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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
Quarterly report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For Quarter Ended: March 31, 1999
Commission File No. 0-23396
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
- ------------------------------------------------------------------------------
New York 11-3182335
(State of Incorporation) (IRS Employer Identification No.)
350 Fifth Avenue
New York, New York
10118
(Address of principal executive office)
(Zip code)
(212) 564-2224
Issuer's telephone number, including area code
- ------------------------------------------------------------------------------
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
issuer was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of May 14, 1999, there were issued and outstanding 1,385,000 shares of
Common Stock, $.001 par value per share, 290,000 shares of Class A Common
Stock, $.001 par value per share, and 1,090,909 shares of Series A Convertible
Participating Preferred Stock, $.001 par value per share.
Transitional Small Business Disclosure Format
Yes No X
----- -----
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Condensed consolidated financial statements
(unaudited)
Balance sheet as of March 31, 1999 3
Statements of operations for the three and nine months
ended March 31, 1999 and 1998 4
Statements of cash flows for the nine months
ended March 31, 1999 and 1998 5
Notes to financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION 18
INDEX TO EXHIBITS 19
SIGNATURES 24
2
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)
March 31, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 834,000
Inventory 92,000
Prepaid expenses and other current assets 97,000
------------
Total current assets 1,023,000
Property, equipment and leasehold improvements - net 6,003,000
Security deposits 475,000
Deferred financing costs 85,000
Other assets - net 356,000
------------
$ 7,942,000
============
LIABILITIES
Current liabilities:
Capital lease obligations - current portion $ 616,000
Notes payable - institutional lenders 2,785,000
Note payable - other 500,000
Accounts payable 1,803,000
Due to contractors 195,000
Accrued expenses 202,000
Interest payable - institutional lenders 284,000
------------
Total current liabilities 6,385,000
Capital lease obligations (less current portion) 249,000
Notes payable - institutional lenders 4,062,000
Deferred rent payable 2,031,000
Accrued interest payable - institutional lenders 1,521,000
------------
14,248,000
------------
Commitments and contingencies
CAPITAL DEFICIENCY
Preferred stock, par value $.001 per share, 5,000,000 shares authorized, 1,090,909 1,000
shares of Series A convertible participating preferred stock issued and outstanding
(liquidating value $2.75 per share)
Common stock - $.001 par value; authorized 19,000,000 shares; one vote per share: 2,000
1,385,000 shares issued and outstanding
Class A common stock - $.001 par value; authorized 1,000,000 shares; five votes 1,000
per share; 290,000 shares issued and outstanding
Treasury stock, 110,000 shares of common stock and 670,000 shares of Class A (601,000)
common stock at cost
Additional paid-in-capital 10,695,000
Accumulated deficit (16,404,000)
------------
(6,306,000)
------------
$ 7,942,000
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
March 31 March 31
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Attraction sales $ 1,655,000 $ 1,958,000 $ 6,182,000 $ 7,148,000
Concession sales 211,000 191,000 831,000 766,000
Sponsorship income 27,000 60,000 76,000 236,000
------------ ------------ ------------ ------------
1,893,000 2,209,000 7,089,000 8,150,000
------------ ------------ ------------ ------------
Operating expenses:
Cost of merchandise sold 93,000 92,000 384,000 383,000
Selling, general and administrative 2,095,000 2,193,000 6,972,000 8,339,000
Depreciation and amortization 500,000 406,000 1,518,000 1,310,000
------------ ------------ ------------ ------------
Total operating expenses 2,688,000 2,691,000 8,874,000 10,032,000
------------ ------------ ------------ ------------
(Loss) from operations before interest expense (795,000) (482,000) (1,785,000) (1,882,000)
Net interest (expense) (308,000) (248,000) (1,093,000) (674,000)
------------ ------------ ------------ ------------
(Loss) before extraordinary item (1,103,000) (730,000) (2,878,000) (2,556,000)
Extraordinary gain from restructuring of liabilities 28,000 0 240,000 0
------------ ------------ ------------ ------------
Net (loss) $ (1,075,000) $ (730,000) $ (2,638,000) $ (2,556,000)
============ ============ ============ ============
(Loss) per share of common stock - basic and diluted:
before extraordinary item $ (.66) $ (.44) $ (1.72) $ (1.53)
============ ============ ============ ============
Net (loss) per share of common stock - basic and diluted $ (.64) $ (.44) $ (1.57) $ (1.53)
============ ============ ============ ============
Weighted average common shares outstanding 1,675,000 1,675,000 1,675,000 1,675,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
March 31
--------------------------
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,638,000) $(2,556,000)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Writeoff of trademark costs 0 37,000
Restructuring of liabilities - noncash (240,000) 0
Depreciation and amortization 1,518,000 1,310,000
Issuance of warrants 156,000 0
Changes in:
Accounts payable, accrued liabilities and deferred rent payable 1,089,000 1,430,000
Inventory 42,000 52,000
Prepaid expenses and other assets 153,000 112,000
Deferred sponsorship income (49,000) (67,000)
----------- -----------
Net cash provided by operating activities 31,000 318,000
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (85,000) (482,000)
Security deposits (2,000) (20,000)
Deferred project and leasing costs 0 (141,000)
Certificate of deposit 0 209,000
----------- -----------
Net cash (used in) investing activities (87,000) (434,000)
----------- -----------
Cash flows from financing activities:
Repayment of capital lease obligations (606,000) (536,000)
Financing costs 0 25,000
Proceeds from notes payable -- --
0 500,000
----------- -----------
Net cash (used in) financing activities (606,000) (11,000)
----------- -----------
Net (decrease) in cash (662,000) (127,000)
Cash at beginning of period 1,496,000 1,119,000
----------- -----------
Cash at end of period $ 834,000 $ 992,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest during the year $ 175,000 $ 211,000
Cash paid for taxes during the year $ 2,000 $ 37,000
Equipment acquired under a capital lease agreement $ 0 $ 20,000
Forgiveness of debt - Officer/Stockholder $ 0 $ 279,000
Note payable offset by security deposit $ 524,000 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form
10-QSB and rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the nine
months ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the full fiscal year ended June 30, 1999. For further
information, refer to the financial statements and footnotes thereto included
in the Company's annual report on Form 10-KSB for the year ended June 30,
1998.
2. Earnings Per Share
Basic and diluted net (loss) per share for each period is calculated
by dividing net loss available to common stockholders for the period by the
weighted average number of common shares outstanding for each period,
excluding the 1,090,909 shares of Series A Convertible Participating Preferred
Stock as such shares were considered to be anti-dilutive.
3. Income Taxes
The principal components of Deferred Tax Assets, Liabilities, and the
Valuation Allowance are as follows:
March 31
-------------------------------
1999 1998
---- ----
Deferred Tax Assets:
Capitalization of start-up costs $ 126,000 $ 302,000
Impairment Loss 1,734,000 0
Net operating loss carryforwards 6,187,000 4,099,000
----------- -----------
8,047,000 4,401,000
Valuation allowance (7,226,000) (3,782,000)
----------- -----------
821,000 619,000
Deferred Tax Liabilities:
Depreciation differences 821,000 619,000
----------- -----------
Net Deferred Tax Asset $ 0 $ 0
=========== ===========
The Company has provided a valuation allowance of $7,226,000 against
its deferred tax asset due to uncertainty of the Company being able to use
this benefit to offset future taxable income. The Company will periodically
evaluate the likelihood of realizing such asset and will adjust such amount
accordingly.
6
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4. Property, equipment and leasehold improvements
Property and equipment, including assets under capital leases are
recorded at cost and are depreciated on the straight-line method over the
estimated useful lives of the assets from two to twelve years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset. Property, equipment
and leasehold improvements at cost are summarized as follows:
Equipment and fixtures 1,662,000
Simulation equipment 2,315,000
Simulation film 1,065,000
Leasehold improvements 5,662,000
---------
10,704,000
Less: Accumulated depreciation
and amortization (4,701,000)
---------
Total $ 6,003,000
=========
5. Inventory
Inventory consists of clothing, souvenirs and food sold at the
Company's existing sites and is valued at the lower of cost (first-in,
first-out) or market.
6. Notes Payable
On December 31, 1996, the Company refinanced its existing equipment
at its New York Skyride location with aggregate proceeds of $1,500,000. The
new note bears interest at 11 1/2% per annum compounded monthly and is to be
repaid in 48 monthly installments secured by a first security interest in all
of the equipment at the New York Skyride location. Additionally, up to
$250,000 of the loan is personally guaranteed by the Company's former
president. As of March 31, 1999, the remaining outstanding balance on this
note was approximately $636,000.
During March 1997, the Company entered into a loan agreement with an
institutional lender to finance the acquisition of additional equipment for XS
New York. Pursuant to this transaction in April 1997, the Company received
$474,000 with an additional $54,000 held by the lender as security. The amount
financed bears interest at 11 1/2% per annum compounded monthly and was
initially to be repaid in 48 monthly installments. During November 1997, the
term was modified to provide for an accelerated payback over 36 months from the
date of issuance. The institutional lender obtained a first security interest in
the equipment and up to $125,000 of the loan is personally guaranteed by the
Company's former president. As of March 31, 1999 the remaining outstanding
balance on this note is approximately $188,000.
7. Subordinated Notes Payable
(1) On December 20, 1996, the Company entered into a Senior Credit Agreement
(the "Senior Credit Agreement") with Prospect Street NYC Discovery Fund, L.P.
("Prospect Street") and Bank of New York, as Trustee for the Employees
Retirement Plan of the Brooklyn Union Gas Company ("BUG"), to obtain up to
$4,100,000 in senior unsecured subordinated debt which accrues interest at an
annual rate of 14% and requires the payment of both principal and interest
five years from the date of issuance. The Senior Credit Agreement was
subsequently amended to increase the amount of the subordinated debt to
$4,450,000 and to provide for the inclusion of additional lenders. Of such
increased amount $2,500,000 was received by the Company from BUG and a related
pension fund and $1,950,000 was received by the Company from Prospect Street
and its affiliates. As of March 31, 1999, unamortized debt discount of
$388,000 remained on these amounts. In connection with the Senior Credit
Agreement, BUG and its related pension fund received warrants to purchase up
to an aggregate of 243,904 shares of Common Stock and Prospect Street and its
affiliates received warrants to purchase up to an aggregate of
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190,242 shares of Common Stock, each exercisable until December 20, 2006 at an
exercise price of $4.25 per share. A purchase price of $1.00 per warrant was
allocated from the subordinated debt proceeds received by the Company. As part
of this financing, on November 6, 1996, Prospect Street provided the Company
with a demand loan of $1,500,000, at an annual interest rate of 14%, which
loan was exchanged for a portion of the subordinated debt under the Senior
Credit Agreement.
(2) During June 1997, the Company received an additional $500,000 loan from
Prospect Street payable upon demand and bearing interest at the rate of 14%
per annum. During December 1997, the Company received a $500,000 loan from a
bank bearing interest at the rate of 6.25% per annum that is secured by a
certificate of deposit from Prospect Street.
(3) On April 15, 1998, the Company and its subsidiaries entered into a
Senior Secured Credit Agreement (the "Credit Agreement") with the Bank of New
York, as Trustee for the Employees Retirement Plan of Keyspan Energy Corp.
("Keyspan") and Prospect Street (together with Keyspan, the "Institutional
Investors") relating to the financing of an aggregate of $935,000 ($500,000
from Keyspan and $435,000 from Prospect Street) (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 matured on July 15, 1998, accrue
interest at a per annum rate equal to 14% and are secured (with certain
exceptions) by all the assets of the Company and its subsidiaries. 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. 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
$2,285,000. Additionally, subsequent to June 30, 1998, the Credit Agreement
was further amended to include under its terms the $500,000 demand loan to the
Company from Prospect Street in June 1997.
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 will
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 for an exercise price of approximately $64.9
million, or, at the option of the holder, pursuant to a cashless exercise
feature, the difference in shares between 173 million shares and that number
of shares having a market value equal to $64.9 million (i.e., at a market price
per share of $.40, an aggregate of 10.8 million shares of Common Stock will be
issued) resulting in significant dilution to existing shareholders.
(4) On September 2, 1998, the Company and its subsidiaries entered into a
Debt to Equity Conversion Agreement (the "Conversion Agreement") with its
Institutional Investors. Pursuant to the Conversion Agreement, the
Institutional Investors have agreed, subject to certain conditions, to convert
all of their respective indebtedness of the Company (the "Debt"),
approximately $7.235 million principal amount plus approximately $1.805
million of accrued interest thereon through March 31, 1999 (the "Initial
Conversion Value") into approximately 8,790 shares of Series B Convertible
Redeemable Preferred Stock of the Company (the "Series B Preferred Stock").
The Institutional Investors have agreed to such conversion in an effort to
comply with certain Nasdaq SmallCap Market ("Nasdaq") net worth criteria to
maintain the listing of the Company's Common Stock on Nasdaq and to make the
Company's balance sheet and capital structure more attractive to potential
investors and the financial community. Provided the Company's listing of its
Common Stock on Nasdaq is reinstated, the conversion of the Debt will be
subject to the approval of the issuance of the Series B Preferred Stock by the
shareholders of the Company at the next annual meeting of shareholders or,
alternatively, receipt from Nasdaq of a waiver of such shareholder approval
requirement. On December 2, 1998, the Company's Common Stock was delisted from
Nasdaq. Although the Company has requested a review of Nasdaq's decision, the
Institutional Investors are not obligated to convert the Debt and
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will likely not make a decision regarding conversion until the Company is
informed of the results of Nasdaq's review, which is expected in May 1999.
The holders of shares of Series B Preferred Stock will be entitled to
a 10% cumulative dividend when, as and if declared by the Board. The shares of
Series B Preferred Stock will be convertible by the holders thereof into that
number of shares of Common Stock of the Company calculated by dividing $1.30
into the Initial Conversion Value of the Series B Preferred Stock (i.e.,
$1,000 per share or an aggregate of $8.79 million), subject to adjustment,
plus any accumulated dividends. The Series B Preferred Stock will be
redeemable by the Company, in whole or in part, at any time upon payment of
the Initial Conversion Value per share (as adjusted from time to time), plus
any accumulated dividends. The Institutional Investors will also have certain
registration rights with respect to the Common Stock issuable upon conversion
of the Series B Preferred Stock.
8. Deferred Rent Payable
The Company, for financial accounting purposes, spreads scheduled
rent increases and rent holidays over the terms of the respective leases using
the straight-line method.
9. Sponsorship Income
As of March 31, 1999, the Company has one existing sponsorship
agreement. The agreement has a five year term and is due to expire in May
1999. In addition to this agreement, the Company also had two other
sponsorship agreements which expired in December 1997 and August 1998,
respectively. All of these agreements which ranged in terms of three to five
years, provided for annual fees, capital improvements and cross promotions for
the Company. Sponsorship revenue under these agreements aggregated
approximately $1,300,000 over their respective terms. During the quarters
ended March 31, 1999 and 1998, the Company recognized as income $27,000 and
$60,000, respectively, which represent monetary fees received from these
sponsors and approximately $8,000 was deferred as of March 31, 1998.
10. Preferred Stock
On July 7, 1995, the Company consummated a stock purchase agreement
with Prospect Street, a small business investment company, pursuant to which
the Company sold 1,090,909 shares of Series A Convertible Participating
Preferred Stock, par value $.001 per share (the "Preferred Stock"), for
$3,000,000. Net proceeds from such investment aggregated approximately
$2,833,000. The Preferred Stock issued is convertible into common stock of the
Company at any time on a share-for-share basis, which was subsequently
adjusted to a conversion rate of 6.91 shares of Common Stock for each share of
Preferred Stock. Pursuant to the stock purchase agreement, the Preferred Stock
and underlying common stock into which it is convertible are subject to both
demand and piggyback registration rights. The Preferred Stock has a
liquidation preference equal to $2.75 per share, or $3,000,000, but does not
pay any dividends unless declared by the Board of Directors. The preferred
stockholder is entitled to an aggregate of up to 24.9% of the outstanding
voting power of the Company, which can increase to 50.1% of the voting power
if, in good faith, in the sole discretion of such preferred stockholder, it
becomes reasonably necessary for the protection of its investment.
11. Recently Issued Accounting Standards
The Financial Accounting Standards Board has recently issued
statements of financial accounting standards No. 129, "Disclosure Of
Information About Capital Structure", No. 130, "Reporting Comprehensive
Income," and No. 131, "Disclosures About Segments Of An Enterprise And Related
Information." The Company believes that the above pronouncements will not have
a significant effect on the information presented in the consolidated
financial statements.
9
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12. Revenue Sharing Agreements
The Company has been provided with certain equipment for use in its
XS New York facility in exchange for a percentage of the revenues generated
therefrom. During November 1997, a new agreement was entered into with 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. Such amounts were offset against selling, general and
administrative expenses for the three months ended September 30, 1997. 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 incentivize the equipment vendor to add more
games and help increase revenues from the XS New York facility.
13. Commitments and Contingencies
In October 1997, the Empire State Building Company (the "ESBCo") sent
notices of default to the Company with respect to the Company's various leases
at the Empire State Building (the "ESB") for an alleged failure to pay rent.
The Company believed it had valid claims and offsets against a portion of the
rents claimed by ESBCo. In December 1997, the Company commenced an action
against the ESBCo seeking injunctive relief to prohibit the ESBCo from
terminating the Company's leases and the licenses agreement relating to the
New York Skyride location and also seeking significant 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, prohibiting the
ESBCo from terminating or canceling the leases and the license agreement and
restraining the ESBCo from interfering with the Company's business or
commencing any proceedings with respect to the leases and the license
agreement. The court ordered the Company to pay $838,000 in undisputed rent. A
determination with respect to disputed rental amounts was expected to be
decided by a referee during December 1998, which proceeding has been postponed
to May 18, 1999. On February 26, 1999, oral arguments were heard by the court
with respect to the Company seeking a preliminary injunction to prevent the
ESBCo from terminating the lease for the undeveloped space on the second
floor. The motion is presently before the court and no decision has been
reached. The court dismissed certain of the Company's claims, but the
Company's core claims of breach of the leases, breach of the licensing
agreement and a breach of the duty of good faith and fair dealing remain. As
to the claims dismissed by the court, the Company filed a notice of appeal on
or about April 20, 1999. The Company is pursuing its other claims and has
commenced discovery with respect to these claims for damages against the
ESBCo.
10
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operational Overview
From its inception until December 22, 1994, the Company's primary
activities consisted of developmental activities, including the preparation of
plans relating to the design of New York Skyride, the Company's first motion
simulator film-based attraction; negotiation of a lease and a license
agreement with the operators of the Empire State Building, the location of New
York Skyride; working with engineers, architects, contractors, designers, and
other parties in connection with the construction of New York Skyride;
developing software and video films in connection with New York Skyride;
developing marketing strategies; initiating marketing and corporate
sponsorship activities; selecting a management team; and obtaining financing.
On December 22, 1994, the Company commenced operations of New York
Skyride and began generating revenue from ticket sales to the attraction and
the sale of merchandise at its souvenir/concession area. New York Skyride was
opened on a preview basis until February 21, 1995, the date of its official
Grand Opening.
During April 1996, the Company signed a 20 year renewable lease (the
"Additional Lease") for an additional 35,000 square feet of space within the
Empire State Building ("the ESB"), adjacent to and above the current location
of New York Skyride. The Additional Lease was entered into in conjunction with
the modification of the lease and the license agreement relating to the New
York Skyride facility (the "Modification Agreements"). As a result of the
Additional Lease and the Modification Agreements, which requires the ESBCo to
increase the level of cooperation with the Company and improve relations
between the ESB staff and the Company's employees, the Company hoped that the
existence of a smaller non-New York related simulator which would not get the
level of preferential treatment as promised to the Company by the ESBCo, would
not have a material impact on the Company's operations taken as a whole.
Additionally, the Company had intended to utilize the additional space to
create a mixed use location-based entertainment center, which development
plans for such additional space were deferred until the Company resolves its
current litigation with the ESBCo. However, the Company believes that the
ESBCo and the ESB staff have not provided the level of cooperation promised
and that such lack of cooperation, in addition to the existence of a
competitor, has negatively impacted the Company's operations and its
development plans for the additional space. The competitor ceased operations
in February, 1998.
In late October, 1997, the ESBCo sent notices of default to the
Company with respect to the Company's various leases at the ESB for an alleged
failure to pay rent. In addition to attempting to resolve the foregoing issues
relating to the circumstances involving the Modification Agreements, the
Company also believes it has valid claims, credits and offsets against a
portion of the rents claimed by the ESBCo. On December 22, 1997, the Company
was informed by representatives of the ESBCo that the Company's proposal to
resolve certain alleged lease defaults was not acceptable. The Company
believes it had negotiated in good faith and had no reason to suspect that its
previously submitted proposal would not be acceptable. In light of this
negative response from the ESBCo, which the Company believes is another
example of the ESBCo's pattern of bad faith and lack of cooperation toward the
Company, the Company has filed a lawsuit against the ESBCo and related parties
seeking, among other things, injunctive relief to prohibit the ESBCo from
terminating the Company's leases at the Empire State Building (the "Leases")
and the License Agreement relating to the New York Skyride (the "License
Agreement") and also seeking damages from the ESBCo.
In April 1998, the Company received injunctive relief, 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 Company paid approximately $838,000 pursuant to
an order from the court relating to undisputed rental amounts. A determination
with respect to disputed rental amounts was expected to be decided by a
referee during December 1998, which proceeding has been postponed to May 18,
1999. On February 26, 1999, oral arguments were heard by the court with
respect to the Company seeking a preliminary injunction to prevent the ESBCo
from terminating the lease for the undeveloped space on the second floor. The
motion is presently before the court and no decision has been reached. The
court dismissed certain of the Company's claims, but the Company's core claims
of breach of the leases, breach of the licensing agreement and a breach
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of the duty of good faith and fair dealing remain. As to the claims dismissed
by the court, the Company filed a notice of appeal on or about April 20, 1999.
The Company is pursuing its other claims and has commenced discovery with
respect to these claims for damages against the ESBCo. See "Part II - Item 1.
Legal Proceedings" below.
Further, as previously disclosed, it is likely that the Company will
not be developing the space within the ESB which is the subject of the
Additional Lease in the near term. The Company is uncertain as to the
disposition of this space as a result of the lawsuit brought by the Company
against the ESBCo described above and the conduct of the defendants in that
lawsuit. Until such disposition, however, the Company will continue to accrue
rent expense with respect to the Additional Lease.
Historically, in the New York metropolitan area, the summer months,
which include significant tourist traffic, represent the busiest period of the
year. During each of the quarters ending March 31, 1999 and 1998, New York
Skyride was visited by approximately 101,000 and 118,000 customers,
respectively. For the quarter ended March 31, 1999 the Company's capture rate
of observatory visitorship averaged approximately 15%, down from approximately
19% for the quarter ended March 31, 1998.
On December 27, 1996, the Company commenced operations, through its
wholly-owned subsidiary, Skyline Virtual Reality, Inc., of an interactive
virtual reality entertainment center, XS New York, which is located in the
heart of Times Square in New York City. XS New York features the latest in
virtual reality hardware and software, simulation technology and interactive
participation game experiences. Additionally, the facility includes a
"cybercafe" which offers light food and refreshments and computer terminals
which are linked to the World Wide Web and the Internet. XS New York was
opened on a preview basis until March 20, 1997, the date of its official Grand
Opening. The Company, on November 4, 1997, renegotiated its revenue-sharing
agreement with the primary equipment supplier of XS New York in consideration
of the sale to such supplier of the "XS" trademarks and related intellectual
property rights. Additionally, in connection with the sale of the trademarks
and other intellectual property rights, such equipment supplier has forgiven
all amounts owed to it by the Company through October 12, 1997 (which
aggregated approximately $427,000). Pursuant to a license agreement from such
supplier, the Company may continue to use the "XS" trademarks in connection
with the Times Square location. 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
incentivize the equipment vendor to add more games and help increase revenues
from the XS New York facility.
Promoting New York Skyride and XS New York to tourist boards (such as
the New York Convention and Visitors Bureau), travel agents, managers of group
activities and visitors to New York City represents a primary focus of the
Company's marketing efforts for these attractions. Since tourists and visitors
are a primary target, special volume discounts are offered to groups such as
conventions and trade associations, as well as through travel agent packages.
School groups are also a significant market for New York Skyride and XS New
York, and special programs are being implemented to target these audiences,
especially during the slower tourist periods in the fall and winter months.
Additionally, the Company's marketing efforts have focused significant
attention on promoting New York Skyride and XS New York for birthday parties
and special events.
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 which 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 to other
entertainment companies 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, in which event, the Company may be
required to writeoff the carrying balance of the $990,000 expended in
connection with this project as of March 31, 1999 (of which a substantial
portion has already been written off).
The Company's revenues are generated primarily form ticket sales for
New York Skyride and game revenues at XS New York, with additional revenues
generated from the sales of food, beverages and souvenir merchandise. The
Company has entered into corporate sponsorship and advertising arrangements
with certain consumer product companies which provide additional revenues and
marketing exposure.
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The Company will continue to market and promote its various
activities through traditional print advertising in publications that go to
New York City tourists and others, as well as broaden its advertising and
promotional programs to the general public through local radio and newspaper
advertising.
Results of Operations
Revenues. Revenues generated during the three and nine months ended
March 31, 1999 aggregated $1,893,000 and $7,089,000, respectively, as compared
to $2,209,000 and $8,150,000, respectively, for the three and nine months
ended March 31, 1998. The decrease in revenues for the three months ended
March 31, 1999 from the prior year period is primarily due to the decrease in
game revenues at the Company's XS New York facility, which accounted for
revenues of $760,000 and $2,543,000, respectively, during the three and nine
months ended March 31, 1999 as compared to $992,000 and $3,549,000,
respectively, for the three and nine months ended March 31, 1998. In addition,
there was a decrease in ticket revenues for the three months ended March 31,
1999 at New York Skyride, as a result of a decrease in the capture rate of
observatory visitorship, which accounted for revenues of $890,000 and
$3,636,000, respectively, during the three and nine months ended March 31,
1999 as compared to $966,000 and $3,600,000, respectively, for the three
months ended March 31, 1999.
Management expects to continue to supplement its primary revenue
stream from ticket sales from New York Skyride and game revenue at XS New York
by selling corporate sponsorships from consumer product companies. During the
three and nine months ended March 31, 1999 and 1998, the Company earned
approximately $27,000 and $76,000, respectively, compared to $60,000 and
$236,000, respectively, in sponsorship income as a result of monthly fees and
capital improvements received from sponsors. The remaining agreement with the
Company's sponsor, which expires in May 1999 will provide annual sponsorship
fees aggregating approximately $75,000 for the year ended June 30, 1999. The
Company expects to pursue sponsorship opportunities in the form of cash,
promotional or barter arrangements. However, no assurances can be made that
the Company will be successful at signing significant new sponsorship
agreements.
Operating Expenses. Operating expenses incurred for the three and
nine months ended March 31, 1999 aggregated $2,688,000 and $8,874,000,
respectively, as compared to $2,691,000 and $10,032,000, respectively, for the
three and nine months ended March 31, 1998. The decrease for the nine months
ended March 31, 1999 is due primarily to a concentrated effort by management
to reduce payroll and overhead. In addition, the Company has, as a result of
negotiations with certain creditors, recorded an extraordinary gain from
restructuring of payables of approximately $240,000 for the nine months ended
March 31, 1999.
Net Loss and Loss Per Share. Basic and diluted net loss and loss per
share available to common shareholders were ($1,075,000) and ($.64) and
($2,638,000) and ($1.57), respectively, for the three and nine months ended
March 31, 1999 as compared to ($730,000) and ($.44) and ($2,556,000) and
($1.53), respectively, for the three and nine months ended March 31, 1998. The
net loss for the three months ended March 31, 1999 included a net loss of
approximately ($646,000) related to XS New York (see "Operating Expenses"
above) and a net loss of approximately ($429,000) related to New York Skyride.
However, for the three months ended March 31, 1999, New York Skyride had net
income from operations (before interest expense and taxes and excluding legal
fees relating to legal proceedings with the ESBCo and rent on additional space
at the Empire State Building) of approximately $9,000 as compared to net
income from operations (before interest expense and taxes and excluding legal
fees relating to legal proceedings with the ESBCo. and rent on additional
space at the Empire State Building) of approximately $33,000 for the three
months ended March 31, 1998. Net income from operations at New York Skyride
decreased from the previous year primarily as a result of a decrease in ticket
revenues and sponsorship income. XS New York incurred a net loss from
operations (before interest expense and taxes) of approximately ($470,000) for
the three months ended March 31, 1999 as compared to a net loss from
operations (before interest expense and taxes) of approximately ($186,000) for
the three months ended March 31, 1998. Net loss from operations at XS New York
increased from the previous period primarily as a result of a decrease in game
revenues as well as additional required accelerated depreciation of
approximately $61,000 resulting from the cancellation clause in the lease.
Working Capital Deficiency. Working capital deficiency at March 31,
1999, was approximately ($5,362,000) compared to a working capital deficiency
of approximately ($5,477,000) at March 31, 1998. The decrease in working
capital deficiency is primarily the result of the offset of a security deposit
against the short-term portion of the note payable balance of approximately
$280,000 reduced by fixed asset purchases by the Company of approximately
$191,000.
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Liquidity and Capital Resources
In February 1994, the Company consummated an initial public offering
("IPO") of 1,495,000 Units (the "Units") (including exercise of the
over-allotment option in April 1994), each Unit consisting of one share of
Common Stock, $.001 par value (the "Common Stock"), one Redeemable Class A
Warrant (the "Class A Warrants") and one Redeemable Class B Warrant (the
"Class B Warrants"). The Class A Warrants and Class B Warrants expired
pursuant to their terms as of February 13, 1999. The Company received
aggregate net proceeds of approximately $6,200,000 in connection with its IPO
which proceeds were used principally for the development of New York Skyride.
On July 7, 1995, in order to pay the Company's creditors, provide
capital for future growth and expansion and allow for an extensive promotional
and marketing campaign, the Company consummated a private placement with
Prospect Street NYC Discovery Fund, L.P. ("Prospect Street") whereby 1,090,909
shares of Series A Convertible Participating Preferred Stock (the "Preferred
Stock") were sold for gross proceeds of $2.75 per share aggregating
$3,000,000. The Preferred Stock was convertible into Common Stock of the
Company at any time on a share-for-share basis, which was substantially
adjusted to a conversion rate of 6.91 shares of Common Stock for each share of
Preferred Stock in connection with the Financing described below. The holders
of the Preferred Stock are entitled to an aggregate of up to 24.9% of the
outstanding voting power of the Company on all matters which come before the
shareholders. Additionally, so long as 272,727 shares of Preferred Stock
remain outstanding, the holders thereof will have the ability to obtain up to
50.1% of the outstanding voting power of the Company and elect a majority of
the Board of Directors in the event the holders of the Preferred Stock
determine in good faith, in their sole discretion, that such action is
reasonably necessary for the protection of their investment. Since Prospect
Street is a Small Business Investment Company subject to the regulatory
oversight of the Small Business Administration ("SBA"), the exercise of this
control provision cannot be made arbitrarily and is subject to SBA review. The
Preferred Stock and the Common Stock into which it is convertible are subject
to a Registration Rights Agreement granting both demand and piggyback
registration rights.
At March 31, 1999, the Company had a working capital deficiency of
approximately ($5,362,000) compared to a working capital deficiency of
($5,477,000) at March 31, 1998 which was due primarily to the offset of a
security deposit against the short-term portion of the note payable balance of
$280,000 reduced by fixed asset purchases by the Company of approximately
$191,000. Since inception, the Company spent approximately $6,668,000 related
to capital expenditures with respect to New York Skyride and approximately
$7,986,000 related to capital expenditures and leasing costs with respect to
XS New York. However, for the year ended June 30, 1998, the Company has
recorded an impairment loss and taken a write-down of the carrying value of
its assets at both New York Skyride and XS New York and recorded a loss
relating to the retirement of certain virtual reality equipment. Additionally,
since April 1996, the Company had expenditures of approximately $876,000 for
security deposits, financing costs and leasing costs associated with the XS
New York project. However, the Company applied approximately $495,000 of a
security deposit to pay off an outstanding note payable with one of its
institutional lenders.
As a result of the Company's development of XS New York, the Company
incurred capital expenditures of approximately $7,891,000, consisting of
$847,000 in design and consulting fees, $5,165,000 in construction and
theming, $255,000 for signage and approximately $1,624,000 for equipment
purchases. For the year ended June 30, 1998, the Company has taken a
write-down of the carrying value of these assets and a loss relating to the
retirement of certain virtual reality equipment. In order to complete the
construction of XS New York and provide additional working capital for growth
and expansion, the Company raised additional secured and unsecured debt
through its relationships with its institutional investors and lenders as
described below.
On December 20, 1996, the Company entered into a Senior Credit
Agreement (the "Senior Credit Agreement") with Prospect Street and Bank of New
York, as Trustee for the Employees Retirement Plan of the Brooklyn Union Gas
Company ("BUG"), to obtain up to $4,100,000 in senior unsecured subordinated
debt which accrues interest at an annual rate of 14% and requires the payment
of both principal and interest five years from the date of issuance. The
Senior Credit Agreement was subsequently amended to increase the amount of the
subordinated debt to $4,450,000 and to provide for the inclusion of additional
lenders. Of such increased amount $2,500,000 was received by the Company from
BUG and a related pension fund and $1,950,000 was received by the Company from
Prospect Street and its affiliates. In connection with the Senior Credit
Agreement, BUG and its related pension fund received warrants to purchase up
to an aggregate of 243,904 shares of
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Common Stock and Prospect Street and its affiliates received warrants to
purchase up to an aggregate of 190,242 shares of Common Stock, each
exercisable until December 20, 2006 at an exercise price of $4.25 per share. A
purchase price of $1.00 per warrant was allocated from the subordinated debt
proceeds received by the Company. As part of this financing, on November 6,
1996, Prospect Street provided the Company with a demand loan of $1,500,000,
at an annual interest rate of 14%, which loan was exchanged for a portion of
the subordinated debt under the Senior Credit Agreement.
During June 1997, the Company received an additional $500,000 loan
from Prospect Street. During December 1997, the Company received a $500,000
loan from a bank bearing interest at the rate of 6.25% per annum that is
secured by a certificate of deposit from Prospect Street.
On April 15, 1998, the Company and its subsidiaries entered into a
Senior Secured Credit Agreement (the "Credit Agreement") with the Bank of New
York, as Trustee for the Employees Retirement Plan of Keyspan Energy Corp.
("Keyspan") and Prospect Street (together with Keyspan, the "Institutional
Investors") relating to the financing of an aggregate of $935,000 ($500,000
from Keyspan and $435,000 from Prospect Street) (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 matured on July 15, 1998, accrue
interest at a per annum rate equal to 14% and are secured (with certain
exceptions) by all the assets of the Company and its subsidiaries. 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. 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
$2,285,000. Additionally, subsequent to June 30, 1998, the Credit Agreement
was further amended to include under its terms the $500,000 demand loan to the
Company from Prospect Street in June 1997.
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 will
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 for an exercise price of approximately $64.9
million, or, at the option of the holder, pursuant to a cashless exercise
feature, the difference in shares between 173 million shares and that number
of shares having a market value equal to $64.9 million (i.e., at a market
price per share of $.40, an aggregate of 10.8 million shares of Common Stock
will be issued) resulting in significant dilution to existing shareholders.
A portion of the proceeds of the Financing were used to pay certain
undisputed rental amounts owing to the ESBCo pursuant to an order issued by
the Supreme Court of the State of New York on April 3, 1998 requiring the
Company to pay $838,000. With respect to the current legal proceedings, the
judge granted the preliminary injunction against the ESBCo and its affiliates.
The issues with respect to disputed rental amounts were referred to a referee
for final determination originally scheduled in December 1998, which
proceeding has been postponed to May 18, 1999. On February 26, 1999, oral
arguments were heard by the court with respect to the Company seeking a
preliminary injunction to prevent the ESBCo from terminating the lease for the
undeveloped space on the second floor. The motion is presently before the
court and no decision has been reached. The court dismissed certain of the
Company's claims, but the Company's core claims of breach of the leases,
breach of the licensing agreement and a breach of the duty of good faith and
fair dealing remain. As to the claims dismissed by the court, the Company
filed a notice of appeal on or about April 20, 1999. The Company is pursuing
its other claims and has commenced discovery with respect to these claims for
damages against the ESBCo.
On September 2, 1998, the Company and its subsidiaries entered into a
Debt to Equity Conversion Agreement (the "Conversion Agreement") with its
Institutional Investors. Pursuant to the Conversion Agreement, the
Institutional Investors have agreed, subject to certain conditions, to convert
all of their respective indebtedness of the Company (the "Debt"),
approximately $7.235 million principal amount plus approximately $1.555
million of accrued interest thereon through
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December 31, 1998 (the "Initial Conversion Value") into approximately 8,790
shares of Series B Convertible Redeemable Preferred Stock of the Company (the
"Series B Preferred Stock"). The Institutional Investors agreed to such
conversion in an effort to comply with certain Nasdaq SmallCap Market
("Nasdaq") net worth criteria to maintain the listing of the Company's Common
Stock on Nasdaq and to make the Company's balance sheet and capital structure
more attractive to potential investors and the financial community. Provided
the Company's listing of its Common Stock on Nasdaq is reinstated, the
conversion of the Debt will be subject to the approval of the issuance of the
Series B Preferred Stock by the shareholders of the Company at the next annual
meeting of shareholders or, alternatively, receipt from Nasdaq of a waiver of
such shareholder approval requirement. On December 2, 1998, the Company's
Common Stock was delisted from Nasdaq. Although the Company has requested a
review of Nasdaq's decision, which is expected in May 1999, the Institutional
Investors are not obligated to convert the Debt and will likely not make a
decision regarding conversion until the Company is informed of the results of
Nasdaq's review.
The holders of shares of Series B Preferred Stock will be entitled to
a 10% cumulative dividend when, as and if declared by the Board. The shares of
Series B Preferred Stock will be convertible by the holders thereof into that
number of shares of Common Stock of the Company calculated by dividing $1.30
into the Initial Conversion Value of the Series B Preferred Stock (i.e.,
$1,000 per share or an aggregate of $8.46 million), subject to adjustment,
plus any accumulated dividends. The Series B Preferred Stock will be
redeemable by the Company, in whole or in part, at any time upon payment of
the Initial Conversion Value per share (as adjusted from time to time), plus
any accumulated dividends. The Institutional Investors will also have certain
registration rights with respect to the Common Stock issuable upon conversion
of the Series B Preferred Stock.
On December 2, 1998, the Company received notification from Nasdaq
that Nasdaq had delisted the Company's securities effective as of the close of
business on December 2, 1998. The Nasdaq hearing with respect to the Company's
eligibility to maintain the listing of its Common Stock on Nasdaq was held on
September 3, 1998. Although the Company has requested a review of the hearing
panel's decision, which is expected in May 1999, such request did not stay the
delisting decision. The Company's securities currently trade on the OTC
Bulletin Board. However, there can be no assurance that the Company's market
makers will continue to make a market thereon. The delisting of the Company's
securities from Nasdaq may have an adverse impact on the liquidity of the
Company's securities and may make it more difficult to trade in the Company's
securities or liquidate an investor's holdings. Also, such delisting may make
it more difficult for the Company to raise equity capital.
During November 1996 the Company entered into a loan agreement with
an institutional lender 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. During March 1999, the Company came
to an agreement with its institutional lender 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.
During December 1996, the Company refinanced certain loans on the
equipment located at its New York Skyride location for aggregate proceeds of
$1,500,000 of which approximately $491,000 was applied to satisfy amounts due
under the original loan. The loan bears annual interest at 11 1/2% and is to be
repaid in 48 monthly installments and is secured by a first lien on all
equipment at New York Skyride. The Company's former president has guaranteed
up to $250,000 of this loan.
During March 1997, the Company signed an agreement with its
institutional lender to finance the acquisition of additional equipment for XS
New York aggregating approximately $474,000. The terms of the loan are the
same as described in the previous paragraph except that the security amount
withheld by the lender is $54,000 and the personal guarantee from the
Company's former president is $125,000.
The lease for the XS New York location contains a cancellation clause
exercisable at any time in the event the landlord commences construction of an
office building 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
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such lease cancellation. 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 was required to
record an impairment loss and write-down the carrying value of its assets at
XS New York as a result of the existence of the cancellation clause in its
lease and the published reports of a sale of the property. The Company has not
received notice of exercise of the cancellation clause and believes that the
site may continue to operate through June 30, 2000. However, 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's independent auditors have included an explanatory
paragraph in their report on the Company's Financial Statements for the year
ended June 30, 1998 to the effect that certain matters raise substantial doubt
about the Company's ability to continue as a going concern, which is
contingent upon, among other things, the Company's ability to secure financing
and attain profitable operations. See Financial Statements.
The Company's short term goals are to focus on its existing
attractions and improve cash flows from operations and reduce corporate
overhead. No assurance can be given that these goals will be accomplished.
The Company's long term goal is to develop simulator and other
location-based entertainment attractions in other major cities primarily in
the United States. There are, however, only a limited number of locations in a
small number of cities that are suitable for such attractions, and there can
be no assurance that the Company could obtain a lease at any such locations or
develop a successful attraction at such locations. Also, development of
additional attractions will require the Company to obtain financing for such
ventures, and there can be no assurance that such financing will be available,
or available on terms and conditions that are acceptable to the Company.
Additionally, it is possible that the Company would find it necessary to have
one or more local partners involved in any additional attractions it might
attempt to develop, further limiting the revenues that the Company could
generate from these locations.
Inflation
The Company believes that the impact of inflation on its operations
since its inception has not been material.
Seasonality
The Company's business is seasonal in nature, based in part, on
higher volumes of tourists in the New York City Metropolitan area during the
spring and summer months and during the December holiday season. The Company
will direct a portion of its marketing and promotional efforts in the New York
City Metropolitan area to (i) attracting a larger percentage of the
Observatory traffic at the Empire State Building, thereby increasing volume to
New York Skyride and (ii) attracting visitors to XS New York, particularly
during non-peak seasons.
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 believes that its
attraction, accounting and other computer systems are currently year 2000
compliant. The Company has determined that its ticketing system and point of
sale system at New York Skyride is not year 2000 compliant and is in the
process of correcting the problem and coming up with a contingency plan in the
event the problem cannot be corrected timely. The Company does not expect that
such compliance or contingency plans will results in expenditures in excess of
$65,000. As of March 31, 1999, the Company has not yet had any expenditures
concerning this issue. Currently, the Company has been in contact with several
ticketing system and point of sale vendors on acquiring systems that are Year
2000 compliant. However, significant uncertainty exists concerning the
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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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On December 23, 1997 the Company filed an action in the Supreme Court
of the State of New York, County of New York, against Empire State Building
Company ("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 Licence 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.
The decision by the Judge was received on April 3, 1998, who ordered the
Company to pay $838,000 in undisputed rent, granted the Company's motion for a
preliminary injunction and submitted the determination of disputed rent
amounts to a referee originally scheduled for December 1998, which proceeding
has been postponed to May 18, 1999. On February 26, 1999, oral arguments were
heard by the court with respect to the Company seeking a preliminary
injunction to prevent the ESBCo from terminating the lease for the undeveloped
space on the second floor. The motion is presently before the court and no
decision has been reached. The court dismissed certain of the Company's
claims, but the Company's core claims of breach of the leases, breach of the
licensing agreement and a breach of the duty of good faith and fair dealing
remain. As to the claims dismissed by the court, the Company filed a notice of
appeal on or about April 20, 1999. The Company is pursuing its other claims
and has commenced discovery with respect to these claims for damages against
the ESBCo.
Item 2. Changes in Securities And Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index located at the end of this report.
(b) There were no reports filed on Form 8-K during the period.
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
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)
19
<PAGE>
Exhibit
Number Description
- ------ -----------
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)
20
<PAGE>
Exhibit
Number Description
- ------ -----------
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)
21
<PAGE>
Exhibit
Number Description
- ------ -----------
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)
21 Subsidiaries of the Company. (9)
27.1 Financial Data Schedule.
- -----------------------
(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.
22
<PAGE>
(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.
23
<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.
Date: May 17, 1999
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
By: /s/ Robert Brenner
------------------------------------------------
Robert Brenner, President and Chief Executive
Officer
By: /s/ Steven Schwartz
------------------------------------------------
Steven Schwartz, Chief Financial Officer
(Principal Financial and Accounting Officer),
Secretary and Treasurer
24
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 834,000
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<CURRENT-ASSETS> 1,023,000
<PP&E> 10,704,000
<DEPRECIATION> 4,701,000
<TOTAL-ASSETS> 7,942,000
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0
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<COMMON> 3,000
<OTHER-SE> (6,310,000)
<TOTAL-LIABILITY-AND-EQUITY> 7,942,000
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<EXTRAORDINARY> 240,000
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