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: March 31, 2006
[ ] 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)
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Check whether the issuer: (i) 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 (ii) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
On May 5, 2006, there were 4,901,148 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
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2006 (unaudited)
and September 30, 2005 (audited) 1
Consolidated Statements of Operations for the three months and
six months ended March 31, 2006 and 2005 (unaudited) 3
Consolidated Statements of Cash Flows for the six months
ended March 31, 2006 and 2005 (unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operations 9
Item 3. Controls and Procedures 15
PART II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities 16
Item 6. Exhibits 16
Signatures 17
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
3/31/06 9/30/05
(UNAUDITED) (AUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 1,473,186 $ 480,330
Accounts receivable
Trade 231,152 310,692
Other, net 140,009 118,872
Marketable securities 51,164 28,919
Inventories 226,254 257,626
Prepaid expenses and other current assets 257,802 87,991
------------ ------------
Total current assets 2,379,567 1,284,430
PROPERTY AND EQUIPMENT:
Buildings, land and leasehold improvements 13,663,451 13,630,778
Furniture and equipment 3,276,540 3,019,445
------------ ------------
16,939,991 16,650,223
Accumulated depreciation (3,690,565) (3,233,468)
------------ ------------
Total property and equipment, net 13,249,426 13,416,755
OTHER ASSETS:
Goodwill and indefinite lived intangibles 9,836,560 9,836,560
Definite lived intangibles, net 115,089 126,262
Other 350,936 365,011
------------ ------------
Total other assets 10,302,585 10,327,833
------------ ------------
Total assets $25,931,578 $25,029,018
============ ============
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See accompanying notes to consolidated financial statements.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
3/31/06 9/30/05
(UNAUDITED) (AUDITED)
CURRENT LIABILITIES:
Accounts payable - trade $ 510,442 $ 1,034,508
Accrued liabilities 702,328 852,865
Current portion of long-term debt 948,898 1,349,894
Line of credit --- 94,888
------------ ------------
Total current liabilities 2,161,668 3,332,155
Other long-term liabilities 258,674 193,648
Long-term debt less current portion 11,650,845 11,896,942
------------ ------------
Total liabilities 14,071,187 15,422,745
COMMITMENTS AND CONTINGENCIES --- ---
MINORITY INTERESTS 32,681 31,337
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par, 1,000,000 shares
authorized; none issued and outstanding --- ---
Common stock, $.01 par, 15,000,000 shares
authorized; 5,499,678 and 5,220,678 shares issued 54,997 52,207
Additional paid-in capital 14,000,780 13,004,567
Accumulated other comprehensive income 37,817 15,572
Accumulated deficit (972,104) (2,203,630)
Less 908,530 shares of common stock held in treasury,
at cost (1,293,780) (1,293,780)
------------ ------------
Total stockholders' equity 11,827,710 9,574,936
------------ ------------
Total liabilities and stockholders' equity $25,931,578 $25,029,018
============ ============
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See accompanying notes to consolidated financial statements.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2006 2005 2006 2005
(UNAUDITED) (UNAUDITED)
Continuing Operations:
Revenues:
Sales of alcoholic beverages $2,215,489 $1,192,768 $4,385,484 $2,403,044
Sales of food and merchandise 677,275 413,996 1,315,999 791,098
Service revenues 2,841,119 1,586,890 5,435,920 3,092,841
Internet revenues 203,751 180,729 412,909 367,960
Other 181,882 69,007 348,941 120,657
----------- ----------- ------------ -----------
Total revenues 6,119,516 3,443,390 11,899,253 6,775,600
Operating expenses:
Cost of goods sold 745,295 448,165 1,454,533 845,935
Salaries and wages 1,678,813 1,203,595 3,348,524 2,411,544
Other general and administrative:
Taxes and permits 779,450 477,037 1,474,765 921,627
Charge card fees 104,074 55,609 206,310 115,296
Rent 296,732 105,875 593,578 177,823
Legal and professional 185,288 178,753 335,946 346,079
Advertising and marketing 315,882 215,796 606,550 357,602
Depreciation and amortization 235,788 140,453 468,269 267,242
Other 814,713 618,081 1,663,127 1,177,199
----------- ----------- ------------ -----------
Total operating expenses 5,156,035 3,443,364 10,151,602 6,620,347
----------- ----------- ------------ -----------
Income from continuing operations 963,481 26 1,747,651 155,253
Other income (expense):
Interest income 8,950 11,556 15,386 20,745
Interest expense (271,469) (167,835) (534,521) (256,949)
Minority interests (2,731) (6,877) (1,344) (6,414)
Other 7,839 46 4,354 (734)
----------- ----------- ------------ -----------
Net income (loss) from continuing
operations 706,070 (163,084) 1,231,526 (88,099)
Discontinued operations:
Loss from discontinued operations --- (66,825) --- (148,294)
Gain on sale of subsidiary --- 291,987 --- 291,987
----------- ----------- ------------ -----------
Net income $ 706,070 $ 62,078 $ 1,231,526 $ 55,594
=========== =========== ============ ===========
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.16 $ (0.04) $ 0.28 $ (0.02)
Income from discontinued operations --- 0.06 --- 0.04
----------- ----------- ------------ -----------
Net income, basic $ 0.16 $ 0.02 $ 0.28 $ 0.02
=========== =========== ============ ===========
Net income, diluted $ 0.14 $ 0.02 $ 0.26 $ 0.01
=========== =========== ============ ===========
Weighted average number of common
shares outstanding:
Basic 4,408,237 3,782,481 4,364,649 3,741,315
=========== =========== ============ ===========
Diluted 5,347,386 3,964,987 4,973,583 3,923,821
=========== =========== ============ ===========
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Comprehensive income (loss) for the three months ended March 31, 2006 and 2005 were $728,315 and $28,710, and for the six months were $1,253,771 and ($22,265), respectively. This includes the changes in available-for-sale securities and net income (loss).
See accompanying notes to consolidated financial statements.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31,
2006 2005
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 1,231,526 $ (88,099)
Adjustments to reconcile income (loss) from
continuing operations to cash provided by operating
activities:
Depreciation and amortization 468,269 267,242
Issuance of warrants 17,777 ---
Minority interests 1,344 6,414
Stocks issued for professional services --- 27,120
Changes in operating assets and liabilities (697,031) 813,580
------------ ------------
Cash provided by operating activities 1,021,885 1,026,257
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (289,768) (988,626)
Proceeds from sale of discontinued operations --- 550,000
Acquisition of business, net of cash acquired --- (2,650,000)
Payments for notes receivable 21,493 (10,012)
------------ ------------
Cash used in investing activities (268,275) (3,098,638)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 75,000 474,650
Proceeds from stock options exercised 249,003 ---
Proceeds from long-term debt 1,035,425 3,802,000
Payments on line-of-credit (94,888) ---
Payments on long-term debt (1,025,294) (488,973)
------------ ------------
Cash provided by financing activities 239,246 3,787,677
CASH FLOW FROM DISCONTINUED OPERATIONS:
Cash provided by operating activities --- 200,042
Cash used in investing activities --- (402,585)
Cash used in financing activities --- (176,089)
------------ ------------
Cash used in discontinued operations --- (378,632)
NET INCREASE IN CASH 992,856 1,336,664
CASH AT BEGINNING OF PERIOD 480,330 275,243
------------ ------------
CASH AT END OF PERIOD $ 1,473,186 $ 1,611,907
============ ============
CASH PAID DURING PERIOD FOR:
Interest $ 552,227 $ 242,151
============ ============
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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.
In March 2006, the seller of the New York club converted $675,000 of principal from the related promissory note into 150,000 shares of restricted common stock.
See accompanying notes to consolidated financial statements.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
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, 2005 included in the Company's Annual Report on Form 10-KSB, as amended and 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 six months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending September 30, 2006.
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 SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2006 2005 2006 2005
Net income, as reported $ 706,070 $ 62,078 $1,231,526 $ 55,594
Less total stock-based employee compensation
expense determined under the fair value
based method for all awards (135,630) (128,393) (271,260) (256,786)
---------- ---------- ----------- ----------
Pro forma net income (loss) $ 570,440 $ (66,315) $ 960,266 $(201,192)
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Earnings (loss) per share:
Basic - as reported $ 0.16 $ 0.02 $ 0.28 $ 0.02
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Diluted - as reported $ 0.14 $ 0.02 $ 0.26 $ 0.01
========== ========== =========== ==========
Basic - pro forma $ 0.13 $ (0.02) $ 0.22 $ (0.05)
========== ========== =========== ==========
Diluted - pro forma $ 0.11 $ (0.02) $ 0.19 $ (0.05)
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RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
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 (loss) consists of net income (loss) and gains (losses) on available-for-sale marketable securities.
5. COMMON STOCK
On October 11, 2005, 10,000 stock options were exercised by one of the Company's directors for proceeds of $21,300. In January 2006, 54,000 stock options were exercised by the Company's employees for proceeds of $138,240 and in February 2006, 10,000 stock options by one of the Company's directors for $25,400. Also, 30,000 shares of the Company's common stock was sold to a non-employee for $75,000 in January 2006. In March 2006, a non-employee exercised 25,000 stock options for $64,063 and the seller of the New York club converted $675,000 of principal from the related promissory note into 150,000 shares of restricted common stock.
6. SEGMENT INFORMATION
Below is the financial information related to the Company's segments:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2006 2005 2006 2005
REVENUES
Club operations $5,915,580 $3,262,661 $11,484,298 $ 6,407,640
Internet websites 203,936 180,729 414,955 367,960
----------- ----------- ------------ ------------
$6,119,516 $3,443,390 $11,899,253 $ 6,775,600
=========== =========== ============ ============
NET INCOME
Club operations $1,317,697 $ 317,999 $ 2,340,205 $ 947,568
Internet websites 30,447 27,226 79,296 58,412
Corporate expenses (642,074) (508,309) (1,187,975) (1,094,079)
Discontinued operations --- 225,162 --- 143,693
----------- ----------- ------------ ------------
$ 706,070 $ 62,078 $ 1,231,526 $ 55,594
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RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
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 recognized would have been an increase of approximately $0 and $4,243 for the three months and an increase of $0 and $3,936 for the six months ended March 31, 2006 and 2005, respectively. This would have also resulted in a deferred revenue balance of approximately $0 and $2,066 as of March 31, 2006 and 2005, 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 March 31, 2006 deferred revenues of approximately $19,200 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 February 6, 2006, the Company issued a Convertible Debenture (the "Debenture") to an unrelated investment group for the principal sum of $1,000,950 bearing interest at the rate of 10% per annum, with a maturity date of February 1, 2009. Under the terms of the Debenture, the Company is required to make three quarterly interest payments beginning May 1, 2006. Thereafter, the Company is required to make nine equal quarterly principal and interest payments. At any time after 366 days from the date of issuance of this Debenture, the Company has the right to redeem the Debenture in whole or in part at any time during the term of the Debenture. At the election of the Holder, the Holder has the right at any time to convert all or any portion of the principal or interest amount of the Debenture into shares of our common stock at a rate of $4.75 per share, which approximates the closing price of the Company's stock on February 6, 2006. The proceeds of the Debenture was used to
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
8. LONG-TERM DEBT (CONTINUED)
payoff certain debt and increase our working capital.
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 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.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2005 2005
Revenues $ 3,443,390 $ 7,261,600
Net income (loss) from continuing
operations $ (163,084) $ (368,099)
Net income (loss) $ 62,078 $ (224,406)
Net income (loss) per share - basic and diluted $ 0.02 $ (0.06)
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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 such assets and liabilities as of March 31, 2005 have been removed from the Company's consolidated results of continuing operations and balance sheet for all periods presented in this document and the cash flows for the six months ended March 31, 2005 have been provided in the consolidated statement of cash flows.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
10. SUBSEQUENT EVENTS
On April 17, May 1, and May 3, 2006, the seller of the New York club converted a total of $900,000 of principal from the related promissory note into 150,000 shares of restricted stock.
On April 5, 2006, the Company's wholly owned subsidiary, RCI Holdings, Inc. completed the acquisition of real property located at 9009 Airport Blvd., Houston, Texas where the Company currently operates Rick's Sports Bar (previously Hummers Sports Bar and XTC South clubs). Pursuant to the terms of the Agreement, the Company paid a total sales price of $1,300,000 which consisted of $500,000 in cash and 160,000 shares of the Company's restricted common stock. As part of the transaction, the Company has agreed to file a registration statement for the resale of such restricted common stock within 45 days after the closing. Additionally, nine months after the filing of the Registration Statement, the Seller shall have the right, but not the obligation, to have the Company buy the shares at a price of $5.00 per share at a rate of no more than 10,000 shares per month until such time as the Seller receives a total of $800,000 from the sale of such shares. Alternatively, the Seller shall have the option to sell such shares in the open market upon the effectiveness of the Registration Statement. The transaction was the result of arms-length negotiations between the parties.
On May 9, 2006, the Company purchased Joint Ventures, Inc., an operator of an adult nightclub in South Houston, Texas, formerly known as Dreamers Cabaret & Sports Bar located at 802 Houston Blvd. The purchase price was for $840,000 paid in cash. The club, located in Houston suburbs, has been converted to an XTC Cabaret.
On April 28, 2006, the Company entered into convertible debentures with three shareholders for a principal sum of $825,000. The term is for two years and the interest rate is 12% per annum. At the election of the holders, the holders have the right at any time to convert all or any portion of the principal or interest amount of the debenture into shares of the Company's common stock at a rate of $6.55 per share. The debenture provides, absent shareholder approval, that the number of shares of the Company's common stock that may be issued by the Company or acquired by the holders upon conversion of the debenture shall not exceed 19.99% of the total number of issued and outstanding shares of the Company's common stock.
The following discussion should be read in conjunction with our audited consolidated financial statements and related notes thereto included in this quarterly report.
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:
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 seven 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 "Rick's Sports Cabaret" 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 May 9, 2006, the Company purchased Joint Ventures, Inc., an operator of an adult nightclub in South Houston, Texas, formerly known as Dreamers Cabaret & Sports Bar located at (802 Houston Blvd.) for $840,000 cash. The club has been converted to an XTC Cabaret.
2. We have extensive internet activities.
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 MARCH 31, 2006 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2005
For the three months ended March 31, 2006, we had consolidated total revenues of $6,119,516 compared to consolidated total revenues of $3,443,390 for the three months ended March 31, 2005, an increase of $2,676,126 or 77.72%. The increase in total revenues was primarily attributable to the increase in revenues generated by our new clubs in Charlotte, North Carolina, and New York, New York, in the amount of $1,639,367; by the increase in revenues generated by our existing clubs in the amount of $1,013,552, a 32.23% increase; and by the increase in internet operations in the amount of $23,207, a 12.84% increase, from a year ago. Our club operations in Houston benefited from the NBA All-Star weekend. Total revenues for same-location-same-period of club operations increased to $4,537,345 for the three months ended March 31, 2006 from $2,953,105 for same period ended March 31, 2005, a 53.65% increase. The increase was primarily attributable to the overall increase in revenues in our club operations.
The cost of goods sold for the three months ended March 31, 2006 was 12.18% of total revenues compared to 13.02% for the three months ended March 31, 2005. The decrease was due primarily to the reduction of cost of goods sold in alcoholic beverages and food at Rick's clubs and by reduction in costs of maintaining our internet operations. The cost of goods sold for the club operations for the three months ended March 31, 2006 was 12.45% compared to 13.45% for the three months ended March 31, 2005. 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 March 31, 2006 was 4.40% compared to 5.21% for the three months ended March 31, 2005. The cost of goods sold for same-location-same-period of club operations for the three months ended March 31, 2006 was 13.02%, compared to 13.12% for the same period ended March 31, 2005.
Payroll and related costs for the three months ended March 31, 2006 were $1,678,813 compared to $1,203,595 for the three months ended March 31, 2005. Payroll for same-location-same-period of club operations increased to $1,086,447 for the three months ended March 31, 2006 from $851,017 for the same period ended March 31, 2005. The increase was primarily due to an increase in entertainers payroll in our club in Minnesota and addition of the new clubs. Management currently believes that its labor and management staff levels are appropriate.
Other general and administrative expenses for the three months ended March 31, 2006 were $2,731,927 compared to $1,791,604 for the three months ended March 31, 2005. The increase was due primarily to increase in taxes and permits, credit card fees, rent, advertising and marketing, indirect operating expenses, insurance, and utilities from adding new locations in New York, New York and Charlotte, North Carolina.
Interest expense for the three months ended March 31, 2006 was $271,469 compared to $167,835 for the three months ended March 31, 2005. The increase was attributable to our obtaining new debt to finance the purchase and renovation of the club in New York. As of March 31, 2006, the balance of long-term debt was $12,599,743 compared to $12,558,047 a year earlier.
Net income for the three months ended March 31, 2006 was $706,070 compared to $62,078 for the three months ended March 31, 2005. The increase in net income was primarily due to increase in overall revenues in our existing clubs. Net income for same-location-same- period of club operations increased to $1,195,011 for the three months ended March 31, 2006 from $525,873 for same period ended March 31, 2005, or by 127.24%.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2006 AS COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2005
For the six months ended March 31, 2006, we had consolidated total revenues of $11,899,253 compared to consolidated total revenues of $6,775,600 for the six months ended March 31, 2005, an increase of $5,123,653 or 75.62%. The increase in total revenues was primarily attributable to the increase in revenues generated by our new clubs in Charlotte, North Carolina, and New York, New York, in the amount of $3,264,866; by the increase in revenues generated by our existing clubs in the amount of $1,811,791, a 28.81% increase; and by the increase in internet operations in the amount of $46,996, a 12.77% increase from a year ago. Our club operations in Houston benefited from the NBA All-Star weekend. Total revenues for same-location-same-period of club operations increased to $8,788,016 for the six months ended March 31, 2006 from $5,945,885 for same period ended March 31, 2005. The increase was primarily attributable to the overall increase in revenues in our club operations.
The cost of goods sold for the six months ended March 31, 2006 was 12.22% of total revenues compared to 12.48% for the six months ended March 31, 2005. The decrease was due primarily to the reduction of cost of goods sold in alcoholic beverages and food at Rick's clubs and reduction in costs of maintaining our internet operations. The cost of goods sold for the club operations for the six months ended March 31, 2006 was 12.51% compared to 12.93% for the three months ended March 31, 2005. 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 six months ended March 31, 2006 was 4.32% compared to 4.68% for the six months ended March 31, 2005. The cost of goods sold for same-location-same-period of club operations for the six months ended March 31, 2006 was 13.39%, compared to 13.03% for the same period ended March 31, 2005.
Payroll and related costs for the six months ended March 31, 2006 were $3,348,524 compared to $2,411,544 for the six months ended March 31, 2005. Payroll for same-location-same-period of club operations increased to $2,185,588 for the six months ended March 31, 2006 from $1,710,976 for the
same period ended March 31, 2005. The increase was primarily due to an increase in entertainers payroll in our club in Minnesota and the addition of new clubs. Management currently believes that its labor and management staff levels are appropriate.
Other general and administrative expenses for the six months ended March 31, 2006 were $5,348,545 compared to $3,362,868 for the six months ended March 31, 2005. The increase was due primarily to increase in taxes and permits, credit card fees, rent, advertising and marketing, indirect operating expenses, insurance, and utilities from adding new locations in New York, New York and Charlotte, North Carolina.
Interest expense for the six months ended March 31, 2006 was $534,521 compared to $256,949 for the six months ended March 31, 2005. The increase was attributable to our obtaining new debt to finance the purchase and renovation of the club in New York. As of March 31, 2006, the balance of long-term debt was $12,599,743 compared to $12,558,047 a year earlier.
Net income for the six months ended March 31, 2006 was $1,231,526 compared to $55,594 for the six months ended March 31, 2005. The increase in net income was primarily due to increase in overall revenues in our existing clubs. Net income for same-location-same-period of club operations increased to $2,132,747 for the six months ended March 31, 2006 from $1,136,087 for same period ended March 31, 2005, or by 87.73%. Management currently believes that the Company is in the position to continue to be profitable by the end of fiscal 2006, but there are no guarantees with the uncertainties of our new clubs.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006, we had a working capital of $217,899 compared to a deficit of $2,047,725 at September 30, 2005. The increase in working capital was primarily due to increases in cash and cash equivalents and prepaid expenses, other current assets, and by decreases in accounts payable, accrued liabilities, current portion of long term debt, and line of credit as a result of increased cash flow from operations. The value of available-for-sale marketable securities increased by $22,245.
Including cash provided by discontinued operations, net cash provided by operating activities in the six months ended March 31, 2006 was $1,021,885 compared to $1,226,299 for the six months ended March 31, 2005. The decrease in cash provided by operating activities was primarily due to the disposition of discontinued operations.
Including cash used by discontinued operations, we used $268,275 of cash in investing activities during the six months ended March 31, 2006 compared to $3,501,223 during the six months ended March 31, 2005. Including cash used by discontinued operations, cash of $239,246 was provided by financing activities during the six months ended March 31, 2006 compared to $3,611,588 during the six months ended March 31, 2005.
Historically, our need for capital was a result of construction or acquisition of new clubs, renovation of older clubs, and investments in technology. Historically, we have also utilized capital to repurchase our common stock as part of our share repurchase program.
On February 6, 2006, we issued an unsecured Convertible Debenture (the "Debenture") to an unrelated investment group for the principal sum of $1,000,950 bearing interest at the rate of 10% per annum, with a maturity date of February 1, 2009. Under the terms of the Debenture, we are required to make three quarterly interest payments beginning May 1, 2006. Thereafter, we are required to make nine equal quarterly principal and interest payments. At any time after 366 days from the date of issuance of this Debenture, we have the right to redeem the Debenture in whole or in part at any time during the term of the Debenture. At the election of the Holder, the Holder has the right at any time to convert all or any portion of the principal or interest amount of the Debenture into shares of our common stock at a rate of $4.75 per share, which approximates the closing price of the Company's stock on February 6, 2006. The proceeds of the Debenture was used to payoff certain debt and increase our working capital.
On April 28, 2006, the Company entered into convertible debentures with three shareholders for a principal sum of $825,000. The term is for two years and the interest rate is 12% per annum. At the election of the holders, the holders have the right at any time to convert all or any portion of the principal or interest amount of the debenture into shares of our common stock at a rate of $6.55 per share. The debenture provides, absent shareholder approval, that the number of shares of our common stock that may be issued by us or acquired by the holders upon conversion of the debenture shall not exceed 19.99% of the total number of issued and outstanding shares of our common stock. The proceeds were partially used to fund the purchase of Joint Ventures, Inc., an operator of an adult nightclub in South Houston, Texas, formerly known as Dreamers Cabaret & Sports Bar located at 802 Houston Blvd. The purchase price was for $840,000 paid in cash. The club, located in the Houston suburbs, has been converted to an XTC Cabaret.
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 available a $100,000 unsecured line-of-credit with a bank other than our existing debt. Interest is payable monthly on the outstanding balance at a floating rate of prime plus 1.5%. This arrangement is subject to renewal in June 2006. There was no outstanding balance under this agreement at March 31, 2006. However, 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.
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 management believes that we are well-positioned to compete successfully in the future, there can be no assurance that we will be able to maintain its 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
We believe that our 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.
As of the end of the period of this report, our principal executive and principal financial officers carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our 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 our internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out its evaluation.
PART II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities
During our quarter ended March 31, 2006, 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.
In January 2006, we sold 30,000 shares of our restricted common stock to a non-employee for $75,000.
In March 2006, the seller of the New York club converted $675,000 of principal from the related promissory note into 150,000 shares of restricted common stock.
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: May 12, 2006 By: /s/ Eric S. Langan
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Eric S. Langan
Chief Executive Officer and
Chief Financial Officer
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Eric S. Langan, Chief Executive Officer and Chief Financial Officer of Rick's Cabaret International, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Rick's Cabaret International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Rick's Cabaret International, Inc. as of, and for, the periods presented in this report;
4. As Chief Executive Officer and Chief Financial Officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Rick's Cabaret International, Inc. and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to Rick's Cabaret International, Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of Rick's Cabaret International, Inc.'s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in Rick's Cabaret International, Inc.'s internal control over financial reporting that occurred during Rick's Cabaret International, Inc.'s most recent fiscal year that has materially affected, or is reasonably likely to materially affect, Rick's Cabaret International, Inc.'s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to Rick's Cabaret International, Inc.'s independent registered public accounting firm and the audit committee of Rick's Cabaret International, Inc.'s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Rick's Cabaret International, Inc.'s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Rick's Cabaret International, Inc.'s internal control over financial reporting.
Date: May 12, 2006 By: /s/ Eric S. Langan
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Eric S. Langan
Chief Executive Officer and
Chief Financial Officer
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO RULE 13a-14(b) OR
RULE 15d-14(b) and 18 U.S.C. Sec.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Rick's Cabaret International, Inc. (the "Company") on Form 10-QSB for the quarter ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eric S. Langan, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 12, 2006 By: /s/ Eric S. Langan
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Eric S. Langan
Chief Executive Officer and
Chief Financial Officer
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