
Upon entering New York Skyride, visitors, who will be treated as
first-class passengers about to depart on a futuristic helicopter flight aboard
the "Zalman 2100 Spacecopter", will proceed into the Pre-Show Heliport area
(approximately 7,500 sq. ft.) where they are introduced to multimedia displays
depicting major New York City tourist attractions as well as informational and
entertaining film clips. These displays have been designed and installed by
certain of the Company's sponsors.
The Pre-Show area has interactive multimedia exhibits which provide the
background of certain tourist attractions in the New York City area. These
exhibits provide the visitor with useful knowledge about New York City and its
many popular tourist sites and a feeling of participation in the New York
Skyride experience.
Following a preflight briefing about "spacecopter" travel, passengers will
enter into one of the two "Zalman 2100 Spacecopters", which are 40 passenger
computer-controlled flight simulators. At the front of each simulator is a large
18' x 18' screen upon which a fast-paced film is displayed. The simulator also
contains an advanced 8-channel digital sound system, with
3
<PAGE>
4 dual amplifiers, 400 watts per channel each (or 3,200 watts of total sound),
to provide passengers with an enhanced audio/visual experience.
Once the passengers are seated in the spacecopter, they begin a seven and a
half minute simulated flight that treats them to an array of New York City
scenes. Spectacular adventures await the passengers throughout their excursion.
For example, the spacecopter crashes into FAO Schwarz, the world's largest toy
store, passes directly under the Brooklyn Bridge, "dives" into a tunnel, crashes
into the East River, has a run-in with a New York City traffic cop, among other
exciting adventures. The spacecopter also visits many of New York City's other
tourist attractions, including Fifth Avenue, the World Trade Center Towers,
Central Park, Times Square and the Statue of Liberty. Since New York Skyride is
intended to be a family-oriented attraction, the film is designed to appeal to
the broadest audience and not purely the most adventurous thrill-seekers. The
film makes the Empire State Building the focal point of the attraction, with a
liftoff and landing taking place from atop the Empire State Building.
Once the spacecopter flight has been completed, passengers exit the
simulators and proceed to the exit lobby which contains a beverage, food and
souvenir concession area. All passengers are able to purchase souvenirs of their
visit to New York Skyride, i.e. a hat, large button or other suitable memento
with the Empire State Building or New York Skyride logo on it.
The XS New York Experience
The Company's latest project under development will include an interactive
virtual reality entertainment center, "XS New York", which is located in the
heart of Times Square in New York City and is expected to commence operations by
December 1996. XS New York will present the latest in state-of-the-art
entertainment technology, featuring cutting-edge virtual reality hardware and
software. Upon entering XS New York, guests will immediately become immersed in
heavily themed "environments" that display futuristic graphics, lighting, audio
and video treatments. Presented in a first class, professional format, guests
will be lead through an expertly designed layout that introduces them to
interactive show action equipment and special effects areas into virtual
"worlds" that offer each guest an opportunity to experience the latest in
virtual reality and related technologies.
Each virtual world will feature a unique type of virtual reality hardware
and software display. Some will offer competition between players while others
will provide exploratory experiences. Tickets will be purchased from a centrally
located ticket area which will also serve as the launching point for most guest
experiences. One of the virtual worlds will include a "Cybercafe" which will
offer light food and refreshments and computer terminals which will be linked to
the World Wide Web and Internet.
Other themed environments will feature attractions such as the newly
created Mag-Ball(TM) competition arena, which will allow guests to participate
in the very popular Mag-Ball(TM) game, and the internationally recognized
Virtuality 2000 series interactive entertainment equipment. Some environments
will include a 3-dimensional action and visual presentation allowing guests to
view their own activity, the activity of competitors and the attractions' vital
statistics on giant overhead monitors and projection screens. Simultaneously,
guests waiting to participate in a
4
<PAGE>
particular virtual world and those seated in the Cybercafe will also be able to
view the fast-paced action and sound effects of certain themed environments.
Some environments will include interactive virtual reality equipment that can be
programmed to function as stand alone units or in conjunction with other players
at locations around the world. The Company intends to stage monthly competitions
between other "XS" locations culminating in a "Virtual Olympics" once each year.
The XS Chicago Experience
In September 1996, the Company entered into a lease for approximately
21,000 square feet of space in the Woodfield Mall outside of Chicago, Illinois.
The Company, through SCI, plans to develop a state-of-the-art interactive
virtual reality entertainment center, XS Chicago, similar to the XS New York
project currently under development. The XS Chicago location will be situated
near the Rainforest Cafe, a successful themed restaurant, and other retail
establishments that attract tourists and regional area residents. The Company
will have to obtain additional financing in connection with the development of
XS Chicago and is currently in the process of identifying potential sources,
although there can be no assurance that such financing will be available on
acceptable terms, or at all. See "Management Discussion and Analysis of
Financial Condition and Results of Operations."
Simulator and Virtual Reality Technologies
The Company's motion simulator attractions utilize state-of-the-art,
computer-controlled aircraft flight simulators. Simex, Inc. (formerly
Interactive Simulation, Inc.), a Canadian company experienced in simulation
technology, provided the sophisticated computer hardware and software that
coordinates the movements of the simulator platform with the images projected on
the screen. The range of motion for the simulators is along six axes (that is,
the simulators can create up and down motions, right and left motions, angled
motions to simulate turning or banking while climbing or descending at varying
degrees and a spin motion, or some combination of the above). The movable
platforms on which the simulators rest and which move in synchronization with
the film were developed by Moog, Inc., a large defense contractor experienced in
the adaptation of flight simulator technology to the entertainment market.
A key component of the simulator technology is the "show control system",
which is a PC-based computer program that coordinates and manages the motion and
gyration of the simulator with the film and audio elements of the program. For
example, when the film image shows the spacecopter banking to the right, there
must be a precise, coordinated movement of the simulator in that direction to
both convince the passengers senses that they are flying in a spacecopter and
prevent passenger disorientation. The speed of the film through the projection
system is faster than normal film, television or video footage, which enhances
the passengers perception of motion and movement. The film is in
state-of-the-art super 35mm format projected at 30 frames per second rather than
standard 24 frames per second, which provides a sharper, more intense image. The
projection equipment is a fully automated system that eliminates the need for a
projector operator. The film was developed in conjunction with Chromavision
Corp., a production studio with extensive experience in fast-paced concept
films.
5
<PAGE>
XS New York and, in the future, XS Chicago will feature a wide assortment
of the latest in entertainment and virtual reality hardware and software
technologies. The state-of-the-art interactive virtual reality technologies
which will be showcased at XS New York and, in the future, XS Chicago include: a
dogfight simulation experience created by Ride and Show Engineering, which
allows direct competition with other participants and provides each participant
the opportunity to engage their opponent, navigate through a canyon at high
speed and fly completely inverted; the "Mag-Ball" experience developed by
Greystone Technology, a southern California defense contractor, which provides
an interactive competition that can be linked with players at other venues
across the country; Virtual Reality game experiences, including Total Recoil,
manufactured by Virtuality Ltd., a British company and the current world leader
in the design, fabrication and production of Virtual Reality entertainment
systems, a simulated skeet shoot contest that provides all the sensations of
firing a shot gun in a completely safe environment, and many other 3-dimensional
software packages, including Alpine Racer - a simulated slalom ski race, Daytona
Speedway - a simulated car racing experience and Full Swing Golf - a simulated
golf experience featuring the most famous golf courses in the world; and a
virtual PC-based game and sports "battle ground" where players compete on-line
and in person, for scholarships and prizes, on a three-tiered pyramid stage,
which will combine the excitement of a Hollywood game show and the intensity of
a PC action game, in the latest unique spectator event. XS New York will also
feature a contemporary Cybercafe which will serve food and beverages while
providing access to the World Wide Web and Internet from table-based PC computer
stations.
XS New York and, in the future, XS Chicago will also include a uniquely
themed retail area that will provide New York related (or in the case of XS
Chicago, Chicago related) merchandise as well as specialty souvenirs. Since
attractions at XS New York and XS Chicago will require the use of magnetic debit
cards, a comprehensive data base will be created indicating customer
demographics and preferences, which information the Company will use for future
software development, special event promotions and merchandise selection.
The Magic on Broadway Experience
The Company is in the process of finalizing negotiations relating to the
participation, through SMI, in a 50/50 Joint Venture which will produce and
manage a "Broadway-style" show featuring the talents of Joseph Gabriel, an
internationally renowned magician. The show, "Magic on Broadway", is currently
being previewed at the Lambs Theatre in New York City and is expected to run
initially for seven months. The joint venture will have the option to extend the
engagement and will receive revenues from ticket and merchandise sales and
administrative fees. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
The Empire State Building Location
New York Skyride is located on the second and third floors of the Empire
State Building, in a 21,800 square foot site that wraps around the south and
west sides of the building with an entrance situated adjacent to the main lobby
escalator that takes all visitors to the waiting area for the Observatory
elevators. Signs and video monitor displays in the Empire State Building's
6
<PAGE>
lobby and in the Observatory ticket purchase area make visitors to the Empire
State Building aware of New York Skyride. Most importantly, visitors who
purchase tickets to the Observatory are offered the choice of purchasing a
combined Observatory/New York Skyride ticket at a reduced price from separate
purchases of tickets to both attractions. The cost of a ticket to New York
Skyride is $9.00, and the cost of a combined ticket with the Observatory is
$11.50 (the cost of a ticket to the Observatory is $4.50). Children's rates,
group rates and senior discounts are also offered along with other promotional
discounts.
The Empire State Building is a focal point for the tourism industry in New
York City. The Observatory, which opened in 1933 and is located on both the
102nd and the 86th floors, has achieved worldwide recognition and publicity, and
is a primary destination for a large percentage of New York City's tourist
traffic. Paid attendance figures provided by management of the Empire State
Building for the last five years for the Observatory are summarized below.
EMPIRE STATE BUILDING OBSERVATORY
ADMISSION TICKET SALES (000'S)
YEAR 1991 1992 1993 1994 1995
---- ---- ---- ---- ----
TOTAL ATTENDANCE 2,295 2,391 2,650 2,915 3,350
Except for 1991, which was the year of the Gulf War, the Observatory
attendance has experienced steady growth.
The Company believes that combined ticket sales at the Observatory's ticket
facilities together with the Company's marketing and promotional campaigns will
enable New York Skyride to attract approximately 25-30% of all visitors to the
Observatory; however, there can be no assurance that these levels will be
achieved. For the year ended June 30, 1996, the Company's capture rate of
Observatory visitorship averaged approximately 23%, up from approximately 20%
for the year ended June 30, 1995. The Company expects that with additional
marketing and promotional activities to further public awareness of New York
Skyride, both inside and outside the Empire State Building, the Company's
capture rate should increase to anticipated levels.
The Times Square Location
The Company has leased approximately 13,000 square feet of space at
1457-1463 Broadway (at 42nd Street), New York, New York in the Business
Improvement District Entertainment Zone located in Times Square in New York
City. This space will be utilized for the Company's latest attraction "XS New
York", a state-of-the-art interactive virtual reality entertainment center.
Ideally situated in the heart of Times Square, XS New York is part of the
exciting revitalization of Times Square along with such other notable names as
Disney's New Amsterdam Theater, Madame Tussaud's Wax Museum and AMC's 26-Plex
Movie Theater, and is located directly across from the World Famous Disney
Store. The Times Square area is visited by approximately 20 to 30 million
tourists annually, employs 250,000 people and
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accommodates 1.5 million commuters every day. This incredible density of people
with significant disposable income continues to grow each year and is expected
to grow at a more significant rate as a result of the revitalization efforts
mentioned above. In addition, Times Square in New York City is the most popular
place in the world on New Year's Eve, particularly so as the millennium
approaches.
The Woodfield Mall Location
The Company leased approximately 21,000 square feet of space in the
Woodfield Mall located outside of Chicago, in Schaumberg, Illinois. The
Woodfield Mall is the fourth largest shopping mall in the United States with
over 2 million square feet of retail space and annual visitorship in excess of
18 million. The Company's premises are located near "The Rainforest Cafe" and
other retail establishments which attract large numbers of visitors to the mall.
Advertising and Promotional Plans
The Company intends to capitalize on the strength of its existing locations
with a multifaceted marketing, public relations and advertising program that
will heighten awareness about New York Skyride (including the fact that it is
the first such motion simulator attraction in New York City) and XS New York
among the more than 25 million persons, including tourists and residents from
the surrounding New York area, who visit New York City every year. Advertising
and promotional activities include a careful mix of paid advertising and
promotional and public relations activities.
In connection with New York Skyride, efforts to attract attendees from the
Observatory are focused within the Empire State Building itself. The management
of the Observatory has agreed to sell combined Observatory and New York Skyride
discounted admission tickets and to identify other opportunities for shared
promotional programs and other joint marketing activities. Pursuant to the terms
of the license agreement with the Observatory, any discount as a result of
combined ticket sales are deducted from the admission price of a New York
Skyride ticket. The non-discounted price of a New York Skyride ticket is $9.00
for adults and $7.00 for children under the age of 12 years.
Promoting New York Skyride and XS New York to tourist boards (such as The
New York Convention & Visitor's Bureau), travel agents, managers of group
activities and visitors to New York City represents a primary focus of the
Company's marketing efforts for these attractions. Since tourists and visitors
are a primary target, special volume discounts are offered to groups such as
conventions and trade associations, as well as through travel agent packages.
School groups are also a significant market for New York Skyride and XS New
York, and special programs are being implemented to target these audiences,
especially during the slower tourist periods in the fall and winter months.
The Company will continue to market and promote its activities through
traditional print advertising in publications that go to New York City tourists
and others, as well as broaden its advertising and promotional programs to the
general public through local radio and newspaper advertising. The Company is in
the process of developing its marketing plans for its XS Chicago
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attraction to be located in the Woodfield Mall and expects to employ similar
advertising and promotional programs throughout the Chicago Metropolitan area
and other surrounding regions.
Corporate Sponsors
Management expects to continue to supplement revenue from ticket sales to
its attractions by soliciting corporate sponsorships from a number of key
consumer product companies. It is expected that these sponsorships will generate
additional revenue for the Company through joint marketing and promotional
programs with these leading consumer product companies. To date, the Company has
entered into three major sponsorship agreements in connection with New York
Skyride, one involving JVC Company of America, a major electronics manufacturer,
one with Pepsi-Cola Bottling Company of New York, Inc., a major soft drink
manufacturer, and one with Fuji Photo Film U.S.A., a major distributor of
photographic and magnetic imaging merchandise. The agreements range in their
terms from three to five years and provide for annual fees, capital improvements
and cross promotions for the Company. The Company believes that such
arrangements will result in greater market awareness and acceptance through the
association of New York Skyride with such corporate sponsors and their products.
Corporate sponsorships in connection with XS New York are being developed and
the Company expects such sponsorships to be a significant source of revenue and
provide significant marketing exposure.
Leases and License Agreements
The Company, through Skyline, entered into both a lease (the "Lease") and
an exclusive license agreement (the "License Agreement") with the Empire State
Building Company, the operator of the Empire State Building in New York City, on
February 26, 1993. The Lease of the premises located at the Empire State
Building is for a term of 20 years and contains rent escalation provisions as
described under "Description of Property" below and certain other provisions
relating to additional rent, taxes, utilities, prohibition against assignment
and cross-default provisions in the event of a default under the License
Agreement. The Company has negotiated a modification to the Lease extending the
term of the Lease to coincide with a new lease for an additional 35,000 square
feet of space adjacent to the New York Skyride location. The modification would
extend the termination date of the Lease from May 1, 2013 through and including
June 30, 2016. The term of the License Agreement has also been extended to
coincide with the new lease for additional space.
The License Agreement provides for the joint sale of tickets to the
Observatory and New York Skyride provided payments by the Company are made
monthly at an annual rate of $150,000 from April 1, 1995 through March 31, 1998;
$175,000 from April 1, 1998 through March 31, 2002; $200,000 from April 1, 2002
through March 31, 2006; $225,000 from April 1, 2006 through April 30, 2013, and
$186,000 from May 1, 2013 through June 30, 2016. The License Agreement also
provides for the reimbursement by the Company of certain costs and expenses
relating to the joint ticket sales and contains cross-default provisions in the
event of a default under the Lease.
During April 1996, the Company signed a 20 year renewable lease for an
additional 35,000 square feet of space within the Empire State Building adjacent
to the New York Skyride facility. The lease term commences September 1, 1996 and
provides for rental payments by the
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Company at an annual rate of $529,000 through July 31, 1997; $565,000 from
August 1, 1997 through July 31, 1998; $600,000 from August 1, 1998 through July
31, 1999; $619,000 from August 1, 1999 through July 31, 2000; $741,000 from
August 1, 2000 through July 31, 2004; $811,000 from August 1, 2004 through July
31, 2007; $882,000 from August 1, 2007 through July 31, 2010; $953,000 from
August 1, 2010 through July 31, 2013; and $1,023,000 from August 1, 2013 through
July 31, 2016. This lease contains rent escalation provisions as described under
"Description of Property" below and certain other provisions relating to
additional rent, taxes, utilities, and prohibitions against assignment. Included
in the lease is a rent credit of $1,363,000 to be applied in equal monthly
installments against the base rent over the first 60 months of the lease.
Additionally during April 1996, the Company signed a ten year renewable
lease for approximately 13,000 square feet of space in the Business Improvement
District Entertainment Zone located in Times Square in New York City. The rent
commencement date is February 1, 1997 and provides for annual rental payments
aggregating $560,345 during the first five years of the lease and $644,000
during the last five years of the lease. The Company is developing a new
state-of-the-art entertainment center at the site, XS New York, featuring the
latest in virtual reality, simulation and related technologies, which is
anticipated to open by December 1996. The lease contains a cancellation clause
exercisable at any time in the event the landlord commences construction of
office buildings on the site at some future date. Should the landlord exercise
the cancellation clause, the Company would be required to vacate the space
within six months after notice, but would be entitled to reimbursement of a
portion of its out-of-pocket construction costs, not to exceed $125 per square
foot.
During September 1996 the Company entered into a fifteen year lease with
Woodfield Associates for approximately 21,000 square feet of space in the
Woodfield Mall located outside of Chicago in Schaumberg, Illinois. The lease
term commences on the later of (i) September 1, 1997 or (ii) 180 days following
the date the leased premises are made available to the Company. The lease
provides for monthly payments at an annual rate of $420,000 from the
commencement of the lease continuing through the fifth lease year, $630,000
beginning with the sixth lease year through the tenth lease year, and $839,000
beginning with the eleventh lease year through the balance of the lease term. In
addition, the lease provides for annual percentage rent equal to 10% of gross
sales which exceed $5,597,000 through year five, $8,395,000 through year ten,
and $11,194,000 thereafter. Included in the lease is a rent credit of $944,325
to be applied in equal monthly installments against the base rent over the first
60 months of the lease. Additional charges under the lease for common area
maintenance charges aggregate $15 per square foot beginning with the first year
of the Lease and are subject to annual percentage increases based on increases
in tax assessments and other costs and expenses. As a condition to the execution
of the lease, the Company was required to provide a $200,000 irrevocable letter
of credit as security for the performance of the Company's obligations under the
lease.
Patents and Trademarks
The Company does not hold any patents relating to New York Skyride or XS
New York and their related technologies. Accordingly, the Company's concept is
not proprietary and is subject to duplication and competition from entities with
greater resources and strengths than the Company. The success of the Company's
business relies heavily on the strength of its location
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and lease terms. The Company has obtained a registered trademark for the name
"New York Skyride" and has a trademark application in process for "XS New York".
Competition
New York Skyride and XS New York compete with all other New York City
tourist attractions and cultural events such as museums, Broadway shows and
other landmarks. These attractions are quite different "experiences" from that
of a trip aboard the Zalman 2100 Spacecopter (which the Company believes is the
first attraction of its type in New York City) or an experience encompassing the
latest in virtual reality and simulator technologies, but they present intense
competition for attendance and visitor dollars. These other attractions are
generally more established, and are owned and operated by entities that have
greater financial resources and managerial expertise than the Company.
Additionally, a major entertainment complex is being developed at Times Square
which will include entertainment attractions from companies such as Disney,
American Cinema, Madame Tussaud and other large entertainment companies.
Additionally, in September 1996, a simulator attraction opened in Times Square,
and a virtual reality high-tech game center is being developed at the old Studio
54 location on 54th Street between Broadway and Eighth Avenues. Further, the
Company is aware that a simulator attraction is currently being developed at the
World Trade Center Towers and a non-New York related simulator is expected to
open in October 1996 on the lower level of the Empire State Building. The
Company believes that the simulator attraction being developed in the Empire
State Building will not have a material impact on the Company or the operations
of New York Skyride since such attraction is not a uniquely "New York"
experience, is expected to have much less capacity than New York Skyride and
will be unable to sell tickets jointly with the Observatory. There can be no
assurance that other virtual reality and simulator attractions will not commence
operations in the New York area at some future point in time.
Insofar as motion simulation technologies, including show control systems
(and related projection and audio technologies), are subject to improvements and
enhancements, it is possible that competitive attractions will be able to offer
a more technologically advanced "experience" to a customer than the experience
offered by New York Skyride. Also, the Company believes that a number of
attractions, which includes the simulator attraction which opened in Times
Square, utilizing so-called "virtual reality" imaging technologies, or large
film format technologies with enhanced 3-dimensional projection technologies,
are likely to open in the New York area within the near future. These
attractions do not depend on motion simulators for their special effects, and
they are also likely to be developed and operated by companies that have
significantly greater financial, managerial and promotional experience and
resources than the Company. While these attractions may not offer a directly
competitive "product" to New York Skyride (i.e., an aerial adventure in New York
City) or XS New York, their presence will certainly create significant
competition for the Company to attract visitors to New York Skyride and XS New
York. The Company will compete with these entities primarily on the basis of
location, uniqueness of product, marketing and price.
To the extent the Company develops similar attractions at landmark
locations in other cities, it is likely to face intense competition from
established cultural and historical attractions owned and operated by entities
with significantly greater resources than the Company. The
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Company is also likely to face intense competition for the right to operate at
other landmark locations.
Employees
As of September 24 1996, the Company employed seven management persons
(other than the Company's President) on a full-time basis. The Company also
employs approximately 85 non-management personnel who typically work one of
three shifts during an approximate 95 hour workweek.
Item 2. DESCRIPTION OF PROPERTY.
The Company's executive offices are located at the Empire State Building at
350 Fifth Avenue, New York, New York. These offices consist of 4,400 square feet
leased at an annual base rental of $101,000, beginning September 1, 1994,
escalating to $110,000 over the five year term of the lease.
On February 26, 1993, the Company entered into an agreement with the
operator of the Empire State Building for the lease of approximately 17,800
square feet of space on the second floor of the Empire State Building for a term
of 20 years. This space is being fully utilized for the Company's New York
Skyride attraction. Annual base rent through March 31, 1998 is $338,371; from
April 1, 1998 through March 31, 2002 is $391,798; from April 1, 2002 through
March 31, 2006 is $445,225; from April 1, 2006 through March 31, 2009 is
$498,642; from April 1, 2009 through April 30, 2013 is $534,270; from May 1,
2013 through June 30, 2016 is $441,663. However, the Company negotiated a
modification of the lease term to coincide with its lease for additional space
as described below. The modification extends the original lease term from May 1,
2013 through and including June 30, 2016. Such annual rent is payable monthly
and subject to additional amounts for taxes and utilities. The Company was not
required to pay the first 21 months rent which is being amortized over the term
of the Lease.
The Company also leases an additional 4,000 square feet of space located
above the primary leased premises. The Company uses such additional space to
accommodate a larger screen (18' X 18') on which to show the New York Skyride
film. The term of this lease coincides with the term of the Lease and License
Agreement, as modified, at an annual base rental for such additional space of
$76,000 escalating to $120,000 over the term of the lease.
During April 1996, the Company signed a 20 year renewable lease for an
additional 35,000 square feet of space adjacent to and above the current
location of New York Skyride. The lease term commences September 1, 1996 and the
annual base rent over the term of the lease will begin at $529,000 and escalate
over the term of the lease to $1,023,000. Included in the lease terms is a rent
credit of $1,363,000 to be applied in equal installments against the base rent
over the first 60 months of the lease. In conjunction with the signing of this
new lease, the terms of both the Lease and License Agreement signed February 26,
1993 were amended to coincide with the new lease. The Company is considering how
to best utilize the additional space in the Empire State Building, including a
mixed use location based entertainment center which would likely require a
partner with significantly greater financial resources than the
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Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Additionally during April 1996 the Company entered into a ten year
renewable lease with the owners of 1457-1463 Broadway, New York, New York for
approximately 13,000 square feet of space. The Company will occupy the ground
floor and mezzanine level and is currently developing an interactive virtual
reality entertainment center. See "The XS New York Experience". The rent
commencement date is February 1, 1997 and annual rental payments aggregate
$560,345 for each of the first five years and $644,000 for each of the last 5
years of the lease. Such annual rent is payable monthly and subject to
additional amounts for taxes.
During September 1996 the Company entered into a fifteen year lease with
Woodfield Associates for approximately 21,000 square feet of space in the
Woodfield Mall located outside of Chicago in Schaumberg, Illinois. The lease
term commences on the later of (i) September 1, 1997 or (ii) 180 days following
the date of the leased premises are made available to the Company. The lease
provides for monthly payments at an annual rate of $420,000 from the
commencement of the lease continuing through the fifth lease year, $630,000
beginning with the sixth lease year through the tenth lease year, and $839,000
beginning with the eleventh lease year through the balance of the lease term. In
addition, the lease provides for a percentage rent equal to 10% of Gross sales
which exceed $5,597,000 through year five, $8,395,000 through year ten, and
$11,194,000 thereafter. Included in the lease is a rent credit of $944,325 to be
applied in equal monthly installments against the base rent over the first 60
months of the lease. Additional charges under the lease for common area
maintenance charges aggregate $15 per square foot beginning with the first year
of the Lease and are subject to annual percentage increases based on increases
in tax assessments and other costs and expenses. As a condition to the execution
of the lease, the Company was required to provide a $200,000 irrevocable letter
of credit as security for the performance of the Company's obligations under the
lease.
The Company believes that its facilities are adequate for its current and
expected future levels of operations.
Item 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not Applicable.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON EQUITY
Prior to February 14, 1994, the date of the Company's initial public
offering, there was no public market for the Units, Common Stock, Class A
Warrants or Class B Warrants (as defined below). Each of these classes of
securities are currently quoted on the Nasdaq Small-Cap Market under the symbols
"SKYLU," "SKYL," "SKYLW" and "SKYLZ," respectively. The following table sets
forth the high and low sales prices for the Units, Common Stock, Class A
Warrants and Class B Warrants for the fiscal periods indicated as reported by
Nasdaq. The quotations shown represent inter-dealer prices without adjustment
for retail mark-ups, mark-downs or commissions, and may not necessarily reflect
actual transactions.
UNITS Fiscal 1996 Fiscal 1995
- ----- ----------- -----------
High Low High Low
---- --- ---- ---
1st Quarter.................. 6 1/8 4 1/4 6 1/4 5
2nd Quarter.................. 6 7/8 4 1/2 6 5/16 5
3rd Quarter.................. 6 1/2 4 6 3/32 4 15/32
4th Quarter.................. 5 3/4 3 3/4 5 5/16 4 1/4
COMMON STOCK
- ------------
High Low High Low
---- --- ---- ---
1st Quarter.................. 4 1/2 2 3/4 4 5/16 3 15/32
2nd Quarter.................. 4 2 3/4 4 5/16 3 15/32
3rd Quarter.................. 4 7/8 3 4 5/16 3 5/32
4th Quarter.................. 4 1/8 2 1/2 4 5/32 3 5/16
CLASS A WARRANTS
- ----------------
High Low High Low
---- --- ---- ---
1st Quarter.................. 1 1/8 3/4 1 5/32 5/16
2nd Quarter.................. 2 1/8 1 1/8 1 5/32 9/16
3rd Quarter.................. 1 3/4 3/4 1 1/32 5/16
4th Quarter.................. 1 1/8 5/8 1 13/32
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CLASS B WARRANTS
- ----------------
High Low High Low
---- --- ---- ---
1st Quarter.................. 1/2 1/4 No No
Trades Trades
2nd Quarter.................. 9/16 3/8 13/32 5/32
3rd Quarter.................. 7/8 9/16 1/4 7/32
4th Quarter.................. 5/8 3/8 5/16 5/32
The per share closing sales price of the Common Stock as reported by Nasdaq
on September 24, 1996 (the date of the last reported sale) was 3-5/8. As of
September 24, 1996, the Company had in excess of 400 beneficial shareholders and
ten shareholders of record.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operational Overview
From its inception until December 22, 1994, the Company's primary
activities consisted of developmental activities, including the preparation of
plans relating to the design of New York Skyride; negotiation of a lease and a
license agreement with the operators of the Empire State Building (the location
for New York Skyride); working with engineers, architects, contractors,
designers, and other parties in connection with the construction and operation
of New York Skyride; developing software and video films in connection with New
York Skyride; developing marketing strategies; initiating marketing and
corporate sponsorship activities by identifying and contacting potential
strategic alliances; selecting a management team; and obtaining financing.
On December 22, 1994, the Company commenced operations of New York Skyride
and began generating revenue from ticket sales to the attraction and the sale of
merchandise at its souvenir/concession area. New York Skyride was opened on a
preview basis until February 21, 1995, the date of its official Grand Opening.
During the period beginning with commencement of operations of New York
Skyride and ending June 30, 1995, the New York Skyride facility was visited by
in excess of 250,000 customers. This period encompassed both the Company's
preview opening and the slower six months of the year. The quarter ended
September 30, which includes the summer months, represents the busiest quarter,
whereas the quarter ended March 31 is the slowest quarter of the year. During
the year ended June 30, 1996, the facility was visited by approximately 700,000
customers. Revenues generated during the year ended June 30, 1996 and June 30,
1995 aggregated $5,978,000 and $2,190,000, respectively, consisting of
$4,609,000 and $1,635,000, respectively, from ticket sales, $1,049,000 and
$354,000, respectively, from the sale of food and merchandise at its
souvenir/concession area, and $320,000 and $201,000, respectively, from
sponsorship income. During the year ended June 30, 1996, the Company earned net
income of $1,046,000. The net loss from operations of $2,225,000 for the year
ended June 30, 1995, is
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a reflection of the New York Skyride facility not commencing full scale
operations until February 21, 1995, and the significant amount of start-up
expenditures incurred during the development and initial operations of the
facility. Additionally, most of the Company's overhead expenses are relatively
constant, whereas revenue is seasonal in nature with a significant portion of
revenue being generated during the summer months and Holiday seasons. Thus, the
period during which the Company was open for operations included a proportionate
share of overhead expenses and a disproportionate amount of revenue.
The Company completed an initial public offering of its securities in
February 1994 and received net proceeds of approximately $6,200,000 therefrom.
The Company utilized such net proceeds for the development and completion of New
York Skyride, including approximately $2,000,000 for renovation of the site at
the Empire State Building, $2,026,000 for design and construction of the
simulators and related technologies contained therein and $1,027,000 for
production of the film. The total cost of these three items, $5,053,000, was
$1,853,000 over original amounts budgeted. Additionally, the Company utilized
approximately $300,000 to complete the interactive video and computer pre-show
area for New York Skyride, approximately $150,000 for the construction of the
food and souvenir concession stand, approximately $300,000 for architectural,
construction and design consultants, and approximately $250,000 in miscellaneous
costs. The Company exceeded its original budget estimates due in part to the
delay in opening and certain enhancements implemented that were not originally
anticipated.
At June 30, 1996 the Company had working capital of approximately
$1,623,000, and an accumulated deficit of approximately $(2,162,000), compared
to a working capital deficiency of $(1,800,000) and an accumulated deficit of
$(3,200,000) at June 30, 1995.
During the fiscal year ended June 30, 1995, the Company was required to
make significant payments to contractors, engineers, architects, consultants and
other professionals upon acceptance for delivery and commencement of operation
of the simulators.
During fiscal 1996, in order for the Company to be able to pay its
creditors, engage in a significant marketing and promotional campaign and
provide capital for future growth and expansion, management raised additional
proceeds from the sale of equity capital and through a loan from a financial
institution as described below.
Liquidity and Capital Resources
The Company received a loan in the amount of $100,000 in October 1993 from
D. H. Blair Investment Banking Corp. ("Blair"), the underwriter of the Company's
initial public offering of its securities. The proceeds of this loan were used
to make certain required payments under the Lease and payment of certain
consulting and professional fees. This loan was repaid in full plus accrued
interest at 10% per annum out of the proceeds of the bridge loan (the "Bridge
Loan") consummated in December 1993 in the aggregate amount of $760,000. The
Bridge Loan consisted of $760,000 in aggregate principal amount promissory notes
(the "Notes") with interest at 10% per annum and was repaid out of the proceeds
of the Company's initial public offering. Additionally, an aggregate of 456,000
Class A Warrants (as defined below) were issued in connection with the Bridge
Loan. Blair acted as placement agent in connection with the Bridge Loan and
received a cash commission of 10% and a non-accountable expense
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allowance of 3% of the aggregate principal amount of the Notes ($98,000). The
net proceeds of approximately $660,000 received in connection with the Bridge
Loan were used to repay the October 1993 $100,000 loan from Blair and for
certain required deposits and payments in connection with the development of New
York Skyride.
In February 1994, the Company consummated an initial public offering of
1,495,000 Units (the "Units") (including exercise of the over-allotment option
in April 1994), each Unit consisting of one share of Common Stock, $.001 par
value (the "Common Stock"), one Redeemable Class A Warrant (the "Class A
Warrants") and one Redeemable Class B Warrant (the "Class B Warrants"). Each
Class A Warrant entitles the holder thereof to purchase, at any time until
February 14, 1999, one share of Common Stock and one Class B Warrant at an
exercise price of $6.65, subject to adjustment in certain circumstances. Each
Class B Warrant entitles the holder thereof to purchase, at any time until
February 14, 1999, one share of Common Stock at an exercise price of $8.75 per
share, subject to adjustment in certain circumstances. The Company received
aggregate net proceeds of approximately $6,200,000 in connection with this
offering, which proceeds were used as described above. The Class A Warrants and
Class B Warrants are subject to redemption under certain conditions. As a result
of the sale by the Company of the Preferred Stock (as described below), the
number of shares into which the Class A Warrants are exercisable and the
exercise price of each Class A Warrant has been adjusted to 1.106 shares of
Common Stock and $6.01 per share, respectively, and the number of shares into
which the Class B Warrants are exercisable and the exercise price of each Class
B Warrant has been adjusted to 1.106 shares of Common Stock and $7.91 per share,
respectively.
Further, 670,000 shares of the Company's issued and outstanding Class A
Common Stock (which is identical to the Common Stock in all respects, except
that each share of Class A Common Stock is entitled to five votes per share and
is currently held by the Company's President) are subject to forfeiture,
pursuant to an escrow arrangement entered into between the Company's President
and Blair, in the event certain pretax earnings targets or per share market
price targets are not met. In the event any of the shares are released from
escrow, the release will be treated, for financial reporting purposes, as
compensation expense to the Company. The Company, however, will not be allowed a
deduction for such charges for income tax purposes. Accordingly, the Company
will recognize, during the period in which the earnings or market price targets
are met, what could be a substantial charge to earnings, which would increase
the Company's loss or reduce or eliminate earnings. The amount of this charge
will be equal to the difference between the aggregate market price of such
shares on the date of release from escrow and the original value assigned to
such shares. The amount of compensation expense recognized by the Company will
not affect the Company's total shareholders' equity.
During November 1994, the Company obtained a loan from an institutional
lender aggregating $1,000,000 (to be repaid in 48 monthly installments) with
interest at 12 1/2% compounded monthly. Pursuant to the loan agreement, the
lender was granted a first security interest in the Company's simulator and
projection equipment. The loan originally required a certificate of deposit of
$250,000 provided by the Company which was released during May 1995. Up to
$500,000 of this loan is personally guaranteed by the Company's president.
17
<PAGE>
In order to pay the Company's creditors, provide capital for future growth
and expansion and allow for an extensive promotional and marketing campaign, the
Company consummated a private placement with an institutional investor on July
7, 1995 whereby 1,090,909 shares of Series A Convertible Participating Preferred
Stock (the "Preferred Stock") were sold for gross proceeds of $2.75 per share
aggregating $3,000,000. The Preferred Stock is convertible into common stock of
the Company at any time on a share-for-share basis. The holders of the Preferred
Stock are entitled to an aggregate of up to 24.9% of the outstanding voting
power of the Company on all matters which come before the shareholders.
Additionally, so long as 272,727 shares of Preferred Stock remain outstanding,
the holders thereof will have the ability to obtain up to 50.1% of the
outstanding voting power of the Company and elect a majority of the Board of
Directors in the event the holders of the Preferred Stock determine in good
faith that such action is reasonably necessary for the protection of their
investment. Since the institutional investor is a Small Business Investment
Company subject to the regulatory oversight of the Small Business Administration
("SBA"), the exercise of this control provision cannot be made arbitrarily and
is subject to SBA review. The Preferred Stock is subject to a Registration
Rights Agreement granting both demand and piggyback registration rights. In
order to consummate the above investment, the president of the Company agreed to
personally guarantee the Company's obligations under the Preferred Stock
purchase agreement, his shares of stock subject to limitations on transfer or
disposition, provide the institutional investor with an irrevocable proxy and
adjust the earnings targets required to release the 670,000 Class A Common Stock
subject to escrow upwards as a result of the Preferred Stock issuance.
Accordingly, in order to ensure that the sale of Preferred Stock would be
consummated, the Board of Directors approved the issuance of an option to
purchase 1,250,000 shares of Common Stock, exercisable at $3.75 per share (the
market price on the date of grant) only in the event that the targets for the
release of the shares subject to escrow are not achieved, and which are subject
to different earnings and equity targets which are more in line with the intent
of the original escrow provisions. The Company will recognize a charge to
earnings during the period in which such options are exercised, equal to the
difference between the aggregate market price of such shares on the date such
options are exercised and the exercise price paid therefor.
The Company used a portion of the net proceeds from the Preferred Stock
sale to repay certain indebtedness incurred in connection with the New York
Skyride project and used the balance of the proceeds for working capital, which
will include expansion of the Company's business through developing attractions
at new locations, including the XS New York project.
As of June 30, 1996, the Company had working capital of approximately
$1,623,000 compared to a working capital deficiency of $(1,800,000) at June 30,
1995 which was due primarily to the New York Skyride project being in excess of
original amounts budgeted by $1,853,000. Since inception approximately
$6,050,000 was spent on capital expenditures relating to New York Skyride and
$230,000 was spent on capital expenditures and leasing costs relating to the XS
New York Times Square project. Losses accumulated to $(2,162,000), of which in
excess of $(2,000,000) occurred prior to the facility's Grand Opening.
The Company is currently involved in a dispute with a subcontractor
regarding amounts billed for work allegedly performed in connection with the New
York Skyride project. The Company believes that it has adequately reserved for
such contingency and does not believe that the resolution of the dispute will
have a material impact on the Company's financial position.
18
<PAGE>
Such contingency represents leasehold improvements which, when amortized over
the remaining term of the Company's lease, will not have a material effect on
the Company's results from operations.
As a result of the Company's development of its Times Square site, certain
contractual agreements have been consummated and deposits and advance payments
made. Such payments include approximately $324,000 of concept and design
consultant fees, approximately $156,000 of architectural fees and approximately
$250,000 of construction costs. The Company estimates the capital expenditures
required to develop the XS New York Times Square facility to be approximately
$5,300,000, which includes both the construction of the facility and related
costs and the acquisition or leasing of the necessary equipment.
In order to develop the Company's Times Square facility, available cash and
cash flow from operations are not currently anticipated to be sufficient to fund
such project. In order to continue to develop the XS New York project, the XS
Chicago project, and achieve the Company's expansion and long term goals, the
Company will need to obtain additional financing to fund its projects. The
Company has identified several sources of additional financing, primarily debt
financing, however, there can be no assurance that such financing will be
available on terms acceptable to the Company, or at all, or that there will not
be construction and other delays affecting completion of such projects. Also,
there can be no assurance that demands placed on the Company's financial
resources by multiple projects, or any one project in particular, will not
affect the Company's ability to successfully complete or finance one or more
such projects, which would adversely affect the Company's expansion and planned
growth strategy. In this regard, the Company has deferred development plans for
the additional space at the Empire State Building site until such time as the XS
New York project is completed and further assessments are made with respect to
the cost and funding of the XS Chicago project. Accordingly, there can be no
assurance that the additional space at the Empire State Building will be
successfully developed without a strategic partner, or at all.
Additionally, the Company's Magic on Broadway joint venture project
requires an initial capital investment of approximately $250,000. The Company
intends to fund this project through cash flows from operations. The Company
will be entitled to receive 50% of the profits, if any, and an administrative
fee from the joint venture. Revenues of the joint venture will consist primarily
of ticket and merchandise sales. Magic on Broadway will initially run for seven
months and may be extended on a weekly basis.
The Company's long term goal is to develop simulator and other location
based entertainment attractions in other major cities in the United States, and
possibly in other countries. There are, however, only a limited number of
locations in a small number of cities that are suitable for such attractions,
and there can be no assurance at all that the Company could obtain a lease at
any such locations or develop a successful attraction at such locations. Also,
development of additional attractions will require the Company to obtain
financing for such ventures, and there can be no assurance that such financing
will be available, or available on terms and conditions that are acceptable to
the Company. Additionally, it is possible that the Company would find it
necessary to have one or more local partners involved in any additional
attractions it might attempt to develop, further limiting the revenues that the
Company could
19
<PAGE>
generate from development of simulator or entertainment attractions at other
locations. The Company continually explores expansion opportunities both in the
United States and abroad.
From time to time, the Company may be involved in negotiations for
additional sites or other entertainment-based projects, however, current
negotiations, if any, are too preliminary to warrant disclosure at this time.
The Company will keep investors informed as other projects mature.
Inflation
The Company believes that the impact of inflation on its operations since
its inception has not been material.
Seasonality
The Company's business is somewhat seasonal in nature, based in part, on
higher volumes of tourists in the New York City Metropolitan area during the
spring and summer months and during the December holiday season. The Company
will direct a portion of its marketing and promotional efforts on attracting a
larger percentage of the Observatory traffic and increasing volume to New York
Skyride and attracting visitors to XS New York, particularly during non-peak
seasons.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is set forth at the end of this report.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information concerning the directors and officers of the Company is
contained in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A no later than 120
days after the close of the fiscal year ended June 30, 1996. such information is
hereby incorporated herein by reference.
20
<PAGE>
Item 10. EXECUTIVE COMPENSATION.
Information concerning Executive Compensation is contained in the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A no later than 120 days after the close of
the fiscal year ended June 30, 1996. Such information is hereby incorporated
herein by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning the security ownership of certain beneficial owners
and management is contained in the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A no
later than 120 days after the close of the fiscal year ended June 30, 1996. Such
information is hereby incorporated herein by reference.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions is
contained in the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A no later than 120 days after the
close of the fiscal year ended June 30, 1996. Such information is hereby
incorporated herein by reference.
Item 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) Exhibits are listed on the Index to Exhibits on page 23 of this report.
The Exhibits required by Item 601 of Regulation S-B are listed on such Index in
response to this Item and are incorporated herein by reference.
Financial Statements required by Regulation S-X are listed in
response to this Item and are set forth at the end of this report and are
incorporated herein by reference.
(b) Reports on Form 8-K:
The registrant has not filed any reports on Form 8-K during the last
quarter of the period covered by this report.
21
<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.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
Date: September 25, 1996 By: /s/Zalman Silber
-----------------------------------
Zalman Silber, President and
Chief Executive Officer
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.
Date: September 25, 1996 By: /s/Jay Coleman
-----------------------------------
Jay Coleman, Chairman of the
Board of Directors
Date: September 25, 1996 By: /s/Zalman Silber
-----------------------------------
Zalman Silber, President, Chief
Executive Officer and Director
Date: September 25, 1996 By: /s/Steven Schwartz
-----------------------------------
Steven Schwartz, Vice President
-Finance, Principal Financial
and Accounting Officer, Secretary
and Treasurer
Date: September 25, 1996 By: /s/David Shamilzadeh
-----------------------------------
David Shamilzadeh, Director
Date: September 25, 1996 By: /s/Neil S. Belloff
-----------------------------------
Neil S. Belloff, Director
Date: September 25, 1996 By: /s/Ronald D. Celmer
-----------------------------------
Ronald D. Celmer, Director
Date: September 25, 1996 By: /s/John F. Barry, III
-----------------------------------
John F. Barry, III, Director
22
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
JUNE 30, 1996 AND JUNE 30, 1995
<PAGE>
[Richard A. Eisner & Company (Letterhead)]
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Skyline Multimedia Entertainment, Inc.
We have audited the accompanying consolidated balance sheet
of Skyline Multimedia Entertainment, Inc. and subsidiaries as at
June 30, 1996, and the related consolidated statements of
operations, changes in stockholders' equity accounts and cash
flows for each of the years in the two-year period then ended.
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 consolidated financial statements
enumerated above present fairly, in all material respects, the
financial position of Skyline Multimedia Entertainment, Inc. and
subsidiaries at June 30, 1996, and the results of their
operations and their cash flows for each of the years in the two-
year period then ended in conformity with generally accepted
accounting principles.
New York, New York
August 14, 1996
With respect to Notes H[1] and K
September 19, 1996
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 1996
A S S E T S
<TABLE>
<S> <C>
Current assets:
Cash (Note C). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,198,000
Inventory (Note B[2]). . . . . . . . . . . . . . . . . . . . . . . . . 130,000
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 168,000
-----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 2,496,000
Property, equipment and leasehold improvements - net
(Notes B[3], D[1] and E) . . . . . . . . . . . . . . . . . . . . . . . 5,597,000
Security deposits (Note G[3]) . . . . . . . . . . . . . . . . . . . . . . 372,000
Net deferred tax asset (net of valuation allowance of $670,000)
(Note F) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,000
Deferred project and leasing costs (Note D[2]). . . . . . . . . . . . . . 230,000
-----------
T O T A L . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,035,000
===========
L I A B I L I T I E S
Current liabilities:
Note payable - current portion (Note E). . . . . . . . . . . . . . . . $ 250,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 372,000
Accrued expenses and other current liabilities . . . . . . . . . . . . 190,000
Deferred sponsorship income. . . . . . . . . . . . . . . . . . . . . . 61,000
-----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 873,000
Note payable - long-term portion (Note E) . . . . . . . . . . . . . . . . 365,000
Deferred rent payable (Note B[4]) . . . . . . . . . . . . . . . . . . . . 713,000
-----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 1,951,000
===========
Commitments and contingencies (Notes D[2], G, H and K)
STOCKHOLDERS' EQUITY
(Note I)
Preferred stock, par value $.001 per share, 5,000,000 shares
authorized, 1,090,909 shares of Series A convertible participating
preferred stock issued and outstanding (liquidating value $2.75
per share) (Note I[2]). . . . . . . . . . . . . . . . . . . . . . . . 1,000
Common stock - $.001 par value; authorized 19,000,000 shares;
one vote per share; issued and outstanding 1,495,000 shares. . . . . . 2,000
Class A common stock - $.001 par value; authorized 1,000,000 shares;
five votes per share; issued and outstanding 960,000 shares;
670,000 shares in escrow . . . . . . . . . . . . . . . . . . . . . . . 1,000
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 9,242,000
Accumulated (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . (2,162,000)
-----------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . 7,084,000
T O T A L . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,035,000
===========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
-2-
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Revenues (Note A):
Ticket sales . . . . . . . . . . . . . . . $ 4,609,000 $ 1,635,000
Concession sales . . . . . . . . . . . . . 1,049,000 354,000
Sponsorship income (Note H[3]) . . . . . . 320,000 201,000
----------- -----------
T o t a l . . . . . . . . . . . . . 5,978,000 2,190,000
----------- -----------
Operating expenses:
Cost of merchandise sold . . . . . . . . . 410,000 168,000
Selling, general and administrative. . . . 4,345,000 3,860,000
Depreciation and amortization. . . . . . . 502,000 237,000
----------- -----------
T o t a l . . . . . . . . . . . . . 5,257,000 4,265,000
----------- -----------
Income (loss) from operations . . . . . . . . 721,000 (2,075,000)
Interest income . . . . . . . . . . . . . . . 120,000 19,000
Interest expense. . . . . . . . . . . . . . . (100,000) (120,000)
----------- -----------
Income (loss) before provision for income
taxes. . . . . . . . . . . . . . . . . . . 741,000 (2,176,000)
Income tax expense (benefit) (Note F) . . . . (305,000) 49,000
----------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . $ 1,046,000 $(2,225,000)
=========== ===========
Net income (loss) per share of common stock
(Note B[1]). . . . . . . . . . . . . . . . $.37 $(1.25)
==== =======
Weighted average number of shares of common
stock outstanding (excludes 670,000 escrow
shares). . . . . . . . . . . . . . . . . . 2,858,000 1,785,000
========= =========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
- 3 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ACCOUNTS
<TABLE>
<CAPTION>
Class A Series A
Common Stock Common Stock Preferred Stock Additional
------------ ------------ --------------- Paid-In Accumulated
Shares Amount Shares Amount Shares Amount Capital (Deficit)
------ ------ ------ ------ ------ ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1,
1994. . . . . . . . 1,495,000 $2,000 960,000 $1,000 $6,405,000 $ (983,000)
Issuance of Class A
warrant in
connection with
equipment financing 5,000
Net (loss) for the
year ended June 30,
1995. . . . . . . . (2,225,000)
--------- ------ ------- ------ ---------- -----------
Balance at June 30,
1995. . . . . . . . 1,495,000 2,000 960,000 1,000 6,410,000 (3,208,000)
Net proceeds from
sale of stock . . . 1,090,909 $1,000 2,832,000
Net income for the
year ended June 30,
1996. . . . . . . . 1,046,000
--------- ------ ------- ------ --------- ------ ---------- -----------
BALANCE AT JUNE 30,
1996. . . . . . . . 1,495,000 $2,000 960,000 $1,000 1,090,909 $1,000 $9,242,000 $(2,162,000)
--------- ------ ------- ------ --------- ------ ---------- -----------
--------- ------ ------- ------ --------- ------ ---------- -----------
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
- 4 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . $1,046,000 $(2,225,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . 502,000 237,000
Deferred income taxes . . . . . . . . . . . . . . . (340,000)
Advances to officer granted as compensation . . . . 47,000
Warrants issued in connection with financings . . . 5,000
Changes in operating assets and liabilities:
(Decrease) increase in accounts payable . . . . . (633,000) 879,000
(Decrease) increase in accrued liabilities. . . . (57,000) 868,000
(Increase) in inventory . . . . . . . . . . . . . (130,000)
(Increase) in prepaid expenses and other current
assets. . . . . . . . . . . . . . . . . . . . . (163,000) (5,000)
Increase in deferred sponsorship income . . . . . 19,000 42,000
---------- -----------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . 374,000 (282,000)
---------- -----------
Cash flows from investing activities:
Purchase of fixed assets. . . . . . . . . . . . . . . . (283,000) (3,571,000)
(Increase) in security deposits . . . . . . . . . . . . (229,000) (20,000)
(Increase) in deferred project and leasing costs. . . . (230,000)
---------- -----------
Net cash (used in) investing activities. . . . (742,000) (3,591,000)
---------- -----------
Cash flows from financing activities:
Proceeds from sale of preferred stock . . . . . . . . . 2,895,000
Deferred private placement costs. . . . . . . . . . . . (62,000)
Repayment of bank loan. . . . . . . . . . . . . . . . . (20,000)
Advances from officer . . . . . . . . . . . . . . . . . 76,000
Repayments to officer . . . . . . . . . . . . . . . . . (76,000)
Proceeds from notes payable . . . . . . . . . . . . . . 1,255,000
Repayment of notes payable. . . . . . . . . . . . . . . (473,000) (167,000)
---------- -----------
Net cash provided by financing activities . . . 2,422,000 1,006,000
---------- -----------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . 2,054,000 (2,867,000)
Cash at beginning of period. . . . . . . . . . . . . . . . 144,000 3,011,000
---------- -----------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . $2,198,000 $ 144,000
---------- -----------
---------- -----------
Supplemental disclosures of cash flow information:
Cash paid for interest during the period. . . . . . . . $ 101,000 $ 92,000
Equipment acquired under a capital lease agreement. . . 23,000
Cash paid for taxes during the period . . . . . . . . . 65,000
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
- 5 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company:
Skyline Multimedia Entertainment, Inc. ("SME") is a holding
company engaged in the development and operation of state-of-the-art
entertainment attractions, and together with its subsidiaries,
New York Skyline, Inc. ("NYSI") and Skyline Virtual Reality, Inc.
("SVR") are referred to as the "Company". Its first site, which is
located in the Empire State Building in New York City, is owned and
operated by NYSI which commenced operations of its "New York Skyride"
facility on December 22, 1994. The second site, which is located in
Times Square in New York City, is owned and is to be operated by SVR.
It is expected that operations of its interactive virtual reality
entertainment center will commence by December 1996.
The Company's business is somewhat seasonal in nature, based in
part, on higher volumes of tourists during the spring and summer
months and holiday seasons.
(NOTE B) - Summary of Significant Accounting Policies:
[1] Net income/loss per share:
Net income/loss per share is based on the weighted average
number of shares outstanding during the period, excluding shares held
in escrow. The weighted average number of common shares was
calculated by including the convertible participating preferred stock
as common stock equivalents, warrants and options outstanding are not
considered as their effect would be anti-dilutive (Note I[1]).
[2] Inventory:
Inventory consists of clothing, souvenirs and food sold in
the Company's gift shop and is valued at the lower of cost (first-in,
first-out) or market.
[3] Property, equipment and leasehold improvements:
Property and equipment, including assets under capital
leases are recorded at cost and are depreciated on the straight-line
method over the estimated useful lives of the assets from three to
twelve years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the
estimated useful life of the asset.
[4] Rent expense:
The Company, for financial accounting purposes, spreads
scheduled rent increases and rent holidays over the term of the lease
using the straight-line method.
(continued)
- 6 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Summary of Significant Accounting Policies: (continued)
[5] Management estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
[6] Recently issued accounting standards:
The Company has not elected to adopt, early, the provisions
of two recently issued accounting standards regarding impairments of
long-lived assets ("FAS 121") and stock based compensation
("FAS 123"). FAS 121 requires entities to review long-lived assets
and certain identifiable intangibles to be held and used, for
impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. FAS 123 permits
accounting for stock-based compensation pursuant to a fair value based
method. If the method is not adopted, FAS 123 requires disclosure of
pro forma net income and pro forma earnings per share on a fair value
basis. The Company has not determined the potential impact, if any,
of the adoption of these standards on its financial position or
results of operations.
(NOTE C) - Concentration of Credit Risk:
The Company maintains all of its cash with highly capitalized
credit-worthy financial institutions. Such balances often exceed the
FDIC limit and are not insured.
(NOTE D) - Property, Equipment and Leasehold Improvements:
[1] Property, equipment and leasehold improvements is summarized
as follows:
Office equipment and fixtures. . . . . $ 579,000
Simulation equipment . . . . . . . . . 2,158,000
Simulation film. . . . . . . . . . . . 1,050,000
Leasehold improvements . . . . . . . . 2,549,000
----------
6,336,000
Less accumulated depreciation and
amortization. . . . . . . . . . . . (739,000)
-----------
B a l a n c e. . . . . . . . $5,597,000
===========
(continued)
- 7 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Property, Equipment and Leasehold Improvements:
(continued)
[2] The Company has incurred project and leasing costs
associated with the development of its Times Square site. As of
June 30, 1996, project and leasing costs of approximately $230,000
were incurred, which include construction, architectural, commissions
and other professional fees necessary to begin development. It is
expected that additional costs aggregating approximately $5,000,000
will be incurred to complete the project.
The Company expects to commence operations of the Times
Square site by December 1996. Upon commencement of operations, such
costs will be categorized and assigned estimated useful lives which
will be used in calculating the appropriate amortization and
depreciation expense.
(NOTE E) - Notes Payable:
At June 30, 1996, the Company has a note outstanding, payable to
an equipment finance company, payable in equal monthly installments
through October 1998, bearing interest at 12 1/2% per annum:
Aggregate payments. . . . . . . . . . $718,000
Less interest . . . . . . . . . . . . 103,000
--------
Present value of net minimum
obligation . . . . . . . . . . . . 615,000
Less current portion. . . . . . . . . 250,000
--------
Long-term portion at June 30,
1996 . . . . . . . . . . . . . . . $365,000
========
The note is collateralized by interests in the Company's
simulator and projection equipment and $500,000 is personally
guaranteed by the Company's president.
(continued)
- 8 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Income Taxes:
[1] Income tax expense (benefit) is comprised of the following:
Year Ended
June 30,
--------------------
1996 1995
---- ----
Current:
Federal. . . . . . . . . . $ - 0 - $ - 0 -
State and local. . . . . . 35,000 49,000
Deferred:
Federal. . . . . . . . . . (211,000) - 0 -
State and local. . . . . . (129,000) - 0 -
--------- -------
Income tax expense
(benefit) . . . . $(305,000) $49,000
========= =======
[2] A reconciliation between the Company's effective income tax
rate and the U.S. Federal income tax rate is as follows:
Year Ended
June 30,
--------------
1996 1995
---- ----
Statutory rate. . . . . . . . 34.0 % (34.0)%
State and local income
(capital) tax, net of
federal tax benefit. . . . (8.4) 2.3
Nondeductible expenses. . . . 2.8
(Reduction of) provision for
valuation allowance for
federal deferred tax
assets . . . . . . . . . . (69.6) 34.0
------ -----
Effective income tax rate
(benefit). . . . . . . . . (41.2)% 2.3 %
======= ======
(continued)
- 9 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Income Taxes: (continued)
[3] The principal components of deferred tax assets, liabilities
and the valuation allowance are as follows:
June 30,
------------------------
1996 1995
---- ----
Deferred tax assets:
Capitalization of start-up
costs. . . . . . . . . . . $ 610,000 $ 893,000
Net operating loss
carryforwards. . . . . . . 730,000 550,000
---------- ----------
1,340,000 1,443,000
Valuation allowance . . . . . (670,000) (1,443,000)
---------- ----------
670,000 - 0 -
Deferred tax liabilities:
Depreciation differences . . 330,000 - 0 -
---------- -----------
Net deferred tax asset. . . . . $ 340,000 $ - 0 -
========== ===========
(NOTE G) - Commitments and Contingencies:
[1] The Company leases office premises and space for its
entertainment attractions from the Empire State Building Company
pursuant to operating leases expiring at various dates through 2016.
Certain of the leases contain renewal options. The leases provide for
free rent or rent credits for various periods; rental expense is
recognized on a straight-line basis over the life of the leases.
[2] During the year ended June 30, 1996 the Company entered into
a ten-year renewable lease with One Times Square Center Partners, L.P.
for space to house its interactive virtual reality entertainment
center. The lease terms provide for five months of rent credits
during the construction period and three months of rent credits during
the first year. The Company expects to start recording rent expense
in December 1996, the expected start of operations. The lease terms
also provide for two five-year renewal options. In addition, the
lease contains a cancellation clause in the event that the landlord
commences construction of office buildings on the site during the
lease term. Should the landlord exercise the cancellation clause, the
Company would be required to vacate the space within six months after
written notice, but would be entitled to reimbursement of a portion of
its out-of-pocket construction costs, not to exceed $125 per square
foot. Rental expense will be recognized by the Company on a straight-
line basis over the initial ten-year term of the lease.
(continued)
- 10 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Commitments and Contingencies: (continued)
[3] Minimum annual rental payments required for all leases are
as follows:
Year Ending
June 30,
-----------
1997 . . . . . . . . . . $ 948,000
1998 . . . . . . . . . . 1,352,000
1999 . . . . . . . . . . 1,474,000
2000 . . . . . . . . . . 1,422,000
2001 . . . . . . . . . . 1,519,000
Thereafter . . . . . . . 23,373,000
-----------
T o t a l. . . $30,088,000
===========
The terms of the leases include escalation clauses for
increases in real estate taxes and certain cost of living adjustments.
Security deposits pursuant to all the leases total $789,000
of which $313,000 was paid at June 30, 1996. Rent expense for the
years ended June 30, 1996 and June 30, 1995 was approximately $805,000
and $563,000, respectively [see Note B[4]].
[4] The Company has a licensing agreement with the Empire State
Building Observatory (the "Observatory") expiring on June 30, 2016, to
have tickets to its entertainment attraction and facility sold by the
licensor's employees at the counter where licensor's tickets to the
observatory are sold. Under the terms of the licensing agreement the
following future payments are required:
Year Ending
June 30,
-----------
1997. . . . . . . . . . . $ 150,000
1998. . . . . . . . . . . 156,250
1999. . . . . . . . . . . 175,000
2000. . . . . . . . . . . 175,000
2001. . . . . . . . . . . 175,000
Thereafter. . . . . . . . 3,115,000
----------
T o t a l . . . $3,946,250
==========
(continued)
- 11 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Commitments and Contingencies: (continued)
[5] The Company at June 30, 1996 is in dispute with a
subcontractor regarding amounts billed for work performed on the
Empire State Building attraction. The Company believes that it has
recorded an adequate liability in connection therewith and does not
believe that the resolution of the dispute will have a material impact
on the Company's financial position. Such contingency represents
leasehold improvements which, when amortized over the remaining term
of the Company's lease, will not have a material effect on the
Company's results from operations.
[6] The Company, has an agreement with an investment banker
which provides for a finder's fee, as defined, in connection with any
business transaction entered into by the Company with a party
introduced by the investment banker. The agreement expires in
February 1999.
(NOTE H) - Employment and Other Agreements:
[1] As at June 30, 1996 the Company renegotiated a one-year
employment agreement with its president beginning July 1, 1996. The
agreement provides for an annual salary of $250,000. Pursuant to such
agreement the president is entitled to an annual bonus of 10% of
earnings before interest, taxes, depreciation and amortization.
During July 1996, the Company advanced approximately
$301,000 to its president, pursuant to a demand note at an interest
rate of 8% which was repaid in September 1996.
[2] As at June 30, 1996 the Company has contracts with two other
executives providing for salaries aggregating approximately $190,000,
subject to annual increases after twelve months. Additionally,
pursuant to one of the agreements, the executive vice president is
entitled to certain incentives in the event that future locations are
established or joint ventures are entered into as a result of his
efforts.
[3] During the fiscal year ended June 30, 1995 the Company
entered into two sponsorship agreements, one with a major
international electronics manufacturer appointing it the presenting
sponsor of its New York skyride and one with a major soft drink
manufacturer. During the year ended June 30, 1996 the Company entered
into a sponsorship agreement with a distributor of photographic and
magnetic imaging. The terms of the agreements range from three to
five years, and provide for annual fees, capital improvements and
cross promotions for the Company. Sponsorship revenue under these
(continued)
- 12 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Employment and Other Agreements: (continued)
[3] (continued)
agreements aggregate approximately $1,300,000 over the terms. The
Company received from sponsors capital improvements and monetary fees
aggregating approximately $339,000 in the year ended June 30, 1996 and
$243,000 in the year ended June 30, 1995, of which $61,000 was
deferred as of June 30, 1996.
(NOTE I) - Stockholders' Equity:
[1] In connection with the Company's public offering of
securities in 1994, the underwriter required that an aggregate of
670,000 shares of the Company's Class A common stock be placed into
escrow. Some or all of such escrow shares may be released commencing
with the year ending June 30, 1996 up to the year ended June 30, 1998
if the Company meets certain minimum earnings thresholds, as defined,
or if certain minimum per share market prices of its common stock are
attained. For the year ended June 30, 1996 none of such escrow shares
were released. As shares are released from escrow they will be
accounted for as reissued for services rendered and the fair value of
such shares will be charged to operations as compensation expense.
The Company, however, would not be allowed a deduction for such
charges for income tax purposes.
[2] On July 7, 1995, the Company consummated a stock purchase
agreement with the Prospect Street NYC Discovery Fund, L.P. (the
"Fund"), pursuant to which the Company sold 1,090,909 shares of
Series A convertible participating preferred stock, par value $.001
per share, for $3,000,000. Net proceeds from such investment,
aggregated approximately $2,833,000. The preferred stock issued is
convertible into common stock of the Company at any time on a share-
for-share basis. The preferred shares are subject to both demand and
piggyback registration rights. The preferred stock has a liquidation
preference equal to $2.75 per share, but does not pay any dividends
unless declared by the Board of Directors. The preferred stockholders
are entitled to an aggregate of up to 24.9% of the outstanding voting
power of the Company which, can increase to 50.1% of the voting power,
if in their sole discretion, it becomes reasonably necessary for the
protection of their investment.
(continued)
- 13 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Stockholders' Equity: (continued)
[3] The Company has outstanding warrants for the purchase of its
common stock as follows:
Warrants Issued in Number of Exercise
Connection With Class Shares Price Expiration Date
------------------- ----- --------- -------- ---------------
Equipment financing. A 14,931 (a)(b) February 14, 1999
Bridge loan. . . . . A 504,336 (a)(b) February 14, 1999
Public offering. . . A 1,653,470 (a)(b) February 14, 1999
Public offering. . . B 1,653,470 (b) February 14, 1999
Officer. . . . . . . B 331,800 (b) February 14, 1999
(a) A Class A warrant is exchangeable for one share of common stock
and one Class B warrant, at an exercise price of $6.01.
(b) A Class B warrant is exchangeable for one share of common stock
at an exercise price of $7.91.
The above warrants may be redeemed by the Company at a price
of $.05 per warrant assuming certain minimum per share market prices
of its common stock, as defined, are met.
[4] The Company has a stock option plan ("Plan A") which, as
amended, provides for the issuance of incentive stock options or
nonqualified options to key employees and officers to be determined by
the Compensation Committee of the Board of Directors. The aggregate
number of shares which may be issued under Plan A is 2,500,000.
Incentive stock options under Plan A may not be granted at less than
the fair market value of the underlying shares at date of grant (110%
of fair market value for a 10% or greater stockholder). Incentive
stock options granted under Plan A will be exercisable for a period
not to exceed ten years.
A summary of stock option activity related to Plan A is as
follows:
Option
Number of Price
Shares Per Share
--------- ---------
Outstanding - July 1, 1994. 45,000 $5.00
Options cancelled . . . . . (45,000) $5.00
Granted . . . . . . . . . . 1,537,500 (a) $3.50 - $4.50
---------
Outstanding - June 30,
1995 . . . . . . . . . . 1,537,500 $3.50 - $4.50
Granted . . . . . . . . . . 15,000 $3.50 - $4.00
---------
Outstanding - June 30, 1996 1,552,500 $3.50 - $4.50
=========
(continued)
- 14 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Stockholders' Equity: (continued)
[4] (continued)
At June 30, 1996, 293,750 of the Plan A options were
exercisable.
(a) Includes an option to purchase 1,250,000 shares of
common stock issued to the Company's president (see Note I[7]).
[5] The Company has a stock option plan for nonemployee
directors ("Plan B"). The aggregate number of shares which may be
issued under Plan B, as amended, is 500,000.
A summary of stock option activity related to Plan B is as
follows:
Option
Number of Price
Shares Per Share
--------- ---------
Outstanding - July 1, 1994. 30,000 $5.00
Granted . . . . . . . . . . 160,000 $3.50 - $4.00
-------
Outstanding - June 30, 1995 190,000 $3.50 - $5.00
Cancelled . . . . . . . . . (10,000) $5.00
Granted . . . . . . . . . . 25,000 $3.75
-------
Outstanding - June 30, 1996 205,000 $3.50 - $5.00
=======
At June 30, 1996 all the Plan B options were exercisable.
[6] In connection with its initial public offering, the Company
granted the underwriter an option, as adjusted, to purchase up to
143,082 units at $6.36 per unit exercisable over a three-year period
commencing February 1997.
[7] As a result of the investment by Prospect Street NYC
Discovery Fund during July 1995, the president of the Company
personally guaranteed the representations and obligations of the
Company under the preferred stock purchase agreement for a one-year
period (which expired in July 1996), became subject to limitations on
the transfer or disposition of Company stock held by him and had the
earnings targets required to release the 670,000 shares of Class A
common stock held in escrow adjusted for the additional shares issued.
Accordingly, in order to ensure that the investment would be
consummated and as an inducement for the president to enter into the
guarantee agreement, the Board of Directors approved the issuance on
June 29, 1995 of options to purchase 1,250,000 shares of common stock
exercisable at $3.75 per share which expire on June 28, 2005. These
options are exercisable only in the event that the targets for the
release of the escrow shares are not achieved, and are subject to
(continued)
- 15 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Stockholders' Equity: (continued)
[7] (continued)
certain adjusted earnings and equity targets, as defined. If the
options become noncontingent, the fair value of the underlying shares
on that date less the option price will be charged to operations as
compensation expense.
[8] At June 30, 1996 the Company has reserved shares of common
stock for issuance upon exercise of warrants, options and conversion
of preferred stock as follows:
Class "A" warrants. . . . . . . . . . 4,345,474
Class "B" warrants. . . . . . . . . . 1,985,270
Plan "A" options. . . . . . . . . . . 1,552,500
Plan "B" options. . . . . . . . . . . 205,000
Underwriter options . . . . . . . . . 572,328
Preferred stock . . . . . . . . . . . 1,090,909
---------
9,751,481
=========
(NOTE J) - Related Party Transactions:
[1] During fiscal year 1995 the Company entered into a two-year
employment contract with an individual related to the president of the
Company to manage the souvenir/concession area of the attraction. The
agreement provides for annual compensation of $55,000 and a 20% bonus
(not to exceed $50,000) of after-tax profits of the souvenir/
concession area in excess of $150,000. For the year ended June 30,
1995, no bonus was payable under the terms of the agreement.
Subsequent to June 30, 1996 such individual received a bonus for that
year of $15,000 which included amounts due pursuant to the above
agreement.
[2] The Company has an agreement with a marketing consulting
firm, whose principal is the Chairman of the Board of Directors of the
Company, to act as the Company's sales agent in soliciting and
negotiating sponsorships and commercial endorsements. Sponsorship
commissions and consulting fees paid to said firm for the years ended
June 30, 1996 and June 30, 1995 aggregated $55,000 and $80,000,
respectively.
[3] The Company incurred legal fees to a law firm, one of whose
employees is a director of the Company. Such fees related primarily
to general corporate services. Legal fees for the year ended June 30,
1996 and June 30, 1995 aggregated $36,000 and $73,000, respectively.
(continued)
- 16 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Related Party Transactions: (continued)
[4] During the year ended June 30, 1995, the Company paid legal
fees to a law firm, one of whose principals was a director of the
Company until February 1995. Such fees related primarily to general
corporate services, which totalled $40,000.
(NOTE K) - Subsequent Events:
On September 5, 1996, the Company entered into a 15 year lease
for space to house its interactive virtual reality entertainment
center in the Chicago area. Total rental payments pursuant to the
lease aggregate approximately $13,200,000. Additional rent may be
charged as a percentage of the gross sales (as defined). As a
condition to the execution of the lease, the Company provided a
$200,000 irrevocable letter of credit as security.
- 17 -
EXHIBIT C
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
-----------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 26, 1996
-----------------------
The Annual Meeting of Shareholders of Skyline Multimedia Entertainment,
Inc. (the "Company"), a New York corporation, will be held at The Empire State
Building, 350 Fifth Avenue, 2nd Floor, New York, New York, on November 26, 1996,
at 9:00 a.m., for the following purposes:
1. To elect six directors of the Company to serve for a term of
one year and until their respective successors shall be elected and shall
qualify;
2. To ratify the appointment of Richard A. Eisner & Company, LLP
as auditors of the Company for the year ending June 30, 1997; and
3. To consider and act upon such other matters as may properly
come before the meeting.
Only shareholders of record at the close of business on October 25,
1996 are entitled to notice of and to vote at the meeting, including any
adjournments thereof.
By Order of the Board of Directors
/s/ Zalman Silber
-------------------------------
Zalman Silber
President and Chief Executive Officer
New York, New York
October 28, 1996
IMPORTANT: The prompt return of proxies will save the Company the expense of
further requests for proxies and will ensure that your shares are voted. A
self-addressed envelope is enclosed for your convenience. No postage is required
if mailed within the United States.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
-----------------------------------------------
PROXY STATEMENT
For Annual Meeting of Shareholders
November 26, 1996
---------------------------------------------------
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
(the "Company"), a New York corporation, for use at the Annual Meeting of
Shareholders of the Company (the "Meeting") which will be held at The Empire
State Building, 350 Fifth Avenue, 2nd Floor, New York, New York, on November 26,
1996, at 9:00 A.M., and at any adjournments thereof.
Shareholders who execute proxies retain the right to revoke them at any
time by notice in writing to the Secretary of the Company, by revocation in
person at the Meeting or by presenting a later dated proxy. Unless so revoked,
the shares represented by proxies will be voted at the Meeting in accordance
with the directions given therein. Shareholders vote at the Meeting by casting
ballots (in person or by proxy) which are tabulated by a person who is appointed
by the Board of Directors before the Meeting to serve as inspector of election
at the Meeting and who has executed and verified an oath of office. Abstentions
and broker "non-votes" are included in the determination of the number of shares
present at the Meeting for quorum purposes. An abstention will have the same
effect as a negative vote except with respect to the election of directors, in
which case an abstention will have no effect since directors are elected by a
plurality vote. Broker "non-votes" are not counted in the tabulations of the
votes cast on proposals presented to shareholders because shares held by a
broker are not considered to be entitled to vote on matters as to which broker
authority is withheld. A broker "non-vote" occurs when a nominee holding shares
for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power with respect to that item and
has not received instructions from the beneficial owner.
The principal executive offices of the Company are located at The
Empire State Building, 350 Fifth Avenue, New York, New York 10118. The
approximate date on which this Proxy Statement and the enclosed form of proxy
will first be sent or given to shareholders is October 28, 1996.
Shareholders of record of the Company's common stock, par value $.001
per share (the "Common Stock"), at the close of business on October 25, 1996
(the "Record Date") shall be entitled to one vote for each share then held. On
October 25, 1996, there were outstanding 2,455,000 shares of Common Stock.
Additionally, holders of the Company's Series A Convertible Preferred Stock (the
"Preferred Stock") shall be entitled to one vote for each share of Preferred
Stock then held voting together as a single class with the holders of the shares
of Common Stock. As of October 25, 1996, members of management of the Company
beneficially hold an aggregate of 2,050,909 shares of Common Stock or 57.8% of
the total outstanding shares of Common Stock and Preferred Stock entitled to
vote at the Meeting, but will be able to vote approximately 81.8% of the total
voting power of the outstanding Common Stock due to the shares of Class A Common
Stock held by the Company's President, which shares are entitled to five votes
per share.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 25,
1996 with respect to the number of shares of Common Stock beneficially owned by
(i) those persons known to the Company to be the owners of more than five
percent of the Common Stock, (ii) each director of the Company (one of whom is
the Chief Executive Officer of the Company) and (iii) all directors and
executive officers of the Company as a group. Unless otherwise indicated, each
of the listed persons has sole voting and investment power with respect to the
shares beneficially owned by such shareholder.
<TABLE>
<CAPTION>
Amount and Percent of
Nature Percent of Preferred Percent of
of Beneficial Common Stock Stock Actual Voting
Name and Address(1) Ownership(2) Outstanding (3) Outstanding Power
- ------------------- ------------ --------------- ----------- -----
<S> <C> <C> <C> <C>
Zalman Silber(4) 1,390,000 35.0% -- 65.0%
Jay Coleman(5) 225,000 6.0% -- 3.0%
David Shamilzadeh(6) 10,000 * -- *
Neil S. Belloff(6) 10,000 * -- *
John F. Barry, III(6)(7) 1,100,909 31.0% 100% 24.9%
Ronald D. Celmer(6)(7) 1,100,909 31.0% 100% 24.9%
Prospect Street NYC 1,090,909 30.8% 100% 24.9%
Discovery Fund, L.P.(7)
All directors and executive 2,890,909 68.2% -- 81.8%
officers as a group (8
persons)(5)(8)
</TABLE>
- -------------------------
* Less than 1%
(1) Unless otherwise noted, the address of each of these persons is c/o the
Company, 350 Fifth Avenue, New York, New York 10118.
(2) Unless otherwise noted, all persons named in the table have sole voting
and dispositive power with respect to all Common Stock beneficially owned
by them.
(3) Based on 2,455,000 shares of Common Stock and 1,090,909 shares of
Preferred Stock issued and outstanding as of October 25, 1996 and includes
shares subject to currently exercisable options and warrants for each
person or group named.
(4) The shares of Common Stock held by Mr. Silber have been designated Class A
Common Stock and are identical in every respect to the Common Stock except
that such shares are entitled to five votes per share so long as Mr.
Silber retains ownership thereof. Accordingly, excluding unexercised
options and warrants, Mr. Silber controls approximately 65.0% of the
voting power of all outstanding shares of Common Stock and Preferred Stock
voting as a single class (approximately 66.9% if all of Mr. Silber's
currently exercisable options and warrants are exercised). Such shares of
Class A Common Stock are convertible into shares of Common Stock at any
time at the option of Mr. Silber and will automatically convert into
shares of
2
<PAGE>
Common Stock upon the transfer or sale of such Class A Common Stock (other
than pursuant to a transfer or sale in which Mr. Silber retains the voting
rights to such shares) or upon the death of Mr. Silber. Also includes
280,000 shares of Common Stock issuable upon the exercise of Class B
Warrants held by Mr. Silber which are immediately exercisable. However,
sales of Mr. Silber's Common Stock, including those issuable upon exercise
of his Class B Warrants are limited to 25,000 shares annually and 100,000
shares in the aggregate pursuant to a stockholders' agreement entered into
in connection with the sale of the Preferred Stock. Includes 670,000
shares (the "Escrowed Shares") held in escrow which are subject to
forfeiture in the event certain earnings or stock price targets are not
achieved by the fiscal year ended June 30, 1998. Includes options to
purchase 150,000 shares of Common Stock which are currently exercisable.
Excludes 1,250,000 shares subject to options, which become exercisable
only in the event the Escrowed Shares are not released and certain
performance or stock price targets are achieved. See "Escrowed Shares".
(5) Includes options to purchase 175,000 shares of Common Stock which are
currently exercisable, 30,000 shares of Common Stock underlying Class A
Warrants which were purchased as part of the Bridge Loan financing in
December 1993 and 20,000 shares of Common Stock underlying Class B
Warrants.
(6) Includes options to purchase 10,000 shares of Common Stock which are
currently exercisable.
(7) Includes 1,090,909 shares of Preferred Stock held by Prospect Street NYC
Discovery Fund, L.P. ("Prospect Street"), of which Messrs. Barry and
Celmer are officers and directors of the general partner, which are
convertible into shares of Common Stock on a share for share basis and
votes together with the Common Stock as a single class on all matters to
be voted on by the holders of the Common Stock. Pursuant to the terms of
the Preferred Stock, Prospect Street will be able to vote up to 24.9% of
the total shares eligible to vote at a shareholders meeting. Additionally,
under certain limited circumstances, Prospect Street may have the right to
obtain up to 50.1% of the total voting power of the Company. Messrs. Barry
and Celmer disclaim beneficial ownership of the shares of Preferred Stock
held by Prospect Street. See "Certain Relationships and Related
Transactions." The address of Prospect Street is 250 Park Avenue, New
York, New York 10177.
(8) Also includes options to purchase an aggregate of 145,000 shares of
Common Stock held by other executive officers which are currently
exercisable.
3
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
Six directors will be elected at the Meeting to serve for a term of one
year and until their respective successors shall have been elected and shall
qualify. The affirmative vote of holders of a plurality of the shares of Common
Stock present in person or by proxy at the Meeting and entitled to vote thereon
is necessary for the election of directors. Proxies received with respect to
this solicitation will be voted FOR the election of the persons named below,
unless otherwise specified in the proxy. At this time, the Board of Directors of
the Company knows of no reason why any nominee might be unable to serve;
however, should such a situation arise, proxies may be voted for the election of
such other person(s) as director(s) as the holders of the proxies may, in their
discretion, determine. There is no arrangement or understanding between any
director and any other person pursuant to which such person was elected as a
director.
<TABLE>
<CAPTION>
Present Principal Occupation and
Name, Business Principal Occupation During Last Director
Address and Age Five Years; Other Activities Since
- --------------- ---------------------------- --------
<S> <C> <C>
Zalman Silber Zalman Silber, President, Chief Executive Officer, 1992
Age 29 Director and founder of the Company, has for more
than the past five years, been an
entrepreneur and residential and
commercial real estate investor. Through
Galaxy International, Inc., a company
founded by Mr. Silber, he established
himself as a top sales agent for the New
York Life Insurance Company and an estate
planning specialist and financial
consultant.
Jay Coleman Jay Coleman has been a non-employee director of the 1993
Age 45 Company since November 1993 and Chairman of the
Board since December 1993. Mr. Coleman has
significant expertise in advertising,
marketing and promotion, and has, for more
than the past five years, been involved as
the founder and Chief Executive Officer of
Entertainment Marketing & Communications
International, Ltd. ("EMCI"), a company
linking worldwide corporate sponsorship,
consumer marketing and promotion with the
broad spectrum of contemporary
entertainment and entertainment
celebrities.
David Shamilzadeh David Shamilzadeh has been a non-employee director of 1995
Age 50 the Company since May, 1995. He has served as Senior
Vice President of Finance of Allou Health and Beauty
Care, Ltd. since April 1991, and the Chief Financial
Officer since April 1990. Prior to being the Chief
Financial Officer, Mr. Shamilzadeh served as Controller
from November 1988 to April 1990. From 1976 to 1988,
Mr. Shamilzadeh was employed as Chief Executive
Officer and Chief Financial Officer of DAAL Knitwear,
a manufacturer of knitwear products. Mr. Shamilzadeh
also served as credit manager of Kayser Roth Corp.,
prior to DAAL Knitwear.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Present Principal Occupation and
Name, Business Principal Occupation During Last Director
Address and Age Five Years; Other Activities Since
- --------------- ---------------------------- --------
<S> <C> <C>
Neil S. Belloff Neil S. Belloff has been a non-employee director of the 1995
Age 37 Company since June 1995. He is an attorney with the
law firm of Rosenman & Colin LLP, the Company's
general counsel. Mr. Belloff has been engaged in the
practice of law for over 10 years, including as an
Attorney-Advisor with the Division of Corporation
Finance of the U.S. Securities & Exchange Commission
from 1988 through 1991.
John F. Barry, III John F. Barry has been a non-employee director of the 1995
Age 44 Company since July 1995. Mr. Barry is a Partner of
Prospect Street Investment Management, an institutional
private equity firm managing $600 million and which is
the general partner of Prospect Street. Mr. Barry serves
on various boards, including BondNet Trading Systems,
New Media and Transitions Research Corporation. Mr.
Barry was previously a securities attorney with Davis
Polk and Wardwell and a corporate finance specialist
with Merrill Lynch.
Ronald D. Celmer Ronald D. Celmer has been a non-employee director of 1995
Age 35 the Company since July 1995. Mr. Celmer is a Partner
of Prospect Street Investment Management, an
institutional private equity firm managing $600 million
and which is the general partner of Prospect Street. Mr.
Celmer serves on various boards, including New Media,
Holgrath Medical Technologies, and Geoclean
Environmental Services. Mr. Celmer was previously a
partner for six years with Ardshiel, Inc., a private equity
investment manager.
</TABLE>
During the fiscal year ended June 30, 1996, the Company's Board of
Directors held six meetings, which were attended by 100% of the then current
directors in person or by telephone. During the fiscal year ended June 30, 1996,
the Company's Compensation Committee held two meetings, which were attended by
100% of the then current members of such committee in person or by telephone.
All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Directors receive
compensation for serving on the Board of Directors as described below. The
Company is required to use its best efforts to elect a designee of D.H. Blair
Investment Banking Corp. ("Blair") to the Board of Directors for a period of
five years from the date of the Company's initial public offering. However, no
such designee has as yet been nominated. The Company has established audit and
compensation committees, a majority of whose members are non-employee directors.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board (and in the case of certain executive officers pursuant
to employment agreements as described below).
There is no family relationship among any of the directors or executive
officers of the Company.
5
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE
IN FAVOR OF THE RE-ELECTION OF THE SIX NOMINEES
TO THE COMPANY'S BOARD OF DIRECTORS
Executive Officers
The executive officers of the Company are listed below. There is no
arrangement or understanding between any executive officer and any other person
regarding selection as an officer.
NAME AGE POSITION
Zalman Silber 29 President, Chief Executive Officer and Director
since 1992
Steven Schwartz 29 Executive Vice President-Finance, Chief Financial
Officer, Secretary and Treasurer since 1994
Mark Messersmith 36 Executive Vice President-Operations and Future
Development since May 1995.
Zalman Silber, See "Proposal 1 - Election of Directors".
Steven Schwartz has been the Executive Vice President-Finance, Chief
Financial Officer, Secretary and Treasurer of the Company since August 1994.
Prior to joining the Company, Mr. Schwartz was employed by Richard A. Eisner &
Company LLP, a large regional accounting firm located in New York City, most
recently as an Audit Supervisor, from January 1990 to July 1994. From July 1988
through December 1989, Mr. Schwartz was employed as a certified public
accountant with Ernst & Young, a major international accounting firm.
Mark Messersmith has been the Executive Vice President - Operations and
Future Development since May 1995. Prior to joining the Company, from February
1995 to May 1995, Mr. Messersmith was an independent consultant to the
entertainment industry. Prior thereto, Mr. Messersmith was associated with
Intamin Ltd., most recently as a Vice President, a leading supplier of showcase
ride systems and simulators for theme and amusement parks, from October 1992 to
February 1995. From October 1989 to October 1992 he was associated with Ride and
Show Engineering, most recently as a Vice President, a firm specializing in the
conception and development of high quality entertainment attractions. Mr.
Messersmith has more than 15 years experience in sales, marketing, project
management and business development. He has orchestrated the installation and
completion of all major ride systems for the MGM Grand Adventures Theme Park in
Las Vegas, NV, and has worked with Universal Studios, Six Flags Theme Parks and
numerous premier entertainment venues around the world.
Executive Compensation
The following table summarizes all compensation paid by the Company
with respect to each of the fiscal years presented for services in all
capacities of the Company's Chief Executive Officer, the Company's Chief
Financial Officer and the Company's Executive Vice President-Operations (the
"Named Executive Officers"). No other executive officer of the Company earned in
excess of $100,000 in any of such fiscal periods.
6
<PAGE>
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------- ---------------------------------------
Other Awards
Annual Restricted All Other
Name and Salary Bonus Compen- Stock Options/ LTIP Payouts Compen-
Principal Position Year ($) ($) sation ($) Awards ($) SARs (#) ($) sation ($)
- ------------------- ---- ------ ----- ---------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Zalman Silber 1996 $147,825 $125,000 -- -- -- -- --
President, Chief 1995 134,000 50,000 -- -- 150,000 -- (1)
Executive Officer 1994 93,750 -- -- -- -- -- --
and Director
Steven Schwartz 1996 $ 76,250 $15,000 -- -- -- -- --
Executive Vice 1995 70,000 55,000 -- -- 60,000 -- --
President-Finance,
Chief Financial
Officer, Secretary
& Treasurer
Mark Messersmith 1996 $ 76,250 $45,000 -- -- -- -- --
Executive Vice
President-
Operations
</TABLE>
- --------------------------
(1) The Company granted options to purchase 1,250,000 shares of Common Stock
which become exercisable only in the event the Escrowed Shares are not released
and certain performance or stock price targets are achieved. See "Escrowed
Shares".
No options were granted to any Named Executive Officer during the
fiscal year ended June 30, 1996. An aggregate of 1,700,000 stock options were
granted to all executive officers and directors as a group during fiscal 1995.
Such options are exercisable at prices per share ranging from $3.50 to $4.00,
which reflects the fair market value on the date of grant. None of such options
were exercised during fiscal 1995 or fiscal 1996.
Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year End Option Value Table
-------------------------------------------
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options Options
Shares at Fiscal at Fiscal
Acquired Year-End(#) Year-End($)
on Value ------------- -------------
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ---- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Zalman Silber -- -- 150,000/1,250,000 (1)
Steven Schwartz -- -- 60,000/-0- (1)
Mark Messersmith -- -- 50,000/-0- (1)
</TABLE>
- ------------------------
(1) These options were not in-the-money at June 30, 1996.
7
<PAGE>
Compensation of Directors
Directors who are not salaried employees of the Company receive an
annual fee of $5,000 for acting as members of the Board of Directors and any of
its committees, and are also entitled to reimbursement for reasonable expenses
incurred in attending any such meetings. Each of the Company's non-employee
directors, Messrs. Coleman, Shamilzadeh, Belloff, Barry and Celmer, received
stock options to purchase 5,000 shares of Common Stock exercisable at prices per
share ranging from $3.50 to $5.00, which reflects the fair market value on the
date of grant. All of such options are currently exercisable. Non-employee
directors automatically receive stock options to purchase 5,000 shares of Common
Stock from the Company on their election or reelection to the Board.
Escrowed Shares
Of the 960,000 shares of Class A Common Stock held by the Company's
President, 670,000 shares are held in escrow and will not be assignable nor
transferable (but may be voted) until such time, if ever, as the Escrowed Shares
are released from escrow in accordance with terms of the escrow agreement. All
Escrowed Shares remaining in escrow on September 30, 1998 will be forfeited and
then canceled and contributed to the Company's capital. The arrangement relating
to the Escrowed Shares was required by Blair as a condition to the Company's
initial public offering of its securities.
The Class A Shareholder's rights to his shares in escrow are not
affected by any change in his status as an employee, officer or director of, or
his relationship with, the Company, and, in the event of the Class A
Shareholder's death, the terms of the escrow agreement will be binding on such
shareholder's executor, administrator, estate and legatees.
305,000 of the Escrowed Shares will be released from escrow if and only
if either (a) the Company's Minimum Pre-tax Income (as defined in the Escrow
Agreement) is at least $2.25 million for the fiscal years ending June 30, 1995
or 1996, or is at least $3 million for the fiscal year ending June 30, 1997, or
is at least $4 million for the fiscal year ending June 30, 1998, or (b) the
closing Bid Price (as defined in the escrow agreement) for the Common Stock
averages in excess of $10.50 per share (subject to adjustment in the event of
any stock split, dividend or distribution, reverse stock split or other similar
event) for 20 consecutive trading days at any time during the 18 month period
commencing on February 14, 1994, or the closing Bid Price of the Common Stock
averages in excess of $14.15 per share for 20 consecutive trading days at any
time during the period commencing September 15, 1995 and ending on February 14,
1997. All Escrowed Shares will be released from escrow if and only if either (y)
the Minimum Pre-tax Income is at least $2.85 million for the fiscal years ending
June 30, 1995 or 1996, or is at least $3.75 million for the fiscal year ending
June 30, 1997, or is at least $5 million for fiscal year ending June 30, 1998,
or (z) the closing Bid Price of the Common Stock averages in excess of $12.50
per share (subject to adjustment in the event of any stock split, dividend or
distribution, reverse stock split or other similar event) for 20 consecutive
trading days at any time until September 14, 1995, or the closing Bid Price of
the Common Stock averages in excess of $16.65 per share for 20 consecutive
trading days at any time from September 15, 1995 through February 14, 1997. As a
result of the sale of Preferred Stock as described below, the earnings targets
were adjusted as follows:
Original Targets As Adjusted Targets
Fiscal Year Partial Release/Full Release Partial Release/Full Release
----------- ---------------------------- ----------------------------
1996 $2,250,000/$2,850,000 $3,262,500/$4,132,500
1997 $3,000,000/$3,750,000 $4,350,000/$5,437,500
1998 $4,000,000/$5,000,000 $5,800,000/$7,250,000
8
<PAGE>
On July 7, 1995, the Company's President personally guaranteed the
Company's obligations under a Stock Purchase Agreement relating to the sale of
the Preferred Stock. In connection with the sale of the Preferred Stock by the
Company, Mr. Silber also agreed to be subject to a Stockholders' Agreement
limiting the transfer or disposition of the Common Stock of the Company held by
him to 25,000 shares in any twelve month period and 100,000 shares in the
aggregate without the consent of Prospect Street. Additionally, as a consequence
of the sale of the Preferred Stock by the Company, a significant adjustment has
been made to the Minimum Pre-Tax Income targets affecting the release from
escrow of the Escrowed Shares held by Mr. Silber, which are subject to
forfeiture in the event such targets are not achieved.
In the opinion of the Board of Directors, these adjusted Minimum
Pre-Tax Income and existing equity price targets are unlikely to be achieved in
the periods required. Accordingly, in order to ensure that the sale of the
Preferred Stock would be consummated and as an inducement to Mr. Silber to enter
into the Guarantee Agreement and the Stockholders' Agreement, both of which were
conditions to the consummation of the sale of the Preferred Stock, and to
provide Mr. Silber with a participation in the Company which is consistent with
the original intent of the establishment of the escrow arrangement, the Board of
Directors (with Mr. Silber abstaining) granted Mr. Silber options to purchase
1,250,000 shares of Common Stock of the Company, which options vest over a
period of two years from the date of grant at an exercise price equal to the
fair market value on the date of grant ($3.75) and are exercisable only in the
event (i) the Escrowed Shares are cancelled and (ii) the following financial
performance or equity price targets are met:
1. Financial Targets: the Company reports pre-tax profits (excluding
extraordinary items) of at least $2,850,000 in any of the fiscal years
ending June 30, 1996, 1997 or 1998; or
2. Equity Price Targets: all of the outstanding shares of Common Stock of
the Company are sold for cash at a per share price of $5.00 at any time
through June 30, 1996, $8.75 at any time through June 30, 1997 or $11.50
at any time through June 30, 1998.
Additionally, 300,000 of the options granted to Mr. Silber will become
exercisable in the event that the closing bid price per share of the Common
Stock as reported on the Nasdaq Stock Market for twenty consecutive trading days
equals or exceeds $5.00 at any time through June 30, 1996, $6.50 at any time
through June 30, 1997 or $8.00 at any time through June 30, 1998. The Board of
Directors believes that the terms of the options granted to Mr. Silber are
consistent with the original intent of the establishment of the escrow
arrangements in connection with the Escrowed Shares, are more realistic
performance targets and reflect adequate compensation in light of Mr. Silber's
personal guarantee of the obligations of the Company and additional restrictions
placed on Mr. Silber's stock ownership described above.
Employment Contracts
The Company has entered into an employment agreement with Zalman Silber
as of October 1, 1993 which terminated on June 30, 1996. Effective July 1, 1996,
the Company entered into a one-year employment agreement with Mr. Silber
providing that Mr. Silber is employed as President and Chief Executive Officer
and must devote as much time as reasonably necessary to the affairs of the
Company. Mr. Silber's contract provides for an annual salary of $250,000 and an
annual bonus in an amount equal to 10% of the Company's earnings before
interest, taxes, depreciation and amortization as reported for the fiscal year
ending June 30, 1997. Mr. Silber will be entitled to participate in all employee
health and other benefit programs offered by the Company. The agreement also
provides for certain payments in the event of Mr. Silber's disability. During
the term of his agreement and for a two-year period thereafter, Mr. Silber is
prohibited from engaging in activities which are competitive with those of the
Company. The agreement also provides Mr. Silber with a monthly automobile
allowance.
On August 15, 1994, the Company entered into a two-year employment
agreement with Steven Schwartz to serve as the Company's Executive Vice
President-Finance and Chief Financial Officer. Pursuant to this agreement, Mr.
Schwartz received a base salary of $70,000 subject to a 10% annual increase.
Effective July 1,
9
<PAGE>
1996, Mr. Schwartz' employment agreement was renewed for a two-year term at
an annual base salary of $95,000. Mr. Schwartz is also entitled to certain
health benefits at the Company's expense.
The Company entered into a two year employment agreement with Mark
Messersmith as of May 1995 to serve as Executive Vice-President Operations and
Future Development. Pursuant to this agreement, Mr. Messersmith will receive a
base salary of $70,000. Mr. Messersmith received a signing bonus of options to
purchase 50,000 shares of Common Stock, 30,000 of which vested immediately and
the remainder of such options vested 12 months from the date of employment. Mr.
Messersmith is also entitled to receive a $35,000 bonus for signing new major
sites, an additional $10,000 upon completion of construction of such site and 3%
of the net after tax profit of such site. Additionally, Mr. Messersmith will be
entitled to 4% of any capital investment in the Company made by third parties
introduced by him. Mr. Messersmith's employment agreement was amended in April,
1996 increasing his base salary to $95,000. Mr. Messersmith is also entitled to
certain health benefits at the Company's expense.
The Company has obtained "key-person" life insurance on Mr. Silber in
the amount of $2,000,000.
Certain Relationships and Related Transactions
During fiscal 1995, the Company entered into an agreement with
Entertainment Marketing & Communications International, Ltd. ("EMCI"), a company
controlled by Jay Coleman, Chairman of the Board of the Company. Pursuant to the
agreement, EMCI, was engaged to solicit, review and assist in negotiations of
sponsorship, commercial endorsement, sponsor merchandising and commercial tie-in
arrangements, marketing and ancillary activities. Upon the consummation of any
such arrangements which results in cash proceeds from the sponsor to the
Company, EMCI would be entitled to receive a commission equal to 20% of such
gross proceeds received by the Company. The Company paid EMCI a monthly retainer
of $5,000 through Feburary, 1995, when such retainer arrangement terminated.
In lieu of certain consulting fees owed to Jay Coleman and for prior
services rendered to the Company, on March 14, 1995 the Company issued options
to purchase 150,000 shares of Common Stock at an exercise price of $4.00 per
share (the fair market value on the date of grant) to Mr. Coleman.
During the fiscal years ended June 30, 1995 and June 30, 1996, the
Company incurred legal fees to a law firm, one of whose employees is a director
of the Company, relating primarily to general corporate services which totalled
$61,000 and $89,000, respectively.
Aaron Silber, the brother of Zalman Silber, is employed by the Company
to manage the Company's concession operations. Pursuant to an employment
agreement, Aaron Silber will receive an annual salary of $55,000 plus a bonus of
20% (up to a maximum of $50,000) of the net after tax profits of the concession
operations in excess of $150,000. Aaron Silber is also entitled to reimbursement
of expenses in the amount of approximately $25,000 incurred in connection with
the establishment of the Company's concession operations and accrued but unpaid
salary from January 1, 1994 through August 31, 1994 in the aggregate amount of
approximately $32,000 (offset by approximately $15,000 in advances to Mr.
Silber) payable in equal installments every two weeks over the next two years.
Mr. Silber also received options to purchase 20,000 shares of the Company's
Common Stock, all of which are currently vested. Subsequent to June 30, 1996,
Mr. Silber's employment agreement was modified to increase his base salary to
$66,000 and he received a bonus equal to $15,000.
Subsequent to June 30, 1996, the Company advanced an aggregate of
$460,000 to the Company's president, of which $341,000 has been repaid. The
balance of $119,000 is payable on demand with interest payable at the rate of 8%
per annum. The Company may offset accrued bonus amounts against such outstanding
balance.
10
<PAGE>
The Company believes that the transactions between the Company and its
officers, directors, employees and consultants described above are on terms no
less favorable to the Company than could have been obtained from unaffiliated
parties under similar circumstances.
Preferred Stock Sale
On July 7, 1995, the Company simultaneously entered into and closed a
Stock Purchase Agreement, dated as of July 7, 1995 (the "Stock Purchase
Agreement"), with Prospect Street pursuant to which the Company sold to Prospect
Street 1,090,909 shares of Preferred Stock of the Company for a purchase price
of $3,000,000. Pursuant to the Stock Purchase Agreement, Prospect Street has
designated two nominees to the Company's Board of Directors. Additionally, in
connection with the sale of the Preferred Stock, the Company has agreed to
certain covenants contained in the Stock Purchase Agreement, which have the
effect of restricting the Company's ability to engage in extraordinary corporate
transactions or transactions involving expenditures in excess of $250,000
without the consent of Prospect Street.
The Preferred Stock is convertible into Common Stock of the Company at
any time on a share-for-share basis. The Preferred Stock has a liquidation
preference equal to $2.75 per share, but does not pay any dividends unless
declared by the Board of Directors. The holders of the Preferred Stock are
entitled to an aggregate of up to 24.9% of the outstanding voting power of the
Company on all matters which come before the shareholders. Additionally, so long
as 100,000 shares of Preferred Stock remain outstanding, the holders thereof
will have the ability, in certain limited circumstances, to elect a majority of
the Board of Directors and obtain up to 50.1% of the outstanding voting power of
the Company. The shares of Common Stock underlying the Preferred Stock is
subject to a Registration Rights Agreement granting both demand and piggyback
registration rights.
Filing Requirements
The Company believes that all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934, as amended, applicable to its officers,
directors and greater than 10% beneficial owners were complied with during the
fiscal year ended June 30, 1996.
PROPOSAL 2
SELECTION OF AUDITORS
The Board of Directors has selected Richard A. Eisner & Company, LLP,
independent auditors, to serve as auditors of the Company for the fiscal year
ending June 30, 1997. Although shareholder ratification of the Board of
Directors' action in this respect is not required, the Board considers it
desirable for shareholders to pass upon the selection of auditors and, if the
shareholders disapprove of the selection, intends to consider the selection of
other auditors for the current fiscal year.
Representatives of Richard A. Eisner & Company, LLP are expected to be
present at the Meeting, will have an opportunity to make a statement if they so
desire, and will be available to respond to appropriate questions from
shareholders.
The affirmative vote of the holders of a majority of the shares of
Common Stock present in person and by proxy at the Meeting and entitled to vote
thereon is necessary for the ratification of the appointment of the auditors.
Proxies received in response to this solicitation will be voted FOR the
ratification of the appointment of the auditors, unless otherwise specified in
the proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF RATIFICATION OF THE
APPOINTMENT OF RICHARD A. EISNER & COMPANY, LLP.
11
<PAGE>
MISCELLANEOUS
Any proposal of an eligible shareholder intended to be presented at the
next annual meeting of Shareholders must be received by the Company for
inclusion in its proxy material and form of proxy relating to that annual
meeting no later than July 25, 1997.
The Board of Directors of the Company does not intend to present, and
does not have any reason to believe that others intend to present, any matter of
business at the Meeting other than those set forth in the accompanying Notice of
Annual Meeting of Shareholders. However, if other matters properly come before
the Meeting, it is the intention of the persons named in the enclosed form of
proxy to vote any proxies in accordance with their judgment.
The Company will bear the cost of preparing, assembling and mailing the
enclosed form of proxy, this Proxy Statement and other material which may be
sent to shareholders in connection with this solicitation. Solicitation may be
made by mail, telephone, telegraph and personal interview. The Company will
reimburse persons holding shares in their names or in the names of nominees for
their reasonable expenses in sending proxies and proxy material to their
principals.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL
YEAR ENDED JUNE 30, 1996 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
IS INCLUDED AS AN EXHIBIT HERETO. ADDITIONAL COPIES ARE AVAILABLE WITHOUT CHARGE
UPON WRITTEN REQUEST DIRECTED TO: SKYLINE MULTIMEDIA ENTERTAINMENT, INC., 350
FIFTH AVENUE, NEW YORK, NEW YORK 10118; ATTENTION: STEVEN SCHWARTZ, CHIEF
FINANCIAL OFFICER.
By order of the Board of Directors,
/s/ Zalman Silber
-------------------------------------
Zalman Silber
President and Chief Executive Officer
New York, New York
October 28, 1996
12
<PAGE>
Exhibit A
ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1996
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996 Commission File No. 0-23396
Skyline Multimedia
Entertainment, Inc.
(Name of Small Business Issuer in Its Charter)
New York 11-3182335
------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
350 Fifth Avenue, New York, New York 10118
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(212) 564-2224
--------------
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(h) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Units consisting of Common Stock, Class A Warrants and Class B Warrants
Common Stock, $.001 Par Value
Redeemable Class A Warrants
Redeemable Class B Warrants
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days:
Yes |X| No |_|
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
|X|
The Company's revenues for its most recent fiscal year were $5,978,000.
The aggregate market value of the voting stock held by non-affiliates of the
Company was $5,700,000 as of September 24, 1996 based on the average bid and
asked prices of such stock as of that date.
There were 2,455,000 shares of Common Stock, $.001 par value, outstanding as of
September 24, 1996. Additionally, there were 1,090,909 shares of Series A
convertible participating preferred stock, $.001 par value, outstanding as of
September 24, 1996.
- --------------------------------------------------------------------------------
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the annual meeting of shareholders to be filed with
the Securities and Exchange Commission within 120 days following the Company's
fiscal year ended June 30, 1996. Certain information to be included therein is
incorporated by reference into Part III hereof.
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS.
General
Skyline Multimedia Entertainment, Inc. (the "Company") is a holding company
incorporated under the laws of the State of New York on November 2, 1993, which
owns all of the outstanding stock of its operating subsidiaries, New York
Skyline, Inc. ("Skyline"), Skyline Virtual Reality, Inc. ("SVR"), Skyline
Chicago, Inc. ("SCI") and Skyline Magic, Inc. ("SMI"). The Company is engaged in
the development and operation of state-of-the-art simulator attractions and
high-technology and family entertainment at established tourist sites and other
popular locations primarily in the United States. The Company's operating
strategy is to capture a large portion of the existing tourist traffic at these
sites and to expand its operations throughout the world. All references to the
"Company" contained herein include Skyline, SVR, SCI and SMI, except where
specifically noted.
On December 22, 1994, the Company commenced operations of its first
attraction, New York Skyride, which is located in the Empire State Building in
New York City. New York Skyride is an exhilarating simulated "aerial tour" of
New York City in a futuristic "spacecopter". New York Skyride features two 40
passenger state-of-the-art flight simulators and related computer-controlled
film projection technologies to provide visitors with a complete "New York"
experience, including an extensive pre-show area featuring interactive
multimedia exhibits depicting the various tourist sites and attractions in and
around the New York Metropolitan area, and culminating in a seven and a half
minute aerial "adventure" in and around New York City. Passengers will not only
experience the sensations of an actual aerial flight, but will also experience
visual images projected on screens within the simulator that envelop the viewer
with a variety of sights and sounds. New York Skyride is intended to provide
visitors with a sensation of taking a "once in a lifetime" aerial flight around
New York City. The Company believes that New York Skyride is identified with the
focal point of the tourism industry in New York City and one of the world's most
famous "must-see" attractions.
During April 1996, through SVR, the Company signed a ten-year renewable
lease for approximately 13,000 square feet of space in the Business Improvement
District Entertainment Zone located at Times Square (Broadway and 42nd Street)
in New York City to develop "XS New York", a state-of-the-art entertainment
center featuring the latest in virtual reality, simulation and related
technologies. XS New York is anticipated to open by December 1996 and will
feature highly themed "environments" exhibiting futuristic graphics, lighting,
audio and visual displays and special effects. Visitors will experience a
professionally created facility that will include unique "Virtual Environments",
each highlighting innovative technologies that will offer an exhilarating
sensory and tactile encounter. In addition, the Company expects to include a
"Cybercafe" which will feature food, refreshments, souvenirs and high speed
computer terminals providing access to the World Wide Web and Internet.
In September 1996, the Company entered into a 15 year lease with the
operators of the Woodfield Mall located outside of Chicago in Schaumberg,
Illinois. The Woodfield Mall is one
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of the largest and most heavily visited malls in the United States, boasting
annual attendance in excess of 18 million. The Company, through SCI, intends to
develop an entertainment venue at this location similar to that of XS New York.
The Company is in the process of finalizing negotiations to create a 50/50
joint venture to produce and operate a "Broadway-style" magic show. The show,
called "Magic on Broadway", is currently being previewed at the Lambs Theatre in
the Broadway district in New York City. The show is expected to run initially
for seven months with options to extend and features the talents of magician
Joseph Gabriel.
The Company intends to use the expertise and experience which it gained
from the operation of New York Skyride to develop these and similar attractions
at other locations in the United States and abroad. However, there can be no
assurance that the Company will be successful in developing these attractions or
other attractions at additional locations.
The Company's revenues are generated primarily from ticket sales, with
additional revenues generated from the sale of food, beverages and souvenir
merchandise. The Company has entered into corporate sponsorship and advertising
arrangements with major international corporations which provide additional
revenue and marketing exposure.
The Company's principal executive office is located at the Empire State
Building, 350 Fifth Avenue, New York, New York 10118 and its telephone number is
(212) 564-2224.
The New York Skyride Experience
New York Skyride is an adventure that is directly related to the New York
City tourist experience. The Company believes that New York Skyride enhances a
visit to the Empire State Building and to New York City by providing an
exciting, bird's-eye view of the landmarks and sites that cannot be seen from
any other vantage point.
Upon entering New York Skyride, visitors, who will be treated as
first-class passengers about to depart on a futuristic helicopter flight aboard
the "Zalman 2100 Spacecopter", will proceed into the Pre-Show Heliport area
(approximately 7,500 sq. ft.) where they are introduced to multimedia displays
depicting major New York City tourist attractions as well as informational and
entertaining film clips. These displays have been designed and installed by
certain of the Company's sponsors.
The Pre-Show area has interactive multimedia exhibits which provide the
background of certain tourist attractions in the New York City area. These
exhibits provide the visitor with useful knowledge about New York City and its
many popular tourist sites and a feeling of participation in the New York
Skyride experience.
Following a preflight briefing about "spacecopter" travel, passengers will
enter into one of the two "Zalman 2100 Spacecopters", which are 40 passenger
computer-controlled flight simulators. At the front of each simulator is a large
18' x 18' screen upon which a fast-paced film is displayed. The simulator also
contains an advanced 8-channel digital sound system, with
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4 dual amplifiers, 400 watts per channel each (or 3,200 watts of total sound),
to provide passengers with an enhanced audio/visual experience.
Once the passengers are seated in the spacecopter, they begin a seven and a
half minute simulated flight that treats them to an array of New York City
scenes. Spectacular adventures await the passengers throughout their excursion.
For example, the spacecopter crashes into FAO Schwarz, the world's largest toy
store, passes directly under the Brooklyn Bridge, "dives" into a tunnel, crashes
into the East River, has a run-in with a New York City traffic cop, among other
exciting adventures. The spacecopter also visits many of New York City's other
tourist attractions, including Fifth Avenue, the World Trade Center Towers,
Central Park, Times Square and the Statue of Liberty. Since New York Skyride is
intended to be a family-oriented attraction, the film is designed to appeal to
the broadest audience and not purely the most adventurous thrill-seekers. The
film makes the Empire State Building the focal point of the attraction, with a
liftoff and landing taking place from atop the Empire State Building.
Once the spacecopter flight has been completed, passengers exit the
simulators and proceed to the exit lobby which contains a beverage, food and
souvenir concession area. All passengers are able to purchase souvenirs of their
visit to New York Skyride, i.e. a hat, large button or other suitable memento
with the Empire State Building or New York Skyride logo on it.
The XS New York Experience
The Company's latest project under development will include an interactive
virtual reality entertainment center, "XS New York", which is located in the
heart of Times Square in New York City and is expected to commence operations by
December 1996. XS New York will present the latest in state-of-the-art
entertainment technology, featuring cutting-edge virtual reality hardware and
software. Upon entering XS New York, guests will immediately become immersed in
heavily themed "environments" that display futuristic graphics, lighting, audio
and video treatments. Presented in a first class, professional format, guests
will be lead through an expertly designed layout that introduces them to
interactive show action equipment and special effects areas into virtual
"worlds" that offer each guest an opportunity to experience the latest in
virtual reality and related technologies.
Each virtual world will feature a unique type of virtual reality hardware
and software display. Some will offer competition between players while others
will provide exploratory experiences. Tickets will be purchased from a centrally
located ticket area which will also serve as the launching point for most guest
experiences. One of the virtual worlds will include a "Cybercafe" which will
offer light food and refreshments and computer terminals which will be linked to
the World Wide Web and Internet.
Other themed environments will feature attractions such as the newly
created Mag-Ball(TM) competition arena, which will allow guests to participate
in the very popular Mag-Ball(TM) game, and the internationally recognized
Virtuality 2000 series interactive entertainment equipment. Some environments
will include a 3-dimensional action and visual presentation allowing guests to
view their own activity, the activity of competitors and the attractions' vital
statistics on giant overhead monitors and projection screens. Simultaneously,
guests waiting to participate in a
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particular virtual world and those seated in the Cybercafe will also be able to
view the fast-paced action and sound effects of certain themed environments.
Some environments will include interactive virtual reality equipment that can be
programmed to function as stand alone units or in conjunction with other players
at locations around the world. The Company intends to stage monthly competitions
between other "XS" locations culminating in a "Virtual Olympics" once each year.
The XS Chicago Experience
In September 1996, the Company entered into a lease for approximately
21,000 square feet of space in the Woodfield Mall outside of Chicago, Illinois.
The Company, through SCI, plans to develop a state-of-the-art interactive
virtual reality entertainment center, XS Chicago, similar to the XS New York
project currently under development. The XS Chicago location will be situated
near the Rainforest Cafe, a successful themed restaurant, and other retail
establishments that attract tourists and regional area residents. The Company
will have to obtain additional financing in connection with the development of
XS Chicago and is currently in the process of identifying potential sources,
although there can be no assurance that such financing will be available on
acceptable terms, or at all. See "Management Discussion and Analysis of
Financial Condition and Results of Operations."
Simulator and Virtual Reality Technologies
The Company's motion simulator attractions utilize state-of-the-art,
computer-controlled aircraft flight simulators. Simex, Inc. (formerly
Interactive Simulation, Inc.), a Canadian company experienced in simulation
technology, provided the sophisticated computer hardware and software that
coordinates the movements of the simulator platform with the images projected on
the screen. The range of motion for the simulators is along six axes (that is,
the simulators can create up and down motions, right and left motions, angled
motions to simulate turning or banking while climbing or descending at varying
degrees and a spin motion, or some combination of the above). The movable
platforms on which the simulators rest and which move in synchronization with
the film were developed by Moog, Inc., a large defense contractor experienced in
the adaptation of flight simulator technology to the entertainment market.
A key component of the simulator technology is the "show control system",
which is a PC-based computer program that coordinates and manages the motion and
gyration of the simulator with the film and audio elements of the program. For
example, when the film image shows the spacecopter banking to the right, there
must be a precise, coordinated movement of the simulator in that direction to
both convince the passengers senses that they are flying in a spacecopter and
prevent passenger disorientation. The speed of the film through the projection
system is faster than normal film, television or video footage, which enhances
the passengers perception of motion and movement. The film is in
state-of-the-art super 35mm format projected at 30 frames per second rather than
standard 24 frames per second, which provides a sharper, more intense image. The
projection equipment is a fully automated system that eliminates the need for a
projector operator. The film was developed in conjunction with Chromavision
Corp., a production studio with extensive experience in fast-paced concept
films.
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XS New York and, in the future, XS Chicago will feature a wide assortment
of the latest in entertainment and virtual reality hardware and software
technologies. The state-of-the-art interactive virtual reality technologies
which will be showcased at XS New York and, in the future, XS Chicago include: a
dogfight simulation experience created by Ride and Show Engineering, which
allows direct competition with other participants and provides each participant
the opportunity to engage their opponent, navigate through a canyon at high
speed and fly completely inverted; the "Mag-Ball" experience developed by
Greystone Technology, a southern California defense contractor, which provides
an interactive competition that can be linked with players at other venues
across the country; Virtual Reality game experiences, including Total Recoil,
manufactured by Virtuality Ltd., a British company and the current world leader
in the design, fabrication and production of Virtual Reality entertainment
systems, a simulated skeet shoot contest that provides all the sensations of
firing a shot gun in a completely safe environment, and many other 3-dimensional
software packages, including Alpine Racer - a simulated slalom ski race, Daytona
Speedway - a simulated car racing experience and Full Swing Golf - a simulated
golf experience featuring the most famous golf courses in the world; and a
virtual PC-based game and sports "battle ground" where players compete on-line
and in person, for scholarships and prizes, on a three-tiered pyramid stage,
which will combine the excitement of a Hollywood game show and the intensity of
a PC action game, in the latest unique spectator event. XS New York will also
feature a contemporary Cybercafe which will serve food and beverages while
providing access to the World Wide Web and Internet from table-based PC computer
stations.
XS New York and, in the future, XS Chicago will also include a uniquely
themed retail area that will provide New York related (or in the case of XS
Chicago, Chicago related) merchandise as well as specialty souvenirs. Since
attractions at XS New York and XS Chicago will require the use of magnetic debit
cards, a comprehensive data base will be created indicating customer
demographics and preferences, which information the Company will use for future
software development, special event promotions and merchandise selection.
The Magic on Broadway Experience
The Company is in the process of finalizing negotiations relating to the
participation, through SMI, in a 50/50 Joint Venture which will produce and
manage a "Broadway-style" show featuring the talents of Joseph Gabriel, an
internationally renowned magician. The show, "Magic on Broadway", is currently
being previewed at the Lambs Theatre in New York City and is expected to run
initially for seven months. The joint venture will have the option to extend the
engagement and will receive revenues from ticket and merchandise sales and
administrative fees. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
The Empire State Building Location
New York Skyride is located on the second and third floors of the Empire
State Building, in a 21,800 square foot site that wraps around the south and
west sides of the building with an entrance situated adjacent to the main lobby
escalator that takes all visitors to the waiting area for the Observatory
elevators. Signs and video monitor displays in the Empire State Building's
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lobby and in the Observatory ticket purchase area make visitors to the Empire
State Building aware of New York Skyride. Most importantly, visitors who
purchase tickets to the Observatory are offered the choice of purchasing a
combined Observatory/New York Skyride ticket at a reduced price from separate
purchases of tickets to both attractions. The cost of a ticket to New York
Skyride is $9.00, and the cost of a combined ticket with the Observatory is
$11.50 (the cost of a ticket to the Observatory is $4.50). Children's rates,
group rates and senior discounts are also offered along with other promotional
discounts.
The Empire State Building is a focal point for the tourism industry in New
York City. The Observatory, which opened in 1933 and is located on both the
102nd and the 86th floors, has achieved worldwide recognition and publicity, and
is a primary destination for a large percentage of New York City's tourist
traffic. Paid attendance figures provided by management of the Empire State
Building for the last five years for the Observatory are summarized below.
EMPIRE STATE BUILDING OBSERVATORY
ADMISSION TICKET SALES (000'S)
YEAR 1991 1992 1993 1994 1995
---- ---- ---- ---- ----
TOTAL ATTENDANCE 2,295 2,391 2,650 2,915 3,350
Except for 1991, which was the year of the Gulf War, the Observatory
attendance has experienced steady growth.
The Company believes that combined ticket sales at the Observatory's ticket
facilities together with the Company's marketing and promotional campaigns will
enable New York Skyride to attract approximately 25-30% of all visitors to the
Observatory; however, there can be no assurance that these levels will be
achieved. For the year ended June 30, 1996, the Company's capture rate of
Observatory visitorship averaged approximately 23%, up from approximately 20%
for the year ended June 30, 1995. The Company expects that with additional
marketing and promotional activities to further public awareness of New York
Skyride, both inside and outside the Empire State Building, the Company's
capture rate should increase to anticipated levels.
The Times Square Location
The Company has leased approximately 13,000 square feet of space at
1457-1463 Broadway (at 42nd Street), New York, New York in the Business
Improvement District Entertainment Zone located in Times Square in New York
City. This space will be utilized for the Company's latest attraction "XS New
York", a state-of-the-art interactive virtual reality entertainment center.
Ideally situated in the heart of Times Square, XS New York is part of the
exciting revitalization of Times Square along with such other notable names as
Disney's New Amsterdam Theater, Madame Tussaud's Wax Museum and AMC's 26-Plex
Movie Theater, and is located directly across from the World Famous Disney
Store. The Times Square area is visited by approximately 20 to 30 million
tourists annually, employs 250,000 people and
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accommodates 1.5 million commuters every day. This incredible density of people
with significant disposable income continues to grow each year and is expected
to grow at a more significant rate as a result of the revitalization efforts
mentioned above. In addition, Times Square in New York City is the most popular
place in the world on New Year's Eve, particularly so as the millennium
approaches.
The Woodfield Mall Location
The Company leased approximately 21,000 square feet of space in the
Woodfield Mall located outside of Chicago, in Schaumberg, Illinois. The
Woodfield Mall is the fourth largest shopping mall in the United States with
over 2 million square feet of retail space and annual visitorship in excess of
18 million. The Company's premises are located near "The Rainforest Cafe" and
other retail establishments which attract large numbers of visitors to the mall.
Advertising and Promotional Plans
The Company intends to capitalize on the strength of its existing locations
with a multifaceted marketing, public relations and advertising program that
will heighten awareness about New York Skyride (including the fact that it is
the first such motion simulator attraction in New York City) and XS New York
among the more than 25 million persons, including tourists and residents from
the surrounding New York area, who visit New York City every year. Advertising
and promotional activities include a careful mix of paid advertising and
promotional and public relations activities.
In connection with New York Skyride, efforts to attract attendees from the
Observatory are focused within the Empire State Building itself. The management
of the Observatory has agreed to sell combined Observatory and New York Skyride
discounted admission tickets and to identify other opportunities for shared
promotional programs and other joint marketing activities. Pursuant to the terms
of the license agreement with the Observatory, any discount as a result of
combined ticket sales are deducted from the admission price of a New York
Skyride ticket. The non-discounted price of a New York Skyride ticket is $9.00
for adults and $7.00 for children under the age of 12 years.
Promoting New York Skyride and XS New York to tourist boards (such as The
New York Convention & Visitor's Bureau), travel agents, managers of group
activities and visitors to New York City represents a primary focus of the
Company's marketing efforts for these attractions. Since tourists and visitors
are a primary target, special volume discounts are offered to groups such as
conventions and trade associations, as well as through travel agent packages.
School groups are also a significant market for New York Skyride and XS New
York, and special programs are being implemented to target these audiences,
especially during the slower tourist periods in the fall and winter months.
The Company will continue to market and promote its activities through
traditional print advertising in publications that go to New York City tourists
and others, as well as broaden its advertising and promotional programs to the
general public through local radio and newspaper advertising. The Company is in
the process of developing its marketing plans for its XS Chicago
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attraction to be located in the Woodfield Mall and expects to employ similar
advertising and promotional programs throughout the Chicago Metropolitan area
and other surrounding regions.
Corporate Sponsors
Management expects to continue to supplement revenue from ticket sales to
its attractions by soliciting corporate sponsorships from a number of key
consumer product companies. It is expected that these sponsorships will generate
additional revenue for the Company through joint marketing and promotional
programs with these leading consumer product companies. To date, the Company has
entered into three major sponsorship agreements in connection with New York
Skyride, one involving JVC Company of America, a major electronics manufacturer,
one with Pepsi-Cola Bottling Company of New York, Inc., a major soft drink
manufacturer, and one with Fuji Photo Film U.S.A., a major distributor of
photographic and magnetic imaging merchandise. The agreements range in their
terms from three to five years and provide for annual fees, capital improvements
and cross promotions for the Company. The Company believes that such
arrangements will result in greater market awareness and acceptance through the
association of New York Skyride with such corporate sponsors and their products.
Corporate sponsorships in connection with XS New York are being developed and
the Company expects such sponsorships to be a significant source of revenue and
provide significant marketing exposure.
Leases and License Agreements
The Company, through Skyline, entered into both a lease (the "Lease") and
an exclusive license agreement (the "License Agreement") with the Empire State
Building Company, the operator of the Empire State Building in New York City, on
February 26, 1993. The Lease of the premises located at the Empire State
Building is for a term of 20 years and contains rent escalation provisions as
described under "Description of Property" below and certain other provisions
relating to additional rent, taxes, utilities, prohibition against assignment
and cross-default provisions in the event of a default under the License
Agreement. The Company has negotiated a modification to the Lease extending the
term of the Lease to coincide with a new lease for an additional 35,000 square
feet of space adjacent to the New York Skyride location. The modification would
extend the termination date of the Lease from May 1, 2013 through and including
June 30, 2016. The term of the License Agreement has also been extended to
coincide with the new lease for additional space.
The License Agreement provides for the joint sale of tickets to the
Observatory and New York Skyride provided payments by the Company are made
monthly at an annual rate of $150,000 from April 1, 1995 through March 31, 1998;
$175,000 from April 1, 1998 through March 31, 2002; $200,000 from April 1, 2002
through March 31, 2006; $225,000 from April 1, 2006 through April 30, 2013, and
$186,000 from May 1, 2013 through June 30, 2016. The License Agreement also
provides for the reimbursement by the Company of certain costs and expenses
relating to the joint ticket sales and contains cross-default provisions in the
event of a default under the Lease.
During April 1996, the Company signed a 20 year renewable lease for an
additional 35,000 square feet of space within the Empire State Building adjacent
to the New York Skyride facility. The lease term commences September 1, 1996 and
provides for rental payments by the
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Company at an annual rate of $529,000 through July 31, 1997; $565,000 from
August 1, 1997 through July 31, 1998; $600,000 from August 1, 1998 through July
31, 1999; $619,000 from August 1, 1999 through July 31, 2000; $741,000 from
August 1, 2000 through July 31, 2004; $811,000 from August 1, 2004 through July
31, 2007; $882,000 from August 1, 2007 through July 31, 2010; $953,000 from
August 1, 2010 through July 31, 2013; and $1,023,000 from August 1, 2013 through
July 31, 2016. This lease contains rent escalation provisions as described under
"Description of Property" below and certain other provisions relating to
additional rent, taxes, utilities, and prohibitions against assignment. Included
in the lease is a rent credit of $1,363,000 to be applied in equal monthly
installments against the base rent over the first 60 months of the lease.
Additionally during April 1996, the Company signed a ten year renewable
lease for approximately 13,000 square feet of space in the Business Improvement
District Entertainment Zone located in Times Square in New York City. The rent
commencement date is February 1, 1997 and provides for annual rental payments
aggregating $560,345 during the first five years of the lease and $644,000
during the last five years of the lease. The Company is developing a new
state-of-the-art entertainment center at the site, XS New York, featuring the
latest in virtual reality, simulation and related technologies, which is
anticipated to open by December 1996. The lease contains a cancellation clause
exercisable at any time in the event the landlord commences construction of
office buildings on the site at some future date. Should the landlord exercise
the cancellation clause, the Company would be required to vacate the space
within six months after notice, but would be entitled to reimbursement of a
portion of its out-of-pocket construction costs, not to exceed $125 per square
foot.
During September 1996 the Company entered into a fifteen year lease with
Woodfield Associates for approximately 21,000 square feet of space in the
Woodfield Mall located outside of Chicago in Schaumberg, Illinois. The lease
term commences on the later of (i) September 1, 1997 or (ii) 180 days following
the date the leased premises are made available to the Company. The lease
provides for monthly payments at an annual rate of $420,000 from the
commencement of the lease continuing through the fifth lease year, $630,000
beginning with the sixth lease year through the tenth lease year, and $839,000
beginning with the eleventh lease year through the balance of the lease term. In
addition, the lease provides for annual percentage rent equal to 10% of gross
sales which exceed $5,597,000 through year five, $8,395,000 through year ten,
and $11,194,000 thereafter. Included in the lease is a rent credit of $944,325
to be applied in equal monthly installments against the base rent over the first
60 months of the lease. Additional charges under the lease for common area
maintenance charges aggregate $15 per square foot beginning with the first year
of the Lease and are subject to annual percentage increases based on increases
in tax assessments and other costs and expenses. As a condition to the execution
of the lease, the Company was required to provide a $200,000 irrevocable letter
of credit as security for the performance of the Company's obligations under the
lease.
Patents and Trademarks
The Company does not hold any patents relating to New York Skyride or XS
New York and their related technologies. Accordingly, the Company's concept is
not proprietary and is subject to duplication and competition from entities with
greater resources and strengths than the Company. The success of the Company's
business relies heavily on the strength of its location
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and lease terms. The Company has obtained a registered trademark for the name
"New York Skyride" and has a trademark application in process for "XS New York".
Competition
New York Skyride and XS New York compete with all other New York City
tourist attractions and cultural events such as museums, Broadway shows and
other landmarks. These attractions are quite different "experiences" from that
of a trip aboard the Zalman 2100 Spacecopter (which the Company believes is the
first attraction of its type in New York City) or an experience encompassing the
latest in virtual reality and simulator technologies, but they present intense
competition for attendance and visitor dollars. These other attractions are
generally more established, and are owned and operated by entities that have
greater financial resources and managerial expertise than the Company.
Additionally, a major entertainment complex is being developed at Times Square
which will include entertainment attractions from companies such as Disney,
American Cinema, Madame Tussaud and other large entertainment companies.
Additionally, in September 1996, a simulator attraction opened in Times Square,
and a virtual reality high-tech game center is being developed at the old Studio
54 location on 54th Street between Broadway and Eighth Avenues. Further, the
Company is aware that a simulator attraction is currently being developed at the
World Trade Center Towers and a non-New York related simulator is expected to
open in October 1996 on the lower level of the Empire State Building. The
Company believes that the simulator attraction being developed in the Empire
State Building will not have a material impact on the Company or the operations
of New York Skyride since such attraction is not a uniquely "New York"
experience, is expected to have much less capacity than New York Skyride and
will be unable to sell tickets jointly with the Observatory. There can be no
assurance that other virtual reality and simulator attractions will not commence
operations in the New York area at some future point in time.
Insofar as motion simulation technologies, including show control systems
(and related projection and audio technologies), are subject to improvements and
enhancements, it is possible that competitive attractions will be able to offer
a more technologically advanced "experience" to a customer than the experience
offered by New York Skyride. Also, the Company believes that a number of
attractions, which includes the simulator attraction which opened in Times
Square, utilizing so-called "virtual reality" imaging technologies, or large
film format technologies with enhanced 3-dimensional projection technologies,
are likely to open in the New York area within the near future. These
attractions do not depend on motion simulators for their special effects, and
they are also likely to be developed and operated by companies that have
significantly greater financial, managerial and promotional experience and
resources than the Company. While these attractions may not offer a directly
competitive "product" to New York Skyride (i.e., an aerial adventure in New York
City) or XS New York, their presence will certainly create significant
competition for the Company to attract visitors to New York Skyride and XS New
York. The Company will compete with these entities primarily on the basis of
location, uniqueness of product, marketing and price.
To the extent the Company develops similar attractions at landmark
locations in other cities, it is likely to face intense competition from
established cultural and historical attractions owned and operated by entities
with significantly greater resources than the Company. The
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Company is also likely to face intense competition for the right to operate at
other landmark locations.
Employees
As of September 24 1996, the Company employed seven management persons
(other than the Company's President) on a full-time basis. The Company also
employs approximately 85 non-management personnel who typically work one of
three shifts during an approximate 95 hour workweek.
Item 2. DESCRIPTION OF PROPERTY.
The Company's executive offices are located at the Empire State Building at
350 Fifth Avenue, New York, New York. These offices consist of 4,400 square feet
leased at an annual base rental of $101,000, beginning September 1, 1994,
escalating to $110,000 over the five year term of the lease.
On February 26, 1993, the Company entered into an agreement with the
operator of the Empire State Building for the lease of approximately 17,800
square feet of space on the second floor of the Empire State Building for a term
of 20 years. This space is being fully utilized for the Company's New York
Skyride attraction. Annual base rent through March 31, 1998 is $338,371; from
April 1, 1998 through March 31, 2002 is $391,798; from April 1, 2002 through
March 31, 2006 is $445,225; from April 1, 2006 through March 31, 2009 is
$498,642; from April 1, 2009 through April 30, 2013 is $534,270; from May 1,
2013 through June 30, 2016 is $441,663. However, the Company negotiated a
modification of the lease term to coincide with its lease for additional space
as described below. The modification extends the original lease term from May 1,
2013 through and including June 30, 2016. Such annual rent is payable monthly
and subject to additional amounts for taxes and utilities. The Company was not
required to pay the first 21 months rent which is being amortized over the term
of the Lease.
The Company also leases an additional 4,000 square feet of space located
above the primary leased premises. The Company uses such additional space to
accommodate a larger screen (18' X 18') on which to show the New York Skyride
film. The term of this lease coincides with the term of the Lease and License
Agreement, as modified, at an annual base rental for such additional space of
$76,000 escalating to $120,000 over the term of the lease.
During April 1996, the Company signed a 20 year renewable lease for an
additional 35,000 square feet of space adjacent to and above the current
location of New York Skyride. The lease term commences September 1, 1996 and the
annual base rent over the term of the lease will begin at $529,000 and escalate
over the term of the lease to $1,023,000. Included in the lease terms is a rent
credit of $1,363,000 to be applied in equal installments against the base rent
over the first 60 months of the lease. In conjunction with the signing of this
new lease, the terms of both the Lease and License Agreement signed February 26,
1993 were amended to coincide with the new lease. The Company is considering how
to best utilize the additional space in the Empire State Building, including a
mixed use location based entertainment center which would likely require a
partner with significantly greater financial resources than the
12
<PAGE>
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Additionally during April 1996 the Company entered into a ten year
renewable lease with the owners of 1457-1463 Broadway, New York, New York for
approximately 13,000 square feet of space. The Company will occupy the ground
floor and mezzanine level and is currently developing an interactive virtual
reality entertainment center. See "The XS New York Experience". The rent
commencement date is February 1, 1997 and annual rental payments aggregate
$560,345 for each of the first five years and $644,000 for each of the last 5
years of the lease. Such annual rent is payable monthly and subject to
additional amounts for taxes.
During September 1996 the Company entered into a fifteen year lease with
Woodfield Associates for approximately 21,000 square feet of space in the
Woodfield Mall located outside of Chicago in Schaumberg, Illinois. The lease
term commences on the later of (i) September 1, 1997 or (ii) 180 days following
the date of the leased premises are made available to the Company. The lease
provides for monthly payments at an annual rate of $420,000 from the
commencement of the lease continuing through the fifth lease year, $630,000
beginning with the sixth lease year through the tenth lease year, and $839,000
beginning with the eleventh lease year through the balance of the lease term. In
addition, the lease provides for a percentage rent equal to 10% of Gross sales
which exceed $5,597,000 through year five, $8,395,000 through year ten, and
$11,194,000 thereafter. Included in the lease is a rent credit of $944,325 to be
applied in equal monthly installments against the base rent over the first 60
months of the lease. Additional charges under the lease for common area
maintenance charges aggregate $15 per square foot beginning with the first year
of the Lease and are subject to annual percentage increases based on increases
in tax assessments and other costs and expenses. As a condition to the execution
of the lease, the Company was required to provide a $200,000 irrevocable letter
of credit as security for the performance of the Company's obligations under the
lease.
The Company believes that its facilities are adequate for its current and
expected future levels of operations.
Item 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not Applicable.
13
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON EQUITY
Prior to February 14, 1994, the date of the Company's initial public
offering, there was no public market for the Units, Common Stock, Class A
Warrants or Class B Warrants (as defined below). Each of these classes of
securities are currently quoted on the Nasdaq Small-Cap Market under the symbols
"SKYLU," "SKYL," "SKYLW" and "SKYLZ," respectively. The following table sets
forth the high and low sales prices for the Units, Common Stock, Class A
Warrants and Class B Warrants for the fiscal periods indicated as reported by
Nasdaq. The quotations shown represent inter-dealer prices without adjustment
for retail mark-ups, mark-downs or commissions, and may not necessarily reflect
actual transactions.
UNITS Fiscal 1996 Fiscal 1995
- ----- ----------- -----------
High Low High Low
---- --- ---- ---
1st Quarter.................. 6 1/8 4 1/4 6 1/4 5
2nd Quarter.................. 6 7/8 4 1/2 6 5/16 5
3rd Quarter.................. 6 1/2 4 6 3/32 4 15/32
4th Quarter.................. 5 3/4 3 3/4 5 5/16 4 1/4
COMMON STOCK
- ------------
High Low High Low
---- --- ---- ---
1st Quarter.................. 4 1/2 2 3/4 4 5/16 3 15/32
2nd Quarter.................. 4 2 3/4 4 5/16 3 15/32
3rd Quarter.................. 4 7/8 3 4 5/16 3 5/32
4th Quarter.................. 4 1/8 2 1/2 4 5/32 3 5/16
CLASS A WARRANTS
- ----------------
High Low High Low
---- --- ---- ---
1st Quarter.................. 1 1/8 3/4 1 5/32 5/16
2nd Quarter.................. 2 1/8 1 1/8 1 5/32 9/16
3rd Quarter.................. 1 3/4 3/4 1 1/32 5/16
4th Quarter.................. 1 1/8 5/8 1 13/32
14
<PAGE>
CLASS B WARRANTS
- ----------------
High Low High Low
---- --- ---- ---
1st Quarter.................. 1/2 1/4 No No
Trades Trades
2nd Quarter.................. 9/16 3/8 13/32 5/32
3rd Quarter.................. 7/8 9/16 1/4 7/32
4th Quarter.................. 5/8 3/8 5/16 5/32
The per share closing sales price of the Common Stock as reported by Nasdaq
on September 24, 1996 (the date of the last reported sale) was 3-5/8. As of
September 24, 1996, the Company had in excess of 400 beneficial shareholders and
ten shareholders of record.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operational Overview
From its inception until December 22, 1994, the Company's primary
activities consisted of developmental activities, including the preparation of
plans relating to the design of New York Skyride; negotiation of a lease and a
license agreement with the operators of the Empire State Building (the location
for New York Skyride); working with engineers, architects, contractors,
designers, and other parties in connection with the construction and operation
of New York Skyride; developing software and video films in connection with New
York Skyride; developing marketing strategies; initiating marketing and
corporate sponsorship activities by identifying and contacting potential
strategic alliances; selecting a management team; and obtaining financing.
On December 22, 1994, the Company commenced operations of New York Skyride
and began generating revenue from ticket sales to the attraction and the sale of
merchandise at its souvenir/concession area. New York Skyride was opened on a
preview basis until February 21, 1995, the date of its official Grand Opening.
During the period beginning with commencement of operations of New York
Skyride and ending June 30, 1995, the New York Skyride facility was visited by
in excess of 250,000 customers. This period encompassed both the Company's
preview opening and the slower six months of the year. The quarter ended
September 30, which includes the summer months, represents the busiest quarter,
whereas the quarter ended March 31 is the slowest quarter of the year. During
the year ended June 30, 1996, the facility was visited by approximately 700,000
customers. Revenues generated during the year ended June 30, 1996 and June 30,
1995 aggregated $5,978,000 and $2,190,000, respectively, consisting of
$4,609,000 and $1,635,000, respectively, from ticket sales, $1,049,000 and
$354,000, respectively, from the sale of food and merchandise at its
souvenir/concession area, and $320,000 and $201,000, respectively, from
sponsorship income. During the year ended June 30, 1996, the Company earned net
income of $1,046,000. The net loss from operations of $2,225,000 for the year
ended June 30, 1995, is
15
<PAGE>
a reflection of the New York Skyride facility not commencing full scale
operations until February 21, 1995, and the significant amount of start-up
expenditures incurred during the development and initial operations of the
facility. Additionally, most of the Company's overhead expenses are relatively
constant, whereas revenue is seasonal in nature with a significant portion of
revenue being generated during the summer months and Holiday seasons. Thus, the
period during which the Company was open for operations included a proportionate
share of overhead expenses and a disproportionate amount of revenue.
The Company completed an initial public offering of its securities in
February 1994 and received net proceeds of approximately $6,200,000 therefrom.
The Company utilized such net proceeds for the development and completion of New
York Skyride, including approximately $2,000,000 for renovation of the site at
the Empire State Building, $2,026,000 for design and construction of the
simulators and related technologies contained therein and $1,027,000 for
production of the film. The total cost of these three items, $5,053,000, was
$1,853,000 over original amounts budgeted. Additionally, the Company utilized
approximately $300,000 to complete the interactive video and computer pre-show
area for New York Skyride, approximately $150,000 for the construction of the
food and souvenir concession stand, approximately $300,000 for architectural,
construction and design consultants, and approximately $250,000 in miscellaneous
costs. The Company exceeded its original budget estimates due in part to the
delay in opening and certain enhancements implemented that were not originally
anticipated.
At June 30, 1996 the Company had working capital of approximately
$1,623,000, and an accumulated deficit of approximately $(2,162,000), compared
to a working capital deficiency of $(1,800,000) and an accumulated deficit of
$(3,200,000) at June 30, 1995.
During the fiscal year ended June 30, 1995, the Company was required to
make significant payments to contractors, engineers, architects, consultants and
other professionals upon acceptance for delivery and commencement of operation
of the simulators.
During fiscal 1996, in order for the Company to be able to pay its
creditors, engage in a significant marketing and promotional campaign and
provide capital for future growth and expansion, management raised additional
proceeds from the sale of equity capital and through a loan from a financial
institution as described below.
Liquidity and Capital Resources
The Company received a loan in the amount of $100,000 in October 1993 from
D. H. Blair Investment Banking Corp. ("Blair"), the underwriter of the Company's
initial public offering of its securities. The proceeds of this loan were used
to make certain required payments under the Lease and payment of certain
consulting and professional fees. This loan was repaid in full plus accrued
interest at 10% per annum out of the proceeds of the bridge loan (the "Bridge
Loan") consummated in December 1993 in the aggregate amount of $760,000. The
Bridge Loan consisted of $760,000 in aggregate principal amount promissory notes
(the "Notes") with interest at 10% per annum and was repaid out of the proceeds
of the Company's initial public offering. Additionally, an aggregate of 456,000
Class A Warrants (as defined below) were issued in connection with the Bridge
Loan. Blair acted as placement agent in connection with the Bridge Loan and
received a cash commission of 10% and a non-accountable expense
16
<PAGE>
allowance of 3% of the aggregate principal amount of the Notes ($98,000). The
net proceeds of approximately $660,000 received in connection with the Bridge
Loan were used to repay the October 1993 $100,000 loan from Blair and for
certain required deposits and payments in connection with the development of New
York Skyride.
In February 1994, the Company consummated an initial public offering of
1,495,000 Units (the "Units") (including exercise of the over-allotment option
in April 1994), each Unit consisting of one share of Common Stock, $.001 par
value (the "Common Stock"), one Redeemable Class A Warrant (the "Class A
Warrants") and one Redeemable Class B Warrant (the "Class B Warrants"). Each
Class A Warrant entitles the holder thereof to purchase, at any time until
February 14, 1999, one share of Common Stock and one Class B Warrant at an
exercise price of $6.65, subject to adjustment in certain circumstances. Each
Class B Warrant entitles the holder thereof to purchase, at any time until
February 14, 1999, one share of Common Stock at an exercise price of $8.75 per
share, subject to adjustment in certain circumstances. The Company received
aggregate net proceeds of approximately $6,200,000 in connection with this
offering, which proceeds were used as described above. The Class A Warrants and
Class B Warrants are subject to redemption under certain conditions. As a result
of the sale by the Company of the Preferred Stock (as described below), the
number of shares into which the Class A Warrants are exercisable and the
exercise price of each Class A Warrant has been adjusted to 1.106 shares of
Common Stock and $6.01 per share, respectively, and the number of shares into
which the Class B Warrants are exercisable and the exercise price of each Class
B Warrant has been adjusted to 1.106 shares of Common Stock and $7.91 per share,
respectively.
Further, 670,000 shares of the Company's issued and outstanding Class A
Common Stock (which is identical to the Common Stock in all respects, except
that each share of Class A Common Stock is entitled to five votes per share and
is currently held by the Company's President) are subject to forfeiture,
pursuant to an escrow arrangement entered into between the Company's President
and Blair, in the event certain pretax earnings targets or per share market
price targets are not met. In the event any of the shares are released from
escrow, the release will be treated, for financial reporting purposes, as
compensation expense to the Company. The Company, however, will not be allowed a
deduction for such charges for income tax purposes. Accordingly, the Company
will recognize, during the period in which the earnings or market price targets
are met, what could be a substantial charge to earnings, which would increase
the Company's loss or reduce or eliminate earnings. The amount of this charge
will be equal to the difference between the aggregate market price of such
shares on the date of release from escrow and the original value assigned to
such shares. The amount of compensation expense recognized by the Company will
not affect the Company's total shareholders' equity.
During November 1994, the Company obtained a loan from an institutional
lender aggregating $1,000,000 (to be repaid in 48 monthly installments) with
interest at 12 1/2% compounded monthly. Pursuant to the loan agreement, the
lender was granted a first security interest in the Company's simulator and
projection equipment. The loan originally required a certificate of deposit of
$250,000 provided by the Company which was released during May 1995. Up to
$500,000 of this loan is personally guaranteed by the Company's president.
17
<PAGE>
In order to pay the Company's creditors, provide capital for future growth
and expansion and allow for an extensive promotional and marketing campaign, the
Company consummated a private placement with an institutional investor on July
7, 1995 whereby 1,090,909 shares of Series A Convertible Participating Preferred
Stock (the "Preferred Stock") were sold for gross proceeds of $2.75 per share
aggregating $3,000,000. The Preferred Stock is convertible into common stock of
the Company at any time on a share-for-share basis. The holders of the Preferred
Stock are entitled to an aggregate of up to 24.9% of the outstanding voting
power of the Company on all matters which come before the shareholders.
Additionally, so long as 272,727 shares of Preferred Stock remain outstanding,
the holders thereof will have the ability to obtain up to 50.1% of the
outstanding voting power of the Company and elect a majority of the Board of
Directors in the event the holders of the Preferred Stock determine in good
faith that such action is reasonably necessary for the protection of their
investment. Since the institutional investor is a Small Business Investment
Company subject to the regulatory oversight of the Small Business Administration
("SBA"), the exercise of this control provision cannot be made arbitrarily and
is subject to SBA review. The Preferred Stock is subject to a Registration
Rights Agreement granting both demand and piggyback registration rights. In
order to consummate the above investment, the president of the Company agreed to
personally guarantee the Company's obligations under the Preferred Stock
purchase agreement, his shares of stock subject to limitations on transfer or
disposition, provide the institutional investor with an irrevocable proxy and
adjust the earnings targets required to release the 670,000 Class A Common Stock
subject to escrow upwards as a result of the Preferred Stock issuance.
Accordingly, in order to ensure that the sale of Preferred Stock would be
consummated, the Board of Directors approved the issuance of an option to
purchase 1,250,000 shares of Common Stock, exercisable at $3.75 per share (the
market price on the date of grant) only in the event that the targets for the
release of the shares subject to escrow are not achieved, and which are subject
to different earnings and equity targets which are more in line with the intent
of the original escrow provisions. The Company will recognize a charge to
earnings during the period in which such options are exercised, equal to the
difference between the aggregate market price of such shares on the date such
options are exercised and the exercise price paid therefor.
The Company used a portion of the net proceeds from the Preferred Stock
sale to repay certain indebtedness incurred in connection with the New York
Skyride project and used the balance of the proceeds for working capital, which
will include expansion of the Company's business through developing attractions
at new locations, including the XS New York project.
As of June 30, 1996, the Company had working capital of approximately
$1,623,000 compared to a working capital deficiency of $(1,800,000) at June 30,
1995 which was due primarily to the New York Skyride project being in excess of
original amounts budgeted by $1,853,000. Since inception approximately
$6,050,000 was spent on capital expenditures relating to New York Skyride and
$230,000 was spent on capital expenditures and leasing costs relating to the XS
New York Times Square project. Losses accumulated to $(2,162,000), of which in
excess of $(2,000,000) occurred prior to the facility's Grand Opening.
The Company is currently involved in a dispute with a subcontractor
regarding amounts billed for work allegedly performed in connection with the New
York Skyride project. The Company believes that it has adequately reserved for
such contingency and does not believe that the resolution of the dispute will
have a material impact on the Company's financial position.
18
<PAGE>
Such contingency represents leasehold improvements which, when amortized over
the remaining term of the Company's lease, will not have a material effect on
the Company's results from operations.
As a result of the Company's development of its Times Square site, certain
contractual agreements have been consummated and deposits and advance payments
made. Such payments include approximately $324,000 of concept and design
consultant fees, approximately $156,000 of architectural fees and approximately
$250,000 of construction costs. The Company estimates the capital expenditures
required to develop the XS New York Times Square facility to be approximately
$5,300,000, which includes both the construction of the facility and related
costs and the acquisition or leasing of the necessary equipment.
In order to develop the Company's Times Square facility, available cash and
cash flow from operations are not currently anticipated to be sufficient to fund
such project. In order to continue to develop the XS New York project, the XS
Chicago project, and achieve the Company's expansion and long term goals, the
Company will need to obtain additional financing to fund its projects. The
Company has identified several sources of additional financing, primarily debt
financing, however, there can be no assurance that such financing will be
available on terms acceptable to the Company, or at all, or that there will not
be construction and other delays affecting completion of such projects. Also,
there can be no assurance that demands placed on the Company's financial
resources by multiple projects, or any one project in particular, will not
affect the Company's ability to successfully complete or finance one or more
such projects, which would adversely affect the Company's expansion and planned
growth strategy. In this regard, the Company has deferred development plans for
the additional space at the Empire State Building site until such time as the XS
New York project is completed and further assessments are made with respect to
the cost and funding of the XS Chicago project. Accordingly, there can be no
assurance that the additional space at the Empire State Building will be
successfully developed without a strategic partner, or at all.
Additionally, the Company's Magic on Broadway joint venture project
requires an initial capital investment of approximately $250,000. The Company
intends to fund this project through cash flows from operations. The Company
will be entitled to receive 50% of the profits, if any, and an administrative
fee from the joint venture. Revenues of the joint venture will consist primarily
of ticket and merchandise sales. Magic on Broadway will initially run for seven
months and may be extended on a weekly basis.
The Company's long term goal is to develop simulator and other location
based entertainment attractions in other major cities in the United States, and
possibly in other countries. There are, however, only a limited number of
locations in a small number of cities that are suitable for such attractions,
and there can be no assurance at all that the Company could obtain a lease at
any such locations or develop a successful attraction at such locations. Also,
development of additional attractions will require the Company to obtain
financing for such ventures, and there can be no assurance that such financing
will be available, or available on terms and conditions that are acceptable to
the Company. Additionally, it is possible that the Company would find it
necessary to have one or more local partners involved in any additional
attractions it might attempt to develop, further limiting the revenues that the
Company could
19
<PAGE>
generate from development of simulator or entertainment attractions at other
locations. The Company continually explores expansion opportunities both in the
United States and abroad.
From time to time, the Company may be involved in negotiations for
additional sites or other entertainment-based projects, however, current
negotiations, if any, are too preliminary to warrant disclosure at this time.
The Company will keep investors informed as other projects mature.
Inflation
The Company believes that the impact of inflation on its operations since
its inception has not been material.
Seasonality
The Company's business is somewhat seasonal in nature, based in part, on
higher volumes of tourists in the New York City Metropolitan area during the
spring and summer months and during the December holiday season. The Company
will direct a portion of its marketing and promotional efforts on attracting a
larger percentage of the Observatory traffic and increasing volume to New York
Skyride and attracting visitors to XS New York, particularly during non-peak
seasons.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is set forth at the end of this report.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information concerning the directors and officers of the Company is
contained in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A no later than 120
days after the close of the fiscal year ended June 30, 1996. such information is
hereby incorporated herein by reference.
20
<PAGE>
Item 10. EXECUTIVE COMPENSATION.
Information concerning Executive Compensation is contained in the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A no later than 120 days after the close of
the fiscal year ended June 30, 1996. Such information is hereby incorporated
herein by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning the security ownership of certain beneficial owners
and management is contained in the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A no
later than 120 days after the close of the fiscal year ended June 30, 1996. Such
information is hereby incorporated herein by reference.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions is
contained in the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A no later than 120 days after the
close of the fiscal year ended June 30, 1996. Such information is hereby
incorporated herein by reference.
Item 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) Exhibits are listed on the Index to Exhibits on page 23 of this report.
The Exhibits required by Item 601 of Regulation S-B are listed on such Index in
response to this Item and are incorporated herein by reference.
Financial Statements required by Regulation S-X are listed in
response to this Item and are set forth at the end of this report and are
incorporated herein by reference.
(b) Reports on Form 8-K:
The registrant has not filed any reports on Form 8-K during the last
quarter of the period covered by this report.
21
<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.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
Date: September 25, 1996 By: /s/Zalman Silber
-----------------------------------
Zalman Silber, President and
Chief Executive Officer
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.
Date: September 25, 1996 By: /s/Jay Coleman
-----------------------------------
Jay Coleman, Chairman of the
Board of Directors
Date: September 25, 1996 By: /s/Zalman Silber
-----------------------------------
Zalman Silber, President, Chief
Executive Officer and Director
Date: September 25, 1996 By: /s/Steven Schwartz
-----------------------------------
Steven Schwartz, Vice President
-Finance, Principal Financial
and Accounting Officer, Secretary
and Treasurer
Date: September 25, 1996 By: /s/David Shamilzadeh
-----------------------------------
David Shamilzadeh, Director
Date: September 25, 1996 By: /s/Neil S. Belloff
-----------------------------------
Neil S. Belloff, Director
Date: September 25, 1996 By: /s/Ronald D. Celmer
-----------------------------------
Ronald D. Celmer, Director
Date: September 25, 1996 By: /s/John F. Barry, III
-----------------------------------
John F. Barry, III, Director
22
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
JUNE 30, 1996 AND JUNE 30, 1995
<PAGE>
[Richard A. Eisner & Company (Letterhead)]
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Skyline Multimedia Entertainment, Inc.
We have audited the accompanying consolidated balance sheet
of Skyline Multimedia Entertainment, Inc. and subsidiaries as at
June 30, 1996, and the related consolidated statements of
operations, changes in stockholders' equity accounts and cash
flows for each of the years in the two-year period then ended.
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 consolidated financial statements
enumerated above present fairly, in all material respects, the
financial position of Skyline Multimedia Entertainment, Inc. and
subsidiaries at June 30, 1996, and the results of their
operations and their cash flows for each of the years in the two-
year period then ended in conformity with generally accepted
accounting principles.
New York, New York
August 14, 1996
With respect to Notes H[1] and K
September 19, 1996
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 1996
A S S E T S
<TABLE>
<S> <C>
Current assets:
Cash (Note C). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,198,000
Inventory (Note B[2]). . . . . . . . . . . . . . . . . . . . . . . . . 130,000
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 168,000
-----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 2,496,000
Property, equipment and leasehold improvements - net
(Notes B[3], D[1] and E) . . . . . . . . . . . . . . . . . . . . . . . 5,597,000
Security deposits (Note G[3]) . . . . . . . . . . . . . . . . . . . . . . 372,000
Net deferred tax asset (net of valuation allowance of $670,000)
(Note F) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,000
Deferred project and leasing costs (Note D[2]). . . . . . . . . . . . . . 230,000
-----------
T O T A L . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,035,000
===========
L I A B I L I T I E S
Current liabilities:
Note payable - current portion (Note E). . . . . . . . . . . . . . . . $ 250,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 372,000
Accrued expenses and other current liabilities . . . . . . . . . . . . 190,000
Deferred sponsorship income. . . . . . . . . . . . . . . . . . . . . . 61,000
-----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 873,000
Note payable - long-term portion (Note E) . . . . . . . . . . . . . . . . 365,000
Deferred rent payable (Note B[4]) . . . . . . . . . . . . . . . . . . . . 713,000
-----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 1,951,000
===========
Commitments and contingencies (Notes D[2], G, H and K)
STOCKHOLDERS' EQUITY
(Note I)
Preferred stock, par value $.001 per share, 5,000,000 shares
authorized, 1,090,909 shares of Series A convertible participating
preferred stock issued and outstanding (liquidating value $2.75
per share) (Note I[2]). . . . . . . . . . . . . . . . . . . . . . . . 1,000
Common stock - $.001 par value; authorized 19,000,000 shares;
one vote per share; issued and outstanding 1,495,000 shares. . . . . . 2,000
Class A common stock - $.001 par value; authorized 1,000,000 shares;
five votes per share; issued and outstanding 960,000 shares;
670,000 shares in escrow . . . . . . . . . . . . . . . . . . . . . . . 1,000
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 9,242,000
Accumulated (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . (2,162,000)
-----------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . 7,084,000
T O T A L . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,035,000
===========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
-2-
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Revenues (Note A):
Ticket sales . . . . . . . . . . . . . . . $ 4,609,000 $ 1,635,000
Concession sales . . . . . . . . . . . . . 1,049,000 354,000
Sponsorship income (Note H[3]) . . . . . . 320,000 201,000
----------- -----------
T o t a l . . . . . . . . . . . . . 5,978,000 2,190,000
----------- -----------
Operating expenses:
Cost of merchandise sold . . . . . . . . . 410,000 168,000
Selling, general and administrative. . . . 4,345,000 3,860,000
Depreciation and amortization. . . . . . . 502,000 237,000
----------- -----------
T o t a l . . . . . . . . . . . . . 5,257,000 4,265,000
----------- -----------
Income (loss) from operations . . . . . . . . 721,000 (2,075,000)
Interest income . . . . . . . . . . . . . . . 120,000 19,000
Interest expense. . . . . . . . . . . . . . . (100,000) (120,000)
----------- -----------
Income (loss) before provision for income
taxes. . . . . . . . . . . . . . . . . . . 741,000 (2,176,000)
Income tax expense (benefit) (Note F) . . . . (305,000) 49,000
----------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . $ 1,046,000 $(2,225,000)
=========== ===========
Net income (loss) per share of common stock
(Note B[1]). . . . . . . . . . . . . . . . $.37 $(1.25)
==== =======
Weighted average number of shares of common
stock outstanding (excludes 670,000 escrow
shares). . . . . . . . . . . . . . . . . . 2,858,000 1,785,000
========= =========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
- 3 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ACCOUNTS
<TABLE>
<CAPTION>
Class A Series A
Common Stock Common Stock Preferred Stock Additional
------------ ------------ --------------- Paid-In Accumulated
Shares Amount Shares Amount Shares Amount Capital (Deficit)
------ ------ ------ ------ ------ ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1,
1994. . . . . . . . 1,495,000 $2,000 960,000 $1,000 $6,405,000 $ (983,000)
Issuance of Class A
warrant in
connection with
equipment financing 5,000
Net (loss) for the
year ended June 30,
1995. . . . . . . . (2,225,000)
--------- ------ ------- ------ ---------- -----------
Balance at June 30,
1995. . . . . . . . 1,495,000 2,000 960,000 1,000 6,410,000 (3,208,000)
Net proceeds from
sale of stock . . . 1,090,909 $1,000 2,832,000
Net income for the
year ended June 30,
1996. . . . . . . . 1,046,000
--------- ------ ------- ------ --------- ------ ---------- -----------
BALANCE AT JUNE 30,
1996. . . . . . . . 1,495,000 $2,000 960,000 $1,000 1,090,909 $1,000 $9,242,000 $(2,162,000)
--------- ------ ------- ------ --------- ------ ---------- -----------
--------- ------ ------- ------ --------- ------ ---------- -----------
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
- 4 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . $1,046,000 $(2,225,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . 502,000 237,000
Deferred income taxes . . . . . . . . . . . . . . . (340,000)
Advances to officer granted as compensation . . . . 47,000
Warrants issued in connection with financings . . . 5,000
Changes in operating assets and liabilities:
(Decrease) increase in accounts payable . . . . . (633,000) 879,000
(Decrease) increase in accrued liabilities. . . . (57,000) 868,000
(Increase) in inventory . . . . . . . . . . . . . (130,000)
(Increase) in prepaid expenses and other current
assets. . . . . . . . . . . . . . . . . . . . . (163,000) (5,000)
Increase in deferred sponsorship income . . . . . 19,000 42,000
---------- -----------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . 374,000 (282,000)
---------- -----------
Cash flows from investing activities:
Purchase of fixed assets. . . . . . . . . . . . . . . . (283,000) (3,571,000)
(Increase) in security deposits . . . . . . . . . . . . (229,000) (20,000)
(Increase) in deferred project and leasing costs. . . . (230,000)
---------- -----------
Net cash (used in) investing activities. . . . (742,000) (3,591,000)
---------- -----------
Cash flows from financing activities:
Proceeds from sale of preferred stock . . . . . . . . . 2,895,000
Deferred private placement costs. . . . . . . . . . . . (62,000)
Repayment of bank loan. . . . . . . . . . . . . . . . . (20,000)
Advances from officer . . . . . . . . . . . . . . . . . 76,000
Repayments to officer . . . . . . . . . . . . . . . . . (76,000)
Proceeds from notes payable . . . . . . . . . . . . . . 1,255,000
Repayment of notes payable. . . . . . . . . . . . . . . (473,000) (167,000)
---------- -----------
Net cash provided by financing activities . . . 2,422,000 1,006,000
---------- -----------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . 2,054,000 (2,867,000)
Cash at beginning of period. . . . . . . . . . . . . . . . 144,000 3,011,000
---------- -----------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . $2,198,000 $ 144,000
---------- -----------
---------- -----------
Supplemental disclosures of cash flow information:
Cash paid for interest during the period. . . . . . . . $ 101,000 $ 92,000
Equipment acquired under a capital lease agreement. . . 23,000
Cash paid for taxes during the period . . . . . . . . . 65,000
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
- 5 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company:
Skyline Multimedia Entertainment, Inc. ("SME") is a holding
company engaged in the development and operation of state-of-the-art
entertainment attractions, and together with its subsidiaries,
New York Skyline, Inc. ("NYSI") and Skyline Virtual Reality, Inc.
("SVR") are referred to as the "Company". Its first site, which is
located in the Empire State Building in New York City, is owned and
operated by NYSI which commenced operations of its "New York Skyride"
facility on December 22, 1994. The second site, which is located in
Times Square in New York City, is owned and is to be operated by SVR.
It is expected that operations of its interactive virtual reality
entertainment center will commence by December 1996.
The Company's business is somewhat seasonal in nature, based in
part, on higher volumes of tourists during the spring and summer
months and holiday seasons.
(NOTE B) - Summary of Significant Accounting Policies:
[1] Net income/loss per share:
Net income/loss per share is based on the weighted average
number of shares outstanding during the period, excluding shares held
in escrow. The weighted average number of common shares was
calculated by including the convertible participating preferred stock
as common stock equivalents, warrants and options outstanding are not
considered as their effect would be anti-dilutive (Note I[1]).
[2] Inventory:
Inventory consists of clothing, souvenirs and food sold in
the Company's gift shop and is valued at the lower of cost (first-in,
first-out) or market.
[3] Property, equipment and leasehold improvements:
Property and equipment, including assets under capital
leases are recorded at cost and are depreciated on the straight-line
method over the estimated useful lives of the assets from three to
twelve years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the
estimated useful life of the asset.
[4] Rent expense:
The Company, for financial accounting purposes, spreads
scheduled rent increases and rent holidays over the term of the lease
using the straight-line method.
(continued)
- 6 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Summary of Significant Accounting Policies: (continued)
[5] Management estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
[6] Recently issued accounting standards:
The Company has not elected to adopt, early, the provisions
of two recently issued accounting standards regarding impairments of
long-lived assets ("FAS 121") and stock based compensation
("FAS 123"). FAS 121 requires entities to review long-lived assets
and certain identifiable intangibles to be held and used, for
impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. FAS 123 permits
accounting for stock-based compensation pursuant to a fair value based
method. If the method is not adopted, FAS 123 requires disclosure of
pro forma net income and pro forma earnings per share on a fair value
basis. The Company has not determined the potential impact, if any,
of the adoption of these standards on its financial position or
results of operations.
(NOTE C) - Concentration of Credit Risk:
The Company maintains all of its cash with highly capitalized
credit-worthy financial institutions. Such balances often exceed the
FDIC limit and are not insured.
(NOTE D) - Property, Equipment and Leasehold Improvements:
[1] Property, equipment and leasehold improvements is summarized
as follows:
Office equipment and fixtures. . . . . $ 579,000
Simulation equipment . . . . . . . . . 2,158,000
Simulation film. . . . . . . . . . . . 1,050,000
Leasehold improvements . . . . . . . . 2,549,000
----------
6,336,000
Less accumulated depreciation and
amortization. . . . . . . . . . . . (739,000)
-----------
B a l a n c e. . . . . . . . $5,597,000
===========
(continued)
- 7 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Property, Equipment and Leasehold Improvements:
(continued)
[2] The Company has incurred project and leasing costs
associated with the development of its Times Square site. As of
June 30, 1996, project and leasing costs of approximately $230,000
were incurred, which include construction, architectural, commissions
and other professional fees necessary to begin development. It is
expected that additional costs aggregating approximately $5,000,000
will be incurred to complete the project.
The Company expects to commence operations of the Times
Square site by December 1996. Upon commencement of operations, such
costs will be categorized and assigned estimated useful lives which
will be used in calculating the appropriate amortization and
depreciation expense.
(NOTE E) - Notes Payable:
At June 30, 1996, the Company has a note outstanding, payable to
an equipment finance company, payable in equal monthly installments
through October 1998, bearing interest at 12 1/2% per annum:
Aggregate payments. . . . . . . . . . $718,000
Less interest . . . . . . . . . . . . 103,000
--------
Present value of net minimum
obligation . . . . . . . . . . . . 615,000
Less current portion. . . . . . . . . 250,000
--------
Long-term portion at June 30,
1996 . . . . . . . . . . . . . . . $365,000
========
The note is collateralized by interests in the Company's
simulator and projection equipment and $500,000 is personally
guaranteed by the Company's president.
(continued)
- 8 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Income Taxes:
[1] Income tax expense (benefit) is comprised of the following:
Year Ended
June 30,
--------------------
1996 1995
---- ----
Current:
Federal. . . . . . . . . . $ - 0 - $ - 0 -
State and local. . . . . . 35,000 49,000
Deferred:
Federal. . . . . . . . . . (211,000) - 0 -
State and local. . . . . . (129,000) - 0 -
--------- -------
Income tax expense
(benefit) . . . . $(305,000) $49,000
========= =======
[2] A reconciliation between the Company's effective income tax
rate and the U.S. Federal income tax rate is as follows:
Year Ended
June 30,
--------------
1996 1995
---- ----
Statutory rate. . . . . . . . 34.0 % (34.0)%
State and local income
(capital) tax, net of
federal tax benefit. . . . (8.4) 2.3
Nondeductible expenses. . . . 2.8
(Reduction of) provision for
valuation allowance for
federal deferred tax
assets . . . . . . . . . . (69.6) 34.0
------ -----
Effective income tax rate
(benefit). . . . . . . . . (41.2)% 2.3 %
======= ======
(continued)
- 9 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Income Taxes: (continued)
[3] The principal components of deferred tax assets, liabilities
and the valuation allowance are as follows:
June 30,
------------------------
1996 1995
---- ----
Deferred tax assets:
Capitalization of start-up
costs. . . . . . . . . . . $ 610,000 $ 893,000
Net operating loss
carryforwards. . . . . . . 730,000 550,000
---------- ----------
1,340,000 1,443,000
Valuation allowance . . . . . (670,000) (1,443,000)
---------- ----------
670,000 - 0 -
Deferred tax liabilities:
Depreciation differences . . 330,000 - 0 -
---------- -----------
Net deferred tax asset. . . . . $ 340,000 $ - 0 -
========== ===========
(NOTE G) - Commitments and Contingencies:
[1] The Company leases office premises and space for its
entertainment attractions from the Empire State Building Company
pursuant to operating leases expiring at various dates through 2016.
Certain of the leases contain renewal options. The leases provide for
free rent or rent credits for various periods; rental expense is
recognized on a straight-line basis over the life of the leases.
[2] During the year ended June 30, 1996 the Company entered into
a ten-year renewable lease with One Times Square Center Partners, L.P.
for space to house its interactive virtual reality entertainment
center. The lease terms provide for five months of rent credits
during the construction period and three months of rent credits during
the first year. The Company expects to start recording rent expense
in December 1996, the expected start of operations. The lease terms
also provide for two five-year renewal options. In addition, the
lease contains a cancellation clause in the event that the landlord
commences construction of office buildings on the site during the
lease term. Should the landlord exercise the cancellation clause, the
Company would be required to vacate the space within six months after
written notice, but would be entitled to reimbursement of a portion of
its out-of-pocket construction costs, not to exceed $125 per square
foot. Rental expense will be recognized by the Company on a straight-
line basis over the initial ten-year term of the lease.
(continued)
- 10 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Commitments and Contingencies: (continued)
[3] Minimum annual rental payments required for all leases are
as follows:
Year Ending
June 30,
-----------
1997 . . . . . . . . . . $ 948,000
1998 . . . . . . . . . . 1,352,000
1999 . . . . . . . . . . 1,474,000
2000 . . . . . . . . . . 1,422,000
2001 . . . . . . . . . . 1,519,000
Thereafter . . . . . . . 23,373,000
-----------
T o t a l. . . $30,088,000
===========
The terms of the leases include escalation clauses for
increases in real estate taxes and certain cost of living adjustments.
Security deposits pursuant to all the leases total $789,000
of which $313,000 was paid at June 30, 1996. Rent expense for the
years ended June 30, 1996 and June 30, 1995 was approximately $805,000
and $563,000, respectively [see Note B[4]].
[4] The Company has a licensing agreement with the Empire State
Building Observatory (the "Observatory") expiring on June 30, 2016, to
have tickets to its entertainment attraction and facility sold by the
licensor's employees at the counter where licensor's tickets to the
observatory are sold. Under the terms of the licensing agreement the
following future payments are required:
Year Ending
June 30,
-----------
1997. . . . . . . . . . . $ 150,000
1998. . . . . . . . . . . 156,250
1999. . . . . . . . . . . 175,000
2000. . . . . . . . . . . 175,000
2001. . . . . . . . . . . 175,000
Thereafter. . . . . . . . 3,115,000
----------
T o t a l . . . $3,946,250
==========
(continued)
- 11 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Commitments and Contingencies: (continued)
[5] The Company at June 30, 1996 is in dispute with a
subcontractor regarding amounts billed for work performed on the
Empire State Building attraction. The Company believes that it has
recorded an adequate liability in connection therewith and does not
believe that the resolution of the dispute will have a material impact
on the Company's financial position. Such contingency represents
leasehold improvements which, when amortized over the remaining term
of the Company's lease, will not have a material effect on the
Company's results from operations.
[6] The Company, has an agreement with an investment banker
which provides for a finder's fee, as defined, in connection with any
business transaction entered into by the Company with a party
introduced by the investment banker. The agreement expires in
February 1999.
(NOTE H) - Employment and Other Agreements:
[1] As at June 30, 1996 the Company renegotiated a one-year
employment agreement with its president beginning July 1, 1996. The
agreement provides for an annual salary of $250,000. Pursuant to such
agreement the president is entitled to an annual bonus of 10% of
earnings before interest, taxes, depreciation and amortization.
During July 1996, the Company advanced approximately
$301,000 to its president, pursuant to a demand note at an interest
rate of 8% which was repaid in September 1996.
[2] As at June 30, 1996 the Company has contracts with two other
executives providing for salaries aggregating approximately $190,000,
subject to annual increases after twelve months. Additionally,
pursuant to one of the agreements, the executive vice president is
entitled to certain incentives in the event that future locations are
established or joint ventures are entered into as a result of his
efforts.
[3] During the fiscal year ended June 30, 1995 the Company
entered into two sponsorship agreements, one with a major
international electronics manufacturer appointing it the presenting
sponsor of its New York skyride and one with a major soft drink
manufacturer. During the year ended June 30, 1996 the Company entered
into a sponsorship agreement with a distributor of photographic and
magnetic imaging. The terms of the agreements range from three to
five years, and provide for annual fees, capital improvements and
cross promotions for the Company. Sponsorship revenue under these
(continued)
- 12 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Employment and Other Agreements: (continued)
[3] (continued)
agreements aggregate approximately $1,300,000 over the terms. The
Company received from sponsors capital improvements and monetary fees
aggregating approximately $339,000 in the year ended June 30, 1996 and
$243,000 in the year ended June 30, 1995, of which $61,000 was
deferred as of June 30, 1996.
(NOTE I) - Stockholders' Equity:
[1] In connection with the Company's public offering of
securities in 1994, the underwriter required that an aggregate of
670,000 shares of the Company's Class A common stock be placed into
escrow. Some or all of such escrow shares may be released commencing
with the year ending June 30, 1996 up to the year ended June 30, 1998
if the Company meets certain minimum earnings thresholds, as defined,
or if certain minimum per share market prices of its common stock are
attained. For the year ended June 30, 1996 none of such escrow shares
were released. As shares are released from escrow they will be
accounted for as reissued for services rendered and the fair value of
such shares will be charged to operations as compensation expense.
The Company, however, would not be allowed a deduction for such
charges for income tax purposes.
[2] On July 7, 1995, the Company consummated a stock purchase
agreement with the Prospect Street NYC Discovery Fund, L.P. (the
"Fund"), pursuant to which the Company sold 1,090,909 shares of
Series A convertible participating preferred stock, par value $.001
per share, for $3,000,000. Net proceeds from such investment,
aggregated approximately $2,833,000. The preferred stock issued is
convertible into common stock of the Company at any time on a share-
for-share basis. The preferred shares are subject to both demand and
piggyback registration rights. The preferred stock has a liquidation
preference equal to $2.75 per share, but does not pay any dividends
unless declared by the Board of Directors. The preferred stockholders
are entitled to an aggregate of up to 24.9% of the outstanding voting
power of the Company which, can increase to 50.1% of the voting power,
if in their sole discretion, it becomes reasonably necessary for the
protection of their investment.
(continued)
- 13 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Stockholders' Equity: (continued)
[3] The Company has outstanding warrants for the purchase of its
common stock as follows:
Warrants Issued in Number of Exercise
Connection With Class Shares Price Expiration Date
------------------- ----- --------- -------- ---------------
Equipment financing. A 14,931 (a)(b) February 14, 1999
Bridge loan. . . . . A 504,336 (a)(b) February 14, 1999
Public offering. . . A 1,653,470 (a)(b) February 14, 1999
Public offering. . . B 1,653,470 (b) February 14, 1999
Officer. . . . . . . B 331,800 (b) February 14, 1999
(a) A Class A warrant is exchangeable for one share of common stock
and one Class B warrant, at an exercise price of $6.01.
(b) A Class B warrant is exchangeable for one share of common stock
at an exercise price of $7.91.
The above warrants may be redeemed by the Company at a price
of $.05 per warrant assuming certain minimum per share market prices
of its common stock, as defined, are met.
[4] The Company has a stock option plan ("Plan A") which, as
amended, provides for the issuance of incentive stock options or
nonqualified options to key employees and officers to be determined by
the Compensation Committee of the Board of Directors. The aggregate
number of shares which may be issued under Plan A is 2,500,000.
Incentive stock options under Plan A may not be granted at less than
the fair market value of the underlying shares at date of grant (110%
of fair market value for a 10% or greater stockholder). Incentive
stock options granted under Plan A will be exercisable for a period
not to exceed ten years.
A summary of stock option activity related to Plan A is as
follows:
Option
Number of Price
Shares Per Share
--------- ---------
Outstanding - July 1, 1994. 45,000 $5.00
Options cancelled . . . . . (45,000) $5.00
Granted . . . . . . . . . . 1,537,500 (a) $3.50 - $4.50
---------
Outstanding - June 30,
1995 . . . . . . . . . . 1,537,500 $3.50 - $4.50
Granted . . . . . . . . . . 15,000 $3.50 - $4.00
---------
Outstanding - June 30, 1996 1,552,500 $3.50 - $4.50
=========
(continued)
- 14 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Stockholders' Equity: (continued)
[4] (continued)
At June 30, 1996, 293,750 of the Plan A options were
exercisable.
(a) Includes an option to purchase 1,250,000 shares of
common stock issued to the Company's president (see Note I[7]).
[5] The Company has a stock option plan for nonemployee
directors ("Plan B"). The aggregate number of shares which may be
issued under Plan B, as amended, is 500,000.
A summary of stock option activity related to Plan B is as
follows:
Option
Number of Price
Shares Per Share
--------- ---------
Outstanding - July 1, 1994. 30,000 $5.00
Granted . . . . . . . . . . 160,000 $3.50 - $4.00
-------
Outstanding - June 30, 1995 190,000 $3.50 - $5.00
Cancelled . . . . . . . . . (10,000) $5.00
Granted . . . . . . . . . . 25,000 $3.75
-------
Outstanding - June 30, 1996 205,000 $3.50 - $5.00
=======
At June 30, 1996 all the Plan B options were exercisable.
[6] In connection with its initial public offering, the Company
granted the underwriter an option, as adjusted, to purchase up to
143,082 units at $6.36 per unit exercisable over a three-year period
commencing February 1997.
[7] As a result of the investment by Prospect Street NYC
Discovery Fund during July 1995, the president of the Company
personally guaranteed the representations and obligations of the
Company under the preferred stock purchase agreement for a one-year
period (which expired in July 1996), became subject to limitations on
the transfer or disposition of Company stock held by him and had the
earnings targets required to release the 670,000 shares of Class A
common stock held in escrow adjusted for the additional shares issued.
Accordingly, in order to ensure that the investment would be
consummated and as an inducement for the president to enter into the
guarantee agreement, the Board of Directors approved the issuance on
June 29, 1995 of options to purchase 1,250,000 shares of common stock
exercisable at $3.75 per share which expire on June 28, 2005. These
options are exercisable only in the event that the targets for the
release of the escrow shares are not achieved, and are subject to
(continued)
- 15 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Stockholders' Equity: (continued)
[7] (continued)
certain adjusted earnings and equity targets, as defined. If the
options become noncontingent, the fair value of the underlying shares
on that date less the option price will be charged to operations as
compensation expense.
[8] At June 30, 1996 the Company has reserved shares of common
stock for issuance upon exercise of warrants, options and conversion
of preferred stock as follows:
Class "A" warrants. . . . . . . . . . 4,345,474
Class "B" warrants. . . . . . . . . . 1,985,270
Plan "A" options. . . . . . . . . . . 1,552,500
Plan "B" options. . . . . . . . . . . 205,000
Underwriter options . . . . . . . . . 572,328
Preferred stock . . . . . . . . . . . 1,090,909
---------
9,751,481
=========
(NOTE J) - Related Party Transactions:
[1] During fiscal year 1995 the Company entered into a two-year
employment contract with an individual related to the president of the
Company to manage the souvenir/concession area of the attraction. The
agreement provides for annual compensation of $55,000 and a 20% bonus
(not to exceed $50,000) of after-tax profits of the souvenir/
concession area in excess of $150,000. For the year ended June 30,
1995, no bonus was payable under the terms of the agreement.
Subsequent to June 30, 1996 such individual received a bonus for that
year of $15,000 which included amounts due pursuant to the above
agreement.
[2] The Company has an agreement with a marketing consulting
firm, whose principal is the Chairman of the Board of Directors of the
Company, to act as the Company's sales agent in soliciting and
negotiating sponsorships and commercial endorsements. Sponsorship
commissions and consulting fees paid to said firm for the years ended
June 30, 1996 and June 30, 1995 aggregated $55,000 and $80,000,
respectively.
[3] The Company incurred legal fees to a law firm, one of whose
employees is a director of the Company. Such fees related primarily
to general corporate services. Legal fees for the year ended June 30,
1996 and June 30, 1995 aggregated $36,000 and $73,000, respectively.
(continued)
- 16 -
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Related Party Transactions: (continued)
[4] During the year ended June 30, 1995, the Company paid legal
fees to a law firm, one of whose principals was a director of the
Company until February 1995. Such fees related primarily to general
corporate services, which totalled $40,000.
(NOTE K) - Subsequent Events:
On September 5, 1996, the Company entered into a 15 year lease
for space to house its interactive virtual reality entertainment
center in the Chicago area. Total rental payments pursuant to the
lease aggregate approximately $13,200,000. Additional rent may be
charged as a percentage of the gross sales (as defined). As a
condition to the execution of the lease, the Company provided a
$200,000 irrevocable letter of credit as security.
- 17 -
<PAGE>
LETTER OF TRANSMITTAL
TO ACCOMPANY
EXCHANGE OFFER RELATING TO
REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
OF
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
ONE SHARE OF COMMON STOCK
PAR VALUE $.001 PER SHARE
FOR
EACH 3.5 OUTSTANDING CLASS A WARRANTS
TENDERED PURSUANT TO ITS OFFERING CIRCULAR
DATED AUGUST 11, 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
SEPTEMBER 9, 1997, UNLESS EXTENDED. TENDERS OF CLASS A WARRANTS MAY BE
WITHDRAWN AT ANY TIME UNTIL THE EXPIRATION DATE, AND IF NOT OTHERWISE
ACCEPTED BY THE COMPANY, AT ANY TIME AFTER OCTOBER 7, 1997.
To: CONTINENTAL STOCK TRANSFER & TRUST COMPANY, THE EXCHANGE AGENT
<TABLE>
<S> <C> <C>
By Hand or Overnight Delivery: By Facsimile: By Mail:
2 Broadway (212) 509-5150 2 Broadway
19th Floor New York, New York 10004
New York, New York 10004 Confirmation by Telephone: Attention: Reorganization Department
Attention: Reorganization Department (212) 509-4000, extension 535 (registered or certified mail
recommended)
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS
VIA A FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
The undersigned acknowledges receipt of the Offering Circular, dated August
11, 1997 (the 'Offering Circular') of Skyline Multimedia Entertainment, Inc.
(the 'Company') and this Letter of Transmittal, which together constitute the
Company's offer (the 'Exchange Offer') to exchange one share of Common Stock,
par value $.00l per share (the 'Common Stock'), of the Company for each 3.5
outstanding Redeemable Class A Common Stock Purchase Warrants (the 'Class A
Warrants'). No fractional shares of Common Stock will be issued. A cash payment
based upon the current market price of a share of Common Stock will be made in
lieu of fractional shares.
This Letter of Transmittal is to be used (i) if certificates for Class A
Warrants are to be physically delivered to the Exchange Agent herewith, or (ii)
if tenders of Class A Warrants are to be made by book-entry transfer to one of
the accounts maintained by the Exchange Agent at The Depository Trust Company,
the Midwest Securities Trust Company, or the Philadelphia Depository Trust
Company, sometimes collectively referred to herein as the 'Book-Entry Transfer
Facilities,' and sometimes individually referred to herein as a 'Book-Entry
Transfer Facility' pursuant to the procedures set forth in the Offering Circular
under the caption 'THE EXCHANGE OFFER--Procedure for Tendering Class A
Warrants,' or (iii) if tenders of Class A Warrants are to be delivered according
to the guaranteed delivery procedures set forth in the Offering Circular under
the caption 'THE EXCHANGE OFFER--Guaranteed Delivery Procedures.' Capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings assigned to them in the Offering Circular.
HOLDERS MUST COMPLETE THE TABLE IN BOX ONE AND SIGN IN BOX TWO TO TENDER
CLASS A WARRANTS. HOLDERS WHO WISH TO TENDER THEIR CLASS A WARRANTS MUST, AT A
MINIMUM, COMPLETE COLUMNS (1) THROUGH (3) IN THE TABLE IN BOX ONE AND COMPLETE
AND SIGN WHERE SIGNATURES ARE REQUIRED IN BOX TWO. If only those columns are
completed, the holder of Class A Warrants will be deemed to have tendered for
exchange all Class A Warrants listed in the table in Box One unless otherwise
indicated in the space provided at the top of Box One. If a holder of Class A
Warrants wishes to tender less than all of such Class A Warrants, column 4 must
be completed in full, and such holder should refer to Instruction 5 herein.
<PAGE>
NOTE: SIGNATURE(S) MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Holders of Class A Warrants who wish to tender with respect to their Class
A Warrants and (i) whose Class A Warrants are not immediately available, or (ii)
who cannot deliver their Class A Warrants, or any other documents required
hereby prior to the Expiration Date, or (iii) who deliver for book-entry
transfer on a timely basis, must deliver their Class A Warrants according to the
guarantee set forth in the Offering Circular under 'Procedure for Tendering
Class A Warrants.' See Instruction 2.
/ / CHECK HERE IF TENDERED CLASS A WARRANTS ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF TENDERED CLASS A WARRANTS ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE
AGENT WITH A BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution _________________________________________
Book-entry Transfer Facility
Account Number __________________ Transaction Code Number ____________
/ / CHECK HERE IF TENDERED WARRANTS ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s) _______________________________________
Date of Execution of Notice of Guaranteed Delivery ____________________
Window Ticket Number (if available) ___________________________________
Name of Institution Which Guaranteed Delivery _________________________
Book-Entry Transfer Facility Account Number (if delivered by book-entry
transfer) _____________________________________________________________
BOX ONE
DESCRIPTION OF CLASS A WARRANTS
- --------------------------------------------------------------------------------
(1) (2) (3) (4)
- --------------------------------------------------------------------------------
AGGREGATE
NUMBER OF NUMBER OF
CERTIFICATE CLASS A CLASS A
NAME(S) AND ADDRESS(ES) OF NUMBER(S) WARRANTS WARRANTS
REGISTERED HOLDER (ATTACH LIST, REPRESENTED TENDERED FOR
(PLEASE FILL IN, IF BLANK)(a) IF NECESSARY) BY CERTIFICATE EXCHANGE(b)
- --------------------------------------------------------------------------------
-------------------------------------------
TOTAL:
- --------------------------------------------------------------------------------
(a) Any beneficial holder whose Class A Warrants are registered in the name of
his broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender Class A Warrants should contact such registered holder
promptly and instruct such registered holder to tender Class A Warrants on
his behalf. If such beneficial holder wishes to tender Class A Warrants on
his own behalf, such beneficial holder must, prior to completing and
executing this Letter of Transmittal and delivering his Class A Warrants,
make appropriate arrangements to register ownership of the Class A Warrants
in such holder's name. The transfer of record ownership of Class A Warrants
may take considerable time and, depending on when such transfer is
requested, may not be accomplished prior to the Expiration Date.
(b) Need not be completed by holders who wish to tender all Warrants listed in
column (3).
- --------------------------------------------------------------------------------
<PAGE>
Ladies and Gentlemen:
In accordance with the terms and subject to the conditions set forth in the
Offering Circular, the undersigned hereby tenders to the Company the
above-described number of Class A Warrants subject to and effective upon
acceptance for exchange of the Class A Warrants tendered herewith. The
undersigned hereby exchanges, assigns and transfers to, or upon the order of the
Company, all right, title and interest in and to all the Class A Warrants that
are being tendered hereby and that are being accepted for exchange pursuant to
the Exchange Offer, and irrevocably constitutes and appoints the Exchange Agent
the true and lawful agent and attorney-in-fact of the undersigned with respect
to such Class A Warrants (with full knowledge that the Exchange Agent also acts
as agent for the Company), with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), to
(a) deliver certificates for such Class A Warrants or transfer ownership of such
Class A Warrants on the account books maintained by the Exchange Agent at a
Book-Entry Transfer Facility, together with, in either case, all accompanying
evidences of transfer and authenticity, to or upon the order of the Company, (b)
present such Class A Warrants for transfer on the books of the Company, and (c)
receive all benefits and otherwise exercise all rights of beneficial ownership
of such Class A Warrants, all in accordance with the terms of the Exchange
Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign and transfer the Class A
Warrants tendered hereby and that when the same are accepted for exchange by the
Company, the Company will acquire good and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances and such Class A
Warrants shall not be subject to any adverse claims. The undersigned will, upon
request, execute and deliver any additional documents determined by the Exchange
Agent or the Company to be necessary or desirable to complete the exchange,
assignment and transfer of the Class A Warrants tendered hereby.
Class A Warrants properly tendered and not withdrawn will be accepted as
soon as practicable after the satisfaction or waiver of all conditions to the
Exchange Offer. Tenders of Class A Warrants may be withdrawn at any time until
the Expiration Date and, if not otherwise accepted by the Company, at any time
after October 7, 1997, by delivery of a notice of withdrawal or revocation to
the Exchange Agent. See 'THE EXCHANGE OFFER--Withdrawal Rights' in the Offering
Circular.
The Exchange Offer is subject to a number of conditions, each of which may
be waived or modified by the Company, as more particularly set forth in the
Offering Circular. The undersigned recognizes that as a result of such
conditions the Company may not be required to exchange any of the Class A
Warrants tendered hereby. In such event, Class A Warrants not exchanged will be
returned to the undersigned at the address shown below the undersigned's
signature, unless otherwise indicated under 'Special Exchange Instructions' or
'Special Delivery Instructions.'
All authority conferred or agreed to be conferred herein shall survive the
death or incapacity of the undersigned, and any obligation of the undersigned
hereunder shall be binding upon the heirs, executors, administrators, legal and
personal representatives, successors in interest and assigns of the undersigned.
The undersigned understands that tenders of Class A Warrants pursuant to any of
the procedures described in the Offering Circular and in this Letter of
Transmittal will constitute a binding agreement between the undersigned and the
Company upon the terms and subject to the conditions of the Exchange Offer.
Unless otherwise indicated herein under 'Special Exchange Instructions' or
'Special Delivery Instructions,' please issue the Common Stock and return any
Class A Warrants not tendered or not accepted for exchange in the name(s) of the
undersigned at the address set forth above under 'Description of Class A
Warrants' in Box One. In the event that the 'Special Exchange Instructions and
the Special Delivery Instructions' are completed, please issue the certificates
for the shares of Common Stock, and/or return such certificates for Class A
Warrants and/or the certificates for the shares of Common Stock, to the person
or persons so indicated.
<PAGE>
SPECIAL EXCHANGE INSTRUCTIONS
(SEE INSTRUCTIONS 1,4, AND 8)
To be completed ONLY if the shares of the Common Stock are to be issued in the
name of someone other than the undersigned.
Issue and Mail Shares of the Common Stock to:
Name ___________________________________________________________________________
(PLEASE PRINT)
Address ________________________________________________________________________
________________________________________________________________________________
(INCLUDE ZIP CODE)
________________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1,4, AND 8)
To be completed ONLY if the shares of the Common Stock are to be mailed to
someone other than the undersigned, or to the undersigned at an address other
than that shown above.
Mail Shares of the Common Stock to:
Name ___________________________________________________________________________
(PLEASE PRINT)
Address ________________________________________________________________________
________________________________________________________________________________
(INCLUDE ZIP CODE)
________________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by a firm that is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., or by a commercial bank or trust
company having an office in the United States (each an 'Eligible Institution').
SIGNATURES ON THIS LETTER OF TRANSMITTAL NEED NOT BE GUARANTEED (A) IF THIS
LETTER OF TRANSMITTAL IS SIGNED BY THE REGISTERED HOLDER(S) OF THE CLASS A
WARRANTS TENDERED HEREWITH AND SUCH HOLDER(S) HAS/HAVE NOT COMPLETED THE
BOXES ENTITLED 'SPECIAL EXCHANGE INSTRUCTIONS' OR 'SPECIAL DELIVERY
INSTRUCTIONS' ON THIS LETTER OF TRANSMITTAL OR (B) IF SUCH CLASS A WARRANTS ARE
TENDERED FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION. SEE INSTRUCTION 6.
2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES FOR CLASS A
WARRANTS; GUARANTEED DELIVERY PROCEDURES. This Letter of Transmittal is to be
used (i) if certificates for Class A Warrants are to be physically delivered to
the Exchange Agent herewith, or (ii) if tenders of Class A Warrants are to be
made by book-entry transfer to the accounts maintained by the Exchange Agent at
one of the Book-Entry Transfer Facilities pursuant to the procedure set forth in
the Offering Circular, or (iii) if tenders of Class A Warrants are to be made
according to the guaranteed delivery procedures set forth in the Offering
Circular. Certificates for all physically delivered Class A Warrants, or
confirmation of any book-entry transfer, as well as a properly completed and
duly executed copy of this Letter of Transmittal or a facsimile thereof, and any
other documents required by this Letter of Transmittal must be received by the
Exchange Agent at its address set forth on the front page of this Letter of
Transmittal prior to the Expiration Date. Holders of Class A Warrants who wish
to tender their Class A Warrants and (i) whose certificates representing numbers
of Class A Warrants are not immediately available, (ii) who cannot deliver their
Class A Warrants or any other documents required hereby prior to the Expiration
Date, or (iii) who cannot complete the procedure for book-entry transfer on a
timely basis, must tender their Class A Warrants according to the guaranteed
delivery procedures set forth in the Offering Circular under 'THE EXCHANGE
OFFER--Guaranteed Delivery Procedures.' Pursuant to such procedures: (a) such
tender must be made by or through an Eligible Institution; (b) a properly
completed and duly executed Notice of Guaranteed Delivery substantially in the
form provided by the Company must be received by the Exchange Agent prior to the
Expiration Date; and (c) the certificates for all physically tendered Class A
Warrants in proper form for transfer, or a confirmation of a book-entry
transfer, as well as a properly completed and duly executed Letter of
Transmittal and any other required documents, must be received by the Exchange
Agent within five New York Stock Exchange trading days following the Expiration
Date, all as provided under the caption 'THE EXCHANGE OFFER--Guaranteed Delivery
Procedures' in the Offering Circular.
The method of delivery of this Letter of Transmittal, Class A Warrants, and
all other required documents to the Exchange Agent is at the election and risk
of the tendering holder of the Class A Warrants. Except as otherwise provided
herein and in the Offering Circular, such delivery will be deemed made only when
actually received by the Exchange Agent. INSTEAD OF EFFECTING DELIVERY BY MAIL,
IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. In all
cases, sufficient time should be allowed to assure timely delivery. No documents
should be sent to the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Class A Warrants will be
resolved by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders and withdrawals
of Class A Warrants that are not in proper form or the acceptance of which
would, in the opinion of the Company or its counsel, be unlawful. The Company
reserves the right to waive any irregularities or conditions of tender as to
particular Class A Warrants. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) will be final and binding.
No alternative, conditional or contingent tenders will be accepted. Unless
waived, any defects or irregularities in connection with tenders and withdrawals
of Class A Warrants must be cured within such time as the Company shall
determine. Neither the Company, the Exchange Agent, nor any other person shall
be under
<PAGE>
any duty to give notice of any defects or irregularities in tenders, nor shall
any of them incur any liability for failure to give any such notice. Tenders and
withdrawals of Class A Warrants will not be deemed to have been made until all
defects and irregularities have been cured or waived. Any Class A Warrants
received by the Exchange Agent that are not properly tendered or delivered and
as to which the irregularities have not been cured or waived will be returned by
the Exchange Agent to the tendering holders of such Class A Warrants unless
otherwise provided in the Letter of Transmittal as soon as practicable following
the Expiration Date.
3. INADEQUATE SPACE. If the space provided under 'Description of Class A
Warrants' is inadequate, list and attach hereto on a separate schedule the
Class A Warrant serial numbers, the class and number of warrants represented
thereby and the number of Class A Warrants being tendered.
4. WITHDRAWALS OF TENDER. Tenders of Class A Warrants may be withdrawn at
any time until the Expiration Date and, if not otherwise accepted for exchange
by the Company, at any time after October 7, 1997.
Any holder of Class A Warrants who has tendered Class A Warrants, who
succeeds to the record ownership of Class A Warrants in respect of which a
tender has previously been given, may withdraw such Class A Warrants by delivery
of a written notice of withdrawal. To be effective, a written or facsimile
transmission notice of withdrawal must (i) be timely received by the Exchange
Agent at its address or facsimile number specified above before the Expiration
Date, (ii) specify the name of the registered holder of the Class A Warrants to
be withdrawn, (iii) contain the certificate numbers (shown on the particular
certificates) evidencing the Class A Warrants to be withdrawn, and the class and
number of Class A Warrants to be withdrawn, and (iv) be signed by the registered
holder of such Class A Warrants in the same manner as the original signature on
this Letter of Transmittal including any required signature guarantees, or be
accompanied by documents of transfer sufficient to have the transfer agent for
the Class A Warrants register the transfer of such Class A Warrants into the
name of the person withdrawing the Class A Warrants.
The signatures on the notice of withdrawal must be guaranteed by an Eligible
Institution unless such Class A Warrants have been tendered (i) by a registered
holder of Class A Warrants who has not completed the boxes on this Letter of
Transmittal entitled 'Special Exchange Instructions' or 'Special Delivery
Instructions' or (ii) for the account of an Eligible Institution.
If the Class A Warrants to be withdrawn have been delivered or otherwise
identified to the Exchange Agent, a signed notice of withdrawal is effective
immediately upon receipt of proper written or facsimile transmission notice of
withdrawal even if physical release is not yet effected.
Any Class A Warrants which have been tendered for exchange but which are
not exchanged will be returned to the holder thereof without cost to such holder
as soon as practicable following the Expiration Date. Properly withdrawn Class A
Warrants may be retendered at any time prior to the Expiration Date by following
one of the procedures described under the caption 'THE EXCHANGE OFFER--
Withdrawal Rights' in the Offering Circular.
5. PARTIAL TENDERS: If tenders are to be made with respect to Class A
Warrants evidenced by a particular warrant certificate, fill in the class and
number of Class A Warrants which are represented by such certificate in column
(4) of Box One above. THE ENTIRE NUMBER OF WARRANTS WILL BE DEEMED TO HAVE BEEN
TENDERED UNLESS OTHERWISE INDICATED. In the case of partial tenders, new
certificates representing Class A Warrants in fully registered form for the
remainder of the Class A Warrants represented by the certificate for which such
partial tender is made will be sent to the persons signing this Letter of
Transmittal, unless otherwise indicated in the appropriate boxes on this Letter
of Transmittal, as promptly as practicable after the expiration or termination
of the Exchange Offer.
6. SIGNATURES ON THIS LETTER OF TRANSMITTAL; INSTRUMENTS OF TRANSFER AND
ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder
of the Class A Warrants tendered hereby, the signature must correspond with the
name as written on the face of the Class A Warrant without alteration,
enlargement or any change whatsoever.
(a) If any of the Class A Warrants tendered are held of record by two
or more persons, all such persons must sign this Letter of Transmittal.
(b) If any of the Class A Warrants tendered are registered in
different names, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal and any necessary accompanying documents as
there are different registrations.
<PAGE>
(c) If this Letter of Transmittal is signed by the registered holders
of Class A Warrants, no endorsements of Class A Warrants or separate
instruments of transfer are required, unless Class A Warrants not exchanged
or the certificates for shares of Common Stock are to be issued in the name
of, or delivered to, any person other than the registered Holders.
Signatures on any such Class A Warrant endorsements or instruments of
transfer must be guaranteed by an Eligible Institution, unless signed by an
Eligible Institution.
(d) If this letter of Transmittal is signed by a person other than
the registered holders of the Class A Warrants, such Class A Warrants must
be endorsed or accompanied by appropriate instruments of transfer and, in
either case, signed exactly as the name(s) of the registered holder(s)
appear(s) on such Warrants. Signatures on any such Class A Warrants or
instruments of transfer must be guaranteed by an Eligible Institution,
unless signed by an Eligible Institution.
(e) If this Letter of Transmittal or any Class A Warrants or
instruments of transfer are signed by a trustee, executor, administrator,
guardian, attorney-in-fact, officer of a corporation, agent or other person
acting in a fiduciary or representative capacity, such person should so
indicate when signing and, unless waived by the Company, proper evidence
satisfactory to the Company and the Exchange Agent of the authority of such
person to so act must be submitted with this Letter of Transmittal.
7. TRANSFER TAXES. The Company will pay or cause to be paid all transfer
taxes, if any, with respect to the exchange and transfer of any Class A Warrants
to it or its order pursuant to the Exchange Offer. If, however, (i) certificates
for the shares of Common Stock to be received in exchange for Class A Warrants
or any Class A Warrants not exchanged are to be issued in the name of, or
delivered to, any person other than the registered holders, or (ii) if a
transfer tax is imposed for any reason other than the transfer of Class A
Warrants to the Company or its order pursuant to the Exchange Offer, the amount
of any transfer taxes (whether imposed on the registered holders or any other
person) will be payable by the tendering holder(s) of Class A Warrants. Unless
satisfactory evidence of the payment of such taxes, or exemption therefrom, is
submitted herewith, the amount of such transfer taxes will be billed directly to
the tendering holder(s) of Class A Warrants. EXCEPT AS PROVIDED IN THIS
INSTRUCTION 7, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO
THE CERTIFICATES LISTED IN THIS LETTER OF TRANSMITTAL.
8. SPECIAL EXCHANGE INSTRUCTIONS AND SPECIAL DELIVERY INSTRUCTIONS. If
shares of the Common Stock to be received in exchange for Class A Warrants are
to be issued in the name of a person other than the signer of this Letter of
Transmittal or if shares of the Common Stock to be received in exchange for
Class A Warrants are to be sent or returned to someone other than signer of this
Letter of Transmittal or to an address other than that shown above, the
appropriate boxes on this Letter of Transmittal should be completed.
9. IRREGULARITIES AND WAIVER OF CONDITIONS All questions as to the
validity, form, eligibility (including time of receipt) and acceptance for
exchange of any tender of Class A Warrants will be determined by the Company, in
its sole discretion, which determination shall be final and binding. The Company
reserves the absolute right to reject any and all tenders of Class A Warrants
determined by it not to be in proper form, or the acceptance or exchange of
which may, in the opinion of the Company's counsel, be unlawful. The Company
also reserves the absolute right to waive any defect or irregularity in any
tender with respect to any particular Class A Warrants or any particular
Warrantholder, and the Company's interpretations of the terms and conditions of
the Exchange Offer (including these instructions) shall be final and binding.
Unless waived, any defects or irregularities in connection with tenders must be
cured within such time as the Company shall determine. Neither the Company, the
Exchange Agent nor any other person will be under any duty or obligation to give
notice of any defects or irregularities in tenders, nor shall any of them incur
any liability for failure to give such notice. Any Class A Warrants received by
the Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned to the appropriate
tending Warrantholder as soon as possible. Except as otherwise provided in the
Offering Circular, the Company reserves the absolute right to waive any of the
specified conditions of the Exchange Offer, as described in the Offering
Circular under the caption 'THE EXCHANGE OFFER--Conditions to the Exchange
Offer.'
10. MUTILATED, LOST, STOLEN OR DESTROYED CLASS A WARRANTS. Any holder
whose Class A Warrants have been mutilated, lost, stolen or destroyed should
immediately contact the Exchange Agent at the address indicated above for
further instructions.
<PAGE>
11. TAXPAYER INFORMATION AND SUBSTITUTE W-9. All Warrantholders. All
Warrantholders receiving cash in lieu of fractional shares must complete the
'Substitute Form W-9' set forth in Box Three.
United States Warrantholders. United States federal income tax law requires
that a United States holder who surrenders Class A Warrants and receives cash in
lieu of fractional shares, to provide the Exchange Agent (as payor) with his or
her correct taxpayer identification number ('TIN'), which, if the surrendering
holder is an individual, is his or her social security number. If the Exchange
Agent is not provided with the correct TIN, the surrendering holder may be
subject to a penalty imposed by the Internal Revenue Service and payments that
are made by the Company to the tendering holder may be subject to a 31% backup
withholding. If withholding results in an overpayment of taxes, a refund may be
obtained. Exempt persons (including generally, among others, all corporations)
are not subject to these backup withholding and reporting requirements.
To prevent the 31% backup withholding tax, each surrendering United States
holder must provide his or her correct TIN and complete Part 3 of the
'Substitute Form W-9' set forth below, certifying that the TIN provided is
correct (or that the surrendering holder is awaiting a TIN) and that (a) in
accordance with the enclosed Guidelines, the surrendering holder is exempt from
backup withholding, or (b) the surrendering holder has not been notified by the
Internal Revenue Service that he or she is subject to backup withholding as a
result of failure to report all interest or dividends, or (c) the Internal
Revenue Service has notified the surrendering holder that he or she is no longer
subject to backup withholding. If shares of the Common stock are to be issued in
more than one name or in a name other than that of the actual owner, consult the
enclosed Guidelines for information on which TIN to report.
Foreign Warrantholders. United States federal income tax law requires a
foreign holder who surrenders Class A Warrants and receives cash in lieu of
fractional shares, to provide the Exchange Agent (as payor) with a certification
on Form W-8, Certification of Foreign Status, of such holder's foreign status or
a TIN. If the Exchange Agent is not provided with the certification of foreign
status or a TIN, payments that are made by the Company to the surrendering
holder may be subject to the 31% backup withholding tax.
If shares of the Common Stock to be received in exchange for Class A
Warrant are to be owned jointly by more than one foreign holder, the 31% backup
withholding will apply unless every joint payee provides the statement regarding
foreign status or any joint payee who has not established foreign status
provides a TIN.
12. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance may be directed to the Exchange Agent at its address and
telephone number set forth above.
IMPORTANT. THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE COPY
HEREOF (TOGETHER WITH CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND
ALL OTHER REQUIRED DOCUMENTS) OR THE NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
<PAGE>
BOX TWO
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL HOLDERS OF WARRANTS SURRENDERING FOR EXCHANGE
REGARDLESS OF WHETHER WARRANTS ARE BEING PHYSICALLY DELIVERED HEREWITH)
In order to validly surrender Warrants for exchange pursuant to the
Exchange Offer, this Letter of Transmittal must be signed by the registered
Holder(s) of Warrants exactly as their name(s) appear(s) on the Warrant
certificate(s) or, if surrendered for exchange by a participant in one of the
Book-Entry Transfer Facilities, exactly as such participant's name appears on a
security position listing as the owner of Warrants, or by person(s) authorized
to become registered Holder(s) by endorsements and documents transmitted with
this Letter of Transmittal.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below
under 'Capacity' and submit evidence satisfactory to the Company of such
person's authority to so act. See Instruction 6 below.
________________________________________________________________________________
________________________________________________________________________________
SIGNATURE(S) OF REGISTERED HOLDER(S) OR AUTHORIZED SIGNATORY
Date: ___________________________, 1997
Name(s): _______________________________________________________________________
(PLEASE PRINT)
________________________________________________________________________________
Capacity (full title): _________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number: ________________________________________________
SIGNATURE GUARANTEE (SEE INSTRUCTION 1 BELOW)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
________________________________________________________________________________
(NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURES)
________________________________________________________________________________
(ADDRESS (INCLUDING ZIP CODE) AND
TELEPHONE NUMBER (INCLUDING AREA CODE) OF FIRM)
________________________________________________________________________________
(AUTHORIZED SIGNATURES)
________________________________________________________________________________
(PRINT NAME)
________________________________________________________________________________
(TITLE)
Date: ___________________________, 1997
PLEASE COMPLETE SUBSTITUTE FORM W-9 IN BOX THREE
OF THIS LETTER OF TRANSMITTAL
<PAGE>
BOX THREE
SUBSTITUTE FORM W-9
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN)
PAYER'S NAME: Skyline Multimedia Entertainment, Inc.
PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT ______________________________
RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. Social Security Number
OR
______________________________
Employer Identification Number
PART 2
CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me); and
(2) I am not subject to backup withholding because (i) I am exempt from backup
withholding, or (ii) I have not been notified by the Internal Revenue
Service ('IRS') that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or (iii) the IRS has notified
me that I am no longer subject to backup withholding.
PART 3
Awaiting TIN ____________________
CERTIFICATE INSTRUCTIONS -- You must cross out item (2) in Part 2 above if you
have been notified by the IRS that you are subject to backup withholding because
of underreporting interest or dividends on your tax return. However, if after
being notified by the IRS that you are subject to backup withholding you
received another notification from the IRS stating that you are no longer
subject to backup withholding, do not cross out item (2).
SIGNATURE ____________________________________ DATE _______________________
NAME _________________________________________
(PLEASE PRINT)
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF
ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropirate Internal Revenue
Service Center or Social Security Administration Officer or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number within 60 days, 31% of all reportable
payments made to me thereafter will be withheld until I provide a number.
SIGNATURE __________________________ DATE ____________________________________
NAME ______________________________
(PLEASE PRINT)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
OFFER TO EXCHANGE
ONE SHARE OF COMMON STOCK
PAR VALUE $.001 PER SHARE
FOR
EACH 3.5 CLASS A WARRANTS
PURSUANT TO ITS OFFERING CIRCULAR
DATED AUGUST 11, 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON SEPTEMBER 9, 1997, UNLESS EXTENDED
August 11, 1997
To Brokers, Dealers, Commercial Banks,
Trust Companies and other Nominees:
Skyline Multimedia Entertainment, Inc., a New York corporation (the
'Company'), is offering (the 'Exchange Offer'), upon the terms and subject to
the conditions set forth in the enclosed offering Circular, dated August 11,
1997 (the 'Offering Circular') and the enclosed Letter of Transmittal, to
exchange one (1) share of Common Stock, $0.001 par value per share (the 'Common
Stock'), of the Company for each 3.5 Redeemable Class A Common Stock Purchase
Warrants (the 'Class A Warrants'). Consummation of the Exchange Offer is subject
to a number of conditions which are described in the Offering Circular and which
may be waived by the Company.
We are asking you to contact your clients for whom you hold Class A
Warrants, registered in your name or in the name of your nominee or who hold
Class A Warrants registered in their own names.
The Company will not pay any fees or commissions to any broker or dealer or
other person for soliciting tenders of Class A Warrants pursuant to the Exchange
Offer. You will be reimbursed for customary mailing and handling expenses
incurred by you in forwarding any of the enclosed materials to your clients.
The Company will pay or cause to be paid all transfer taxes, if any,
applicable to the transfer and exchange of Class A Warrants to it or its order,
except as otherwise provided in Instruction 7 of the Letter of Transmittal.
For your information and for forwarding to your clients for whom you hold
Class A Warrants registered in your name or in the name of your nominee or who
hold Class A Warrants registered in their own names we are enclosing the
following documents:
1. The Offering Circular;
2. A Letter of Transmittal (to be used to accept the Exchange Offer);
3. A form of letter which may be sent to your clients for whose
accounts you hold Class A Warrants registered in your name or the name of
your nominee, with space provided for obtaining such clients' instructions
with regard to the Exchange Offer;
4. A Notice of Guaranteed Delivery;
5. The Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9; and
6. A return envelope addressed to Continental Stock Transfer & Trust
Company, the Exchange Agent.
WE URGE YOU TO CONTACT YOUR CLIENTS AS SOON AS POSSIBLE. The Exchange Offer
will expire at 5:00 p.m., New York City time, on September 9, 1997, unless
extended. The time and date of such
<PAGE>
expiration, as such may be extended pursuant to the procedures described in the
Offering Circular, is referred to as the 'Expiration Date.'
To participate in the Exchange Offer, certificates for Class A Warrants or
timely confirmation of any book-entry transfer of such Class A Warrants into the
Exchange Agent's account at the Depository Trust Company, the Midwest Securities
Trust Company or the Philadelphia Depository Trust Company accompanied by a duly
executed and properly completed Letter of Transmittal or facsimile thereof,
together with any required signature guarantees, and any other required
documents, must be delivered to the Exchange Agent as indicated in the Letter of
Transmittal and the Offering Circular prior to the Expiration Date.
Holders of Class A Warrants who wish to tender their Class A Warrants and
(i) whose Class A Warrants are not immediately available, (ii) who cannot
deliver their Class A Warrants, or any other documents required by the Letter of
Transmittal prior to the Expiration Date, or (iii) who cannot complete the
procedure for book-entry transfer on a timely basis, must tender their Class A
Warrants according to the guaranteed delivery procedures set forth in the
Offering Circular under 'THE EXCHANGE OFFER--Guaranteed Delivery Procedures.'
Any inquiries you may have with respect to the Exchange Offer or requests
for additional copies of the above documents should be addressed to the Exchange
Agent at its address or telephone number set forth on the back cover page of the
Offering Circular.
Very truly yours,
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AN AFFILIATE OF
THE COMPANY, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE
ANY REPRESENTATION ON BEHALF OF ANY OF THESE WITH RESPECT TO THE EXCHANGE OFFER
NOT MADE IN THE OFFERING CIRCULAR OR THE LETTER OF TRANSMITTAL.
2
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
OFFER TO EXCHANGE
ONE SHARE OF COMMON STOCK
PAR VALUE $.001 PER SHARE
FOR
EACH 3.5 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON SEPTEMBER 9, 1997, UNLESS EXTENDED
To our Clients:
Enclosed for your consideration are an Offering Circular dated August 11,
1997 (the 'Offering Circular'), and a form of Letter of Transmittal (the 'Letter
of Transmittal') relating to the offer (the 'Exchange Offer') of Skyline
Multimedia Entertainment, Inc., a New York corporation (the 'Company'), to
exchange one share of its Common Stock, $0.001 par value per share (the 'Common
Stock') of the Company for each 3.5 Class A Redeemable Common Stock Purchase
Warrants (the 'Class A Warrants'). Each holder of a fractional interest in
shares of the Company's Common Stock will be entitled to receive a cash payment
in lieu of such fractional amount based on the current market price of a share
of Common Stock. Consummation of the Exchange Offer is subject to a number of
conditions which are described in the Offering Circular and which may be waived
by the Company. The Exchange Offer is conditioned on at least 95% of the
outstanding Class A Warrants being tendered and at least 95% of the Class B
Warrants being tendered pursuant to a concurrent exchange offer.
This material is being forwarded to you as the beneficial owner of Class A
Warrants held by us in your account but not registered in your name. A TENDER OF
SUCH CLASS A WARRANTS MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND
PURSUANT TO YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to tender
for exchange any or all such Class A Warrants held by us for your account,
pursuant to the terms and conditions set forth in the enclosed Offering Circular
and the related Letter of Transmittal.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender your Class A Warrants on your behalf in accordance
with the provisions of the Exchange Offer. THE EXCHANGE OFFER WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 9, 1997, UNLESS EXTENDED BY THE
COMPANY. Tenders of Class A Warrants may be withdrawn at any time prior to the
Expiration Date and if not otherwise accepted for exchange by the Company, at
any time after October 7, 1997. The Exchange Agent shall deliver the Common
Stock to be received in exchange for Class A Warrants or return the tendered and
withdrawn Class A Warrants promptly after the Expiration Date or withdrawal of
the tendered Class A Warrants.
We urge you to read the enclosed Offering Circular carefully before
instructing us to tender your Class A Warrants.
If you wish to have us tender any or all of your Class A Warrants, please
so instruct us by completing, executing, detaching and returning to us the
attached instruction form. THE ACCOMPANYING FORM OF LETTER OF TRANSMITTAL IS
FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND MAY NOT BE USED BY YOU TO TENDER
CLASS A WARRANTS.
If we do not receive written instructions in accordance with the procedures
presented in the Offering Circular and the Letter of Transmittal, we will not
tender any of the Class A Warrants in your account.
<PAGE>
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
Offering Circular and the Letter of Transmittal relating to the Exchange Offer
by the Company to exchange Common Stock for the Class A Warrants of the Company.
This will instruct you to tender the number of Class A Warrants indicated
below (or, if no amount is indicated below, the full number of Class A Warrants)
which are held by you for the account of the undersigned, upon the terms and
subject to the conditions set forth in such Offering Circular and related Letter
of Transmittal.
Number of Class A Warrants to be tendered: _______________(1)
- ------------------
(1) I/we understand that if I/we sign without indicating a lesser amount in the
space above, the entire number of Class A Warrants held by you for my/our
account will be tendered.
SIGN HERE
Signature:
- --------------------------------------------------------------------------------
Name(s)
- --------------------------------------------------------------------------------
Address(es)
- --------------------------------------------------------------------------------
Zip Code
Area Code and Telephone No(s). ____________________________________
Taxpayer Identification
or Social Security No(s). ____________________________________
Dated ____________________________________
2
<PAGE>
NOTICE OF GUARANTEED DELIVERY
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
OFFER TO EXCHANGE
ONE SHARE OF COMMON STOCK
PAR VALUE $.001 PER SHARE
FOR
EACH 3.5 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON SEPTEMBER 9, 1997, UNLESS EXTENDED.
This form or one substantially equivalent hereto must be used to accept
the Exchange Offer of Skyline Entertainment, Inc. (the 'Company') made pursuant
to the Offering Circular dated August 11, 1997 and the accompanying Letter of
Transmittal (the 'Exchange Offer') if certificates for the Class A Warrants are
not immediately available or time will not permit all required documents to
reach the Exchange Agent prior to the Expiration Date of the Exchange Offer or
if the procedures for book-entry transfer cannot be completed on a timely basis.
Such form may be delivered by hand or transmitted by telegram, telex, facsimile
transmission or mail to the Exchange Agent prior to the Expiration Date.
To: Continental Stock Transfer & Trust Company
<TABLE>
<S> <C> <C>
By Hand or Overnight Delivery: By Facsimile: By Mail:
2 Broadway (212) 509-5150 2 Broadway
19th Floor Attention: Reorganization Department 19th Floor
New York, New York 10004 New York, New York 10004
Attention: Reorganization Department Confirmation by Telephone: Attention: Reorganization Department
(212) 509-4000, (registered or certified mail
extension 535 recommended)
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF INSTRUCTION
VIA FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS FORM IS NOT TO BE USED TO GUARANTEE SIGNATURES. The Eligible
Institution which completes this form must communicate the guarantee to the
Exchange Agent and must deliver the Letter of Transmittal and certificates for
Class A Warrants to the Exchange Agent within the time period shown herein.
Failure to do so could result in a financial loss to such Eligible Institution.
<PAGE>
Ladies and Gentlemen:
The Undersigned hereby tenders to the Company, upon the terms and
conditions set forth in the Offering Circular and related Letter of Transmittal
(which constitute the 'Exchange Offer'), receipt of which is hereby
acknowledged, Class A Warrants pursuant to the guaranteed delivery procedure
described in the Offering Circular.
(PROCEDURE: TYPE OR PRINT ALL INFORMATION BELOW)
Signatures(s): _________________________________________________________________
________________________________________________________________________________
Name(s) of Record Holder(s):
________________________________________________________________________________
Address(es): ___________________________________________________________________
________________________________________________________________________________
Zip Code
Area Code and Tel. No.(s): _____________________________________________________
Dated: _________________________________________________________________________
Class A Warrants No(s). (if available):
________________________________________________________________________________
Number of Class A Warrants:
________________________________________________________________________________
CHECK IF CLASS A WARRANTS WILL BE TENDERED BY BOOK-ENTRY TRANSFER.
/ / The Depository Trust Company
/ / The Midwest Securities Trust Company
/ / Philadelphia Depository Trust Company
________________________________________________________________________________
Account Number: ________________________________________________________________
GUARANTEE
(DO NOT USE FOR SIGNATURE GUARANTEE)
The undersigned, a bank, broker, dealer, credit union, savings association
or other entity that is a member in good standing of a recognized Medallion
Program approved by the Securities Transfer Association, Inc. (an 'Eligible
Institution'), hereby guarantees that either the certificate representing the
Class A Warrants tendered hereby, in proper form for transfer, or timely
confirmation of the book-entry transfer of such Class A Warrants into the
Exchange Agent's account at the Depository Trust Company, the Midwest Securities
Trust Company or the Philadelphia Depository Trust Company, in each case
together with a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) with any required signature guarantees and any other required
documents, will be received by the Exchange Agent at one of its addresses set
forth above, no later than three business days after the delivery of this
Notice.
________________________________________________________________________________
Name of Firm
________________________________________________________________________________
Address
________________________________________________________________________________
Zip Code
Area Code & Tel. No. ___________________________________________________________
________________________________________________________________________________
Authorized Signature
________________________________________________________________________________
Name
________________________________________________________________________________
Title Please type or print
Dated: __________________________________________________________________ , 1997
NOTE: DO NOT SEND CLASS A WARRANT CERTIFICATES WITH THIS FORM. CERTIFICATES
MUST BE SENT WITH THE LETTER OF TRANSMITTAL.
<PAGE>
FOR IMMEDIATE RELEASE
- --------------------------------------------------------------------------------
CONTACT: STEVEN SCHWARTZ
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
(212) 564-2224
- --------------------------------------------------------------------------------
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. ANNOUNCES COMMON
STOCK EXCHANGE OFFER FOR ITS CLASS A AND CLASS B WARRANTS;
LETTER OF INTENT SIGNED FOR PRIVATE PLACEMENT.
New York, New York, July 2, 1997--Skyline Multimedia Entertainment, Inc.
(NASDAQ: SKYL) announced today that its Board of Directors approved an exchange
offer for all outstanding Class A and Class B Warrants. The Company will offer
to exchange one newly issued share of its Common Stock for four outstanding
Class A Warrants and one newly issued share of its Common Stock for each eight
outstanding Class B Warrants. The exchange offer will be conditioned on, among
other things, minimum tender by the holders of at least 75% of outstanding
Warrants of each class.
If the Company receives tenders for the minimum number of Warrants pursuant
to the exchange offer (i.e. 75% of outstanding Warrants of each class), there
will be approximately 540,000 additional shares of Common Stock outstanding. If
the Company receives tenders for all outstanding Warrants, there will be a total
of approximately 720,000 additional shares of Common Stock outstanding.
The Warrants are quoted on the NASDAQ Small-Cap Market, however, based on
the trading history of the Common Stock, the Warrants have never been and are
not currently 'in-the-money.' As of July 1, 1997 (or the most recent trading
date available), the closing bid and last sale prices of the Common Stock, Class
A Warrants and Class B Warrants reported on the NASDAQ Small-Cap Market were
$2.875 and $3.375, $0.562 and $0.625, $0.25 and $0.312, respectively. The
Warrants expire by their terms on February 13, 1999 unless redeemed earlier.
The Company intends to file with the Securities and Exchange Commission and
mail to Warrantholders shortly, exchange offer documents setting forth the terms
of the exchange offer. The exchange offer will commence upon mailing the
exchange offer documents and will be held open for 20 business days unless
extended. This press release does not constitute an offer to sell or the
solicitation of an offer to buy securities, which offer will be made only by
means of the exchange offer documents.
According to Zalman Silber, the Company's President and Chief Executive
Officer, 'the exchange offer will provide warrant holders with a longer term
equity security and a true ownership stake in the Company, eliminate uncertainty
with the respect to the exercisability of the Warrants and provide greater
liquidity through ownership of the Company's Common Stock. In addition, the
exchange offer will eliminate the tremendous warrant overhang which affects the
market for the Company's securities, and, more importantly, will make it easier
for the Company to raise needed equity capital.'
Additionally, the Company announced today the execution of a non-binding
letter of intent with Cowen & Company to raise approximately $10 million through
the private placement of debt or equity securities. However, there is no
assurance that such private placement will be consummated on acceptable terms,
which must still be negotiated, or at all. The Company expects to use the
proceeds of any such private placement for the continued development of its
current projects.
Headquartered in New York, Skyline Multimedia Entertainment, Inc. is a
holding company engaged in the development and operation of state-of-the-art
location based entertainment attractions worldwide. New York Skyline, Inc., a
wholly-owned subsidiary, owns and operates New York Skyride, the first flight
simulator in the metropolitan New York area. The New York Skyride is located in
the Empire State Building, New York's premier tourist attraction. Through
Skyline Virtual Realty, Inc., the Company owns and operates XS New York, New
York City's first and only virtual reality entertainment center, located in the
heart of Times Square. The Company is also currently engaged in the development
and operation of additional attractions to be located at the Sydney Tower in
Sydney, Australia and the Woodfield Mall in Schaumberg, Illinois, outside of
Chicago.
<PAGE>
FOR IMMEDIATE RELEASE
- --------------------------------------------------------------------------------
CONTACT: STEVEN SCHWARTZ
SKYLINE MULTIMEDIA ENTERTAINMENT INC.
(212) 564-2224
- --------------------------------------------------------------------------------
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. ANNOUNCES
REVISED COMMON STOCK EXCHANGE OFFERS FOR ITS
CLASS A AND CLASS B WARRANTS.
New York, New York, July 9, 1997--Skyline Multimedia Entertainment, Inc.
(NASDAQ: SKYL; SKYLU) announced today that its Board of Directors, based in part
on the advice of its financial advisors, approved a revised exchange rate
relating to its previously announced exchange offers for all outstanding Class A
and Class B Warrants. The Company will offer to exchange one newly issued share
of its Common Stock for 3.5 outstanding Class A Warrants and one newly issued
share of its Common Stock for seven outstanding Class B Warrants. The exchange
offer will be conditioned on, among other things, minimum tender by the holders
of at least 75% of outstanding Warrants of each class.
Based on the new exchange rate, if the Company receives tenders for the
minimum number of Warrants pursuant to the exchange offers (i.e., 75% of
outstanding Warrants of each class), there will be approximately 615,000
additional shares of Common Stock outstanding. If the Company receives tenders
for all outstanding Warrants, there will be a total of approximately 820,000
additional shares of Common Stock outstanding.
The Warrants are quoted on the NASDAQ Small-Cap Market; however, based on
the trading history of the Common Stock, the Warrants have never been and are
not currently 'in-the-money.' As of July 8, 1997 (or the most recent trading
date available), the closing bid and last sale prices of the Common Stock, Class
A Warrants and Class B Warrants reported on the NASDAQ Small-Cap Market were
$3.125 and $3.25, $0.625 and $0.625, and $0.25 and $0.25, respectively. The
Warrants expire by their terms on February 13, 1999, unless earlier redeemed.
The Company intends to file with the Securities and Exchange Commission and
mail to warrant holders shortly, exchange offer documents setting forth the
terms of the exchange offers. The exchange offers will commence upon mailing the
respective exchange offer documents and will be held open for 20 business days,
unless extended. This press release does not constitute an offer to sell or the
solicitation of an offer to buy securities, which offer will be made only by
means of the exchange offer documents.
According to Zalman Silber, the Company's President and Chief Executive
Officer, 'the exchange rate as revised will ensure the successful completion of
the exchange offers and provide greater participation by warrantholders in
ownership of the Company.'
As previously stated, the Company believes that the exchange offers will
provide warrant holders with a longer term equity security, a true ownership
stake in the Company, elimination of the uncertainty with the respect to the
exercisability of the Warrants and greater liquidity through ownership of the
Company's Common Stock. In addition, the Company believes the exchange offers
will eliminate the tremendous warrant overhang which affects the market for the
Company's securities, and, more importantly, will make it easier for the Company
to raise needed equity capital, which the Company is in the process of arranging
in the form of a $10 million private placement of debt or equity securities.
However, there is no assurance that such private placement will be consummated
on acceptable terms, which must still be negotiated, or at all. The Company
expects to use the proceeds of any such private placement for the continued
development of its current projects.
Headquartered in New York, Skyline Multimedia Entertainment, Inc. is a
holding company engaged in the development and operation of state-of-the-art
location-based entertainment attractions worldwide. New York Skyline, Inc., a
wholly-owned subsidiary, owns and operates New York Skyride, the first flight
simulator in the metropolitan New York area. The New York Skyride is located in
the Empire State Building, New York's premier tourist attraction. Through
Skyline Virtual Realty, Inc., the Company owns and operates XS New York, New
York City's first and only virtual reality entertainment center, located in the
heart of Times Square. The Company is also currently engaged in the development
and operation of additional attractions to be located at the Sydney Tower in
Sydney, Australia and the Woodfield Mall in Schaumberg, Illinois outside of
Chicago.
