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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File No. 000-24452
RMS TITANIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Florida 59-2753162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 Battery Place, New York, New York 10004
Address of principal executive offices
Issuer's telephone number, including area code: (212) 558-6300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.0001 per share
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes No X
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ].
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of June 12, 1999, was:
$17,326,278.
The number of shares outstanding of each of the registrant's classes of
common stock, as of June 12, 1999, were: 16,187,119
NUMBER OF SHARES
TITLE OF EACH CLASS OUTSTANDING
------------------- -----------
Common Stock, par value $.0001
per share 16,187,119
DOCUMENTS INCORPORATED BY REFERENCE: The registrant's definitive proxy
statement to be filed pursuant to Regulation 14A or definitive information
statement to be filed pursuant to Regulation 14C.
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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Annual Report
on Form 10-K contains forward-looking statements within the meaning of the
Private Securities Reform Act of 1995 which involve certain risks and
uncertainties. 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 and under in Item 7 "Managements's Discussion and
Analysis of Financial Conditions and Operations." 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 the 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 by the Company or any
other person that the objectives and plans of the Company will be achieved.
ITEM 1. BUSINESS
BACKGROUND
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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 (the "Acquisition"). References to the
"Company" in this Report relate to TVLP prior to the acquisition and the
combined entities of TVLP and RMS Titanic, Inc. after the Acquisition.
Pursuant to a judgment entered in the Federal District Court for the
Eastern District of Virginia on June 7, 1994, the Company was 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 the
Company is 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.
See "Salvage Rights" below.
The Company was 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 therefrom 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, the Company 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 1800 objects were
recovered during the course of thirty-two (32) dives on such 1987
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expedition. The recovered objects were conserved and preserved by Electricite de
France ("EDF"), the French government-owned utility. In addition to the
recovered objects, the Company's 1987 expedition also produced approximately 140
hours of videotape footage and an estimated 7,000 still photographs from the
wreck site.
In June 1993, the Company successfully completed its 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, the Company recovered over 1,000 objects and produced
approximately 125 hours of videotape footage during its third expedition to the
Titanic wreck site. In August 1996, the Company recovered 74 objects and
produced approximately 125 hours of videotape footage during its fourth
expedition to the Titanic wreck site. In cooperation with the Company, Discovery
Communications, Inc. produced three (3) hours of television programming based
upon the Company's 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 the Company raised the Hull
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.
In August 1998, the Company recovered 70 objects and produced
approximately 350 hours of videotape footage during its 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.
The Company's 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 the
Company's exhibition of its Titanic artifacts in the United States.
During 1997 through the date of this report, exhibitions of objects
recovered from the Titanic were presented in association with the Company 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); a continuing tour to several cities in Japan (from
July 24, 1998 until its scheduled conclusion on July 31, 1999;) and in Atlantic
City, New Jersey (from May 29, 1999 until its
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scheduled conclusion on September 7, 1999).
The Company has granted a subsidiary of SFX Entertainment, Inc. the
exclusive worldwide rights to present exhibitions of the Company's 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 to the Company.
PLAN OF OPERATIONS
------------------
The Titanic has captivated the thoughts and imagination of millions of
people throughout the world for the decades since 1912, when it struck an
iceberg and sank in the North Atlantic, causing the loss of more than 1500 of
the 2228 lives on board. The depth of the abiding international interest in the
Titanic over the more than eighty-five years since its sinking is reflected by
the December 1997 release of the highest grossing motion picture of all time,
"Titanic," as well as by a prodigious volume of works that have been published
about all facets of its story, the production of other feature length movies and
plays about its tragic voyage, and the broadcast of television programs about
its 1985 discovery and scientific examinations of the wreck approximately two
and one-half miles below the surface of the ocean. As the only entity that has
recovered and conserved items from the Titanic, the Company is in the unique
position to present, in a previously untold manner, a visible and tangible
perception of the Titanic by the exhibition of these artifacts to the general
public. Management of the Company intends to present such exhibitions throughout
the world, and to thereafter establish a permanent museum for the display of the
Titanic artifacts, in an enlightening and dignified manner that embodies respect
for those who lost their lives and embraces the advances in science that have
permitted the memory of the Titanic to be physically presented to current and
future generations. The principal sources of revenues of the Company have been
and are expected to be ticket sales for admission to exhibitions, merchandising
revenues, licensing revenues and sponsorship revenues.
The long-term intent of the Company's research and recovery program is
to keep the artifacts recovered from the Titanic together as a "collection" and
make them available for exhibition to the public. Pursuant to its charter
agreements with IFREMER, the Company has agreed that the "collection" of
artifacts would not be sold by the Company to any individual or private
collector. However, if it became necessary to protect the interests of the
Company, all of the artifacts as a "collection" could be sold to an entity that
would make them available for exhibition to the public, subject to the
restrictions of the Company's agreement with IFREMER. Such agreement defines
"artifact" as any object that was either a part of the Titanic or a possession
of a person on board. Coins, coal, currency, diamonds (non-jewelry), precious
metals, and gem stones are not considered artifacts for purposes of the IFREMER
agreements.
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EXHIBITIONS
-----------
The Company plans to present exhibition tours of Titanic artifacts at
cities throughout the world. In pursuit of this plan, the Company has presented
exhibitions in association with third parties in cities in the United States,
Europe and Japan.
Agreement with Subsidiary of SFX Entertainment, Inc.
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 $8.5 million annually. The license agreement has an initial term of
one year, commencing September 14, 1999, with SFX having the option to extend
the term for up to four additional one-year periods. Such $8.5 million 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.
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 $8.5 million annual guaranteed minimum payment to be made
to the Company will be credited against its share of net revenues in excess of
project expenses. The Company has the right to terminate the license agreement
effective as of September 14, 2001, or annually thereafter, upon the occurrence
of certain conditions, including the merger or sale of majority control of the
Company or substantially all of its assets. If the Company terminates the
license agreement, SFX will have the right to continue one major exhibition,
containing no more than 200 of the Company's Titanic artifacts and involving an
investment by SFX in excess of $2,000,000, until no later than September 14,
2004 in consideration of the payment to the Company of a minimum of $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 is a related party to this exhibition.
Atlantic City Exhibition
The Company is currently presenting an exhibition of approximately 200
of its Titanic artifacts in Atlantic City at the Tropicana Hotel. This
exhibition, which includes the Big Piece recovered during the 1998 Titanic
expedition, commenced on May 29, 1999 and is scheduled to conclude on September
7, 1999. Pursuant to the exhibition agreement, 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
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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. See "Business-Merchandising"
below.
SFX has no rights or interest in any revenues of the Company derived
from the Atlantic City exhibition.
Japan Exhibition
The Company has entered into an agreement with Titanic Exhibition Japan
Inc. ("TEJI") for the exhibition of approximately 200 Titanic artifacts in seven
(7) venues in Japan commencing on or about July 24, 1998 and ending on or about
August 1, 1999. The Japanese exhibition has been presented in the cities of
Tokyo from July 24, 1998 to August 24, 1998; Yokohama from August 29, 1998 to
October 15, 1998; Joetsu from November 7, 1998 to November 29, 1998; Osaka from
December 5, 1998 to February 7, 1999; Hiroshima from April 3, 1999 to April 25,
1999 and in Fukuoka from April 29, 1999 to the present, with a scheduled closing
date of June 20, 1999. It is planned that the exhibition will be presented in
the city of Sapporo form June 26, 1999 to August 1, 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
is responsible for payment of all costs and expenses related to the design,
construction, operation and marketing of the exhibition, and that the Company
will receive the greater of $3.00 per person who attends the exhibition or fifty
(50%) of the profits from the exhibition. Under the exhibition agreement,
"profits" means the excess of net revenues (including ticket, sponsorship,
merchandising and ancillary revenues, if any, derived from the exhibition) less
"project expenses" (which includes all costs and expenses of every kind and
description in establishing, operating and marketing the exhibition up to a
maximum of approximately $3,470,000). Additionally, the exhibition agreement
provides that RMST has the right to select and obtain legal title to fifty (50%)
of the exhibitry utilized in the exhibition at no additional cost to RMST, with
such rights to be exercised no later than the completion of the exhibition tour.
SFX has no rights or interest in any revenues of the Company derived
from the Japan exhibition tour.
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Prior Exhibitions
The Company's prior exhibitions of its Titanic artifacts have included
the following:
Prelude Exhibition at the National Maritime Museum
--------------------------------------------------
On October 4, 1994, the Company and the National Maritime Museum opened
The Wreck of the Titanic exhibition at the National Maritime Museum. This
exhibition, which was presented as a prelude to the Company's planned worldwide
exhibition tour, was scheduled to conclude on April 2, 1995. In March 1995, this
prelude exhibition was extended to October 1, 1995. A record-breaking number of
people visited the National Maritime Museum during the Prelude Exhibition, with
approximately 720,000 people having been admitted to the Museum during its term
of presentation.
The Wreck of the Titanic exhibition featured the first major
presentation of artifacts recovered from the debris field surrounding the
Titanic wreck site. Approximately 150 artifacts were exhibited in an area
approximating 5,000 square feet. This exhibition, which covered several themes,
including the history of the Titanic, searching for and discovering the wreck,
the 1987, 1993 and 1994 recovery expeditions, artifact conservation and
preservation, and the contemplated world tour, also included a 4-meter model of
the bow section of the wreck, a one-third scale model of the Nautile (the
high-technology manned submersible used to explore the wreck site and recover
artifacts), and previously unseen footage of the wreck site. The principal
obligations of the Company with respect to the Prelude Exhibition were to make
the Titanic artifacts available for the term of such exhibit; provide
photographs, video footage and other information relating to the recovery of the
Titanic artifacts; provide models and plans of the worldwide exhibition for
display in the Prelude Exhibition; and to consult with the National Maritime
Museum with respect to the design and content of the Prelude Exhibition. The
National Maritime Museum was responsible for the design, fabrication and
operation of the Prelude Exhibition.
Pursuant to the Prelude Exhibition agreement, the Company and the
National Maritime Museum equally shared all revenues from ticket sales through
April 2, 1995, net of value added tax, refunds and commissions ("Net Revenue"),
after recoupment by the National Maritime Museum of its costs and adjustments,
up to a maximum of pound sterling 600,000, incurred in connection with the
design and construction of the exhibition. Pursuant to the agreement, extending
the prelude exhibition from April 2, 1995 through October 1, 1995, the Company
received twenty (20%) percent of the Net Revenue. The Company's share of the Net
Revenues derived from the Prelude Exhibition amounted to $650,071 during the
twelve month period of its presentation.
Merchandising activities with the National Maritime Museum and
Winterland Productions (UK) Limited ("Winterland") were undertaken in connection
with The Wreck of the Titanic exhibition, pursuant to which all merchandise was
designed, manufactured and/or acquired by Winterland, and profits from
merchandising activities were shared equally between the Company, the National
Maritime Museum and Winterland. The Company's share of profits from such
merchandising activities amounted to $174,305 during the Prelude Exhibition.
Memphis Exhibition
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Following the Prelude Exhibition, in 1996 the Company entered into an
agreement with the City of Memphis, Tennessee for the presentation of a larger
exhibition of Titanic artifacts in Memphis, Tennessee from April 3, 1997 through
September 30, 1997. Pursuant to the exhibition agreement, as amended, the City
of Memphis was responsible for payment of all costs and expenses related to the
design, construction and operation of the exhibition. Additionally, pursuant to
the agreement, the Company received exhibition revenues of $720,000 in
installments between September 1996 and August 1, 1997, and also received 65% of
the net profits, as defined, derived from ticket, merchandise and sponsorship
revenues in excess of $5,000,000, plus the actual out-of-pocket expenses
incurred by the City in packing, shipping and insuring the transit of the
objects from Semur-en-Auxious, France, where the conservation laboratory is
located, to Memphis, Tennessee. The exhibition agreement also granted the
Company a right of first refusal for the purchase of any or all display cases,
theatrical pieces, didactic panels, models, lighting instruments, and other
display items that may be developed by the City for the exhibition at a price
equal to seventy-five (75%) percent of the cost of the production thereof.
The Memphis exhibition displayed in themed galleries more than 250
artifacts recovered between 1987 and 1994 by the Company in an area of
approximately 25,000 square feet, including a bronze cherub, the ship's
whistles, a steward's jacket, silver dinnerware, fine china, gold coins,
jewelry, delicate paper objects such as a stock certificate and personal
letters, communications and navigational gear, and a piece of one of Titanic's
engines. This exhibition also included an 18-foot scale model of the Titanic,
replications of a First Class stateroom, dining rooms, Third Class and crew
cabins and recreational areas of the Titanic, the Marconi Room, and a model of
the bow of the wreck.
Approximately 635,000 individuals attended the Memphis exhibition
during the six-month term of its presentation. The Company earned approximately
$2,040,000 of revenue from this exhibition, inclusive of the minimum guaranteed
fees of $720,000.
The objects exhibited at the Memphis exhibition and associated
exhibitry were transported and installed in the Florida International Museum in
St. Petersburg, Florida for an exhibition presented from November 15, 1997 to
May 31, 1998. See "St. Petersburg Exhibition" below.
Hamburg Exhibition
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The Company entered into an agreement, as amended, with Cre - Co Finanz
GmbH ("CRE"), a company organized under the laws of Germany, for the
presentation of an exhibition of approximately 300 of the Company's Titanic
artifacts in Speicherstadt, the historic maritime center of Hamburg, Germany,
from May 8, 1997 through November 8, 1997 (the "Hamburg Exhibition Agreement").
This agreement was amended to extend the exhibition until September 30, 1998,
following previous extensions through January 31, 1998 and May 10, 1998. CRE was
responsible for payment of all expenses incurred in connection with establishing
and presenting this exhibition. In addition to displaying objects from Titanic
and her passengers and crew, the Hamburg exhibition included the first
opportunity for the public to view Titanic's bell, compass, telegraph and safe
together. The theme of the Hamburg exhibition was an interactive presentation of
the technological advances required to accomplish the recovery and conservation
of Titanic's artifacts, and included replicas of the First Class, Second Class
and Third Class cabins, and a model of the bow of the wreck.
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Pursuant to the Hamburg Exhibition Agreement, the Company received
two-thirds (2/3) and CRE received, through February 28, 1998, one-third (1/3) of
the profits from this exhibition (the "Profits), which were defined as net
revenues (including ticket, sponsorship, merchandising and ancillary revenues,
if any, derived from the exhibition) less "project expenses" (which included all
costs and expenses of every kind and description in establishing, operating and
marketing the exhibition up to a maximum of approximately $2,700,000, plus an
additional allowance, as defined, for operating expenses for attendance
thresholds between 300,000 and 700,000. Simultaneously with the execution of
this agreement, the Company was paid the sum of $350,000 as an advance against
its share of Profits (the "Advance"). In addition, CRE advanced the sum of
$110,000 during the 1998 fiscal year which was provided for the conservation of
artifacts utilized in the Hamburg exhibition. The Hamburg Exhibition Agreement
was amended so as to provide that in satisfaction of Cre's obligations to the
Company for the period ended February 28, 1998, CRE would pay to the Company the
sum of $433,189 and transfer to the Company exhibitry utilized in the Hamburg
exhibition which cost $559,414, which was due to the Company for its share of
exhibition revenue earned. It was further agreed that CRE would pay to the
Company, for the period from March 1, 1998 through May 1, 1998, the sum of
$2.00 per visitor to the exhibition, fifteen (15%) percent of gross merchandise
sales, and fifty (50%) of the gross catalogue sales at the exhibition. During
the period between May 2, 1998 and September 30, 1998, the Company received
two-thirds (2/3) of all ticket revenues in excess of a monthly operating budget
of 400,000 DM; twenty (20%) percent of gross merchandise sales (exclusive of
catalogue sales) and fifty (50%) of gross catalogue sales, less the costs per
unit for printing the catalogue. The Company further agreed to pay two-thirds of
the cost of approximately 325,000 DM to refurbish the Hamburg exhibition, and up
to two-thirds (2/3), or up to $150,000, whichever was less, for the
deinstallation and shipment of the exhibition to Zurich, Switzerland. The
objects exhibited at the Hamburg exhibition and associated exhibitry were
transported and installed in a venue in Zurich, Switzerland for an exhibition
presented from November 11, 1998 to May 9, 1999. See "Zurich Exhibition" below.
The Company earned approximately $2,820,000 from the Hamburg
exhibition, inclusive of the $350,000 Advance paid to the Company, $110,000
advanced by CRE for the conservation of artifacts, and the $559,414 of exhibitry
transferred to the Company. Approximately 1.1 million people attended this
exhibition.
St. Petersburg Exhibition
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The Company entered into an agreement with the Florida International
Museum, Inc. ("FIM") and the City of Memphis (the "City") for an exhibition of
the artifacts and associated exhibitry displayed in the Memphis exhibition in
St. Petersburg, Florida from November 15, 1997 to May 15, 1998. Pursuant to the
exhibition agreement, FIM was responsible for payment of all costs and expenses
related to the design, construction and operation of the exhibition. This
agreement further provided that the Company would receive attendance fees (the
"Attendance Fees") as follows for attendees from whom FIM receives more than
$6.00 to attend the exhibition: $.34 per visitor for the first 250,000
visitors; $2.80 per visitor for 250,001 to 350,000 visitors; $3.10 per visitor
for 350,001 and 450,000 visitors; and $2.95 per visitor in excess of 450,000.
In addition, the Company would receive $1.00 for every visitor who pays $6.00
or less for admission to the exhibition. The exhibition agreement additionally
provided that the Company would receive ten (10%) of the gross revenue, as
defined, from the sale of merchandise at the FIM Gift Shop related to the
exhibition (the "Gift Shop Fee"). The minimum combined Attendance Fee and Gift
Shop Fee payable to the
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Company was $300,000, $100,000 of which was paid in January 1997, $50,000 of
which was paid on November 15, 1997, and the balance of which was paid during
the term of the exhibition from the Company's share of ticket and merchandise
revenue. Additionally, pursuant to the agreement, FIM agreed to lease the
exhibitry utilized in the Memphis exhibition for $150,000. Such $150,000 payment
was remitted on the Company's behalf for the purchase of exhibitry from the City
under the agreement. The Company exercised its rights to purchase items of
exhibitry at a cost in excess of such $150,000.
This exhibition agreement was amended so as to provide for an extension
of the term of this exhibition to May 31, 1998, with the Company to receive,
during the period from May 16, 1998 through May 31, 1998, $2.60 per visitor from
whom FIM receives more than $6.00 per ticket and $1.00 per visitor from whom FIM
receives $6.00 or less per ticket. In all other respects, the exhibition
agreement among FIM, the City of Memphis and the Company remained unchanged.
The Company earned approximately $1,577,500 from this exhibition. Upon
closing of the exhibition on May 31, 1998, approximately 830,000 people had
attended the exhibition.
Queen Mary Exhibition
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The Company entered into an agreement with the RMS Foundation, Inc. to
exhibit 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
an exhibition titled "Titanic: The Expedition." This agreement was amended from
time-to- time so as to extend this exhibition until March 21, 1999 (the
"Extension Term"). Approximately thirty (30) unrestored artifacts recovered
during the Summer of 1996 expedition (including one of Titanic's whistles, a
large silver soup tureen, binoculars in a leather case, and a porthole) and
fourteen (14) conserved artifacts from prior expeditions are displayed at the
Queen Mary, together with a life-size rendition of the 20 ton section of the
Titanic hull that the Company sought to raise from the debris field surrounding
the Titanic wreck site during the Summer of 1996 Expedition, a two-ton flotation
bag used in artifact recovery operations, and a full-size replica of a three-ton
light tower that the Company utilized to illuminate portions of the wreck during
the Company's 1996 expedition to the Titanic. The theme of this exhibition is
the exploration of, and efforts to recover objects from, the Titanic wreck.
Pursuant to the Queen Mary exhibition agreement, RMS Foundation is responsible
for payment of all costs and expenses related to the design, construction and
operation of the exhibition. Pursuant to the agreement, as amended, the Company
received from the sale of up to 150,000 tickets, $2.00 per ticket during the
Initial terms 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
receives fifty (50%) percent of net profits, as defined, from the sale of
merchandise at the Queen Mary exhibition, and fifty (50%) of any sponsorship
revenue.
The "Titanic: The Expedition" presented at the Queen Mary is designed
to be presented in an area of approximately 6,000 square feet, as compared to
the Memphis, Hamburg, and St. Petersburg exhibitions, which have occupied
between 30,000 square feet to more than 40,000 square feet. The Queen Mary
exhibition is substantially the same as the "Titanic: The Expedition" exhibition
presented at the National Maritime Center (NAUTICUS) in Norfolk, Virginia from
November 27, 1996 through March 31, 1997, from which the Company derived ticket
and merchandising revenues of approximately $125,000 through February 28, 1997.
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The Queen Mary exhibition closed on March 21, 1999, with approximately
264,000 visitors having attended this exhibition. The Company earned
approximately $713,000 from this exhibition.
Boston Exhibition
-----------------
The Company entered into an agreement with Resource Plus and Event
Management International ("EMI"), a division of the World Trade Center Boston,
for the presentation of more than 175 artifacts in Boston, Massachusetts from
July 1, 1998 through on or about November 15, 1998. This exhibition primarily
included the Company's Titanic artifacts presented in the Memphis and St.
Petersburg exhibitions. Pursuant to the exhibition agreement, EMI was
responsible for payment of all costs and expenses related to the design,
construction, operation and marketing of the exhibition, and the Company was
entitled to receive two-thirds (2/3), and EMI will receive one-third (1/3), of
the profits from this exhibition (the "Profits"), which were defined as net
revenues (including ticket, sponsorship, merchandising and ancillary revenues,
if any, derived from the exhibition) less "cost of operations" (which includes
all costs and expenses of every kind and description in operating and marketing
the exhibition up to a maximum of approximately $2,525,000, but does not include
the costs of the exhibitry utilized in the exhibition). The exhibition agreement
further provided that the ownership interest in certain exhibitry and equipment
aggregating $750,000 was transferred to the Company as of August 31, 1998, in
satisfaction of the minimum exhibition fees due to the Company. This exhibition
closed on November 29, 1998, with attendance of approximately 250,000 visitors.
The Company did not earn exhibition fees in excess of the minimum. The objects
exhibited at the Boston exhibition and associated exhibitry were transported and
installed in a venue in St. Paul, Minnesota for an exhibition presented from
January 1, 1999 through May 9, 1999. See "St. Paul Exhibition" below.
St. Paul Exhibition
-------------------
The Company entered into an agreement with Media Rare, Inc. for the
presentation of the objects and exhibitry contained in the Company's Boston
exhibition for a period of four (4) months commencing on January 1, 1999 and
ending on April 30, 1999. Pursuant to this agreement, the Company received a
minimum payment of $1,000,000. This minimum payment is a credit against the
Company's share of two-thirds of the net profits, as defined, derived from
ticket, merchandise and sponsorship revenues in excess of a budget of
approximately $2,000,000. The budget for this exhibition includes a $300,000
payment to the Company for the lease of its exhibitry for the St. Paul
exhibition.
This exhibition was extended from May 1, 1999 to May 9, 1999 pursuant
to an amendment to the exhibition agreement, which provided that the Company
shall receive a minimum of $3.00 per visitor to the exhibition during the
extension period, with two-thirds (2/3) of any profits of 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.
Japan Exhibition
----------------
The Company has entered into an agreement with Titanic Exhibition Japan
Inc. ("TEJI") for the exhibition of approximately 200 Titanic artifacts in seven
(7) venues in Japan commencing on July
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24, 1998 and ending on or about August 1, 1999. The Japanese exhibition has been
presented in the cities of Tokyo, Yokohama, Joetsu, Osaka and Hiroshima, is
currently being presented in the city of Fukuoka, and is scheduled to be
presented in the city of Sapporo. 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 is responsible for payment of
all costs and expenses related to the design, construction, operation and
marketing of the exhibition, and that the Company will receive the greater of
$3.00 per person who attends the exhibition or fifty (50%) of the profits from
the exhibition. Under the exhibition agreement, "profits" means the excess of
net revenues (including ticket, sponsorship, merchandising and ancillary
revenues, if any, derived from the exhibition) less "project expenses" (which
includes all costs and expenses of every kind and description in establishing,
operating and marketing the exhibition up to a maximum of approximately
$3,470,000. Additionally, the exhibition agreement provides that RMST has the
right to select and obtain legal title to fifty (50%) of the exhibitry utilized
in the exhibition at no additional cost to RMST, with such rights to be
exercised no later than the completion of the exhibition tour.
THE PERMANENT MUSEUM
--------------------
Upon completion of a world tour of the Company's artifacts, the Company
intends to establish a permanent museum for the artifacts at a facility in a
major United States or European market where tourism is well-established. The
selection of the site of such museum will be made by management based primarily
upon the recommendations of the International Advisory Committee (see
"International Advisory Committee" below), the size of the potential market and
the costs of establishing and operating an appropriate facility.
MERCHANDISING
-------------
The merchandising efforts in connection with the Memphis, Hamburg,
Queen Mary and St. Petersburg exhibitions were undertaken by the parties with
which the Company is presenting such exhibitions. The Company does not have
responsibility for procurement of any merchandise or the operation of the
merchandise shops at the venues.
The Company has entered into an agreement with an unaffiliated third
party, Titanic Merchandise Inc. ("TMI"), to operate and manage retail
merchandise operations at the Company's exhibitions in the United States until
July 1, 2001. Pursuant to this agreement, TMI is responsible for all costs
associated with the retail operations, including but not limited to build-out,
inventory and operational costs and has agreed to pay to RMST and the
co-presenters of the exhibition, such as EMI with respect to the Boston
exhibition, an amount equal to thirty (30%) of the gross revenue realized
through retail sales at the exhibition site. TMI has also agreed to pay to RMST
an amount equal to ten (10%) percent of its gross revenue received from sales
made by TMI to third parties, and an amount equal to five (5%) of the suggested
retail price bearing the Company's logos or incorporating other proprietary
rights of RMST, whether sold at exhibitions or through retail outlets other than
the exhibitions.
The Company intends to manufacture replicas of selected artifacts or to
sell licenses to third parties for replication of artifacts that have been
recovered from the Titanic. It is contemplated that the
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Company will receive a negotiated royalty from the sales of the artifact
replicas in consideration of the granting of such licenses. No assurances can be
given that such licensing arrangements will be successfully consummated, or if
consummated, will result in the Company's receipt of significant revenues. The
Company also intends to pursue the direct marketing of merchandise through its
web site (http://www.titanic-online.com) and through third parties.
The Company has entered into an agreement with Tehabi Books for the
publication of a "coffee table" book titled "Titanic Legacy of the World's
Greatest Ocean Liner" to be distributed by Time-Life Books, which was published
in October 1997 (the "Book"). The Book was on the New York Times Bestseller List
for thirteen (13) consecutive weeks ending in April 1998. Pursuant to its
agreement with Tehabi, all expenses related to the development and production of
the book, including but not limited to all payments to the printer, the author
and the owners of all photographic rights, were the sole responsibility of
Tehabi. The Company granted to Tehabi the exclusive right to publish in book
form all photographs owned by the Company that were selected for inclusion in
the Book, in consideration for which the Company receives a royalty, for the
first 50,000 copies of the book, of $175 per photograph or image owned by the
Company (the "Photographs"), and $87.50 per Photograph for every additional
50,000 copies, prorated according to the number of additional books produced.
In addition, Tehabi and the Company agreed that Tehabi would receive the first
$200,000 of net revenue derived from its sale of the Book (which was defined as
gross revenue less certain actual manufacturing costs, such as printing costs
and photography royalties paid to the Company for Books produced over the first
50,000 copies), the Company would receive the next $40,000 of net revenue, and
the parties would equally share all net revenue in excess of $240,000.
EXPEDITIONS TO THE TITANIC
--------------------------
As a consequence of the depth of the Titanic approximately two and
one-half miles below the surface of the ocean in the North Atlantic, the Company
is dependent upon chartering vessels outfitted with highly advanced deep sea
technology in order to conduct expeditions to the Titanic. With respect to its
1987, 1993, 1994, 1996 and 1998 expeditions, the Company entered into charter
agreements with IFREMER, pursuant to which IFREMER supplied the crew and
equipment necessary to conduct research and recovery efforts. In addition to
utilization of the research vessel NADIR, recovery efforts are undertaken
through the manned submersible NAUTILE. Small, hard-to-reach areas necessary for
visual reconnaissance efforts are accessed by a small robot, known as ROBIN,
controlled by crewmen on board the NAUTILE. The dive team has the capability of
retrieving heavy objects, such as a lifeboat davit weighing approximately 4,000
lbs., to fragile objects weighing but a few ounces. Because of the immense
pressure of approximately 6,000 pounds per square inch at the wreck site, it is
impossible for the dive team to reach such depths and explore the wreck site
through any means other than a submersible. The NAUTILE and ROBIN are each
equipped with video and still cameras that record all recovery and exploration
efforts. In connection with its 1987, 1993, 1994, 1996 and 1998 expeditions to
the wreck site, the Company engaged experts from various fields, including
maritime scientists and other professional experts, to assist in the Company's
exploration and recovery efforts. Management of the Company intends to engage
experts from such fields for its future expeditions to the Titanic.
During the Company's 1998 expedition to the Titanic, in addition to
recovering the largest artifact to date -- a 26 foot by 20 foot outer section of
the hull of Titanic weighing approximately 20 tons, known
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as the "Big Piece," other objects recovered during this expedition included a
port-side gangway door from D-Deck, found on the sea bed with its latch
mechanism open; a golden chandelier from one of the ship's first class public
rooms; a stateroom coat hook; a light switch control panel from the galley
area; a skylight from the first class elevator shaft; a small 60-second
hourglass used for navigation; a round dial with spindle and spring mechanism
that may be an electronic wall clock from the Marconi radio room. During the
1998 expedition, a new area of the debris field apparently containing large
amounts of passenger baggage was discovered, which the Company intends to
explore and to focus attention upon for future recovery operations.
Additionally, through the use of ultra-high resolution digital
underwater technology, more than 3,000 individual digital photographs were
captured of the Titanic's wreck site. These photographs have been compiled and
processed utilizing special computerized software into the world's first
high-resolution photomosaic of the Titanic's wreck site, including the
first-ever composition of the entire mangled stern section as well as portions
of the debris field surrounding the wreck.
The Company's ability to conduct expeditions to the Titanic is subject
to the availability of necessary research and recovery vessels and equipment for
chartering by the Company during the months between June and September, which is
the "weather window" for such activities in the North Atlantic. Research and
recovery efforts with a manned submersible are presently limited to the
availability of the NAUTILE pursuant to charter arrangements with IFREMER. To
the best of the knowledge of management of the Company, no other submersible
with the capability of reaching the depth of the Titanic is commercially
available to or acceptable by the Company for chartering. While management of
the Company believes that the utilization of a manned submersible is the
preferred means for conducting its research and recovery efforts, the Company
could conduct sufficient operations through the use of unmanned,
surface-controlled, remote operated vehicles, an adequate number of which, in
management's opinion, would be available for chartering by the Company on
acceptable terms from numerous sources of supply.
RESTORATION AND CONSERVATION
----------------------------
Upon recovery from the wreck site, artifacts are in varying states of
deterioration and fragility. Having been submerged in the depths of the ocean
for more than eighty-five (85) years, objects have been subject to the corrosive
effects of chlorides present in the sea water. The restoration of many of the
metal, leather and paper artifacts requires the application of sophisticated
electrolysis and other electrochemical techniques. Various artifacts recovered
from the 1987 expedition were restored and conserved by the laboratories of
Electricite de France, the French government-owned utility. Except for those
unrestored artifacts that are exhibited in Atlantic City, New Jersey and in the
touring exhibition in Japan, unrestored artifacts recovered from the 1993, 1994,
1996 and 1998 expeditions are presently undergoing conservation processes at
LP3, a privately-owned conservation laboratory in Semur-en-Auxois, France.
SALVAGE RIGHTS
--------------
Pursuant to a judgment entered in the Federal District Court for the
Eastern District of Virginia on June 7, 1994, the Company was declared
salvor-in-possession of the wreck and wreck site of the Titanic, the true, sole
and exclusive owner of any items recovered from the Titanic and, so long as the
Company is
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salvor-in-possession, the sole and exclusive owner of all items recovered from
the Titanic in the future. The Court's judgment includes, without limitation,
the contents, cargo, hull, machinery, engine, tackle, apparel and appurtenances
of the Titanic, and provides that all potential claimants are barred and
precluded from filing claims so long as the Company is salvor-in-possession. No
other entity has the right to salvage the Titanic while the Company is
salvor-in-possession. In order to maintain salvor-in-possession status, the
Company, among other things, will need to maintain a reasonable presence at the
wreck through periodic expeditions and will need to continue efforts at salvage
and preservation of artifacts during the period between salvage expeditions.
In February 1996, a third-party instituted a motion in the Federal
District Court for the Eastern District of Virginia seeking rescission of the
June 7, 1994 order awarding to the Company salvor-in-possession status. By order
dated May 10, 1996 entered after trial, such motion was denied. The court also
modified its June 7, 1994 order to the extent of requiring the Company to file
more frequent periodic reports as to the status of its activities. In August
1996, the Court amended such May 10, 1996 order so as to include the award of
exclusive rights to photograph the Titanic within the award of
salvor-in-possession status, and enjoined third-parties from entering the wreck
site for purposes of obtaining photography or for other purposes.
An unrelated entity announced the intention of conducting a
photographic expedition, known as Operation Titanic, to the Titanic wreck site
during August 1998, when the Company intended to conduct its 1998 expedition.
The Company commenced legal proceedings and obtained an injunction prohibiting
such photographic expedition during August 1998 or at any other time so long as
the Company is salvor-in-possession of the wreck and wreck site of the Titanic.
Notwithstanding such injunction, the Operation Titanic photographic expedition
occurred in September 1998. In March 1999, the District Court's granting of an
injunction prohibiting the photographic expedition was reversed by the Fourth
Circuit of the United States. The Company is considering appealing the reversal
of the District Court's determination to the United States Supreme Court.
Future photographic expeditions to the Titanic have been announced by
third-parties. In the event that such photographic expeditions are undertaken
while the Company is conducting its expedition, safety hazards regarding the
deployment of submersibles chartered by the Company while other submersibles
are deployed could interfere with the Company conducting its expeditions. See
"Item 3. Legal Proceedings" below.
Management of the Company believes that all requirements to maintain
its salvor-in-possession status have been satisfied and will be satisfied in the
foreseeable future. Should the Company not maintain its salvor-in-possession
status, other entities could conduct salvage operations and recover items from
the Titanic wreck site. Management believes, however, that salvage operations by
other entities, if successful, would not have a material adverse affect upon the
Company's plan of exhibition activities. However, the loss of exclusive
photographic rights could have a materially adverse affect upon the Company's
ability to generate revenues from ancillary activities, such as television
productions related to, or passenger cruises accompanying, research and recovery
expeditions.
INTERNATIONAL ADVISORY COMMITTEE
--------------------------------
In March 1994, the Company and the National Maritime Museum initiated
the formation of an
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International Advisory Committee with the purpose to "safeguard the future of
the Titanic wreck site and objects raised from it and to ensure that they are
conserved to the highest standards to be saved for future generations in a
Titanic Memorial Museum." The members of the International Advisory Committee,
in addition to the Company and the National Maritime Museum of Greenwich,
London, England, are as follows: Musee de la Marine, Paris, France; IFREMER; The
Maritime Association, New York, New York; Titanic International Society,
Freehold, New Jersey; Charles A. Haas (author and historian); National Maritime
Museum, Stockholm, Sweden; National Maritime Museum of Norway, Oslo, Norway;
John P. Eaton (author and historian); and the British Titanic Historical
Society, Lancashire, England. Annual meetings of the Committee were held in
London, England in October 1994, 1995 and 1996. It is expected that a meeting of
the Committee will be held in the fall of 1999.
MARKETING
---------
The organizations in association with which the Company is presenting
its exhibitions are responsible for undertaking and paying for the marketing and
promotion of the exhibitions. The Company intends to establish special
promotional programs for school-age children and educational institutions, and
plans to develop and distribute teaching materials to aid in the historical and
scientific studies currently used in school curriculum regarding the Titanic.
COMPETITION
-----------
The entertainment and exhibition industries are intensely competitive.
There can be no assurances that the Company will be able to compete effectively.
Many of the entities with which the Company will be competing have substantially
greater resources than the Company. Additionally, following the success of the
motion picture "Titanic" in December 1997, a number of entities have undertaken,
or announced an intention to offer, exhibitions or events with the theme of
Titanic or involving memorabilia related to its sinking. Although the Company is
the only entity that exhibits artifacts recovered from the wreck site of the
Titanic, competition may be encountered from these exhibitions or events for the
consumer's interest in Titanic or with respect to the interest of prospective
venues for presenting the Company's Titanic exhibition. Management intends to
compete with other entities based upon the mass appeal of its planned exhibits
to consumers of entertainment, museum, scientific and educational offerings and
the quality and value of the entertainment experience, emphasizing the unique
and distinctive perspective of the Titanic that the Company will incorporate
into its exhibits as Titanic's salvor-in-possession and as the only entity that
has the rights to objects recovered from the Titanic.
The success of the Company's merchandising efforts will depend largely
upon the consumer appeal of its merchandise and the success of its exhibitions.
Management of the Company believes that its merchandise will compete primarily
on the basis of its unique character and quality.
EMPLOYEES
---------
As of June 5, 1999, the Company had six (6) employees, one of whom is
its President. The Company is not a party to any collective bargaining
agreement.
The Company's future business and operating results depend in
significant part upon the continued
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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 depend in significant part upon its ability
to attract and retain qualified additional management, marketing and support
personnel for its operations. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting or
retaining such personnel. The loss of Mr. Tulloch or the Company's inability to
attract and retain skilled employees, as needed, could materially and adversely
affect the Company's business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
---------------------
The Company will be subject to environmental laws and regulation by
federal, state and local authorities in connection with its planned exhibition
activities. The Company does not anticipate that the costs to comply with such
laws and regulations will have any material effect on the Company's capital
expenditures, earnings or competitive position.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive offices are located in New York, New
York and consist of premises of approximately 3,500 square feet which were
leased pursuant to a lease expiring in September 1998, and month-to-month
thereafter. The Company has executed a five-year lease for such premises which
is expected to commence in or about June 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is 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 seeks a declaratory judgment permitting him to participate in a
photographic expedition to the wreck of the Titanic known as Operation Titanic.
This action does 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
are 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 has 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 states that
the Company has the right to exclude others from the wreck site regardless of
whether the Company is 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 have appealed the Order to
the U.S. Court of Appeals for the Fourth Circuit. In March 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
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ruling that the Company could exclude others from viewing and photographing the
wreck and wreck site. The Company is considering appealing the decision of the
U.S. Court of Appeals to the United States Supreme Court.
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, presently pending before 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. A proposed settlement of this action
is presently under consideration, the terms of which would not have a material
financial affect upon the Company. 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.
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ITEM 4. SUBMISSION OF MATTERS OF VOTE OF SECURITY HOLDERS
During its fiscal year ended February 28, 1999, no matters were
submitted to the vote of the Company's security holders.
PART II
ITEM 5. PRICE RANGE OF SECURITIES
(a) MARKET INFORMATION. The Company's Common Stock is traded on the
over-the-counter market on a limited and sporadic basis. The following table
sets forth the range of high and low bid quotations of the Company's Common
Stock for the periods set forth below, as reported by OTC Bulletin Board of
Nasdaq Trading & Market Services. Such quotations represent inter-dealer
quotations, without adjustment for retail markets, markdowns or commissions, and
do not necessarily represent actual transactions.
FISCAL PERIOD
- -------------
COMMON STOCK
------------
HIGH LOW
BID BID
1999
1st Quarter 2.0625 .875
2nd Quarter 1.9375 .78125
3rd Quarter 1.6563 .78125
4th Quarter 2.75 1.1875
HIGH LOW
BID BID
1998
1st Quarter .58 .38
2nd Quarter .47 .375
3rd Quarter .71875 .38
4th Quarter 2.00 .5625
- ----------
(a) HOLDERS. The approximate number of holders of record of the Company's
Common Stock as of June 10, 1999 was 1068.
(c) DIVIDENDS. The Company has not paid or declared any dividends upon its
Common Stock since its inception, and intends to re-invest earnings, if any, in
the Company to accelerate its growth. Accordingly, the Company does not
contemplate or anticipate paying any dividends upon its Common Stock in the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL INFORMATION
The selected financial data set forth below is qualified by reference
to, and should be read in conjunction with, the Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Form 10-K. The selected
financial data have been derived from the Company's Financial Statements which
have been audited by Goldstein Golub Kessler LLP, independent certified public
accountants, as indicated in their reports. Their report on the financial
statements as of February 28, 1999 and February 28, 1998 and for each of the
three years in the period ended February 28, 1999 is included elsewhere in this
Form 10-K. Their reports on the statement of financial position as of February
28, 1997 and the financial statements for the years ended February 28, 1996 and
February 28, 1995, and for the two years in the period ended February 28, 1996,
are not included herein.
YEAR ENDED FEBRUARY 28(29), 1995 1996 1997 1998 1999
Statement of Operations Data:
Revenue $ 204,366 $ 724,541 $ 1,246,564 $ 4,658,270 $ 9,856,841
Net income (loss) $ (1,531,036) $ (149,632) $ 157,534 $ 3,367,437 $ 4,063,194
Income (loss)
per share (1) $ (.11) $ (.01) $ .01 $ .21 $ .25
Weighted average number of
common shares outstanding 13,620,390 15,834,644 16,141,950 16,181,868 16,187,128
FEBRUARY 28(29), 1995 1996 1997 1998 1999
Balance Sheet Data:
Total assets $ 6,164,641 $ 6,060,456 $ 8,005,384 $10,078,696 $13,909,713
Long Term Obligations $ 300,000 -- -- -- --
Total Liabilities $ 3,433,666 $ 2,194,624 $ 3,941,978 $ 2,642,103 $ 2,409,926
Owners' Equity $ 2,730,975 $ 3,865,832 $ 4,063,406 $ 7,436,593 $11,499,787
The Company has declared no cash dividends.
(1) Earnings per share is based upon the weighted average number of common
shares outstanding for the periods presented after giving retroactive
effect to the shares issued in connection with the Acquisition described in
Note 2 of Notes to Financial Statements. The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, during
fiscal year 1998. SFAS No. 128 required retroactive restatement for all
periods presented in the financial statements. The adoption of SFAS No. 128
had no effect on the restatement of the net income (loss) per common share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides information to assist in the
understanding of the Company's financial condition and results of operations,
and should be read in conjunction with the financial statements and related
notes appearing elsewhere herein.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1999 AS COMPARED
TO YEAR ENDED FEBRUARY 28, 1998
- ----------------------------------------
During its fiscal year ended February 28, 1999 (the ("1999 fiscal
year"), the Company's revenues increased approximately 112% as compared to its
fiscal year ended February 28, 1998 (the "1998 fiscal year"), primarily as a
result of an increase of approximately 2,947% in the Company's licensing fees
during its 1999 fiscal year as compared to its 1998 fiscal year, and an increase
of approximately 32% in the Company's exhibition and related merchandise
revenues during its 1999 fiscal year as compared to its 1998 fiscal year. These
changes were primarily a result of the Company having earned licensing fees of
approximately $3,345,000 during 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"), and the scope of the Company's exhibition activities during
the 1999 fiscal year as compared to the 1998 fiscal year. Revenue from
merchandise, book and other activities increased approximately 178% during the
1999 fiscal year as compared to the 1998 fiscal year. This change resulted
primarily from revenue derived during the 1999 fiscal year derived from a book
published in conjunction with unrelated third parties and revenue derived from
the sale of merchandise through the Company's web site
(http://www.titanic-online.com). The Company's revenue from the sale of coal
increased approximately 51% during the 1999 fiscal year as compared to the 1998
fiscal year, primarily as a result of increases in the amount of coal sold
through the Company's web site, in the merchandise shops of the Company's United
States exhibitions, and through other direct marketing activities.
The Company's cost of coal sold increased approximately 36% during the
1999 fiscal year as compared to the 1998 fiscal year as a result of an increase
in the volume of coal sales during these corresponding periods. General and
administrative expenses of the Company increased approximately 47% during the
1999 fiscal as compared to the 1998 fiscal year, primarily as a result of an
increase in professional fees and expenses of $150,000 incurred during the 1999
fiscal year related to the deinstallation and transportation of the Hamburg,
Germany exhibition to Zurich, Switzerland. The Company's depreciation and
amortization expenses increased approximately 961% during the 1999 fiscal year
as compared to the 1998. During 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, as compared to zero costs attributable to license fees during the
1998 fiscal year. During the 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
21
22
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 November 1998.
The Company's income before provision for income taxes increased
approximately 67% during the 1999 fiscal year as compared to the 1998 fiscal
year. The Company's provision for income taxes increased approximately 1,108%
during the 1999 fiscal year as compared to the 1998 fiscal year. After
application of the available portion of its net operating loss carryforward for
the 1998 and 1999 fiscal years, the Company's net income increased approximately
21% during the 1999 fiscal year as compared to the 1998 fiscal year.
YEAR ENDED FEBRUARY 28, 1998 AS COMPARED
TO YEAR ENDED FEBRUARY 28, 1997
- ----------------------------------------
During its fiscal year ended February 28, 1998 (the ("1998 fiscal
year"), the Company's revenues increased approximately 274% as compared to its
fiscal year ended February 28, 1997 (the "1997 fiscal year"), primarily as a
result of an increase of approximately 3,479% in the Company's exhibition
revenues during its 1998 fiscal year as compared to its 1997 fiscal year. This
increase in exhibition revenues was principally attributable to the presentation
of major exhibitions of two separate collections of the Company's Titanic
artifacts in Memphis, Tennessee for approximately six (6) months during the 1998
fiscal year, in Hamburg, Germany for approximately ten (10) months during the
1998 fiscal year, and in St. Petersburg, Florida for approximately three and
one-half months during the 1998 fiscal year. In addition, during the 1998 fiscal
year, the Company's smaller exhibition of Titanic artifacts, "Titanic: The
Expedition," was presented in Norfolk, Virginia for one (1) month and in Long
Beach, California for approximately seven (7) months during the 1998 fiscal
year. In comparison, the only exhibition activity of the Company during the 1997
fiscal year was the presentation of its smaller exhibition in Norfolk, Virginia
for approximately one (1) month.
During the 1998 fiscal year, licensing fees decreased approximately
87%, primarily as a result of the Company having earned licensing fees 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 1997 fiscal
year. The Company did not conduct an expedition to the Titanic wreck site during
the 1998 fiscal year, and license fees during this period were derived from the
grant of rights to use portions of the Company's stock video footage and still
photographs. During its 1998 fiscal year, the Company earned zero revenue from
sponsorship rights, as compared to having earned $150,000 from the granting of
sponsorship rights with respect to the Company's expedition to the Titanic wreck
site during the 1997 fiscal year.
The Company's revenue from the sale of merchandise and books increased
approximately 827% during the 1998 fiscal year as compared to the 1997 fiscal
year, primarily as a result of the Company, during the 1998 fiscal year, having
published a book in conjunction with unrelated third parties and having
established a web site which promoted the sale of merchandise through mail-order
and the Company's 1-800-TITANIC telephone number. The Company's revenue from the
sale of coal increased approximately 56% during its 1998 fiscal year as compared
to its 1997 fiscal year, primarily as a result of sales of coal made through the
Company's web site and in the merchandise shops of the Company's United States
exhibitions.
The Company's cost of coal sold increased approximately 75% during the
1998 fiscal year as compared to the 1997 fiscal year, primarily as a result of
an increase in coal sales during these corresponding periods. General and
administrative expenses of the Company increased approximately 10% during the
1998 fiscal as compared to the 1997 fiscal year, primarily as a result of an
increase in conservation expenses in connection with the preparation of objects
for exhibition in Memphis, Tennessee and Hamburg, Germany.
22
23
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 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 on 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 approximately $99,400 as of
February 28, 1999. There were no profits from sale of cruise ship cabins for the
1996 expedition.
The Company entered into an agreement with IFREMER to charter equipment
and crew necessary to conduct a research and recovery expedition to the wreck
site of the Titanic in the Summer, 1996. Pursuant to the terms of such charter
agreement, the Company agreed to pay IFREMER 2,000,000 French francs
(approximately $400,000 U.S. Dollars) on or before June 20, 1996; 2,100,000
French francs (approximately $420,000 U.S. Dollars) on or before July 15, 1996;
and the sum of $980,000, payable as follows: (a) remittance of fifty (50%) of
the wholesale price of any products sold by the Company involving the 1996
expedition, up to a maximum of $480,000; and (b) up to a maximum of $500,000
payable from the following sources: (i) $.50 per visitor to any exhibition
organized by the Company; (ii) a lump sum of $250,000 for the Memphis
exhibition, payable prior to March 1, 1997; and (iii) one-third of the Company's
revenues received from any exhibition of artifacts organized by a third party,
as described. The agreement further provides that in the event the payments from
these sources do not amount to $980,000 within three (3) years after September
1, 1996, any remaining balance shall be paid from the Company's exhibition
revenues, as defined above. The Company has satisfied its obligations to pay
$500,000 of its exhibition revenue to IFREMER, as described above, and has not
received any income from the sale of products involving the 1996 expedition.
In connection with the Summer of 1998 Expedition, the Company entered
into an agreement with IFREMER to charter equipment and crew necessary for this
expedition, which commenced on August 3,
23
24
1998 and concluded on August 31, 1998. Pursuant to the terms of such charter
agreement, the Company agreed to pay IFREMER, in addition to a deposit of
$200,000, the sum of $1,460,000 for this expedition, inclusive of all amounts
that were due and owing to IFREMER for the Summer of 1996 Expedition ($480,000).
The Company agreed to pay $1,260,000 of such charter costs prior to the
commencement of the Summer of 1998 Expedition, with the $200,000 balance to be
paid upon the conclusion of the expedition. Pursuant to the agreement between
the Company and its audio-visual licensee for the Summer of 1998 Expedition, the
Company's audio-visual licensee paid $1,150,000 of such charter costs on the
Company's behalf. The balance of $280,000 payable by the Company to IFREMER
under the charter agreement was paid during the 1999 fiscal year.
In addition to the charter agreement with IFREMER, the Company also
entered into agreements with unrelated third parties for the chartering of
equipment and crews in connection with the Summer of 1998 Expedition in an
aggregate amount of $2,195,000. The Company's audio-visual licensee for the
Summer of 1998 Expedition, in addition to the $1,150,000 payment to IFREMER
discussed above, also agreed to pay all of such other charter costs on the
Company's behalf.
The Company's capital commitments during its 1999 fiscal year includes
compensation to the Company's principal executive officer and lease payments for
its principal offices.
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
from the distribution of revenues to the Company under its agreements for
exhibitions in St. Paul, Minnesota; Atlantic City, New Jersey; its touring
exhibition in Japan; and 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. None of the Company's cash flow during the 1999 fiscal
year derived from financing activities, with approximately $1,624,000 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 issue will have a material adverse affect upon the Company.
Except for historical information contained herein, this Annual Report
on Form 10-K contains
24
25
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 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
25
26
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 third quarter of the 1999 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.
ITEM 8. FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report F-1
Balance Sheet at February 28, 1998 and 1999 F-2
Statement of Income for the years ended
February 28, 1997, 1998 and 1999 F-3
Statement of Stockholders' Equity for the years ended
February 28, 1997, 1998 and 1999 F-4
Statement of Cash Flows for the years ended
February 28, 1997, 1998 and 1999 F-5
Notes to Financial Statements F-6 - F-20
26
27
PART III
The information for this part is incorporated by reference from the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A or
definitive information statement to be filed pursuant to Regulation 14C.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
The following documents are filed as part of this Report on Form 10-K:
(a) Financial Statements. The following financial statements of the
Company are included in this Annual Report:
Independent Auditor's Report F-1
Balance Sheet at February 28, 1998 and 1999 F-2
Statement of Income for the years ended
February 28, 1997, 1998 and 1999 F-3
Statement of Stockholders' Equity for the years ended
February 28, 1997, 1998 and 1999 F-4
Statement of Cash Flows for the years ended
February 28, 1997, 1998 and 1999 F-5
Notes to Financial Statements F-6 - F-20
(b) Financial Statement Schedules. None.
(c) Exhibits.
3.1 Articles of Incorporation, as amended.(1)
4.1 First Amendment to By-Laws of the Registrant.(2)
9.1 Voting Trust Agreement among Titanic Ventures Limited Partnership,
George Tulloch, Allan H. Carlin, Arnie Geller, G. Michael Harris, Kurt
Hothorn, Cheryl Hothorn, Westgate Entertainment Corp., Anne A. Hill,
Diane Carlin, Shirley A. Hill, James A. Hill, and D. Michael Harris(3)
10.1 Lease Agreement between the Company and 17 Battery Place North
27
28
Associates.(4)
10.2 Agreement dated April 15, 1996 between the Company and CRE-CO Finanz
GmbH.(5)
10.3 Pledge Agreement dated April 15, 1996 between the Company and CRE-CO
Finanz GmbH.(5)
10.4 Bailment Agreement dated April 15, 1996 between the Company and CRE-CO
Finanz GmbH.(5)
10.5 1996 Charter Agreement with IFREMER.(6)
10.6 Agreement dated August 8, 1996 between the Company and the City of
Memphis.(6)
10.7 Agreement dated July 22, 1996 between Discovery Communications, Inc.,
Ellipse Programme and the Company (omitted and filed separately as
confidential information).(6)
10.8 Agreement dated May 23, 1997 between the Company and RMS Foundation,
Inc.(7)
10.9 Amendment to Agreement dated April 15, 1997 between the Company and
CRE-CO Finanz GmbH.(8)
10.10 Agreement between the registrant and Resource Plus and Event
Management International None dated April 24, 1998(9)
10.11 Agreement between the registrant and Titanic Exhibition Japan Inc.
dated May 17, 1998(9)
10.12 Agreement between the registrant and CRE-CO Finanz dated April 15,
1998(9)
10.13 1998 Charter Agreement with IFREMER.(10)
10.14 1998 Charter Agreement with Oceaneering International, Inc.(10)
10.15 Agreement dated July 15, 1998 between Discovery Communications
and the Company.
10.16 1998 Charter Agreement with Aqua Plus.(10)
10.17 1998 Charter Agreement with Les Abeilles International, Travocean
and the Company.(10)
10.18 Amendment to Agreement dated August 4, 1998 between the Company and
CRE-CO Finanz GmbH.(10)
10.19 Agreement dated September 25, 1998 between the Company and Media Rare,
Inc.(11)
10.20 Promissory Note dated January 5, 1999 executed by George Tulloch in
favor of the registrant.
10.21 Pledge Agreement dated January 5, 1999 between George Tulloch and the
registrant.
-----------------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form 8-A.
(2) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1995.
(3) Filed as exhibit 7.2 to Form 13D filed on September 2, 1997.
(4) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended February 28, 1994.
(5) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1996.
28
29
(6) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1996.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1996.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1997.
(9) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1998.
(10) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1998.
(11) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1998.
29
30
SIGNATURES
----------
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RMS TITANIC, INC.
June 14, 1999 By: /s/ George H. Tulloch
---------------------------------------
George H. Tulloch, President and
Principal Executive Officer and Principal
Accounting Officer
30
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the date indicated:
/s/ George Tulloch June 14, 1999
- -----------------------------
George Tulloch, Director
/s/ Allan H. Carlin June 14, 1999
- -----------------------------
Allan H. Carlin, Director
- -----------------------------
Arnie Geller, Director
- -----------------------------
G. Michael Harris, Director
/s/ Kurt Hothorn June 14, 1999
- -----------------------------
Kurt Hothorn, Director
/s/ Paul-Henri Nargeolet June 22, 1999
- -----------------------------
Paul-Henri Nargeolet
31
32
RMS TITANIC, INC.
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS:
Balance Sheet at February 28, 1998 and 1999 F-2
Statement of Income for the Years Ended February 28, 1997,
1998 and 1999 F-3
Statement of Stockholders' Equity for the Years Ended February 28, 1997,
1998 and 1999 F-4
Statement of Cash Flows for the Years Ended February 28, 1997,
1998 and 1999 F-5
Notes to Financial Statements F-6 - F-20
33
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
RMS Titanic, Inc.
We have audited the accompanying balance sheets of RMS Titanic, Inc. as of
February 28, 1998 and 1999, and the related statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended February
28, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RMS Titanic, Inc. as of
February 28, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended February 28, 1999, in conformity
with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
June 4, 1999
F-1
34
RMS TITANIC, INC.
BALANCE SHEET
- --------------------------------------------------------------------------------
FEBRUARY 28, 1998 1999
- --------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,000,269 $ 719,929
Accounts receivable 640,760 1,645,373
Refundable withholding tax (Note 11) 45,848 429,022
Prepaid expenses and other current assets (Note 10) - 179,024
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,686,877 2,973,348
Artifacts Recovered, at cost (Notes 4 and 12) 7,700,340 9,181,340
Deferred Income Tax Asset, net of valuation allowance of
$503,000 in 1998 (Note 5) - 509,000
Property and Equipment, net of accumulated depreciation
of $73,207 and $319,013, respectively (Notes 3 and 11) 652,599 1,207,331
Other Assets 38,880 38,694
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 10,078,696 $ 13,909,713
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities (Notes 2 and 4) $ 2,483,200 $ 1,909,926
Income taxes payable 143,960 -
Deferred revenue (Note 11) 14,943 500,000
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,642,103 2,409,926
- --------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 2, 8 and 9)
Stockholders' Equity (Notes 2, 6 and 7):
Common stock - $.0001 par value; authorized 30,000,000 shares,
issued and outstanding 16,187,128 shares 1,619 1,619
Additional paid-in capital 13,915,748 13,915,748
Accumulated deficit (6,480,774) (2,417,580)
- --------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 7,436,593 11,499,787
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,078,696 $ 13,909,713
========================================================================================================
See Notes to Financial Statements
F-2
35
RMS TITANIC, INC.
STATEMENT OF INCOME
- --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------
Revenue (Notes 11 and 12):
Exhibitions and related merchandise sales $ 116,019 $ 4,151,912 $ 5,459,913
Licensing fees 860,000 114,708 3,495,290
Sponsorship fees 150,000 - -
Merchandise and other 26,391 244,676 680,081
Sale of coal 94,154 146,974 221,557
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 1,246,564 4,658,270 9,856,841
- ----------------------------------------------------------------------------------------------------------------------
Expenses:
Cost of coal sold 8,010 14,000 19,000
Cost of merchandise sold - - 45,816
General and administrative (Note 9) 1,071,460 1,176,373 1,733,395
Depreciation and amortization (Note 3) 8,703 23,171 245,806
Expedition costs attributable to licensing fees (Note 12) - - 1,845,000
Impairment loss on exhibitry equipment (Note 3) - - 150,000
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 1,088,173 1,213,544 4,039,017
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 158,391 3,444,726 5,817,824
Other income (expense):
Interest income - 11,131 51,702
Interest expense and financing costs (857) (5,750) -
Other income (expense) (Note 10) - 67,330 5,000
- ----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 157,534 3,517,437 5,874,526
Provision for income taxes (Note 5) - 150,000 1,811,332
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 157,534 $ 3,367,437 $ 4,063,194
======================================================================================================================
Earnings per common share $ .01 $ .21 $ .25
======================================================================================================================
Weighted-average number of common shares outstanding 16,141,950 16,181,868 16,187,128
======================================================================================================================
See Notes to Financial Statements
F-3
36
RMS TITANIC, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
YEARS ENDED FEBRUARY 28, 1997, 1998 AND 1999
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of February 29, 1996 16,137,128 $ 1,614 $ 13,869,963 $(10,005,745) $ 3,865,832
Issuance of common stock:
Other than cash (Notes 6 and 8) 40,000 4 40,036 - 40,040
Net income for the year ended February 28, 1997 - - - 157,534 157,534
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of February 28, 1997 16,177,128 1,618 13,909,999 (9,848,211) 4,063,406
Issuance of common stock:
Other than cash (Notes 6 and 8) 10,000 1 5,749 - 5,750
Net income for the year ended February 28, 1998 - - - 3,367,437 3,367,437
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of February 28, 1998 16,187,128 1,619 13,915,748 (6,480,774) 7,436,593
Net income for the year ended February 28, 1999 - - - 4,063,194 4,063,194
- ---------------------------------------------------------------------------------------------------------------------------
Balance as of February 28, 1999 16,187,128 $ 1,619 $ 13,915,748 $ (2,417,580) $ 11,499,787
===========================================================================================================================
See Notes to Financial Statements
F-4
37
RMS TITANIC, INC.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, 1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 157,534 $ 3,367,437 $ 4,063,194
- ------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 8,703 23,171 245,806
Impairment loss on exhibitry equipment - - 150,000
Rights granted in satisfaction of accrued liability - (60,000) -
Financing fees - 5,750 -
Amortization of deferred revenue - (1,465,057) (14,943)
Other - (87,500) (76,500)
Noncash settlement with exhibitor - (559,414) -
Noncash exhibition revenue - - (750,000)
Reduction in artifacts recovered 8,010 14,000 19,000
Reduction of deferred income tax valuation allowance - - (509,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (15,205) (606,045) (1,004,613)
(Increase) decrease in refundable withholding tax (87,500) 41,652 (383,174)
Decrease (increase) in prepaid expenses and other current assets 5,200 4,800 (179,024)
(Increase) decrease in other assets - (269) 186
Increase (decrease) in income taxes payable - 143,960 (143,960)
Increase in deferred revenue 675,000 805,000 500,000
Increase (decrease) in accounts payable and accrued liabilities 158,136 (595,248) (573,274)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 752,344 (2,335,200) (2,719,496)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 909,878 1,032,237 1,343,698
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Artifact recovery costs, net of $980,000 of related accounts payable
in 1997 (820,000) - (1,500,000)
Purchases of property and equipment (2,085) (9,292) (124,038)
- ------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (822,085) (9,292) (1,624,038)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activity - repayment of notes payable (25,742) (128,530) -
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 62,051 894,415 (280,340)
Cash and cash equivalents at beginning of year 43,803 105,854 1,000,269
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 105,854 $ 1,000,269 $ 719,929
========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 857 - -
========================================================================================================================
Income taxes - $ 6,094 $ 2,354,652
========================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITY:
Property and equipment acquired in settlement of certain exhibition
obligations - $ 559,414 $ 750,000
========================================================================================================================
Noncash purchases of property and equipment - $ 87,500 $ 76,500
========================================================================================================================
See Notes 2, 6 and 8 for information regarding noncash investing and financing
activities.
See Notes to Financial Statements
F-5
38
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF RMS Titanic, Inc. initially conducted business as
BUSINESS AND SUMMARY Titanic Ventures Limited Partnership ("TVLP"). RMS
OF SIGNIFICANT Titanic, Inc. and TVLP are referred to as the
ACCOUNTING POLICIES: "Company" as the context dictates.
TVLP was formed on August 5, 1987 for the purposes of
exploring the wreck and surrounding oceanic area of
the vessel the RMS Titanic (the "Titanic"); obtaining
oceanic material and scientific data available
therefrom in various forms, including still and
moving photography and artifacts from the wreck site;
and utilizing such data and artifacts in
revenue-producing activities such as touring
exhibitions, television programs and the sale of
still photography. In addition, the Company earns
revenue from the sale of coal and Titanic-related
products (see Notes 11 and 12).
The Company commenced operations in August 1987 with
an expedition and dive to the wreck of the Titanic
from which the Company recovered over 1,800 objects,
including coins, currency and other items. The
Company completed a second expedition and dive to the
Titanic in June 1993, during which approximately 800
artifacts were recovered and videotape of such
expedition was produced. In July 1994, a third
expedition and dive to the Titanic was completed by
the Company, during which over 1,000 artifacts and
other items (coal used on the Titanic) were recovered
and videotape of such expedition was produced. In
July 1996, a fourth expedition and dive to the
Titanic was completed by the Company, during which
over 70 artifacts were recovered and videotape of
such expedition was produced. In August 1998, a fifth
expedition and dive to the Titanic was completed by
the Company, during which over 70 artifacts were
recovered, including a section of the hull. All the
items recovered as described above are collectively
referred to as the "Artifacts."
The Company was in the development stage through May
31, 1997 and for the years ended February 28, 1998
and 1999 is considered an operating company.
Pursuant to a judgment entered in the Federal
District Court for the Eastern District of Virginia
(the "Court") on June 7, 1994, as amended, the
Company was declared salvor-in-possession of the
Titanic, the sole and exclusive owner of any items
recovered from the Titanic and, so long as the
Company is salvor-in-possession, the sole and
exclusive owner of items recovered from the Titanic
in the future (see Note 8).
Artifacts recovered from the Titanic are carried at
the lower of cost of recovery or net realizable value
("NRV"). The costs of recovery are the direct costs
of chartering of vessels and related crews and
equipment required to complete the dive operations.
Costs associated with the care, management and
preservation of recovered artifacts are expensed as
incurred. A majority of the Artifacts were located
outside the United States at February 28, 1998 and
1999.
To ascertain that the aggregate NRV of the Artifacts
exceeds the direct costs of recovery of such
Artifacts, the Company evaluates various evidential
matter. Such evidential matter includes documented
sales and offerings of Titanic-related memorabilia by
auction houses and private dealers, an appraisal of
certain artifacts, insurance coverage obtained in
connection with the potential theft, damage or
destruction of all or part of the Artifacts and other
evidential matter regarding the public interest in
the Titanic.
F-6
39
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Under an agreement with IFREMER, the Institute of
France for the Research and Exploration of the Sea,
which was the general contractor for the salvage
operations, the Company is restricted from selling
certain artifacts except to an entity that will make
them available for exhibition to the public, as
defined.
For purposes of the statement of cash flows, the
Company considers all highly liquid investments with
a maturity of three months or less to be cash
equivalents.
The Company maintains cash in bank accounts which, at
times, may exceed federally insured limits. The
Company has not experienced any losses on these
accounts.
Revenue from the licensing of the production and
exploitation of audio and visual recordings, which
are performed by third parties, related to the
Company's expeditions are recognized at the time that
the expedition and dive take place.
Revenue from the licensing of still photographs is
recognized at the time the rights were granted to the
licensee.
Revenue from exhibitions is recorded in the period
that the exhibition takes place. The amount recorded
represents the Company's share of the net revenue, as
defined, from the exhibition.
Revenue from the granting of sponsorship rights
related to the Company's expeditions and dives is
recognized at the completion of the expedition.
Revenue from the sale of Titanic-related products is
recognized when the item is sold (see Note 11).
Coal recovered from the Titanic is being offered for
sale by the Company. Revenue from sales of such coal
is recognized at the date of shipment to customers.
Recovery costs attributable to the coal have been
charged to operations as revenue from coal sales have
been recognized.
The Company provides for income taxes in accordance
with Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. Under
this statement, deferred income tax assets and
liabilities are determined based on differences
between financial reporting and tax bases of assets
and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the
differences are expected to reverse.
Depreciation of property and equipment is provided
for by the straight-line method over the estimated
lives of the related assets (see Note 3).
In October 1995, the Financial Accounting Standards
Board (the "FASB") issued SFAS No. 123, Accounting
for Stock-Based Compensation. SFAS No. 123
encourages, but does not require, companies to record
compensation cost for stock-based employee
compensation plans at fair value. The Company has
elected to continue to account for its stock-based
compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, Accounting for
Stock Issued to Employees, and for options granted in
fiscal years beginning after December 15, 1994 to
present pro forma earnings (loss) and per share
information as though it had adopted SFAS No. 123.
Under the provisions of
F-7
40
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
APB Opinion No. 25, compensation cost for stock
options is measured as the excess, if any, of the
quoted market price of the Company's common stock at
the date of the grant over the amount an employee
must pay to acquire the stock.
In February 1997, the FASB issued SFAS No. 128,
Earnings per Share. 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. The adoption of SFAS No. 128
had no effect on the restatement of earnings
per common share for the year ended February 28,
1997. Diluted EPS is not presented for the years
ended February 28, 1997, 1998 and 1999 since the
dilutive effect of potential common shares is not
material.
The Company does not believe that any recently
issued, but not yet effective, accounting standards
will have a material effect on the Company's
financial position, results of operations or cash
flows.
The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect reported amounts in the financial
statements. Actual results could differ from those
estimates.
2. REVERSE ACQUISITION: On May 4, 1993, TVLP sold all rights, title and
interest in its assets to First Response Medical,
Inc. ("FRM"), a public company, subject to FRM
assuming all of its liabilities. TVLP was issued
7,066,667 unregistered shares of common stock of FRM
as consideration for the sale. FRM also issued
400,000 shares of unregistered common stock to
unrelated parties as a finders' fee in connection
with the transaction. These shares, when added to the
2,266,666 shares of FRM unregistered common stock
issued to the former president of the Company,
represented approximately 90% of the total issued and
outstanding common shares of FRM after the
acquisition. Since TVLP owned a controlling interest
in FRM, the transaction was accounted for as a
"reverse acquisition" with TVLP deemed to be the
acquiring entity. FRM changed its name to RMS
Titanic, Inc. The historical financial statements of
TVLP prior to May 4, 1993 have been substituted for
the historical financial statements of FRM. There
were 973,373 shares of FRM outstanding on the date of
the acquisition.
The stockholder of the general partner of TVLP (who
is also the chairman of the board of directors of the
Company) has voting control over the shares of common
stock of RMS Titanic, Inc. held by TVLP. The control
of such shares has been challenged in a legal action
which commenced during September 1997, the result of
which may require the distribution of certain shares
to certain partners of TVLP. A change in control of
RMS Titanic, Inc. may occur in such instance.
Included in accounts payable and accrued liabilities
is $45,000 due to certain partners of TVLP.
F-8
41
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. PROPERTY AND Property and equipment, at cost, consists of the
EQUIPMENT: following:
Estimated
February 28, 1998 1999 Useful Life
---------------------------------------------------------------------------------
Exhibitry equipment $559,414 $1,435,961 5 years
Office equipment 34,083 45,574 5 years
Furniture and fixtures 44,809 44,809 5 years
Exhibitry equipment deposit 87,500 -
---------------------------------------------------------------------------------
725,806 1,526,344
Less accumulated depreciation 73,207 319,013
---------------------------------------------------------------------------------
$652,599 $1,207,331
=================================================================================
During the year ended February 28, 1999, the Company
recorded an impairment loss of $150,000 attributable
to certain exhibitry equipment.
4. ACCOUNTS
PAYABLE AND Accounts payable and accrued liabilities consist of
ACCRUED the following:
LIABILITIES:
February 28, 1998 1999
----------------------------------------------------------------------------------------
Accrued compensation (see Note 9) $1,219,583 $1,195,683
Amounts payable for professional fees and consulting 323,030 366,278
Amounts payable to foreign vendors 585,500 -
Other miscellaneous liabilities 355,087 347,965
----------------------------------------------------------------------------------------
$2,483,200 $1,909,926
========================================================================================
The Company entered into an agreement with IFREMER
for the charter of equipment to conduct the Company's
fourth expedition to the Titanic wreck site in August
1996 ("Summer of 1996 Expedition"). Pursuant to the
agreement, the Company paid IFREMER the sum of
$820,000 (proceeds from the granting of licensing
rights to a third party) and was obligated to pay
an additional $980,000 to IFREMER, as defined,
due no later than September 1, 2000. The
artifacts recovered during the Summer of 1996
Expedition served as collateral for this obligation.
At February 28, 1998, the unpaid balance of $480,000
was included in amounts payable to foreign vendors.
As of February 28, 1999, the Company has made all
payments to IFREMER in accordance with the
agreement.
F-9
42
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. Income Taxes The provision for income taxes consists of the
following components:
Year ended February 28, 1998 1999
-------------------------------------------------
Current:
Federal $ 76,000 $1,761,084
State and local 74,000 559,248
-------------------------------------------------
150,000 2,320,332
-------------------------------------------------
Deferred:
Federal -- (386,000)
State and Local -- (123,000)
-------------------------------------------------
-- (509,000)
-------------------------------------------------
$ 150,000 $1,811,332
=================================================
The total provision for income taxes differs from
that amount which would be computed by applying the
U.S. federal income tax rate to income before
provision for income taxes. The reasons for these
differences are as follows:
Year ended February 28, 1998 1999
-----------------------------------------------------------------
Statutory federal income tax rate 34.0 % 34.0 %
State income taxes, net of federal benefit 2.1 9.5
Use of net operating loss carryforwards (31.6) -
Valuation allowance of temporary differences - (8.7)
Foreign tax credits - (2.0)
Other, net (.2) (2.0)
-----------------------------------------------------------------
EFFECTIVE INCOME TAX RATE 4.3 % 30.8 %
=================================================================
The deferred income tax asset consists of the
following:
February 28, 1998 1999
--------------------------------------------------------
Expenses not currently deductible $ 503,000 $ 509,000
--------------------------------------------------------
Gross deferred tax asset 503,000 509,000
Valuation allowance 503,000 -
--------------------------------------------------------
NET DEFERRED TAX ASSET $ - 0 - $ 509,000
========================================================
A valuation allowance of 100% of the deferred income
tax asset has been provided at February 28, 1998 due
to the uncertainty of future realization of net
operating loss carryforwards. During the year ended
February 28, 1999, $503,000 of the valuation
allowance was reversed, due to the increased
earnings of the Company. Based on management's
assessment, it is more likely than not that all the
net deferred tax assets will be realized through
future taxable earnings.
6. STOCKHOLDERS' EQUITY: Prior to the acquisition, FRM initiated an exchange
agreement with the holders of certain Class B
warrants in which the holders would receive shares of
common stock of FRM in exchange for certain Class B
warrants. As of February 28, 1998 and 1999, the
Company had received 20,700 Class B warrants to be
exchanged for 20,700 shares of common stock of the
Company,
F-10
43
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of which 17,500 shares still remain to be issued.
There are 5,666 warrants outstanding as of February
28, 1999.
The following common shares were issued to LS Capital
Corporation ("LS Capital") to satisfy certain
obligations based upon a negotiated settlement of
certain litigation (see Note 8):
Additional Price
Year Ended Common Stock Paid-in per
February 28, 1997 Date Shares Amount Capital Total Share
-------------------------------------------------------------------------------
Settlement of
lawsuit 1/15/97 40,000 $4 $40,036 $40,040 $1.0010
===============================================================================
Additional Price
Year Ended Common Stock Paid-in per
February 28, 1998 Date Shares Amount Capital Total Share
- ------------------------------------------------------------------------------------------------------------------------
Settlement of
lawsuit 7/18/97 5,000 - $ 2,250 $ 2,250 $.45
Settlement of
lawsuit 10/30/97 5,000 $1 3,499 3,500 .70
- ------------------------------------------------------------------------------------------------------------------------
10,000 $1 $ 5,749 $ 5,750
========================================================================================================================
7. STOCK OPTIONS: Transactions relating to stock options are as follows:
Weighted- Weighted-
Average Average
Exercise Options Exercise
Number Price Exer- Price
of Shares per Share cisable per Share
- ------------------------------------------------------------------------------------------------------------------------
Balance at February 28(29), 1996
and 1997 580,000 $1.47 580,000 $1.47
Granted - April 1997 250,000 $1.00 250,000 $1.00
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1998
830,000 $1.33 830,000 $1.33
Canceled - January 1999 <500,000> $1.25 <500,000> $1.25
Granted - January 1999 500,000 $1.25 500,000 $1.25
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1999
830,000 $1.47 830,000 $1.33
========================================================================================================================
In January 1999, the Company extended the expiration date from April 6, 1999 to
April 6, 2004 of an immediately exercisable option to purchase 500,000 shares of
the Company's common stock at a price of $1.25 per share. For financial
reporting purposes, this has been treated as a new option grant and the
cancelation of an existing option.
F-11
44
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes the information
about stock options outstanding at February 28,
1999:
Options Outstanding and Exercisable
Weighted-
Average Weighted-
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life (Years) Price
- ------------------------------------------------------------------------------------------------------------------------
$ .50 50,000 .13 $ .50
$ .75 50,000 .13 $ .75
$1.00 50,000 .13 $1.00
$1.25 550,000 4.65 $1.25
$1.50 50,000 .13 $1.50
$2.88 80,000 .21 $2.88
- ------------------------------------------------------------------------------------------------------------------------
$.50 - $2.88 830,000 $1.33
========================================================================================================================
The Company has elected, in accordance with the
provisions of SFAS No. 123, to apply the current
accounting rules under APB Opinion No. 25 and
related interpretations in accounting for stock
options and, accordingly, has presented the
disclosure-only information as required by SFAS
No. 123. If the Company had elected to recognize
compensation cost based on the fair value of the
options granted at the grant date as prescribed by
SFAS No. 123, the Company's net income and income
per common share for the years ended February 28,
1998 and 1999 would approximate the pro forma
amounts shown in the table below.
Year ended February 28, 1998 1999
- -----------------------------------------------------------------------------------------------------------------------
Reported net income $3,367,437 $4,063,194
=======================================================================================================================
Pro forma net income $3,336,837 $4,018,308
=======================================================================================================================
Reported net income per common share $ .21 $ .25
=======================================================================================================================
Pro forma net income per common share $ .21 $ .25
=======================================================================================================================
The fair value of options granted (which is
amortized to expense over the option vesting
period in determining the pro forma impact) is
estimated on the date of grant using the
Black-Scholes option-pricing model with the
following weighted-average assumptions:
Year ended February 28, 1998 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Expected life of options 2 yrs. 5 yrs.
===================================================================================================================================
Risk-free interest rate 6.45% 4.60%
===================================================================================================================================
Expected volatility of RMS Titanic, Inc. 117.5% 113.3%
===================================================================================================================================
Expected dividend yield on RMS Titanic, Inc. - -
===================================================================================================================================
F-12
45
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The weighted-average fair value of options granted
during the years ended February 28, 1998 and 1999
is as follows:
Year Ended February 28, 1998 1999
-----------------------------------------------------------------------------------------------------
Fair value of each option granted $ .245 $ .90
Total number of options granted 250,000 500,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FAIR VALUE OF ALL OPTIONS GRANTED $ 61,250 $450,000
===================================================================================================================================
In accordance with SFAS No. 123, the
weighted-average fair value of stock options
granted is based on a theoretical statistical
model using the preceding Black-Scholes
assumptions. In actuality, because the Company's
stock options do not trade on a secondary
exchange, employees can receive no value or derive
any benefit from holding stock options under these
arrangements without an increase in the market
price of the Company. Such an increase in stock
price would benefit all stockholders
commensurately.
During the year ended February 28, 1999, 250,000
stock options granted during April 1997 became the
subject of a litigation (see Note 8).
8. LITIGATION: The Company is a named defendant in a lawsuit
commenced in the United States District Court for
the Southern District of New York (the "New York
Court") 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. 97
Civ. 9248). The plaintiff therein alleges, 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, copy
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 New York 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,
presently
F-13
46
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
pending before 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 options
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 options,
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
options, 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. This action was in the discovery stage of
proceedings; however, the parties have commenced
settlement discussions, which it is contemplated
will result in modifications to certain
provisions of the option agreement. Management
believes that the modifications to the option
agreement will not have a material effect
on the financial position of the Company (see
Note 7). If the action is not resolved through
settlement, the Company intends to defend
vigorously against the plaintiff's claims and to
pursue its counterclaim.
The Company is 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 seeks a
declaratory judgment permitting him to participate
in a photographic expedition to the wreck of the
Titanic known as Operation Titanic. This action
does 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 various unrelated parties
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 has
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 into
the wreck site. The Court's ruling to that effect
also states that the Company has the right to
exclude others from the wreck site regardless of
whether the Company is at the wreck site while
other groups attempt to visit the site. Pursuant
to stipulation, the action commenced by the
plaintiff 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 have appealed the Order to
the U.S. Court of Appeals for the Fourth Circuit.
In March 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
F-14
47
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Company could exclude others from viewing and
photographing the wreck and wreck site. The
Company is considering appealing the decision of
the U.S. Court of Appeals to the United States
Supreme Court.
During the year ended February 28, 1997, a lawsuit
in which the Company was a named defendant that
commenced in the Supreme Court of the State of New
York, County of New York, on or about September
22, 1994 (Glenville Properties Incorporated
("Glenville") v. RMS Titanic, Inc. et al.,
94/127087) was settled. Pursuant to the terms of a
settlement agreement, the Company agreed to pay LS
Capital, an affiliate of Glenville, $154,272,
representing the outstanding note payable
principal balance of $126,050 and accrued interest
of $28,222, in 12 equal installments commencing on
January 15, 1997, subject to acceleration if the
Company achieves certain revenue levels
("Threshold Amounts"), during such 12-month
period, as defined (see Note 4). The Company also
agreed to place 15,000 shares of its common stock
in escrow, with such shares to be either issued in
5,000 share increments to LS Capital in the event
such Threshold Amounts are not achieved at the end
of the Company's quarterly periods, or to be
canceled in the event such Threshold Amounts are
achieved. Additionally, affiliates of LS Capital
have agreed to release the Company from
liabilities aggregating approximately $40,000 and
the Company has agreed to issue 40,000
unregistered shares of its common stock to LS
Capital during the year ended February 28, 1997.
The Company did not meet the Threshold Amounts
during the six- and nine-month periods ended
August 31, and November 30, 1997, respectively,
and as such issued 10,000 shares to LS Capital
relating to this settlement during the year ended
February 28, 1998.
9. COMMITMENTS AND Compensation amounting to approximately $120,000
CONTINGENCIES: was charged to operations during each of the years
ended February 28, 1997, 1998 and 1999, pursuant
to certain employment-related arrangements with
the chairman of the board of directors and a
former president of the Company. Additionally,
accounts payable and accrued liabilities include
amounts payable to these individuals in the
aggregate amount of $1,219,583 and $1,195,683 at
February 28, 1998 and 1999, respectively, in
connection with these arrangements.
The Company has agreed to a noncancelable
operating lease for its office which is expected
to expire 5 years from the effective date. The
lease is expected to be subject to escalation for
(i) the Company's pro rata share of increases in
real estate taxes, and (ii) increases in a certain
index. The approximate future minimum annual
rental commitment is expected to be approximately
$86,000.
F-15
48
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Rent expense charged to operations amounted to
approximately $70,000, $75,000 and $88,000 for the
years ended February 28, 1997, 1998 and 1999,
respectively.
The Company's Form 10-Ks for the years ended
February 28, 1997 and 1998 have not been filed as
of June 1999. The Form 10-Ks for the years ended
February 28, 1997 and 1998 that were approved by
management to be filed were filed in Form 8-Ks on
July 3, 1997 and June 16, 1998, respectively as a
result of certain corporate governance issues
which existed at those times.
10. OTHER RELATED A limited partner of TVLP, Taurus International
PARTY ("Taurus"), has provided services to TVLP as an
TRANSACTIONS: agent of TVLP in France. These services have
included securing legal representation, insurance
coverage, storage facilities and other
relationships required to maintain the Artifacts
while preservation work has been performed in
France by Electricite de France. Accounts payable
to Taurus amounted to $37,600 as of February 28,
1997. The amount was forgiven by Taurus during
the year ended February 28, 1998 and is included
in other income in the Company's statement of
income for the year ended February 28, 1998.
Included in prepaid expenses and other current
assets are loans to the Company's president in
the aggregate amount of approximately $73,000.
Such amount is expected to be repaid, with
interest at 8% per annum, by February 29,
2000, and is fully secured by accruals for past
compensation owed by the Company to its
President.
11. EXHIBITIONS: In October 1996, the Company entered into an
agreement with the National Maritime Center
("Nauticus"), a political subdivision of the City
of Norfolk, Virginia, for an exhibition of
Titanic artifacts at Nauticus from November 27,
1996 through March 31, 1997. Pursuant to the
agreement, the Company received one-third of
revenue, as defined, from the sale of 150,000
tickets. In addition, the Company received 50% of
net profits, as defined, from the sale of
merchandise at the exhibition, and 50% of
sponsorship revenue, net of the difference, if
any, between the $500,000 expended by Nauticus
for the design, construction and marketing of the
exhibition and Nauticus' share of ticket revenue
and net profits, as defined, from the sale of
merchandise at the exhibition.
In August 1996, the Company entered into an
agreement with the City of Memphis, Tennessee, for
an exhibition of Titanic artifacts in Memphis,
Tennessee, from April 3, 1997 to September 30,
1997. Pursuant to the agreement, the Company
received exhibition revenue of $720,000 in
installments between September 1996 and August 1,
1997, and received 65% of the net profits, as
defined, derived from ticket, merchandise and
sponsorship revenue in excess of $5,000,000.
In April 1996, the Company entered into an
agreement with CRE-CO Finanz GmbH ("CRE-CO"), 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, $2.00 per visitor from
March 1, 1998 to May 1, 1998, and two-thirds of
the net profits, after recoupment of
F-16
49
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 nonrefundable advance against the
Company's share of net profits, as defined. At
February 28, 1999, refundable foreign withholding
taxes amounting to $429,022 are receivable in
connection with revenue earned from the
exhibition. Included in exhibition revenue for the
year ended February 28, 1998 is an amount
attributable to the transfer of ownership to the
Company from CRE-CO of certain exhibitry equipment
aggregating $559,414 in satisfaction of amounts
due the Company for its share of exhibition
revenue earned. During the year ended February 28,
1999, the Company recognized revenue aggregating
approximately $1,272,000.
In December 1996, the Company entered into an
agreement, as amended, 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 $.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. During the
year ended February 28, 1999, the Company
recognized revenue aggregating $1,292,522.
In May 1997, the Company entered into an agreement
with the RMS Foundation, Inc. for artifacts,
expedition equipment, photographs and film footage
from the 1996 Titanic expedition to be exhibited
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 and was
further extended to September 7, 1998 in April
1998 (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 of 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 will receive 50% of net profits, as
defined, from the sale of merchandise at the Queen
Mary exhibition, and 50% of any sponsorship
revenue. During the year ended February 28, 1999,
the Company recognized revenue aggregating
$454,862.
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 agreement, the Company was to
receive two-thirds of the net profits, after
recoupment of certain project expenses, as
defined. The agreement further provided that the
ownership interest of certain exhibitry and
equipment aggregating $750,000 was transferred to
the Company as of August 31, 1998, in satisfaction
of the minimum exhibition fees due to the Company.
This exhibition closed on
F-17
50
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 seven venues in Japan
commencing on or about July 20, 1998 and ending
on or about July 1, 1999. Pursuant to the
exhibition agreement, TEJI has agreed to pay
$321,000 for the conservation and restoration of
such artifacts. In addition, TEJI will pay to the
Company the greater of $3.00 per attendee or 50%
of the profits, as defined, and that the Company
has the right to select and obtain legal title to
50% of the exhibitry utilized in the exhibition
at no additional cost to the Company. During the
year ended February 28, 1999, the Company
recognized revenue aggregating $819,793 under the
agreement.
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 and the acquisition
of related exhibitry equipment utilized in the
Company's exhibition in Hamburg, Germany.
Pursuant to the agreement, the Company is 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. During the
year ended February 28, 1999, the Company
recognized revenue aggregating $400,000 pursuant
to the 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. The Company's revenue for
the year ended February 28, 1999 includes
$650,000 from the exhibition, representing 50% of
the minimum guaranteed fee ($500,000) and 50% of
the exhibitry lease fee ($150,000). The
remaining portion of the minimum fee of $500,000
is included in deferred revenue in the
accompanying balance sheet at February 28, 1999
Total exhibition revenue from sources outside the
United States amounted to approximately $2,492,000
for the year ended February 28, 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 the
Company 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 annually. The license
agreement has an initial term of one year,
commencing September 14, 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
F-18
51
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
Pursuant to the license agreement, the Company
will receive 65% and SFX will receive 35% of net
ticket, merchandise and sponsorship revenue, 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 revenue in excess of
project expenses. The Company has the right to
terminate the license agreement effective as of
September 14, 2001, or annually thereafter, upon
the occurrence of certain conditions, including
the merger or sale of majority control of the
Company or substantially all of its assets. If the
Company terminates the license agreement, SFX will
have the right to continue one major exhibition,
containing no more than 200 of the Company's
Titanic artifacts and involving an investment by
SFX in excess of $2,000,000, until no later than
September 14, 2004 in consideration of the payment
to the Company of a minimum of $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, 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 is a related party 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
("Tropicana"). This exhibition, which includes a
section of Titanic's hull recovered during the
1998 Titanic expedition, is scheduled to conclude
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 revenue, 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 30% of the gross revenue derived
from the sale of merchandise at the retail shop
established within the exhibition premises.
12. LICENSING AND The Company conducted its fifth expedition to the
SPONSORSHIP Titanic wreck site in August 1998 (the "Summer of
FEES: 1998 Expedition"). The Company and an unrelated
television production company entered into an
agreement whereby the Company granted certain
rights to the production company for the
production and exploitation of audio and visual
recordings with respect to the Summer of 1998
Expedition. In consideration of the granting of
such rights, the television production company,
among other things, agreed to pay the cost for
chartering equipment and crew necessary for the
Summer of 1998 Expedition, including, but not
limited to, $1,150,000 of the costs for chartering
IFREMER's equipment and crew and an aggregate of
$2,195,000 of additional equipment and crew from
other unrelated third parties on behalf of the
Company. Of this $2,195,000, the
F-19
52
RMS TITANIC, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Company has charged to operations $1,845,000
during the year ended February 28, 1999,
representing costs attributable to the licensing
agreements. The Company has retained the rights
for commercial exploitation of recordings made at
the Titanic wreck site in a print format and
electronic media format, and certain royalty and
other rights with respect to the marketing and
sale of home videos based upon the Summer of 1998
Expedition.
F-20
53
EXHIBITS
RMS TITANIC, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999
3.1 Articles of Incorporation, as amended.(1)
4.1 First Amendment to By-Laws of the Registrant.(2)
9.1 Voting Trust Agreement among Titanic Ventures Limited Partnership,
George Tulloch, Allan H. Carlin, Arnie Geller, G. Michael Harris, Kurt
Hothorn, Cheryl Hothorn, Westgate Entertainment Corp., Anne A. Hill,
Diane Carlin, Shirley A. Hill, James A. Hill, and D. Michael Harris(3)
10.1 Lease Agreement between the Company and 17 Battery Place North
Associates.(4)
10.2 Agreement dated April 15, 1996 between the Company and CRE-CO Finanz
GmbH.(5)
10.3 Pledge Agreement dated April 15, 1996 between the Company and CRE-CO
Finanz GmbH.(5)
10.4 Bailment Agreement dated April 15, 1996 between the Company and CRE-CO
Finanz GmbH.(5)
10.5 1996 Charter Agreement with IFREMER.(6)
10.6 Agreement dated August 8, 1996 between the Company and the City of
Memphis.(6)
10.7 Agreement dated July 22, 1996 between Discovery Communications, Inc.,
Ellipse Programme and the Company (omitted and filed separately as
confidential information).(6)
10.8 Agreement dated May 23, 1997 between the Company and RMS Foundation,
Inc.(7)
10.9 Amendment to Agreement dated April 15, 1996 between the Company and
CRE-CO Finanz GmbH.(8)
10.10 Agreement between the registrant and Resource Plus and Event
Management International None dated April 24, 1998(9)
10.11 Agreement between the registrant and Titanic Exhibition Japan Inc.
dated May 17, 1998(9)
10.12 Agreement between the registrant and CRE-CO Finanz dated April 15,
1998(9)
10.13 1998 Charter Agreement with IFREMER.(10)
10.14 1998 Charter Agreement with Oceaneering International, Inc.(10)
10.15 Agreement dated July 15, 1998 between Discovery Communications
and the Company.
10.16 1998 Charter Agreement with Aqua Plus.(10)
10.17 1998 Charter Agreement with Les Abeilles International, Travocean
and the Company.(10)
10.18 Amendment to Agreement dated August 4, 1998 between the Company and
CRE-CO Finanz GmbH.(10)
10.19 Agreement dated September 25, 1998 between the Company and Media Rare,
Inc.(11)
10.20 Promissory Note dated January 5, 1999 executed by George Tulloch in
favor of the registrant.
10.21 Pledge Agreement dated January 5, 1999 between George Tulloch and the
registrant.
- -----------------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form 8-A.
(2) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1995.
32
54
(3) Filed as exhibit 7.2 to Form 13D filed on September 2, 1997.
(4) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended February 28, 1994.
(5) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1996.
(6) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1996.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1996.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1997
(9) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1998.
(10) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1998.
(11) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1998.
33