<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
Quarterly report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For Quarter Ended: December 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
---- ----
As of February ___, 1998, there were issued and outstanding 1,385,000
shares of Common Stock, $.001 par value per share, 960,000 shares of Class A
Common Stock, $.001 par value per share, and 1,090,909 shares of Series A
Convertible Participating Preferred Stock, $.001 par value per share.
Transitional Small Business Disclosure Format
Yes No X
---- ----
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Balance sheet as of December 31, 1997 3
Statements of operations for the three and six months
ended December 31, 1997 and 1996 4
Statements of cash flows for the six months
ended December 31, 1997 and 1996 5
Notes to financial statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION 18
SIGNATURES 20
INDEX TO EXHIBITS 21
2
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997
ASSETS
Current Assets
Cash $990,000
Inventory (Note 5) 130,000
Prepaid expenses and
other current assets 238,000
-----------
TOTAL CURRENT ASSETS 1,358,000
Property, equipment and leasehold
improvements - net (Note 4) 11,721,000
Security deposits (Note 6) 972,000
Deferred project and leasing
costs (Note 4) 741,000
Due from officer (Note 11) 279,000
Deferred financing costs-- net 159,000
Payments to Contractor 400,000
Other assets-- net 32,000
-----------
TOTAL ASSETS $15,662,000
===========
LIABILITIES
Current Liabilities
Capital Lease Obligations - current portion (Note 6) 835,000
Accounts payable 2,441,000
Accrued expenses and other current liabilities 870,000
Due to Contractors 1,100,000
Deferred sponsorship income (Note 9) 32,000
Note Payable (Note 7) 1,000,000
-----------
TOTAL CURRENT LIABILITIES 6,278,000
Accrued Interest Payable - long term(Note 7) 612,000
Capital Lease Obligations - long term portion
(Notes 6 and 7) 1,539,000
Note Payable (Note 7) 3,884,000
Deferred rent payable (Note 8) 1,313,000
----------
TOTAL LIABILITIES 13,626,000
Commitments and Contingencies (Notes 4 and 14)
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 9,989,000
Accumulated deficit (7,356,000)
-----------
Total Stockholders' equity 2,036,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,662,000
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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<TABLE>
<CAPTION>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
December 31 December 31
-------------------------------- -------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
REVENUES:
<S> <C> <C> <C> <C>
Attraction sales $ 2,468,000 $1,392,000 $ 5,190,000 $2,966,000
Concession sales 249,000 270,000 575,000 647,000
Sponsorship income 88,000 87,000 176,000 173,000
------------- ------------- ------------- -------------
TOTAL REVENUES 2,805,000 1,749,000 5,941,000 3,786,000
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Cost of merchandise sold 166,000 97,000 291,000 230,000
Selling, general and
administrative 3,474,000 2,144,000 6,146,000 3,462,000
Depreciation and amortization 446,000 157,000 904,000 293,000
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 4,086,000 2,398,000 7,341,000 3,985,000
------------- ------------- ------------- -------------
(Loss) from operations (1,281,000) (649,000) (1,400,000) (199,000)
Net interest (expense) (Notes 6
and 7) (206,000) (72,000) (426,000) (74,000)
------------- ------------- ------------- -------------
(Loss) before provision for
income taxes (1,487,000) (721,000) (1,826,000) (273,000)
Income tax expense (Note 3) 0 20,000 0 164,000
Net deferred tax benefit (Note 3) 0 (229,000) 0 (824,000)
Net income/(loss) $ (1,487,000) $ (512,000) $ (1,826,000) $ 387,000
============ ============= ============= =============
Basic earnings/(loss) per share $ (.89) $ (.29) $ (1.09) $ .22
============ ============= ============= =============
Diluted earnings/(loss) per share $ (.89) $ (.29) $ (1.09) $ .14
============ ============= ============= =============
Basic Weighted average number
of shares (excludes 670,000
escrow shares and 1,090,909
preferred shares) 1,675,000 1,785,000 1,675,000 1,785,000
============ ============= ============= =============
Diluted Weighted average number
of shares (excludes 670,000
escrow shares) 1,675,000 1,785,000 1,675,000 2,876,000
============ ============= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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<TABLE>
<CAPTION>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
December 31
--------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $(1,826,000) $387,000
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities:
Depreciation and amortization expense 904,000 293,000
Deferred income taxes 0 (695,000)
Write off of trademark costs 37,000 0
Issuance Of Warrants 0 53,000
Changes in operating assets and liabilities:
(Increase) decrease in inventory 38,000 (69,000)
(Increase) decrease in prepaid and other assets 7,000 (352,000)
(Decrease) in deferred sponsorship income (43,000) (33,000)
Increase in accounts payable, accrued expenses and
deferred rent payable 941,000 2,453,000
--------------- ---------------
Net cash provided by operating activities 58,000 2,037,000
--------------- ---------------
Cash flows from investing activities:
(Increase) in security deposits (20,000) (38,000)
Acquisition of property, equipment and
leasehold improvements (346,000) (5,758,000)
Advances to officer/stockholder 0 (188,000)
(Increase)Decrease in certificate of deposit 209,000 (203,000)
(Increase) in deferred project and leasing costs (119,000) (22,000)
--------------- ---------------
Net cash (used in) investing activities (276,000) (6,209,000)
--------------- ---------------
Cash flows from financing activities:
Financing costs 21,000 (175,000)
Repayment of notes payable (432,000) (732,000)
Proceeds from notes payable 500,000 5,075,000
--------------- ---------------
Net cash provided by financing activities 89,000 4,168,000
--------------- ---------------
Net (decrease) in cash (129,000) (4,000)
Cash at beginning of period 1,119,000 2,198,000
--------------- ---------------
Cash at end of period $ 990,000 $ 2,194,000
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest....................... $147,000 $ 60,000
Taxes.......................... $19,000 $ 26,000
Acquisition of Equipment Under Capital Lease....................... $ 20,000 0
</TABLE>
The accompanying Notes are an integral part of these financial statements
5
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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 six months ended December 31, 1997 are
not necessarily indicative of the results that may be expected for the full
fiscal year ended June 30, 1998. 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, 1997.
2. EARNINGS PER SHARE
Basic Net income/(loss) per share for each period is calculated by
dividing net income/(loss) available to common stockholders for the period by
the weighted average number of common shares outstanding for each period,
excluding shares held in escrow, and the preferred shares. Under the diluted
method, however, the weighted average number of common shares was calculated for
the six months ended December 31, 1996 including the convertible participating
preferred stock as common stock equivalents. For the three and six months ended
December 31, 1997 and the three month period ended December 31, 1996, the
1,090,909 shares of Series A Convertible Participating Preferred Stock were not
included in the calculation of the net (loss) per share as such shares were
considered to be anti-dilutive.
3. INCOME TAXES
The principal components of Deferred Tax Assets, Liabilities, and the
Valuation Allowance are as follows:
December 31
-----------------------------
1997 1996
------------ ------------
Deferred Tax Assets:
Capitalization of start-up costs $ 346,000 $ 522,000
Net operating loss carryforwards 3,738,000 993,000
------------ ------------
4,084,000 1,515,000
Valuation allowance (3,463,000) 0
------------ ------------
621,000 1,515,000
Deferred Tax Liabilities:
Depreciation differences 621,000 480,000
------------ ------------
Net Deferred Tax Asset $ 0 $ 1,035,000
============ ============
The Company has provided a valuation allowance of $3,463,000 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
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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 $1,978,000
Simulation equipment 2,619,000
Simulation film 1,069,000
Leasehold improvements 8,584,000
-----------
14,250,000
Less: Accumulated depreciation
and amortization (2,529,000)
Total $11,721,000
(B) The Company has incurred leasing costs in connection with the
development of its Times Square site. It is expected that additional costs
aggregating approximately $6,000,000 will be required to complete the Australia
site if a definitive lease is successfully negotiated. "See--Management's
Discussion and Analysis of Financial Condition and Results of Operations." Upon
commencement of operations, such costs will be amortized and depreciated over
their estimated useful lives.
5. INVENTORY
Inventory consists of clothing, souvenirs and food sold at the
Company's existing 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 acquisition of the equipment for its XS
New York site. The Company received approximately $1,024,000 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, the Company received $559,000 with an
additional $51,000 held by the lender as security. Such security is to be
released after 24 months
7
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
subject to a satisfactory payment record by the Company. The amount financed
bears interest at 11 1/2% per annum compounded monthly and was initially to be
repaid in 48 monthly installments. During November 1997, the term was modified
to provide for an accelerated payback over 36 months from the date of issuance.
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. SUBORDINATED NOTE PAYABLE
(A) Between December 1996 and March 1997, the Company borrowed in the
aggregate $4,450,000 from certain institutional lenders which loans accrue
interest at an annual rate of 14% and require the payment of both principal and
interest five years from the date of issuance. In connection with the
subordinated debt, lenders received in the aggregate warrants to purchase up to
434,146 shares of Common Stock at an exercise price of $4.25 per share, which
the Company valued at approximately $278,000 using the Black Scholes pricing
model, which amount is amortized over the term of the loans. A purchase price of
$1.00 per warrant was allocated from the subordinated debt proceeds received by
the Company. One of the institutional lenders loaned the Company an additional
$500,000 on June 30, 1997 and $500,000 during December 1997.
(B) Future annual principal payments on long-term debt exclusive of
capital lease obligations, as of December 31, 1997 are as follows:
Year Ending June 30
2000 $2,500,000
2001 1,950,000
----------
4,450,000
Less unamortized debt discount (566,000)
$3,884,000
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 December 1997 and 1996, the Company recognized as income
$88,000 and $87,000, respectively, which represent a portion of the capital
improvements and monetary fees received from these sponsors and approximately
$32,000 and $28,000, respectively, were deferred during such periods.
8
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 since March 1996. 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
good faith, in the sole discretion of such preferred stockholder, it becomes
reasonably necessary for the protection of its investment.
11. DUE FROM OFFICER
During the six months ended December 31, 1997, no advances were made to
the Company's executive officers. Amounts due from officer represent primarily
certain federal, state and local payroll related withholding tax obligations due
to the Company from such officer. Amounts due accrue interest at 8% annually.
Additionally, the officer has agreed, to refund $750,000 of compensation
received during the year ended June 30, 1997. Upon receipt, such amounts will be
reflected as additional contributions to capital.
12. RECENTLY ISSUED ACCOUNTING STANDARDS
During fiscal year ended June 30, 1997 the Company implemented Statement
of Financial Accounting Standards No. 123, "Account for Stock-Based
Compensation" (SFAS No. 123). The provisions of SFAS No. 123 allow companies to
either expense the estimated fair value of employee stock options or to continue
to follow the intrinsic value method set forth in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") but
disclose the pro forma effects on net loss and net loss per share had the fair
value of the options been expensed. The Company has elected to continue to apply
APB 25 in accounting for its stock option incentive plans. 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 equipment 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 six months
ended December 31, 1997, an aggregate of approximately $47,000 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. During November 1997, a new agreement was entered into with a
specific vendor whereby the Company's revenue-sharing obligation was reduced
from 40% to 14% in exchange for the Company selling the XS trademark and related
intellectual property rights to such vendor. The Company can continue to use the
XS trademark at its Times Square location pursuant to a license agreement
entered into in connection with the sale of the trademark. In addition, the
vendor agreed to waive all amounts due under the prior revenue-sharing agreement
through October 12, 1997 which aggregated approximately $427,000. Such amounts
9
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
were offset against selling, general and administrative expenses for the six
months ended December 31, 1997.
14. COMMITMENTS AND CONTINGENCIES
In late October 1997, the Empire State Building Company (the "ESBCo")
sent notices of default to the Company with respect to the Company's various
leases at the Empire State Building (the "ESB") for failure to pay rent. The
Company believed it had valid claims and offsets against a portion of the rents
claimed by ESBCo. The Company was negotiating such rent dispute in good faith
until December 22, 1997, when the Company was informed by representatives of the
ESBCo that the Company's proposal with respect to certain alleged lease
defaults, was not accepted. The Company believes it has negotiated in good faith
and had no reason to suspect that its previously submitted proposal would not be
acceptable. In light of this negative response from the ESBCo, the Company has
filed a lawsuit against the ESBCo and related parties seeking, among other
things, injunctive relief to prohibit the ESBCo from terminating the Company's
leases at the Empire State Building (the "Leases") and the License Agreement
relating to the New York Skyride (the "License Agreement") and also seeking
damages from the ESBCo. The Company has received a temporary restraining order,
among other things, prohibiting the ESBCo from terminating or canceling the
Leases and the License Agreement and restraining the ESBCo from interfering with
the Company's business or commencing any proceedings with respect to the Leases
and the License Agreement.
10
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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 (the
"Additional 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 Additional Lease was entered into in conjunction with the
modification of the lease and the license agreement relating to the New York
Skyride facility (the "Modification Agreements"). The Additional Lease and the
Modification Agreements were the direct result of negotiations between the
Company and the Empire State Building Company, the landlord of the Empire State
Building, relating to the opening of a competitive simulator attraction on the
lower level of the ESB. As a result of the Additional Lease and the Modification
Agreements, which requires the ESBCo to increase the level of cooperation with
the Company and improve relations between the ESB staff and the Company's
employees, the Company concluded that the existence of a smaller non-New York
related simulator which would not get the level of preferential treatment as
promised to the Company by the ESBCo, would not have a material impact on the
Company's operations taken as a whole. Additionally, the Company had intended to
utilize the additional space to create a mixed use location-based entertainment
center, which development plans for such additional space were deferred until
such time as the XS New York project was operating profitably and further
assessment was made with respect to the cost and funding of the Woodfield Mall
and Sydney Skyride projects (described below). However, the Company believes
that the ESBCo and the ESB staff have not provided the level of cooperation
promised and that such lack of cooperation, not merely the existence of a
competitor, has impacted the Company's operations. In late October, 1997, the
ESBCo sent notices of default to the Company with respect to the Company's
various leases at the ESB for failure to pay rent. In addition to attempting to
resolve the foregoing issues relating to the circumstances involving the
Modification Agreements, the Company also believes it has valid claims, credits
and offsets against a portion of the rents claimed by the ESBCo. On December 22,
1997, the Company was informed by representatives of the ESBCo that the
Company's proposal with respect to certain alleged lease defaults, was not
accepted. The Company believes it has negotiated in good faith and had no reason
to suspect that its previously submitted proposal would not be acceptable. In
light of this negative response from the ESBCo, which the Company believes is
another example of the ESBCo's pattern of bad faith and lack of cooperation
toward the Company, the Company has filed a lawsuit against the ESBCo and
related parties seeking, among other things, injunctive relief to prohibit the
ESBCo from terminating the Company's leases at the Empire State Building (the
"Leases") and the License Agreement relating to the New York Skyride (the
"License Agreement") and also seeking damages from the ESBCo. The Company has
received a temporary restraining order, among other things, prohibiting the
ESBCo from terminating or canceling the Leases and the License Agreement and
restraining the ESBCo from interfering with the Company's
11
<PAGE>
business or commencing any proceedings with respect to the Leases and the
License Agreement. See "Part II - Item 1. Legal Proceedings" below.
Further, as previously disclosed, it is likely, that the Company will be
unable to develop the space within the ESB which is the subject of the
Additional Lease in the near term. The Company is uncertain as to the
disposition of this space as a result of the lawsuit brought by the Company
against the ESBCo described above. Until such disposition, however, the Company
will continue to accrue rent expense with respect to the Additional Lease.
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 December 31, 1997 and 1996, New York
Skyride was visited by approximately 141,000 and 160,000 customers,
respectively. The Company believes that such decrease reflects a decrease in the
capture rate of the traffic to the Observatory of the ESB from 19% to 16%. The
Company further believes that such decrease in the capture rate is attributable,
at least in part, to the lack of cooperation of the ESBCo and the staff of the
ESB as described above.
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. The Company, on November 4, 1997,
renegotiated its revenue- sharing agreement with the primary equipment supplier
of XS New York in consideration of the sale to such supplier of the "XS"
trademarks and related intellectual property rights. Additionally, in connection
with the sale of the trademarks and other intellectual property rights, such
equipment supplier has forgiven all amounts owed to it by the Company through
October 12, 1997 (which aggregated approximately $427,000). Pursuant to a
license agreement from such supplier, the Company may continue to use the "XS"
trademarks in connection with the Times Square location. See "--Liquidity and
Capital Resources."
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 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 its subsidiary, Skyline
Chicago, Inc., had plans to develop a state-of-the-art interactive virtual
reality entertainment center similar to the XS New York project. In connection
with 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. As a result of construction delays due to the lack
of sufficient funding, the Company did not commence operations on the date
required in the lease. The Company received notice on December 22, 1997 that the
landlord had reentered the premises occupied by the Company as a result of
certain defaults and has declared such lease terminated. The Company is
currently in negotiations with the landlord to arrive at a settlement in
connection with the lease termination. Management believes, based on current
negotiations, that such settlement amount will not have a material impact on the
Company's financial condition or results of operations.
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
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(the "Tower") in Sydney, Australia. The Centrepoint Shopping Center 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 base rent is expected to range from $225,000 in Year 1 to $600,000 in
Year 8. The letter of intent also contemplates a provision for percentage rent
of 6.5% of gross sales in excess of $7,000,000. The Company 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 is
still in the process of negotiating for the sale of a combined ticket to both
the Tower and the Company's attraction or a possible joint venture with the
owner of the Tower; however, no assurance can be given with respect to the
successful conclusion of such negotiations or, if successfully concluded,
whether funding will be available to commence construction or whether such site
will operate profitably or provide net income to the Company.
The Company hopes to finalize lease negotiations and documentation
during the Spring of 1998 and expects to pattern the Tower project after New
York Skyride, but with a uniquely Australian theme. If negotiations are
successfully concluded in the Spring of 1998, the Company anticipates that it
will open its "Sydney Skyride" during the Winter of 1999 at an anticipated cost
of approximately $6 million. The previous sentence is considered a
forward-looking statement and is based on estimates by the Company that include
assumptions with respect to availability of funding and seasonal construction
issues, either or both of which may affect the proposed opening of a particular
site. For example, unavailability of adequate funding will result in delays in
commencement or suspension of construction. Additionally, construction may also
be hampered by adverse weather conditions in the winter months, as well as
increases in prices for raw materials and equipment, strikes, work-stoppages,
unanticipated events and regional, national and international economic trends.
Accordingly, there can be no assurances that the Company will be able to open
such facility as anticipated or for the anticipated cost. Additionally, there
can be no assurance 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 this
project and complete construction of the "Sydney Skyride" by the date
anticipated, if at all.
The Company intends to use the expertise and experience which it gained
from the operation of New York Skyride and XS New York 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 able to develop any
additional attractions, or if developed, that such attractions will be
successful.
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 attraction to be
located in the Sydney Skyride and expects to employ similar advertising and
promotional programs throughout such local areas and surrounding regions.
RESULTS OF OPERATIONS
REVENUES. Revenues generated during the three and six months ended
December 31, 1997 aggregated $2,805,000 and $5,941,000, respectively as compared
to $1,749,000 and $3,786,000 respectively for the three and six months ended
December 31, 1996. The increase in revenue for the three and six months ended
December 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 $1,382,000 and $2,645,000 during the three and
six months ended December 31, 1997.
Management expects to continue to supplement its primary revenue stream
from ticket sales for New York Skyride and game revenue at XS New York by
soliciting corporate sponsorships from a number of key consumer
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product companies. During both the three and six month periods ended December
31, 1997 the Company earned approximately $88,000 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.
OPERATING EXPENSES. Operating expenses incurred during the three and six
months ended December 31, 1997, aggregated $4,086,000 and $7,341,000 compared to
$2,398,000 and $3,985,000 for the three and six months ended December 31, 1996.
The increase is due in part to an increase in overhead at the New York Skyride
from $1,301,000 and $2,742,000 for the three and six months ended December 31,
1996, to approximately $1,460,000 and $3,309,000 for the three and six months
ended December 31, 1997. Additionally, due to the opening of the Company's new
attraction at Times Square there were additional operating expenses of
$1,440,000 for the three months ended December 31, 1997. Additionally, as a
result of defaults on the Woodfield Mall lease, the Company incurred expenses
during the quarter ended December 31, 1997 relating to this facility aggregating
approximately $660,000. These costs included rent accrued during the period as
well as the write-off of all assets acquired relating to the facility. Also,
included in operating expenses during the quarter ended December 31, 1997 is
approximately $120,000 relating to the proposed warrant exchange offer, which
was terminated on November 4, 1997, and approximately $80,000 in accrued rental
expense relating to the additional space in the Empire State Building.
NET INCOME/(LOSS) AND EARNINGS/(LOSS) PER SHARE. Basic and diluted net
income/(loss) and earnings/(loss) per share available to common stockholders
BEFORE deferred taxes were ($1,487,000) and ($.89) and ($1,826,000) and ($1.09)
for the three and six months ended December 31, 1997 as compared to ($741,000)
and ($.42) and (437,000) and ($.24) for the three and six months ended December
31, 1996. The net loss for the quarter ended December 31, 1997 included a loss
of approximately ($563,000) related to XS New York (see "Operating Expenses"
above), a loss of approximately ($248,000) from New York Skyride, and a loss of
approximately ($676,000) related to certain start-up costs and writeoffs in
connection with the Company's Woodfield Mall and proposed Australia sites.
During the quarter ended December 31, 1996, New York Skyride operations
generated income of approximately $60,000 with $229,000 in deferred tax benefit
realized, offset, in part, by start-up costs of approximately $550,000 related
to XS New York.
As a result of operating loss carryforwards from prior years, the
Company recognized a net deferred tax benefit of $229,000 or $.13 per share,
during the quarter ended December 31, 1996 which was offset by a provision for
certain state and local income taxes of ($20,000) or ($.01) per share. During
the quarter ended December 31, 1997 there was a provision for certain state and
local taxes on capital aggregating $12,000 with no benefit recognized for net
operating loss carryforwards.
WORKING CAPITAL. Working capital (deficiency) at December 31, 1997, was
approximately ($4,920,000) compared to a working capital (deficiency) of
approximately ($182,000) at December 31, 1996. The reduction in working capital
is primarily the result of the XS New York buildout of approximately $7,724,000,
the operating loss incurred during the past six month period of ($1,826,000),
deferred project, leasing and financing costs aggregating $932,000 related to
the Company's capital investments in XS New York and Sidney Skyride and 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
14
<PAGE>
determine in good faith, in their sole discretion, that such action is
reasonably necessary for the protection of their 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 of December 31, 1997, the Company had a working capital (deficiency)
of approximately ($4,920,000) compared to working capital (deficiency) of
($182,000) at December 31, 1996 which was due primarily to costs incurred in
connection with the construction and opening of XS New York and losses incurred
from operations. Additionally, as a result of defaults on the Woodfield Mall
lease, the Company incurred expenses during the quarter ended December 31, 1997
relating to this facility aggregating approximately $660,000. These costs
included rent accrued during the period as well as the write-off of all assets
acquired relating to the facility. Also, included in operating expenses during
the quarter ended December 31, 1997 is approximately $120,000 relating to the
proposed warrant exchange offer, which was terminated on November 4, 1997, and
approximately $80,000 in rental expense relating to the additional space in the
Empire State Building which the Company has yet to make a decision as to its
ultimate use. Since inception, the Company spent approximately $6,050,000
related to capital expenditures with respect to New York Skyride and
approximately $7,819,000 related to capital expenditures and leasing costs with
respect to the XS New York Times Square project. Additionally, the Company had
expenditures of approximately $362,000 for security deposits and financing costs
associated with the XS New York project.
The Company is currently involved in a dispute with a subcontractor
regarding amounts billed for work allegedly performed in connection with the XS
New York 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. 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 XS New York, the Company
incurred capital expenditures and leasing costs of approximately $7,819,000
consisting of $890,000 in leasing, design and consulting fees, $5,143,000 in
construction and theming, $253,000 for signage and approximately $1,598,000 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.
The Company entered into a revenue-sharing arrangement with its primary
equipment supplier of the games and attractions at XS New York. Under the prior
arrangement the Company was obligated to pay 40% of revenues from such equipment
to the supplier. The Company did not anticipate that the machines installed by
such supplier would account for such a significant portion of the Company's
revenues from XS New York. The new revenue-sharing arrangement, which was
renegotiated as of November 4, 1997, requires the Company to pay 14% of revenues
(as defined in the Agreement) to such equipment supplier. In connection with
such revised revenue-sharing agreement and the forgiveness through October 12,
1997 of all amounts owed by the Company to such equipment supplier (which
aggregated approximately $427,000), the Company agreed to sell the "XS"
trademarks and related intellectual property rights to the equipment supplier.
The Company, pursuant to a three-year renewable license agreement, can continue
to use the "XS" trademarks and related concepts at its Times Square location.
On December 20, 1996, the Company entered into a Senior Credit Agreement
(the "Senior Credit Agreement") with Prospect Street and Bank of New York, as
Trustee for the Employees Retirement Plan of the Brooklyn Union Gas Company
("BUG"), 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 five (5) years from
15
<PAGE>
the date of issuance. The Senior Credit Agreement was subsequently amended to
increase the amount of the subordinated debt to $4,450,000 and to provide for
the inclusion of additional lenders. Of such increased amount $2,500,000 was
received by the Company from BUG and a related pension fund and $1,950,000 was
received by the Company from Prospect Street and its affiliates. In connection
with the Senior Credit Agreement, BUG and its related pension fund received
warrants to purchase up to an aggregate of 243,904 shares of Common Stock and
Prospect Street and its affiliates received warrants to purchase up to an
aggregate of 190,242 shares of Common Stock, each exercisable and expiring at
various dates from February 1999 through December 31, 2007 at various exercise
prices ranging from $4.25 to $7.91 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 demand loan of $1,500,000, at an annual interest
rate of 14%, which loan was exchanged for a portion of the subordinated debt
under the Senior Credit Agreement. During June 1997, and December 1997 the
Company received two additional loans each in the principal amount of $500,000
from one of its institutional lenders.
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.
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 November
1997, the payment term was modified to provide for an accelerated payback over
36 months from the date of issuance.
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.
During the six month period ended December 31, 1997, the president of
the Company agreed to refund $750,000 of compensation received during the fiscal
year in consideration of execution of an employment agreement.
As a result of construction delays due to the lack of sufficient
funding, the Company was not be able to commence operation of the Woodfield Mall
site on the date required in the lease. The Company received notice on December
22, 1997 that the landlord had re-entered the premises occupied by the Company
as a result of certain defaults and has declared such lease terminated. The
Company is currently in negotiations with the landlord to arrive at a settlement
in connection with the lease termination. Management believes, based on current
negotiations, that such settlement will not have a material impact on the
Company's financial condition or results of operations.
The Company estimates the capital expenditures required to develop the
Sydney Skyride facility will be approximately $6,000,000. The Company expects to
incur losses during the initial years of operation of each new site primarily as
a result of start-up expenses and costs associated with commencement of
operations. The previous sentences are considered forward-looking statements and
are based on estimates by the Company that include the construction of the
facility, equipment hardware and software, and design and theming costs, which
estimates are each subject to, and may be increased by, construction delays,
increased prices for raw materials and equipment,
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<PAGE>
architectural redesigns, strikes, and work-stoppages, unanticipated events and
regional, national and international economic trends. In order to develop new
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.
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 growth
strategy.
The Company is currently seeking alternative sources of financing to
satisfy its capital requirements for the foreseeable future. On December 10,
1997 the Company signed a letter of intent with an investment banking firm with
respect to the sale of securities or other financing transaction, which it hopes
will be consummated during the quarter ended June 30, 1998. The purpose of the
proposed offering or financing transaction is to raise needed equity capital to
assist the Company in satisfying its financial obligations and to provide
capital for expansion. There can be no assurance, however, that this proposed
offering will be consummated on terms favorable to the Company or at all. In the
event the Company does not receive adequate financing in the near term, of which
there can be no assurance, the Company will be forced to abandon certain of its
proposed projects, possibly curtail current operations, or be forced to sell
some or a significant portion of its assets in order to satisfy its obligations.
The Company's independent auditors have included an explanatory
paragraph in the Company's Annual Report on Form 10-KSB for the year ended June
30, 1997 to the effect that certain matters raise substantial doubt about the
Company's ability to continue as a going concern, which is contingent upon,
among other things, the Company's ability to secure financing and attain
profitable operations.
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.
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. 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 23, 1997 the Company filed an action in the Supreme Court
of the State of New York, County of New York, against Empire State Building
Company, Empire State Building Associates, Helmsley-Spear, Inc. et.al., seeking,
among other things, injunctive relief to prohibit the ESBCo from terminating the
Company's Leases and the License Agreement relating to the New York Skyride and
also seeking damages from the ESBCo. The basis for the Company's claims are,
among other things, the lack of cooperation by the ESBCo and its staff in
violation of the Leases and the License Agreement, as well as bad faith, fraud
and self-dealing on the part of the ESBCo and certain members of its management
staff. The Company has received a temporary restraining order, among other
things, prohibiting the ESBCo from terminating or canceling the Leases and the
License Agreement and restraining the ESBCo from interfering with the Company's
business or commencing any proceedings with respect to the Leases and the
License Agreement. A hearing with respect to the temporary restraining order was
held on February 6, 1998. The Company is awaiting a decision by the Judge in
this proceeding with respect to the Company's motion for a preliminary
injuction, which decision is expected in the next few weeks. Pending receipt of
such decision, the temporary restraining order will continue. The Company's
other claims with respect to damages will proceed in the normal course
irrespective of the outcome of the hearing on February 6, 1998.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The following summarizes the votes at the annual meeting of the Company
Shareholders held on November 26, 1997:
Matter For Withheld
1. Election of Directors:
Zalman Silber 6,806,064 7,785
Jay Coleman 6,806,064 7,785
David Shamilzadeh 6,806,064 7,785
Neil S. Belloff 6,806,064 7,785
John F. Barry, III 6,806,064 7,785
Ronald Celmer 6,806,064 7,785
2. Ratification of selection of Richard A. Eisner & Company, LLP as
independent auditors for the 1997 fiscal year.
For Against Abstentions Broker Non-Votes
6,806,549 3,300 1,000 0
18
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) The following Current Reports have been filed during the period:
1. November 24, 1997 relating to an extension of the
time to cure alleged lease defaults under certain ESB
leases until December 12, 1997.
2. December 11, 1997 relating to an extension of time to
cure alleged lease defaults under certain ESB leases
until December 19, 1997.
3. December 18, 1997 relating to an extension of time to
cure alleged lease defaults under certain ESB leases
until December 24, 1997.
4. December 24, 1997 relating to the Company's
commencement of a lawsuit against the ESBCo, the
receipt of an injunctive relief with respect thereto,
and notification of default at the Woodfield Mall
premises.
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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 and Chief
Financial Officer (Principal Financial
and Accounting Officer)
Dated: February ___, 1998
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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)
21
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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)
22
<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.(12)
10.39 Senior Promissory Note dated March 14, 1997 between the
Company and Prospect Street NYC Co-Investment Fund, L.P.(12)
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.(12)
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.(12)
23
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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.(12)
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.(12)
10.44 Purchase Agreement, dated as of November 4, 1997, by and
among the Company, Skyline Virtual Reality, Inc. ("SVR") and
Namco Cybertainment, Inc. ("Namco"). (13)
10.45 Trademark License Agreement, dated as of November 4, 1997,
between SVR and Namco. (13)
10.46 Revenue-Sharing Agreement, dated as of November 4, 1997, by
and among the Company, SVR and Namco. (13)
10.47 Employment Agreement dated as of December 1, 1997 between
the Company and Zalman Silber.
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.
24
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION
(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 forthe quarter ended December 31, 1996.
(12) Previously filed as an exhibit to the Company's quarterly
report on Form 10-QSB forthe quarter ended March 31, 1997.
(13) Previously filed as an exhibit to the Company's quarterly
report on Form 10-QSB for the quarter ended September 30,
1997 (as filed with the Commission on November 13, 1997).
25
<PAGE>
EXHIBIT 10.47
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of December 1, 1997 between
Skyline Multimedia Entertainment, Inc., a New York corporation (the "Company"),
and Zalman Silber (the "Executive").
ARTICLE I
EMPLOYMENT
The Company hereby employs Executive, and Executive accepts
employment with the Company, upon the following terms and conditions:
1.1 (a) Employment. The Company hereby employs Executive, and Executive
agrees to serve, as the President and Chief Executive Officer of the Company and
its subsidiaries (the "Subsidiaries") during the term of this Agreement. Subject
to the Board of Directors of the Company and the Board of Directors of each
Subsidiary, the Executive shall actively manage, and have responsibility for and
supervision over, the business activities and affairs of the Company and the
Subsidiaries, and he shall manage, supervise and direct its and their officers,
employees and agents. The Executive agrees to devote as much business time and
attention and best efforts to the affairs of the Company and the Subsidiaries
during the term of this Agreement as is reasonably necessary to fulfill
Executive's responsibilities hereunder.
(b) Board of Directors. The Company agrees that during the term of
this Agreement it will use its best efforts to cause the Executive to be
nominated and elected to the Company's Board of Directors, and will vote its
stock to elect the Executive to the Board of Directors of each Subsidiary.
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1.2 Term. The Employment of the Executive by the Company under the
terms and conditions of this Agreement will commence as of December 1, 1997 and
continue until December 31, 1998, and shall be automatically renewed for
successive one year terms through December 31, 2000 (the "Term", and each one
year renewal, a "Renewal Term") upon the achievement of certain performance
goals for each such calendar year as established by the Board of Directors,
unless terminated sooner in accordance with the provisions of Article IV;
provided, however, that this Agreement shall be automatically renewed for
successive one year terms in the event such performance goals are not achieved
and the Board of Directors does not provide Executive with notice of termination
of this Agreement pursuant to Section 4.1(c)(vi) hereunder within ten (10) days
of determination of whether or not such performance goals have been achieved.
ARTICLE II
COMPENSATION
2.1 (a) Annual Salary. During the Term the Company shall pay to the
Executive an annual salary of $275,000 (the "Base Salary") payable in equal
installments every two weeks. Executive shall be entitled to a salary increase
at the sole discretion of the Board of Directors.
(b) Bonus. Executive shall be entitled to receive an annual bonus
at the sole discretion of the Board of Directors.
(c) Performance Bonus. In additional to any other compensation to be
received pursuant to this Agreement, Executive shall be entitled to receive,
commencing with the 1998 calendar year, a performance bonus (the "Performance
Bonus") based on satisfying the criteria, and in the amounts, set forth in the
Performance Bonus Award established by the Board of Directors or any
compensation committee thereof for each calendar year which ends during the Term
(or a partial
2
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calendar year in the case of death or a Permanent Disability determination). The
Performance Bonus shall be paid in cash periodically as the Board directs, but
no less frequently than annually promptly after the close of each calendar year.
2.2 Reimbursement of Expenses. The Executive shall be entitled to
receive prompt reimbursement of all reasonable expenses incurred by the
Executive in performing services hereunder, including all expenses of travel,
entertainment and living expenses while away from home on business at the
request of, or in the service of, the Company or any Subsidiary, provided that
such expenses are incurred and accounted for in accordance with the policies and
procedures established by the Company.
2.3 Automobile. At the Executive's option, the Company shall pay
directly, or shall reimburse the Executive, for the full cost of leasing an
automobile selected by the Executive. The Company shall also pay directly, or
reimburse the Executive, for all reasonable costs and expenses incurred by the
Executive in connection with the maintenance, insurance and operation of the
automobile.
2.4 Benefits. The Company shall pay to Executive the annual cost of a
disability insurance policy which provides for payments equal to 75% of Base
Salary during the term of disability, with payments commencing two months after
the commencement of the disability. The Executive shall be entitled to
participate in and be covered by all health, insurance, pension and other
employee plans and benefits established by the Company (collectively referred to
herein as the "Company Benefit Plans") for its executive employees generally,
subject to meeting applicable eligibility requirements. Additionally, the
Company shall reimburse Executive for the annual cost of a life insurance policy
on the life of Executive which provides for payment of an aggregate of one
million dollars to Executive's designated beneficiaries.
3
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2.5 Vacations and Holidays. During the Term, the Executive shall be
entitled to an annual vacation leave of a minimum of four weeks at full pay. The
Executive shall also be entitled to such holidays as are established by the
Company for all employees and such other religious holidays as is customary
pursuant to Executive's religious practice.
ARTICLE III
CONFIDENTIALITY AND NONDISCLOSURE
3.1 Confidentiality. The Executive will not during his employment by
the Company or thereafter at any time disclose, directly or indirectly, to any
person or entity or use, or permit the use of, any trade secrets or confidential
information relating to the Company or any Subsidiary (the "Confidential
Information") except as required by law. "Confidential Information" shall
include the terms of any lease for space, the terms of any agreement for the
development of any simulator, film, hardware, software or technology related
thereto, the terms of any license agreement relating to any of the foregoing,
and all information denominated as "Confidential" and made available only on a
restricted basis; provided however, that "Confidential Information" shall not
include information which comes into the public domain through no fault of
Executive or which Executive obtains after the termination of employment with
the Company or otherwise from a third party who, to the knowledge of Executive,
has the right to disclose such information.
3.2 Return of Company Material. Executive shall promptly deliver to the
Company on termination of Executive's employment with the Company, for whatever
the reason, or at any time the Company may so request, all Company or Subsidiary
memoranda, notes, records, reports, manuals, drawings, computer software, and
all documents containing Confidential Information belonging to the Company,
including all copies of such materials which Executive may then possess or have
under Executive's control.
4
<PAGE>
3.3 Non-Competition. Subject to Section 4.3(c) of this Agreement,
during the Term and any Renewal Term and for a two-year period thereafter (the
"Non-Compete Period") the Executive will not, directly or indirectly, without
the consent of the Board of Directors of the Company: (i) own, manage, operate,
join, control, or participate in or be connected with, as an officer, employee
partner, stockholder, director, adviser, consultant, or agent (whether paid or
unpaid), any business, which is at the time engaged in any activities which
compete with the business of the Company or any Subsidiary, including, but not
limited to, (a) engaging in the food or souvenir concession business at the same
or adjacent locations to where the Company or any Subsidiary conducts business,
and (b) leasing space or entering into licensing arrangements to provide
simulated rides, virtual reality arcade games or theater-based attractions,
where tickets are sold to the public, at the same or adjacent locations to where
the Company or any Subsidiary conducts business; the foregoing provision being
also intended to prohibit Executive from acquiring or holding in excess of 5% of
any issue of stock or securities of any Company which has any securities listed
on a national securities exchange or quoted in the daily listing of
over-the-counter market securities; (ii) utilize any employees of the Company to
perform any service which conflicts with their full-time employment with the
Company or otherwise take actions which result in the termination of any
employee's relationship with the Company; provided, however, that
notwithstanding any other provision contained in this Agreement, in the event of
termination of Executive for any reason, the restrictions contained in this
Section 3.3 shall be effective only for so long as the Company continues to pay
Executive his then monthly base Salary in advance during the Non-Compete Period.
3.4 Right to Injunctive and Equitable Relief. As a result of
Executive's position as founder and a principal shareholder of the Company,
Executive's obligations not to disclose or use Confidential Information and to
refrain from the activities described in this Article III are of a special
5
<PAGE>
and unique character which gives them a peculiar value, and which is supported
by valuable consideration. The Company cannot be reasonably or adequately
compensated in damages in an action at law in the event Executive breaches such
obligations. Therefore, the Executive expressly agrees that the Company shall be
entitled to injunctive and other equitable relief without bond or other security
in the event of such breach in addition to any other rights or remedies which
the Company may possess. Furthermore, the obligations of Executive and the
rights and remedies of the Company under this Article III are cumulative and in
addition to, and not in lieu of, any obligations, rights, or remedies created by
applicable law relating to misappropriation or theft of trade secrets or
confidential information.
ARTICLE IV
TERMINATION
4.1 Termination by the Company. The Board of Directors may terminate
the Executive's employment hereunder as follows:
(a) Upon the death of Executive, whereupon this Agreement shall
immediately terminate;
(b) Upon a determination of Permanent Disability; "Permanent
Disability" shall mean a physical or mental incapacity as a result of which
Executive becomes totally unable to continue the performance of his duties
hereunder for a period of 180 consecutive days or an aggregate of 270 days in
any 24-month period. A determination of Permanent Disability shall be subject to
the certification of a qualified medical doctor agreed to by the Company and
Executive or, in the event of Executive's incapacity to designate a doctor,
Executive's legal representative. In the absence of agreement between the
Company and Executive, each party shall nominate a qualified medical doctor
6
<PAGE>
and the two doctors so nominated shall select a third doctor, who shall make the
determination as to the occurrence and continuance of a Permanent Disability; or
(c) For cause. "Cause" shall mean only the following:
(i) the willful and, after notice and an opportunity to cure,
continued failure by Executive to substantially perform his duties hereunder
(other than such failure resulting from Executive's incapacity due to physical
or mental illness);
(ii) willful and, after notice and an opportunity to cure,
continued misconduct by Executive (which includes a willful breach of a material
term of this Agreement by Executive in the performance of his duties hereunder);
(iii) conviction of a felony relating to the performance of
Executive's duties to the Company;
(iv) willful theft from the Company;
(v) a willful violation of any law, rule or regulation, or the
imposition of a final order issued by any regulatory authority against the
Company, which, in any event, prohibits Executive from holding an executive
position with the Company or any Subsidiary; or
(vi) the failure to achieve the performance goals for any
calendar year of the Term or Renewal Term as set forth in the Performance Bonus
Award.
For purposes of this Agreement, no act, or failure to act, on
Executive's part shall be considered "willful" unless done, or omitted to be
done, by Executive in bad faith and without a reasonable belief that such action
or omission by Executive was in the best interests of the Company, and no
termination by the Company for "Cause" shall be effective unless Executive shall
have been given written notice of the breaches of this Section 4.1(c) and a
period of 60 days within which to cure any such breach, or if not curable,
Executive shall be given, within 30 days after the giving of
7
<PAGE>
such notice of breach of this Section 4.1(c) by the Company, an opportunity to
make a presentation to the Board at a meeting of the Board. Following such
meeting, the Board shall determine whether to terminate Executive's services for
"Cause" pursuant to this Section 4.1(c) and shall notify Executive of its
decision.
4.2 Termination by Executive for Good Reason. Executive may terminate
his employment hereunder for Good Reason. For purposes of this Agreement, the
term "Good Reason" shall mean and shall be deemed to exist if, without the prior
written consent or written waiver of Executive, (i) Executive is assigned duties
or responsibilities that are inconsistent in any material respect with the scope
of the duties or responsibilities associated with his titles or position, as set
forth in this Agreement (or which he may receive during the Term), (ii)
Executive's duties or responsibilities are significantly reduced, except with
respect to any corporate action initiated or recommended by Executive and
approved by the Board, (iii) the Company fails to provide Executive the
Performance Bonus as required under this Agreement and the Performance Bonus
Award, (iv) the Company fails to perform substantially any material term or
provision of this Agreement, (v) Executive's office location is relocated to one
that is more than ten (10) miles from the location at which Executive was based
immediately prior to the relocation, (vi) the Company fails to obtain the full
assumption of this Agreement by a successor entity (whether as a result of
merger, reorganization or otherwise), or (vii) Executive is not elected to the
Board or is not reelected thereto or is forced to resign therefrom for any
reason not constituting Cause. Termination by Executive pursuant to this Section
4.2 shall be effective on the date that Executive first provides written notice
to the Board of the events specified in this Section 4.2(i-vii).
4.3 Severance Payments.
8
<PAGE>
(a) Termination for Cause. In the event of termination pursuant to
Section 4.1(c), Executive shall receive no severance, and shall be entitled to
receive, in lieu of any other payments or benefits, his accrued but unpaid
salary at the rate provided in Section 2.1(a) (as increased from time to time by
the Board), plus any amounts due but unpaid for any prior completed fiscal or
calendar year including any Performance Bonus for such prior calendar year and
any discretionary bonuses for any prior calendar or fiscal year, and any
reimbursable expenses incurred prior to the date of termination (collectively,
the "Accrued Obligations").
(b) Termination as a Result of Death. In the event of termination
pursuant to Section 4.1(a), Executive's estate or beneficiaries, as the case may
be, shall be entitled to receive, in addition to any other payments or benefits
hereunder, (i) the proceeds from any insurance policies paid for by the Company
in favor of Executive's estate or beneficiaries, (ii) any Accrued Obligations,
(iii) all unpaid salary, whether or not accrued, remaining through the final
Renewal Term, and (iv) an amount equal to $900,000 offset by any Performance
Bonus amounts received under this Agreement. Such amounts shall be paid promptly
in a lump sum in cash. In addition, all options that are unvested at the date of
termination shall vest, and the restriction on any options or stock held by
Executive shall terminate.
(c) Termination Without Cause or For Good Reason. In the event of
termination by the Company without Cause or by Executive for Good Reason,
Executive shall be entitled to receive (i) Accrued Obligations through the date
of termination, plus (ii) all unpaid salary, whether or not accrued, remaining
through the final Renewal Term, plus (iii) an amount equal to $900,000 offset by
any Performance Bonus amounts received under this Agreement (each of the amounts
in subclauses (i) through (iii) payable in a lump sum in cash within 30 days
after the date of termination, (iv) continuation, at the Company's expense, of
any group health (which may be
9
<PAGE>
provided by payment of COBRA continuation coverage premiums), life insurance and
long-term disability coverages at the levels in effect on Executive's date of
termination for a period of eighteen months following such date of termination
(or Executive shall receive from the Company the economic equivalent of such
coverages in cash), and (v) all options that are unvested at the date of
termination shall vest, and the restriction on any options or stock held by
Executive shall terminate. Additionally, in the event of termination of
Executive by the Company without Cause or by Executive for Good Reason, the
restrictions contained in Section 3.3 of this Agreement shall terminate as of
such termination date and be of no further force and effect for any purpose.
(d) Voluntary Termination. If Executive shall voluntarily resign
for other than Good Reason, he shall be entitled only to Accrued Obligations
through the effective date of such resignation or voluntary termination, and
that any such amounts shall be promptly paid in a lump sum in cash.
(e) Termination due to Permanent Disability. If Executive's
employment hereunder is terminated as a result of Permanent Disability, in lieu
of any other payments or benefits (other than any such disability benefits he
may receive), he shall be paid a single lump sum in cash within thirty (30) days
of the date of his termination, an amount equal to (i) all Accrued Obligations,
(ii) all unpaid salary, whether or not accrued, remaining through the Final
Renewal Term, plus (iii) an amount equal to $900,000 offset by any Performance
Bonus amounts received under this Agreement. In addition the unvested portion of
any options held by Executive on such date shall vest, and any restriction on
any options or stock held by Executive shall terminate.
(f) General Release. Prior to Executive's receipt of any severance
payment under this Section 4.3, Executive shall issue a general release to the
Company in such form as the Company may reasonably require, which release shall
extinguish all actual or potential claims or causes of
10
<PAGE>
action he has, may have had, or hereafter may have against the Company. The
Company shall simultaneously provide a release to Executive in the form mutatis
mutandis given to the Company by Executive.
(g) Other Payments Upon Termination. If notice of termination of
Executive is given by Executive or the Company, Executive shall continue to
receive his Base Salary (as increased from time to time by the Board), bonus
payments and benefits as provided in Article II until the date of termination,
and shall also be entitled to reimbursement for reimbursable expenses as set
forth in Section 2.2.
(h) Company's Option to Terminate Executive after Notice of
Termination. The Company, or, if notice is given by the Company, the Executive,
may, at any time during the period after notice of termination by Executive or
the Company and before the date of termination specified in the notice given in
accordance with Section 4.1 or Section 4.2, as the case may be (the "Notice
Period"), elect to terminate this Agreement and Executive's employment hereunder
immediately. In such event the Company shall pay Executive an amount equal to
all Accrued Obligations he would have received or been entitled to for the
duration of the Notice Period at the rate provided in Article II. Such amounts
shall be paid within thirty (30) days after the election pursuant to this
Section 4.3(h). Nothing contained in this Section 4.3(h) shall be deemed to
reduce in any way any amounts due Executive pursuant to any other term or
provision of this Article IV.
ARTICLE V
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY
5.1 Merger etc.; Change of Control
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(a) In the event of a future disposition of the properties and
business of the Company substantially as an entirety by merger, consolidation,
sale of assets, reorganization or otherwise, then the Company may elect:
(i) to assign this Agreement and all of its rights and
obligations hereunder to the acquiring, surviving or reorganized entity;
provided that such entity shall assume in writing all of the obligations of the
Company hereunder; and provided further, that the Company (in the event and so
long as it remains in existence) shall remain liable for the performance of its
obligations hereunder in the event of a breach of this Agreement by the
acquiring, surviving or reorganized entity; or
(ii) in addition to its other rights of termination, to
terminate this Agreement upon at least 90 days' written notice and by paying
Executive an amount equal to (a) all Accrued Obligations through the date of
termination, (b) all unpaid salary, whether or not accrued, remaining through
the final Renewal Term, plus (c) an amount equal to $900,000 offset by any
Performance Bonus amounts received under this Agreement, all such amounts
pursuant to subclauses (a) through (c) shall be payable in a single lump sum
within 30 days after the date of termination. In addition, upon the date of
termination hereunder, (A) all options which the Executive then holds which are
not vested shall immediately vest, (B) the restrictions on any stock held by
Executive shall terminate, (C) Executive, at the Company's expense, shall
continue to be a participant in any group health (which may be provided by
payment of the COBRA continuation coverage premiums), life insurance and
long-term disability plans or programs maintained by the Company (or shall
receive from the Company the economic equivalent of such coverages in cash) at
the level in effect on Executive's date of termination for a period of eighteen
months following his date of termination.
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(b) In the event of a change of control (a "Change of Control")
which is not agreed to in writing by Executive (other than a Change of Control
pursuant to contractual obligations existing on the date hereof to which the
Company or Executive are bound), Executive may terminate this Agreement, in
which event the Company shall pay Executive, upon Executive's execution of a
general release of claims in lieu of any other payments or benefits, an amount
equal to (i) all Accrued Obligations through the date of termination, (ii) all
unpaid salary, whether or not accrued, remaining through the final Renewal Term,
plus (iii) an amount equal to $900,000 offset by any Performance Bonus amounts
received under this Agreement, all such amount pursuant to subclauses (i)
through (iii) shall be paid in a single lump sum within 30 days after the date
of termination. In addition, upon the date of termination hereunder, (A) all
options which Executive then holds which are not vested shall immediately vest,
(B) the restrictions on any stock held by Executive shall terminate and, (C)
Executive, at the Company's expense, shall continue to be a participant in any
group health (which may be provided by payment of COBRA continuation coverage
premiums), life insurance and long-term disability plans or programs maintained
by the Company (or shall receive from the Company the economic equivalent of
such coverages in cash) at the level in effect on Executive's date of
termination for a period of eighteen months following his date of termination.
(c) For purposes of this Agreement, "Change of Control" means any
of the following:
(i) the acquisition by any "person" (as such term is used in
Section 13(d) or 14(d) of the Securities Exchange Act of 1934) of 30% or more of
the voting power of securities of the Company (or securities convertible or
exchangeable into voting securities of the Company or beneficially owned by such
person) or the acquisition by an existing stockholder of an additional 5% of the
voting power of securities of the Company (or securities convertible or
exchangeable into
13
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voting securities of the Company or beneficially owned by such person) over and
above that owned by such person as of the date hereof; excluding, however, the
following: (x) any acquisition of the Company's securities by the Company or a
Subsidiary of the Company, (y) any acquisition of the Company's securities by an
employee benefit plan (or related trust) sponsored or maintained by the Company
or a Subsidiary of the Company, or (z) any acquisition by an existing
stockholder of the Company as of the date hereof pursuant to a contractual
arrangement existing as of the date hereof and by which the Company or Executive
is a party and bound thereby; or
(ii) any merger, sale of substantially all of the assets, or
reorganization, of the Company, under circumstances where the holders of 20% or
more of the equity securities of the surviving, acquiring or reorganized entity
of such transaction were not holders of 20% or more of the Common Stock of the
Company immediately prior to the consummation of such transaction; or
(iii) any change in the composition of the Board of Directors
of the Company not approved by a majority of the Board prior to such change,
other than pursuant to a contractual arrangement existing as of the date hereof
and by which the Company or Executive is a party and bound thereby; or
(iv) the addition of more than two additional directors to the
Board of Directors or a change in 1/3 of the current members of the Board of
Directors, in either case, without the written consent of Executive, other than
pursuant to a contractual arrangement existing as of the date hereof and by
which the Company or Executive is a party and bound thereby.
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ARTICLE VI
GENERAL PROVISIONS
6.1 Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt required, postage prepaid, as follows:
If to the Company:
Skyline Multimedia Entertainment, Inc.
350 Fifth Avenue, Suite 612
New York, New York 10118
Attn: Chairman, Compensation Committee of the Board of Directors
If to Executive:
Zalman Silber
1259 56th Street
Brooklyn, New York 11219
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
6.2 No waivers. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by Executive and the Company. No waiver by either party hereto at
any time or any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver or similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
6.3 No Mitigation; No Offset. In the event of Executive's termination
of employment, he shall be under no obligation to seek other employment and
there shall be no offset against any amounts due Executive hereunder on account
of any remuneration Executive may obtain from any
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subsequent employment. Any amounts due Executive hereunder are in the nature of
liquidated damages, and not in the nature of a penalty.
6.4 Legal Fees. The Company shall promptly pay or reimburse the
Executive for his reasonable costs of enforcing this Agreement, including,
specifically, the fees and expenses of his counsel.
6.5 Arbitration. Any and all disputes or controversies arising out of
or relating to this Agreement, other than injunctive relief pursuant to Section
3.4, shall be resolved by arbitration at the American Arbitration Association at
its New York City offices before a panel of three arbitrators under the then
existing rules and regulations of the American Arbitration Association. The
parties agree that in any such arbitration, the arbitrators shall not have the
power to reform or modify this Agreement in any way and to that extent their
powers are so limited. The determination of the arbitrators shall be final and
binding on the parties hereto and judgment on it may be entered in any court of
competent jurisdiction. Except as required by law, neither the Company nor
Executive shall issue any press release or make any statement which is
reasonably foreseeable to become public with respect to any arbitration or
dispute between the parties without receiving the prior written consent of the
other party to the content of such press release or statement. In the event
Executive prevails in such proceedings, as determined by the arbitrators, the
Company shall reimburse Executive for all expenses (including, without
limitation, reasonable legal fees and expenses) incurred by Executive in
connection with such proceeding or any other proceeding in which Executive
prevails in contesting or defending any claim or controversy arising out of or
relating to this Agreement. All such amounts shall be paid promptly, but in any
event within ten (10) days after Executive provides the Company with a statement
of such amounts to be recovered. In the event Executive does not prevail in such
proceedings, as determined by the arbitrators, each party hereto shall be
responsible for their own
16
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expenses (including, without limitation, legal fees and expenses) incurred in
connection with such proceedings.
6.6 D&O Insurance. The Company agrees to use its best efforts to obtain
and maintain a directors and officers liability insurance policy covering
Executive in an amount that is no less than the policy currently in effect for
senior executives or, if no such policy exists, a sufficient amount to provide
such indemnification, and to maintain such policy during the Term and any
Renewal Term (and for so long thereafter as is practicable in the circumstances,
taking into account the availability of such insurance).
6.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York without regard to its
Conflicts of Laws provisions.
6.8 Severability or Partial Invalidity. The invalidity or
unenforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
6.9 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
6.10 Entire Agreement. This Agreement constitutes the entire agreement
of the parties and supersedes all prior written or oral and all contemporaneous
oral agreements, understanding, and negotiations between the parties with
respect to the subject matter hereof. This Agreement is intended by the parties
as the final expression of their agreement with respect of such terms as are
included in this agreement and may not be contradicted by evidence of any prior
or contemporaneous agreement. The parties further intend that this Agreement
constitutes the complete
17
<PAGE>
and exclusive statements of its terms and that no extrinsic evidence may be
introduced in any judicial proceeding involving this Agreement.
6.11 Assignment. Subject to the provisions of Article V hereof, this
Agreement and the rights, duties and obligations hereunder may not be assigned
or delegated by any party without the prior written consent of the other party.
Any such assignment or delegation without the prior written consent of the other
party shall be void and be of no effect. Notwithstanding the foregoing
provisions of this Section 6.11, the Company may assign or delegate its rights,
duties and obligations hereunder to any person or entity which succeeds to all
or substantially all of the business of the Company through merger,
consolidation, reorganization, or other business combination or by acquisition
of all or substantially all of the assets of the Company; provided that such
person assumes the Company's obligations under this Agreement in accordance with
Section 5.1.
6.12 Beneficial Interests. This Agreement shall inure to the benefit of
and be enforceable by Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die while any amounts are still payable to him hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to Executive's devisee, legatee, or other designee,
if there be no such designee, to Executive's estate.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
A New York corporation
By: s/Steven Schwartz
------------------------------------
Steven Schwartz
Executive Vice President-Finance and
Chief Financial Officer
EXECUTIVE
s/Zalman Silber
------------------------------------
ZALMAN SILBER
19
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<PERIOD-END> DEC-31-1997
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