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, 2003
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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There were 2,095,000 shares of common stock, $.001 par value per share, issued
as of February 18, 2004. Additionally, there were 1,090,909 shares of Series A
Convertible Participating Preferred Stock, $.001 par value per share, issued and
outstanding, and 960,000 shares of class A common stock, $.001 par value, issued
as of February 18, 2004.
Transitional Small Business Disclosure Format
Yes No X
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SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
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Item 1. Condensed consolidated financial statements
(unaudited)
Balance sheet as of December 31, 2003 3
Statements of operations for the three and six months
ended December 31, 2003 and 2002 4
Statements of cash flows for the six months
ended December 31, 2003 and 2002 5
Notes to financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION 14
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SIGNATURES 14
2
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS AT DECEMBER 31, 2003
(To the nearest $1,000)
ASSETS
Current assets:
Cash and money market funds ..................................... $ 672,000
Inventory ....................................................... 67,000
Prepaid expenses and other current assets ....................... 691,000
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Total current assets ............................. 1,430,000
Property, equipment and leasehold improvements - net ............... 3,845,000
Web site development costs - net ................................... 58,000
Security deposits .................................................. 151,000
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T O T A L ........................................ $ 5,484,000
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LIABILITIES
Current liabilities:
Capital lease obligations ....................................... $ 3,000
Notes payable ................................................... 7,735,000
Interest payable ................................................ 6,143,000
Accounts payable ................................................ 146,000
Accrued expenses ................................................ 129,000
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Total current liabilities ........................ 14,156,000
Deferred rent payable .............................................. 1,291,000
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Total liabilities ................................ 15,447,000
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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,
issued 2,095,000 shares ......................................... 2,000
Class A common stock - $.001 par value; authorized 1,000,000 shares,
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 ................................................ (20,214,000)
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Total capital deficiency ......................... (9,963,000)
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T O T A L ........................................ $ 5,484,000
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The notes to financial statements are made a part hereof.
3
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(To the nearest $1,000)
Three Months Ended Six Months Ended
December 31, December 31,
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2003 2002 2003 2002
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Revenues:
Attraction sales ............................ $ 1,930,000 $ 1,470,000 $ 3,913,000 $ 3,091,000
Concessions sales ........................... 279,000 285,000 597,000 626,000
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2,209,000 1,755,000 4,510,000 3,717,000
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Operating expenses:
Cost of merchandise sold .................... 108,000 104,000 299,000 210,000
Selling, general and administrative ......... 1,322,000 1,070,000 2,505,000 2,053,000
Depreciation and amortization ............... 170,000 145,000 339,000 279,000
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1,600,000 1,319,000 3,143,000 2,542,000
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Income from operations before
interest income and expense ................. 609,000 436,000 1,367,000 1,175,000
Interest income ................................ 1,000 13,000 6,000 26,000
Interest expense ............................... (601,000) (607,000) (1,271,000) (1,187,000)
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NET INCOME (LOSS)............................... $ 9,000 $ (158,000) $ 102,000 $ 14,000
=====================================================================================================================
Income (loss) per share of common
stock:
Basic ....................................... $ 0.00 $ (0.07) $ 0.04 $ 0.01
=====================================================================================================================
Diluted ..................................... $ 0.00 $ (0.07) $ 0.01 $ 0.00
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Weighted number of average
common shares outstanding:
Basic ....................................... 2,275,000 2,275,000 2,275,000 2,275,000
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Diluted ..................................... 9,813,000 2,275,000 9,813,000 9,813,000
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The notes to financial statements are made a part hereof.
4
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(To the nearest $1,000)
Six Months Ended
December 31,
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INCREASE (DECREASE) IN CASH AND MONEY
MARKET FUNDS 2003 2002
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Cash flows from operating activities:
Net income $ 102,000 $ 14,000
Adjustments to reconcile results of operations
to net cash effect of operating activities:
Depreciation and amortization 339,000 279,000
Deferred rent payable (19,000) (19,000)
Net changes in assets and liabilities:
Inventory 60,000 (27,000)
Prepaid expenses and other current assets (263,000) (133,000)
Accounts payable and accrued liabilities (217,000) (355,000)
Interest payable (2,223,000) 1,186,000
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Total adjustments (2,323,000) 931,000
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Net cash provided by (used for) operating activities (2,221,000) 945,000
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Cash flows from investing activities:
Purchase of property, equipment and improvements (154,000) (899,000)
Web site development costs (19,000)
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Net cash used for investing activities (154,000) (918,000)
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Cash flows from financing activities:
Repayment of capital lease obligations (4,000) (2,000)
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NET INCREASE (DECEASE) IN CASH AND
MONEY MARKET FUNDS (2,379,000) 25,000
Cash and money market funds - July 1 3,051,000 3,722,000
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CASH AND MONEY MARKET FUNDS - DECEMBER 31 $ 672,000 $3,747,000
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Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,494,000* $ 100,000
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* See Footnote 1
The notes to financial statements are made a part hereof.
5
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, 2003 are not necessarily indicative of
the results that may be expected for the full fiscal year ending June 30,
2004. 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, 2003.
The accompanying unaudited condensed consolidated financial statements have
been prepared on a going-concern basis. At December 31, 2003, the Company
has a working capital deficiency of $12,726,000 and a capital deficiency of
$9,963,000. Additionally, the Company's borrowings from its note holder are
either past due or due on demand. In October 2003, the Company was notified
by the note holder of its intent to seek full and complete satisfaction of
the loans and accrued interest on them. While the note holder is currently
not requiring immediate satisfaction of the debt, it has preserved the
right to demand payment in full at any time. The note holder demanded
repayment of $3,000,000 in September 2003. Additionally, the note holder
demanded that, beginning in October 2003 the Company make monthly payments
of not less than 85% of monthly operating cash flows and submitted a
schedule of required minimum monthly payments. Payments pursuant to such
schedule aggregate $1,468,000 for the year ending June 30, 2004 (of which
$493,000 has been paid through December 31, 2003), $2,639,000 for the year
ending June 30, 2005, $2,639,000 for the year ending June 30, 2006 and
$815,000 for the three months ending September 30, 2006. All payments are
first to be applied against the accrued interest outstanding on September
14, 2003, which aggregated approximately $8,933,000. Remaining payments are
then to be applied against the outstanding principal balance of the loans
and lastly against interest accrued subsequent to September 14, 2003. In
addition, unless agreed to by the note holder, the Company is restricted
from (a) incurring any new debt, (b) modifying, changing or executing any
new lease agreements, (c) making expenditures in an amount greater than
$5,000 and (d) taking any action not in the ordinary course of business.
Therefore, the Company is dependent on the continued forbearance of its
note holder because the Company currently does not have available funds to
fully repay these loans and accrued interest on them. The above factors
give rise to substantial doubt as to the ability of the Company to continue
as a going concern. 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.
6
SKYLINE MULTIMEDIA ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Inventory
Inventory consists of clothing, souvenirs and food sold at the Company's
site and is valued at the lower of cost (first-in, first-out) or
market.
7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The following discussion of our financial condition and results of our
operations should be read in conjunction with the Financial Statements and Notes
thereto. This document contains certain forward-looking statements including,
among others, anticipated trends in our financial condition and results of
operations and our business strategy. These forward-looking statements are based
largely on our current expectations and are subject to a number of risks and
uncertainties. Actual results could differ materially from these forward-looking
statements. Important factors to consider in evaluating such forward-looking
statements include (i) changes in external factors or in the internal budgeting
process which might impact trends in our results of operations; (ii)
unanticipated working capital or other cash requirements; (iii) changes in our
business strategy or an inability to execute its strategy due to unanticipated
changes in the industries in which it operates; and (iv) various competitive
market factors that may prevent us from competing successfully in the
marketplace.
Overview
Skyline Multimedia Entertainment, Inc. (the "Company") is a holding company
incorporated under the laws of the State of New York on November 2, 1993, which
owns all of the outstanding stock of its operating subsidiary, New York Skyline,
Inc. ("Skyline"). We operate the New York Skyride, a state-of- the-art simulator
attraction located in the Empire State Building in New York City, New York.
We commenced operations of the New York Skyride on December 22, 1994. New
York Skyride is an exhilarating simulated "aerial tour" of New York City in a
futuristic "spacecopter". New York Skyride features two 40 passenger flight
simulators and related computer-controlled projection technologies to provide
visitors with a complete "New York" experience, including an extensive pre-show
area featuring interactive multimedia exhibits depicting the various tourist
sites and attractions in and around the New York Metropolitan area, and
culminating in a ten minute aerial "adventure" in and around New York City.
Passengers will not only experience the sensations of an actual aerial flight,
but will also experience visual images projected on screens within the simulator
that envelop the viewer with a variety of sights and sounds. New York Skyride is
intended to provide visitors with a sensation of taking a "once in a lifetime"
aerial adventure around New York City.
For the six months ended December 31, 2003 and 2002, our New York Skyride
facility was visited by approximately 434,000 and 345,000 customers,
respectively.
Our revenues have been generated primarily from ticket sales for New York
Skyride with additional revenues generated from the sale of souvenir merchandise
and profit-sharing arrangements from the sale of tickets to other attractions.
We are presently in the process of winding down the operations of our gift shop,
which we expect to close in the current fiscal quarter of 2004. We are uncertain
as to how we will utilize this space in the future. We are currently seeking
revenue generating opportunities for this space, however we cannot provide any
assurance that we will be successful in this capacity. We are also seeking to
enter into corporate sponsorship and advertising arrangements with certain
consumer product companies to provide additional revenues and marketing
exposure.
THE COMPANY'S PROFITABILITY IS DEPENDENT UPON TOURISM, WHICH MAY BE NEGATIVELY
IMPACTED BY MANY FACTORS, INCLUDING THE CONTINUED SOFTNESS IN THE TOURISM
INDUSTRY AND POTENTIAL TERRORIST ATTACKS
The Company's operations and, in turn, its revenues are dependent upon
tourism, which may be negatively impacted by certain factors, including, but not
limited to, the failure of important seasonal business to materialize, the
continued softness in the tourism industry, the outbreak or spread of illness
(such as SARS), temporary power outages or blackouts, and the possibility of
terrorist attacks.
The Company's operations and results may also be impacted as a result of
future terrorist attacks. The Company's sole facility is located in New York
City at the Empire State Building, which may be considered a prime target for
terrorist activities. If terrorists were to attack the Empire State Building or
New York City, the Company's attendance and, in turn, its revenues may be
negatively impacted. Furthermore, if the Empire State Building were to be
permanently closed as a result of a terrorist attack, then the Company would, in
all likelihood, be forced to cease operations.
8
Results of Operations
Results of Operations - Six Months Ended December 31, 2003 Compared to Six
Months Ended December 31, 2002.
Revenues
Revenues generated during the six months ended December 31, 2003,
aggregated $4,510,000, as compared to $3,717,000 for the six months ended
December 31, 2002. The increase in revenues primarily resulted from an increase
in Empire State Building Observatory and New York Skyride co-marketing efforts
with respect to attendee management and the sale of combination tickets, as well
as the establishment of new business relationships with other companies in the
tourism and travel industry.
Total Operating Expenses
Total operating expenses incurred for the six months ended December 31,
2003, aggregated $3,143.000, as compared to $2,542,000 for the six months ended
December 31, 2002. The increase for the six months ended December 31, 2003 as
compared to the six months ended December 31, 2002, was primarily due to an
increase in salaries paid to hourly employees associated with the increased
sales, increases in real estate taxes and operating cost escalations relating to
the Company's leases and promotional materials, and other increases in
connection with the increase in revenue.
Net Income and Income Per Share
The net income and basic earnings per share available to common
shareholders was $102,000 and $.04 for the six months ended December 31, 2003 as
compared to $14,000 and $.01 for the six months ended December 31, 2002. In
addition, the diluted earnings per share was $.01 for the six months ended
December 31, 2003 as compared to $.00 for the six months ended December 31,
2002. This included interest expense of $1,271,000 and $1,187,000 for the six
months ended December 31, 2003 and December 31, 2002, respectively.
Working Capital Deficiency
Liquidity and Capital Resources
The working capital deficiency at December 31, 2003, was approximately
($12,726,000) compared to a working capital deficiency of approximately
($11,132,000) at December 31, 2002. The increase in the working capital
deficiency was the primary result of the purchase of certain fixed assets during
the second fiscal quarter of 2004 as well as additional acrrued interest on the
debt as described below. Furthermore, our current noteholder has demanded
payments through December 2006 of not less than 85% of monthly cash flows from
operations as more fully described below.
FINANCING ARRANGEMENTS
As of the date hereof, we had the following financing arrangements in
place:
9
Senior Credit Agreement
The Company entered into a Senior Credit Agreement, dated as of December
20, 1996 (the "Senior Credit Agreement"), with certain institutional lenders
(the "Lenders") pursuant to which the Company initially borrowed an aggregate of
$2,500,000 in the form of senior notes (the "Senior Notes"), which accrued
interest at 14% a year and required the payment of both principal and interest
on December 20, 2001. Subsequently, in February 1997 and March 1997, the parties
entered into a Amendments to the Senior Credit Agreement pursuant which provided
for (i) the borrowing of an aggregate of $4,450,000, and (ii) the acceptance of
funds from new additional lenders. In connection with the debt, the lenders
received warrants to purchase up to 434,143 shares of common stock at an
exercise price of $4.25 per share.
The Company is in default on the Senior Notes, which became due on December
20, 2001. As a result, effective December 20, 2001, the interest rate on the
principal and unpaid interest was increased to 21%.
Senior Secured Credit Agreement
The Company entered into a Senior Secured Credit Agreement (the " Senior
Secured Credit Agreement"), dated as of May 20, 1998, with certain of the
Lenders pursuant to which the Company initially borrowed an aggregate of
$935,000 in the form of senior secured demand notes (the "Demand Notes"). The
Demand Notes accrue interest at 14% a year and are collateralized by
substantially all the assets of the Company and its subsidiaries not otherwise
pledged. Subsequently, in May 1998 and July 2000, the parties entered into
Amendments to the Senior Secured Credit Agreement pursuant to which the
Company's aggregate borrowings were increased to $2,785,000 (the "Financing"),
which included $500,000 of funds that were accepted from a new additional
lender.
In connection with the debt, the Lenders received Warrants that are
exercisable for an aggregate of 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.
The Demand Notes and the obligations under the Senior Secured Credit
Agreement and the Warrants are also collateralized by a pledge of the stock of
the Company's subsidiary. In connection with the Senior Secured Credit
Agreement, one of the lenders 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 Company's
outstanding Series A Preferred Stock (the "Preferred Stock") 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.
Other Note Payable
In June 1997, the Company also borrowed an additional $500,000 of funds
from one of the Lenders, which is payable upon demand and bears interest at the
rate of 14%.
Preferred Stock
As discussed above, the Company also has 1,090,909 shares of Series A
Convertible Participating Preferred Stock outstanding, which shares were
originally sold to one of the lenders in 1995. The following is a summary of the
rights, preferences, qualifications, limitations and restrictions of the
Preferred Stock:
10
o The holders are entitled to an aggregate of up to 24.9% of the
outstanding voting power of the Company on all matters which come
before the shareholders;
o A majority of the holders are entitled to elect two directors of the
Company. Pursuant to this right, in August 2002, the SBA, as the
Receiver for Prospect Street, elected Richard Stewart as a director of
the Company;
o Additionally, so long as 272,727 shares of Preferred Stock remain
outstanding, the holders thereof will have the ability to elect a
majority of the Board of Directors and obtain up to 50.1% of the
outstanding voting power of the Company in the event that the holders
of the Preferred Stock determine in good faith that such action is
reasonably necessary for the protection of its investment;
o As stated above, as a result of the issuance of Warrants in connection
with the financing pursuant to the Credit Agreement, the conversion
rate of 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. Thus, the Preferred Stock may be
converted into an aggregate of 7,538,181 shares of common stock of the
Company; and
o The Preferred Stock and underlying Common Stock into which it is
convertible are subject to both demand and piggyback registration
rights.
Acquisition Of Debt, Warrants And Stock Held By Lenders
In September 2003, an investor (the "Investor") acquired from the Lenders
all of (i) the Senior Notes and Demand Notes (including all unpaid interest
thereon), (ii) the warrants issued in connection with the Senior Credit
Agreement and the Senior Secured Credit Agreement, (iii) the preferred and
common stock held by the Lenders, and (iv) all of the Lender's rights under the
Senior Credit Agreement and the Senior Secured Credit Agreement ((i) through
(iv) are hereinafter referred to as the "Debt"). In addition, following the
acquisition of the debt, the new investor notified the Company of its demand for
repayment of $3 million, to be applied against unpaid interest, which amount was
paid in September 2003.
Letter From Investor
On October 24, 2003, the Company received a letter from the Investor
setting forth the Investor's proposed plan of operations for the Company and
service of the Debt. In the letter the Investor stated that although it has not
waived its rights to pursue all remedies available to it in connection with the
Debt, it would not require immediate satisfaction of the Debt if certain demands
are followed. The demands are as follows:
o payment of not less than 85% of the Company's monthly operating cash
flow to the Investor to be applied initially toward the interest and
then toward the principal of the Debt, which such payments are to
commence in October 2003 and continue on the last day of each month
thereafter. The Investor also submitted a schedule of required minimum
monthly payments through the period ended September 30, 2006. Payments
pursuant to such schedule aggregate $1,468,000 for the year ending
June 30, 2004, $2,639,000 for the year ending June 30, 2005,
$2,639,000 for the year ending June 30, 2006 and $815,000 for the
three months ending September 30, 2006. Such payments are first to be
applied against the accrued interest outstanding on September 14,
2003, which aggregated approximately $8,933,000. Remaining payments
are then to be applied against the outstanding principal balance on
the loans and lastly against interest accrued subsequent to September
14, 2003. Through December 31, 2003, the Company has paid $493,000
towards the $1,468,000 provided for in the schedule of required
minimum payments provided by the Investor;
11
o unless the Investor agrees in writing the Company is not permitted to
(i) make any expenditure in an amount greater than $5,000, (ii) incur
any indebtedness, (iii) modify, change or execute any lease, or (iv)
take any action not in the ordinary course of business;
o conduct its business in accordance with a yearly budget;
o use its best efforts to preserve intact its business organization;
o confer with the Investor regarding operational matters and adverse
events; and
o provide the Investor with a weekly information report.
The Company is in continuing discussions with the Investor regarding the
Debt and the satisfaction of the conditions set forth in the letter. It should
be noted, however, that notwithstanding the satisfaction by the Company of all
of the conditions set forth in the letter from the Investor, the Investor
specifically reserved the right to demand payment in full on all obligations.
The Company is dependent on the continued forbearance of its note holder because
the Company currently does not have available funds to fully repay these loans
and the accrued interest on them. The above factors give rise to substantial
doubt as to the ability of the Company to continue as a going concern.
CAPITAL COMMITMENTS
The following is a summary of the Senior Notes, Demand Notes, Other Notes
and warrants currently outstanding:
Principal Accrued
Financing Amount of Maturity Interest as of Number of
Instrument Notes Date 12/30/03 Warrants
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Senior Notes $4,450,000 12/20/01 $4,513,154 434,143
Demand Notes $2,785,000 On Demand $1,335,426 *
Other Note $ 500,000 On Demand $ 294,790
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Totals $7,735,000 $6,143,370
* - As described above, in connection with the Credit Agreement, the Company
issued Warrants to the lenders that 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 the date of
exercise.
12
CONTRACTUAL OBLIGATIONS
In addition to the foregoing, as of December 31, 2003, summarized below are
our general and contractual obligations:
Contractual Obligations at December 31, 2003
Less than One-Three Four-Five Over 5
Contractual Obligations 1 Year Years Years Years
Long Term Debt $ - $ - $ - $ -
Short Term Debt $ - $ - $ - $ -
Operating Leases 567,000 1,750,000 1,254,000 3,959,000
Capital Leases 3,000
Licensing Fee 200,000 644,000 450,000 1,340,000
Total per Period $770,000 $2,394,000 $1,704,000 $5,299,000
SUMMARY
Except for the financing facilities described above, the Company has no
other current arrangements in place with respect to financing. As stated in the
report on the Company's Financial Statements for the year ended June 30, 2003,
the Company's ability to continue as a going concern is dependent upon continued
forbearance of the Company's lender because the Company currently does not have
available funds to repay these loans. Accordingly, the Company is in need of
either securing new financing, attaining profitable operations and/or
negotiating more favorable repayment terms on its outstanding debt.
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
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles require the appropriate application of certain
accounting policies, many of which require us to make estimates and assumptions
about future events and their impact on amounts reported in the financial
statements, and related notes. Since future events and their impact cannot be
determined with certainty, the actual results will inevitably differ from our
estimates. Such differences could be material to the financial statements.
We believe application of accounting policies, and the estimates inherently
required by the policies, are reasonable. These accounting policies and
estimates are constantly reevaluated, and adjustments are made when the facts
and circumstances dictate a change. Historically, we have found the application
of accounting policies to be appropriate, and the actual results have not
differed materially form those determined using necessary estimates.
Our accounting policies are more fully described in Note B to the
consolidated financial statements, located in our Form 10-KSB for the fiscal
year ended June 30, 2003, a copy of which has been previously filed with the
Securities and Exchange Commission. We have identified certain critical
accounting policies which are described below.
Deferred valuation allowance - We have recorded a valuation allowance equal
to our net deferred tax assets, due to the uncertainty of the Company being able
to use this benefit to offset future taxable income. If we were to determine
that the Company would be able to realize the benefit of our net deferred tax
assets in excess of its recorded amount, an adjustment to the valuation
allowance would increase the income in the period such determination was made.
13
Long-lived assets - In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated undiscounted future
net cash flows of the related long-lived assets, and reduce their carrying value
by the excess, if any, of the result of the calculation. We believe at this time
that the long-lived assets' carrying values and useful lives continues to be
appropriate. Future adverse changes in market conditions or poor operating
results of underlying investments could result in an inability to recover the
carrying value of the investments that may not be reflected in an investments
carrying value, thereby requiring an impairment charge in the future.
Item 3. Controls and Procedures
As of December 31, 2003, an evaluation was performed under the supervision
and with the participation of the Company's management, including the Principal
Executive Officer and the Principal Accounting Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, the Company's management, including the Principal
Executive Officer and the Principal Accounting Officer, concluded that the
Company's disclosure controls and procedures were effective as of December 31,
2003. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to December 31, 2003.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities And Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
The Company is in default on the amounts payable to its creditor under the
Senior Credit Agreement, dated as of December 20, 1996, which became due on
December 20, 2001. As a result, the interest rate on the principal and unpaid
interest was increased to 21% effective December 20, 2001. The Company is in
continuing discussions with the Investor regarding the Debt, including the
Senior Credit Agreement, and the satisfaction of the conditions set forth in the
letter received from the Investor dated October 24, 2003. It should be noted,
however, that notwithstanding the satisfaction by the Company of all of the
conditions set forth in the letter from the Investor, the Investor specifically
reserved the right to demand payment in full on all obligations. The Company is
dependent on the continued forbearance of its note holder because the Company
currently does not have available funds to fully repay these loans and the
accrued interest on them. The above factors give rise to substantial doubt as to
the ability of the Company to continue as a going concern.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the Principal Executive Officer and Principal
Accounting Officer of Skyline Multimedia Entertainment, Inc.
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Principal Executive Officer and Principal
Accounting Officer of Skyline Multimedia Entertainment, Inc.
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports
None.
15
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SKYLINE MULTIMEDIA ENTERTAINMENT, INC.
By: /s/ Michael Leeb
-----------------
Michael Leeb, Chief Operating Officer and President
Dated: February 18, 2004