<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 000-24452
RMS TITANIC, INC.
-----------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Florida 59-2753162
- ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.
incorporation or organization)
17 Battery Place, Suite 203, New York, NY 10004
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (212) 558-6300
--------------
Indicate by check mark whether the registrant (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 X No
--- ---
The number of shares outstanding of the registrant's common stock on
October 19, 1999 was 16,187,119.
<PAGE> 2
<TABLE>
<CAPTION>
PAGE
NUMBER
------
PART I
FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The financial statements of RMS Titanic, Inc. (the "Company") included
herein were prepared, without audit, pursuant to rules and regulations of the
Securities and Exchange Commission. Because certain information and notes
normally included in financial statements prepared in accordance with generally
accepted accounting principles were condensed or omitted pursuant to such rules
and regulations, these financial statements should be read in conjunction with
the financial statements and notes thereto included in the audited financial
statements of the Company as included in the Company's Form 10-K for the year
ended February 28, 1999.
3
<PAGE> 4
<TABLE>
<CAPTION>
RMS TITANIC, INC.
BALANCE SHEET
========================================================================================================================
AUGUST 31, FEBRUARY 28,
1999 1999
- ------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,049,576 $ 719,929
Accounts receivable 1,072,181 1,645,373
Refundable withholding tax - 429,022
Prepaid expenses and other current assets 313,536 179,024
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,435,293 2,973,348
Artifacts Recovered, at cost 9,179,114 9,181,340
Deferred Income Tax Asset, net 509,000 509,000
Property and Equipment, net of accumulated depreciation
of $469,626 and $319,013, respectively 1,467,220 1,207,331
Other Assets 100,224 38,694
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 14,690,851 $ 13,909,713
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,725,333 $ 1,909,926
Income taxes payable 125,408 -
Deferred revenue 500,000 500,000
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,350,741 2,409,926
- -----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Common stock - $.0001 par value; authorized 30,000,000 shares,
issued and outstanding 16,187,128 shares 1,619 1,619
Additional paid-in capital 13,915,748 13,915,748
Accumulated deficit (1,577,257) (2,417,580)
- -----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 12,340,110 11,499,787
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,690,851 $ 13,909,713
=======================================================================================================================
See Notes to Financial Statements
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
RMS TITANIC, INC.
STATEMENT OF INCOME
(UNAUDITED)
===========================================================================================================================
THREE-MONTH THREE-MONTH SIX-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Exhibitions and related merchandise sales $ 1,369,437 $ 1,073,511 $ 2,497,515 $ 3,170,530
Licensing fees 4,952 3,365,650 16,313 3,481,591
Merchandise and other 37,165 157,511 200,612 429,531
Sale of coal 12,626 46,127 22,265 123,466
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 1,424,180 4,642,799 2,736,705 7,205,118
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Cost of coal sold 1,263 8,853 2,227 11,483
Cost of merchandise sold 3,081 - 4,607 -
General and administrative 705,831 477,384 1,266,777 864,779
Depreciation and amortization 67,920 55,225 150,613 85,450
Expedition costs attributable to licensing fees - 1,845,000 - 1,845,000
Impairment loss on exhibitry equipment - 150,000 - 150,000
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 778,095 2,536,462 1,424,224 2,956,712
- ---------------------------------------------------------------------------------------------------------------------------
Income before other income 646,085 2,106,337 1,312,481 4,248,406
Other income - 5,000 - 5,000
- ---------------------------------------------------------------------------------------------------------------------------
Income from operations 646,085 2,111,337 1,312,481 4,253,406
Interest income 16,432 15,771 30,342 26,211
- ---------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 662,517 2,127,108 1,342,823 4,279,617
Provision for income taxes 249,303 889,299 502,500 1,700,563
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 413,214 $ 1,237,809 $ 840,323 $ 2,579,054
===========================================================================================================================
Basic income per common share $ .03 $ .08 $ .05 $ .16
===========================================================================================================================
Weighted-average number of shares outstanding 16,187,128 16,187,128 16,187,128 16,187,128
===========================================================================================================================
See Notes to Financial Statements
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
RMS TITANIC, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
SIX-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 840,323 $ 2,579,054
- ---------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 150,613 85,450
Impairment loss on exhibitry equipment - 150,000
Reduction in artifacts recovered 2,227 -
Noncash exhibition revenue (375,000) (333,333)
Other - (76,500)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 573,191 (316,459)
Decrease (increase) in refundable withholding tax 429,022 (195,070)
Increase in prepaid expenses and other current assets (134,512) -
Increase in other assets (61,530) (2,000)
Decrease in accounts payable and accrued liabilities (184,593) (262,610)
Increase in income taxes payable 125,408 715,890
Decrease in deferred revenue - (14,943)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 524,826 (249,575)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,365,149 2,329,479
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Artifact recovery costs - (1,500,000)
Purchases of property and equipment (35,502) (66,070)
- ---------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (35,502) (1,566,070)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,329,647 763,409
Cash and cash equivalents at beginning of period 719,929 1,000,269
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,049,576 $ 1,763,678
===========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 421,750 $ 964,000
===========================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITY:
Noncash purchases of property and equipment $ 375,000 $ 826,500
===========================================================================================================================
See Notes to Financial Statements
</TABLE>
6
<PAGE> 7
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - The accompanying financial statements contain all adjustments
necessary to present fairly the financial position of the Company as
of August 31, 1999 and its results of operations and its cash flows
for the three and six months ended August 31, 1999 and 1998. Results
of operations for the three and six month periods ended August 31,
1999 are not necessarily indicative of the results that may be
expected for the year ending February 28, 1999.
Note 2 - In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings per Share was issued. SFAS No. 128 requires dual
presentation of basic earnings (loss) per share ("EPS") and diluted
EPS on the face of all statements of earnings issued after December
15, 1997 for all entities with complex capital structures. Basic EPS
is computed as net earnings divided by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur from common shares issuable
through stock-based compensation including stock options, restricted
stock awards, warrants and other convertible securities. Diluted EPS
is not presented for the three and six months ended August 31, 1999
and 1998 since the dilutive effect of potential common shares is not
material.
Note 3 - In April 1996, the Company entered into an agreement with CRE-CO
Finanz GmbH, a German company, for an exhibition of Titanic artifacts
in Europe from May 8, 1997 to November 8, 1997. The agreement, as
amended, extended the exhibition through May 10, 1998 and further
extended the exhibition through September 30, 1998. Pursuant to the
agreement, as amended, the Company received two-thirds of the net
profits, after recoupment of certain project expenses through February
28, 1998, and $2.00 per visitor from March 1, 1998 to May 1, 1998, and
two-thirds of the net profits, after recoupment of certain project
expenses, from May 2, 1998 through September 30, 1998, as defined. In
addition, the Company received a percentage of merchandise revenue, as
defined, for the period from March 1, 1998 to September 30, 1998.
Additionally, the Company received guaranteed exhibition fees
attributable to the initial term of the exhibition of $460,000 as a
non-refundable advance against the Company's share of net profits, as
defined.
In December 1996, the Company entered into an agreement with
Florida International Museum, Inc. for an exhibition of Titanic
artifacts
7
<PAGE> 8
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
in St. Petersburg, Florida, from November 15, 1997 to May 15, 1998 and
further extended the exhibition to May 31, 1998. Pursuant to the
agreement, the Company received exhibition revenue from attendance
fees ranging from $0.34 to $3.10 per attendee, based upon the total
number of attendees during the exhibition term ("Attendance Fee"), as
defined. In addition, the Company received 10% of gross revenue, as
defined, from the sale of merchandise at the exhibition ("Gift Shop
Fee"). The minimum combined Attendance Fee and Gift Shop Fee payable
to the Company under the terms of the agreement was $300,000.
In May 1997, the Company entered into an agreement with the RMS
Foundation, Inc. for the exhibition of artifacts, expedition
equipment, photographs and film footage from the 1996 Titanic
expedition aboard the Queen Mary in Long Beach, California (the "Queen
Mary") from June 1, 1997 through January 5, 1998 (the "Initial Term").
In January 1998, the agreement was amended and the exhibition was
extended through February 5, 1998, was further extended through
September 7, 1998, and has been extended on a month-to-month basis
thereafter (the "Extension Term"). The exhibition was thereafter
extended through March 21, 1999. Pursuant to the Queen Mary exhibition
agreement, the Company received, from the sale up to 150,000 tickets,
$2.00 per ticket during the Initial Term and $2.50 per ticket during
the Extension Term, and $3.00 per ticket from the sale of more than
150,000 tickets. In addition, the Company received fifty (50%) percent
of net profits, as defined, from the sale of merchandise at the Queen
Mary exhibition.
In April 1998, the Company entered into an agreement with Resource
Plus and Event Management International ("EMI"), a division of the
World Trade Center Boston, for an exhibition of Titanic artifacts in
Boston, Massachusetts from July 1, 1998 through on or about November
15, 1998. Pursuant to the exhibition agreement, the Company was to
receive two-thirds (2/3) of the net profits, after recoupment of
certain project expenses, as defined. The agreement further provided
that the ownership interest of certain exhibitry and equipment
aggregating $750,000 was transferred to the Company as of August 31,
1998, in satisfaction of the minimum exhibition fees due to the
Company. This exhibition closed on November 29, 1998. The Company
earned no exhibition fees in excess of the minimum.
8
<PAGE> 9
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
In May 1998, the Company entered into an agreement with Titanic
Exhibition Japan Inc. ("TEJI") for the exhibition of approximately
200 Titanic artifacts in several venues in Japan commencing on or
about July 20, 1998 and ending on or about July 31, 1999. Such tour
was extended to August 31, 1999. Pursuant to the exhibition
agreement, TEJI has agreed to pay the conservator of the Company's
artifacts $321,000 for the conservation and restoration of artifacts
to be displayed in the exhibition. The exhibition agreement further
provides that TEJI will pay to the Company the greater of $3.00 per
attendee or 50% of the profits, as defined, and provides the Company
the right to select and obtain legal title to 50% of the exhibitry
utilized in the exhibition at no additional cost to the Company.
Revenue for the quarter ended August 31, 1999 includes $150,000,
representing 40% of the value of the Company's share of the exhibitry
utilized in the Japanese exhibition.
In August 1998, the Company entered into an agreement with CRE-CO and
Freddy Burger Management Group for the exhibition of Titanic artifacts
in Zurich, Switzerland from November 11, 1998 through May 9, 1999.
Pursuant to the agreement, the Company was to be paid a minimum of
$600,000, in equal monthly installments of $100,000 commencing
November 30, 1998, with such payments to be credited against the
Company's rights to receive two-thirds of the profits, if any, as
defined, from ticket, merchandise and sponsorship revenue in excess of
a budget of approximately $3,000,000.
In September 1998, the Company entered into an agreement with Media
Rare, Inc. for the presentation in St. Paul, Minnesota, of the objects
and exhibitry contained in the Company's Boston exhibition for a
period of four months commencing on January 1, 1999 and ending on
April 30, 1999. Pursuant to this agreement, the Company received,
subsequent to February 28, 1999, the minimum fee of $1,000,000. This
minimum payment represents a credit against the Company's share of
two-thirds of the net profits, as defined, derived from ticket,
merchandise and sponsorship revenue in excess of certain project
expenses of approximately $2,000,000, as defined. Included in the
project expenses is a $300,000 payment to the Company for the lease of
its exhibitry for the St. Paul exhibition. Pursuant to an amendment to
this agreement, Media Rare agreed to pay the Company a minimum of
$3.00 per visitor to the exhibition during the extension thereof from
9
<PAGE> 10
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
May 1, 1999 to May 9, 1999 (the "Extension"), with two-thirds of any
revenues in excess of a budget of approximately $113,000 for the
extension period to be paid to the Company, after crediting the $3.00
per visitor fee paid to the Company against such profit distribution.
The Company's revenue for the quarter ended May31, 1999 includes
$680,358 from this exhibition, representing 50% of the minimum
guaranteed fee ($500,000), 50% of the exhibitry lease fee ($150,000),
and $30,358 for the Extension.
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"), pursuant to which RMST granted SFX an exclusive worldwide
license to exhibit the Company's Titanic artifacts in consideration of
the payment to the Company of a minimum of $8,500,000 million
annually. The license agreement has 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. Such $8,500,000
payment is payable as follows: $500,000 upon the effective date of the
license agreement, and payments of $2,000,000 each on a quarterly
basis commencing September 15, 1999. The license agreement became
effective in May 1999. All obligations of SFX under the license
agreement have been guaranteed by SFX Entertainment, Inc. Included in
deferred revenue in the accompanying balance sheet at August 31, 1999
is $500,000 which represents the unearned portion of the minimum fee.
Pursuant to the license agreement, the Company will receive sixty-five
(65%) percent and SFX will receive thirty-five (35%) percent of net
ticket, merchandise and sponsorship revenues, after deduction of
mutually agreed upon project expenses. The $8,500,000 annual
guaranteed minimum payment to be made to the Company will be credited
against its share of net revenues in excess of project expenses. The
Company has the right to terminate the license agreement effective as
of September 14, 2001, or annually thereafter, upon the occurrence of
certain conditions, including the merger or sale of majority control
of the Company or substantially all of its assets. If the Company
terminates the license agreement, SFX will have the right to continue
one major exhibition, containing no more than 200 of the Company's
Titanic artifacts and involving an investment by SFX in excess of
$2,000,000, until no later than September 14, 2004 in consideration of
the payment to the Company of a minimum of
10
<PAGE> 11
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
$2,250,000 annually. Upon recoupment of the project expenses, the
Company has the right to select and obtain legal title to, without the
payment of additional consideration, sixty-five (65%) of the exhibitry
built for the exhibitions presented during the term of the agreement.
In addition, the license agreement provides that the Company shall
receive twenty (20%) percent of the profits, if any, from a current
Titanic themed exhibition in Orlando, Florida presented by SFX and
third parties. Under the license agreement, SFX does not have the
right to include any of the Company's Titanic artifacts in the Orlando
exhibition. A member of the board of directors of the Company is a
related party to this exhibition. Subsequent to the execution of the
license agreement, the Company granted SFX the right to include a
limited number of its Titanic artifacts in the Orlando, FL exhibition
in consideration of the payment to the Company of $.50 per visitor to
this exhibition.
The Company commenced an exhibition on May 29, 1999 of approximately
200 of its Titanic artifacts in Atlantic City at the Tropicana Hotel.
This exhibition, which includes a section of Titanic's hull recovered
during the 1998 Titanic expedition, concluded on September 7, 1999.
Pursuant to the exhibition agreement entered into in April 1999,
Tropicana is responsible for payment of all costs and expenses
related to the presentation, operation and marketing of the
exhibition, with the exception of the Company's contribution of
approximately $100,000 of the installation costs of the exhibition.
The exhibition agreement provides that the Company will receive all
ticket and merchandising revenue from the exhibition, without
recoupment by Tropicana of any of its costs for presenting, operating
and marketing the exhibition. It was further agreed that sponsorship
revenues, less commissions, will be divided equally between the
Company and Tropicana.
Merchandising operations at the Atlantic City exhibition are conducted
through an unaffiliated third party, Titanic Merchandising, Inc.
("TMI"). Pursuant to the Company's agreement with TMI, the Company
receives thirty (30%) percent of the gross revenues derived from the
sale of merchandise at the retail shop established within the
exhibition premises. The Company's revenue for the quarter ended
August 31, 1999 includes $1,124,046 from the Atlantic City exhibition.
11
<PAGE> 12
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 4 - The Company was a named defendant in a lawsuit commenced in the
United States District Court for the Eastern District of Virginia) on
or about May 4, 1998 (Haver v. RMS Titanic, Inc., Civil Action No.:
2:98cv507). The plaintiff therein sought a declaratory judgment
permitting him to participate in a photographic expedition to the
wreck of the Titanic known as Operation Titanic. This action did not
challenge the Company's salvor-in-possession status. On or about May
4, 1998, the Company instituted a motion for a preliminary injunction
in the United States District Court for the Eastern District of
Virginia against Deep Ocean Expeditions, Mike McDowell, Bakers World
Travel, Quark Expedition, Ralph White, Don Walsh, Alfred S. McLaren,
WildWings, and Mr. Haver, all of whom were involved in Operation
Titanic, seeking an order enjoining such parties from conducting their
proposed photographic expedition. (R.M.S. Titanic, Inc. v. The Wrecked
and Abandoned Vessel, etc. believed to be the RMS Titanic, in rem,
Civil Action No. 2:93cv902). The United States District Court for the
Eastern District of Virginia had previously held, in August 1996, that
RMS Titanic, Inc. had the right to exclude others from taking
photographs of the wreck and to control entry in to the wreck site.
The Court's ruling to that effect also stated that the Company had the
right to exclude others from the wreck site regardless of whether the
Company was at the wreck site while other groups attempt to visit the
site. Pursuant to stipulation, the action commenced by Mr. Haver and
the Company's motion for a preliminary injunction have been
consolidated. By Order dated June 23, 1998, the Court granted the
Company's motion for a preliminary injunction enjoining certain
parties from visiting the wreck site to view and photograph the wreck.
Certain of the enjoined parties appealed the Order to the U.S. Court
of Appeals for the Fourth Circuit. In April 1999 the U.S. Court of
Appeals for the Fourth Circuit issued an opinion affirming the
Company's status as salvor-in-possession of the wreck of the Titanic,
and reversing that portion of the District Court's ruling that the
Company could exclude others from viewing and photographing the wreck
and wreck site. In October 1999, the United States Supreme Court
denied the Company's petition for a writ of certorari seeking an
appeal from the decision of the U.S. Court of Appeals for the Fourth
Circuit rendered in April 1999.
12
<PAGE> 13
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The Company is a named defendant in a lawsuit commenced in the United
States District Court for the Southern District of New York on or
about December 16, 1997 (Lindsay v. The Wrecked and Abandoned Vessel
RMS Titanic, et al., in rem, and RMS Titanic, Inc. et al., No.
97Civ9248), as disclosed in the Company's report on Form 8-K dated
June 15, 1998. The plaintiff alleges therein, inter alia, that he
rendered certain services to the Company in connection with its 1996
expedition to the Titanic wreck site and in particular connection with
the alleged production of film, video and still images of the Titanic
illuminated by certain light towers. The relief sought includes an
accounting and a judgment declaring the plaintiff a co-salvor of the
1996 expedition and awarding him, in specie, the underwater, film,
video and still photographs allegedly obtained by plaintiff from the
use of the light towers. The plaintiff also seeks an award of
compensatory damages of up to approximately $500,000 and punitive
damages in excess of $2,000,000 based upon claims of breach of
contract, copyright infringement, fraudulent misrepresentation, money
lent, quantum meruit and conversion. Management of the Company has
filed an answer denying the essential allegations of the complaint,
and has asserted counterclaims seeking compensatory and punitive
damages against the plaintiff based upon, among other things, claims
that the plaintiff has wrongfully removed and retained property owned
by the Company and has infringed upon the Company's copyright to the
images obtained with the light towers. The Company filed a motion to
dismiss the complaint and/or transfer it to the Eastern District of
Virginia. By order dated September 1, 1998, the Court granted the
Company's motion to dismiss the plaintiff's claim for an accounting,
and otherwise denied the Company's motion to dismiss and/or transfer
the action. This action is now in the stage of discovery proceedings,
with a motion instituted by the Company to dismiss plaintiff's claim
for copyright infringement, as alleged in an amended complaint, having
been denied by the Court. The Company intends to defend itself
vigorously against the plaintiff's claims and to pursue its
counterclaims
The Company is a named defendant in a lawsuit commenced in the Arizona
Superior Court, Maricopa County (North American Capital Consultants,
Inc. v. RMS Titanic, Inc. et al.) On March 3, 1999, the Company
removed the action to the United States District Court for the
District of Arizona (No. CIV 99-0401-PHX-
13
<PAGE> 14
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SMM). The complaint alleges that the Company breached a contractual
obligation to deliver to the plaintiff, a financial public relations
firm, 250,000 warrants exercisable, at various prices per share, into
freely-trading common stock of the Company, and further claims that
the actions of the Company, in allegedly promising to deliver such
warrants, constituted negligent misrepresentation, fraud, and breach
of fiduciary duty, and that the plaintiff is entitled to recover
damages on a quantum meruit basis. The complaint seeks an order
requiring the Company to deliver the warrants, damages in the amount
of $250,000 and unspecified punitive damages, attorneys' fees and
costs. The Company has filed an answer denying the essential
allegations of the complaint, and has asserted a counterclaim alleging
the plaintiff's breach of its contractual obligations to the Company
and is seeking damages of approximately $36,000 plus attorneys' fees
and costs. If this action is not resolved through settlement, the
Company intends to defend vigorously against the plaintiff's claims
and to pursue its counterclaim. This action is now in the discovery
stage of proceedings.
ITEM 2. 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
FOR THE QUARTER ENDED AUGUST 31, 1999 VERSUS
THE QUARTER ENDED AUGUST 31, 1998
FOR THE SIX MONTHS ENDED AUGUST 31, 1999 VERSUS
THE SIX MONTHS ENDED AUGUST 31, 1998
During the second quarter and the first six months of its 2000 fiscal
year (the "2000 fiscal year"), the Company's revenues decreased approximately
69% and 62%, respectively, as compared to the second quarter and the first six
months of its 1999 fiscal year (the "1999 fiscal year"). These
14
<PAGE> 15
changes were principally attributable to decreases in licensing fees of
approximately 100% during the second quarter and first six months of the 2000
fiscal year, as compared to the corresponding periods of the 1999 fiscal year,
and primarily derived from the Company having earned licensing fees of
approximately $3,345,000 during the second quarter of the 1999 fiscal year
related to the production and exploitation of audio and visual recordings with
respect to the Company's expedition to the Titanic wreck site during the summer
of 1998 (the "Summer of 1998 Expedition"). The Company did not conduct an
expedition to the Titanic wreck site during the summer of 1999.
The Company's revenue from exhibitions increased approximately 28%
during the second quarter of the 2000 fiscal year as compared to the second
quarter of the 1999 fiscal year, and decreased approximately 21% during the
first six months of the 2000 fiscal year as compared to the first six months of
the 1999 fiscal year. Those changes were primarily attributable to differences
in the timing of receipts from the Company's exhibitions and the extent of the
Company's exhibition activities during the respective fiscal periods. In
addition, the Company's revenue from its exhibition in Atlantic City, New Jersey
during the second quarter of its 2000 fiscal year was substantially greater than
its revenue from its exhibition in Boston, Massachusetts during the second
quarter of its 1999 fiscal year, while the Company's revenue from its exhibition
in Zurich, Switzerland during the first quarter of the 2000 fiscal year was
substantially less than its revenues from its Hamburg, Germany exhibition during
the first quarter of the 1999 fiscal year.
In view of the logistical and operational difficulties in establishing
short-term exhibitions on satisfactory terms, and the Company's license to a
subsidiary of SFX Entertainment, Inc. of worldwide rights to exhibit the
Company's Titanic artifacts for a minimum of one (1) year, commencing September
14, 1999, in consideration of the payment to the Company of a minimum of
$8,500,000, the Company, apart from commitments for the completion of the
touring exhibition in Japan, has entered into only an agreement for the
exhibition of its artifacts in Atlantic City, New Jersey during the period from
May 29, 1999 to September 7, 1999.
Merchandise and other revenue decreased approximately 76% during the
second quarter of the 2000 fiscal year as compared to the second quarter of the
1999 fiscal year, and decreased approximately 53% during the first six months of
the 2000 fiscal year as compared to the first six months of the 1999 fiscal
year. These decreases were principally attributable to the heightened interest
in Titanic products during the first quarter of the 1999 fiscal year during the
release of the feature film "Titanic," as well as the Company's receipt of
revenues during the 1999 quarter from a book published in conjunction with
unrelated third parties. Additionally, the Company recognized, as other revenue
during the first quarter of its 2000 fiscal year, $150,000 from the rental of
exhibitry for use in the St. Paul, Minnesota exhibition, as compared to having
recognized, during the first quarter of the 1999 fiscal year, $76,500 from the
rental of exhibitry for use in the St. Petersburg, Florida exhibition. The
Company's revenue from the sale of coal decreased approximately 73% during the
second quarter of the 2000 fiscal year as compared to the second quarter of the
1999 fiscal year, and decreased approximately 82% during the first six months of
the 2000 fiscal year as compared to the first six months of the 1999 fiscal
year. These decreases were principally a result of decrease in sales of coal
made through the Company's web site, retail efforts undertaken by third parties
while the "Titanic"
15
<PAGE> 16
movie was in theatrical release.
The Company's cost of coal sold decreased approximately 86% during the
second quarter of the 2000 fiscal year as compared to the second quarter of the
1999 fiscal year, and approximately 81% during the first six months of the 2000
fiscal year as compared to the first six months of the 1999 fiscal year, with
such cost relating to the volume of sales in the respective periods. The
Company's general and administrative expenses increased approximately 48% during
the second quarter of the 2000 fiscal year as compared to the second quarter of
the 1999 fiscal year, and increased approximately 47% during the first six
months of the 2000 fiscal year as compared to the first six months of the 1999
fiscal year. These changes were primarily the result of exhibition expenses
incurred in connection with the deinstallation, transportation and installation
of the Company's exhibition from St. Paul, Minnesota to Atlantic City, New
Jersey, an increase in professional fees and executive compensation, and an
increase in insurance expenses. The Company's depreciation and amortization
expenses increased approximately 23% and 76% during the second quarter and first
six months of the 2000 fiscal year, respectively, as compared to the
corresponding periods of the 1999 fiscal year. During the second quarter of the
1999 fiscal year, the Company incurred $1,845,000 of costs related to vessel and
equipment chartering related to the Company's audio-visual licensee's
requirements for the Summer of 1998 Expedition. During the second quarter of its
1999 fiscal year, the Company recorded an impairment loss of $150,000
attributable to exhibitry equipment related to the Company's exhibition of
Titanic artifacts in Hamburg, Germany based upon the determination that certain
items of exhibitry would not be utilized in the planned re-location and
presentation of the Hamburg exhibition in Zurich, Switzerland commencing in the
middle of November 1998.
The Company's income before provision for income taxes decreased
approximately 69% during the second quarter and first six months of the 2000
fiscal year, as compared to the corresponding periods of the 1999 firscal year.
The Company's net income decreased approximately 67% during the second quarter
and first six months of the 2000 fiscal year as compared to the corresponding
perios of the 1999 fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
In connection with its 1994 expedition to the wreck site of the
Titanic, the Company entered into an agreement with IFREMER to charter equipment
and crew necessary to conduct research and recovery efforts. Pursuant to the
terms of such charter agreement, the Company has paid IFREMER the sum of
$300,000 and was obligated to pay an additional $700,000 in two installments of
$350,000 each payable on September 30 and December 1, 1994. The installment due
to IFREMER on September 30, 1994 was paid during the first quarter of the
Company's 1996 fiscal year, payment of the final $350,000 installment was
extended to October 1, 1995. During the 1996 fiscal year, the Company paid
$70,000 on account of such obligation, with the $280,000 balance thereof having
been paid subsequent to February 29, 1996. The source of such $280,000 payment
was from an unaffiliated entity with which the Company entered into an agreement
for the marketing of coal and the sale of
16
<PAGE> 17
cabins of cruise ships which accompanied the Company on its 1996 research and
recovery expedition, and this payment was made as an advance against the
Company's share of profits from Titanic coal sales and sales of such cruise ship
cabins. The $280,000 advance was reduced by approximately $180,600 from the sale
of coal during the 1999, 1998, 1997 and 1996 fiscal years, resulting in an
unpaid balance of $99,400 as of February 28, 1999. Such unpaid balance, which
was not further reduced through the second quarter of the 2000 fiscal year, does
not bear interest. There were no profits from sale of cruise ship cabins for the
1996 expedition.
The Company's capital commitments during its 2000 fiscal year include
lease payments for its principal offices, and compensation to its executive
officer and to its general counsel.
Pursuant to its agreement with Resource Plus and Event International
("EMI") for the exhibition of the Company's artifacts in Boston, Massachusetts,
the Company agreed to pay EMI the sum of $300,000 to provide certain services,
including de-installation, shipping and installation of the exhibition in its
next venue (St. Paul, Minnesota). As a result of EMI's alleged breach of the
agreement, the Company terminated EMI's obligations and corresponding rights
with respect to the de-installation, shipping and installation of the
exhibition. EMI has demanded that the Company pay $100,000 to EMI with respect
to these matters, and in addition thereto, the sum of approximately $175,000 in
connection with claimed cost overruns incurred in connection with the Boston
exhibition. The Company has rejected such demands.
The Company's near term operating needs will be financed principally
through its exhibition tour agreement with a subsidiary of SFX Entertainment,
Inc, pursuant to which the Company will be paid a minimum of $8.5 million
annually for the grant of exhibition rights for an initial one-year period
commencing September 14, 1999, subject to options granted to the licensee to
extend the term for up to four (4) additional one year periods in consideration
of additional minimum annual payments to the Company of $8.5 million.
Substantially all of the Company's cash flow derives from the
Company's operating activities during the first six months of the 2000 fiscal
year. None of the Company's cash flow during the first six months of the 2000
fiscal year derived from financing activities, with approximately $36,000 used
in investing activities.
In view of the Company's recent purchase of new computers and the
limited impact that Year 2000 issue has upon the Company's business activities
or competitive conditions, management of the Company does not believe that Year
2000 issues will have a material adverse affect upon the Company.
Except for historical information contained herein, this Quarterly
Report on Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Reform Act of 1995 which involve certain risks and
uncertainties including, without limitation, the Company's needs, as discussed
above, to obtain additional financing in order to achieve its objectives and
plans. The Company's actual results or outcomes may differ materially from
those anticipated. Important facts that the Company believes might cause such
differences are discussed in the cautionary statements accompanying the
forward-looking statements as well as in the risk factors discussed below.
Although the Company
17
<PAGE> 18
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 this Report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation of the
Company or any other such person that the objectives and plans of the Company
will be achieved. The forward looking statements of the Company contained in
this report are also subject to the following risks and uncertainties:
The Company's future business and operating results depend in
significant part upon the continued contributions of George Tulloch, the
Company's President. The Company does not maintain a key person life insurance
policy on Mr. Tulloch. The Company's future business and operating results also
depends in significant part upon its ability to attract and retain qualified
additional management and support personnel for its operations.
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 so as to
maintain its salvor-in-possession status. The Company's ability to undertake
future expeditions may be dependent upon the availability of financing from the
grant of licenses to produce television programming and/or the grant of
expedition sponsorship rights. No assurances can be given that such financing
will be available on satisfactory terms.
The amount spent by consumers on discretionary items, such as
entertainment activities and the purchase of merchandise, is dependent upon
consumers' levels of discretionary income, which may be adversely affected by
general or local economic conditions. A decrease in consumer spending on such
activities could have a material adverse effect on the Company's revenues from
exhibition activities and merchandising efforts.
The Company's sales of coal recovered from the Titanic wreck site and
other merchandise through its web site increased significantly during the period
of the initial theatre release of the motion picture "Titanic" in December 1997
without the Company incurring any significant marketing expenses. This coal is
the only object recovered from the Titanic that the Company is offering or will
offer for sale to the general public. Through the date of this report,
approximately 125,000 units of the Company's Titanic coal have been sold since
the commencement of such sales in the fall 1996, which represents approximately
one-half of the total units of coal available for sale. A substantial portion of
the remaining Titanic coal supply is different in size than that which the
Company has marketed to date, and the Company's pricing and commercial
presentation of the coal is likely to change. No assurances can be given that
different price points or different presentations of the coal will be attractive
to consumers. Additionally, in the event that the Company does not recover any
additional Titanic coal, and the existing supply of coal is exhausted in the
future, the volume of the Company's merchandise sales may be materially
adversely affected in the absence of the introduction and marketing of
additional products, such as replicas of artifacts.
18
<PAGE> 19
To the extent that the Company has transactions outside of the United
States, the Company could be affected by nationalizations or unstable
governments or legal systems or intergovernmental disputes. These economic and
political uncertainties may affect the Company's results of operations,
especially to the extent that these matters affect the Company's exhibition
plans in Europe and Japan.
In connection with its activities outside of the United States, the
Company is exposed to the risk of currency fluctuations between the United
States dollar and certain foreign currency. If the value of the United States
dollar increases in relation to the foreign currency, the Company's potential
revenues from exhibition and merchandising activities outside of the United
States will be adversely affected. During the second quarter of the 2000 fiscal
year, there were no significant fluctuations in the exchange rates with respect
to foreign currencies in which the Company transacts business. Although the
Company's financial arrangements with IFREMER and its exhibition organizers in
Germany, Zurich and Japan and other entities have been based in whole or in part
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.
19
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
With regard to the lawsuit commenced in the United States District
Court for the Eastern District of Virginia) on or about May 4, 1998 (Haver v.
RMS Titanic, Inc., Civil Action No.: 2:98cv507) described in the report on Form
10-K for the year ended February 28, 1999, in October 1999 the United States
Court has denied the Company's petition for a writ of certorari seeking an
appeal from the decision of the U. S. Court of Appeals for the Fourth Circuit
rendered in April 1999.
There has been no material change in the status of the lawsuit
commenced in the United States District Court for the Southern District of New
York on or about December 16, 1997 (Lindsay v. The Wrecked and Abandoned Vessel
RMS Titanic, et al., in rem, and RMS Titanic, Inc. et al., No. 97Civ9248)
subsequent to the filing of the report on Form 10-K for the year ended February
28, 1999, except that the Company's motion to dismiss plaintiff's copyright
claims has been denied.
There has been no material change in the status of the lawsuit
commenced in the Arizona Superior Court, Maricopa County (North American Capital
Consultants, Inc. v. RMS Titanic, Inc. et al.), which has been removed to the
United States District Court for the District of Arizona (No. CIV
99-0401-PHX-SMM) subsequent to the filing of the report on Form 10-K for the
year ended February 28, 1999, except that negotiations with respect to
settlement of said action are not ongoing as of the date of this report.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 9, 1999, at the Annual Meeting of Stockholders of
the Company, the following were elected directors of the
Company: George Tulloch (13,163,026 votes in favor; 1,921,811
votes withheld); Allan H. Carlin (13,163,028 votes in favor;
1,921,809 votes withheld); Arnie Geller (13,163,028 votes in
favor; 1,921,809 votes withheld; G. Michael Harris (13,163,028
votes in favor; 1,921,809 votes withheld); Kurt Hothorn
(13,163,028 votes in favor; 1,921,809 votes withheld); Paul
Henri Nargeolet (13,048,028 votes in favor; 2,046,809 votes
withheld. Additionlly, the appointment of Goldstein Golub
Kessler LLP as the Company's independent accountants for the
fiscal year ended February 29, 2000 was ratified by a vote of
13,046,362 shares in favor, 50,327 shares against and 1,988,150
shares abstaining.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
20
<PAGE> 21
None.
(b) REPORTS ON FORM 8-K
None.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
RMS TITANIC, INC.
(Registrant)
Dated: October 20, 1999 By:/s/George Tulloch
---------------------------------------
George Tulloch, Principal Executive Officer
and Principal Accounting Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 2,049,576
<SECURITIES> 0
<RECEIVABLES> 1,072,181
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,435,293
<PP&E> 1,936,846
<DEPRECIATION> 469,626
<TOTAL-ASSETS> 14,690,851
<CURRENT-LIABILITIES> 2,350,741
<BONDS> 0
0
0
<COMMON> 1,619
<OTHER-SE> 12,338,491
<TOTAL-LIABILITY-AND-EQUITY> 14,690,851
<SALES> 200,612
<TOTAL-REVENUES> 2,736,705
<CGS> 4,607
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,419,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,342,823
<INCOME-TAX> 502,500
<INCOME-CONTINUING> 840,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 840,323
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
