January 19, 2000
RMS TITANIC INC (SOST)
Quarterly Report (SEC form 10-Q)
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.
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,
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.
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,
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.
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
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.
RMS TITANIC, INC. |
