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, 2002
[ ] 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.
(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]
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 May 31, 2002, was: $2,023,606.
The number of shares outstanding of each of the registrant's classes of
common stock, as of May 31, 2002, were:
NUMBER OF SHARES
TITLE OF EACH CLASS OUTSTANDING
Common Stock, par value $.0001
per share 18,550,847
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 involves 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. The Company does not have any obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.
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.
On April 12, 2002, the United States Court of Appeals for the Fourth Circuit
(the "Fourth Circuit") affirmed two orders of the United States District Court
for the Eastern District of Virginia, Norfolk Division. R.M.S. Titanic, Inc. v.
The Wrecked and Abandoned Vessel . . ., 2002 U.S. App. LEXIS 6799 (4th Cir.
2002). Dated September 26, 2001 and October 19, 2001, these orders restricted
the sale of artifacts recovered by the Company from the RMS Titanic wreck site.
In rendering its opinion, the Fourth Circuit reviewed and declared ambiguous the
June 7, 1994 order of the District Court that had awarded ownership to the
Company of all items then salvaged from the wreck of the Titanic as well as all
items to be salvaged in the future by the Company so long as the Company
remained salvor-in-possession of the Titanic. Having found the June 7, 1994
order ambiguous, the Fourth Circuit reinterpreted the order to convey only
possession, not title, pending determination of a salvage award. This opinion
conflicts with previous rulings that were rendered by both the Fourth Circuit,
R.M.S. Titanic, Inc. v. Haver, et al, 171 F.3d 943 (4th Cir. 1999) and the
District Court all of which rulings the Company relied upon in the conduct of
its business. Furthermore, based on a June 7th 1994 order of the District Court,
the Company believed it was the exclusive owner of the artifacts. The Company
intends to petition the United States Supreme Court to hear its appeal of the
April 12, 2002 decision of the Fourth Circuit.
In its April 12, 2002 Opinion, the Fourth Circuit indicated that the Company, as
salvor, has a lien in the previously recovered artifacts and that it is
necessary for the District Court to determine the Company's salvage award and
satisfy the award with the proceeds from a sale of the artifacts. Should it
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become apparent to the District Court that the proceeds of any sale would
clearly be inadequate to pay the salvor its full reward, then the court might,
as a matter of discretion, award the salvor title to the property in lieu of the
proceeds of sale, thus saving the costs of sale. The salvor does not have a
direct right, however, to title in the property. As a result of the Fourth
Circuit's opinion, the Company does not own the artifacts under the jurisdiction
of the United States District Court for the Eastern District of Virginia,
Norfolk Division but instead has a salvor's lien.
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 southern 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 in 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.
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. These artifacts from the 1987 expedition were subsequently awarded
to the Company by the government of France.
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
numerous objects and produced approximately 125 hours of videotape footage
during its fourth expedition to the TITANIC wreck site. Present management is
reviewing recovery details of the 1996 expedition.
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 numerous 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. Present
management is also reviewing recovery details of the 1998 expedition.
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The Company's 1987, 1993, 1994, 1996, and 1998 TITANIC expeditions were
completed by charter agreements with IFREMER. The objects recovered from those
expeditions were ultimately transported to a privately-owned conservation
laboratory in France for restoration and preservation processes in preparation
for exhibition, except for several objects conserved by EDF that were recovered
in 1987 and the "Big Piece", which went through its conservation process 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 manned submersibles- the "MIR-1" and "MIR-2 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 bridge telephone.
Among personal items recovered were binoculars, a pair of opera glasses,
sixty-five intact perfume ampoules, 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
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 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 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 2000
expedition, the Company utilized this ship for fifty-three days. At the end of
the expedition, the Explorer landed the recovered artifacts in Norfolk, Virginia
for eventual delivery to the conservation facility the Company established with
Eastern Michigan State University. During the summer of 2001, the SV Explorer
had several charters for a total of 49 days.
In May 2001, the Company acquired ownership of the RMS Carpathia that was sunk
in 1918 off the coast of the United Kingdom. This ship rescued the survivors of
the Titanic. This ship wreck will play a role in the Company's future business
plan.
On April 2, 2002, the Company entered into a Purchase Agreement for the sale of
the common stock, representing 100% ownership, of its Danepath Ltd. subsidiary
to Argosy International Ltd. The purchase price, as amended by Agreement on June
1, 2002, was $1.5 million. Danepath's principal asset is the research and
recovery vessel "SV Explorer". Under the terms of the Purchase Agreements the
Company received $100,000 upon execution and an obligation of $1.4 million,
bearing interest at 8% per annum that will be paid within six months. This
obligation is collateralized with both a first mortgage on the vessel "SV
Explorer", the principal asset owned by Danepath, and all the common stock of
the Company owned by Argosy International, Ltd. On March 6, 2002, in a separate
agreement, the Company sold to Argosy International, for minimal consideration,
its 100% ownership interest in White Star Marine Recovery, Ltd. That sale
terminated its obligation under an agreement with Argosy International for the
consulting services of Graham Jessop. At the time of this sale, White Star
Marine Recovery had no assets other than this consulting contract.
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 ninety years ago. The December 1997 release
of the highest grossing motion picture of all time, "TITANIC," as well as a
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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 subject
to a Federal District Court salvage award. 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
and applicable overage payments for exhibits including but not limited to ticket
sales for admission to exhibitions, merchandising revenues, and sponsorship
revenues. Additional revenues include other merchandise and licensing sources.
The Company's two most important obligations are to maximize shareholder value
and secure a salvage award from the District Court regarding the TITANIC
artifacts.
SALVOR LIEN
In its April 12, 2002 Opinion, the Fourth Circuit held that the Company, as
salvor, has a lien in the recovered artifacts and that it is necessary for the
District Court to determine the Company's salvage award and satisfy the award
with the proceeds from a sale of the artifacts. Should it become apparent to the
District Court that the proceeds of any sale would clearly be inadequate to pay
the salvor its full reward, then the court might, as a matter of discretion,
award the salvor title to the property in lieu of the proceeds of sale, thus
saving the costs of sale. The salvor does not have a direct right, however, to
title in the property. As a result of the Fourth Circuit's opinion, the Company
does not own the artifacts under the jurisdiction of the United States District
Court for the Eastern District of Virginia, Norfolk Division but instead has a
salvor's lien. The process to determine what award should be granted to the
Company for its efforts, undertaken in the salvage of artifacts from the Titanic
is left to the discretion of the District Court. In this process of determining
the appropriate award, courts generally rely on the six factors set out in The
Blackwall, 77. U.S. (10 Wall.) 1,14 (1869) that include: (1) the labor expended
by the salvors in rendering the salvage service. (2) the promptitude, skill, and
energy displayed in rendering the service and saving the property. (3) the value
of the property employed by the salvors in rendering the service, and the danger
to which such property was exposed. (4) the risk incurred by the salvors in
securing the property from the impending peril. (5) the value of the property
saved. (6) the degree of danger from which the property was rescued.
EXHIBITIONS
The Company has presented exhibitions in association with third parties
throughout the world and nearly ten million people have attended these exhibits.
The Company, subject to a salvage award, plans to continue to present exhibition
tours of TITANIC artifacts.
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
SFX was granted an exclusive worldwide license to exhibit 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, two additional
extensions have been granted which now extends the agreement to December 31,
2003. Each amendment required a guaranteed minimum annual payment of $2,000,000.
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For the amendment period ended November 31, 2001, the Company received payments
of $616,000 over the guaranteed minimum annual payments pursuant to the revenue
sharing provisions of the agreement. Upon execution of the fourth amendment in
May 2002, the Company received a payment of $750,000. The most recent amendment
was with Clear Channel Entertainment Exhibits, Inc. ("CCEE") formerly known as
SFX Family Entertainment, Inc.
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;
Cincinnati, Ohio from November 2000 through March 2001; in Seattle, Washington
from March 2001 to October 2001; Kansas City, Missouri from April 2001 to
September 2001; Baltimore, Maryland from April 2001 to February 2002; Nashville,
Tennessee from May 2001 to September 2001; St. Louis, Missouri from December
2001 to April 2002; a South American tour included Buenos Aires, Argentina from
April 2001 to June 2001 and Santiago, Chile from August 2001 to December 2001.
Current Exhibitions
CCEE is presenting TITANIC exhibits in Phoenix, Arizona, Norwalk, Connecticut,
Cleveland Ohio and Houston, Texas.
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 those proprietary rights. The Company participates in all
other income from gift shop sales through its contract with CCEE. Certain items
such as coal recovered from the TITANIC wreck site are sold directly by the
Company to third parties including Events Management Inc. An exhibit catalog is
published by the Company and the profits from sales at exhibits are shared
equally between CCEE, Events Management Inc. and the Company.
MARKETING
The Company has developed several retail products utilizing coal from the
Titanic that have been incorporated into jewelry and necklaces. The Company
intends to continue developing such products to increase its merchandizing
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 for by
CCEE 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
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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, 1998, and 2000 expeditions to the wreck site, the Company engaged maritime
scientists and other professional experts to assist in the exploration and
recovery efforts.
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 bridge telephone. Personal items recovered included binoculars, a
pair of opera glasses, sixty-five intact perfume ampoules, 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. The
nine leather bags found 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 "open weather window" for such activities. Research and recovery efforts
with a manned submersible are presently limited to the availability and the
co-operation with: 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. The SV Explorer
operated as a support vessel during Expedition 2000 to the Titanic. This
Danepath subsidiary was sold to Argosy International Ltd. in April 2002.
EXPEDITION TO THE CARPATHIA
The Company plans a recovery operation to the RMS Carpathia wreck location to
recover objects that the Company owns as a result of its purchase of ownership
rights for that vessel. At the present time, a definitive schedule has not been
set for this endeavor but it is expected to occur during this calendar year.
RESTORATION AND CONSERVATION
Upon recovery from the Titanic wreck site, artifacts are in varying states of
deterioration and fragility. Having been submerged in the depths of the ocean
for more than 90 years, objects have been subjected to the corrosive effects of
chlorides present in seawater. The restoration of many of the metal, leather,
and paper artifacts requires the application of sophisticated electrolysis and
other electrochemical techniques. Some of the 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
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that are currently being exhibited, many of the artifacts recovered from the
1987,1993, 1994, 1996 and 1998 expeditions have undergone conservation processes
at LP3, a privately-owned conservation laboratory in Semur-en-Auxois, France.
During 2001, the Company had a conservation program with Eastern Michigan
University, located in Ypsilanti, Michigan to utilize their conservation program
for the Titanic 2000 artifacts. This program was initiated in May of 2001 and
concluded on December 31, 2001.
All Titanic artifacts that are not being exhibited as part of the SFX Exhibition
Tour Agreement are presently housed in the Company's conservation and warehouse
facility located in Atlanta.
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. 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.
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
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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.
On April 12, 2002, the United States Court of Appeals for the Fourth Circuit
(the "Fourth Circuit") affirmed two orders of the United States District Court
for the Eastern District of Virginia, Norfolk Division. R.M.S. Titanic, Inc. vs.
The Wrecked and Abandoned Vessel [ 2002 U.S. App. LEXIS 6799 (4th Cir. 2002)].
Dated September 26, 2001 and October 19, 2001, these orders restricted the sale
of artifacts recovered by the Company from the RMS Titanic wreck site. In
rendering its opinion, the Fourth Circuit reviewed and declared ambiguous the
June 7, 1994 order of the District Court that had awarded ownership to the
Company of all items then salvaged from the wreck of the Titanic as well as all
items to be salvaged in the future by the Company so long as the Company
remained salvor-in-possession of the Titanic. Having found the June 7, 1994
order ambiguous, the Fourth Circuit reinterpreted the order to convey only
possession, not title, pending determination of a salvage award and further held
that the Company currently has no title to any artifacts that it had previously
recovered from the wreck of the Titanic nor to any artifacts that it might
recover in the future. This opinion conflicts with previous rulings that were
rendered by both the Fourth Circuit, R.M.S. Titanic, Inc. v. Haver, et al, 171
F.3d 943 (4th Cir. 1999) and the District Court and upon which the Company had
relied on in the conduct of its business. Furthermore, based on a June 7th 1994
order of the District Court, the Company believed it was the exclusive owner of
the artifacts. The Company intends to petition the United States Supreme Court
to hear its appeal of the April 12, 2002 decision of the Fourth Circuit.
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. 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 continue to 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 There was not a television or video contract
for the Company's last Titanic expedition in 2000.
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
9
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.
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 3, 2002, 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 had a 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. The Company had entered into a settlement agreement which
was completed on May 29, 2002 relieving the Company of any further obligation
under this lease.
The Company leased 4,000 sq. ft of warehouse space at 224 Airport Industrial
Drive, Ypsilanti, Michigan from December 4, 2000 through December 31, 2001 for
conservation purposes. The lease was for $12,800 for the first six month period
and $2,200 per month thereafter.
The Company has a thirty-eight month lease obligation commencing November 1,
2001 for approximately 10,080 square feet of space at an undisclosed location
for security purposes in Atlanta, Georgia. This facility is used for
conservation, restoration, and storage of Titanic artifacts. The monthly rents
are $5,460 through October 31, 2002; and thereafter $6,090 through October 21,
2003 and finally $6,720 through December 31, 2004.
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. This action was similar to that used by Mr. Tulloch as a
director to remove other directors in July 1997.
10
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 was resolved or settled.
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 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 has been re-affirmed in the District Court and
11
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 it 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
was not been notified by the SEC of the purpose and nature of the proceedings
for which the subpoena duces tecum was served. The Company has complied 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 was made to 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
the Company believes were misappropriated and a complaint has been made to the
appropriate law enforcement authorities in Pinellas County, Florida. 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 for the Company's Expedition 2000. The Company filed an
answer that included a setoff for damages. On May 8, 2002, this case was
dismissed with prejudice with each party paying its own legal expenses and
executing a confidentiality agreement. The Company did not pay any consideration
for this settlement.
12
On May 3, 2001, the Company was served with a lawsuit in Superior Court in the
State of California which later was removed to the United States District Court
for the Central District of California by Westgate Entertainment Corporation, a
California corporation, and its wholly owned subsidiary, Weyland & Chase
Engineering, NV, a Netherlands Antilles corporation. The complaint claims that
on January 18, 2000, the plaintiffs entered into oral five year, "pay or play"
contracts of $200,000 per year for Westgate Entertainment and $100,000 per year
for Weyland & Chase. Westgate Entertainment further claims the Company agreed to
pay or provide other additional considerations. The Central District Court
entered an order denying the Company's motion for summary judgment. Thereafter,
in March of 2002, the Central District Court denied the Company's right to
appeal its interlocutory order denying the Company's motion for summary
judgment. The trial is scheduled in the District Court for the summer of 2002.
The eventual outcome of this matter is uncertain at the present time.
On April 12, 2002, the United States Court of Appeals for the Fourth Circuit
(the "Fourth Circuit") affirmed two orders of the United States District Court
for the Eastern District of Virginia, Norfolk Division. R.M.S. Titanic, Inc. vs.
The Wrecked and Abandoned Vessel [ 2002 U.S. App. LEXIS 6799 (4th Cir. 2002)].
Dated September 26, 2001 and October 19, 2001, these orders restricted the sale
of artifacts recovered by the Company from the RMS Titanic wreck site. In
rendering its opinion, the Fourth Circuit reviewed and declared ambiguous the
June 7, 1994 order of the District Court that had awarded ownership to the
Company of all items then salvaged from the wreck of the Titanic as well as all
items to be salvaged in the future by the Company so long as the Company
remained salvor-in-possession of the Titanic. Having found the June 7, 1994
order ambiguous, the Fourth Circuit reinterpreted the order to convey only
possession, not title, pending determination of a salvage award. This opinion
conflicts with previous rulings that were rendered by both the Fourth Circuit,
R.M.S. Titanic, Inc. v. Haver, et al, 171 F.3d 943 (4th Cir. 1999) and the
District Court all of which rulings the Company had relied on in the conduct of
its business. Furthermore, based on a June 7th 1994 order of the District Court,
the Company believed it was the exclusive owner of the artifacts. The Company
intends to petition the United States Supreme Court to hear its appeal of the
April 12, 2002 decision of the Fourth Circuit.
On April 25, 2002, the Company was served with notice of litigation initiated by
Lawrence D'Addario, et al vs. Arnie Geller, G. Michael Harris, Joe Marsh, Gerald
Couture, Nick Cretan, Doug Banker and the Company. In the United States District
Court for the Eastern District of Virginia, Norfolk Division Case No. 2:02cv250.
The suit alleges fraud, self-dealing, mismanagement, diversion and waste of
corporate assets by the individuals in their capacity as directors and/or
officers of the Company and for Joe Marsh, as a principal shareholder of the
Company. The Company intends to vigorously defend itself and its officers and
directors in this matter. No determination can be made at this time as to the
likely outcome of this matter or what the consequences could be for the Company.
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.
13
(b) FISCAL PERIOD
COMMON STOCK
HIGH LOW
BID BID
2002
1st Quarter 1.20 0.42
2nd Quarter 0.85 0.65
3rd Quarter 0.80 0.42
4th Quarter 0.52 0.34
2001
1st Quarter 2.83 1.03
2nd Quarter 3.13 1.39
3rd Quarter 1.75 0.56
4th Quarter 1.44 0.41
(b) HOLDERS. The number of holders of record of the Company's Common Stock
as of May 31, 2002 was 1895.
(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, 2002, February 28, 2001, and February 29, 2000 and for each of
the three years in the period ended February 28, 2002 is included elsewhere in
this Form 10-K.
YEAR ENDED FEBRUARY 28(29)
1998 1999 2000 2001 2002
- ---------------------------------------------------------------------------------------------------------
Statement of Operations Data:
( In thousands, except per share
and weighted average shares)
Revenues:
Continuing operations $ 4,658 9,857 6,433 5,699 2,768
Discontinued operations -- -- -- 14 504
Net income (loss)
Continuing operations $3,367 4,063 (21) 36 (7,260)
Discontinued operations -- -- -- (88) (168)
Gain on sale 644
14
Income (loss) per share:
Continuing operations $ .21 .25 -- -- (.38)
Discontinued operations -- -- -- -- --
Weighted average number of
common shares
outstanding 16,181,868 16,187,128 16,187,128 16,732,991 18,058,573
FEBRUARY 28(29), 1998 1999 2000 2001 2002
- ----------------------------------------------------------------------------------------------------
Balance Sheet Data:
(In thousands)
Total Assets $ 10,079 13,910 15,372 15,002 8,839
Long Term Obligations -- -- -- -- --
Total Liabilities $ 2,642 2,410 3,569 2,251 1,497
Shareholders' Equity $ 7,437 11,500 11,803 12,751 7,342
Selected Quarterly Financial Information (unaudited)
(in thousands, except per share data)
5/31/01 8/31/01 11/30/01 2/28/02
- -------------------------------------------------------------------------------------------------------------
Revenues:
Continuing operations $ 612 $ 923 $ 780 $ 453
Discontinued operations - 438 66 -
----------------------------------------------
612 1,361 846 453
Expenses:
Continuing operations 827 937 845 7,427
Discontinued operations 111 337 145 79
----------------------------------------------
938 1,274 990 7,506
Net income/(loss):
Continuing operations (213) (12) (65) (6,224)
Discontinued operations (118) 101 (79) (72)
----------------------------------------------
(323) 89 (143) (6,296)
Net income/(loss) per share:
Continuing operations (.01) .00 .00 (.35)
Discontinued operations (.01) .00 (.01) .00
---------------------------------------------
(.02) .00 (.01) (.35)
- -------------------------------------------------------------------------------------
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)
15
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, 2002 AS COMPARED TO YEAR ENDED FEBRUARY 28, 2001
During its fiscal year ended February 28, 2002 (the "2002 fiscal year"), the
Company's revenues decreased to $2,768,000 as compared to $5,699,000 in the
fiscal year ended February 28, 2001 (the "2001 fiscal year"). This decrease of
$2,931,000, or 51%, primarily reflects lower licensing fee income in the 2002
fiscal year. In the 2001 year, licensing fee income benefited from the higher
guaranteed annual payment on the first year of the Exhibition Tour Agreement
with SFX.
Exhibition revenue and related sales were $2,354,000 in the 2002 fiscal year as
compared to $5,464,000 in the 2001 fiscal year for a decrease of $3,110,000, or
57%. This decrease in revenues was principally attributable to lower payments
under the Exhibition Tour Agreement with SFX. SFX declined to renew the
agreement on essentially similar terms during 2001 and consequently a revised
agreement was negotiated which resulted in lower annual guaranteed payments.
The Company's merchandise and other revenues, that included the sale of
merchandise, books and royalty payments, increased to $414,000 from $235,000 in
the prior fiscal year. This increase of $179,000, or 76% is primarily attributed
to the contribution of catalog income from the sale of catalogs at each
exhibition venue during the 2002 fiscal year. There was not any catalog sales in
the 2001 fiscal year. The sale of coal recovered from the TITANIC was $62,000 in
the current fiscal year compared to $67,000 in the prior year. In addition, the
Company received an insurance payment of $95,000 during fiscal year ended
February 28, 2002 for the loss of artifacts in a theft that occurred in
Nashville, Tennessee on January 28, 2001 of 10 coins and nine bank notes that
were recovered from the Titanic wreck site in 1987.
Cost of goods sold were $91,000 for the 2002 fiscal year as compared to $13,000
in the 2002 fiscal year. This increase of $78,000 is primarily attributed to the
costs associated with the catalogs sold during the 2002 fiscal year. There were
no catalogs sales in the prior year's period.
Expenses for expedition costs were only $32,000 for the 2002 fiscal year as
compared to $763,000 in the 2001 fiscal year. During the 2001 fiscal year the
Company undertook the summer of 2000 expedition to the Titanic wreck site. There
was not a similar expedition conducted during the 2002 fiscal year although a
survey was undertaken in early 2002 in Papua New Guinea territorial waters.
General and administrative expenses were $3,391,000 for the 2002 fiscal year as
compared to $4,405,000 in the 2001 fiscal year. This decrease of $1,014,000, or
23%, is primarily attributed to reductions in consulting expenses, accounting
fees, and legal expenses over the prior year.
Depreciation and amortization expense for the 2002 fiscal year was $374,000 as
compared to $558,000 in the 2001 fiscal year. This decrease of $184,000, or 33%,
is primarily attributed to the reduction of amortization expenses during the
year for intangibles acquired in the 2001 fiscal year that were sold as part of
the Carpathia acquisition transaction.
16
As a result of The United States Court of Appeals for the Fourth Circuit finding
the June 7, 1994 order ambiguous, the Fourth Circuit reinterpreted the order to
convey only possession, not title, pending determination of a salvage award and
further held that the Company currently has no title to any artifacts that it
had previously recovered from the wreck of the Titanic nor to any artifacts that
it might recover in the future. In light of the requirements of SFAS
121-impairment of long-lived assets and SFAS 142-the valuation of non-goodwill
intangibles, the value of a salvor lien that may be granted to the Company is at
present undeterminable and uncertain and cannot be reliably estimated,
management elected to establish an impairment charge of $8.1 million to costs of
artifacts recovered in expeditions that occurred after 1987. This loss was
reduced by expected tax benefits of $2.1 million. The artifacts recovered in the
1987 expedition that the Company was awarded by the Government of France remains
a Company asset and is valued at $3.2 million, the cost of recovery.
There was a loss from continuing operations of $7,268,000 for the 2002 fiscal
year as compared to a loss from operations of $40,000 in the 2001 fiscal year.
The substantial decrease in income from operations is primarily attributed to
the write down of the valuation of artifacts recovered that is attributed to the
recent Fourth Circuit Appellate Court decision. This loss is also attributed to
the lower revenues for fiscal year 2002 while the Company incurred higher
proportionate direct and general and administrative expenses although there were
overall reductions in those expenses.
During the 2002 fiscal year, the Company earned interest income of $8,000 as
compared to $76,000 in the prior year. The Company maintained higher cash
balances during the 2001 fiscal year at higher interest rates.
On April 2, 2002, the Company entered into a Purchase Agreement for the sale of
the common stock, representing 100% ownership, of its Danepath Ltd. subsidiary
to Argosy International Ltd. The purchase price, as amended by Agreement on June
1, 2002, was $1.5 million. Danepath's principal asset is the research and
recovery vessel "SV Explorer". Under the terms of the Purchase Agreements the
Company received $100,000 upon execution and an obligation of $1.4 million,
bearing interest at 8% per annum that will be paid within six months. This
obligation is collateralized with both a first mortgage on the vessel "SV
Explorer", the principal asset owned by Danepath, and all the common stock of
the Company owned by Argosy International, Ltd. For the fiscal year ended
February 28, 2002, the Danepath subsidiary had an operating loss of $168,000.
The Company realized a gain of $644,000 on the sale of Danepath for the 2002
fiscal year.
Income (loss) after income taxes for continuing operations was ($7,260,000) for
the 2002 fiscal year as compared to $36,000 in the 2001 fiscal year. For
discontinued operations, the Company had a loss of $168,000 for the 2002 fiscal
year, but realized a gain of $644,000 on the sale of this business. Basic and
diluted earnings per common share were $(0.38) and $ -0- for the 2002 and 2001
fiscal years, respectively. The loss per common share for the discontinued
operation was not material. The weighted average common shares outstanding were
18,058,573 and 16,732,991 for the 2002 and 2001 fiscal years, respectively.
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 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 continues to seek other
revenue producing opportunities.
17
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
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 salvage project
in the Pacific Ocean.
General and administrative expenses of the Company decreased $1,749,000, or
approximately 28%, from $6,154,000 in 2000 fiscal year to $4,405,000 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 established with Eastern Michigan University. SV Explorer
is owned by Danepath Ltd., until recently, a wholly owned subsidiary of the
Company. 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 an 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 $40,000 in the fiscal year 2001
as compared to $134,000 in the fiscal year 2000, a decrease of approximately
30%. 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. The loss from discontinued operations was $88,000 for the 2001
fiscal year. This business was established during the 2001 fiscal year.
18
The Company's income before provision for income taxes was $36,000 in the fiscal
year 2001 as compared to a loss of $21,000 in the 2000 fiscal year. There was no
provision for income taxes in either fiscal year. Consequently, the net profit
was $36,000 for the 2001 fiscal year and the net loss was $21,000 for the 2000
fiscal year. 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $441,000 for the year ended February
28, 2002 as compared to cash provided of $472,000 in the 2001 fiscal year. This
decrease in cash provided by operating activities for this fiscal year is
primarily attributed to the increase in prepaid and refundable taxes, $
1,345,000, and the net loss $6,841,000, that was not offset by the decrease in
other assets, $6,786,000, and the reduction in accounts payable and accrued
expenses of $292,000 during the year.
For the year ended February 28, 2002, cash used in investing activities included
$23,000 for the purchase of property and equipment. In the prior year 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.
The Company's net working capital (deficiency) and stockholders' equity were
$2,241,000 and $7,342,000 at February 28, 2002 as compared to a working capital
deficit of $854,000 and stockholders' equity $12,751,000 at February 28, 2001.
The Company's current ratio was 2.5 at February 28, 2002 as compared to 0.8 at
February 28, 2001. The present improvement in the Company's working capital
position is attributed to the sale of the Company's Danepath subsidiary, the
increase in refundable taxes and a reduction in accounts payables. Management
expects future income to offset the costs of its internally planned operations.
In May 2001, the Company acquired the ownership rights to the shipwreck the RMS
Carpathia (the "Carpathia"). The Carpathia was the vessel that rescued the
survivors from the Titanic. The value that was assigned to this asset
($1,374,000) is the un-amortized value of other intangible assets purchased by
the Company in April 2000 from this same entity ($555,000), plus the fair market
value of 1,104,545 newly issued shares of common stock ($819,000).
Management plans to undertake a recovery operation to the Carpathia in calendar
year 2002 to recover objects. As the Company owns the Carpathia, it is the
intent of management to sell and/or exhibit those items recovered As part of the
Danepath sale transaction, the Company has a priority use of the Danepath
personnel and equipment, including the SV Explorer. It is anticipated that the
costs of this operation can be conducted without any outside funding. 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 CCEE requires a minimum of $2,000,000 annually for the grant
of exhibition rights for a one-year period. On May 1, 2002 the fourth amendment
to the Exhibition Tour Agreement was executed between CCEE and the Company.
SALVOR-IN-POSSESSION STATUS RISK
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's ability to undertake future
19
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.
INTERNATIONAL CURRENCY RISKS
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. 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.
THE FOURTH CIRCUIT COURT'S RULING - A NEW SUBSTANTIAL RISK FACTOR
The Fourth Circuit decision to declare the June 7, 1994 District Court order
ambiguous in its recent ruling on April 12, 2002 has introduced substantial risk
and uncertainty in the future of the Company. Prior to that ruling, the Company
conducted it business relying on its ownership of artifacts recovered from the
wreck site as its property. The Fourth Circuit's ruling voided that ownership of
those artifacts recovered on expeditions after 1987, some 1800 artifacts. The
Company is relying on the award of the government of France for ownership of
those artifacts recovered in the 1987 expedition and continues to recognize a
carrying cost of $3.2 million for those artifacts. Subsequent to the ruling by
the Fourth Circuit, the Company had filed a mandate with the Appellate Court to
forestall the issuance of the Fourth Circuit's opinion until the opportunity for
a Supreme Court review had passed. That motion to stay the mandate is attached
in this filing. That motion was denied on April 26, 2002.
In eliminating ownership by the Company of a majority of artifacts, the Fourth
Circuit declared that the Company was entitled to a salvor's lien for its
expedition efforts over the years. The Company had expended more than $8.1
million for expeditions after the 1987 expedition. This revocation of ownership
of artifacts recovered after 1987 has resulted in an impairment charge of
approximately $6.1 million, net of taxes.
The monetary award that may be granted for a salvor lien is subject to the
consideration by a maritime court of the "Blackwall factors" which impart
substantial uncertainty as to the amount and appropriateness of the award to be
granted. These Blackwall factors include: (1) the labor expended by the salvors
in rendering the salvage service. (2) the promptitude, skill, and energy
displayed in the rendering the service and saving the property. (3) the value of
the property employed by the salvor in rendering the service, and the danger to
which such property was exposed. (4) the risk incurred by the salvor in securing
the property from the impending peril. (5) the value of the property saved. (6)
the degree of danger from which the property was rescued.
The Company has taken a position that after relying on the 1994 district court
order for eight years in the conduct of its business and within previous rulings
the Fourth Circuit had ample opportunity to rescind that 1994 order when it
reviewed the case in 1999, and it is demonstrably unfair and unwarranted to
deprive the Company of ownership of those artifacts that are under the
jurisdiction of the federal district court. Despite that, the Company's effort
to file a Petition for Certiorari with the United States Supreme Court may not
meet with success as only a small percentage-less than 5% are considered for
review by that court.
In light of these circumstances and the likelihood of the Fourth Circuit's
ruling being binding on the district court and the Company, management intends
to immediately seek a salvage award for all the applicable recovery expeditions
that it conducted to the Titanic wreck site. It is uncertain at this time what
the award shall be or how long it will take to obtain an award.
20
ITEM 8. FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets at February 28, 2001
and February 28,2002 F-2
Consolidated Statements of Operations and Comprehensive
Operations for the years ended
February 28 (29), 2000, 2001 and 2002 F-3
Consolidated Statements of Stockholders' Equity for the years ended
February 28(29), 2000, 2001 and 2002 F-4
Consolidated Statements of Cash Flows for the years ended
February 28(29), 2000, 2001 and 2002 F-5
Notes to Financial Statements F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 15, 2002 the Company dismissed Goldstein Golub Kessler LLP as the
Company's principal accountant and engaged Kempisty & Company, Certified Public
Accountants, P.C.,as its principal independent accountants to audit the
financial statements of the Company for the year ended February 28, 2002.
The reports of Goldstein Golub Kessler LLP on the Company's financial statements
for the years ended February 28, 2001 and February 29, 2000 did not contain an
adverse opinion or a disclaimer of opinion, and were not qualified or modified
as to uncertainty, audit scope or accounting principles.
The decision to change accountants was approved by the Company's Board of
Directors. The Board of Directors determined that the Company's auditing needs
could be handled by Kempisty & Company, Certified Public Accountants, P. C., as
efficiently and more economically compared to the former accounting firm.
During the years ended February 28, 2001 and February 29, 2000 and through
January 14, 2002, there were no disagreements with Goldstein Golub Kessler LLP
on any matter of accounting principles or practices, financial statement
disclosures or audit scope or procedure, which disagreements if not resolved to
the satisfaction of Goldstein Golub Kessler LLP would have caused them to make
reference thereto in their reports on the financial statements for such periods.
Goldstein Golub Kessler LLP furnished a letter addressed to the Commission
stating that it agrees with the above paragraph 1, 2 and 4.
21
PART III
ITEM 10. MANAGEMENT
OFFICERS AND DIRECTORS
The directors, executive officers, and significant employees of the Company are:
Name Age Position
Arnie Geller 61 President, Chief Executive Officer, Director
Gerald Couture 56 Vice President, Secretary, Director and
Chief Financial Officer
Dik Barton 42 Vice President, Director of Operations
Nick N. Cretan 67 Director
Doug Banker 50 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. Mr. Geller is on the board of the
Titanic Foundation Inc., an unaffiliated non-profit entity.
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 Alpha Resources, Inc., a registered reporting entity.
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 May 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
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 is President of the
Board of the Motor City Music Foundation in Detroit, Michigan.
22
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 four meetings during the fiscal year ended February
28, 2002 At the present time, the Company has no nominating, executive, or
compensation committees. The full board presently functions as the audit
committee.
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 29, 2000, February
28, 2001 and February 28, 2002.
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 2002 -0- $ 3,269 -0-
2001 -0- 3,270 -0-
2000 $ 210,000 -0- 500,000
Allan Carlin(1)
Former Secretary and General
Counsel 2002 -0- $ 2,668 -0-
2001 $ 48,000 8,911 -0-
2000 220,000 -0- -0-
G. Michael Harris (2)
Former Vice President and
Chief Operating Officer 2002 -0- -0- -0-
2001 $ 325,000 $ 710 -0-
2000 79,200 -0- -0-
Current Officers:
Arnie Geller(3) (4)(5)
President and Chief
Executive Officer 2002 $ 358,463 $ 48,101 500,000
2001 292,220 22,759 875,000
2000 79,200 -0- -0-
23
Gerald Couture(6)(7)
Vice President Finance
Chief Financial Officer 2002 $ 225,687 $113,059 600,000
2001 100,769 5,905 375,000
2000 -0- -0- -0-
Dik Barton (8)
Vice President and 2002 $134,361 $ 3,619 250,000
Director of Operations 2001 79,073 -0- -0-
2000 -0- -0- -0-
(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 that amounted to
$2.5 million. 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. A new Employment Agreement between the Company and Mr. Geller was
executed on February 2, 2002 that provides for an annual base salary of
$330,000 with 5% per year increases. 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 stock
options as an officer and director to purchase 1.375 million shares of the
Company's common stock at price ranging from $0.40 to $1.75 per share which
were closing prices of the stock at the respective times of issuance. All
of 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) Includes in other compensation, medical payments including medical
insurance of $36,101 and a car allowance of $12,000.
(6) On April 25, 2000, the Company engaged Mr. Couture as Vice President and
its Chief Financial Officer pursuant to a one-year employment agreement.
After that employment agreement expired Mr. Couture continued to serve as
an officer of the Company with his compensation dependent upon the services
he performed. On February 2, 2002, Mr. Couture and the Company executed a
new employment agreement for a term of four years at an annual base salary
of $270,000 with 5% per year increases. 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 had previously 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. Mr. Couture received an option to purchase 600,000
shares at a price of $.40 per share that was the closing price of the
Company's common stock on February 1, 2002 as part of his new employment
agreement. In addition on February 2, 2002, Mr. Couture's option to acquire
75,000 shares of common stock was reset to an exercise price of $0.40 that
was the closing price of the common stock on February 1, 2002. All of these
options expire in ten years.
24
(7) Includes in other compensation, medical payments including medical
insurance of $10,782 and a car allowance of $7,500, an office allowance of
$10,000, payments to his consulting firm for the professional services of
others of $7,415 and the election to receive compensation in the Company's
common stock of $77,362 that was delivered in fiscal year 2002 but was
primarily earned in the prior fiscal year.
(8) On May 6, 2001 Mr. Barton previously a consultant to the Company became a
Vice President and Director of Operations for the Company with the
execution of a three year employment agreement at a annual salary of
$130,000 for the first year, $143,000 for the second year and $157,000 for
the final year. As part of his compensation, Mr. Barton was issued options
to purchase 250,000 shares of the Company's common stock at an exercise
price of $0.88 per share, the common stock price at the time of the grant.
This stock option has a five-year term. On March 22, 2002, Mr. Barton
resigned as an officer of the Company and again became a consultant to the
Company.
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, 2002.
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
the Company at an exercise price of $1.15 that 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. On February 2, 2002 the strike price
for these options were reset to $0.40 the closing price of the Company's common
stock as of February 1, 2002.
25
ITEM. 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table enumerates, as of May 30, 2002, 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 2,515,568 13.6
605 Southside Drive
Akron, Ohio 44317
William S. Gasparrini Common 2,328,937 12.6
23 Oak Street
Greenwich, CT 06831
Argosy International , Ltd. Common 1,704,545 9.2
PO Box 260
Providenciales
Turks & Caicos, B.W.I.
Arnie Geller (2)
c/o RMS Titanic, Inc. Common 1,475,000 8.0
3340 Peachtree Road, N.E, Suite 1225.
Atlanta, GA 30326
Nick Cretan (3) Common 25,000 --
Suite 913
17 Battery Place
New York, NY 10004
Gerald Couture (4) Common 358,764 1.9
901 Chestnut Street, Suite A
Clearwater, FL 33756
Doug Banker (5) Common 25,000 --
6508 Crane Road
Ypsilanti, MI 48197
All Officers and Directors as a Group Common 1,883,764 10.1
(4 persons)
(1) Includes Mr. Marsh's latest Form 13D filing.
(2) Common stock held as tenancy by the entireties with his wife. Excludes
options to purchase 1,375,000 shares of common stock.
(3) Excludes options to purchase 75,000 shares of common stock.
(4) Excludes options to purchase 975,000 shares of common stock.
(5) Excludes 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.
26
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 all officers and directors have filed their Forms 3 and 4
for the fiscal year ended February 28, 2002. 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, 2002, 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 an extension period commencing on
November 30, 2001 through December 31, 2002. Furthermore, on March 2, 2002, an
extension was granted SFX Entertainment, Inc. for an extension commencing on
November 30, 2001 through January 5, 2003. In addition, on May 1, 2002, a
further extension was granted to Clear Channel Entertainment Exhibits, Inc., a
Delaware corporation formerly known as SFX Family Entertainment, Inc. for the
period commencing on January 6, 2003 until December 31, 2003.
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.
A consulting firm in which the Company's Chief Financial Officer is a principal,
has rendered services to the Company for the time of other professionals.
Payment for these services amounted to $7,415 in Fiscal Year 2002 and $5,905 in
the prior year.
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 Auditors' Report F-1
Consolidated Balance Sheets at February 28, 2001
and February 28, 2002 F-2
Consolidated Statements of Operations
and Comprehensive Operations for the years ended
February 28(29), 2000, 2001 and 2002 F-3
Consolidated Statements of Stockholders' Equity
for the years ended February 28(29), 2000, 2001 and 2002 F-4
27
Consolidated Statements of Cash Flows for the years ended
February 28(29), 2000, 2001 and 2002 F-5
Notes to Financial Statements F-7
(b) Reports on Form 8-K
Form 8-K filed on January 15, 2002 regarding change of auditors.
Form 8-K filed on April 17, 2002 regarding sale of Danepath, Ltd.
Form 8-K filed on April 30, 2002 regarding the Fourth Circuit Appellate Court
decision regarding the appeal of the District Court decisions.
(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.
10.13 1998 Charter Agreement with IFREMER.
10.14 1998 Charter Agreement with Oceaneering International, 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.
28
10.22.4 Agreement dated May 7, 2001 by and among the Company, Argosy International, Inc. and Graham
Jessop(*3)
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.
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.
10.23.7 Employment Agreement dated May 6, 2001 between the Company and Dik Barton.
10.23.8 Employment Agreement dated February 2, 2002 between the Company and Arnie Geller.(*3)
10.23.9 Employment Agreement dated February 2, 2002 between the Company and Gerald Couture.(*3)
10.24 The Company's 2000 Stock Option Plan and form of stock option.
10.30 Amendment to Exhibition Tour Agreement, dated September 18, 2000,
between the Company and SFX Family Entertainment Inc.
10.31 Second Amendment to Exhibition Tour Agreement, dated May 7, 2001 between the Company and SFX
Family Entertainment Inc.
10.32 Third Amendment to Exhibition Tour Agreement, dated March 7, 2002 between the Company and SFX
Family Entertainment Inc.(*3)
10.33 Fourth Amendment to Exhibition Tour Agreement, dated May 1, 2002 between the Company and Clear
Channel Entertainment Exhibits, Inc.(*3)
10.34 Form of lease dated October 16, 2001 for offices and warehouse in Atlanta, Georgia. (*3)
10.35 Agreement dated April 2, 2002, between the Company, Argosy International Ltd, Danepath Ltd and
Graham Jessop. (*1)
10.36 Stock Pledge Agreement dated April 2, 2002, between the Company and Argosy International, Ltd. (*1)
10.37 Deed of Covenant from Danepath Ltd to the Company. (*1)
29
10.38 Letter Modification Agreement dated April 4, 2002, between the Company, Argosy International Ltd,
Danepath Ltd and Graham Jessop. (*1)
10.39 United States Court of Appeals R.M.S. Titanic, Inc. v. The Wrecked and Abandoned Vessel. Opinion
No. 01-2227 (*2)
10.40 Motion for Stay of Mandate as filed on April 22,2002.(*3)
10.41 Letter Modification Agreement dated June 1, 2002, between the Company, Argosy International Ltd,
Danepath Ltd and Graham Jessop.(*3)
99 Additional Exhibits
Subsidiaries of RMS TITANIC
(*1) -- incorporated herein as referenced to an 8-K filing of April 17, 2002.
(*2) -- incorporated herein as referenced to an 8-K filing of April 30, 2002.
(*3) -- attached in this filing.
30
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 17, 2002 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 17, 2002
- -----------------------------
Arnie Geller, President.
Chief Executive Officer, Director
/s/ Gerald Couture June 17, 2002
- -----------------------------
Gerald Couture, Vice President, Chief
Financial Officer, Secretary,
Director
/s/ Nick Cretan June 17, 2002
- -----------------------------
Nick Cretan, Director
/s/ Doug Banker June 17, 2002
- -----------------------------
Doug Banker, Director
31
RMS TITANIC, INC.
FINANCIAL STATEMENTS
FEBRUARY 28, 2002
RMS TITANIC, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------
Independent Auditors' Report F-1
Consolidated Financial Statements:
Consolidated Balance Sheets at February 28, 2001 and February 28, 2002 F-2
Consolidated Statements of Operations and Comprehensive Operations for the
Years Ended February 29, 2000, February 28, 2001 and February 28, 2002 F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
February 29, 2000, February 28, 2001 and February 28, 2002 F-4
Consolidated Statements of Cash Flows for the Years Ended
February 29, 2000, February 28, 2001 and February 28, 2002 F-5 - F-6
Notes to Financial Statements F-7 - F-23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
RMS Titanic, Inc.
We have audited the accompanying consolidated balance sheet of RMS Titanic, Inc.
and Subsidiary as of February 28, 2002 and the related statements of operations
and comprehensive operations, stockholders' equity, and cash flows for the year
ended February 28, 2002. 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 audit 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 Subsidiary as of February 28, 2002 and the results of their operations and
their cash flows the year ended February 28, 2002, in conformity with accounting
principles generally accepted in the United States of America.
The financial statements at February 28, 2001 and for the two years in the
period ended February 28, 2001 were audited by other auditors, whose report
dated June 4, 2001 expressed an unqualified opinion on those financial
statements. They have not performed any auditing procedures since that date.
Kempisty & Company
Certified Public Accountants, P. C.
New York, New York
June 5, 2002
F-1
RMS TITANIC, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------
February 28, February 28,
2001 2002
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 610,000 $ 146,000
Accounts receivable 36,000 40,000
Prepaid and refundable taxes 585,000 2,261,000
Prepaid expenses and other current assets 153,000 70,000
Net assets of discontinued operations 470,000 1,221,000
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 1,884,000 3,738,000
Artifacts owned, at cost 11,282,000 4,495,000
Salvor's lien - 1,000
Deferred Income Tax Asset 303,000 -
Property and Equipment, net of accumulated depreciation
of $936,000 and $1,210,000, respectively 841,000 544,000
Other Assets 692,000 61,000
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $15,002,000 $8,839,000
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 938,000 $ 709,000
Deferred income tax liability 72,000 -
Deferred revenue 1,241,000 788,000
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,251,000 1,497,000
- -----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Common stock - $.0001 par value; authorized 30,000,000 shares,
issued and outstanding 16,947,128 and 18,550,047 shares, respectively 2,000 2,000
Additional paid-in capital 15,240,000 16,615,000
Accumulated other comprehensive operations (31,000) (31,000)
Accumulated deficit (2,460,000) (9,244,000)
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity 12,751,000 7,342,000
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $15,002,000 $8,839,000
=======================================================================================================================
See Notes to Financial Statements
F-2
RMS TITANIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
- -----------------------------------------------------------------------------------------------------------------
February 29, February 28, February 28,
Year ended 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------
Revenue:
Exhibitions and related merchandise sales $ 6,136,000 $5,464,000 $ 2,354,000
Licensing fees 17,000 108,000 313,000
Merchandise and other 221,000 60,000 39,000
Sale of coal 59,000 67,000 62,000
- -----------------------------------------------------------------------------------------------------------------
Total revenue 6,433,000 5,699,000 2,768,000
- -----------------------------------------------------------------------------------------------------------------
Expenses:
General and administrative 6,154,000 4,405,000 3,391,000
Depreciation and amortization 303,000 558,000 374,000
Expedition costs 11,000 763,000 32,000
Cost of merchandise sold 18,000 5,000 85,000
Cost of coal sold 6,000 8,000 6,000
Impairment loss on exhibitry equipment 75,000 - -
Impairment charge for artifacts recovered, net of taxes - - 6,148,000
- -----------------------------------------------------------------------------------------------------------------
Total expenses 6,567,000 5,739,000 10,036,000
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (134,000) (40,000) (7,268,000)
Other income:
Interest 113,000 76,000 8,000
Other - - -
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (21,000) 36,000 (7,260,000)
Provision (benefit) for income taxes - - -
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) from Continuing Operations before
discontinued operations and extra-ordinary gain $ (21,000) $ 36,000 $(7,260,000)
=================================================================================================================
Discontinued operations:
Loss from operations of Danepath subsidiary disposed of: - (88,000) (168,000)
Gain on disposal of Danepath including provision in 2002 of
a $46,000 operating loss during phase out period. - - 644,000
=================================================================================================================
$ (21,000) $(52,000) $(6,784,000)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) for basic and diluted common shares from
Continuing operations $ - 0 - $ - 0 - $ (0.38)
Net income (loss) for basic and diluted common shares from
discontinued operations $ - 0 - $ - 0 - $ -0-
Earnings (loss) per common share, basic and diluted $ - 0 - $ - 0 - $ (0.38)
=================================================================================================================
Weighted-average number of common shares outstanding 16,187,128 16,732,991 18,058,573
=================================================================================================================
See Notes to Financial Statements
F-3
RMS TITANIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended February 29, 2000, February 28, 2001 and February 28, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common StockAdditional Other
Number Paid-in Comprehensive Accumulated Stockholders'
of Shares Amount Capital Operation Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of March 1, 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
Common stock issued for acquisition
of ownership of RMS Carpathia 1,704,545 - 819,000 819,000
Return of common stock for sale
of intangibles (600,000)
Issuance of common stock for services 498,374 - 343,000 - - 343,000
Issuance of compensatory stock options 213,000 213,000
Net income (6,784,000) (6,784,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of February 28, 2002 18,550,047 $2,000 $16,615,000 $(31,000) $(9,244,000) $7,342,000
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
F-4
RMS TITANIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------
February 29, February 28, February 28,
Year ended 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (21,000) $ (21,000) $ (6,841,000)
Deduct Loss from discontinued operation - - (168,000)
- -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) from continuing operations $ (21,000) $ (21,000) $ (6,673,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Net gain on sale of business - - 644,000
Depreciation and amortization 303,000 599,000 374,000
Impairment loss on exhibitry equipment 75,000 - -
Amortization of deferred revenue 104,000 - -
Issuance of common stock for services - 100,000 -
Issuance of compensatory stock options 133,000 - 213,000
Net deferred income tax benefit (expense) (46,000) 324,000
Other (3,000) - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 1,274,000 335,000 (3,000)
(Increase) decrease in prepaid and refundable taxes (734,000) 578,000 (1,365,000)
Decrease (increase) in prepaid expenses and other current assets 129,000 (103,000) 365,000
Decrease (decrease) in other assets - (29,000) 6,749,000
Increase in deferred revenue - 637,000 (453,000)
Increase (decrease) in accounts payable and accrued liabilities 976,000 (1,948,000) (292,000)
- ------------------------------------------------------------------------------------------------------------------------------
Total adjustments 2,402,000 493,000 6,232,000
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,381,000 472,000 (441,000)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Artifact recovery costs - (2,107,000) -
Purchases of property and equipment (36,000) (776,000) (23,000)
- ------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (36,000) (2,883,000) (23,000)
- ------------------------------------------------------------------------------------------------------------------------------
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 2,345,000 (2,442,000) (464,000)
Cash and cash equivalents at beginning of year 720,000 3,065,000 610,000
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year 3,065,000 $ 623,000 $ 146,000
==============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 1,207,000 $ - 0 - $ - 0 -
==============================================================================================================================
F-5
RMS TITANIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
- ------------------------------------------------------------------------------------------------------------------
February 29, February 28, February 28,
Year ended 2000 2001 2002
- ------------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash financing and
investing activities:
Issuance of compensatory stock options $ 133,000 $ - 0 - $ 213,000
==================================================================================================================
Common stock to be issued in settlement litigation $ 191,000 $ - 0 - $ - 0 -
==================================================================================================================
Common stock issued for assets $ - 0 - $ 900,000 $ 819,000
==================================================================================================================
F-6
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO 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.
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 utilized in the expedition to the TITANIC
wreck site during the summer of 2000. 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".
In May 2001, the Company acquired the ownership rights to the shipwreck the RMS
Carpathia (the "Carpathia"). The Carpathia was the vessel that rescued the
survivors from the Titanic. The value that was assigned to this asset
($1,374,000) is the un-amortized value of other intangible assets purchased by
the Company in April 2000 from this same entity ($555,000), plus the fair market
value of 1,104,545 newly issued shares of common stock ($819,000).
On April 2, 2002, the Company entered into a Purchase Agreement for the sale of
the common stock, representing 100% ownership, of its Danepath Ltd. subsidiary
to Argosy International Ltd. The purchase price, as amended by Agreement on June
1, 2002, was $1.5 million. Danepath's principal asset is the research and
recovery vessel "SV Explorer". Under the terms of the Purchase Agreements the
Company received $100,000 upon execution and an obligation of $1.4 million,
bearing interest at 8% per annum that will be paid within six months. This
obligation is collateralized with both a first mortgage on the vessel "SV
Explorer", the principal asset owned by Danepath, and all the common stock of
the Company owned by Argosy International, Ltd. On March 6, 2002, in a separate
agreement, the Company sold to Argosy International, for minimal consideration,
its 100% ownership interest in White Star Marine Recovery, Ltd. That sale
terminated its obligation under an agreement with Argosy International for the
consulting services of Graham Jessop. At the time of this sale, White Star
Marine Recovery had no assets other than this consulting contract.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All inter-company 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 there-from 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, so long as the
Company is salvor-in-possession, pursuant to a judgment entered in the Federal
District Court for the Eastern District of Virginia. On April 12, 2002, the
United States Court of Appeals for the Fourth Circuit (the "Fourth Circuit")
affirmed two orders of the United States District Court for the Eastern District
of Virginia, Norfolk Division. R.M.S. Titanic, Inc. v. The Wrecked and Abandoned
F-7
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Vessel ., 2002 U.S. App. LEXIS 6799 (4th Cir. 2002). Dated September 26, 2001
and October 19, 2001, these orders restricted the sale of artifacts recovered by
the Company from the RMS Titanic wreck site. In rendering its opinion, the
Fourth Circuit reviewed and declared ambiguous the June 7, 1994 order of the
District Court that had awarded ownership to the Company of all items then
salvaged from the wreck of the Titanic as well as all items to be salvaged in
the future by the Company so long as the Company remained salvor-in-possession
of the Titanic. Having found the June 7, 1994 order ambiguous, the Fourth
Circuit reinterpreted the order to convey only possession, not title, pending
determination of a salvage award.
As a consequence of the Fourth Circuit's decision, the Company reviewed the
carrying cost of artifacts recovered from Titanic expeditions to determine
impairment of values. Up until the ruling by the Fourth Circuit, the Company was
carrying the value of the artifacts that it recovered from the Titanic wreck
site at the respective costs of the expeditions as the Company believed it was
the owner of all artifacts recovered. The Company had relied on ownership being
granted by the United States Federal District Court in a June 7, 1994 order. As
a consequence of this review and in compliance with the requirements of
Statement of Financial Accounting Standards ("SFAS") 142- impairment of
long-lived assets and SFAS 121-the valuation of non-goodwill intangibles, it was
determined that an impairment of realizable values had occurred because of the
Fourth Circuit's ruling that removed ownership of certain artifacts from the
Company that are under the jurisdiction of the United States District Court. The
District Court has jurisdiction of all artifacts that have been recovered from
the Titanic wreck site except for those 1800 artifacts recovered in the 1987
expedition. These 1987 artifacts were previously awarded to the Company by the
government of France in 1993. Furthermore, the Salvor's Lien that the Fourth
Circuit Court acknowledged the Company was entitled to under its
Salvor-in-Possession status could not be quantified other than for a de minimus
amount because of the uncertainty of the wide latitude given a United States
Federal Maritime Court to evaluate the Blackwall factors for a salvor's award
and the adjustment to such an award, if any, for revenues the Company has
derived from the exhibition of artifacts since 1994. Therefore an impairment
charge of an amount equal to the costs of recovery for all expeditions after
1987, net of tax benefit, was established less a re-classification of $1,000, a
de minimus amount, for the value of a salvor's lien.
Since August 1987, the Company has completed six expeditions to the wreck site
of the Titanic and has recovered approximately 6,000 artifacts, a section of the
Titanic's hull and coal used on the Titanic.
Artifacts recovered in the 1987 Titanic expedition 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 for that expedition.
Costs associated with the care, management and preservation of recovered
Artifacts are expensed as incurred. A majority of the Artifacts are located
within 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.
F-8
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with maturities of three months or less to be cash
equivalents.
The Company maintains cash in bank accounts that, 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 wreck site is sold 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.
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
F-9
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
stock awards, warrants and other, is not presented for the years ended February
29, 2000, February 28, 2001 and February 28, 2002 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 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 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 un-reimbursed 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-10
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO 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
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) 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, 2002, 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.
F-11
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
February 28, February 28, Estimated
2001 2002 Useful Life
- -------------------------------------------------------------------------------------------------
Exhibitry equipment $1,378,000 $1,378,000 5 years
Office equipment 175,000 188,000 5 years
Furniture and fixtures 164,000 188,000 5 years
- -------------------------------------------------------------------------------------------------
1,717,000 1,754,000
Less accumulated depreciation 936,000 1,210,000
- -------------------------------------------------------------------------------------------------
$ 692,000 $ 544,000
=================================================================================================
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
February 28, February 28,
2001 2002
- --------------------------------------------------------------------------------
Amounts payable for professional and consulting fees 492,000 $ 413,000
Other miscellaneous liabilities 211,000 296,000
- --------------------------------------------------------------------------------
$938,000 $ 709,000
================================================================================
5. INCOME TAXES
The provision for income taxes consists of the following components:
February 29, February 28, February 28,
Year ended 2000 2001 2002
- -------------------------------------------------------------------------------------------------
Current:
Federal $ - $(257,000) $(2,720,000)
State and local $ 46,000 (35,000) (786,000)
- -------------------------------------------------------------------------------------------------
46,000 (292,000) (3,506,000)
- -------------------------------------------------------------------------------------------------
Less: Tax effect
of impairment charge 1,954,000
Deferred:
Federal (86,000) 257,000 1,230,000
State and local 40,000 35,000 322,000
- -------------------------------------------------------------------------------------------------
(46,000) 292,000 1,552,000
- -------------------------------------------------------------------------------------------------
Provision for income taxes $ -0- $ -0- $ -0-
- -------------------------------------------------------------------------------------------------
F-12
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO 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 29, February 28, February 28,
Year ended 2000 2001 2002
- -------------------------------------------------------------------------------------------------
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 327.6 6.0 (6.0)%
Net Operating Loss Carry-forward - - 21.0%
Impairment Charge - - - 19.0%
Other, net - 33.2 -
- --------------------------------------------------------------------------------------------------
Effective income tax rate -0-% -0-% -0-%
==================================================================================================
The net deferred income tax asset consists of the following:
February 28, February 28,
2001 2002
- --------------------------------------------------------------------------------
Net Operating loss carry-forward $1,552,000
Deferred tax asset - expenses not currently
deductible $303,000 294,000
Deferred tax liability - depreciation (72,000) -
Valuation allowance for doubtful tax assets (1,846,000)
- --------------------------------------------------------------------------------
Net deferred tax $231,000 $-0-
The net operating loss carry-forward of approximately $3,900,000 expires in
2022. A valuation allowance of 100% of the deferred income tax asset has been
provided at February 28, 2002 because of the uncertainties as to the amount of
taxable income that will be generated in the future years as a result of the
determination by the federal court of appeals that the Company does not own the
Titanic artifacts. During the years ended February 28, 1999 through February 28,
2001, the Company had no valuation allowance.
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, 2002, 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 were 5,556 warrants
outstanding as of February 28, 2002.
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.
During the year ended February 28, 2002, the Company issued 333,767 shares of
common stock as compensation.
F-13
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO 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 was primarily responsible in assisting the Company in
exploiting the intangible assets acquired, the assets were 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. Amortization expense for the year ended
February 28, 2002 amounted to approximately $60,000. In May of 2001 these
intangibles were exchanged in a transaction for the ownership of the RMS
Carpathia as discussed below.
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 was assigned to this asset ($1,374,000) is the
un-amortized value of other intangible assets purchased by the Company in April
2000 from this same entity ($555,000), plus the fair market value of 1,104,545
newly issued shares of common stock ($819,000).
On April 2, 2002, the Company entered into a Purchase Agreement for the sale of
the common stock, representing 100% ownership, of its Danepath Ltd. subsidiary
to Argosy International Ltd. The purchase price, as amended by Agreement on June
1, 2002, was $1.5 million. Danepath's principal asset is the research and
recovery vessel "SV Explorer". Under the terms of the Purchase Agreements the
Company received $100,000 upon execution and an obligation of $1.4 million,
bearing interest at 8% per annum that will be paid within six months. This
obligation is collateralized with both a first mortgage on the vessel "SV
Explorer", the principal asset owned by Danepath, and all the common stock of
the Company owned by Argosy International, Ltd. On March 6, 2002, in a separate
agreement, the Company sold to Argosy International, for minimal consideration,
its 100% ownership interest in White Star Marine Recovery, Ltd. That sale
terminated its obligation under an agreement with Argosy International for the
consulting services of Graham Jessop. At the time of this sale, White Star
Marine Recovery had no assets other than this consulting contract.
F-14
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 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
Canceled -0- -0-
Granted 1,350,000 $0.48
- -------------------------------------------------------------------------------------------------
Balance at February 28, 2002 4,000,000 $1.22
=================================================================================================
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.
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, 2002,
options to purchase 3,000,000 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.
F-15
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
In May 2001, the Company granted an option to purchase 250,000 shares of the
Company's common stock at $0.88 per share to its Vice President and Director of
Operations. This option has a 5-year maturity.
In February 2002, the Company granted an option to purchase 500,000 shares of
the Company's common stock at $0.40 per share to its Vice President and Chief
Financial Officer. This option has a 10-year maturity.
In February 2002, the Company granted an option to purchase 500,000 shares of
the Company's common stock at $0.40 per share to its President and Chief
Executive Officer. This option has a 10-year maturity.
In February 2002, the Company reset the option strike price for 300,000
outstanding options owned by its directors to $0.40.
The following table summarizes the information about stock options outstanding
at February 28, 2002:
Options Outstanding and Exercisable
------------------------------------------------------
Weighted-
Average Weighted-
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life (Years) Price
- --------------------------------------------------------------------------------
$0.40 1,400,000 9.92 $0.40
$0.88 250,000 9.25 $0.88
$1.15 300,000 8.83 $1.15
$1.25 500,000 2.10 $1.25
$1.63 300,000 8.17 $1.63
$1.75 500,000 8.33 $1.75
$2.00 500,000 2.24 $2.00
$3.00 - $5.00 250,000 1.00 $4.00
- --------------------------------------------------------------------------------
$0.40 - $5.00 4,000,000 $1.28
================================================================================
F-16
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO 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), 2000,
2001 and 2002 would approximate the pro forma amounts shown in the table below:
February 29, February 28, February 28,
Year ended 2000 2001 2002
- --------------------------------------------------------------------------------
Reported net income (loss) $(21,000) $ (21,000) $ (6,784,000)
================================================================================
Pro forma net income (loss) $(1,261,000) $(2,896,000) $ (6,784,000)
================================================================================
Reported net income (loss)
per common share $ - 0 - $ - 0 - $ (.38)
Pro forma net income (loss)
per common share $ (.08) $ (.17) $ (.38)
================================================================================
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 29, February 28, February 28,
Year ended 2000 2001 2002
- --------------------------------------------------------------------------------
Expected life of options 5 years 9.07 years 9.07 years
================================================================================
Risk-free interest rate 5.75% 5.85% 4.75%
================================================================================
Expected volatility of RMS
Titanic, Inc. 113.3% 116.7% 100.0%
================================================================================
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 29, February 28, February 28,
Year ended 2000 2001 2002
- --------------------------------------------------------------------------------
Fair value of each
option granted $ 1.87 $ 1.38 $ .16
Total number of
options granted 500,000 2,150,000 1,350,000
- --------------------------------------------------------------------------------
Total fair value of all
options granted $ 937,500 $ 2,962,000 $ 212,600
================================================================================
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.
F-17
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. LITIGATION:
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 it 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
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
F-18
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 documents requested by the Commission. The
Company is unable to predict the outcome of this matter.
On January 27, 2001, 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 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. On May 8, 2002, this case was dismissed with prejudice with each
party paying its own legal expenses and executing a confidentiality agreement.
The Company did not pay any additional consideration for this settlement.
On May 3, 2001, the Company was served with a lawsuit in Superior Court in the
State of California which later was removed to the United States District Court
for the Central District of California by Westgate Entertainment Corporation, a
California corporation, and its wholly owned subsidiary, Weyland & Chase
Engineering, NV, a Netherlands Antilles corporation. The complaint claims that
on January 18, 2000, the plaintiffs entered into oral five year, "pay or play"
contracts of $200,000 per year for Westgate Entertainment and $100,000 per year
for Weyland & Chase. Westgate Entertainment further claims the Company agreed to
pay or provide other additional considerations. The Central District Court
entered an order denying the Company's motion for summary judgment. Thereafter,
in March of 2002, the Central District Court denied the Company's right to
appeal its interlocutory order denying the Company's motion for summary
judgment. The trial is scheduled in the District Court for the summer of 2002.
The eventual outcome of this matter is uncertain at the present time.
On April 12, 2002, the United States Court of Appeals for the Fourth Circuit
(the "Fourth Circuit") affirmed two orders of the United States District Court
for the Eastern District of Virginia, Norfolk Division. R.M.S. Titanic, Inc. v.
The Wrecked and Abandoned Vessel . . ., 2002 U.S. App. LEXIS 6799 (4th Cir.
2002). Dated September 26, 2001 and October 19, 2001, these orders restricted
F-19
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the sale of artifacts recovered by the Company from the RMS Titanic wreck site.
In rendering its opinion, the Fourth Circuit reviewed and declared ambiguous the
June 7, 1994 order of the District Court that had awarded ownership to the
Company of all items then salvaged from the wreck of the Titanic as well as all
items to be salvaged in the future by the Company so long as the Company
remained salvor-in-possession of the Titanic. Having found the June 7, 1994
order ambiguous, the Fourth Circuit reinterpreted the order to convey only
possession, not title, pending determination of a salvage award. This opinion
conflicts with previous rulings that were rendered by both the Fourth Circuit,
R.M.S. Titanic, Inc. v. Haver, et al, 171 F.3d 943 (4th Cir. 1999) and the
District Court, all of which the Company had relied upon in the conduct of its
business. Furthermore, based on a June 7, 1994 Order of the District Court, the
Company believed it was the exclusive owner of the artifacts. The Company
intends to petition the United States Supreme Court to hear its appeal of the
April 12, 2002 decision of the Fourth Circuit.
On April 25, 2002, the Company was served with notice of litigation initiated by
Lawrence D'Addario, et al v. Arnie Geller, G. Michael Harris, Joe Marsh, Gerald
Couture, Nick Cretan, Doug Banker and the Company in the United States District
Court for the Eastern District of Virginia, Norfolk Division Case No. 2:02cv250.
The suit alleges fraud, self-dealing, mismanagement, diversion and waste of
corporate assets by the individuals in their capacity as directors and/or
officers of the Company and for Joe Marsh, as a principal shareholder of the
Company. The Company intends to vigorously defend itself and its officers and
directors in this matter. No determination can be made at this time as to the
likely outcome of this matter or what the consequences could be for the Company.
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, 2002, the Company entered into agreements for
the services of two individuals for an annual aggregate amount of $600,750. Each
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 February 2, 2002, the Company executed a revised 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 $330,750 per year, with
annual 5% increases.
F-20
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On February 2, 2002, the Company executed a revised employment agreement with
its Vice President and Chief Financial Officer. The employment agreement is for
a four-year term and provides for annual base salaries of $270,000 per year,
with annual 5% increases.
On May 6, 2001, the Company entered into a three-year employment agreement with
an individual as Vice President and Director of Operations, providing for a
salary of $130,000, $143,000, and $157,850 respectively, for each year of the
three-year term. In addition, this individual received options to purchase
250,000 share of common stock at an exercise price of $.88 per share. Subsequent
to year-end, on March 22, 2002, this individual resigned his position and became
a consultant to the Company.
The Company has non-cancelable 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,
2002, the Company entered into another non-cancelable operating lease for office
space and vacated one of its previously used offices. Subsequent to year-end,
the Company entered into an agreement to lease certain office and warehouse
space through December 31, 2004.
Future minimum lease payments for leases in effect as of February 28, 2002 and
entered into subsequent to that date are as follows:
Year ending February 28(29),
2003 $ 195,000
2004 150,000
2005 144,000
2006 7,000
2007 -0-
- ----------------------------------------------------------------
$496,000
================================================================
Rent expense charged to operations amounted to $84,000, $147,000 and $167,000
for the years ended, February 29, 2000, February 28, 2001, and February 28, 2002
respectively.
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 with 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, 2002, 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" 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.
F-21
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 28, 2001 and
February 28, 2002 is $25,000 due to certain partners of TVLP.
11. EXHIBITIONS:
During the three-year period ended February 28, 2002 and subsequent to year-end,
the Company has presented, through licensing arrangements exhibitions of
Titanic's Artifacts and other Titanic memorabilia.
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
ticket, merchandise, and sponsorship and ancillary revenues over $10,000,000.
Furthermore, two additional extensions have been granted which now extends the
agreement to December 31, 2003. Each amendment required a guaranteed minimum
annual payment of $2,000,000. For the amendment period ended November 31, 2001,
the Company received payments of $616,000 over the guaranteed minimum annual
payments pursuant to the revenue sharing provisions of the agreement. Upon
execution of the fourth amendment in May 2002, the Company received a payment of
$750,000. The most recent amendment was with Clear Channel Entertainment
Exhibits, Inc. ("CCEE"), formerly known as SFX Family Entertainment, Inc.
12. SUBSEQUENT EVENTS:
On April 2, 2002, the Company entered into a Purchase Agreement for the sale of
the common stock, representing 100% ownership, of its Danepath Ltd. subsidiary
to Argosy International Ltd. The purchase price, as amended by Agreement on June
1, 2002, was $1.5 million. Danepath's principal asset is the research and
recovery vessel "SV Explorer". Under the terms of the Purchase Agreements the
Company received $100,000 upon execution and an obligation of $1.4 million,
bearing interest at 8% per annum that will be paid within six months. This
obligation is collateralized with both a first mortgage on the vessel "SV
Explorer", the principal asset owned by Danepath, and all the common stock of
the Company owned by Argosy International, Ltd. On March 6, 2002, in a separate
agreement, the Company sold to Argosy International, for minimal consideration,
its 100% ownership interest in White Star Marine Recovery, Ltd. That sale
terminated its obligation under an agreement with Argosy International for the
consulting services of Graham Jessop. At the time of this sale, White Star
Marine Recovery had no assets other than this consulting contract.
F-22
RMS TITANIC, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
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On April 12, 2002, the United States Court of Appeals for the Fourth Circuit
(the "Fourth Circuit") affirmed two orders of the United States District Court
for the Eastern District of Virginia, Norfolk Division. R.M.S. Titanic, Inc. v.
The Wrecked and Abandoned Vessel, 2002 U.S. App. LEXIS 6799 (4th Cir. 2002).
Dated September 26, 2001 and October 19, 2001, these orders restricted the sale
of artifacts recovered by the Company from the RMS Titanic wreck site. In
rendering its opinion, the Fourth Circuit reviewed and declared ambiguous the
June 7, 1994 order of the District Court that had awarded ownership to the
Company of all items then salvaged from the wreck of the Titanic as well as all
items to be salvaged in the future by the Company so long as the Company
remained salvor-in-possession of the Titanic. Having found the June 7, 1994
order ambiguous, the Fourth Circuit reinterpreted the order to convey only
possession, not title, pending determination of a salvage award. This opinion
conflicts with previous rulings that were rendered by both the Fourth Circuit,
R.M.S. Titanic, Inc. v. Haver, et al, 171 F.3d 943 (4th Cir. 1999) and the
District Court all of which the Company had relied upon in the conduct of its
business. Furthermore, based on a June 7, 1994 Order of the District Court, the
Company believed it was the exclusive owner of the artifacts. The Company
intends to petition the United States Supreme Court to hear its appeal of the
April 12, 2002 decision of the Fourth Circuit.
On April 25, 2002, the Company was served with notice of litigation initiated by
Lawrence D'Addario, et al vs. Arnie Geller, G. Michael Harris, Joe Marsh, Gerald
Couture, Nick Cretan, Doug Banker and the Company in the United States District
Court for the Eastern District of Virginia, Norfolk Division Case No. 2:02cv250.
The suit alleges fraud, self-dealing, mismanagement, diversion and waste of
corporate assets by the individuals in their capacity as directors and/or
officers of the Company and for Joe Marsh, as a principal shareholder of the
Company. The Company intends to vigorously defend itself and its officers and
directors in this matter. No determination can be made at this time as to the
likely outcome of this matter or what the consequences could be for the Company.
F-23