SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
Quarterly report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For Quarter Ended: December 31, 1999
Commission File No. 0-23396
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
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New York 11-3182335
(State of Incorporation) (IRS Employer Identification No.)
350 Fifth Avenue
New York, New York 10118
(Address of principal executive office)
(Zip code)
(212) 564-2224
Issuer's telephone number, including area code
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Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
issuer was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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As of February 25, 2000 , there were issued and outstanding 2,095,000
shares of Common Stock, $.001 par value per share, 960,000 shares of Class A
Common Stock, $.001 par value per share, and 1,090,909 shares of Series A
Convertible Participating Preferred Stock, $.001 par value per share .
Transitional Small Business Disclosure Format
Yes No X
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<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
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<TABLE>
<CAPTION>
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Condensed consolidated financial statements
(unaudited)
<S> <C> <C> <C>
Balance sheet as of December 31, 1999 3
Statements of operations for the three and six months
ended December 31, 1999 and 1998 5
Statements of cash flows for the six months
ended December 31, 1999 and 1998 6
Notes to financial statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION 20
INDEX TO EXHIBITS 22
SIGNATURES 23
</TABLE>
2
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (unaudited)
December 31, 1999
ASSETS
(To the nearest $1,000)
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash ......................................................... $ 987,000
Inventory .................................................... 124,000
Prepaid expenses and other current assets .................... 345,000
-----------
Total current assets .................................... 1,456,000
Property, equipment and leasehold improvements - net ............ 4,742,000
Security deposits ............................................... 321,000
Deferred financing costs ........................................ 335,000
Other assets - net .............................................. 30,000
-----------
TOTAL ................................................... $ 6,884,000
===========
LIABILITIES
Current liabilities:
Capital lease obligations - current portion .................. $ 376,000
Notes payable - institutional lenders ........................ 3,285,000
Accounts payable ............................................. 761,000
Accrued expenses and other current liabilities ............... 436,000
Interest payable - institutional lenders ..................... 524,000
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Total current liabilities ............................... 5,382,000
Capital lease obligations - Less Current Portion ................ 43,000
Notes payable - institutional lenders - Less Current Portion .... 4,450,000
Deferred rent payable ........................................... 1,359,000
Interest payable - institutional lenders ........................ 2,043,000
-----------
Commitments and contingencies ................................... 13,277,000
-----------
</TABLE>
3
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (unaudited )
December 31, 1999
CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
<S> <C> <C>
Preferred stock, par value $.001 per share, 5,000,000 shares authorized,
1,090,909 shares of Series A convertible participating preferred stock issued
and outstanding
(liquidating value $2.75 per share) 1,000
Common stock - $.001 par value; authorized 19,000,000 shares;
one vote per share issued 2,095,000 shares 2,000
Class A common stock - $.001 par value; authorized 1,000,000 shares,
five votes per share, issued 960,000 shares 1,000
Treasury stock, 110,000 shares of common stock and 670,000 shares
of Class A common stock at cost (601,000)
Additional paid-in capital 10,848,000
Accumulated deficit (16,644,000)
------------
Total capital deficiency (6,393,000)
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TOTAL $ 6,884,000
============
</TABLE>
The notes to financial statements are made a part hereof.
4
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(To the nearest $1,000)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
December 31 December 31
-------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
Revenues:
<S> <C> <C> <C> <C>
Attraction sales ........................................ $ 2,409,000 $ 1,956,000 $ 5,289,000 $ 4,527,000
Concession sales ........................................ 264,000 282,000 612,000 620,000
Sponsorship income ...................................... 11,000 18,000 23,000 49,000
----------- ----------- ----------- -----------
2,684,000 2,256,000 5,924,000 5,196,000
----------- ----------- ----------- -----------
Total expenses:
Cost of merchandise sold ................................ 113,000 112,000 251,000 291,000
Selling, general and administrative ..................... 2,533,000 2,279,000 5,289,000 4,877,000
Depreciation and amortization ........................... 536,000 504,000 1,063,000 1,018,000
----------- ----------- ----------- -----------
3,182,000 2,895,000 6,603,000 6,186,000
----------- ----------- ----------- -----------
(Loss) from operations before interest expense ............. (498,000) (639,000) (679,000) (990,000)
Interest Income ............................................ 13,000 16,000 16,000 33,000
Interest Expense ........................................... (287,000) (328,000) (575,000) (818,000)
----------- ----------- ----------- -----------
Loss before extraordinary item ............................. (772,000) (951,000) (1,238,000) (1,775,000)
Extraordinary gain from settlement of liabilities .......... 2,322,000 5,000 2,355,000 212,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) .......................................... $ 1,550,000 $ (946,000) $ 1,117,000 $(1,563,000)
=========== =========== =========== ===========
Income (Loss) per share of common stock - basic and diluted:
Income (Loss) before extraordinary item ................. $ (.34) $ (.57) $ (.54) $ (1.06)
=========== =========== =========== ===========
Net Income (loss) ...................................... $ .68 $ (.56) $ .49
$ (.93)
=========== =========== =========== ===========
Weighted average common shares outstanding ................. 2,275,000 1,675,000 2,275,000 1,675,000
=========== =========== =========== ===========
</TABLE>
The notes to financial statements are made a part hereof.
5
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(To the nearest $1,000)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
December 31,
--------------------------------
1999 1998
--------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net Income (loss) ........................................................... $ 1,117,000 $(1,563,000)
----------- -----------
Adjustments to reconcile results of operations to net cash effect of
operating activities:
Extraordinary Gains from settlement of
liabilities .......................................................... (2,355,000) (212,000)
Depreciation and amortization .......................................... 1,063,000 1,018,000
Deferred rent payable .................................................. 231,000 270,000
Net Changes in assets and liabilities:
Inventory ............................................................ 2,000 34,000
Prepaid expenses and other assets .................................... (288,000) 133,000
Security deposits .................................................... (98,000) 2,000
Accounts payable and accrued liabilities ............................. 499,000 (124,000)
Due to Contractor .................................................... (115,000) (155,000)
Interest Payable - Institutional lenders ............................... 510,000 511,000
Deferred sponsorship income ............................................ (23,000) (49,000)
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Total adjustments ................................................ (574,000) 1,428,000
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Net cash provided by (used for)
operating activities ........................................... 543,000 (135,000)
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Cash flows used for investing activities:
Purchase of fixed assets .................................................... (54,000) (68,000)
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Cash flows from financing activities:
Financing Costs ............................................................. 96,000 156,000
Repayment of capital lease obligations ...................................... (378,000) (416,000)
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Net cash (used for) financing activities ......................... (282,000) (260,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH ................................................ 207,000 (463,000)
Cash - July 1 .................................................................. 780,000 1,496,000
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Cash - December 31 ............................................................. $ 987,000 $ 1,033,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for
Interest ................................................................. $ 64,000 $ 99,000
Taxes .................................................................... -0- 2,000
</TABLE>
6
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-QSB and rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended December 31, 1999 are
not necessarily indicative of the results that may be expected for the full
fiscal year ended June 30, 2000. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended June 30, 1999.
2. Earnings Per Share
Basic and diluted net (loss)per share for each period is calculated by
dividing net loss available to common stockholders for the period by the
weighted average number of common shares outstanding for each period, excluding
the 1,090,909 shares of Series A Convertible Participating Preferred Stock as
such shares were considered to be anti-dilutive.
3. Income Taxes
The principal components of Deferred Tax Assets, Liabilities, and the
Valuation Allowance are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ -----------
Deferred Tax Assets:
<S> <C> <C>
Capitalization of start-up costs $ 0 $ 81,000
Impairment Loss ................ 1,734,000 1,734,000
Net operating loss carryforwards 6,529,000 6,869,000
----------- -----------
8,263,000 8,684,000
Valuation allowance .................... (7,247,000) (7,824,000)
----------- -----------
Deferred Tax Liabilities: .............. 1,016,000 860,000
Depreciation differences ............... 1,016,000 860,000
----------- -----------
Net Deferred Tax Asset ................. $ 0 $ 0
=========== ===========
</TABLE>
7
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
The Company has provided a valuation allowance of $7,247,000 against its
deferred tax asset due to uncertainty of the Company being able to use this
benefit to offset future taxable income. Accordingly, there was no tax effect
related to the extraordinary gain recognized for the three and six month periods
ended December 31, 1999. The Company will periodically evaluate the likelihood
of realizing such asset and will adjust such amount accordingly.
4. Property, equipment and leasehold improvements
Property and equipment, including assets under capital leases are
recorded at cost and are depreciated on the straight-line method over the
estimated useful lives of the assets from two to twelve years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset.
Property, equipment and leasehold improvements at cost are summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment and fixtures $ 1,865,000
Simulation equipment 2,324,000
Simulation film 1,065,000
Leasehold improvements 5,597,000
------------
10,851,000
Less: Accumulated depreciation
and amortization (6,109,000)
------------
Total $ 4,742,000
============
</TABLE>
5. Inventory
Inventory consists of clothing, souvenirs and food sold at the
Company's existing sites and is valued at the lower of cost (first-in,
first-out) or market.
6. Capital Lease Obligations
On December 31, 1996, the Company refinanced its existing equipment at
its New York Skyride location from aggregate proceeds of $1,500,000. The
obligation bears interest at 11 1/2% a year compounded monthly and is payable in
48 monthly installments secured by a first security interest in all of the
equipment at the New York Skyride location. Additionally, up to
8
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
$250,000 of the obligation is personally guaranteed by the Company's former
president In March 1997, the Company entered into a loan agreement to finance
the acquisition of additional equipment for XS New York. Pursuant to this
transaction, in April 1997 the Company received $559,000 with an additional
$54,000 held by the lender as security. The amounts financed bear interest at 11
1/2% a year compounded monthly and were initially to be repaid in 48 monthly
installments. However, in November 1997 the term was modified to provide for an
accelerated payback over 36 months from the date of issuance. The lender
obtained a first security interest in the equipment and a personal guarantee by
the Company's former president of up to $125,000 of the loan. The loan was paid
in full in February 2000.
7. Notes Payable
In December 1996, the Company entered into a Senior Credit Agreement with
the Bank of New York as trustee for the Employees Retirement Plan of Keyspan
Energy Corp. ("Keyspan") and Prospect Street NYC Discovery Fund, L.P. ("Prospect
Street") (together with Keyspan, the "Institutional Investors"). The agreement
(as amended) provided for the borrowing of $4,450,000 in the form of senior
notes which accrue interest at 14% a year and require the payment of both
principal and interest on December 20, 2001. In connection with this debt, the
lenders received warrants to purchase up to 434,146 shares of common stock at an
exercise price of $4.25 per share which the Company valued at approximately
$712,000 using the Black-Scholes pricing model. The warrants expire on December
20, 2006.
In June 1997, the Company received an additional $500,000 loan from
Prospect Street payable upon demand and bearing interest at 14% a year.
In December 1997, the Company received a $500,000 loan from a bank bearing
interest at 6.25% a year that is secured by a certificate of deposit from
Prospect Street. 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. However, the
Company is currently negotiating new terms with Prospect Street and anticipates
them to be in place by March 31, 2000.
On May 20, 1998, the Company and its subsidiaries entered into a Senior
Secured Credit Agreement (the "Credit Agreement") with the Institutional
Investors relating to the financing of an aggregate of $2,285,000 (the
"Financing"), in exchange for receipt by the Institutional Investors of senior
secured promissory notes (the "Notes") and the issuance of warrants to purchase
shares of Common Stock of the Company (the "Warrants"). The Notes, which are
payable on demand, accrue interest at 14% a year and are secured (with certain
9
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
exceptions) by all the assets of the Company and its subsidiaries not otherwise
pledged. Additionally, the Credit Agreement was amended to include under its
terms the $500,000 demand loan to the Company from Prospect Street in June 1997.
The Institutional Investors have not demanded payment of the Notes. The Notes
and the obligations under the Credit Agreement and the Warrants are also
collateralized by a pledge of the stock of the Company's subsidiaries. In
connection with the Credit Agreement, Keyspan also received the right to appoint
two members to the Company's Board of Directors. Further, as a result of the
issuance of Warrants in connection with the Financing, the conversion rate of
the Series A Preferred Stock (the "Preferred Stock") held by Prospect Street was
adjusted from a conversion rate of one share of Common Stock for each share of
Preferred Stock to a conversion rate of 6.91 shares of Common Stock for each
share of Preferred Stock.
The Warrants are exercisable for 94% of the fully diluted Common Stock of
the Company (after issuance) at an exercise price of $.375 per share.
Accordingly, the exercise of such Warrants by the Institutional Investors would
result in a significant change in the ownership of the Company. The Company
approved this transaction after consideration of its alternatives and financial
situation. The Warrants are exercisable for approximately 173 million shares of
Common Stock at an aggregate exercise price of approximately $64.9 million or,
at the option of the holder pursuant to a cashless exercise feature, based on
the difference in shares between 173 million shares and the number of shares
having market value equal to $64.9 million (e.g., at a market price per share of
$.40, an aggregate of 10.8 million shares of Common Stock would be issued).
Either exercise would result in significant dilution to existing shareholders
which could also result in an annual limitation in the future utilization of the
Company's net operating loss carryforwards.
8. Deferred Rent Payable
The Company, for financial accounting purposes, spreads scheduled rent
increases and rent holidays over the terms of the respective leases using the
straight - line method. In connection with the settlement with ESBCo, as
described in Note 12, the Company recorded a reversal of approximately $908,000
of its deferred rent liability.
9. Preferred Stock
On July 7, 1995, the Company consummated a stock purchase agreement with
Prospect Street NYC Discovery Fund, L.P. ("Prospect Street"), a small business
investment company, pursuant to which the Company sold 1,090,909 shares of
Series A Convertible Participating Preferred Stock, par value $.001 per share
(the "Preferred Stock"), for $3,000,000. Net proceeds from such investment,
aggregated approximately $2,833,000. The Preferred Stock issued is convertible
into common stock of the Company at any time on a share-for-share basis, which
was
10
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
subsequently adjusted to a conversion rate of 6.91 shares of Common Stock for
each share of Preferred Stock. Pursuant to the stock purchase agreement, the
Preferred Stock and underlying common stock into which it is convertible are
subject to both demand and piggyback registration rights. The Preferred Stock
has a liquidation preference equal to $2.75 per share, or $3,000,000, but does
not pay any dividends unless declared by the Board of Directors. The preferred
stockholder is entitled to an aggregate of up to 24.9% of the outstanding voting
power of the Company, which can increase to 50.1% of the voting power if, in
good faith, in the sole discretion of such preferred stockholder, it becomes
reasonably necessary for the protection of its investment.
10. Recently Issued Accounting Standards
The Financial Accounting Standards Board has recently issued statements of
financial accounting standards No. 129, "Disclosure Of Information About Capital
Structure", No. 130, "Reporting Comprehensive Income," and No. 131, "Disclosures
About Segments Of An Enterprise And Related Information." The Company believes
that the above pronouncements will not have a significant effect on the
information presented in the consolidated financial statements.
11. Revenue Sharing Agreements
The Company has been provided with certain equipment for use in its XS New
York facility in exchange for a percentage of the revenues generated therefrom.
During November 1997, 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 vendor. The Company can continue to use the
XS trademark at its Times Square location pursuant to a license agreement
entered into in connection with the sale of the trademark. In December 1998, the
revenue-sharing agreement was amended to increase the percentage of revenues
payable to the equipment vendor to 16% of the net revenue, as defined, and 50%
of the excess over such amount. In December 1999, the revenue-sharing agreement
was further amended to increase the percentage of revenues payable to 21 % of
the net revenue, as defined, without any net revenue amounts in excess over such
amount being subject to revenue-sharing.
12. Settlement of Litigation
On or about December 30, 1999, the Company entered into a settlement
agreement with the Empire State Building Company ("ESBCo"), in connection with a
lawsuit originally filed by the Company against ESBCo 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
11
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
sought injunctive relief to prohibit ESBCo from, among other things, terminating
the Company's Lease and a License agreement relating to the New York Skyride, as
well as monetary damages from ESBCo and the other defendants. The basis for the
Company's claims was, among other things, a lack of cooperation from ESBCo and
its staff, in violation of the Lease and License agreements, as well as bad
faith, fraud and self-dealing by ESBCo and certain members of its management
staff.
The settlement between the Company and ESBCo provides for, among other
things, the following:
(a) The Company and each named Defendant to enter into and execute
a Stipulation of Discontinuance dismissing each cause of
action, cross-claim and counterclaim asserted in the lawsuit.
Such Stipulation of Discontinuance was duly executed by all of
the parties and has been filed with the Clerk of the Court.
(b) The Company and each defendant to exchange releases regarding
their respective claims in the lawsuit. All such releases have
been exchanged with the exception of three of the named
Defendants. In the event that the Company does not receive
releases for the above Defendants, the Company will not
provide those three Defendants with releases.
(c) The Company to surrender 35,000 square feet of space at 350
Fifth Avenue, New York, New York 10118, which the Company had
previously intended to use for expansion, and ESBCo is to
refund the Company's $100,000 security deposit on the space,
in addition to any interest accrued on the security deposit.
(d) The Company and ESBCo to modify their license agreement to
provide for, among other things:
a. a contingent license fee based upon various increases in the
Company's ticket sales;
b. the installation of electronic ticket vending machines for
sale of New York Skyride tickets, Observatory tickets and Skyride /
Observatory combination tickets at various locations throughout the
Empire State Building;
c. a guarantee that the Company will receive ESBCo's lowest
wholesale rates for any observatory tickets purchased by the Company
from ESBCo; and
d. a minimum of fifteen (15) days notice must be given before
either party can exercise the limited termination provision of the
License Agreement.
12
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
(e) The Company and ESBCo will modify the Lease agreements for the
space utilized by the Skyride at 350 Fifth Avenue, to provide
that any rent escalation will be governed by and adjusted
semi-annually proportionately with the increase in the
Consumer Price Index, published by the Bureau of Labor
Statistics of the U.S. Department of Labor.
(f) ESBCo to grant the Company an option, which is to be executed
on or before April 30, 2000, to extend its lease of 4,400
square feet of space used as executive offices at 350 Fifth
Avenue, New York, New York, 10118, pursuant to the existing
lease agreement dated April 14, 1994. The Company must inform
ESBCo of its decision to extend the lease by March 31, 2000.
(g) The Company and ESBCo to pay their own costs and attorneys'
fees associated with the action.
In addition to the settlement terms described, as a result of the
settlement, the Company will be reimbursed $150,000, which it had posted with
the Court as a condition of the Court's grant of a Yellowstone injunction in the
case on May 18, 1999.
13
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company was formed in November 1993. In February 1994, the Company
consummated an initial public offering from which it received aggregate net
proceeds of approximately $6,200,000, which proceeds were used principally for
the development of New York Skyride.
On December 22, 1994, the Company commenced operations of New York
Skyride and began generating revenue from ticket sales to the attraction and the
sale of merchandise at its souvenir/concession area. New York Skyride was opened
on a preview basis until February 21, 1995, the date of its official Grand
Opening.
For the three and six months ended December 31, 1999, the Company's New
York Skyride facility was visited by approximately 145,000 and 335,000
customers, respectively, as compared to 138,000 and 331,000 customers,
respectively, for the three and six months ended December 31, 1998. The Company
also experienced an increase in its capture rate of observatory visitorship from
approximately 16.4% for the six months ended December 31, 1999, compared to
approximately 16.1% for the six months ended December 31, 1998.
Results of Operations - Three and Six Months Ended December 31, 1999 Compared to
Three and Six Months Ended December 31, 1998
Revenues
Revenues generated during the three and six months ended December 31,
1999, aggregated $2,684,000 and $5,924,000, respectively, as compared to $
2,256,000 and $ 5,196,000 for the three and six months ended December 31, 1998.
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 $1,774,000 for the three months ended December 31,
1999, as compared to $1,403,000 for the year ended December 31, 1998. The
increase is also attributable to an increase in Empire State Building
Observatory Combination Ticket Sales at the Company's New York Skyride facility.
14
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Total Expenses
Total expenses incurred for the three and six months ended December 31,
1999 aggregated $3,182,000 and $ 6,603,000, respectively, as compared to $
2,895,000 and $ 6,186,000 for the three and six months ended December 31, 1998.
The increase was due to the Company's purchase 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, as well as an
increase in corporate and marketing salary and overhead expenses.
Extraordinary Gain
The Company, as a result of negotiations with certain creditors and the
Settlement of its litigation with the ESBCo (as previously discussed in the
notes to the financial statements above ) , recorded an extraordinary gain from
the settlement of these liabilities (which included a writeoff of accumulated
outstanding payables of approximately $1,414,000 and a reversal of approximately
$908,000 of its deferred rent liability) of approximately $2,322,000 and $
2,355,000 for the three and six months ended December 31, 1999, as compared with
$5,000 and $ 212,000 for the three and six months ended December 31, 1998.
Net Income (Loss) and Income (Loss) Per Share
The basic and diluted net income (loss) and earnings (loss) per share
before extraordinary items was ($772,000) and ($.34) and ($1,238,000) and ($.54)
for the three and six months ended December 31, 1999, respectively, as compared
to ($951,000) and ($.57) and ($1,775,000) and ($ 1.06) for the three and six
months ended December 31, 1998, respectively. The basic and diluted net income
(loss) and earnings (loss) per share available to common shareholders was $
1,550,000 and $.68 and $1,117,000 and $ .49 for the three and six months ended
December 31, 1999, respectively, as compared to ($946,000) and ($.56) and
($1,563,000) and ($.93) for the three and six months ended December 31, 1998.
Loss before extraordinary items, for the three months ended December
31, 1999, included a loss of approximately ($650,000) at XS New York and a loss
of approximately ($122,000) at New York Skyride as compared to a loss of
approximately ($628,000) at XS New York and loss of approximately ($323,000) at
New York Skyride for the three months ended December 31, 1998.
For the three months ended December 31, 1999, New York Skyride had
income from operations (before interest expense) of approximately $172,000,
excluding legal fees of approximately $51,000 from its legal proceedings with
the ESBCo and rent of approximately $155,000 on additional space at the Empire
State Building ), as compared to income from
15
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
operations (before interest expense) of approximately $107,000 (excluding legal
fees of approximately $52,000 from its legal proceedings with the ESBCo, and
rent of approximately $262,000 on additional space at the Empire State Building)
for the three months ended December 31, 1998. Income from operations at New York
Skyride improved from the previous year as a result of a reduction in overhead
at New York Skyride.
XS New York incurred a loss from operations (before interest expense)
of approximately ($464,000) for the three months ended December 31, 1999 as
compared to a loss from operations (before interest expense) of approximately
($637,000) for the three months ended December 31, 1998. Losses from operations
at XS New York decreased from the previous year primarily as a result of a
reduction of overhead.
Working Capital Deficiency
Liquidity and Capital Resources
The working capital deficiency at December 31, 1999, was approximately
($3,926,000) 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 $1,414,000 and a reversal of deferred rent liability of
approximately $908,000 during the three months ended December 31, 1999.
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 December 31, 1999, the Company had the following financing arrangements in
place:
- - In December 1996, the Company entered into a Senior Credit Agreement with
Prospect Street and Bank of New York, as Trustee for the Employees Retirement
Plan of the Brooklyn Union Gas Company. Pursuant to the agreement (as amended),
the Company borrowed an aggregate of $4,450,000. The funds borrowed accrue
interest at an annual rate of 14% and require the payment of both principal and
interest five years from the date of issuance. In connection with the Senior
Credit Agreement, the lenders received warrants to purchase up to an aggregate
of 434,146 shares of Common Stock, which warrants are exercisable until December
20, 2006 at an exercise price of $4.25 per share.
- - In June 1997, the Company borrowed an additional $500,000 from Prospect
Street. The loan is payable on demand and bears interest at the rate of 14% per
annum.
16
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
- - In December 1997, the Company borrowed $500,000 from a bank bearing interest
at the rate of 6.25% per annum that is secured by a Certificate of Deposit from
Prospect Street. 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, however, the
Company is currently negotiating new terms with Prospect Street and anticipates
them to be in place by March 31, 2000.
- - 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 from Keyspan from an aggregate of $500,000 to $1,850,000 which
increased the total financing from $935,000 to $2,785,000. In addition, the
Credit Agreement was further amended, subsequent to June 30, 1998, to include
under its terms the $500,000 demand loan to the Company from Prospect Street in
June 1997.
In addition to the foregoing, as of December 31, 1999, the Company had
the following agreements or arrangements with certain key suppliers in place:
- The Company has an agreement with its major gaming equipment supplier
pursuant to which the Company has been provided with certain equipment for use
in its XS New York facility in exchange for agreeing to (i) share a percentage
of the revenues generated from the XS New York facility with the supplier and
(ii) sell the XS trademark and related intellectual property rights to such
vendor. With respect to the revenue sharing obligation, the agreement (as
amended) provides for the Company to share 21 % of the net revenue, as defined,
without any net revenue amounts in excess over such amounts being subject to
revenue-sharing. The agreement (as amended) also provides that the Company can
continue to use the XS trademark at its Times Square location pursuant to a
license agreement entered into in connection with the sale of the trademark.
17
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
- The lease for the XS New York location contains a cancellation clause
exercisable at any time in the event the landlord opts to commence construction
of an office building on the site at some future date. Should the landlord
exercise the cancellation clause, the Company would be required to vacate the
space within four months after notice, but would be entitled to reimbursement
during the first five years of the lease of a portion of its out-of-pocket
construction costs, not to exceed $125 per square foot. In April 1999, the
Company the lease for the Times Square premises was terminated, but the Company
was entitled to remain in possession upon the terms and conditions of the lease
and pay, in lieu of rent, use and occupancy charges which are 25% less than the
base rent payable under the lease. The total rent reduction will be offset
against the reimbursement by the landlord upon the Company vacating the space.
The Company has become aware of plans by the landlord to sell the property to a
developer. The Company is not certain of the timing of the sale of such property
or whether such developer will construct an office building on the site. As of
June 30, 1998, the Company recorded an impairment loss and wrote-down the
carrying value of its assets at XS New York as a result of the published reports
of a sale of the property. However, there can be no assurance that the landlord
will request that the Company vacate the premises earlier. Should the Company
vacate the premises earlier, this will result in a charge to earnings equal to
the unamortized portion of its investment (adjusted for assets which are sold
and reimbursed construction costs) at the time of such event, if any, which
could have a material adverse effect on the Company's operations and financial
condition taken as a whole.
Except for the financing facilities described above, the Company has no
other current arrangements in place with respect to financing. As stated in the
auditors' report on the Company's Financial Statements for the year ended June
30, 1999, the Company's ability to continue as a going concern is dependent upon
continued forbearance of the Company's lenders because the Company currently
does not have available funds to repay its currently outstanding demand loans.
Accordingly, the Company is in need of either securing new financing and/or
attaining profitable operations or the continued forebearance of its creditors.
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.
18
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Seasonality
The Company's business is seasonal in nature, based in part, on higher
volumes of tourists in the New York City Metropolitan area during the spring and
summer months and during the December holiday season.
Year 2000 Compliance
The Company did not experience any problems relating to Year 2000
compliance with its own computer systems or those of companies doing business
with it.
19
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about December 30, 1999, the Company entered into a settlement
agreement with the Empire State Building Company ("ESBCo"), in connection with a
lawsuit originally filed by the Company against ESBCo 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
ESBCo from, among other things, terminating the Company's Lease and a License
agreement relating to the New York Skyride, as well as monetary damages from
ESBCo and the other defendants. The basis for the Company's claims was, among
other things, a lack of cooperation from ESBCo and its staff, in violation of
the Lease and License agreements, as well as bad faith, fraud and self-dealing
by ESBCo and certain members of its management staff.
The settlement between the Company and ESBCo provides for, among other
things, the following:
The Company and each named Defendant to enter into and execute
a Stipulation of Discontinuance dismissing each cause of
action, cross-claim and counterclaim asserted in the lawsuit.
Such Stipulation of Discontinuance was duly executed by all of
the parties and has been filed with the Clerk of the Court.
The Company and each defendant to exchange releases regarding
their respective claims in the lawsuit. All such releases have
been exchanged with the exception of three of the named
Defendants. In the event that the Company does not receive
releases for the above Defendants, the Company will not
provide those three Defendants with releases.
The Company to surrender 35,000 square feet of space at 350
Fifth Avenue, New York, New York 10118, which the Company had
previously intended to use for expansion, and ESBCo is to
refund the Company's $100,000 security deposit on the space,
in addition to any interest accrued on the security deposit.
The Company and ESBCo to modify their license agreement to
provide for, among other things:
a. a contingent license fee based upon various increases in the
Company's ticket sales;
20
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
b. the installation of electronic ticket vending machines for
sale of New York Skyride tickets, Observatory tickets and Skyride /
Observatory combination tickets at various locations throughout the
Empire State Building;
c. a guarantee that the Company will receive ESBCo's lowest
wholesale rates for any observatory tickets purchased by the Company
from ESBCo; and
d. a minimum of fifteen (15) days notice must be given before
either party can exercise the limited termination provision of the
License Agreement.
The Company and ESBCo will modify the Lease agreements for the
space utilized by the Skyride at 350 Fifth Avenue, to provide
that any rent escalation will be governed by and adjusted
semi-annually proportionately with the increase in the
Consumer Price Index, published by the Bureau of Labor
Statistics of the U.S. Department of Labor.
ESBCo to grant the Company an option, which is to be executed
on or before April 30, 2000, to extend its lease of 4,400
square feet of space used as executive offices at 350 Fifth
Avenue, New York, New York, 10118, pursuant to the existing
lease agreement dated April 14, 1994. The Company must inform
ESBCo of its decision to extend the lease by March 31, 2000.
The Company and ESBCo to pay their own costs and attorneys'
fees associated with the action.
In addition to the settlement terms described, as a result of the
settlement, the Company will be reimbursed $150,000, which it had posted with
the Court as a condition of the Court's grant of a Yellowstone injunction in the
case on May 18, 1999.
Item 2. Changes in Securities And Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
21
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
a. Financial Data Schedule.
b. See Exhibit Index located at the end of this report.
(b) Reports on Form 8-K
a. On February 2, 2000 the Company filed a report on Form 8-K
regarding settlement of its litigation with Empire State
Building Company, et al.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.63 Second Amendment to Agreement dated November 1, 1997, between Namco Cybertainment, Inc., a Delaware
corporation, and Skyline Multimedia Entertainment, Inc., d/b/a XS New York, dated December 12, 1999.
</TABLE>
22
<PAGE>
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
By: /s/ Robert Brenner
- -------------------
Robert Brenner,
Chief Executive Officer, President
By: /s/ Ronald H. Aghassi
- -------------------
Ronald H. Aghassi,
Vice President of Finance
23
EXHIBIT 10.63
Second Amendment
to Agreement dated November 1, 1997,
between Namco Cybertainment, Inc. and
Skyline Multimedia Entertainment, Inc.,
d/b/a XS New York,
dated December 12, 1999.
<PAGE>
SECONDARY AMENDMENT TO REVENUE SHARING AGREEMENT
THIS AGREEMENT made and entered into as the 13th day of December, 1999, by
and between NAMCO CYBERTAINMENT, INC., a Delaware corporation ("NCI") and
SKYLINE MULTIMEDIA ENTERTAINMENT, INC., d/b/a XS NEW YORK, a Delaware
corporation ("Skyline").
WHEREAS by Agreement dated November 1, 1997 entered into between NCI And
skyline as amended by amendment dated December 23, 1998, (the "Agreement")
skyline granted NCI the exclusive right to operate Equipment, as defined in the
Agreement at the Skyline premises located between 41st and 42nd Streets and
Broadway and 7th Avenue, New York, New York (the "premises"); and
WHEREAS, NCI and Skyline now desire to amend and modify the Agreement.
NOW THEREFORE, in consideration of mutual promises and covenants of the
parties hereto, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Agreement is hereby modified
and amended and the parties mutually agree as follow:
1. (a) Effective January 3, 2000 through May 31, 2000 the Fees payable
by Skyline to NCI pursuant to section 3 of the Agreement will
be twenty-one (21%) of the weekly net revenues.
(b) Effective June 1, 2000 through the term of the Agreement, the
Fees payable by Skyline to NCI pursuant to section 3 of the
Agreement will be twenty-two (22%) of the weekly net
revenues.
2. Effective January 3, 2000, Section 4 (a) and (b) of the Agreement are
Amended by deleting "14%" and inserting "21%" through May 31, 2000 And
22% thereafter.
Except as herinabove amended, all terms and conditions of the Agreement shall
remain unchanged and in full force and effect
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement to revenue
Sharing Agreement as of the day and date first above written.
Namco: Skyline:
NAMCO CYBERTAINMENT INC. SKYLINE MULTIMEDIA
ENTERTAINMENT, INC.
Signature: /s/ Mark Messersmith Signature: /s/ Robert Brenner
Name: Mark Messersmith Name: Robert Brenner
Title: Executive Vice President Title: President
Dated: 12-13-99 Dated: 12-13-99
SKYLINE VIRTUAL REALTY, INC.
Signature: /s/ Robert Brenner
Name: Robert Brenner
Title: President
Dated: 12-13-00
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 987,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 124,000
<CURRENT-ASSETS> 1,456,000
<PP&E> 10,851,000
<DEPRECIATION> 6,109,000
<TOTAL-ASSETS> 6,884,000
<CURRENT-LIABILITIES> 5,382,000
<BONDS> 0
0
1,000
<COMMON> 3,000
<OTHER-SE> (6,397,000)
<TOTAL-LIABILITY-AND-EQUITY> 6,884,000
<SALES> 5,901,000
<TOTAL-REVENUES> 5,924,000
<CGS> 251,000
<TOTAL-COSTS> 251,000
<OTHER-EXPENSES> 6,352,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 559,000
<INCOME-PRETAX> (1,238,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,238,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,355,000
<CHANGES> 0
<NET-INCOME> 1,117,000
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.49
</TABLE>
