SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB/A
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999 Commission File No. 0-23396
Skyline Multimedia
Entertainment, Inc.
(Name of Small Business Issuer in Its Charter)
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New York 11-3182335
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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350 Fifth Avenue, New York, New York 10118
(Address of principal executive offices) (Zip Code)
(212) 564-2224
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act :
Units consisting of Common Stock, Class A Warrants and Class B Warrants
Common Stock, $.001 Par Value Per Share
Redeemable Class A Warrants
Redeemable Class B Warrants
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days: Yes X No :
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB/A or any amendment to
this Form 10-KSB/A. ?
The Company's revenues for its most recent fiscal year were $9,603,000.
The aggregate market value of the voting stock held by non-affiliates of
the Company was $130,565 as of October 12, 1999 based on the average bid and
asked price of $0.098 per share as of that date.
There were 2,095,000 shares of Common Stock, $.001 par value, outstanding
as of October 12, 1999. Additionally, there were 1,090,909 shares of Series A
Convertible Participating Preferred Stock, $.001 par value per share, and
960,000 shares of Class A Common Stock, $.001 par value, outstanding as of
October 12, 1999.
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PART I
Item 1. DESCRIPTION OF BUSINESS.
General
Skyline Multimedia Entertainment, Inc. (the "Company") is a holding company
incorporated under the laws of the State of New York on November 2, 1993, which
owns all of the outstanding stock of its operating subsidiaries, New York
Skyline, Inc. ("Skyline") and Skyline Virtual Reality, Inc. ("SVR"). The Company
is engaged in the development and operation of state-of-the-art simulator
attractions and high-technology and family entertainment at established tourist
sites in New York City. All references to the "Company" contained herein include
Skyline and SVR, except where specifically noted.
On December 22, 1994, the Company commenced operations of its first
attraction, New York Skyride, which is located in the Empire State Building in
New York City. New York Skyride is an exhilarating simulated "aerial tour" of
New York City in a futuristic "spacecopter". New York Skyride features two 40
passenger flight simulators and related computer-controlled film projection
technologies to provide visitors with a complete "New York" experience,
including an extensive pre-show area featuring interactive multimedia exhibits
depicting the various tourist sites and attractions in and around the New York
Metropolitan area, and culminating in a seven and a half minute aerial
"adventure" in and around New York City. Passengers will not only experience the
sensations of an actual aerial flight, but will also experience visual images
projected on screens within the simulator that envelop the viewer with a variety
of sights and sounds. New York Skyride is intended to provide visitors with a
sensation of taking a "once in a lifetime" aerial adventure around New York
City. The Company believes that New York Skyride is identified with the focal
point of the tourism industry in New York City and one of the world's most
famous "must-see" attractions.
On December 27, 1996, the Company commenced operations, through SVR, 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 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 that
are linked to the Internet. XS New York was opened on a preview basis until
March 20, 1997, the date of its official Grand Opening.
During December 1996, the Company had signed a letter of intent to develop
a simulator attraction, similar to New York Skyride, to be located at the base
of the tower above the Centrepoint Shopping Center that adjoins the world famous
Sydney Tower (the "Tower") in Sydney, Australia. However, the Company was not
successful in finalizing lease negotiations with the landlord of the Tower or
arranging for adequate financing for its "Sydney Skyride" project. The Company
is in the process of seeking to license or sell the Australian-themed film
footage taken by the Company. There can be no assurance that the Company will be
able to successfully license or sell such film to these investors or other
entertainment companies.
The Company's revenues are generated primarily from ticket sales for New
York Skyride and game revenue at XS New York, with additional revenues generated
from the sale of food, beverages and souvenir merchandise. The Company is also
seeking to enter into corporate sponsorship and advertising arrangements with
certain consumer product companies to provide additional revenues and marketing
exposure.
The Company's principal executive office is located at the Empire State
Building, 350 Fifth Avenue, New York, New York 10118 and its telephone number is
(212) 564-2224.
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The New York Skyride Experience
New York Skyride is an adventure that captures and builds upon the New York
City tourist experience. The Company believes that New York Skyride enhances a
visit to the Empire State Building and to New York City by providing an
exciting, bird's-eye view of the landmarks and sites that cannot be seen from
any other vantage point.
Visitors to New York Skyride are treated as first-class passengers on a
futuristic helicopter flight around New York City. Upon entering, guests are
directed to the pre-show heliport area (approximately 7,500 sq. ft.) where they
are introduced to multimedia displays designed and installed by certain of the
Company's prior sponsors. These displays depict major New York City tourist
attractions as well as providing informational and entertaining film clips. The
exhibits provide the visitor with their first feeling of participation in the
New York Skyride experience.
Following a preflight briefing about "spacecopter" travel passengers enter
into one of two spacecopters , which are 40 passenger computer-controlled flight
simulators. At the front of each simulator is a large 18' x 18' screen upon
which New York Skyride's super 35mm film is presented. The simulator also
contains an advanced 8-channel digital sound system, with 4 dual amplifiers, 400
watts per channel each (or 3,200 watts of total sound), to provide passengers
with an enhanced audio/visual experience.
Once the passengers are seated in the spacecopter, they begin a
seven-and-a-half minute simulated flight that treats them to a spectacular array
of New York City scenes and adventures. For example, the spacecopter crashes
into FAO Schwarz, the world's largest toy store, passes directly under the
Brooklyn Bridge, "dives" into a tunnel, crashes into the East River and has a
run-in with a New York City traffic cop, among other exciting adventures. The
spacecopter also visits many of New York City's other tourist attractions,
including Fifth Avenue, the World Trade Center Towers, Central Park, Times
Square and the Statue of Liberty. Since New York Skyride is intended to be a
family-oriented attraction, the film makes the Empire State Building the focal
point of the attraction, with a liftoff and landing taking place from atop the
Empire State Building, to appeal to the broadest audience and not just the most
adventurous thrill-seekers.
Once the spacecopter flight is complete, passengers exit the simulators and
proceed to the lobby and a beverage, food and souvenir concession area.
Passengers are able to purchase souvenirs of their visit to New York Skyride.
The XS New York Experience
XS New York is an interactive virtual reality entertainment center located
in the heart of Times Square in New York City. XS New York presents the latest
in entertainment technology, featuring cutting-edge virtual reality hardware and
software. Upon entering XS New York, guests are immersed in futuristic graphics,
lighting, audio and video treatments. Upon further inspection, guest find
interactive show action equipment and special effects areas that allow them to
experience the latest in virtual reality and similar technologies. Some of the
equipment offers competition between players while others provide exploratory
experiences. Several attractions include a 3-dimensional action and visual
presentation allowing guests to view their own activity, the activity of
competitors and the attractions' vital statistics on giant overhead monitors and
projection screens. Still other attractions can be programmed to function as
stand alone units or in conjunction with other players at other locations.
Tickets are purchased from a centrally located ticket area. Guests are also
invited to enjoy XS New York's "Cybercafe" which serves light food and beverages
while providing access to the World Wide Web and Internet from table-based PC
computer stations. Finally, guests can purchase "XS" related merchandise as well
as specialty souvenirs in XS New York's retail area.
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Simulator and Virtual Reality Technologies
The Company's motion simulator attractions utilize computer-controlled
aircraft flight simulators. Simex, Inc. (formerly Interactive Simulation, Inc.),
a Canadian company experienced in simulation technology, provided the
sophisticated computer hardware and software that coordinates the movements of
the simulator platform with the images projected on the screen. The range of
motion for the simulators is along six axes (that is, the simulators can create
up and down motions, right and left motions, angled motions to simulate turning
or banking while climbing or descending at varying degrees and a spin motion, or
some combination of the above). The movable platforms on which the simulators
rest and which move in synchronization with the film were developed by Moog,
Inc., a large defense contractor experienced in the adaptation of flight
simulator technology to the entertainment market.
A key component of the simulator technology is the "show control system",
which is a PC-based computer program that coordinates and manages the motion and
gyration of the simulator with the film and audio elements of the program. For
example, when the film image shows the spacecopter banking to the right, there
must be a precise, coordinated movement of the simulator in that direction to
both convince the passengers' senses that they are flying in a spacecopter and
prevent passenger disorientation. The speed of the film through the projection
system is faster than normal film, television or video footage, which enhances
the passengers' perception of motion and movement. The film is in super 35mm
format projected at 30 frames per second rather than standard 24 frames per
second, which provides a sharper, more intense image. The projection equipment
is a fully automated system that eliminates the need for a projector operator.
The film was developed in conjunction with Chromavision Corp., a production
studio with extensive experience in fast-paced concept films.
XS New York features a wide assortment of the latest in entertainment and
virtual reality hardware and software technologies. The interactive virtual
reality technologies which are showcased at XS New York include: Alpine Racer -
a simulated slalom ski race, Daytona Speedway - a simulated car racing
experience, a laser tag arena, and a virtual PC-based "battle ground" where
players compete on-line and in person on stage.
The Empire State Building Location
New York Skyride is located on the second and third floors of the Empire
State Building, in a 21,800 square foot site that wraps around the south and
west sides of the building. The location's entrance is situated adjacent to the
main lobby escalator that takes all visitors to the waiting area for the
Observatory elevators. Signs in the Empire State Building's lobby and in the
Observatory ticket purchase area inform visitors to the Empire State Building
about New York Skyride. Most importantly, visitors who purchase tickets to the
Observatory are offered the choice of purchasing a combined Observatory/New York
Skyride ticket at a reduced price, as compared with the separate purchase of
tickets to both attractions. The cost of individual tickets to New York Skyride
and the Observatory are $11.50 and $6.00 for adults, respectively, and $8.50 and
$3.00 for children under the age of 12, respectively. In comparison, the cost of
a combined ticket with the Observatory is $14.00 for adults and $9.00 for
children under the age of 12. Any discount resulting from combined ticket sales
are deducted from the admission price of a New York Skyride ticket. Children's
rates, group rates and senior discounts are also offered along with other
promotional discounts.
The Empire State Building is a focal point for the tourism industry in New
York City. The Observatory, which opened in 1933 and is located on both the
102nd and the 86th floors, has achieved worldwide recognition and publicity, and
is a primary destination for a large percentage of New York City's tourist
traffic. Estimated paid attendance figures provided by management of the Empire
State Building for the last five years for the Observatory are summarized below.
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EMPIRE STATE BUILDING OBSERVATORY
ADMISSION TICKET SALES (000'S)
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YEAR 1994 1995 1996 1997 1998
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TOTAL ATTENDANCE 2,915 3,350 3,350 3,675 3,614
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For the year ended June 30, 1999, the Company's capture rate of Observatory
visitorship averaged approximately 15.6%, down from an average of approximately
16% for the year ended June 30, 1998, and 19% for the year ended June 30, 1997.
The Company believes that the decrease in the capture rate is a direct result of
issues involving management of the Empire State Building as set forth in a
pending lawsuit by the Company against the Empire State Building Company and
others. See "Legal Proceedings." The Company is currently engaged in discussions
with management of the Empire State Building to resolve this situation. However,
there can be no assurance that satisfactory resolution of any issues will be
achieved or that the capture rate will increase to previous levels.
The Times Square Location
The Company currently leases approximately 13,000 square feet of space at
1457-1463 Broadway (at 42nd Street), New York, New York in the Business
Improvement District Entertainment Zone located in Times Square in New York
City. The Company utilizes this space for its interactive virtual reality
entertainment center - XS New York. See "Item 2. Description of Property."
Advertising and Promotional Plans
The Company's current marketing plans include a multifaceted marketing,
public relations and advertising program to heighten awareness of the New York
Skyride, and the XS New York facility, among the more than 25 million persons
who visit New York City every year. The Company has enlisted the services of an
advertising agency to aid in its advertising and marketing campaign.
New York Skyride's advertising and promotional support programs concentrate
on tourist to New York City, families with children in the Greater New York
metropolitan area, and youth groups from surrounding areas. The Company is also
continuing its efforts to attract attendees to the Empire State Building
Observatory by offering combined Observatory and Skyride Admission tickets. The
Company also co-markets with other New York City tourist companies, including
Circle Line and Gray Line.
XS New York's efforts target young adults, Times Square visitors, and
corporate groups. The Company is also focused on developing its corporate event
business for group functions, product introduction parties, meetings and holiday
parties.
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In addition, the Company continues to promote New York Skyride and XS New
York to tourist boards, travel agents, managers of group activities and visitors
to New York City. Special volume discounts, travel agent packages, and other
special programs are offered to target group audiences, especially during the
slower tourist periods in the fall and winter months.
Corporate Sponsors
Historically, the Company has solicited and maintained several corporate
sponsorships from consumer product companies. The Company currently has no such
sponsorship agreements. The Company is currently seeking new corporate
sponsorships that will result in greater market awareness and acceptance through
the association of New York Skyride and XS New York with their products. There
can be no assurance that the Company will be able to successfully enter into new
sponsorship agreements.
License Agreements
On February 26, 1993, the Company, through Skyline, entered into an
exclusive license agreement (the "License Agreement") with the Empire State
Building Company, the operator of the Empire State Building in New York City.
The License Agreement provides for the joint sale of tickets to the Observatory
and New York Skyride so long as the Company makes monthly payments at the
following annual rates:
i. $150,000 from April 1, 1995 through March 31, 1998,
ii. $175,000 from April 1, 1998 through March 31, 2002,
iii. $200,000 from April 1, 2002 through March 31, 2006,
iv. $225,000 from April 1, 2006 through April 30, 2013, and
v. $186,000 from May 1, 2013 through June 30, 2016.
The License Agreement also requires the Company to reimburse certain costs
and expenses relating to the joint ticket sales and contains cross-default
provisions in the event of a default under the Lease. The term of the License
agreement has been extended from its original 20-year term to a term lasting
through June 30, 2016, which coincides with a new lease for space adjacent to
the New York Skyride location. For a description of the lease, See "Item 2.
Description of Property."
Patents and Trademarks
The Company does not hold any patents relating to New York Skyride or XS
New York and their related technologies. Accordingly, the Company's concept is
not proprietary and is subject to duplication and competition from entities with
greater resources and strengths than the Company. The Company has obtained
registered trademarks for the name "New York Skyride" and "XS", however, during
November 1997, the Company agreed to sell the "XS" trademarks and related
intellectual property rights to an equipment supplier. In return, the Company
renegotiated its revenue sharing agreement to reflect the trademark sale
agreement and the equipment supplier forgave approximately $427,000 owed by the
Company. In addition, the Company can continue to use the "XS" trademarks and
related concepts at its Times Square location, pursuant to a three-year
renewable license agreement. In December 1998, the Company amended the
revenue-sharing agreement to increase the percentage of revenues payable to the
equipment vendor. The Company believes that this amendment will provide
incentive to the equipment vendor to add more games and help increase revenues
from the XS New York facility.
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Competition
New York Skyride and XS New York compete with all other New York City
tourist attractions and cultural events such as museums, Broadway shows,
shopping boutiques and cultural and historic landmarks. While these attractions
are quite different "experiences" from New York Skyride's spacecopter trip
(which the Company believes is the first attraction of its type in New York
City) or XS New York's virtual reality and simulator technologies, they continue
to present intense competition for attendance and visitor dollars. Generally,
these other attractions are more established, and are owned and operated by
entities that have greater financial resources and managerial expertise than the
Company. In addition, more intense competition of this type can be expected at
Times Square due to the major entertainment complex that is being developed
there. The complex will include entertainment attractions from companies such as
Disney, American Cinema, Madame Tussaud, ESPN, Broadway City, E-Walk and other
large entertainment companies.
In addition to competing with general New York City tourist attractions,
New York Skyride and XS New York have direct competitors in the virtual reality
and simulator markets. In September 1999, ESPN Zone, a sports based
entertainment attraction utilizing virtual reality and simulator technologies,
began operations in their Times Square location. Furthermore, a New York
helicopter tour simulator attraction opened in March 1997 at the World Trade
Center Towers. There can be no assurance that other virtual reality and
simulator attractions will not commence operations in the New York area in the
future.
Insofar as motion simulation technologies, including show control systems
(and related projection and audio technologies), are subject to improvements and
enhancements, it is possible that competitive attractions will be able to offer
more technologically advanced "experiences" to customers than the experience
offered by New York Skyride. Also, the Company believes that a number of
attractions utilizing "virtual reality" imaging technologies, or large film
format technologies with enhanced 3-dimensional projection technologies, are
likely to open in the New York area within the near future. These attractions do
not depend on motion simulators for their special effects, and they are also
likely to be developed and operated by companies that have significantly greater
financial, managerial and promotional experience and resources than the Company.
While these attractions may not offer a directly competitive "product" to New
York Skyride (i.e., an aerial adventure in New York City) or XS New York, their
presence will certainly create significant competition for the Company to
attract visitors to New York Skyride and XS New York. The Company will compete
with these entities primarily on the basis of location, uniqueness of product,
marketing and price.
Employees
As of September 24, 1999, the Company employed five management persons
(other than the Company's Executive Officers) on a full-time basis. The Company
also employs approximately 155 non-management personnel. Since August 1997, the
Company has contracted with employees for its XS New York facilites through the
International Union of Industrial, Service, Transport and Health Employees. The
Company believes that it has had good relations with the union, and that such
union representation will not have a material adverse effect on the Company's
financial condition or results of operations.
Item 2. DESCRIPTION OF PROPERTY.
The Company's executive offices are located at the Empire State Building at
350 Fifth Avenue, New York, New York. These offices consist of 4,400 square
feet, and are leased at a cost of approximately $110,000, payable monthly, and
expiring on October 31, 1999.
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In addition to these offices, the Company has four lease agreements on its
two operating sites. On February 26, 1993, the Company entered into the First
Lease agreement with the operator of the Empire State Building, to lease
approximately 17,800 square feet on the second floor of the Empire State
Building for a term of 20 years. The First Lease has been extended to a longer
term, lasting through June 30, 2016, to coincide with the Second and Third
Leases for additional space, as described below. The Company's annual base rent
under the First Lease is scheduled in the following manner:
i. $391,798 from April 1, 1998 through March 31, 2002,
ii. $445,225 from April 1, 2002 through March 31, 2006,
iii. $498,642 from April 1, 2006 through March 31, 2009,
iv. $534,270 from April 1, 2009 through April 30, 2013, and
v. $441,663 from May 1, 2013 through June 30, 2016.
The annual rent is payable monthly and subject to additional amounts for
taxes and utilities. The Company was not required to pay the first 21 months
rent, which benefit is being amortized over the term of the Lease.
The Company also leases an additional 4,000 square feet located above the
primary leased premises (the "Second Lease"). The Company uses this space to
accommodate the two large screens (18' X 18') on which the New York Skyride film
is shown. The Second Lease premises has an annual base rent of $76,000, which
increases to $120,000 over the term of the lease. The term of the Second Lease
coincides with the term of the First Lease and License Agreement, as modified.
During April 1996, the Company signed a 20 year renewable lease for an
additional 35,000 square feet within the Empire State Building adjacent to the
New York Skyride facility (the "Third Lease"). The lease commenced July 1, 1997.
The Company is required to pay rent at the following annual rates:
(i) $600,000 from August 1, 1998 through July 31, 1999,
(ii) $619,000 from August 1, 1999 through July 31, 2000,
(iii) $741,000 from August 1, 2000 through July 31, 2004,
(iv) $811,000 from August 1, 2004 through July 31, 2007,
(v) $882,000 from August 1, 2007 through July 31, 2010,
(vi) $953,000 from August 1, 2010 through July 31, 2013, and
(vii) $1,023,000 from August 1, 2013 through July 31, 2016.
In addition, the Third Lease contained a rent credit of $1,363,000 to be
applied in equal monthly installments against the base rent over the first 60
months of the lease, as well as rent escalation provisions and certain other
provisions relating to additional rent, taxes, utilities, and prohibitions
against assignment.
The Company had intended to utilize the additional space in the Empire
State Building to create a mixed use entertainment center, for which the Company
would need additional capital. Development plans for the additional space have
been deferred until the Company resolves its litigation with the Empire State
Building Company. See "Legal Proceedings." No assurance can be given that the
Company's plans to develop the additional space will be realized. The Company is
in the process of finalizing a settlement if its lawsuit with the Empire State
Building. The proposed settlement, as presently envisioned, would provide for
the Company to relinquish back to the Empire State Building the unused
additional second floor space. No assurance can be given that the settlement
will be consummated in this form, if at all.
Lastly, during April 1996 the Company entered into a ten year renewable
lease with the owners of 1457-1463 Broadway, New York, New York for
approximately 13,000 square feet of space (the "Fourth Lease"). The Company
currently occupies the ground floor and mezzanine level and commenced full
operations of its interactive virtual reality entertainment center in March
1997. See "The XS New York Experience". The rent commencement date was February
1, 1997 and annual rental payments are $560,345 for each of the first five years
and $644,000 for each of the last 5 years of the lease. During June 1997 the
Company amended the lease to include 5,760 square feet of additional space at an
annual rental of approximately $29,000. Such annual rent is payable monthly and
subject to additional amounts for taxes. In April 1999, the Company renegotiated
both of the leases for the Times Square premises so that each of the
aforementioned rents has been reduced by 25%, respectively. This reduction in
rent will be offset against the reimbursement by the landlord upon termination,
if any.
<PAGE>
The Fourth Lease contains a cancellation clause exercisable at any time in
the event the landlord commences construction of office buildings and uses
incidental thereto on the site at some future date. Should the landlord exercise
the cancellation clause, the Company would be required to vacate the space
within six months after notice, but would be entitled to reimbursement during
the first five years of the lease of a portion of its out-of-pocket construction
costs, not to exceed $125 per square foot. In the event the lease is canceled,
the Company will incur a charge to earnings equal to the unamortized portion of
its investment (adjusted for assets which are sold and reimbursed construction
costs) at the time of such lease cancellation.. The Company has become aware of
plans by the landlord to sell the property to a developer. However, the Company
is not certain of the timing of the sale of such property or whether such
developer will construct office buildings and uses incidental thereto on the
site. Further, the Company has not received notice of exercise of the
cancellation clause. Nonetheless, there can be no assurance that the landlord
will not cancel the lease earlier. Cancellation of the lease will have a
material adverse effect on the Company's operations and financial condition
taken as a whole.
The Company believes that its facilities are adequate for its current and
expected future levels of operations.
Item 3. LEGAL PROCEEDINGS.
The Company was a defendant in a lawsuit filed by Knightsbridge, Ltd., a
construction contractor hired by the Company in connection with its XS New York
project. The action, commenced in June 1997, in the Supreme Court of the State
of New York was finally settled in July 1999, at which time the Company reached
a agreement with respect to the remaining outstanding claims made by three
subcontractors. Pursuant to the settlement agreement, the Company paid the
subcontractors $57,500 in July 1999 and $57,500 in August 1999.
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
("ESBCo"), Empire State Building Associates, Helmsley-Spear, Inc. et.al.,
seeking, among other things, injunctive relief to prohibit the ESBCo from
terminating the Company's Lease and the License Agreement relating to the New
York Skyride and also seeking significant 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 Lease 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 preliminary injunction, which, among other
things, prohibits the ESBCo from terminating or canceling the Lease and the
License Agreement and restrains the ESBCo from interfering with the Company's
business or commencing any proceedings with respect to the Lease and the License
Agreement. A hearing with respect to the temporary restraining order was held on
February 6, 1998. Subsequently, in April 1998, the Company paid $838,000 in
undisputed rent, pursuant to a court order, which order also granted the
Company's motion for a preliminary injunction and provided that the
determination of disputed rent amounts be submitted to a referee. Since that
time, the referral to a referee has been rescinded and the disputed rent issue
referred to general arbitration. On February 26, 1999, the Company sought a
preliminary injunction to prevent the ESBCo from terminating the Lease for
undeveloped space on the second floor of the Empire State Building. The Court
ruled in favor of the Company on the motion and granted a Yellowstone
injunction. If the settlement of the case is not consummated, the Company
intends to proceed with discovery with respect to its other claims for damages
against the ESBCo and its affiliates. The Company is in the process of
finalizing a settlement of its lawsuit with the Empire State Building. The
proposed settlement, as presently envisioned, would provide for the Company to
relinquish back to the Empire State Building the unused additional second floor
space. No assurance can be given that the settlement will be consummated in this
form, if at all. In the event a settlement cannot be reached, the Company
intends to proceed with discovery with respect to its other claims for damages
against the ESBCo and its affiliates. The Company intends to proceed with
discovery with respect to its other claims for damages against the ESBCo and its
affiliates.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not Applicable.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON EQUITY
Prior to February 14, 1994, the date of the Company's initial public
offering, there was no public market for the Units, Common Stock, Class A
Warrants or Class B Warrants (collectively, the "Securities"). From February
1994 through December 1997, each of these classes of securities were quoted on
the Nasdaq SmallCap Market under the symbols "SKYLU," "SKYL," "SKYLW" and
"SKYLZ," respectively. In December 1998, the Company's Securities were delisted
from the Nasdaq SmallCap Market. Since that time, the Company's Common Stock has
been traded on the Over The Counter Bulletin Board (the "OTCBB"), under the
symbol "SKYL".
The following table sets forth the high and low sales prices for the Units,
Common Stock, Class A Warrants and Class B Warrants for the fiscal periods
indicated as reported by Nasdaq or in the over-the-counter market. The
quotations shown represent inter-dealer prices without adjustment for retail
mark-ups, mark-downs or commissions, and may not necessarily reflect actual
transactions.
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Fiscal 1999 Fiscal 1998
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UNITS High Low High Low
- ----- ---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter............................................... 5/8 1/16 4 3/4 3 3/8
2nd Quarter............................................... 5/8 1/16 3 1/4 5/8
3rd Quarter............................................... -- -- 7/8 1/2
4th Quarter............................................... -- -- 9/32 9/32
COMMON STOCK High Low High Low
- ------------ ---- --- ---- ---
1st Quarter............................................... 1/2 1/8 3 1/4 1 7/8
2nd Quarter............................................... 1/4 1/16 2 3/32 7/32
3rd Quarter............................................... 3/8 1/16 7/8 3/8
4th Quarter............................................... --- --- 11/16 1/4
CLASS A WARRANTS High Low High Low
- ---------------- ---- --- ---- ---
1st Quarter............................................... 0 0 7/8 7/16
2nd Quarter............................................... 0 0 13/32 1/32
3rd Quarter............................................... 0 0 1/16 0
4th Quarter............................................... 0 0 0 0
CLASS B WARRANTS High Low High Low
- ---------------- ---- --- ---- ---
1st Quarter............................................... 0 0 7/16 1/4
2nd Quarter............................................... 0 0 3/16 1/32
3rd Quarter............................................... 0 0 0 0
4th Quarter............................................... 0 0 0 0
</TABLE>
<PAGE>
The per share closing sales price of the Common Stock as reported by the
OTCBB on October 12, 1999 (the date of the last reported sale) was $0.098. As of
October 12, 1999, the Company had in excess of 400 beneficial shareholders and
25 shareholders of record.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto included. This document contains certain
forward-looking statements including, among others, anticipated trends in the
Company's financial condition and results of operations and the Company's
business strategy. These forward-looking statements are based largely on the
Company's current expectations and are subject to a number of risks and
uncertainties. Actual results could differ materially from these forward-looking
statements. Important factors to consider in evaluating such forward-looking
statements include (i) changes in external market factors or in the Company's
internal budgeting process which might impact trends in the Company's results of
operations; (ii) unanticipated working capital or other cash requirements; (iii)
changes in the Company's business strategy or an inability to execute its
strategy due to unanticipated changes in the industries in which it operates;
and (iv) various competitive market factors that may prevent the Company's from
competing successfully in the marketplace.
Overview
The Company was formed in November 1993. In February 1994, the Company
consummated an initial public offering from which it received aggregate net
proceeds of approximately $6,200,000, which proceeds were used principally for
the development of New York Skyride. Prior to the initial public offering, the
Company's activities consisted primarily of developmental activities, including
the preparation of plans relating to the design of New York Skyride; negotiation
of a lease and a license agreement with the operators of the Empire State
Building (the location for New York Skyride); working with engineers,
architects, contractors, designers, and other parties in connection with the
construction and operation of New York Skyride; developing software and video
films in connection with New York Skyride; developing marketing strategies;
initiating marketing and corporate sponsorship activities by identifying and
contacting potential strategic alliances; selecting a management team; and
obtaining financing.
On December 22, 1994, the Company commenced operations of New York Skyride
and began generating revenue from ticket sales to the attraction and the sale of
merchandise at its souvenir/concession area. New York Skyride was opened on a
preview basis until February 21, 1995, the date of its official Grand Opening.
For the years ended June 30, 1999 and 1998, the Company's New York Skyride
facility was visited by approximately 582,000 and 600,000 customers,
respectively.
Results of Operations
Year Ended June 30, 1999 compared to Year Ended June 30, 1998
Revenues
Revenues generated during the year ended June 30, 1999 and June 30, 1998
aggregated $9,603,000 and $10,834,000, respectively. The decrease in revenues
from the prior year is primarily due to a decrease in revenues at the Company's
XS New York facility, which accounted for revenues of approximately $3,590,000
for the year ended June 30, 1999, as compared to $4,811,000 for the year ended
June 30, 1998. In addition, there was a decrease in sponsorship income, which
accounted for revenues of $101,000 for the year ended June 30, 1999, as compared
to $271,000 for the prior year period, due to the expiration of all existing
sponsorship agreements.
<PAGE>
Operating Expenses
Operating expenses incurred for the year ended June 30, 1999 aggregated
$12,419,000 as compared to $17,901,000 for the year ended June 30, 1998. The
decrease was due, in part, to the following:
o At June 30, 1998, the Company recorded an impairment loss, and
wrote-down approximately $3,644,000 of the carrying value of its assets at
XS New York. The write-down resulted from published reports of a sale of
the property, which, if consummated, would trigger a cancellation clause in
XS New York's lease;
o The Company recorded a loss of approximately $224,000 as a result of
the retirement of certain virtual reality equipment at XS New York for the
year ended June 30, 1998;
o As a result of a default on the lease for the cancelled Woodfield
Mall project, in Schamberg, Illinois, the Company incurred expenses of
approximately $640,000 for the year ended June 30, 1998;
o As a result of costs related to the Sydney Skyride Project, the
Company incurred expenses for the year ended June 30, 1998 of $515,000,
whereas the Company incurred charges of $308,000, consisting primarily of
the write-off of assets, for the year ended June 30, 1999 due to the
cancellation of the Sidney Skyride Project; and
o The Company incurred costs relating to the proposed warrant exchange
offer, which was terminated on November 4, 1997, of approximately $180,000
for the year ended June 30, 1998.
Extraordinary Gain
The Company, as a result of negotiations with certain creditors, recorded
an extraordinary gain from the settlement of liabilities of approximately
$213,000 for the year ended June 30, 1999, as compared with $659,000 for the
year ended June 30, 1998;
Net Loss and Loss Per Share
The basic and diluted net loss and net loss per share available to common
shareholders was ($3,994,000) and ($1.76) for the year ended June 30, 1999 as
compared to ($8,235,000) and ($4.92) for the year ended June 30, 1998.
The net loss for the year ended June 30, 1999 included net losses of
approximately ($2,620,000) at XS New York (excluding an extraordinary gain of
$213,000 from the settlement of liabilities with certain creditors),
approximately ($1,279,000) at New York Skyride, and approximately ($308,000)
relating to the Sydney Skyride project.
The net loss for the year ended June 30, 1998 included an impairment loss
and write-down of approximately $3,644,000 of the carrying value of the
Company's assets at XS New York, a loss of approximately $224,000 relating to
the retirement of certain virtual reality equipment at XS New York, and a loss
of $1,155,000 as a result of costs incurred on the Woodfield Mall Lease and
Sydney Skyride Projects.
For the year ended June 30, 1999, New York Skyride had income from
operations (before interest expense) of approximately $419,000 (excluding legal
fees of approximately $258,000 from its legal proceedings with the ESBCo, and
rent of approximately $866,000 on additional space at the Empire State
Building), as compared to income from operations (before interest expense) of
approximately $270,000 (excluding legal fees of approximately $275,000 from its
legal proceedings with the ESBCo, and rent of approximately $740,000 on
additional space at the Empire State Building) for the year ended June 30, 1998.
Income from operations at New York Skyride improved from the previous year as a
result of a reduction in overhead at New York Skyride.
<PAGE>
XS New York incurred a loss from operations (before interest expense) of
approximately ($1,803,000) for the year ended June 30, 1999 as compared to a
loss from operations (before interest expense) of approximately ($1,043,000) for
the year ended June 30, 1998. Losses from operations at XS New York increased
from the previous year primarily as a result of a decrease in revenues.
Working Capital Deficiency
Liquidity and Capital Resources
The working capital deficiency at June 30, 1999, was approximately
($5,593,000) compared to a working capital deficiency of approximately
($4,911,000) at June 30, 1998. The increase in the working capital deficiency is
primarily the result of the loss from operations for the year ended June 30,
1999, which included rent expense relating to the additional space in the Empire
State Building and legal fees in connection with its legal proceedings against
the ESBCo.
The Company has historically sustained its operations from the sale of debt
and equity securities, through institutional debt financing and through
agreements or arrangements for financing with certain key suppliers.
As of June 30, 1999, the Company had the following financing arrangements
in place:
o In December 1996, the Company entered into a Senior Credit
Agreement with Prospect Street and Bank of New York, as Trustee for
the Employees Retirement Plan of the Brooklyn Union Gas Company.
Pursuant to the agreement (as amended), the Company borrowed an
aggregate of $4,450,000. The funds borrowed 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
Senior Credit Agreement, the lenders received warrants to purchase up
to an aggregate of 434,146 shares of Common Stock, which warrants are
exercisable until December 20, 2006 at an exercise price of $4.25 per
share.
o In June 1997, the Company borrowed an additional $500,000 from
Prospect Street. The loan is payable on demand and bears interest at
the rate of 14% per annum.
o In December 1997, the Company borrowed $500,000 from a bank
bearing interest at the rate of 6.25% per annum that is secured by a
Certificate of Deposit from Prospect Street.
o In May 1998, the Company and its subsidiaries entered into a
Senior Secured Credit Agreement with the Bank of New York, as Trustee
for the Employees Retirement Plan of Keyspan Energy Corp. and Prospect
Street pursuant to which the Company borrowed an aggregate of
$935,000. The funds borrowed accrue interest at an annual rate of 14%
and are payable on demand. The Notes are secured (with certain
exceptions) by all the assets of the Company and its subsidiaries. In
connection with the Credit Agreement, the lenders received warrants to
purchase 94% of the fully diluted Common Stock of the Company (after
issuance) at an exercise price of $.375 per share. The notes and the
obligations under the Credit Agreement and the warrants are also
collateralized by a pledge of the stock of the Company's subsidiaries.
In addition, Keyspan also received the right to appoint two members to
the Company's Board of Directors. Further, as a result of the issuance
of warrants in connection with the Financing, the conversion rate of
the Series A Preferred Stock held by Prospect Street was adjusted from
a conversion rate of one share of Common Stock for each share of
Preferred Stock to a conversion rate of 6.91 shares of Common Stock
for each share of Preferred Stock. On May 29, 1998, the Credit
Agreement was amended to increase the loan amount funded by Keyspan
from an aggregate of $500,000 to $1,850,000 which increased the total
financing from $935,000 to $2,785,000. In addition, the Credit
Agreement was further amended, subsequent to June 30, 1998, to include
under its terms the $500,000 demand loan to the Company from Prospect
Street in June 1997.
<PAGE>
In addition to the foregoing, as of June 30, 1999, the Company had the
following agreements or arrangements with certain key suppliers in place:
o The Company has entered into an agreement with its major gaming
equipment supplier pursuant to which the Company has been provided
with certain equipment for use in its XS New York facility in exchange
for agreeing to (i) share a percentage of the revenues generated from
the XS New York facility with the supplier and (ii) sell the XS
trademark and related intellectual property rights to such vendor.
With respect to the revenue sharing obligation, the agreement (as
amended) provides for the Company to share 16% of the net revenue, as
defined, and 50% of the excess over such amount. The agreement (as
amended) also provides that 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.
o The lease for the XS New York location contains a cancellation
clause exercisable at any time in the event the landlord opts to
commence construction of an office building on the site at some future
date. Should the landlord exercise the cancellation clause, the
Company would be required to vacate the space within six months after
notice, but would be entitled to reimbursement during the first five
years of the lease of a portion of its out-of-pocket construction
costs, not to exceed $125 per square foot. In April 1999, the Company
renegotiated the lease for the Times Square premises so that the rent
has been reduced by 25%. This reduction in rent will be offset against
the reimbursement by the landlord upon termination, if any. The
Company has become aware of plans by the landlord to sell the property
to a developer. The Company is not certain of the timing of the sale
of such property or whether such developer will construct an office
building on the site. As of June 30, 1998, the Company recorded an
impairment loss and wrote-down the carrying value of its assets at XS
New York as a result of the published reports of a sale of the
property. The Company has not received notice of exercise of the
cancellation clause. However, there can be no assurance that the
landlord will not cancel the lease earlier. Cancellation of the lease
will result in a charge to earnings equal to the unamortized portion
of its investment (adjusted for assets which are sold and reimbursed
construction costs) at the time of such lease cancellation, if any,
which could have a material adverse effect on the Company's operations
and financial condition taken as a whole.
Except for the financing facilities described above, the Company has no
other current arrangements in place with respect to financing. As stated in the
report on the Company's Financial Statements for the year ended June 30, 1999,
the Company's ability to continue as a going concern is dependent upon continued
forbearance of the Company's lenders because the Company currently does not have
available funds to repay its currently outstanding demand loans. Accordingly,
the Company is in need of either securing new financing and/or attaining
profitable operations.
Management has been reviewing and reducing operating expenses and focusing
on its marketing efforts on the Empire State Building and it is hopeful that its
efforts to increase visitors to the site will be successful. In the event that
the Company does not successfully improve its operating activities and results
of operations, the Company will need additional financing. There can be no
assurances that additional financing will be available on acceptable terms, if
at all, or that the Company will be able to achieve profitable operations. If
additional financing arrangements are not obtained, the Company may be unable to
fully fund its operations, pursue its business strategy, take advantage of new
opportunities, develop or enhance our products, or respond to competitive
pressures and financial or marketing hurdles. Such inability would have a
materially adverse effect on the Company's business, operating results and
financial condition.
<PAGE>
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.
Year 2000 Compliance
There are issues associated with the programming code in existing computer
systems as the year 2000 approaches. The "year 2000 problem" is pervasive and
complex, as virtually every computer operation will be affected in some way by
the rollover of the two digit year value of 00. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company has not verified that
companies doing business with it are year 2000 compliant. The Company does not
anticipate that it will incur significant operating expenses or be required to
invest heavily in computer system improvements to be year 2000 compliant. The
Company is currently updating its ticketing system for year 2000 compliance, and
expects that the system will be compliant by December 31, 1999. The Company
believes that its attraction, accounting and other computer systems are
currently year 2000 compliant. However, significant uncertainty exists
concerning the potential costs and effects associated with year 2000 compliance.
Any year 2000 compliance problem the Company encounters could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is set forth at the end of this report.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 4, 1999, the Company, with the approval of the Company's Board of
Directors, elected to replace Richard A. Eisner & Company, LLP ("RAE") as the
Company's independent auditors with the independent auditing firm of Cornick,
Garber, & Sandler, LLP.
RAE's reports for each of the two years ended June 30, 1998 included an
explanatory paragraph explaining certain factors that raise substantial doubt
about the Company's ability to continue as a going concern.
During the Company's two most recent fiscal years ended June 30, 1998, and
through June 1999, there were no disagreements with RAE on any matter of
accounting principles or practices, financial statement disclosure, auditing
scope, or procedure which disagreements, if not resolved to the satisfaction of
RAE, would have caused it to make reference to the subject matter of the
disagreement in connection with its report.
The Company requested RAE to furnish it with a letter addressed to the
Securities and Exchange Commission stating whether RAE agrees with the
statements contained in the second and third paragraphs above. A copy of the
letter from RAE to the Securities and Exchange Commission was filed as an
Exhibit to the Company's Form 8-K filed on June 7, 1999.
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information concerning the directors and officers of the Company is
contained in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A no later than 120
days after the close of the fiscal year ended June 30, 1999. Such information is
hereby incorporated herein by reference.
Item 10. EXECUTIVE COMPENSATION.
Information concerning the directors and officers of the Company is
contained in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A no later than 120
days after the close of the fiscal year ended June 30, 1999. Such information is
hereby incorporated herein by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning the directors and officers of the Company is
contained in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A no later than 120
days after the close of the fiscal year ended June 30, 1999. Such information is
hereby incorporated herein by reference.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning the directors and officers of the Company is
contained in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A no later than 120
days after the close of the fiscal year ended June 30, 1999. Such information is
hereby incorporated herein by reference.
Item 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) Exhibits are listed on the Index to Exhibits on page 26 of this report.
The Exhibits required by Item 601 of Regulation S-B are listed on such Index in
response to this Item and are incorporated herein by reference.
(b) Reports on Form 8-K:
On June 7, 1999, the registrant filed a report on Form 8-K.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
By: /s/Robert Brenner
Robert Brenner
Chief Executive Officer, President
/s/ Ronald H. Aghassi
Ronald H. Aghassi
Vice President of Finance
Date: October 14, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: October 14, 1999 /s/ Steven Vocino
Steven Vocino, Chairman of the Board
Date: October 14, 1999 /s/ Thomas Riordan
Thomas Riordan, Director
Date: October 14, 1999 /s/John F. Barry, III
John F. Barry, III, Director
Date: October 14, 1999 /s/Robert Brenner
Robert Brenner, Director
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
3.1 Certificate of Incorporation of the Company. (1)
3.2 By-laws of the Company. (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 (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 Company and Zalman Silber. (1)
10.4 Lease Agreement dated February 26, 1993 between the Company and 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 Simulation, Inc. (3)
10.7 Film Production Agreement dated April 7, 1994 between the Company and 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 15, 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)
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 Fund relating
to the Common Stock issuable upon conversion of the Preferred Stock. (2)
10.16 Guarantee of Zalman Silber dated 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 Fund. (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 amendment dated March 1996 between the Company and the Empire State Building relating to additional
space. (8)
10.21 Amendment dated March 1996, to the Company's original lease and license 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, N.Y. (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)
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 Independent Resources Inc. (11)
10.36 Loan and Security Agreement dated December 4, 1996, between the Company and 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)
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. (14)
10.48 Senior Secured Credit Agreement dated as of May 20, 1998 among the Company's and its subsidiaries and
Prospect Street and Bank of New York, as Trustee for the Employees Retirement Plan of Keyspan Energy
Corp. ("Keyspan", and together with Prospect Street, the "Institutional Investors"). (15)
10.49 Form of Warrants to Purchase Common Stock to be issued to the Institutional Investors. (15)
10.50 Senior Secured Demand Promissory Notes dated as of May 20, 1998 issued to the Institutional Investors. (15)
10.51 Security Agreement dated as of May 20, 1998 among the Company and its subsidiaries and the Institutional
Investors. (15)
10.52 Pledge Agreement dated as of May 20, 1998 among the Company and its subsidiaries and the Institutional
Investors. (15)
10.53 Amended and Restated Separation Agreement and General Release dated as of May 20, 1998. (15)
10.53A First Amendment to Senior Secured Credit Agreement dated as of May 29, 1998 among the Company and
its subsidiaries and the Institutional Investors. (16)
10.54 Employment Agreement dated as of May 12, 1998 between the Company and Steven Schwartz. (16)
10.55 Employment Agreement dated as of June 15, 1998 between the Company and Jay Berkman. (16)
10.56 Debt to Equity Conversion Agreement dated as of September 2, 1998. (17)
10.57 Registration Rights Agreement dated as of September 2, 1998. (17)
10.58 Form of Certificate of Amendment to Certificate of Incorporation. (17)
10.59 Employment Agreement dated as of July 14, 1999, between the Company and Robert Brenner.
21 Subsidiaries of the Company. (9)
23 Letter from Richard A. Eisner & Company, LLP to the Securities & Exchange Commission, dated June 4, 1999 (18)
27.1 Financial Data Schedule.
</TABLE>
(1) Previously filed as an exhibit to Registration Statement on Form SB-2
(Commission File No. 33-73276) declared effective on February 14, 1994.
(2) Previously filed as an exhibit to the Company's current report on Form
8-K filed on July 21, 1995.
(3) Previously filed as an exhibit to the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1994.
(4) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended September 30, 1994.
(5) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 1994.
(6) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended March 31, 1995.
(7) Previously filed as an exhibit to the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1995.
(8) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended March 31, 1996.
(9) Previously filed as an exhibit to the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1996.
(10) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended September 30, 1996.
(11) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 1996.
(12) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the 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.
(14) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 1997.
(15) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended March 31, 1998.
(16) Previously filed as an exhibit to the Company's current report on Form
8-K filed on July 10, 1998.
(17) Previously filed as an exhibit to the Company's current report on Form
8-K filed on September 17, 1998.
(18) Previously filed as an exhibt to the Company's current report on Form
8-K filed on June 6, 1999.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
<PAGE>
Independent Auditors' Report
To The Board of Directors and Stockholders
Skyline Multimedia Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of SKYLINE
MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES as at June 30, 1999 and the
related consolidated statements of operations, changes in stockholders' equity
(capital deficiency) and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of Skyline
Multimedia Entertainment, Inc. and Subsidiaries as at June 30, 1999, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has experienced significant net losses in
recent years and at June 30, 1999 has substantial negative working capital and a
substantial capital deficiency, it is possible that the Company may have to
vacate its virtual reality game-site prior to the scheduled termination of the
lease and the Company is dependent upon the continued forbearance of its
principal creditors in not demanding payment of outstanding indebtedness. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Cornick, Garber & Sandler, LLP
------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
October 1, 1999
<PAGE>
Independent Auditors' Report
To The Board of Directors and Stockholders
Skyline Multimedia Entertainment, Inc.
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity (capital deficiency) and cash flows of Skyline
Multimedia Entertainment, Inc. and subsidiaries for the year ended June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the consolidated results of operations and
consolidated cash flows of Skyline Multimedia Entertainment, Inc. and
subsidiaries for the year ended June 30, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A, the Company
has experienced significant losses for each of the two years ended June 30, 1998
and as of June 30, 1998 is in a negative working capital position. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/RICHARD A. EISNER & COMPANY, LLP
New York, New York
August 27, 1998
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 1999
ASSETS
------
(To the nearest $1,000)
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash ........................................................................ $ 780,000
Inventory ................................................................... 122,000
Prepaid expenses and other current assets ................................... 39,000
------------
Total current assets ......................................... 941,000
Property, equipment and leasehold improvements - net ........................... 5,632,000
Security deposits .............................................................. 418,000
Deferred financing costs ....................................................... 424,000
Other assets - net ............................................................. 47,000
------------
T O T A L .................................................... $ 7,462,000
============
LIABILITIES
-----------
Current liabilities:
Capital lease obligations - current portion ................................. $ 639,000
Note payable - institutional lenders ........................................ 2,785,000
Note payable - other ........................................................ 500,000
Accounts payable ............................................................ 1,973,000
Due to contractors .......................................................... 115,000
Accrued expenses ............................................................ 135,000
Interest payable - institutional lenders .................................... 364,000
Deferred sponsorship income ................................................. 23,000
------------
Total current liabilities .................................... 6,534,000
Capital lease obligations - less current portion ............................... 159,000
Note payable - institutional lenders ........................................... 4,450,000
Deferred rent payable .......................................................... 2,135,000
Interest payable - institutional lenders ....................................... 1,693,000
------------
14,971,000
------------
Commitments and contingencies (Notes H and M)
CAPITAL DEFICIENCY
------------------
Preferred stock, par value $.001, 5,000,000 shares authorized, 1,090,909 shares
of Series A convertible participating preferred stock issued and outstanding
(liquidating value $2.75 per share) ......................................... 1,000
Common stock - $.001 par value; authorized 19,000,000 shares,
one vote per share, issued 2,095,000 shares ................................. 2,000
Class A common stock - $.001 par value; authorized 1,000,000 shares,
five votes per share, issued 960,000 shares ................................. 1,000
Treasury stock, 110,000 shares of common stock and 670,000 shares
of Class A common stock at cost ............................................. (601,000)
Additional paid-in capital ..................................................... 10,848,000
Accumulated deficit ............................................................ (17,760,000)
------------
Total capital deficiency ..................................... (7,509,000)
------------
T O T A L .................................................... $ 7,462,000
============
</TABLE>
The notes to financial statements are made a part hereof.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(To the nearest $1,000)
<TABLE>
<CAPTION>
Class A Series A Additional
Common Stock Common Stock Preferred Stock Treasury Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Stock Capital Deficit Total
--------- ------ ------ ------ --------- ------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 1,495,000 $2,000 960,000 $1,000 1,090,909 $1,000 $(601,000) $9,989,000 $(5,531,000) $3,861,000
Issuance of warrants in
connection with
financings 935,000 935,000
Repurchase and retirement
of officer's warrants
and options (245,000) (245,000)
Common shares returned
from escrow 0 0
Net (loss) for the year
ended June 30, 1998 (8,235,000) (8,235,000)
--------- ------ ------- ------ --------- ------ --------- ----------- ------------- ----------
Balance - June 30, 1998 1,495,000 2,000 960,000 1,000 1,090,909 1,000 (601,000) 10,679,000 (13,766,000) (3,684,000)
Common shares issued as
payment for services 600,000 169,000 169,000
Net (loss) for the year
ended June 30, 1999 (3,994,000) (3,994,000)
--------- ------ ------- ------ --------- ------ --------- ----------- ------------- ----------
Balance - June 30, 1999 2,095,000 $2,000 960,000 $1,000 1,090,909 $1,000 $(601,000) $10,848,000 $(17,760,000)$(7,509,000)
========= ====== ======= ====== ========= ====== ========= =========== ============= ==========
</TABLE>
The notes to financial statements are made a part hereof.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(To the nearest $1,000)
<TABLE>
<CAPTION>
Year Ended
June 30,
----------
1999 1998
---- ----
Revenues:
<S> <C> <C>
Attraction sales ................................. $ 8,359,000 $ 9,532,000
Concessions sales ................................ 1,143,000 1,031,000
Sponsorship income ............................... 101,000 271,000
------------ ------------
9,603,000 10,834,000
------------ ------------
Operating expenses:
Cost of merchandise sold ......................... 515,000 434,000
Selling, general and administrative .............. 9,576,000 11,634,000
Depreciation and amortization .................... 2,028,000 1,755,000
Loss on impairment of long-lived assets .......... 300,000 3,854,000
Loss on retirement of assets ..................... 224,000
------------ ------------
12,419,000 17,901,000
------------ ------------
(Loss) from operations before interest income and
expense .......................................... (2,816,000) (7,067,000)
Interest income ..................................... 44,000 32,000
Interest expense .................................... (1,435,000) (1,859,000)
------------ ------------
(Loss) before extraordinary item .................... (4,207,000) (8,894,000)
Extraordinary gain from settlement of liabilities ... 213,000 659,000
------------ ------------
NET (LOSS) .......................................... $ (3,994,000) $ (8,235,000)
============ ============
(Loss) per share of common stock - basic and diluted:
(Loss) before extraordinary item ................. $ (1.85) $ (5.31)
============ ============
Net (loss) ....................................... $ (1.76) $ (4.92)
============ ============
Weighted number of average common shares outstanding 2,275,000 1,675,000
============ ============
</TABLE>
The notes to financial statements are made a part hereof.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(To the nearest $1,000)
<TABLE>
<CAPTION>
Year Ended
June 30,
----------
INCREASE (DECREASE) IN CASH 1999 1998
------------ -----------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) .................................................................. $(3,994,000) $(8,235,000)
----------- -----------
Adjustments to reconcile results of operations to net cash effect of
operating activities:
Loss on impairment of long-lived assets .................................. 300,000 3,854,000
Loss on retirement of fixed assets ....................................... 224,000
Gains on restructuring of liabilities - noncash .......................... (213,000) (659,000)
Depreciation and amortization ............................................ 2,237,000 1,813,000
Deferred rent payable .................................................... 500,000 646,000
Fair value of common stock issued as payment
for services .......................................................... 169,000
Net changes in assets and liabilities:
Inventory ............................................................. 12,000 34,000
Prepaid expenses and other current assets ............................. 185,000 (25,000)
Security deposits ..................................................... 554,000 (20,000)
Accounts payable and accrued liabilities .............................. 89,000 (156,000)
Due to contractors .................................................... (350,000)
Interest payable - institutional lenders .............................. 1,013,000 1,000,000
Deferred sponsorship income ........................................... (26,000) (26,000)
----------- -----------
Total adjustments ................................................. 4,820,000 6,335,000
----------- -----------
Net cash provided by (used for) operating activities .............. 826,000 (1,900,000)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets .................................................... (257,000) (588,000)
Redemption of certificate of deposit ........................................ 209,000
Deferred project and leasing costs .......................................... 101,000
Advances to officer ......................................................... (40,000)
----------- -----------
Net cash used for investing activities ............................ (257,000) (318,000)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of notes with warrants ........................... 3,720,000
Financing costs ............................................................. (157,000)
Repayment of capital lease obligations ...................................... (1,285,000) (763,000)
Purchase of Company's options and warrants held by officer .................. (205,000)
----------- -----------
Net cash provided by (used for) financing activities .............. (1,285,000) 2,595,000
----------- -----------
NET INCREASE (DECREASE) IN CASH ................................................ (716,000) 377,000
Cash - July 1 .................................................................. 1,496,000 1,119,000
----------- -----------
CASH - JUNE 30 ................................................................. $ 780,000 $ 1,496,000
=========== ===========
</TABLE>
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-2-
<TABLE>
<CAPTION>
Year Ended
June 30,
----------
1999 1998
---- ----
Supplemental disclosures of cash flow information:
Cash paid for:
<S> <C> <C>
Interest ...................................... $210,000 $219,000
======== =======
Taxes ......................................... $ 2,000 $ 44,000
======== =======
Equipment acquired under a capital lease agreement $ 28,000
========
</TABLE>
The notes to financial statements are made a part hereof.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE A - The Company
Skyline Multimedia Entertainment, Inc. ("SME") is a holding
company engaged in the development and operation of state-of-the-art
entertainment attractions and together with its wholly-owned
subsidiaries, New York Skyline, Inc. ("NYSI") and Skyline Virtual
Reality, Inc. ("SVR") are referred to as the "Company." Its first
site, which is located in the Empire State Building in New York City,
is owned and operated by NYSI which commenced operations of its "New
York Skyride" facility on December 22, 1994. Its revenues for the
years ended June 30, 1999 and 1998 were $6,013,000 and $6,023,000,
respectively. The second site, which is located in Times Square ("XS")
in New York City, is owned and operated by SVR which commenced
operations of its interactive virtual reality entertainment center on
December 27, 1996. Its revenues for the years ended June 30, 1999 and
1998 were $3,590,000 and $4,811,000, respectively.
The Company's business is somewhat seasonal in nature, based in
part on higher volumes of tourists during the spring and summer months
and holiday seasons.
The accompanying financial statements have been prepared on a
going-concern basis. As reflected in the accompanying financial
statements, the Company has experienced recurring net losses from
operations and as of June 30, 1999 has a working capital deficiency of
$5,593,000 and a capital deficiency of $7,509,000. In addition, the
Company has become aware of plans by the landlord of its XS Site to
sell the property to a developer. The cancellation of this lease would
have a material adverse effect on the operations of the Company. As
further indicated in Note H, the Company's borrowings from
institutional lenders and investors includes borrowings which are due
on demand. The Company is dependent on the continued forbearance of
these lenders because the Company currently does not have available
funds to repay these loans, which, if demanded, would cause the
Company to be in default under its other agreements with these
lenders. The above factors give rise to substantial doubt as to the
ability of the Company to continue as a going concern. In April 1999,
the Company negotiated a 25% rent reduction on the XS premises which
will be offset against the lease cancellation payment, if any. In
addition, management has been reviewing and reducing operating
expenses and focusing on its marketing efforts on the Empire State
Building. Management is hopeful that its efforts to increase visitors
to the site will be successful. The accompanying financial statements
have not been adjusted to give effect to the amount or classification
of recorded assets or the classification and amount of liabilities
should the Company be unable to continue as a going concern.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-2-
NOTE B - Summary of Significant Accounting Policies
- ------ ------------------------------------------
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of the Company and its wholly-owned subsidiaries. Material
intercompany transactions and account balances have been eliminated in
consolidation.
Loss Per Share
During the year ended June 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS No. 128"). SFAS No. 128 requires the reporting of basic
and diluted earnings/loss per share. Basic loss per share is
calculated by dividing net loss by the weighted average number of
outstanding common shares during the year. Diluted per share data
includes the effects of options, warrants and convertible securities,
when they are dilutive. As all potential common shares were
antidilutive for the years ended June 30, 1999 and 1998, they are not
included in the calculation of diluted loss per share. There was no
effect of adoption of SFAS No. 128 on the 1998 financial statements.
Inventory
Inventory consists of clothing, souvenirs and food and is stated
at the lower of cost (first-in, first-out) or market.
Property, Equipment and Leasehold Improvements
Property and equipment, including assets under capital leases are
stated at cost less accumulated depreciation unless impaired, in which
case a charge is recognized for the write down of such asset to its
net realizable amount. Depreciation is provided on the straight-line
method over the two to twelve year estimated useful lives of the
assets. Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life
of the asset.
Rent Expense
The Company, for financial accounting purposes, recognizes
scheduled rent increases and rent holidays over the term of the lease
using the straight-line method.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-3-
NOTE B - Summary of Significant Accounting Policies (Continued)
- ------ ------------------------------------------------------
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Stock-Based Compensation
Stock-based compensation is recognized under the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting 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 employee stock option
incentive plans (see Note J).
Fair Value of Financial Instruments
The Company's financial instruments are comprised primarily of
demand notes, notes payable, capitalized leases and senior debt.
Because of the financial condition of the Company, management is
unable to estimate the fair values of these obligations.
Impairment of Long-Lived Assets
The impairment of long-lived assets is determined utilizing the
provisions of Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of ("SFAS No. 121"). The Company periodically
reviews all its long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may not
be recoverable.
For the year ended June 30, 1999, the Company recorded a $300,000
impairment loss on a cancelled project in Sidney, Australia (see Note
D for other impairment losses).
Advertising
Advertising costs are expensed when incurred. Advertising costs
were $338,000 and $351,000 for the years ended June 30, 1999 and 1998,
respectively.
Reclassifications
Certain items have been reclassified with the current year's
presentation.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-4-
NOTE C - Concentration of Credit Risk
- ------ ----------------------------
The Company maintains all of its cash with highly capitalized
financial institutions. Such balances often exceed the FDIC limit and
are not insured.
NOTE D - Property, Equipment and Leasehold Improvements
- ------ ----------------------------------------------
Property, equipment and leasehold improvements is summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment and fixtures .......................... $ 1,847,000
Simulation film ................................. 1,065,000
Simulation equipment ............................ 2,324,000
Leasehold improvements .......................... 5,561,000
-----------
10,797,000
Less accumulated depreciation and amortization .. 5,165,000
-----------
$ 5,632,000
===========
</TABLE>
In accordance with the provisions of SFAS 121, the Company has
recorded impairment losses in connection with certain of its
operations and prospective ventures. The circumstances relating to
these matters indicated that the discounted future cash flows from
these matters would be less than the carrying value of certain
long-lived assets. Such calculation reflects the possible cancellation
of the lease at one of the Company's locations. Accordingly, in June
1998, the Company recognized an asset impairment loss of $3,854,000.
The loss is the difference between the carrying value of the
long-lived assets and the fair value of these assets based on
discounted estimated future cash flows.
NOTE E - Capital Lease Obligations
In November 1996, the Company entered into an agreement to
finance the acquisition of certain equipment for its XS New York site.
The Company received approximately $1,024,000, with $495,000 held by
the lender as security. In March 1999, the Company and its
institutional lender agreed to offset the security plus accrued
interest against the outstanding balance of $530,000. An additional
payment of approximately $18,000 was required to pay the loan in full.
On December 31, 1996, the Company refinanced its existing
equipment at its New York Skyride location from aggregate proceeds of
$1,500,000. The obligation bears interest at 11 1/2% a year compounded
monthly and is payable 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 obligation is personally
guaranteed by the Company's former president.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-5-
NOTE E - Capital Lease Obligations (Continued)
- ------ -------------------------------------
In March 1997, the Company entered into a loan agreement to
finance the acquisition of additional equipment for XS New York.
Pursuant to this transaction, in April 1997 the Company received
$559,000 with an additional $54,000 held by the lender as security.
The amounts financed bear interest at 11 1/2% a year compounded
monthly and were initially to be repaid in 48 monthly installments.
However, in November 1997 the term was modified to provide for an
accelerated payback over 36 months from the date of issuance. The
lender obtained a first security interest in the equipment and a
personal guarantee by the Company's former president of up to $125,000
of the loan.
The future minimum lease payments under capital lease obligations
as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending June 30:
<S> <C> <C>
2000 $714,000
2001 151,000
2002 18,000
2003 7,000
2004 7,000
--------
Total minimum lease payments ................. 897,000
Less amount representing interest at
9.2% to 11.5% a year ..................... 99,000
--------
Present value of minimum lease payments ...... 798,000
Less current portion ......................... 639,000
--------
Long-term portion ............................ $159,000
========
</TABLE>
NOTE F - Notes Payable
- ------ -------------
In December 1996, the Company entered into a Senior Credit
Agreement with the Bank of New York as trustee for the Employees
Retirement Plan of Keyspan Energy Corp. ("Keyspan") and Prospect
Street NYC Discovery Fund, L.P. ("Prospect Street") (together
with Keyspan, the "Institutional Investors"). The agreement (as
amended) provided for the borrowing of $4,450,000 in the form of
senior notes which accrue interest at 14% a year and require the
payment of both principal and interest on December 20, 2001. In
connection with the subordinated debt, the lender received
warrants to purchase up to 434,146 shares of common stock at an
exercise price of $4.25 per share which the Company valued at
approximately $712,000 using the Black-Scholes pricing model. The
warrants expire on December 20, 2006.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-6-
NOTE F - Notes Payable (Continued)
- ------ -------------------------
In June 1997, the Company received an additional $500,000
loan from Prospect Street payable upon demand and bearing
interest at 14% a year.
In December 1997, the Company received a $500,000 loan from
a bank bearing interest at 6.25% a year that is secured by a
certificate of deposit from Prospect Street.
On May 20, 1998, the Company and its subsidiaries entered
into a Senior Secured Credit Agreement (the "Credit Agreement")
with the Institutional Investors relating to the financing of an
aggregate of $2,285,000 (the "Financing"), in exchange for
receipt by the Institutional Investors of senior secured
promissory notes (the "Notes") and the issuance of warrants to
purchase shares of Common Stock of the Company (the "Warrants").
The Notes, which are payable on demand, accrue interest at 14% a
year and are secured (with certain exceptions) by all the assets
of the Company and its subsidiaries not otherwise pledged.
Additionally, the Credit Agreement was amended to include under
its terms the $500,000 demand loan to the Company from Prospect
Street in June 1997. The Institutional Investors have not
demanded payment of the Notes. The Notes and the obligations
under the Credit Agreement and the Warrants are also
collateralized by a pledge of the stock of the Company's
subsidiaries. In connection with the Credit Agreement, Keyspan
also received the right to appoint two members to the Company's
Board of Directors. Further, as a result of the issuance of
Warrants in connection with the Financing, the conversion rate of
the Series A Preferred Stock (the "Preferred Stock") held by
Prospect Street was adjusted from a conversion rate of one share
of Common Stock for each share of Preferred Stock to a conversion
rate of 6.91 shares of Common Stock for each share of Preferred
Stock.
The Warrants are exercisable for 94% of the fully diluted
Common Stock of the Company (after issuance) at an exercise price
of $.375 per share. Accordingly, the exercise of such Warrants by
the Institutional Investors would result in a significant change
in the ownership of the Company. The Company approved this
transaction after consideration of its alternatives and financial
situation. The Warrants are exercisable for approximately 173
million shares of Common Stock at an aggregate exercise price of
approximately $64.9 million or, at the option of the holder
pursuant to a cashless exercise feature, based on the difference
in shares between 173 million shares and that number of shares
having a market value equal to $64.9 million (e.g., at a market
price per share of $.40, an aggregate of 10.8 million shares of
Common Stock would be issued). Either exercise would result in
significant dilution to existing shareholders which could also
result in an annual limitation in the future utilization of the
Company's net operating loss carryforwards.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-7-
NOTE G - Income Taxes
- ------ ------------
The principal components of deferred tax assets, liabilities
and the valuation allowance are as follows:
<TABLE>
<CAPTION>
June 30,
--------
1999 1998
---- ----
Deferred tax assets:
<S> <C> <C>
Capitalization of start-up costs ........ $ 81,000 $ 229,000
Impairment loss ......................... 1,734,000 1,542,000
Net operating loss carryforwards ........ 6,869,000 4,033,000
----------- -----------
8,684,000 5,804,000
Less valuation allowance ................ (7,824,000) (5,185,000)
----------- -----------
860,000 619,000
Deferred tax liabilities:
Depreciation differences ................ 860,000 619,000
----------- -----------
Net deferred tax asset ..................... $ -- $ --
=========== ===========
</TABLE>
The Company has provided valuation allowances of $7,824,000
at June 30, 1999 and $5,185,000 at June 30, 1998 equal to its net
deferred tax assets 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.
At June 30, 1999, the Company has available net operating
loss carryforwards to reduce future federal taxable income of
approximately $15,300,000 for tax reporting purposes which expire
from 2010 through 2019. Pursuant to the provisions of the
Internal Revenue Code, future utilization of these past losses
may be subject to certain annual limitations based on changes in
the ownership of the Company's stock that may occur.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-8-
NOTE H - Commitments
- ------ -----------
The Company leases office premises and space for its
entertainment attractions in the Empire State Building pursuant
to operating leases expiring substantially in June 2016. The
lease for the office space expires on October 31, 1999. Certain
of the leases contain renewal options for up to 10 years. The
leases provide for free rent or rent credits for various periods;
rental expense is recognized on a straight-line basis over the
life of the leases. The Company was served a notice of default by
the landlord (see Note M).
In April 1996, the Company entered into a ten-year renewable
lease for space to house its interactive virtual reality
entertainment center. The lease terms also provide for two
five-year renewal options. In addition, the lease contains a
cancellation clause in the event that the landlord commences
construction of office buildings on the site during the lease
term. Should the landlord exercise the cancellation clause, the
Company would be required to vacate the space within six months
after written notice, but would be entitled to reimbursement
during years 1-5 of a portion of its out-of-pocket construction
costs, not to exceed $125 per square foot. In April 1999, the
Company renegotiated the lease whereby the rent has been reduced
25%. This reduction in rent will be offset against the
reimbursement by the landlord, if any. The Company has become
aware of plans to sell the property to a developer. The Company
is not sure of the timing of the sale; however, the Company
believes that XS can continue to operate through June 30, 2000.
Accordingly, the Company has adjusted the life of the related
assets so that they will be fully depreciated at June 30, 2000.
Rental expense will be recognized by the Company on a
straight-line basis over the term of the lease.
Minimum annual rental payments required for all operating
leases are as follows:
<TABLE>
<CAPTION>
Year Ending June 30:
<S> <C>
2000 $ 1,578,000
2001 1,671,000
2002 1,748,000
2003 1,797,000
2004 1,797,000
Thereafter 19,198,000
-----------
$27,789,000
===========
</TABLE>
The terms of the leases include escalation clauses for
increases in real estate taxes and certain cost of living
adjustments.
Rent expense for the years ended June 30, 1999 and 1998 was
approximately $2,225,000 and $2,150,000, respectively (see Note
B).
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-9-
NOTE H - Commitments (Continued)
- ------ -----------------------
The Company has a licensing agreement with the Empire State
Building Observatory (the "Observatory") expiring on June 30,
2016 to have tickets to its New York Skyride facility sold by the
licensor's employees at the counter where licensor's tickets to
the observatory are sold. Under the terms of the licensing
agreement, the following future payments are required:
<TABLE>
<CAPTION>
Year Ending June 30,
<S> <C>
2000 $ 175,000
2001 175,000
2002 181,000
2003 200,000
2004 200,000
Thereafter 2,534,000
---------
$3,465,000
=========
</TABLE>
NOTE I - Employment and Other Agreements
- ------ -------------------------------
In April 1998, the Company and its former president entered
into a separation agreement. Pursuant to its terms, the former
president agreed to relinquish all positions in the Company held
by him and deliver to the Company for cancellation all of his
options and warrants in the Company in exchange for the
forgiveness of amounts previously advanced. The Company agreed to
make payments of approximately $206,000 and forgave approximately
$318,000 in loan receivables. The Company charged additional
paid-in capital for $245,000 for the repurchase of stock and
outstanding options and warrants with the balance being charged
to operations. The Company, in turn, received 670,000 shares of
Class A common stock, then held in escrow, as well as the return
and cancellation of Class B warrants for 280,000 shares and
options to purchase 1,400,000 shares of common stock. The Company
exchanged general releases and the former president has granted
to one of its institutional investors an irrevocable proxy with
respect to the vote of such Class A common stock until the
remaining 290,000 shares of Class A common stock, which are
currently pledged as collateral in connection with a loan, can be
transferred upon release of such pledge.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-10-
NOTE I - Employment and Other Agreements (Continued)
- ------ -------------------------------------------
In November 1998, the Company entered into an agreement with
its new President and Chief Executive Officer. The agreement is
for twenty-four months at $18,000 per month. The agreement can be
terminated by either party upon ninety days written notice. If
the Company terminates the agreement, a termination fee will be
paid equal to six months severance plus one additional month for
each month the employee has been employed after May 1999, up to a
maximum of twelve months. If a change of control of the Company
occurs during employment or within twelve months of termination
or resignation, the Company will be required to pay 3% of the
transaction proceeds or $250,000, whichever is greater. A
semiannual bonus is payable equal to 10% of the first $1,000,000
of EBITDA (earnings before interest, taxes, depreciation and
amortization) and 5% of EBITDA in excess of $1,000,000. A bonus
of $50,000 is payable on October 15, 1999 if the Company does not
file a bankruptcy proceeding.
NOTE J - Stockholders' Equity
- ------ --------------------
In connection with the Company's public offering of
securities in 1994, the underwriter required that an aggregate of
670,000 shares of the Company's Class A common stock be placed
into escrow. Some or all of such escrow shares were eligible to
be released up to the year ended June 30, 1998 if the Company had
met certain minimum earnings thresholds, as defined, or if
certain minimum per share market prices of its common stock were
attained. Since neither the earnings requirement nor the minimum
per share market price requirement were met, the escrow shares
reverted to the Company on June 30, 1998.
On July 7, 1995, the Company consummated a stock purchase
agreement with Prospect Street, pursuant to which the Company
sold 1,090,909 shares of Series A convertible participating
preferred stock, par value $.001 per share, for $3,000,000. Net
proceeds from such offering, aggregated approximately $2,833,000.
The preferred stock issued is convertible into common stock of
the Company at any time at a conversion rate of 6.91 shares of
common stock for each share of preferred stock. The preferred
shares are subject to both demand and piggyback registration
rights. The preferred stock has a liquidation preference equal to
$2.75 per share, but does not pay any dividends unless declared
by the Board of Directors. The preferred stockholders are
entitled to an aggregate of up to 24.9% of the outstanding voting
power of the Company which can increase to 50.1% of the voting
power if in their sole discretion it becomes reasonably necessary
for the protection of its investment.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-11-
NOTE J - Stockholders' Equity (Continued)
- ------ --------------------------------
At June 30, 1999, the Company has outstanding warrants for
the purchase of its common stock as follows:
<TABLE>
<CAPTION>
Warrants Issued in
Connection With/ Number of Exercise
Held By Shares Price Expiration Date
<S> <C> <C> <C>
Sub-debt financing 243,904 (a) December 20, 2006
Sub-debt financing 48,780 (a) December 31, 2006
Sub-debt financing 48,780 (a) February 18, 2007
Sub-debt financing 43,902 (a) March 14, 2007
Sub-debt financing 48,780 (a) March 21, 2007
Equipment financing 50,000 (b) December 31, 2007
</TABLE>
(a) The warrants are exercisable into one share of
common stock at an exercise price of $4.25.
(b) The warrant is exercisable into one share of common
stock at an exercise price of $6.00.
The above warrants may be redeemed by the Company at a price
of $.05 per warrant assuming certain minimum per share market
prices of its common stock, as defined, are met.
The Company has a stock option plan ("Plan A") which, as
amended, provides for the issuance of incentive stock options or
nonqualified options to key employees and officers to be
determined by the compensation committee of the Board of
Directors. The aggregate number of shares which may be issued
under Plan A is 2,500,000. Incentive stock options under Plan A
may not be granted at less than the fair market value of the
underlying shares at date of grant (110% of fair market value for
a 10% or greater stockholder). Incentive stock options granted
under Plan A can be exercisable for a period not to exceed ten
years.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-12-
NOTE J - Stockholders' Equity (Continued)
- ------ --------------------------------
A summary of stock option activity related to Plan A is as
follows:
<TABLE>
<CAPTION>
Exercise
Number of Price
Shares Per Share
<S> <C> <C> <C> <C>
Outstanding - July 1, 1997 1,671,500 $3.50 - $5.00
Granted 827,500 $0.31 - $1.88
Cancelled (1,567,500) $1.88 - $5.00
----------
Outstanding - June 30, 1998 931,500 $0.31 - $4.00
Cancelled (907,500) $0.31 - $4.00
-----------
Outstanding - June 30, 1999 24,000 (a) $2.75 - $4.00
===========
</TABLE>
(a) All of the Plan A options are currently
exercisable.
The following table presents information relating to Plan A
stock options outstanding at June 30,1999:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Average Remaining
Exercise Life in
Shares Price Years
<S> <C> <C> <C>
7,500 $4.00 1.05
16,500 $2.75 2.20
------
24,000 $3.14 1.84
======
</TABLE>
The Company has a stock option plan for nonemployee
directors ("Plan B"). The aggregate number of shares which may be
issued under Plan B, as amended, is 500,000.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-13-
NOTE J - Stockholders' Equity (Continued)
- ------ --------------------------------
A summary of stock option activity related to Plan B is as
follows:
<TABLE>
<CAPTION>
Option
Number of Price
Shares Per Share
--------- ---------
<S> <C> <C> <C>
Outstanding - July 1, 1997 240,000 $3.50 - $5.00
Granted 25,000 $1.50
Cancelled (75,000) $1.50 - $5.00
--------
Outstanding - June 30, 1998 190,000 $1.50 - $4.00
Granted 75,000 $.25
Cancelled (170,000) $1.50 - $4.00
--------
Outstanding - June 30, 1999 95,000 $ .25 - $4.00
========
</TABLE>
The following table presents information relating to Plan B
stock options outstanding at June 30, 1999
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Life in Exercise
Shares Price Years Shares Price
------ -------- --------- ------ --------
<S> <C> <C> <C> <C> <C>
75,000 $ .25 4.01
5,000 $ 1.50 3.41 5,000 $1.50
15,000 $ 3.83 1.61 15,000 $3.83
------ ------
95,000 $ .88 3.60 20,000 $3.25
====== ======
</TABLE>
The Board of Directors approved a stock buy-back program
where the Company is authorized to purchase up to 300,000 shares
of common stock. As of June 30, 1999, the Company has purchased
110,000 shares which is shown as treasury stock.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-14-
NOTE J - Stockholders' Equity (Continued)
- ------ --------------------------------
At June 30, 1998, the Company has reserved shares of common
stock for issuance upon exercise of warrants, options and
conversions of preferred stock as follows:
<TABLE>
<CAPTION>
<S> <C>
Plan "A" options 24,000
Plan "B" options 95,000
Preferred stock 7,538,181
Sub-debt financing 434,146
Equipment financing 50,000
-----------
8,141,327
</TABLE>
The Company has elected to follow Accounting Principles
Board Opinion 25 ("APB 25") and related interpretations in
accounting for its employee stock options. Under APB 25, where
the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no
compensation is recognized.
Pro forma information regarding net loss and loss per share
as required by SFAS No.123 has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that statement. The effect of applying SFAS No. 123 on
the 1999 and 1998 pro forma net loss is not necessarily
representative of the effects on reported operations for future
years due to, among other things: (1) the vesting period of the
stock options and (2) the fair value of additional stock options
in future years. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the
grant date for awards under the plans consistent with the
methodology prescribed under SFAS No. 123, the Company's net loss
in 1999 and 1998 would have been approximately $(4,003,000) and
$(8,332,000) or $(1.76) per share and $(4.97) per share,
respectively. The weighted average fair value of the options and
warrants granted during fiscal 1999 and 1998 are estimated as
$.11 and $.16, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following
assumptions: expected dividend yield of 0% in both of the years,
expected volatility of 40% in both of the years, risk-free
interest rate of 5.48% in 1999 and between 5.53% and 6.00% for
1998 and an estimated life of 5 years in 1999 and from 1 to 10
years in 1998.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-15-
NOTE J - Stockholders' Equity (Continued)
- ------ --------------------------------
The exercise price for warrants and options issued in
connection with services rendered by nonemployees or financing
arrangements is determined by negotiations between the Company
and the third party. Generally, warrants and options are issued
to employees with an exercise price of not less that the quoted
market price of the stock on the date of grant.
NOTE K - Related Party Transactions
- ------ --------------------------
In July 1998, the Company issued 600,000 shares of common
stock to a director of the Company in connection with certain
consulting services which were valued at approximately $169,000.
During the fiscal year 1998, the Company employed an
individual related to the former president of the Company to
manage the souvenir/concession area of the attraction. The
agreement provided for annual compensation of $80,000. In June
1998, the Company and this individual terminated the employment
contract. The termination agreement provided for a severance
payment of $18,000.
The Company had an agreement with a marketing consulting
firm whose principal was the former Chairman of the Board of
Directors of the Company to act as the Company's sales agent in
soliciting and negotiating sponsorships and commercial
endorsements. Sponsorship commissions and consulting fees earned
by said firm for the year ended June 30, 1998 were $48,000.
The Company incurred legal fees to a law firm, one of whose
partners was a director of the Company. Such fees related
primarily to general corporate services. Legal fees for the year
ended June 30, 1998 were $283,000.
NOTE L - 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. In November 1997, a new agreement
was entered into with its major equipment supplier 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.
In December 1998, the revenue-sharing agreement was amended to
increase the percentage of revenues payable to the equipment
vendor to 16% of the net revenue, as defined, and 50% of the
excess over such amount. The Company believes that this amendment
will incentivize the equipment vendor to add more games and help
increase revenues from the XS New York facility.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-16-
NOTE M - Contingencies
- ------ -------------
In October 1997, the Empire State Building Company (the
"ESBCo") sent notices of default to the Company alleging that the
Company failed to pay rent pursuant to certain leases at the
Empire State Building (the "ESB") (the "Notices"). The Company
believed it had valid claims and offsets against a portion of the
rents claimed by ESBCo. Thus, the Company responded to the
Notices and informed the ESBCo that the ESBCo, as well as others:
(1) had breached the leases and the license agreement; and (2)
had failed to provide the Company with certain credits, offsets
and adjustments that were due and owing to the Company under the
leases and license Agreement.
In December 1997, the Company commenced an action against
the ESBCo, Empire State Building Associates, Helmsley-Spear, Inc.
and others, seeking injunctive relief to prohibit the ESBCo from
terminating the Company's leases and the license agreement
relating to the New York Skyride location and also seeking
damages from the ESBCo. The Company asserts that the ESBCo
violated the terms of the leases and the license agreement. The
Company has received an injunction, which among other things,
prohibits 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. The court
ordered the Company to pay $838,000 in undisputed rent. The
Company intends to defend its position vigorously with respect to
its other claims for damages against the ESBCo.
NOTE N - Extraordinary Gains From Restructuring of Liabilities
- ------ -----------------------------------------------------
During the year ended June 30, 1999, the Company settled
$1,148,000 of liabilities to vendors for $935,000 resulting in a
gain of $213,000.
In November 1997, the Company agreed to sell its XS
trademarks and related property rights to its major equipment
supplier at its XS site. 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. In
connection therewith, the supplier agreed to reduce its
revenue-sharing percentage and forgave approximately $427,000
owed by the Company. The Company recognized a gain of $385,000
from the settlement of the liability net of the assets sold. The
total gain from restructuring of these liabilities in fiscal 1998
was $659,000.
SKYLINE MULTIMEDIA
ENTERTAINMENT, INC.
EMPIRE STATE BUILDING
350 FIFTH AVENUE, SUITE 612
NYC, NY 10118
July 14, 1999
Mr. Robert Brenner
President
Logical Systems, Inc.
c/o Skyline Multimedia Entertainment, Inc.
Empire State Building
350 Fifth Avenue, Suite 612
New York, NY 10018
Dear Rick:
Skyline Multimedia, Inc. (the "Company") hereby agrees to contract with Logical
Systems, Inc. ("Consultant") for the services of Robert Brenner ("Brenner") for
the position of Chief Executive Officer and Director of the Company for a period
of two years (the "Employment Term"). In such capacity, Robert Brenner shall be
covered and indemnified by the Company to the full extent of the Company's
Directors' and Officers' liability insurance.
The terms and conditions of this engagement are as follows:
This Agreement may be cancelled by either party with ninety (90) days
written notice.
The company will pay Consultant the gross monthly fee ("Fee") of $18,000,
which consists of the base amount of $15,000 per month plus 20% to cover the
cost of health, life, disability and other employment related costs.
In the event that the Company cancels this Agreement for any reason during
the Employment Term, or fails to offer to renew the Agreement, the Company will
pay a one-time termination fee equal to six months severance, plus one
additional month of severance for each month consultant has been employed at the
Company beyond May 1999, up to a maximum of twelve months severance.
If the event that a change of control of the Company occurs, the Company
shall pay to Consultant an incentive fee equal to the greater of 3% of the
transaction proceeds or $250,000; provided, however, that if a change of control
occurs during the twelve-month period following termination of this Agreement
and such change of control occurs in connection with negotiations that commenced
during the term of this Agreement, then Consultant shall be entitled to all such
incentive payments described in this Clause 4. As an incentive to improve
profitability, the Company shall pay a bonus to Consultant equal to 10% the
first $1,000,000 of annual EBITDA and 5% of EBITDA in excess of $1,000,000 per
year. This bonus may be paid semi-annually; provided, however, that upon the
termination of this Agreement, Consultant shall be paid any amounts accruing
under this Clause 5 on a pro rata basis up to and including such termination
date. In the event the Company survives through September 30, 1999 without the
necessity of a bankruptcy filing, the Company will pay Consultant a one-time
bonus of $50,000; provided, however that if the Company subsequently files for
bankruptcy with 15 days thereafter, the Company shall not be obligated under
this Clause 5 and Consultant shall return to the Company any funds previously
paid pursuant to this Clause.
This Agreement shall be deemed effective as of November 15, 1998.
Yours truly,
Skyline Multimedia, Inc.
/s/Ronald H. Aghassi
Name: Ronald H. Aghassi
Title: Vice President of Finance
(As directed per Board Meeting of 8/4/99)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE
FISCAL YEAR ENDED JUNE 30, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> jun-30-1999
<PERIOD-END> jun-30-1999
<CASH> 780,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 122,000
<CURRENT-ASSETS> 941,000
<PP&E> 10,797,000
<DEPRECIATION> 5,165,000
<TOTAL-ASSETS> 7,462,000
<CURRENT-LIABILITIES> 6,534,000
<BONDS> 4,450,000
0
1,000
<COMMON> 3,000
<OTHER-SE> (7,513,000)
<TOTAL-LIABILITY-AND-EQUITY> 7,462,000
<SALES> 9,502,000
<TOTAL-REVENUES> 9,603,000
<CGS> 515,000
<TOTAL-COSTS> 515,000
<OTHER-EXPENSES> 11,904,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,435,000
<INCOME-PRETAX> (4,207,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,207,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 213,000
<CHANGES> 0
<NET-INCOME> (3,994,000)
<EPS-BASIC> (1.76)
<EPS-DILUTED> (1.76)
</TABLE>
