Note 4 - Notes Payable, Royalty Payable, and Capital Lease Obligations

3 Months Ended

May 31, 2014

4.	Notes Payable, Royalty Payable, and Capital Lease Obligations

On October 17, 2011, the Company entered into an Asset Purchase Agreement to purchase the assets of a Titanic-themed exhibition (Titanic: The Experience or “TTE”) in Orlando, Florida from Worldwide Licensing & Merchandising, Inc. and its shareholder, G. Michael Harris (together, “Worldwide”). Pursuant to the Agreement, the Company purchased the assets of the Orlando exhibition from Worldwide in an installment sale. The Company agreed to pay Worldwide directly a total of $800 thousand over a two-year period, and also agreed to assume rental and other arrearages owed by Worldwide, totaling $720 thousand, which the Company will pay over a four-year period. Based upon an interest rate of 7.6% the net present value of these payments was approximately $1,377 thousand as of the date of the transaction.

As of May 31, 2014, the short-term portion of the note payable was $0 and the long-term portion as $179 thousand which is payable in the fourth quarter of fiscal 2016. The long-term portion payable relates to rental and other arrearages payable on behalf of Worldwide.

On April 20, 2012, PEM and PEM Newco, LLC, both subsidiaries of the Company, entered into a purchase agreement with AEG Live LLC, AEG Exhibitions LLC, and Arts and Exhibitions International, LLC pursuant to which Newco purchased substantially all of the assets of AEI. The assets purchased include the rights and tangible assets relating to four touring exhibitions known as “King Tut II,” “Cleopatra,” “America I Am” and “Real Pirates.” Of these four exhibitions, the Company is currently touring only “Real Pirates”. The Company issued a non-recourse non-interest bearing note as part of this transaction. The book value of the note was recorded based upon the expected future cash flows of the exhibitions and discounted to its net present value at an imputed interest rate of 7.0%.

In March 2014, the Company paid $300 thousand and purchased the tangible assets that were required to be returned to AEG Live, LLC at the end of the purchase agreement.

On April 17, 2014, PEM and AEG terminated the Promissory Note. As part of the termination of the Promissory Note, PEM and AEG entered into a Revenue Payment Agreement providing for modified future payments to AEG with respect to bookings of acquired exhibitions. Pursuant to the Revenue Payment Agreement, going forward PEM will make royalty payments to AEG equal to (a) 90% of net revenues from future bookings and (b) 20% of the net revenues from proposed exhibitions acquired from AEG that are ultimately developed and presented. “Net Revenues” are determined after deduction by PEM of the direct expenses of operating the exhibitions. Pursuant to the Revenue Payment Agreement, AEG will pay to PEM a management fee of 10% of gross revenues (after deducting any booking fees) for each calendar year thereafter; provided that the management fee shall not be less than the following minimum fees: $500,000 in calendar year 2014; and $125,000 in calendar years 2015 and 2016.

We considered the accounting guidance in ASC 805, 405, and 470 when evaluating the accounting for the note cancellation and execution of the revenue payment agreement. We note that there was no substantive modification of the obligations under the Note that were made in connection with the cancellation of the Note and the execution of the revenue payment agreement. Accordingly, we do not believe the note was settled and therefore the royalty obligation will continue to be remeasured each period until it is ultimately settled.

Beginning in the first fiscal quarter of 2015, revenues, expenses, assets, and liabilities related to these exhibitions are recorded on a gross reporting basis in the Company’s consolidated financial statements since we are now the primary obligor under these agreements, are fulfilling the customer agreements with assets that the Company has all rights and title to, rather than acting in a management capacity as it was prior to the amendment, have latitude to determine pricing and retain future profits from the arrangement with customers, and retain the credit risk with customers. The majority of the assets and liabilities added as a result of this are restricted cash and deferred revenue

As of May 31, 2014, the short-term portion of the royalty payable was $0 and the long-term portion was $949 thousand.

Capital lease obligations

The Company leases certain computer and security equipment under capital leases. As of May 31, 2014, the balance sheet reflects the short-term portion of capital lease obligations of $40 thousand and the long-term portion of $51 thousand.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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