10QSB 1 ras10q0304.txt RASCALS 3/31/2004 U. S. Securities and Exchange Commission Washington, D. C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File No. 0-33145 RASCALS INTERNATIONAL, INC. -------------------------------------------- (Name of Small Business Issuer in its Charter) Delaware 84-1195628 ----------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 501 Bloomfield Avenue, Montclair, NJ 07042 ------------------------------------------ (Address of Principal Executive Offices) Issuer's Telephone Number: (973) 223-1233 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: May 18, 2004 Common Voting Stock: 38,289,188 Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] PART 1. FINANCIAL INFORMATION Rascals International, Inc. and Subsidiaries Condensed Consolidated Balance Sheet March 31, 2004 Assets Current Assets Inventory $ 8,938 Prepaid consulting 985,604 ---------- Total Current Assets 994,542 ---------- Property and equipment, net 44,465 Other Assets Construction in progress 544,547 Deposit on acquisition 725,000 Liquor license, net of accumulated amortization of $24,592 26,508 Security deposits 2,500 Prepaid consulting, net of current portion 423,137 ---------- Total Other Assets 1,721,692 ---------- Total Assets 2,760,699 ========== Liabilities and Stockholders' Equity Current Liabilities Accounts payable and accrued expenses 2,091,409 Equity line of credit 850,000 Due to Rascals Montclair 167,297 Notes payable 392,000 Deferred income 13,312 ---------- Total Current Liabilities 3,514,018 ---------- Total Liabilities 3,514,018 ---------- Stockholders' Equity Common stock, authorized 100,000,000 shares, $.001 par value, 15,179,838 shares issued and outstanding 15,180 Additional paid-in capital 9,718,913 Accumulated deficit (10,487,412) ---------- Total Stockholders' Equity (753,319) ---------- Total Liabilities and Stockholders' Equity $ 2,760,699 ========== See notes to the condensed consolidated financial statements. Rascals International, Inc. and Subsidiaries Condensed Consolidated Statements of Operations Three Months Ended March 31, 2004 2003 (Unaudited) (Unaudited) ----------------------------- Net Sales $ 238,551 $ 1,118,226 Costs and Expenses Cost of sales 95,851 511,468 Restaurant operating expenses 39,962 382,255 Rent expense 21,726 38,825 Depreciation and amortization 3,091 10,606 --------- --------- Total Costs and Expenses 160,630 943,154 Gross Profit 77,921 175,072 General and Administrative expenses General and administrative expenses 504,647 300,171 Stock based compensation - 57,917 Stock issued for consulting services 321,108 5,459 --------- --------- Total General and Administrative Expenses 825,755 363,547 Net Loss $ (747,834) $ (188,475) ========= ========= Earnings per share Earnings (Loss) Per Common Share $ (0.06) $ (2.60) ========= ========= Earnings (Loss) Per Share-Assuming Dilution $ (0.06) $ (2.60) ========= ========= Weighted Average Number of Common Shares Outstanding 11,720,862 72,408 ========== ========= See notes to the condensed consolidated financial statements. Rascals International, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2004 2003 --------------------------- Cash Flows From Operating Activities $ (190,523) $ (34,366) Cash Flows From Investing Activities Deposit on acquisition (725,000) - Construction in progress (544,547) - Proceeds from sale of liquor license 60,000 - --------- -------- Net Cash (Used) in Investing Activities (1,209,547) - --------- -------- Cash Flows From Financing Activities Borrowings on line of credit 850,000 - Issuance of common stock 475,000 - Proceeds from notes payable 75,000 31,378 --------- -------- Net Cash Provided by Financing Activities 1,400,000 31,378 --------- -------- Net Decrease in Cash and Equivalents (70) (2,988) Cash and Equivalents at Beginning of Period 70 31,075 --------- -------- Cash and Equivalents at End of Period $ - $ 28,087 ========= ======== See notes to the condensed consolidated financial statements. Rascals International, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Three Month Period Ended March 31, 2004 (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statement have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The unaudited condensed financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2003. 2. EQUITY LINE OF CREDIT During the quarter ended March 31, 2004, the Company borrowed an aggregate of $1,325,000 against the equity line of credit. Pursuant to the terms of the agreement, the Company repaid $475,000 of the equity line of credit by the issuance of 4,448,107 shares of the Company's common stock. As of March 31, 2004, the outstanding balance on the line of credit was $850,000. Subsequent to March 31, 2004, the Company received an additional $175,000 advance on the equity line of credit. 3. CONSTRUCTION IN PROGRESS During the quarter ended March 31, 2004, Rascals Montclair, a company owned by a board member and the Company's CEO, financed construction costs aggregating $544,547 for a new Rascals Comedy Club located in Montclair, New Jersey. Through March 31, 2004, the Company repaid Rascals Montclair an aggregate $377,250. The balance due Rascals Montclair at March 31, 2004 of $167,297 is due on demand and bears no interest rate. 4. DEPOSIT ON ACQUISITION In January 2004, the Company entered into an informal arrangement with the owners of a chain of dance clubs (the "owners"), whereby the Company is contributing funds to a joint venture, which is using the funds to develop "mega-entertainment complexes", each consisting of a Rascals Comedy Club and a dance club. Through March 31, 2004, the Company has contributed $725,000 to the project. The informal agreement with the owners calls for four "mega- entertainment complexes" to be built. The Company will own one-third of the equity in these complexes if it contributes at least $2.9 million to the project. Subsequent to the quarter ended March 31, 2004, the Company contributed an additional $125,000 to the project. 5. SUBSEQUENT EVENT Subsequent to the quarter ended March 31, 2004, the Company ceased operations at the Rascals Comedy Club in Ocean, New Jersey. In connection therewith, the Company sold its liquor license with respect to the Ocean, New Jersey club for $285,000, $85,000 in cash and $200,000 in settlement of a debt to a note holder of the Company. Item 2. Management Discussion and Analysis Forward-looking Statements This Report contains certain forward-looking statements regarding Rascals International, its business and financial prospects. These statements represent Management's present intentions and its present belief regarding the company's future. Nevertheless, there are numerous risks and uncertainties that could cause our actual results to differ from the results suggested in this Report. Among the more significant factors are: 1. Rascals lacks the capital necessary to expand its operations. 2. Our debts exceed the book value of our assets. 3. We have committed to issue shares of common stock that one of our creditors will resell to the market until we eliminate $750,000 in debt, which is likely to dilute the value of our common stock. Because these and other risks may cause Rascals' actual results to differ from those anticipated by Management, the reader should not place undue reliance on any forward-looking statements that appear in this Report. Readers should also take note that Rascals will not necessarily make any public announcement of changes affecting these forward-looking statements, which should be considered accurate on this date only. Results of Operations At the beginning of 2002 Rascals embarked on a new business plan. While our business through 2001 consisted entirely of the operation of stand-alone restaurant/comedy club facilities, in 2002 we began to develop alternative locations for Rascals' comedy by organizing hotel-based clubs and by granting licenses to utilize the name "Rascals." We also began to develop multiple channels of distribution for the comedic entertainment produced in our clubs, such as home video sales and pay-per-view sales. As the year progressed, however, it became apparent that our efforts in developing and managing these multiple channels of distribution, though profitable, were not cost-effective. These distribution channels that we developed early in 2002 remain in place, and we expect them to be a source of revenue in the future. However, in the third quarter of 2002 we refocused our attention on the development of new Rascals clubs, both hotel-based and licensed. Our focus today is on developing a sufficient number of clubs to achieve an efficient level of operations. Recently we have expanded our new direction from hotel-based clubs to clubs in entertainment venues, where a large, pre-existing clientele can be converted into customers of our club. Our first two efforts in this new type of environment are now under contract: 1. During the Summer of 2003 we reached agreement to lease a 7,000 square foot facility in the newly-developed Louisiana Riverwalk Project, a $150 Million entertainment, dining and shopping complex in Shreveport/Bossier City, Louisiana. If we can obtain the funds necessary to develop the facility, we expect to open a comedy club with beverage and snack service there in the summer of 2004. 2. In December 2003 we signed a ten year lease for 7,000 square feet in the Palisades Center, the second largest retail mall in the United States. Again, if the necessary funds become available, we plan to open a 350-seat comedy club in the Palisades Mall later in 2004. The most dramatic example of our new focus on entertainment venues is our ongoing joint venture with JHF Properties, the owners of a chain of dance clubs called either "Banana Joe's" or "Cactus Lounge." In January 2004 we entered into an informal arrangement under which Rascals is contributing funds to JHF Properties, which is using the funds to develop "mega-entertainment complexes, each consisting of a Rascals Comedy Club and a dance club, either a Banana Joe's or a Cactus Lounge. To date Rascals has contributed $975,000 to the project. The first such mega-entertainment complex opened in Jackson, Mississippi at the end of March. The second opened in Omaha, Nebraska in April. Our understanding with JHF Properties is that an additional three complexes will be built. Rascals will own one-third of the equity in these complexes if it contributes no less than $2.9 million to the project. Moreover, it is understood that if Rascals purchases the nine existing Banana Joe's clubs owned by JHF Properties, Rascals will also acquire 100% ownership of the new mega-entertainment complexes. However, there is no contract in effect that formalizes either the arrangement for development of the mega- entertainment complexes or the acquisition of the nine Banana Joe's. Our efforts to increase the number of our clubs with a minimal capital commitment have also led us into a number of licensing arrangements. For example, we have given a license to a group which opened a 300-seat "Rascals Comedy Club" in Jersey City, New Jersey during the first quarter of 2004. Rascals provides the group with its plans and designs for the club, consulted with the group during the development stage, and will provide bookings for a fee. In return, the licensee pays an initial fee to Rascals and a monthly royalty throughout the ten-year term of the license. The transitions in our business plan has resulted in a marked disparity between revenues and expenses. Since our new operations are only in their early stages, we continued to realize most of our net sales from our restaurant/comedy club facility in Ocean, New Jersey, which we closed in May 2004. Our overall operations generated a gross profit in the first quarter of 2004 of $77,921. However, that gross profit was not sufficient to support the corporate activities involved in developing our new business plan. These widespread efforts to implement new revenue sources resulted in general and administrative expenses during the first quarter of 2004 of $825,755. The portion of general and administrative expenses that are payable in cash was increased somewhat from the three months ended March 31, 2003 ($300,171) to the three months ended March 31, 2004 ($504,647). However, the non-cash expense increased by $257,732, as we incurred $321,108 in "stock based" expenses during the recent quarter. In 2003 86% of our revenue came from the two New Jersey restaurant-clubs that we have operated since the 1980s. In 2004 we expect most of our revenue to arise from new operations. This will occur because: * We closed our West Orange club and restaurant at the end of June 2003. In recent years that club had produced over 60% of our annual revenue. In May 2004 we closed our club and restaurant in Ocean, New Jersey. That club produced most of the remaining 40% of our revenues in recent years. Each of these clubs will be replaced in a nearby location - the West Orange club is being replaced by a new club and restaurant in Montclair, New Jersey. But the Montclair club will be owned by a licensee from Rascals and the replacement for the Ocean club is likely to likewise be built by someone other than Rascals itself. * We are now realizing revenue from our Cherry Hill hotel- based operation which, albeit far less in amount than revenue from West Orange or Ocean, will, after its start- up phase is completed, produce far greater gross profit margins. * Our interest in the mega-entertainment complexes being constructed by JHF Properties should begin to contribute to our revenues in the second quarter of this year. * The first three videos licensed from the Rascals Library were introduced to the market for home videos in July 2003. They are on sale at Best Buy and other national retail chains. Depending on the success of this marketing effort, successive offerings may be made, which could contribute substantially to our operating results. These new directions in our operations bode well for the future. Initial results from these ventures, however, are not likely to be profitable due to start-up costs; so 2004 will be a year of transition. Our goal is to return to profitability in 2005. Liquidity and Capital Resources On October 8, 2003 Rascals signed an Equity Line of Credit Agreement with Cornell Capital Partners, LP. The Equity Line of Credit Agreement provides that during the two years commencing January 8, 2004 Rascals may demand that Cornell Capital Partners purchase shares of common stock from Rascals. Rascals may make a demand no more than once every seven trading days. The maximum purchase price on each demand is $150,000. The aggregate maximum that Rascals may demand from Cornell Capital Partners is $10,000,000. The number of shares that Cornell Capital Partners will purchase after a demand will be determined by dividing the dollar amount demanded by a per share price. The per share price used will be 98% of the lowest daily volume- weighted average price during the five trading days that follow the date a demand is made by Rascals. Cornell Capital Partners is required by the Agreement to pay each amount demanded by Rascals, unless (a) there is no prospectus available for Cornell Capital Partners to use in reselling the shares, (b) the purchase would result in Cornell Capital Partners owning over 9.9% of Rascals outstanding shares, or (c) the representations made by Rascals in the Agreement prove to be untrue. During 2004 Rascals has sold a total of 13,815,556 shares to Cornell Capital Partners pursuant to the terms of the Equity Line of Credit Agreement, and received $1,065,000 for those shares. In addition, Cornell Capital Partners has made loans to Rascals, the remaining balance of which totals $750,000. The loans will be satisfied at a rate of $50,000 per week by Rascals issuing shares to Cornell Capital Partners under the terms of the Equity Line of Credit Agreement. The number of shares that will be issued in this way will depend on the market price of our common stock from time to time. From the funds provided by Cornell Capital Partners, Rascals has advanced $975,000 to JHF Properties to fund the development of the four mega- entertainment complexes that we are developing jointly with JHF Properties. Our understanding with JHF Properties calls for Rascals to contribute at least an additional $1,925,000 to the project, in exchange for a 33 % interest in the four complexes. Our interest will increase to 100% if Rascals purchases nine existing clubs owned by JHF Properties. Although we do not have a contract for the purchase of the clubs, it is likely that purchase of the nine clubs would require payment of at least $1,250,000 plus issuance of Rascals common stock. We are currently investigating sources for the funds required for this purpose. At the present time, our liquid assets are negligible, while we had over $3.5 million in accounts and notes payable on March 31, 2004. We also have plans to fund the build-out of three new clubs during 2004 (Palisades, Montclair, and Shreveport) in addition to funding the joint venture with JHF Properties. Our plan is to use the proceeds from our equity line of credit with Cornell Capital Partners to reduce our payables and to fund our building plans. We are also actively seeking alternative sources of capital investment, as the Cornell Capital Partners equity line is not likely to be sufficient for all of our purposes. Item 3. Controls and Procedures Eduardo Rodriguez, our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the Company's disclosure controls and procedures as of March 31, 2004. Based on his evaluation, he concluded that the controls and procedures in place are sufficient to assure that material information concerning the Company which could affect the disclosures in the Company's quarterly and annual reports is made known to him by the other officers and employees of the Company, and that the communications occur with promptness sufficient to assure the inclusion of the information in the then- current report. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date on which Mr. Rodriguez performed his evaluation. PART II - OTHER INFORMATION Item 2. Changes in Securities and Small Business Issuer Purchase of Equity Securities (c) Unregistered sales of equity securities From January 2004 through March 2004 Rascals sold a total of 4,448,107 shares of common stock to Cornell Capital Partners, LP. The shares were sold for $475,000 cash. The sales were exempt pursuant to Section 4(2) of the Act since the sales were not made in a public offering and were made to an entity whose executives had access to detailed information about Rascals and which was acquiring the shares for its own account. There were no underwriters. (e) Purchases of equity securities The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the 1st quarter of 2004. Item 6. Exhibits and Reports on Form 8-K. Reports on Form 8-K: None Exhibits: 31 Rule 13a-14(a) Certification 32 Rule 13a-14(b) Certification 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 thereunto duly authorized. RASCALS INTERNATIONAL, INC. Date: May 19, 2004 By: /s/ Eduardo Rodriguez ---------------------------------- Eduardo Rodriguez, Chief Executive Officer & Chief Financial Officer * * * * * EXHIBIT 31: Rule 13a-14(a) Certification I, Eduardo Rodriguez, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Rascals International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal controls over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. Date: May 19, 2004 /s/ Eduardo Rodriguez ------------------------------------------ Eduardo Rodriguez, Chief Executive Officer * * * * * EXHIBIT 32: Rule 13a-14(b) Certification The undersigned officer certifies that this report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Rascals International, Inc. A signed original of this written statement required by Section 906 has been provided Rascals International, Inc. and will be retained by Rascals International, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Date: May 19, 2004 /s/ Eduardo Rodriguez -------------------------------------------- Eduardo Rodriguez (Chief executive officer)