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.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is set forth at the end of this report.
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, 2001, are as follows:
Name Age Position
Steven Vocino 46 Director
John F. Barry, III 49 Director
Michael Leeb 42 Chief Operating Officer and Acting President
John Harlow 52 Director
Jared D. Schulman 35 Director
The following is a brief description of each officer and director listed above:
Steven Vocino was appointed by our 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.
John F. Barry III has been a non-employee director of Skyline 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.
Michael Leeb has been an employee of Skyline since February 1994. Mr. Leeb
currently holds the position of Chief Operating Officer and Acting President.
Mr. Leeb started with us as the Director of Operations in February of 1994. Mr.
Leeb was promoted to Senior Vice President of Operations in March of 1998. Mr.
Leeb was then named Chief Operating Officer in November 2000. Previously, Mr.
Leeb was employed by W.M. Amusements from February 1984 through December 1993.
Mr. Leeb's last position held at W.M. Amusements was Operations Manager for
Splish Splash Water Park in Riverhead, New York.
John Harlow has been a non-employee director of Skyline since 2001. Mr.
Harlow has been employed with Prospect Street Ventures since 2000. Mr. Harlow is
currently the managing director and chief technology officer of Prospect Street
Ventures, as well as the chairman of investment committee and the information
technology department. From 1992 to 1999, Mr. Harlow was the founder and chief
executive officer of Pan American Telecommunications Corporation. Prior thereto
Mr. Harlow was with Adler & Company where he served as venture manager and on
the boards of a variety of technology companies. From 1977 to 1983, Mr. Harlow
was a corporate attorney at Cravath, Swaine & Moore specializing in public and
private securities offerings, mergers and acquisitions, and asset based
financings. Mr. Harlow graduated magna cum laude with a B.S. in Business
Administration from Boston University and received an M.B.A./J.D. degree from
the University of California at Berkeley.
Jared D. Schulman has been a non-employee director of Skyline since 2001.
Mr. Schulman has been employed by Service Engine, Inc., a web-site tracking
service, since January 1999 and currently holds the position of chief executive
officer. In addition, from October 1995 to present, Mr. Schulman has been an
executive officer at Site Trends, LLC, a web site development company. As a
founder of Site Trends, LLC, Mr. Schulman spearheaded business development and
helped build a seed investment of $8,000 into more than $3 million in annual
revenue within 5 years. Mr. Schulman has more than 12 years management and
business development experience in electronic marketing and e-commerce,
including pioneering online projects while collaborating with GTE, Compuserve,
GE and Prodigy. While at M. Fabrikant & Sons, Mr. Schulman developed and managed
electronic data interchange (EDI) commerce transactions platforms and
Just-In-Time systems to connect Wal-Mart, K-Mart and Zales, supporting more than
$500 million in sales.
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.
Non-employee directors are also entitled to reimbursement for reasonable
expenses incurred in attending any such meetings.
Steven Vocino receives an annual retainer of $10,000 for his services as
Chairman of the Board. In addition, Steven Vocino received options to purchase
25,000 shares of common stock in July 1998 in connection with his appointment to
the board of directors. Furthermore, in July 1998, Mr. Vocino received 600,000
shares of common stock of Skyline in consideration for services rendered to us
in connection with negotiation of favorable settlements with certain of our
creditors.
Item 10. EXECUTIVE COMPENSATION.
The following table summarizes all compensation paid by us with respect to
the fiscal year ended June 30, 2001 paid by us to the our Acting President, and
all other executive officers whose total cash compensation exceeded $100,000 in
the fiscal year ended June 30, 2001 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Other Restricted Securities LTIP Pay All Other
Name and Principal Year Salary Bonus Annual Stock Underlying outs ($) Compensation
Position ($) ($) Compens Award(s) Options/ ($)
-ation ($) SAR's (#)
Michael Leeb,
Acting President 2001 150,000 25,000 --- --- --- --- ---
2000 100,000 15,000 --- --- --- --- ---
Employment and Other Agreements
In January 2000, we entered into an employment agreement with Michael
Leeb, its vice president of operations, which expired in December 2001 and
provided for cancellation by either party upon ninety days written notice. The
agreement provided for a base salary of $100,000 per year through December 2000
with a minimum increase of 5% thereafter. Additionally, the agreement provided
for an annual incentive bonus with a minimum of $15,000 per year. In January
2001, we entered into a new employment agreement with Mr. Leeb, which expires in
December 2002, with an automatic renewal provision. Mr. Leeb has become the
chief operating officer, acting president, secretary and treasurer. The
agreement provides for a base salary of $150,000 per year through December 2001
with a minimum increase of 5% thereafter. Additionally, the agreement provides
for a guaranteed annual incentive bonus of $25,000 per year, payable quarterly,
and for the future issuance of options to purchase 1% of Skyline's common stock
on a fully diluted basis, pursuant to our employee stock option plan.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of June 30, 2001,
with respect to the number of shares of each class of voting stock beneficially
owned by (i) those persons known to us to be the owners of more than five
percent of any such class of our voting stock, (ii) each of our directors of and
(iii) all of our directors and executive officers 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.
------------------- -------------------------- ------------------------------ ------------
COMMON STOCK SERIES A PREFERRED STOCK
------------------- -------------------------- ------------------------------ ------------
Name and Address Beneficial % of % of Total % of
(1) Ownership Total Beneficial Outstanding Actual
Outstanding Ownership Voting
(2) Power (3)
------------------- -------------- ----------- ----------------- ------------ ------------
John F. Barry, 95,751,124 97.9% 1,090,909 (8) 100% 38.5%
III (4) (5)(6)(7)
(8)
------------------- -------------- ----------- ----------------- ------------ ------------
Steven Vocino 625,000 28.6% --- --- 5.4%
(9)
------------------- -------------- ----------- ----------------- ------------ ------------
The Bank of New 86,768,900 97.6% --- --- ---
York, as Trustee (10)
for the Employees
Retirement Plan
of Key Span
Energy Corp.
------------------- -------------- ----------- ----------------- ------------ ------------
Prospect Street 95,731,124 97.9% 1,090,909 (8) 100% 38.5% (11)
NYC Discovery (6)(7)(8)
Fund, L.P.
------------------- -------------- ----------- ----------------- ------------ ------------
All directors and 186,686,324 98.1% 1,090,909 (8) 100% 43.9%
executive
officers as a
group (5
persons)(12)
------------------- -------------- ----------- ----------------- ------------ ------------
---------------------------
(1) Unless otherwise noted, the address of each of these persons is c/o
Skyline Multimedia Entertainment, Inc., 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 Skyline 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.
(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 35,000 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
us. 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 us, 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 our 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 our 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 Skyline, so long as 272,727 shares of
series A preferred stock remain outstanding, and upon notice to us, 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 Skyline 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 common stock, which shares became
unrestricted on July 2, 1998, and (ii) options to purchase 25,000 shares of
common stock held by such individual which are currently exercisable.
(10) 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 us. Beneficial
ownership of such securities are attributed to Keyspan and its affiliates.
(11) 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.
(12) Includes all shares beneficially owned by Messrs. Barry and Vocino, shares
beneficially held by Prospect Street and Keyspan. See footnotes (4) through (9),
(10) and (11) above.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On May 20, 1998, the Company and its subsidiaries entered into a Senior
Secured Credit Agreement (the "Credit Agreement") with the Keyspan Energy Corp.
("Keyspan") and Prospect Street NYC Discovery Fund, L.P. ("Prospect Street")
relating to the financing of an aggregate of $2,785,000 (the "Financing") in
exchange for receipt by the Keyspan and Prospect Street 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. Keyspan and Prospect Street 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. Keyspan and Prospect Street 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.
We believe that all transactions between us and our officers, directors
and employees described above are on terms no less favorable to us 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 28 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.
(b) Reports on Form 8-K:
None.
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,
Acting President
Dated: October 11, 2001
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.
Date: October 11, 2001 /s/ Steven Vocino
Steven Vocino, Chairman of the Board
Date: October 11, 2001 /s/ John F. Barry
John F. Barry, III, Director
Date: October 11, 2001 /s/ John Harlow
John Harlow, Director
Date: October 11, 2001
/s/ Jared D. Schulman
Jared D. Schulman, Director
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Certificate of Incorporation of Skyline. (1)
3.2 By-laws of Skyline. (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 Skyline's 1994 Stock Incentive Plan (as Amended and Restated). (9)
10.2 Skyline's Stock Option Plan for Non-Employee Directors (as Amended and Restated). (9)
10.3 Employment Agreement dated October 1, 1993 between Skyline and Zalman Silber. (1)
10.4 Lease Agreement dated February 26, 1993 between Skyline and Empire State Building Company. (1)
10.5 License Agreement dated February 26, 1993 between Skyline and the Empire State Building Company.
(1)
10.6 Purchase Agreement dated February 14, 1994 between Skyline and Interactive Simulation, Inc. (3)
10.7 Film Production Agreement dated April 7, 1994 between Skyline and Empire Productions, Inc., and
Chromavision Corp. (3)
10.8 Lease Agreement dated April 14, 1994 between Skyline and the Empire State Building Company
relating to Skyline's executive offices. (3)
10.9 Lease Agreement dated February 8, 1994 between Skyline and the Empire State Building Company
relating to additional space. (3)
10.10 Construction contract dated July 5, 1994 between Skyline and Signature Construction Group Inc. (4)
10.11 Loan and security agreement dated November 16, 1994 between Skyline and PhoenixCor, Inc. (5)
10.12 Employment Agreement dated August 15, 1994 between Skyline and Steven Schwartz. (5)
10.13 Sponsorship Agreement dated February 21, 1995 between Skyline and Dentsu USA, Inc. on behalf of
JVC Company of America. (6)
10.14 Stock Purchase Agreement, dated as of July 7, 1995, between Skyline and Prospect Street Fund. (2)
10.15 Registration Rights Agreement dated as of July 7, 1995 between Skyline and Prospect Street Fund
relating to the common stock issuable upon conversion of the Preferred Stock. (2)
10.16 Guarantee of Zalman Silber dated as of July 7, 1995 relating to the guarantee of Skyline'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 Skyline 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 Skyline and the Empire State Building relating to
additional space. (8)
10.21 Amendment dated March 1996, to Skyline's original lease and license agreement with the Empire
State Building Company. (8)
10.22 Lease agreement dated March 1996 between Skyline 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 Skyline 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 Skyline and Prospect Street. (10)
10.25 Note Purchase Agreement dated November 6, 1996, between Skyline 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 Skyline 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 Skyline and Prospect Street. (11)
10.29 Indemnity, Subrogation and Contribution Agreement dated December 20, 1996, between Skyline and
Prospect Street. (11)
10.30 Amended and restated Registration Rights Agreement dated December 20, 1996, between Skyline,
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 Skyline and Prospect Street. (11)
10.32 Senior Promissory Note dated December 20, 1996 between Skyline 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 Skyline, Prospect Street, and Bank of New York as
Trustee for the Employees Retirement Plan of The Brooklyn Union
Gas Company.
(11)
10.34 Loan and Security Agreement dated December 4, 1996, between Skyline and People's Bank. (11)
10.35 Loan and Security Agreement dated December 4, 1996, between Skyline and Independent Resources Inc.
(11)
10.36 Loan and Security Agreement dated December 4, 1996, between Skyline 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 Skyline 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 Skyline and Prospect Street NYC Co-Investment
Fund, L.P. (12)
10.40 Senior Promissory Note dated March 21, 1997 between Skyline 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 Skyline 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 Skyline and Prospect Street NYC
Co-Investment Fund, L.P. (12)
10.43 Stock Purchase Warrant Agreement dated March 21, 1997 between Skyline 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 Skyline, 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 Skyline, SVR and Namco. (13)
10.47 Employment Agreement dated as of December 1, 1997 between Skyline and Zalman Silber. (14)
10.48 Senior Secured Credit Agreement dated as of May 20, 1998 among Skyline'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 Skyline and its subsidiaries and the
Institutional Investors. (15)
10.52 Pledge Agreement dated as of May 20, 1998 among Skyline 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 Skyline and its
subsidiaries and the Institutional Investors. (16)
10.54 Employment Agreement dated as of May 12, 1998 between Skyline and Steven Schwartz. (16)
10.55 Employment Agreement dated as of June 15, 1998 between Skyline 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 Skyline
and Robert Brenner.
10.60 Employment Agreement dated as of January 13, 2000, between
Skyline and Michael Leeb.
10.61 Amendment to Lease Agreement between Skyline 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 Skyline,
Skyline Virtual Reality Inc., d/b/a/ XS New York, and Namco Cybertainment, Inc.
10.63 Employment Agreement effective as of January 1, 2001, between Skyline and Michael Leeb.
21 Subsidiaries of Skyline. (9)
23 Letter from Richard A. Eisner & Company, LLP to the Securities & Exchange Commission, dated June
4, 1999. (18)
27.1 Financial Data Schedule.
(1) Previously filed as an exhibit to Registration Statement on Form SB-2
(Commission File No. 33-73276) declared effective on February 14, 1994.
(2) Previously filed as an exhibit to Skyline's current report on Form 8-K
filed on July 21, 1995.
(3) Previously filed as an exhibit to Skyline's annual report on Form
10-KSB for the fiscal year ended June 30, 1994.
(4) Previously filed as an exhibit to Skyline's quarterly report on Form
10-QSB for the quarter ended September 30, 1994.
(5) Previously filed as an exhibit to Skyline's quarterly report on Form
10-QSB for the quarter ended December 31, 1994.
(6) Previously filed as an exhibit to Skyline's quarterly report on Form
10-QSB for the quarter ended March 31, 1995.
(7) Previously filed as an exhibit to Skyline's annual report on Form
10-KSB for the fiscal year ended June 30, 1995.
(8) Previously filed as an exhibit to Skyline's quarterly report on Form
10-QSB for the quarter ended March 31, 1996.
(9) Previously filed as an exhibit to Skyline's annual report on Form
10-KSB for the fiscal year ended June 30, 1996.
(10) Previously filed as an exhibit to Skyline's quarterly report on Form
10-QSB for the quarter ended September 30, 1996.
(11) Previously filed as an exhibit to Skyline's quarterly report on Form
10-QSB for the quarter ended December 31, 1996.
(12) Previously filed as an exhibit to Skyline's quarterly report on Form
10-QSB for the quarter ended March 31, 1997.
(13) Previously filed as an exhibit to Skyline's quarterly report on Form
10-QSB for the quarter ended September 30, 1997.
(14) Previously filed as an exhibit to Skyline's quarterly report on Form
10-QSB for the quarter ended December 31, 1997.
(15) Previously filed as an exhibit to Skyline's quarterly report on Form
10-QSB for the quarter ended March 31, 1998.
(16) Previously filed as an exhibit to Skyline's current report on Form 8-K
filed on July 10, 1998.
(17) Previously filed as an exhibit to Skyline's current report on Form 8-K
filed on September 17, 1998.
(18) Previously filed as an exhibit to Skyline's current report on Form
8-K, filed on June 6, 1999.
(19) Previously filed as an exhibit to Skyline's annual report on Form
10-KSB for the fiscal year ended June 30, 2000.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
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, 2001 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, 2001.
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 auditing standards
generally accepted in the United States of America. 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, 2001, and
the consolidated results of their operations and their consolidated cash flows
for each of the two years in the period ended June 30, 2001, in conformity with
accounting principles generally accepted in the United States of America.
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, 2001 has substantial
negative working capital and a substantial capital deficiency. Also, since a
substantial portion of the working capital deficiency is comprised of notes
payable that are currently due or will be due by December 2001, the Company is
dependent upon the continued forbearance of its principal creditors in not
demanding payment of the 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 22, 2001
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 2001
ASSETS
(To the nearest $1,000)
Current assets:
Cash and money market funds $ 2,212,000
Inventory 100,000
Prepaid expenses and other current assets 161,000
--------------
Total current assets 2,473,000
Property, equipment and leasehold improvements - net 3,305,000
Security deposits 151,000
Deferred financing costs 82,000
--------------
T O T A L $ 6,011,000
=============
LIABILITIES
Current liabilities:
Capital lease obligations - current portion $ 16,000
Notes payable - institutional lenders 7,735,000
Accounts payable 368,000
Accrued expenses 236,000
Interest payable - institutional lenders 4,199,000
--------------
Total current liabilities 12,554,000
Capital lease obligations - less current portion 14,000
Deferred rent payable 1,320,000
--------------
Total liabilities 13,888,000
--------------
Commitments and contingencies (Notes I and J)
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 (18,128,000)
--------------
Total capital deficiency (7,877,000)
--------------
TOTAL $ 6,011,000
==============
The notes to financial statements are made a part hereof.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(To the nearest $1,000)
Year Ended
June 30,
----------------------------------
2001 2000
--------------- ---------------
Revenues:
Attraction sales $ 6,930,000 $ 9,108,000
Concessions sales 959,000 1,092,000
Other income 67,000 23,000
--------------- --------------
7,956,000 10,223,000
Operating expenses:
Cost of merchandise sold 416,000 440,000
Selling, general and administrative 6,311,000 8,999,000
Depreciation and amortization 809,000 2,119,000
------------- -------------
7,536,000 11,558,000
Income (loss) before interest income and
expense and extraordinary item 420,000 (1,335,000)
Interest income 77,000 33,000
Interest expense (1,142,000) (1,139,000)
------------- -------------
(Loss) before extraordinary item (645,000) (2,441,000)
Extraordinary gains from settlements of liabilities 72,000 2,646,000
-------------- -------------
NET INCOME (LOSS) $ (573,000) $ 205,000
============ ============
Income (loss) per share of common stock - basic and diluted:
(Loss) before extraordinary item $(.28) $(1.07)
===== ======
Net income (loss) $(.25) $ .09
===== ======
Weighted number of average common shares outstanding 2,275,000 2,275,000
============ ============
The notes to financial statements are made a part hereof.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(To the nearest $1,000)
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
--------- ------ ------- ------ --------- ------ ---------- ----------- ------------- ------------
Balance - July 1, 2000 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)
Net (loss) for the year
ended June 30, 2001 (573,000) (573,000)
--------- ------ ------- ------ --------- ------ ---------- ----------- ------------- ------------
BALANCE - JUNE 30, 2001 2,095,000 $2,000 960,000 $1,000 1,090,909 $1,000 $(601,000) $10,848,000 $(18,128,000) $(7,877,000)
========= ====== ======= ====== ========= ====== ========== =========== ============= ============
The notes to financial statements are made a part hereof.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(To the nearest $1,000)
Year Ended
June 30,
INCREASE (DECREASE) IN CASH AND MONEY
MARKET FUNDS 2001 2000
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ (573,000) $ 205,000
------------ -----------
Adjustments to reconcile results of operations to net cash effect of
operating activities:
Noncash gains on restructuring of liabilities (72,000) (2,762,000)
Depreciation and amortization 809,000 2,119,000
Deferred rent payable 159,000 167,000
Net changes in assets and liabilities:
Inventory 46,000 (24,000)
Prepaid expenses and other current assets 72,000 (194,000)
Security deposits 23,000 151,000
Accounts payable and accrued liabilities (406,000) 687,000
Due to contractors (115,000)
Interest payable - institutional lenders 1,091,000 1,051,000
Deferred sponsorship income (23,000)
-------------- --------------
Total adjustments 1,722,000 1,057,000
----------- ------------
Net cash provided by operating activities 1,149,000 1,262,000
Cash flows from investing activities:
Purchase of fixed assets (105,000) (154,000)
Cash flows from financing activities:
Repayment of capital lease obligations (141,000) (579,000)
------------ ------------
NET INCREASE IN CASH 903,000 529,000
Cash and money market funds - July 1 1,309,000 780,000
----------- ------------
CASH AND MONEY MARKET FUNDS - JUNE 30 $2,212,000 $ 1,309,000
========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 51,000 $ 89,000
============ =============
The notes to financial statements are made a part hereof.
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 in December 1994. The second site,
which was located in Times Square in New York City, was owned by
SVR which had operated an interactive virtual reality entertainment
center from December 1996 to January 2001.
In December 2000, SVR was notified by its landlord of the exercise
of a cancellation clause, as provided in the lease. As a result, in
January 2001, SVR ceased its operations, returned leased game
equipment to the vendor and sold at auction certain other fully
depreciated property and equipment for approximately $65,000. The
following table presents certain operating information for SVR's
operation.
July 1, 2000 Year Ended
to January 7, June 30,
2001 2000
---------------- --------------
(To the nearest $1,000)
Revenues $1,155,000 $3,164,000
Direct operating
expenses (before
depreciation) 979,000 3,031,000
Depreciation -- 1,341,000
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, 2001 has a
working capital deficiency of $10,081,000 and a capital deficiency
of $7,877,000. As further indicated in Note F, 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. Manage-ment 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)
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 include the accounts of SME
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, 2001 and
2000, 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 its value is
considered to be 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 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)
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 H).
Fair Value of Financial Instruments
The Company's financial instruments are comprised primarily of
demand notes and senior debt payable. Because of the financial
condition of the Company, manage- ment 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.
Advertising
Advertising costs are expensed when incurred. Advertising costs
were $200,000 and $303,000 for the years ended June 30, 2001 and
2000, respectively.
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.
(Continued)
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-4-
NOTE D - Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements is summarized as
follows:
Estimated
Useful Life
(Years)
Equipment and fixtures $ 869,000 5-7
Simulation film 1,047,000 10
Simulation equipment 2,090,000 12
Leasehold improvements 2,604,000 10-16
-----------
6,610,000
Less accumulated depreciation and amortization 3,305,000
-----------
$3,305,000
===========
NOTE E - Capital Lease Obligations
The future minimum lease payments under capital lease obligations
as of June 30, 2001 are as follows:
Year Ending June 30:
2002 $18,000
2003 8,000
2004 8,000
---------
Total minimum lease payments 34,000
Less amount representing interest at
11.1% to 16.2% a year 4,000
---------
Present value of minimum lease payments 30,000
Less current portion 16,000
---------
Long-term portion $14,000
=========
(Continued)
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 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.
(Continued)
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. 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.
NOTE G - Income Taxes
The principal components of deferred tax assets, liabilities and
the valuation allowance are as follows:
June 30,
----------------------------------
2001 2000
--------------- ---------------
Deferred tax assets:
Deferred rent payable $ 594,000 $ 523,000
Depreciation differences -- 1,971,000
Net operating loss carryforwards 8,245,000 6,040,000
----------- -----------
8,839,000 8,534,000
Less valuation allowance (8,789,000) (8,534,000)
----------- -----------
Total deferred tax assets 50,000 --
Depreciation differences (50,000) --
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The Company has provided valuation allowances equal to its net
deferred tax assets at June 30, 2001 and June 30, 2000 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, 2001, the Company has available net operating loss
carryforwards to reduce future federal taxable income of
approximately $18,300,000 for tax reporting purposes which expire
from 2010 through 2021. 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.
(Continued)
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-7-
NOTE H - Stockholders' Equity
In July 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. 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.
At June 30, 2001, the Company has outstanding warrants for the
purchase of 484,146 shares of common stock of which warrants to
purchase 434,146 shares of common stock at a price of $4.25 per
share expire on December 20, 2006 and warrants to purchase 50,000
shares of common stock at a price of $6.00 per share expire on
December 31, 2001.
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 options granted under Plan A can be
exercisable for a period not to exceed ten years.
A summary of stock option activity related to Plan A is as follows:
Exercise
Number of Price
Shares Per Share
Outstanding - July 1, 1999 through
June 30, 2000 24,000 $2.75 - $4.00
Cancelled during the year ended
June 30, 2001 (11,500) $2.75 - $4.00
---------
Outstanding - June 30, 2001 12,500 $2.75
=========
The options outstanding at June 30, 2001 are currently
exercisable and expire in September 2001.
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.
(Continued)
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-8-
NOTE H - Stockholders' Equity (Continued)
A summary of stock option activity related to Plan B is as follows:
Option
Number of Price
Shares Per Share
Outstanding - July 1, 1999 through
June 30, 2000 95,000 $1.50 - $4.00
Cancelled during the year ended June 30, 2001 (35,000) $ .25 - $3.75
-------
Outstanding - June 30, 2001 60,000 $ .25 - $4.00
=======
The following table presents information relating to Plan B stock
options outstanding at June 30, 2001, all of which are currently
exercisable:
Weighted
Weighted Average
Average Remaining
Exercise Life in
Shares Price Years
50,000 $ .25 2.01
5,000 $1.50 1.41
5,000 $4.00 .41
-------
60,000 $ .67 1.82
======
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, 2001, the Company has purchased 110,000
shares which is reflected as treasury stock.
At June 30, 2001, in addition to shares under warrants, pursuant to
the 1998 Credit Agreement (Note F) the Company has reserved shares
of common stock for issuance upon exercise of warrants, options and
conversions of preferred stock as follows:
Plan "A" options 12,500
Plan "B" options 60,000
Preferred stock 7,538,181
Sub-debt financing 434,146
Equipment financing 50,000
-----------
Total 8,094,827
============
(Continued)
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-9-
NOTE H - Stockholders' Equity (Continued)
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.
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. 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 2001 and 2000 would have been
approximately $(646,000) and $(2,444,000) or $(.28) per share and
($1.07) per share, respectively, and its net income (loss) in 2001
and 2000 would have been approximately $(574,000) and $202,000 or
$(.25) per share and $.09 per share, respectively. No options or
warrants were issued during 2000 and 2001.
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 than the quoted market price of
the stock on the date of grant.
NOTE I - Commitments
The Company leases space for its Skyride attraction in the Empire
State Building pursuant to an operating lease expiring in June
2016. Additionally, the Company occupies office space under a lease
which expires on April 30, 2004.
Minimum annual rental payments required for these leases are as
follows:
Year Ending June 30:
2002 $ 563,000
2003 612,000
2004 601,000
2005 545,000
2006 561,000
Thereafter 6,128,000
-----------
$9,010,000
===========
(Continued)
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-10-
NOTE I - Commitments (Continued)
The leases include escalation clauses for increases in real estate
taxes and certain cost of living adjustments.
Rent expense for the years ended June 30, 2001 and 2000 was
approximately $902,000 and $1,649,000, 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:
Year Ending June 30:
2002 $ 181,000
2003 200,000
2004 200,000
2005 200,000
2006 206,000
Thereafter 2,127,000
-----------
$3,114,000
===========
In addition to the minimum annual fee, the agreement provides for a
contingent license 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 J - Employment Agreement
In April 2001, the Company entered into an employment agreement
with an officer which expires in December 2002 but which may be
cancelled by either party upon ninety days written notice. The
agreement provides for a base salary of $150,000 per year through
December 2001 with a minimum increase of 5% thereafter.
Additionally, the agreement provides for a minimum annual incentive
bonus of $25,000, and for the future issuance of options to
purchase 1% of the Company's common stock on a fully diluted basis,
pursuant to the Company's employee stock option plan (Note H).
(Continued)
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-11-
NOTE K - Extraordinary Gains from Restructurings of Liabilities
During the year ended June 30, 2001, the Company settled
outstanding liabilities to vendors resulting in an extraordinary
gain of $72,000.
Extraordinary gains from restructuring of liabilities for the year
ended June 30, 2000 are comprised of the following:
Settlement of Empire State Building litigation $2,206,000
Revised virtual reality entertainment center
stipulation agreement 389,000
Settlements with vendors 51,000
------------
Total $2,646,000
============
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, on December 23, 1997. 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 a 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
outstanding liabilities to vendors resulting in a gain of $51,000.
Exhibit 10.63
SKYLINE MULTIMEDIA
ENTERTAINMENT, INC
EMPIRE STATE BUILDING
350 FIFTH AVENUE, SUITE 612
NEW YORK, NY 10118
(212) 564-2224 FAX (212) 564-0652
April 10, 2001
Mr. Michael Leeb
6 Linford Lane
Melville, NY 11747
Dear Michael:
The purpose of this letter is to memorialize the terms of your employment
contract, which we have agreed upon:
1. This Agreement is between Skyline Multimedia Entertainment Inc.
("Skyline") and Michael Leeb ("Leeb") an individual.
2. Leeb agrees to work full-time and exclusively for Skyline as its Chief
Operating Officer. In such capacity, Michael Leeb shall be covered
and indemnified by Skyline to the full extent of the Company's
Directors' and Officers' liability insurance.
3. This Agreement is for a period of 2 years, beginning January 1, 2001.
4. Either party may cancel this Agreement upon 90 days written notice.
5. Beginning January 1, 2001 Skyline will pay Leeb a base rate of $150,000
per year.
6. In each subsequent year, beginning with the year 2002, Leeb will
receive an increase in the base rate of at least 5%.
7. In addition to base pay Leeb will receive a guaranteed bonus of
$25,000.
8. The minimum annual bonus of $25,000 will be divided into four
quarterly payments, payable within one month after the end of each
calendar quarter(April, July, October, January).
9. In the event that Skyline exercises its right to cancel this
Agreement, and Leeb continues to work for the full 90 day notice
period, the minimum annual bonus set forth in this Agreement will
continue in effect during the notice period. Otherwise, the
minimum annual bonus will terminate as of the date the company
cancels this Agreement.
10. In the event Leeb cancels this Agreement, the minimum annual bonus will
end on the day Leeb cancels this Agreement.
11. Annually, the Board of Directors will review Leeb's performance
and based on their evaluation, Leeb will receive a performance
bonus at the Board's discretion.
12. Skyline will match any funds Leeb contributes to an IRA account,
to the legal limit in effect as of the date of this Agreement.
Skyline's matching payment, if any, each year, will be paid by
March 31 each year, provided however, that Leeb gives the company
satisfactory documentation of his contribution no later than March
1. Otherwise, Skyline will make payment to Leeb within 30 days
providing such documentation.
13. Skyline will provide family health care insurance to Leeb without any
financial contribution on his part.
14. In addition, Leeb will receive options pursuant to an option plan to
purchase 1% of the shares of Skyline Multimedia Entertainment Inc.
subject to the vesting schedule set forth in such agreement.
15. In the event that Skyline excersize its right to cancel this
Agreement, or this Agreement is not renewed, or the company is
sold and Leeb's employment is terminated as a result, and provided
that Leeb works for the entire 90 day notice period, at the end of
the 90 day notice period Leeb will be entitled to receive six
months of severance pay at his base rate of pay.
16. The employment contract between Skyline and Leeb dated January 13,
2001 shall remain in effect until January 1, 2001, that date upon
which this contract becomes effective.
Signed this 12 day of April, 2001 /s/ Michael Leeb
-----------------
Michael Leeb
Acknowledge and agreed upon:
/s/ John B. Harlow Date: 4/10/01
John B. Harlow, Member of the Board of Directors
(Prospect Street Ventures)
Date: _________
Steven Vocino, Chairman of the Board
/s/ John Barry Date: _________
John Barry, Member of the Board of Directors
(Prospect Street Ventures)
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