MIAMI GARDENS SQUARE ONE, INC. AND
STELLAR MANAGEMENT CORPORATION
COMBINED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2007 and
Year Ended December 31, 2006
Table of Contents
| Report of Independent Registered Public Accounting Firm | | 1 |
| | | |
| Audited Combined Financial Statements: | | |
| | | |
| Combined Balance Sheets | | 2 |
| | | |
| Combined Statements of Income | | 3 |
| | | |
| Combined Statements of Changes in Stockholders’ Equity | | 4 |
| | | |
| Combined Statements of Cash Flows | | 5 |
| | | |
| Notes to Combined Financial Statements | | 6 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
Miami Gardens Square One, Inc. and Stellar Management Corporation
We have audited the accompanying combined balance sheets of Miami Gardens Square One, Inc. and Stellar Management Corporation as of September 30, 2007 and December 31, 2006, and the related combined statements of income, changes in stockholders’ equity, and cash flows for the nine months ended September 30, 2007 and the year ended December 31, 2006. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of Miami Gardens Square One, Inc. and Stellar Management Corporation as of September 30, 2007 and December 31, 2006, and the combined results of their operations and their cash flows for the nine months ended September 30, 2007 and the year ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.
/s/ Whitley Penn LLP
Dallas, Texas
February 11, 2008
MIAMI GARDENS SQUARE ONE, INC. AND STELLAR MANAGEMENT CORPORATION
COMBINED BALANCE SHEETS
| | | September 30, | | | December 31, | |
| | | 2007 | | | 2006 | |
| | | | | | | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 673,971 | | | $ | 403,366 | |
| Accounts receivable, trade | | | 319,650 | | | | 218,571 | |
| Inventories | | | 328,728 | | | | 287,731 | |
| Prepaid expenses | | | 43,012 | | | | 43,507 | |
| Total current assets | | | 1,365,361 | | | | 953,175 | |
| | | | | | | | | |
| Property and equipment, net | | | 4,312,888 | | | | 4,808,237 | |
| | | | | | | | | |
| Other assets -- deposits | | | 96,085 | | | | 63,465 | |
| Total assets | | $ | 5,774,334 | | | $ | 5,824,877 | |
| | | | | | | | | |
| Liabilities and Stockholders’Equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 325,306 | | | $ | 341,036 | |
| Notes payable, related party | | | 2,105,000 | | | | 3,905,000 | |
| Notes payable | | | 447,918 | | | | 1,094,459 | |
| Total current liabilities | | | 2,878,224 | | | | 5,340,495 | |
| | | | | | | | | |
| Commitments and contingencies | | | - | | | | - | |
| | | | | | | | | |
| Stockholders’equity: | | | | | | | | |
| Common stock, $.01 par value, 4,000 shares authorized, 2,050 shares issued | | | 20 | | | | 20 | |
| Additional paid-in capital | | | 2,366,023 | | | | 2,366,023 | |
| Retained earnings(accumulated deficit) | | | 530,067 | | | | (1,881,661 | ) |
| Total stockholders’equity | | | 2,896,110 | | | | 484,382 | |
| | | | | | | | | |
| Total liabilities and stockholders’equity | | $ | 5,774,334 | | | $ | 5,824,877 | |
See accompanying notes to combined financial statements.
MIAMI GARDENS SQUARE ONE, INC. AND STELLAR MANAGEMENT CORPORATION
COMBINED STATEMENTS OF INCOME
| | | Nine Months | | | | |
| | | Ended | | | Year Ended | |
| | | September 30, | | | December 31, | |
| | | 2007 | | | 2006 | |
| | | | | | | |
| Revenues: | | | | | | |
| Sales of alcoholic beverages | | $ | 12,441,539 | | | $ | 13,275,533 | |
| Service revenues | | | 1,232,040 | | | | 998,950 | |
| Other | | | 308,951 | | | | 339,535 | |
| | | | 13,982,530 | | | | 14,614,018 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Cost of goods sold | | | 1,840,317 | | | | 2,276,989 | |
| Salaries and wages | | | 1,756,808 | | | | 2,098,442 | |
| Other general and administrative: | | | | | | | | |
| Taxes and permits | | | 1,178,611 | | | | 1,482,305 | |
| Charge card fees | | | 186,932 | | | | 400,726 | |
| Rent | | | 684,668 | | | | 675,008 | |
| Advertising and marketing | | | 271,358 | | | | 464,931 | |
| Depreciation | | | 495,349 | | | | 629,601 | |
| Other | | | 2,422,978 | | | | 3,074,684 | |
| | | | 8,837,021 | | | | 11,102,686 | |
| | | | | | | | | |
| Income from operations | | | 5,145,509 | | | | 3,511,332 | |
| | | | | | | | | |
| Other income | | | 34,000 | | | | 58,216 | |
| Interest expense | | | (327,748 | ) | | | (559,866 | ) |
| | | | | | | | | |
| Net income | | $ | 4,851,761 | | | $ | 3,009,682 | |
See accompanying notes to combined financial statements.
MIAMI GARDENS SQUARE ONE, INC. AND STELLAR MANAGEMENT CORPORATION
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND YEAR ENDED DECEMBER 31, 2006
| | | | Common Stock | | | Additional | | | Retained Earnings | | | Total Stockholders' | |
| | | | Number of Shares | | | Amount | | | Paid-in Capital | | | (Accumulated Deficit) | | | Equity (Deficit) | |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2005 | | | | 2,050 | | | $ | 20 | | $ | 1,500,280 | | | $ | (1,697,030 | ) | | $ | (196,730 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Stockholder contributions | | | | - | | | | - | | | 865,743 | | | | - | | | | 865,743 | |
| Stockholder distributions | | | | - | | | | - | | | - | | | | (3,194,313 | ) | | | (3,194,313 | ) |
| Net income | | | | - | | | | - | | | - | | | | 3,009,682 | | | | 3,009,682 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2006 | | | | 2,050 | | | | 20 | | | 2,366,023 | | | | (1,881,661 | ) | | | 484,382 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stockholder distributions | | | | - | | | | - | | | - | | | | (2,440,033 | ) | | | (2,440,033 | ) |
| Net income | | | | - | | | | - | | | - | | | | 4,851,761 | | | | 4,851,761 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2007 | | | | 2,050 | | | $ | 20 | | $ | 2,366,023 | | | $ | 530,067 | | | $ | 2,896,110 | |
See accompanying notes to combined financial statements.
MIAMI GARDENS SQUARE ONE, INC. AND STELLAR MANAGEMENT CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
| | | Nine Months | | | | |
| | | Ended | | | Year Ended | |
| | | September 30, | | | December 31, | |
| | | 2007 | | | 2006 | |
| Operating Activities | | | | | | |
| Net income | | $ | 4,851,761 | | | $ | 3,009,682 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation | | | 495,349 | | | | 629,601 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (101,079 | ) | | | (218,571 | ) |
| Inventories | | | (40,997 | ) | | | (235,503 | ) |
| Prepaid expenses and other assets | | | (32,125 | ) | | | (13,119 | ) |
| Accounts payable and accrued liabilities | | | (15,730 | ) | | | 163,469 | |
| Net cash provided by operating activities | | | 5,157,179 | | | | 3,335,559 | |
| | | | | | | | | |
| Investing Activities | | | | | | | | |
| Purchases of property and equipment | | | - | | | | (378,137 | ) |
| | | | | | | | | |
| Financing Activities | | | | | | | | |
| Bank overdraft | | | | - | | | (47,745) | |
| Proceeds from debt | | | 40,000 | | | | 2,210,000 | |
| Payments on debt | | | (2,486,541 | ) | | | (2,387,741 | ) |
| Stockholder contributions | | | - | | | | 865,743 | |
| Stockholder distributions | | | (2,440,033 | ) | | | (3,194,313 | ) |
| Net cash used in financing activities | | | (4,886,574 | ) | | | (2,554,056 | ) |
| | | | | | | | | |
| Net increase in cash and cash equivalents | | | 270,605 | | | | 403,366 | |
| Cash and cash equivalents at beginning of year | | | 403,366 | | | | - | |
| | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 673,971 | | | $ | 403,366 | |
| | | | | | | | | |
| Supplemental Disclosures of Cash Flow Information | | | | | | | | |
| Cash paid during the year for interest | | $ | 347,895 | | | $ | 536,584 | |
See accompanying notes to combined financial statements.
MIAMI GARDENS SQUARE ONE, INC. AND STELLAR MANAGEMENT CORPORATION
Notes to Combined Financial Statements
September 30, 2007 and December 31, 2006
Miami Gardens Square One, Inc. and Stellar Management Corporation were incorporated in the state of Florida in 2003. The Companies have common ownership and currently own and operate a nightclub that offers live adult entertainment. The nightclub and corporate office are located in Miami Gardens, Florida. The companies are collectively referred to herein as “the Company”.
| B. | Summary of Significant Accounting Policies |
A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
Principles of Combination
The combined financial statements include the accounts of Miami Gardens Square One, Inc. and Stellar Management Corporation. Significant intercompany accounts and transactions have been eliminated in combination.
Basis of Accounting
The accounts are maintained and the financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At September 30, 2007 and December 31, 2006, the Company had no such investments. The Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). At September 30, 2007 and December 31, 2006, the uninsured portion of these deposits approximated $386,000 and $371,000, respectively. The Company has not incurred any losses related to its cash on deposit with financial institutions.
Accounts Receivable
Accounts receivable, trade is comprised of credit card charges, which are generally converted to cash in two to five days after a purchase is made. The Company recognizes allowances for doubtful accounts when, based on management judgment, circumstances indicate that accounts receivable will not be collected. There was no allowance for doubtful accounts as of September 30, 2007 and December 31, 2006.
MIAMI GARDENS SQUARE ONE, INC. AND STELLAR MANAGEMENT CORPORATION
Notes to Combined Financial Statements
(Continued)
| B. | Summary of Significant Accounting Policies - continued |
Inventories
Inventories include non-alcoholic beverages, bar supplies, and Company merchandise. Inventories are carried at the lower of average cost, which approximates actual cost determined on a first-in, first-out (“FIFO”) basis, or market.
Property and Equipment
Property and equipment are stated at cost. Provisions for depreciation and amortization are made using straight-line rates over the estimated useful lives of the related assets and the shorter of useful lives or terms of the applicable leases for leasehold improvements. Furniture, equipment and leasehold improvements have estimated useful lives between three and eight and one-half years. Expenditures for major renewals and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. The cost of assets sold or abandoned and the related accumulated depreciation are eliminated from the accounts and any gains or losses are charged or credited in the accompanying combined statement of income of the respective period.
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.
Advertising and Marketing
Advertising and marketing expenses are primarily comprised of costs related to public advertisements and giveaways, which are used for promotional purposes. Advertising and marketing expenses are expensed as incurred and are included in operating expenses in the accompanying combined statements of income.
Income Taxes
The Company is an S-Corporation for federal income tax purposes and the Company is taxed similar to a partnership, whereby income taxes are the responsibility of the individual shareholders. Therefore, no provision for income taxes is made in the accompanying combined financial statements.
Fair Value of Financial Instruments
In accordance with the reporting requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this statement and includes this additional information in the notes to combined financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. The carrying value of the Company’s notes payable also approximates fair value since these instruments bear market rates of interest. None of these instruments are held for trading purposes.
MIAMI GARDENS SQUARE ONE, INC. AND STELLAR MANAGEMENT CORPORATION
Notes to Combined Financial Statements
(Continued)
Property and equipment consisted of the following:
| | | September 30, | | | December 31, | |
| | | 2007 | | | 2006 | |
| | | | | | | |
| Leasehold improvements | | $ | 4,693,511 | | | $ | 4,693,511 | |
| Equipment, furniture and fixtures | | | 744,327 | | | | 744,327 | |
| | | | 5,437,838 | | | | 5,437,838 | |
| Less accumulated depreciation and amortization | | | (1,124,950 | ) | | | (629,601 | ) |
| | | | | | | | | |
| | | $ | 4,312,888 | | | $ | 4 ,808,237 | |
| D. | Notes Payable, Related Party |
Notes payable, related party consisted of notes payable to individuals, including a Company stockholder, interest payable monthly at rates from 12%-13%, collateralized by certain real property owned by a stockholder and guaranteed by the Company’s two stockholders, principal due in May 2008. These notes were all paid off subsequent to September 30, 2007; therefore, all debt is shown as current.
Following is a summary of notes payable as of September 30, 2007 and December 31, 2006. These notes were all paid off subsequent to September 30, 2007; therefore, all debt is shown as current.
| | | |
| | September 30, | | December 31, | |
| | | 2007 | | | 2006 | |
| $1,300,000 credit facility with a bank, interest at prime plus 1.5% but not less than 10%, principal payable $27,083 monthly plus accrued interest, matures in June 2009, collateralized by certain real property owned by a Company stockholder and guaranteed by the Company’s two stockholders | | $ | 322,918 | | | $ | 769,459 | |
| Unsecured notes payable to individuals, interest payable monthly atrates from 8%-13%, maturing at various dates from January 2007 to August 2008 | | | 125,000 | | | | 325,000 | |
| Total | | $ | 447,918 | | | $ | 1,094,459 | |
MIAMI GARDENS SQUARE ONE, INC. AND STELLAR MANAGEMENT CORPORATION
Notes to Combined Financial Statements
(Continued)
| F. | Commitments and Contingencies |
Leases
The Company leases a building and corporate office space under operating leases, of which rent expense was approximately $684,668 and $675,008 for the nine months ended September 30, 2007 and the year ended December 31, 2006, respectively.
Future minimum annual lease obligations as of September 30, 2007, approximate the following:
| Years ended September 30: | | | |
| 2008 | | $ | 851,268 | |
| 2009 | | | 851,268 | |
| 2010 | | | 851,268 | |
| 2011 | | | 851,268 | |
| 2012 | | | 851,268 | |
| Thereafter | | | 1,489,719 | |
| Total future minimum lease obligations | | $ | 5,746,059 | |
Litigation
The Company can be subjected to certain routine legal matters in the ordinary course of business. The Company does not believe that the ultimate resolution of the matters will have a material impact on the Company's financial position or results of operations.
Following is a summary of the common stock of the Company:
| | | Number of Shares Authorized | |
| Miami Gardens Square One, Inc. | $.01 | 2,000 | 2,000 |
| Stellar Management Corporation | $.01 | 2,000 | 50 |
H. Subsequent Events
The Company paid off all its notes payable subsequent to September 30, 2007.
Effective November 30, 2007, the Company was acquired by Rick’s Cabaret International, Inc., which operates live adult entertainment nightclubs. Rick’s Cabaret International, Inc. is a publicly traded company.
