Quarterly Report (SEC form 10-Q)- October 20, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RMS TITANIC INC (SOST)
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 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" 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
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
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.
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. |
