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The following is an excerpt from a 10KSB SEC Filing, filed by SKYLINE MULTIMEDIA ENTERTAINMENT INC on 10/16/2001.
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SKYLINE MULTIMEDIA ENTERTAINMENT INC - 10KSB - 20011016 - LIQUIDITY_CAPITAL

Liquidity and Capital Resources

The working capital deficiency at June 30, 2001, was approximately ($10,081,000) compared to a working capital deficiency of approximately ($3,561,000) at June 30, 2000. The increase in the working capital deficiency is primarily the result of the reclassification of $6,874,000 of senior secured notes payable plus accrued interest, which are due in December 2001, as a current liability.

We have historically sustained our 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, 2001, we had the following financing arrangements in place:

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 lenders received warrants to purchase up to 434,146 shares of common stock at an exercise price of $4.25 per share.


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 collateralized by substantially all the assets of the Company and its subsidiaries not otherwise pledged. In December 1999, Prospect Street repaid a $500,000 bank loan on behalf of the Company. The Institutional Investors agreed to add the $500,000 to the amount loaned by Prospect Street under the Credit Agreement. However, the amount is subordinated to the $2,785,000. 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. The agreement provides for a cashless exercise feature, whereby the holder has the option of reducing the aggregate number of shares received based upon the fair market value (as defined) of the Company's stock at date of exercise. 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.

Except for the financing facilities described above, we have no other current arrangements in place with respect to financing. 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, 2001 has a working capital deficiency of $10,081,000 and a capital deficiency of $7,877,000. Additionally, the Company's borrowings from institutional lenders and investors includes borrowings which are due on demand and borrowings which are due in December 2001. The Company is dependent on the continued forbearance of these lenders because the Company currently does not have available funds to fully repay these loans. The above factors give rise to substantial doubt as to the ability of the Company to continue as a going concern. Management has been reviewing and reducing operating expenses and focusing on its marketing efforts on the Empire State Building attraction. 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.

No assurance can be given that we will be able to obtain additional capital on acceptable terms, if at all. In such an event, this would have a materially adverse effect on our business, operating results and financial condition.

Inflation

We believe that the impact of inflation on its operations since its inception has not been material.

Seasonality

Our 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.


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