Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] Annual Report under Section 13 Or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended September 30, 2004
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission File Number: 0-26958
Rick's Cabaret International, Inc.
(Name of Small Business Issuer in Its Charter)
Texas 76-0458229
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
10959 Cutten Road
Houston, Texas 77066
(Address of Principal Executive Offices)
(formerly 505 North Belt Drive Suite 630
Houston, Texas 77060)
(281) 397-6730
(Issuer's Telephone Number)
(formerly 281 820-1181)
Securities Registered Under Section 12(b) Of The Exchange Act:
Title Of Each Class n/a
Name Of Each Exchange On Which Registered n/a
Securities Registered Pursuant to 12(g) of the Exchange Act:
Title Of Each Class
Common Stock, $.01 Par Value
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 [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The Issuer's revenues for the year ended September 30, 2004 were
$15,959,684.
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The aggregate market value of Common Stock held by non-affiliates of the
registrant at December 27, 2004, based upon the last reported sales prices on
the NASDAQ SmallCap Market, was $10,101,404.
As of December 27, 2004, there were approximately 3,700,148 shares of
Common Stock outstanding (this amount excludes treasury shares).
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TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Common Equity, Related Stockholder
Matters and Small Business Issuer Purchases
Of Equity Securities 11
Item 6. Management's Discussion and Analysis or
Plan of Operation 14
Item 7. Financial Statements 19
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 19
Item 8A. Controls and Procedures 19
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of
The Exchange Act 20
Item 10. Executive Compensation 22
Item 11. Security Ownership of Certain Beneficial
Owners and Management and
Related Stockholder Matters 24
Item 12. Certain Relationships and Related Transactions 26
Item 13. Exhibits and Reports on Form 8-K 26
Item 14. Principal Accountant Fees and Services 27
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Our name is Rick's Cabaret International, Inc. We currently own and
operate seven adult nightclubs under the names "Rick's Cabaret" and "XTC" that
offer live adult entertainment, restaurant and bar operations. Our nightclubs
are in Houston, Austin and San Antonio, Texas, and Minneapolis, Minnesota. In
June 2004, we converted our original Rick's Cabaret nightclub in Houston's
Galleria District into Club Onyx, an upscale venue that welcomes all customers
but cater especially to urban professionals, businessmen and professional
athletes. We also own and operate a sports bar under the name of "Hummers" in
Houston and own or operate premiere adult entertainment Internet websites.
Our online entertainment sites are xxxPassword.com, CouplesTouch.com,
M4Mcouples.com, and NaughtyBids.com. The site xxxPassword.com features adult
content licensed through Voice Media, Inc. CouplesTouch.com is a personals site
for those in the swinging lifestyle. M4Mcouples.com is a personals site for
gays, lesbians, and bisexuals. Naughtybids.com is our online adult auction
site. It contains consumer-initiated auctions for items such as adult videos,
apparel, photo sets, adult paraphernalia and other erotica. There are typically
approximately 10,000 active auctions at this site at any given time. We charge
the seller a fee for each successful auction. All of our sites use proprietary
software platforms written by us to deliver the best experience to the user
without being constrained by off-the-shelf software solutions.
Our website address is www.ricks.com. We make available free of charge our
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Annual Report on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports
on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with the SEC under
Securities Exchange Act of 1934, as amended. Information contained in the
website shall not be construed as part of this Form 10-KSB.
References to us in this Form 10-KSB include our 100%-owned and 51%-owned
consolidated subsidiaries.
BUSINESS ACTIVITIES--NIGHTCLUBS
Prior to the opening of the first Rick's Cabaret in 1983 in Houston, Texas,
the topless nightclub business was characterized by small establishments
generally managed by their owner. Operating policies of these establishments
were often lax, the sites were generally dimly lit, standards for performers'
personal appearance and personality were not maintained and it was customary for
performers to alternate between dancing and waiting tables. The quantity and
quality of bar service was low and food was not frequently offered. Music was
usually "hard" rock and roll, played at a loud level by a disc jockey. Usually,
only cash was accepted. Many businessmen felt uncomfortable in such
environments. Recognizing a void in the market for a first-class adult
nightclub, we designed Rick's Cabaret to target the more affluent customer by
providing a unique quality entertainment environment. The following summarizes
our areas of operation that distinguish us:
FEMALE ENTERTAINMENT. Our policy is to maintain high standards for both
personal appearance and personality for the topless entertainers and waitresses.
Of equal importance is a
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performer's ability to present herself attractively and to talk with customers.
We prefer that the performers we hire be experienced dancers. We make a
determination as to whether a particular applicant is suitable based on such
factors of appearance, attitude, dress, communication skills and demeanor. At
all clubs, except for our Minnesota location, the entertainers are independent
contractors. We do not schedule their work hours.
MANAGEMENT. We often recruit staff from inside the topless industry, in
the belief that management with experience in the sector adds to our ability to
grow and attract quality entertainers. Management with experience is able to
train new recruits from outside the industry.
COMPLIANCE POLICIES/EMPLOYEES. We have a policy of ensuring that our
business is carried on in conformity with local, state and federal laws. In
particular, we have a "no tolerance" policy as to illegal drug use in or around
the premises. Posters placed throughout the nightclubs reinforce this policy,
as do periodic unannounced searches of the entertainers' lockers. Entertainers
and waitresses who arrive for work are not allowed to leave the premises without
the permission of management. If an entertainer does leave the premises, she is
not allowed to return to work until the next day. We continually monitor the
behavior of entertainers, waitresses and customers to ensure that proper
standards of behavior are observed.
COMPLIANCE POLICIES/CREDIT CARDS. We review all credit card charges made
by our customers. We have in place a formal policy requiring that all credit
card charges must be approved, in writing, by management before any charges are
accepted. Management is trained to review credit card charges to ensure that
the only charges approved for payment are for food, drink and entertainment.
FOOD AND DRINK. We believe that a key to the success of our branded adult
nightclubs is a quality, first-class bar and restaurant operation to compliment
our adult entertainment. We employ service managers who recruit and train
professional waitstaff and ensure that each customer receives prompt and
courteous service. We employ chefs with restaurant experience. Our bar
managers order inventory and schedule bar staff. We believe that the operation
of a first class restaurant is a necessary component to the operation of a
premiere adult cabaret, as is the provision of premium wine, liquor and beer in
order to ensure that the customer perceives and obtains good value. Our
restaurant operations provide business lunch buffets and full lunch and dinner
menu service with hot and cold appetizers, salads, seafood, steak, and lobster.
An extensive selection of quality wines is available.
CONTROLS. Operational and accounting controls are essential to the
successful operation of a cash intensive nightclub and bar business. We have
designed and implemented internal procedures and controls designed to ensure the
integrity of our operational and accounting records. Wherever practicable, we
separate management personnel from all cash handling so that management is
isolated from and does not handle any cash. We use a combination of accounting
and physical inventory control mechanisms to maintain a high level of integrity
in our accounting practices. Information technology plays a significant role in
capturing and analyzing a variety of information to provide management with the
information necessary to efficiently manage and control the nightclub. Deposits
of cash and credit card receipts are reconciled each day to a daily income
report. In addition, we review on a daily basis (i) cash and credit card
summaries which tie together all cash and credit card transactions occurring at
the front door, the bars in the club and the cashier station, (ii) a summary of
the daily bartenders' check-out reports, and (iii) a daily cash requirements
analysis which reconciles the previous day's cash on hand to the requirements
for the next day's operations. These daily computer reports alert management of
any variances from
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expected financial results based on historical norms. We conduct a monthly
independent overview of our financial condition and operating results.
ATMOSPHERE. We maintain a high design standard in our facilities and
decor. The furniture and furnishings in the nightclubs are designed to create
the feeling of an upscale restaurant. The sound system is designed to provide
quality sound at levels where conversations can still take place. The
environment is carefully monitored for music selection, entertainer and waitress
appearance and all aspects of customer service on a continuous basis.
VIP ROOM. In keeping with our emphasis on serving the upper-end of the
businessmen's market, some of our nightclubs include a VIP room, which is open
to individuals who purchase memberships. A VIP room provides a higher level of
service and luxury.
ADVERTISING AND PROMOTION. Our consumer marketing strategy is to position
Rick's Cabarets as premiere entertainment facilities that provide exceptional
topless entertainment in a fun, yet discreet, environment. We use a variety of
highly targeted methods to reach our customers: hotel publications, local radio,
cable television, newspapers, billboards, taxi-cab reader boards, and the
Internet, as well as a variety of promotional campaigns. These campaigns ensure
that the Rick's Cabaret name is kept before the public.
Rick's Cabaret has received a significant amount of media exposure over the
years in national magazines such as Playboy, Penthouse, Glamour Magazine, The
Ladies Home Journal, Time Magazine, and Texas Monthly Magazine. Segments about
Rick's have aired on national and local television programs such as "Extra" and
"Inside Edition", and we have provided entertainers for Pay-Per-View features as
well. Business stories about Rick's Cabaret have appeared in The Wall Street
Journal, Los Angeles Times, Houston Business Journal, and numerous other
regional publications.
NIGHTCLUB LOCATIONS. We have two Rick's Cabaret and one Club Onyx
locations in Houston, Texas and one Rick's Cabaret in Minneapolis, Minnesota.
We also own four nightclubs in San Antonio, Austin, and Houston, Texas that
operate under the name XTC. We also own a controlling interest in and operate a
sport bar called "Hummers".
On February 19, 2003, we acquired 51% control of the Wild Horse Cabaret
adult nightclub near Hobby Airport, Houston, Texas and operate it as part of our
popular XTC Cabaret group. Goodwill of $79,842 was recorded during fiscal year
2003 as a result of this acquisition.
In April 2003, we organized RCI Ventures, Inc. to acquire Nocturnal
Concepts, Inc., which operates as an addition to our XTC Cabaret group, called
"XTC Galleria". As part of this transaction, we transferred our ownership of
Tantric Enterprises, Inc. (our subsidiary that operates Club Encounters) to RCI
Ventures, Inc. As a result of these transactions we own a 51% interest in RCI
Ventures, Inc. On September 30, 2004, we sold our shares in RCI Ventures, Inc.
to unrelated third parties for $15,000 cash and a $235,000 note receivable with
an annual interest rate of 6% over five years. As a part of the transaction,
the Purchaser entered into a five-year lease for Club Encounters with an option
for five additional years.
In May 2003, we opened a sports bar called "Hummers", which is located next
to Wild Horse Cabaret, in Houston, Texas.
We sold our New Orleans nightclub in March 1999, but it continues to use
our name under a licensing agreement. We continually explore expansion
opportunities to open or acquire more
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nightclubs in strategically valuable locations in the United States.
On June 12, 2003, we entered into an Asset Purchase Agreement with Taurus
Entertainment Companies, Inc. ("Taurus"), whereby we acquired all the assets and
liabilities of Taurus in exchange for 3,752,008 shares of Taurus of the
4,002,008 that we owned plus $20,000 in cash. We also executed an
Indemnification and Transaction Fee Agreement with Taurus for which we received
$270,000 in cash, with $140,000 payable at closing, $60,000 due on July 15, 2003
and $70,000 due on August 15, 2003. We have received the $60,000 payment and
have restructured the remaining balance originally due August 15, 2003, with a
note receivable bearing 12% annual interest over a five year term. The monthly
payment is $1,557.11 with first payment to begin on October 1, 2004.
On March 3, 2004, we acquired the assets and business of a 7,000 square
foot gentlemen's club in North Houston, which became our fifth XTC Cabaret. As
a part of the transaction, we entered into a new five-year lease with an option
for five additional years. The results of operations of this new venue are
included in the accompanying consolidated financial statements from the date of
acquisition. The $265,000 all-cash purchase transaction generated goodwill of
$20,000 and property and equipment at $245,000.
On September 15, 2004, our wholly-owned subsidiary, RCI Entertainment (New
York), Inc., a New York corporation ("RCI New York"), entered into a definitive
Stock Purchase Agreement (the "Stock Purchase Agreement") with Peregrine
Enterprises, Inc., a New York corporation ("Peregrine") and its shareholders,
pursuant to which RCI New York agreed to purchase all of the shares of common
stock of Peregrine. Peregrine owns and operates an adult entertainment cabaret
located in midtown Manhattan. The cabaret club is located near the Empire State
Building and Madison Square Garden, and is less than 10 blocks from Times
Square. The Stock Purchase Agreement provides for closing the transaction on or
before December 1, 2004, subject to satisfaction of certain conditions,
including obtaining adequate financing, transfer of all existing licenses and
permits to RCI New York, obtaining consent of the Landlord, execution of a
Non-Disturbance Agreement, and other conditions consistent with transactions of
this type. The closing date has been extended to January 15, 2005.
Under the terms of the Stock Purchase Agreement, the purchase price of the
transaction is $7,625,000, payable $2,500,000 in cash at closing and $5,125,000
payable in a promissory note bearing simple interest at the rate of 4.0% per
annum (the "Promissory Note"). The Promissory Note is payable commencing 120
days after Closing as follows: (a) the payment of $58,333.33 per month for
twenty-four (24) consecutive months; (b) the payment of $63,333.33 for
twenty-four (24) consecutive months; (c) the payment of $68,333.33 for twelve
(12) consecutive months; and (d) a lump sum payment of the remaining balance to
be paid on the sixty-first (61st) month. $2,000,000 of the principal amount of
the Promissory Note is convertible into shares of our restricted common stock at
prices ranging from $4.00 to $7.50 per share. The parties will also enter a
Stock Pledge Agreement and Security Agreement to secure the Promissory Note.
Upon closing of the transaction, the owners of Peregrine will enter into a
five-year covenant not to compete with Peregrine, RCI New York, or the Company.
We intend to rename the cabaret club as "Rick's Cabaret" which will occupy
10,000 square feet on three levels, with an additional 4,000 square feet
available for office space.
The terms and conditions of the Stock Purchase Agreement were the result of
extensive arm's length negotiations between the parties.
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BUSINESS ACTIVITIES--INTERNET ADULT ENTERTAINMENT WEB SITES
In 1999, we began adult Internet Web site operations. Our xxxPassword.com
website features adult content licensed through Voice Media, Inc. We added
CouplesTouch.com in year 2002 and M4Mcouples.com in year 2003. CouplesTouch.com
caters to those in the swinging lifestyle. It is essentially a dating site for
couples. M4Mcouples.com is a similar site catering to the gay, lesbian, and
bisexual lifestyles. Our Internet traffic is generated through the purchase of
traffic from third-party adult sites or Internet domain owners and the purchase
of banner advertisements or "key word" searches from Internet search engines.
In addition, the bulk of our traffic now comes from search engines on which we
don't pay for preferential listings. There are numerous adult entertainment
sites on the Internet that we compete with.
In May 2002, we purchased 700,000 shares of our own common stock from Voice
Media, Inc. for an aggregate price of $918,700 (or $795,302 adjusted for imputed
interest) that equals approximately $1.32 per share. That purchase price was
below market value on the date of the purchase. Voice Media, Inc. presently
owns none of our shares of common stock. These shares are presently held as
treasury shares. We may cancel these shares at a later date. The control person
of Voice Media, Inc. is Ron Levi, who was a Director until June 2002. The
terms of this transaction were the result of arms-length negotiations between
Voice Media, Inc. and us. We believe the transaction was favorable to us in
view of the market value of our common stock and the payment terms, although no
appraisal or fairness opinion was done. All management contracts previously
signed relating to the management of xxxPassword.com will remain in effect.
Pursuant to the transaction, the payment schedule is as follows:
(a) The amount of $229,675 due on January 10, 2003;
(b) The amount of $229,675 due on January 10, 2004;
(c) The amount of $229,675 due on January 10, 2005; and
(d) A final payment in the amount of $229,675 due on January 10, 2006.
We are current on these payments.
BUSINESS ACTIVITIES--INTERNET ADULT AUCTION WEB SITES
Our adult auction site features erotica and other adult materials that are
purchased in a bid-ask method. We charge the seller a fee for each successful
auction. Where previously we operated 6 individual auctions sites, now we have
combined these into one main site, NaughtyBids.com, to maximize our brand name
recognition of this site. The site contains new and used adult oriented
consumer initiated auctions for items such as adult videos, apparel, photo sets
and adult paraphernalia. NaughtyBids has approximately 10,000 items for sale at
any given time. NaughtyBids.com offers third party webmasters an opportunity to
create residual income from web surfers through the NaughtyBids Affiliate
Program, which pays third party webmasters a percentage of every closing auction
sale in which the buyer originally came from the affiliate webmaster's site.
There are numerous auction sites on the Internet that offer adult products and
erotica.
COMPETITION
The adult topless club entertainment business is highly competitive with
respect to price, service and location. All of our nightclubs compete with a
number of locally owned adult clubs, some of whose names may have name
recognition that equals that of Rick's Cabaret or XTC. While there may be
restrictions on the location of a so-called "sexually oriented business", there
are no
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barriers to entry into the adult cabaret entertainment market. For example,
there are approximately 50 adult nightclubs located in the Houston area, all of
which are in direct competition with our five Houston cabarets. In Minneapolis,
Rick's Cabaret is favorably located downtown and is a short walk from the
Metrodome Stadium and the Target Center. There are two adult nightclubs in
Minneapolis in direct competition with us.
The names "Rick's" and "Rick's Cabaret" and "XTC Cabaret" are proprietary.
We believe that the combination of our existing brand name recognition and the
distinctive entertainment environment that we have created will allow us to
compete effectively in the industry and within the cities where we operate.
Although we believe that we are well positioned to compete successfully, there
can be no assurance that we will be able to maintain our high level of name
recognition and prestige within the marketplace.
GOVERNMENTAL REGULATIONS
We are subject to various federal, state and local laws affecting our
business activities. In particular, in Texas the authority to issue a permit to
sell alcoholic beverages is governed by the Texas Alcoholic Beverage Commission
(the "TABC"), which has the authority, in its discretion, to issue the
appropriate permits. We presently hold a Mixed Beverage Permit and a Late Hour
Permit (the "Permits"). These Permits are subject to annual renewal, provided
we have complied with all rules and regulations governing the permits. Renewal
of a permit is subject to protest, which may be made by a law enforcement agency
or by the public. In the event of a protest, the TABC may hold a hearing at
which time the views of interested parties are expressed. The TABC has the
authority after such hearing not to issue a renewal of the protested alcoholic
beverage permit. Rick's has never been the subject of a protest hearing against
the renewal of Permits. Minnesota has similar laws that may limit the
availability of a permit to sell alcoholic beverages or that may provide for
suspension or revocation of a permit to sell alcoholic beverages in certain
circumstances. It is our policy, prior to expanding into any new market, to
take steps to ensure compliance with all licensing and regulatory requirements
for the sale of alcoholic beverages as well as the sale of food.
In addition to various regulatory requirements affecting the sale of
alcoholic beverages, in Houston, and in many other cities, the location of a
topless cabaret is subject to restriction by city ordinance. Topless nightclubs
in Houston, Texas are subject to "The Sexually Oriented Business Ordinance" (the
"Ordinance"), which contains prohibitions on the location of an adult cabaret.
The prohibitions deal generally with distance from schools, churches, and other
sexually oriented businesses and contain restrictions based on the percentage of
residences within the immediate vicinity of the sexually oriented business. The
granting of a Sexually Oriented Business Permit ("Business Permit") is not
subject to discretion; the Business Permit must be granted if the proposed
operation satisfies the requirements of the Ordinance. See Item 3. "Legal
Proceedings".
In Minneapolis, we are required to be in compliance with state and city
liquor licensing laws. Our location in Minneapolis is presently zoned to enable
the operation of a topless cabaret. We were a plaintiff in civil litigation
against the defendant City of Minneapolis. On September 16, 2003, the suit was
settled mainly on the basis that the City of Minneapolis will enact a late
hour's operation ordinance and allows qualifying liquor establishments,
including us at our current location, to operate until 3:00 a.m. We believe
that, in the long run, the restoration of late hours operation on a permanent
basis is preferable to going forward with the litigation and in our best
interest.
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In San Antonio and Austin we are required to be in compliance with city or
county sexually oriented business ordinances.
TRADEMARKS
Our rights to the trademarks "Rick's" and "Rick's Cabaret" are established
under common law, based upon our substantial and continuous use of these
trademarks in interstate commerce since at least as early as 1987. We have
registered our service mark, "RICK'S AND STARS DESIGN", with the United States
Patent and Trademark Office. We have also obtained service mark registrations
from the Patent and Trademark Office for the "RICK'S CABARET" service mark.
There can be no assurance that the steps we have taken to protect our service
marks will be adequate to deter misappropriation.
EMPLOYEES AND INDEPENDENT CONTRACTORS
As of September 30, 2004, we had approximately 529 employees of which 47
are in management positions, including corporate and administrative operation
and approximately 482 of which are engaged in entertainment, food and beverage
service, including bartenders, waitresses, and entertainers. None of our
employees are represented by a union and we consider our employee relations to
be good. Additionally, we have independent contractor relationships with more
than 600 entertainers, who are self-employed and perform at our locations on a
non-exclusive basis as independent contractors. Our entertainers in
Minneapolis, Minnesota act as commissioned employees.
SHARE REPURCHASES
As of December 27, 2004 we owned 908,530 treasury shares of our common
stock that we acquired in open market purchases and from investors who
originally acquired the shares from us in private transactions. At this time,
we do not have any plan to use these shares to acquire any assets.
On September 16, 2003, our board of directors authorized us to repurchase
up to $500,000 worth of our common stock. No shares have been purchased under
this program.
ITEM 2. PROPERTIES
Our principal executive office is located at 10950 Cutten Road, Houston,
Texas 77066 which consists of a 9,000 square feet office/warehouse building. We
recently purchased this property for $512,739, payable with $86,279 cash at
closing and $426,460 in a promissory note carrying 7% interest and a 15 year
term. The monthly payment is $3,834. We closed this transaction in mid December
2004. We believe that our offices are adequate for our present needs and that
suitable space will be available to accommodate our future needs.
We own two locations of Rick's Cabaret (one in Houston and one in
Minneapolis), Club Onyx, and the two locations of XTC (one in Austin and one in
San Antonio). We lease the South Houston location, formerly known as the
Chesapeake Bay Club. We own the location of Encounters couples club in Houston,
which is currently under lease to RCI Ventures, Inc. We lease XTC Wildhorse,
Hummers, and XTC North locations.
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Club Onyx located on Bering Drive in Houston has an aggregate 12,300 square
feet of space. The balance as of September 30, 2004, that we owed on the
mortgage is $296,163 and the interest rate is prime plus 1%. During fiscal year
2004, we paid $4,289 in monthly principal and interest payments. In December
2004, we paid off this mortgage.
The Rick's Cabaret located on North Belt Drive in Houston has 12,000 square
feet of space. On November 17, 2004, we obtained a mortgage using this property
as collateral. The principal balance of the new mortgage is $1,042,000, with an
annual interest rate of 10% over a 10 year term. The monthly payment is
$10,056. The money received from this new note will be used to finance the
acquisition of the New York club.
The Rick's Cabaret located in Minneapolis has 15,400 square feet of space.
The balance as of September 30, 2004, that we owed on the mortgage is $2,120,680
and the interest rate is 9%. We pay $22,732 in monthly principal and interest
payments. The last mortgage payment is due in 2018.
The XTC nightclub in Austin has 8,600 square feet of space, which sits on
1.2 acres of land. The balance of the mortgage that we owe as of September 30,
2004 is $367,072 with an interest rate of 11% and monthly principal and interest
payments of $14,586. The last payment is due in February 2007. On November 30,
2004, we obtained an additional mortgage. The principal balance of the new
mortgage is $900,000, with an annual interest rate of 11% over a 10 year term.
The monthly payment is $9,290. The money received from this new note will be
used to finance the acquisition of the New York club.
We own XTC nightclub in San Antonio, which has 7,800 square feet of space.
On November 15, 2004, we obtained a mortgage using this property as collateral.
The principal balance of the new mortgage is $590,000, with an annual interest
rate of 10% over a 10 year term. The monthly payment is $5,694. The money
received from this new note will be used to finance the acquisition of the New
York club.
Encounters club has 8,000 square feet of space. The balance of the
mortgage as of September 30, 2004, that we owed was $27,667 and the interest
rate was 7%. During fiscal year 2004, we paid $1,500 in monthly principal and
interest payments. In December 2004, we paid off this mortgage. On November 30,
2004, together with property in Austin, this property was used as an additional
collateral to secure the $900,000 mortgage above. Beginning November 2004, we
began receiving a monthly lease payment from Tantric Enterprises, Inc. in the
amount of $4,000 for this space.
Our subsidiary, Citation Land LLC, owns a 350-acre ranch in Brazoria
County, Texas, and approximately 50 acres of raw land in Wise County, Texas.
The balance as of September 30, 2004 that we owe on the Brazoria County
ranch mortgage is $293,224 and the interest rate is 9%. We pay $2,573 in monthly
principal and interest payments. The last mortgage payment is due in March 2006
with a balloon payment of $287,920.
The balance as of September 30, 2004 that we owe on the Wise County raw
land mortgage is $142,263 and the interest rate is 12%. We pay $1,537 in monthly
principal and interest payments. The last mortgage payment is due in March 2026.
We lease the property in Houston, Texas, where our Rick's Cabaret (South)
is located. We acquired the operations of the Chesapeake Bay Club in May 2000.
The lease term is for ten years,
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expiring in May 2010, with an additional ten-year lease option thereafter. The
initial lease terms are $12,000 monthly plus 4% of gross revenues that are in
excess of $125,000 per month (excluding payments that we make to dancers), with
the total monthly rent not to exceed $20,000 per month.
We lease the property in Houston, Texas, where our XTC Wildhorse is
located. The lease term is for five years, with an additional five-year lease
option thereafter. The initial base rent is $4,845 monthly for the first two
years ending July 31, 2004, with an annual increase of $570 thereafter.
We lease the property in Houston, Texas, where Hummers is located. The
lease term is for five years, with an additional five-year lease option
thereafter. The initial base rent is $2,763 monthly for the first two years
ending April 30, 2005, with an annual increase of $325 thereafter.
We lease the property in Houston, Texas, where our XTC North is located.
The lease term is for five years, beginning March 2004, with an additional
five-year lease option thereafter. The initial base rent is $8,000 monthly until
August 31, 2006, at which time the monthly base rent increases to $9,000.
ITEM 3. LEGAL PROCEEDINGS
SEXUALLY ORIENTED BUSINESS ORDINANCE OF HOUSTON, TEXAS
In January 1997, the City Council of the City of Houston passed a
comprehensive new Ordinance regulating the location of and the conduct within
Sexually Oriented Businesses (the "Ordinance"). The Ordinance established new
minimum distances that Sexually Oriented Businesses may be located from schools,
churches, playgrounds and other sexually oriented businesses. There were no
provisions in the Ordinance exempting previously permitted sexually oriented
businesses from the effect of the new Ordinance. In 1997, we were informed that
one of our Houston locations at 3113 Bering Drive failed to meet the
requirements of the Ordinance and accordingly the renewal of our Business
License at that location was denied.
The Ordinance provided that a business which was denied a renewal of its
operating permit due to changes in distance requirements under the Ordinance
would be entitled to continue in operation for a period of time (the
"Amortization Period") if the owner were unable to recoup, by the effective date
of the Ordinance, its investment in the business that was incurred through the
date of the passage and approval of the Ordinance.
We filed a request with the City of Houston requesting an extension of time
during which operations at our north Houston facility could continue under the
Amortization Period provisions of the Ordinance since we were unable to recoup
our investment prior to the effective date of the Ordinance. An administrative
hearing was held by the City of Houston to determine the appropriate
Amortization Period to be granted to us. At the Hearing, we were granted an
amortization period that has since been reached. We have the right to appeal
any decision of the Hearing official to the district court in the State of
Texas.
In May 1997, the City of Houston agreed to defer implementation of the
Ordinance until the constitutionality of the entire Ordinance was decided by
court trial. In February 1998, the U.S. District Court for the Southern
District of Texas, Houston Division, struck down certain provisions of the
Ordinance, including the provision mandating a 1,500 foot distance between a
club and schools, churches and other sexually oriented business, leaving intact
the provision of the 750 foot
9
distance as it existed prior to the Ordinance.
The City of Houston has appealed the District Court's rulings with the
Fifth Circuit Court of Appeals. In the event that the City of Houston is
successful in the appeal, we could be out of compliance and such an outcome
could have an adverse impact on our future. Our nightclub in our south Houston
location has a valid permit/license that will expire in December 2005. The
permits for our north Houston location and our Bering Drive location have
expired.
There are other provisions in the Houston, Texas Ordinance, such as
provisions governing the level of lighting in a sexually oriented business, the
distance between a customer and dancer while the dancer is performing in a state
of undress and provisions regarding the licensing of dancers and club managers
that were upheld by the court which may be detrimental to our business. We, in
concert with other sexually oriented businesses, are appealing these aspects of
the Ordinance.
In November, 2003, a three judge panel from the Fifth Circuit Court of
Appeals published their Opinion which affirmed the Trial Court's ruling
regarding lighting levels, customer and dancer separation distances and
licensing of dancers and staff. The Court of Appeals, however, did not follow
the Trial Court's ruling regarding the distance from which a club may be located
from a church or school. The Court of Appeals held that a distance measurement
of 1,500 feet would be upheld upon a showing by the City of Houston that its
claims that there were alternative sites available for relocating the clubs
could be substantiated. The case was remanded for trial on the issue of the
alternative sites.
There are other technical issues, which could additionally bear upon the
location of the clubs, which were not decided at the trial level during the
initial phase of the case. It is anticipated that these technical issues will
be joined in the Trial Court. The City has not sought to modify any of the
terms of the injunction against enforcement of any location provision of the
Ordinance.
The appeals process as it relates to the Court's rulings in 1998 has been
exhausted. The Trial Court has entered a new scheduling order which places
trial on the remaining issues for sometime in mid-2006 or later. Under the
holding of the First Circuit Court of Appeals, the City of Houston has the
burden of proof to show that, under the distance measurements contained in the
1997 ordinance, there are over 2,000 alternate sites available for relocation.
If the City of Houston can meet this initial burden, then the Trial Court will
consider the remaining location issues which were not decided during the initial
summary phase of the case. In the event the City of Houston can meet its burden
and the Trial Court moves forward with the case, an appeal is anticipated. A
ruling on the remaining issues in favor of the City of Houston could have an
adverse impact on the Rick's locations in Houston,Texas.
OTHER LEGAL MATTERS
On May 2, 2003, a lawsuit was filed in the United States District Court for
the Western District of Texas, San Antonio division, as a result of the City of
San Antonio having adopted a new ordinance, which, among other things, banned
nude dancing. This suit asked the Court to declare the ordinance
unconstitutional and enjoin the City from enforcing it. It is probable that
this suit will proceed to trial if we elect to continue our present
entertainment format.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Shareholders on August 27, 2004. Eric S.
Langan, Robert L. Watters, Steven L. Jenkins, Alan Bergstrom and Travis Reese
were nominated and elected as Directors with the following vote results at the
shareholder meeting:
For Against Abstain
--------- ------- -------
Eric S. Langan 3,256,793 8,019 6,619
Robert L. Watters 3,256,793 8,019 6,619
Steven L. Jenkins 3,256,793 8,019 6,619
Alan Bergstrom 3,256,793 8,019 6,619
Travis Reese 3,256,793 8,019 6,619
At the Annual Meeting, the Shareholders ratified Whitley Penn as the
Company's Independent Auditors, with the following vote results:
3,253,446 VOTES FOR RATIFICATION
-----------
11,067 VOTES AGAINST RATIFICATION
-----------
299 ABSTAIN
-----------
At the Annual Meeting, the Shareholders also approved the Amendment to 1999
Stock Option Plan, with the following vote results:
1,959,745 VOTES FOR RATIFICATION
-----------
52,087 VOTES AGAINST RATIFICATION
-----------
2,099 ABSTAIN
-----------
While no other matters were presented at the Annual Meeting, the following
votes were submitted by Shareholders with respect to any other business coming
before the Annual Meeting of Shareholders:
3,217,515 VOTES FOR OTHER BUSINESS
-----------
35,737 VOTES AGAINST OTHER BUSINESS
-----------
11,560 ABSTAIN
-----------
The meeting was adjourned when all matters of business had been discussed.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the NASDAQ SmallCap Market under the symbol
"RICK" The following table sets forth the quarterly high and low of sales prices
per share for the common stock. Our fiscal year ended September 30, 2004.
11
COMMON STOCK PRICE RANGE
HIGH LOW
Fiscal 2003
-----------
First Quarter $2.35 $2.00
Second Quarter $2.48 $1.45
Third Quarter $1.65 $1.11
Fourth Quarter $1.75 $1.25
Fiscal 2004
-----------
First Quarter $1.84 $1.50
Second Quarter $2.84 $1.74
Third Quarter $3.30 $2.40
Fourth Quarter $2.79 $2.21
On December 27, 2004, the last sales price for the common stock as reported
on the NASDAQ SmallCap Market was $2.73. On December 27, 2004, there were
approximately 200 stockholders of record of the common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
DIVIDEND POLICY
We have not paid, and do not currently intend to pay cash dividends on our
common stock in the foreseeable future. Our current policy is to retain all
earnings, if any, to provide funds for operation and expansion of our business.
The declaration of dividends, if any, will be subject to the discretion of the
Board of Directors, which may consider such factors as our results of operation,
financial condition, capital needs and acquisition strategy, among others.
During fiscal year 2003, we purchased 57,500 shares of our common stock at
an average price of $2.07 per share, or an aggregate purchase price of $118,649,
pursuant to the stock buy-back program approved in June 2001.
On September 16, 2003, our board of directors authorized us to repurchase
up to $500,000 worth of our common stock. No shares have been purchased
under this program.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth all equity compensation plans as of September 30,
2004:
12
--------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS
OUTSTANDING OPTIONS, WARRANTS PRICE OF OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED
AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
--------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 908,000 $ 2.42 92,000
--------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 0 0 300,000
--------------------------------------------------------------------------------------------------------------------------------
TOTAL 908,000 $ 2.42 392,000
--------------------------------------------------------------------------------------------------------------------------------
DIRECTOR COMPENSATION
We do not currently pay any cash directors' fees, but we pay the expenses
of our directors in attending board meetings. In September 2004, we issued
10,000 options to each Director who is a member of our audit committee and 5,000
options to our other Directors. These options have a strike price of $2.54 per
share and expire in September 2009.
EMPLOYEE STOCK OPTION PLANS
While we have been successful in attracting and retaining qualified
personnel, we believe that our future success will depend in part on our
continued ability to attract and retain highly qualified personnel. We pay wages
and salaries that we believe are competitive. We also believe that equity
ownership is an important factor in our ability to attract and retain skilled
personnel. We have adopted stock option plans (the "Plans") for employees and
directors. The purpose of the Plans is to further our interests, our
subsidiaries and our stockholders by providing incentives in the form of stock
options to key employees and directors who contribute materially to our success
and profitability. The grants recognize and reward outstanding individual
performances and contributions and will give such persons a proprietary interest
in us, thus enhancing their personal interest in our continued success and
progress. The Plans also assist us and our subsidiaries in attracting and
retaining key employees and directors. The Plans are administered by the Board
of Directors. The Board of Directors has the exclusive power to select the
participants in the Plans, to establish the terms of the options granted to each
participant, provided that all options granted shall be granted at an exercise
price equal to at least 85% of the fair market value of the common stock covered
by the option on the grant date and to make all determinations necessary or
advisable under the Plans.
In 1995 we adopted the 1995 Stock Option Plan (the "1995 Plan"). A total of
300,000 shares could be granted and sold under the 1995 Plan, all of which were
not exercised and have expired. We do not plan to issue any additional options
under the 1995 Plan.
In August 1999 we adopted the 1999 Stock Option Plan (the "1999 Plan") with
500,000 shares authorized to be granted and sold under the 1999 Plan. In August
2004, shareholders approved an Amendment to the 1999 Plan (the "Amendment")
which increased the total number of shares authorized to 1,000,000. As of
September 30, 2004, 908,000 stock options are presently outstanding under the
1999 Plan, none of which have been exercised.
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended September 30, 2004, we had no sales of
unregistered shares of our
13
common stock.
ITEM 6. 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 the related notes to the financial
statements included in this annual report.
FORWARD LOOKING STATEMENT AND INFORMATION
We are 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 us or on behalf of us. 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. Our expectations, beliefs and projections
are expressed in good faith and we believe that they have a reasonable basis,
including without limitation, our examination of historical operating trends,
data contained in our records and other data available from third parties.
There can be no assurance that our expectations, beliefs or projections will
result, be achieved, or be accomplished. In addition to other factors and
matters discussed elsewhere in this Form 10-KSB, the following are important
factors that in our view could cause material adverse affects on our financial
condition and results of operations: the risks and uncertainties related to our
future operational and financial results, the risks and uncertainties relating
to our Internet operations, competitive factors, the timing of the openings of
other clubs, the availability of acceptable financing to fund corporate
expansion efforts, our dependence on key personnel, the ability to manage
operations and the future operational strength of management, and the laws
governing the operation of adult entertainment businesses. We have no
obligation to update or revise these forward-looking statements to reflect the
occurrence of future events or circumstances.
GENERAL
We operate in two businesses in the adult entertainment industry:
1. We own and operate upscale adult nightclubs serving primarily businessmen
and professionals. Our nightclubs offer live adult entertainment,
restaurant and bar operations. We own and operate seven adult nightclubs
under the name "Rick's Cabaret" and "XTC" in Houston, Austin and San
Antonio, Texas, and Minneapolis, Minnesota. We also own and operate a sport
bar called the "Hummers" and an upscale venue that caters especially to
urban professionals, businessmen and professional athletes called "Club
Onyx" in Houston. No sexual contact is permitted at any of our locations.
2. We have extensive Internet activities.
a) We currently own three adult Internet membership Web sites at
www.couplestouch.com, www.M4Mcouples.com, and www.xxxpassword.com. We
-------------------- ------------------ -------------------
14
acquire xxxpassword.com site content from wholesalers.
b) We operate an online auction site www.naughtybids.com. This site
-------------------
provides our customers with the opportunity to purchase adult products
and services in an auction format. We earn revenues by charging fees
for each transaction conducted on the automated site.
Our nightclub revenues are derived from the sale of liquor, beer, wine,
food, merchandise, cover charges, membership fees, independent contractors'
fees, commissions from vending and ATM machines, valet parking and other
products and service. 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.
We performed our annual evaluation on goodwill impairment as of September
30, 2004. No impairment losses were identified as a result of this evaluation.
Beginning in fiscal 2002 and continuing through fiscal 2004, we greatly
reduced our usage of promotional pricing for membership fees for our adult
entertainment web sites. This reduced our revenues from these web sites.
CRITICAL ACCOUNTING POLICIES
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. Estimates and
assumptions are based on historical experience, forecasted future events and
various other assumptions that we believe to be reasonable under the
circumstances. Estimates and assumptions may vary under different assumptions
or conditions. We evaluate our estimates and assumptions on an ongoing basis.
We believe the accounting policies below are critical in the portrayal of our
financial condition and results of operations.
Accounts and Notes 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's accounts receivable other is comprised of employee advances and other
miscellaneous receivables. Notes receivable are included in other assets in the
accompanying consolidated balance sheets. We recognize allowances for doubtful
accounts or notes when, based on management judgment, circumstances indicate
that accounts or notes receivable will not be collected. There is no allowance
for doubtful accounts or notes receivable as of September 30, 2004 and 2003.
Inventories
Inventories include alcoholic beverages, food, and Company merchandise.
Inventories are carried at the lower of cost, average cost, which approximates
actual cost determined on a first-in, first-out ("FIFO") basis, or market.
15
Marketable Securities
Marketable securities at September 30, 2004 and 2003 consist of common
stock. As of September 30, 2004 and 2003, the Company's marketable securities
were classified as available-for-sale, which are carried at fair value, with
unrealized gains and losses reported as other comprehensive income within the
stockholders' equity section of the accompanying consolidated balance sheets.
The cost of marketable equity securities sold is determined on a specific
identification basis. The fair value of marketable equity securities is based
on quoted market prices.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets for
financial reporting purposes. Buildings have estimated useful lives ranging from
31 to 40 years. Furniture, equipment and leasehold improvements have estimated
useful lives between five and seven 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
statement of income of the respective period.
Goodwill
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles
Assets, which addresses the accounting for goodwill and other intangible assets.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized, but reviewed on an annual basis for impairment. We adopted
SFAS effective October 1, 2001.
Revenue Recognition
Except for VIP Memberships, we recognize revenue at the point-of-sale upon
receipt of cash, check, or credit card charge. Membership revenue is deferred
and recognized over the estimated membership usage period, which is estimated to
be 12 and 24 months for annual and lifetime memberships, respectively. We
recognize 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. We recognize Internet auction
revenue when payment is received from the credit card as revenues are not deemed
estimable nor collection deemed probable prior to that point.
Advertising and Marketing
Advertising and marketing expenses is primarily composed 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.
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
16
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.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004 AS COMPARED
TO THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
For the fiscal year ended September 30, 2004, we had consolidated total
revenues of $15,959,684, compared to consolidated total revenues of $15,059,569
for the year ended September 30, 2003. This was an increase of $900,115 or
5.97%. While we had an increase in total revenues in our existing and new
nightclub operations of $1,156,950, the decrease in total revenues resulted from
our Internet businesses was $256,835. Revenues from nightclub operations for
same-location same-period increased by 5.88%, while revenues of Internet
businesses for same-sites same-period decreased by 24.38%. The overall increase
was primarily due to the increase in revenues of our existing and new club
operations.
Our net income before minority interest for the year ended September 30,
2004 was $780,029 compared to $403,936 for the year ended September 30, 2003.
The increase in net income was primarily due to the increase of income from
operations. Our net income from operations for nightclub operations was
$2,542,482 for the year ended September 30, 2004 compared with $1,934,150 for
the year ended September 30, 2003. Our net income from operations for our
Internet businesses was $88,958 for the year ended September 30, 2004 compared
with $36,421 for the year ended September 30, 2003. Our net income for our
nightclub operations for the same-location-same-period increased by 35.48%. Our
net income for our Internet operations for the same-web-site-same-period
increased by 144.25%.
Our cost of goods sold for the year ended September 30, 2004 was 12.42% of
total revenues compared to 14.58 % of related revenues for the year ended
September 30, 2003. The decrease was due primarily to decrease in costs of our
Internet activities and an addition of XTC club, which has low cost of goods
sold. Our cost of goods sold for the nightclub operations for the year ended
September 30, 2004 was 12.55% of our total revenues from club operations
compared to 14.40% for the year ended September 30, 2003. We continued our
efforts to achieve reductions in cost of goods sold of the club operations
through improved inventory management. We are continuing a program to improve
margins from liquor and food sales and food service efficiency. Our cost of
sales from our Internet operations for the year ended September 30, 2004 was
8.77% compared to 17.41% of related revenues for the year ended September 30,
2003. We have implemented measures to reduce expenses in our Internet
operations.
Our payroll and related costs for the year ended September 30, 2004 were
$5,491,401 compared to $5,393,708 for the year ended September 30, 2003. The
increase was primarily due to the increase in payroll in opening new clubs. Our
payroll for our nightclub operations for same-location-same-period decreased by
1.14%. Our payroll for same-site-same-period Internet operations increased by
6.53%. We believe that our labor and management staff levels are at appropriate
levels.
Our other general and administrative expenses for the year ended September
30, 2004 were $7,419,507 compared to $7,112,974 for the year ended September 30,
2003. The increase was primarily due to the increase in taxes & permit, rent,
insurance, utilities, and advertising &
17
marketing expenses from opening new locations. Other selling, general and
administrative expenses for same-location-same-period for the nightclub
operations increased by 5.32%, while the same expenses for same-site same-period
for Internet operations decreased by 37.27%.
Our interest expense for the year ended September 30, 2004 was $344,438
compared to $384,221 for the year ended September 30, 2003. The decrease was
primarily due to the decrease in debt. We have decreased our long term debt to
$3,881,610 as of September 30, 2004 compared to debt of $4,026,335 as of
September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, we had working capital of $464,218 compared to
working capital of $52,305 as of September 30, 2003. Because of the large volume
of cash we handle, stringent cash controls have been implemented. At September
30, 2004, our cash and cash equivalents were $278,185 compared to $604,865 at
September 30, 2003. The decrease was due to the money that we set aside in an
escrow account in relation to our plan to purchase a club in New York. The total
amount in the escrow account is $800,000, $550,000 of which is fully refundable
to us in case the transaction is not completed.
Our net cash provided by operating activities in the year ended September
30, 2004 was $497,941 compared to $586,326 for the year ended September 30,
2003. The decrease in cash provided by operating activities was primarily due to
the money that set aside in an escrow account in relation to our plan to
purchase a club in New York offset by increases in net income and accounts
payable and accrued liabilities. The total amount in the escrow account is
$800,000, with $550,000 of which is fully refundable to us in case the
transaction is not completed.
Our depreciation for the year ended September 30, 2004 was $544,137
compared to $531,561 for the year ended September 30, 2003.
In our opinion, working capital is not a true indicator of our financial
status. Typically, businesses in our industry carry current liabilities in
excess of current assets because businesses in our industry receive
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 in our industry with opportunities to adjust to short-term business
down turns. We consider the primary indicators of financial status to be the
long-term trend of revenue growth, the mix of sales revenues, overall cash flow,
and profitability from operations and the level of long-term debt.
On November 15 and 17, 2004, the Company borrowed $590,000 and $1,042,000,
respectively, from a financial institution at annual interest rate of 10% over a
10 year term. The monthly payment of principal and interest are $5,694 and
$10,056, respectively. On November 30, 2004, the Company borrowed $900,000 from
an unrelated individual at 11% annual interest rate over a 10 year term. The
monthly payment of principal and interest is $9,290. The money received from
this financing will be used for the acquisition of New York club.
We have not established lines of credit or financing other than the above
mentioned notes payable and 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.
18
We believe that the adult entertainment industry standard of treating
entertainers as independent contractors provides us with safe harbor protection
to preclude payroll tax assessment for prior years. We have prepared plans that
we believe will protect our profitability in the event that sexually oriented
business industry is required in all states to convert dancers who are now
independent contractors into employees.
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 indicates that there are no seasonal fluctuations in our Internet
activities.
GROWTH STRATEGY
We believe that our nightclub 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 planned acquisition of the New York club, 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 us
contributing equity 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 and/or 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. We plan to
focus on high-margin Internet activities that leverage our marketing skills
while requiring a low level of start-up cost and ongoing operating costs.
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item 7 is included in this report
beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
ITEM 8A. CONTROLS AND PROCEDURES
Eric Langan, our Chief Executive Officer and Chief Financial Officer, has
concluded that our
19
disclosure controls and procedures are appropriate and effective. He has
evaluated these controls and procedures as of September 30, 2004. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
Directors are elected annually and hold office until the next annual
meeting of our stockholders or until their successors are elected and qualified.
Officers are elected annually and serve at the discretion of the Board of
Directors. There is no family relationship between or among any of our
directors and executive officers. Our Board of Directors consists of five
persons.
Name Age Position
-----------------------------------------------------------------------------
Eric S. Langan 36 Director, Chairman, Chief Executive Officer, President and
Chief Financial Officer
Travis Reese 35 Director and V.P.-Director of Technology
Robert L. Watters 53 Director
Alan Bergstrom 58 Director
Steven Jenkins 48 Director
Eric S. Langan has been a Director since 1998 and our President since March
1999. Mr. Langan is also our Chief Financial Officer. He has been involved in
the adult entertainment business since 1989. From January 1997 through the
present, he has held the position of President of XTC Cabaret, Inc. From
November 1992 until January 1997, Mr. Langan was the President of Bathing
Beauties, Inc. Since 1989, Mr. Langan has exercised managerial control over more
than a dozen adult entertainment businesses. Through these activities, Mr.
Langan has acquired the knowledge and skills necessary to successfully operate
adult entertainment businesses.
Robert L. Watters is our founder and has been our Director since 1986. Mr.
Watters was our President and our Chief Executive Officer from 1991 until March
1999. Since 1999, Mr. Watters has owned and operated Rick's Cabaret, an adult
entertainment club in New Orleans, Louisiana, which licenses our name. He was
also a founder in 1989 and operator until 1993 of the Colorado Bar & Grill, an
adult club located in Houston, Texas and in 1988 performed site selection,
negotiated the property purchase and oversaw the design and permitting for the
club that became the Cabaret Royale, in Dallas, Texas. Mr. Watters practiced law
as a solicitor in London, England and is qualified to practice law in New York.
Mr. Watters worked in the international tax group of the accounting firm of
Touche, Ross & Co. (now succeeded by Deloitte & Touche) from 1979 to 1983 and
was engaged in the private practice of law in Houston, Texas from 1983 to 1986,
when he became involved in our full-time management. Mr. Watters graduated from
the London School of Economics and Political Science, University of London, in
1973 with a Bachelor of Laws (Honours) degree and in 1975 with a Master of Laws
degree from Osgoode Hall Law School, York University.
20
Steven L. Jenkins has been a Director since June 2001. Since 1988, Mr.
Jenkins has been a certified public accountant with Pringle Jenkins &
Associates, P.C., located in Houston, Texas. Mr. Jenkins is the President and
owner of Pringle Jenkins & Associates, P.C. Mr. Jenkins has a BBA Degree (1979)
from Texas A&M University. Mr. Jenkins is a member of the AICPA and the TSCPA.
Alan Bergstrom became our Director in 1999. Since 1997, Mr. Bergstrom has
been the Chief Operating Officer of Eagle Securities, which is an investment
consulting firm. Mr. Bergstrom is also a registered stockbroker with Rhodes
Securities, Inc. From 1991 until 1997, Mr. Bergstrom was a Vice
President--Investments with Principal Financial Securities, Inc. Mr. Bergstrom
holds a B.B.A. Degree in Finance, 1967, from the University of Texas.
Travis Reese became our Director and V.P.-Director of Technology in 1999.
From 1997 through 1999, Mr. Reese had been a senior network administrator at St.
Vincent's Hospital in Santa Fe, New Mexico. During 1997, Mr. Reese was a
computer systems engineer with Deloitte & Touche. From 1995 until 1997, Mr.
Reese was Vice President with Digital Publishing Resources, Inc., an Internet
service provider. From 1994 until 1995, Mr. Reese was a pilot with Continental
Airlines. From 1992 until 1994, Mr. Reese was a pilot with Hang On, Inc., an
airline company. Mr. Reese has an Associates Degree in Aeronautical Science from
Texas State Technical College.
There is no family relationship between or among any of our directors and
executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
We have no compensation committee. Decisions concerning executive officer
compensation for fiscal 2004 were made by the full Board of Directors. Eric S.
Langan and Travis Reese are our only directors who are also our officers.
We have an Audit Committee of independent directors whose members are
Robert L. Watters, Alan Bergstrom and Steven Jenkins. Our Board of Directors
has adopted a Charter for our Audit Committee. The Charter establishes the
independence of our Audit Committee and sets forth the scope of our Audit
Committee's duties. The purpose of our Audit Committee is to conduct continuing
oversight of our financial affairs. Our Audit Committee conducts an ongoing
review of our financial reports and other financial information prior to their
being filed with the Securities and Exchange Commission, or otherwise provided
to the public. Our Audit Committee also reviews our systems, methods and
procedures of internal controls in the areas of: financial reporting, audits,
treasury operations, corporate finance, managerial, financial and SEC
accounting, compliance with law, and ethical conduct. Our Audit Committee is
objective, and reviews and assesses the work of our independent registered
public accountants.
All of our Audit Committee members are independent Directors. The Board of
Directors elects the Members of our Audit Committee annually. The Members serve
until their successors are duly elected and qualified. All Members of the audit
Committee are free from any relationship that could conflict with Member's
independent judgment. All Members are able to read and understand fundamental
financial statements, including a balance sheet, income statement, and cash flow
statement. At least one Member has past employment experience in finance or
accounting, requisite professional certification in accounting, or other
comparable experience or background, including a current or past position as a
chief executive or financial officer or other senior officer with financial
oversight responsibilities. Steven L. Jenkins serves as Chairman of the Audit
Committee, having
21
been elected by the Members of our Audit Committee. Steven L. Jenkins also
serves as the Audit Committee's Financial Expert, having been elected by a
unanimous vote of the Members of our Audit Committee.
We have a Nominating Committee composed of independent directors Robert L.
Watters, Alan Bergstrom and Steven L. Jenkins. In July 2004, the Board
unanimously adopted a Charter with regard to the process to be used for
identifying and evaluating nominees for director. The Charter establishes the
independence of our Nominating Committee and sets forth the scope of the
Nominating Committee's duties. A majority of the members of the Nominating
Committee will be independent. A copy of the Nominating Committee's Charter can
be found on the Company's website at www.ricks.com.
-------------
CERTAIN SECURITIES FILINGS
Based on a review of the forms submitted to the Company during the fiscal
year ended September 30, 2004, we believe that all persons subject to Section
16(a) of the Exchange Act in connection with their relationship with us have
complied on a timely basis.
CODE OF ETHICS
The Company has adopted a code of ethics for its Principal Executive and
Senior Financial Officers, which was previously filed as Exhibit 14 to our Form
10-KSB for the fiscal year ended September 30, 2003 as filed with the SEC on
December 29, 2003.
ITEM 10. EXECUTIVE COMPENSATION
The following table reflects all forms of compensation for services to us
for the fiscal years ended September 30, 2004, 2003 and 2002 of certain
executive officers.
22
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Other Securities
Name and Annual Restricted Underlying All Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation (1) Awards SARs Payouts sation
($) ($) ($) ($) (#) ($) ($)
--------------------------------------------------------------------------------------------------
Eric Langan
2004 $ 326,038 -0- -0- -0- 280,000 -0- -0-
2003 $ 260,000 -0- -0- -0- 5,000 -0- -0-
2002 $ 260,000 -0- -0- -0- -0- -0- -0-
Mr. Langan is our Chairman, a Director, Chief Executive Officer, President and
Acting Chief Financial Officer.
Travis Reese
2004 $ 161,000 -0- -0- -0- 55,000 -0- -0-
2003 $ 158,855 -0- -0- -0- 5,000 -0- -0-
2002 $ 137,500 -0- -0- -0- -0- -0- -0-
Mr. Reese is a Director and V.P.-Director of Technology
__________________________________
(1) We provide certain executive officers certain personal benefits. Since
the value of such benefits does not exceed the lesser of $50,000 or
10% of annual compensation, the amounts are omitted.
OPTION/SAR GRANTS IN LAST FISCAL YEAR (Individual Grants)
Number of Percent of Total
Securities Options/SARs
Underlying Granted To
Options/SARs Employees In Exercise of Expiration
Name Granted Fiscal Year Base Price Date
# % $/share
-----------------------------------------------------------------------------
Eric Langan 75,000 shares (1) 13.04 % $ 2.20 2/06/2009
5,000 shares (1) .86 % $ 2.54 9/14/2009
200,000 shares (1) 34.78 % $ 2.49 9/14/2009
Travis Reese 5,000 shares (1) .86 % $ 2.54 9/14/2009
55,000 shares (1) 9.56 % $ 2.49 9/14/2009
___________________________________
(1) There were no exercises of options by these persons during the fiscal year
ended September 30, 2004
23
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number Of Unexercised
Securities Underlying Value of Unexercised
Options/SARs In-The-Money Options/
Shares At FY-End SARs At FY-End
Acquired On Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
# $ # $
------------------------------------------------------------------------------------
Eric Langan -0- (1) -0- 190,000 / 205,000 $ 16,100 / $-0-
Travis Reese -0- (1) -0- 40,000 / 55,000 $ 6,350 / $-0-
___________________________________
(1) There were no exercises of options by these persons during the fiscal year
ended September 30, 2004
DIRECTOR COMPENSATION
We do not currently pay any cash directors' fees, but we pay the expenses
of our directors in attending board meetings. In September 2004, we issued
10,000 options to each Director who is a member of our audit committee and 5,000
options to our other Directors. These options have a strike price of $2.54 per
share and expire in September 2009.
EMPLOYMENT AGREEMENTS
We have a one-year employment agreement with Mr. Eric S. Langan (the
"Langan Agreement"). The Langan Agreement extends through April 1, 2005 and
provides for an annual base salary of $325,000. The Langan Agreement also
provides for participation in all benefit plans maintained by us for salaried
employees. The Langan Agreement contains a confidentiality provision. We have
not established long-term incentive plans or defined benefit or actuarial plans.
Under a prior employment agreement, Mr. Langan received options to purchase
75,000 shares at an exercise price of $2.20 per share, which vested immediately.
We intend to enter into a new Employment Agreement with Mr. Langan at the end of
the current term.
We also have a three-year employment agreement with Mr. Travis Reese (the
"Reese Agreement"). The Reese Agreement extends through February 1, 2007 and
provides for an annual base salary of $175,000. The Reese Agreement also
provides for participation in all benefit plans maintained by us for salaried
employees. The Reese Agreement contains a confidentiality provision. We have not
established long-term incentive plans or defined benefit or actuarial plans. We
intend to enter into a new Employment Agreement with Mr. Reese at the end of the
current term.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information at December 27, 2004,
with respect to the beneficial ownership of shares of Common Stock by (i) each
person known to us who owns
24
beneficially more than 5% of the outstanding shares of Common Stock, (ii) each
of our directors, (iii) each of our executive officers and (iv) all of our
executive officers and directors as a group. Unless otherwise indicated, each
stockholder has sole voting and investment power with respect to the shares
shown. As of December 27, 2004, there were 3,700,148 share of common stock
outstanding.
--------------------------------------------------------------------------------------
NAME/ADDRESS NUMBER OF SHARES TITLE OF CLASS PERCENT OF CLASS
(8)
--------------------------------------------------------------------------------------
Eric S. Langan 1,011,200 (1) Common stock 25.9%
505 North Belt, Suite 630
Houston, Texas 77060
--------------------------------------------------------------------------------------
Robert L. Watters 35,000 (2) Common stock 0.9%
315 Bourbon Street
New Orleans, Louisiana 70130
--------------------------------------------------------------------------------------
Steven L. Jenkins 30,000 (3) Common stock 0.8%
16815 Royal Crest Drive
Suite 160
Houston, Texas 77058
--------------------------------------------------------------------------------------
Travis Reese 46,745 (4) Common stock 1.2%
505 North Belt, Suite 630
Houston, Texas 77060
--------------------------------------------------------------------------------------
Alan Bergstrom 35,000 (2) Common stock 0.9%
904 West Avenue, Suite 100
Austin, Texas 78701
--------------------------------------------------------------------------------------
E. S. Langan. L.P. 578,632 Common stock 15.6%
505 North Belt, Suite 630
Houston, Texas 77060
--------------------------------------------------------------------------------------
Ralph McElroy 817,147(5) Common stock 21.4%
1211 Choquette
Austin, Texas, 78757
--------------------------------------------------------------------------------------
William Friedrichs 382,550(6) Common stock 10.3%
16815 Royal Crest Dr., Suite 260
Houston, Texas 77058
--------------------------------------------------------------------------------------
All of our Directors and 1,157,945 (7) Common stock 28.9%
Officers as a
Group of five persons
--------------------------------------------------------------------------------------
_____________________________
(1) Mr. Langan has sole voting and investment power for 242,568 shares that he
owns directly. Mr. Langan has shared voting and investment power for 578,632
shares that he owns indirectly through E. S. Langan, L.P. Mr. Langan is the
general partner of E. S. Langan, L.P. This amount also includes options to
purchase up to 190,000 shares of common stock that are presently exercisable.
(2) Includes options to purchase up to 25,000 shares of common stock that are
presently exercisable.
(3) Includes options to purchase up to 20,000 shares of common stock that are
presently exercisable.
(4) Includes options to purchase up to 40,000 shares of common stock that are
presently exercisable.
(5) Includes 66,545 shares of common stock that would be issuable upon
conversion of a convertible debenture held by Mr. McElroy. Also includes 52,135
shares of common stock that would be issuable upon conversion of a convertible
promissory note held by Mr. McElroy.
(6) Includes 170,000 shares owned by WMF Investments, Inc. Mr. Friedrichs is a
control person of WMF Investments, Inc.
(7) Includes options to purchase up to 300,000 shares of common stock that are
presently exercisable.
25
(8) These percentages exclude treasury shares in the calculation of percentage
of class.
We are not aware of any arrangements that could result in a change of
control.
The disclosure required by Item 201(d) of Regulation S-B is set forth in
ITEM 5 herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Board of Directors has adopted a policy that our business affairs will
be conducted in all respects by standards applicable to publicly held
corporations and that we will not enter into any future transactions and/or
loans between us and our officers, directors and 5% shareholders unless the
terms are no less favorable than could be obtained from independent, third
parties and will be approved by a majority of our independent and disinterested
directors. In our view, all of the transactions described below meet this
standard.
In May 2002, we loaned $100,000 to Eric Langan who is our Chief Executive
Officer. The promissory note is unsecured, bears interest at 11% and is
amortized over a period of ten years. The note contains a provision that in the
event Mr. Langan leaves the Company for any reason, the note immediately becomes
due and payable in full. The balance of the note was $85,955 at September 30,
2004 and is included in other assets in our balance sheet.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 14 - Code of Ethics - Previously filed as an exhibit to our Form
10-KSB for the fiscal year ended September 30, 2003 as filed with the SEC on
December 29, 2003.
Exhibit 21 - Subsidiaries of the Registrant.
Exhibit 31.1 - Certification of Chief Executive Officer of Rick's
Cabaret International, Inc. Corporation 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 31.2 - Certification of Chief Financial Officer of Rick's
Cabaret International, Inc. Corporation 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 of Rick's Cabaret
International, Inc. Corporation pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and Section 1350 of 18 U.S.C. 63.
Exhibit 32.2 - Certification of Chief Financial Officer of Rick's Cabaret
International, Inc. Corporation pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and Section 1350 of 18 U.S.C. 63.
(b) Reports on Form 8-K.
26
The Company filed Form 8-K relating to Item 1.01 and 9.01 related to
the Stock Purchase Agreement with Peregrine Enterprises, Inc. on September
17, 2004.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees paid or accrued for
professional services rendered by Whitley Penn for the audit of our annual
financial statements for fiscal year 2004 and fiscal year 2003 and the aggregate
fees paid or accrued for audit-related services and all other services rendered
by Whitley Penn for fiscal year 2004 and fiscal year 2003.
2004 2003
------ ------
Audit fees 77,613 30,891
Audit-related fees - -
Tax fees - -
All other fees - -
------ ------
Total 77,613 30,891
------ ------
The category of "Audit fees" includes fees for our annual audit, quarterly
reviews and services rendered in connection with regulatory filings with the
SEC, such as the issuance of comfort letters and consents.
The category of "Audit-related fees" includes employee benefit plan audits,
internal control reviews and accounting consultation.
The category of "Tax fees" includes consultation related to corporate
development activities.
All above audit services, audit-related services and tax services were
pre-approved by the Audit Committee, which concluded that the provision of such
services by Whitley Penn was compatible with the maintenance of that firm's
independence in the conduct of its auditing functions. The Audit Committee's
outside auditor independence policy provides for pre-approval of all services
performed by the outside auditors.
27
SIGNATURES
In accordance with the requirements of Section 13 of 15(d) of the Exchange
Act, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on December 30, 2004.
Rick's Cabaret International, Inc.
/s/ Eric S. Langan
---------------------------------
By: Eric S. Langan
Director, Chief Executive Officer,
President and Chief Financial Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
/s/ Eric S. Langan
---------------------
Eric S. Langan Director, Chief Executive Officer, December 30, 2004
President and Chief Financial Officer
/s/ Travis Reese
---------------------
Travis Reese Director and December 30, 2004
V.P.-Director of Technology
/s/ Robert L. Watters
---------------------
Robert L. Watters Director January 4, 2005
/s/ Alan Bergstrom
---------------------
Alan Bergstrom Director December 30, 2004
/s/ Steven Jenkins
---------------------
Steven Jenkins Director January 3, 2005
28
RICK'S CABARET INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2004 AND 2003
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm . . . . . . . . . F-2
Audited Consolidated Financial Statements:
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity. . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . F-7
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Rick's Cabaret International, Inc.
We have audited the accompanying consolidated balance sheets of Rick's Cabaret
International, Inc., a Texas Corporation, and subsidiaries, as of September 30,
2004 and 2003, and the related consolidated statements of income, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rick's Cabaret
International, Inc. and subsidiaries as of September 30, 2004 and 2003, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Whitley Penn
Dallas, Texas
November 19, 2004
F - 2
RICK'S CABARET INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 278,185 $ 604,865
Accounts receivable:
Trade 72,909 45,319
Other 203,343 213,886
Marketable securities 122,350 135,000
Inventories 261,486 230,451
Prepaid expenses and other current assets 1,010,416 83,647
------------ ------------
Total current assets 1,948,689 1,313,168
Property and equipment, net 8,833,018 8,777,057
Other assets:
Goodwill, net 1,982,848 1,962,848
Other 435,204 202,439
------------ ------------
Total other assets 2,418,052 2,165,287
------------ ------------
Total assets $13,199,759 $12,255,512
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 317,278 $ 189,208
Accrued liabilities 650,348 622,216
Current portion of long-term debt 516,845 449,439
------------ ------------
Total current liabilities 1,484,471 1,260,863
Deferred gain on sale of a subsidiary 163,739 -
Long-term debt 3,364,765 3,576,896
------------ ------------
Total liabilities 5,012,975 4,837,759
Commitments and contingencies - -
Minority interests 40,808 36,032
Stockholders' equity:
Preferred stock, $.10 par, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par, 15,000,000 shares
authorized, 4,608,678 shares issued 46,087 46,087
Additional paid-in capital 11,273,149 11,273,149
Accumulated other comprehensive income 109,002 120,000
Accumulated deficit (1,988,482) (2,763,735)
------------ ------------
9,439,756 8,675,501
Less 908,530 shares of common stock held in treasury, at cost 1,293,780 1,293,780
------------ ------------
Total stockholders' equity 8,145,976 7,381,721
------------ ------------
Total liabilities and stockholders' equity $13,199,759 $12,255,512
============ ============
See accompanying notes to consolidated financial statements.
F - 3
RICK'S CABARET INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED SEPTEMBER 30,
2004 2003
-------------- --------------
Revenues:
Sales of alcoholic beverages $ 6,839,948 $ 6,671,498
Sales of food and merchandise 1,712,225 1,661,358
Service revenues 6,290,698 5,333,889
Internet revenues 796,353 1,053,188
Other 320,460 339,636
-------------- --------------
15,959,684 15,059,569
Operating expenses:
Cost of goods sold 1,983,207 2,194,940
Salaries and wages 5,491,401 5,393,708
Other general and administrative:
Taxes and permits 2,215,377 2,074,067
Charge card fees 267,609 254,953
Rent 536,067 336,592
Legal and professional 554,155 714,250
Advertising and marketing 861,280 817,328
Depreciation 544,137 531,561
Other 2,440,882 2,384,223
-------------- --------------
14,894,115 14,701,622
-------------- --------------
Income from operations 1,065,569 357,947
Other income (expense):
Interest income 28,898 16,875
Interest expense (344,438) (384,221)
Gain on sale or disposition of assets - 345,820
Other 30,000 67,515
-------------- --------------
Income before minority interests 780,029 403,936
Minority interests (4,776) 34,358
-------------- --------------
Net income $ 775,253 $ 438,294
============== ==============
Basic and diluted earnings per share $ 0.21 $ 0.12
============== ==============
Weighted average number of common shares outstanding 3,700,148 3,729,167
============== ==============
See accompanying notes to consolidated financial statements.
F - 4
RICK'S CABARET INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2004 AND 2003
COMMON STOCK ACCUMULATED TREASURY STOCK
------------------ ADDITIONAL OTHER --------------
NUMBER PAID-IN COMPREHENSIVE ACCUMULATED NUMBER
OF SHARES AMOUNT CAPITAL INCOME DEFICIT OF SHARES
--------- ------- ----------- --------------- ------------- --------------
Balance at September 30, 2002 4,608,678 $46,087 $11,273,149 $ - $ (3,202,029) 851,030
Net income - - - - 438,294 -
Change in available-for-sale securities - - - 120,000 - -
Comprehensive income
Purchases of treasury stock - - - - - 57,500
--------- ------- ----------- --------------- ------------- ---------------
Balance at September 30, 2003 4,608,678 46,087 11,273,149 120,000 (2,763,735) 908,530
Net income - - - - 775,253 -
Reclassification from unrealized to
realized gain - - - (13,222) - -
Change in available-for-sale securities - - - 2,224 - -
Comprehensive income
--------- ------- ----------- --------------- ------------- --------------
Balance at September 30, 2004 4,608,678 $46,087 $11,273,149 $ 109,002 $ (1,988,482) 908,530
========= ======= =========== =============== ============= ==============
TREASURY STOCK
-------------- TOTAL
STOCKHOLDERS'
AMOUNT EQUITY
-------------- ---------------
Balance at September 30, 2002 $ (1,175,131) $ 6,942,076
Net income - 438,294
Change in available-for-sale securities - 120,000
---------------
Comprehensive income 558,294
---------------
Purchases of treasury stock (118,649) (118,649)
-------------- ---------------
Balance at September 30, 2003 (1,293,780) 7,381,721
Net income - 775,253
Reclassification from unrealized to
realized gain - (13,222)
Change in available-for-sale securities - 2,224
---------------
Comprehensive income 764,255
-------------- ---------------
Balance at September 30, 2004 $(1,293,780) $ 8,145,976
============== ===============
See accompanying notes to consolidated financial statements.
F - 5
RICK'S CABARET INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
2004 2003
-------------- --------------
OPERATING ACTIVITIES
Net income $ 775,253 $ 438,294
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 544,137 531,561
Minority interests 4,776 (34,358)
Gain on sale of subsidiary - (342,251)
Gain on sales of marketable securities (19,807) -
Gain on sales or disposition of property and equipment - (3,569)
Changes in operating assets and liabilities:
Accounts receivable (18,307) 37,432
Inventories (42,942) (19,649)
Prepaid expenses and other current assets (931,907) (24,831)
Accounts payable and accrued liabilities 186,738 3,697
-------------- --------------
Net cash provided by operating activities 497,941 586,326
INVESTING ACTIVITIES
Acquisitions (265,000) (150,000)
Proceeds from sale of subsidiary 6,811 180,000
Proceeds from sales of marketable securities 21,459 -
Purchases of property and equipment (423,964) (162,220)
Proceeds from sales of property and equipment 12,033 47,718
-------------- --------------
Net cash used in investing activities (648,661) (84,502)
FINANCING ACTIVITIES
Purchases of treasury stock - (118,649)
Proceeds from long-term debt 300,000 -
Payments on long-term debt (475,960) (511,676)
-------------- --------------
Net cash used in financing activities (175,960) (630,325)
-------------- --------------
Net decrease in cash and cash equivalents (326,680) (128,501)
Cash and cash equivalents at beginning of year 604,865 733,366
-------------- --------------
Cash and cash equivalents at end of year $ 278,185 $ 604,865
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 351,791 $ 374,270
============== ==============
NON-CASH TRANSACTIONS
During the year ended September 30, 2003, the Company transferred a Company
vehicle and the related note to an individual. The remaining note payable
was $69,342 which approximated the fair value of the vehicle on the date of
transfer.
During the year ended September 30, 2004, the Company financed the purchase
of a vehicle with a note payable in the amount of $31,235.
During the year ended September 30, 2004, the Company divested of a
business, see Note K. As a result of the divestiture, the Company received
a note receivable in the amount of $235,000, recorded a deferred gain of
$163,739, and removed $78,072 of net assets from its books.
See accompanying notes to consolidated financial statements.
F - 6
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
A. NATURE OF BUSINESS
Rick's Cabaret International, Inc. (the "Company") is a Texas corporation
incorporated in 1994. The Company currently owns and operates nightclubs that
offer live adult entertainment, restaurant, and bar operations. These
nightclubs are located in Houston, Austin and San Antonio, Texas, as well as
Minneapolis, Minnesota. The Company also owns and operates several adult
entertainment Internet websites. The Company's corporate offices are located in
Houston, Texas.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows:
BASIS OF ACCOUNTING
The accounts are maintained and the consolidated financial statements have been
prepared using the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
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, 2004 and
2003, 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, 2003, the uninsured portion of these deposits
approximated $95,000. There were no uninsured deposits at September 30, 2004.
The Company has not incurred any losses related to its cash on deposit with
financial institutions.
F - 7
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ACCOUNTS AND NOTES 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's accounts receivable other is comprised of employee advances and other
miscellaneous receivables. Notes receivable are included in other assets in the
accompanying consolidated balance sheets. The Company recognizes allowances for
doubtful accounts or notes when, based on management judgment, circumstances
indicate that accounts or notes receivable will not be collected. There is no
allowance for doubtful accounts or notes receivable as of September 30, 2004 and
2003.
MARKETABLE SECURITIES
Marketable securities at September 30, 2004 and 2003 consist of common stock.
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires certain investments
be recorded at fair value or amortized cost. The appropriate classification of
the investments in marketable equity is determined at the time of purchase and
re-evaluated at each balance sheet date. As of September 30, 2004 and 2003, the
Company's marketable securities were classified as available-for-sale, which are
carried at fair value, with unrealized gains and losses reported as other
comprehensive income within the stockholders' equity section of the accompanying
consolidated balance sheets. The cost of marketable equity securities sold is
determined on a specific identification basis. The fair value of marketable
equity securities is based on quoted market prices. The Company had realized
gains of approximately $20,000 related to marketable securities for the year
ended September 30, 2004. Marketable securities held at September 30, 2004 and
2003 have a cost basis of approximately $13,000 and $15,000, respectively.
INVENTORIES
Inventories include alcoholic beverages, food, and Company merchandise.
Inventories are carried at the lower of cost, 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. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets for financial
reporting purposes. Buildings have estimated useful lives ranging from 31 to 40
years. Furniture, equipment and leasehold improvements have estimated useful
lives between five and seven 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
statement of income of the respective period.
F - 8
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
GOODWILL
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles
Assets, which addresses the accounting for goodwill and other intangible assets.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized, but reviewed on an annual basis for impairment. The Company
adopted SFAS effective October 1, 2001. The Company's annual evaluation was
performed as of September 30, 2004. No impairment losses were identified as a
result of this evaluation.
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 and annual 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. The Company began deferring such revenue in the quarter
ended March 31, 2004, and this amount is recorded in accrued liabilities.
If the Company had deferred membership revenue and recognized it based on the
lives above prior to January 1, 2004, the impact on revenue and net income
recognized would have been an increase of approximately $47,000 and a decrease
of approximately $19,000 for the years ended September 30, 2004 and 2003,
respectively. This would have also resulted in an increase in the deferred
revenue balance of approximately $12,000 and $59,000 as of September 30, 2004
and 2003, respectively. Management does not believe the impact of this
difference in accounting treatment is material to the Company's annual and
quarterly financial statements.
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 as revenues are
not deemed estimable nor collection deemed probable prior to that point.
ADVERTISING AND MARKETING
Advertising and marketing expenses are primarily composed 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 consolidated statements of income.
F - 9
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INCOME TAXES
Deferred income taxes are determined using the liability method in accordance
with 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.
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with the provisions of
SFAS No. 130, Reporting Comprehensive Income. Comprehensive income consists of
net income and gains (losses) on available-for-sale marketable securities and is
presented in the consolidated statements of changes in stockholders' equity.
EARNINGS PER COMMON SHARE
The Company computes earnings per share in accordance with SFAS No. 128,
Earnings Per Share. SFAS No. 128 provides for the calculation of basic and
diluted earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflect the potential dilution of securities that could share in the
earnings of the Company. The impact of dilutive stock options does not change
earnings per share, therefore basic and diluted earnings per share are the same.
Stock options of approximately 733,000 and 498,000 for the years ended September
30, 2004 and 2003, respectively, have been excluded from earnings per share due
to the stock options being anti-dilutive.
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 consolidated 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 short and long-term
debt also approximates fair value since these instruments bear market rates of
interest. None of these instruments are held for trading purposes.
F - 10
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK OPTIONS
At September 30, 2004, the Company has stock options outstanding, which are
described more fully in Note F. 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 and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
The following presents pro forma net income and per share data as if a fair
value accounting method had been used to account for stock-based compensation:
YEAR ENDED SEPTEMBER 30,
2004 2003
-------------- --------------
Net income, as reported $ 775,253 $ 438,294
Less total stock-based employee compensation
expense determined under the fair value
based method for all awards (216,616) (98,882)
-------------- --------------
Pro forma net income $ 558,637 $ 339,412
============== ==============
Earnings per share:
Basic and diluted - as reported $ 0.21 $ 0.12
============== ==============
Basic and diluted - pro forma $ 0.15 $ 0.09
============== ==============
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation 46R ("FIN 46R"), a revision to interpretation 46 ("FIN 46"),
Consolidation of Variable Interest Entities. FIN 46R clarifies some of the
provisions of FIN 46 and exempts certain entities from its requirements. FIN
46R is effective at the end of the first interim period ending after March 15,
2004. Entities that have adopted FIN 46 prior to this effective date can
continue to apply the provision of FIN 46 until the effective date of FIN 46R or
elect early adoption of FIN 46R. The adoption of FIN 46 and FIN 46R did not
have a material impact on the Company's consolidated financial statements.
In March 2004, the FASB ratified the recognition and measurement guidance and
certain disclosure requirements for impaired securities as described in Emerging
Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The Company does not
believe the adoption of the recognition and
F - 11
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
measurement guidance in EITF Issue 03-1 will have a material impact on the
Company's consolidated financial statements.
C. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
SEPTEMBER 30,
2004 2003
----------- -----------
Buildings and land $ 9,002,412 $ 8,970,743
Leasehold improvements 581,532 311,411
Furniture 598,924 595,743
Equipment 1,448,305 1,322,624
----------- -----------
Total property and equipment 11,631,173 11,200,521
Less accumulated depreciation 2,798,155 2,423,464
----------- -----------
Property and equipment, net $ 8,833,018 $ 8,777,057
=========== ===========
F - 12
D. LONG-TERM DEBT
Long-term debt consisted of the following:
SEPTEMBER 30,
2004 2003
---------- ----------
Note payable at prime (as
determined by the Wall Street
Journal) plus 1%, matures
December 2004 * $ 296,163 $ 331,364
Notes payable at 9%, matures
February 2018 * 2,120,680 2,198,734
Notes payable at 12%, matures
March 2026 * 142,263 143,559
Note payable at 9%, matures
March 2006 * 293,224 296,795
Note payable at 10%, matures
August 2010, unsecured 188,051 210,260
Note payable with imputed interest
at 7%, matures January 2006,
unsecured 415,255 602,739
Note payable at 11%, matures
February 2007 * 367,072 186,843
Note payable at 7%, matures
December 2004 * 27,667 56,041
Note payable at 8.99%, matures
October 2007, collateralized by
a vehicle 31,235 -
---------- ----------
Total debt 3,881,610 4,026,335
Less current portion 516,845 449,439
---------- ----------
Total long-term debt $3,364,765 $3,576,896
========== ==========
* Collateralized by real estate
Future maturities of long-term debt consist of the following:
2005 $ 516,845
2006 842,997
2007 275,432
2008 191,210
2009 207,322
Thereafter 1,847,804
----------
Total maturities of long-term debt $3,881,610
==========
F - 13
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED 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 September 30, as a result of
the following:
2004 2003
---------- ----------
Computed expected tax expense $ 263,586 $ 149,020
State income taxes 23,257 -
Deferred tax asset valuation
allowance (286,843) (149,020)
---------- ----------
Total income tax expense $ - $ -
========== ==========
The significant components of the Company's deferred tax assets and liabilities
at September 30, are as follows:
2004 2003
---------- ----------
Deferred tax assets (liabilities):
Goodwill $ 295,712 $ 501,606
Property and equipment 96,339 51,179
Net operating losses 153,636 223,097
Unrealized gain on marketable
securities (40,331) (40,800)
Other 16,646 -
Valuation allowance (522,002) (735,082)
---------- ----------
$ - $ -
========== ==========
The Company has established a valuation allowance to fully reserve the deferred
tax assets at September 30, 2004 and 2003 due to the uncertainty of the timing
and amounts of future taxable income. At September 30, 2004, the Company had
net oerating loss carryforwards of approximately $415,000, which expire in 2011
through 2018.
F. STOCK OPTIONS
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan") for
employees and directors. In August 1999 the Company adopted the 1999 Stock
Option Plan (the "1999 Plan") (collectively, "the Plans"). The options granted
under the Plans may be either incentive stock options, or non-qualified options.
The Plans are administered by the Board of Directors or by a compensation
committee of the Board of Directors. The Board of Directors has the exclusive
power to select individuals to receive grants, to establish the terms of the
options granted to each participant, provided that all options granted shall be
granted at an exercise price equal to at least
F - 14
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. STOCK OPTIONS - CONTINUED
85% of the fair market value of the common stock covered by the option on the
grant date and to make all determinations necessary or advisable under the
Plans.
Following is a summary of options for the years ended September 30:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
2004 PRICE 2003 PRICE
----------------------------------------------
Outstanding at beginning of year 498,000 $ 2.35 643,500 $ 2.40
Granted 575,000 2.46 40,000 1.40
Expired (165,000) 2.29 (185,500) 2.33
Exercised - - - -
----------- -----------
Outstanding at end of year 908,000 2.42 498,000 2.35
=========== ===========
Exercisable at end of year 408,000 $ 2.32 458,000 $ 2.41
=========== ===========
Weighted-average remaining
contractual life 3.12 years 1.58 years
=========== ===========
As of September 30, 2004, the range of exercise prices for outstanding options
was $1.40 - $2.56.
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, Accounting for Stock Based
Compensation, requires the use of option valuation models that were not
developed for use in valuing employee stock options. See footnote B for related
disclosures.
Under APB No. 25, no compensation expense is recorded when the exercise price of
the Company's employee stock option equals the fair value of the underlying
stock on the date of grant. Compensation equal to the intrinsic value of
employee stock options is recorded when the exercise price of the stock option
is less than the fair value of the underlying stock on the date of grant. Any
resulting compensation is amortized to expense over the remaining vesting
periods of the options on a straight-line basis. For the years ended September
30, 2004 and 2003, no amounts were recorded to compensation expense related to
stock options issued to employees.
Information regarding pro forma net income is required by SFAS 123, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123. The fair value of these options was
estimated at the date of grant using a Black-Scholes option-pricing model using
the following weighted average assumptions:
F - 15
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. STOCK OPTIONS - CONTINUED
2004 2003
----------------------
Volatility 137% 165%
Expected lives 3.3 years 3.0 years
Expected dividend yield - -
Risk free rates 3.45% 3.00%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
G. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment and facilities under operating leases, of
which rent expense was $536,000 and $301,000 for the years ended September 30,
2004 and 2003, respectively.
Future minimum annual lease obligations as of September 30, 2004 approximate the
following:
2005 $ 378,000
2006 405,000
2007 419,000
2008 330,000
2009 247,000
Thereafter 126,000
----------
Total future minimum lease obligations $1,905,000
==========
H. SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
Company is engaged in adult night clubs and adult entertainment websites
("Internet"). The Company has identified such segments
F - 16
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. SEGMENT INFORMATION -CONTINUED
based on management responsibility and the nature of the Company's products,
services and costs. There are no major distinctions in geographical areas
served as all operations are in the United States. The Company measures segment
profit (loss) as income (loss) from operations. Total assets are those assets
controlled by each reportable segment.
The following table sets forth certain information about each segment's
financial information for the year ended September 30:
2004 2003
------------ ------------
Business segment sales:
Night clubs $15,163,331 $14,006,381
Internet 796,353 1,053,188
------------ ------------
$15,959,684 $15,059,569
============ ============
Business segment operating income:
Night clubs $ 2,542,482 $ 1,934,150
Internet 88,958 36,421
General corporate (1,565,871) (1,612,624)
------------ ------------
$ 1,065,569 $ 357,947
============ ============
Business segment capital expenditures:
Night clubs $ 659,073 $ 110,198
Internet 5,580 35,310
General corporate 35,546 16,712
------------ ------------
$ 700,199 $ 162,220
============ ============
Business segment depreciation:
Night clubs $ 385,425 $ 420,312
Internet 43,308 40,960
General corporate 115,404 70,289
------------ ------------
$ 544,137 $ 531,561
============ ============
Business segment assets:
Night clubs $ 6,640,888 $ 6,719,389
Internet 108,595 169,444
General corporate 6,450,276 5,366,679
------------ ------------
$13,199,759 $12,255,512
==========================
F - 17
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. RELATED PARTY TRANSACTIONS
In May 2002, the Company loaned $100,000 to Eric Langan, Chief Executive Officer
of the Company. The note is unsecured, bears interest at 11% and is amortized
over a period of ten years. The note contains a provision that in the event Mr.
Langan leaves the Company for any reason, the note immediately becomes due and
payable in full. The balance of the note was approximately $86,000 and $93,000
at September 30, 2004 and 2003, respectively, and is included in other assets in
the accompanying consolidated balance sheets.
J. EMPLOYEE RETIREMENT PLAN
The Company sponsors a Simple IRA plan (the "Plan"), which covers all of the
Company's corporate employees. The Plan allows the corporate employees to
contribute up to the maximum amount allowed by law, with the Company making a
matching contribution of 3% of the employee's salary. Expenses related to
matching contributions to the Plan approximated $23,000 and $24,000 for the
years ended September 30, 2004 and 2003, respectively.
K. ACQUISITIONS AND DISPOSITIONS
On February 19, 2003, the Company acquired 51% control of the Wild Horse Cabaret
adult nightclub near Hobby Airport, Houston, Texas and will operate it as part
of the Company's popular XTC Cabaret group. The purchase price was $150,000 of
which approximately $70,000 was allocated to property and equipment and $80,000
was allocated to goodwill.
In April 2003, the Company organized RCI Ventures Inc. ("RCI Ventures") to
acquire from an unrelated party Nocturnal Concepts, Inc. ("Nocturnal"), which
operates as an addition to the Company's XTC Cabaret group. The Company
transferred its ownership of Tantric Enterprises, Inc. ("Tantric") to RCI
Ventures and as a result of these transactions the Company obtained a 51%
interest in RCI Ventures. RCI Ventures is comprised solely of Tantric and
Nocturnal. The other 49% owner is an unrelated individual who previously owned
100% of Nocturnal. The unrelated individual brings significant club experience
to RCI Ventures.
The transaction was accounted for as an exchange of non-monetary assets under
APB No. 29, Accounting for Non-monetary Transactions. The exchange was not the
culmination of an earnings process, but instead was an agreement under which the
two stockholders share profits from the newly formed RCI Ventures on a
prospective basis based on respective equity ownership. As a result, no step up
in basis was recorded at the acquisition date, and the Company recognized no
gain or loss.
On June 12, 2003, the Company entered into an Asset Purchase Agreement with
Taurus Entertainment Companies, Inc. ("Taurus"), whereby the Company acquired
all the assets and liabilities of Taurus in exchange for 3,752,008 shares of
Taurus of the 4,002,008 that the Company owned plus $20,000 in cash from
Bluestar Physical Therapy, Inc. ("Bluestar"), the acquirer of the Taurus public
shell. As the Company is publicly traded it was determined that the Company had
no future use for the Taurus public shell and the Company wanted to eliminate
the
F - 18
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. ACQUISITIONS AND DISPOSITIONS - CONTINUED
related costs associated with owning a separate public entity. The Company
negotiated to retain 250,000 shares of Taurus to participate in the potential
future gains from an investment in Taurus.
The Company also executed an Indemnification and Transaction Fee Agreement (the
"Agreement") totaling $340,000 for which the Company received $270,000, payable
$140,000 at closing, with $60,000 due on July 15, 2003, and $70,000 due on
August 15, 2003. The remaining outstanding balance of $70,000 is due in the near
term. Management has assessed the collectibility of the outstanding balance and
believes it is fully collectible as it is collateralized by three million shares
of Taurus stock held in escrow.
In accordance with the Agreement, the Company is to indemnify Taurus for
liabilities assumed by the Company, which were included in the closing balance
sheet, and liabilities that exist or may arise in the future related to Taurus
prior to or as of the closing date of the transaction. An additional
significant consideration of this agreement was to compensate the Company for
the time and effort expended to assist in the consummation of this transaction.
The indemnification was requested by Bluestar, as Bluestar did not have
experience with the Company's adult entertainment industry and therefore did not
believe they had a basis to determine what, if any, obligations could exist.
The operations of Bluestar are focused in the medical industry. The
Company previously consolidated Taurus' financial position, in accordance with
the consolidation method of accounting, as the Company owned greater than 50% of
Taurus' shares prior to consummating this transaction, which resulted in the
Company properly including all of Taurus' related liabilities in its
consolidated financial statements. As of the date of the transaction, the
Company determined that it was not probable that there would be any claims to
indemnify in the future. No claims have arisen subsequent to the completion of
the transaction. The gain on the sale of the transaction included $270,000
from the Agreement, and the Company has recognized a $342,000 gain in total
related to this transaction for the year ended September 30, 2003.
On March 3, 2004, the Company acquired the assets and business of a 7,000 square
foot gentlemen's club in North Houston and it became the Company's fifth XTC
Cabaret. As a part of the transaction, the Company entered into a new five-year
lease with an option for five additional years. The results of operations of
this new venue are included in the accompanying consolidated financial
statements from the date of acquisition. The $265,000 all-cash purchase
transaction generated goodwill of $20,000. Proforma results of operations have
not been provided, as the amounts were not deemed material to the consolidated
financial statements.
On September 30, 2004, the Company entered into a Stock Purchase Agreement with
an unrelated third party, whereby the Company sold all of its 510 shares of
common stock of RCI Ventures, Inc. for $15,000 cash and a $235,000 note
receivable bearing interest at a rate of 6% over a five year period. As a part
of the transaction, Trumps, a wholly-owned subsidiary of the Company, and
Tantric, a wholly-owned subsidiary of RCI Ventures entered into a five year
lease agreement for the property located at 5718 Fairdale, Houston, Texas. The
Company has
F - 19
RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. ACQUISITIONS AND DISPOSITIONS - CONTINUED
recorded a $163,739 deferred gain related to this transaction for the year ended
September 30, 2004. The gain will be recognized upon collection of the note
receivable.
N. SUBSEQUENT EVENTS (UNAUDITED)
OFFICE BUILDING
On August 12, 2004, the Company entered into a purchase commitment to buy a
9,000 square foot office building for $512,739, payable with $86,279 cash at
closing and the remainder with a fifteen year promissory note bearing interest
at 7%. The Company closed this transaction in mid December 2004.
ACQUISITION OF NEW YORK CLUB
On September 15, 2004, the Company's wholly-owned subsidiary, RCI Entertainment
New York, Inc., a New York corporation ("RCI New York"), entered into a
definitive Stock Purchase Agreement (the "Stock Purchase Agreement") with
Peregrine Enterprises, Inc., a New York corporation ("Peregrine") and its
shareholders, pursuant to which RCI New York agreed to purchase all of the
shares of common stock of Peregrine. Peregrine owns and operates an adult
entertainment cabaret located in midtown Manhattan. The cabaret club is located
near the Empire State Building and Madison Square Garden, and is less than 10
blocks from Times Square. The Stock Purchase Agreement provides for closing the
transaction on or before December 1, 2004, subject to satisfaction of certain
conditions, including obtaining adequate financing, the transfer of all existing
licenses and permits to RCI New York, obtaining consent of the Landlord,
execution of a Non-Disturbance Agreement, and other conditions consistent with
transactions of this type. The closing has been extended to January 15, 2005.
Under the terms of the Stock Purchase Agreement, the purchase price of the
transaction is $7,625,000, payable $2,500,000 in cash at closing and $5,125,000
payable in a promissory note bearing simple interest at the rate of 4.0% per
annum (the "Promissory Note"). The Promissory Note is payable commencing 120
days after Closing as follows: (a) the payment of $58,333.33 per month for
twenty-four (24) consecutive months; (b) the payment of $63,333.33 for
twenty-four (24) consecutive months; (c) the payment of $68,333.33 for twelve
(12) consecutive months; and (d) a lump sum payment of the remaining balance to
be paid on the sixty-first (61st) month. $2,000,000 of the principal amount of
the Promissory Note is convertible into shares of restricted common stock at
prices ranging from $4.00 to $7.50 per share. The parties will also enter a
Stock Pledge Agreement and Security Agreement to secure the Promissory Note.
Upon closing of the transaction, the owners of Peregrine will enter a five-year
covenant not to compete with Peregrine, RCI New York or the Company. The Company
intends to rename the cabaret club as "Rick's Cabaret" which will occupy 10,000
square feet on three levels, with an additional 4,000 square feet available for
office space.
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RICK'S CABARET INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. SUBSEQUENT EVENTS (UNAUDITED) - CONTINUED
The terms and conditions of the Stock Purchase Agreement were the result of
extensive arm's length negotiations between the parties.
The Company has secured the financing for the retirement, acquisition and
renovation of certain properties in three separate promissory notes pledging
various real properties as collateral. The notes obtained are as follows:
On November 15, 2004, the Company borrowed $590,000 at annual interest rate
of 10% over a 10 year term. The monthly payment of principal and interest
is $5,694.
On November 17, 2004, the Company borrowed $1,042,000 at 10% annual
interest rate over a 10 year term. The monthly payment of principal and
interest is $10,056.
On November 30, 2004, the Company borrowed $900,000 at 11% annual interest
rate over a 10 year term. The monthly payment of principal and interest is
$9,290.
F - 21