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RICK > SEC Filings for RICK > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for RICKS CABARET INTERNATIONAL INC

Form 10-Q for RICKS CABARET INTERNATIONAL INC


8-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our audited consolidated financial statements and related notes thereto included in this quarterly report.

GENERAL

Rick's Cabaret International, Inc. was incorporated in the State of Texas in 1994. Through our subsidiaries, as of June 30, 2013, we own and/or operate a total of thirty-seven nightclubs that offer live entertainment, restaurant and bar operations. We also intend, through our subsidiaries, to open an additional six locations by the end of the calendar year. We have one reportable segment, nightclubs. Our website address is www.Ricks.com . We also have an investors' website - www.ricksinvestor.com.

SCHEDULE OF CLUBS

                                            Date
         Name of Nightclub             Acquired/Opened
Club Onyx, Houston, TX                      1995
Rick's Cabaret, Minneapolis, MN             1998
XTC Cabaret, Austin, TX                     1998
XTC Cabaret, San Antonio, TX                1998
XTC Cabaret North, Houston, TX              2004
Rick's Cabaret, New York City, NY           2005
Club Onyx, Charlotte, NC                    2005
Rick's Cabaret, San Antonio, TX             2006
XTC Cabaret South, South Houston, TX        2006
Rick's Cabaret, Fort Worth, TX              2007
Tootsie's Cabaret, Miami Gardens, FL        2008
XTC Cabaret, Dallas, TX                     2008
Club Onyx, Dallas, TX                       2008
Club Onyx, Philadelphia, PA                 2008
Rick's Cabaret, North Austin, TX            2009
Cabaret North, Fort Worth, TX               2009
Cabaret East, Fort Worth, TX                2010
XTC Cabaret, Fort Worth, TX                 2010
Rick's Cabaret DFW, Fort Worth, TX          2011
Downtown Cabaret, Minneapolis, MN           2011
Rick's Cabaret, Indianapolis, IN            2011
Temptations, Aledo, TX                      2011
Silver City Cabaret, Dallas, TX             2012
Jaguars Club, Odessa, TX                    2012
Jaguars Club, Phoenix, AZ                   2012
Jaguars Club, Lubbock, TX                   2012
Jaguars Club, Longview, TX                  2012
Jaguars Club, Tye, TX                       2012
Jaguars Club, Edinburg, TX                  2012
Jaguars Club, El Paso, TX                   2012
Jaguars Club, Harlingen, TX                 2012
Rick's Cabaret, Lubbock, TX                 2012
Jaguar's Club, Beaumont, TX                 2012
Rick's Cabaret, Odessa, TX (1)              2012
Vee Lounge, Fort Worth, TX                  2013
Bombshells, Dallas, TX                      2013
Ricky Bobby, Fort Worth, TX (2)             2013
Temptations, Sulphur, LA                    2013
Temptations, Beaumont, TX (1)               2013
Vivid Cabaret, Los Angeles (1)              2013
Vivid Cabaret, New York (1)                 2013
Bombshells, Beaumont, TX (1)
Jaguars, Houston (1)

(1) To be opened in 2013.
(2) Opened in July 2013

As noted above, we have the following nightclubs/restaurant under construction or contract:

Vivid Cabaret in New York - the building is being remodeled and should open in the fall.
Vivid Cabaret in Los Angeles to be opened soon - awaiting final hearing
Temptations Beaumont (Texas) is opening August 15.
Rick's Cabaret Odessa, Texas - under construction - opening in the fall.
Bombshells Beaumont - property under contract, awaiting licensing and permits.
Jaguars Houston to be opened in former Rick's Houston location in 2013.

Our nightclub revenues are derived from the sale of liquor, beer, wine, food, merchandise, cover charges, membership fees, independent contractors' fees, commissions from vending and ATM machines, valet parking and other products and services.

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles ("GAAP"). GAAP consists of a set of standards issued by the Financial Accounting Standards Board ("FASB") and other authoritative bodies in the form of FASB Statements, Interpretations, FASB Staff Positions, Emerging Issues Task Force consensuses and American Institute of Certified Public Accountants Statements of Position, among others. The Company has updated references to GAAP in this Form 10-Q to reflect the guidance in the Accounting Standards Codification ("ASC"). The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including investment impairment. These estimates are based on management's historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

Accounts and Notes Receivable

Trade accounts receivable for the nightclub operation is primarily comprised of credit card charges, which are generally converted to cash in two to five days after a purchase is made. The media division's accounts receivable is primarily comprised of receivables for advertising sales and Expo registration. The Company's accounts receivable- other is comprised of employee advances and other miscellaneous receivables. The long-term portion of notes receivable are included in other assets in the accompanying consolidated balance sheets. The Company recognizes interest income on notes receivable based on the terms of the agreement and based upon management's evaluation that the notes receivable and interest income will be collected. 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.

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. Provisions for depreciation and amortization are made using straight-line rates over the estimated useful lives of the related assets and the shorter of useful lives or terms of the applicable leases for leasehold improvements. Buildings have estimated useful lives ranging from 29 to 40 years. Furniture, equipment and leasehold improvements have estimated useful lives between five and 40 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 consolidated statement of income of the respective period.

Goodwill and Intangible Assets

FASB ASC 350, Intangibles - Goodwill and Other addresses the accounting for goodwill and other intangible assets. Under FASB ASC 350, goodwill and intangible assets with indefinite lives are no longer amortized, but reviewed on an annual basis for impairment. Definite lived intangible assets are amortized on a straight-line basis over their estimated lives. Fully amortized assets are written-off against accumulated amortization.

Impairment of Long-Lived Assets

The Company reviews property and equipment and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of its carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible assets with definite lives are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value. Assets are grouped at the lowest level for which there are identifiable cash flows, principally at the club level, when assessing impairment. Cash flows for our club assets are identified at the individual club level. The Company's annual evaluation was performed as of September 30, 2012, based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. We determined that there was no net asset impairment at September 30, 2012.

Fair Value of Financial Instruments

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments 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.

Derivative Financial Instruments

The Company accounts for financial instruments that are indexed to and potentially settled in, its own stock, including stock put options, in accordance with the provisions of FASB ASC 815, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock. Under certain circumstances that would require the Company to settle these equity items in cash, and without regard to probability, FASB ASC 815 would require the classification of all or part of the item as a liability and the adjustment of that reclassified amount to fair value at each reporting date, with such adjustments reflected in the Company's consolidated statements of income. The first instrument to meet the requirements of FASB ASC 815 for derivative accounting occurred in the quarter ended June 30, 2010 when the Company renegotiated the payback terms of certain put options and agreed to pledge as collateral to certain holders a second lien on certain property.

Revenue Recognition

The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise, other revenues and services at the point-of-sale upon receipt of cash, check, or credit card charge.

The Company recognizes Internet revenue from monthly subscriptions to its online entertainment sites when notification of a new or existing subscription and its related fee are received from the third party hosting company or from the credit card company, usually two to three days after the transaction has occurred. The monthly fee is not refundable. 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.

Revenues from the sale of magazines and advertising content are recognized when the issue is published and shipped. Revenues and external expenses related to the Company's annual Expo convention are recognized upon the completion of the convention in August.

Sales and Liquor Taxes

The Company recognizes sales and liquor taxes paid as revenues and an equal expense in accordance with FASB ASC 605, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement. Total sales and liquor taxes aggregated $6.1 million and $5.1 million for the nine months ended June 30, 2013 and 2012, respectively.

Advertising and Marketing

Advertising and marketing expenses are primarily comprised of costs related to public advertisements and giveaways, which are used for promotional purposes. Advertising and marketing expenses are expensed as incurred and are included in operating expenses in the accompanying consolidated statements of income.

Income Taxes

Deferred income taxes are determined using the liability method in accordance with FASB ASC 740, 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.

FASB ASC 740 creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are no unrecognized tax benefits to disclose in the notes to the consolidated financial statements.

Put Options

In certain situations, the Company issues restricted common shares as partial consideration for acquisitions of certain businesses or assets. Pursuant to the terms and conditions of the governing acquisition agreements, the holder of such shares has the right, but not the obligation, to put a fixed number of the shares on a monthly basis back to the Company at a fixed price per share. The Company may elect during any given month to either buy the monthly shares or, if management elects not to do so, the holder can sell the monthly shares in the open market, and any deficiency between the amount which the holder receives from the sale of the monthly shares and the value of shares will be paid by the Company. The Company has accounted for these shares in accordance with the guidance established by FASB ASC 480, Distinguishing Liabilities From Equity, as a reclassification of the value of the shares from permanent to temporary equity. As the shares become due, the Company transfers the value of the shares back to permanent equity, less any amount paid to the holder. Also see "Derivative Financial Instruments" above. We finished liquidating these put options during the quarter ended March 31, 2013.

Earnings (Loss) Per Common Share

The Company computes earnings (loss) per share in accordance with FASB ASC 260, Earnings Per Share. FASB ASC 260 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. Potential common stock shares consist of shares that may arise from outstanding dilutive common stock options and warrants (the number of which is computed using the "treasury stock method") and from outstanding convertible debentures (the number of which is computed using the "if converted method"). Diluted EPS considers the potential dilution that could occur if the Company's outstanding common stock options, warrants and convertible debentures were converted into common stock that then shared in the Company's earnings (loss) (as adjusted for interest expense, that would no longer occur if the debentures were converted).

Stock Options

The stock option compensation costs recognized for the quarters ended June 30, 2013 and 2012 were $281,745 and $12,381, respectively, and were $845,235 and $33,016, respectively, for the nine months then ended. See Note 4 of Notes to Consolidated Financial Statements for information regarding stock options issued.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2013 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2012

For the three months ended June 30, 2013, we had consolidated total revenues of $28.3 million compared to consolidated total revenues of $23.9 million for the three months ended June 30, 2012, an increase of $4.4 million or 18.3%. The increase in total revenues was primarily attributable to approximately $3.6 million contributed by the Jaguars club chain acquired in late 2012, $1.1 million by the new Bombshells and Vee Lounge opened earlier this year, along with strong results from our clubs in New York and Minneapolis. Total revenues for same-location-same-period of club operations decreased by 2.1% to $22.8 million for the three months ended June 30, 2013 from $23.3 million for the same period ended June 30, 2012.

Following is a comparison of the Company's income statement for the quarters ended June 30, 2013 and 2012 with percentages compared to total revenue:

            (in thousands)                  2013         %            2012         %

Sales of alcoholic beverages             $   11,105       39.2 %   $    9,711       40.6 %
Sales of food and merchandise                 3,288       11.6 %        2,286        9.6 %
Service Revenues                             12,382       43.7 %       10,576       44.2 %
Other                                         1,533        5.4 %        1,348        5.6 %
Total Revenues                               28,308      100.0 %       23,921      100.0 %

Cost of Goods Sold                            3,680       13.0 %        3,279       13.7 %
Salaries & Wages                              6,413       22.7 %        5,299       22.2 %
Stock-based Compensation                        282        1.0 %           12        0.1 %
Taxes and permits                             4,275       15.1 %        3,618       15.1 %
Charge card fees                                410        1.4 %          361        1.5 %
Rent                                            846        3.0 %          726        3.0 %
Legal & professional                            642        2.3 %          992        4.1 %
Advertising and marketing                     1,181        4.2 %          959        4.0 %
Insurance                                       573        2.0 %          387        1.6 %
Utilities                                       523        1.9 %          454        1.9 %
Depreciation and amortization                 1,337        4.7 %        1,398        5.8 %
Settlement of lawsuit                           160        0.6 %          200        0.8 %
Loss on sale of assets                            -        0.0 %          332        1.4 %
Other                                         2,336        8.3 %        1,867        7.8 %

Total operating expenses                     22,658       80.0 %       19,884       83.1 %
Operating income                              5,650       20.0 %        4,037       16.9 %

Interest income and other                       (2)        0.0 %          (2)        0.0 %
Interest expense                            (1,868)       -6.6 %      (1,098)       -4.6 %

Gain (loss) on change in fair value of
derivative instruments                            1        0.0 %         (17)       -0.1 %
Income from continuing operations        $                         $
before income taxes                           3,781       13.4 %        2,920       12.2 %

Following is an explanation of significant variances in the above amounts.

Service revenues include cover charges, fees paid by entertainers, room rentals, memberships and fees charged for credit card processing. Other revenues include ATM commissions earned, video games and other vending and certain promotion fees charged to our entertainers. We recognize revenue from other revenues and services at the point-of-sale upon receipt of cash, check, or credit card charge.

Cost of goods sold includes cost of alcoholic and non-alcoholic beverages, food, cigars and cigarettes, merchandise, media printing/binding, media postage and internet traffic purchases and webmaster payouts. The cost of goods sold for the club operations for the three months ended June 30, 2013 was 12.9% compared to 13.7% for the three months ended June 30, 2012. The cost of goods sold for same-location-same-period of club operations for the three months ended June 30, 2013 was 12.9%, compared to 13.6% for the same period ended June 30, 2012. The principal reasons for the slight decrease is due to the hiring of a beverage director and the continuing effect on costs of our national buying power for alcoholic beverages and energy drinks.

The increase in payroll and related costs, stated as "Salaries & Wages" above, was primarily due to the addition of the new clubs. Payroll for same-location-same-period of club operations was $4.3 million for the three months ended June 30, 2013 compared to $4.4 million for the three months ended June 30, 2012. Management currently believes that its labor and management staff levels are appropriate.

Stock-based compensation is a noncash cost from issuing stock options to employees and Board members in 2013and 2012. All but 10,000 options are fully vested in July 2013.

The decrease in rent expense as a percentage of revenues is due to the Company's purchase of the real estate with its recent acquisitions.

The decrease in legal and professional is due principally to the completion of discovery in the New York wage and hour lawsuit during 2013. See Commitments and Contingencies in Notes to Consolidated Financial Statements.

Also see Commitments and Contingencies in Notes to Consolidated Financial Statements for an explanation of the settlement of lawsuits.

Generally, the increase in other expense categories is due to the increase in clubs and revenues.

The loss on sale of assets in 2012 is the result of the sale of an aircraft.

Income taxes, as a percentage of income before taxes was 37.3% and 35.0% for the quarters ended June 30, 2013 and 2012, respectively due to the tax effect of the larger nondeductible stock-based compensation in 2013.

Operating income (exclusive of corporate overhead) for same-location-same-period of club operations was $5.9 million for the three months ended June 30, 2013, compared to $5.8 million for the same period in 2012.

Our "operating margin", the percentage of operating income to total revenues, was 20.0% and 16.9% for the quarters ended June 30, 2013 and 2012, respectively. The 2013 quarter was affected by the settlement of lawsuit of $160,000. Without that expense, the 2013 quarter operating margin would have been 20.5%. Without the lawsuit settlement, net income would have been $2.4 million and diluted earnings per share would have been $0.25 in 2013. The 2012 quarter was affected by the settlement of lawsuit of $200,000 and the loss on sale of assets. Without those expenses, the 2012 quarter operating margin would have been 18.3%. Without the lawsuit settlement and the loss on sale of aircraft, net income would have been $2.5 million and diluted earnings per share would have been $0.22 in 2012.

The quarter ended June 30. 2013 also includes approximately $230,000 of losses from clubs/restaurants unopened as of June 30, 2013.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2013 AS COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2012

For the nine months ended June 30, 2013, we had consolidated total revenues of $84.2 million compared to consolidated total revenues of $71.4 million for the nine months ended June 30, 2012, an increase of $12.8 million or 18.0%. The increase in total revenues was primarily attributable to clubs acquired or opened during the last year. Total revenues for same-location-same-period of club continuing operations decreased 1.0% to $66.4 million for the nine months ended June 30, 2013 from $67.0 million for the same period ended June 30, 2012.

Following is a comparison of the Company's income statement for the nine months ended June 30, 2013 and 2012 with percentages compared to total revenue:

           (in thousands)                 2013          %             2012          %

Sales of alcoholic beverages           $   32,554         38.7 %   $   29,033        40.7 %
Sales of food and merchandise               8,744         10.4 %        6,619         9.3 %
Service Revenues                           38,089         45.2 %       31,743        44.5 %
Other                                       4,790          5.7 %        3,958         5.5 %
Total Revenues                             84,177        100.0 %       71,353       100.0 %

Cost of Goods Sold                         10,561         12.5 %        9,601        13.5 %
Salaries & Wages                           18,600         22.1 %       15,428        21.6 %
Stock-based Compensation                      845          1.0 %           33         0.0 %
Taxes and permits                          13,069         15.5 %       11,018        15.4 %
Charge card fees                            1,126          1.3 %        1,042         1.5 %
Rent                                        2,199          2.6 %        2,150         3.0 %
Legal & professional                        2,263          2.7 %        2,433         3.4 %
Advertising and marketing                   3,452          4.1 %        2,994         4.2 %
Insurance                                   1,642          2.0 %        1,027         1.4 %
Utilities                                   1,564          1.9 %        1,264         1.8 %
Depreciation and amortization               3,969          4.7 %        3,708         5.2 %
Settlement of lawsuit                         160          0.2 %        2,031         2.8 %
Loss on sale of assets                          -          0.0 %          332         0.5 %
Other                                       6,967          8.3 %        5,432         7.6 %

Total operating expenses                   66,417         78.9 %       58,493        82.0 %
Operating income                           17,760         21.1 %       12,860        18.0 %

Interest income and other                       6          0.0 %            2         0.0 %
Interest expense                          (5,273)         -6.3 %      (3,178)        -4.5 %
Gain (loss) on change in fair value
of derivative instruments                       2          0.0 %          120         0.2 %
Income from continuing operations
before income taxes                    $   12,495         14.8 %   $    9,804        13.7 %

Following is an explanation of significant variances in the above amounts.

Service revenues include cover charges, fees paid by entertainers, room rentals, memberships and fees charged for credit card processing. Other revenues include ATM commissions earned, video games and other vending and certain promotion fees charged to our entertainers. We recognize revenue from other revenues and services at the point-of-sale upon receipt of cash, check, or credit card charge.

Cost of goods sold includes cost of alcoholic and non-alcoholic beverages, food, cigars and cigarettes, merchandise, media printing/binding, media postage and internet traffic purchases and webmaster payouts. The cost of goods sold for the club operations for the nine months ended June 30, 2013 was 12.5% compared to 13.4% for the nine months ended June 30, 2012. The cost of goods sold for same-location-same-period of club operations for the nine months ended June 30, 2013 was 12.8%, for the nine months ended June 30, 2013 compared to 13.1% for the nine months ended June 30, 2012. The principal reasons for the slight decrease is due to the hiring of a beverage director and the continuing effect on costs of our national buying power for alcoholic beverages and energy drinks.

Payroll for same-location-same-period of club operations was $12.2 million for each of the nine months ended June 30, 2013 and 2012. Management currently believes that its labor and management staff levels are appropriate. . . .

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