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: December 31, 2001
[ ] 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.)
505 North Belt, Suite 630
Houston, Texas 77060
(Address of principal executive offices, including zip code)
(281) 820-1181
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X]
No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
On January 28, 2002, there were 4,595,494 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
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2001 (unaudited)
and September 30, 2001 (audited) . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the three months
ended December 31, 2001 and 2000 (unaudited) . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the three months
ended December 31, 2001 and 2000 (unaudited). . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 7
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
i
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
12/31/01 9/30/01
(UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash $ 838,103 $ 704,628
Accounts receivable 361,459 379,653
Prepaid expenses 89,507 81,477
Inventories 203,262 196,300
Land held for sale --- 200,000
------------ ------------
Total current assets 1,492,331 1,562,058
------------ ------------
PROPERTY AND EQUIPMENT
Buildings, land and leasehold improvements 9,039,980 8,974,252
Furniture and equipment 1,810,570 1,545,876
------------ ------------
10,850,550 10,520,128
Accumulated depreciation (1,837,142) (1,717,214)
------------ ------------
9,013,408 8,802,914
------------ ------------
OTHER ASSETS
Goodwill less accumulated amortization 4,499,223 4,415,391
Other 143,635 168,137
------------ ------------
4,642,858 4,483,528
------------ ------------
$15,148,597 $14,948,500
============ ============
1
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
12/31/01 9/30/01
(UNAUDITED) (AUDITED)
CURRENT LIABILITIES
Current portion of long term debt $ 264,419 $ 327,162
Accounts payable - trade 235,874 234,591
Accrued expenses 554,490 499,049
------------ ------------
Total current liabilities 1,054,783 1,060,802
LONG TERM DEBT, LESS CURRENT PORTION
Long-term debt less current portion 3,491,405 3,509,914
------------ ------------
Total Liabilities 4,546,188 4,570,716
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS 80,248 78,816
STOCKHOLDERS' EQUITY
Preferred stock - $.10 par, authorized
1,000,000shares; none outstanding --- ---
Common stock - $.01 par, authorized
15,000,000 shares
issued 4,598,678 and 4,598,678 45,987 45,987
Additional paid in capital 11,257,449 11,257,449
Retained earnings (deficit) (683,627) (930,849)
Treasury stocks, at cost (97,648) (73,619)
------------ ------------
Total stockholders' equity 10,522,161 10,298,968
------------ ------------
$15,148,597 $14,948,500
============ ============
2
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
(UNAUDITED) (UNAUDITED)
REVENUES
Sales of alcoholic beverages $ 1,634,224 $ 1,340,042
Sales of food and merchandise 215,587 191,945
Service revenues 1,273,319 1,272,716
Internet revenues 663,720 2,010,800
Other 267,575 235,910
--------------- ---------------
4,054,425 5,051,413
--------------- ---------------
OPERATING EXPENSES
Cost of goods sold 862,548 1,834,029
Salaries and wages 1,267,527 1,226,002
Other general and administrative
Taxes and permits 503,888 479,888
Charge card fees 61,283 84,129
Rent 52,468 77,067
Legal and professional 151,086 217,791
Advertising and marketing 176,083 132,273
Other 646,630 665,386
--------------- ---------------
3,721,513 4,716,565
--------------- ---------------
INCOME FROM OPERATIONS 332,912 334,848
Interest income 6,032 8,730
Interest Expense (91,722) (92,813)
--------------- ---------------
Net Income $ 247,222 $ 250,765
=============== ===============
NET INCOME PER COMMON SHARE $ 0.06 $ 0.06
=============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING 4,595,494 4,348,678
=============== ===============
3
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000
---------- ----------
NET INCOME $ 247,222 $ 250,765
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation 119,928 99,631
Amortization of goodwill 0 83,824
Minority interests 1,432 3,159
Changes in assets and liabilities:
Accounts receivable 18,194 (91,763)
Prepaid expenses (8,030) 42,046
Inventories (6,962) 9,790
Accounts payable and accrued expenses 56,724 (16,572)
---------- ----------
Cash provided by operating activities 428,508 380,880
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (130,422) (107,424)
Increase in goodwill and other assets (59,330) (156,725)
---------- ----------
Cash used by investing activities (189,752) (264,149)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 0 50
Purchase of treasury stock (24,029)
Payments on long term debt (81,252) (132,010)
---------- ----------
Cash used by financing activities (105,281) (131,960)
---------- ----------
NET INCREASE/(DECREASE) IN CASH 133,475 (15,229)
CASH AT BEGINNING OF PERIOD 704,628 374,532
---------- ----------
CASH AT END OF PERIOD $ 838,103 $ 359,303
========== ==========
CASH PAID DURING PERIOD FOR:
Interest $ 91,722 $ 92,813
========== ==========
4
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles 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 generally accepted accounting
principles 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, 2001 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 ended December 31, 2001 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2002.
2. SEGMENT INFORMATION
In October 1999, the Company launched its web-sites operation. This segment
derives revenues from membership fees, traffic sold, and sale of feeds to other
web-site operators. Below is the financial information by segment.
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED DECEMBER 31, 2001 ENDED DECEMBER 31, 2000
REVENUES
Internet Web-sites $ 663,720 $ 2,010,800
Clubs operation 3,390,705 3,040,613
------------------------- -------------------------
$ 4,054,425 $ 5,051,413
========================= =========================
NET INCOME/(LOSS)
Internet Web-sites $ 136,739 $ 269,464
Clubs operation 320,406 156,755
Corporate expenses (209,923) (175,454)
------------------------- -------------------------
$ 247,222 $ 250,765
========================= =========================
PROPERTY & EQUIPMENT, NET DEPRECIATION
Internet Web-sites $ 113,990 $ 248,941
Club operation 8,699,418 8,331,034
------------------------- -------------------------
$ 8,813,408 $ 8,579,975
========================= =========================
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3. NEW ACCOUNTING STANDARD
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). As its title implies, SFAS No. 142 addresses the accounting
for goodwill and other intangible assets and will be effective for the Company's
fiscal year beginning October 1, 2001. Under SFAS 142, goodwill will no longer
be amortized. Instead, goodwill will be tested for impairment initially and on
an annual basis thereafter at a level of reporting referred to as the reporting
unit. The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired, thus the second step of the impairment test is unnecessary. If the
carrying amount of a reporting unit exceeds its fair value, the second step of
the goodwill impairment test shall be performed to measure the amount of
impairment loss, if any.
The second step of the goodwill impairment test, used to measure the amount of
impairment loss, compares the implied fair value of reporting unit goodwill with
the carrying amount of that goodwill. If the carrying amount of reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
shall be recognized in an amount equal to that excess. The loss recognized
cannot exceed the carrying amount of goodwill. After a goodwill impairment loss
is recognized, the adjusted carrying amount of goodwill shall be its new
accounting basis. Subsequent reversal of a previously recognized goodwill
impairment loss is prohibited once the measurement of that loss is completed.
The implied fair value of goodwill shall be determined in the same manner as the
amount of goodwill recognized in a business combination is determined. That is,
an entity shall allocate the fair value of a reporting unit to all of the assets
and liabilities of that unit (including any unrecognized intangible assets) as
if the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the price paid to acquire the reporting unit.
The excess of the fair value of a reporting unit over the amounts assigned to
its assets and liabilities is the implied fair value of goodwill.
The Company plans to implement its formal goodwill impairment testing by the end
of the three month period ending March 31, 2002.
For the quarter ended December 31, 2001 2000
-------- --------
Reported net income $247,222 $250,765
Add back: Goodwill Amortization -- 83,824
Adjusted net income $247,222 $334,589
Basic earnings per share:
Reported net income $ .06 $ .06
Goodwill amortization -- .02
Adjusted net income $ .06 $ .08
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with our audited
consolidated financial statements and related notes thereto included in this
annual report.
FORWARD LOOKING STATEMENT AND INFORMATION
The Company is including the following cautionary statement in this Form 10-KSB
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-KSB 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, competitive factors, 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
Our Company presently conducts its business in two different areas of operation:
1. We own and operate upscale adult nightclubs serving primarily businessmen
and professionals that offer live adult entertainment, restaurant and bar
operations. We own and operate six adult nightclubs under the name "Rick's
Cabaret" and "XTC" in Houston, Austin and San Antonio, Texas, and
Minneapolis, Minnesota. On November 17, 2001, we opened an adult-themed
club called "Encounters" that serves the couples or "swingers'" market in
Houston. No sexual contact is permitted at any of our locations.
7
2. We have various Internet activities.
a) We currently own three adult Internet membership Web sites at
www.dancerdorm.com , www.amateurdan.com, and www.xxxpassword.com. During
------------------ ------------------ -------------------
the course of the fiscal year ending September 30, 2001, we changed our
Internet strategy and no longer create the content for these sites, opting
instead to purchase content from wholesalers at what we believe will be a
cost saving.
b) We operate a network of six online auction sites accessible on the
Internet under the flagship site www.naughtybids.com. These sites provide
-------------------
customers with the opportunity to purchase adult products and services in
an auction format. We earn revenues by charging service fees for each
transaction conducted on the highly automated sites, all of which utilize a
single technology platform operated by us.
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
service. Our Internet revenues are derived from subscriptions to adult content
Internet Web sites, 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 DECEMBER 31, 2001 AS COMPARED
TO THE THREE MONTHS ENDED DECEMBER 31, 2000
For the three months ended December 31, 2001, the Company had consolidated total
revenues of $4,054,425 compared to consolidated total revenues of $5,051,413 for
the three months ended December 31, 2000, or a decrease of $996,988. The
decrease in total revenues was primarily due to the decrease in revenues
generated by the Company's Internet businesses. The Company's Internet
entertainment business is in a transitional phase. Management is rigorously
eliminating costly subscription marketing programs that generate high revenues
but which have low margin yields. Instead, we are focusing on programs with
third parties that are expected to generate higher margins on reduced revenues.
This transitional phase is expected to last through the first half of the
present fiscal year, during which income from Internet operations may be
impacted.
The cost of goods sold for the three months ended December 31, 2001 was 21.28%
of total revenues compared to 36.31% for the three months ended December 31,
2000. The decrease was due primarily to the reduction in costs of maintaining
our Internet operations. The cost of goods sold for the club operation for the
three months ended December 31, 2001 was 14.75% of the sales of alcoholic
beverages and food compared to 14.31% for the three months ended December 31,
2000. The increase was due primarily to the increase in food costs and the
addition of logo merchandise in our sales mix. We continued our efforts to
achieve reductions in cost of goods sold of the club operations through improved
inventory management. We continue a program to improve margins from liquor and
food sales and food service efficiency. The cost of sales from our Internet
operation for the three months ended December 31, 2001 was 70.02%.
8
Payroll and related costs for the three months ended December 31, 2001 were
$1,267,527 compared to $1,226,002 for the three months ended December 31, 2000.
The increase was a reflection of the additional personnel experienced by the
Company as it adds more locations and continues to increase the size and the
scope of our internet operation. Management currently believes that its labor
and management staff levels are of appropriate levels.
Other selling, general and administrative expenses for the three months ended
December 31, 2001 were $1,591,438 compared to $1,656,484 for the three months
ended December 31, 2000. The decrease was due to reductions in rent, legal and
professional, and other expenses.
Interest expense for the three months ended December 31, 2001 was $91,722
compared to $ 92,813 for the three months ended December 31, 2000. The decrease
was primarily due to the Company's position in not obtaining new debts, but to
aggressively reduce its debt burden.
Net income for the three months ended December 31, 2001 was $247,222 compared to
a net income of $250,765 for the three months ended December 31, 2000. The
decrease in net income was primarily due to the decrease in revenues in
Company's internet business.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had working capital of $437,548 compared to
working capital of $501,256 at September 30, 2001.
Net cash provided by operating activities in the three months ended December 31,
2001 was $428,508 compared to net cash provided of $380,880 for the three months
ended December 31, 2000. The increase in cash provided by operating activities
was due to a decrease in accounts receivable and the effect of accumulated
depreciation.
Depreciation and Amortization for the three months ended December 31, 2001 were
$119,928 compared to $183,455 for the three months ended December 31, 2000.
There was no amortization for the three months ended December 31, 2001.
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
inventories 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.
9
Because of the large volume of cash we handle, stringent cash controls have been
implemented. 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 significantly 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 research, new clubs may be opened, or existing clubs
acquired, 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 equity in the form of our brand name and
management expertise. As is the case of the aforementioned Encounters club 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 in 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.
10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 99.1 -- Report of Independent Auditor on Review
of Unaudited Financial Statements.
(b) Reports on Form 8-K
None
11
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: February 11, 2002 By: /s/ Eric S. Langan
Eric S. Langan
President and Chief Accounting Officer
12