UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 Or 15(d) of the Securities Exchange
Act of 1934; For the quarterly period ended: June 30, 2005
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-26958
RICK'S CABARET INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0458229
(State or other jurisdiction IRS Employer
of incorporation or organization) Identification No.)
10959 Cutten Road
Houston, Texas 77066
(Address of principal executive offices, including zip code)
(281) 397-6730
(Registrant's telephone number, including area code)
APPLICABLE ONLY TO CORPORATE ISSUERS
On August 9, 2005, there were 4,087,148 shares of common stock, $.01 par value,
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
RICK'S CABARET INTERNATIONAL, INC.
TABLE OF CONTENTS
-----------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2005 (unaudited)
and September 30, 2004 (audited). . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the three months and
nine months ended June 30, 2005 and 2004 (unaudited). . . . . . . 3
Consolidated Statements of Cash Flows for the nine months
ended June 30, 2005 and 2004 (unaudited). . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis or Plan of Operations. . . .10
Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . . .16
PART II OTHER INFORMATION
Item 2. Unregistered sales of equity securities and use of proceeds . . .17
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .17
Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . .18
i
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
06/30/05 9/30/04
(UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 477,729 $ 275,243
Accounts receivable
Trade 89,625 72,909
Other, net 166,016 204,093
Marketable securities 31,143 122,350
Inventories 227,407 232,746
Prepaid expenses and other current assets 315,231 976,577
Net assets of discontinued operations --- 27,674
---------------- ----------------
Total current assets 1,307,151 1,911,592
---------------- ----------------
PROPERTY AND EQUIPMENT
Buildings, land and leasehold improvements 12,534,604 9,394,619
Furniture and equipment 2,342,859 1,946,583
---------------- ----------------
14,877,463 11,341,202
Accumulated depreciation (3,046,133) (2,659,762)
---------------- ----------------
Total property and equipment, net 11,831,330 8,681,440
---------------- ----------------
OTHER ASSETS
Goodwill, net 2,326,031 1,898,926
Other intangible assets, net 7,831,597 ---
Other 491,934 432,658
---------------- ----------------
Total other assets 10,649,562 2,331,584
---------------- ----------------
Total assets $ 23,788,043 $ 12,924,616
================ ================
See accompanying notes to consolidated financial statements.
1
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
06/30/05 9/30/04
(UNAUDITED) (AUDITED)
CURRENT LIABILITIES
Accounts payable - trade $ 403,740 $ 291,650
Accrued liabilities 1,057,094 588,883
Current portion of long-term debt 1,041,826 492,310
---------------- ----------------
Total current liabilities 2,502,660 1,372,843
Deferred gain on sale of subsidiary 163,739 163,739
Long-term debt less current portion 11,798,023 3,201,250
---------------- ----------------
Total liabilities 14,464,422 4,737,832
---------------- ----------------
COMMITMENTS AND CONTINGENCIES --- ---
MINORITY INTERESTS 47,169 40,808
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par, 1,000,000 shares
authorized; none outstanding --- ---
Common stock, $.01 par, 15,000,000 shares
authorized; 4,995,678 and 4,608,678 shares issued 49,957 46,087
Additional paid-in capital 12,446,049 11,273,149
Accumulated other comprehensive income 17,796 109,002
Accumulated deficit (1,943,570) (1,988,482)
Less 908,530 shares of common stock held in treasury,
at cost (1,293,780) (1,293,780)
---------------- ----------------
Total stockholders' equity 9,276,452 8,145,976
---------------- ----------------
Total liabilities and stockholders' equity $ 23,788,043 $ 12,924,616
================ ================
See accompanying notes to consolidated financial statements.
2
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004
(UNAUDITED) (UNAUDITED)
Continuing Operations:
Revenues:
Sales of alcoholic beverages $ 1,363,425 $ 1,269,908 $ 3,766,469 $ 4,329,346
Sales of food and merchandise 414,348 394,785 1,205,446 1,154,109
Service revenues 1,673,269 1,594,664 4,766,110 4,314,514
Internet revenues 200,876 200,300 568,836 603,723
Other 77,093 61,961 197,751 245,767
---------------- ---------------- --------------- ---------------
Total revenues 3,729,011 3,521,618 10,504,612 10,647,459
---------------- ---------------- --------------- ---------------
Operating expenses:
Cost of goods sold 438,444 353,359 1,284,378 1,228,144
Salaries and wages 1,315,625 1,292,352 3,727,169 3,676,524
Other general and administrative:
Taxes and permits 484,244 459,866 1,405,870 1,438,470
Charge card fees 52,353 64,423 167,649 183,299
Rent 128,874 97,800 306,697 256,602
Legal and professional 156,750 130,336 502,829 406,244
Advertising and marketing 185,963 246,246 543,566 616,865
Depreciation and amortization 141,532 122,315 408,773 369,666
Other 661,623 538,591 1,838,823 1,538,278
---------------- ---------------- --------------- ---------------
Total operating expenses 3,565,408 3,305,288 10,185,754 9,714,092
---------------- ---------------- --------------- ---------------
Income from continuing operations 163,603 216,330 318,858 933,367
Other income (expense):
Interest income 6,868 6,270 27,611 21,085
Interest expense (181,348) (83,014) (438,298) (242,337)
Gain from sale of marketable securities - 2,929 - 19,807
Minority interests 53 (17,471) (6,360) (6,925)
Other 143 451 (591) (2,071)
---------------- ---------------- --------------- ---------------
Net income (loss) from continuing
operations (10,681) 125,495 (98,780) 722,926
Discontinued operations:
Income (loss) from discontinued operations - (34,920) (148,294) (24,839)
Gain on sale of discontinued operations - - 291,987 -
---------------- ---------------- --------------- ---------------
Net income (loss) $ (10,681) $ 90,575 $ 44,913 $ 698,087
================ ================ =============== ===============
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.00 $ 0.03 $ (0.03) $ 0.20
Income (loss) from discontinued operations 0.00 (0.01) 0.04 (0.01)
---------------- ---------------- --------------- ---------------
Net income (loss), basic $ 0.00 $ 0.02 $ 0.01 $ 0.19
================ ================ =============== ===============
Net income (loss), diluted $ 0.00 $ 0.02 $ 0.01 $ 0.19
================ ================ =============== ===============
Weighted average number of common
shares outstanding:
Basic 3,967,148 3,700,148 3,816,592 3,700,148
================ ================ =============== ===============
Diluted 3,967,148 3,700,148 3,938,960 3,700,148
================ ================ =============== ===============
Comprehensive income for the three months ended June 30, 2005 and 2004 were
($24,029) and $19,874, and for the nine months were ($46,294) and $664,844,
respectively. This includes the changes in available-for-sale securities and
net income (loss).
See accompanying notes to consolidated financial statements.
3
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2005 AND 2004
2005 2004
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,913 $ 698,087
Loss from discontinued operations 148,294 24,839
Gain on sale of discontinued operations (291,987) ---
-------------- --------------
Income (loss) from continuing operations (98,780) 722,926
Adjustments to reconcile income (loss) from
continuing operations to cash provided by operating
activities:
Depreciation and amortization 408,773 369,666
Minority interests 6,360 6,925
Gain on sale of marketable securities --- (19,807)
Common Stock issued for professional services 27,120 ---
Changes in operating assets and liabilities 600,686 (666,995)
-------------- --------------
Cash provided by operating activities 944,159 412,715
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,469,609) (288,625)
Proceeds from sale of marketable securities --- 21,460
Proceeds from sale of discontinued operations 550,000 ---
Payments for notes receivable 21,303 3,023
Acquisitions of businesses, net of cash acquired (2,587,846) (265,000)
-------------- --------------
Cash used in investing activities (4,486,152) (529,142)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 474,650 ---
Proceeds from long-term debt 4,062,000 300,000
Payments on long-term debt (792,171) (386,530)
-------------- --------------
Cash provided by (used in) financing activities 3,744,479 (86,530)
-------------- --------------
NET INCREASE (DECREASE) IN CASH 202,486 (202,957)
CASH AT BEGINNING OF PERIOD 275,243 563,559
-------------- --------------
CASH AT END OF PERIOD $ 477,729 $ 360,602
============== ==============
CASH PAID DURING PERIOD FOR:
Interest $ 435,999 $ 244,431
============== ==============
Non-cash transactions:
During the quarter ended December 31, 2004, the Company purchased a 9,000
square foot office building for $516,499, payable with $90,039 cash at closing
and a fifteen-year promissory note, bearing interest rate at 7%, in the amount
of $426,460.
On January 18, 2005, the Company purchased a club in New York for
$7,775,000, payable with $2,500,000 cash at closing and a five-year secured
convertible promissory note, bearing interest rate at 4%, in the amount of
$5,125,000, and transaction costs of $150,000.
On March 31, 2005, 12,000 shares of restricted common stock were issued as
compensation pursuant to a consulting agreement for a total value of $27,120,
and were issued as part of the transaction costs related to the club in New
York.
On June 10, 2005, the Company purchased a club in Charlotte, North Carolina
for $1,000,000, payable with a seven-year promissory note bearing interest at a
rate of 7%, in the amount of $325,000 and 180,000 shares of common stock valued
at $675,000.
See accompanying notes to consolidated financial statements.
4
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB of
Regulation S-B. They do not include all information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. However, except as disclosed herein, there has
been no material change in the information disclosed in the notes to the
financial statements for the year ended September 30, 2004 included in the
Company's Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission. The interim unaudited financial statements should be read in
conjunction with those financial statements included in the Form 10-KSB. In the
opinion of Management, all adjustments considered necessary for a fair
presentation, consisting solely of normal recurring adjustments, have been made.
Operating results for the three months and nine months ended June 30, 2005 are
not necessarily indicative of the results that may be expected for the year
ending September 30, 2005.
2. STOCK OPTIONS
The Company accounts for its stock options under the recognition and measurement
principles of Accounting Principles Board ("APB") opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. The following table
illustrates the effect on net income (loss) and earnings (loss) per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock Based
Compensation, to stock-based employee compensation. The following presents pro
forma net income (loss) and per share data as if a fair value accounting method
had been used to account for stock-based compensation:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004
Net income (loss), as reported $ (10,681) $ 90,575 $ 44,913 $ 698,087
Less total stock-based employee compensation
expense determined under the fair value
based method for all awards (128,393) (11,943) (385,179) (187,122)
--------------- --------------- --------------- ---------------
Pro forma net income (loss) $ (139,074) $ 78,632 $ (340,266) $ 510,965
=============== =============== =============== ===============
Earnings (loss) per share:
Basic - as reported $ 0.00 $ 0.02 $ 0.01 $ 0.19
=============== =============== =============== ===============
Diluted - as reported $ 0.00 $ 0.02 $ 0.01 $ 0.19
=============== =============== =============== ===============
Basic and diluted - pro forma $ (0.04) $ 0.02 $ (0.09) $ 0.14
=============== =============== =============== ===============
5
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
3. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
4. COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with the provisions
of SFAS No. 130, Reporting Comprehensive Income. Comprehensive income consists
of net income (loss) and gains (losses) on available-for-sale marketable
securities.
5. COMMON STOCK
In January 2005, 20,000 stock options were exercised by the Company's employees
and directors for $39,625. In March 2005, the Company issued 150,000 shares of
common stock to an unrelated investor and received proceeds of $375,000, 12,000
shares of restricted common stock were issued at a value of $2.26 per share
pursuant to a consulting agreement, and 25,000 stock options were exercised by
the Company's employees for $60,025. On June 10, 2005, the Company issued
180,000 shares of common stock pursuant to the purchase of a club in Charlotte,
North Carolina. See Note 9.
6. SEGMENT INFORMATION
Below is the financial information related to the Company's segments:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004
REVENUES
Club operations $ 3,528,135 $ 3,321,318 $ 9,935,776 $ 10,043,736
Internet websites 200,876 200,300 568,836 603,723
--------------- --------------- --------------- ---------------
$ 3,729,011 $ 3,521,618 $ 10,504,612 $ 10,647,459
=============== =============== =============== ===============
NET INCOME (LOSS)
Club operations $ 466,967 $ 508,275 $ 1,414,536 $ 1,834,454
Internet websites 39,893 36,227 98,304 62,135
Corporate expenses (517,541) (419,007) (1,611,620) (1,173,663)
Discontinued operations --- (34,920) 143,693 (24,839)
--------------- --------------- --------------- ---------------
$ (10,681) $ 90,575 $ 44,913 $ 698,087
=============== =============== =============== ===============
6
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
7. REVENUE RECOGNITION
The Company recognizes revenue from the sale of alcoholic beverages, food and
merchandise, and services at the point-of-sale upon receipt of cash, check, or
credit card charge. This includes daily, annual and lifetime VIP memberships.
Under Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, membership revenue should be deferred and recognized over the
estimated membership usage period. Management estimates that the weighted
average useful lives for memberships are 12 and 24 months for annual and
lifetime memberships, respectively. The Company does not track membership usage
by type of membership, however it believes these lives are appropriate and
conservative, based on management's knowledge of its client base and membership
usage at the clubs.
If the Company had deferred membership revenue and recognized it based on the
lives above, the impact on revenue and net income (loss) recognized would have
been an increase of approximately $1,721 and $13,675 for the three months and an
increase of $3,591 and $37,424 for the nine months ended June 30, 2005 and 2004,
respectively. This would have also resulted in a deferred revenue balance of
approximately $345 and $22,126 as of June 30, 2005 and 2004, respectively.
Management does not believe the impact of this difference in accounting
treatment is material to the Company's annual and quarterly financial
statements. However, the Company began to record revenues in such manner
effective January 1, 2004, and hence as of June 30, 2005 deferred revenues of
$21,994 have been recorded related to such memberships.
The Company recognizes Internet revenue from monthly subscriptions to its online
entertainment sites when notification of a new subscription is received from the
third party hosting company or from the credit card company, usually two to
three days after the transaction has occurred. The Company recognizes Internet
auction revenue when payment is received from the credit card company as
revenues are not deemed estimable nor collection deemed probable prior to that
point.
8. LONG-TERM DEBT
On November 15 and 17, 2004, the Company borrowed $590,000 and $1,042,000,
respectively, from a financial institution at an annual interest rate of 10%
over a 10 year term. The monthly payments of principal and interest are $5,694
and $10,056, respectively. The note is secured by the Company's properties
located at 2023 Sable Lane, San Antonio and at 410 N. Sam Houston PKWY E.,
Houston, Texas. On November 30, 2004, the Company borrowed $900,000 from an
unrelated individual at an 11% annual interest rate over a 10 year term. The
monthly payment of principal and interest is $9,290. The note is secured by the
Company's properties located in 3501 Andtree, Austin and at 5718 Fairdale,
Houston, Texas. On December 30, 2004, the Company borrowed $1,270,000 from a
financial institution at an annual interest rate of 10% over a 10 year term. The
monthly payment of principal and interest is $12,256. The note is secured by the
Company's property located at 3113 Bering Drive, Houston, Texas.
7
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
8. LONG-TERM DEBT (continued)
The money received from this financing was used for the acquisition and
renovation of the New York club.
On June 17, 2005, the Company borrowed $160,000 from a shareholder and $100,000
from an unrelated individual at an annual interest rate of 12% and 11% over 3
and 10 year term, respectively.
9. ACQUISITIONS AND DISPOSITIONS
On January 18, 2005, the Company completed the acquisition of Peregrine
Enterprises, Inc., which operated the Paradise Club in Midtown Manhattan, New
York (50 West 33rd Street). The total consideration was for $7.775 million for
the assets and stock of the former Paradise Club, which had operated on the site
for more than a decade. The transaction consisted of $2.5 million in cash and
$5.125 million in a promissory note bearing simple interest at the rate of 4.0%
per annum with a balloon payment at end of five years, part of which is
convertible to restricted shares of Rick's Cabaret common stock at prices
ranging from $4.00 to $7.50 per share, and transaction costs of $150,000. The
results of operations of the club are included in our consolidated statement of
operations from January 18, 2005.
The following information summarizes the initial allocation of fair values
assigned to the assets and liabilities at the acquisition date based on a
preliminary valuation. Subsequent adjustments may be recorded upon the
completion of the valuation and the final determination of the purchase price
allocation.
Current assets $ 150,000
Discounted lease 446,486
Non-compete agreement 100,000
License 7,307,514
Current liabilities assumed (229,000)
--------------
Net assets acquired $ 7,775,000
The following unaudited pro forma information presents the results of operations
as if the acquisition had occurred as of the beginning of the immediate
preceding period. The pro forma information is not necessarily indicative of
what would have occurred had the acquisition been made as of such periods, nor
is it indicative of future results of operations. The pro forma amounts give
effect to appropriate adjustments for the fair value of the assets acquired,
amortization of intangibles and interest expense.
8
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
9. ACQUISITIONS AND DISPOSITIONS (continued)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004
Revenues $ 3,729,011 $ 4,183,244 $ 10,990,612 $ 12,478,285
Net income (loss) from continuing
operations (10,681) 138,309 (378,780) 352,293
Net income (loss) $ (10,681) $ 100,868 $ (235,087) $ 324,935
Net income (loss) per share -
basic and diluted $ 0.00 $ 0.03 $ (0.06) $ 0.09
On March 31, 2005, the Company completed the sale of one of its clubs known as
'Rick's South' to MBG Acquisition LLC for $550,000 cash. In connection with the
sale, the Company recorded a gain of $291,987. The club's business was
accounted for as discontinued operations under accounting principles generally
accepted in the United States of America and therefore, the club's results of
operations and cash flows have been removed from the Company's consolidated
results of continuing operations and cash flows for all periods presented in
this document and such assets and liabilities as of September 30, 2004 have been
netted in one line item on the balance sheet.
On June 10, 2005, the Company completed the acquisition of a 30,000 square foot
nightclub in Charlotte, North Carolina, which was previously known as 'The
Manhattan Club' (5300 Old Pineville Road). The venue has been renamed Rick's
Cabaret. The purchase price was $1,000,000 through the issuance of 180,000
shares of restricted common stock valued at $675,000 and a seven-year promissory
note of $325,000, bearing interest at a rate of 7%. The note is secured by
liens upon the assets of and hereafter acquired assets of RCI Entertainment
(North Carolina), Inc. The results of operations of the club are included in the
Company's consolidated statement of operations from February 1, 2005, when we
assumed risk of loss for the club's operation under our management.
The following information summarizes the initial allocation of fair values
assigned to the assets and liabilities at the acquisition date based on a
preliminary valuation. Subsequent adjustments may be recorded upon the
completion of the valuation and the final determination of the purchase price
allocation.
9
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
9. ACQUISITIONS AND DISPOSITIONS (continued)
Current assets $ 104,595
Property & equipment, net depreciation 640,192
Goodwill 427,105
Other assets 1,510
Current liabilities assumed (173,402)
--------------
Net assets acquired $ 1,000,000
10. SUBSEQUENT EVENTS
On July 12, 2005, the Company organized RCI Dating Services, Inc. ("RCI
Dating"), which operates as an addition to the Company's internet operations, to
acquire CouplesClick.net from ClickMatch LLC ("ClickMatch"). The Company
transferred its ownership in CouplesTouch.com to RCI Dating and as a result of
the transaction the Company obtained an 85% interest in RCI Dating with the
other 15% owned by ClickMatch.
On July 20, 2005, the Company issued 40,000 stock options to its Board of
Directors.
On July 22, 2005, the Company entered into a secured convertible debenture with
one of its shareholders for a principal sum of $660,000, which includes the loan
on June 17, 2005, in the amount of $160,000. The term is for three years and
interest rate is at 12% per annum. The debenture matures on August 1, 2008. The
Company also issued 50,000 warrants at $3.00 per share in relation to this
debenture. The debenture is secured by Company's ownership in Citation Land, LLC
and RCI Holdings, Inc., both are wholly owned subsidiaries.
In July 2005, the Company received additional borrowing in the amount of
$100,000 from the same unrelated individual who advanced $100,000 in June 2005,
and with whom the Company had two existing notes. The term is for 10 years and
the interest rate is 11% per annum. On August 15, 2005, the notes were amended
and the amounts from June and July were included in one of the notes, for a
combined total of $1,341,520.34 payable to this individual.
On July 27, 2005, the Company issued subscription agreements for 200,000 shares
valued at $400,000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
-----------------------------------------------------------
The following discussion should be read in conjunction with our audited
consolidated financial statements and related notes thereto included in this
quarterly report.
10
FORWARD LOOKING STATEMENT AND INFORMATION
The Company is including the following cautionary statement in this Form 10-QSB
to make applicable and take advantage of the safe harbor provision of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements, which are
other than statements of historical facts. Certain statements in this Form
10-QSB are forward-looking statements. Words such as "expects," "believes,"
"anticipates," "may," and "estimates" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties are set forth below. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result, be achieved, or be accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause material adverse affects
on the Company's financial condition and results of operations: the risks and
uncertainties relating to our Internet operations, the impact and implementation
of the sexually oriented business ordinances in the jurisdictions where our
facilities operate, competitive factors, the timing of the openings of other
clubs, the availability of acceptable financing to fund corporate expansion
efforts, and the dependence on key personnel. The Company has no obligation to
update or revise these forward-looking statements to reflect the occurrence of
future events or circumstances.
GENERAL
We presently conduct our business in two different areas of operation:
1. We own and operate upscale adult nightclubs serving primarily
businessmen and professionals. Our nightclubs offer live adult
entertainment, restaurant and bar operations. We own and operate eight
adult nightclubs under the name "Rick's Cabaret" and "XTC" in Houston,
Austin and San Antonio, Texas; Minneapolis, Minnesota; Charlotte,
North Carolina, and New York, New York. We also own and operate a
sports bar called "Hummers" and an upscale venue that caters
especially to urban professionals, businessmen and professional
athletes called "Club Onyx" in Houston. No sexual contact is permitted
at any of our locations. On January 18, 2005, we completed the
acquisition of Peregrine Enterprises, Inc., which operated the
Paradise Club in Midtown Manhattan, New York (50 West 33rd Street).
The results of operations of this new venue are included in the
accompanying consolidated financial statements from the date of
acquisition. Pro forma results of operations have been provided. The
club is currently undergoing renovation with an anticipated
grand-opening in September as 'Rick's Cabaret'. On March 31, 2005, we
sold one of our clubs known as Rick's South. On June 10, 2005, we
completed the acquisition of a 30,000 square foot nightclub in
Charlotte, North Carolina. We have changed the name of the club from
'The Manhattan Club' (5300 Old Pineville Road) to 'Rick's Cabaret'.
The results of operations of the club are
11
included in our consolidated statement of operations from February 1,
2005, when we assumed risk of loss for the club's operations under our
management.
2. We have extensive internet activities.
a) We currently own three adult Internet membership Web sites at
www.couplestouch.com, www.M4Mcouples.com, and
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www.xxxpassword.com. We acquire www.xxxpassword.com site content
------------------- -------------------
from wholesalers.
b) We operate an online auction site www.naughtybids.com. This site
-------------------
provides our customers with the opportunity to purchase adult
products and services in an auction format. We earn revenues by
charging fees for each transaction conducted on the automated
site.
Our nightclub revenues are derived from the sale of liquor, beer, wine, food,
merchandise, cover charges, membership fees, independent contractors' fees,
commissions from vending and ATM machines, valet parking, and other products and
services. Our internet revenues are derived from subscriptions to adult content
internet websites, traffic/referral revenues, and commissions earned on the sale
of products and services through Internet auction sites, and other activities.
Our fiscal year end is September 30.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 2004
For the three months ended June 30, 2005, the Company had consolidated total
revenues of $3,729,011 compared to consolidated total revenues of $3,521,618 for
the three months ended June 30, 2004, an increase of $207,393 or 5.89%. The
increase in total revenues was primarily attributable to the revenues generated
by the Company's new club in Charlotte, North Carolina, and by the increase in
revenues generated by the Company's existing club businesses in the amount of
$206,817, a 6.23% increase from a year ago. Total revenues for
same-location-same-period of club operations increased to $3,262,362 for the
three months ended June 30, 2005 from $3,179,315 for same period ended June 30,
2004, or by 2.61%. The increase was primarily attributable to the increase in
revenues in the Company's club operations.
The cost of goods sold for the three months ended June 30, 2005 was 11.76% of
total revenues compared to 10.03% for the three months ended June 30, 2004. The
increase was due primarily to the addition of Rick's clubs, which have a higher
cost of goods sold, offset by a reduction in costs of maintaining our internet
operations. The cost of goods sold for the club operations for the three
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months ended June 30, 2005 was 12.19% compared to 10.22% for the three months
ended June 30, 2004. We continue a program to improve margins from liquor and
food sales and food service efficiency. The cost of goods sold from our internet
operations for the three months ended June 30, 2005 was 4.22% compared to 6.88%
for the three months ended June 30, 2004. The cost of goods sold for
same-location-same-period of club operations for the three months ended June 30,
2005 was 12.10%, compared to 10.23% for the same period ended June 30, 2004.
Payroll and related costs for the three months ended June 30, 2005 were
$1,315,625 compared to $1,292,352 for the three months ended June 30, 2004.
Payroll for same-location-same-period of club operations decreased to $914,238
for the three months ended June 30, 2005 from $988,127 for the same period ended
June 30, 2004. Management has implemented labor cost reduction initiative and
currently believes that its labor and management staff levels are appropriate.
Other general and administrative expenses for the three months ended June 30,
2005 were $1,811,339 compared to $1,659,577 for the three months ended June 30,
2004. The increase was due primarily to increase in legal and professional,
rent, indirect operating expenses, travel and lodging, and utilities from adding
two new locations in New York, New York and Charlotte, North Carolina.
Interest expense for the three months ended June 30, 2005 was $181,348 compared
to $83,014 for the three months ended June 30, 2004. The increase was
attributable to the Company's obtaining new debt to finance the purchase of a
club in New York. As of June 30, 2005, the balance of long-term debt was
$12,839,849 compared to $3,923,356 a year earlier.
Net loss for the three months ended June 30, 2005 was ($10,681) compared to net
income of $90,575 for the three months ended June 30, 2004. The decrease in net
income was primarily due to increase in operating expenses due to managing two
new locations in New York and North Carolina and increase in interest expenses
related to the acquisition of a club in New York. Net income for
same-location-same-period of club operations increased to $783,755 for the three
months ended June 30, 2005 from $548,881 for same period ended June 30, 2004, or
by 42.79%.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2005 AS COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 2004
For the nine months ended June 30, 2005, the Company had consolidated total
revenues of $10,504,612 compared to consolidated total revenues of $10,647,459
for the nine months ended June 30, 2004, or a decrease of $142,847. The
decrease in total revenues was primarily attributable to the decrease in overall
revenues generated by the Company's club business in previous quarters plus a
decrease of $34,887 by the Company's internet business. The Company's club
operations in Houston benefited from the Super Bowl in the previous year. Total
revenues for same-location-same-period of club operations decreased to
$9,539,247 for the nine months ended June 30, 2005 from $9,610,536 for same
period ended June 30, 2004, or by 0.74%. The decrease in internet revenues was
due to the Company's transition from programs which generate high revenues with
very low margins to programs which will produce higher margins from lower
revenues.
The cost of goods sold for the nine months ended June 30, 2005 was 12.23% of
total revenues compared to 11.53% for the nine months ended June 30, 2004. This
increase is attributable to the addition of Rick's club, which have higher cost
of goods sold, offset by reduction in costs of maintaining our internet
operations. The cost of goods sold for the club operations for the nine months
ended June 30, 2005 was 12.69% and 11.66% for the nine months ended June 30,
2004. The cost of goods sold from our internet operations for the nine months
ended June 30, 2005 was 4.52% compared to 9.52% for the nine months ended June
30, 2004. The cost of
13
goods sold for same-location-same-period of club operations for the nine months
ended June 30, 2005 was 12.35%, compared to 11.61% for the same period ended
June 30, 2004.
Payroll and related costs for the nine months ended June 30, 2005 were
$3,727,169 compared to $3,676,524 for the nine months ended June 30, 2004. This
increase was the result of additional personnel added to the Company's new club
operations offset by labor cost reduction in the Company's existing club
operations. Management currently believes that its labor and management staff
levels are appropriate.
Other general and administrative expenses for the nine months ended June 30,
2005 were $5,174,207 compared to $4,809,424 for the nine months ended June 30,
2004. The increase was due primarily to an increase in legal and professional,
rent, indirect operating expenses, travel and lodging, and utilities from
opening new locations in New York, New York and Charlotte, North Carolina.
Interest expense for the nine months ended June 30, 2005 was $438,298 compared
to $242,337 for the nine months ended June 30, 2004. The increase was
attributable to the Company obtaining new debt to finance the purchase of a club
in New York. As of June 30, 2005, the balance of long-term debt was $12,839,849
compared to $3,923,356 a year earlier.
Net income for the nine months ended June 30, 2005 was $44,913 compared to
$698,087 for the nine months ended June 30, 2004. The decrease in net income
was primarily due to the increase in operating expenses due to managing two new
locations in New York and North Carolina and increase in interest expense
related to the acquisitions of a club in New York. Net income for
same-location-same-period of club operations increased to $1,973,572 for the
nine months ended June 30, 2005 from $1,899,491 for same period ended June 30,
2004, or by 3.90%. Management currently believes that the Company is in
position to continue to be profitable in fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005, the Company had a working capital deficit of ($1,195,509)
compared to working capital of $538,749 at September 30, 2004. The decrease in
working capital was primarily due to increases in accrued liabilities and
current portion of long term debt, and a decrease in prepaid expenses and other
current assets. The value of available-for-sale marketable securities decreased
by $91,207, primarily due to market price fluctuation.
Net cash provided by operating activities in the nine months ended June 30, 2005
was $944,159 compared to net cash provided of $412,715 for the nine months ended
June 30, 2004. The increase in cash provided by operating activities was
primarily due to decreases in other current assets and increases in accounts
payable and accrued expenses.
The Company used $4,486,152 and $529,142 of cash in investing activities during
the nine months ended June 30, 2005 and 2004, respectively. $3,744,479 of cash
was provided and $86,530 of cash was used in financing activities during the
nine months ended June 30, 2005 and 2004, respectively.
14
The Company's need for capital historically was a result of construction or
acquisition of new clubs, renovation of older clubs, and investments in
technology. The Company also has historically utilized capital to repurchase
its common stock as part of the Company's share repurchase program.
On September 16, 2003, the Company was authorized by its board of directors to
repurchase up to $500,000 worth of the Company's common stock. No shares have
been purchased under this plan.
On November 15 and 17, 2004, the Company borrowed $590,000 and $1,042,000,
respectively, from a financial institution at an annual interest rate of 10%
over a 10 year term. The monthly payments of principal and interest are $5,694
and $10,056, respectively. The note is secured by the Company's properties
located at 2023 Sable Lane, San Antonio and at 410 N. Sam Houston PKWY E.,
Houston, Texas. On November 30, 2004, the Company borrowed $900,000 from an
unrelated individual at an 11% annual interest rate over a 10 year term. The
monthly payment of principal and interest is $9,290. The note is secured by the
Company's properties located in 3501 Andtree, Austin and at 5718 Fairdale,
Houston, Texas. On December 30, 2004, the Company borrowed $1,270,000 from a
financial institution at an annual interest rate of 10% over a 10 year term. The
monthly payment of principal and interest is $12,256. The note is secured by the
Company's property located at 3113 Bering Drive, Houston, Texas. The money
received from this financing was used for the acquisition and renovation of the
New York club.
The Company entered into a promissory note on January 18, 2005, for $5,125,000
bearing simple interest at the rate of 4.0% per annum with a balloon payment at
the end of five years, part of which is convertible to restricted shares of
Rick's Cabaret common stock at prices ranging from $4.00 to $7.50 per share.
On June 10, 2005, the Company entered into a promissory note for $325,000
bearing interest at a rate of 7% per annum for a seven year term. The note is
secured by liens upon the assets of and hereafter acquired assets of RCI
Entertainment (North Carolina), Inc.
On June 17, 2005, the Company borrowed $160,000 from a shareholder and $100,000
from an unrelated individual at an annual interest rate of 12% and 11% over 3
and 10 year term, respectively.
In the opinion of management, working capital is not a true indicator of the
financial status. Typically, businesses in the industry carry current
liabilities in excess of current assets because the business receives
substantially immediate payment for sales, with nominal receivables, while
accounts payable and other current liabilities normally carry longer payment
terms. Vendors and purveyors often remain flexible with payment terms providing
businesses with opportunities to adjust to short-term business down turns. The
Company considers the primary indicators of financial status to be the long-term
trend of revenue growth and mix of sales revenues, overall cash flow,
profitability from operations and the level of long-term debt.
We have not established lines of credit or financing other than our existing
debt. There can be no assurance that we will be able to obtain additional
financing on reasonable terms in the future, if at all, should the need arise.
15
In the event the sexually oriented business industry is required in all states
to convert the entertainers who perform at our locations, from being independent
contractors to employee status, we have prepared alternative plans that we
believe will protect our profitability. We believe that the industry standard
of treating the entertainers as independent contractors provides sufficient safe
harbor protection to preclude payroll tax assessment for prior years.
The sexually oriented business industry is highly competitive with respect to
price, service and location, as well as the professionalism of the
entertainment. Although we believe that we are well-positioned to compete
successfully in the future, there can be no assurance that we will be able to
maintain our high level of name recognition and prestige within the marketplace.
SEASONALITY
Our nightclub operations are affected by seasonal factors. Historically, we have
experienced reduced revenues from April through September with the strongest
operating results occurring during October through March. Our experience to date
indicates that there does not appear to be a seasonal fluctuation in our
Internet activities.
GROWTH STRATEGY
The Company believes that its club operations can continue to grow organically
and through careful entry into markets and demographic segments with high growth
potential. Upon careful market research, we may open new clubs. As is the case
with the acquisition of the New York and North Carolina clubs, we may acquire
existing clubs in locations that are consistent with our growth and income
targets, and which appear receptive to the upscale club formula we have
developed. We may form joint ventures or partnerships to reduce start-up and
operating costs, with our Company contributing assets in the form of our brand
name and management expertise. We may also develop new club concepts that are
consistent with our management and marketing skills. We may also acquire real
estate in connection with club operations, although some clubs may be on leased
premises.
We also expect to continue to grow our Internet profit centers and plan to focus
in the future on high-margin activities that leverage our marketing skills while
requiring a low level of start-up expense and ongoing operating costs.
Item 3. CONTROLS AND PROCEDURES.
--------------------------
As of the end of the period of this report, the Company's principal executive
and principal financial officers carried out an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and procedures.
This evaluation was carried out under the supervision and with the participation
of the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in the Company's periodic reports
to the Securities and Exchange Commission. There have been no significant
changes in the
16
Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
PART II OTHER INFORMATION
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
During the quarter ended June 30, 2005, we completed the following transactions
in reliance upon exemptions from registration under the Securities Act of 1933,
as amended (the "Act") as provided in Section 4(2) thereof. All certificates
issued in connection with these transactions were endorsed with a restrictive
legend confirming that the securities could not be resold without registration
under the Act or an applicable exemption from the registration requirements of
the Act. None of the transactions involved a public offering, underwriting
discounts or sales commissions. We believe that each person was a "qualified"
investor within the meaning of the Act and had knowledge and experience in
financial and business matters, which allowed them to evaluate the merits and
risks of our securities. Each person was knowledgeable about our operations and
financial condition.
On June 10, 2005, as a part of the purchase of a club in Charlotte, North
Carolina, we issued 180,000 shares of common stock to the Seller. These shares
were valued at $675,000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------------------------------------------------------------
We held our Annual Meeting of Shareholders on June 27, 2005. Eric S.
Langan, Robert L. Watters, Steven L. Jenkins, Alan Bergstrom and Travis Reese
were nominated and elected as Directors with the following vote results at the
shareholder meeting:
For Withheld
--------- --------
Eric S. Langan 3,016,606 15,493
Robert L. Watters 2,970,456 61,643
Steven L. Jenkins 2,970,506 55,593
Alan Bergstrom 2,970,456 55,643
Travis Reese 2,970,656 61,443
At the Annual Meeting, the Shareholders ratified Whitley Penn as the
Company's Independent Registered Public Accounting Firm for the fiscal year
ending September 30, 2005, with the following vote results:
3,016,624 VOTES FOR RATIFICATION
---------
12,000 VOTES AGAINST RATIFICATION
---------
3,500 ABSTAIN
---------
While no other matters were presented at the Annual Meeting, the following
votes were submitted by Shareholders with respect to any other business coming
before the Annual Meeting of Shareholders:
17
2,935,172 VOTES FOR OTHER BUSINESS
---------
85,872 VOTES AGAINST OTHER BUSINESS
---------
11,080 ABSTAIN
---------
The meeting was adjourned when all matters of business had been
discussed.
Item 6. EXHIBITS.
---------
Exhibit 31.1 - Certification of Chief Executive Officer and
Chief Financial Officer of Rick's Cabaret International, Inc. required by Rule
13a - 14(1) or Rule 15d - 14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification of Chief Executive Officer and
Chief Financial Officer of Rick's Cabaret International, Inc. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RICK'S CABARET INTERNATIONAL, INC.
Date: August 15, 2005 By: /s/ Eric S. Langan
---------------------
Eric S. Langan
Chief Executive Officer and Chief Financial Officer
18