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FINANCIAL STATEMENTS

Years Ended December 31, 2006 and 2005

 

Table of Contents

 

Report of Independent Registered Public Accounting Firm	1
Audited Financial Statements:
Balance Sheets	2
Statements of Income	3
Statements of Changes in Stockholder’s Equity	4
Statements of Cash Flows	5
Notes to Financial Statements	6

W.K.C., INC.
BALANCE SHEETS
		December 31,
		2006				2005
Assets
Current assets:
Cash		$	-			$	28,461
Accounts receivable:
Trade			38,564				32,037
Employees			61,042				40,700
Inventories			36,515				39,429
Total current assets			136,121				140,627
Deferred tax assets			85,870				72,323
Property and equipment, net			512,247				446,675
Total assets		$	734,238			$	659,625
Liabilities and Stockholder's Equity
Current liabilities:
Bank overdraft		$	23,341			$	-
Accounts payable and accrued liabilities			416,429				320,187
Line-of-credit			1,096				-
Total current liabilities			440,866				320,187
Deferred rent			110,156				137,630
Total liabilities			551,022				457,817
Commitments and contingencies			-				-
Stockholder's equity:
Common stock, no par value, 321,000 shares authorized,251,000 shares issued and outstanding			251,000				251,000
Accumulated deficit			(67,784	)			(49,192	)
Total stockholder's equity			183,216				201,808
Total liabilities and stockholder's equity		$	734,238			$	659,625

W.K.C., INC.
STATEMENTS OF INCOME
		Year Ended December 31,
		2006				2005
Revenues:
Sales of  alcoholic beverages		$	2,616,029			$	2,588,033
Sales of food and merchandise			536,567				534,324
Service revenues			812,372				643,831
Other			86,095				61,612
			4,051,063				3,827,800
Operating expenses:
Cost of goods sold			809,465				766,203
Salaries and wages			974,590				962,907
Other general and administrative:
Taxes and permits			521,351				529,385
Charge card fees			61,955				56,194
Rent			148,701				147,870
Legal and professional			37,308				32,598
Advertising and marketing			140,348				160,341
Depreciation			95,029				85,134
Other			532,984				557,260
			3,321,731				3,297,892
Income from operations			729,332				529,908
Interest expense			18,750				-
Net income before income taxes			710,582				529,908
Income tax expense			246,890				207,223
Net income		$	463,692			$	322,685

W.K.C., INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2006 AND 2005
		Common Stock								Retained Earnings				Total
		Number								(Accumulated				Stockholder's
		of Shares				Amount				Deficit)				Equity
Balance at December 31, 2004			251,000			$	251,000			$	102,623			$	353,623
Net income			-				-				322,685				322,685
Stockholder distributions			-				-				(474,500	)			(474,500	)
Balance at December 31, 2005			251,000				251,000				(49,192	)			201,808
Net income			-				-				463,692				463,692
Stockholder distributions			-				-				(482,284	)			(482,284	)
Balance at December 31, 2006			251,000			$	251,000			$	(67,784	)		$	183,216

W.K.C., INC.
STATEMENTS OF CASH FLOWS
		Year Ended December 31,
		2006				2005
Operating Activities
Net income		$	463,692			$	322,685
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			95,029				85,134
Deferred rent			(15,939	)			(4,944	)
Deferred income taxes			(13,547	)			(13,268	)
Changes in operating assets and liabilities:
Accounts receivable			(26,869	)			(33,861	)
Inventories			2,914				(8,239	)
Bank overdraft			23,341				-
Accounts payable and accrued liabilities			84,707				134,339
Net cash provided by operating activities			613,328				481,846
Investing Activities
Purchases of property and equipment			(160,601	)			(26,405	)
Financing Activities
Proceeds from line-of-credit, net			1,096				-
Stockholder distributions			(482,284	)			(474,500	)
Net cash used in financing activities			(481,188	)			(474,500	)
Net decrease in cash and cash equivalents			(28,461	)			(19,059	)
Cash and cash equivalents at beginning of year			28,461				47,520
Cash and cash equivalents at end of year		$	-			$	28,461
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest		$	18,750			$	-
Cash paid during the year for income taxes		$	150,000			$	109,557

Notes to Financial Statements

December 31, 2006 and 2005

 

A.	Nature of Business

W.K.C., Inc. (the “Company”) was incorporated in the state of Texas in 1990.  The Company currently owns and operates a nightclub that offers live adult entertainment.  The nightclub and corporate office are located in Fort Worth, Texas.

 

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:

 

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 December 31, 2006 and 2005, 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”).  There were no uninsured deposits at December 31, 2006 and 2005.  The Company has not incurred any losses related to its cash on deposit with financial institutions.

Accounts and 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 December 31, 2006 and 2005.

 

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W.K.C., INC.

Notes to 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 is stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets for financial reporting purpose.  The estimated useful lives of furniture and equipment range from five to ten years.  Leasehold improvements are depreciated using the straight-line method over the shorter of the respective lease term or the estimated useful lives of the assets.  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 recognized in the accompanying statement of income of the respective period.

 

Revenue Recognition

The Company recognizes revenue from the sale of non-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 statements of income.

Income Taxes

Deferred income taxes are determined using the liability method in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes .  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

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W.K.C., INC.

Notes to Financial Statements (continued)

 

 

B.	Summary of Significant Accounting Policies - continued

 

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 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 line-of-credit also approximates fair value since this instrument bears market rates of interest.  None of these instruments are held for trading purposes.

 

C.	Property and Equipment

 

Property and equipment consisted of the following:

 

 

		December 31,
		2006				2005
Leasehold improvements		$	905,383			$	775,233
Furniture and equipment			537,297				506,845
Total property and equipment			1,442,680				1,282,079
Less accumulated depreciation			930,433				835,404
Property and equipment, net		$	512,247			$	446,675

 

D.	Line-of-Credit

 

The Company has available a $75,000 unsecured line-of-credit with a financial institution.  Principal and interest are payable daily by deducting 10% of credit card proceeds until the entire amount due is paid.  The amount outstanding under this agreement at December 31, 2006 was $1,096.  The remainder of the line-of-credit was available for future borrowings at December 31, 2006.

 

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W.K.C., INC.

Notes to Financial Statements (continued)

 

 

E.	Income Taxes

Income tax expense for the years presented differs from the “expected” federal income tax expense computed by applying the U.S. federal statutory rate of 34% to earnings before income taxes for the years ended December 31, as a result of the following:

 

		2006				2005
Computed expected tax expense		$	241,598			$	180,169
Other			5,292				27,054
Total income tax expense		$	246,890			$	207,223

 

The significant components of the Company’s deferred tax assets at December 31 are as follows:

 

		2006				2005
Deferred tax assets:
Property and equipment		$	34,947			$	15,503
Deferred rent			50,923				6,820
		$	85,870			$	72,323

 

F.	Commitments and Contingencies

Leases

The Company leases a building and corporate office space under operating leases, of which rent expense was approximately $148,701 and $147,870 for the years ended December 31, 2006 and 2005, respectively.

The Company’s building lease contains escalating lease payments over the lease term and, as a result, the Company is recording rent expense on a straight-line basis over the term of the lease.  The Company has recorded approximately $138,000 and $154,000 of deferred rent at December 31, 2006 and 2005, respectively, as reflected in the accompanying balance sheets.

Future minimum annual lease obligations as of December 31, 2006, approximates the following:

2007		$	176,000
2008			174,000
2009			181,000
2010			140,000
Total future minimum lease obligations		$	671,000

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W.K.C., INC.

Notes to Financial Statements (continued)

 

 

F.	Commitments and Contingencies – continued

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.

 

G.  Subsequent Events

In January 2007, the Company borrowed an additional $75,000 on the existing line-of-credit.

 

Effective April 24, 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.

 

 

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RICK'S CABARET INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2006
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
		Rick's				WKC				Pro Forma Adjustments				Pro Forma Combined
Total revenue		$	7,030			$	1,012			$	-			$	8,042
Operating expenses:
Cost of goods sold			891				200				-				1,091
Salaries and wages			2,071				252				-				2,323
Stock compensation			65				-				-				65
Depreciation & amortization			365				24				18		B		407
Other general and administrative			3,051				359				(95	)	C		3,315
Total operating expenses			6,443				835				(77	)			7,201
Operating income			587				177				77				841
Interest expense			(326	)			-				(41	)	D		(367	)
Income tax expense			-				(53	)			-				(53	)
Other			92				3				-				95
Net income		$	353			$	127			$	36			$	516
Net income per share:
Basic		$	0.07											$	0.09
Diluted		$	0.06											$	0.08
Weighted average shares outstanding:
Basic			5,141												5,816
Diluted			5,433												6,108

RICK'S CABARET INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2006 *
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
		Rick's				WKC *				Pro Forma Adjustments				Pro Forma Combined
Total revenue		$	24,487			$	4,051			$	-			$	28,538
Operating expenses:
Cost of goods sold			2,915				809				-				3,724
Salaries and wages			7,082				975				-				8,057
Depreciation & amortization			1,049				95				70		B		1,214
Other general and administrative			10,450				1,443				(378	)	C		11,515
Total operating expenses			21,496				3,322				(308	)			24,510
Operating income			2,991				729				308				4,028
Interest expense			(1,057	)			(19	)			(168	)	D		(1,244	)
Income tax expense			-				(247	)			-				(247	)
Other			(181	)			-				-				(181	)
Net income		$	1,753			$	463			$	140			$	2,356
Net income per share:
Basic		$	0.38											$	0.44
Diluted		$	0.35											$	0.41
Weighted average shares outstanding:
Basic			4,641												5,316
Diluted			5,066												5,741

DESCRIPTION		AMOUNT (IN THOUSANDS)
Total consideration:
Cash		$	5,000
Issuance of Promissory Note			2,400
Estimated transaction costs			100
		$	7,500
Allocation:
Current assets		$	36
Property and equipment			3,012
Non-compete agreement			100
Sexually oriented business license			4,352
		$	7,500