SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2000 Commission File No. 0-23396
Skyline Multimedia
Entertainment, Inc.
(Name of Small Business Issuer in Its Charter)
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New York 11-3182335
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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350 Fifth Avenue, New York, New York 10118
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(Address of principal executive offices) (Zip Code)
(212) 564-2224
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act :
Units consisting of Common Stock, Class A Warrants and Class B Warrants
Common Stock, $.001 Par Value Per Share
Redeemable Class A Warrants
Redeemable Class B Warrants
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days:
Yes No X
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
The Company's revenues for its most recent fiscal year were $10,223,000.
The aggregate market value of the voting stock held by non-affiliates of the
Company was $130,565 as of September 11, 2000, based on the average bid and
asked price of $0.13 per share as of that date.
There were 2,095,000 shares of Common Stock, $.001 par value, outstanding as of
September 11, 2000. Additionally, there were 1,090,909 shares of Series A
Convertible Participating Preferred Stock, $.001 par value per share, and
960,000 shares of Class A Common Stock, $.001 par value, outstanding as of
September 11, 2000.
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PART I
Item 1. DESCRIPTION OF BUSINESS.
General
Skyline Multimedia Entertainment, Inc. (the "Company") is a holding
company incorporated under the laws of the State of New York on November 2,
1993, which owns all of the outstanding stock of its operating subsidiaries, New
York Skyline, Inc. ("Skyline") and Skyline Virtual Reality, Inc. ("SVR"). The
Company is engaged in the development and operation of state-of-the-art
simulator attractions and high-technology and family entertainment at
established tourist sites in New York City. All references to the "Company"
contained herein include Skyline and SVR, except where specifically noted.
On December 22, 1994, the Company commenced operations of its first
attraction, New York Skyride, which is located in the Empire State Building in
New York City. New York Skyride is an exhilarating simulated "aerial tour" of
New York City in a futuristic "spacecopter". New York Skyride features two 40
passenger flight simulators and related computer-controlled film projection
technologies to provide visitors with a complete "New York" experience,
including an extensive pre-show area featuring interactive multimedia exhibits
depicting the various tourist sites and attractions in and around the New York
Metropolitan area, and culminating in a seven and a half minute aerial
"adventure" in and around New York City. Passengers will not only experience the
sensations of an actual aerial flight, but will also experience visual images
projected on screens within the simulator that envelop the viewer with a variety
of sights and sounds. New York Skyride is intended to provide visitors with a
sensation of taking a "once in a lifetime" aerial adventure around New York
City.
On December 27, 1996, the Company commenced operations, through SVR, of
an interactive virtual reality entertainment center, XS New York, which is
located in the heart of Times Square in New York City. XS New York features the
latest in virtual reality hardware and software, simulation technology and
interactive participation game experiences. Additionally, the facility includes
a "cybercafe" which offers computer terminals that are linked to the Internet.
XS New York was opened on a preview basis until March 20, 1997, the date of its
official Grand Opening.
The Company's revenues are generated primarily from ticket sales for
New York Skyride and game revenue at XS New York, with additional revenues
generated from the sale of food, beverages and souvenir merchandise. The Company
is also seeking to enter into corporate sponsorship and advertising arrangements
with certain consumer product companies to provide additional revenues and
marketing exposure.
The Company's principal executive office is located at the Empire State
Building, 350 Fifth Avenue, New York, New York 10118 and its telephone number is
(212) 564-2224.
The New York Skyride Experience
New York Skyride is an adventure that captures and builds upon the New
York City tourist experience. The Company believes that New York Skyride
enhances a visit to the Empire State Building and to New York City by providing
an exciting, bird's-eye view of the landmarks and sites that cannot be seen from
any other vantage point.
Visitors to New York Skyride are treated as first-class passengers on a
futuristic helicopter flight around New York City. Upon entering, guests are
directed to the pre-show heliport area (approximately 7,500 sq. ft.) where they
are introduced to multimedia displays designed and installed by certain of the
Company's prior sponsors. These displays depict major New York City tourist
attractions as well as providing informational and entertaining film clips. The
exhibits provide the visitor with their first feeling of participation in the
New York Skyride experience.
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Following a preflight briefing about "spacecopter" travel passengers
enter into one of two spacecopters , which are 40 passenger computer-controlled
flight simulators. At the front of each simulator is a large 18' x 18' screen
upon which New York Skyride's super 35mm film is presented. The simulator also
contains an advanced 8-channel digital sound system, with 4 dual amplifiers, 400
watts per channel each (or 3,200 watts of total sound), to provide passengers
with an enhanced audio/visual experience.
Once the passengers are seated in the spacecopter, they begin a
seven-and-a-half minute simulated flight that treats them to a spectacular array
of New York City scenes and adventures. For example, the spacecopter crashes
into FAO Schwarz, the world's largest toy store, passes directly under the
Brooklyn Bridge, "dives" into a tunnel, crashes into the East River and has a
run-in with a New York City traffic cop, among other exciting adventures. The
spacecopter also visits many of New York City's other tourist attractions,
including Fifth Avenue, the World Trade Center Towers, Central Park, Times
Square and the Statue of Liberty. Since New York Skyride is intended to be a
family-oriented attraction, the film makes the Empire State Building the focal
point of the attraction, with a liftoff and landing taking place from atop the
Empire State Building, to appeal to the broadest audience and not just the most
adventurous thrill-seekers.
Once the spacecopter flight is complete, passengers exit the simulators
and proceed to the lobby and a beverage, food and souvenir concession area.
Passengers are able to purchase souvenirs of their visit to New York Skyride.
The XS New York Experience
XS New York is an interactive virtual reality entertainment center
located in the heart of Times Square in New York City. XS New York presents the
latest in entertainment technology, featuring cutting-edge virtual reality
hardware and software. Upon entering XS New York, guests are immersed in
futuristic graphics, lighting, audio and video treatments. Upon further
inspection, guests find interactive show action equipment and special effects
areas that allow them to experience the latest in virtual reality and similar
technologies. Some of the equipment offers competition between players while
others provide exploratory experiences. Several attractions include a
3-dimensional action and visual presentation allowing guests to view their own
activity, the activity of competitors and the attractions' vital statistics on
giant overhead monitors and projection screens. Still other attractions can be
programmed to function as stand alone units or in conjunction with other players
at other locations. Tickets are purchased from a centrally located ticket area.
Guests are also invited to enjoy XS New York's "Cybercafe" which provides access
to the World Wide Web and Internet from table-based PC computer stations.
Simulator and Virtual Reality Technologies
The Company's motion simulator attractions utilize computer-controlled
aircraft flight simulators. Simex, Inc. (formerly Interactive Simulation, Inc.),
a Canadian company experienced in simulation technology, provided the
sophisticated computer hardware and software that coordinates the movements of
the simulator platform with the images projected on the screen. The range of
motion for the simulators is along six axes (that is, the simulators can create
up and down motions, right and left motions, angled motions to simulate turning
or banking while climbing or descending at varying degrees and a spin motion, or
some combination of the above). The movable platforms on which the simulators
rest and which move in synchronization with the film were developed by Moog,
Inc., a large defense contractor experienced in the adaptation of flight
simulator technology to the entertainment market.
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A key component of the simulator technology is the "show control
system", which is a PC-based computer program that coordinates and manages the
motion and gyration of the simulator with the film and audio elements of the
program. For example, when the film image shows the spacecopter banking to the
right, there must be a precise, coordinated movement of the simulator in that
direction to both convince the passengers' senses that they are flying in a
spacecopter and prevent passenger disorientation. The speed of the film through
the projection system is faster than normal film, television or video footage,
which enhances the passengers' perception of motion and movement. The film is in
super 35mm format projected at 30 frames per second rather than standard 24
frames per second, which provides a sharper, more intense image. The projection
equipment is a fully automated system that eliminates the need for a projector
operator. The film was developed in conjunction with Chromavision Corp., a
production studio with extensive experience in fast-paced concept films.
XS New York features a wide assortment of the latest in entertainment
and virtual reality hardware and software technologies. The interactive virtual
reality technologies which are showcased at XS New York include: Alpine Racer -
a simulated slalom ski race, Daytona Speedway - a simulated car racing
experience, a laser tag arena, and a virtual PC-based "battle ground" where
players compete on-line and in person on stage.
The Empire State Building Location
New York Skyride is located on the second and third floors of the
Empire State Building, in a 21,800 square foot site that wraps around the south
and west sides of the building. The location's entrance is situated adjacent to
the main lobby escalator that takes all visitors to the waiting area for the
Observatory elevators. Signs in the Empire State Building's lobby and in the
Observatory ticket purchase area inform visitors to the Empire State Building
about New York Skyride. Most importantly, visitors who purchase tickets to the
Observatory are offered the choice of purchasing a combined Observatory/New York
Skyride ticket at a reduced price, as compared with the separate purchase of
tickets to both attractions. The cost of individual tickets to New York Skyride
and the Observatory are $11.50 and $9.00 for adults, respectively, and $8.50 and
$4.00 for children under the age of 12, respectively. In comparison, the cost of
a combined ticket with the Observatory is $17.00 for adults and $10.00 for
children under the age of 12. Any discount resulting from combined ticket sales
are deducted from the admission price of a New York Skyride ticket. Children's
rates, group rates and senior discounts are also offered along with other
promotional discounts.
The Empire State Building is a focal point for the tourism industry in
New York City. The Observatory, which opened in 1933 and is located on both the
102nd and the 86th floors, has achieved worldwide recognition and publicity, and
is a primary destination for a large percentage of New York City's tourist
traffic. Estimated paid attendance figures provided by management of the Empire
State Building for the last five years for the Observatory are summarized below.
EMPIRE STATE BUILDING OBSERVATORY
ADMISSION TICKET SALES (000'S)
YEAR 1995 1996 1997 1998 1999
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TOTAL ATTENDANCE 3,350 3,350 3,675 3,614 3,617
For the year ended June 30, 2000, the Company's capture rate of
Observatory visitorship averaged approximately 16.86%, up from an average of
approximately 15.15% for the year ended June 30, 1999. The Company believes that
the increase in the capture rate is a direct result of its litigation settlement
with the Empire State Building Company, an increase in Empire State Building
observatory sales and a sustained marketing effort of its product.
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The Times Square Location
The Company currently occupies approximately 13,000 square feet of
space at 1457-1463 Broadway (at 42nd Street), New York, New York in the Business
Improvement District Entertainment Zone located in Times Square in New York
City. The Company utilizes this space for its interactive virtual reality
entertainment center - XS New York. See "Item 2. Description of Property," and
"Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
Advertising and Promotional Plans
The Company's current marketing plans include a multifaceted marketing,
public relations and advertising program to heighten awareness of the New York
Skyride, and the XS New York facility, among the more than 25 million persons
who visit New York City every year.
New York Skyride's advertising and promotional support programs
concentrate on tourists to New York City, families with children in the Greater
New York metropolitan area, and youth groups from surrounding areas. The Company
is also continuing its efforts to attract attendees to the Empire State Building
Observatory by offering combined Observatory and Skyride admission tickets. The
Company also co-markets with other New York City tourist companies, including
Circle Line and Gray Line.
XS New York's efforts target young adults, Times Square visitors, and
corporate groups. The Company is also focused on developing its corporate event
business for group functions, product introduction parties, meetings and holiday
parties.
In addition, the Company continues to promote New York Skyride and XS
New York to tourist boards, travel agents, managers of group activities and
visitors to New York City. Special volume discounts, travel agent packages, and
other special programs are offered to target group audiences, especially during
the slower tourist periods in the fall and winter months.
Corporate Sponsors
Historically, the Company has solicited and maintained several
corporate sponsorships from consumer product companies. The Company currently
has no such sponsorship agreements. The Company is currently seeking new
corporate sponsorships that will result in greater market awareness and
acceptance through the association of New York Skyride and XS New York with
their products. There can be no assurance that the Company will be able to
successfully enter into new sponsorship agreements.
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License Agreements
On February 26, 1993, the Company, through Skyline, entered into an
exclusive license agreement (the "License Agreement") with the Empire State
Building Company ("ESBCo"), the operator of the Empire State Building in New
York City. The License Agreement provides for the joint sale of tickets to the
Observatory and New York Skyride so long as the Company makes payments at the
following annual rates:
(i) $150,000 from April 1, 1995 through March 31, 1998,
(ii) $175,000 from April 1, 1998 through March 31, 2002,
(iii) $200,000 from April 1, 2002 through March 31, 2006,
(iv) $225,000 from April 1, 2006 through April 30, 2013, and
(v) $186,000 from May 1, 2013 through June 30, 2016.
The License Agreement also requires the Company to reimburse certain costs and
expenses relating to the joint ticket sales and contains cross-default
provisions in the event of a default under the Lease. The term of the License
agreement has been extended from its original 20-year term to a term lasting
through June 30, 2016, which coincides with a new lease for space adjacent to
the New York Skyride location. For a description of the lease, See "Item 2.
Description of Property."
In December 1999, ESBCo and Skyline executed a Second Modification of License
Agreement ("SMLA"). This latest Amendment provides for a contingent license fee,
in addition to the flat annual fee noted above, in the event that the capture
rate at ESBCo's ticket window (number of Skyride tickets sold by ESBCo as a
percentage of Observatory tickets sold by ESBC) exceeds 10.5%. This provision
was added to the SMLA as an incentive for ESBCo to devote greater efforts to
promote the Skyride. Until the end of 1996, the capture rate at ESBCo's window
averaged approximately 15%. This rate declined to 10.3% in 1997, 9.9% in 1998,
8% in 1999 and the first half of 2000. The contingent license fee ranges from an
annual fee of $10,500 at 10.5% to $1,400,000 at 26%.
Patents and Trademarks
The Company does not hold any patents relating to New York Skyride or
XS New York and their related technologies. Accordingly, the Company's concept
is not proprietary and is subject to duplication and competition from entities
with greater resources and strengths than the Company. The Company has obtained
registered trademarks for the name "New York Skyride" and "XS", however, during
November 1997, the Company agreed to sell the "XS" trademarks and related
intellectual property rights to an equipment supplier. In return, the Company
renegotiated its revenue sharing agreement to reflect the trademark sale
agreement and the equipment supplier forgave approximately $427,000 owed by the
Company. In addition, the Company can continue to use the "XS" trademarks and
related concepts at its Times Square location, pursuant to a three-year
renewable license agreement.
Competition
New York Skyride and XS New York compete with all other New York City
tourist attractions and cultural events such as museums, Broadway shows,
shopping boutiques and cultural and historic landmarks. While these attractions
are quite different "experiences" from New York Skyride's spacecopter trip
(which the Company believes is the first attraction of its type in New York
City) or XS New York's virtual reality and simulator technologies, they continue
to present intense competition for attendance and visitor dollars. Generally,
these other attractions are more established, and are owned and operated by
entities that have greater financial resources and managerial expertise than the
Company. In addition, more intense competition of this type can be expected at
Times Square due to the major entertainment complex that is being developed
there. The complex will include entertainment attractions from companies such as
Disney, American Cinema, Madame Tussaud, ESPN, Broadway City, E-Walk and other
large entertainment companies.
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In addition to competing with general New York City tourist
attractions, New York Skyride and XS New York have direct competitors in the
virtual reality and simulator markets. In September 1999, ESPN Zone, a sports
based entertainment attraction utilizing virtual reality and simulator
technologies, began operations in their Times Square location. Furthermore, a
New York helicopter tour simulator attraction opened in March 1997 at the World
Trade Center Towers. There can be no assurance that other virtual reality and
simulator attractions will not commence operations in the New York area in the
future.
Insofar as motion simulation technologies, including show control
systems (and related projection and audio technologies), are subject to
improvements and enhancements, it is possible that competitive attractions will
be able to offer more technologically advanced "experiences" to customers than
the experience offered by New York Skyride. Also, the Company believes that a
number of attractions utilizing "virtual reality" imaging technologies, or large
film format technologies with enhanced 3-dimensional projection technologies,
are likely to open in the New York area within the near future. These
attractions do not depend on motion simulators for their special effects, and
they are also likely to be developed and operated by companies that have
significantly greater financial, managerial and promotional experience and
resources than the Company. While these attractions may not offer a directly
competitive "product" to New York Skyride (i.e., an aerial adventure in New York
City) or XS New York, their presence will certainly create significant
competition for the Company to attract visitors to New York Skyride and XS New
York. The Company will compete with these entities primarily on the basis of
location, uniqueness of product, marketing and price.
Employees
As of September 30, 2000, the Company employed four management persons
(other than the Company's Executive Officers) on a full-time basis. The Company
also employs approximately 125 non-management personnel. Since August 1997, the
Company has contracted with employees for its XS New York facilites through the
International Union of Industrial, Service, Transport and Health Employees. The
Company believes that it has had good relations with the union, and that such
union representation will not have a material adverse effect on the Company's
financial condition or results of operations.
Item 2. DESCRIPTION OF PROPERTY.
The Company's executive offices are located at the Empire State Building at
350 Fifth Avenue, New York, New York. These offices consist of 4,400 square
feet, and are leased at an annual cost of approximately $110,000, payable
monthly. The lease for these premises expired on October 31, 1999. However, the
ESB Co. has granted the Company an option to extend its lease. The ESB Co. and
the Company are currently negotiating an extension. The ESB Co. has agreed,
until and extension is consummated, to allow the Company to continue leasing the
space under the same terms as its expired lease.
In addition to these offices, the Company has four lease agreements on
its two operating sites. On February 26, 1993, the Company entered into the
First Lease agreement with the operator of the Empire State Building, to lease
approximately 17,800 square feet on the second floor of the Empire State
Building for a term of 20 years. The First Lease has been extended to a longer
term, lasting through June 30, 2016, to coincide with the Second and Third
Leases for additional space, as described below. The Company's annual base rent
under the First Lease is scheduled in the following manner:
(i) $391,798 from April 1, 1998 through March 31, 2002,
(ii) $445,225 from April 1, 2002 through March 31, 2006,
(iii) $498,642 from April 1, 2006 through March 31, 2009,
(iv) $534,270 from April 1, 2009 through April 30, 2013, and
(v) $441,663 from May 1, 2013 through June 30, 2016.
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The annual rent is payable monthly and subject to additional amounts for taxes
and utilities. The Company was not required to pay the first 21 months rent,
which benefit is being amortized over the term of the Lease.
The Company also leases an additional 4,000 square feet located above
the primary leased premises (the "Second Lease"). The Company uses this space to
accommodate the two large screens (18' X 18') on which the New York Skyride film
is shown. The Second Lease premises has an annual base rent of $76,000, which
increases to $120,000 over the term of the lease. The term of the Second Lease
coincides with the term of the First Lease and License Agreement, as modified.
The Company also currently occupies approximately 13,000 square feet of
space at 1457-1463 Broadway (at 42nd Street), New York, New York in the Business
Improvement District Entertainment Zone located in Times Square in New York
City. The Company utilizes this space for its interactive virtual reality
entertainment center - XS New York. The lease for these premises, which was
entered into in April 1996, contained a provision allowing the landlord to
terminate the lease upon six months notice. In the event the landlord exercised
this termination right during the first five years of the lease, the Company was
entitled to a maximum termination fee of approximately $974,000 to be reduced on
a straight-line basis over 60 months. In April 1999, by mutual agreement of the
parties, however, this lease was terminated and a stipulation was signed. In
general terms, the stipulation enabled the Company to continue to occupy the
premises on the same terms as in the original lease, but reduced the notice
period from six months to four months in exchange for a 25% reduction in rent.
The Stipulation further provided that the landlord was entitled to recover this
25% rent reduction out of any termination fee which may be owed to the Company.
In addition, the Company agreed to vacate the premises within four months of
notification by the landlord of its exercise of the cancellation clause. In May
2000, the stipulation was further amended to provide that the Company will
vacate the premises within sixty days upon receiving notice of the landlord's
exercise of the cancellation clause. In conjunction with this amendment, the
landlord forgave certain past due rental payments, less a security deposit
previously paid by the Company. The agreement also provided for future rentals
equal to weekly gaming revenues in excess of $32,500, up to a maximum rental of
$10,000 per week. This rental provision was further amended in June 2000, to
provide that such future rentals would be equal to 50% of the weekly gaming
revenues in excess of $37,500 with a maximum of $10,000 per week.
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.
The Company believes that its facilities are adequate for its current
levels of operations.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not Applicable.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON EQUITY
Prior to February 14, 1994, the date of the Company's initial public
offering, there was no public market for the Units, Common Stock, Class A
Warrants or Class B Warrants (collectively, the "Securities"). From February
1994 through December 1997, each of these classes of securities were quoted on
the Nasdaq SmallCap Market under the symbols "SKYLU," "SKYL," "SKYLW" and
"SKYLZ," respectively. In December 1998, the Company's Securities were delisted
from the Nasdaq SmallCap Market. Since that time, the Company's Common Stock has
been traded on the Over The Counter Bulletin Board (the "OTCBB"), under the
symbol "SKYL".
The following table sets forth the high and low sales prices for the
Units, Common Stock, Class A Warrants and Class B Warrants for the fiscal
periods indicated as reported by Nasdaq or in the over-the-counter market. The
quotations shown represent inter-dealer prices without adjustment for retail
mark-ups, mark-downs or commissions, and may not necessarily reflect actual
transactions.
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Fiscal 2000 Fiscal 1999
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UNITS High Low High Low
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1st Quarter............................................. 9/16 1/16 5/8 1/16
2nd Quarter............................................. --- --- 5/8 1/16
3rd Quarter............................................. --- --- --- ---
4th Quarter............................................. --- --- --- ---
COMMON STOCK High Low High Low
------------ ---- --- ---- ---
1st Quarter............................................. 3/8 1/16 1/2 1/8
2nd Quarter............................................. 3/4 1/16 1/4 1/16
3rd Quarter............................................. 7/8 1/8 3/8 1/16
4th Quarter............................................. 3/4 1/4 --- ---
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CLASS A WARRANTS High Low High Low
---------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter............................................. 0 0 0 0
2nd Quarter............................................. 0 0 0 0
3rd Quarter............................................. 0 0 0 0
4th Quarter............................................. 0 0 0 0
CLASS B WARRANTS High Low High Low
---------------- ---- --- ---- ---
1st Quarter............................................. 0 0 0 0
2nd Quarter............................................. 0 0 0 0
3rd Quarter............................................. 0 0 0 0
4th Quarter............................................. 0 0 0 0
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The per share closing sales price of the Common Stock as reported by the
OTCBB on September 11, 2000, (the date of the last reported sale) was $0.13. As
of September 11, 2000, the Company had in excess of 25 beneficial shareholders
and 400 shareholders of record.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto. This document contains certain forward-looking
statements including, among others, anticipated trends in the Company's
financial condition and results of operations and the Company's business
strategy. These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from these forward-looking statements.
Important factors to consider in evaluating such forward-looking statements
include (i) changes in external factors or in the Company's internal budgeting
process which might impact trends in the Company's results of operations; (ii)
unanticipated working capital or other cash requirements; (iii) changes in the
Company's business strategy or an inability to execute its strategy due to
unanticipated changes in the industries in which it operates; and (iv) various
competitive market factors that may prevent the Company's from competing
successfully in the marketplace.
Overview
Skyline Multimedia Entertainment, Inc. (the "Company") is a holding company
incorporated under the laws of the State of New York on November 2, 1993, which
owns all of the outstanding stock of its operating subsidiaries, New York
Skyline, Inc. ("Skyline") and Skyline Virtual Reality, Inc. ("SVR"). The Company
is engaged in the development and operation of state-of-the-art simulator
attractions and high-technology and family entertainment at established tourist
sites in New York City.
On December 22, 1994, the Company commenced operations of its first
attraction, New York Skyride, which is located in the Empire State Building in
New York City. New York Skyride is an exhilarating simulated "aerial tour" of
New York City in a futuristic "spacecopter". New York Skyride features two 40
passenger flight simulators and related computer-controlled film projection
technologies to provide visitors with a complete "New York" experience,
including an extensive pre-show area featuring interactive multimedia exhibits
depicting the various tourist sites and attractions in and around the New York
Metropolitan area, and culminating in a seven and a half minute aerial
"adventure" in and around New York City. Passengers will not only experience the
sensations of an actual aerial flight, but will also experience visual images
projected on screens within the simulator that envelop the viewer with a variety
of sights and sounds. New York Skyride is intended to provide visitors with a
sensation of taking a "once in a lifetime" aerial adventure around New York
City.
For the years ended June 30, 2000 and 1999, the Company's New York Skyride
facility was visited by approximately 610,000 and 582,000 customers,
respectively.
On December 27, 1996, the Company commenced operations, through SVR, of an
interactive virtual reality entertainment center, XS New York, which is located
in the heart of Times Square in New York City. XS New York features the latest
in virtual reality hardware and software, simulation technology and interactive
participation game experiences. Additionally, the facility includes a
"cybercafe" which offers computer terminals that are linked to the Internet. XS
New York was opened on a preview basis until March 20, 1997, the date of its
official Grand Opening.
<PAGE>
The Company's revenues are generated primarily from ticket sales for
New York Skyride and game revenue at XS New York, with additional revenues
generated from the sale of food, beverages and souvenir merchandise. The Company
is also seeking to enter into corporate sponsorship and advertising arrangements
with certain consumer product companies to provide additional revenues and
marketing exposure.
Results of Operations
Year Ended June 30, 2000 compared to Year Ended June 30, 1999
Revenues
Revenues generated during the year ended June 30, 2000 aggregated
$10,223,000 as compared to $9,603,000 for the year ended June 30, 1999. 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 $7,059,000 for the year ended June 30, 2000, as
compared to $6,013,000 for the year ended June 30, 1999. The increase is also
attributable to an increase in Empire State Building Observatory Combination
Ticket Sales at the company's New York Skyride facility. This increase in
revenues is offset by a decrease in revenues at the Company's XS New York
facility, which accounted for revenues of approximately $3,164,000 for the year
ended June 30, 2000, as compared to $3,590,000 for the year ended June 30, 1999.
Total Expenses
Total expenses incurred for the year ended June 30, 2000 aggregated
$11,558,000, as compared to $12,419,000 for the year ended June 30, 1999. The
decrease for the year ended June 30, 2000 was primarily due to a decrease in
rent expense of approximately $459,000 relating to the surrender of a lease for
certain space in the Empire State Building, and a decrease in legal fees of
approximately $ 258,000 which related to the settlement with the ESBCo. (see "-
Extraordinary Gains" below) for the year ended June 30, 1999. Additionally, the
Company reduced its corporate overhead expenses. However, such amounts were
offset by an increase of purchases of additional Empire State Building
Observatory tickets for resale as part of combination tickets with New York
Skyride, resulting in higher revenues as described above.
Extraordinary Gains
The Company, as a result of the Settlement of its litigation with the
ESBCo. (as discussed in the notes to the financial statements), recorded an
extraordinary gain (which included a reversal of unpaid rents and charges
aggregating $1,413,000, the reversal of deferred rents payable aggregating
$909,000 relating to the surrender of a lease for certain space which was
scheduled to expire in July 2016 less $116,000 of related legal fees incurred)
of approximately $2,206,000 for the year ended June 30, 2000.
In addition, as a result of the stipulation agreement relating to the
Company's virtual reality entertainment center, the Company recorded an
extraordinary gain of $389,000 for the year ended June 30, 2000, comprised of
the forgiveness of $157,000 past due rentals (net of a $93,000 security deposit
held by the landlord) and the reversal of $232,000 deferred rentals resulting
from the elimination of fixed monthly rents.
Also, during the year ended June 30, 2000, the Company settled $70,000
of liabilities to vendors for $19,000 resulting in a gain of $51,000.
Finally, during the year ended June 30, 1999, the Company settled
$1,148,000 of liabilities to vendors for $935,000 resulting in an extraordinary
gain of $213,000.
Net Income (Loss) and Income (Loss) Per Share
The basic and diluted net income (loss) and earnings (loss) per share
before extraordinary items was ($2,441,000) and ($1.07) for the year ended June
30, 2000, as compared to ($4,207,000) and ($1.85) for the year ended June 30,
1999. The basic and diluted net income (loss) and earnings (loss) per share
available to common shareholders was $205,000 and $.09 for the year ended June
30, 2000, as compared to ($3,994,000) and ($1.76) for the year ended June 30,
1999.
<PAGE>
Loss before extraordinary items, for the year ended June 30, 2000,
included a loss of approximately ($2,639,000) at XS New York and income of
approximately $198,000 at New York Skyride as compared to a loss of
approximately ($2,620,000) at XS New York, a loss of approximately ($1,279,000)
at New York Skyride, and a loss of approximately ($308,000) relating to the
cancelled Sydney Skyride Project for the year ended June 30, 1999.
For the year ended June 30, 2000, New York Skyride had income from
operations (before extraordinary item, net interest, depreciation and
amortization) of approximately $1,134,000, as compared to a loss from operations
(before extraordinary item, net interest, depreciation and amortization) of
approximately ($136,000 ) for the year ended June 30, 1999. Income from
operations at New York Skyride improved from the previous year as a result of a
decrease in rent expense of approximately $459,000 relating to the surrender of
a lease for certain space in the Empire State Building and a decrease in legal
fees of approximately $258,000 which related to the settlement with the ESBCo.
(see "- Extraordinary Gains" above). Additionally, the Company reduced its
corporate overhead expenses. However, such amounts were offset by an increase of
purchases of additional Empire State Building Observatory tickets for resale
resulting in higher revenues as described above.
XS New York had a loss from operations (before extraordinary item, net
interest, depreciation and amortization) of approximately ($350,000) for the
year ended June 30, 2000 as compared to a loss from operations (before
extraordinary item, net interest, depreciation and amortization) of
approximately ($344,000) for the year ended June 30, 1999. Income from
operations at XS New York decreased from the previous year primarily as a result
of a decrease in gaming revenues offset by a reduction of overhead.
Working Capital Deficiency
Liquidity and Capital Resources
The working capital deficiency at June 30, 2000, was approximately
($3,561,000) compared to a working capital deficiency of approximately
($5,593,000) at June 30, 1999. The decrease in the working capital deficiency is
primarily the result of the settlement of the Company's litigation with the
ESBCo., which included a writeoff of accumulated outstanding payables of
approximately $1,413,000.
The Company has historically sustained its operations from the sale of debt
and equity securities, through institutional debt financing and through
agreements or arrangements for financing with certain key suppliers.
As of June 30, 2000, the Company had the following financing arrangements
in place:
o In December 1996, the Company entered into a Senior Credit Agreement
with Prospect Street and Bank of New York, as Trustee for the Employees
Retirement Plan of the Brooklyn Union Gas Company. Pursuant to the
agreement (as amended), the Company borrowed an aggregate of
$4,450,000. The funds borrowed accrue interest at an annual rate of 14%
and require the payment of both principal and interest five years from
the date of issuance. In connection with the Senior Credit Agreement,
the lenders received warrants to purchase up to an aggregate of 434,146
shares of Common Stock, which warrants are exercisable until December
20, 2006 at an exercise price of $4.25 per share.
o In June 1997, the Company borrowed an additional $500,000 from Prospect
Street. The loan is payable on demand and bears interest at the rate of
14% per annum.
<PAGE>
o In December 1997, the Company borrowed $500,000 from a bank bearing
interest at the rate of 6.25% per annum that was secured by a
Certificate of Deposit from Prospect Street. The loan from this bank,
however, was paid off in full by Prospect Street in December 1999 and
has been recorded by the Company as a Senior Secured Promissory Note to
Prospect Street. Prospect Street has agreed to honor the same terms as
the Company previously had with the bank. The Company is currently
negotiating new terms and rate with Prospect Street.
o In May 1998, the Company and its subsidiaries entered into a
Senior Secured Credit Agreement with the Bank of New York, as Trustee
for the Employees Retirement Plan of Keyspan Energy Corp. and Prospect
Street pursuant to which the Company borrowed an aggregate of
$935,000. The funds borrowed accrue interest at an annual rate of 14%
and are payable on demand. The Notes are secured (with certain
exceptions) by all the assets of the Company and its subsidiaries. In
connection with the Credit Agreement, the lenders received warrants to
purchase 94% of the fully diluted Common Stock of the Company (after
issuance) at an exercise price of $.375 per share. The notes and the
obligations under the Credit Agreement and the warrants are also
collateralized by a pledge of the stock of the Company's subsidiaries.
In addition, Keyspan also received the right to appoint two members to
the Company's Board of Directors. Further, as a result of the issuance
of warrants in connection with the Financing, the conversion rate of
the Series A Preferred Stock held by Prospect Street was adjusted from
a conversion rate of one share of Common Stock for each share of
Preferred Stock to a conversion rate of 6.91 shares of Common Stock
for each share of Preferred Stock. On May 29, 1998, the Credit
Agreement was amended to increase the loan amount funded by Keyspan
from an aggregate of $500,000 to $1,850,000 which increased the total
financing from $935,000 to $2,285,000. 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 June 30, 2000, the Company had the
following agreements or arrangements with certain key suppliers in place:
o The Company has entered into an agreement with its major gaming
equipment supplier pursuant to which the Company has been provided
with certain equipment for use in its XS New York facility in exchange
for agreeing to (i) share a percentage of the revenues generated from
the XS New York facility with the supplier and (ii) sell the XS
trademark and related intellectual property rights to such vendor. In
November 1997, an 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 supplier. 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. Additionally, the supplier has the authority to
establish and set the gaming prices, and at its sole discretion, may
elect to terminate, with 60 days notice, the agreement and remove all
of its equipment and assets from the premises if gaming revenues from
its equipment did not reach a minimum of $3,500,000 for any
consecutive 12 month period. In December 1998, the revenue-sharing
agreement was amended to increase the percentage of revenues payable
to the supplier to 16% of the net revenue, as defined, and 50% of the
excess over such amount. In December 1999, the agreement was again
amended to adjust the amounts payable to the supplier to 21% of net
revenues through May 2000 and 22% thereafter. In August 2000, the
parties signed a Third Amendment to Revenue Sharing Agreement which
added release language from Skyline to the supplier, clarification of
payment and pricing terms and modification of the supplier's
cancellation notice period from 60 days to 30 days.
<PAGE>
o In April 1996, the Company entered into a lease at 1457
Broadway for its XS New York location. This lease contained a
provision allowing the landlord to terminate the lease upon six months
notice. In the event the landlord exercised this termination right
during the first five years of the lease, the Company was entitled to
recover a portion of its leasehold improvements in the form of a
termination fee. The maximum recovery was originally $974,000 and was
to be reduced to zero, on a straight-line basis, over 60 months. In
April 1999, by mutual agreement of the parties, this lease was
terminated and in its place a stipulation was executed. In general
terms, the stipulation enabled the Company to continue to occupy the
premises under the same terms as contained in the original lease, but
with a shorter termination notice period and a reduced rent. The
notice period was reduced from six months to four months and the rent
was reduced by 25%. The Stipulation further provided that the landlord
was entitled to recover this 25% rent reduction out of any termination
fee which may be owed to the Company. In May 2000, the stipulation was
amended to provide a revised method of calculating rent, forgiveness
of past charges and a further shortening of the termination notice
period from 4 months to 2 months. Under this revision, the Company was
entitled to occupy the premises rent-free for any week in which its
gaming revenue did not exceed $32,500. The Company agreed to allow the
landlord to recover any rent forgiven under this arrangement against
the Company's $93,000 security deposit, in addition to the landlord's
previous right to recover against any termination fee which may be
owed the Company, The company and landlord later modified this
arrangement such that the Company is entitled to occupy rent-free
unless gaming revenue reaches $37,500 per week. For gaming revenue in
excess of $37,500 per week, the company must pay 50% of the excess up
to a maximum of $10,000 per week.
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. No formal notification has been issued to date.
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, 2000,
the Company's ability to continue as a going concern is dependent upon continued
forbearance of the Company's institutional lenders because the Company currently
does not have available funds to repay these loans, which, if demanded, would
cause the Company to be in default under its other agreements with these
lenders. Accordingly, the Company is in need of either securing new financing
and/or attaining profitable operations.
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.
<PAGE>
Seasonality
The Company's business is seasonal in nature, based in part, on higher
volumes of tourists in the New York City Metropolitan area during the spring and
summer months and during the December holiday season.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is set forth at the end of this report.
<PAGE>
PART III
Item 8. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS
None.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Our executive officers, directors and key employees and their ages
and positions with us as of June 30, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Steven Vocino 45 Director
Thomas Riordan 41 Director
John F. Barry, III 48 Director
Michael Leeb (1) 41 Chief Operating Officer and Acting President
Robert Brenner 50 President, CEO and Director
Ronald Aghassi 34 Vice President of Finance, Secretary
</TABLE>
(1) The agreement pursuant to which Robert Brenner acted as the Company's
President and Chief Executive Offier expired on November 15, 2000 without being
renewed. Michael Leeb has been appointed as the Company's Acting President
effective as of November 16, 2000.
The following is a brief description of each officer and director listed above:
Steven Vocino was appointed by the Company's Board in of Directors as
Chairman of the Board in 1998 to fill a vacancy thereon. Mr. Vocino is the
Founder and President of WTLN-TV, founded in 1989 the Teaching Learning Network,
an international television program supplier. Mr. Vocino's background includes a
variety of fully sponsored internationally televised sporting events (i.e., 1984
Summer Olympic Games, the Traveling Sportsman, Tour of America and the Pan Am
Games). Apart from sports programming, Mr. Vocino has established an excellent
sponsor and advertising following within the children's programming market.
Productions include Classroom of the Future, College Bound, Pets and Vets and
Kids Cafe. Mr. Vocino has established an excellent reputation within the
broadcast, cable and public television industry and has won numerous awards for
programming, including Telly, Emmy, Golden Globe, Golden Apple, Peabody,
International Peace Through Sports Awards and Children's Television Workshop
Awards. In 1995, Mr. Vocino assumed the responsibilities of president of New
Media Inc., a television production company focusing on the travel industry, and
was instrumental in its turnaround.
Thomas Riordan has been a non-employee director of the Company since
April 1998. Since July 1998, Mr. Riordan has been the Treasurer of Brooklyn
Union Gas Company, a public utility ("BUG"), which recently merged to form
Keyspan Energy Corp. From July 1997 to June 1998, Mr. Riordan was Manager of
Financial Management of BUG, and from October 1991 to June 1997, he was Manager
of Pension Trust Administration. Mr. Riordan, through his positions at BUG, has
significant experience in all areas of corporate finance, cash management,
investment administration, and banking.
John F. Barry III has been a non-employee director of the Company since
July 1995. Mr. Barry is an officer and director of the general partner of
Prospect Street and also a partner of Prospect Street Investment Management, an
institutional private equity firm managing $300 million and which is an
affiliate of the general partner of Prospect Street. Mr. Barry serves on various
boards, including BondNet Trading Systems, New Media, Transitions Research
Corporation and 24/7 Media, Inc. Mr. Barry was previously a securities attorney
with Davis Polk & Wardwell and a corporate finance specialist with Merrill
Lynch.
<PAGE>
Michael Leeb was appointed as the Chief Operating Officer and Acting
President of the Company in November 2000. Mr. Leeb has been employed by the
Company since February 1994, having served as the Director of Operations from
February 1994 to June 1998, and as the Vice President of Operations from since
June 1998. Prior to joining the Company, Mr. Leeb was employed by W.A.
Amusements from February 1984 to December 1993, having acted as the Operations
Manager for Splish Splash Water Park in Riverhead, New York.
Robert Brenner has been the President, Chief Executive Officer and a
director of the Company since November 1998. Prior to joining the Company, Mr.
Brenner had been serving as a senior adviser to Prospect Street Ventures. He was
Group President of ISS Technology Group from 1995-1998. From 1971 to 1995, Mr.
Brenner was Chairman and Chief Executive Officer of US Maintenance Corporation,
a facility services contracting company that he sold in 1995 to International
Service Systems, Inc., a $2.5 billion Danish facilities service company.
Ronald Aghassi has been the Controller of the Company since June 1996
and the Vice President of Finance and Secretary of the Company since June 1999.
Prior to joining the Company, Mr. Aghassi was employed as an Audit Supervisor by
Cornick, Garber & Sandler, LLP (which firm has been the Company's current
auditors since June 1999), a medium-sized regional accounting firm located in
New York City, from December 1994 to June 1996. From June 1988 through December
1994, Mr. Aghassi was employed as a certified public accountant with various
accounting firms specializing in the entertainment industry.
Directors serve until the next annual meeting of stockholders or until
their successors are elected and qualified. Officers serve at the discretion of
the Board of Directors. The Board of Directors does not have any committees.
Directors who are not salaried employees of the Company receive options to
purchase 25,000 shares of Common Stock upon their initial election or
appointment to the Board and options to purchase 12,500 shares of Common Stock
upon their re-election to the Board. All of such options granted as set forth
herein are exercisable one year from the date of grant at an exercise price
equal to the fair market value on the date of grant. Non-employee directors are
also entitled to reimbursement for reasonable expenses incurred in attending any
such meetings. In addition, Steven Vocino receives an annual retainer of $10,000
for his services as Chairman of the Board.
Messrs. Riordan and Vocino each received options to purchase 25,000
shares of Common Stock in July 1998 in connection with their appointments to the
Board. In addition, in July 1998, Steven Vocino, Chairman of the Board of
Directors, received 600,000 shares of restricted Common Stock of the Company in
consideration for services rendered to the Company in connection with
negotiation of favorable settlements with certain of the Company's creditors.
<PAGE>
Item 10. EXECUTIVE COMPENSATION.
The following table summarizes all compensation paid by the Company
with respect to the fiscal year ended June 30, 2000 paid by the Company to the
Company's Chief Executive Officer, and all other executive officers whose total
cash compensation exceeded $100,000 in the fiscal year ended June 30, 2000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Other Restricted Securities LTIP Pay All Other
Name and Principal Year Salary Bonus ($) Annual Stock Underlying outs ($) Compensation
Position ($) Compen Award(s) Options/ ($)
-sation ($) SAR's (#)
($)
Robert Brenner,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
President and Chief 2000 --- 166,000 216,000 --- --- --- ---
Executive Officer(1) 1999 --- 136,000 135,000 --- --- --- ---
</TABLE>
(1) Mr. Brenner has acted as President and Chief Executive Officer of the
Company pursuant to a Consulting Agreement entered into in November 1998.
Accordingly, Mr. Brenner's compensation is reflective of the fees paid to him in
accordance with said agreement. Furthermore, his compensation for the 1999
fiscal year reflects the fact that he began rendering services to the Company in
November 1998. See "Executive Compensation - Employment and other Agreements."
Employment and Other Agreements
In November 1998, the Company entered into a consulting agreement for
the services of Robert Brenner as its President and Chief Executive Officer. The
consulting agreement is for twenty-four months at $18,000 per month and provides
for additional incentive payments equal to 10% of the first $1,000,000 of EBITDA
(earnings before interest, taxes, depreciation and amortization) and 5% of
EBITDA in excess of $1,000,000, payable in semiannual installments. Pursuant to
the agreement, the Company also paid a one-time $50,000 incentive fee
attributable to the Company's survival through October 15, 1999 without a
bankruptcy filing. If a change of control of the Company occurs during the term
of the agreement or within twelve months of its termination to a party the
Company held discussions with during the term of the Agreement, the Company will
be required to pay 3% of the transaction proceeds or $250,000, whichever is
greater. The consulting agreement can be terminated by either party upon ninety
days written notice. If the Company terminates or fails to offer to renew the
agreement, a termination fee of $216,000 is payable. At least one member of the
Board of Directors of the Company has questioned the due authorization of the
consulting agreement.
In January 2000, the Company entered into an employment agreement with
Michael Leeb, its Vice President of Operations, which expires in December 2001
but which may be cancelled by either party upon ninety days written notice. The
agreement provides for a base salary of $100,000 per year through December 2000
with a minimum increase of 5% thereafter. Additionally, the agreement provides
for an annual incentive bonus with a minimum of $15,000 per year.
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of June 30, 2000,
with respect to the number of shares of each class of voting stock beneficially
owned by (i) those persons known to the Company to be the owners of more than
five percent of any such class of voting stock of the Company, (ii) each
director of the Company and (iii) all directors and executive officers of the
Company as a group. Unless otherwise indicated, each of the listed persons has
sole voting and investment power with respect to the shares beneficially owned
by such shareholder.
<TABLE>
<CAPTION>
COMMON STOCK CLASS A SERIES A PREFERRED STOCK
COMMON STOCK
Name and Address Beneficial % of % of % of Total % of
(1) Ownership Total Beneficial Total Beneficial Outstanding Actual
Outstanding Ownership OutstandingOwnership Voting
(2) Power (3)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
John F. Barry, 95,751,124 97.9% 290,000 (7) 100% 1,090,909 (8) 100% 38.5%
III (4) (5)(6)(7)
(8)
Steven Vocino 625,000 28.6% --- --- --- --- 5.4%
(9)
Thomas Riordan 86,768,900 97.6% --- --- --- --- ---
(10) (11)
Robert Brenner --- --- --- --- --- --- ---
The Bank of New 86,768,900 97.6% --- --- --- --- ---
York, as Trustee (11)
for the Employees
Retirement Plan
of Key Span
Energy Corp.
Prospect Street 95,731,124 97.9% 290,000 (7) 100% 1,090,909 (8) 100% 38.5% (12)
NYC Discovery (6)(7)(8)
Fund, L.P.
All directors and 186,686,324 98.1% 290,000 (7) 100% 1,090,909 (8) 100% 43.9%
executive
officers as a
group (5
persons)(13)
</TABLE>
---------------------------
(1) Unless otherwise noted, the address of each of these persons is c/o the
Company, 350 Fifth Avenue, New York, New York 10118.
(2) Based on an aggregate of 2,095,000 shares of Common Stock issued and
outstanding as of the Record Date, and includes shares subject to currently
exercisable options and warrants for each person or group named.
(3) Does not include Common Stock issuable upon exercise of options and
warrants, and assumes no exercise of the right of the holder of the Series A
Preferred Stock to acquire up to 50.1% of the total voting power of the Company
and to elect a majority of the Board of Directors under certain circumstances
and limits such holder's voting power to 24.9% of the total outstanding voting
power.
<PAGE>
(4) Beneficial ownership of all the securities set forth in (5)-(8) below is
attributed to Mr. Barry pursuant to his position as an officer and director of
the general partner of Prospect Street and its affiliates. See "Certain
Relationships and Related Transactions." Mr. Barry disclaims beneficial
ownership of the shares of Common Stock, Class A Common Stock, Series A
Preferred Stock and Warrants held by Prospect Street and its affiliates. The
address of Prospect Street is 10 East 40th Street, 44th Floor, New York, New
York 10016.
(5) Includes options to purchase 20,000 shares of Common Stock held by such
individual which are currently exercisable.
(6) Includes a warrant held by Prospect Street to purchase up to 86,500,000
shares of Common Stock and warrants to purchase up to 146,341 shares of Common
Stock, all of which were received in connection with certain loans provided to
the Company. In addition, the beneficial ownership of Prospect Street also
includes an aggregate of 52,700 shares of Common Stock, and warrants to purchase
up to 43,902 shares of Common Stock received in connection with certain loans
provided to the Company, which securities are held by affiliates of Prospect
Street.
(7) Includes 290,000 shares of Class A Common Stock (which shares are entitled
to five votes per share and vote together with the Common Stock as a single
class on all matters to be voted on by the holders of the Common Stock) which
Prospect Street purchased from the Company's former president, subject to such
shares being held as collateral for a loan, and pursuant to an irrevocable
proxy, Prospect Street has the right to vote such shares.
(8) Includes 1,090,909 shares of Series A Preferred Stock held by Prospect
Street which, in the aggregate, are convertible into approximately 7,538,181
shares of Common Stock and which vote together with the Common Stock as a single
class on all matters to be voted on by the holders of the Common Stock; except
that the holder of the Series A Preferred Stock has the right, voting as a
separate class, to elect two directors to the Company's Board of Directors. Mr.
Barry is the designee of Prospect Street. Pursuant to the terms of the Series A
Preferred Stock, Prospect Street will be able to vote up to 24.9% of the total
shares eligible to vote at the Meeting. See footnote (15) below. Additionally,
pursuant to the Certificate of Incorporation of the Company, so long as 272,727
shares of Series A Preferred Stock remain outstanding, and upon notice to the
Company, Prospect Street, as the holder of the Series A Preferred Stock, has the
right to obtain up to 50.1% of the total voting power of the Company and to
elect a majority of the Board of Directors in the event the holders of the
Series A Preferred Stock determine in good faith 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
SBA, the exercise of this control provision cannot be made arbitrarily and is
subject to SBA review.
(9) Reflects (i) 600,000 shares of restricted Common Stock, which shares became
unrestricted on July 2, 1998, and (ii) options to purchase 20,000 shares of
Common Stock held by such individual which are currently exercisable.
(10) Mr. Riordan is the designee of Keyspan.
(11) Includes (i) a warrant held by Keyspan to purchase up to 86,500,000 shares
of Common Stock and a warrant to purchase 243,900 shares of Common Stock, which
were received in connection with certain loans provided to the Company, and (ii)
options to purchase 20,000 shares of Common Stock held by Thomas Riordan which
are currently exercisable. Beneficial ownership of such securities are
attributed to Keyspan and its affiliates.
(12) Prospect Street is a Small Business Investment Company subject to
regulatory oversight by the SBA. Pursuant to certain SBA restrictions, Prospect
Street will only be able to vote up to 24.9% of the total shares eligible to
vote at the Meeting, subject to Prospect Street's right to vote 50.1% of the
total shares eligible to vote under certain circumstances.
(13) Includes all shares beneficially owned by Messrs. Barry and Vocino, shares
beneficially held by Prospect Street and Keyspan, and 4,000 shares beneficially
owned by Ronald Aghassi. See footnotes (4) through (9), (11) and (12) above.
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In December 1997, the Company borrowed $500,000 from a bank bearing
interest at the rate of 6.25% per annum that was secured by a Certificate of
Deposit from Prospect Street. The loan from this bank, however, was paid off in
full by Prospect Street in December 1999 and has been recorded by the Company as
a Senior Secured Promissory Note to Prospect Street. Prospect Street has agreed
to honor the same terms as the Company previously had with the bank. The Company
is currently negotiating new terms and rate with Prospect Street.
On April 15, 1998, the Company and its subsidiaries entered into the
Senior Secured Credit Agreement with 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 (the "Maturity Date"), 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 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 held by
Prospect Street was adjusted from a conversion rate of one share of Common Stock
for each share of Series A Preferred Stock to a conversion rate of 6.91 shares
of Common Stock for each share of Series A 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 financing
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 in the aggregate for approximately 173
million shares of Common Stock (86.5 million for each of Keyspan and Prospect
Street) for an aggregate 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.
The Company believes that all transactions between the Company and its
officers, directors and employees described above are on terms no less favorable
to the Company than could have been obtained from unaffiliated parties under
similar circumstances.
Item 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) Exhibits are listed on the Index to Exhibits on page __ of this
report. The Exhibits required by Item 601 of Regulation S-B are listed on such
Index in response to this Item and are incorporated herein by reference.
<PAGE>
(b) Reports on Form 8-K:
None.
<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/ Michael Leeb
Michael Leeb, Chief Operating Officer and Acting President
By: /s/ Ronald H. Aghassi
Ronald H. Aghassi, Vice President of Finance
Dated: November 20, 2000
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
Date: November 20, 2000 /s/ Steven Vocino
Steven Vocino, Chairman of the Board
Date: November 20, 2000 /s/ Thomas Riordan
Thomas Riordan, Director
Date: November 20, 2000 /s/ John F. Barry, III
John F. Barry, III, Director
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit
Number Description
<S> <C>
3.1 Certificate of Incorporation of the Company. (1)
3.2 By-laws of the Company. (1)
3.3 Certificate of Amendment of Certificate of Incorporation relating to the issuance of the Preferred
Stock. (2)
4.1 See Exhibits 3.1 and 3.2
10.1 The Company's 1994 Stock Incentive Plan (as Amended and Restated). (9)
10.2 The Company's Stock Option Plan for Non-Employee Directors (as Amended and Restated). (9)
10.3 Employment Agreement dated October 1, 1993 between the Company and Zalman Silber. (1)
10.4 Lease Agreement dated February 26, 1993 between the Company and Empire State Building Company. (1)
10.5 License Agreement dated February 26, 1993 between the Company and the Empire State Building
Company. (1)
10.6 Purchase Agreement dated February 14, 1994 between the Company and Interactive Simulation, Inc. (3)
10.7 Film Production Agreement dated April 7, 1994 between the Company and Empire Productions, Inc.,
and Chromavision Corp. (3)
10.8 Lease Agreement dated April 14, 1994 between the Company and the Empire State Building Company
relating to the Company's executive offices. (3)
10.9 Lease Agreement dated February 8, 1994 between the Company and the Empire State Building Company
relating to additional space. (3)
10.10 Construction contract dated July 5, 1994 between the Company and Signature Construction Group Inc.
(4)
10.11 Loan and security agreement dated November 16, 1994 between the Company and PhoenixCor, Inc. (5)
10.12 Employment Agreement dated August 15, 1994 between the Company and Steven Schwartz. (5)
10.13 Sponsorship Agreement dated February 21, 1995 between the Company and Dentsu USA, Inc. on behalf
of JVC Company of America. (6)
10.14 Stock Purchase Agreement, dated as of July 7, 1995, between the Company and Prospect Street Fund.
(2)
10.15 Registration Rights Agreement dated as of July 7, 1995 between the Company and Prospect Street
Fund relating to the Common Stock issuable upon conversion of the Preferred Stock. (2)
<PAGE>
10.16 Guarantee of Zalman Silber dated as of July 7, 1995 relating to the guarantee of the Company's
obligations under the Stock Purchase Agreement. (2)
10.17 Stockholders' Agreement dated as of July 7, 1995 between Zalman Silber and Prospect Street Fund.
(2)
10.18 Amendment to Employment Agreement dated June 29, 1995 between the Company and Zalman Silber. (7)
10.19 Agreement dated March 16, 1995 by and between Skyline, PhoenixCor, Inc. and Zalman Silber relating
to the release of certain security deposits; and the Rider dated March 16, 1995 to the Individual
Guaranty of Zalman Silber. (7)
10.20 Lease amendment dated March 1996 between the Company and the Empire State Building relating to
additional space. (8)
10.21 Amendment dated March 1996, to the Company's original lease and license agreement with the Empire
State Building Company. (8)
10.22 Lease agreement dated March 1996 between the Company and One Times Square Center Partners, L.P.,
for space located at 1457-1463 Broadway, New York, N.Y. (8)
10.23 Lease agreement dated September 5, 1996 between the Company and Woodfield Associates, for space
located at the Woodfield Mall in Schaumberg, Illinois. (9)
10.24 Letter of Intent relating to senior unsecured subordinated debt financing dated October 23, 1996,
between the Company and Prospect Street. (10)
10.25 Note Purchase Agreement dated November 6, 1996, between the Company and Prospect Street. (10)
10.26 Guarantee of Zalman Silber dated November 6, 1996 relating to the Note Purchase Agreement. (10)
10.27 Senior Credit Agreement dated December 20, 1996, between the Company and Prospect Street and Bank
of New York as Trustee for the Employees Retirement Plan of The Brooklyn Union Gas Company. (11)
10.28 Subsidiary Guaranty Agreement dated December 20, 1996, between the Company and Prospect Street.
(11)
10.29 Indemnity, Subrogation and Contribution Agreement dated December 20, 1996, between the Company and
Prospect Street. (11)
10.30 Amended and restated Registration Rights Agreement dated December 20, 1996, between the Company,
Prospect Street, and Bank of New York as Trustee for the Employees Retirement Plan of The Brooklyn
Union Gas Company. (11)
10.31 Senior Promissory Note dated December 20, 1996, between the Company and Prospect Street. (11)
10.32 Senior Promissory Note dated December 20, 1996 between the Company and Bank of New York as Trustee
for the Employees Retirement Plan of The Brooklyn Union Gas Company. (11)
10.33 Stock Purchase Warrant Agreements dated December 20, 1996, between the Company, Prospect Street,
and Bank of New York as Trustee for the Employees Retirement Plan of The Brooklyn Union Gas
Company. (11)
<PAGE>
10.34 Loan and Security Agreement dated December 4, 1996, between the Company and People's Bank. (11)
10.35 Loan and Security Agreement dated December 4, 1996, between the Company and Independent Resources
Inc. (11)
10.36 Loan and Security Agreement dated December 4, 1996, between the Company and PhoenixCor, Inc. (11)
10.37 Guarantees of Zalman Silber dated December 4, 1996 relating to the Loan and Security Agreements
with People's Bank and PhoenixCor, Inc. (11)
10.38 Senior Promissory Note dated February 18, 1997 between the Company and Bank of New York, as
Trustee for the Employees Retirement Plan of The Brooklyn Union Gas Company. (12)
10.39 Senior Promissory Note dated March 14, 1997 between the Company and Prospect Street NYC
Co-Investment Fund, L.P. (12)
10.40 Senior Promissory Note dated March 21, 1997 between the Company and Bank of New York, as Trustee
for Brooklyn Union Gas Company Non-Bargaining Health VEBA. (12)
10.41 Stock Purchase Warrant Agreement dated February 18, 1997 between the Company and Bank of New York,
as Trustee for the Employee Retirement Plan of The Brooklyn Union Gas Company. (12)
10.42 Stock Purchase Warrant Agreements dated March 14, 1997 between the Company and Prospect Street NYC
Co-Investment Fund, L.P. (12)
10.43 Stock Purchase Warrant Agreement dated March 21, 1997 between the Company and Bank of New York, as
Trustee for Brooklyn Union Gas Company Non-Bargaining Health VEBA. (12)
10.44 Purchase Agreement, dated as of November 4, 1997, by and among the Company, Skyline Virtual
Reality, Inc. ("SVR") and Namco Cybertainment, Inc. ("Namco"). (13)
10.45 Trademark License Agreement, dated as of November 4, 1997, between SVR and Namco. (13)
10.46 Revenue-Sharing Agreement, dated as of November 4, 1997, by and among the Company, SVR and
Namco. (13)
10.47 Employment Agreement dated as of December 1, 1997 between the Company and Zalman Silber. (14)
10.48 Senior Secured Credit Agreement dated as of May 20, 1998 among the Company's and its subsidiaries
and Prospect Street and Bank of New York, as Trustee for the Employees Retirement Plan of Keyspan
Energy Corp. ("Keyspan", and together with Prospect Street, the "Institutional Investors"). (15)
10.49 Form of Warrants to Purchase Common Stock to be issued to the Institutional Investors. (15)
10.50 Senior Secured Demand Promissory Notes dated as of May 20, 1998 issued to the Institutional
Investors. (15)
10.51 Security Agreement dated as of May 20, 1998 among the Company and its subsidiaries and the
Institutional Investors. (15)
<PAGE>
10.52 Pledge Agreement dated as of May 20, 1998 among the Company and its subsidiaries and the
Institutional Investors. (15)
10.53 Amended and Restated Separation Agreement and General Release dated as of May 20, 1998. (15)
10.53A First Amendment to Senior Secured Credit Agreement dated as of May 29, 1998 among the Company and
its subsidiaries and the Institutional Investors. (16)
10.54 Employment Agreement dated as of May 12, 1998 between the Company and Steven Schwartz. (16)
10.55 Employment Agreement dated as of June 15, 1998 between the Company and Jay Berkman. (16)
10.56 Debt to Equity Conversion Agreement dated as of September 2, 1998. (17)
10.57 Registration Rights Agreement dated as of September 2, 1998. (17)
10.58 Form of Certificate of Amendment to Certificate of Incorporation. (17)
10.59 Consulting Agreement dated as of July 14, 1999, between the
Company and Robert Brenner.
10.60 Employment Agreement dated as of January 13, 2000, between the
Company and Michael Leeb.
10.61 Amendment to Lease Agreement between the Company and One Times Square Center Partners, L.P., for
space located at 1457-1463 Broadway, New York, N.Y., dated June 1, 2000.
10.62 Third Amendment to Revenue Sharing Agreement, dated as of August 2, 2000, by and among the
Company, Skyline Virtual Reality Inc., d/b/a/ XS New York, and Namco Cybertainment, Inc.
21 Subsidiaries of the Company. (9)
23 Letter from Fichard A. Eisner & Company, LLP to the Securities & Exchange Commission, dated June
4, 1999. (18)
27.1 Financial Data Schedule.
</TABLE>
(1) Previously filed as an exhibit to Registration Statement on Form SB-2
(Commission File No. 33-73276) declared effective on February 14, 1994.
(2) Previously filed as an exhibit to the Company's current report on Form
8-K filed on July 21, 1995.
(3) Previously filed as an exhibit to the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1994.
(4) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended September 30, 1994.
(5) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 1994.
(6) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended March 31, 1995.
<PAGE>
(7) Previously filed as an exhibit to the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1995.
(8) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended March 31, 1996.
(9) Previously filed as an exhibit to the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 1996.
(10) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended September 30, 1996.
(11) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 1996.
(12) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended March 31, 1997.
(13) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended September 30, 1997.
(14) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended December 31, 1997.
(15) Previously filed as an exhibit to the Company's quarterly report on
Form 10-QSB for the quarter ended March 31, 1998.
(16) Previously filed as an exhibit to the Company's current report on Form
8-K filed on July 10, 1998.
(17) Previously filed as an exhibit to the Company's current report on Form
8-K filed on September 17, 1998.
(18) Previously filed as an exhibit to the Company's current report on Form
8-K, filed on June 6, 1999.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
<PAGE>
Independent Auditors' Report
To The Board of Directors and Stockholders
Skyline Multimedia Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES as at June 30, 2000 and
the related consolidated statements of operations, changes in capital deficiency
and cash flows for each of the two years in the period ended June 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Skyline Multimedia Entertainment, Inc. and Subsidiaries as at June 30, 2000, and
the consolidated results of their operations and their consolidated cash flows
for each of the two years in the period ended June 30, 2000, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
A to the financial statements, the Company has experienced significant losses
before extraordinary items in recent years and at June 30, 2000 has substantial
negative working capital and a substantial capital deficiency, it is possible
that the Company may have to vacate its virtual reality game-site prior to the
scheduled termination of the lease and the Company is dependent upon the
continued forbearance of its principal creditors in not demanding payment of
outstanding indebtedness. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note A. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
\s\CORNICK, GARBER & SANDLER, LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
August 30, 2000
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 2000
ASSETS
(To the nearest $1,000)
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash $ 1,309,000
Inventory 146,000
Prepaid expenses and other current assets 233,000
---------------
Total current assets 1,688,000
Property, equipment and leasehold improvements - net 3,892,000
Security deposits 174,000
Deferred financing costs 243,000
Other assets - net 12,000
----------------
T O T A L $ 6,009,000
=============
LIABILITIES
Current liabilities:
Capital lease obligations - current portion $ 198,000
Notes payable - institutional lenders 3,285,000
Accounts payable 714,000
Accrued expenses 368,000
Interest payable - institutional lenders 684,000
---------------
Total current liabilities 5,249,000
Capital lease obligations - less current portion 29,000
Notes payable - institutional lenders 4,450,000
Deferred rent payable 1,161,000
Interest payable - institutional lenders 2,424,000
--------------
13,313,000
Commitments and contingencies (Notes H and M)
CAPITAL DEFICIENCY
Preferred stock, par value $.001, 5,000,000 shares authorized, 1,090,909 shares
of Series A convertible participating preferred
stock issued and outstanding (liquidating value $2.75 per share) 1,000
Common stock - $.001 par value; authorized 19,000,000 shares,
one vote per share, issued 2,095,000 shares 2,000
Class A common stock - $.001 par value; authorized 1,000,000 shares,
five votes per share, issued 960,000 shares 1,000
Treasury stock, 110,000 shares of common stock and 670,000 shares
of Class A common stock at cost (601,000)
Additional paid-in capital 10,848,000
Accumulated deficit (17,555,000)
-------------
Total capital deficiency (7,304,000)
--------------
T O T A L $ 6,009,000
=============
</TABLE>
The notes to financial statements are made a part hereof.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(To the nearest $1,000)
<TABLE>
<CAPTION>
Class A Series A Additional
Common Stock Common Stock Preferred Stock Treasury Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Stock Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1998 1,495,000 $2,000 960,000 $1,000 1,090,909 $1,000 $(601,000) $10,679,000 $(13,766,000) $(3,684,000)
Common shares issued as
payment for services 600,000 169,000 169,000
Net (loss) for the year
ended June 30, 1999 (3,994,000) (3,994,000)
--------- ------ ------- ------ --------- ------ ---------- ----------- ------------- ------------
Balance - June 30, 1999 2,095,000 2,000 960,000 $1,000 1,090,909 1,000 (601,000) 10,848,000 (17,760,000) (7,509,000)
Net income for the year
ended June 30, 2000 205,000 205,000
--------- ------ ------- ------ --------- ------ ---------- ----------- ------------- ------------
BALANCE - JUNE 30, 2000 2,095,000 $2,000 960,000 $1,000 1,090,909 $1,000 $(601,000) $10,848,000 $(17,555,000) $(7,304,000)
========= ====== ======= ====== ========= ====== ========== =========== ============= ============
</TABLE>
The notes to financial statements are made a part hereof.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(To the nearest $1,000)
<TABLE>
<CAPTION>
Year Ended
June 30,
----------------------------------
2000 1999
--------------- ----------------
Revenues:
<S> <C> <C>
Attraction sales $ 9,108,000 $ 8,359,000
Concessions sales 1,092,000 1,143,000
Sponsorship income 23,000 101,000
--------------- --------------
10,223,000 9,603,000
------------ -------------
Operating expenses:
Cost of merchandise sold 440,000 515,000
Selling, general and administrative 8,999,000 9,576,000
Depreciation and amortization 2,119,000 2,028,000
Loss on impairment of long-lived assets 300,000
--------------- --------------
11,558,000 12,419,000
(Loss) before interest income and
expense and extraordinary item (1,335,000) (2,816,000)
Interest income 33,000 44,000
Interest expense (1,139,000) (1,435,000)
--------------- --------------
(Loss) before extraordinary item (2,441,000) (4,207,000)
Extraordinary gains from settlements of liabilities 2,646,000 213,000
--------------- --------------
NET INCOME (LOSS) $ 205,000 $ (3,994,000)
============= ============
Income (loss) per share of common stock - basic and diluted:
(Loss) before extraordinary item $(1.07) $(1.85)
============= ============
Net income (loss) $ .09 $(1.76)
============= ============
Weighted number of average common shares outstanding 2,275,000 2,275,000
============= ============
</TABLE>
The notes to financial statements are made a part hereof.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(To the nearest $1,000)
<TABLE>
<CAPTION>
Year Ended
June 30,
INCREASE (DECREASE) IN CASH 2000 1999
-------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 205,000 $(3,994,000)
------------ -----------
Adjustments to reconcile results of operations to net cash effect of
operating activities:
Loss on impairment of long-lived assets 300,000
Noncash gains on restructuring of liabilities (2,762,000) (213,000)
Depreciation and amortization 2,119,000 2,237,000
Deferred rent payable 167,000 500,000
Fair value of common stock issued as payment
for services 169,000
Net changes in assets and liabilities:
Inventory (24,000) 12,000
Prepaid expenses and other current assets (194,000) 185,000
Security deposits 151,000 554,000
Accounts payable and accrued liabilities 687,000 89,000
Due to contractors (115,000)
Interest payable - institutional lenders 1,051,000 1,013,000
Deferred sponsorship income (23,000) (26,000)
--------------- --------------
Total adjustments 1,057,000 4,820,000
------------- ------------
Net cash provided by operating activities 1,262,000 826,000
Cash flows from investing activities:
Purchase of fixed assets (154,000) (257,000)
Cash flows from financing activities:
Repayment of capital lease obligations (579,000) (1,285,000)
------------- ------------
NET INCREASE (DECREASE) IN CASH 529,000 (716,000)
Cash - July 1 780,000 1,496,000
------------- -------------
CASH - JUNE 30 $ 1,309,000 $ 780,000
============= =============
</TABLE>
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-2-
<TABLE>
<CAPTION>
Year Ended
June 30,
-----------------------------
2000 1999
----------- ------------
Supplemental disclosures of cash flow information:
Cash paid for:
<S> <C> <C>
Interest $89,000 $ 210,000
======= ==========
Taxes $ 2,000
==========
Equipment acquired under a capital lease agreement $ 28,000
==========
</TABLE>
The notes to financial statements are made a part hereof.
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE A - The Company
Skyline Multimedia Entertainment, Inc. ("SME") is a holding company
engaged in the development and operation of state-of-the-art
entertainment attractions and together with its wholly-owned
subsidiaries, New York Skyline, Inc. ("NYSI") and Skyline Virtual
Reality, Inc. ("SVR") are referred to as the "Company." Its first
site, which is located in the Empire State Building in New York
City, is owned and operated by NYSI which commenced operations of
its "New York Skyride" facility on December 22, 1994. Its revenues
for the years ended June 30, 2000 and 1999 were $7,059,000 and
$6,013,000, respectively. The second site, which is located in
Times Square ("XS") in New York City, is owned and operated by SVR
which commenced operations of its interactive virtual reality
entertainment center on December 27, 1996. Its revenues for the
years ended June 30, 2000 and 1999 were $3,164,000 and $3,590,000,
respectively.
The Company's business is somewhat seasonal in nature, based in
part on higher volumes of tourists during the spring and summer
months and holiday seasons.
The accompanying financial statements have been prepared on a
going-concern basis. As reflected in the accompanying financial
statements, the Company has experienced recurring losses before
extraordinary items from operations and as of June 30, 2000 has a
working capital deficiency of $3,561,000 and a capital deficiency
of $7,304,000. In addition, the Company has become aware of plans
by the landlord of its XS Site to sell the property to a developer
which would cause a cancellation of its lease upon 60 days notice
to the Company by the landlord. As further indicated in Note H, the
Company's borrowings from institutional lenders and investors
includes borrowings which are due on demand. The Company is
dependent on the continued forbearance of these lenders because the
Company currently does not have available funds to repay these
loans, which, if demanded, would cause the Company to be in default
under its other agreements with these lenders. The above factors
give rise to substantial doubt as to the ability of the Company to
continue as a going concern. In December 1999, the Company settled
its on-going lease disputes with its landlord at the Empire State
Building (see Note M) and in May 2000, the Company negotiated a
further revision to its XS lease (see Note H). In addition,
management has been reviewing and reducing operating expenses and
focusing on its marketing efforts on the Empire State Building.
Management is hopeful that its efforts to increase visitors to the
site will be successful. The accompanying financial statements have
not been adjusted to give effect to the amount or classification of
recorded assets or the classification and amount of liabilities
should the Company be unable to continue as a going concern.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-2-
NOTE B - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of the Company and its wholly-owned subsidiaries. Material
intercompany transactions and account balances have been eliminated
in consolidation.
Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing net income
(loss) by the weighted average number of outstanding common shares
during the year. Diluted per share data includes the effects of
options, warrants and convertible securities, when they are
dilutive. Because all potential common shares were either
antidilutive or nondilutive for the years ended June 30, 2000 and
1999, they are not included in the calculation of diluted per share
amounts.
Inventory
Inventory consists of clothing, souvenirs and food and is stated at
the lower of cost (first-in, first-out) or market.
Property, Equipment and Leasehold Improvements
Property and equipment, including assets under capital leases is
stated at cost less accumulated depreciation unless impaired, in
which case a charge is recognized for the write down of such asset
to its estimated net realizable amount. Depreciation is provided on
the straight-line method over the two to twelve year estimated
useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term
or the estimated useful life of the asset.
Rent Expense
The Company, for financial accounting purposes, recognizes
scheduled rent increases and rent holidays over the term of the
lease using the straight-line method.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-3-
NOTE B - Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation
Stock-based compensation is recognized under the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"). The provisions of
SFAS No. 123 allow companies to either expense the estimated fair
value of employee stock options or to continue to follow the
intrinsic value method set forth in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), but disclose the pro forma effects on net loss and net loss
per share had the fair value of the options been expensed. The
Company has elected to continue to apply APB 25 in accounting for
its employee stock option incentive plans (see Note J).
Fair Value of Financial Instruments
The Company's financial instruments are comprised primarily of
demand notes, notes payable, capitalized leases and senior debt.
Because of the financial condition of the Company, management is
unable to estimate the fair values of these obligations.
Impairment of Long-Lived Assets
The Company periodically reviews all its long-lived assets whenever
events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable.
For the year ended June 30, 1999, the Company recorded a $300,000
impairment loss on a cancelled project in Sidney, Australia.
Advertising
Advertising costs are expensed when incurred. Advertising costs
were $303,000 and $338,000 for the years ended June 30, 2000 and
1999, respectively.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-4-
NOTE C - Concentration of Credit Risk
The Company maintains all of its cash with highly capitalized
financial institutions. However, since such balances often exceed
the $100,000 FDIC insurance limit, such excess is not insured.
NOTE D - Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements is summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment and fixtures $ 1,957,000
Simulation film 1,070,000
Simulation equipment 2,324,000
Leasehold improvements 5,596,000
-------------
10,947,000
Less accumulated depreciation and amortization 7,055,000
-------------
$ 3,892,000
=============
</TABLE>
NOTE E - Capital Lease Obligations
The future minimum lease payments under capital lease obligations
as of June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Year Ending June 30:
<S> <C> <C>
2001 $223,000
2002 18,000
2003 7,000
2004 7,000
-----------
Total minimum lease payments 255,000
Less amount representing interest at
9.2% to 11.5% a year 28,000
-----------
Present value of minimum lease payments 227,000
Less current portion 198,000
-----------
Long-term portion $ 29,000
===========
(Continued)
</TABLE>
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-5-
NOTE F - Notes Payable
In December 1996, the Company entered into a Senior Credit
Agreement with the Bank of New York as trustee for the Employees
Retirement Plan of Keyspan Energy Corp. ("Keyspan") and Prospect
Street NYC Discovery Fund, L.P. ("Prospect Street") (together with
Keyspan, the "Institutional Investors"). The agreement (as amended)
provided for the borrowing of $4,450,000 in the form of senior
notes which accrue interest at 14% a year and require the payment
of both principal and interest on December 20, 2001. In connection
with the subordinated debt, the lender received warrants to
purchase up to 434,146 shares of common stock at an exercise price
of $4.25 per share which the Company valued at approximately
$712,000 using the Black-Scholes pricing model. The warrants expire
on December 20, 2006.
In December 1997, the Company received a $500,000 demand 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 $2,785,000 (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. In December 1999, Prospect
Street repaid the $500,000 bank loan on behalf of the Company.
While the Company and Prospect Street are now negotiating the terms
of this loan, Prospect Street has agreed to extend the same terms
and rate as existed under the bank loan. 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.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-6-
NOTE F - Notes Payable (Continued)
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.
NOTE G - Income Taxes
The principal components of deferred tax assets, liabilities and
the valuation allowance are as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------
2000 1999
--------------- ---------------
Deferred tax assets:
<S> <C> <C>
Capitalization of start-up costs $ 14,000 $ 136,000
Depreciation differences 1,957,000 1,863,000
Net operating loss carryforwards 6,040,000 5,676,000
----------- -----------
8,011,000 7,675,000
Less valuation allowance (8,011,000) (7,675,000)
----------- -----------
Net deferred tax asset $ -- $ --
============== =============
</TABLE>
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-7-
NOTE G - Income Taxes (Continued)
The Company has provided valuation allowances equal to its net
deferred tax assets at June 30, 2000 and June 30, 1999 due to
uncertainty of the Company being able to use this benefit to offset
future taxable income. The Company will periodically evaluate the
likelihood of realizing such asset and will adjust such amount
accordingly.
At June 30, 2000, the Company has available net operating loss
carryforwards to reduce future federal taxable income of
approximately $13,400,000 for tax reporting purposes which expire
from 2010 through 2020. Pursuant to the provisions of the Internal
Revenue Code, future utilization of these past losses may be
subject to certain annual limitations based on changes in the
ownership of the Company's stock that may occur.
NOTE H - Commitments
The Company leases space for its Skyride attraction in the Empire
State Building pursuant to an operating lease expiring in June
2016. The lease provides for free rent or rent credits for various
periods; rental expense is recognized on a straight-line basis over
the life of the lease. Additionally, the Company occupies office
space under a lease which expired on October 31, 1999. The Company
is currently negotiating the terms of a new lease with the landlord
and is paying rent on a month-to-month basis at a rate of
approximately $9,200 per month.
The Company occupies space to house its interactive virtual reality
entertainment center. In April 1999, the lease was renegotiated
under the terms of a stipulation agreement. The stipulation
agreement provided for a 25% reduction of rent offset by a
reduction of a termination fee from the landlord in the event the
landlord exercises a cancellation clause as provided in the lease.
Additionally, it required that, upon notification by the landlord
of its exercise of the cancellation clause, the Company vacate the
premises within four months.
In May 2000, the stipulation agreement was revised. As a result of
the revision, the Company must vacate the premises within sixty
days upon receiving notice of the landlord's exercise of the
cancellation clause. Additionally, the landlord forgave payment of
any rentals due less the security deposit previously paid by the
Company (See Note M). The agreement also provided for future
rentals equal to weekly gaming revenues in excess of $32,500 with a
maximum rental of $10,000 per week. Subsequent to June 1, 2000,
such amounts were adjusted whereby the rentals would be equal to
50% of the weekly gaming revenues in excess of $37,500 with a
maximum of $10,000 per week.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-8-
NOTE H - Commitments (Continued)
The Company is aware of the landlord's plans to sell the property
to a developer; however, the timing of such sale is not presently
known. All related assets have been fully depreciated at June 30,
2000.
Minimum annual rental payments required for all operating leases
are as follows:
<TABLE>
<CAPTION>
Year Ending June 30:
<S> <C> <C>
2001 $ 480,000
2002 496,000
2003 545,000
2004 545,000
2005 545,000
Thereafter 6,689,000
-----------
$9,300,000
===========
</TABLE>
The Empire State Building lease includes escalation clauses for
increases in real estate taxes and certain cost of living
adjustments.
Rent expense for the years ended June 30, 2000 and 1999 was
approximately $1,649,000 and $2,225,000, respectively (see Note B).
The Company has a licensing agreement with the Empire State
Building Company ("ESBC") expiring on June 30, 2016 to have tickets
to its New York Skyride facility sold by the licensor's employees
at the counter where licensor's tickets to the observatory are
sold. Under the terms of the licensing agreement, the following
future minimum payments are required:
<TABLE>
<CAPTION>
Year Ending June 30:
<S> <C> <C>
2001 $ 175,000
2002 181,000
2003 200,000
2004 200,000
2005 200,000
Thereafter 2,334,000
-----------
$3,290,000
===========
</TABLE>
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-9-
NOTE H - Commitments (Continued)
In December 1999, the Company and ESBC executed a Second
Modification of License Agreement. The agreement provides for a
contingent license fee, in addition to the flat annual fee, in the
event that the capture rate at ESBC's ticket window (number of
Skyride tickets sold by ESBC as a percentage of ESBC Observatory
tickets sold) exceeds 10.5%. The contingent license fee ranges from
an annual fee of $10,500 at a capture rate of 10.5% to $1,400,000
at a capture rate of 26%.
NOTE I - Consulting and Employment Agreements
In November 1998, the Company entered into a consulting agreement
for the services of its President and Chief Executive Officer. The
agreement is for twenty-four months at $18,000 per month and
provides for additional incentive payments equal to 10% of the
first $1,000,000 of EBITDA (earnings before interest, taxes,
depreciation and amortization) and 5% of EBITDA in excess of
$1,000,000 payable in semiannual installments. Pursuant to the
agreement, the Company also paid a one-time $50,000 incentive fee
attributable to the Company's survival through October 15, 1999
without a bankruptcy filing. The agreement expired in November 2000
and was not renewed. The agreement provides that if the Company
terminates or fails to offer to renew the agreement, a termination
fee of $216,000 is payable. However, at least one member of the
Board of Directors has questioned the due authorization of the
agreement.
In January 2000, the Company entered into an employment agreement
with an officer which expires in December 2001 but which may be
cancelled by either party upon ninety days written notice. The
agreement provides for a base salary of $100,000 per year through
December 2000 with a minimum increase of 5% thereafter.
Additionally, the agreement provides for an annual incentive bonus
with a minimum of $15,000 per year.
NOTE J - Stockholders' Equity
On July 7, 1995, the Company sold to Prospect Street, 1,090,909
shares of Series A convertible participating preferred stock, par
value $.001 per share, for $3,000,000. Net proceeds from such
offering, aggregated approximately $2,833,000. The preferred stock
issued is convertible into common stock of the Company at any time
at a conversion rate of 6.91 shares of common stock for each share
of preferred stock. The preferred shares are subject to both demand
and piggyback registration rights. The preferred stock has a
liquidation preference equal to $2.75 per share, but does not pay
any dividends unless declared by the Board of Directors. The
preferred stockholders are entitled to an aggregate of up to 24.9%
of the outstanding voting power of the Company which can increase
to 50.1% of the voting power if in Prospect Street's sole
discretion it becomes reasonably necessary for the protection of
its investment.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-10-
NOTE J - Stockholders' Equity (Continued)
At June 30, 2000, the Company has outstanding warrants for the
purchase of its common stock as follows:
<TABLE>
<CAPTION>
Warrants Issued in
Connection With/ Number of Exercise
Held By Shares Price Expiration Date
<S> <C> <C> <C>
Sub-debt financing 243,904 (a) December 20, 2006
Sub-debt financing 48,780 (a) December 31, 2006
Sub-debt financing 48,780 (a) February 18, 2007
Sub-debt financing 43,902 (a) March 14, 2007
Sub-debt financing 48,780 (a) March 21, 2007
Equipment financing 50,000 (b) December 31, 2007
</TABLE>
(a) The warrants are exercisable into one share of common stock
at an exercise price of $4.25.
(b) The warrant is exercisable into one share of common stock
at an exercise price of $6.00.
The above warrants may be redeemed by the Company at a price of
$.05 per warrant if certain minimum per share market prices of its
common stock, as defined, are present.
The Company has a stock option plan ("Plan A") which, as amended,
provides for the issuance of incentive stock options or
nonqualified options to key employees and officers to be determined
by the compensation committee of the Board of Directors. The
aggregate number of shares which may be issued under Plan A is
2,500,000. Incentive stock options under Plan A may not be granted
at less than the fair market value of the underlying shares at date
of grant (110% of fair market value for a 10% or greater
stockholder). Incentive stock options granted under Plan A can be
exercisable for a period not to exceed ten years.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-11-
NOTE J - Stockholders' Equity (Continued)
A summary of stock option activity related to Plan A is as follows:
<TABLE>
<CAPTION>
Exercise
Number of Price
Shares Per Share
<S> <C> <C>
Outstanding - July 1, 1998 931,500 $0.31 - $4.00
Cancelled during the year ended
June 30, 1998 (907,500) $0.31 - $4.00
--------
Outstanding - June 30, 1999 and
June 30, 2000 24,000 (a) $2.75 - $4.00
=========
</TABLE>
(a) All of the options are currently exercisable.
The following table presents information relating to Plan A stock
options outstanding at June 30, 2000:
Approximate
Weighted Average
Weighted Average Remaining
Shares Exercise Price Life
7,500 $4.00 1 month
16,500 $2.75 14 months
------
24,000 $3.14 10 months
======
The Company has a stock option plan for nonemployee directors
("Plan B"). The aggregate number of shares which may be issued
under Plan B, as amended, is 500,000.
A summary of stock option activity related to Plan B is as follows:
<TABLE>
<CAPTION>
Option
Number of Price
Shares Per Share
<S> <C> <C> <C> <C>
Outstanding - July 1, 1998 190,000 $1.50 - $4.00
Granted during the year ended June 30, 1999 75,000 $.25
Cancelled during the year ended June 30, 1999 (170,000) $1.50 - $4.00
--------
Outstanding - June 30, 1999 and
June 30, 2000 95,000 $ .25 - $4.00
=========
</TABLE>
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-12-
NOTE J - Stockholders' Equity (Continued)
The following table presents information relating to Plan B stock
options outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Life in Exercise
Shares Price Years Shares Price
<S> <C> <C> <C> <C> <C>
75,000 $ .25 3.01 37,500 $ .25
5,000 $ 1.50 2.41 5,000 $1.50
15,000 $ 3.83 .61 15,000 $3.83
------ ------
95,000 $ .88 2.60 57,500 $3.25
====== ======
</TABLE>
The Board of Directors approved a stock buy-back program where the
Company is authorized to purchase up to 300,000 shares of common
stock. As of June 30, 2000, the Company has purchased 110,000
shares which is reflected as treasury stock.
At June 30, 2000, the Company has reserved shares of common stock
for issuance upon exercise of warrants, options and conversions of
preferred stock as follows:
<TABLE>
<CAPTION>
<S> <C>
Plan "A" options 24,000
Plan "B" options 95,000
Preferred stock 7,538,181
Sub-debt financing 434,146
Equipment financing 50,000
-----------
Total 8,141,327
===========
</TABLE>
The Company has elected to follow Accounting Principles Board
Opinion 25 ("APB 25") and related interpretations in accounting for
its employee stock options. Under APB 25, where the exercise price
of the Company's employee stock options equals the market price of
the underlying stock on the date of grant, no compensation is
recognized.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-13-
NOTE J - Stockholders' Equity (Continued)
Pro forma information regarding net income (loss) and income (loss)
per share as required by SFAS No.123 has been determined as if the
Company had accounted for its employee stock options under the fair
value method of that statement. The effect of applying SFAS No. 123
on the 2000 and 1999 pro forma net income (loss) is not necessarily
representative of the effects on reported operations for future
years due to, among other things: (1) the vesting period of the
stock options and (2) the fair value of additional stock options in
future years. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant date
for awards under the plans consistent with the methodology
prescribed under SFAS No. 123, the Company's loss before
extraordinary items in 2000 and 1999 would have been approximately
$2,444,000 and $4,216,000 or $(1.07) per share and $(1.85) per
share, respectively, and its net income (loss) in 2000 and 1999
would have been approximately $202,000 and $(4,003,000) or $.09 per
share and $(1.76) per share, respectively. The weighted average
fair value of the options granted during 1999 are estimated as $.11
on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: expected dividend yield of 0%,
expected volatility of 40%, risk-free interest rate of 5.48% and an
estimated life of 5 years. No options or warrants were issued
during 2000.
The exercise price for warrants and options issued in connection
with services rendered by nonemployees or financing arrangements is
determined by negotiations between the Company and the third party.
Generally, warrants and options are issued to employees with an
exercise price of not less that the quoted market price of the
stock on the date of grant.
NOTE K - Related Party Transaction
In July 1998, the Company issued 600,000 shares of common stock to
a director of the Company in connection with certain consulting
services which were valued at approximately $169,000.
NOTE L - Revenue Sharing Agreements
The Company has been provided with certain equipment for use in its
XS New York facility in exchange for a percentage of the revenues
generated therefrom. In November 1997, a new agreement was entered
into with its major equipment supplier whereby the Company's
revenue-sharing obligation was reduced from 40% to 14% in exchange
for the Company selling the XS trademark and related intellectual
property rights to such supplier. 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. Additionally, the supplier has the authority to
establish and set the gaming prices and, at their sole discretion,
may elect to terminate, with 60 days notice, the agreement and
remove all of its equipment and assets from the premises if gaming
revenues from its equipment do not reach a minimum of $3,500,000
for any consecutive 12 month period. In December 1998, the
revenue-sharing agreement was amended to increase the percentage of
revenues payable to the supplier to 16% of the net revenue, as
defined, and 50% of the excess over such amount. In December 1999,
the agreement was again amended to adjust the amounts payable to
the supplier to 21% of net revenues through May 2000 and 22%
thereafter. In August 2000, the parties signed a third Amendment to
Revenue Sharing Agreement which added release language from the
Company to the supplier, clarification of payment and pricing terms
and modification of the supplier's cancellation notice period from
60 days to 30 days.
(Continued)
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-14-
NOTE M - Extraordinary Gains from Restructurings of Liabilities
Extraordinary gains from restructuring of liabilities for the year
ended June 30, 2000 are comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Settlement of Empire State Building litigation $2,206,000
Revised virtual realty entertainment center
stipulation agreement 389,000
Settlements with vendors 51,000
------------
Total $2,646,000
============
</TABLE>
In December 1999, the Company entered into a settlement agreement
with ESBC, in connection with a lawsuit originally filed by the
Company against ESBC and other named defendants in the Supreme
Court of the State of New York, County of New York on December 23,
1997. The Company's action primarily sought injunctive relief to
prohibit ESBC from, among other things, terminating the Company's
lease and license agreements relating to the New York Skyride, as
well as monetary damages from ESBC and the other defendants. The
basis for the Company's claim was, among other things, lack of
cooperation from ESBC and its staff in violation of the lease and
license agreements, as well as bad faith, fraud and self-dealing by
ESBC and certain members of its management staff.
The settlement resulted in an extraordinary gain of $2,206,000 for
the year ended June 30, 2000 representing reversal of amounts due
to ESBC for unpaid rents and charges aggregating $1,413,000, the
reversal of deferred rents payable aggregating $909,000 relating to
the surrender of a lease for certain space which was scheduled to
expire in July 2016, less $116,000 of related legal fees incurred.
In addition, as a result of the stipulation agreement relating to
the Company's virtual reality entertainment center (see Note H),
the Company recorded an extraordinary gain of $389,000 for the year
ended June 30, 2000 comprised of the forgiveness of $157,000 past
due rentals (net of a $93,000 security deposit held by the
landlord) and the reversal of $232,000 deferred rentals resulting
from the elimination of fixed monthly rents.
Also, during the year ended June 30, 2000, the Company settled
$70,000 of liabilities to vendors for $19,000 resulting in a gain
of $51,000.
During the year ended June 30, 1999, the Company settled $1,148,000
of liabilities to vendors for $935,000 resulting in an
extraordinary gain of $213,000.
