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 November 30, 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)
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)
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.
[X] Yes [ ] No
The number of shares outstanding of the registrant's common stock on
November 30, 1999 was 16,187,128.
<PAGE>
INDEX
PAGE
NUMBER
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
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>
RMS TITANIC, INC.
Balance Sheets
<TABLE>
<CAPTION>
November 30, February 28,
1999 1998
--------------------- --------------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,641,530 $ 719,929
Accounts receivable 571,004 1,645,373
Refundable withholding tax 166,475 429,022
Prepaid expenses and other current assets 1,187,468 179,024
--------------------- --------------------
Total current assets 5,566,477 2,973,348
--------------------- --------------------
Artifacts recovered, at cost 9,178,839 9,181,340
Deferred income tax asset, net 509,000 509,000
Property and equipment, net of accumulated depreciation
of $564,486 and $319,013, respectively 1,372,848 1,207,331
Other assets 99,224 38,694
Total assets $ 16,726,388 $ 13,909,713
===================== ====================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities $ 2,100,227 $ 1,909,926
Income taxes payable 1,083,947 -
Deferred revenue 729,167 500,000
--------------------- --------------------
Total current liabilities 3,913,341 2,409,926
--------------------- --------------------
Commitments and contingencies - -
Stockholders' Equity:
Common stock, par value $.0001
authorized 30,000,000 shares,
16,187,128 issued and outstanding 1,619 1,619
Additional paid-in capital 13,915,748 13,915,748
Accumulated deficit (1,104,320) (2,417,580)
--------------------- --------------------
Total stockholders' equity 12,813,047 11,499,787
--------------------- --------------------
Total liabilities and stockholders' equity $ 16,726,388 $ 13,909,713
===================== ====================
</TABLE>
See notes to financial statements.
4
<PAGE>
RMS TITANIC, INC.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
----------------------------------- ----------------------------------------
November 30, November 30, November 30, November 30,
1999 1998 1999 1998
-------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenue:
Exhibitions and related merchandise sales $ 1,881,303 $ 991,008 $ 4,378,818 $ 4,161,538
Licensing fees (11,550) - 4,763 3,481,591
Merchandise and other 9,850 118,694 210,462 548,225
Sale of coal 2,743 70,094 25,008 193,560
-------------- ---------------- ----------------- -----------------
Total revenue 1,882,346 1,179,796 4,619,051 8,384,914
Expenses:
Cost of coal sold 274 7,517 2,501 19,000
Cost of merchandise sold 7,357 35,347 11,964 35,347
General and administrative 659,532 488,901 1,926,309 1,353,680
Depreciation and amortization 94,860 79,115 245,473 164,565
Expedition costs attributable to licensing fees - - - 1,845,000
Impairment loss on exhibitory equipment 150,000
-------------- ---------------- ----------------- -----------------
Total expenses 762,023 610,880 2,186,247 3,567,592
Income from operations 1,120,323 568,916 2,432,804 4,817,322
-------------- ---------------- ----------------- -----------------
Other Income:
Interest income 35,502 11,581 65,844 37,792
Other - - - 5,000
-------------- ---------------- ----------------- -----------------
Total other income 35,502 11,581 65,844 42,792
-------------- ---------------- ----------------- -----------------
Income before provision for income taxes 1,155,825 580,497 2,498,648 4,860,114
Provision for income taxes 682,888 221,514 1,185,388 1,922,077
-------------- ---------------- ----------------- -----------------
Net income $ 472,937 $ 358,983 $ 1,313,260 $ 2,938,037
============== ================ ================= =================
Basic loss per common share $ 0.03 $ 0.02 $ 0.08 $ 0.18
============== ================ ================= =================
Weighted average number of
common shares outstanding 16,187,128 16,187,128 16,187,128 16,187,128
============== ================ ================= =================
</TABLE>
See notes to financial statements.
5
<PAGE>
RMS TITANIC, INC.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------------------
November 30, November 30,
1999 1998
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Reconciliation of net income to net cash
used in operating activities
Net income $ 1,313,260 $ 2,938,037
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 245,473 164,565
Impairment loss on exhibitory equipment - 150,000
Reduction in artifacts recovered 2,501 19,000
Amortization of deferred revenue - (76,500)
Noncash exhibition revenue (375,000) (750,000)
Changes in operating assets and liabilities
Decrease in accounts receivable 1,074,369 23,413
(Increase) in other current assets (1,008,444) (7,600)
Decrease (increase) in refundable withholding tax 262,547 (383,174)
(Increase) in other assets (60,530) (814)
Increase (decrease) in accounts payable and accrued liabilities 190,301 (470,201)
Increase (decrease) in income taxes payable 1,083,947 5,920
Increase (decrease) in deferred revenue 229,167 (14,943)
----------------- ------------------
Net cash used in operating activities 2,957,591 1,597,703
----------------- ------------------
Cash flows from investing activities:
Artifact recovery costs - (1,500,000)
Purchases of property and equipment (35,990) (99,417)
----------------- ------------------
Net cash used in investing activities (35,990) (1,599,417)
----------------- ------------------
Cash flows from financing activities:
- -
----------------- ------------------
Net cash provided by financing activities - -
----------------- ------------------
Net increase in cash 2,921,601 (1,714)
Cash and cash equivalents at the beginning of period 719,929 1,000,269
----------------- ------------------
Cash and cash equivalents at the end of period $ 3,641,530 $ 998,555
================= ==================
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ - $ 1,900,000
================= ==================
Supplemental schedule of noncash investing activity:
Noncash purchases of property and equipment $ 375,000 $ 826,500
================= ==================
</TABLE>
See notes to financial statements.
6
<PAGE>
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 November 30, 1999 and its results of operations and its cash flows
for the three and nine months ended November 30, 1999 and 1998.
Results of operations for the three and nine month periods ended
November 30, 1999 are not necessarily indicative of the results that
may be expected for the year ending February 28, 2000.
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 nine months ended
November 30, 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 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,
7
<PAGE>
RMS TITANIC, INC.
Notes to Financial Statements
(unaudited)
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.
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 nine
months ended November 30, 1999 included $622,317 from this 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. The Company's revenue for the
nine month period ended November 30, 1999 included $200,000 from this
agreement.
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
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.
Revenue of $530,358 was included from this exhibition for the nine
month period ended November 30, 1999.
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 November 30,
1999 is $729,167 which represents the unearned portion of the minimum
fee. The Company's revenue for the nine month period ended November
30, 1999 included $1,770,823 from this agreement.
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
8
<PAGE>
RMS TITANIC, INC.
Notes to Financial Statements
(unaudited)
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 $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 nine month period
ended November 30, 1999 includes $1,245,228 from the Atlantic City
exhibition.
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.
9
<PAGE>
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- 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.
Please refer to Part II, Item 1 of this form 10-Q, for additional
legal proceedings information.
10
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RMS TITANIC, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q and the discussion which follows contains forward looking
statements that should be read in conjunction with the Financial Statements and
notes thereto, appearing elsewhere herein. These statements include, among
others, information regarding future operations and future net cash flows. Such
statements reflect our current views with respect to future events and financial
performance. These forward looking statements involve risks and uncertainties,
including, without limitation, general economic and business conditions, changes
in political, social and economic conditions, regulatory initiatives and
compliance with governmental regulations, many of which are beyond our control.
Since these statements involve risks and uncertainties and are subject to change
at any time, our actual results could differ materially from expected results.
GENERAL
On May 4, 1993, RMS Titanic, Inc. acquired all of the assets and assumed all of
the liabilities of Titanic Ventures Limited Partnership ("TVLP"), a Connecticut
limited partnership.
Pursuant to a judgment entered in the Federal District Court for the Eastern
District of Virginia on June 7, 1994, we were declared salvor-in-possession of
the vessel RMS Titanic (the "Titanic"), the sole and exclusive owner of any
items recovered from the Titanic and, so long as we are 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 and 1998.
We were 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 approximately 400 miles off the coast of
Newfoundland; obtaining oceanic material and scientific data available there
from in various forms, including still and moving photography and artifacts from
the wreck site; and utilizing such data and artifacts for historical
verification, scientific education and public awareness and in revenue-producing
activities such as touring exhibitions, television programs and the sales of
still photography. In August 1987, we contracted with the Institute of France
for the Research and Exploration of the Sea ("IFREMER") to conduct an expedition
and dive to the wreck of the Titanic. Utilizing state-of-the-art technology of
IFREMER, which is the French Government's, and the world's largest,
oceanographic institute, approximately sixty (60) days of research and recovery
operations were performed at the Titanic wreck site through the use of a manned
submersible NAUTILE. Approximately 1,800 objects were recovered during the
course of thirty-two (32) dives on such 1987 expedition. The recovered objects
were conserved and preserved by Electricite de France ("EDF"), the French
government-owned utility. In addition to the recovered objects, our 1987
expedition also produced approximately 140 hours of videotape footage and an
estimated 7,000 still photographs from the wreck site.
In June 1993, we successfully completed our second expedition to the Titanic
wreck site, recovering approximately 800 artifacts and producing approximately
105 hours of videotape footage during the course of fifteen (15) dives. In July
1994, we recovered over 1,000 objects and produced approximately 125 hours of
videotape footage during our third expedition to the Titanic wreck site. In
August 1996, we recovered 74 objects and produced approximately 125 hours of
videotape footage during our fourth expedition to the Titanic wreck site. In
cooperation with Discovery Communications, Inc., we produced three (3) hours of
television programming based upon our 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 (the "Big
Piece"). Although we raised the Big Piece to within approximately 200 feet of
the surface of the ocean, efforts to recover this object were unsuccessful as a
result of stormy weather conditions and resulting ocean turbulence.
11
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RMS TITANIC, INC.
In August 1998, we recovered 70 objects and produced approximately 350 hours of
videotape footage during our fifth expedition to the Titanic wreck site. This
expedition, again undertaken in cooperation with Discovery Communications, Inc.,
produced five (5) hours of television programming about the expedition,
including the first-ever live broadcast from the Titanic wreck site and a one
(1) 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.
Our 1993, 1994, 1996 and 1998 Titanic expeditions were also conducted pursuant
to charter agreements with IFREMER. The objects recovered in the 1993, 1994,
1996 and 1998 expeditions were transported to a privately-owned conservation
laboratory in France for restoration and/or preservation processes in
preparation for exhibition, except for the Big Piece, with respect to which
conservation processes have been ongoing while on exhibit as part of our
exhibition of Titanic artifacts in the United States.
During 1997 through the date of this report, exhibitions of objects recovered
from the Titanic were presented in Norfolk, Virginia (which opened in November
1996 and was presented until March 31, 1997); in Memphis, Tennessee (from April
3, 1997 to September 30, 1997), Hamburg, Germany (from May 8, 1997 to September
30, 1998); at the Queen Mary in Long Beach, California (from May 31, 1997 to
March 21, 1999); St. Petersburg, Florida (from November 15, 1997 through May 31,
1998); Boston, Massachusetts (from July 1, 1998 through November 30, 1998);
Zurich, Switzerland (from November 11, 1998 through May 9, 1999); St. Paul,
Minnesota (from January 1, 1999 through May 9, 1999); Several cities in Japan
(from July 24, 1998 through July 31, 1999); and Atlantic City, New Jersey (from
May 29, 1999 through September 7, 1999).
We have granted a subsidiary of SFX Entertainment, Inc. the exclusive worldwide
rights to present exhibitions of our Titanic artifacts commencing September 14,
1999 for a one-year period, subject to extension for four (4) additional periods
of one year each, in consideration of minimum payments of $8.5 million per year.
RESULTS OF OPERATIONS
Three months ended November 30, 1999 compared to three months ended November 30,
1998
During the three months ended November 30, 1999, our revenues were $1,882,346
compared to $1,179,796 for the same period of 1998, which represents an increase
of $702,550, or 60%. This increase was primarily attributed to an increase in
exhibition fees.
Revenues from exhibitions were $1,881,303 compared to $991,008 for the same
period of 1998, which represents an increase of $890,295, or 90%. This increase
was primarily attributable to differences in the timing of our receipts from
exhibitions and the extent of our exhibition activities during the respective
fiscal periods. In addition, revenue from our exhibition in Atlantic City, New
Jersey during the three months ended November 30, 1999 was substantially greater
than revenue from our exhibition in Boston, Massachusetts during same period of
1998, while our revenue from our exhibition in Zurich, Switzerland during the
three month period ended November 30, 1999 was substantially less than revenue
from our Hamburg, Germany exhibition during the same period the previous year..
Licensing fees decreased $11,550 for the three months ended November 30, 1999
compared to the three month period ended November 30, 1998. This decrease was
the result of the forgiveness of certain licensing fees which amounted to
approximately $12,500.
Merchandise and other revenues for the three months ended November 30, 1999 were
$9,850 compared to $118,694 for the same period of 1998, which represents a
decrease of $108,844 or 1,100%. This decrease was primarily attributed to
heightened interest in Titanic products during the quarter ended November 30,
1998, at which time occurred the release of the feature film "Titanic." In
addition, during this same quarter, we received revenue from a book published in
conjunction with unrelated third parties.
12
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RMS TITANIC, INC.
The sale of coal was $2,743 for the three months ended November 30, 1999
compared to $70,094 for the same period a year ago, which represents a decrease
of $67,351 or 2,460%. This decrease was the result of less emphasis on sales of
coal on our Internet site and our retail efforts through third parties.
Costs associated with coal sold remained the same as a percentage of sales and
was in line with the dollar volume of sales decreases. The cost of merchandise
sold as a percentage of sales increased from 30% of sales for the period ended
November 30, 1998 to 75% of sales for the same period of 1999. This increase was
associated with discounts and mark downs of our merchandise in the quarter ended
November 30, 1999 as our strategy focused less on retail outlets.
General and administrative expenses were $659,532 for the three month period
ended November 30, 1999 as compared to $488,901 for the same period on 1998,
which represents an increase of $170,631 or 35%. This increase was primarily
attributed to increases in conservation expenses associated with the restoration
of artifacts of approximately $120,000 and an increase in officer salaries of
$120,000. These expenses were offset by reduced legal and professional fees of
approximately $55,000 and freight costs of approximately $15,000 for the three
month period ended November 30, 1999 as compared to the same period of 1998.
Depreciation and amortization costs increased $15,745, or 20% from $79,115 for
the three month period ended November 30, 1998 to $94,860 for the same period in
1999. This increase is attributed to an increase in capital expenditures during
1999. Capital expenditures for property and equipment increased by $165,517 for
the nine month period ended November 30, 1999.
Interest income was $35,502 for the three month period ended November 30, 1999
as compared to $11,581 for the same period of 1998, which represents an increase
of $23,921, or 207%. This increase was the result of additional interest earned
on our cash reserves. Cash and cash equivalents were $3,641,530 at November 30,
1999 as compared to $998,555 at November 30, 1998.
Net income from was $472,937 for the three month period ended November 30, 1999
as compared to $358,983 for the prior year period. This represents an increase
of $113,954 or 32%, which was primarily attributed to increases in exhibition
revenues.
Nine months ended November 30, 1999 compared to nine months ended November 30,
1998
During the nine months ended November 30, 1999, our revenues were $4,619,051
compared to $8,384,914 for the same period of 1998, which represents a decrease
of $3,765,863, or 82%. This decrease was primarily attributed to a decrease in
licensing fee revenue.
Licensing fees decreased $3,476,828 compared to the nine month period ended
November 30, 1998. This decrease was the result of a lack of licensing revenues
in fiscal 2000 for expedition to the Titanic wreck site. During the nine month
period ended November 30, 1998, we earned licensing fees related to the
production and exploitation of audio and visual recordings with respect to our
expeditions to the Titanic wreck site during the summer of 1998.
We did not conduct an expedition to the Titanic wreck in 1999.
Revenues from exhibitions were $4,378,818 for the nine month period ended
November 30, 1999 compared to $4,161,538 for the same period of 1998, which
represents an increase of $217,280, or 5%. This increase was primarily
attributable to differences in the timing of our receipts from exhibitions and
the extent of our exhibition activities during the respective fiscal periods.
Merchandise and other revenues for the nine months ended November 30, 1999 were
$210,462 compared to $548,225 for the same period of 1998, which represents a
decrease of $337,763 or 160%. This decrease was primarily attributed to
heightened interest in Titanic products during the nine month period ended
November 30, 1998, at which time occurred the release of the feature film
"Titanic." In addition, during this same period, we received revenue from a book
published in conjunction with unrelated third parties.
13
<PAGE>
RMS TITANIC, INC.
The sale of coal was $25,008 for the nine months ended November 30, 1999
compared to $193,560 for the same period a year ago, which represents a decrease
of $168,552 or 674%. This decrease was the result of less emphasis on selling
coal on our Internet site and our retail efforts through third parties.
Costs associated with coal sold and merchandise sold remained the same as a
percentage of sales and were in line with the dollar volume of sales decreases
for the nine month periods ended November 30, 1999 and 1998.
General and administrative expenses were $1,926,309 for the nine month period
ended November 30, 1999 as compared to $1,353,680 for the same period of 1998,
which represents an increase of $572,629 or 42%. This increase was attributed to
increases in exhibition costs, conservation expenses, management compensation,
and accounting costs. Exhibition costs increased approximately $160,000 for the
nine month period ended November 30, 1999 as compared to the same period the
previous year. This increase was primarily attributable to the geographic
locations of the exhibits. Conservation expenses associated with the restoration
of artifacts increased $80,000 for the corresponding periods of 1999 and 1998.
During the nine month period ended November 30, 1999 management compensation
increased approximately $340,000 as compared to the same period of 1998.
Depreciation and amortization costs increased $80,908, or 49% from $164,565 for
the nine month period ended November 30, 1998 to $245,473 for the same period in
1999. This increase was attributed to an increase in capital expenditures during
1999. Capital expenditures for property and equipment increased by $165,517 for
the nine month period ended November 30, 1999.
During the nine months ended November 30, 1998, we incurred $1,845,000 of costs
related to vessel and equipment chartering related to our audio-visual
licensee's requirements for the Summer of 1998 expedition. During the nine
months ended November 30, 1998, we recorded an impairment loss of $150,000
attributable to exhibitry equipment related to our 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.
Interest income was $65,844 for the nine month period ended November 30, 1999 as
compared to $37,792 for the same period of 1998, which represents an increase of
$28,052, or 174%. This increase was the result of additional interest earned on
our cash reserves. Cash and cash equivalents were $3,641,530 at November 30,
1999 as compared to $998,555 at November 30, 1998.
Net income was $1,313,260 for the nine month period ended November 30, 1999 as
compared to $2,938,037 for the prior year period. This represents a decrease of
$1,624,777 or 124%, which was primarily attributed to a lack of license fee
revenues for the nine months ended November 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased by $2,921,601 to $3,641,530 at November
30, 1999 from $719,929 at November 30, 1998. At November 30, 1999 we had working
capital of $1,653,136, and a current ratio of 1.4, compared to $563,422 in
working capital at November 30, 1998, and a current ratio of 1.2. The primary
source of cash received during the nine month period ended November 30, 1999 was
$2,957,591 generated from operations.
Our capital commitments during our 2000 fiscal year include lease payments for
our principal offices, and compensation to our executive officers and general
counsel.
In addition, in order to maintain our salvor-in-possession status we must, among
other things, maintain a reasonable presence at the Titanic wreck through
periodic expeditions. We will be required to incur the costs for future
expeditions so as to maintain our salvor-in-possession status. Our ability to
14
<PAGE>
RMS TITANIC, INC.
undertake future expeditions may be dependent upon our cash reserves and the
availability of financing from the grant of licenses to produce television
programming and/or the grant of expedition sponsorship rights, however, there
are no assurances that such financing will be available on satisfactory terms.
Our near term operating needs will be financed principally through our
exhibition tour agreement with a subsidiary of SFX Entertainment, Inc, pursuant
to which we 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 RMS Titanic, Inc. of $8.5 million.
Substantially all of the our cash flow derives from our operating activities
during the nine month period ended November 30, 1999. None of the our cash flow
during this period was derived from financing activities, with approximately
$36,000 used in investing activities.
The Company's bank has stopped honoring checks and froze all funds on deposit
until the dispute among the directors as described in Part II, Item 1, is
resolved or otherwise settled. In addition, SFX has notified the Company it will
not tender the $2,000,000 due for the last quarter of 1999 until the dispute
among current and former directors is resolved or settled. The bank's decision
to freeze funds and SFX's decision to defer funding of the $2,000,000 payment is
having an adverse effect on the Company's available working capital and
short-term liquidity.
YEAR 2000 ISSUES
As of the date hereof, we are not aware of any Year 2000 issues involving our
internal software or computer systems.
CURRENCY FLUCTUATIONS
In connection with our business activities outside of the United States, we are
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, our potential revenues from exhibition and
merchandising activities outside of the United States will be adversely
affected. During the nine month period ended November 30, 1999, there were no
significant fluctuations in the exchange rates with respect to foreign
currencies in which we transact business. Although our 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, we
have sought and will continue to seek to base our financial commitments and
understandings upon the United States dollar in our material business
transactions so as to minimize the adverse potential effect of currency
fluctuations.
15
<PAGE>
RMS TITANIC, INC.
PART II
OTHER INFORMATION
-----------------
Item 1 - Legal Proceedings
- --------------------------
On December 15, 1999, RMS Titanic, Inc., Arnie Geller and G. Michael
Harris commenced an action in the Supreme Court of the State of New York, in and
for the County of New York, under Index No. 605625/99 (the "New York Action").
Contemporaneously with the filing of the summons and complaint, the
plaintiffs obtained a temporary restraining order pending a motion brought by
plaintiffs for a preliminary injunction to enjoin defendants Allan Carlin,
George Tulloch, Kurt Hothorn and Paul Henri Nargeolet from interfering with the
business of plaintiff RMS Titanic, Inc. Arnie Geller and G. Michael Harris were
two of the six directors prior to November 26, 1999.
Prior to November 26, 1999, plaintiffs Arnie Geller and G. Michael
Harris; Harris and defendant Allan Carlin, George Tulloch, Kurt Hothorn and Paul
Henri Nargeolet were all directors of plaintiff RMS Titanic, Inc. The New York
Action was commenced with the filing of a summons and complaint on the 15th days
of December, 1999.
The plaintiffs in the New York Action complaint had six causes of action:
(a) A cause of action for a permanent injunction enjoining defendants from
interfering with the business of plaintiff RMS Titanic, Inc.;
(b) A cause of action for declaratory judgment declaring that plaintiffs Arnie
Geller and G. Michael Harris are the sole directors of the corporation
pursuant to a majority written consent signed on November 26th, which
majority consent was signed either by shareholders or signed as proxies;
(c) A cause of action for declaratory judgment adjudging that a purported
warrant or option given by plaintiff RMS Titanic, Inc. to defendant Allan
Carlin in 1994 to purchase 500,000 shares of common stock of RMS Titanic,
Inc. at an exercise price of $1.25 per share was never legally extended. In
investigating the matter, it was discovered that on a computer disk the
extension was prepared sometime in June because of the time sequence of the
previous documents on the disk and the subsequent documents. It also
appears that George Tulloch, a sole director of the corporation, signed a
unanimous directors consent in June 1999 and said directors consent was
transmitted by George Tulloch in Hawaii to the New York office;
(d) A cause of action for an accounting against defendant Allan Carlin for the
monies paid to him for the period commencing January 1, 1996 and
thereafter;
(e) A cause of action for a judgment against defendant Allan Carlin directing
him to deliver the physical assets to plaintiff RMS Titanic, Inc; and
(f) A cause of action for a judgment against defendant George Tulloch directing
him to deliver the physical assets to plaintiff RMS Titanic, Inc.
Unbeknownst to plaintiffs, defendants on December 13, 1999, commenced
an action in the United States District Court for the District of Connecticut by
the filing of a summons and complaint (the "Connecticut Action") against Arnie
Geller, G. Michael Harris, John A. Joslyn, Westgate Entertainment Corp., William
S. Gasparrini, Jon Thompson, P. David Lucas, Steven P. Sybesma, Joe Marsh,
Stanley Thomas, Tag Acquisition, LLC, Michael T. Cronin, Johnson, Blakely, Pope,
Bokor, Ruppel & Burns, P.A., John Hill, James Jill, Shirley Hill, Anne Hill,
Fairline Limited and Financial Group of Kuwait (the "Connecticut Complaint").
The Connecticut Action was filed under file No. 399CV2401 (Judge Hall).
Defendants Geller, Harris, Joslyn, Gasparrini, Thompson, Lucas, Sybesma, Marsh
and Thomas signed a Schedule 13D, which was filed with the Securities and
16
<PAGE>
RMS TITANIC, INC.
Exchange Commission ("SEC") on November 26, 1999. The other defendants are as
follows:
Michael T. Cronin is a partner in the law firm of Johnson, Blakely,
Pope, Bokor, Ruppel & Burns, P.A., a Florida law firm located in Clearwater,
Florida. The law firm is also a defendant.
Defendants John Hill, James Hill, Shirley Hill and Anne Hill are
members of the Hill family, which gave irrevocable proxies to defendant Arnie
Geller.
Defendants Fairline Limited and Financial Group of Kuwait gave
defendants a proxy.
The Connecticut plaintiffs, which are the New York defendants, named
RMS Titanic, Inc. as plaintiff in the Connecticut Action.
The complaint in the Connecticut Action contained eleven causes of
action:
(a) The first cause of action alleged a claim under ss.13(d) of the Securities
Exchange Act of 1934 and Rule 13(d) promulgated thereunder. See pp.52 - 56
of the complaint. Plaintiff seek legal and equitable relief setting aside
the actions taken by defendants and a judgment declaring the Connecticut
plaintiffs to be directors and management, and enjoining defendants from
voting their shares.
(b) The second cause of action is a claim under ss.14(d) and (f) of the
Securities Exchange Act of 1934, as amended, and Rule 14 promulgated
thereunder.
(c) The third cause of action seeks a declaratory judgment adjudging that the
Connecticut defendants acted without a majority of the outstanding shares
because of violation of ss.13(d) and ss.14(a) of the Securities Exchange
Act.
(d) The fourth cause of action is for common law fraud.
(e) The fifth cause of action is for breach of fiduciary duty.
(f) The sixth cause of action alleges a violation of stipulated judgment dated
December 10, 1996 and agreement and stipulation dated March, 1999.
(g) The seventh cause of action is for unlawful entry and detainer under New
York law.
(h) The eighth cause of action seeks declaratory relief alleging violations of
Florida Corporation Law regarding proxies, consents by shareholders without
a meeting and control-share acquisitions.
(i) The ninth cause of action seeks recovery under the Racketeering Influence
and Corrupt Organization Act under ("RICO") based on RICO.
(j) The tenth cause of action is a cause of action under RICO under 18
U.S.C.ss.1962(d).
(k) The eleventh cause of action seeks relief under the Connecticut Unfair
Trade Practices Act.
On December 21, 1999, the hearing of the preliminary injunction in the
New York Action was heard by Judge Cozier. Judge Cozier stated the New York
defendants are the Connecticut plaintiffs who put in answering papers the
complaint, together with a copy of the New York defendants' motion in
Connecticut for a preliminary injunction returnable January 7, 2000 with an
order of expeditious discovery. Judge Cozier said that because they filed the
papers two days before the New York Action, and dispute the offices are in New
York, Judge Cozier denied the motion and stated that the matter would be heard
in Connecticut.
17
<PAGE>
RMS TITANIC, INC.
On January 7, 2000, the evidentiary hearing for the Connecticut
plaintiffs' motion for preliminary injunction was commenced. Judge Hall only
heard two witnesses and adjourned the matter to Wednesday, January 12, 2000.
However, Judge Hall recused as the judge from the case. The reason for such
recusal is unknown. Judge Underhill, a member of the Federal Court for the
District of Connecticut, was substituted. Judge Underhill referred the case to
Magistrate Garfinkel who is attempting to have all parties resolve their
differences. The parties are currently in settlement negotiations. The failure
to reach a definitive settlement agreement on a timely basis will have a
material adverse effect on the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Effective November 26, 1999, through an Action by Written Consent of
Stockholders holding the majority of the voting rights for outstanding common
stock, George A. Tulloch, Allan H. Carlin, Kurt Hothorn and Paul Henri Nargeolet
were removed as directors of the Company leaving Arnie Geller and G. Michael
Harris as the remaining two directors. Stockholders holding voting rights for a
total of 8,136,630 shares consented. See the Form 8-K, filed on or about
December 1, 1999.
In an attempt to resolve the litigation matters described in Part II -
Item 1 above, preliminary proxy materials were filed with the SEC on December
29, 1999, relating to a special meeting of shareholders. The purpose of this
special meeting of shareholders is to ratify the removal of Mr. Carlin, Mr.
Tulloch, Mr. Hothorn and Mr. Nargeolet and to elect Mr. Harris, Mr. Geller and a
new nominee as directors. On January 10, 2000, the staff issued a comment letter
regarding preliminary proxy materials. The issuer's response to the comment
letter and timing of this special meeting is dependent upon the whether the
parties are able to enter a definitive and final settlement agreement regarding
the Connecticut and New York litigation referred to in Item 1 above.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) None
(b) See the Form 8-K filed on or about December 1, 1999.
18
<PAGE>
RMS TITANIC, INC.
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: January 19, 2000 By: /s/ Arnie Geller
---------------------------------------
Arnie Geller, Principal Executive Officer
19
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