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: September 30, 1999
Commission File No. 0-23396
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
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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
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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
There were 2,095,000 shares of Common Stock, $.001 par value, outstanding
as of November 10, 1999. Additionally, there were 1,090,909 shares of Series A
Convertible Participating Preferred Stock, $.001 par value per share, and
960,000 Preferred Stock, $.001 par value per share, and 960,000 shares of Class
A Common Stock, $.001 par value, outstanding as of November 10, 1999.
Transitional Small Business Disclosure Format
Yes No X
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
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<TABLE>
<CAPTION>
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Condensed consolidated financial statements
(unaudited)
<S> <C> <C> <C>
Balance sheet as of September 30, 1999 3
Statements of operations for the three months
ended September 30, 1999 and 1998 5
Statements of cash flows for the three months
ended September 30, 1999 and 1998 6
Notes to financial statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION 15
INDEX TO EXHIBITS 16
SIGNATURES 21
</TABLE>
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (unaudited)
September 30, 1999
<TABLE>
<CAPTION>
ASSETS
(To the nearest $1,000)
Current assets:
<S> <C>
Cash ........................................................................ $ 1,067,000
Inventory ................................................................... 127,000
Prepaid expenses and other current assets ................................... 150,000
-----------
Total current assets ................................................... 1,344,000
Property, equipment and leasehold improvements - net ........................... 5,208,000
Security deposits .............................................................. 421,000
Deferred financing costs ....................................................... 376,000
Other assets - net ............................................................. 39,000
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TOTAL .................................................................. $ 7,388,000
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LIABILITIES
Current liabilities:
Capital lease obligations - current portion ................................. $ 599,000
Note payable - institutional lenders ........................................ 2,785,000
Note payable - other ........................................................ 500,000
Accounts payable ............................................................ 2,077,000
Accrued expenses ............................................................ 311,000
Interest payable - institutional lenders .................................... 444,000
Deferred sponsorship income ................................................. 10,000
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Total current liabilities .............................................. 6,726,000
Capital lease obligations - Less Current Portion .......................... 39,000
Notes payable --
institutional lenders 4,450,000 Deferred rent payable 2,247,000 Interest payable
- - institutional lenders 1,868,000
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15,330,000
Commitments and contingencies
CAPITAL DEFICIENCY
Preferred stock, par value $.001 per share, 5,000,000 shares authorized,
1,090,909 shares of Series A convertible participating preferred stock issued
and outstanding
(liquidating value $2.75 per share) ......................................... 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 ............................................................ (18,193,000)
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Total capital deficiency ............................................. (7,942,000)
TOTAL 7,388,000
============
</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>
THREE MONTHS ENDED
September 30
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1999 1998
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Revenues:
<S> <C> <C>
Attraction sales ............................... $ 2,880,000 $ 2,571,000
Concession sales ............................... 348,000 338,000
Sponsorship income ............................. 12,000 31,000
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3,240,000 2,940,000
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Operating expenses:
Cost of merchandise sold ....................... 138,000 179,000
Selling, general and administrative ............ 2,756,000 2,598,000
Depreciation and amortization .................. 527,000 514,000
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3,421,000 3,291,000
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(Loss) from operations before interest expense .... (181,000) (351,000)
Interest Income ................................... 3,000 17,000
Interest Expense .................................. (288,000) (490,000)
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Loss before extraordinary item .................... (466,000) (824,000)
Extraordinary gain from settlement of liabilities . 33,000 207,000
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NET (LOSS) ........................................ $ (433,000) $ (617,000)
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(Loss) per share of common stock basic and diluted:
(Loss) before extraordinary item ............ $ (.21) $ (.49)
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Net (loss) ................................. $ (.19) $ (.37)
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Weighted average common shares outstanding ........ 2,275,000 2,275,000
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</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>
THREE MONTHS ENDED
September 30
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1999 1998
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Cash flows from operating activities:
<S> <C> <C>
Net (loss) .................................... $ (433,000) $ (617,000)
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Adjustments to reconcile results of
operations to net cash effect of
operating activities:
Gains on restructuring of
liabilities - noncash .................. (33,000) (207,000)
Depreciation and amortization ............ 527,000 514,000
Deferred rent payable .................... 112,000 135,000
Net Changes in assets and liabilities:
Inventory .............................. (5,000) 13,000
Prepaid expenses and other assets ...... (111,000) (52,000)
Security deposits ...................... (3,000) 5,000
Accounts payable and accrued
liabilities .......................... 262,000 (29,000)
Due to Contractor ........................ (115,000) --
Interest Payable - Institutional lenders . 255,000 255,000
Deferred sponsorship income .............. (13,000) (31,000)
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Total adjustments .................. 876,000 603,000
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Net cash provided by (used for)
operating activities ............. 443,000 (14,000)
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Cash flows from investing activities:
Purchase of fixed assets ...................... (44,000) (39,000)
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Net cash used for
investing activities ............. (44,000) (39,000)
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Cash flows from financing activities:
Financing Costs ............................... 48,000 156,000
Repayment of capital lease obligations ........ (160,000) (207,000)
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Net cash used for
financing activities ............. (112,000) (51,000)
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NET INCREASE (DECREASE) IN CASH .................. 287,000 (104,000)
Cash - July 1 .................................... 780,000 1,496,000
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Cash - September 30 .............................. $ 1,067,000 $ 1,392,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for
Interest ................................... $ 32,000 $ 62,000
Taxes ...................................... -0- 2,000
</TABLE>
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB and rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the full
fiscal year ended June 30, 2000. 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, 1999.
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:
<TABLE>
<CAPTION>
September 30
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1999 1998
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Deferred Tax Assets:
<S> <C> <C>
Capitalization of start-up costs $ 37,000 $ 214,000
Impairment Loss ................ 1,734,000 1,734,000
Net operating loss carryforwards 7,149,000 5,111,000
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8,920,000 7,059,000
Valuation allowance .................... (8,060,000) (6,356,000)
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860,000 703,000
Deferred Tax Liabilities:
Depreciation differences ............... 860,000 703,000
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Net Deferred Tax Asset ................. $ 0 $ 0
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</TABLE>
The Company has provided a valuation allowance of $8,060,000 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.
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
Equipment and fixtures $ 1,865,000
Simulation equipment 2,324,000
Simulation film 1,065,000
Leasehold improvements 5,586,000
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10,840,000
Less: Accumulated depreciation
and amortization (5,632,000)
-----------
Total $ 5,208,000
===========
</TABLE>
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. 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.
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.
<PAGE>
7. 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.
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.
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.
<PAGE>
9. Preferred Stock
On July 7, 1995, the Company consummated a stock purchase agreement with
Prospect Street NYC Discovery Fund, L.P. ("Prospect Street"), a small business
investment company, pursuant to which the Company sold 1,090,909 shares of
Series A Convertible Participating Preferred Stock, par value $.001 per share
(the "Preferred Stock"), for $3,000,000. Net proceeds from such investment,
aggregated approximately $2,833,000. The Preferred Stock issued is convertible
into common stock of the Company at any time on a share-for-share basis, 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.
10. 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.
11. 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. 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 provide an incentive to the equipment vendor to add more games and help
increase revenues from the XS New York facility.
12. 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 failure to pay rent. 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: (i) had breached the leases and the license
agreement, and (ii) had failed to provide the Company with certain credits,
offsets and adjustments that were due and owed to the Company under the lease
and license agreements. Thus, the Company responded to the notices and informed
the ESBCo that the ESBCO, as well as others, had breached the leases and the
license agreement, and had failed to provide the Company with certain credits,
offsets and adjustments that were due and owing to the Company under the lease
and license agreement.
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 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 prohibiting the ESBCo from terminating or canceling the leases and
the license agreement and restraining 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.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 three months ended September 30, 1999 and 1998, the Company's New
York Skyride facility was visited by approximately 190,000 and 193,000
customers, respectively.
Results of Operations - Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
Revenues
Revenues generated during the three months ended September 30, 1999 and
September 30, 1998 aggregated $3,240,000 and $2,940,000, respectively. The
increase in revenues from the prior year is primarily due to an increase in the
average ticket price collected for the New York Skyride, which accounted for
revenues of approximately $2,171,000 for the three months ended September 30,
1999, as compared to $1,917,000 for the year ended September 30, 1998. The
increase is also attributable to an increase in Empire State Building
Observatory Combination Ticket Sales at the Company's New York Skyride facility.
Operating Expenses
Operating expenses incurred for the three months ended September 30, 1999
aggregated $3,421,000 as compared to $3,291,000 for the three months ended
September 30, 1998. The increase was due primarily to an increase in the amount
of Empire State Building Observatory tickets purchased for resale as part of
combination tickets with New York Skyride.
Extraordinary Gain
The Company, as a result of negotiations with certain creditors, recorded
an extraordinary gain from the settlement of liabilities of approximately
$33,000 for the three months ended September 30, 1999, as compared with $207,000
for the three months ended September 30, 1998.
Net Loss and Loss Per Share
The basic and diluted net loss and net loss per share available to common
shareholders was ($433,000) and ($.19) for the three months ended September 30,
1999 as compared to ($617,000) and ($.37) for the three months ended September
30, 1998.
<PAGE>
The net loss for the three months ended September 30, 1999 included net
losses of approximately ($720,000) at XS New York and net income of
approximately $254,000 at New York Skyride (excluding an extraordinary gain of
$33,000 from the settlement of liabilities with certain creditors.
For the three months ended September 30, 1999, New York Skyride had income
from operations (before interest expense) of approximately $598,000 (excluding
legal fees of approximately $40,000 from its legal proceedings with the ESBCo,
and rent of approximately $203,000 on additional space at the Empire State
Building), as compared to income from operations (before interest expense) of
approximately $343,000 (excluding legal fees of approximately $54,000 from its
legal proceedings with the ESBCo, and rent of approximately $191,000 on
additional space at the Empire State Building) for the three months ended
September 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.
XS New York incurred a loss from operations (before interest expense) of
approximately ($535,000) for the year ended September 30, 1999 as compared to a
loss from operations (before interest expense) of approximately ($444,000) for
the year ended September 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 September 30, 1999, was approximately
($5,382,000) compared to a working capital deficiency of approximately
($4,803,000) at September 30, 1998. The increase in the working capital
deficiency is primarily the result of the loss from operations for the three
months ended September 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 September 30, 1999, the Company had the following financing arrangements
in place:
- 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.
- 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.
- 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.
- 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
<PAGE>
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.
In addition to the foregoing, as of September 30, 1999, the Company had the
following agreements or arrangements with certain key suppliers in place:
- 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.
- 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. 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.
<PAGE>
In the event that the Company is unable to sustain positive cash flow, the
Company will need additional capital. However, the Company has no assurance that
additional capital will be available on acceptable terms, if at all. In such an
event, this would have a materially adverse effect on the Company's business,
operating results and financial condition.
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 verified that
companies doing business with it are year 2000 compliant. 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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
an 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.
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) Exhibits
a. Financial Data Schedule.
(b) Not Applicable
<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
By: /s/ Ronald H. Aghassi
-------------------
Ronald H. Aghassi,
Vice President of Finance
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