<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-QSB
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934; For the Quarterly Period Ended: June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26958
RICK'S CABARET INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0037324
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3113 Bering Drive
Houston, Texas 77057
(Address of principal executive offices, including zip code)
(713) 785-0444
(Registrant's telephone number, including area code)
--------------------------------
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
At August 12, 1997, 4,120,922 shares of common stock, $.01 par value,
were outstanding.
Transitional Small Business Disclosure Format (check one); Yes [ ] No [x]
- --------------------------------------------------------------------------------
1
<PAGE> 2
RICK'S CABARET INTERNATIONAL, INC.
CONTENTS
<TABLE>
<CAPTION>
Page(s)
<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (unaudited)
and September 30, 1996 3
Consolidated Statements of Operations for the three months and
nine months ended June 30, 1997 and 1996 ( unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
June 30, 1997 and 1996 ( unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 16
Item 5. Other Information 17
Item 6. Exhibits and Reports and Form 8-K 18
SIGNATURES
- ----------
</TABLE>
2
<PAGE> 3
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 357,193 $ 3,150,003
Accounts receivable 54,185 73,531
Inventories 56,991 47,620
Prepaid expenses 82,038 172,198
Income taxes receivable 216,128 47,735
------------ ------------
Total current assets 766,535 3,491,087
------------ ------------
Property and equipment:
Buildings, land and leasehold improvements 6,230,448 2,225,710
Furniture and equipment 1,284,300 742,320
------------ ------------
7,514,748 2,968,030
Less accumulated depreciation (755,880) (554,338)
------------ ------------
6,758,868 2,413,692
------------ ------------
Other assets:
Other 289,706 228,062
------------ ------------
$ 7,815,109 $ 6,132,841
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 418,812 $ 153,677
Accounts payable - trade 614,618 336,253
Accrued expenses 219,650 245,264
------------ ------------
Total current liabilities 1,253,080 735,194
Long-term debt, less current portion 1,791,440 77,826
------------ ------------
Total liabilities 3,044,520 813,020
------------ ------------
Commitments and contingencies -- --
Stockholders' equity (Note 2):
Preferred stock - $.10 par, authorized
1,000,000 shares; none issued -- --
Common stock - $.01 par, authorized 15,000,000 shares;
issued 4,120,922 and 4,068,077, respectively 41,209 40,681
Additional paid in capital 5,804,728 5,788,528
Retained earnings (1,075,348) (509,388)
------------ ------------
Total stockholders' equity 4,770,589 5,319,821
------------ ------------
$ 7,815,109 $ 6,132,841
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
(Restated)
<S> <C> <C> <C> <C>
Revenues:
Sales of alcoholic beverages $ 901,515 $ 594,907 $2,472,800 $1,790,913
Sales of food 102,743 85,560 303,321 218,289
Service revenues 635,030 457,982 1,699,963 1,370,312
Other 36,678 11,831 243,139 139,775
---------- ---------- ---------- ----------
1,675,966 1,150,280 4,719,223 3,519,289
---------- ---------- ---------- ----------
Operating expenses:
Cost of goods sold 311,525 225,064 901,488 660,756
Salaries and wages 450,936 450,248 1,531,510 1,245,176
Other general and administrative:
Taxes and permits 135,336 155,945 315,803 460,285
Charge card fees 28,855 24,260 63,419 61,800
Rent 132,448 95,107 370,367 243,307
Legal and accounting 27,843 118,726 201,776 158,299
Advertising 175,819 124,406 615,080 448,349
Other 301,309 418,804 1,094,351 866,950
---------- ---------- ---------- ----------
1,564,071 1,612,560 5,093,794 4,144,922
---------- ---------- ---------- ----------
Income (loss) from operations 111,895 (462,280) (374,571) (625,633)
Other income (expense)
Interest income 134 41,949 5,965 134,892
Interest expense (46,026) (4,196) (88,217) (12,778)
---------- ---------- ---------- ----------
(45,892) 37,753 (82,252) 122,114
---------- ---------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of accounting change 66,003 (424,527) (456,823) (503,519)
Income taxes -- (96,800) -- (144,000)
---------- ---------- ---------- ----------
Income (loss) before cumulative effect
of accounting change 66,003 (327,727) (456,823) (359,519)
Cumulative effect of change in accounting
for preopening costs - no income
tax effect -- -- (151,138) --
---------- ---------- ---------- ----------
Net income (loss) $ 66,003 $ (327,727) $ (607,961) $ (359,519)
========== ========== ========== ==========
Earnings (loss) per common share:
Before cumulative effect of change in
accounting for preopening costs $ 0.02 $ (0.09) $ (0.12) $ (0.10)
Effect of accounting change -- -- (0.03) --
---------- ---------- ---------- ----------
Net income (loss) per common share $ 0.02 $ (0.09) $ (0.15) $ (0.10)
========== ========== ========== ==========
Weighted average shares outstanding 4,120,922 3,649,074 4,120,922 3,643,025
========== ========== ========== ==========
Proforma amounts assuming the new accounting
method is applied retroactively:
Net income (loss) $ 66,003 $ (327,727) $ (456,823) $ (359,519)
========== ========== ========== ==========
Net income (loss) per share $ 0.02 $ (0.09) $ (0.12) $ (0.10)
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(unaudited) (unaudited)
<S> <C> <C>
Net (loss) income $ (607,961) $ (359,519)
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation 209,952 84,376
Changes in assets and liabilities:
Accounts receivable 19,346 (179,664)
Inventories (9,371) (2,095)
Prepaid expenses 90,160 (129,614)
Accounts payable and accrued liabilities 252,751 309,405
Income taxes receivable (168,393) (180,305)
---------- ----------
Net cash (used in) provided by operating activities (213,516) (457,416)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (4,647,243) (1,437,984)
Increase in other assets (100,969) (39,890)
---------- ----------
Net cash used in investing activities (4,748,212) (1,477,874)
---------- ----------
Cash flows from financing activities:
Proceeds from the sale of common stock 168,746 4,834,450
Common stock issued for services -- 111,109
Proceeds from borrowing 2,056,904 --
Payments on long-term debt (56,732) (197,916)
Increase in deferred financing costs -- (174,811)
---------- ----------
Net cash provided by (used in) financing activities 2,168,918 4,572,832
---------- ----------
Net increase (decrease) in cash (2,792,810) 2,637,542
Cash at beginning of period 3,150,003 195,112
---------- ----------
Cash at end of period $ 357,193 $2,832,654
========== ==========
Cash paid during the period for:
Interest $ 86,240 $ 12,778
========== ==========
Income taxes $ -- $ 181,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB of Regulation S-B. They
do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. However, except as
disclosed herein, there has been no material change in the information
disclosed in the notes to the financial statements for the year ended September
30, 1996 included in the Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission. The interim unaudited financial statements
should be read in conjunction with those financial statements included in the
Form 10-KSB. In the opinion of Management, all adjustments considered
necessary for a fair presentation, consisting solely of normal recurring
adjustments, have been made. Operating results for the three months and nine
months ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending September 30, 1997.
2. PUBLIC OFFERING
On October 13, 1995, the Company completed its offering of 1,840,000
shares of common stock. The proceeds of the sale of stock amounted to
approximately $4,270,000 net of underwriting discounts, commissions, and
expenses of the offering. During October 1996, the Company completed a private
placement of 380,000 shares of common stock and received approximately
$1,235,000. The Company has recently completed the process of registering
those private placement shares with a Form S-3 filed with the Securities and
Exchange Commission.
A portion of the proceeds of the Company's public offering has been
used for capital improvements at the existing Houston, Texas location,
acquisition of land and building at the existing Houston, Texas location,
acquisition of land for a new Houston location, demolition and refurbishment of
the New Orleans location, payments on the Company's existing borrowings, and
for working capital purposes.
3. CHANGE IN ACCOUNTING PRINCIPLE - PREOPENING COSTS
The Company has changed its method of accounting for preopening costs
for new locations from the deferral method to directly expensing the costs in
the period in which they were incurred. Management believes that the direct
expense method is preferable
6
<PAGE> 7
because it does not subject future periods to losses resulting from estimates
of future recoverability and more reasonably matches costs with revenues. The
cumulative impact of the change results in an additional $312,322 of costs
being recognized during the first fiscal quarter of the 1997 fiscal year. The
recognition of this additional costs increases the company's loss for the first
fiscal quarter to $(715,939) or $(0.17) per share from the loss of $(403,797)
or $(0.10) as previously reported. There were no preopening costs incurred
during the quarters ended March 31, 1997 and June 30, 1997.
4. ADVERTISING COSTS
The Company recognized advertising costs of $175,819 and $615,080
during the three and nine month periods ended June 30, 1997. During the first
quarter of fiscal 1997, the Company deferred costs of $100,969 which represents
expenditures incurred to develop a new advertising campaign which will be used
in other locations during the next eighteen months. These costs are for logo
design, artwork and ad layouts, a photographic library and the associated
creative fees.
5. COMMITMENTS AND CONTINGENCIES
Sexually Oriented Business Ordinance - Houston, Texas
In January, 1997, the City Council of the City of Houston, Texas
passed a comprehensive new ordinance regulating the location of and the conduct
within Sexually Oriented Businesses. The Company, along with numerous other
sexually oriented businesses has sought court relief to halt implementation of
the new ordinance until such time as the matter can be brought before a full
and considered hearing. No assurance can be given as to the likelihood of the
success of any litigation filed against the City of Houston, but in the event
that such litigation is unsuccessful it is likely that the Company will be able
to take the benefit of the amortization period provision contained in the new
ordinance designed to allow recovery of a business's investment and which will
allow the Company to continue in business at its present location during the
amortization period.
Employment Agreements
The Company presently has a three year employment agreement (the
"Agreement") with Robert L. Watters to serve as its President and Chief
Executive Officer. The Agreement, which extends through December 31, 1997,
provides for an annual base salary of $300,000. The agreement also allows for
an annual bonus, at the discretion of the Board of Directors (excluding Mr.
Watters), based upon the financial performance, including evaluation of the
income and earnings of the Company during the year. The Agreement also
provides for participation in all benefit plans maintained by the Company for
salaried employees. The Agreement contains a confidentiality provision and an
agreement by Mr. Watters not to compete with the Company upon the
7
<PAGE> 8
expiration of the Agreement. During April, 1997, the employment agreement was
extended to December 31, 2000 under terms substantially identical to those
previously in place.
During March 1997, the Company entered into three year employment
agreements (the "Agreements") with Erich N. White, Vice President of
Operations and member of the Board of Directors, and Robert O. Jones, Director
of Operations to serve in their present capacities and as General Managers of
the New Orleans, Louisiana and Houston, Texas locations, respectively. The
Agreements are substantially identical and extend through December 31, 2000,
providing for an annual base salary of $60,000 and additional stock options for
25,000 shares of common stock each. The agreements also allow for annual
bonuses based on the financial performance of the individual locations for
which they are responsible. Additionally, the agreements contain a provision
which provides for the direct issuance of common stock to them upon the
attainment of certain financial benchmarks. As of June 30, 1997, no costs have
been recognized for compensation to the individuals.
6. STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation (SFAS 123) was issued by the Financial Accounting
Standards Board in October 1995. SFAS 123 established financial accounting and
reporting standards for stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments to acquire goods
and services from non-employees. This statement defines a fair based method of
accounting for employee stock options or similar equity instruments, and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25, Accounting for
Stock Issued to Employees. Entities electing to remain with the accounting in
Opinion 25 must make pro forma disclosures on net income and, if presented,
earnings per share, as if the fair value based method of accounting defined by
SFAS 123 had been applied. The Company adopted SFAS 123 in the first quarter
of fiscal 1997 and elected to continue accounting for its equity instruments
using the accounting prescribed by Opinion 25. The Company will include the
disclosures required by SFAS 123 in the Company's 1997 annual report.
8
<PAGE> 9
PART I
FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements appearing in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission for the year ending September
30, 1996.
GENERAL
The Company was formed in December 1994 to acquire all of the
outstanding capital stock of Trumps, Inc., a Texas corporation ("Trumps")
formed in 1982. Since 1983, Trumps has operated Rick's Cabaret, a premier
adult nightclub offering topless entertainment in Houston, Texas. In 1995, the
Company acquired Tantra, a non-sexually oriented discotheque and billiard club
also located in Houston, Texas from Robert L. Watters, the principal
shareholder. Tantra became operational during the second quarter of fiscal
1995. In February, 1996, the Company formed RCI Entertainment (Louisiana) Inc.
a Louisiana corporation for the purpose of administering, operating, managing
and leasing its new location in New Orleans which opened on December 30, 1996.
In June 1996, the Company formed RCI Entertainment (Texas) Inc. for the purpose
of acquiring 1.13 acres of land in Houston, Texas. The Company has placed the
property for sale. On December 17, 1996, the Company acquired the land and
building at its primary Houston, Texas location thereby allowing the Company
to remain at the location and settling some long-standing litigation. (See
LIQUIDITY AND CAPITAL RESOURCES). The Company's fiscal year end is September
30.
Revenues are derived from the sale of liquor, beer, wine and food,
which comprises approximately 60% of total revenues, and charges to the
entertainers and cover charges which comprise approximately 38% of total
revenues for the third quarter of fiscal 1997 revenues. For the third quarter
of fiscal 1996, these percentages were 59% and 40% respectively. Cover charges
as a percentage of individual location total revenues, increased during the
current quarter due to Tantra and New Orleans, where cover charges are a larger
part of revenues than at the Houston, Texas location. The remaining revenues
are derived from the sale of memberships, merchandise, and miscellaneous other
revenue sources. Membership sales are for access to Rick's VIP Room, and range
in price from $200 for an annual membership to $1,200 for a lifetime membership
or corporate membership. Additional VIP benefits include a waiver of cover
charges, a 10% to 15% discount on drink prices, complimentary drink tickets and
miscellaneous other benefits depending on the type of membership purchased.
The prices were reduced and benefits derived from membership were restructured
during the second quarter of fiscal 1997 as the Company commenced a promotional
campaign to increase overall sales of VIP memberships. Additionally, the
Company reduced the
9
<PAGE> 10
operating hours of the Houston location, effective April 1, 1997, in an effort
to increase efficiency and lower operating costs by only remaining open during
the peak revenue producing hours, thereby more closely matching operating
capacity to seasonal demands.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 compared to the Three Months Ended
June 30, 1996. For the quarter ended June 30, 1997, the Company had
consolidated total revenues of $1,675,966, an increase of $525,686 from fiscal
1996 third quarter revenues of $1,150,280. The New Orleans location opened on
December 30, 1996 and was positively affected by The Sugar Bowl, The Super
Bowl, an active convention calendar, and to a lesser extent, the Mardi Gras
celebration during the second fiscal quarter. During the current quarter
revenues declined 15% due primarily to seasonal factors affecting the New
Orleans area. Revenues in New Orleans vary significantly based upon special
events in the city and there can be no assurance that revenue levels noted
during the second fiscal quarter will remain at this level in future periods.
Revenues in Houston declined 19% from the same period in 1996 or $176,724.
Revenues in Houston continue to be affected by the level of competition and by
public perception of a newly enacted city ordinance affecting sexually-oriented
businesses which is pending judicial review. Revenues at Tantra, the Company's
non-sexually oriented discotheque and billiard club, were $172,892 during the
quarter. The Company continues to study potential acquisition candidates which
would contribute to overall revenue growth and profitability and currently has
one club in Minneapolis, Minnesota under purchase contract. The purchase of
that club is currently awaiting the satisfactory completion of acquisition
financing (See LIQUIDITY AND CAPITAL RESOURCES).
Cost of goods sold were 31% and 33% of sales of alcoholic beverages
and food for the third quarters of fiscal 1997 and 1996, respectively. The
decrease during this quarter is primarily due to the discontinuance of special
and promotional events relating to the opening of the New Orleans location and
the adjustment of promotional pricing and hours in Houston. The Company
continues to aggressively decrease costs in Houston by improving menu
offerings, reducing food inventory stocks and spoilage, and by modifying buying
procedures. Additionally, in Houston, effective April 1, 1997, the Company has
discontinued its luncheon operations four days a week in an effort to reduce
food and preparation costs. The Company did not experience a significant
revenue decline attributable to these reduced operating hours.
Payroll and related costs remained even at $450,936 from the third
quarter of fiscal 1996. In Houston, the Company reduced its overall number of
administrative and kitchen personnel through layoffs and attrition in the
Houston club, Tantra, and in the corporate office. The beneficial impact of
these reductions was noticed during this quarter. Management personnel which
previously had been training and preparing for the opening of the New Orleans
location became fully utilized as of the opening of the club on December 30,
1996. With the reductions noted above, increased operating and
10
<PAGE> 11
management efficiencies, and the opening of the New Orleans location,
Management currently believes that its labor and management staff levels are at
appropriate levels and that additional management staff needed for the opening
of an additional club could be readily obtained from existing ranks.
Other selling, general and administrative expenses decreased 15% or
$135,638 from the third quarter of fiscal 1996 to the third quarter of fiscal
1997. Advertising and promotion increased $51,413 due to an outdoor advertising
campaign promoting the New Orleans and Houston location. During the second
quarter of 1997, the Company capitalized $100,969 of costs relating to the
development of a future promotional campaign which will provide benefit to the
Company over the next eighteen months at all locations. Additionally, during
the second fiscal quarter of 1997, the Company changed the method used to
account for preopening costs from the deferral method to directly expensing the
costs in the period in which they are incurred. During the third fiscal
quarters of 1997 and 1996, there were no activities occurring which would have
resulted in the direct expensing of any preopening costs.
Interest income decreased during the third quarter of fiscal 1997 as a
result of utilizing the proceeds of the Company's public offering and private
placement. Interest expense increased as a result of bank financing associated
with the construction of the New Orleans facility and the acquisition of the
existing Houston facility. (See LIQUIDITY AND CAPITAL RESOURCES).
Net income for the third quarter of 1997 was $66,003. The Company
recorded depreciation and amortization expense of $80,280 during the quarter.
Nine Months Ended June 30, 1997 compared to the Nine Months Ended June
30, 1996. For the nine months ended June 30, 1997, the Company had
consolidated total revenues of $4,719,223, an increase of $1,199,934 from net
revenues of $3,519,289 for the nine months ended June 30, 1996.
Cost of goods sold was 32% and 33% of sales of alcoholic beverages and
food for the first nine months of fiscal 1997 and 1996, respectively.
Payroll and related costs increased $286,334 from the first nine
months of fiscal 1996 due to the addition of New Orleans personnel. In
Houston, the Company reduced its overall number of administrative and kitchen
personnel through layoffs and attrition in the Houston club, Tantra, and in
the corporate office. The beneficial impact of these reductions was noticed
during the third quarter and will continue through the fourth fiscal quarter of
1997.
Other selling, general and administrative expenses increased 19% or
$421,806 from the first nine months of fiscal 1997. Advertising and promotion
increased due to an
11
<PAGE> 12
extensive radio, print and outdoor advertising campaign promoting the grand
opening of the New Orleans location. Legal and accounting increased during the
nine months due to fees associated with the settlement of Dallas Fontenot and
Robert L. Watters v. Casa El Sol - Acapulco, S.A. and Zu Corporation, fees
associated with the Company's year end audit and cost incurred to prepare for
routine audits performed by a state and federal agency. Additionally, during
the second fiscal quarter of 1997, the Company changed the method used to
account for preopening costs from the deferral method to directly expensing the
costs in the period in which they are incurred. Accounting rules require the
impact of the change to be recognized during the first interim period of the
fiscal year of the change. The cumulative impact of the change in accounting
method is $151,138 and the effect of the restatement of the first fiscal
quarter of 1997 results is to increase the operating loss by $161,184.
Interest income decreased during the nine months ending June 30, 1997
as a result of utilizing the proceeds of the Company's public offering and
private placement. Interest expense increased as a result of bank financing
associated with the construction of the New Orleans facility and the
acquisition of the existing Houston facility. (See LIQUIDITY AND CAPITAL
RESOURCES).
Net loss for the nine months ended June 30, 1997 was $(607,961),
(after restatement of the cumulative effect of the accounting method change).
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL DEFICIT
At June 30, 1997 the Company had a working capital deficit and current
ratio of $(486,545) and 0.6:1, respectively. The working capital deficit
primarily results from operating losses and a construction cost overrun of
approximately $650,000 resulting from the New Orleans location. Management
plans to mitigate the effects of the working capital deficit by (i) taking
steps to restore the Company to profitability (ii) placing existing owned real
estate on the Southwest Freeway in Houston, Texas for sale and (iii) seeking
additional sources of capital to complete new acquisitions. Management
believes that additional locations can be added to the existing corporate
infrastructure with minimal overhead increases.
In the opinion of management, working capital is not a true indicator
of the financial status. Typically, the Company carries current liabilities in
excess of current assets because the business receives substantially immediate
payment for sales, with nominal receivables, while inventories and other
current liabilities normally carry longer payment terms. Vendors and purveyors
often remain flexible with payment terms providing the Company with
opportunities to adjust to short-term business down turns. The Company
considers the primary indicators of financial status to be the long-term
12
<PAGE> 13
trend and mix of sales revenues, overall cash flow and profitability from
operations and the level of long-term debt.
During the nine months ended June 30, 1997 the Company decreased its
cash used in operations to $213,516 from $457,416 during the same period in
fiscal 1996. Depreciation expense recorded during this period was $209,952.
Management believes that the decrease in cash used in operations is a positive
trend indicating the impact which an additional location can have on overall
overhead coverage and operating results. The Company experienced an operating
profit from operations of $111,985 during this fiscal quarter compared to an
operating loss of $(462,280) during the same period in the previous year,
indicating certain successful results from management's efforts to restore the
Company's profitability.
Acquisition of Facilities
On December 17, 1996, the Company acquired the land and building at
its primary Houston, Texas location thereby allowing the Company to remain at
the location and settling the lawsuit Dallas Fontenot and Robert L. Watters v.
Casa El Sol - Acapulco, S.A. and Zu Corporation. The Company used existing
cash proceeds from the public offering and subsequent private placement of
$1,000,000 in conjunction with a bank loan of $1,000,000 to finance the
acquisition of the property. The loan bears interest at 10.25%, with monthly
payments of $13,434 and is due in full on December 17, 2001. The loan is
collateralized by the land and building, and the existing owned property on
Southwest Freeway in Houston, Texas. In the event of sale of the Southwest
Freeway property, a portion of sales proceeds would be required to pay down the
outstanding balance of this loan.
On December 24, 1996, the Company entered into an asset purchase
agreement and purchase money contract with a Minnesota based company to acquire
the assets of an operating club in Minneapolis, Minnesota. Under the existing
agreements, the Company would acquire the land, building and substantially all
of the operating assets of the club. The closing of the transaction is subject
to the completion of additional financing which would provide the funding
required for the acquisition. Management believes that it currently has
available outside sources of equity capital to the Company which would allow
the completion of this transaction within the contractual time allowed.
Other than the Minneapolis club, Company has no additional clubs or
locations under contract nor is it involved in negotiations which would result
in the acquisition of additional locations. The Company continually reviews
potential acquisition candidates for suitability.
The Company continues to plan for the opening of a cabaret style
dinner theater on the second floor of the New Orleans club. Completion of the
second floor facility is currently contingent upon the obtaining additional
construction cost financing
13
<PAGE> 14
Borrowings
In October 1996, the Company obtained an interim construction period
loan for the New Orleans facility in the amount of $800,000. During December
1996 and January 1997, the loan was funded and the proceeds were utilized to
pay construction costs. The loan bears interest at 8.5% with interest only due
monthly. This loan was converted to permanent financing during August 1997.
On May 5, 1997, the Company obtained an additional loan of $256,904
from the same bank to cover a portion of the additional construction costs
incurred for the New Orleans facility. The loan bears interest at 9.0% with
payments of $5,000 per month plus interest due beginning June through August
1997, and $10,000 per month plus interest due September through November 1997.
The outstanding balance of $211,904 is due in full on December 5, 1997.
The Company does not have any unused lines of bank financing or credit
facilities.
UNCERTAINTIES
Sexually Oriented Business Ordinance - Houston, Texas
In January, 1997, the City Council of the City of Houston, Texas
passed a comprehensive new ordinance regulating the location of and the conduct
within Sexually Oriented Businesses. The Company, along with numerous other
sexually oriented businesses has sought court relief to halt implementation of
the new ordinance until such time as the matter can be brought before a full
and considered hearing. No assurance can be given as to the likelihood of the
success of any litigation filed against the City of Houston, but in the event
that such litigation is unsuccessful it is likely that the Company will be able
to take the benefit of the amortization period provision contained in the new
ordinance designed to allow recovery of a business's investment and which will
allow the Company to continue in business at its present location during the
amortization period. (See PART II - OTHER INFORMATION, ITEM 1. LEGAL
PROCEEDINGS)
SEASONALITY
The Company is significantly affected by seasonal factors. Typically, the
Company has experienced reduced revenues from April through September with the
strongest operating results occurring during October through March. While
management continues to believe that the overall trend remains consistent, the
Company has experienced decreased sales in the Houston location during the
October through March period. Management attributes these decreases to the
current level of competition and to the public
14
<PAGE> 15
perception of a newly enacted city ordinance affecting sexually-oriented
businesses which is undergoing judicial review.
SPECIAL NOTE REGARDING FORWARD LOOKING INFORMATION
The Management Discussion and Analysis contains various "forward-looking
statements" which represent the Company's expectations or beliefs concerning
future events and involve a number of risks and uncertainties. Important
factors that could cause actual results to differ materially from those
indicated include risks and uncertainties relating to the impact and
implementation timing of the sexually-oriented business ordinance in the city
of Houston, Texas, the timing of the opening of the dinner theater in New
Orleans, the possible lack of market acceptance of this concept, and the
availability of acceptable financing to fund corporate expansion efforts.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In Dallas J. Fontenot v. Trumps, Inc. and Robert L. Watters, Cause No.
94-057144 in the 127th District Court of Harris County, Texas (the "Fontenot
Lawsuit"), Mr. Fontenot sued the Company and Mr. Watters for alleged breaches
of an Agreement entered into in April, 1993 among Mr. Fontenot, the Company and
Mr. Watters. Mr. Fontenot alleges that Mr. Watters and the Company have
breached this Agreement, but does not indicate the manner in which the breach
has occurred. The Company believes that it has fully complied with its
obligations under this Agreement. The litigation is presently in the
discovery stage. The Company believes, after consultation with counsel, that
it has defenses to the claims being asserted against it and that the risk of
material financial exposure to the Company is unlikely.
In March, 1997, Classic Affairs and Robert Sabes initiated litigation
against the Company in Minneapolis, Minnesota styled Robert W. Sabes and
Classic Affairs, Inc., d/b/a Shiek's Palace Royale v. Rick's Cabaret
International, Inc., a Texas corporation, RCI Entertainment (Minnesota), Inc.
and Robert L. Watters, in District Court, 4th Judicial District, Cause No.
CT97-006457. The suit alleges that the Company and Mr. Watters violated a
Non-Competition Agreement which was to have been executed upon the closing of
the acquisition of Shiek's Palace Royale which never took place.
Mr. Sabes ("Sabes") and Classic Affairs, Inc. ("Classic Affairs") are
seeking an order from the Court that the covenant not to compete is binding
upon the Company and Mr. Watters even though the acquisition of Shiek's Palace
Royale never took place, as well as an order for unspecified damages for the
breach of the agreement. The Company and Mr. Watters have answered the
original complaint and have denied all of the allegations contained therein.
Further, the Company has filed a Counterclaim against Sabes and Classic Affairs
alleging that Sabes and Classic Affairs are seeking to interfere with the
Company's right to purchase another adult entertainment facility in
Minneapolis. The Company believes, after consultation with counsel, that the
claims asserted by Sabes and Classic Affairs are without merit and are subject
to defenses. The Company intends to defend this suit against the claims
asserted and to pursue its counterclaim against Sabes and Classic Affairs.
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 new Ordinance, which is pending judicial
review establishes new distances that Sexually Oriented Businesses may be
located to schools, churches, playgrounds and other sexually oriented
businesses. There are no provisions in the Ordinance exempting previously
permitted sexually oriented businesses from the effect of the new Ordinance.
Rick's Cabaret at its original location at 3113 Bering Drive and its proposed
new location on the Southwest Freeway applied for new permits under the new
ordinance as required by March 1, 1997. On March 19 and 20, 1997, the Company
was informed that each of its locations failed to meet the requirements of the
Ordinance and accordingly the renewal of the Company's Business License had
been denied.
16
<PAGE> 17
The Ordinance provides that a business which is denied a renewal of
its operating permit due to changes in distance requirements under the
Ordinance is entitled to continue in operation for a period of time (the
"Amortization Period") if the owner is 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.
On April 14, 1997, the Company filed a written request with the City
of Houston requesting an extension of time during which the Company may
continue operations at its original location under the Amortization Period
provisions of the Ordinance since the Company was unable to recoup its
investment prior to the effective date of the Ordinance. An administrative
hearing (the "Hearing") was held on July 11, 1997 by the City of Houston to
determine the appropriate Amortization Period to be granted to the Company. At
the Hearing, the Company requested that it be granted an Amortization Period at
is original location equal to forty-five years from the effective date of the
Ordinance. On August 13, 1997, the Hearing Officials informed the Company that
an Amortizations Period of one year had been granted to the Company. The
Company will appeal the decision of the Hearing official to the district court
in the State of Texas. There can be no assurance given as to the results of the
appeal process.
On May 12, 1997 the City of Houston agreed to defer implementation of
the Ordinance until the constitutionality of the entire Ordinance is decided by
court trial.
The Company, along with numerous other sexually oriented businesses
has sought court relief to halt implementation of the new ordinance until such
time as the matter can be brought before a full and considered hearing. The
court hearing originally set for July 14, 1997 has been reset for September 15,
1997. There are other provisions in the 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 which may be
detrimental to the conduct of business by the Company and all of these
provisions also will be the subject of the above mentioned litigation.
No assurance can be given as to the likelihood of the success of any
litigation filed against the City of Houston, but in the event that such
litigation is unsuccessful it is likely that the Company will be able to take
the benefit of the Amortization Period provision contained in the new Ordinance
designed to allow recovery of a business's investment and which will allow the
Company to continue in business at its present location during the Amortization
Period.
ITEM 5. OTHER INFORMATION
On July 25, 1997, Robert Gary White resigned as Chief Accounting
Officer. On the same date, Robert L. Watters assumed the position of Chief
Accounting Officer.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS AND FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On June 5, 1997 the Company filed an amended Form 8-K
which reported disclosure of Other Events for its
Form 8-K filed on October 22, 1996
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RICK'S CABARET INTERNATIONAL, INC.
Date: August 12, 1997 By: /s/ Robert L. Watters
-----------------------------
Robert L. Watters, President and
Chief Accounting Officer
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000935419
<NAME> RICK'S CABARET INTERNATIONAL, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 357,193
<SECURITIES> 0
<RECEIVABLES> 54,185
<ALLOWANCES> 0
<INVENTORY> 56,991
<CURRENT-ASSETS> 766,535
<PP&E> 7,514,748
<DEPRECIATION> (755,880)
<TOTAL-ASSETS> 7,815,109
<CURRENT-LIABILITIES> 1,253,080
<BONDS> 0
0
0
<COMMON> 41,209
<OTHER-SE> 4,729,380
<TOTAL-LIABILITY-AND-EQUITY> 7,815,109
<SALES> 1,675,966
<TOTAL-REVENUES> 1,675,966
<CGS> 311,525
<TOTAL-COSTS> 1,252,546
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,026
<INCOME-PRETAX> 66,003
<INCOME-TAX> 0
<INCOME-CONTINUING> 66,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,003
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
