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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 000-24452
RMS TITANIC, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Florida 59-2753162
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3340 Peachtree Rd, NE, Suite 1225, Atlanta, GA 30326
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Address of principal executive offices
Issuer's telephone number, including area code: (404) 842-2600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.0001 per share
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes No X
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Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of June 1, 2001, was: $12,651,000.
The number of shares outstanding of each of the registrant's classes of
common stock, as of June 1, 2001, were:
NUMBER OF SHARES
TITLE OF EACH CLASS OUTSTANDING
Common Stock, par value $.0001
per share 16,953,117
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DOCUMENTS INCORPORATED BY REFERENCE: The registrant's definitive proxy
statement to be filed pursuant to Regulation 14A or definitive information
statement to be filed pursuant to Regulation 14C.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Annual Report on Form
10-K contains forward-looking statements within the meaning of the Private
Securities Reform Act of 1995 that involve certain risks and uncertainties. The
Company's actual results or outcomes may differ materially from those
anticipated. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements contained in the Report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, such information should not be
regarded as a representation by the Company that the objectives and plans of the
Company will be achieved.
ITEM 1. BUSINESS
BACKGROUND
On May 4, 1993, RMS Titanic, Inc. acquired all the assets and assumed all the
liabilities of TITANIC Ventures Limited Partnership ("TVLP"), a Connecticut
limited partnership (the "Acquisition"). References to the "Company" in this
Report relate to TVLP prior to the Acquisition and the combined entities of TVLP
and RMS Titanic, Inc. after the Acquisition.
Pursuant to a judgment entered in the Federal District Court for the Eastern
District of Virginia on June 7, 1994, the Company was declared
salvor-in-possession of the vessel RMS Titanic ("TITANIC"), the sole and
exclusive owner of any items recovered from the TITANIC and so long as the
Company is salvor-in-possession, the sole and exclusive owner of items recovered
from the TITANIC in the future (the "Order"). The Order was re-affirmed by the
Federal District Court for the Eastern District of Virginia in 1996. In March
1999, the United States Court of Appeals for the Fourth Circuit affirmed the
Company's status as salvor-in-possession, however, it reversed the portion of
the 1996 decision that the Company could exclude other parties from viewing and
photographing the TITANIC site. The United States Supreme Court declined to
review the Company's appeal of this decision.
The Company was formed in 1987 for the purposes of exploring the wreck and
surrounding oceanic areas of the TITANIC, which sank in 1912, and lies more than
12,500 feet below the surface of the Atlantic Ocean. This location is
approximately 400 miles off the coast of Newfoundland. The Company has obtained
oceanic material and scientific data available in various forms that include
still and moving photography and artifacts from the wreck site; and is utilizing
this data and artifacts for historical verification, scientific education and
public awareness. All these activities are directed toward producing income for
the company resulting from touring exhibitions, television programs, and the
sales of still photographs.
In August 1987, the Company contracted with the Institute of France for the
Research and Exploitation of the Sea ("IFREMER"), which is owned by the French
Government, to conduct an expedition and dive to the wreck of the TITANIC. Using
state-of-the-art technology from IFREMER (the world's largest oceanographic
institute), approximately sixty days of research and recovery operations were
performed at the TITANIC wreck site in 1987 through the use of a manned
submersible NAUTILE. Approximately 1,800 objects were recovered during the
course of the thirty-two dives in that expedition.
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The recovered objects were conserved and preserved by Electricite de France
("EDF"), the French government-owned utility. In addition to the recovery of
historic objects, the Company's 1987 expedition also produced approximately 140
hours of videotape footage and an estimated 7,000 still photographs from the
wreck site.
In June 1993, the Company successfully completed its second expedition to the
TITANIC wreck site, during which it recovered approximately 800 artifacts and
produced approximately 105 hours of videotape footage during the course of
fifteen dives. In July 1994, the Company recovered over 1,000 objects and
produced approximately 125 hours of videotape footage during its third
expedition to the TITANIC wreck site. In August 1996, the Company recovered 74
objects and produced approximately 125 hours of videotape footage during its
fourth expedition to the TITANIC wreck site.
With the Company's cooperation, Discovery Communications, Inc. produced three
hours of television programming based upon the Company's activities and
scientific studies undertaken during the 1996 expedition. Two hours of this
programming, presented in "TITANIC: Anatomy of A Disaster," was the highest
rated program in the history of The Discovery Channel when it aired in April
1997. In addition to obtaining videotape footage for the television productions,
a substantial portion of the 1996 expedition was devoted to the recovery of a
section of the TITANIC hull, measuring approximately 26 feet by 20 feet and
weighing approximately 20 tons, from the debris field surrounding the wreck.
Although the Company raised the "Big Piece" to within approximately 200 feet of
the surface of the ocean, efforts to recover it were unsuccessful because of
stormy weather conditions and severe ocean turbulence.
In August 1998, the Company recovered 70 objects and produced approximately 350
hours of videotape footage during its fifth expedition to the TITANIC wreck
site. This expedition, again undertaken in cooperation with Discovery
Communications, Inc., produced five hours of television programming about the
expedition, including the first-ever live broadcast from the TITANIC wreck site
and a one hour Dateline NBC special broadcast. Among the highlights of the 1998
expedition was the successful recovery of the "Big Piece" and extensive mapping
of the TITANIC and portions of the wreck site through the capture of thousands
of high-resolution color digital photographs.
The Company's 1993, 1994, 1996, and 1998 TITANIC expeditions were completed by
charter agreements with IFREMER. The objects recovered in the 1993, 1994, 1996
and 1998 expeditions were transported to a privately-owned conservation
laboratory in France for restoration and preservation processes in preparation
for exhibition, except for the "Big Piece", that is using on-going conservation
processes while on exhibit as part of the Company's exhibition of its TITANIC
artifacts in the United States.
During the summer of 2000, the Company conducted its most recent expedition
("Expedition 2000")to the TITANIC wreck site in the North Atlantic. During this
expedition, the Company utilized the services of the P.P. Shirshov Institute of
Oceanology of Moscow, Russia, which provided the research vessel "Akademik
Mstislav Keldysh" and two deep manned submersibles- the "MIR-1" and "MIR-2". The
Keldysk is a 400 foot, 6,340 ton research vessel that was ideally suited for
operation in the North Atlantic Ocean. The expedition resulted in a total of
twenty-eight dives over a four week period that resulted in the recovery of more
than 900 objects from the wreck site and the discovery of a new debris field.
Among the artifacts recovered in this expedition were: the ship's wheel and
stand, whistle control timer from the navigation bridge, the main telegraph base
and the docking bride telephone. Among personal items recovered were binoculars,
a pair of opera glasses, sixty-five intact perfume ampoules belonging to
passenger Mr. Adolphe Saalfeld, a camera, bowler hat, first class demitasse and
dinner plate. A base for a cherub likely from the Grand Staircase as well as
gilded wood from a balustrade were also recovered. The nine leather bags
provided more than one hundred additional objects. Some medicinal items were
recovered that included a cobalt blue bottle that reads: BROMOSELTZER EMERSON
DRUG CO. BALTIMORE MARYLAND. For the first time, two toilets, a wok, an intact
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deck light, circulating fans, thermometers, four eggcups, and a metal megaphone
were recovered. These items will further provide a clearer picture of the
workings of the TITANIC at that time period, and will further enhance future
exhibition presentations. This expedition was conducted during the months of
July and August 2000.
In June 2000, the Company established a wholly owned United Kingdom subsidiary,
Danepath Ltd. For the purpose of purchasing the research vessel, RRS Challenger,
a 178 foot- 1050 ton ship that was to be utilized in the upcoming expedition to
the TITANIC wreck site during that summer. This vessel was acquired on June 30,
2000 from the Natural Environment Research Council, a British governmental
agency. The name of the vessel was changed to the SV EXPLORER. During the
expedition, the Company utilized this ship for fifty-three days. At the end of
the expedition, the Explorer delivered the recovered artifacts to a warehouse
facility in Norfolk, Virginia for eventual delivery to the conservation facility
the Company recently established with Eastern Michigan State University. The
intent of management is to utilize the SV Explorer for its own search and
recovery operations when it is not chartered by other companies. Presently, the
SV Explorer has completed one of three charters scheduled this year with
European companies.
PLAN OF OPERATIONS
The TITANIC continues to captivate the thoughts and imagination of millions of
people throughout the world since 1912, when it struck an iceberg and sank in
the North Atlantic, causing the loss of more than 1,500 of the 2,228 lives on
board. The depth of this international interest in the TITANIC has been
continuous since sinking more than eighty-nine years ago. The December 1997
release of the highest grossing motion picture of all time, "TITANIC," as well
as a prodigious volume of works that have been published about all facets of its
story, the production of other feature length movies and plays about its tragic
voyage, and the broadcast of television programs about its 1985 discovery and
scientific examinations of the wreck approximately two and one-half miles below
the surface of the ocean attests to the public's continuing fascination in the
TITANIC. As the only enterprise that has recovered and conserved items from the
TITANIC, the Company is in a unique position to present exhibitions of TITANIC
artifacts for viewing by the public. Management intends to continue to present
exhibitions throughout the world as demand for these tours is warranted.
Management will also continue to conduct these exhibitions in an enlightening
and dignified manner that embodies respect for those who lost their lives in the
disaster.
The principal sources of revenues of the Company have been payment guarantees
for Exhibit attendance, ticket sales for admission to exhibitions, merchandising
revenues, licensing revenues and sponsorship revenues.
The Company's two most important obligations are to maximize shareholder value
and secure the future of the TITANIC artifacts. While the Company continues to
maintain its status as Salvor-in-Possession it will actively search out
opportunities leading to permanent placement of the Artifacts. As long as the
Company maintains its Salvor-in-Possession status, any disposition of Artifacts
will be done with the knowledge of the Federal Courts and without compromising
the obligations of the Company.
EXHIBITIONS
The Company has presented exhibitions in association with third parties in
cities in the United States, Europe, and Japan and over seven million people
have attended these exhibits. The Company plans to continue to present
exhibition tours of TITANIC artifacts in cities throughout the world.
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Agreement with Subsidiary of SFX Entertainment, Inc.
In March 1999, the Company entered into an agreement with Magicworks
Entertainment, Inc., a direct subsidiary of PACE Entertainment, Inc. and an
indirect subsidiary of SFX Entertainment, Inc. (collectively "SFX"), in which we
granted SFX an exclusive worldwide license to exhibit our TITANIC artifacts for
the payment of at least $8.5 million annually. This license agreement had an
initial term of one year, commencing September 15, 1999, with SFX having the
option to extend the term for up to four additional one-year periods. All
obligations of Magicworks Entertainment, Inc. under this license agreement were
guaranteed by SFX Entertainment, Inc. The original agreement was amended on
September 18, 2000 between the Company and SFX Family Entertainment, Inc.,
successor to Magicworks Entertainment, Inc.. Furthermore, another extension was
granted on May 7, 2001 to extend this agreement to December 31, 2002. The first
amendment required a minimum annual payment of $2,000,000, which was made during
the fiscal year ended February 28, 2001. Upon execution of the second amendment,
the Company received a payment of $750,000.
Pursuant to the license agreement, as amended, the Company will receive twenty
percent of the ticket, merchandise, sponsorship, and ancillary revenues over
$10,000,000. In addition, proceeds from the South American exhibition tour,
after deduction of certain related expenses, shall be shared with SFX on a
fifty-fifty basis. The license agreement, as amended, requires that certain
conservation costs be equally shared between SFX and the Company.
During fiscal year ended February 28, 2001, we removed our artifacts from the
TITANIC themed exhibition in Orlando, Florida previously operated by SFX and
third parties. At that time, a former officer and director of the Company was an
owner in that exhibition.
From 1997 through the present time, exhibitions of objects recovered from the
TITANIC were presented in association with the Company in the following cities
and countries: Norfolk, Virginia from November 1996 until March 1997; Memphis,
Tennessee from April 1997 to September 1997; Hamburg, Germany from May 1997 to
September 1998; at the Queen Mary in Long Beach, California from May 1997 to
March 1999; in St. Petersburg, Florida from November 1997 to May 1998; in
Boston, Massachusetts from July 1998 through November 1998; in Zurich,
Switzerland from November 1998 through May 1999; in St. Paul, Minnesota from
January 1999 through May 1999; a tour of several cities in Japan from July 1998
through July 1999; Atlantic City, New Jersey from May 1999 until September 1999.
Las Vegas, Nevada from January 1999 through October 2000; Chicago, Illinois from
February through October 2000; Dallas, Texas from March through June 2000; and
Cincinnati, Ohio from November 2000 through March 2001.
Current Exhibitions
SFX is presenting TITANIC exhibits in Seattle, Washington that began in March;
Kansas City, Missouri and Baltimore, Maryland which began in April; and
Nashville, Tennessee that began in May. The South American tour includes Buenos
Aires, Argentina and Santiago, Chile.
MERCHANDISING
The Company has an ongoing arrangement with Events Management, Inc. (the gift
shop operator at all domestic Exhibits) and receives monthly payments for
certain items that are sold in the Exhibit gift shops, on their web-site and
marketed through other channels of distribution. These payments equal ten
percent of gross revenue received from sales to third parties and an amount
equal to five percent of the retail price on products bearing the Company's
logos or incorporating our proprietary rights. The Company participates in all
other income from gift shop sales through its contract with SFX. Certain items
such as coal recovered from the TITANIC wreck site are sold directly by the
Company to third parties including Events Management Inc.
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MARKETING
The Company intends to market perfume from the TITANIC, based upon fragrances
recovered during Expedition 2000 by awarding licenses to third parties for
replication of certain fragrances. It is contemplated that the Company will
receive a royalty from the sale of the perfume for granting such licenses. No
assurances can be given that such licensing arrangements will be successfully
consummated, or if consummated, will result in the Company's receipt of
significant revenues. The Company also intends to pursue the direct marketing of
merchandise and archive through its web site (http://www.rmsTITANIC.net) and
through third parties.
The marketing and promotion of TITANIC Exhibitions is handled and paid by SFX
and other third parties involved with the presentation of Exhibits.
EXPEDITIONS TO THE TITANIC
With the depth of the TITANIC wreck approximately two and one-half miles below
the surface of the ocean in the North Atlantic, the Company is dependent upon
chartering vessels outfitted with highly advanced deep sea technology in order
to conduct expeditions to the site. In its 1987, 1993, 1994, 1996, and 1998
expeditions, the Company entered into charter agreements with IFREMER, pursuant
to which IFREMER supplied the crew and equipment necessary to conduct research
and recovery efforts. In addition to utilization of the research vessel NADIR,
recovery efforts were undertaken through the manned submersible NAUTILE. Small,
hard-to-reach areas necessary for visual reconnaissance efforts were accessed by
a small robot, known as ROBIN, controlled by crewmen on board the NAUTILE. The
dive team had the capability of retrieving heavy objects, such as a lifeboat
davit weighing approximately 4,000 lbs., to fragile objects weighing but a few
ounces. Because of the immense pressure of approximately 6,000 pounds per square
inch at the wreck site, it is impossible for a dive team to reach such depths
and explore the wreck site through any means other than a submersible. The
NAUTILE and ROBIN were each equipped with video and still cameras that recorded
all recovery and exploration efforts. In connection with its 1987, 1993, 1994,
1996, and 1998 expeditions to the wreck site, the Company engaged maritime
scientists and other professional experts, to assist in the exploration and
recovery efforts. Management intends to engage experts from such fields for its
future expeditions to the TITANIC, one of which is planned for the summer of
2002.
During the Company's 1998 expedition to the TITANIC, in addition to recovering
the largest artifact to date -- a 26 foot by 20 foot outer section of the hull
of TITANIC weighing approximately 20 tons, known as the "Big Piece", other
objects recovered during this expedition included a port-side gangway door from
D-Deck, found on the sea bed with its latch mechanism open; a golden chandelier
from one of the ship's first class public rooms; a stateroom coat hook; a light
switch control panel from the galley area; a skylight from the first class
elevator shaft; a small 60-second hourglass used for navigation; a round dial
with spindle and spring mechanism that may be an electronic wall clock from the
Marconi radio room.
Additionally, by using ultra-high resolution digital underwater technology, more
than 3,000 individual digital photographs were captured of the TITANIC site.
These photographs have been compiled and processed utilizing special
computerized software into the world's first high-resolution photo-mosaic of the
wreck site, including the first-ever composition of the entire mangled stern
section as well as portions of the debris field surrounding the wreck.
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In its most recent recovery operation in Expedition 2000, the Company conducted
twenty-eight dives over a four week period that recovered more than 900 items
from the wreck site, which included the discovery of a new debris field. Among
the artifacts recovered in this expedition, were: the ship's Wheel and Stand,
whistle control timer from the navigation bridge, the main telegraph base and
the docking bride telephone. Among personal items recovered there included
binoculars, a pair of opera glasses, sixty-five intact perfume ampoules
belonging to passenger Mr. Adolphe Saalfeld, a camera, bowler hat, first class
demitasse and dinner plate. A base for a bronze cherub likely from the Grand
Staircase was recovered as well as gilded wood from a balustrade. Of the nine
leather bags found, they provided more than one hundred items. Some medicinal
items were recovered that included a cobalt blue bottle that reads: BROMOSELTZER
EMERSON DRUG CO. BALTIMORE MARYLAND. For the first time, two toilets, a wok, an
intact deck light, circulating fans, thermometers, four eggcups, and a metal
megaphone were recovered.
The Company's ability to conduct expeditions to the TITANIC is subject to the
availability of necessary research and recovery vessels and equipment for
chartering by the Company during the months between June and September, which is
the "weather window" for such activities in the North Atlantic. Research and
recovery efforts with a manned submersible are presently limited to the
availability of the NAUTILE through charter arrangements with IFREMER and MIR I
and MIR II using charter arrangements with P.P. Shirshov Institute of
Oceanology. To the Company's knowledge, no other submersible with the capability
of reaching the depth of the TITANIC is presently commercially available or
acceptable to the Company for such chartering. The Company could also conduct
operations with unmanned, surface-controlled, remote operated vehicles, which
may be available for chartering on suitable terms from other sources.
Danepath Ltd., the Company's wholly-owned United Kingdom subsidiary, acquired
the SV Explorer, a research and recovery vessel in June 2000. This ship will be
utilized to do future search and recovery work at various wreck sites. The SV
Explorer operated as a support vessel during Expedition 2000 to the Titanic.
RESTORATION AND CONSERVATION
Upon recovery from the wreck site, artifacts are in varying states of
deterioration and fragility. Having been submerged in the depths of the ocean
for more than 89 years, objects have been subjected to the corrosive effects of
chlorides present in sea water. The restoration of many of the metal, leather,
and paper artifacts requires the application of sophisticated electrolysis and
other electrochemical techniques. Artifacts recovered from the 1987 expedition
were restored and conserved by the laboratories of Electricite de France, the
French government-owned utility. Except for un-restored artifacts that are
currently being exhibited, all artifacts recovered from the 1993, 1994, 1996 and
1998 expeditions are either undergoing or have undergone conservation processes
at LP3, a privately-owned conservation laboratory in Semur-en-Auxois, France.
On May 17, 2001, the Company and Eastern Michigan University announced their
partnership in the conservation of the artifacts recovered from the wreck site.
Eastern Michigan University is located in Ypsilanti, Michigan and is the fifth
largest university in Michigan with an enrollment exceeding 23,000. Among EMU's
more than 200 graduate and undergraduate programs, its Historic Preservation
Program ranks among the finest. The EMU Regents approved the program in 1979,
and in 1989, the program received the coveted "Certificate of Commendation" from
the American Association of State & Local History for ten years of nationally
recognized performance within the field of historic preservation education.
Dr. Ted Ligibel is the Director of the Historic Preservation Programs and Dr.
Lauren Sickels-Taves is assistant professor and head conservator of the TITANIC
effort. Dr. Sickels-Taves earned an M.S., Historic Preservation and a Ph.D. in
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Architecture. She has been a pioneer in the application of rigorous scientific
methodology and advanced technology to materials analysis in historic
preservation.
The Company intends to have all its artifacts delivered to EMU for continuing
conservation. Presently, all the artifacts recovered during the expedition
conducted in 2000 are being preserved at the facility established in
co-operation with EMU.
SCIENCE AND ARCHAEOLOGY
TITANIC was a great luxury liner that bequeathed to the world a classic story of
tragedy at sea. Today, this shipwreck is treated as an archaeological site,
historic structure, attraction for adventure tourism, ecological phenomenon,
international memorial, and as valuable property to be recovered and shared with
humanity. The Company as salvor-in-possession of the shipwreck, believes that
all of these purposes are legitimate and beneficial to society. The Company also
believes that the multiple values of TITANIC and its status as a social-cultural
icon demand the perspectives of many experts in scientific interpretation and
stewardship of the site.
The Company is in the best position to provide for archaeological survey,
scientific interpretation, and stewardship of the TITANIC shipwreck. The Company
possesses the largest collection of data, information, images, and cultural
materials associated with the shipwreck.
Work has already begun with an agreement between the company and Eastern
Michigan University for conservation of artifacts from the site. In addition,
the Company has developed a partnership with the Center for Maritime &
Underwater Resource Management, a nonprofit corporation, for services in
archaeology, scientific research, and resource management.
The Company intends to present their collection of knowledge and cultural
materials of TITANIC to researchers, educators, and other audiences in the form
of a scientific report, associated interactive website, and other intellectual
products that advance the purposes of the company. Revenues from the sale of
these intellectual products are expected to at least meet the total production
costs.
The scientific report will integrate the results of all expeditions to TITANIC
wreck site since its discovery. In addition, the publication will include the
first comprehensive site plan of the TITANIC, which will assist greatly in
determining future products in research, materials conservation, and education.
The interactive website will virtually share with the world this scientific
knowledge as well as its entire collection of cultural materials.
SALVAGE RIGHTS
Pursuant to the judgment entered in the Federal District Court for the Eastern
District of Virginia on June 7, 1994, the Company was declared
salvor-in-possession of the wreck and wreck site of the TITANIC, the sole and
exclusive owner of any items recovered from the TITANIC and, so long as the
Company is salvor-in-possession, the sole and exclusive owner of all items
recovered from the TITANIC in the future. The Court's judgment includes, without
limitation, the contents, cargo, hull, machinery, engine, tackle, apparel, and
appurtenances of the TITANIC, and provides that all potential claimants are
barred and precluded from filing claims so long as the Company is
salvor-in-possession. No other entity has the right to salvage the TITANIC while
the Company is salvor-in-possession. To maintain salvor-in-possession status,
the Company, among other things must maintain a reasonable presence at the wreck
through periodic expeditions and continue salvage efforts and the preservation
of artifacts during the period between salvage expeditions.
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In February 1996, a third-party instituted a motion in the Federal District
Court for the Eastern District of Virginia seeking rescission of the June 7,
1994 order awarding salvor-in-possession status to the Company. By an order
dated May 10, 1996, the motion was denied. The court also modified its June 1994
order to require the Company to file more frequent reports about its activities.
In August 1996, the Court amended the May 1996 order to include the award to the
Company of exclusive rights to photograph the TITANIC within the award of
salvor-in-possession status, and enjoined third parties from entering the wreck
site for purposes of obtaining photography or for other purposes.
An unrelated entity announced the intention of conducting a photographic
expedition, known as Operation TITANIC, to the TITANIC wreck site during August
1998, when the Company intended to conduct its 1998 expedition. The Company
commenced legal proceedings and obtained an injunction prohibiting such
photographic expedition during August 1998 or at any other time so long as the
Company is salvor-in-possession of the wreck and wreck site of the TITANIC.
Notwithstanding such injunction, the Operation TITANIC photographic expedition
occurred in September 1998. In March 1999, the District Court's granting of an
injunction prohibiting the photographic expedition was reversed by the Fourth
Circuit of the United States. The Company appealed the reversal of the District
Court's determination to the United States Supreme Court. The Supreme Court
declined to review this matter in October 1999. As a result, the Company no
longer has exclusive photographic rights to the TITANIC.
Future photographic expeditions to the TITANIC have been announced by
third-parties. In the event that such photographic expeditions are undertaken
while the Company is conducting its expedition, safety hazards regarding the
deployment of submersibles chartered by the Company while other submersibles are
deployed could interfere with the Company conducting its expeditions.
Entities within the United States, United Kingdom, France and Canada are working
together to implement an international agreement that could diminish or divest
the Company of its salvor-in-possession rights. See Item 3- Legal Proceedings.
Management believes that all requirements to maintain its salvor-in-possession
status have been satisfied by the Company and will continue to be satisfied in
the future. Should the Company not maintain its salvor-in-possession status,
other entities could conduct salvage operations and recover items from the
TITANIC wreck site. Management believes that salvage operations by other
entities, if successful, would not have a material adverse affect upon the
Company's exhibition activities.
The loss of exclusive photographic rights could have a materially adverse affect
upon the Company's ability to generate revenues from ancillary activities, such
as television productions, or passenger cruises accompanying research and
recovery expeditions
COMPETITION
The entertainment and exhibition industries are intensely competitive. There can
be no assurances given the Company's limited capital resources, that we will be
able to compete effectively. Many enterprises with which the Company will be
competing have substantially greater resources than the Company. Additionally,
following the success of the motion picture "TITANIC" in December 1997, a number
of entities have undertaken, or announced an intention to offer, exhibitions or
events with the theme of TITANIC or involving memorabilia related to its
sinking. Although the Company is the only entity that exhibits artifacts
recovered from the wreck site of the TITANIC, competition may be encountered
from these exhibitions or events for the consumer's interest in TITANIC or the
Company's TITANIC exhibitions. Management intends to compete with other entities
based upon the mass appeal of its planned exhibits to consumers of
entertainment, museum, scientific and educational offerings, and the quality and
value of the entertainment experience. The Company will emphasize the unique and
distinctive perspective of the TITANIC into its exhibits as TITANIC's
salvor-in-possession and as the only entity that has ownership rights to objects
recovered from the wreck site.
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The success of the Company's merchandising efforts will depend largely upon the
consumer appeal of its merchandise and the success of its exhibitions.
Management believes that its merchandise will compete primarily because of its
unique character and quality.
EMPLOYEES
As of June 1, 2001, the Company had five employees. The Company is not a party
to any collective bargaining agreement.
ENVIRONMENTAL MATTERS
The Company will be subject to environmental laws and regulation by federal,
state and local authorities in connection with its planned exhibition
activities. The Company does not anticipate that the costs to comply with such
laws and regulations will have any material effect on the Company's capital
expenditures, earnings, or competitive position.
ITEM 2. DESCRIPTION OF PROPERTY
The Company has its principal executive offices located at Tower Place, 3340
Peachtree Road N.E., Suite 1225, Atlanta, Georgia. This space of approximately
2,759 square feet is used for management, administration, and marketing for its
operations. The lease commenced on April 18, 2000 and is for a five-year term
and requires base lease payments of $64,836 annually.
The Company has an lease obligation for office space at 401 Corbett Street,
Clearwater, Florida. This location previously housed the Company's
administrative and marketing activities until those functions were relocated to
the Atlanta office. Presently, a sublease has been arranged for this office
space that is equivalent to the master lease obligation. The Company's
obligation on the master lease is for a five-year term ending May 30, 2005 with
annual lease payments of $36,570.
The Company's former office located at 17 Battery Place in New York was closed
during April 2000. The obligation under a lease was settled with the landlord
during September 2000. The market value of other similar rentals at the New York
location were higher than the Company's lease rate.
ITEM 3. LEGAL PROCEEDINGS
Legal Action by Former Officers and Directors
On November 26, 1999, two of the six members of the Company's Board of
Directors, Messrs. Geller and Harris, and others; acting via an action by
written consent of the holders of a majority of voting rights of the Company's
common stock, in lieu of a meeting; removed Messrs. Tulloch, Hothorn, Nargeolet,
and Carlin as Directors of the Company and subsequently Messrs Tulloch and
Carlin as Officers.
The removed officers and directors brought an action in the United States
District Court for Connecticut against Messrs. Geller and Harris and others
seeking to obtain a judicial reversal of their removal from power. Because of
the uncertainty as to the individuals who could conduct business on behalf of
the Company during the time from November 26, 1999 to the resolution of the
dispute, the Company's bank stopped honoring checks and froze all funds on
deposit. In addition, a creditor notified the company that it would not tender a
$2,000,000 payment otherwise due and payable until the dispute among current and
former directors is resolved or settled.
10
The legal action was resolved on January 21, 2000 with a Settlement Agreement
wherein the Company agreed, among other things, to: (a) pay to Messrs. Tulloch
and Carlin an aggregate amount of $2,500,000 in three equal installments to be
completed within six months of the date of the settlement; (b) allow Messrs.
Tulloch and Carlin to submit documented requests for reimbursement of previously
un-reimbursed business expenses; (c) review / revise payment information
submitted to the Internal Revenue Service with respect to the nature of
previously made payments to Mr. Carlin; (d) the authority of Messrs. Tulloch and
Carlin to exercise previously issued options to acquire an aggregate of
1,000,000 shares of the Company's common stock and to cause the company to file
a Registration Statement with respect to the options and underlying shares of
common stock; (e) indemnify the former Officers and Directors who participate in
the Settlement Agreement to the full extent of applicable law and to the extent
of Officers and Directors Liability under the existing Company policy; and (f)
reimburse Messrs. Tulloch and Carlin for the costs of health insurance for a
period of 18 months.
Messrs. Tulloch and Carlin agreed, among other things, to: (a) accept the
$2,500,000 as full monetary payment (with the exception of previously noted
un-reimbursed business expenses) for any claims against the Company, Messrs.
Geller and Harris and others in connection with this action and amounts
otherwise due them in connection with their roles as Officers and Directors of
the Company; (b) send appropriate letters to the Company's bank and
aforementioned creditor to "unfreeze" corporate funds and to allow operational
cash flow to resume; (c) entered into an eighteen month standstill agreement
which precludes them from interfering in Company management without the prior
approval of the Board of Directors and shareholders; (d) discontinue their
efforts to have the TITANIC determined to be a monument and to restrict the
removal of materials from the TITANIC wreck site; (e) return all the Company's
property in their possession, including records and files, and provide a
complete list of Company Artifacts which are located anywhere in the world; (f)
provide, for a three month period, cooperation in effecting a professional
management transfer; (g) return all monies held in Mr. Carlin's attorney trust
account along with an accounting of such; and (h) discontinue access to the
Company's internet site and to sell back to the company, at cost, another web
site utilizing the name "TITANIC".
At February 29, 2000 accounts payable and accrued liabilities includes a balance
of $1,608,000 payable to Messrs. Tulloch and Carlin under the terms of the
Settlement Agreement. These obligations were paid during the fiscal year ended
February 28, 2001. During the year ended February 29, 2000, $1,672,000 was
charged to operations in connection with this Settlement Agreement.
The Company has indemnified all defendants in the legal action brought by the
removed Officers and Directors from all legal fees and expenses and other costs
associated with the action.
Other Legal Proceedings
The Company was a party to certain litigations that have been resolved during
the year ended February 29, 2000 resulting in settlements of $391,000 being
charged to operations for such year. The $391,000 consists of cash and 100,000
shares of the Company's common stock.
The United States Department of State and the National Oceanic and Atmospheric
Administration of the United States Department of Commerce (the "NOAA") are
working together to implement an International Agreement (the "Agreement") with
entities in the United Kingdom, France and Canada that would diminish and/or
divest the Company of its salvor-in-possession rights to the TITANIC which had
been awarded by the Federal District Court for the Eastern District of Virginia
11
(the "District Court"). The Company has raised numerous objections to the United
States Department of State regarding the actions of the United States to
participate in efforts to reach an agreement governing salvage activities of the
TITANIC. The Agreement, as drafted, does not recognize the existing rights of
the Company in the TITANIC, that has been re-affirmed in the District Court and
affirmed by the Court of Appeals of the Fourth Circuit, and provides that the
Agreement becomes effective when any two of the party states sign it. The United
States Department of Justice has represented that the United States believed it
had complied with the RMS TITANIC Memorial Act in the development of the
international guidelines to implement the Agreement, but would solicit comments
from the public at large regarding the draft international guidelines and the
NOAA will consider the comments, and then publish the final international
guidelines. On April 3, 2000 the Company filed a motion for declaratory judgment
asking that the District Court declare unconstitutional and inappropriate the
efforts of the United States to reach an international agreement with the other
parties and that it be precluded from seeking to implement such an agreement. On
September 15, 2000, in a decision by the Court it was ruled that the Company's
motion was not ripe for consideration at the present time, and that the Company
may renew its motion when and if an international Agreement is agreed to and
signed by the parties to the Agreement, final guidelines are drafted, and
Congress passes implementing legislation. The Company expects, that whatever the
outcome of this matter, there will be no impact on artifacts its already owns.
The Company was defendant in an action brought by Suarez Corporation Industries
("SCI") in the United States District Court for the Southern District of New
York. Between October 1995 and March 1997, the Company and SCI entered into
various agreements providing for the exploitation of artifacts and other
merchandise and arranging for a cruise and ancillary events including the
financing and sharing of the division of contractual defined profits all with
respect to the 1996 Research and Recovery Expedition of the TITANIC by the
Company. SCI has brought various claims that included co-salvor status, breach
of contract for which SCI is seeking $8,000,000 among other claims. On February
8, 2001, the Company, as defendant, was granted a judgment in its favor as the
lawsuit was not timely filed and was time-barred from consideration. Suarez did
not appeal this judgment within the prescribed time.
On May 10, 2001, the Company received a subpoena duces tecum from the Securities
and Exchange Commission requesting various documents relating to, among other
things, the change in control of the Company that occurred during November 1999;
any solicitations that may have been made without a written proxy statement or a
filing; the purchase of the Company's common stock by certain shareholders; the
accuracy of the Company's financial statements; information about the Company's
accounting procedures and controls; documents about its subsidiaries; and other
information about consulting agreements, communications with certain
individuals, employment of its officers, and other company matters. The Company
has not been notified by the SEC of the purpose and nature of the proceedings
for which the subpoena duces tecum has been served. The Company will comply with
the subpoena. The Company now knows that G. Michael Harris, a former officer and
director, had filed a complaint with the SEC. The basis for this knowledge is a
letter from Mr. Harris' attorney. Mr. Harris' employment with the Company was
terminated because of evidence he misappropriated corporate monies for his own
purposes and a complaint has been made to the appropriate law enforcement
authorities in Pinellas County, Florida.
On September 7, 2000, Mr. G. Michael Harris, a former officer and director of
the Company filed suit in the Circuit Court of the Sixth Judicial Circuit in and
for Pinellas County, Florida, Civil Division. In that suit, Mr. Harris has
alleged that the Company breached an employment agreement entered into between
him and the Company, and that he has been damaged by the breach. The Company has
responded to this Complaint, denying the validity or enforceability of the
employment agreement and setting forth the Company's position that it acted
appropriately and within its rights. Moreover, the Company has filed a
counter-suit against Mr. Harris and others, to recover $84,000 of monies that
12
the Company believes were misappropriated and a complaint has been made to the
appropriate law enforcement authorities in Pinellas County, Florida. The Company
is continuing its investigation of Mr. Harris' conduct while an officer of the
Company. The outcome of these matters is uncertain at the present time and the
effect they may have on the Company's financial position and results of
operations is not currently determinable.
On January 27, 2000, the Company was served with a lawsuit by Oceaneering
International, Inc. for monies purportedly owed under a June 27, 2000 contract
for maritime services in association with the Company's Expedition 2000. The
Company has filed an answer that included a setoff for damages that is sustained
and continues to sustain as a result of Oceaneering's acts and omissions. These
include Oceaneering's failure to provide an appropriate vessel, equipment and
personnel for conducting maritime operations in the North Atlantic for
Expedition 2000. The Company is in the discovery stage of this litigation and
the outcome of this matter at the present time is uncertain.
On May 3, 2001, the Company was served with a lawsuit by Westgate Entertainment
Corporation, a California corporation, and Weyland & Chase Engineering, NV, a
Netherlands Antilles corporation, both under the control of John Joslyn, a
California resident. In that lawsuit, Mr. Joslyn claims a breach of purported
five year, oral, non-cancelable, "pay or play" consulting agreement for $300,000
per year, among other claims. The Company has no written consulting contract
with any Joslyn entity. The Company intends to file a counterclaim. This matter
is in the preliminary stages and the outcome is uncertain at the present time.
ITEM 4. SUBMISSION OF MATTERS OF VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. PRICE RANGE OF SECURITIES
(a) MARKET INFORMATION. The Company's Common Stock is traded on the
over-the-counter market on a limited and sporadic basis. The following table
sets forth the range of high and low bid quotations of the Company's Common
Stock for the periods set forth below, as reported by OTC Bulletin Board of
Nasdaq Trading & Market Services. Such quotations represent inter-dealer
quotations, without adjustment for retail markets, markdowns or commissions, and
do not necessarily represent actual transactions.
FISCAL PERIOD
COMMON STOCK
HIGH LOW
BID BID
2001
1st Quarter 2.825 1.025
2nd Quarter 3.125 1.385
3rd Quarter 1.75 .56
4th Quarter 1.4375 .4125
13
2000
1st Quarter 2.875 1.375
2nd Quarter 2.56 1.72
3rd Quarter 4.375 1.66
4th Quarter 3.8125 2.4375
(b) HOLDERS. The number of holders of record of the Company's Common Stock
as of June 8, 2001 was 1445.
(c) DIVIDENDS. The Company has not paid or declared any dividends upon its
Common Stock since its inception, and intends to re-invest earnings, if any, in
the Company to accelerate its growth. Accordingly, the Company does not
contemplate or anticipate paying any dividends upon its Common Stock in the
future.
ITEM 6. SELECTED FINANCIAL INFORMATION
The selected financial data set forth below is qualified by reference to, and
should be read in conjunction with, the Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Form 10-K. The selected financial data
have been derived from the Company's Financial Statements which have been
audited by independent certified public accountants. The financial statements as
of February 28, 2001, February 29, 2000, and February 28, 1999 and for each of
the three years in the period ended February 28, 2001 is included elsewhere in
this Form 10-K.
YEAR ENDED FEBRUARY 28(29)
1997 1998 1999 2000 2001
Statement of Operations Data:
(In thousands, except per share
and weighted average shares)
Revenue $ 1,247 4,658 9,857 6,433 5,699
Net income (loss) $ 158 3,367 4,063 (21) (21)
Income (loss)
per share (1) $ .01 .21 .25 -0- -0-
Weighted average number of
common shares
outstanding 16,141,950 16,181,868 16,187,128 16,187,128 16,732,991
FEBRUARY 28(29), 1997 1998 1999 2000 2001
Balance Sheet Data:
(In thousands)
Total Assets $ 8,005 10,079 13,910 15,372 15,002
Long Term Obligations -- -- -- -- --
Total Liabilities $ 3,942 2,642 2,410 3,569 2,251
Shareholders' Equity $ 4,063 7,437 11,500 11,803 12,751
14
Selected Quarterly Financial Information (unaudited)
(in thousands, except per share data)
5/31/00 8/31/00 11/30/00 2/28/01
Revenues $ 2,158 $ 2,149 $ 886 $ 506
Expenses 1,642 1,817 1,040 1,312
Net income/(loss) 322 236 (149) (430)
Net income/(loss)
per share .02 .01 (.01) (.02)
5/31/99 8/31/99 11/30/99 2/29/00
Revenues $ 1,312 $ 1,424 $ 1,882 $ 1,815
Expenses 646 778 762 4,381
Net income/(loss) 427 413 473 (1,334)
Net income/(loss)
per share .03 .03 .03 (.09)
The Company has declared no cash dividends.
Basic income (loss) per common share ("EPS") is computed as net income (loss)
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS is not presented since there was no effect of potential
common shares or the dilution effect of such potential common shares is not
material.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides information to assist in the understanding of
the Company's financial condition and results of operations, and should be read
in conjunction with the financial statements and related notes appearing
elsewhere herein.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 2001 AS COMPARED TO YEAR ENDED FEBRUARY 29, 2000
During its fiscal year ended February 28, 2001 ("2001 fiscal year"), Company's
revenues decreased to $5,699,000 from $6,433,000 in the fiscal year ended
February 29, 2000 ("2000 fiscal year"). This decrease of approximately 11% as
compared to the prior fiscal year is primarily as a result of a decrease of
$672,000 in the Company's exhibition and related merchandise sales during its
2001 fiscal year as compared to 2000 fiscal year. The revenue from the Company's
SFX agreement has been renegotiated from the original arrangement as a result of
the parties experience in the first year of operation. The amendments that the
Company has executed more clearly reflect the current realities of the economic
prospects of exhibition of its artifacts. The Company is reviewing the
opportunity to conduct its own exhibitions in the future. At this time, it is
the opinion of management that the present arrangement with SFX is the most
effective way to address the revenue producing opportunities of exhibition of
its artifacts.
In 2001 fiscal year, there was an aggregate decrease from $297,000 to $235,000,
or $62,000, for other revenues as compared to the 2000 fiscal year. Other
revenue includes licensing fees, merchandise, and the sale of coal. Licensing
fees increased during the 2001 fiscal year because of the recent expedition to
the TITANIC wreck site during the summer of 2000. Revenue from merchandise, book
and other activities decreased approximately 73% during the 2001 fiscal year as
compared to the 2000 fiscal year. This decrease resulted primarily from lower
15
revenues derived from merchandising because of the inclusion of such revenue
sources within the amended SFX agreement. The Company's revenue from the sale of
coal increased approximately 14% during the 2001 fiscal year as compared to the
2000 fiscal year. Such coal sales are being made directly from the Company's
offices to Events Management, Inc for exhibitions. The Company's cost of coal
sold increased approximately 33% during the 2001 fiscal year as compared to the
2000 fiscal year as a result of an increase in the volume of coal sales during
these corresponding periods.
With the expedition in the summer of 2000, the Company expended $2,107,000
during the 2001 fiscal year for recovering 900 new artifacts from the TITANIC
wreck site. These costs increased the carrying value of the artifacts. There was
not an expedition to the TITANIC wreck site during the 2000 fiscal year. In
addition, the Company incurred approximately $605,000 of expenses relating to
this expedition. These expenses are not directly related to artifact recovery
operations. Also, the Company incurred $157,000 of expense for a new salvage
project in the Pacific Ocean.
General and administrative expenses of the Company decreased $1,747,000, or
approximately 28%, from $6,154, 000 in 2000 fiscal year to $4,407,000 in the
2001 fiscal year. During the 2000 fiscal year, the Company settled certain
lawsuits, one of which was with former management that included the payment of
$1,671,000. In addition, two other litigation matters were resolved by $392,000
charged to operations during the 2000 fiscal year. During the 2001 fiscal year,
consulting expenses amounted to $892, 000 from $195,000 in the prior year. Legal
expenses declined in the fiscal year 2001 to $944,000 from $1,039,000 in the
prior fiscal year.
Operating expenses of $41,000 were incurred during the 2001 fiscal year for the
Company's SV Explorer, a 178 foot- 1050 ton, ship acquired in June 2000,
exclusive of $204,000 of direct costs for recovery of the artifacts during the
Expedition 2000. There are not comparable costs for the 2000 fiscal year. It is
estimated that the use of the Company's own vessel resulted in substantial
savings during the fifty-three days that this vessel was engaged in that
expedition. The SV Explorer delivered the recovered artifacts to Norfolk,
Virginia at the end of the expedition for eventual delivery to the conservation
facility the Company recently established with Eastern Michigan State
University. SV Explorer is owned by Danepath Ltd, a wholly owned subsidiary of
the Company. The intent of management is to utilize the SV Explorer for its own
salvage and recovery operations when it is not being chartered by other
companies The SV Explorer has recently completed one charter and has two
additional charter commitments with European companies during this summer.
The Company's depreciation and amortization expenses increased to $587,000 from
$303,000, or 94%, during the 2001 fiscal year as compared to the 2000 fiscal
year. This increase is primarily attributed to the amortization of certain
intangibles which the Company acquired in early 2000 for $900,000. These
intangibles are related to prospective salvage opportunities for twelve
shipwrecks throughout the world. These intangibles were exchanged in May 2001
for the ownership rights to the "Carpathia".
During the 2000 fiscal year, the Company incurred a impairment loss on exhibitry
equipment. There was not a similar expense during the 2001 fiscal year. Total
expenses for the fiscal year 2001 decreased to $5,811,000 from $6,567,000, or
12%, which was similar to the decrease in total revenues over the same period.
The Company's loss from operations decreased to $112,000 in the fiscal year 2001
as compared to $134,000 in the fiscal year 2000, a decrease of approximately
16%. Interest income for the 2001 fiscal year amounted to $76,000 as compared to
$113,000 in the prior fiscal year. This decrease is attributed to lower interest
derived from the Company's interest bearing bank account during the recent
fiscal year. During the 2001 fiscal year the Company received other income of
$15,000, thus total other income was $81,000 for this year.
16
The Company's loss before provision for income taxes were $21,000 in the fiscal
year 2001 and the same for the 2000 fiscal year. There was no provision for
income taxes in either fiscal year. Consequently, the net loss for each of these
two fiscal years was $21,000. Basic and diluted earnings per common share were
$-0- for both the 2001 and 2000 fiscal years. The weighted average common shares
outstanding were 16,732,991 and 16, 187,128 for the 2001 and 2000 fiscal years,
respectively.
YEAR ENDED FEBRUARY 29, 2000 AS COMPARED TO YEAR ENDED FEBRUARY 28, 1999
During its fiscal year ended February 29, 2000 (the "2000 fiscal year"), the
Company's revenues decreased to $6,433,000 as compared to $9,857,000 in the
fiscal year ended February 28, 1999 (the "1999 fiscal year"). This decrease of
$3,424,000, or 35%, primarily reflects lower licensing fee income in the 2000
fiscal year. In the 1999 year, licensing fee income benefited from the
production and exploitation of audio and visual recordings for the Company's
expedition to the TITANIC wreck site during the summer of 1998 in the amount of
approximately $3,300,000.
Exhibition and merchandising revenue was $6,136,000 in the 2000 fiscal year as
compared to $5,460,000 in the 1999 fiscal year for an increase of $676,000, or
12%. This increase in revenues was principally attributable to the presentation
of major exhibitions in Atlantic City, St. Paul and Japan, as well as the income
received from Magicworks, a subsidiary of SFX for their licensing agreement
executed during the year.
The Company's merchandise and other revenues, that included the sale of
merchandise, books and royalty payments, decreased to $221,000 from $680,000 in
the prior fiscal year. This decrease of $459,000, or 67% is attributed to
substantially lower sales in each category for the current fiscal year. The sale
of coal recovered from the TITANIC was $59,000 in the current fiscal year
compared to $222,000 in the prior year. This decrease is attributed to the
curtailing of marketing efforts during the recent year as compared to the prior
years marketing emphasis.
General and administrative expenses were $6,154,000 for the 2000 fiscal year as
compared to $1,733,000 in the 1999 fiscal year. This increase of $4,421,000, or
255%, is attributed to $2,230,000 incurred for the settlement with previous
management that was charged to operations including the related legal expenses,
additional legal expenses of $272,000 which were primarily the result of the
legal matters surrounding the change in management, the settlement of two
litigations for $694,000 including legal expenses, a bad debt expense of
$250,000 for the Japan exhibitions, and higher exhibition expenses.
Depreciation and amortization expense for the 2000 fiscal year was $303,000 as
compared to $246,000 in the 1999 fiscal year. This increase of $57,000, or 23%,
is attributed to the impact of depreciation charges for a full year as
depreciation of certain exhibitry in the prior year was only for a part of the
full year.
Expenses for expedition costs were only $11,000 for the 2000 fiscal year as
compared to $1,845,000 in the 1999 fiscal year. During the 1999 fiscal year the
Company undertook the "Summer of 1998 Expedition". There was not an expedition
conducted during the 2000 fiscal year.
There was a loss from operations of $134,000 for the 2000 fiscal year as
compared to income from operations of $5,818,000 in the 1999 fiscal year. The
decrease in income from operations is attributed to the lower revenue for fiscal
year 2000 while the Company incurred higher expenses as detailed above.
17
During the 2000 fiscal year, the Company earned interest income of $113,000 as
compared to $52,000 in the prior year. The Company maintained higher cash
balances during the 2000 fiscal year.
Income (loss) before provision for income taxes was ($21,000) for the 2000
fiscal year as compared to $5,875,000 in the 1999 fiscal year The Company has a
loss of $21,000 for the 2000 fiscal year as compared to net income of $4,063,000
in the 1999 fiscal year. Basic and diluted earnings per common share were $-0-
and $0.25 for the 2000 and 1999 fiscal years, respectively. The weighted average
common shares outstanding were 16,187,128 for both the 2000 and 1999 fiscal
years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $472,000 for the year ended
February 28, 2001 as compared to $2,381,000 in the 2000 fiscal year. This
decrease in cash provided by operating activities for this fiscal year is
primarily attributed to the reduction in accounts payable and accrued expenses
of $1,948,000 during the year.
For the year ended February 28, 2001, cash used in investing activities was
$2,883,000 of which $2,107,000 was expended for artifact recovery as the Company
conducted an expedition to the TITANIC wreck site during the summer of 2000 and
the purchase of property and equipment for $776,000. The property and equipment
purchases include $529,000 for the ship, SV Explorer, and related marine
equipment, $128,000 for office equipment, and $119,000 for furniture and
fixtures.
During late July 2000, the Company borrowed $250,000 from a financing source to
provide for its short term needs that was to be repaid from income tax refunds
anticipated from the federal government. In September 2000, this loan was repaid
with interest.
The Company's net working capital (deficiency) and stockholders' equity were
$(854,000) and $12,751,000 at February 28, 2001 as compared to $1,080,000 and
$11,803,000 at February 29, 2000. The Company's current ratio was .6 at February
28, 2001 as compared to 1.3 at February 29, 2000. The present working capital
situation is attributed the investment that management has made to provide for
new sources of revenue. These include the utilization of our ship, the SV
Explorer, for both ship charter engagements, and thereby reduce expenses
relating to using this vessel for our own salvage and recovery operations. These
operations will be conducted within the Company's wholly owned United Kingdom
subsidiary, Danepath Limited. Management expects future income to offset costs
of its internally planned operations.
Management plans to continue the exploration of the TITANIC and an expedition is
planned for the summer of 2002 to recover artifacts. With this business strategy
and the development of its Danepath operations, management believes it is
focusing on the key elements necessary for the Company to be both profitable and
successful over the long-term.
Management expects that it will be able to arrange for the financial resources,
including licensing arrangements, to properly execute its strategic plan,
although no assurances can be given that it will be successful in such
endeavors.
The Company has sufficient working capital to meet its planned needs for the
next twelve months without any significant additional funding. The exhibition
tour agreement with a subsidiary of SFX Entertainment, Inc., as amended,
requires a minimum of $2,000,000 annually for the grant of exhibition rights for
a one-year period commencing November 14, 2001. On May 7, 2001 the second
amendment to the Exhibition Tour Agreement was executed between SFX and the
Company.
18
In order to protect its salvor-in-possession status and to prevent third-parties
from salvaging the TITANIC wreck and wreck site, or interfering with the
Company's rights and ability to salvage the wreck and wreck site, the Company
may have to commence judicial proceedings against third-parties. Such
proceedings could be expensive and time-consuming. Additionally, the Company, in
order to maintain its salvor-in-possession status, needs to, among other things,
maintain a reasonable presence at the wreck through periodic expeditions. The
Company will be required to incur the costs for future expeditions to maintain
its salvor-in-possession status. The Company plans to conduct a dive in the
summer of 2002. The Company's ability to undertake future expeditions may be
dependent upon the availability of financing from the grant of licenses to
produce television programming and/or the grant of expedition sponsorship
rights. No assurances can be given that such financing will be available on
satisfactory terms.
In connection with its activities outside of the United States, the Company is
exposed to the risk of currency fluctuations between the United States dollar
and certain foreign currency. If the value of the United States dollar increases
in relation to the foreign currency, the Company's potential revenues from
exhibition and merchandising activities outside of the United States will be
adversely affected. During the fiscal year ended February 28, 2001, there were
fluctuations in the exchange rates with respect to foreign currencies in which
the Company transacts business that resulted in the Company realizing a foreign
currency translation loss of $31,000. Future losses may be realized as the
Company develops its Danepath business operation. Although the Company's
financial arrangements with its foreign vendors and exhibition organizers have
been based upon foreign currencies, the Company has sought and will continue to
seek to base its financial commitments and understandings upon the United States
Dollar in its material business transactions so as to minimize the adverse
potential effect of currency fluctuations.
ITEM 8. FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report F-1
Consolidated Balance Sheet at February 29, 2000
and February 28,2001 F-2
Consolidated Statement of Operations and Comprehensive
Operations for the years ended
February 28 (29), 1999, 2000 and 2001 F-3
Consolidated Statement of Stockholders' Equity for the years ended
February 28(29), 1999, 2000 and 2001 F-4
Consolidated Statement of Cash Flows for the years ended
February 28(29), 1999, 2000 and 2001 F-5
Notes to Consolidated Financial Statements F-7
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. MANAGEMENT
OFFICERS AND DIRECTORS
The directors, executive officers, and significant employees of the Company are:
Name Age Position
- ---- --- --------
Arnie Geller 60 President, Chief Executive Officer, Director
Gerald Couture 55 Vice President, Secretary, Director and
Chief Financial Officer
Nick N. Cretan 66 Director
Doug Banker 49 Director
Arnie Geller serves as President and as a director of the Company from his
reappointment in November 1999 as an officer of the Company. Previously he
served as President from May 1993 to May 1995, and has served as a director of
the Company since May 26,1999. Prior to 1993, Mr. Geller had principally been
engaged in various executive capacities in the record industry for approximately
27 years. Mr. Geller was a self-employed corporate consultant prior to his
appointment as President of the Company.
Gerald Couture serves as Vice President- Finance, Chief Financial Officer and
director of the Company since April 2000. Mr. Couture is a partner and
principal, in Couture & Company, Inc., a private corporate financial consulting
firm formed in 1973. Over the last twenty-five years, Mr. Couture has, through
his consulting firm, been involved in public offerings, mergers and
acquisitions, venture capital investing, crisis management, reorganizations and
the financial management a number of growth enterprises. Mr. Couture is a
director and officer of Thermacell Technologies, Inc. and Alpha Resources, Inc.,
both registered reporting entities. Mr. Couture has a MBA from Temple
University, Philadelphia, and a B.S. in Chemical Engineering from the University
of Massachusetts.
Nick Cretan has served as a Director of the Company since April 2000. Mr. Cretan
has more than thirty years of management experience including his present
position as Chief Operating Officer of the non-profit Maritime Association of
the Port of New York and New Jersey. He also serves as President of Friends of
the Statue of Liberty, Ellis Island Foundation, President of Friends of Gateway
National Parks Foundation and as Executive Director of the American Merchant
Marine Memorial Foundation. Previously he served as Deputy Director of the San
Francisco Marine Exchange and staff assistant at the National Federation of
Independent Business.
Doug Banker has served as a Director of the Company since August 2000. Mr.
Banker has more than twenty-five years experience in the entertainment industry
that includes providing management services to musicians and recording artists;
marketing, merchandising, licensing, and sales of music media products; the
development and management of concerts and similar events. Mr. Banker is the
20
manager and principal stockholder in Skillet Records, LLC, an independent record
label business that provides national distribution for music artists. Mr. Banker
also has authored several significant software programs that have achieved
commercial success and which he has been involved with the management of the
enterprises created for their commercialization. Mr. Banker was President of the
Board of the Motor City Music Foundation in Detroit, Michigan from 1996 to 2000.
No family relationship exists between or among any of the members of the board
of directors and executive officers of the Company. Except as disclosed above,
none of the nominees are directors of any other company having a class of equity
securities registered under or required to file periodic reports pursuant to the
Securities Exchange Act of 1934, as amended, or any company registered as an
investment company under the Investment Company Act of 1940, as amended.
The Board of Directors held eleven meetings during the fiscal year ended
February 28, 2001, At the present time, the Company has no nominating,
executive, or compensation committees. The full board presently functions as the
audit committee.
21
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation paid to the
executive officers of the Company for the fiscal years ended February 28, 1999,
February 29, 2000 and February 28, 2001.
Long-Term
Compensation
-------------
Common
Name Other Shares
and Year Annual Subject to
Principal Ended February Compen- Options
Position 28th(29th) Salary sation Granted
- ---------------------- --------------- ------ ------------- ----------
Former
Officers:
George Tulloch(1)
Former President and Chief
Financial Officer 2001 -0- $3,270 -0-
2000 $210,000 -0- 500,000
1999 $120,000 -0- -0-
Allan Carlin(1)
Former Secretary and General
Counsel 2001 $ 48,000 $8,911 -0-
2000 $220,000 -0- -0-
1999 $215,000 -0- 500,000
G. Michael Harris (2)
Former Vice President and Chief
Operating Officer 2001 $325,000 $ 710 -0-
2000 $79,200 -0- -0-
1999 -0- -0- -0-
Current Officers:
Arnie Geller(3) (4)
President and Chief
Executive Officer 2001 $292,220 $22,759 875,000
2000 $79,200 -0- -0-
1999 -0- -0- -0-
Gerald Couture(5)
Vice President Finance
Chief Financial Officer 2001 $ 100,769 $ 5,905 375,000
2000 -0- -0- -0-
1999 -0- -0- -0-
22
(1) Messrs Tulloch and Carlin served as directors and officers of the Company
until November 26, 1999. See "LEGAL PROCEEDINGS." The above table excludes
settlement payments made to Messrs. Tulloch and Carlin. See LEGAL
PROCEEDINGS- Legal Action by Former Officers and Directors
(2) Mr. Harris was appointed Executive Vice President and Chief Operating
Officer of the Company on November 26, 1999. Mr. Harris was elected a
director on August 9, 1999. Mr. Harris' employment was terminated on August
27, 2000 and he was removed from the Board of Directors on September 12,
2000. During the year, Mr. Harris was issued a stock option which was
cancelled at the time of this termination. See "LEGAL PROCEEDINGS."
(3) Mr. Geller was appointed President and Chief Executive Officer of the
Company on November 26, 1999. Mr. Geller was elected a director on August
9, 1999 The Employment Agreement between the Company and Mr. Geller
provides for an annual base salary of $300,000. At Mr. Geller's option, he
may elect to receive his compensation in shares of the Company's common
stock. For this purpose, the common stock will be valued at 50% of its
closing bid price as of the date of the election. Mr. Geller has been
granted a stock option to purchase 500,000 shares of the Company's common
stock at a price of $1.75 per share which was the closing price of the
stock on June 28, 2000. Mr. Geller has also been granted a stock option to
purchase 375,000 shares of the Company's common stock at a price of $1.15
per share which was the closing price of the stock on January 26, 2001.
Both these options expire in ten years.
(4) In February 2000, the Company paid accrued salary to Mr. Geller of $400,000
for the period May 1993 to May 1995, during which time Mr. Geller served as
President.
(5) On April 25, 2000, the Company engaged Mr. Couture as its Chief Financial
Officer. The Employment Agreement between the Company and Mr. Couture
provides for an annual base salary of $120,000. At Mr. Couture's option, he
may elect to receive his compensation in shares of the Company's common
stock. For this purpose, the common stock will be valued at 50% of its
closing bid price as of the date of the election. Mr. Couture has also been
granted a stock option to purchase 300,000 shares of the Company's common
stock at a price of $1.625 per share, which was the closing price of the
stock on April 24, 2000. In addition, Mr. Couture was granted a option to
acquire 75,000 shares of common stock at a price of $1.15 which was the
closing price of the common stock on January 26, 2001. Both these options
expire in ten years.
Option Exercises and Holdings
Stock options granted to Mr. Tulloch during the fiscal year ended February 29,
2000 consist of options to purchase 500,000 shares of the Company's common stock
at an exercise price of $2.00 with an expiration of May 26, 2004.
No executive officer of the Company exercised any stock options during the
fiscal year ended February 28, 2001.
Compensation of Directors
The Company presently compensates all directors by issuing 25,000 shares of
common stock for appointment as a director and subsequently, options to purchase
common stock of the Company for each year of service. On January 27, 2000 each
director was granted an option to purchase 75,000 shares of the common stock of
23
the Company at an exercise price of $1.15 which was the closing price of the
Company's common stock as of January 26, 2001. The purpose of this grant of
options and shares of common stock was to align the interests of the directors
with that of the Company's shareholders.
ITEM. 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table enumerates, as of June 12, 2001, the name, address,
and ownership, both by numerical holding and percentage of interest, of each
beneficial owner or more than five percent (5%) of the Company's outstanding
Common Stock, the directors of the Company, individually, and its directors and
executive officers as a group.
Amount
Name and Address of Beneficially Common Stock
Beneficial Owner Class Owned Percentage
- ------------------- ----- ----- ----------
Joe Marsh (1) Common 3,327,363 19.0
605 Southside Drive
Akron, Ohio 44317
William S. Gasparrini Common 2,328,937 13.5
23 Oak Street
Greenwich, CT06831
Arnie Geller (2)
c/o RMS Titanic, Inc. Common 1,475,000 8.7
3340 Peachtree Road, N.E, Suite 1225.
Atlanta, GA 30326
Lawrence A. D'Addario Common 923,566 6.0
3 Pray Trust #2
Box 78
Quechee, VT 05059
Nick Cretan (3) Common 100,000 --
Suite 913
17 Battery Place
New York, NY 10004
Stephen Sybesma Common 1,000,000 5.6
9658 Springstone Rd.
McCordsville, IN 46005
Gerald Couture (4) Common 375,000 2.2
901 Chestnut Street, Suite A
Clearwater, FL 33767
Doug Banker (5) Common 136,000 --
6508 Crane Road
Ypsilanti, MI 48197
All Officers and Directors as a Group Common 2,050,000 12.1
(4 persons)
24
(1) Includes Mr. Marsh's latest Form 4 filing and the recent issuance by the
Company of 25,000 shares of common stock for re-imbursement of indemnified
expenses.
(2) Common stock held as tenancy by the entireties with his wife. Excludes
options to purchase 875,000 shares of common stock.
(3) Includes options to purchase 75,000 shares of common stock.
(4) Includes options to purchase 375,000 shares of common stock; 375,000.
(5) Includes options to purchase 75,000 shares of common stock.
Other than as set forth above, the Company is not aware of any other
stockholders who beneficially own, individually or as a group, 5% or more of the
outstanding shares of Common Stock.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
the Company's outstanding shares of Common Stock, to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock. Such persons are required by SEC
regulation to furnish the Company with copies of all such reports that they
file.
At the present time, two officers who are also on the Board of Directors, and
the two other directors have not filed their Forms 3 and 4 for the fiscal year
ended February 28, 2001. The Company is aware of one beneficial owner of more
than 10% of the Company's Common Stock who has not filed a report as required by
Section 16 of the Securities Exchange Act of 1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended February 28, 2001, the Company entered into an
amended agreement with a subsidiary of SFX Entertainment, Inc., pursuant to
which, among other things, the Company licensed to SFX the worldwide rights to
exhibit the Company's TITANIC artifacts for fourteen and one-half months,
commencing September 15, 2000 (the "License Agreement").
On January 27, 2001, the Company entered into an agreement with International
Institute of Oceanographic Exploration, LLC ("IIOE"), a British Virgin Islands
company, to co-venture to search, identify and salvage shipwrecks located in
certain territorial waters in the Pacific Ocean. The president of the Company
holds an equity interest in this company. IIOE has an agreement with a
governmental agency to conduct marine survey operations that includes searching
for and recovering shipwrecks and their contents. The Company agreed to finance
a marine survey operation utilizing its personnel. The Company's financial
commitment is for a maximum of $250,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
The following documents are filed as part of this Report on Form 10-K:
(a) Financial Statements. The following financial statements of the Company are
included in this Annual Report:
Independent Auditor's Report F-1
Consolidated Balance Sheet at February 29, 2000
and February 28, 2001 F-2
25
Consolidated Statement of Operations
and Comprehensive Operations for the years ended
February 28(29), 1999, 2000 and 2001 F-3
Consolidated Statement of Stockholders' Equity
for the years ended February 28(29), 1999, 2000 and 2001 F-4
Consolidated Statement of Cash Flows for the years ended
February 28(29), 1999, 2000 and 2001 F-5
Notes to Financial Statements F-7
(b) Reports on Form 8-K
1. Form 8-K filed on September 7, 2000 containing termination of employment
of G. Michael Harris as Executive Vice President and Chief Operating
Officer.
2. Form 8-K filed on September 14, 2000 containing the change of by-laws to
remove a director for cause and the removal of G. Michael Harris as a
director.
(c) Exhibits.
3.1 Articles of Incorporation, as amended.
4.1 First Amendment to By-Laws of the Registrant.
4.2 Second Amendment to By-Laws of the Registrant.
9.1 Voting Trust Agreement among Titanic Ventures Limited Partnership,
George Tulloch, Allan H. Carlin, Arnie Geller, G. Michael Harris, Kurt
Hothorn, Cheryl Hothorn, Westgate Entertainment Corp., Anne A. Hill,
Diane Carlin, Shirley A. Hill, James A. Hill, and D. Michael Harris.
10.1.1 Lease Agreement between the Company and 17 Battery Place North
Associates.
10.1.2 Lease Agreement between the Company and Tower Park Place
10.2 Agreement dated April 15, 1996 between the Company and CRE-CO Finanz
GmbH.
10.3 Pledge Agreement dated April 15, 1996 between the Company and CRE-CO
Finanz GmbH.(5)
10.4 Bailment Agreement dated April 15, 1996 between the Company and CRE-CO
Finanz GmbH.
10.5 1996 Charter Agreement with IFREMER.
10.6 Agreement dated August 8, 1996 between the Company and the City of
Memphis.
10.7 Agreement dated July 22, 1996 between Discovery Communications, Inc.,
Ellipse Programme and the Company (omitted and filed separately as
confidential information).
26
10.8 Agreement dated May 23, 1997 between the Company and RMS Foundation,
Inc.
10.9 Amendment to Agreement dated April 15, 1997 between the Company and
CRE-CO Finanz GmbH.
10.10 Agreement between the registrant and Resource Plus and Event Management
International None dated April 24, 1998.
10.11 Agreement between the registrant and TITANIC Exhibition Japan Inc. dated
May 17, 1998.
10.12 Agreement between the registrant and CRE-CO Finanz dated April 15, 1998.
10.13 1998 Charter Agreement with IFREMER.
10.14 1998 Charter Agreement with Oceaneering International, Inc.
10.15 Agreement dated July 15, 1998 between Discovery Communications and the
Company.
10.16 1998 Charter Agreement with Aqua Plus.
10.17 1998 Charter Agreement with Les Abeilles International, Travocean and
the Company.
10.18 Amendment to Agreement dated August 4, 1998 between the Company and
CRE-CO Finanz GmbH.
10.19 Agreement dated September 25, 1998 between the Company and Media Rare,
Inc.
10.20 Promissory Note dated January 5, 1999 executed by George Tulloch in
favor of the registrant.
10.21 Pledge Agreement dated January 5, 1999 between George Tulloch and the
registrant.
10.22.1 Exhibition Tour Agreement dated March 31, 1999 between the Company and
Magicworks Entertainment Inc. is incorporated by reference to the
Company's report on Form 10-Q for the fiscal quarter ended May 31, 1999.
10.22.2 Agreement dated April 18, 2000 by and among Whitestar Marine Recover,
Ltd. Argosy International, ltd. Graham Jessop and the Company.
10.22.3 Agreement dated April 18, 2000 by and among the Company, Argosy
International, Inc. and Graham Jessop.
10.23 Lease dated March 27, 2000 for offices in Atlanta, Georgia.
10.23.1 Employment Agreement dated April 25, 2000 between the Company and Gerald
Couture.
10.23.2 Stock Option Agreement dated April 25, 2000 between the Company and
Gerald Couture.
27
10.23.3 Employment Agreement dated June 29, 2000 between the Company and Arnie
Geller is incorporated by reference to the Company's report on Form 10-Q
for the fiscal quarter ended August 31, 2000.
10.23.4 Stock Option Agreement dated June 29, 2000 between the Company and Arnie
Geller is incorporated by reference to the Company's report on Form 10-Q
for the fiscal quarter ended August 31, 2000.
10.23.5 Employment Agreement dated June 29, 2000 between the Company and G.
Michael Harris is incorporated by reference to the Company's report on
Form 10-Q for the fiscal quarter ended August 31, 2000..
10.23.6 Stock Option Agreement dated June 29, 2000 between the Company and G.
Michael Harris is incorporated by reference to the Company's report on
Form 10-Q for the fiscal quarter ended August 31, 2000.
10.24 The Company's 2000 Stock Option Plan.
10.30 Exhibition Agreement dated April 5, 1999 between the Company and Adamar
New Jersey, Inc. is incorporated by reference to the Company's report on
Form 10-Q for the fiscal quarter ended May 31, 1999.
10.31 Amendment to Exhibition Tour Agreement, dated September 18, 2000,
between the Company and SFX Family Entertainment Inc.
10.32 Second Amendment to Exhibition Tour Agreement, dated May 7, 2001 between
the Company and SFX Family Entertainment Inc. is incorporated by
reference to the Company's report on Form 10-Q for fiscal quarter ended
August 31, 2000.
10.33 Agreement dated December 1, 2000 between International Institute of
Oceanographic Exploration, LLC and the Company.
10.34 Reserved
10.35 Reserved
99 Additional Exhibits
Subsidiaries of RMS TITANIC
28
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the Registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RMS TITANIC, INC.
June 15, 2001 By: /s/ Arnie Geller
---------------------------------------
Arnie Geller, President and Chief
Executive Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the date indicated:
/s/ Arnie Geller June 15, 2001
- -----------------------------
Arnie Geller, President.
Chief Executive Officer, Director
/s/ Gerald Couture June 15, 2001
- -----------------------------
Gerald Couture, Vice President, Chief
Financial Officer, Secretary,
Director
/s/ Nick Cretan June 15, 2001
- -----------------------------
Nick Cretan, Director
/s/ Doug Banker June 15, 2001
- -----------------------------
Doug Banker, Director
29
RMS TITANIC, INC.
FINANCIAL STATEMENTS
FEBRUARY 28, 2001
RMS TITANIC, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Independent Auditor's Report F-1
Consolidated Financial Statements:
Consolidated Balance Sheet at February 29, 2000 and February 28, 2001 F-2
Consolidated Statement of Operations and Comprehensive Operations for the
Years Ended February 28, 1999, February 29, 2000 and February 28, 2001 F-3
Consolidated Statement of Stockholders' Equity for the Years Ended
February 28, 1999, February 29, 2000 and February 28, 2001 F-4
Consolidated Statement of Cash Flows for the Years Ended February 28, 1999,
February 29, 2000 and February 28, 2001 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-21
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
RMS Titanic, Inc.
We have audited the accompanying consolidated balance sheets of RMS Titanic,
Inc. and Subsidiaries as of February 28, 2001 and February 29, 2000, and the
related statements of operations and comprehensive operations, stockholders'
equity, and cash flows for each of the three years in the period ended February
28, 2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
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 audit 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RMS Titanic, Inc.
and Subsidiaries as of February 28, 2001 and February 29, 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended February 28, 2001, in conformity with accounting principles
generally accepted in the United States of America.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
June 4, 2001
F-1
RMS TITANIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------
February 29, February 28,
2000 2001
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,065,000 $ 623,000
Accounts receivable 371,000 36,000
Prepaid and refundable taxes 1,163,000 585,000
Prepaid expenses and other current assets 50,000 153,000
- -------------------------------------------------------------------------------------------------------------
Total current assets 4,649,000 1,397,000
Artifacts Recovered, at cost 9,175,000 11,282,000
Deferred Income Tax Asset 634,000 303,000
Property and Equipment, net of accumulated depreciation
of $622,000 and $936,000, respectively 866,000 1,328,000
Other Assets 48,000 692,000
- -------------------------------------------------------------------------------------------------------------
Total Assets $ 15,372,000 $ 15,002,000
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 2,886,000 $ 938,000
Deferred income tax liability 79,000 72,000
Deferred revenue 604,000 1,241,000
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 3,569,000 2,251,000
- -------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Common stock - $.0001 par value; authorized 30,000,000 shares,
issued and outstanding 16,187,128 and 16,947,928 shares, respectively 2,000 2,000
Additional paid-in capital 14,240,000 15,240,000
Accumulated other comprehensive operations - (31,000)
Accumulated deficit (2,439,000) (2,460,000)
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity 11,803,000 12,751,000
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 15,372,000 $ 15,002,000
=============================================================================================================
See Notes to Financial Statements
F-2
RMS TITANIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE OPERATIONS
- -------------------------------------------------------------------------------------------------------------
February 28, February 29, February 28,
Year ended 1999 2000 2001
- -------------------------------------------------------------------------------------------------------------
Revenue:
Exhibitions and related merchandise sales $ 5,460,000 $ 6,136,000 $ 5,464,000
Licensing fees 3,495,000 17,000 108,000
Merchandise and other 680,000 221,000 60,000
Sale of coal 222,000 59,000 67,000
- -------------------------------------------------------------------------------------------------------------
Total revenue 9,857,000 6,433,000 5,699,000
- -------------------------------------------------------------------------------------------------------------
Expenses:
General and administrative 1,733,000 6,154,000 4,407,000
Depreciation and amortization 246,000 303,000 587,000
Expedition costs attributable to licensing fees 1,845,000 11,000 763,000
Cost of merchandise sold 46,000 18,000 5,000
Cost of coal sold 19,000 6,000 8,000
Operating costs - - 41,000
Impairment loss on exhibitry equipment 150,000 75,000 -
- -------------------------------------------------------------------------------------------------------------
Total expenses 4,039,000 6,567,000 5,811,000
- -------------------------------------------------------------------------------------------------------------
Income (loss) from operations 5,818,000 (134,000) (112,000)
Other income:
Interest 52,000 113,000 76,000
Other 5,000 - 15,000
- -------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes 5,875,000 (21,000) (21,000)
Provision for income taxes 1,812,000 - -
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,063,000 $ (21,000) $ (21,000)
=============================================================================================================
Earnings per common share, basic and diluted $ .25 $ -0- $ -0-
=============================================================================================================
Weighted-average number of
common shares outstanding 16,187,128 16,187,128 16,732,991
=============================================================================================================
Net income (loss) $ 4,063,000 $ (21,000) $ (21,000)
Other comprehensive operations:
Foreign currency translation - - (31,000)
- -------------------------------------------------------------------------------------------------------------
Comprehensive net income (loss) $ 4,063,000 $ (21,000) $ (52,000)
=============================================================================================================
See Notes to Financial Statements
F-3
RMS TITANIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------
Years ended February 28, 1999, February 29, 2000 and February 28, 2001
- --------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
Number Paid-in Comprehensive Accumulated Stockholders'
of Shares Amount Capital Operation Deficit Equity
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of March 1, 1998 16,187,128 $2,000 $13,916,000 - $(6,481,000) $ 7,437,000
Net income - - - - 4,063,000 4,063,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of February 28, 1999 16,187,128 2,000 13,916,000 - (2,418,000) 11,500,000
Issuance of compensatory stock options - - 133,000 - - 133,000
Common stock to be issued in settlement
of litigation - - 191,000 - - 191,000
Net loss - - - - (21,000) (21,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of February 29, 2000 16,187,128 2,000 14,240,000 - (2,439,000) 11,803,000
Common stock issued for acquisition of
intangibles 600,000 - 900,000 - - 900,000
Issuance of common stock in settlement
of litigation as of February 29, 2000 100,000 - - - - -
Issuance of common stock for services 60,000 - 100,000 - - 100,000
Foreign currency translation adjustment - - - $(31,000) - (31,000)
Net loss - - - - (21,000) (21,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of February 28, 2001 16,947,128 $2,000 $15,240,000 $(31,000) $(2,460,000) $12,751,000
===========================================================================================================================
See Notes to Financial Statements
F-4
RMS TITANIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
February 28, February 29, February 28,
Year ended 1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 4,063,000 $ (21,000) $ (21,000)
- -----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 246,000 303,000 599,000
Impairment loss on exhibitry equipment 150,000 75,000 -
Amortization of deferred revenue (15,000) 104,000 -
Noncash settlements - 191,000 -
Noncash exhibition revenue (750,000) - -
Issuance of common stock for services - - 100,000
Issuance of compensatory stock options - 133,000 -
Net deferred income tax benefit (expense) (509,000) (46,000) 324,000
Other (57,000) (3,000) -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,005,000) 1,274,000 335,000
(Increase) decrease in prepaid and refundable taxes (383,000) (734,000) 578,000
Decrease (increase) in prepaid expenses and other current assets (179,000) 129,000 (103,000)
Decrease in other assets - - (29,000)
Increase (decrease) in income taxes payable (144,000) - -
Increase in deferred revenue 500,000 - 637,000
Increase (decrease) in accounts payable and accrued liabilities (573,000) 976,000 (1,948,000)
- -----------------------------------------------------------------------------------------------------------------------
Total adjustments (2,719,000) 2,402,000 493,000
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,344,000 2,381,000 472,000
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Artifact recovery costs (1,500,000) - (2,107,000)
Purchases of property and equipment (124,000) (36,000) (776,000)
- -----------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (1,624,000) (36,000) (2,883,000)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from debt - - 250,000
Repayment of debt - - (250,000)
- -----------------------------------------------------------------------------------------------------------------------
Cash used in financing activities - - -
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - (31,000)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (280,000) 2,345,000 (2,442,000)
Cash and cash equivalents at beginning of year 1,000,000 720,000 3,065,000
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 720,000 $ 3,065,000 $ 623,000
=======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 2,355,000 $ 1,207,000 $ -0-
=======================================================================================================================
(continued)
See Notes to Financial Statements
F-5
RMS TITANIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
February 28, February 29, February 28,
Year ended 1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash financing and
investing activities:
Property and equipment acquired in settlement of certain
exhibition obligations $ 750,000 $ - 0 - $ - 0 -
=======================================================================================================================
Noncash purchases of property and equipment $ 77,000 $ - 0 - $ - 0 -
=======================================================================================================================
Issuance of compensatory stock options $ - 0 - $ 133,000 $ - 0 -
=======================================================================================================================
Common stock to be issued in settlement litigation $ - 0 - $ 191,000 $ - 0 -
=======================================================================================================================
Common stock issued for intangible assets $ - 0 - $ - 0 - $ 900,000
=======================================================================================================================
See Notes to Financial Statements
F-6
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
RMS Titanic, Inc. initially conducted business as Titanic Ventures Limited
Partnership ("TVLP"). In 1993, RMS Titanic, Inc. acquired all of TVLP's assets
and assumed all of TVLP's liabilities. The transaction was accounted for as a
"reverse acquisition" with TVLP deemed to be the acquiring entity. RMS Titanic,
Inc. and TVLP are referred to as the "Company" as the context dictates.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
The Company was formed in 1987 for the purposes of exploring the wreck and
surrounding oceanic area of the vessel the RMS Titanic (the "Titanic");
obtaining oceanic material and scientific data available therefrom in various
forms, including still and moving photography and artifacts ("Artifacts") from
the wreck site; and utilizing such data and Artifacts in revenue-producing
activities such as touring exhibitions, television programs and the sale of
still photography. The Company also earns revenue from the sale of coal and
Titanic-related products.
The Company was declared salvor-in-possession of the Titanic, the sole and
exclusive owner of any items recovered from the Titanic and, so long as the
Company is salvor-in-possession, the sole and exclusive owner of items recovered
from the Titanic in the future, pursuant to a judgment entered in the Federal
District Court for the Eastern District of Virginia.
Since August 1987, the Company has completed six expeditions and dives to the
wreck of the Titanic and has recovered over 6,000 artifacts, a section of the
Titanic's hull and coal used on the Titanic.
Artifacts recovered from the Titanic are carried at the lower of cost of
recovery or net realizable value ("NRV"). The costs of recovery are the direct
costs of chartering of vessels and related crews and equipment required to
complete the dive operations. Costs associated with the care, management and
preservation of recovered Artifacts are expensed as incurred. A majority of the
Artifacts are located outside the United States.
To ascertain that the aggregate NRV of the Artifacts exceeds the direct costs of
recovery of such Artifacts, the Company evaluates various evidential matter.
Such evidential matter includes documented sales and offerings of
Titanic-related memorabilia by auction houses and private dealers, an appraisal
of certain Artifacts, insurance coverage obtained in connection with the
potential theft, damage or destruction of all or part of the Artifacts and other
evidential matter regarding the public interest in the Titanic.
Under the 1998 Charter Agreement with the Institute of France for the Research
and Exploitation of the Sea ("IFREMER"), the Company is contractually restricted
from selling certain Artifacts except to an entity that will make them available
for exhibition to the public, as defined.
At each balance sheet date, the Company evaluates the period of amortization of
intangible assets. The factors used in evaluating the period of amortization
include: (i) current operating results, (ii) projected future operating results,
and (ii) other material factors that affect the continuity of the business.
F-7
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.
The Company maintains cash in bank accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses on these
accounts.
Revenue from the licensing of the production and exploitation of audio and
visual recordings by third parties, related to the Company's expeditions, is
recognized at the time that the expedition and dive take place.
Revenue from the licensing of still photographs and video is recognized at the
time the rights are granted to the licensee.
Revenue from the granting of sponsorship rights related to the Company's
expeditions and dives is recognized at the completion of the expedition.
Revenue sharing from the sale of Titanic-related products by third parties is
recognized when the item is sold.
Revenue from license agreements is recognized pro-rata over the life of the
agreements. Amounts received in excess of amounts earned are shown as deferred
revenue.
Coal recovered from the Titanic is being offered for sale by the Company.
Revenue from sales of such coal is recognized at the date of shipment to
customers. Recovery costs attributable to the coal are charged to operations as
revenue from coal sales are recognized.
Income tax expense includes income taxes currently payable and deferred taxes
arising from temporary differences between financial reporting and income tax
bases of assets and liabilities. They are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Depreciation of property and equipment is provided for by the straight-line
method over the estimated lives of the related assets.
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has elected to account for its stock-based compensation plans using the
intrinsic value method prescribed by Accounting Procedures Bulletin ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and to present pro
forma earnings (loss) and per share information as though it had adopted SFAS
No. 123. Under the provisions of APB Opinion No. 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Basic earnings per common share ("EPS") is computed as net earnings divided by
the weighted-average number of common shares outstanding for the period. Diluted
EPS, representing the potential dilution that would occur from common shares
issuable through stock-based compensation, including stock options, restricted
F-8
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
stock awards, warrants and other, is not presented for the years ended February
28, 1999, February 29, 2000 and February 28, 2001 since there was no dilutive
effect of potential common shares or the dilutive effect is not material.
The Company does not believe that any recently issued, but not yet effective,
accounting standards will have a material effect on the Company's financial
position, results of operations or cash flows.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts in the financial statements. Actual results could differ
from those estimates.
All amounts in the accompanying financial statements have been rounded to the
nearest thousand dollar.
2. CORPORATE GOVERNANCE, DIRECTORS, OFFICERS AND OTHER MATTERS:
On November 26, 1999, two of the then six members of the Company's board of
directors, Mr. Geller and Mr. Harris, acting via an action by written consent of
the holders of a majority of voting rights of the Company's common stock, in
lieu of a meeting, removed Messrs. Tulloch, Hothorn, Nargeolet and Carlin as
directors of the Company and subsequently Messrs. Tulloch and Carlin as
officers.
The removed officers and directors brought an action in the United States
District Court for Connecticut against Messrs. Geller and Harris and others
seeking to obtain a judicial reversal of their removal from office. Because of
the uncertainty as to the individuals who could conduct business on behalf of
the Company during the time from November 26, 1999 to the resolution of the
dispute, the Company's bank stopped honoring checks and froze all funds on
deposit. In addition, a creditor notified the Company that it would not tender a
$2,000,000 payment otherwise due and payable until the dispute among current and
former directors was resolved or settled.
The legal action was resolved on or about January 21, 2000 with a Settlement
Agreement whereby the Company agreed, among other things, to: (a) pay to Messrs.
Tulloch and Carlin an aggregate amount of $2,500,000 in three equal installments
to be completed within six months of the date of the settlement; (b) allow
Messrs. Tulloch and Carlin to submit documented requests for reimbursement of
previously unreimbursed business expenses; (c) review/revise payment information
submitted to the Internal Revenue Service with respect to the nature of payments
previously made to Mr. Carlin; (d) give Messrs. Tulloch and Carlin the authority
to exercise previously issued options to acquire an aggregate of 1,000,000
shares of the Company's common stock and to cause the Company to file a
Registration Statement with respect to the options and underlying shares of
common stock; (e) indemnify the former officers and directors who participate in
the Settlement Agreement to the full extent of applicable law and to the extent
of officers' and directors' liability under the existing Company policy; and (f)
reimburse Messrs. Tulloch and Carlin for the costs of health insurance for a
period of 18 months.
F-9
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Messrs. Tulloch and Carlin agreed, among other things, to: (a) accept the
$2,500,000 as full monetary payment (with the exception of previously noted
unreimbursed business expenses) for any claims against the Company, Messrs.
Geller and Harris and others in connection with this action and amounts
otherwise due them in connection with their roles as officers and directors of
the Company; (b) send appropriate letters to the Company's bank and
aforementioned creditor to "unfreeze" corporate funds and to allow operational
cash flow to resume; (c) enter into an 18-month standstill agreement which
precludes them from interfering in Company management without the prior approval
of the board of directors and shareholders; (d) discontinue their efforts to
have the Titanic determined to be a monument and to restrict the removal of
materials from the Titanic wreck site; (e) return all the Company's property in
their possession, including records and files, and provide a complete list of
Company Artifacts which are located anywhere in the world; (f) provide, for a
three-month period, cooperation in effecting a professional management transfer;
(g) return all monies held in Mr. Carlin's attorney trust account along with an
accounting of such; and (h) discontinue access to the Company's Internet site
and to sell back to the Company, at cost, another Web site utilizing the name
"Titanic."
At February 29, 2000, accounts payable and accrued liabilities include a balance
of $1,608,000 payable to Messrs. Tulloch and Carlin under the terms of the
Settlement Agreement. At February 28, 2001, there were no amounts due under the
terms of the Settlement Agreement. During the year ended February 29, 2000,
$1,672,000 was charged to operations in connection with this Settlement
Agreement.
The Company has indemnified all defendants in the legal action brought by the
removed officers and directors from all legal fees and expenses and other costs
associated with the action.
The Company has not properly filed fully executed Form 10-Ks for each of the
years ended February 28, 1997 and 1998. As a result of the Company's principal
accounting officer and a majority of the board of directors declining to execute
the Company's Form 10-K for the year ended February 28, 1997, the Company filed,
as an exhibit to its Form 8-K, the form of Form 10-K that had been approved for
filing by Mr. Tulloch, the Company's principal executive officer and a director.
It is believed that the Company's principal accounting officer and certain of
its directors refused to execute the Form 10-K because they were uncertain as to
whether the Form 10-K reflected all necessary disclosures or contained
disclosures that were materially inaccurate or misleading or otherwise
inappropriate. Similarly, for the year ended February 28, 1998, the Company
filed, as an exhibit to its Form 8-K, the form of Form 10-K that had been
approved for filing by Mr. Tulloch. It is the intention of the current board of
directors and management to ascertain the effect of these actions and to take
appropriate steps.
F-10
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
February 29, February 28, Estimated
2000 2001 Useful Life
- --------------------------------------------------------------------------------
Exhibitry equipment $1,385,000 $1,378,000 5 years
Office equipment 58,000 175,000 5 years
Marine vessel and related equipment - 529,000 5 to 10 years
Furniture and fixtures 45,000 182,000 5 years
- --------------------------------------------------------------------------------
1,488,000 2,264,000
Less accumulated depreciation 622,000 936,000
- --------------------------------------------------------------------------------
$ 866,000 $1,328,000
================================================================================
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
February 29, February 28,
2000 2001
- --------------------------------------------------------------------------------
Accrued amounts under Settlement Agreement $1,608,000 -
Amounts payable for professional and consulting fees 694,000 $492,000
Common stock to be issued - 235,000
Other miscellaneous liabilities 584,000 211,000
- --------------------------------------------------------------------------------
$2,886,000 $938,000
================================================================================
5. INCOME TAXES:
The provision for income taxes consists of the following components:
February 28, February 29, February 28,
Year ended 1999 2000 2001
- --------------------------------------------------------------------------------
Current:
Federal $1,761,000 - $(257,000)
State and local 560,000 $ 46,000 (35,000)
- --------------------------------------------------------------------------------
2,321,000 46,000 (292,000)
- --------------------------------------------------------------------------------
Deferred:
Federal (386,000) (86,000) 257,000
State and local (123,000) 40,000 35,000
- --------------------------------------------------------------------------------
(509,000) (46,000) 292,000
- --------------------------------------------------------------------------------
$1,812,000 $ - 0 - $ - 0 -
================================================================================
F-11
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The total provision for income taxes differs from that amount which would be
computed by applying the U.S. federal income tax rate to income before provision
for income taxes. The reasons for these differences are as follows:
February 28, February 29, February 28,
Year ended 1999 2000 2001
- --------------------------------------------------------------------------------
Statutory federal income tax rate 34.0 % (34.0)% (34.0)%
Effect of federal graduated tax
rates - (293.6) (5.2)
State income taxes, net of federal
benefit 9.5 327.6 6.0
Valuation allowance of temporary
differences (8.7) - -
Foreign tax credits (2.0) - -
Other, net (2.0) - 33.2
- --------------------------------------------------------------------------------
Effective income tax rate 30.8 % - 0 - % - 0 - %
================================================================================
The net deferred income tax asset consists of the following:
February 29, February 28,
2000 2001
- --------------------------------------------------------------------------------
Deferred tax asset - expenses not currently
deductible $634,000 $303,000
Deferred tax liability - depreciation (79,000) (72,000)
- --------------------------------------------------------------------------------
Net deferred tax $555,000 $231,000
================================================================================
A valuation allowance of 100% of the deferred income tax asset had been provided
at February 28, 1998 due to the uncertainty of future realization of net
operating loss carryforwards. During the year ended February 28, 1999, the
entire valuation allowance was reversed due to the increased earnings of the
Company. Based on management's assessment, it is more likely than not that all
the deferred tax assets will be realized through future taxable earnings.
6. STOCKHOLDERS' EQUITY:
Prior to the acquisition of TVLP's assets, the Company initiated an exchange
agreement with the holders of certain Class B warrants in which the holders
would receive shares of the Company's common stock in exchange for certain Class
B warrants. Through February 28, 2001, the Company had received 20,700 Class B
warrants to be exchanged for 20,700 shares of common stock of the Company, of
which 16,500 shares still remain to be issued. There are 5,556 warrants
outstanding as of February 28, 2001.
During the year ended February 28, 2001, the Company issued 100,000 shares of
common stock to a third party as settlement of certain litigation.
F-12
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In April 2000, the Company acquired certain intangible assets in exchange for
600,000 shares of its common stock valued at $900,000 after giving effect to
certain restrictions placed on such common stock. Concurrently, the Company
entered into an agreement for the services of an individual to January 3, 2003.
Since the individual will assist the Company in exploiting the intangible assets
acquired, the assets are being amortized over the term of the individual's
service agreement. The assets are included in other assets in the accompanying
balance sheet. Amortization expense for the year ended February 28, 2001 and
accumulated amortization at February 28, 2001 amounted to approximately
$285,000.
7. STOCK OPTIONS:
Transactions relating to stock options are as follows:
Weighted-
Number of Average
Shares and Exercise
Options Price
Exercisable per Share
- --------------------------------------------------------------------------------
Balance at March 1, 1998 830,000 $1.33
Canceled (500,000) $1.25
Granted 500,000 $1.25
- --------------------------------------------------------------------------------
Balance at February 28, 1999 830,000 $1.33
Expired (330,000) $1.46
Granted 500,000 $2.00
- --------------------------------------------------------------------------------
Balance at February 29, 2000 1,000,000 $1.63
Canceled (500,000) $1.15
Granted 2,150,000 $1.79
- --------------------------------------------------------------------------------
Balance at February 28, 2001 2,650,000 $1.60
================================================================================
In January 1999, the Company extended the expiration date from April 6, 1999 to
April 6, 2004 of an immediately exercisable option to purchase 500,000 shares of
the Company's common stock at a price of $1.25 per share. For financial
reporting purposes, this has been treated as a new option grant and the
cancellation of an existing option.
In July 1999, the Company granted to its president options to purchase 500,000
shares of common stock. The options are exercisable at $2.00 per share through
May 26, 2004. Compensation expense of $133,000 was charged to operations in
connection with these options.
During the year ended February 28, 2001, the Company granted to an employee
options, expiring March 31, 2003, to acquire: (a) 83,333 shares of the Company's
common stock at an exercise price of $3.00 per share; (b) 83,333 shares of the
Company's common stock at an exercise price of $4.00 per share; and (c) 83,334
shares of the Company's common stock at an exercise price of $5.00 per share.
F-13
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In April 2000, the Company adopted an incentive stock option plan (the "Plan")
under which options to purchase 3,000,000 shares of common stock may be granted
to certain key employees, directors or consultants. The exercise price will be
based on the fair market value of such shares as determined by the board of
directors at the date of the grant of such options. As of February 28, 2001,
options to purchase 1,400,000 shares of common stock have been granted under the
Plan.
In April 2000, the Company granted an officer/director a stock option to
purchase 300,000 shares of the Company's common stock at a price of $1.625 per
share, which was the market value of the stock at the time of grant. The option
expires in 10 years.
In June 2000, the Company granted an option to purchase 500,000 shares of the
Company's common stock at $1.75 per share to its President and Chief Executive
Officer. This option has a 10-year maturity.
In June 2000, the Company granted an option to purchase 500,000 shares of the
Company's common stock at $1.75 per share to an officer and director.
Subsequently, this option was cancelled.
In January 2001, options were issued to employees and directors to purchase
600,000 shares of common stock at $1.15 per share. The options expire in 10
years.
The following table summarizes the information about stock options outstanding
at February 28, 2001:
Options Outstanding and Exercisable
---------------------------------------------------------
Weighted-
Average Weighted-
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life (Years) Price
- --------------------------------------------------------------------------------
$1.15 600,000 9.83 $1.15
$1.25 500,000 3.10 $1.25
$1.63 300,000 9.83 $1.63
$1.75 500,000 9.83 $1.75
$2.00 500,000 3.24 $2.00
$3.00 - $5.00 250,000 2.00 $4.00
- --------------------------------------------------------------------------------
$1.25 - $5.00 2,650,000 $1.77
================================================================================
F-14
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has elected, in accordance with the provisions of SFAS No. 123, to
apply the current accounting rules under APB Opinion No. 25 and related
interpretations in accounting for stock options and, accordingly, has presented
the disclosure-only information as required by SFAS No. 123. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at the grant date as prescribed by SFAS No. 123, the Company's net
income and income per common share for the years ended February 28 (29), 1999,
2000 and 2001 would approximate the pro forma amounts shown in the table below:
February 28, February 29, February 28,
Year ended 1999 2000 2001
- --------------------------------------------------------------------------------
Reported net income (loss) $4,063,000 $ (21,000) $ (21,000)
================================================================================
Pro forma net income (loss) $4,018,000 $(1,261,000) $(2,896,000)
================================================================================
Reported net income (loss)
per common share $ .25 $ - 0 - $ - 0 -
================================================================================
Pro forma net income (loss)
per common share $ .25 $ (.08) $ (.17)
================================================================================
The fair value of options granted (which is amortized to expense over the option
vesting period in determining the pro forma impact) is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
February 28, February 29, February 28,
Year ended 1999 2000 2001
- --------------------------------------------------------------------------------
Expected life of options 5 years 5 years 9.07 years
================================================================================
Risk-free interest rate 4.60% 5.75% 5.85%
================================================================================
Expected volatility of RMS
Titanic, Inc. 113.3% 113.0% 116.7%
================================================================================
Expected dividend yield on
RMS Titanic, Inc. $ - 0 - $ - 0 - $ - 0 -
================================================================================
The weighted-average fair value of options granted during the years is as
follows:
February 28, February 29, February 28,
Year ended 1999 2000 2001
- --------------------------------------------------------------------------------
Fair value of each
option granted $ .90 $ 1.87 $ 1.38
Total number of
options granted 500,000 500,000 2,150,000
- --------------------------------------------------------------------------------
Total fair value of all
options granted $450,000 $937,500 $2,962,000
================================================================================
F-15
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In accordance with SFAS No. 123, the weighted-average fair value of stock
options granted is based on a theoretical statistical model using the preceding
Black-Scholes assumptions. In actuality, because the Company's stock options do
not trade on a secondary exchange, employees can receive no value or derive any
benefit from holding stock options under these arrangements without an increase
in the market price of the Company. Such an increase in stock price would
benefit all stockholders commensurately.
8. LITIGATION:
The Company was a party to certain litigations that have been resolved during
the year ended February 29, 2000 resulting in settlements of $391,000 being
charged to operations for such year. The $391,000 consists of cash and 100,000
shares of the Company's common stock that are issuable as of February 29, 2000
and issued in 2000.
The United States Department of State and the National Oceanic and Atmospheric
Administration of the United States Department of Commerce (the "NOAA") are
working together to implement an International Agreement (the "Agreement") with
entities in the United Kingdom, France and Canada that would diminish and/or
divest the Company of its salvor-in-possession rights to the Titanic which had
been awarded by the Federal District Court for the Eastern District of Virginia
(the "District Court"). The Company has raised numerous objections to the United
States Department of State regarding the actions of the United States to
participate in efforts to reach an agreement governing salvage activities of the
Titanic. The Agreement, as drafted, does not recognize the existing rights of
the Company in the Titanic that have been reaffirmed in the District Court and
affirmed by the Court of Appeals of the Fourth Circuit and provides that the
Agreement enters into force when any two of the party states sign it. The United
States Department of Justice has represented that the United States believed it
had complied with the RMS Titanic Memorial Act in the development of the
international guidelines to implement the Agreement, but would solicit comments
from the public at large regarding the draft international guidelines and the
NOAA will consider the comments, and then publish the final international
guidelines. On April 3, 2000, the Company filed a motion for declaratory
judgment asking that the District Court declare unconstitutional and
inappropriate the efforts of the United States to reach an international
agreement with the other parties and that it be precluded from seeking to
implement such an agreement. On September 15, 2000, in a decision by the Court
it was ruled that the Company's motion was not ripe for consideration at the
present time, and that the Company may renew its motion when and if an
international Agreement is agreed to and signed by the parties to the Agreement,
final guidelines are drafted, and Congress passes implementing legislation. The
Company expects, that whatever the outcome of this matter, there will be no
impact on artifacts its already owns.
The Company was a defendant in an action brought by Suarez Corporation
Industries ("SCI") in the United States District Court for the Southern District
of New York. Between October 1995 and March 1997, the Company and SCI entered
into various agreements providing for the exploitation of artifacts and other
merchandise and arranging for a cruise and ancillary events including the
financing and sharing of the division of contractual defined profits all with
respect to the 1996 expedition of the Titanic by the Company. SCI brought
various claims that included co-salvor status and breach of contract. On
F-16
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 8, 2001, the Company, as defendant, was granted a judgment in its favor
as the lawsuit was not timely filed and was time-barred from consideration.
Suarez did not appeal this judgment within the prescribed time.
On September 7, 2000, Mr. G. Michael Harris, a former officer and director of
the Company, filed suit in the Circuit Court of the Sixth Judicial Circuit in
and for Pinellas County, Florida, Civil Division. In that suit, Mr. Harris has
alleged that the Company breached an employment agreement entered into between
him and the Company, and that he has been damaged by the breach. The Company has
responded to this complaint, denying the validity or enforceability of the
employment agreement and setting forth the Company's position that it acted
appropriately and within its rights. Moreover, the Company has filed a
counter-suit against Mr. Harris and others, to recover $84,000 of monies that
the Company believes were misappropriated and a complaint has been made to the
appropriate law enforcement authorities in Pinellas County, Florida. The Company
is continuing the investigation of Mr. Harris' conduct during his tenure with
the Company. The outcome of these matters is uncertain at the present time and
the effect they may have on the Company's financial position and results of
operations is not currently determinable.
On January 16, 2001, the Securities and Exchange Commission (the "Commission")
authorized its staff to conduct a formal order of investigation. The Commission
has requested various documents relating to, among other things, the change in
control of the Company that occurred during November 1999; any solicitations
that may have been made without a written proxy statement or a filing; the
purchase of the Company's common stock by certain shareholders; the accuracy of
the Company's financial statements; information about the Company's accounting
procedures and controls; documents about its subsidiaries; and other information
about consulting agreements, communications with certain individuals, employment
of its officers, and other Company matters. The Company is cooperating with the
investigation and has produced, and is producing, documents requested by the
Commission. The Company is unable to predict the outcome of this matter.
On January 27, 2000, the Company was served with a lawsuit by Oceaneering
International, Inc. ("Oceaneering") for monies purportedly owed under a June 27,
2000 contract for maritime services in association with the Company's 2000
expedition. The Company has filed an answer that included a setoff for damages
that it sustained and continues to sustain as a result of Oceaneering's acts and
omissions. These include Oceaneering's failure to provide an appropriate vessel,
equipment and personnel for conducting maritime operations in the North Atlantic
for Expedition 2000. The litigation is currently in the discovery stage and the
outcome of this matter at the present time is uncertain.
On May 3, 2001, the Company was served with a lawsuit by Westgate Entertainment
Corporation, a California corporation, and Weyland & Chase Engineering, NV, a
Netherlands Antilles corporation, both under the control of John Joslyn, a
California resident. In that lawsuit, Mr. Joslyn claims a breach of purported
five year, oral, non-cancelable, "pay or play" consulting agreement for $300,000
per year, among other claims. The Company has no written consulting contract
with any Joslyn entity. The Company intends to file a counterclaim. This matter
is in the preliminary stages and the outcome is uncertain at the present time.
F-17
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company is involved in various claims and other legal actions arising in the
ordinary course of business. Management is of the opinion that the ultimate
outcome of these matters would not have a material adverse impact on the
financial position of the Company or the results of its operations.
9. COMMITMENTS AND CONTINGENCIES:
Compensation amounting to $120,000 was charged to operations during the year
ended February 28, 1999, pursuant to a certain employment-related arrangement
with an individual who was the former President and former chairman of the board
of directors of the Company and $430,000 for the year ended February 29, 2000
for that individual and another individual who was a former officer and
director. Additionally, accounts payable and accrued liabilities include amounts
payable to these individuals in the aggregate amount of $-0- and approximately
$1,196,000 at February 28, 2001 and February 29, 2000, respectively, in
connection with these arrangements.
During the year ended February 28, 2001, the Company entered into agreements for
the services of two individuals for an annual aggregate amount of $245,000. An
individual, at his option, may elect to receive his compensation in shares of
the Company's common stock. For this purpose, the common stock will be valued at
50% of its closing bid price as of the date of the election.
On June 29, 2000, the Company finalized an employment agreement with its
President and Chief Executive Officer. The employment agreement is for a
five-year term and provides for annual base salaries of $300,000 per year.
Subsequent to year-end, the Company entered into a three-year employment
agreement with an individual providing for salary of $130,000 - $150,000 per
year. In addition, this individual received options to purchase 250,000 shares
of common stock at an exercise price of $.88 per share.
The Company has noncancelable operating leases for office space. The leases are
subject to escalation for the Company's pro rata share of increases in real
estate taxes and operating costs. During the fiscal year ended February 28,
2001, the Company entered into another noncancelable operating lease for office
space and vacated one of its previously used offices. Subsequent to year-end,
the Company entered into an agreement to sublease certain office space through
May 2003.
Future minimum lease payments for leases in effect as of February 28, 2001 and
entered into subsequent to that date, reduced by the minimum lease payments
required by the sublease agreement, are as follows:
Year ending February 28(29),
2002 $ 70,000
2003 59,000
2004 91,000
2005 100,000
2006 18,000
- --------------------------------------------------------------------------------
$338,000
================================================================================
Rent expense charged to operations amounted to $88,000, $84,000 and $147,000 for
the years ended February 28, 1999, February 29, 2000 and February 28, 2001,
respectively.
F-18
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On January 27, 2001, the Company entered into an agreement with International
Institute of Oceanographic Exploration, LLC ("IIOE"), a British Virgin Islands
company, to search, identify and salvage shipwrecks located in certain
territorial waters in the Pacific Ocean. The president of the Company holds an
equity interest in IIOE. IIOE has an agreement with a foreign governmental
agency to conduct marine survey operations that includes searching for and
recovering shipwrecks and their contents. The Company agreed to finance a marine
survey operation utilizing its personnel up to a maximum of $250,000. The
Company is entitled to recover its cash outlay prior to any distribution of
proceeds by IIOE from these ventures, and then is entitled to receive 22% of the
contents recovered from the shipwrecks salvaged. As of February 28, 2001, the
Company had expended approximately $157,000 toward this agreement. Due to the
uncertainty regarding the recoverability of the amounts expended on this
project, the Company has charged "expedition costs attributable to licensing
fees" in the accompanying statement of operations for the full amount expended.
The agreement has a term of eighteen months.
During the year ended February 28, 2001, the Company borrowed $250,000 from a
nonaffiliated party. This obligation had an interest rate of 12% per annum and
was secured with the Company's pending income tax refunds. The lender will also
receive $25,000 worth of restricted common stock as consideration for this loan.
On September 30, 2000, this loan was repaid with interest.
10. OTHER RELATED PARTY TRANSACTIONS:
Included in prepaid expenses and other current assets at February 29, 2000 were
loans to the Company's former president in the aggregate amount of $73,000. Such
amount was discharged as a result of the settlement agreement discussed in Note
2.
Included in accounts payable and accrued liabilities at February 29, 2000 and
February 28, 2001 is $25,000 due to certain partners of TVLP.
11. EXHIBITIONS:
During the three-year period ended February 28, 2001 and subsequent to year-end,
the Company has presented, through licensing arrangements, the following
exhibitions of Titanic's Artifacts and other Titanic memorabilia.
Location Dates
- -------- -----
St. Petersburg, Florida November 1997 - May 1998
United States
Long Beach, California May 1997 - March 1999
United States
Boston, Massachusetts July 1998 - November 1998
United States
Japan (various cities) July 1998 - July 1999
Zurich, Switzerland November 1998 - May 1999
F-19
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
St. Paul, Minnesota January 1999 - May 1999
United States
Atlantic City, New Jersey May 1999 - September 1999
United States
Las Vegas, Nevada January 1999 - October 2000
United States
Chicago, Illinois February 2000 - October 2000
United States
Dallas, Texas March 2000 - June 2000
United States
Cincinnati, Ohio November 2000 - March 2001
United States
Seattle, Washington Began in March 2001
United States
Buenos Aires Began in March 2001
Argentina
Kansas City, Missouri Began in April 2001
United States
Baltimore, Maryland Began in April 2001
United States
Nashville, Tennessee Began in May 2001
United States
During the year ended February 28, 1999, the Company received ownership interest
in certain exhibitry and equipment aggregating $750,000 in satisfaction of
exhibition fees due to the Company.
In March 1999, the Company entered into an agreement with Magicworks
Entertainment, Inc., a direct subsidiary of PACE Entertainment, Inc. and an
indirect subsidiary of SFX Entertainment, Inc. (collectively "SFX"), in which
the Company granted SFX an exclusive worldwide license to exhibit the Company's
Titanic artifacts for a minimum payment of $8,500,000, annually. This license
agreement had an initial term of one year, commencing September 15, 1999, with
SFX having the option to extend the term for up to four additional one-year
periods. All obligations of Magicworks Entertainment, Inc. under this license
agreement were guaranteed by SFX Entertainment, Inc. The original agreement was
amended on September 18, 2000 by the Company and SFX Family Entertainment, Inc.,
successor to Magicworks Entertainment, Inc. Another amendment was agreed to on
May 7, 2001 which extended the agreement to December 31, 2002. The first
amendment required a minimum annual payment of $2,000,000 that was received
during fiscal year ended February 28, 2001. Upon execution of the second
amendment, an additional payment of $750,000 was received. Pursuant to the
license agreement, as amended, the Company will receive twenty percent of the
F-20
RMS TITANIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ticket, merchandise, and sponsorship and ancillary revenues over $10,000,000. In
addition, the Company has the opportunity to receive additional revenue from the
South American exhibition tour, after deduction of certain related expenses, at
fifty percent of the income received by SFX. Furthermore, the license agreement,
as amended, requires that certain conservation costs be equally shared between
SFX and the Company. Upon recoupment of the project expenses, the Company has
the right to select and obtain legal title to, without the payment of additional
consideration, certain of the exhibitry built for the exhibitions presented
during the term of the agreement.
12. SUBSEQUENT EVENTS:
In January 2001 the Company entered into agreements with a group of related
entities (unrelated to the Company) whereby these entities would provide the
Company future publicity services. In exchange for these services, the Company
was to issue these entities 200,000 shares of common stock, warrants to purchase
500,000 shares of common stock and $50,000. Subsequent to year-end, the Company
and these entities agreed to terminate the agreements. The entities returned the
200,000 shares of common stock they received (issued after year-end), cancelled
the warrant agreement and kept $28,000 of the amount advanced them for printing,
design and other services provided in March and April 2001.
In May 2001, the Company acquired the rights to the shipwreck the RMS Carpathia
(the "Carpathia"). The Carpathia was the vessel that rescued the survivors from
the Titanic. The value that will be assigned to this asset is the unamortized
value of other intangible assets purchased by the Company in April 2000 from
this same entity, plus the fair market value of 1,104,545 newly issued shares of
common stock. At February 28, 2001, the carrying value of the intangible assets
returned, which are included in other assets in the accompanying balance sheet,
was approximately $615,000.
F-21